Cisco 2007 Annual Report Download - page 29

32 Cisco Systems, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purchase acquisitions completed to date, the development of these technologies remains a significant risk due to the remaining
efforts to achieve technological feasibility, rapidly changing customer markets, uncertain standards for new products, and significant
competitive threats. The nature of the efforts to develop these technologies into commercially viable products consists primarily of
planning, designing, experimenting, and testing activities necessary to determine that the technologies can meet market expectations,
including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss
of market share or a lost opportunity to capitalize on emerging markets and could have a material adverse impact on our business and
operating results.
The following table summarizes the key assumptions underlying the valuation for our purchase acquisitions completed in fiscal 2007
for which in-process R&D was recorded (in millions, except percentages):
In-Process
R&D Expense
Estimated Cost to
Complete Technology
at Time of Acquisition
Risk-Adjusted
Discount Rate for
In-Process R&D
IronPort Systems, Inc. $ 7 $ 2 27.0%
WebEx Communications, Inc. 66 13 16.0%
Other 8 7 29.0%
Total $ 81 $ 22
The key assumptions primarily consist of an expected completion date for the in-process projects; estimated costs to complete the
projects; revenue and expense projections, assuming the products have entered the market; and discount rates based on the risks
associated with the development lifecycle of the in-process technology acquired. Failure to achieve the expected levels of revenue and
net income from these products will negatively impact the return on investment expected at the time that the acquisitions were completed
and may result in impairment charges. Actual results from the purchase acquisitions to date did not have a material adverse impact on our
business and operating results.
Interest Income, Net
The components of interest income, net, are as follows (in millions):
Years Ended July 28, 2007 July 29, 2006
Interest income $ 1,092 $ 755
Interest expense (377) (148)
Total $ 715 $ 607
The increase in interest income during fiscal 2007 compared with fiscal 2006 was primarily due to higher average interest rates on our
portfolio of cash and cash equivalents and fixed income securities, and higher average balances. The increase in interest expense was
due to fiscal 2007 having a full year of interest expense on the $6.5 billion in senior unsecured notes compared with fiscal 2006, which only
included interest expense subsequent to the issuance date in February 2006. Interest expense includes the effect of $6.0 billion of interest
rate swaps which effectively convert fixed-rate interest expense to floating-rate interest expense based on the London Interbank Offered
Rate (“LIBOR”).
Other Income, Net
The components of other income, net, are as follows (in millions):
Years Ended July 28, 2007 July 29, 2006
Net gains on investments in fixed income and publicly traded equity securities $ 250 $ 53
Net (losses) gains on investments in privately held companies (18) 86
Impairment charges on investments in privately held companies (22) (15)
Net gains and impairment charges on investments 210 124
Other (85) (94)
Total $ 125 $ 30
The other expenses for fiscal 2007 and 2006 consisted primarily of contributions of publicly traded equity securities and products
to charitable organizations.