Blackberry 1998 Annual Report Download - page 17

production mode and reduces its dependency on
these revenue sources. Gross margins were as forecast
in fiscal 1998, and are considered reasonable given the
dominance of hardware products in RIM’s sales mix.
Research and development expenses
R&D investment rose 45% to $6.5 million in fiscal
1998, but declined as a percentage of revenue to 20%
from 37% in fiscal 1997 as a function of strong sales
growth. Increased total spending was a result of
the expansion of product development teams in
preparation for the launch of next-generation
products. R&D expenditures consisted largely of
salaries for technical personnel, the cost of related
engineering materials, software tools and support,
and third party R&D costs.
Administration and marketing expenses
Administrative and marketing expenses increased
57% to $4.0 million from $2.5 million in fiscal 1997,
again reflecting RIM’s growth. However, these
expenses declined to 12% of revenue from 21% a
year earlier – a trend which is expected to continue
as revenue increases.
Depreciation and amortization
Depreciation and amortization expense was $2.2
million in fiscal 1998, versus $0.6 million expensed
in fiscal 1997. The increase was related to significant
capital spending during the year for production and
R&D facilities which increased RIM’s depreciable
asset base.
Investment income
Investment income of $2.0 million was primarily
related to interest earned on net proceeds of
approximately $105 million from the Company’s
initial public offering in October 1997.
Income taxes
The Company’s past R&D activities have given rise
to income tax loss carryforwards and investment tax
credits (ITCs) which resulted in a net income tax
recovery in fiscal 1997 and restricted taxes payable in
fiscal 1998 to large corporations minimum tax. The
$0.4 million tax provision for the current year also
reflects the income tax offset arising from the
deduction of share issue costs. This benefit has been
allocated to share issue costs included in share capital.
As at February 28, 1998, the Company had
remaining tax loss carryforwards, allocable share issue
costs, and ITCs sufficient to shelter approximately
$22.7 million of federal taxable income and approxi-
mately $21.0 million of provincial taxable income. As
RIM intends to further invest in R&D in the future,
the accrual of additional tax credits to offset tax
payable is expected to be ongoing.
Net Income
Net income was $539,965 in fiscal 1998 compared to
$43,737 in fiscal 1997. Operating losses of $1.0 million
resulted from increasing R&D efforts and the
expansion of the Company’s production facilities
as RIM positioned itself to deliver new products to
the emerging wireless messaging market. These losses
were offset by investment income of $2.0 million.
Earnings per share were $0.01 on both a basic
and fully diluted basis, compared to EPS of $0.00 in
fiscal 1997.
Liquidity and capital resources
Operating cash flow of $0.3 million was generated
in fiscal 1998, compared to a shortfall of $17.7 million
in fiscal 1997. Last year’s shortfall was mainly
attributable to a build-up in RIM’s components
inventory to fill backlogged orders. Operating cash
flow improved in fiscal 1998 as these components
were used in production.
The major uses of cash were capital expenditures
of $8.3 million for the expansion of RIM’s manufac-
turing and R&D facilities, up slightly from $8.2
million in fiscal 1997, and $1.4 million in debt
repayment. These amounts were easily funded by
$109.1 million in share issue proceeds from RIM’s
IPO and an equity investment by Intel.
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MANAGEMENT’S DISCUSSION AND ANALYSIS