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46
RESEARCH IN MOTION LIMITED
management’s discussion and analysis of financial
condition and results of operations continued
FOR THE THREE MONTHS AND FISCAL YEAR ENDED MARCH 3, 2007
2006. The agreement eliminated the need for any further
court proceedings or decisions relating to damages or
injunctive relief. On March 3, 2006, the Company paid
NTP $612.5 million in full and final settlement of all claims
against the Company, as well as for a perpetual, fully-paid up
license going forward. This amount included money already
escrowed by the Company as of March 3, 2006.
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 final 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 fiscal 2006
operating results. During fiscal 2006, the Patent Office
issued various office actions rejecting all claims in all NTP
patents. Accordingly, though the rulings of the Patent Office
are subject to appeal by NTP, given the conclusions and the
strength of the conclusions reached by the Patent Office, no
value has been ascribed to the NTP license. This resulted in
an additional charge to earnings of $18.3 million reflecting
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
fiscal 2006.
Investment Income
Investment income increased by $29.1 million to $66.2 million
in fiscal 2006 from $37.1 million in fiscal 2005. The increase
primarily reflects the incremental interest income as a result
of improved interest rate yields in fiscal 2006 compared to
fiscal 2005 as well as the significant increase in cash, cash
equivalents, short-term investments and investments during
fiscal 2006 primarily from higher net earnings compared to
the prior year.
Income Taxes
The Company’s income tax expense in fiscal 2006 was $106.9
million, resulting in an effective tax rate of 22.2%. During
the first quarter of fiscal 2006, the income tax provision
was reduced by $27.0 million because of the Company
recognizing incremental cumulative ITCs attributable to prior
fiscal years. ITCs are generated as a result of the Company
incurring eligible SR&ED expenditures, which, under the
“flow-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 benefits 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 fiscal 2006 current tax expense
primarily reflects 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 indefinitely
by these subsidiaries.
In fiscal 2005, the Company recorded an income tax
recovery of $139.4 million. The Company’s recognition of its
deferred income tax assets in the fourth quarter of fiscal 2005
was primarily responsible for the income tax recovery. In the
fourth quarter of fiscal 2005, the Company determined that
it was more likely than not that it could realize the full value
of its deferred 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 fiscal 2005.
Net Income
Net income increased by $169.1 million to $374.7 million, or
$1.98 per share basic and $1.91 per share diluted, in fiscal
2006 compared to net income of $205.6 million, or $1.10
per share basic and $1.04 per share diluted in the prior year.
The increase reflects primarily higher operating profit/gross
margin resulting from increased device shipments as well as
lower litigation costs in fiscal 2006 when compared to fiscal
2005 (see “Litigation”).
The weighted average number of shares outstanding was
188.9 million common shares for basic EPS and 196.2 million
common shares for diluted EPS for the year ended March 4,
2006 compared to 187.7 million common shares for basic EPS
and 198.0 million common shares for diluted EPS for fiscal
year 2005.