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Cisco Alters Andiamo Accounting

Cisco Systems Inc. (Nasdaq: CSCO) today disclosed that it will take a non-cash charge in the next quarter of between $200 million and $500 million related to a change in the way it accounts for the expected value of stock options granted to Andiamo Systems Inc. employees.

The disclosure reveals that Cisco believes it has invested at least $339 million into Andiamo to date ($139 million in debt plus a minimum of $200 million in options expenses). That would easily make Andiamo one the most richly valued "startups" in the storage networking industry.

Andiamo is the Fibre Channel switch venture that, since its inception in early 2001, has been exclusively funded by Cisco. Last August, Cisco said it would acquire Andiamo in an all-stock deal worth as much as $2.5 billion (although the final price is expected to be less). Andiamo is housed on the Cisco campus in San Jose, Calif. (see Cisco's Creative Andiamo Options, Cisco Buys Andiamo, and Cisco Owns Up to Andiamo).

The company disclosed the accounting change today in its 10Q filing for the quarter ended April 26, 2003, with the Securities and Exchange Commission (SEC).

In its filing, Cisco cited the Financial Accounting Standards Board's rule No. 46, "Consolidation of Variable Interest Entities," issued in January 2003, which requires companies to report assets, liabilities, and results of a "variable-interest entity" as part of its consolidated financial statements. Cisco says "substantially all Andiamo employee stock and options" fall into the variable accounting category, because the final purchase price Cisco pays for Andiamo is primarily derived from a revenue-based formula.

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