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Research In Motion Annual Report 2005

Table of contents

  • Page 1
    Research In Motion Annual Report 2005

  • Page 2
    ...with RIM's expanding foreign operations; RIM's dependence on a limited number of significant customers; fluctuations in quarterly financial results and difficulties in forecasting the Company's growth rate for BlackBerry subscribers; reliance on third-party network developers; foreign exchange risks...

  • Page 3
    ... Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to email, phone, SMS (short message service), organizer, Internet and intranet-based corporate data applications. RIM also...

  • Page 4
    ...new BlackBerry handheld for WLAN networks. TM TM TM TM TM • Introduced a significant upgrade to BlackBerry Enterprise Server v4.0 for Microsoft® Exchange. Expanded market opportunity through BlackBerry Enterprise Server launches for IBM® Lotus® Domino® 7.0 and Novell® GroupWise®. Increased...

  • Page 5
    ...platform that supports a wide range of applications on a variety of proprietary and third party devices. We believe that we are still in the early days of this market and that there is a tremendous opportunity ahead of us. RIM Annual Revenue (in millions of U.S. dollars) BlackBerry Subscriber Base...

  • Page 6
    ... (loss) Earnings (loss) per share Basic Diluted Operating Data (percentage of revenue) Gross margin Research and development Selling, marketing and administration Balance Sheet Data Cash, cash equivalents, short-term investments and investments Total assets Shareholders' equity $ 1,350,447 714,533...

  • Page 7
    ... partners launch several BlackBerry-enabled devices through our BlackBerry Connect and BlackBerry Built-In licensing programs, introduced BlackBerry Enterprise Server (BES) v4.0 software, added support for Novell GroupWise, and achieved a marked increase in the number of third party applications...

  • Page 8
    ... of 100 new carriers this year. Carriers are increasingly recognizing that the high average revenue per user (ARPU) and low churn of the average BlackBerry customer is good for their business and are devoting greater resources to the promotion of BlackBerry in their enterprise and retail channels...

  • Page 9
    ...-art call center in Waterloo has over 550 employees and operates 24 hours per day, seven days per week. In addition, RIM's "TSupport" technical support program has become widely accepted with over 20% of RIM's corporate customer base already signing on to the program, including many of our largest...

  • Page 10
    ... the past year, RIM introduced several new devices including the BlackBerry 7250, BlackBerry 7520, BlackBerry 7290, and BlackBerry 7100 Series. These new devices were also supported by a wide range of software enhancements for both BlackBerry Enterprise Server and BlackBerry Internet Service. We...

  • Page 11
    ... average sales price and monthly average revenue per unit for its BlackBerry handhelds in fiscal 2006; the Company's estimates regarding earnings sensitivity relating to warranty expense; the Company's estimate regarding revenue sensitivity for the effect of a change in average selling price ("ASP...

  • Page 12
    ...with RIM's expanding foreign operations; RIM's dependence on a limited number of significant customers; fluctuations in quarterly financial results and difficulties in forecasting the Company's growth rate for BlackBerry subscribers; reliance on third-party network developers; foreign exchange risks...

  • Page 13
    .... RIM's BIS-related services use the same wireless architecture and infrastructure that is being used by RIM's enterprise BlackBerry handheld customers. Revenues are also generated from sales of accessories, repair programs, non-recurring engineering services ("NRE") and radio modems to original...

  • Page 14
    12 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Critical Accounting Policies and Estimates General The preparation of the Consolidated Financial Statements requires management...

  • Page 15
    ... as it sells an increasing number of its wireless handheld and software products and service relay access through network carriers and resellers rather than directly. The Company evaluates the collectibility of its trade receivables based upon a combination of factors on a periodic basis. When...

  • Page 16
    ...inventory during each reporting period, which includes a review of, among other factors, demand requirements, component part purchase commitments of the Company and certain key suppliers, product life cycle and development plans, component cost trends, product pricing and quality issues. If customer...

  • Page 17
    ... intangible asset. RIM and NTP are currently working to finalize the definitive agreements. Warranty The Company provides for the estimated costs of product warranties at the time revenue is recognized. BlackBerry handheld products are generally covered by a time-limited warranty for varying periods...

  • Page 18
    16 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Investments Investments classified as available for sale under Statement of Financial Accounting Standards 115 are carried at ...

  • Page 19
    ... issued amended Statement of Financial Accounting Standards 123 ("SFAS 123(R)") Accounting for Share-Based Payment, which requires all companies to use the fair-value based method of accounting for stock-based compensation, and is in effect for all interim periods beginning after June 15, 2005. SFAS...

  • Page 20
    18 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Summary Results of Operations - Fiscal 2005 Compared to Fiscal 2004 and Fiscal 2003 The following table sets forth certain ...

  • Page 21
    ... consolidated statement of operations data expressed as a percentage of revenue for the periods indicated: Fiscal year ended February 26, 2005 February 28, 2004 Change 2005/2004 March 1, 2003 Revenue Cost of sales Gross margin Expenses Research and development Selling, marketing and administration...

  • Page 22
    20 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Research and development, Selling, marketing and administration, and Amortization The Company continued to invest heavily in ...

  • Page 23
    ... Consolidated Financial Statements. (3)During the third quarter of fiscal 2004, the Company reclassified costs associated with its BlackBerry network operations center and its technical and service support operations center to Cost of sales. Such costs were previously included in Selling, marketing...

  • Page 24
    ... a number of new products in the current fiscal year which operate on the GPRS, iDEN and CDMA20001X wireless networks and expanded its customer base of carrier customers, which account for the volume growth. The Company reconciles handset shipments and estimated carrier channel inventory levels...

  • Page 25
    ... in NRE revenue in the current year; Improved service margins resulting from cost efficiencies in RIM's network operations infrastructure as a result of the increase in BlackBerry subscribers; Reductions in handheld unit warranty rates and net warranty expense (see "Critical Accounting Policies and...

  • Page 26
    ...consist primarily of salaries for technical personnel, engineering materials, certification and tooling expense, outsourcing and consulting services, software tools and related information technology infrastructure support, and travel. Research and development expenditures increased by $38.5 million...

  • Page 27
    ... Financial Statements and "Critical Accounting Policies and Estimates - Valuation of long-lived assets, intangible assets and goodwill". Changes in Capital Assets Amortization During fiscal 2005, the Company re-evaluated the estimated useful lives of certain of its information technology assets...

  • Page 28
    ... RIM and its partners to sell its products, services and infrastructure completely free and clear of any claim by NTP, including any claims that NTP may have against wireless carriers, ISV partners or against third-party products that use RIM's BlackBerry Connect/BlackBerry Built-In technology. RIM...

  • Page 29
    ....4 million, or $1.14 per share basic and $1.09 per share diluted, in fiscal 2005 compared to net income of $51.8 million, or $0.33 per share basic and $0.31 per share diluted, in the prior year. See "Executive Summary" for an analysis and reconciliation of the fiscal 2005 increase in net income and...

  • Page 30
    ... interim periods indicated: Change For the three months ended February 26, 2005 February 28, 2004 2005/2004 (in thousands, except for percentages and per share amounts) Revenue Cost of sales Gross margin Expenses Research and development Selling, marketing and administration Amortization Sub-total...

  • Page 31
    ... 2005, given the quarterly increases in revenue realized by the Company during fiscal 2005. Three month fiscal periods ended February 26, 2005 $ % of Revenue November 27, 2004 $ % of Revenue February 28, 2004 $ % of Revenue Revenue Research and development Selling, marketing and administration...

  • Page 32
    30 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) NTP Litigation Matter During the fourth quarter of fiscal 2005, the Company recorded a provision of $294.2 million to account ...

  • Page 33
    ... of this net increase. The table below summarizes the key components of the changes in working capital items. Fiscal year ended February 26, 2005 February 28, 2004 Change 2005/2004 Changes in working capital items: Trade receivables Other receivables Inventory Accounts payable Accrued liabilities...

  • Page 34
    ... of capital assets and intangible assets of $21.8 million and $32.3 million, respectively. NTP Litigation As discussed in "Critical Accounting Policies and Estimates - Litigation", "Results of Operations - Litigation" and note 15 to the Consolidated Financial Statements, RIM will pay to NTP $450...

  • Page 35
    ... in which payments are due as at February 26, 2005: Less than Total One Year One to Three Years Four to Five Years More than Five Years Long-term debt Operating lease obligations Purchase obligations and commitments Total $ 6,728 17,773 227,264 $ 251,765 $ 223 $ 3,490 227,264 $ 230,977 $ 773...

  • Page 36
    34 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) A summary of the differences to reported values contained in the Company's consolidated statements of operations under U.S. ...

  • Page 37
    ... current assets and Accumulated other comprehensive income. To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into forward contracts to sell U.S. Dollars and purchase Canadian Dollars. These contracts have been designated as fair value hedges, with...

  • Page 38
    ...rather than directly. The Company is undergoing significant sales growth in North America and internationally, resulting in the growth in its carrier customer base in terms of numbers, sales and trade receivables volumes and in some instances new or significantly increased credit limits. The Company...

  • Page 39
    ... the years ended February 26, 2005, February 28, 2004 and March 1, 2003 37 Equity Method of Accounting to Investments In June 2004, the Emerging Issues Task Force released Issue No. 03-01 Whether an Investor Should Apply the Equity Method of Accounting to Investments other than Common Stock ("EITF...

  • Page 40
    ... information appearing throughout this Annual Report is consistent with the Consolidated Financial Statements. The Consolidated Financial Statements have been reviewed by the Audit Committee and approved by the Board of Directors of Research In Motion Limited. In fulfilling its responsibility...

  • Page 41
    ..., 2005. Independent Auditors' Report Chartered Accountants To the Shareholders of Research In Motion Limited We have audited the consolidated statements of operations, shareholders' equity and cash flows of Research In Motion Limited for the year ended March 1, 2003. These financial statements are...

  • Page 42
    ... Capital assets (note 6) Intangible assets (note 7) Goodwill (note 8) Liabilities Current Accounts payable Accrued liabilities (notes 13 and 18 (c)) Accrued litigation and related expenses (note 15) Income taxes payable (note 9) Deferred revenue Current portion of long-term debt (note 10) Long-term...

  • Page 43
    ... gains on investments available for sale Net change in derivative fair value during the year Amounts reclassified to earnings during the year Shares issued: Exercise of stock options Common shares repurchased pursuant to Common Share Purchase Program Balance as at March 1, 2003 Comprehensive income...

  • Page 44
    ... In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Consolidated Statements of Operations For the year ended February 26, 2005 February 28, 2004 U.S. GAAP (note 1) March 1, 2003 Revenue Cost...

  • Page 45
    ...Issuance of share capital and warrants Financing costs Buyback of common shares pursuant to Common Share Purchase Program (note 11(a)) Repayment of long-term debt Cash flows from investing activities Acquisition of investments Proceeds on sale or maturity of investments Acquisition of capital assets...

  • Page 46
    ...the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to email, phone, SMS (short message service), personal organizer, Internet and intranet-based corporate data applications. RIM also...

  • Page 47
    ...increasing number of its wireless handheld and software products and service relay access through network carriers and resellers rather than selling directly to end consumers. The Company evaluates the collectibility of its trade receivables balances based upon a combination of factors on a periodic...

  • Page 48
    ...materials plus direct labour applied to the product and the applicable share of manufacturing overhead. Cost is determined on a first-in-first-out basis. (j) Impairment of long-lived assets The Company reviews long-lived assets such as property, plant and equipment, and intangible assets with finite...

  • Page 49
    ... assets are ready for use. Amortization is provided using the following rates and methods: Buildings, leaseholds and other BlackBerry operations and other information technology Manufacturing equipment, research and development equipment, and tooling Furniture and fixtures Straight-line over terms...

  • Page 50
    48 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) In the event that the fair value of the reporting unit, including goodwill, is less than the carrying value, the implied fair ...

  • Page 51
    ...fiscal 2003 was primarily with respect to grants from Technology Partnerships Canada on account of eligible scientific research and experimental development expenditures. Assistance related to the acquisition of capital assets used for research and development is credited against the cost of related...

  • Page 52
    ... pricing model: For the year ended February 26, 2005 February 28, 2004 March 1, 2003 Net income (loss) - as reported Stock-based compensation expense for the year Net income (loss) - proforma Proforma earnings (loss) per common share: Basic Diluted Weighted average number of shares outstanding...

  • Page 53
    ... not own an investment in the common stock, but exercises significant influence over the financial and operating policies of the Company. EITF 02-14 goes on to state that the equity method of accounting for investments should only be applied when the investor has investments in common stock, or in...

  • Page 54
    52 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) (b) Stock-based compensation On December 16, 2004, the FASB issued amended SFAS 123 ("SFAS 123(R)") Accounting for Share-Based ...

  • Page 55
    ... following: Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As at February 26, 2005 Government sponsored enterprise notes Asset-backed securities Commercial paper and corporate bonds Auction-rate securities Classified as Short-Term Classified as Long-Term Total As at February...

  • Page 56
    ... 7,679 (8,675) 42,836 February 26, 2005 Accumulated Cost amortization Net book value Land Buildings, leaseholds and other BlackBerry operations and other information technology Manufacturing equipment, research and development equipment, and tooling Furniture and fixtures $ 8,850 109,654 135,352...

  • Page 57
    ... 2004, the Company purchased the assets of a company whose proprietary software products enable wireless access to a corporate email system using a handheld device. Effective February 2005, the Company acquired 100% of the common shares of a company that offers technology that will be incorporated...

  • Page 58
    ... email systems including corporate, proprietary and POP3/IMAP4 using a handheld device. In addition, effective September 2002, the Company also acquired 100% of the common shares of a small company with expertise and technology related to wireless networks. The results of the acquirees' operations...

  • Page 59
    ... year ended February 26, 2005 February 28, 2004 March 1, 2003 Statutory Canadian tax rate Expected income tax provision (recovery) Differences in income taxes resulting from: Manufacturing and processing activities Increase (decrease) in valuation allowance Investment tax credits Foreign exchange...

  • Page 60
    58 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Deferred income tax assets and liabilities consist of the following temporary differences: As at February 26, 2005 February 28,...

  • Page 61
    ...of this stock dividend doubled the number of stock options outstanding and reduced the exercise prices of these stock options by half of the original exercise price. The following details the changes in issued and outstanding common shares and common share purchase warrants for the three years ended...

  • Page 62
    60 Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) Share Capital Common share Common shares purchase warrants Total Balance as at March 2, 2002 Exercise of options Common shares...

  • Page 63
    ...the years ended February 26, 2005, February 28, 2004 and March 1, 2003 61 A summary of option activity since March 2, 2002 is shown below: Options Outstanding Weighted Number (in 000's ) Average Exercise Price Balance as at March 2, 2002 Granted during the year Exercised during the year Forfeited...

  • Page 64
    ...damages or recoveries and the ultimate amounts, if any, with respect to all of the Inpro actions is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at February 26, 2005. On March 22, 2005 a complaint was filed on behalf of the Board of Regents...

  • Page 65
    ...these consolidated financial statements as at February 26, 2005. By letter dated February 16, 2004, T-Mobile Deutschland GmbH and T-Mobile International AG (collectively, "TMO") served RIM's wholly-owned UK subsidiary Research In Motion UK Limited ("RIM-UK"), with a third party notice in relation to...

  • Page 66
    ... Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) The change in the Company's accrued warranty obligations from March 2, 2002 to February 26, 2005 was as follows: Accrued warranty...

  • Page 67
    ... future costs with respect to ongoing legal and professional fees, plaintiff's attorney fees and prejudgment interest. Fiscal 2004 On August 5, 2003, the District Court ruled on NTP's request for an injunction with respect to RIM continuing to sell BlackBerry handhelds, software and service in...

  • Page 68
    ...permits RIM and its partners to sell its products, services and infrastructure completely free and clear of any claim by NTP, including any claims that NTP may have against wireless carriers, ISV (independent software vendor) partners or against third party products that use RIM's BlackBerry Connect...

  • Page 69
    ... share. For the year ended February 26, 2005 February 28, 2004 March 1, 2003 Numerator for basic and diluted earnings (loss) per share available to common stockholders Denominator for basic earnings (loss) per share - weighted average shares outstanding Effect of dilutive securities: Employee stock...

  • Page 70
    ...Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) 18. Supplemental Information (a) Net changes in working capital items February 26, 2005 February 28, 2004 February 28, 2003 Trade...

  • Page 71
    ..., 2005, February 28, 2004 and March 1, 2003 69 19. Financial Instruments Values of financial instruments outstanding were as follows: February 26, 2005 Notional Amount Carrying Amount Estimated Fair Value Assets (Liabilities) Cash and cash equivalents Available-for-sale investments Long-term debt...

  • Page 72
    ... Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise indicated) To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into forward contracts to sell...

  • Page 73
    ... organized and managed as a single reportable business segment. The Company's operations are substantially all related to the research, design, manufacture and sales of wireless communications products, services and software. Selected financial information is as follows: For the year ended February...

  • Page 74
    ... National Market Symbol: RIMM The Toronto Stock Exchange Symbol: RIM Corporate Office Research In Motion Limited 295 Phillip Street Waterloo, Ontario, N2L 3W8 Corporate Website E. Kendall Cork Managing Director, Sentinel Associates Ltd. Jim Estill 1 Chief Executive Officer, SYNNEX Canada Ltd. John...

  • Page 75
    ...2005 Research In Motion Limited. All Rights Reserved. The BlackBerry and RIM families of related marks, images and symbols are the exclusive properties and trademarks of Research In Motion Limited. RIM, Research In Motion, the "envelope in motion" symbol, "Always On, Always Connected" and BlackBerry...

  • Page 76
    295 Phillip Street Waterloo, Ontario, Canada N2L 3W8 Tel: 519.888.7465 Fax: 519.888.6906 Email: [email protected] www.rim.com