Blackberry 2006 Annual Report Download

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Table of contents

  • Page 1
    RES EARC H I N MOTI O N AN N UAL REPO RT 2006

  • Page 2
    ... with its network carrier partners and licensees; • RIM's dependence on its carrier partners to grow its BlackBerry subscriber base and to accurately report subscriber account activations and deactivations to RIM on a timely basis; • fluctuations in RIM's quarterly financial results and...

  • Page 3
    ...â„¢ product line, software development tools, radio-modems and other hardware and software. Founded in 1984 and based in Waterloo, Ontario, RIM operates offices in North America, Europe and Asia Pacific. RIM is listed on the Nasdaq Stock Market (Nasdaq: RIMM) and the Toronto Stock Exchange (TSX: RIM...

  • Page 4
    2 gLOBAL MARkET a world of The flagship product of Research In Motion Limited, BlackBerry is a leading wireless connectivity solution, providing access to a wide range of applications on a variety of wireless devices around the world. It combines award winning devices, software and services to ...

  • Page 5
    ... RIM's state-of-the-art, on-site development and testing labs, RIM continues to launch new product lines such as the fully re-engineered BlackBerry 8700 Series. The BlackBerry 8700 Series of devices are the first TM BlackBerry devices to run on the high-speed EDGE network, and feature unrivaled web...

  • Page 6
    ... Income before income taxes Provision for (recovery of) income taxes Net income Earnings 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...

  • Page 7
    ... thank our customers, partners and shareholders for their support over the past year as we worked REVENUES Research In Motion • A new version of BlackBerry Internet ServiceTM was launched; • BlackBerry Enterprise Server v4.1 and MDS v4.1 with support for web services were brought to market. We...

  • Page 8
    ... networks in 60 countries around the world. There are approximately another 150 carriers around the world that are scheduled for launch in fiscal 2007. North America remains the largest market for BlackBerry and this year we launched several new BlackBerry devices in this region and added a number...

  • Page 9
    ...the teams developed and brought to market new BlackBerry 7100 style devices for Ev-DO and iDEN® networks, the BlackBerry SmartCard Reader, BlackBerry Enterprise Server v4.1 and BlackBerry MDS v4.1, and a new version of BlackBerry Internet Service. In the coming year, the R&D team will be working on...

  • Page 10
    ... to BlackBerry Enterprise Server and BlackBerry Internet Service and encourage the development and enablement of third-party applications for the BlackBerry solution; • Work closely with key partners to enhance the BlackBerry user experience; • Launch a number of new BlackBerry Connect...

  • Page 11
    ... and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with the audited consolidated financial statements and the accompanying notes (the "Consolidated Financial Statements") of Research In Motion Limited ("RIM" or the "Company") for the fiscal year ended...

  • Page 12
    ... with its network carrier partners and licensees; • RIM's dependence on its carrier partners to grow its BlackBerry subscriber base and to accurately report subscriber account activations and deactivations to RIM on a timely basis; • fluctuations in RIM's quarterly financial results and...

  • Page 13
    ... the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information including email, phone, short messaging service (SMS), Internet and intranet-based applications. RIM...

  • Page 14
    12 Research In Motion Limited An important part of RIM's BlackBerry wireless platform is the software that is installed on corporate servers and/or desktop personal computers. Software revenues include fees from (i) licensing RIM's BlackBerry Enterprise Server® ("BES") software; (ii) client ...

  • Page 15
    ... bills the customer prior to performing the service, the prebilling is recorded as deferred revenue. Refer to "Sources of Revenue" for more information on the calculation of the number of subscriber accounts. Software Revenue from licensed software is recognized at the inception of the license term...

  • Page 16
    ...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 demand subsequently differs from the Company's forecasts, requirements for inventory write-offs that differ from the Company...

  • Page 17
    ...book value of the acquired license, after accumulated amortization, related to the fiscal 2005 accrual. See "Litigation - Change in Estimate During Fiscal 2006". Litigation As has been more fully disclosed in the Company's annual consolidated financial statements and notes for the fiscal years ended...

  • Page 18
    ... of time. The Company's warranty obligation is affected by product failure rates, changes in warranty periods, regulatory developments with respect to warranty obligations in the countries in which the Company carries on business, freight expense, and material usage and other related repair costs...

  • Page 19
    ... 9 to the Consolidated Financial Statements. Stock-Based Compensation The Company has stock-based compensation plans which are described in note 11(b) to the Consolidated Financial Statements. Stock options are granted with an exercise price equal to the fair market value of the shares on the day...

  • Page 20
    ...In Motion Limited On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued amended Statement of Financial Accounting Standards 123 ("SFAS 123(R)") Accounting for Share-Based Payments, which requires all companies to use the fair-value based method of accounting for stock-based...

  • Page 21
    ... except for per share amounts) Revenue Cost of sales Gross margin Expenses Research and development Selling, marketing and administration Amortization Sub-total Litigation (1) Income from operations Investment income Income before income taxes Provision for (recovery of) income taxes (2) Net income...

  • Page 22
    ... consolidated statement of operations data expressed as a percentage of revenue for the periods indicated: Fiscal Year Ended March 4, 2006 February 26, 2005 Change 2006/2005 February 28, 2004 Revenue Cost of sales Gross margin Expenses Research and development Selling, marketing and administration...

  • Page 23
    ...software and NRE revenues in fiscal 2006, lower net warranty expense as well as the Company's continuing cost reduction efforts for its BlackBerry devices and service revenue streams which was partially offset by a 6.8% decrease in ASP. Research and development, Selling, marketing and administration...

  • Page 24
    ... In Motion Limited Fiscal 2006 Year Fourth Quarter Third Quarter Second Quarter First Quarter (in thousands, except per share data) Revenue Gross margin Research and development, Selling, marketing and administration, and Amortization Litigation (1) Investment income Income before income taxes...

  • Page 25
    ... has launched a number of new products in the current fiscal year and now has devices operating on the GPRS, iDEN, EDGE, CDMA and Ev-DO wireless networks and expanded its customer base of carrier customers, which account for the volume growth. ASP decreased 6.8%, or $26, in fiscal 2006 to $356 per...

  • Page 26
    ...Consolidated Financial Statements); • A decline in amortization expense as a percentage of consolidated revenue, as the Company continues to realize economies of scale in its manufacturing operations; and • An increase in non-warranty repair revenues. Research and Development, Selling, Marketing...

  • Page 27
    Annual Report 2006 25 Research and Development Research and development expenditures consist primarily of salaries for technical personnel, engineering materials, certification and tooling expense, outsourcing and consulting services, software tools and related information technology ...

  • Page 28
    ... included in Cost of sales, and $2.5 million was included in Amortization. See also note 1(k) to the Consolidated Financial Statements. During fiscal 2005, the Company also re-evaluated the estimated useful lives of capital assets used in manufacturing, and research and development operations that...

  • Page 29
    ... partners, suppliers or customers in relation to the Company's products or services, (including BlackBerry Connect and Built-In technology), or in relation to third party products and services, to the extent they are used in connection with the Company's products and services. For the years ended...

  • Page 30
    ..., or $1.14 basic EPS and $1.09 diluted EPS in the prior year. The increase reflects primarily higher operating profit/gross margin resulting from increased device Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and...

  • Page 31
    ...the Three Months Ended March 4, 2006 February 26, 2005 Change 2006/2005 (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 Litigation (1) Loss from operations...

  • Page 32
    ... net warranty expense; • Improved service margins resulting from cost efficiencies in RIM's network operations infrastructure as a result of the increase in BlackBerry subscribers. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except...

  • Page 33
    ....5 million, an additional charge to earnings in the amount of $162.5 million was recorded in operating results in the three-month period ending March 4, 2006. During fiscal 2006, the Patent Office issued various office actions rejecting all claims in all NTP patents. Accordingly, though the rulings...

  • Page 34
    ...relating to the NTP litigation which was funded in escrow in fiscal 2005, offset in part by higher income from operations. The table below summarizes the key components of this net decrease. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars...

  • Page 35
    ... costs of acquisition of short-term investments and investments, net of the proceeds on sale or maturity in the amount of $747.8 million. NTP Litigation Funding See also "Litigation" and notes 10 and 15 to the Consolidated Financial Statements. As a result of the definitive licensing and settlement...

  • Page 36
    ... including service operations. The Company intends to fund current and future capital and intangible asset expenditure requirements from existing financial resources and cash flows. The Company has not declared any cash dividends in the last three fiscal years. Cash, cash equivalents, short-term...

  • Page 37
    ...of its products and service relay access through network carriers and resellers 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...

  • Page 38
    ... a fair-value based method in the first quarter of fiscal 2007. See note 1(u) of the Consolidated Financial Statements for proforma disclosure and related EPS impact. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data...

  • Page 39
    ... in reports filed or submitted by it under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's Co-Chief Executive Officers and Chief Financial Officer have...

  • Page 40
    ... 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 for the reliability and integrity of financial information, management has developed and maintains systems of accounting and internal...

  • Page 41
    ... balance sheets of Research In Motion Limited as at March 4, 2006, February 26, 2005 and February 28, 2004 and the consolidated statements of operations, shareholders' equity and cash flows for the years ended March 4, 2006, February 26, 2005 and February 28, 2004. These financial statements are the...

  • Page 42
    ... 19) See notes to the consolidated financial statements. On behalf of the Board: Jim Balsillie Director Mike Lazaridis Director 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...

  • Page 43
    ... to earnings during the year - Shares issued: Exercise of stock options 23,269 Common shares repurchased pursuant to Common Share Repurchase Program (62,981) Issuance of restricted share units 159 Balance as at March 4, 2006 $ 1,852,713 $ See notes to the consolidated financial statements. (2,771...

  • Page 44
    42 CONSOLIdATEd STATEMENTS OF OPERATIONS For the Year Ended March 4, 2006 February 26, 2005 February 28, 2004 Revenue Cost of sales gross margin Expenses Research and development (note 14) Selling, marketing and administration (notes 18(d) and 19) Amortization Litigation (note 15) Income from ...

  • Page 45
    ... Cash flows from operating activities Net income Items not requiring an outlay of cash: Amortization Deferred income taxes Issuance of restricted share units Loss (gain) on disposal of capital assets Loss on foreign currency translation of long-term debt Unrealized foreign exchange loss (gain) Net...

  • Page 46
    ... product line, software development tools, radio-modems and other hardware and software. The Company was incorporated on March 7, 1984 under the Ontario Business Corporations Act. The Company's shares are traded on The Toronto Stock Exchange under the symbol RIM and on the NASDAQ National Market...

  • Page 47
    ... as available-for-sale under Statement of Financial Accounting Standards ("SFAS") 115 are carried at fair value. Changes in market value are accounted for through accumulated other comprehensive income until such investments mature or are sold. For the years ended March 4, 2006, February 26, 2005...

  • Page 48
    ... Company makes this assessment by considering available evidence, including changes in general market conditions, specific industry and individual company data, the length of time and the extent to which the fair value has been less than cost, the financial condition and the near-term prospects of...

  • Page 49
    Annual Report 2006 47 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 between 5 and 40 years Straight-line over terms between 3 and 5 ...

  • Page 50
    ... provided. In instances where the Company bills the customer prior to performing the service, the prebilling is recorded as deferred revenue. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as otherwise...

  • Page 51
    ...fair value is established through prices charged for each revenue element when that element is sold separately. The revenue recognition policies described above are then applied to each unit of accounting. (q) Research and development The Company is engaged in research and development work. Research...

  • Page 52
    ... Company's net income and earnings per share on a proforma basis using the fair value method as determined using the Black-Scholes option pricing model: Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as...

  • Page 53
    ...of time. The Company's warranty obligation is affected by product failure rates, differences in warranty periods, regulatory developments with respect to warranty obligations in the countries in which the Company carries on business, freight expense, and material usage and other related repair costs...

  • Page 54
    ... As previously disclosed, the Company will now be required to adopt a fair-value based method in the first quarter of fiscal 2007. 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)

  • Page 55
    ... fair value and comprise the following: March 4, 2006 February 26, 2005 Balances with banks Certificates of deposit Repurchase agreements Commercial paper and corporate notes $ 80,825 30,053 - 348,662 $ 26,005 10,012 907 573,430 $ 459,540 Cash and cash equivalents carry weighted-average yields...

  • Page 56
    54 Research In Motion Limited Available-for-sale investments are recorded at fair value and comprise the following: Amortized Cost Unrealized gains Unrealized Losses Estimated Fair Value As at March 4, 2006 Government sponsored enterprise notes Commercial paper and corporate bonds Asset-backed ...

  • Page 57
    ... as follows: Less than 12 months Fair Value Unrealized losses 12 months or more Fair Value Unrealized losses Total Fair Value Unrealized losses As at March 4, 2006 Government sponsored enterprise notes Commercial paper and corporate bonds Asset-backed securities Bank certificates of deposit 14,046...

  • Page 58
    ... of $1,318 with respect to certain capital assets no longer used by the Company; $618 of this amount was included in Cost of sales. 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...

  • Page 59
    ... intended product offerings. Of this amount $2,750 was included in Cost of sales with the balance of $1,577 recorded as Amortization expense. Such charges reflected management's assessment of net realizable values. For the year ended March 4, 2006, amortization expense related to intangible assets...

  • Page 60
    ...' operations have been included in the consolidated financial statements commencing from each respective closing date to March 4, 2006. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: For the year ended March 4, 2006...

  • Page 61
    Annual Report 2006 59 9. Income Taxes The difference between the amount of the provision for (recovery of) income taxes and the amount computed by multiplying income before income taxes by the statutory Canadian tax rate is reconciled as follows: For the year ended March 4, 2006 February 26, 2005 ...

  • Page 62
    ... on March 1, 2009. Interest expense on long-term debt for the year was $483 (February 26, 2005 - $460; February 28, 2004 - $771). 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)

  • Page 63
    Annual Report 2006 61 The scheduled long-term debt principal payments for the fiscal years 2007 through to maturity are as follows: For the years ending 2007 2008 2009 2010 $ 262 281 301 6,269 $ As at March 4, 2006, the Company has a $70 million Letter of Credit Facility ("the Facility") with ...

  • Page 64
    ... capital of the common shares of $328,231 was charged to retained earnings. All common shares repurchased by the Company pursuant to the Common Share Repurchase Program have been cancelled. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars...

  • Page 65
    ... its directors, officers and employees. The stock options are issued with an exercise price in either Canadian or U.S. dollars. The exercise price is equal to the fair market value of the Company's common shares at the date of grant. These stock options generally vest over a period of five years and...

  • Page 66
    ...,406 54 ,69 1 For the year ended March 4, 2006, the Company incurred rental expense of $5,767 (February 26, 2005 - $3,023; February 28, 2004 - $2,197). Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share data, and except as...

  • Page 67
    ... consolidated financial statements as at March 4, 2006. By letter dated February 16, 2004, T-Mobile Deutschland GmbH ("TMO-DG") 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...

  • Page 68
    ... to these financial statements and was paid by RIM on March 14, 2006. Thomas agreed to a dismissal of the litigation and all claims against RIM and its customers as part of the settlement and the action has been dismissed. On May 1, 2006, Visto Corporation ("Visto") filed a complaint in the...

  • Page 69
    Annual Report 2006 67 13. Product Warranty The Company estimates its warranty costs at the time of revenue recognition based on historical warranty claims experience and records the expense in Cost of sales. The warranty accrual balance is reviewed quarterly to establish that it materially ...

  • Page 70
    ... fees in the amount of $7.9 million as well as an accrual in the amount of $18.3 million to write-off the intangible asset following the November 30, 2005 ruling. Research In Motion Limited • Incorporated Under the Laws of Ontario (In thousands of United States dollars, except per share...

  • Page 71
    ...BlackBerry related business. The resolution permits RIM and its partners to sell RIM products and services completely free and clear of any claim by NTP, including any claims that NTP may have against wireless carriers, channel partners, suppliers or customers in relation to RIM products or services...

  • Page 72
    70 Research In Motion Limited 16. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share. For the year ended March 4, 2006 February 26, 2005 February 28, 2004 Net income for basic and diluted earnings per share available to common shareholders ...

  • Page 73
    ...992) (11,561) 512 16,976 16,123 33,690 (36,261) (3,225) 2,162 $ (396,464) $ (43,605) (b) Certain statement of cash flow information related to interest and income taxes paid is summarized as follows: For the year ended March 4, 2006 February 26, 2005 February 28, 2004 Interest paid during the...

  • Page 74
    ...to their short maturities. The fair value of investments has been estimated based upon market quotes from an independent pricing service. The fair value of foreign currency forward contracts has been estimated using market quoted rates of foreign currencies. The fair value of long-term debt has been...

  • Page 75
    ... same period that the forecasted transaction affects earnings. 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 76
    ... 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 March 4, 2006 February 26, 2005 February 28, 2004 Revenue Canada United...

  • Page 77
    Annual Report 2006 75 21. Subsequent Event On March 9, 2006, the Company completed the acquisition of 100% of the capital stock of Ascendent Systems Inc. ("Ascendent"). Ascendent specializes in enterprise solutions to simplify voice mobility implementations. The purchase price allocation will be ...

  • Page 78
    ... Accountants 515 Riverbend Drive P.O. Box 9458, Station C Kitchener, Ontario, N2G 4W9 Stock Exchange Listings Nasdaq 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...

  • Page 79
    ... 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 are registered with the U.S. Patent and Trademark Office...

  • Page 80
    295 Phillip Street Waterloo, Ontario, Canada N2L 3W8 T: 519.888.7465 F: 519.888.6906 E: [email protected] www.rim.com