| 1 | Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months and Six Months Ended September 1, 2007 | ||
| 2 | Consolidated Financial Statements for the Three Months and Six Months Ended September 1, 2007 | ||
| 3 | Canadian Forms 52-109F2 — Certification of Interim Filings |
| • | the Company’s plans and expectations with respect to matters relating to its historical stock option granting practices, including regulatory investigations and litigation in connection therewith; | ||
| • | the Company’s expectations regarding the average selling price (“ASP”) of its BlackBerry devices; | ||
| • | the Company’s estimates regarding revenue sensitivity for the effect of a change in ASP; | ||
| • | the Company’s estimates of purchase obligations and other contractual commitments; and | ||
| • | the Company’s expectations with respect to the sufficiency of its financial resources. |
| • | risks related to RIM’s internal review of its stock option granting practices, the restatement of its previously filed financial statements as a result of the review, and regulatory investigations or litigation relating to those matters, including risks associated with court approval of the settlement of the application commenced on January 24, 2007 in the Ontario Superior Court of Justice — Commercial List by a pension fund that alleges it was a shareholder of RIM; | ||
| • | third-party claims for infringement of intellectual property rights by RIM and the outcome of any litigation with respect thereto; | ||
| • | RIM’s ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products; | ||
| • | the efficient and uninterrupted operation of RIM’s network operations center and the networks of its carrier partners; | ||
| • | the occurrence or perception of a breach of RIM’s security measures, or an inappropriate disclosure of confidential or personal information; | ||
| • | RIM’s ability to manage production facilities and its reliance on third-party manufacturers for certain products; | ||
| • | reduced spending by customers due to the uncertainty of economic and geopolitical conditions; | ||
| • | RIM’s ability to obtain rights to use software or components supplied by third parties; | ||
| • | RIM’s ability to enhance current products and develop new products; | ||
| • | RIM’s ability to establish new, and to build on existing, relationships with its network carrier partners and distributors; | ||
| • | RIM’s dependence on its carrier partners to grow its BlackBerry subscriber account base; | ||
| • | RIM’s dependence on a limited number of significant customers; | ||
| • | intense competition within RIM’s industry, including the possibility that strategic transactions by RIM’s competitors or carrier partners could weaken RIM’s competitive position or that RIM may be required to reduce its prices to compete effectively; | ||
| • | the continued quality and reliability of RIM’s products and services; | ||
| • | RIM’s reliance on its suppliers for functional components and the risk that suppliers will not be able to supply components on a timely basis or in sufficient quantities; | ||
| • | effective management of growth and ongoing development of RIM’s service and support operations; | ||
| • | risks associated with acquisitions, investments and other business initiatives; | ||
| • | risks associated with RIM’s expanding foreign operations; | ||
| • | dependence on key personnel and RIM’s ability to attract and retain key personnel; | ||
| • | reliance on third-party network infrastructure developers and software platform vendors; | ||
| • | foreign exchange risks; | ||
| • | changes in interest rates affecting RIM’s investment portfolio and the creditworthiness of its investment portfolio; |
2
| • | risks associated with short product life cycles; | ||
| • | government regulation of wireless spectrum and radio frequencies; | ||
| • | restrictions on import of RIM’s products in certain countries due to encryption of the products; | ||
| • | the costs and burdens of compliance with new government regulations; | ||
| • | continued use and expansion of the Internet; | ||
| • | regulation, certification and health risks and risks relating to the misuse of RIM’s products; | ||
| • | tax liabilities, resulting from changes in tax laws or otherwise, associated with RIM’s worldwide operations; and | ||
| • | difficulties in forecasting RIM’s quarterly financial results and the growth of its subscriber base. |
3
4
5
| • | Benefits from Option Grants - All directors and each of RIM’s co-Chief Executive Officers and Chief Operating Officers agreed in respect of options that were incorrectly priced to return any benefit on previously exercised options and to reprice unexercised options that were incorrectly priced. All vice presidents of the Company were asked to agree to similar treatment for their options that have dating issues, where those options were granted after the employee’s commencement of employment and in the employee’s capacity as vice presidents. As of the date hereof, 93% of the stock options held by directors, c-level officers and vice presidents that are subject to such repricing have been repriced, and the Company has received $1.6 in restitution payments from its directors, c-level officers and vice presidents (representing 20% of anticipated restitution payments from such individuals). The process is ongoing. | ||
| • | Changes to the Company’s Stock Option Granting Practices — In June 2007, the Board of Directors approved a formal policy on granting equity awards, the details of which are described in the Company’s Management Information Circular, dated June 14, 2007 (the “Management Information Circular”), a copy of which can be found on SEDAR at www.sedar.com and on the SEC’s website at www.sec.gov. | ||
| • | Changes to the Company’s Board of Directors, Board Committees and Organizational Structure In accordance with the Special Committee’s recommendations and other considerations, the Board of Directors has established a new Oversight Committee, separated the roles of Chairman and CEO, implemented other changes to the Company’s Board, Audit Committee, Compensation Committee, |
6
| and Nominating Committee, and has changed various management roles. In addition to Ms. Barbara Stymiest and Mr. John Wetmore, who became directors of the Company in March 2007, Mr. David Kerr and Mr. Roger Martin were elected as directors of the Company at the annual general meeting of the Company on July 17, 2007. Each of the new directors and nominees are “independent” within the meaning of applicable securities laws and stock exchange rules. Mr. Douglas Fregin did not stand for re-election at the annual general meeting of the Company and as previously disclosed, Mr. Kendall Cork and Dr. Douglas Wright also did not stand for re-election at the annual general meeting of the Company. Mr. Cork and Dr. Wright were appointed to the honorary position of Director Emeritus of the Board effective July 17, 2007 in recognition of their substantial contributions to the Company over many years. As described in further detail in the Management Information Circular, in June 2007, the Board amended the Stock Option Plan to provide that options held by directors of the Company will not terminate upon a director ceasing to be a director of the Company if such person is appointed as a Director Emeritus of the Board. Had this amendment not been made, unvested options held by Mr. Cork and Dr. Wright (the majority of which vested on August 14, 2007) would have terminated upon each of them ceasing to be a director of the Company. In recognition of Mr. Cork’s and Dr. Wright’s substantial contributions to the Company over many years, the Board determined that such amendment to the Stock Option Plan was appropriate. As a result of the amendment, the Company recorded additional compensation expense in the second quarter of fiscal 2008 in the amount of $3.5 million. | |||
| • | Other Changes - The Company is in the process of establishing an internal audit department, the head of which will report directly to the chair of the Audit Committee. Additionally, the Company is enhancing its capabilities in U.S. GAAP and in securities disclosure and compliance matters issues by establishing two new permanent full-time positions to be filled, respectively, by an employee with expertise in U.S. GAAP and an employee with expertise in securities disclosure and compliance. The latter employee will be responsible for administering RIM’s stock option granting program. A candidate selection process is underway to fill these positions. |
7
| • | The Company’s stock option granting practices are subject to ongoing investigations by the SEC, the OSC and the USAO. The investigations and requests for information, including interviews with the Company’s management and others, have required significant management attention and resources. The period of time necessary to resolve the investigations or to adequately respond to requests for information is uncertain, and these matters could require significant additional attention and resources that could otherwise be devoted to the operation of the Company’s business. At this time, the Company cannot predict what, if any, regulatory or other action may result from the investigations or inquiries. If the securities regulators or the USAO determine that a violation of securities or other laws may have occurred, or has occurred, the Company or its officers and directors may receive notices regarding potential enforcement action or prosecution and could be subject to civil or criminal penalties or other remedies. For example, the Company or its officers could be required to pay substantial damages, fines or other penalties, the regulators could seek an injunction against the Company or seek to ban an officer or director of the Company from acting as such, or the USAO could seek to impose criminal sanctions against the Company or its officers or directors if it determines that there was an intent to violate securities or other laws, any of which actions would have a material adverse effect on the Company. There can be no assurance that other regulatory agencies in the United States, Canada or elsewhere will not make inquiries about, or commence investigations into, matters relating to the Company’s stock option practices. | ||
| • | As previously disclosed, the Company has been served with an application filed by a shareholder in Ontario, Canada, which, among other things, seeks permission of the Ontario court to commence a shareholder derivative action purportedly on behalf of the Company against certain of the Company’s directors and officers relating to the Company’s historical option granting practices, and also makes certain demands with respect to the conduct and scope of the Review. Additional lawsuits, including purported class actions and additional derivative actions, may be filed relating to the Company’s stock option granting practices. The amount of time to resolve any such lawsuits is unpredictable, and defending against such lawsuits could require significant additional attention and resources that could otherwise be devoted to the operation of the Company’s business. In addition, an unfavorable outcome in any such litigation could have a material adverse effect on the Company’s business, financial condition and results of operations. | ||
| • | The Company could incur significant liabilities in connection with any litigation relating to its stock option granting practices, which liabilities may not be covered by insurance. In addition, the Company has indemnity obligations (including for legal expenses) for former and current directors, officers and employees, which are described in greater detail in the Management Information Circular. | ||
| • | As noted above, in connection with the Restatement, the Company has applied judgment in choosing whether to revise measurement dates for prior stock option grants. While the Company believes it has made appropriate judgments in determining the correct measurement dates for its stock option grants in connection with the Restatement, the issues surrounding past stock option grants and financial statement restatements are complex and guidance in these areas may continue to evolve. If new guidance imposes additional or different requirements or if the SEC or the OSC disagrees with the manner in which the Company has accounted for and reported the financial impact, there is a risk the Company may have to further restate its prior financial statements, amend its filings with the SEC or |
8
| the OSC (including the Consolidated Financial Statements and this MD&A), or take other actions not currently contemplated. Additionally, if the SEC or the OSC disagrees with the manner in which the Company has accounted for and reported the financial impact of past option grants, there could be delays in subsequent filings with the SEC or the OSC. | |||
| • | The Company may face challenges in hiring and retaining qualified personnel due to the Restatement, the regulatory investigations and contact with the USAO and, in the case of certain of its officers, the repricing of stock options held by such officers and the repayment of any benefits, including by officers of the Company that were not involved in the stock option granting process. In addition, restrictions on the Company’s ability to grant stock options to new employees under its policy on granting equity awards, which provides for quarterly grants of stock options except in limited and exceptional circumstances, may make it more difficult for the Company to attract new employees. The loss of the services of any of the Company’s key employees or challenges in hiring new employees could have a material adverse effect on its business and growth prospects. In addition, the Company may receive claims by employees who may be subject to adverse tax consequences as a result of errors in connection with stock option grants. |
9
| As at and for the Three Months Ended | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| Q2 Fiscal | |||||||||||||||||||||||
| September 1, 2007 | September 2, 2006 | 2008/2007 | |||||||||||||||||||||
| (in thousands, except for per share amounts) | |||||||||||||||||||||||
Revenue |
$ | 1,372,250 | 100.0 | % | $ | 658,541 | 100.0 | % | $ | 713,709 | |||||||||||||
Cost of sales |
667,833 | 48.7 | % | 288,456 | 43.8 | % | 379,377 | ||||||||||||||||
Gross margin |
704,417 | 51.3 | % | 370,085 | 56.2 | % | 334,332 | ||||||||||||||||
Expenses |
|||||||||||||||||||||||
Research and development |
88,171 | 6.4 | % | 55,846 | 8.5 | % | 32,325 | ||||||||||||||||
Selling, marketing and
administration |
197,943 | 14.4 | % | 116,283 | 17.7 | % | 81,660 | ||||||||||||||||
Amortization |
25,350 | 1.8 | % | 18,453 | 2.8 | % | 6,897 | ||||||||||||||||
| 311,464 | 22.7 | % | 190,582 | 28.9 | % | 120,882 | |||||||||||||||||
Income from operations |
392,953 | 28.6 | % | 179,503 | 27.3 | % | 213,450 | ||||||||||||||||
Investment income |
18,984 | 1.4 | % | 12,606 | 1.9 | % | 6,378 | ||||||||||||||||
Income before income taxes |
411,937 | 30.0 | % | 192,109 | 29.2 | % | 219,828 | ||||||||||||||||
Provision for income taxes |
124,252 | 9.1 | % | 51,957 | 7.9 | % | 72,295 | ||||||||||||||||
Net income |
$ | 287,685 | 21.0 | % | $ | 140,152 | 21.3 | % | $ | 147,533 | |||||||||||||
Earnings per share |
|||||||||||||||||||||||
Basic |
$ | 0.51 | $ | 0.25 | $ | 0.26 | |||||||||||||||||
Diluted |
$ | 0.50 | $ | 0.25 | $ | 0.25 | |||||||||||||||||
Weighted-average number of
shares outstanding (000’s) |
|||||||||||||||||||||||
Basic |
558,991 | 555,162 | |||||||||||||||||||||
Diluted |
572,165 | 570,678 | |||||||||||||||||||||
Total assets |
$ | 3,989,379 | $ | 2,495,730 | $ | 1,493,649 | |||||||||||||||||
Total liabilities |
$ | 920,262 | $ | 404,030 | $ | 516,232 | |||||||||||||||||
Total long-term liabilities |
$ | 77,798 | $ | 37,076 | $ | 40,722 | |||||||||||||||||
Shareholders’ equity |
$ | 3,069,117 | $ | 2,091,700 | $ | 977,417 | |||||||||||||||||
10
11
| Fiscal Year 2008 | Fiscal Year 2007 | Fiscal Year 2006 | ||||||||||||||||||||||||||||||||
| Second | First | Fourth | Third | Second | First | Fourth | Third | |||||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||||
| (as restated) (1) | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||||||||||||||||
Revenue |
$ | 1,372,250 | $ | 1,081,911 | $ | 930,393 | $ | 835,053 | $ | 658,541 | $ | 613,116 | $ | 561,219 | $ | 560,596 | ||||||||||||||||||
Gross margin |
$ | 704,417 | $ | 560,070 | $ | 497,358 | $ | 452,631 | $ | 370,085 | $ | 337,728 | $ | 308,511 | $ | 312,669 | ||||||||||||||||||
Research and development,
Selling, marketing and administration,
and Amortization |
311,464 | 276,212 | 256,454 | 228,087 | 190,582 | 175,851 | 152,991 | 139,110 | ||||||||||||||||||||||||||
Litigation (2) |
— | — | — | — | — | — | 162,500 | 26,176 | ||||||||||||||||||||||||||
Investment income |
(18,984 | ) | (16,447 | ) | (14,794 | ) | (12,666 | ) | (12,606 | ) | (12,051 | ) | (19,219 | ) | (17,483 | ) | ||||||||||||||||||
Income before income taxes |
411,937 | 300,305 | 255,698 | 237,210 | 192,109 | 173,928 | 12,239 | 164,866 | ||||||||||||||||||||||||||
Provision for (recovery of) income
taxes (3) |
124,252 | 77,085 | 68,314 | 62,018 | 51,957 | 45,084 | (3,356 | ) | 46,059 | |||||||||||||||||||||||||
Net income |
$ | 287,685 | $ | 223,220 | $ | 187,384 | $ | 175,192 | $ | 140,152 | $ | 128,844 | $ | 15,595 | $ | 118,807 | ||||||||||||||||||
Earnings per share (4) |
||||||||||||||||||||||||||||||||||
Basic |
$ | 0.51 | $ | 0.40 | $ | 0.34 | $ | 0.32 | $ | 0.25 | $ | 0.23 | $ | 0.03 | $ | 0.21 | ||||||||||||||||||
Diluted |
$ | 0.50 | $ | 0.39 | $ | 0.33 | $ | 0.31 | $ | 0.25 | $ | 0.22 | $ | 0.03 | $ | 0.20 | ||||||||||||||||||
Research and development |
$ | 88,171 | $ | 74,934 | $ | 67,321 | $ | 61,184 | $ | 55,846 | $ | 51,822 | $ | 44,322 | $ | 41,799 | ||||||||||||||||||
Selling, marketing and administration |
197,943 | 177,483 | 167,112 | 146,569 | 116,283 | 107,958 | 93,347 | 84,514 | ||||||||||||||||||||||||||
Amortization |
25,350 | 23,795 | 22,021 | 20,334 | 18,453 | 16,071 | 15,322 | 12,797 | ||||||||||||||||||||||||||
| $ | 311,464 | $ | 276,212 | $ | 256,454 | $ | 228,087 | $ | 190,582 | $ | 175,851 | $ | 152,991 | $ | 139,110 | |||||||||||||||||||
| (1) | See “Restatement of Previously Issued Financial Statements” and note 3 to the Consolidated Financial Statements. | ||
| (2) | See “Critical Accounting Policies and Estimates — Litigation” in the Company’s annual MD&A for the fiscal year ended March 3, 2007. | ||
| (3) | See “Results of Operations — Income Taxes” and note 10 to the Consolidated Financial Statements. | ||
| (4) | Basic and diluted earnings per share have been adjusted to reflect the 3-for-1 stock split implemented by way of a stock dividend. The stock dividend was paid on August 20, 2007 to common shareholders of record at the close of business on August 17, 2007. |
12
| Change - Fiscal | |||||||||||||||||||||||||||
| Q2 Fiscal 2008 | Q2 Fiscal 2007 | 2008/2007 | |||||||||||||||||||||||||
Number of devices
sold |
3,056,000 | 1,360,000 | 1,696,000 | 124.7 | % | ||||||||||||||||||||||
ASP |
$ | 353 | $ | 349 | $ | 4 | 1.0 | % | |||||||||||||||||||
Revenues |
|||||||||||||||||||||||||||
Devices |
$ | 1,077,165 | 78.5 | % | $ | 474,612 | 72.1 | % | $ | 602,553 | 127.0 | % | |||||||||||||||
Service |
201,415 | 14.7 | % | 128,365 | 19.5 | % | 73,050 | 56.9 | % | ||||||||||||||||||
Software |
57,203 | 4.2 | % | 38,154 | 5.8 | % | 19,049 | 49.9 | % | ||||||||||||||||||
Other |
36,467 | 2.6 | % | 17,410 | 2.6 | % | 19,057 | 109.5 | % | ||||||||||||||||||
| $ | 1,372,250 | 100.0 | % | $ | 658,541 | 100.0 | % | $ | 713,709 | 108.4 | % | ||||||||||||||||
13
14
| Three Month Fiscal Periods Ended | ||||||||||||||||||||||||
| September 1, 2007 | June 2, 2007 | September 2, 2006 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| $ | Revenue | $ | Revenue | $ | Revenue | |||||||||||||||||||
Revenue |
$ | 1,372,250 | $ | 1,081,911 | $ | 658,541 | ||||||||||||||||||
Research and development |
$ | 88,171 | 6.4 | % | $ | 74,934 | 6.9 | % | $ | 55,846 | 8.5 | % | ||||||||||||
Selling, marketing and
administration |
197,943 | 14.4 | % | 177,483 | 16.4 | % | 116,283 | 17.7 | % | |||||||||||||||
Amortization |
25,350 | 1.8 | % | 23,795 | 2.2 | % | 18,453 | 2.8 | % | |||||||||||||||
| $ | 311,464 | 22.7 | % | $ | 276,212 | 25.5 | % | $ | 190,582 | 28.9 | % | |||||||||||||
15
16
17
| For the Six Months Ended | ||||||||||||||||||||||
| Change | ||||||||||||||||||||||
| September 1, 2007 | September 2, 2006 | 2008/2007 | ||||||||||||||||||||
| (in thousands, except for per share amounts) | ||||||||||||||||||||||
Revenue |
$ | 2,454,161 | 100.0 | % | $ | 1,271,657 | 100.0 | % | $ | 1,182,504 | ||||||||||||
Cost of sales |
1,189,674 | 48.5 | % | 563,844 | 44.3 | % | 625,830 | |||||||||||||||
Gross margin |
1,264,487 | 51.5 | % | 707,813 | 55.7 | % | 556,674 | |||||||||||||||
Expenses |
||||||||||||||||||||||
Research and development |
163,105 | 6.6 | % | 107,668 | 8.5 | % | 55,437 | |||||||||||||||
Selling, marketing and
administration |
375,426 | 15.3 | % | 224,241 | 17.6 | % | 151,185 | |||||||||||||||
Amortization |
49,145 | 2.0 | % | 34,524 | 2.7 | % | 14,621 | |||||||||||||||
| 587,676 | 23.9 | % | 366,433 | 28.8 | % | 221,243 | ||||||||||||||||
Income from operations |
676,811 | 27.6 | % | 341,380 | 26.8 | % | 335,431 | |||||||||||||||
Investment income |
35,431 | 1.4 | % | 24,657 | 1.9 | % | 10,774 | |||||||||||||||
Income before income taxes |
712,242 | 29.0 | % | 366,037 | 28.8 | % | 346,205 | |||||||||||||||
Provision for income taxes |
201,337 | 8.2 | % | 97,041 | 7.6 | % | 104,296 | |||||||||||||||
Net income |
$ | 510,905 | 20.8 | % | $ | 268,996 | 21.2 | % | $ | 241,909 | ||||||||||||
Earnings per share |
||||||||||||||||||||||
Basic |
$ | 0.91 | $ | 0.48 | $ | 0.43 | ||||||||||||||||
Diluted |
$ | 0.89 | $ | 0.47 | $ | 0.42 | ||||||||||||||||
Weighted-average number
of shares outstanding
(000’s) |
||||||||||||||||||||||
Basic |
558,422 | 556,995 | ||||||||||||||||||||
Diluted |
571,379 | 573,408 | ||||||||||||||||||||
18
| For the Six Month Periods | Change - Fiscal | |||||||||||||||||||||||||
| Q2 YTD Fiscal 2008 | Q2 YTD Fiscal 2007 | 2008/2007 | ||||||||||||||||||||||||
Number of devices sold |
5,472,000 | 2,571,000 | 2,901,000 | 112.8 | % | |||||||||||||||||||||
ASP |
$ | 347 | $ | 353 | $ | (6 | ) | (1.6 | %) | |||||||||||||||||
Revenues |
||||||||||||||||||||||||||
Devices |
$ | 1,901,218 | 77.5 | % | $ | 907,559 | 71.4 | % | $ | 993,659 | 109.5 | % | ||||||||||||||
Service |
375,000 | 15.3 | % | 245,453 | 19.3 | % | 129,547 | 52.8 | % | |||||||||||||||||
Software |
111,670 | 4.6 | % | 80,693 | 6.3 | % | 30,977 | 38.4 | % | |||||||||||||||||
Other |
66,273 | 2.6 | % | 37,952 | 3.0 | % | 28,321 | 74.6 | % | |||||||||||||||||
| $ | 2,454,161 | 100.0 | % | $ | 1,271,657 | 100.0 | % | $ | 1,182,504 | 93.0 | % | |||||||||||||||
19
20
21
| As at | ||||||||||||
| September 1, 2007 | June 2, 2007 | Change - Q2/Q1 | ||||||||||
Cash and cash equivalents |
$ | 847,903 | $ | 712,244 | $ | 135,659 | ||||||
Short-term investments |
493,941 | 456,372 | 37,569 | |||||||||
Investments |
386,489 | 394,138 | (7,649 | ) | ||||||||
Cash, cash equivalents,
short-term investments
and investments |
$ | 1,728,333 | $ | 1,562,754 | $ | 165,579 | ||||||
| Three Months Ended | ||||||||||||
| Change - Fiscal | ||||||||||||
| September 1, 2007 | September 2, 2006 | 2008/2007 | ||||||||||
Net income |
$ | 287,685 | $ | 140,152 | $ | 147,533 | ||||||
Amortization |
41,277 | 30,590 | 10,687 | |||||||||
Deferred income taxes |
(13,356 | ) | 21,422 | (34,778 | ) | |||||||
Share-based compensation |
9,000 | 4,816 | 4,184 | |||||||||
Changes in: |
||||||||||||
Trade receivables |
(134,211 | ) | 19,993 | (154,204 | ) | |||||||
Other receivables |
(50,772 | ) | (521 | ) | (50,251 | ) | ||||||
Inventory |
(42,738 | ) | (61,228 | ) | 18,490 | |||||||
Accounts payable |
(8,085 | ) | 42,042 | (50,127 | ) | |||||||
Accrued liabilities |
45,134 | 26,217 | 18,917 | |||||||||
All other |
93,164 | 27,082 | 66,082 | |||||||||
Cash provided from operating activities |
$ | 227,098 | $ | 250,565 | $ | (23,467 | ) | |||||
22
| Six Months Ended | ||||||||||||
| Change-Fiscal | ||||||||||||
| September 1, 2007 | September 2, 2006 | 2008/2007 | ||||||||||
Net income |
$ | 510,905 | $ | 268,996 | $ | 241,909 | ||||||
Amortization |
78,993 | 57,399 | 21,594 | |||||||||
Deferred income taxes |
(62,151 | ) | 54,627 | (116,778 | ) | |||||||
Share-based payment |
14,300 | 9,800 | 4,500 | |||||||||
Changes in: |
||||||||||||
Trade receivables |
(279,931 | ) | (58,286 | ) | (221,645 | ) | ||||||
Other receivables |
(68,158 | ) | (304 | ) | (67,854 | ) | ||||||
Inventory |
(45,486 | ) | (60,996 | ) | 15,510 | |||||||
Accounts payable |
51,590 | 38,040 | 13,550 | |||||||||
Accrued liabilities |
121,898 | 27,053 | 94,845 | |||||||||
All other |
128,185 | 14,358 | 113,827 | |||||||||
Cash flows from operating activities |
$ | 450,145 | $ | 350,687 | $ | 99,458 | ||||||
23
| One to | Greater | ||||||||||||||||||||
| Less than One | Three | Four to | than Five | ||||||||||||||||||
| Total | Year | Years | Five Years | Years | |||||||||||||||||
Long-term debt |
$ | 7,203 | $ | 312 | $ | 6,891 | $ | — | $ | — | |||||||||||
Operating lease obligations |
91,727 | 12,893 | 30,130 | 14,820 | 33,884 | ||||||||||||||||
Purchase obligations and commitments |
1,376,428 | 1,376,428 | — | — | — | ||||||||||||||||
Total |
$ | 1,475,358 | $ | 1,389,633 | $ | 37,021 | $ | 14,820 | $ | 33,884 | |||||||||||
24
25
26
27
| As at | ||||||||
| September 1, | March 3, | |||||||
| 2007 | 2007 | |||||||
Assets |
||||||||
Current |
||||||||
Cash and cash equivalents (note 4) |
$ | 847,903 | $ | 677,144 | ||||
Short-term investments (note 4) |
493,941 | 310,082 | ||||||
Trade receivables |
852,568 | 572,637 | ||||||
Other receivables |
108,332 | 40,174 | ||||||
Inventory (note 5) |
301,393 | 255,907 | ||||||
Other current assets (note 14) |
99,876 | 41,697 | ||||||
Deferred income tax asset (note 10) |
64,729 | 21,624 | ||||||
| 2,768,742 | 1,919,265 | |||||||
Investments (note 4) |
386,489 | 425,652 | ||||||
Capital assets (note 6) |
572,185 | 487,579 | ||||||
Intangible assets (note 7) |
144,565 | 138,182 | ||||||
Goodwill (note 8) |
112,438 | 109,932 | ||||||
Deferred income tax asset (note 10) |
4,960 | 8,339 | ||||||
| $ | 3,989,379 | $ | 3,088,949 | |||||
Liabilities |
||||||||
Current |
||||||||
Accounts payable |
$ | 181,860 | $ | 130,270 | ||||
Accrued liabilities |
411,360 | 287,629 | ||||||
Income taxes payable (note 10) |
212,923 | 99,958 | ||||||
Deferred revenue |
36,009 | 28,447 | ||||||
Current portion of long-term debt |
312 | 271 | ||||||
| 842,464 | 546,575 | |||||||
Long-term debt |
6,891 | 6,342 | ||||||
Deferred income tax liability (note 10) |
42,299 | 52,532 | ||||||
Income taxes payable (note 10) |
28,608 | — | ||||||
| 920,262 | 605,449 | |||||||
Shareholders’ Equity |
||||||||
Capital stock (note 11) |
||||||||
Authorized — unlimited number of non-voting,
cumulative, redeemable, retractable preferred
shares; unlimited number of non-voting,
redeemable, retractable Class A common shares
and unlimited number of voting common shares
Issued - 559,820,028 voting common shares
(March 3, 2007 - 557,613,432) |
2,126,098 | 2,099,696 | ||||||
Retained earnings |
870,132 | 359,227 | ||||||
Paid-in capital |
57,920 | 36,093 | ||||||
Accumulated other comprehensive income (loss)
(note 14) |
14,967 | (11,516 | ) | |||||
| 3,069,117 | 2,483,500 | |||||||
| $ | 3,989,379 | $ | 3,088,949 | |||||
On behalf of the Board: |
||
Jim Balsillie
|
Mike Lazaridis | |
Director
|
Director |
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Capital | Paid-In | Retained | Comprehensive | |||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||
Balance as at March 3, 2007 |
$ | 2,099,696 | $ | 36,093 | $ | 359,227 | $ | (11,516 | ) | $ | 2,483,500 | |||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net income |
— | — | 510,905 | — | 510,905 | |||||||||||||||
Net change in unrealized gains on investments
available for sale |
— | — | — | 3,984 | 3,984 | |||||||||||||||
Net change in derivative fair value during the
period |
— | — | — | 25,525 | 25,525 | |||||||||||||||
Amounts reclassified to earnings during the period |
— | — | — | (3,026 | ) | (3,026 | ) | |||||||||||||
Other paid-in capital (note 12) |
— | 6,273 | — | — | 6,273 | |||||||||||||||
Shares issued: |
||||||||||||||||||||
Exercise of stock options (note 11) |
23,183 | — | — | — | 23,183 | |||||||||||||||
Transfers to capital stock resulting from stock
option exercises |
3,219 | (3,219 | ) | — | — | — | ||||||||||||||
Share-based compensation (note 12) |
— | 14,300 | — | — | 14,300 | |||||||||||||||
Excess tax benefits from share-based
compensation (note 12) |
— | 4,473 | — | — | 4,473 | |||||||||||||||
Balance as at September 1, 2007 |
$ | 2,126,098 | $ | 57,920 | $ | 870,132 | $ | 14,967 | $ | 3,069,117 | ||||||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue |
$ | 1,372,250 | $ | 658,541 | $ | 2,454,161 | $ | 1,271,657 | ||||||||
Cost of sales |
667,833 | 288,456 | 1,189,674 | 563,844 | ||||||||||||
Gross margin |
704,417 | 370,085 | 1,264,487 | 707,813 | ||||||||||||
Expenses |
||||||||||||||||
Research and development |
88,171 | 55,846 | 163,105 | 107,668 | ||||||||||||
Selling, marketing and administration (note 15) |
197,943 | 116,283 | 375,426 | 224,241 | ||||||||||||
Amortization |
25,350 | 18,453 | 49,145 | 34,524 | ||||||||||||
| 311,464 | 190,582 | 587,676 | 366,433 | |||||||||||||
Income from operations |
392,953 | 179,503 | 676,811 | 341,380 | ||||||||||||
Investment income |
18,984 | 12,606 | 35,431 | 24,657 | ||||||||||||
Income before income taxes |
411,937 | 192,109 | 712,242 | 366,037 | ||||||||||||
Provision for income taxes (note 10) |
||||||||||||||||
Current |
137,643 | 30,631 | 267,809 | 39,865 | ||||||||||||
Deferred |
(13,391 | ) | 21,326 | (66,472 | ) | 57,176 | ||||||||||
| 124,252 | 51,957 | 201,337 | 97,041 | |||||||||||||
Net income |
$ | 287,685 | $ | 140,152 | $ | 510,905 | $ | 268,996 | ||||||||
Earnings per share (note 13) |
||||||||||||||||
Basic |
$ | 0.51 | $ | 0.25 | $ | 0.91 | $ | 0.48 | ||||||||
Diluted |
$ | 0.50 | $ | 0.25 | $ | 0.89 | $ | 0.47 | ||||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Cash flows from operating activities |
||||||||||||||||
Net income |
$ | 287,685 | $ | 140,152 | $ | 510,905 | $ | 268,996 | ||||||||
Items not requiring an outlay of cash: |
||||||||||||||||
Amortization |
41,277 | 30,590 | 78,993 | 57,399 | ||||||||||||
Deferred income taxes |
(13,356 | ) | 21,422 | (62,151 | ) | 54,627 | ||||||||||
Income taxes payable |
311 | — | 28,608 | — | ||||||||||||
Share-based compensation (note 12) |
9,000 | 4,816 | 14,300 | 9,800 | ||||||||||||
Other |
223 | (632 | ) | 1,019 | (451 | ) | ||||||||||
Net changes in working capital items (note 18) |
(98,042 | ) | 54,217 | (121,529 | ) | (39,684 | ) | |||||||||
Net cash provided by operating activities |
227,098 | 250,565 | 450,145 | 350,687 | ||||||||||||
Cash flows from financing activities |
||||||||||||||||
Issuance of share capital (note 11) |
19,446 | 6,880 | 23,183 | 17,200 | ||||||||||||
Other paid-in capital (note 12) |
6,273 | — | 6,273 | — | ||||||||||||
Excess tax benefits from share-based compensation (note 12) |
3,073 | — | 4,473 | — | ||||||||||||
Common shares repurchased pursuant to Common
Share Repurchase Program (note 11) |
— | (203,933 | ) | — | (203,933 | ) | ||||||||||
Repayment of long-term debt |
(74 | ) | (66 | ) | (140 | ) | (129 | ) | ||||||||
Net cash provided by financing activities |
28,718 | (197,119 | ) | 33,789 | (186,862 | ) | ||||||||||
Cash flows from investing activities |
||||||||||||||||
Acquisition of investments |
(67,691 | ) | (3,912 | ) | (182,498 | ) | (9,012 | ) | ||||||||
Proceeds on sale or maturity of investments |
57,774 | 17,821 | 83,095 | 35,701 | ||||||||||||
Acquisition of capital assets |
(78,995 | ) | (68,639 | ) | (145,748 | ) | (112,704 | ) | ||||||||
Acquisition of intangible assets |
(13,718 | ) | (8,601 | ) | (23,457 | ) | (30,692 | ) | ||||||||
Business acquisitions (note 8) |
(3,200 | ) | (72,578 | ) | (3,200 | ) | (111,456 | ) | ||||||||
Acquisition of short-term investments |
(335,728 | ) | (20,978 | ) | (623,486 | ) | (21,756 | ) | ||||||||
Proceeds on sale and maturity of short-term
investments |
321,431 | 5,609 | 582,149 | 85,596 | ||||||||||||
Net cash used in investing activities |
(120,127 | ) | (151,278 | ) | (313,145 | ) | (164,323 | ) | ||||||||
Effect of foreign exchange (loss) gain on cash and cash
equivalents |
(30 | ) | 606 | (30 | ) | 606 | ||||||||||
Net increase in cash and cash equivalents
for the period |
135,659 | (97,226 | ) | 170,759 | 108 | |||||||||||
Cash and cash equivalents, beginning of period |
712,244 | 556,874 | 677,144 | 459,540 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 847,903 | $ | 459,648 | $ | 847,903 | $ | 459,648 | ||||||||
| 1. | BASIS OF PRESENTATION | |
| These interim consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”). They do not include all of the disclosures required by U.S. GAAP for annual financial statements and should be read in conjunction with Research In Motion’s (“RIM” or the “Company”) audited consolidated financial statements (the “financial statements”) for the year ended March 3, 2007, which have been prepared in accordance with U.S. GAAP. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included in these financial statements. Operating results for the three and six months ended September 1, 2007 are not necessarily indicative of the results that may be expected for the full year ending March 1, 2008. | ||
| The Company’s fiscal year end date is the 52 or 53 weeks ending on the last Saturday of February, or the first Saturday of March. The fiscal years ending March 1, 2008 and March 3, 2007 comprise 52 weeks. | ||
| 2. | ACCOUNTING PRONOUNCEMENTS | |
| (a) | Adoption of Accounting Pronouncements | |
| Accounting for Uncertainty in Income Taxes | ||
| In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in tax positions subject to Statement of Financial Accounting Standard (“SFAS”) No. 109 Accounting for Income Taxes (“SFAS 109”). FIN 48 provides a recognition threshold and a mechanism to measure and record tax positions taken, or expected to be taken during the filing of tax returns. The mechanism is a two-step process in which the tax position is evaluated for recognition on “a more likely than not” basis that it will be sustained upon examination. If step one is satisfied the position is then evaluated to determine the amount to be recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, interim period accounting, disclosure and transition. The Company adopted FIN 48 in the first quarter of fiscal 2008 with the impact described in note 10. | ||
| (b) | RECENTLY ISSUED PRONOUNCEMENTS | |
| Fair Value Measurements | ||
| In September 2006, the FASB issued SFAS 157 Fair Value Measurements. SFAS 157 clarifies the definition of fair value, establishes a framework for measurement of fair value, and expands disclosure about fair value measurements. SFAS 157 is effective for fiscal years beginning after December 15, 2007 and the Company will be required to adopt the standard in the first quarter of fiscal 2009. The Company is currently evaluating what impact, if any, SFAS 157 will have on its financial statements. | ||
| The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115 | ||
| In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of SFAS 115. SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. If |
1
| elected, unrealized gains or losses on certain items will be reported in earnings at each subsequent reporting period. SFAS 159 is effective for the Company as of the beginning of its 2009 fiscal year. The Company has not determined whether it will elect to adopt the fair value measurement provisions of this statement, or what impact it will have on its consolidated financial statements. | ||
| 3. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS | |
| As discussed in greater detail under “Explanatory Note Regarding the Restatement of Previously Issued Financial Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 3, 2007 and Note 4 to the audited consolidated financial statements of the Company for the fiscal year ended March 3, 2007, the Company restated its consolidated balance sheet as of March 4, 2006 and its consolidated statements of operations, consolidated statements of cash flows and consolidated statements of shareholders’ equity for the fiscal years ended March 4, 2006 and February 26, 2005, and the related note disclosures (the “Restatement”), to reflect additional non-cash stock compensation expense relating to certain stock-based awards granted prior to the adoption of the Company’s stock option plan on December 4, 1996 (as amended from time to time, the “Stock Option Plan”) and certain stock option grants during the 1997 through 2006 fiscal periods, as well as certain adjustments related to the tax accounting for deductible stock option expenses. The Restatement did not result in a change in the Company’s previously reported revenues, total cash and cash equivalents or net cash provided from operating activities. | ||
| The Restatement is the result of a voluntary internal review (the “Review”) by the Company of its stock option granting practices, which was commenced under the direction of the Audit Committee of the Company’s Board of Directors, at the initiative of Dennis Kavelman, the Company’s former Chief Financial Officer (now the Company’s Chief Operating Officer — Administration and Operations), with the support of Jim Balsillie, the Co-Chief Executive Officer of the Company, and the executive management team of the Company. Following the recusal of two Audit Committee members who also served on the Compensation Committee, the Review was completed by the remaining two members of the Audit Committee as a special committee of independent directors of the Board of Directors (the “Special Committee”). The Special Committee was assisted in the Review by outside legal counsel and outside accounting advisors in both Canada and the United States. The Special Committee reviewed the facts and circumstances surrounding the 3,231 grants of stock options to acquire common shares that were made between December 1996 and August 2006 to 2,034 employees and directors of the Company. The Special Committee also reviewed stock based awards granted prior to the adoption of the Stock Option Plan. | ||
| The Review identified three significant types of accounting errors being: (1) the misapplication of U.S. GAAP as it relates to a “net settlement” feature contained in the Stock Option Plan until February 27, 2002, which resulted in variable accounting treatment, (2) the misapplication of U.S. GAAP in the accounting for certain share awards granted prior to the adoption of the Stock Option Plan, which also resulted in variable accounting treatment and (3) the misapplication of U.S. GAAP in the determination of an accounting measurement date for options granted after February 27, 2002. The Special Committee determined that the Company failed to maintain adequate internal and accounting controls with respect to the issuance of options in compliance with the Stock Option Plan, both in terms of how options were granted and documented, and the measurement date used to account for certain option grants. The grant process was characterized by informality and a lack of definitive documentation as to when the accounting measurement date for a stock option occurred, and lacked safeguards to ensure compliance with applicable accounting, regulatory and disclosure rules. |
2
| Each of the SEC, the OSC and the office of the United States Attorney for the Southern District of New York (the “USAO”) has commenced investigations in connection with the Company’s stock option granting practices. The Company intends to continue to cooperate with each of these agencies. | ||
| 4. | CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS | |
| Cash consists of demand deposits held at various financial institutions. Cash equivalents are highly liquid investments with maturities of three months or less at the date of acquisition. Short-term investments consist of liquid investments with remaining maturities of less than one year. Investments with maturities in excess of one year are classified as non-current investments. | ||
| All cash equivalents and investments are categorized as available-for-sale and are carried at fair value with unrealized gains and losses recorded through other comprehensive income. In the event of a decline in value, which is other than temporary, the cash equivalents and investments are written down to fair value by a charge to earnings. | ||
| 5. | INVENTORY | |
| Inventory is comprised as follows: |
| September 1, | March 3, | |||||||
| 2007 | 2007 | |||||||
Raw materials |
$ | 146,706 | $ | 121,439 | ||||
Work in process |
164,887 | 141,938 | ||||||
Finished goods |
11,686 | 8,413 | ||||||
Provision for excess and obsolete inventory |
(21,886 | ) | (15,883 | ) | ||||
| $ | 301,393 | $ | 255,907 | |||||
3
| 6. | CAPITAL ASSETS | |
| Capital assets are comprised of the following: |
| September 1, 2007 | ||||||||||||
| Accumulated | Net book | |||||||||||
| Cost | amortization | value | ||||||||||
Land |
$ | 50,565 | $ | — | $ | 50,565 | ||||||
Buildings, leaseholds and other |
243,174 | 37,599 | 205,575 | |||||||||
BlackBerry operations and other information
technology |
374,492 | 189,433 | 185,059 | |||||||||
Manufacturing equipment |
135,332 | 80,523 | 54,809 | |||||||||
Furniture and fixtures |
128,562 | 52,385 | 76,177 | |||||||||
| $ | 932,125 | $ | 359,940 | $ | 572,185 | |||||||
| March 3, 2007 | ||||||||||||
| Accumulated | Net book | |||||||||||
| Cost | amortization | value | ||||||||||
Land |
$ | 39,509 | $ | — | $ | 39,509 | ||||||
Buildings, leaseholds and other |
217,941 | 29,560 | 188,381 | |||||||||
BlackBerry operations and other information
technology |
304,778 | 159,739 | 145,039 | |||||||||
Manufacturing equipment |
117,958 | 66,553 | 51,405 | |||||||||
Furniture and fixtures |
106,592 | 43,347 | 63,245 | |||||||||
| $ | 786,778 | $ | 299,199 | $ | 487,579 | |||||||
| 7. | INTANGIBLE ASSETS | |
| Intangible assets comprise the following: |
| September 1, 2007 | ||||||||||||
| Accumulated | Net book | |||||||||||
| Cost | amortization | value | ||||||||||
Acquired technology |
$ | 59,674 | $ | 24,765 | $ | 34,909 | ||||||
Licenses |
92,611 | 77,216 | 15,395 | |||||||||
Patents |
109,288 | 15,027 | 94,261 | |||||||||
| $ | 261,573 | $ | 117,008 | $ | 144,565 | |||||||
4
| March 3, 2007 | ||||||||||||
| Accumulated | Net book | |||||||||||
| Cost | amortization | value | ||||||||||
Acquired technology |
$ | 58,639 | $ | 19,183 | $ | 39,456 | ||||||
Licenses |
90,811 | 68,177 | 22,634 | |||||||||
Patents |
87,630 | 11,538 | 76,092 | |||||||||
| $ | 237,080 | $ | 98,898 | $ | 138,182 | |||||||
| 8. | BUSINESS ACQUISITIONS | |
| During the second quarter of fiscal 2008, the Company purchased 100% of the common shares of a company whose proprietary software will be incorporated into the Company’s software. The transaction closed on August 22, 2007. The operating results were not material to the Company’s consolidated operating results in the second quarter of fiscal 2008. | ||
| During the second quarter of fiscal 2007, the Company purchased 100% of the common shares of Slipstream Data Inc. (“Slipstream”). The transaction closed on July 7, 2006. Slipstream provides acceleration, compression and network optimization to enhance the online experience for mobile, dial and broadband subscribers, while significantly reducing bandwidth requirements. The operating results of Slipstream were not material to the Company’s consolidated operating results in the second quarter of fiscal 2007. | ||
| During the first quarter of fiscal 2007, the Company purchased 100% of the common shares of Ascendent Systems Inc. (“Ascendent”). The transaction closed on March 9, 2006. Ascendent specializes in enterprise solutions to simplify voice mobility implementations and allows the Company to further extend and enhance the use of wireless communications by offering a voice mobility solution that helps customers align their mobile voice and data strategies. The operating results of Ascendent were not material to the Company’s consolidated operating results in the first quarter of fiscal 2007. | ||
| In the acquisitions noted above, the consideration paid by the Company was cash and the results of the acquirees’ operations have been included in the consolidated financial statements commencing from the closing date to September 1, 2007. | ||
| The following tables summarizes the fiscal 2008 fair value allocations of the purchase price of the assets acquired and liabilities assumed at the date of acquisition along with prior year’s acquisition allocations: |
5
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Assets purchased |
||||||||||||||||
Current assets |
$ | — | $ | 2,829 | $ | — | $ | 3,233 | ||||||||
Capital assets |
— | 427 | — | 802 | ||||||||||||
Deferred income tax asset |
— | — | — | 4,806 | ||||||||||||
Acquired technology |
1,035 | 31,354 | 1,035 | 38,932 | ||||||||||||
Goodwill |
2,506 | 51,425 | 2,506 | 82,632 | ||||||||||||
| 3,541 | 86,035 | 3,541 | 130,405 | |||||||||||||
Liabilities assumed |
— | 2,603 | — | 8,095 | ||||||||||||
Deferred income tax liability |
341 | 10,854 | 341 | 10,854 | ||||||||||||
| 341 | 13,457 | 341 | 18,949 | |||||||||||||
Net non-cash assets acquired |
3,200 | 72,578 | 3,200 | 111,456 | ||||||||||||
Cash acquired |
1 | 3,438 | 1 | 3,560 | ||||||||||||
Net assets acquired |
$ | 3,201 | $ | 76,016 | $ | 3,201 | $ | 115,016 | ||||||||
| The purchase price allocation for the 2007 acquisitions were finalized in the fourth quarter of fiscal 2007. The acquisitions were accounted for using the purchase method whereby identifiable assets acquired and liabilities assumed were recorded at their estimated fair value as of the date of acquisition. The excess of the purchase price over such fair value was recorded as goodwill. Acquired technology includes current and core technology, and is amortized over periods ranging from two to five years. | ||
| 9. | PRODUCT WARRANTY | |
| The Company estimates its warranty costs at the time of revenue recognition based on historical warranty claims experience, expectations of future return rates and unit warranty repair costs. The expense is recorded in Cost of sales. The warranty accrual balance is reviewed quarterly to establish that it materially reflects the remaining obligation, based on the anticipated future expenditures over the balance of the obligation period. Adjustments are made when the actual warranty claim experience differs from these estimates. | ||
| The change in the Company’s warranty expense and actual warranty experience for the six months ended September 1, 2007 as well as the accrued warranty obligations as at September 1, 2007 are set forth in the following table: |
Accrued warranty obligations as at March 3, 2007 |
$ | 36,669 | ||
Warranty
costs incurred for the six months ended September 1, 2007 |
(30,308 | ) | ||
Warranty provision for the six months ended September 1, 2007 |
46,845 | |||
Accrued warranty obligations as at September 1, 2007 |
$ | 53,206 | ||
6
| 10. | INCOME TAXES | |
| For the first six months of fiscal 2008, the Company’s net income tax expense was $201.3 million or a net effective income tax rate of 28.3% compared to a net income tax expense of $97.0 million or a net effective income tax rate of 26.5% in the first six months of fiscal 2007. | ||
| The Company has not recorded a valuation allowance against its deferred income tax assets (September 2, 2006 — $nil). | ||
| 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. | ||
| The Company adopted the provisions of FIN 48 Accounting for Uncertainty in Income Taxes at the beginning of fiscal 2008 (“the adoption date”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold of more likely than not to be sustained upon examination. | ||
| The cumulative effect of the application of FIN 48 as at the adoption date resulted in the Company reclassifying $25.9 million from current taxes payable to non-current taxes payable for uncertain tax positions not expected to be resolved within one year. There was no cumulative effect adjustment to the Company’s fiscal 2008 opening retained earnings. | ||
| The Company’s total unrecognized tax benefits as at the adoption date and September 1, 2007 were $152.7 million and $164.2 million respectively. The increase in unrecognized tax benefits is primarily due to changes in measurement of existing uncertain tax positions related to the appreciation of the Canadian dollar versus U.S. dollar and other measurement criteria. The Company’s total unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate were $152.7 and $164.2 million as at the adoption date and September 1, 2007 respectively. | ||
| A summary of open tax years by major jurisdiction is presented below: |
Jurisdiction |
||||
Canada (1) |
Fiscal 2001 - 2007 | |||
United States (1) |
Fiscal 2003 - 2007 | |||
United Kingdom |
Fiscal 2002 - 2007 | |||
| (1) | Includes federal as well as provincial and state jurisdictions, as applicable. |
| The Company is subject to ongoing examination by tax authorities in the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes. Specifically, the Canada Revenue Agency (“CRA”) is currently examining the Company’s fiscal 2001-2005 Canadian corporate tax filings. The Company expects the CRA to conclude its examination in fiscal 2008 or fiscal 2009. The CRA has also given the Company notice that they will begin examining the Company’s fiscal 2006 and Fiscal 2007 Canadian corporate tax filings in fiscal 2008. |
7
| The Company has other non-Canadian income tax audits pending. While the final resolution of these audits is uncertain, the Company believes the ultimate resolution of these audits will not have a material adverse effect on its consolidated financial position, liquidity or results of operations. It is not possible for the Company to estimate a range of reasonably possible outcomes, or timing, of any adjustments to the total amount of uncertain tax benefits that may result from these audits. | ||
| The Company recognizes interest and penalties related to unrecognized tax benefits as interest expense that is netted and reported within Investment income. The amount of interest and penalties accrued as at September 1, 2007 is approximately $2.5 million and nil respectively. | ||
| 11. | CAPITAL STOCK | |
| The Company declared a 3-for-1 stock split of the Company’s outstanding common shares on June 28, 2007. The stock split was implemented by way of a stock dividend. Shareholders received two common shares of the Company for each common share held. The stock dividend was paid on August 20, 2007 to common shareholders of record at the close of business on August 17, 2007. All share, earnings per share and stock option data for the current, year to date and prior comparative periods have been adjusted to reflect this stock dividend. |
| Shares | ||||||||
| Outstanding | Amount | |||||||
| (000’s) | ||||||||
Common shares outstanding as at March 3, 2007 |
557,613 | $ | 2,099,696 | |||||
Exercise of stock options |
2,207 | 23,183 | ||||||
Transfers to capital stock resulting from stock option exercises |
— | 3,219 | ||||||
Common shares outstanding as at September 1, 2007 |
559,820 | $ | 2,126,098 | |||||
| During the second quarter of fiscal 2008, there were 1,753,980 stock options exercised. | ||
| The Company had 559.8 million common shares outstanding, 17.5 million stock options to purchase common shares outstanding and no restricted share units outstanding as at October 3, 2007. | ||
| Pursuant to the Common Share Repurchase Program, the Company repurchased 19.0 million common shares at a cost of $391,212 during the third quarter of fiscal 2006 and repurchased 9.5 million common shares at a cost of $203,933 during the second quarter of fiscal 2007 which brought the total number of common shares repurchased to the approved maximum of 28.5 million common shares. The amounts paid in excess of the per share paid-in capital of the common shares of $328,231 in the third quarter of fiscal 2006 and $172,171 in the second quarter of fiscal 2007 were charged to retained earnings. All common shares repurchased by the Company pursuant to the Common Share Repurchase Program have been cancelled. The common shares noted above have been adjusted to reflect the 3-for-1 stock split. | ||
| 12. | SHARE-BASED PAYMENT | |
| Stock Option Plan | ||
| The Company has an incentive stock option plan for directors, officers and employees of the Company and its subsidiaries. |
8
| Effective in fiscal 2007, the Company adopted SFAS 123(R) to record stock compensation expense, using the modified prospective transition (“MPT”) method. Under the MPT method, there is no restatement of prior periods. The adoption of SFAS 123(R) has resulted in a charge to earnings and a credit to paid-in capital of $14.3 million in the first six months of fiscal 2008 ($9.6 million – first six months of fiscal 2007). | ||
| In accordance with SFAS 123(R), beginning in fiscal 2007, the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows. | ||
| Options granted under the plan generally vest over a period of five years and are generally exercisable over a period of seven years to a maximum of ten years from the grant date. The Company issues new shares to satisfy stock option exercises. There are 10.6 million stock options vested and not exercised as at September 1, 2007. There are 14.9 million stock options available for future grants under the stock option plan. | ||
| As a result of the Company’s Review (as more fully discussed in Note 3), certain outstanding stock options were to be repriced to reflect a higher exercise price as certain employees agree to have their options repriced. Some of the options have been repriced as of September 1, 2007 and this has been reflected in the tables below. Repriced options in fiscal 2008 include 59 stock option grants to 40 individuals involving options to acquire 8,502,000 common shares. In addition, total restitution amounts received in the quarter for incorrectly priced options that were exercised prior to fiscal 2007 were $1.6 million. Where subject options have not yet been repriced, the per option information contained in the disclosure below relates to the historical prices for these stock options. As the repricing of the options has increased the exercise price upward, therefore making the options less valuable, there will be no stock compensation expense related to the repricing event. | ||
| The Company’s Co-Chief Executive Officers voluntarily offered to assist the Company in defraying costs incurred in connection with the Review and the Restatement by contributing CAD $10.0 million (CAD $5.0 million each) of those costs. The Company received these voluntary payments in the second quarter of fiscal 2008 and were recorded net of income taxes as an increase to paid-in capital. | ||
| In June 2007, the Board amended the Stock Option Plan to provide that options held by directors of the Company will not terminate upon a director ceasing to be a director of the Company if such person is appointed as a Director Emeritus of the Board. During the quarter there were a total of five grants to two Directors Emeritus that were modified. As a result of the amendment, the Company recorded additional compensation expense in the second quarter of fiscal 2008 in the amount of $3.5 million. |
9
| A summary of option activity since March 3, 2007 is shown below. |
| Options Outstanding | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number | Exercise Price | Contractual | Instrinsic | |||||||||||||
| (in 000’s) | per share | Life in Years | Value | |||||||||||||
Balance as at March 3, 2007 |
19,162 | $ | 11.76 | |||||||||||||
Granted during the period |
678 | 55.14 | ||||||||||||||
Exercised during the period |
(2,207 | ) | 9.70 | |||||||||||||
Forfeited during the period |
(115 | ) | 21.50 | |||||||||||||
Balance as at September 1,
2007 |
17,518 | $ | 15.72 | 3.07 | $ | 1,220,855 | ||||||||||
Vested and expected to vest at
September 1, 2007 |
16,907 | $ | 15.35 | 3.01 | $ | 1,184,610 | ||||||||||
Exercisable at September 1,
2007 |
10,613 | $ | 8.98 | 2.11 | $ | 811,161 | ||||||||||
| The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock on September 1, 2007 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on September 1, 2007. The intrinsic value of stock options exercised during the first six months of fiscal 2008, calculated using the average market price during the period, was approximately $49 per share. | ||
| A summary of unvested stock options since March 3, 2007 is shown below: |
| Options Outstanding | ||||||||
| Weighted- | ||||||||
| Number | average grant | |||||||
| (in 000’s) | date fair value | |||||||
Balance as at March 3, 2007 |
9,130 | $ | 8.03 | |||||
Granted during the period |
678 | 23.13 | ||||||
Vested during the period |
(2,787 | ) | 3.96 | |||||
Forfeited during the period |
(115 | ) | 10.14 | |||||
Balance as at September 1, 2007 |
6,906 | $ | 11.12 | |||||
| As of September 1, 2007, there was $48.0 million of unrecognized stock-based compensation expense related to |
10
| unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 2.0 years. The total fair value of stock options vested during the six months ended September 1, 2007 was $11.0 million. | ||
| Cash received from stock option exercises for the six months ended September 1, 2007 was $23.2 million (September 2, 2006 — $17.2 million). | ||
| The weighted average fair value of stock options granted during the quarter was calculated using the Black-Scholes Merton (“BSM”) option-pricing model with the following assumptions: |
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Weighted average grant
date fair value of
stock options granted
during the periods |
$ | 30.48 | $ | 11.12 | $ | 23.13 | $ | 11.39 | ||||||||
Assumptions: |
||||||||||||||||
Risk free interest rates |
4.7 | % | 5.0 | % | 4.7 | % | 5.0 | % | ||||||||
Expected life in years |
4.4 | 4.4 | 4.4 | 4.4 | ||||||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Volatility |
47 | % | 55 | % | 41%-47 | % | 55 | % | ||||||||
| The Company has not paid a dividend in the previous ten fiscal years and has no current expectation of paying cash dividends on its common stock. The risk-free interest rates utilized during the life of the stock options are based on a U.S. Treasury security for an equivalent period. The Company estimates the volatility of its common stock at the date of grant based on a combination of the implied volatility of publicly traded options on its common stock, and historical volatility, as the Company believes that this is a better indicator of expected volatility going forward. The expected life of stock options granted under the plan is based on historical exercise patterns, which the Company believes are representative of future exercise patterns. | ||
| Restricted Share Unit Plan (the “RSU Plan”) | ||
| The Company has an RSU plan under which eligible participants include any officer or employee of the Company or its subsidiaries. At the Company’s option, RSUs can be redeemed for either common shares issued from treasury, common shares purchased on the open market or the cash equivalent on the vesting dates. Compensation expense is measured on the grant date and recognized over the vesting period. The Company recorded no compensation expense with respect to RSUs in the second quarter of fiscal 2008 (second quarter of fiscal 2007 — $89). | ||
| The Company did not issue any RSUs in the three month period and six month period ended September 1, 2007 and there were no RSUs outstanding as at September 1, 2007 (March 3, 2007 – nil). | ||
| 13. | EARNINGS PER SHARE | |
| As described in note 11, a three-for-one stock split was implemented by way of a stock dividend to shareholders of record at the close of business on August 17, 2007. All share, earnings per share and stock option data for the current, year to date and prior comparative periods have been adjusted to reflect this stock dividend. |
11
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Net income for basic and diluted
earnings per
share available to commons stockholders |
$ | 287,685 | $ | 140,152 | $ | 510,905 | $ | 268,996 | ||||||||
Weighted-average number of shares
outstanding (000’s) — basic |
558,991 | 555,162 | 558,422 | 556,995 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Employee stock options (000’s) |
13,174 | 15,516 | 12,957 | 16,413 | ||||||||||||
Weighted-average number of shares and
assumed conversions (000’s) — diluted |
572,165 | 570,678 | 571,379 | 573,408 | ||||||||||||
Earnings per share — reported |
||||||||||||||||
Basic |
$ | 0.51 | $ | 0.25 | $ | 0.91 | $ | 0.48 | ||||||||
Diluted |
$ | 0.50 | $ | 0.25 | $ | 0.89 | $ | 0.47 | ||||||||
| For the three months ended | ||||||||
| September 1, | September 2, | |||||||
| 2007 | 2006 | |||||||
Net income |
$ | 287,685 | $ | 140,152 | ||||
Net change in unrealized gains on available-for-sale
investments |
5,740 | 4,579 | ||||||
Net change in derivative fair value during the period, net of income tax
expense of $542 (September 2, 2006 - income tax recovery $167) |
1,077 | (315 | ) | |||||
Amounts reclassified to earnings during the period, net of income tax
expense of $1,388 (September 2, 2006 - income tax expense of $1,387) |
(2,757 | ) | (2,621 | ) | ||||
Comprehensive income |
$ | 291,745 | $ | 141,795 | ||||
12
| For the six months ended | ||||||||
| September 1, | September 2, | |||||||
| 2007 | 2006 | |||||||
Net income |
$ | 510,905 | $ | 268,996 | ||||
Net change in unrealized gains on available-for-sale
investments |
3,984 | 5,668 | ||||||
Net change in derivative fair value during the period, net of income
tax
expense of $13,379 (September 2, 2006 - income tax expense $2,242) |
25,525 | 4,231 | ||||||
Amounts reclassified to earnings during the period, net of income tax
expense of $1,529 (September 2, 2006 - income tax expense of
$3,007) |
(3,026 | ) | (5,677 | ) | ||||
Comprehensive income |
$ | 537,388 | $ | 273,218 | ||||
| As at | ||||||||
| September 1, | March 3, | |||||||
| 2007 | 2007 | |||||||
Accumulated net unrealized losses on available-for-sale investments |
$ | (2,410 | ) | $ | (6,394 | ) | ||
Accumulated net unrealized gains (losses) on derivative instruments |
17,377 | (5,122 | ) | |||||
Total accumulated other comprehensive gain/(loss) |
$ | 14,967 | $ | (11,516 | ) | |||
| The fair value of derivative instruments of $25.9 million (March 3, 2007 – ($7.3) million) is included in Other current assets ($27.7 million; March 3, 2007 — $5.1 million) and Accrued Liabilities ($1.8 million; March 3, 2007 — $12.4 million) on the Consolidated Balance Sheet. | ||
| 15. | FOREIGN EXCHANGE GAINS AND LOSSES | |
| Selling, marketing and administration expense for the first six months of fiscal 2008 includes $0.3 million with respect to a foreign exchange loss (fiscal 2007 — foreign exchange loss of $2.9 million). The Company is exposed to foreign exchange fluctuations as a result of transactions in currencies other than its U.S. dollar functional currency. |
13
| 16. | COMMITMENTS AND CONTINGENCIES | |
| (a) | Credit Facility | |
| The Company has a $100 million Demand Credit Facility (“the Facility”) to support and secure operating and financing requirements. As at September 1, 2007, the Company has utilized $17.7 million of the Facility for outstanding letters of credit and $82.3 million of the Facility was unused. The Company has pledged specific investments as security for this Facility. | ||
| The Company has an additional $2.4 million Demand Credit Facility (“the Additional Facility”). The Additional Facility is used to support and secure other operating and financing requirements. As at September 1, 2007, the Company has utilized $1.5 million of the Additional Facility for outstanding letters of credit and $0.9 million of this facility was unused. The Company has pledged specific investments as security for this facility. | ||
| (b) | Litigation | |
| Research In Motion Limited and Research In Motion Corporation v. Eatoni Ergonomics, Inc., Civil Case No. 05 CV 0851-K, United States District Court for the Northern District of Texas (“the Litigation”). On April 28, 2005, the Company filed a declaratory judgment action against Eatoni Ergonomics, Inc. (“Eatoni”) seeking judgment of non-infringement and invalidity of Eatoni’s United States Patent No. 6,885,317 (“the ‘317 patent”), titled “Touch-typable Devices Based On Ambiguous Codes And Methods to Design Such Devices.” Eatoni asserted a counterclaim of infringement of the ‘317 patent. The Company and Eatoni mediated and executed a Settlement Agreement on September 26, 2005. On March 29, 2007, in a final, non-appealable, confidential Arbitration Award, the Arbitrator upheld the enforceability of the Settlement Agreement, finding that it requires dismissal of the Litigation. On June 7, 2007 RIM and Eatoni filed a stipulation of dismissal in the Northern District Court of Texas dismissing with prejudice all claims that each party had brought in the suit. In the settlement, the Company was granted a license for the ‘317 patent. Also, as part of the Settlement the Company is also involved in discussions with Eatoni directed toward a joint development project. | ||
| 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 to litigation in Germany (the “Neomax Litigation”) in which the plaintiff, Neomax Co., Ltd. (“Neomax”), formerly Sumitomo Special Metals Co., Ltd., brought an action against TMO in relation to cell phones sold by TMO in Germany for alleged infringement of a European Patent purportedly owned by Neomax, which in very general terms, relates to magnets installed as components in cell phones. On February 16, 2006, a partial judgment was issued by the Court of Appeals in Düsseldorf which rejected Neomax’s damage claim based upon negligent patent infringement and ordered the scheduling of further evidentiary proceedings. On April 3, 2006, Neomax filed an appeal before the German Federal Supreme Court for Civil Matters (BGH) seeking to overturn the partial judgment by the Court of Appeals in Düsseldorf. On March 26, 2007, the German Federal Patent Court delivered a judgment invalidating certain claims of the subject patent. As a result, the appellate courts have been asked to stay the outstanding appeals pending the decision of the German Federal Patent Court becoming final and binding. It is not anticipated that the appellate courts will rule on the merits of any of the appeals before the fourth quarter of fiscal 2008. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to the Neomax Litigation (or any related litigation) is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 1, 2007. | ||
| By letter dated February 3, 2005 (the “Letter”), TMO-DG delivered to RIM-UK notice of a claim for indemnity in relation to litigation in Düsseldorf, Germany in which the plaintiff, Inpro, brought action against TMO-DG (the “Litigation”) for infringement of the B1 Patent. The Company joined the Litigation as an intervening party in support of the defendant TMO-DG. The Company also filed an invalidity action in the patent court in Munich Germany. On January 27, 2006, the Munich court declared the B1 Patent invalid. Inpro has appealed the Munich court’s decision and an appeal will not be heard until some time in 2008. On March 21, 2006, the Düsseldorf |
14
| court stayed the infringement action until a final decision on validity has been made. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to the Litigation (or any related litigation) is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 1, 2007. | ||
| On May 1, 2006, Visto Corporation (“Visto”) filed a complaint in the United States District Court for the Eastern District of Texas, Marshall Division (the “Marshall District Court”), against the Company alleging infringement of four patents (United States Patent No. 6,023,708, 6,085,192, 6,151,606 and 6,708,221) and seeking an injunction and monetary damages. On May 1, 2006, RIM filed a declaratory judgment complaint against Visto in the United States District Court for the Northern District of Texas (Dallas Division) (the “Dallas District Court”) alleging that the Visto 6,085,192, 6,151,606, and 6,708,221 patents are invalid and/or not infringed. RIM filed an amended declaratory judgment complaint in the Dallas District Court on May 12, 2006 adding complaints of infringement against Visto for infringement of United States Patent No. 6,389,457 and 6,219,694, which are owned by RIM. Visto responded to RIM’s amended complaint on July 5, 2006 by filing a declaratory judgment claims in the Dallas District Court that the RIM 6,389,457 and 6,219,694 patents are invalid and/or not infringed. On June 16, 2006, RIM filed a declaratory judgment complaint against Visto in the Dallas District Court alleging that Patent No. 7,039,679 is invalid and/or not infringed The declaratory judgment filed by RIM in the Dallas District Court against Visto’s United States Patents No. 6,085,192, 6,151,606 and 6,708,221 has been dismissed. This will proceed as part of the Visto suit in the Eastern District of Texas. The RIM complaint filed in the Dallas District Court against Visto for infringement of RIM’s United States Patent No. 6,389,457 and 6,219,694 was consolidated with the declaratory judgment action filed by RIM against Visto’s patent No. 7,039,679 into one case. RIM’s complaint filed against Visto for infringement of RIM’s United States Patent No. 6,389,457 and 6,219,694 (consolidated with the declaratory judgment filed by RIM against Visto patent No, 7,039,679) was dismissed to allow RIM to refile those complaints in the Marshall District Court. RIM’s motion to amend its response to add an infringement claim under the RIM ‘457 and ‘694 patents, along with a declaratory judgement complaint against Visto patent 7,039,679, to the Marshall District Court action was granted on March 6, 2007. RIM’s motion to transfer Visto’s declaratory judgment counterclaims filed on July 5, 2006 (against the RIM Patents, US 6,389,457 and 6,219,694) from the Northern District of Texas Court to the Eastern District of Texas Court was granted on May, 17, 2007. All of RIM’s and Visto’s claims and counterclaims filed in the Northern District of Texas will now be heard in the Eastern District of Texas case. Proceedings are currently pending. As of September 21, 2007, the United States Patent & Trademark Office has issued office actions in reexamination proceedings rejecting all claims of each of the five patents asserted against RIM in the patent infringement action filed by Visto in the Eastern District of Texas against RIM on April 28, 2006. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to the Litigation (or any related litigation) is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 1, 2007. |
| On August 28, 2007, Visto filed a new complaint in the United States Court for the Eastern District of Texas, Marshall Division, against the Company alleging infringement of two United States Patents (United States Patent No. 5,857,201 and 6,324,542). RIM’s answer is due October 18, 2007. Proceedings are currently pending. | ||
| On June 15, 2007, RIM filed in the United States District Court for the Northern District of California a complaint against Visto for infringement of U.S. Patent No. 5,889,839, which is owned by RIM. On July 9, 2007, Visto filed its answer to RIM’s complaint asserting defences based on non-infringement, invalidity and unenforceability. On August 29, 2007, Visto filed a motion to amend Visto’s answer and add counterclaims of infringement by RIM of United States patents No. 7,255,231 and 7,228,383 in the Northern District of California case. Proceedings are currently pending. |
15
| On July 5, 2006, RIM commenced an action in the Federal Court of Canada against Visto for infringement of RIM’s Canadian Patent No. 2,245,157; 2,356,073 and 2,356,046. Proceedings are currently pending. On June 1, 2007, RIM commenced an action in the Ontario Superior Court of Justice against Visto Corporation and two of its executive officers. The action seeks damages for conspiracy, for false and misleading statements in contravention of the Competition Act, for contravention of the Trade-marks Act, for injurious falsehood and for unlawful interference with RIM’s economic relations. Proceedings are currently pending. | ||
| On October 30, 2006, RIM commenced an action against Visto in the High Court of Justice (Chancery Division, Patents Court) in London, England. The action sought a declaration that Visto’s U.K. patent [EP (UK) 0,996,905] is invalid and should be revoked. On December 5, 2006, RIM requested that the court decide that RIM’s actions in the U.K. do not infringe the same patent. RIM sent to Visto a non-confidential Product and Process Description (PPD) providing a technical description of RIM’s products offered in the UK. On February 2, 2007, Visto acknowledged that RIM’s products described in the non-confidential PPD do not infringe Visto’s U.K. patent [EP (UK) 0,996,905]. However, on February 2, 2007 Visto also filed a defence and counterclaim alleging that another RIM product allegedly not in the non-confidential PPD, the Mail Connector product, does infringe Visto’s U.K. patent [EP (UK) 0,996,905]. Visto also alleged that the action filed by RIM in Italy (see below) was filed in bad faith or with gross negligence and that filing the proceedings in Italy amounts to the tort of abuse of process. Visto further has asked the Court to order revocation of RIM’s U.K. patents [EP (UK) 1 096 727] and [EP (UK) 1 126 662]. RIM presented a jurisdiction challenge to Visto’s abuse of process claims related to RIM’s filing of the action in Italy on the basis that the UK Court did not have jurisdiction in the UK for the abuse of process claims. The Court decided in RIM’s favour in a hearing held on April 3, 2007 on RIM’s jurisdictional challenge and Visto has appealed the Court’s decision. On April 13, 2007, in view of the fact that Viso acknowledged that RIM’s products described in the PPD do not infringe the Visto UK patent, RIM served a notice of discontinuance that it was withdrawing its request that the Court decide that the RIM products described in the PPD do not infringe the Visto UK patent. The Appeals Court has set a date of December 19, 2007 for Visto’s appeal of the Court’s decision on RIM’s jurisdictional challenge to be heard. A hearing was held in the UK Court on August 7, 2007 on an application filed by Visto requesting a stay of the litigation. The UK Court denied Visto’s request for a stay. Proceedings are currently pending. | ||
| On December 27, 2006, RIM commenced an action in Italy in the Court of Milan, Specialized Division in Industrial and Intellectual Property. RIM is requesting that the court declare the Italian portion of Visto’s patent No. EP0996905 invalid and declare that RIM’s activities in Belgium, France, Italy, Germany, the Netherlands and Spain do not infringe patent EP0996905. On May 28, 2007 Visto filed a request with the Court of Milan that the Court hold a hearing on the issue of whether the Court has jurisdiction to decide that RIM’s activities in Belgium, France, Italy, Germany, the Netherlands and Spain do not infringe patent EP 0996905. Proceedings are currently pending. | ||
| On May 31, 2006, RIM filed a declaratory judgment action in the United States Court for the Northern District of Texas, Dallas Division, against DataQuill BVI, Ltd. in which RIM seeks a ruling that the United States Patent 6,058,304 is invalid and not infringed by RIM products. On August 15, 2006, DataQuill filed a motion to dismiss to which RIM filed a response on September 15, 2006. On March 27, 2007, the U.S. District Court for the Northern District of Texas issued an order denying DataQuill’s Motion to Dismiss. On April 13, 2007 RIM filed an amended complaint which added a declaratory judgment counterclaim to the suit seeking a ruling that DataQuill’s continuation patent of the 304 patent, United States Patent 7,139,591 (the “591 Patent”) is invalid and not infringed by RIM products. On April 24, 2007 DataQuill filed its answer to RIM’s declaratory judgment complaint. DataQuill counterclaimed for infringement of the 304 and 591 patents and is seeking an injunction and monetary damages. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 1, 2007. |
16
| On July 26, 2006, Williams Wireless Technologies filed a complaint against RIM Corporation and five other defendants in the United States District Court for the Eastern District of Texas, Sherman Division, alleging infringement of United States Patent No. 4,809,297 (the ‘297 patent). Williams Wireless sought an unspecified amount of damages for past infringement of the ‘297 patent. The ‘297 patent expired on February 28, 2006. RIM responded to the complaint in October 2006 that the patent was invalid and not infringed. A settlement was reached between RIM and William Wireless Technologies on June 12, 2007. In the settlement, the parties both agreed to dismiss all claims brought against each other with prejudice and RIM received a full release and covenant not to assert from Williams Wireless that covers RIM and its customers. | ||
| On June 6, 2007 Minerva Industries (“Minerva”) filed a complaint in the United States District Court for the Eastern District of Texas, Marshall Division, against the Company alleging infringement of United States Patent No. 6,681,120 and seeking an injunction and monetary damages. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 1, 2007. | ||
| On January 24, 2007, RIM was served with a Notice of Application that was filed with the Ontario Superior Court of Justice — Commercial List by a pension fund that alleges it was a shareholder, seeking various orders against the Company and named directors. On April 27, 2007 RIM was served with a Fresh As Amended Notice of Application (the “Amended Notice of Application”) by the shareholder. The Amended Notice of Application sought an order for a declaration that various actions of the Company and the named directors were oppressive or unfairly prejudicial to, or unfairly disregards the interests of the pension fund. Among other things, the pension fund also sought an order granting it leave to commence a derivative action in the name and on behalf of the Company relating to RIM’s option granting practices, seeking damages and ancillary relief against certain of RIM’s directors. On October 5, 2007, RIM and the other defendants entered into an agreement with the shareholder to settle the application and proposed derivative action. Under the settlement, each of the respondents to the application and each of the defendants in the proposed derivative action denied the allegations made against them by the pension fund. The settlement will not result in the payment of any monetary compensation (apart from legal costs) or past or present RIM shareholders. Pursuant to the terms of the settlement, in exchange for a full release. RIM has agreed to certain corporate governance measures that are consistent with previously announced measures, and to pay $1.1 million on account of the shareholder’s legal costs which has been recorded in these consolidated financial statements as at September 1, 2007. In addition, as part of the settlement and consistent with their earlier voluntary agreement (described in RIM’s March 5, 2007 press release) to contribute up to CAD $5.0 million each to defray the costs incurred by RIM in connection with the management-initiated voluntary review of RIM’s historical stock option granting practices. RIM’s co-CEO’s, Jim Balsillie and Mike Lazaridis, have agreed to pay RIM a further CAD $2.5 million each to defray the review costs incurred by RIM. The parties to the application are also seeking a representation order that will bind all RIM shareholders to the terms of the agreement. The settlement is subject to court approval, which will be sought at a motion to be heard on November 5, 2007. | ||
| From time to time, the Company is involved in other claims in the normal course of business. Additional lawsuits, including purported class actions and derivative actions, may be filed based upon allegations substantially similar to those described in the Amended Notice of Application or otherwise relating to the Company’s historical stock option granting practices. Management assesses such claims and where considered likely to result in a material exposure and, where the amount of the claim is quantifiable, provisions for loss are made based on management’s assessment of the likely outcome. The Company does not provide for claims that are considered unlikely to result in a significant loss, claims for which the outcome is not determinable or claims where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable. | ||
| 17. | SEGMENT DISCLOSURES | |
| The Company is 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. |
17
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue |
||||||||||||||||
Canada |
$ | 107,739 | $ | 52,362 | $ | 174,379 | $ | 96,185 | ||||||||
United States |
790,560 | 363,282 | 1,398,401 | 747,852 | ||||||||||||
Other |
473,951 | 242,897 | 881,381 | 427,620 | ||||||||||||
| $ | 1,372,250 | $ | 658,541 | $ | 2,454,161 | $ | 1,271,657 | |||||||||
Revenue
|
||||||||||||||||
Canada |
7.9 | % | 8.0 | % | 7.1 | % | 7.6 | % | ||||||||
United States |
57.6 | % | 55.1 | % | 57.0 | % | 58.8 | % | ||||||||
Other |
34.5 | % | 36.9 | % | 35.9 | % | 33.6 | % | ||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue mix |
||||||||||||||||
Devices |
$ | 1,077,165 | $ | 474,612 | $ | 1,901,218 | $ | 907,559 | ||||||||
Service |
201,415 | 128,365 | 375,000 | 245,453 | ||||||||||||
Software |
57,203 | 38,154 | 111,670 | 80,693 | ||||||||||||
Other |
36,467 | 17,410 | 66,273 | 37,952 | ||||||||||||
| $ | 1,372,250 | $ | 658,541 | $ | 2,454,161 | $ | 1,271,657 | |||||||||
| As at | ||||||||
| September 1, | March 3, | |||||||
| 2007 | 2007 | |||||||
Capital assets, intangible assets and goodwill |
||||||||
Canada |
$ | 736,850 | $ | 645,562 | ||||
United States |
51,608 | 50,321 | ||||||
Other |
40,730 | 39,810 | ||||||
| $ | 829,188 | $ | 735,693 | |||||
Total assets
|
||||||||
Canada |
$ | 1,362,013 | $ | 948,671 | ||||
United States |
1,268,394 | 983,491 | ||||||
Other |
1,358,972 | 1,156,787 | ||||||
| $ | 3,989,379 | $ | 3,088,949 | |||||
18
| For the three months ended | For the six months ended | |||||||||||||||
| September 1, | September 2, | September 1, | September 2, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Trade receivables |
$ | (134,211 | ) | $ | 19,993 | $ | (279,931 | ) | $ | (58,286 | ) | |||||
Other receivables |
(50,772 | ) | (521 | ) | (68,158 | ) | (304 | ) | ||||||||
Inventory |
(42,738 | ) | (61,228 | ) | (45,486 | ) | (60,996 | ) | ||||||||
Other current assets |
(15,148 | ) | (1,752 | ) | (21,969 | ) | (7,293 | ) | ||||||||
Accounts payable |
(8,085 | ) | 42,042 | 51,590 | 38,040 | |||||||||||
Accrued liabilities |
45,134 | 26,217 | 121,898 | 27,053 | ||||||||||||
Income taxes payable |
106,122 | 25,389 | 112,965 | 19,234 | ||||||||||||
Deferred revenue |
1,656 | 4,077 | 7,562 | 2,868 | ||||||||||||
| $ | (98,042 | ) | $ | 54,217 | $ | (121,529 | ) | $ | (39,684 | ) | ||||||
| 19. | COMPARATIVE FIGURES | |
| Certain of the comparative figures have been reclassified to conform to the current year presentation. |
19
| 1. | I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Research In Motion Limited (the “Issuer”) for the interim period ending September 1, 2007; | |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; | |
| 3. | Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; | |
| 4. | The Issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Issuer, and we have: |
| (a) | designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the Issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared; and | ||
| (b) | designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Issuer’s GAAP; and |
| 5. | I have caused the Issuer to disclose in the interim MD&A any change in the Issuer’s internal control over financial reporting that occurred during the Issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the Issuer’s internal control over financial reporting. |
| /s/ Michael Lazaridis | ||||
| MICHAEL LAZARIDIS Co-Chief Executive Officer |
||||
| 1. | I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Research In Motion Limited (the “Issuer”) for the interim period ending September 1, 2007; | |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; | |
| 3. | Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; | |
| 4. | The Issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Issuer, and we have: |
| (a) | designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the Issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared; and | ||
| (b) | designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Issuer’s GAAP; and |
| 5. | I have caused the Issuer to disclose in the interim MD&A any change in the Issuer’s internal control over financial reporting that occurred during the Issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the Issuer’s internal control over financial reporting. |
| /s/ James Balsillie | ||||
| JAMES BALSILLIE Co-Chief Executive Officer |
||||
| 1. | I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Research In Motion Limited (the “Issuer”) for the interim period ending September 1, 2007; | |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; | |
| 3. | Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; | |
| 4. | The Issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Issuer, and we have: |
| (a) | designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the Issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared; and | ||
| (b) | designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Issuer’s GAAP; and |
| 5. | I have caused the Issuer to disclose in the interim MD&A any change in the Issuer’s internal control over financial reporting that occurred during the Issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the Issuer’s internal control over financial reporting. |
| /s/ Brian Bidulka | ||||
| BRIAN BIDULKA Chief Accounting Officer |
||||
| Research In Motion Limited | ||||
| Date: October 5, 2007 | By: | /s/ Brian Bidulka | ||
| Name: | Brian Bidulka | |||
| Title: | Chief Accounting Officer | |||