Blackberry 2006 Annual Report Download - page 30

Research In Motion Limited
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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)
As at February 26, 2005, the Company had an accrued liability of $450.0 million in respect of the NTP
litigation which included an intangible asset of $20.0 million. As the full and nal settlement amount paid
on March 3, 2006 was $612.5 million, an additional charge to earnings in the amount of $162.5 million was
recorded in the scal 2006 operating results. During scal 2006, the Patent Ofce issued various ofce
actions rejecting all claims in all NTP patents. Accordingly, though the rulings of the Patent Ofce are
subject to appeal by NTP, given the conclusions and the strength of the conclusions reached by the Patent
Ofce, no value has been ascribed to the NTP license. This resulted in an additional charge to earnings
of $18.3 million reecting the book value of the intangible asset at the time the Term Sheet was ruled
unenforceable. The charge of $162.5 million, the write-off of the intangible asset of $18.3 million as well
as incremental legal and professional fees in respect of the litigation resulted in a charge to earnings of
$201.8 million in scal 2006.
Investment Income
Investment income increased by $29.1 million to $66.2 million in scal 2006 from $37.1 million in scal
2005. The increase primarily reects the incremental interest income as a result of improved interest rate
yields in scal 2006 compared to scal 2005 as well as the signicant increase in cash, cash equivalents,
short-term investments and investments during the current year primarily from higher net earnings
compared to the prior year.
Income Taxes
The Company’s income tax expense in scal 2006 was $104.0 million, resulting in an effective tax rate
of 21.4%. During the rst quarter of scal 2006, the income tax provision was reduced by $27.0 million
because of the Company recognizing incremental cumulative ITC attributable to prior scal years.
ITC’s are generated as a result of the Company incurring eligible SR&ED expenditures, which, under the
“ow-through” method, are credited as a reduction of income tax expense. The Company recorded this
$27.0 million reduction in its deferred income tax provision as a result of a favorable tax ruling involving
another Canadian technology corporation, but also applicable to the Company. The tax ruling determined
that stock option benets are considered eligible SR&ED expenditures.
The deferred income tax asset recorded on the balance sheet relates primarily to ITCs and other tax loss
carry-forwards. The Company’s scal 2006 current tax expense primarily reects certain large corporation
taxes, and certain other minimum and foreign taxes.
The Company has not provided for Canadian income taxes or foreign withholding taxes that would apply
on the distribution of the earnings of its non-Canadian subsidiaries, as these earnings are intended to be
reinvested indenitely by these subsidiaries.
In scal 2005, the Company recorded an income tax recovery $142.2 million. The Company’s recognition of
its deferred income tax assets in the fourth quarter of scal 2005 was primarily responsible for the income
tax recovery. In the fourth quarter of scal 2005, the Company determined that it was more likely than not
that it could realize the full value of its deferred income tax assets and that a valuation allowance was no
longer required. Accordingly, the Company recognized the full value of its deferred income tax assets on its
balance sheet at the end of scal 2005.
Net Income
Net income increased by $168.7 million to $382.1 million, or $2.02 basic EPS and $1.96 diluted EPS, in
scal 2006 compared to net income of $213.4 million, or $1.14 basic EPS and $1.09 diluted EPS in the prior
year. The increase reects primarily higher operating prot/gross margin resulting from increased device