-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BO1JbJFabbOq+qojEISR3w6mAGZqXPzlxSfdGDoRk1JbDhDJKoCOlW9S83H4jvYe NFED7dczLCy59C98Sq3M3A== 0001341004-07-000172.txt : 20070116 0001341004-07-000172.hdr.sgml : 20070115 20070116070133 ACCESSION NUMBER: 0001341004-07-000172 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20070116 FILED AS OF DATE: 20070116 DATE AS OF CHANGE: 20070116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESEARCH IN MOTION LTD CENTRAL INDEX KEY: 0001070235 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 000000000 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29898 FILM NUMBER: 07530420 BUSINESS ADDRESS: STREET 1: 295 PHILLIP ST STREET 2: WATERLOO CITY: ONTARIO CANADA STATE: A6 ZIP: 00000 BUSINESS PHONE: 5198887465 MAIL ADDRESS: STREET 1: 295 PHILLIP STREET STREET 2: WATERLOO, ONTARIO N2L 3W8 CITY: ONTARIO STATE: A6 ZIP: N2L 3W8 6-K 1 tor60835.txt FORM 6-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 6-K Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of, January 2007 ---------------------------------------- ----------- Commission File Number 000-29898 ---------------------------------------- ----------- Research In Motion Limited - ------------------------------------------------------------------------------- (Translation of registrant's name into English) 295 Phillip Street, Waterloo, Ontario, Canada N2L 3W8 - ------------------------------------------------------------------------------- (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F: Form 20-F Form 40-F X ---------- ---------- Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____ Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____ Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes No X ---------- ---------- If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_______________ =============================================================================== DOCUMENTS INCLUDED AS PART OF THIS REPORT Document 1 Additional financial information on the preliminary results for the three months and six months ended September 2, 2006. 2 Additional financial information on the preliminary results for the three months and nine months ended December 2, 2006. This Report on Form 6-K is incorporated by reference into: (i) the Registration Statement on Form S-8 of the Registrant, which was originally filed with the Securities and Exchange Commission on March 28, 2002 (File No. 333-85294); and (ii) the Registration Statement on Form S-8 of the Registrant, which was originally filed with the Securities and Exchange Commission on October 21, 2002 (File No. 333-100684). DOCUMENT 1 RESEARCH IN MOTION LIMITED Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 January 16, 2007 EXPLANATORY NOTE On September 28, 2006, Research In Motion Limited ("RIM" or the "Company") publicly announced that the Audit Committee of its Board of Directors was completing a management-initiated, voluntary review of RIM's historical option granting practices. As a result of the recusal of two members of the Audit Committee, who are also members of RIM's Compensation Committee, the review is being continued 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 is being assisted in this regard by external legal counsel and external accounting consultants in both Canada and the United States. The Special Committee has made a preliminary determination that, under United States generally accepted accounting principles ("U.S. GAAP") pursuant to which RIM prepares its financial statements, certain accounting errors were made in connection with the administration of certain historical stock options granted and has made a preliminary determination that a restatement of RIM's historical financial statements will be required to reflect this. Although the review is ongoing, it is expected that the potential effect of any such restatement will be to increase the amount of non-cash charges associated with past option grants and thereby reduce the amount of RIM's previously reported U.S. GAAP earnings and related consolidated retained earnings which will be offset by similar adjustments to either the capital stock or paid-in capital accounts within shareholders' equity. The Company has had communications with both the United States Securities and Exchange Commission (the "SEC") and the Ontario Securities Commission (the "OSC") about its internal review of its stock option grants, and intends to continue to cooperate with the SEC and the OSC. On September 28, 2006, RIM publicly announced its preliminary operating results for the second quarter of fiscal 2007 (the "Preliminary Q2 Results") and on December 21, 2006, RIM publicly announced its preliminary operating results for the third quarter of fiscal 2007 (the "Preliminary Q3 Results"). The Preliminary Q2 Results and the Preliminary Q3 Results are considered preliminary pending the restatement related to RIM's historical non-cash charges associated with past option grants. On September, 28, 2006, RIM had made preliminary determinations based on the information it had at that point in time, that the amount of such non-cash charges would be approximately $25-$45 million over the period since RIM's initial public offering in 1997. On October 13, 2006, RIM announced that in connection with the ongoing review, and subsequent to September 28, 2006, RIM identified an additional error under U.S. GAAP that will require a further adjustment to its historical financial statements. The net effect of the additional error will be to substantially increase the amount of RIM's September 28, 2006 estimate of the non-cash charges associated with the past stock option grants and thereby reduce the amount of RIM's previously reported U.S. GAAP earnings over the periods to be restated. As previously disclosed, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results or to current or future fiscal years' operating results as a result of the restatement. 1 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 As a result of the ongoing review, RIM has delayed the filing of its consolidated financial statements and Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A") for the second and third quarters of fiscal 2007 in order for the review to be completed. The Company expects to file with the OSC and other Canadian securities regulators and furnish to the SEC its consolidated financial statements and related MD&A for the second and third quarters of fiscal 2007 and its restated historical consolidated financial statements and related MD&A prior to its fiscal year end of March 3, 2007. In the meantime, RIM has complied with, and intends to continue to comply with, the alternative information guidelines recommended by OSC Policy 57-603 "Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements" and Canadian Securities Administrators Staff Notice 57-301 by providing bi-weekly updates on its affairs and progress with respect to remedying the financial statements default and the review of its historical option granting practices by way of press release. In addition, in order to provide as much information to shareholders as possible prior to the Company's financial statement and MD&A filings for the second and third quarter of fiscal 2007 and while its management-initiated, voluntary review is ongoing, the Company advised the OSC that it intended to disclose additional financial information beyond the information provided with the Preliminary Q2 Results and the Preliminary Q3 Results, including a narrative explanation of the Company's operating performance during those quarters and certain additional financial information relating to balance sheet accounts (the "Additional Financial Information"). The Additional Financial Information included in this document is being filed with Canadian securities regulators and furnished to the SEC in furtherance of such undertaking. Readers are cautioned that this Additional Financial Information should not be considered a complete MD&A pursuant to National Instrument 51-102 ("NI-51-102") nor should this Additional Financial Information be considered to be complete consolidated financial statements for the second and third quarters of fiscal 2007 as certain information normally contained in RIM's MD&A, consolidated financial statements and the notes to such financial statements is not included in this Additional Financial Information. As noted above, complete consolidated financial statements and MD&A prepared in accordance with NI 51-102 for the second and third quarters of fiscal 2007 will be filed with the OSC and furnished to the SEC once the review of the Company's historical option practices has been completed together with the required restatements of the historical consolidated financial statements. Readers are further cautioned that this Additional Financial Information is preliminary and does not reflect any adjustments that may be required to RIM's historical consolidated financial statements (including a restatement of the consolidated financial statements for the prior year comparative periods as set forth herein) as a result of the completion of the Company's management-initiated, voluntary review of its historical option granting practices. As noted above, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results, or the financial information relating to the second quarter of fiscal 2007 contained in this Additional Financial Information, or to current or future financial years' operating results as a result of any restatements with respect to past option grants. However, the review is ongoing and the Preliminary Q2 Results, Preliminary Q3 Results and the financial information relating to the second quarter of fiscal 2007 contained in this Additional Financial Information may be subject to adjustment as a result of a restatement of RIM's historical financial statements. This Additional Financial Information is presented in United States dollars, except for certain financial information contained in tables which is expressed in thousands of United States dollars, and as otherwise indicated. This Additional Financial Information is prepared as of January 16, 2007. 2 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 All financial information herein has been derived from financial information which has been prepared and presented in accordance with U.S. GAAP. This Additional Financial Information has been prepared by management of the Company and is unaudited. Special Note Regarding Forward-Looking Statements This document contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including statements relating to: o RIM's ongoing management-initiated, voluntary review of historical option granting practices, including statements regarding: preliminary determinations and expectations regarding the financial impact of the review on RIM's historical, current and future financial results; the anticipated timing of filing consolidated financial statements and MD&A; and RIM's intention to provide regular updates to its shareholders; o the Company's estimates regarding revenue sensitivity for the effect of a change in ASP on its device revenue; o the Company's estimates of purchase obligations and other contractual commitments; and o the Company's expectations with respect to the sufficiency of its financial resources. The words "expect", "anticipate", "estimate", "may", "will", "should", "intend", "believe", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by RIM in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that RIM believes are appropriate in the circumstances. Many factors could cause RIM's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, some of which are discussed in greater detail in the "Risk Factors" section of RIM's Annual Information Form, which is included in RIM's Annual Report on Form 40-F (copies of which filings may be obtained at www.sedar.com and www.sec.gov): o risks related to the Company's ongoing management-initiated, voluntary review of historical option granting practices, including: determinations made by the Special Committee, outside advisors and others with respect to the ongoing review; unanticipated developments and delays encountered during the ongoing review; developments regarding RIM's ongoing communications with the SEC and OSC; additional corrections that may be required based on factual findings and analysis in the ongoing review; and legal and accounting developments regarding stock option grants and the interpretation of such guidance; o third-party claims for infringement of intellectual property rights by RIM and the outcome of any litigation with respect thereto; o RIM's ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products; o RIM's ability to obtain rights to use software or components supplied by third parties; o RIM's ability to enhance current products and develop and introduce new products; o the efficient and uninterrupted operation of RIM's network operations center and the networks of its carrier partners; o RIM's ability to establish new, and to build on existing, relationships with its network carrier partners and licensees; o RIM's dependence on its carrier partners to grow its BlackBerry subscriber base and to accurately report subscriber account activations and deactivations to RIM on a timely basis; 3 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 o fluctuations in RIM's quarterly financial results and difficulties in forecasting the growth rate for BlackBerry subscriber accounts; o the occurrence or perception of a breach of RIM's security measures, or an inappropriate disclosure of confidential or personal information; o 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; o the continued quality and reliability of RIM's products; o 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; o effective management of growth and ongoing development of RIM's service and support operations; o risks associated with acquisitions; o risks associated with RIM's expanding foreign operations; o RIM's dependence on a limited number of significant customers; o reduced spending by customers due to the uncertainty of economic and geopolitical conditions; o dependence on key personnel and RIM's ability to attract and retain key personnel; o reliance on third-party network infrastructure developers and software platform vendors; o foreign exchange risks; o changes in interest rates affecting RIM's investment portfolio and the creditworthiness of its investment portfolio; o RIM's ability to manage production facilities and its reliance on third-party manufacturers for certain products; o risks associated with short product life cycles; o government regulation of wireless spectrum and radio frequencies; o restrictions on import of RIM's products in certain countries due to encryption of the products; o the costs and burdens of compliance with new government regulations; o continued use and expansion of the Internet; o regulation, certification and health risks; and o tax liabilities, resulting from changes in tax laws or otherwise, associated with RIM's worldwide operations. These factors should be considered carefully and readers should not place undue reliance on RIM's forward-looking statements. RIM has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Overview RIM is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information including email, phone, short messaging service (SMS), Internet and intranet-based applications. RIM technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. RIM's products, services and embedded technologies are used by thousands of organizations around the world and include the BlackBerry(R) wireless platform, software development tools and other hardware and software. The Company's sales and marketing efforts include collaboration with strategic partners and distribution channel relationships to promote the sales of its products and services as well as its own supporting sales and marketing teams. 4 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Sources of Revenue RIM's primary revenue stream is its BlackBerry wireless platform, which includes sales of wireless devices, software and service. The BlackBerry wireless platform provides users with a wireless extension of their work and personal email accounts, including Microsoft(R) Outlook(R), Lotus Notes(R), Novell(R) GroupWise(R), MSN(R)/Hotmail, Yahoo! Mail(R), POP3/ISP email and others. RIM generates hardware revenues from sales, primarily to carriers, of BlackBerry wireless devices, which provide users with the ability to send and receive wireless messages and data. RIM's BlackBerry wireless devices also incorporate a mobile phone, a personal information manager (PIM) including contact, calendar, tasks and memo functionality, which can synchronize with the user's desktop PIM system, and web-browsing capability. Certain BlackBerry devices also include multimedia capabilities. RIM generates service revenues from billings to its BlackBerry subscriber base primarily from a monthly infrastructure access fee to a carrier/distributor where a carrier or other distributor bills the BlackBerry subscriber. The BlackBerry subscriber base is the total of all subscriber accounts that have an active status at the end of a reporting period. Each carrier instructs RIM to create subscriber accounts and determines whether the subscriber account should have an active status. That carrier is charged a service fee for each subscriber account each month regardless of the amount of data traffic the subscriber passes over the BlackBerry architecture. If a carrier informs RIM to deactivate the subscriber account, then RIM no longer includes that subscriber account in its BlackBerry subscriber account base and ceases billing from the date of notification of deactivation. On a quarterly basis, RIM may make an estimate of pending deactivations for certain carriers that do not use a fully-integrated provisioning system. It is, however, the carrier's responsibility to report changes to the subscriber account status on a timely basis to RIM. The number of subscriber accounts is a non-financial metric and is intended to highlight the change in RIM's subscriber base and should not be relied upon as an indicator of RIM's financial performance. The number of subscriber accounts does not have any standardized meaning prescribed by U.S. GAAP and may not be comparable to similar metrics presented by other companies. An important part of RIM's BlackBerry wireless platform is the software that is installed on corporate servers. Software revenues include fees from (i) licensing RIM's BlackBerry Enterprise Server(TM) ("BES") software; (ii) client access licenses ("CALs"), which are charged for each subscriber using the BlackBerry service via a BES; (iii) maintenance and upgrades to software; and (iv) technical support. RIM also offers the BlackBerry Connect(TM) and BlackBerry Built-In(TM) Licensing Programs which enable leading device manufacturers to equip their handsets with BlackBerry functionality, in order that users and organizations can connect to BlackBerry wireless services on a broader selection of devices and operating systems. BlackBerry Connect technology enables a variety of leading manufacturers to take advantage of proven BlackBerry architecture to automatically deliver email and other data to a broader choice of wireless devices, operating systems and email applications. BlackBerry Built-In technology enables leading manufacturers to incorporate popular BlackBerry applications into their mobile phones and handheld devices in addition to supporting "push"-based BlackBerry wireless services. Revenues are also generated from sales of accessories, repair and maintenance programs and non-recurring engineering services ("NRE"). 5 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Critical Accounting Policies and Estimates General The preparation of the consolidated financial statements of the Company requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based upon management's historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates. The Company's critical accounting policies and estimates have been reviewed and discussed with the Company's Audit Committee. Except as noted below, there have been no changes to the Company's critical accounting policies and estimates from those disclosed as at March 4, 2006. Share-Based Payment In the first quarter of fiscal 2007, the Company adopted the provisions of Statement of Financial Accounting Standard 123(R) ("SFAS 123(R)") Share-Based Payment. Under the provisions of SFAS 123(R), stock-based compensation expense is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model and is recognized rateably over the requisite service period. The BSM model requires various judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The BSM option-pricing model used in SFAS 123(R) is consistent with that used in pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation. The Company is using the modified prospective transition ("MPT") method as permitted by SFAS 123(R) to record stock-based compensation expense and accordingly prior periods have not been restated to reflect the impact of SFAS 123(R). Stock-based compensation expense calculated using the MPT approach is recognized on a prospective basis in the financial statements for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning in the Company's fiscal 2007 year. Stock-based compensation expense for awards granted prior to fiscal 2007 is based on the grant-date fair value as determined under the pro forma provisions of SFAS 123. As a result of the Company adopting SFAS 123(R) in the first quarter of fiscal 2007, the Company's net income for the six months ended September 2, 2006 was $8.7 million lower, or $0.05 per share basic and diluted, than if the Company had continued to account for share-based payments under Accounting Principles Board Opinion 25 ("APB 25"). Readers are cautioned that this Additional Financial Information is preliminary and does not reflect any adjustments that may be required to RIM's historical consolidated financial statements (including a restatement of the consolidated financial statements for the prior year comparative periods as set forth herein) as a result of the completion of the Company's management-initiated, voluntary review of its historical option granting practices. As noted above, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results, or the financial information relating to the second quarter of fiscal 2007 contained in this Additional Financial Information, or to current or future financial years' operating results as a result of any restatements with respect to past option grants. However, the review is ongoing and the Preliminary Q2 Results, Preliminary Q3 Results and the financial information relating to the second quarter of fiscal 2007 contained in this Additional 6 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Financial Information may be subject to adjustment as a result of a restatement of RIM's historical financial statements. Common Shares Outstanding On January 12, 2007, there were 185.7 million voting common shares, 6.5 million options to purchase voting common shares and no Restricted Share Units outstanding. 7 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Summary of Preliminary Results of Operations - Second Quarter of Fiscal 2007 Compared to the Second Quarter of Fiscal 2006 The following table sets forth certain unaudited consolidated statement of operations data, which is expressed in thousands of dollars and as a percentage of revenue for the interim periods indicated, as well as unaudited consolidated balance sheet data, which is expressed in thousands of dollars, as at September 2, 2006 and August 27, 2005: As at and for the Three Months Ended Change September 2, 2006 August 27, 2005 Q2 Fiscal 2007/2006 ----------------------------------------------------------------------------- (in thousands, except for per share amounts) ----------------------------------------------------------------------------- Revenue $ 658,541 100.0% $ 490,082 100.0% $ 168,459 Cost of sales 288,369 43.8% 221,067 45.1% 67,302 ----------------------------------------------------------------------------- Gross margin 370,172 56.2% 269,015 54.9% 101,157 ----------------------------------------------------------------------------- Expenses Research and development 55,622 8.4% 37,677 7.7% 17,945 Selling, marketing and administration 115,860 17.6% 72,263 14.7% 43,597 Amortization 18,453 2.8% 11,549 2.4% 6,904 ----------------------------------------------------------------------------- Sub-total 189,935 28.8% 121,489 24.8% 68,446 ----------------------------------------------------------------------------- Litigation (1) - 0.0% 6,640 1.4% (6,640) ----------------------------------------------------------------------------- 189,935 28.8% 128,129 26.1% 61,806 ----------------------------------------------------------------------------- Income from operations 180,237 27.4% 140,886 28.7% 39,351 Investment income 12,606 1.9% 15,700 3.2% (3,094) ----------------------------------------------------------------------------- Income before income taxes 192,843 29.3% 156,586 32.0% 36,257 Provision for income taxes (2) 52,066 7.9% 45,531 9.3% 6,535 ----------------------------------------------------------------------------- Net income $ 140,777 21.4% $ 111,055 22.7% $ 29,722 ============================================================================= Earnings per share Basic $ 0.76 $ 0.58 $ 0.18 ================== ================= =============== Diluted $ 0.74 $ 0.56 $ 0.18 ================== ================= =============== Weighted-average number of shares outstanding ('000's) Basic 185,054 190,896 Diluted 189,627 198,417 Total assets $ 2,495,730 $ 2,943,160 Total liabilities $ 400,015 $ 702,634 Total long-term liabilities $ 37,076 $ 6,602 Shareholders' equity $ 2,095,715 $ 2,240,526 8 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Notes: - ------ (1) See "Results of Operations - Litigation". (2) See "Results of Operations - Income Taxes".
Executive Summary Revenue increased by $168.4 million, or 34.4%, to $658.5 million in the second quarter of fiscal 2007 compared to $490.1 million in the preceding year's second quarter. The number of BlackBerry devices sold increased by 401,000, or 41.8%, to approximately 1,360,000 in the second quarter of fiscal 2007, compared to approximately 959,000 during the second quarter of fiscal 2006. Service revenue increased by $42.9 million to $128.4 million, reflecting the Company's increase in BlackBerry subscriber accounts during the period. Software revenue decreased by $2.4 million to $38.2 million in the second quarter of fiscal 2007. The Company's net income increased by $29.7 million to $140.8 million, or $0.76 basic earnings per share ("basic EPS") and $0.74 diluted earnings per share ("diluted EPS"), in the second quarter of fiscal 2007, compared to $111.1 million, or $0.58 basic EPS and $0.56 diluted EPS in the second quarter of fiscal 2006. The $29.7 million increase in net income in the second quarter of fiscal 2007 primarily reflects an increase in gross margin in the amount of $101.2 million, which was partially offset by an increase of $61.5 million in the Company's research and development and sales and marketing programs. Fiscal 2007 second quarter net income also includes the effect of the Company adopting SFAS 123(R), resulting in an after-tax stock-based compensation expense in the amount of $4.3 million. A more comprehensive analysis of these factors is contained in "Results of Operations". Results of Operations Three months ended September 2, 2006 compared to the three months ended August 27, 2005 Revenue Revenue for the second quarter of fiscal 2007 was $658.5 million, an increase of $168.4 million, or 34.4%, from $490.1 million in the second quarter of fiscal 2006. 9 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 A comparative breakdown of the significant revenue streams is set forth in the following table: Change - Fiscal Q2 Fiscal 2007 Q2 Fiscal 2006 2007/2006 --------------------------------------------------------------------- Number of devices sold 1,360,000 959,000 401,000 41.8% ============ ============ ====================== ASP $ 349 $ 357 $ (8) (2.2%) ============ ============ ====================== Revenues Devices $ 474,612 72.1% $ 342,574 69.9% $ 132,038 38.5% Service 128,365 19.5% 85,468 17.4% 42,897 50.2% Software 38,154 5.8% 40,554 8.3% (2,400) (5.9%) Other 17,410 2.6% 21,486 4.4% (4,076) (19.0%) --------------------------------------------------------------------- $ 658,541 100.0% $ 490,082 100.0% $ 168,459 34.4% =====================================================================
Device revenue increased by $132.0 million, or 38.5%, to $474.6 million, or 72.1% of consolidated revenue, in the second quarter of fiscal 2007 compared to $342.6 million, or 69.9% of consolidated revenue, in the second quarter of fiscal 2006. This increase in device revenue over the prior year's period is attributable to a volume increase of 401,000 devices, or 41.8%, to approximately 1,360,000 devices sold in the current fiscal quarter, compared to approximately 959,000 devices sold in the second quarter of fiscal 2006. In addition to new devices being sold to new users, device upgrades continued to be strong in the second quarter of fiscal 2007 as a result of new product launches. ASP decreased by $8, or 2.2%, to $349 in the current quarter from $357 in the second quarter of fiscal 2006 due primarily to a change in the BlackBerry device mix. The Company estimates that a $10 or 2.9% change in overall ASP would result in a quarterly revenue change of approximately $14 million based upon the Company's volume of devices shipped in the second quarter of fiscal 2007. Service revenue increased $42.9 million, or 50.2%, to $128.4 million and comprised 19.5% of consolidated revenue in the second quarter of fiscal 2007, compared to $85.5 million, or 17.4% of consolidated revenue in the second quarter of fiscal 2006. BlackBerry subscriber account additions increased by net 705,000 to approximately 6.2 million subscriber accounts as at September 2, 2006 with approximately 26% of RIM's subscriber account base being outside of North America, compared to an increase of net 620,000 during the second quarter of fiscal 2006 to approximately 3.7 million subscriber accounts as at August 27, 2005. Software revenue decreased $2.4 million to $38.2 million and comprised 5.8% of consolidated revenue in the second quarter of fiscal 2007, compared to $40.6 million, or 8.3% of consolidated revenue, in the second quarter of fiscal 2006 as software continued to be used as a tool in enterprise marketing programs in fiscal 2007. Other revenue, which primarily includes accessories, repair and maintenance programs, NRE and sundry, decreased by $4.1 million to $17.4 million in the second quarter of fiscal 2007 compared to $21.5 million in the second quarter of fiscal 2006. The majority of the decrease was attributable to decreases in NRE and accessories revenues, offset in part by an increase in non-warranty repairs. Gross Margin Gross margin increased by $101.2 million, or 37.6%, to $370.2 million, or 56.2% of revenue, in the second quarter of fiscal 2007, compared to $269.0 million, or 54.9% of revenue, in the same period of the previous 10 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 fiscal year. Gross margin percentage increased in the second quarter of fiscal 2007 primarily due to favorable changes in BlackBerry device mix, improved service margins resulting from cost efficiencies in RIM's network operations infrastructure as a result of the increase in BlackBerry subscriber accounts and a decline in certain fixed costs as a percentage of consolidated revenue as the Company continues to realize economies of scale in its manufacturing operations. This was offset, in part, by a decline in software revenues of $2.4 million to $38.2 million comprising 5.8% of the total revenue mix in the second quarter of fiscal 2007, compared to $40.6 million and 8.3% respectively in the second quarter of fiscal 2006. Research and Development, Selling, Marketing and Administration, and Amortization Expense The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter ended September 2, 2006 compared to the quarter ended June 3, 2006 and the quarter ended August 27, 2005. The Company believes it is meaningful to provide a comparison between the second quarter and the first quarter of fiscal 2007 given the quarterly increases in revenue realized by the Company during fiscal 2007. Three Month Fiscal Periods Ended --------------------------------------------------------------- September 2, 2006 June 3, 2006 August 27, 2005 --------------------------------------------------------------- % of % of % of $ Revenue $ Revenue $ Revenue --------------------------------------------------------------- Revenue $ 658,541 $ 613,116 $ 490,082 --------------------------------------------------------------- Research and development $ 55,622 8.4% $ 51,518 8.4% $ 37,677 7.7% Selling, marketing and administration 115,860 17.6% 107,255 17.5% 72,263 14.7% Amortization 18,453 2.8% 16,071 2.6% 11,549 2.4% --------------------------------------------------------------- $ 189,935 28.8% $ 174,844 28.5% $ 121,489 24.8% ===============================================================
Research and Development Research and development expenditures consist primarily of salaries for technical personnel, engineering materials, certification and tooling expense, outsourcing and consulting services, software tools and related information technology and office infrastructure support and travel. Research and development expenditures increased by $17.9 million to $55.6 million, or 8.4% of revenue, in the quarter ended September 2, 2006, compared to $37.7 million, or 7.7% of revenue, in the second quarter of fiscal 2006. The majority of the increase during the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006 was attributable to salaries and benefits, travel and office expenses, as well as related staffing infrastructure costs. 11 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Selling, Marketing and Administration Expenses Selling, marketing and administrative expenses consist primarily of salaries and benefits, marketing, advertising and promotion, travel and entertainment, external advisory fees, related information technology and office infrastructure support, recruiting, and foreign exchange gain or loss. Selling, marketing and administrative expenses increased by $43.6 million to $115.9 million, or 17.6% of revenue, for the second quarter of fiscal 2007 compared to $72.3 million, or 14.7% of revenue, for the comparable period in fiscal 2006. The net increase of $43.6 million was primarily attributable to increased expenditures for marketing, advertising and promotion expenses, salary and benefit expense primarily as a result of increased personnel, consulting and external advisory fees, travel and office expenses, as well as related staffing infrastructure costs. Amortization Amortization expense relating to certain capital and all intangible assets other than licenses increased by $6.9 million to $18.5 million for the second quarter of fiscal 2007 compared to $11.5 million for the comparable period in fiscal 2006. The increased amortization expense in the second quarter of fiscal 2007 primarily reflects the impact of amortization expense with respect to capital and certain intangible asset expenditures incurred primarily during fiscal 2006 and the first quarter of fiscal 2007. Litigation As has been more fully disclosed in the Company's annual consolidated financial statements and notes for the fiscal years ended March 4, 2006, February 26, 2005 and February 28, 2004, the Company was the defendant in a patent litigation matter brought by NTP, Inc. ("NTP") alleging that the Company infringed on eight of NTP's patents. On March 3, 2006, the Company and NTP signed definitive licensing and settlement agreements. All terms of the agreement were finalized and the litigation against RIM was dismissed by a court order on March 3, 2006. The agreement eliminated the need for any further court proceedings or decisions relating to damages or injunctive relief. On March 3, 2006, RIM paid NTP $612.5 million in full and final settlement of all claims against RIM, as well as for a perpetual, fully-paid up license going forward. This settlement amount included money already escrowed by RIM as of March 3, 2006. As the litigation was settled in fiscal 2006, no amount is reflected in the results of operations for fiscal 2007. The Company recorded an expense of $6.6 million in the second quarter of fiscal 2006 to account for incremental current and estimated legal and professional fees in connection with this litigation. Investment Income Investment income decreased by $3.1 million to $12.6 million in the second quarter of fiscal 2007 from $15.7 million in the comparable period of fiscal 2006. The decrease reflects the decrease in cash, cash equivalents, short-term investments and investments when compared to the prior year's quarter resulting primarily from the funding of the NTP litigation settlement in the amount of $612.5 million in the fourth quarter of fiscal 2006 as well as the common shares of the Company repurchased as part of the Company's Common Share Repurchase Program in the amount of $595.1 million offset, in part, by improved interest rate yields. Income Taxes 12 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 For the second quarter of fiscal 2007, the Company's income tax expense was $52.1 million resulting in an effective tax rate of 27.0% compared to an income tax expense of $45.5 million or an effective tax rate of 29.1% in the second quarter of fiscal 2006. 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. Net Income The Company's net income increased by $29.7 million to $140.8 million, or $0.76 basic EPS and $0.74 diluted EPS, in the second quarter of fiscal 2007 compared to $111.1 million, or $0.58 basic EPS and $0.56 diluted EPS, in the second quarter of fiscal 2006. The $29.7 million increase in net income in the second quarter of fiscal 2007 reflects primarily an increase in gross margin in the amount of $101.2 million which was partially offset by an increase of $61.5 million in the Company's research and development and sales and marketing programs. The fiscal 2007 second quarter net income also includes the effect of the Company adopting SFAS 123(R), resulting in an after-tax stock-based compensation expense in the amount of $4.3 million, or $0.03 diluted EPS. The weighted average number of shares outstanding was 185.1 million common shares for basic EPS and 189.6 million common shares for diluted EPS for the quarter ended September 2, 2006 compared to 190.9 million common shares for basic EPS and 198.4 million common shares for diluted EPS for the comparable period last year. Liquidity and Capital Resources Cash and cash equivalents, short-term investments and investments decreased by $91.3 million to $1.16 billion as at September 2, 2006 from $1.26 billion as at June 3, 2006. The majority of the Company's cash and cash equivalents, short-term investments and investments are denominated in U.S. dollars as at September 2, 2006. A comparative summary of cash and cash equivalents, short-term investments and investments is set out below. As at As at September 2 June 3 Change - 2006 2006 Q2/Q1 ------------------------------------------ Cash and cash equivalents $ 459,648 $ 556,874 $ (97,226) Short-term investments 237,670 166,275 71,395 Investments 467,324 532,749 (65,425) ------------------------------------------ Cash, cash equivalents, short-term investments and investments $1,164,642 $ 1,255,898 $ (91,256) ==========================================
13 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Three months ended September 2, 2006 compared to the three months ended August 27, 2005 Operating Activities Cash flow provided by operating activities was $250.6 million in the second quarter of fiscal 2007, compared to cash flow provided by operating activities of $174.0 million in the second quarter of the preceding fiscal year, representing an increase of $76.6 million. The table below summarizes the key components of this net increase. Three Months Ended Change - Fiscal September 2, 2006 August 27, 2005 2007/2006 ---------------------------------------------------------- Net income $ 140,777 $ 111,055 $ 29,722 Amortization 30,590 20,967 9,623 Deferred income taxes 21,422 31,532 (10,110) Changes in: Trade receivables 19,993 (6,742) 26,735 Other receivables (521) (4,219) 3,698 Inventory (61,228) (3,530) (57,698) Accounts payable 42,042 40,698 1,344 Accrued liabilities 25,915 3,557 22,358 All other 31,575 5,135 26,440 ---------------------------------------------------------- Changes in working capital items - before NTP litigation items 250,565 198,453 52,112 Litigation provision - 2,826 (2,826) Restricted cash - (27,311) 27,311 ---------------------------------------------------------- Cash provided by operating activities $ 250,565 $ 173,968 $ 76,597 ==========================================================
Financing Activities Cash flow used in financing activities was $197.1 million for the second quarter of fiscal 2007 compared to cash flow provided by financing activities of $3.3 million in the fiscal 2006 comparable period. The use of cash in the second quarter of fiscal 2007 was primarily attributable to the repurchase of 3.2 million common shares in the amount of $203.9 million pursuant to the Company's Common Share Repurchase Program. Investing Activities Cash flow used in investing activities for the second quarter of fiscal 2007 was $151.3 million and included a business acquisition of $72.6 million, capital asset additions of $68.6 million and intangible asset expenditures of $8.6 million. For the second quarter of the prior fiscal year, cash flow used in investing activities was $6.6 million and included capital asset expenditures of $55.7 million and intangible asset expenditures of $3.6 million partially offset by transactions involving the costs of acquisition of short-term investments and investments, net of the proceeds on sale or maturity, in the amount of $52.6 million. 14 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Aggregate Contractual Obligations The following table sets out aggregate information about the Company's contractual obligations and the periods in which payments are due as at September 2, 2006: One to Greater Less than Three Four to than Five Total One Year Years Five Years Years ----------------------------------------------------------- Long-term debt $ 7,161 $ 278 $ 6,883 $ - $ - Operating lease obligations 70,969 8,121 24,003 10,884 27,961 Purchase obligations and commitments 1,079,469 955,969 123,500 - - ----------------------------------------------------------- Total $ 1,157,599 $ 964,368 $ 154,386 $ 10,884 $ 27,961 ===========================================================
Purchase obligations and commitments of $1.08 billion as of September 2, 2006, in the form of purchase orders or contracts, are primarily for the purchase of raw materials, as well as for capital assets and other goods and services. The expected timing of payment of these purchase obligations and commitments is estimated based upon current information. Timing of payment and actual amounts paid may be different depending upon the time of receipt of goods and services or changes to agreed-upon amounts for some obligations. The Company may also be liable for certain key suppliers' component part inventories and purchase commitments if the Company's changes to its demand plans adversely affects these certain key suppliers. As of September 2, 2006, the Company has commitments on account of capital expenditures of approximately $46 million included in the $1.08 billion above, primarily for land and building, manufacturing and information technology, including service operations. The Company intends to fund current and future capital and intangible asset expenditure requirements from existing financial resources and cash flows. The Company has not declared any cash dividends in the last three fiscal years. Cash, cash equivalents, short-term investments and investments were $1.16 billion as at September 2, 2006. The Company believes its financial resources, together with expected future earnings, are sufficient to meet funding requirements for current financial commitments, for future operating and capital expenditures not yet committed, and also provide the necessary financial capacity to meet current and future growth expectations. The Company has a $100 million Demand Credit Facility (the "Facility") to fund financing and operating requirements, of which $16.3 million was utilized as of September 2, 2006 resulting in $83.7 million available for future use. The Company has pledged specific investments as security for this Facility. The Company had previously utilized $48 million of the Facility in order to fund a letter of credit to partially satisfy the Company's liability and funding obligation in the NTP matter. As a result of the settlement of the NTP matter, the Company cancelled the letter of credit on March 6, 2006. The Company has an additional demand facility in the amount of $18.1 million to support and secure other operating and financing requirements. As at September 2, 2006, $16.7 million of this facility was unused. A general security agreement and a general assignment of book debts have been provided as collateral for this facility. 15 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Market Risk of Financial Instruments The Company is engaged in operating and financing activities that generate risk in three primary areas: Foreign Exchange The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency of the U.S. Dollar. The majority of the Company's revenues in the second quarter of fiscal 2007 were transacted in U.S. Dollars, Canadian Dollars, Euros and British Pounds. Purchases of raw materials are primarily transacted in U.S. Dollars. Other expenses, consisting of the majority of salaries, certain operating costs and most manufacturing overhead, are incurred primarily in Canadian Dollars. At September 2, 2006, approximately 8% of cash and cash equivalents, 32% of trade receivables and 15% of accounts payable and accrued liabilities are denominated in foreign currencies (August 27, 2005 - 2%, 35%, and 22%, respectively). These foreign currencies primarily include the British Pound, Euro and Canadian Dollar. As part of its risk management strategy, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments, including forward contracts and options. The Company does not use derivative instruments for speculative purposes. To partially hedge exposures relating to foreign currency anticipated transactions, the Company has entered into forward contracts to sell U.S. Dollars and purchase Canadian Dollars. These contracts have been designated as cash flow hedges, with the resulting changes in fair value recorded in other comprehensive income, and subsequently reclassified to earnings in the period in which the cash flows from the associated hedged transactions affect earnings. These cash flow hedges were fully effective at September 2, 2006. As at September 2, 2006, the unrealized gain on these forward contracts was approximately $22.7 million (August 27, 2005 - $17.6 million). These amounts were included in Other current assets and Accumulated other comprehensive income. To partially hedge exposures relating to foreign currency denominated liabilities, the Company has entered into forward contracts to sell U.S. Dollars and purchase Canadian Dollars. These contracts have been designated as fair value hedges, with gains and losses on the hedge instruments being recognized in earnings each period, offsetting the change in the U.S. dollar value of the hedged liabilities. As at September 2, 2006, nil was recorded in respect of this amount (August 27, 2005 - gain of $0.2 million). This amount was included in Selling, marketing and administration expenses. To partially hedge exposures relating to foreign currency cash and receivable balances, the Company has entered into forward contracts to sell Canadian Dollars and purchase U.S. Dollars, to sell Euros and purchase U.S. Dollars, to sell British Pounds and purchase U.S. Dollars, and to sell Hungarian Forint and purchase U.S. Dollars. These contracts have been designated as fair value hedges, with gains and losses on the hedge instruments being recognized in earnings each period, offsetting the change in the U.S. Dollar value of the hedged assets. As at September 2, 2006, an unrealized loss of $0.5 million was recorded in respect of this amount (August 27, 2005 - unrealized loss of $1.0 million). This amount was included in Selling, marketing and administration expenses. Interest Rate Cash, cash equivalents and investments are invested in certain instruments of varying maturities. Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying 16 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 maturities. The fair value of investments, as well as the investment income derived from the investment portfolio, will fluctuate with changes in prevailing interest rates. The Company does not currently use interest rate derivative financial instruments in its investment portfolio. Credit and Customer Concentration The Company has historically been dependent on an increasing number of significant telecommunication carriers and on larger more complex contracts with respect to sales of the majority of its products and services. The Company is experiencing significant sales growth in North America and internationally, resulting in the growth in its carrier customer base in terms of numbers, sales and trade receivables volumes and, in some instances, new or significantly increased credit limits. While the Company sells to a variety of customers, two customers comprised 19% and 16% of trade receivables as at September 2, 2006 ( June 3, 2006 - three customers comprised 22%, 12% and 12%). Additionally, two customers comprised 19% and 17%, of the Company's fiscal 2007 second quarter sales (second quarter of fiscal 2006 - four customers comprised 23%, 15%, 11% and 11%). The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations to the Company. The Company mitigates some of this risk by limiting counterparties to major financial institutions and by continuously monitoring their creditworthiness. As at September 2, 2006, the maximum credit exposure to a single counterparty, measured as a percentage of the total fair value of the applicable derivative instruments was 52% (August 27, 2005 - 46%). The Company is exposed to market and credit risk on its investment portfolio. The Company mitigates this risk by investing only in liquid, investment grade securities and by limiting exposure to any one entity or group of related entities. As at September 2, 2006, no single issuer represented more than 11% of the total cash, cash equivalents and investments (August 27, 2005 - no single issuer represented more than 8% of the total cash, cash equivalents and investments). Impact of Accounting Pronouncements Not Yet Implemented Accounting for Certain Hybrid Financial Instruments In February 2006, the FASB issued SFAS 155 Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133 and among other things, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 is in effect for fiscal years beginning after September 15, 2006 and the Company will be required to adopt the standard in the first quarter of fiscal 2008. The Company is currently evaluating what impact, if any, SFAS 155 will have on its financial statements. 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. 17 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 Accounting for Uncertainty in Income Taxes In July 2006, the 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 SFAS 109 Accounting for Income Taxes. 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. FIN 48 is effective for the Company as of the beginning of its fiscal 2008 year. The Company is currently evaluating the impact FIN 48 will have on its financial statements. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108") Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that a company consider and evaluate materiality with respect to identified unadjusted errors using both a rollover and iron curtain approach. The rollover approach quantifies a misstatement based on the identified unadjusted item originating in the current year income statement and ignores any portion of the misstatement that originated in a prior period. The iron curtain approach quantifies misstatements that exist in the balance sheet at the end of the current period regardless of the period of origin. Financial statements would be required to be adjusted when either approach results in quantifying a misstatement that is material. SAB 108 is effective for the Company's 2007 fiscal year. The Company is evaluating the impact, if any, that SAB 108 will have on its consolidated financial statements. 18 Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands)(unaudited) Preliminary Consolidated Balance Sheets As at ------------------------------------ September 2, March 4, 2006 2006 ----------------- ---------------- Assets Current Cash and cash equivalents $ 459,648 $ 459,540 Short-term investments 237,670 175,553 Trade receivables 376,510 315,278 Other receivables 32,178 31,861 Inventory 195,665 134,523 Other current assets 50,266 45,035 Deferred income tax asset 38,988 94,789 ------------ ---------------- 1,390,925 1,256,579 Investments 467,324 614,309 Capital assets 397,144 326,313 Intangible assets 128,678 85,929 Goodwill 111,659 29,026 ------------ ---------------- $ 2,495,730 $ 2,312,156 ============ ================ Liabilities Current Accounts payable $ 120,685 $ 94,954 Accrued liabilities 178,939 144,912 Income taxes payable 38,943 17,584 Deferred revenue 24,094 20,968 Current portion of long-term debt 278 262 -------------- ---------------- 362,939 278,680 Long-term debt 6,883 6,851 Deferred income tax liability 30,193 27,858 -------------- ---------------- 400,015 313,389 -------------- ---------------- Shareholders' Equity 2,095,715 1,998,767 -------------- ---------------- $ 2,495,730 $ 2,312,156 ============== ================
19 Research In Motion Limited (United States dollars, in thousands, except per share data)(unaudited) Preliminary Consolidated Statements of Operations For the Three Months Ended For the Six Months Ended September 2, August 27, September 2, August 27, 2006 2005 2006 2005 --------------- -------------- --------------- --------------- Revenue $ 658,541 $ 490,082 $ 1,271,657 $ 944,030 Cost of sales 288,369 221,067 563,638 424,798 --------------- -------------- --------------- --------------- Gross margin 370,172 269,015 708,019 519,232 --------------- -------------- --------------- --------------- Expenses Research and development 55,622 37,677 107,140 72,211 Selling, marketing and administration 115,860 72,263 223,115 135,134 Amortization 18,453 11,549 34,524 21,832 Litigation - 6,640 - 13,115 --------------- -------------- --------------- --------------- 189,935 128,129 364,779 242,292 --------------- -------------- --------------- --------------- Income from operations 180,237 140,886 343,240 276,940 Investment income 12,606 15,700 24,657 29,516 --------------- -------------- --------------- --------------- Income before income taxes 192,843 156,586 367,897 306,456 --------------- -------------- --------------- --------------- Provision for income taxes Current 30,740 6,681 41,995 9,311 Deferred 21,326 38,850 55,352 53,570 --------------- -------------- --------------- --------------- 52,066 45,531 97,347 62,881 --------------- -------------- --------------- --------------- Net income $ 140,777 $ 111,055 $ 270,550 $ 243,575 =============== ============== =============== =============== Earnings per share Basic $ 0.76 $ 0.58 $ 1.46 $ 1.28 =============== =============== =============== =============== Diluted $ 0.74 $ 0.56 $ 1.42 $ 1.23 =============== =============== =============== ===============
20 Research In Motion Limited (United States dollars, in thousands, except per share data)(unaudited) Preliminary Consolidated Statements of Cash Flows For the Three Months Ended For the Six Months Ended September 2, August 27, September 2, August 27, 2006 2005 2006 2005 ------------- ------------- ------------- -------------- Cash flows from operating activities Net income $ 140,777 $ 111,055 $ 270,550 $ 243,575 Items not requiring an outlay of cash: Amortization 30,590 20,967 57,399 39,193 Deferred income taxes 21,422 31,532 52,852 48,921 Share-based payment 4,389 - 8,909 - Other (632) (424) (451) (396) Net changes in working capital items 54,019 10,838 (38,572) (22,043) ------------- ------------- ------------- -------------- Net cash provided by operating activities 250,565 173,968 350,687 309,250 ------------- ------------- ------------- -------------- Cash flows from financing activities Issuance of share capital 6,880 3,354 17,200 11,594 Common shares repurchased pursuant to Common Share Repurchase Program (203,933) - (203,933) - Repayment of long-term debt (66) (57) (129) (110) ------------- ------------- ------------- -------------- Net cash (used in) provided by financing activities (197,119) 3,297 (186,862) 11,484 ------------- ------------- ------------- -------------- Cash flows from investing activities Acquisition of investments (3,912) (38,524) (9,012) (50,932) Proceeds on sale or maturity of investments 17,821 6,236 35,701 27,491 Acquisition of capital assets (68,639) (55,683) (112,704) (86,972) Acquisition of intangible assets (8,601) (3,594) (30,692) (9,946) Business acquisitions (72,578) - (111,456) (3,795) Acquisition of short-term investments (20,978) (15,283) (21,756) (113,476) Proceeds on sale and maturity of short-term investments 5,609 100,207 85,596 389,490 ------------- ------------- ------------- -------------- Net cash (used in) provided by investing activities (151,278) (6,641) (164,323) 151,860 ------------- ------------- ------------- -------------- Effect of foreign exchange gain on cash and cash equivalents 606 442 606 442 ------------- ------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents for the period (97,226) 171,066 108 473,036 Cash and cash equivalents, beginning of period 556,874 912,324 459,540 610,354 ------------- ------------- ------------- -------------- Cash and cash equivalents, end of period $ 459,648 $ 1,083,390 $ 459,648 $ 1,083,390 ============= ============= ============= ==============
21 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS Cash equivalents are highly liquid investments with maturities of three months or less at the date of acquisition and are carried at fair value. 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 investments are categorized as available-for-sale and are carried at fair value with gains and losses recorded through other comprehensive income. In the event of a decline in value which is other than temporary, the investments are written down to estimated realizable value by a charge to earnings. INVENTORY Inventory is comprised as follows: September 2, March 4, 2006 2006 ----------------------------- Raw materials $ 129,316 $ 107,049 Work in process 69,437 31,848 Finished goods 5,255 3,905 Provision for excess and obsolete inventory (8,343) (8,279) ----------------------------- $ 195,665 $ 134,523 =============================
CAPITAL ASSETS Capital assets are comprised of the following: September 2, 2006 --------------------------------------- Accumulated Net book Cost amortization value --------------------------------------- Land $ 17,840 $ - $ 17,840 Buildings, leaseholds and other 178,315 23,532 154,783 BlackBerry operations and other information technology 260,814 134,754 126,060 Manufacturing equipment 99,243 54,529 44,714 Furniture and fixtures 89,288 35,541 53,747 --------------------------------------- $ 645,500 $ 248,356 $ 397,144 =======================================
22 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 March 4, 2006 ------------------------------------------- Accumulated Net book Cost amortization value ------------------------------------------- Land $ 15,647 $ - $ 15,647 Buildings, leaseholds and other 137,982 19,473 118,509 BlackBerry operations and other information technology 214,566 112,598 101,968 Manufacturing equipment 88,563 43,966 44,597 Furniture and fixtures 74,548 28,956 45,592 ------------------------------------------- $ 531,306 $ 204,993 $ 326,313 ===========================================
INTANGIBLE ASSETS Intangible assets comprise the following: September 2, 2006 ----------------------------------------- Accumulated Net book Cost amortization value ----------------------------------------- Acquired technology $ 57,305 $ 13,471 $ 43,834 Licenses 87,056 58,006 29,050 Patents 65,072 9,278 55,794 ----------------------------------------- $ 209,433 $ 80,755 $ 128,678 =========================================
March 4, 2006 ----------------------------------------- Accumulated Net book Cost amortization value ----------------------------------------- Acquired technology $ 18,373 $ 9,465 $ 8,908 Licenses 82,806 48,576 34,230 Patents 50,790 7,999 42,791 ----------------------------------------- $ 151,969 $ 66,040 $ 85,929 =========================================
BUSINESS ACQUISITIONS 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 operating results in the second quarter of fiscal 2007. 23 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 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 operating results in the first quarter of fiscal 2007. During the first quarter of fiscal 2006, the Company purchased 100% of the common shares of a company whose proprietary software was incorporated into the Company's BlackBerry platform. The transaction closed on March 24, 2005. 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 each respective closing date to September 2, 2006. The following table summarizes the preliminary fiscal 2007 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: For the three months ended For the six months ended ------------------------------------------------------------ September 2, August 27, September 2, August 27, 2006 2005 2006 2005 ------------------------------------------------------------ Assets purchased Current assets $ 2,829 $ - $ 3,233 $ 158 Capital assets 427 - 802 - Deferred income tax asset - - 4,806 259 Acquired technology 31,354 - 38,932 6,223 Goodwill 51,425 - 82,632 - ------------------------------------------------------------ 86,035 - 130,405 6,640 ------------------------------------------------------------ Liabilities assumed 2,603 - 8,095 645 Deferred income tax liability 10,854 - 10,854 2,200 ------------------------------------------------------------ 13,457 - 18,949 2,845 ------------------------------------------------------------ Net non-cash assets acquired 72,578 - 111,456 3,795 Cash acquired 3,438 - 3,560 3 ------------------------------------------------------------ Net assets acquired $ 76,016 $ - $ 115,016 $ 3,798 ============================================================
The purchase price allocations for the fiscal 2007 acquisitions will be 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. 24 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 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 2, 2006, as well as the accrued warranty obligations as at September 2, 2006, are set forth in the following table: Accrued warranty obligations as at March 4, 2006 $ 22,387 Warranty costs incurred for the six months ended September 2, 2006 (16,132) Warranty provision for the six months ended September 2, 2006 17,554 Adjustments for changes in estimate for the six months ended September 2, 2006 3,100 ------------- Accrued warranty obligations as at September 2, 2006 $ 26,909 =============
FOREIGN EXCHANGE GAINS AND LOSSES Selling, marketing and administration expense for the first six months of fiscal 2007 includes $2.9 million with respect to a foreign exchange loss (fiscal 2006 - foreign exchange loss of $1.8 million). The Company is exposed to foreign exchange fluctuations as a result of transactions in currencies other than its U.S. dollar functional currency. COMMITMENTS AND CONTINGENCIES (a) Credit Facility The Company has a $100 million Facility to fund financing and operating requirements, of which $16.3 million was utilized as of September 2, 2006 resulting in $83.7 million available for future use. The Company has pledged specific investments as security for this Facility. The Company had previously utilized $48 million of the Facility in order to fund a letter of credit to partially satisfy the Company's liability and funding obligation in the NTP litigation matter. As a result of the settlement of the NTP litigation matter, the Company cancelled the letter of credit on March 6, 2006. The Company has an additional demand facility in the amount of $18.1 million to support and secure other operating and financing requirements. As at September 2, 2006, $16.7 million of this facility was unused. A general security agreement and a general assignment of book debts have been provided as collateral for this facility. 25 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 (b) Litigation The Company was the defendant in a patent litigation matter brought by NTP alleging that the Company infringed on eight of NTP's patents. On March 3, 2006, the Company and NTP jointly announced that they signed definitive licensing and settlement agreements. All terms of the agreement were finalized and the litigation against RIM was dismissed by a court order on March 3, 2006. The agreement eliminated the need for any further court proceedings or decisions relating to damages or injunctive relief. On March 3, 2006, RIM paid NTP $612.5 million in full and final settlement of all claims against RIM, as well as for a perpetual, fully-paid up license going forward. As the litigation was settled in fiscal 2006, no amount is reflected in the results of operations for fiscal 2007. The Company recorded an expense of $6.6 million in the second quarter of fiscal 2006 to account for incremental current and estimated legal and professional fees in connection with this litigation. In November 2003, Inpro II Licensing S.a.r.l. ("Inpro II") filed an action in the United States District Court for the District of Delaware (the "U.S. Inpro Action") asserting United States Patent No. 6,523,079 against both RIM and one of its customers. RIM was successful in the District Court, and the matter was heard on appeal on December 8, 2005 at the Federal Circuit. On May 11, 2006, the Federal Circuit released its decision which affirmed the District Court's dismissal. On May 25, 2006, Inpro II filed a petition for panel rehearing and rehearing en banc with the Federal Circuit, which petition was denied on June 19, 2006. Inpro II did not file a petition for certiorari with the United States Supreme Court within the time allowed and therefore the final judgment dismissing the U.S. Inpro Action in its entirety is final and binding, and Inpro II has no further appeal rights. As a result, no amount has been recorded in these consolidated financial statements as at September 2, 2006 as the action has been dismissed. Eatoni Ergonomics, Inc. ("Eatoni") has alleged that RIM's BlackBerry 7100 Series infringes the claims of United States Patent No. 6,885,317. Proceedings are currently pending. At this time, the likelihood of damages or recoveries and the ultimate amount, if any, with respect to this action is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 2, 2006. On August 31, 2005, Morris Reese ("Reese") filed a complaint in the United States District Court for the Eastern District of Texas, Marshall Division, against Research In Motion Corporation, along with 7 other defendants alleging infringement of United States Patent No. 6,427,009. A definitive settlement agreement was entered into between RIM and Reese on June 29, 2006. The amount of the settlement is not material to these financial statements. Reese agreed to a dismissal of the litigation and all claims against RIM and its customers as part of the settlement. The action was dismissed by the court on July 12, 2006. By letter dated February 16, 2004, T-Mobile Deutschland GmbH ("TMO-DG") and T-Mobile International AG (collectively, "TMO") served RIM's wholly-owned UK subsidiary, Research In Motion UK Limited ("RIM-UK"), with a third party notice in relation 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 Dusseldorf 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 Dusseldorf. A decision on the BGH appeal is expected within twelve months. At this time, the likelihood of damages or recoveries and the ultimate amounts, if 26 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 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 2, 2006. On May 9, 2005, RIM-UK filed an action against Inpro Licensing S.a.r.l. ("Inpro") in the High Court of Justice (Chancery Division, Patents Court) (the "High Court") in London, England. The action sought a declaration that the UK patent, designated under European Patent EP 0892947B1 ("the B1 Patent"), was invalid and an order that the patent be revoked. On February 2, 2006, the High Court ruled in favor of RIM that all patent claims in the B1 Patent are invalid. Inpro has appealed the High Court's decision and a hearing is scheduled to begin on January 15, 2007. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation (or any related litigation) is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at September 2, 2006. 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 Dusseldorf, 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. On January 27, 2006, the court declared the B1 Patent invalid. Inpro has appealed the court's decision and an appeal will not be heard until some time in 2008. On March 21, 2006, the 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 2, 2006. 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 by filing 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 complaint filed by RIM in the Dallas District Court against Visto's United States Patents Nos. 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 has been 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) has been 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's 6,389,457 and 6,219,694 patents to the Marshall District Court action is now pending in the Marshall District Court. 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 2, 2006. 27 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 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 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. 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. EP 0996905 invalid and declare 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 Northern District of Texas 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. Proceedings are currently pending. 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 2, 2006. 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 alleging infringement of United States Patent No. 4,809,297 (the `297 patent). Williams Wireless seeks 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. 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 2, 2006. From time to time, the Company is involved in other claims in the normal course of business. 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. 28 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 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. Selected financial information is as follows: For the three months ended For the six months ended -------------------------------------------------------------- September 2, August 27, September 2, August 27, Revenue 2006 2005 2006 2005 -------------------------------------------------------------- Canada $ 52,362 $ 39,665 $ 96,185 $ 84,900 United States 363,282 317,986 747,852 594,419 Other 242,897 132,431 427,620 264,711 -------------------------------------------------------------- $ 658,541 $ 490,082 $ 1,271,657 $ 944,030 ============================================================== Revenue Canada 8.0% 8.1% 7.6% 9.0% United States 55.1% 64.9% 58.8% 63.0% Other 36.9% 27.0% 33.6% 28.0% ------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% =============================================================
29 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Six Months Ended September 2, 2006 For the three months ended For the six months ended ------------------------------------------------------------ September 2, August 27, September 2, August 27, Revenue mix 2006 2005 2006 2005 ------------------------------------------------------------ Devices $ 474,612 $ 342,574 $ 907,559 $ 656,833 Service 128,365 85,468 245,453 162,510 Software 38,154 40,554 80,693 87,994 Other 17,410 21,486 37,952 36,693 ------------------------------------------------------------ $ 658,541 $ 490,082 $ 1,271,657 $ 944,030 ============================================================
As at ----------------------------- September 2, March 4, Capital assets, intangible assets and goodwill 2006 2006 ----------------------------- Canada $ 540,328 $ 398,965 United States 65,164 26,378 Other 31,989 15,925 ----------------------------- $ 637,481 $ 441,268 ============================= Total assets Canada $ 870,126 $ 745,691 United States 707,982 629,980 Other 917,622 936,485 ----------------------------- $ 2,495,730 $ 2,312,156 =============================
CASH FLOW INFORMATION Net changes in working capital items: For the three months ended For the six months ended ---------------------------------------------------------- September 2, August 27, September 2, August 27, 2006 2005 2006 2005 ---------------------------------------------------------- Trade receivables $ 19,993 $ (6,742) $ (58,286) $ (28,162) Other receivables (521) (4,219) (304) (13,732) Inventory (61,228) (3,530) (60,996) 8,567 Restricted cash - (27,311) - (50,824) Other current assets (1,752) 5 (7,293) (2,449) Accounts payable 42,042 40,698 38,040 32,975 Accrued liabilities 25,915 3,557 26,040 18,686 Accrued litigation - 2,826 - 6,163 Income taxes payable 25,493 5,811 21,359 6,258 Deferred revenue 4,077 (257) 2,868 475 ---------------------------------------------------------- $ 54,019 $ 10,838 $ (38,572) $ (22,043) ==========================================================
30 DOCUMENT 2 RESEARCH IN MOTION LIMITED Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 January 16, 2007 EXPLANATORY NOTE On September 28, 2006, Research In Motion Limited ("RIM" or the "Company") publicly announced that the Audit Committee of its Board of Directors was completing a management-initiated, voluntary review of RIM's historical option granting practices. As a result of the recusal of two members of the Audit Committee, who are also members of RIM's Compensation Committee, the review is being continued 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 is being assisted in this regard by external legal counsel and external accounting consultants in both Canada and the United States. The Special Committee has made a preliminary determination that, under United States generally accepted accounting principles ("U.S. GAAP") pursuant to which RIM prepares its financial statements, certain accounting errors were made in connection with the administration of certain historical stock options granted, and has made a preliminary determination that a restatement of RIM's historical financial statements will be required to reflect this. Although the review is ongoing, it is expected that the potential effect of any such restatement will be to increase the amount of non-cash charges associated with past option grants and thereby reduce the amount of RIM's previously reported U.S. GAAP earnings and related consolidated retained earnings which will be offset by similar adjustments to either the capital stock or paid-in capital accounts within shareholders' equity. The Company has had communications with both the United States Securities and Exchange Commission (the "SEC") and the Ontario Securities Commission (the "OSC") about its internal review of its stock option grants, and intends to continue to cooperate with the SEC and the OSC. On September 28, 2006, RIM publicly announced its preliminary operating results for the second quarter of fiscal 2007 (the "Preliminary Q2 Results") and on December 21, 2006, RIM publicly announced its preliminary operating results for the third quarter of fiscal 2007 (the "Preliminary Q3 Results"). The Preliminary Q2 Results and the Preliminary Q3 Results are considered preliminary pending the restatement related to RIM's historical non-cash charges associated with past option grants. On September, 28, 2006, RIM had made preliminary determinations based on the information it had at that point in time, that the amount of such non-cash charges would be approximately $25-$45 million over the period since RIM's initial public offering in 1997. On October 13, 2006, RIM announced that in connection with the ongoing review, and subsequent to September 28, 2006, RIM identified an additional error under U.S. GAAP that will require a further adjustment to its historical financial statements. The net effect of the additional error will be to substantially increase the amount of RIM's September 28, 2006 estimate of the non-cash charges associated with the past stock option grants and thereby reduce the amount of RIM's previously reported U.S. GAAP earnings over the periods to be restated. As previously disclosed, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results or to current or future fiscal years' operating results as a result of the restatement. 1 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 As a result of the ongoing review, RIM has delayed the filing of its consolidated financial statements and Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A") for the second and third quarters of fiscal 2007 in order for the review to be completed. The Company expects to file with the OSC and other Canadian securities regulators and furnish to the SEC its consolidated financial statements and related MD&A for the second and third quarters of fiscal 2007 and its restated historical consolidated financial statements and related MD&A prior to its fiscal year end of March 3, 2007. In the meantime, RIM has complied with, and intends to continue to comply with, the alternative information guidelines recommended by OSC Policy 57-603 "Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements" and Canadian Securities Administrators Staff Notice 57-301 by providing bi-weekly updates on its affairs and progress with respect to remedying the financial statements default and the review of its historical option granting practices by way of press release. In addition, in order to provide as much information to shareholders as possible prior to the Company's financial statement and MD&A filings for the second and third quarter of fiscal 2007 and while its management-initiated, voluntary review is ongoing, the Company advised the OSC that it intended to disclose additional financial information beyond the information provided with the Preliminary Q2 Results and the Preliminary Q3 Results, including a narrative explanation of the Company's operating performance during those quarters and certain additional financial information relating to balance sheet accounts (the "Additional Financial Information"). The Additional Financial Information included in this document is being filed with Canadian securities regulators and furnished to the SEC in furtherance of such undertaking. Readers are cautioned that this Additional Financial Information should not be considered a complete MD&A pursuant to National Instrument 51-102 ("NI-51-102") nor should this Additional Financial Information be considered to be complete consolidated financial statements for the second and third quarters of fiscal 2007 as certain information normally contained in RIM's MD&A, consolidated financial statements and the notes to such financial statements is not included in this Additional Financial Information. As noted above, complete consolidated financial statements and MD&A prepared in accordance with NI 51-102 for the second and third quarters of fiscal 2007 will be filed with the OSC and furnished to the SEC once the review of the Company's historical option practices has been completed together with the required restatements of the historical consolidated financial statements. Readers are further cautioned that this Additional Financial Information is preliminary and does not reflect any adjustments that may be required to RIM's historical consolidated financial statements (including a restatement of the consolidated financial statements for the prior year comparative periods as set forth herein) as a result of the completion of the Company's management-initiated, voluntary review of its historical option granting practices. As noted above, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results, or the financial information relating to the third quarter of fiscal 2007 contained in this Additional Financial Information, or to current or future financial years' operating results as a result of any restatements with respect to past option grants. However, the review is ongoing and the Preliminary Q2 Results, Preliminary Q3 Results and the financial information relating to the third quarter of fiscal 2007 contained in this Additional Financial Information may be subject to adjustment as a result of a restatement of RIM's historical financial statements. This Additional Financial Information is presented in United States dollars, except for certain financial information contained in tables which is expressed in thousands of United States dollars, and as otherwise indicated. This Additional Financial Information is prepared as of January 16, 2007. 2 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 All financial information herein has been derived from financial information which has been prepared and presented in accordance with U.S. GAAP. This Additional Financial Information has been prepared by management of the Company and is unaudited. Special Note Regarding Forward-Looking Statements This document contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including statements relating to: o RIM's ongoing management-initiated, voluntary review of historical option granting practices, including statements regarding: preliminary determinations and expectations regarding the financial impact of the review on RIM's historical, current and future financial results; the anticipated timing of filing consolidated financial statements and MD&A; and RIM's intention to provide regular updates to its shareholders; o the Company's expectations regarding the average selling price ("ASP") of its BlackBerry devices; o the Company's estimates regarding revenue sensitivity for the effect of a change in ASP on its device revenue; o the Company's estimates of purchase obligations and other contractual commitments; and o the Company's expectations with respect to the sufficiency of its financial resources. The words "expect", "anticipate", "estimate", "may", "will", "should", "intend", "believe", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by RIM in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that RIM believes are appropriate in the circumstances. Many factors could cause RIM's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, some of which are discussed in greater detail in the "Risk Factors" section of RIM's Annual Information Form, which is included in RIM's Annual Report on Form 40-F (copies of which filings may be obtained at www.sedar.com and www.sec.gov): o risks related to the Company's ongoing management-initiated, voluntary review of historical option granting practices, including: determinations made by the Special Committee, outside advisors and others with respect to the ongoing review; unanticipated developments and delays encountered during the ongoing review; developments regarding RIM's ongoing communications with the SEC and OSC; additional corrections that may be required based on factual findings and analysis in the ongoing review; and legal and accounting developments regarding stock option grants and the interpretation of such guidance; o third-party claims for infringement of intellectual property rights by RIM and the outcome of any litigation with respect thereto; o RIM's ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products; o RIM's ability to obtain rights to use software or components supplied by third parties; o RIM's ability to enhance current products and develop and introduce new products; o the efficient and uninterrupted operation of RIM's network operations center and the networks of its carrier partners; o RIM's ability to establish new, and to build on existing, relationships with its network carrier partners and licensees; 3 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 o RIM's dependence on its carrier partners to grow its BlackBerry subscriber base and to accurately report subscriber account activations and deactivations to RIM on a timely basis; o fluctuations in RIM's quarterly financial results and difficulties in forecasting the growth rate for BlackBerry subscriber accounts; o the occurrence or perception of a breach of RIM's security measures, or an inappropriate disclosure of confidential or personal information; o 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; o the continued quality and reliability of RIM's products; o 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; o effective management of growth and ongoing development of RIM's service and support operations; o risks associated with acquisitions; o risks associated with RIM's expanding foreign operations; o RIM's dependence on a limited number of significant customers; o reduced spending by customers due to the uncertainty of economic and geopolitical conditions; o dependence on key personnel and RIM's ability to attract and retain key personnel; o reliance on third-party network infrastructure developers and software platform vendors; o foreign exchange risks; o changes in interest rates affecting RIM's investment portfolio and the creditworthiness of its investment portfolio; o RIM's ability to manage production facilities and its reliance on third-party manufacturers for certain products; o risks associated with short product life cycles; o government regulation of wireless spectrum and radio frequencies; o restrictions on import of RIM's products in certain countries due to encryption of the products; o the costs and burdens of compliance with new government regulations; o continued use and expansion of the Internet; o regulation, certification and health risks; and o tax liabilities, resulting from changes in tax laws or otherwise, associated with RIM's worldwide operations. These factors should be considered carefully, and readers should not place undue reliance on RIM's forward-looking statements. RIM has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 4 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Overview RIM is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information including email, phone, short messaging service (SMS), Internet and intranet-based applications. RIM technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. RIM's products, services and embedded technologies are used by thousands of organizations around the world and include the BlackBerry(R) wireless platform, software development tools and other hardware and software. The Company's sales and marketing efforts include collaboration with strategic partners and distribution channel relationships to promote the sales of its products and services as well as its own supporting sales and marketing teams. Sources of Revenue RIM's primary revenue stream is its BlackBerry wireless platform, which includes sales of wireless devices, software and service. The BlackBerry wireless platform provides users with a wireless extension of their work and personal email accounts, including Microsoft(R) Outlook(R), Lotus Notes(R), Novell(R) GroupWise(R), MSN(R)/Hotmail, Yahoo! Mail(R), POP3/ISP email and others. RIM generates hardware revenues from sales, primarily to carriers, of BlackBerry wireless devices, which provide users with the ability to send and receive wireless messages and data. RIM's BlackBerry wireless devices also incorporate a mobile phone, a personal information manager (PIM) including contact, calendar, tasks and memo functionality, which can synchronize with the user's desktop PIM system, and web-browsing capability. Certain BlackBerry devices also include multimedia capabilities. RIM generates service revenues from billings to its BlackBerry subscriber base primarily from a monthly infrastructure access fee to a carrier/distributor where a carrier or other distributor bills the BlackBerry subscriber. The BlackBerry subscriber base is the total of all subscriber accounts that have an active status at the end of a reporting period. Each carrier instructs RIM to create subscriber accounts and determines whether the subscriber account should have an active status. That carrier is charged a service fee for each subscriber account each month regardless of the amount of data traffic the subscriber passes over the BlackBerry architecture. If a carrier informs RIM to deactivate the subscriber account, then RIM no longer includes that subscriber account in its BlackBerry subscriber account base and ceases billing from the date of notification of deactivation. On a quarterly basis, RIM may make an estimate of pending deactivations for certain carriers that do not use a fully-integrated provisioning system. It is, however, the carrier's responsibility to report changes to the subscriber account status on a timely basis to RIM. The number of subscriber accounts is a non-financial metric and is intended to highlight the change in RIM's subscriber base and should not be relied upon as an indicator of RIM's financial performance. The number of subscriber accounts does not have any standardized meaning prescribed by U.S. GAAP and may not be comparable to similar metrics presented by other companies. An important part of RIM's BlackBerry wireless platform is the software that is installed on corporate servers. Software revenues include fees from (i) licensing RIM's BlackBerry Enterprise Server(TM) ("BES") software; (ii) client access licenses ("CALs"), which are charged for each subscriber using the BlackBerry service via a BES; (iii) maintenance and upgrades to software; and (iv) technical support. 5 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 RIM also offers the BlackBerry Connect(TM) and BlackBerry Built-In(TM) Licensing Programs, which enable leading device manufacturers to equip their handsets with BlackBerry functionality, in order that users and organizations can connect to BlackBerry wireless services on a broader selection of devices and operating systems. BlackBerry Connect technology enables a variety of leading manufacturers to take advantage of proven BlackBerry architecture to automatically deliver email and other data to a broader choice of wireless devices, operating systems and email applications. BlackBerry Built-In technology enables leading manufacturers to incorporate popular BlackBerry applications into their mobile phones and handheld devices in addition to supporting "push"-based BlackBerry wireless services. Revenues are also generated from sales of accessories, repair and maintenance programs and non-recurring engineering services ("NRE"). Critical Accounting Policies and Estimates General The preparation of the consolidated financial statements of the Company requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based upon management's historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates. The Company's critical accounting policies and estimates have been reviewed and discussed with the Company's Audit Committee. Except as noted below, there have been no changes to the Company's critical accounting policies and estimates from those disclosed as at March 4, 2006. Share-Based Payment In the first quarter of fiscal 2007, the Company adopted the provisions of Statement of Financial Accounting Standard 123(R) ("SFAS 123(R)") Share-Based Payment. Under the provisions of SFAS 123(R), stock-based compensation expense is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model and is recognized rateably over the requisite service period. The BSM model requires various judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The BSM option-pricing model used in SFAS 123(R) is consistent with that used in pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation. The Company is using the modified prospective transition ("MPT") method as permitted by SFAS 123(R) to record stock-based compensation expense and accordingly prior periods have not been restated to reflect the impact of SFAS 123(R). Stock-based compensation expense calculated using the MPT approach is recognized on a prospective basis in the financial statements for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning in the Company's fiscal 2007 year. Stock-based compensation expense for awards granted prior to fiscal 2007 is based on the grant-date fair value as determined under the pro forma provisions of SFAS 123. As a result of the Company adopting SFAS 123(R) in the first quarter of fiscal 2007, the Company's net income for the nine months ended December 2, 2006 was $12.3 million lower, or $0.06 per share basic and diluted, than if the Company had continued to account for share-based payments under Accounting Principles Board Opinion 25 ("APB 25"). Readers are cautioned that this Additional 6 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Financial Information is preliminary and does not reflect any adjustments that may be required to RIM's historical consolidated financial statements (including a restatement of the consolidated financial statements for the prior year comparative periods as set forth herein) as a result of the completion of the Company's management-initiated, voluntary review of its historical option granting practices. As noted above, the Company does not currently anticipate a material adjustment to the Preliminary Q2 Results or the Preliminary Q3 Results, or the financial information relating to the third quarter of fiscal 2007 contained in this Additional Financial Information, or to current or future financial years' operating results as a result of any restatements with respect to past option grants. However, the review is ongoing and the Preliminary Q2 Results, Preliminary Q3 Results and the financial information relating to the third quarter of fiscal 2007 contained in this Additional Financial Information may be subject to adjustment as a result of a restatement of RIM's historical financial statements. Common Shares Outstanding On January 12, 2007, there were 185.7 million voting common shares, 6.5 million options to purchase voting common shares and no Restricted Share Units outstanding. 7 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Summary of Preliminary Results of Operations - Third Quarter of Fiscal 2007 Compared to the Third Quarter of Fiscal 2006 The following table sets forth certain unaudited consolidated statement of operations data, which is expressed in thousands of dollars and as a percentage of revenue for the interim periods indicated, as well as unaudited consolidated balance sheet data, which is expressed in thousands of dollars, as at December 2, 2006 and November 26, 2005:
As at and for the Three Months Ended Change Q3 December 2, 2006 November 26, 2005 2007/2006 ---------------------------------------------------------------------------- (in thousands, except for per share amounts) --------------------------------------------------------------------------- Revenue $ 835,053 100.0% $ 560,596 100.0% $ 274,457 Cost of sales 382,295 45.8% 247,851 44.2% 134,444 --------------------------------------------------------------------------- Gross margin 452,758 54.2% 312,745 55.8% 140,013 --------------------------------------------------------------------------- Expenses Research and development 60,833 7.3% 41,567 7.4% 19,266 Selling, marketing and administration 145,903 17.5% 83,965 15.0% 61,938 Amortization 20,334 2.4% 12,797 2.3% 7,537 --------------------------------------------------------------------------- Sub-total 227,070 27.2% 138,329 24.7% 88,741 --------------------------------------------------------------------------- Litigation (1) - 0.0% 26,176 4.7% (26,176) --------------------------------------------------------------------------- 227,070 27.2% 164,505 29.3% 62,565 --------------------------------------------------------------------------- Income from operations 225,688 27.0% 148,240 26.4% 77,448 Investment income 12,666 1.5% 17,483 3.1% (4,817) --------------------------------------------------------------------------- Income before income taxes 238,354 28.5% 165,723 29.6% 72,631 Provision for income taxes (2) 62,337 7.5% 45,574 8.1% 16,763 --------------------------------------------------------------------------- Net income $ 176,017 21.1% $ 120,149 21.4% $ 55,868 =========================================================================== Earnings per share Basic $ 0.95 $ 0.63 $ 0.32 ================ ============== ============ Diluted $ 0.93 $ 0.61 $ 0.32 ================ ============== ============ --------------------------------------------------------------------------- Weighted-average number of shares outstanding (ooo's) Basic 184,321 189,341 Diluted 189,821 196,339 Total assets $ 2,769,520 $ 2,814,222 Total liabilities $ 474,069 $ 841,103 Total long-term liabilities $ 32,786 $ 6,704 Shareholders' equity $ 2,295,451 $ 1,973,119
8 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Notes: - ------ (1) See "Results of Operations - Litigation". (2) See "Results of Operations - Income Taxes". Executive Summary Revenue increased by $274.5 million, or 49.0%, to $835.1 million in the third quarter of fiscal 2007 compared to $560.6 million in the preceding year's third quarter. The number of BlackBerry devices sold increased by 685,000, or 60.7%, to approximately 1,814,000 in the third quarter of fiscal 2007, compared to approximately 1,129,000 during the third quarter of fiscal 2006. Service revenue increased by $38.7 million to $142.5 million, reflecting the Company's increase in BlackBerry subscriber accounts during the period. Software revenue increased by $3.6 million to $43.2 million in the third quarter of fiscal 2007. The Company's net income increased by $55.9 million to $176.0 million, or $0.95 basic earnings per share ("basic EPS") and $0.93 diluted earnings per share ("diluted EPS"), in the third quarter of fiscal 2007, compared to $120.1 million, or $0.63 basic EPS and $0.61 diluted EPS, in the third quarter of fiscal 2006. The $55.9 million increase in net income in the third quarter of fiscal 2007 primarily reflects an increase in gross margin in the amount of $140.0 million, which was partially offset by an increase of $81.2 million in the Company's research and development and sales and marketing programs. Fiscal 2006 third quarter operating results also included a litigation accrual in the amount of $26.2 million relating to the NTP, Inc. ("NTP") matter. Fiscal 2007 third quarter net income also includes the effect of the Company adopting SFAS 123(R), resulting in an after-tax stock-based compensation expense in the amount of $3.6 million. A more comprehensive analysis of these factors is contained in "Results of Operations". Results of Operations Three months ended December 2, 2006 compared to the three months ended November 26, 2005 Revenue Revenue for the third quarter of fiscal 2007 was $835.1 million, an increase of $274.5 million, or 49.0%, from $560.6 million in the third quarter of fiscal 2006. 9 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 A comparative breakdown of the significant revenue streams is set forth in the following table:
Change - Fiscal Q3 Fiscal 2007 Q3 Fiscal 2006 2007/2006 -------------------------------------------------------------------------------------- Number of devices sold 1,814,000 1,129,000 685,000 60.7% ================= ================= ========================== ASP $ 345 $ 347 $ (2) (0.6%) ================= ================= ========================== Revenues Devices $ 625,626 74.9% $ 391,880 69.9% $ 233,746 59.6% Service 142,532 17.1% 103,839 18.5% 38,693 37.3% Software 43,235 5.2% 39,594 7.1% 3,641 9.2% Other 23,660 2.8% 25,283 4.5% (1,623) (6.4%) ------------------------------------------------------------------------------------ $ 835,053 100.0% $ 560,596 100.0% $ 274,457 49.0% ====================================================================================
Device revenue increased by $233.7 million, or 59.6%, to $625.6 million, or 74.9% of consolidated revenue, in the third quarter of fiscal 2007 compared to $391.9 million, or 69.9% of consolidated revenue in the third quarter of fiscal 2006. This increase in device revenue over the prior year's period is attributable to the volume increase of 685,000 devices, or 60.7%, to approximately 1,814,000 devices sold in the current fiscal quarter, compared to approximately 1,129,000 devices sold in the third quarter of fiscal 2006. The increase in device shipments in the third quarter of fiscal 2007 when compared to the second quarter of fiscal 2007 shipments of approximately 1,360,000 primarily reflects the impact of new product launches in the quarter. ASP decreased slightly to $345 in the current quarter from $347 in the third quarter of fiscal 2006 due primarily to a change in BlackBerry device mix. As RIM expands its market focus into the consumer market and as the technology continues to mature, the Company expects the ASP to continue to decline. ASP is dependant on projected future sales volumes, device mix, new device introductions for the Company's enterprise, prosumer and consumer offerings as well as pricing by competitors in the industry. The Company estimates that a $10 or 2.9% change in overall ASP would result in a quarterly revenue change of approximately $18 million, based upon the Company's volume of devices shipped in the third quarter of fiscal 2007. Service revenue increased $38.7 million, or 37.3%, to $142.5 million and comprised 17.1% of consolidated revenue in the third quarter of fiscal 2007, compared to $103.8 million, or 18.5% of consolidated revenue in the third quarter of fiscal 2006. BlackBerry subscriber account additions increased by net 875,000 to approximately 7 million subscriber accounts as at December 2, 2006 with approximately 27% of RIM's subscriber account base being outside of North America, compared to an increase of net 645,000 during the third quarter of fiscal 2006 to approximately 4.3 million subscriber accounts as at November 26, 2005. The increase in subscriber accounts in the third quarter of fiscal 2007 when compared to the second quarter of fiscal 2007 additions of approximately net 705,000 primarily reflects the impact of the new product launches noted above. Software revenue increased $3.6 million to $43.2 million and comprised 5.2% of consolidated revenue in the third quarter of fiscal 2007, compared to $39.6 million, or 7.1% of consolidated revenue, in the third quarter of fiscal 2006. Other revenue, which primarily includes accessories, repair and maintenance programs, NRE, and sundry, decreased by $1.6 million to $23.7 million in the third quarter of fiscal 2007 compared to $25.3 million in the third quarter of fiscal 2006. The majority of the decrease was attributable to decreases in NRE and other 10 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 revenue, offset in part by an increase in non-warranty repair and accessories revenue. Gross Margin Gross margin increased by $140.0 million, or 44.8%, to $452.7 million, or 54.2% of revenue, in the third quarter of fiscal 2007, compared to $312.7 million, or 55.8% of revenue, in the same period of the previous fiscal year. The 1.6% decline in consolidated gross margin percentage was primarily due to a higher percentage of device shipments which comprised 74.9% of the total revenue mix in the third quarter of fiscal 2007 compared to 69.9% in the third quarter of fiscal 2006, changes in the BlackBerry device mix and certain charges relating to inventory obsolescence for older products. Gross margin percentage for devices are generally lower than the Company's consolidated gross margins. This was offset in part by improved service margins resulting from cost efficiencies in RIM's network operations infrastructure as a result of the increase in BlackBerry subscriber accounts and a decline in certain fixed costs as a percentage of consolidated revenue as the Company continues to realize economies of scale in its manufacturing operations. Research and Development, Selling, Marketing and Administration, and Amortization Expense The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter ended December 2, 2006 compared to the quarter ended September 2, 2006 and the quarter ended November 26, 2005. The Company believes it is meaningful to provide a comparison between the third quarter and the second quarter of fiscal 2007 given the quarterly increases in revenue realized by the Company during fiscal 2007.
Three Month Fiscal Periods Ended ------------------------------------------------------------------------------------ December 2, 2006 September 2, 2006 November 26, 2005 ------------------------------------------------------------------------------------ % of % of % of $ Revenue $ Revenue $ Revenue Revenue $ 835,053 $ 658,541 $ 560,596 ------------------------------------------------------------------------------------ Research and development $ 60,833 7.3% $ 55,622 8.4% $ 41,567 7.4% Selling, marketing and administration 145,903 17.5% 115,860 17.6% 83,965 15.0% Amortization 20,334 2.4% 18,453 2.8% 12,797 2.3% ------------------------------------------------------------------------------------ $ 227,070 27.2% $ 189,935 28.8% $ 138,329 24.7% ====================================================================================
Research and Development Research and development expenditures consist primarily of salaries for technical personnel, engineering materials, certification and tooling expense, outsourcing and consulting services, software tools and related information technology infrastructure support and travel. Research and development expenditures increased by $19.2 million to $60.8 million, or 7.3% of revenue, in the quarter ended December 2, 2006 compared to $41.6 million, or 7.4% of revenue, in the third quarter of fiscal 2006. The majority of the increase during the third quarter of fiscal 2007 compared to the third quarter 11 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 of fiscal 2006 were attributable to salaries and benefits, third party new product development costs, travel and office expenses, as well as related staffing infrastructure costs. Selling, Marketing and Administration Expenses Selling, marketing and administrative expenses consist primarily of salaries and benefits, marketing, advertising and promotion, travel and entertainment, external advisory fees, related information technology and office infrastructure support, recruiting and foreign exchange gain or loss. Selling, marketing and administrative expenses increased by $61.9 million to $145.9 million, or 17.5% of revenue, for the third quarter of fiscal 2007 compared to $84.0 million, or 15.0% of revenue for the comparable period in fiscal 2006. The net increase of $61.9 million was primarily attributable to increased expenditures for marketing, advertising and promotion expenses including additional programs to support new product launches, salary and benefit expense primarily as a result of increased personnel as well as external advisory fees. Other increases were attributable to travel and office expenses as well as related staffing infrastructure costs. Amortization Amortization expense relating to certain capital and all intangible assets other than licenses increased by $7.5 million to $20.3 million for the third quarter of fiscal 2007 compared to $12.8 million for the comparable period in fiscal 2006. The increased amortization expense primarily reflects the impact of amortization expense with respect to capital and certain intangible asset expenditures incurred primarily during the first two quarters of fiscal 2007. Litigation As has been more fully disclosed in the Company's annual consolidated financial statements and notes for the fiscal years ended March 4, 2006, February 26, 2005 and February 28, 2004, the Company was the defendant in a patent litigation matter brought by NTP alleging that the Company infringed on eight of NTP's patents. On March 3, 2006, the Company and NTP signed definitive licensing and settlement agreements. All terms of the agreement were finalized and the litigation against RIM was dismissed by a court order on March 3, 2006. The agreement eliminated the need for any further court proceedings or decisions relating to damages or injunctive relief. On March 3, 2006, RIM paid NTP $612.5 million in full and final settlement of all claims against RIM, as well as for a perpetual, fully-paid up license going forward. This settlement amount included money already escrowed by RIM as of March 3, 2006. As the litigation was settled in fiscal 2006, no amount is reflected in the results of operations for fiscal 2007. The Company recorded an expense of $26.2 million in the third quarter of fiscal 2006 to account for the full writedown of the acquired NTP license that was recorded in March 2005 which, after accumulated depreciation, had net book value of $18.3 million as well as an expense of $7.9 million to account for incremental current and estimated legal and professional fees in connection with this litigation. Investment Income Investment income decreased by $4.8 million to $12.7 million in the third quarter of fiscal 2007 from $17.5 million in the comparable period of fiscal 2006. The decrease reflects the decrease in cash, cash equivalents, short-term investments and investments when compared to the prior year's quarter resulting primarily from 12 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 the funding of the NTP litigation settlement in the amount of $612.5 million in the fourth quarter of fiscal 2006 as well as the common shares of the Company repurchased as part of the Company's Common Share Repurchase Program in the amount of $595.1 million offset, in part, by improved interest rate yields. Income Taxes For the third quarter of fiscal 2007, the Company's income tax expense was $62.3 million resulting in an effective tax rate of 26.2% compared to an income tax expense of $45.6 million or a 27.5% effective tax rate in the third quarter of fiscal 2006. 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. Net Income The Company's net income increased by $55.9 million to $176.0 million, or $0.95 basic EPS and $0.93 diluted EPS, in the third quarter of fiscal 2007, compared to $120.1 million, or $0.63 basic EPS and $0.61 diluted EPS, in the third quarter of fiscal 2006. The $55.9 million increase in net income in the third quarter of fiscal 2007 reflects primarily an increase in gross margin in the amount of $140.0 million, which was partially offset by an increase of $81.2 million in the Company's research and development and sales and marketing programs. Fiscal 2006 third quarter operating results also included a litigation expense of $26.2 million relating to the NTP matter. The fiscal 2007 third quarter net income also includes the effect of the Company adopting SFAS 123(R), resulting in stock-based compensation expense in an after-tax amount of $3.6 million, or $0.02 diluted EPS. The weighted average number of shares outstanding was 184.3 million common shares for basic EPS and 189.8 million common shares for diluted EPS for the quarter ended December 2, 2006 compared to 189.3 million common shares for basic EPS and 196.3 million common shares for diluted EPS for the comparable period last year. Nine months ended December 2, 2006 compared to the nine months ended November 26, 2005 Revenue Revenue for first nine months of fiscal 2007 was $2.1 billion, an increase of $602.1 million, or 40.0%, from $1.5 billion in the first nine months of fiscal 2006. 13 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 A comparative breakdown of the significant revenue streams is set forth in the following table:
For the Nine Month Periods Change - Fiscal Q3 YTD Fiscal 2007 Q3 YTD Fiscal 2006 2007/2006 --------------------------------------------------------------------------------------- Number of devices sold 4,385,000 2,925,000 1,460,000 49.9% ================= ================= ============================= ASP $ 350 $ 359 $ (9) (2.5%) ================= ================= ============================= Revenues Devices $ 1,533,185 72.8% $ 1,048,713 69.7% $ 484,472 46.2% Service 387,985 18.4% 266,349 17.7% 121,636 45.7% Software 123,928 5.9% 127,588 8.5% (3,660) (2.9%) Other 61,612 2.9% 61,976 4.1% (364) (0.6%) --------------------------------------------------------------------------------------- $ 2,106,710 100.0% $ 1,504,626 100.0% $ 602,084 40.0% =======================================================================================
Device revenue increased by $484.5 million, or 46.2%, to $1.53 billion, or 72.8% of consolidated revenue in the first nine months of fiscal 2007 compared to $1.05 billion, or 69.7% of consolidated revenue in the first nine months of fiscal 2006. This increase in device revenue over the prior year's period is primarily attributable to a volume increase of 1,460,000 devices, or 49.9%, to approximately 4,385,000 devices sold in the first nine months of fiscal 2007 compared to approximately 2,925,000 devices sold in the first nine months of fiscal 2006, partially offset by a decrease of $9, or 2.5%, in ASP to $350 in the current nine month fiscal period from $359 in the first nine months of fiscal 2006. Service revenue increased by $121.7 million, or 45.7%, to $388.0 million and comprised 18.4% of consolidated revenue in the first nine months of fiscal 2007 compared to $266.3 million, or 17.7% of consolidated revenue, in the first nine months of fiscal 2006. BlackBerry subscriber account additions were approximately net 2.2 million for the nine month period ended December 2, 2006 compared to approximately net 1.8 million for the comparable period last year. Software revenue decreased $3.7 million, or 2.9%, to $123.9 million in the first nine months of fiscal 2007 from $127.6 million in the first nine months of fiscal 2006 as software continued to be used as a tool in enterprise marketing programs in fiscal 2007. Other revenue decreased marginally by $0.4 million to $61.6 million in the first nine months of fiscal 2007 compared to $62.0 million in the first nine months of fiscal 2006. Gross Margin Gross margin increased by $328.8 million, or 39.5 %, to $1.2 billion, or 55.1% of revenue, in the first nine months of fiscal 2007, compared to $832.0 million, or 55.3% of revenue, in the same period of the previous fiscal year. The net decrease of 0.2% in consolidated gross margin percentage was primarily due to the higher percentage of device shipments which comprised 72.8% of the total revenue mix for the first nine months of fiscal 2007 compared to 69.7% in the comparable period of fiscal 2006 as well as changes in BlackBerry device mix. This was offset in part by improved service margins resulting from cost efficiencies in RIM's network operations infrastructure as a result of the increase in BlackBerry subscriber accounts and a decline 14 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 in certain fixed costs as a percentage of consolidated revenue as the Company continues to realize economies of scale in its manufacturing operations. Research and Development, Selling, Marketing and Administration, and Amortization Expense Research and Development Research and development expenditures increased by $54.2 million to $168.0 million, or 8.0% of revenue, in the nine months ended December 2, 2006, compared to $113.8 million, or 7.6% of revenue, in the first nine months of fiscal 2006. The majority of the increases during the first nine months of fiscal 2007 when compared to fiscal 2006 were attributable to salaries and benefits, third party new product development costs, travel and office expenses as well as related staffing infrastructure costs. Selling, Marketing and Administration Expenses Selling, marketing and administrative expenses increased by $149.9 million to $369.0 million, or 17.5% of revenue, for the first nine months of fiscal 2007 compared to $219.1 million or 14.6% of revenue, for the comparable period in fiscal 2006. The net increase of $149.9 million was primarily attributable to increased expenditures for marketing, advertising and promotion expenses, salary and benefit expense, consulting and external advisory costs, travel and office expenses as well as related staffing infrastructure costs. Amortization Amortization expense relating to certain capital and all intangible assets other than licenses increased by $20.2 million to $54.8 million for the first nine months of fiscal 2007 compared to $34.6 million for the comparable period in fiscal 2006. The increased amortization expense primarily reflects the impact of capital and intangible asset additions incurred during the first two quarters of fiscal 2007 and fiscal 2006. Investment Income Investment income decreased by $9.7 million to $37.3 million in the first nine months of fiscal 2007 from $47.0 million for the same period last year. The decrease reflects the decrease in cash, cash equivalents, short-term investments and investments when compared to the prior year's quarter resulting primarily from the funding of the NTP litigation settlement in the amount of $612.5 million in the fourth quarter of fiscal 2006 as well as the common shares of the Company repurchased as part of the Company's Common Share Repurchase Program in the amount of $595.1 million offset, in part, by improved interest rate yields. 15 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Income Taxes For the first nine months of fiscal 2007, the Company's income tax expense was $159.7 million resulting in an effective tax rate of 26.3% compared to an income tax expense of $108.5 million or a 23.0% effective tax rate for the same period last year. During the first quarter of fiscal 2006, the tax provision was reduced by $27.0 million as a result of the Company recognizing incremental cumulative Investment Tax Credits ("ITCs") attributable to prior fiscal years. ITCs are generated as a result of the Company incurring eligible Scientific Research & Development expenditures, which, under the "flow-through" method, are credited as a reduction of income tax expense. The Company recorded this $27.0 million reduction in its deferred income tax provision as a result of a favorable tax ruling involving another Canadian technology corporation, but also applicable to the Company. Net Income The Company's net income increased by $82.9 million to $446.6 million, or $2.41 per share basic and $2.34 per share diluted, in the first nine months of fiscal 2007 compared to net income of $363.7 million, or $1.91 per share basic and $1.84 per share diluted, in the prior year's comparable period. The $82.9 million increase in net income in the first nine months of fiscal 2007 reflects primarily an increase in gross margin in the amount of $328.8 million, which was offset by an increase of $204.1 million in the Company's research and development and sales and marketing programs. Results for the nine months ended December 2, 2006 also include the effect of the Company adopting SFAS 123(R), resulting in an after-tax stock-based compensation expense in the amount of $12.3 million, or $0.06 per share diluted EPS. The weighted average number of shares outstanding was 185.2 million common shares for basic EPS and 190.8 million common shares for diluted EPS for the nine months ended December 2, 2006, compared to 190.1 million common shares for basic EPS and 197.2 million common shares for diluted EPS for the comparable period last year. Liquidity and Capital Resources Cash and cash equivalents, short-term investments and investments increased by $155.4 million to $1.32 billion as at December 2, 2006 from $1.16 billion as at September 2, 2006. The majority of the Company's cash and cash equivalents, short-term investments and investments are denominated in U.S. dollars as at December 2, 2006. 16 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 A comparative summary of cash and cash equivalents, short-term investments and investments is set out below.
As at December As at September Change - 2, 2006 2, 2006 Q3/Q2 ----------------------------------------------------- Cash and cash equivalents $ 612,817 $ 459,648 $ 153,169 Short-term investments 280,635 237,670 42,965 Investments 426,595 467,324 (40,729) ------------------------------------------------- Cash, cash equivalents, short-term investments and investments $ 1,320,047 $ 1,164,642 $ 155,405 =================================================
Three months ended December 2, 2006 compared to the three months ended November 26, 2005 Operating Activities Cash flow provided by operating activities was $215.3 million in the third quarter of fiscal 2007, compared to cash flow provided by operating activities of $148.3 million in the third quarter of the preceding fiscal year, representing an increase of $67.0 million. The table below summarizes the key components of this net increase.
Three Months Ended December 2, November 26, Change - Fiscal 2006 2005 2007/2006 ---------------------------------------------------------- Net income $ 176,017 $ 120,149 $ 55,868 Amortization 34,642 21,464 13,178 Deferred income taxes 16,673 (32,818) 49,491 Changes in: Trade receivables (72,144) (43,806) (28,338) Other receivables (2,157) (7,500) 5,343 Inventory (20,410) (27,956) 7,546 Accounts payable (9,912) 29,325 (39,237) Accrued liabilities 49,854 28,549 21,305 All other 42,731 69,203 (26,472) ---------------------------------------------------------- Changes in working capital items - before NTP litigation items 215,294 156,610 58,684 Litigation provision - 25,010 (25,010) Restricted cash - (33,334) 33,334 ---------------------------------------------------------- Cash provided from operating activities $ 215,294 $ 148,286 $ 67,008 ==========================================================
17 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Financing Activities Cash flow provided by financing activities was $22.2 million for the third quarter of fiscal 2007 resulting primarily from the issuance of share capital on the exercise of stock options. Cash flow used in financing activities of $387.4 million in the fiscal 2006 comparable period was primarily attributable to the repurchase of 6.3 million common shares in the amount of $391.2 million pursuant to the Common Share Repurchase Program. Investing Activities Cash flow used in investing activities was $85.0 million for the third quarter of fiscal 2007 and included capital asset additions of $64.1 million and intangible asset additions of $18.7 million. For the third quarter of the prior fiscal year, cash flow used in investing activities was $110.9 million and included transactions involving the proceeds on sale or maturity of short-term investments and investments, net of the costs of acquisition in the amount of $59.9 million as well as $51.0 million which included capital asset additions of $43.6 million and intangible asset additions of $7.4 million. Nine months ended December 2, 2006 compared to the nine months ended November 26, 2005 Operating Activities Cash flow provided by operating activities was $566.6 million in the first nine months of fiscal 2007 compared to cash flow provided by operating activities of $458.0 million in the first nine months of the preceding fiscal year, representing an increase of $108.6 million. The table below summarizes the key components of this net increase.
Nine Months Ended December 2, November 26, Change - Fiscal 2006 2005 2007/2006 ------------------------------------------------------------ Net income $ 446,567 $ 363,724 $ 82,843 Amortization 92,041 60,657 31,384 Deferred income taxes 69,525 16,103 53,422 Changes in: Trade receivables (130,430) (71,968) (58,462) Other receivables (2,461) (21,232) 18,771 Inventory (81,406) (19,389) (62,017) Accounts payable 28,128 62,300 (34,172) Accrued liabilities 75,894 47,235 28,659 All other 68,729 73,533 (4,804) ------------------------------------------------------------ Changes in working capital items - before NTP litigation items 566,587 510,963 55,624 Litigation provision - 31,173 (31,173) Restricted cash - (84,158) 84,158 ------------------------------------------------------------ Cash provided from operating activities $ 566,587 $ 457,978 $ 108,609 ============================================================
18 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Financing Activities Cash flow used in financing activities was $164.7 million for the first nine months of fiscal 2007 resulting primarily from repurchase of 3.2 million common shares in the amount of $203.9 million pursuant to the Common Share Repurchase Program partially offset by the issuance of share capital on the exercise of stock options. Cash flow used in financing activities of $375.9 million in the fiscal 2006 comparable period was primarily attributable to the repurchase of 6.3 million common shares in the amount of $391.2 million pursuant to the Common Share Repurchase Program partially offset by the issuance of share capital on the exercise of stock options. Investing Activities Cash flow used in investing activities was $249.3 million for the first nine months of fiscal 2007, which included capital asset additions of $176.8 million, intangible asset expenditures of $49.4 million and business acquisitions of $116.0 million, offset in part by transactions involving the proceeds on sale or maturity of short-term investments and investments, net of the costs of acquisition in the amount of $93.0 million. For the first nine months of the prior fiscal year, cash flow provided by investing activities was $41.0 million which included transactions involving the costs of acquisition of short-term investments and investments, net of the proceeds on sale or maturity in the amount of $192.7 million, offset in part by $151.7 million relating to capital asset expenditures of $130.6 million and intangible asset expenditures of $17.3 million. Aggregate Contractual Obligations The following table sets out aggregate information about the Company's contractual obligations and the periods in which payments are due as at December 2, 2006:
Less than One to Four to Greater than Total One Year Three Years Five Years Five Years ----------------------------------------------------------------------------- Long-term debt $ 6,865 $ 274 $ 6,591 $ - $ - Operating lease obligations 75,184 8,627 26,427 12,491 27,639 Purchase obligations and commitments 1,590,653 1,232,918 357,735 - - ------------------------------------------------------------------------------ Total $ 1,672,702 $ 1,241,819 $ 390,753 $ 12,491 $ 27,639 ==============================================================================
Purchase obligations and commitments of $1.59 billion as of December 2, 2006, in the form of purchase orders or contracts, are primarily for the purchase of raw materials, as well as for capital assets and other goods and services. The expected timing of payment of these purchase obligations and commitments is estimated based upon current information. Timing of payment and actual amounts paid may be different depending upon the time of receipt of goods and services or changes to agreed-upon amounts for some obligations. The Company may also be liable for certain key suppliers' component part inventories and purchase commitments if the Company's changes to its demand plans adversely affects these certain key suppliers. As of December 2, 2006, the Company has commitments on account of capital expenditures of approximately $110 million included in the $1.59 billion above, primarily for land and building, manufacturing and information technology, including service operations. The Company intends to fund current and future capital and intangible asset expenditure requirements from existing financial resources and cash flows. 19 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 The Company has not declared any cash dividends in the last three fiscal years. Cash, cash equivalents, short-term investments and investments were $1.32 billion as at December 2, 2006. The Company believes its financial resources, together with expected future earnings, are sufficient to meet funding requirements for current financial commitments, for future operating and capital expenditures not yet committed, and also provide the necessary financial capacity to meet current and future growth expectations. The Company has a $100 million Demand Credit Facility (the "Facility") to fund financing and operating requirements of which $16.4 million was utilized as of December 2, 2006 resulting in $83.6 million available for future use. The Company has pledged specific investments as security for this Facility. The Company had previously utilized $48 million of the Facility in order to fund a letter of credit to partially satisfy the Company's liability and funding obligation in the NTP matter. As a result of the settlement of the NTP matter, the Company cancelled the letter of credit on March 6, 2006. The Company has an additional demand facility in the amount of $17.5 million to support and secure other operating and financing requirements. As at December 2, 2006, $16.0 million of this facility was unused. A general security agreement and a general assignment of book debts have been provided as collateral for this facility. Market Risk of Financial Instruments The Company is engaged in operating and financing activities that generate risk in three primary areas: Foreign Exchange The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency of the U.S. Dollar. The majority of the Company's revenues in fiscal 2007 were transacted in U.S. Dollars, Canadian Dollars, Euros and British Pounds. Purchases of raw materials are primarily transacted in U.S. Dollars. Other expenses, consisting of the majority of salaries, certain operating costs and most manufacturing overhead, are incurred primarily in Canadian Dollars. At December 2, 2006, approximately 6% of cash and cash equivalents, 36% of trade receivables and 17% of accounts payable and accrued liabilities are denominated in foreign currencies (November 26, 2005 - 2%, 27%, and 22%, respectively). These foreign currencies include the British Pound, Euro, and Canadian Dollar. As part of its risk management strategy, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments, including forward contracts and options. The Company does not use derivative instruments for speculative purposes. To partially hedge exposures relating to foreign currency anticipated transactions, the Company has entered into forward contracts to sell U.S. Dollars and purchase Canadian Dollars, to sell Euros and purchase U.S. Dollars, and to sell British Pounds and purchase U.S. Dollars. These contracts have been designated as cash flow hedges, with the resulting changes in fair value recorded in other comprehensive income, and subsequently reclassified to earnings in the period in which the cash flows from the associated hedged transactions affect earnings. These cash flow hedges were fully effective at December 2, 2006. As at December 2, 2006, the unrealized gain on these forward contracts was approximately $3.9 million (November 26, 2005 - $23.1 million). These amounts were included in Other current assets and Accumulated other comprehensive income. To partially hedge exposures relating to foreign currency denominated liabilities, the Company has entered into forward contracts to sell U.S. Dollars and purchase Canadian Dollars. These contracts have been 20 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 designated as fair value hedges, with gains and losses on the hedge instruments being recognized in earnings each period, offsetting the change in the U.S. dollar value of the hedged liabilities. As at December 2, 2006, nil was recorded in respect of this amount (November 26, 2005 - gain of $0.4 million). This amount was included in Selling, marketing and administration expenses. To partially hedge exposures relating to foreign currency cash and receivable balances, the Company has entered into forward contracts to sell Canadian Dollars, Euros, British Pounds, Japanese Yen and Hungarian Forint, and purchase U.S. Dollars. These contracts have been designated as fair value hedges, with gains and losses on the hedge instruments being recognized in earnings each period, offsetting the change in the U.S. Dollar value of the hedged assets. As at December 2, 2006, a loss of $1.0 million was recorded in respect of this amount (November 26, 2005 - loss of $0.3 million). This amount was included in Selling, marketing and administration expenses. Interest Rate Cash, cash equivalents and investments are invested in certain instruments of varying maturities. Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying maturities. The fair value of investments, as well as the investment income derived from the investment portfolio, will fluctuate with changes in prevailing interest rates. The Company does not currently use interest rate derivative financial instruments in its investment portfolio. Credit and Customer Concentration The Company has historically been dependent on an increasing number of significant telecommunication carriers and on larger more complex contracts with respect to sales of the majority of its products and services. The Company is experiencing significant sales growth in North America and internationally, resulting in the growth in its carrier customer base in terms of numbers, sales and trade receivables volumes and in some instances new or significantly increased credit limits. While the Company sells to a variety of customers, three customers comprised 15%, 12% and 10% of trade receivables as at December 2, 2006 (September 2, 2006 - two customers comprised 19%, and 16%). Additionally, four customers comprised 16%, 15%, 12% and 9% of the Company's fiscal 2007 third quarter sales (third quarter of fiscal 2006 - four customers comprised 19%, 17%, 15% and 13%). The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations to the Company. The Company mitigates some of this risk by limiting counterparties to major financial institutions and by continuously monitoring their creditworthiness. As at December 2, 2006, the maximum credit exposure to a single counterparty, measured as a percentage of the total fair value of the applicable derivative instruments was 69% (November 26, 2005 - 51%). The Company is exposed to market and credit risk on its investment portfolio. The Company mitigates this risk by investing only in liquid, investment grade securities and by limiting exposure to any one entity or group of related entities. As at December 2, 2006, no single issuer represented more than 12% of the total cash, cash equivalents and investments (November 26, 2005 - no single issuer represented more than 10% of the total cash, cash equivalents and investments). 21 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months and Nine Months Ended December 2, 2006 Impact of Accounting Pronouncements Not Yet Implemented Accounting for Certain Hybrid Financial Instruments In February 2006, the FASB issued SFAS 155 Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133 and among other things, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 is in effect for fiscal years beginning after September 15, 2006 and the Company will be required to adopt the standard in the first quarter of fiscal 2008. The Company is currently evaluating what impact, if any, SFAS 155 will have on its financial statements. 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. Accounting for Uncertainty in Income Taxes In July 2006, the 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 SFAS 109 Accounting for Income Taxes. 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. FIN 48 is effective for the Company as of the beginning of its fiscal 2008 year. The Company is currently evaluating the impact FIN 48 will have on its financial statements. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108") Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that a company consider and evaluate materiality with respect to identified unadjusted errors using both a rollover and iron curtain approach. The rollover approach quantifies a misstatement based on the identified unadjusted item originating in the current year income statement and ignores any portion of the misstatement that originated in a prior period. The iron curtain approach quantifies misstatements that exist in the balance sheet at the end of the current period regardless of the period of origin. Financial statements would be required to be adjusted when either approach results in quantifying a misstatement that is material. SAB 108 is effective for the Company's 2007 fiscal year. The Company is evaluating the impact, if any, that SAB 108 will have on its consolidated financial statements. 22 Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands)(unaudited) Preliminary Consolidated Balance Sheets As at -------------------------------------- December 2, March 4, 2006 2006 ----------------- ----------------- Assets Current Cash and cash equivalents $ 612,817 $ 459,540 Short-term investments 280,635 175,553 Trade receivables 448,697 315,278 Other receivables 34,335 31,861 Inventory 216,075 134,523 Other current assets 33,301 45,035 Deferred income tax asset 30,327 94,789 ----------------- ----------------- 1,656,187 1,256,579 Investments 426,595 614,309 Capital assets 437,020 326,313 Intangible assets 134,966 85,929 Goodwill 114,752 29,026 ----------------- ----------------- $ 2,769,520 $ 2,312,156 ================= ================= Liabilities Current Accounts payable $ 110,773 $ 94,954 Accrued liabilities 225,993 144,912 Income taxes payable 78,272 17,584 Deferred revenue 25,971 20,968 Current portion of long-term debt 274 262 ----------------- ----------------- 441,283 278,680 Long-term debt 6,591 6,851 Deferred income tax liability 26,195 27,858 ----------------- ----------------- 474,069 313,389 ----------------- ----------------- Shareholders' Equity 2,295,451 1,998,767 ----------------- ----------------- $ 2,769,520 $ 2,312,156 ================= ================= 23 Research In Motion Limited (United States dollars, in thousands, except per share data)(unaudited) Preliminary Consolidated Statements of Operations
For the Three Months Ended For the Nine Months Ended December 2, November 26, December 2, November 26, 2006 2005 2006 2005 --------------- --------------- --------------- --------------- Revenue $ 835,053 $ 560,596 $ 2,106,710 $ 1,504,626 Cost of sales 382,295 247,851 945,933 672,649 --------------- --------------- --------------- --------------- Gross margin 452,758 312,745 1,160,777 831,977 --------------- --------------- --------------- --------------- Expenses Research and development 60,833 41,567 167,973 113,778 Selling, marketing and administration 145,903 83,965 369,018 219,099 Amortization 20,334 12,797 54,858 34,629 Litigation - 26,176 - 39,291 --------------- --------------- --------------- --------------- 227,070 164,505 591,849 406,797 --------------- --------------- --------------- --------------- Income from operations 225,688 148,240 568,928 425,180 Investment income 12,666 17,483 37,323 46,999 --------------- --------------- --------------- --------------- Income before income taxes 238,354 165,723 606,251 472,179 --------------- --------------- --------------- --------------- Provision for income taxes Current 50,775 75,929 92,770 85,240 Deferred 11,562 (30,355) 66,914 23,215 --------------- --------------- --------------- --------------- 62,337 45,574 159,684 108,455 --------------- --------------- --------------- --------------- Net income $ 176,017 $ 120,149 $ 446,567 $ 363,724 =============== =============== =============== =============== Earnings per share Basic $ 0.95 $ 0.63 $ 2.41 $ 1.91 =============== =============== =============== =============== Diluted $ 0.93 $ 0.61 $ 2.34 $ 1.84 =============== =============== =============== ===============
See notes to the consolidated financial statements. 24 Research In Motion Limited (United States dollars, in thousands)(unaudited) Preliminary Consolidated Statements of Cash Flows
For the Three Months Ended For the Nine Months Ended December 2, November 26, December 2, November 26, 2006 2005 2006 2005 ------------- ------------- ------------- -------------- Cash flows from operating activities Net income $ 176,017 $ 120,149 $ 446,567 $ 363,724 Items not requiring an outlay of cash: Amortization 34,642 21,464 92,041 60,657 Deferred income taxes 16,673 (32,818) 69,525 16,103 Share-based payment 3,682 - 12,591 - Other (840) 335 (685) 381 Net changes in working capital items (14,880) 39,156 (53,452) 17,113 ------------- ------------- ------------- -------------- Net cash provided by operating activities 215,294 148,286 566,587 457,978 ------------- ------------- ------------- -------------- Cash flows from financing activities Issuance of share capital 22,221 3,896 39,421 15,490 Common shares repurchased pursuant to Common Share Repurchase Program - (391,212) (203,933) (391,212) Repayment of long-term debt (67) (58) (196) (168) ------------- ------------- ------------- -------------- Net cash (used in) provided by financing activities 22,154 (387,374) (164,708) (375,890) ------------- ------------- ------------- -------------- Cash flows from investing activities Acquisition of investments (35,555) (40,840) (44,567) (91,772) Proceeds on sale or maturity of investments 30,464 9,022 66,165 36,513 Acquisition of capital assets (64,139) (43,619) (176,843) (130,591) Acquisition of intangible assets (18,720) (7,396) (49,412) (17,342) Business acquisitions (4,574) - (116,030) (3,795) Acquisition of short-term investments (41,750) (70,625) (63,506) (184,101) Proceeds on sale and maturity of short-term investments 49,282 42,562 134,878 432,052 ------------- ------------- ------------- -------------- Net cash (used in) provided by investing activities (84,992) (110,896) (249,315) 40,964 ------------- ------------- ------------- -------------- Effect of foreign exchange gain on cash and cash equivalents 713 (295) 713 (295) ------------- ------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents for the period 153,169 (350,279) 153,277 122,757 Cash and cash equivalents, beginning of period 459,648 1,083,390 459,540 610,354 ------------- ------------- ------------- -------------- Cash and cash equivalents, end of period $ 612,817 $ 733,111 $ 612,817 $ 733,111 ============= ============= ============= ============== See notes to the consolidated financial statements.
25 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS Cash equivalents are highly liquid investments with maturities of three months or less at the date of acquisition and are carried at fair value. 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 investments are categorized as available-for-sale and are carried at fair value with gains and losses recorded through other comprehensive income. In the event of a decline in value which is other than temporary, the investments are written down to estimated realizable value by a charge to earnings. INVENTORY Inventory is comprised as follows: December 2, March 4, 2006 2006 --------------------------- Raw materials $ 122,749 $ 107,049 Work in process 91,812 31,848 Finished goods 10,630 3,905 Provision for excess and obsolete inventory (9,116) (8,279) --------------------------- $ 216,075 $ 134,523 =========================== CAPITAL ASSETS Capital assets are comprised of the following:
December 2, 2006 ----------------------------------------------------- Accumulated Net book Cost amortization value ----------------------------------------------------- Land $ 31,079 $ - $ 31,079 Buildings, leaseholds and other 188,419 26,350 162,069 BlackBerry operations and other information technology 285,713 146,712 139,001 Manufacturing equipment 109,780 60,327 49,453 Furniture and fixtures 94,590 39,172 55,418 ----------------------------------------------------- $ 709,581 $ 272,561 $ 437,020 =====================================================
26 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006
March 4, 2006 ----------------------------------------------------- Accumulated Net book Cost amortization value ----------------------------------------------------- Land $ 15,647 $ - $ 15,647 Buildings, leaseholds and other 137,982 19,473 118,509 BlackBerry operations and other information technology 214,566 112,598 101,968 Manufacturing equipment 88,563 43,966 44,597 Furniture and fixtures 74,548 28,956 45,592 -------------------------------------------------- $ 531,306 $ 204,993 $ 326,313 ==================================================
INTANGIBLE ASSETS Intangible assets comprise the following:
December 2, 2006 ------------------------------------------------- Accumulated Net book Cost amortization value ------------------------------------------------- Acquired technology $ 58,639 $ 16,425 $ 42,214 Licenses 90,546 64,552 25,994 Patents 77,003 10,245 66,758 ------------------------------------------------- $ 226,188 $ 91,222 $ 134,966 ================================================= March 4, 2006 ------------------------------------------------- Accumulated Net book Cost amortization value ------------------------------------------------- Acquired technology $ 18,373 $ 9,465 $ 8,908 Licenses 82,806 48,576 34,230 Patents 50,790 7,999 42,791 ------------------------------------------------- $ 151,969 $ 66,040 $ 85,929 =================================================
BUSINESS ACQUISITIONS During the third quarter of fiscal 2007, the Company purchased 100% of the common shares of a company whose proprietary software will be incorporated into the Company's BlackBerry platform. The transaction closed on September 22, 2006. The acquired company's operating results were not material to the Company's operating results in the third quarter of fiscal 2007. 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 27 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 subscribers, while significantly reducing bandwidth requirements. The operating results of Slipstream were not material to the Company's 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 operating results in the first quarter of fiscal 2007. During the first quarter of fiscal 2006, the Company purchased 100% of the common shares of a company whose proprietary software was incorporated into the Company's BlackBerry platform. The transaction closed on March 24, 2005. 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 each respective closing date to December 2, 2006. The following table summarizes the preliminary fiscal 2007 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:
For the three months ended For the nine months ended -------------------------------------------------------------------- December 2, November 26, December 2, November 26, 2006 2005 2006 2005 -------------------------------------------------------------------- Assets purchased Current assets $ 294 $ - $ 3,705 $ 158 Capital assets - - 802 - Deferred income tax asset 654 - 5,460 259 Acquired technology 1,334 - 40,266 6,223 Goodwill 3,272 - 85,726 - ------------------------------------------------------------- 5,554 - 135,959 6,640 ------------------------------------------------------------- Liabilities assumed 500 - 8,595 645 Deferred income tax liability 480 - 11,334 2,200 ------------------------------------------------------------- 980 - 19,929 2,845 ------------------------------------------------------------- Net non-cash assets acquired 4,574 - 116,030 3,795 Cash acquired 89 - 3,649 3 ------------------------------------------------------------- Net assets acquired $ 4,663 $ - $ 119,679 $ 3,798 =============================================================
The purchase price allocations for the fiscal 2007 acquisitions will be 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. 28 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 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 nine months ended December 2, 2006, as well as the accrued warranty obligations as at December 2, 2006, are set forth in the following table: Accrued warranty obligations as at March 4, 2006 $ 22,387 Warranty costs incurred for the nine months ended December 2, 2006 (29,363) Warranty provision for the nine months ended December 2, 2006 36,358 Adjustments for changes in estimate for the nine months ended December 2, 2006 3,100 --------------- Accrued warranty obligations as at December 2, 2006 $ 32,482 =============== FOREIGN EXCHANGE GAINS AND LOSSES Selling, marketing and administration expense for the first nine months of fiscal 2007 includes $2.7 million with respect to a foreign exchange loss (fiscal 2006 - foreign exchange loss of $2.2 million). The Company is exposed to foreign exchange fluctuations as a result of transactions in currencies other than its U.S. dollar functional currency. COMMITMENTS AND CONTINGENCIES (a) Credit Facility The Company has a $100 million Facility to fund financing and operating requirements of which $16.4 million was utilized as of December 2, 2006 resulting in $83.6 million available for future use. The Company has pledged specific investments as security for this Facility. The Company had previously utilized $48 million of the Facility in order to fund a letter of credit to partially satisfy the Company's liability and funding obligation in the NTP, litigation matter. As a result of the settlement of the NTP litigation matter, the Company cancelled the letter of credit on March 6, 2006. The Company has an additional demand facility in the amount of $17.5 million to support and secure other operating and financing requirements. As at December 2, 2006, $16.0 million of this facility was unused. A general security agreement and a general assignment of book debts have been provided as collateral for this facility. 29 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 (b) Litigation The Company was the defendant in a patent litigation matter brought by NTP alleging that the Company infringed on eight of NTP's patents. On March 3, 2006, the Company and NTP jointly announced that they signed definitive licensing and settlement agreements. All terms of the agreement were finalized and the litigation against RIM was dismissed by a court order on March 3, 2006. The agreement eliminated the need for any further court proceedings or decisions relating to damages or injunctive relief. On March 3, 2006, RIM paid NTP $612.5 million in full and final settlement of all claims against RIM, as well as for a perpetual, fully-paid up license going forward. As the litigation was settled in fiscal 2006, no amount is reflected in the results of operations for fiscal 2007. The Company recorded an expense of $26.2 million in the third quarter of fiscal 2006 to account for the full writedown of the acquired NTP license that was recorded in March 2005 which, after accumulated depreciation, had net book value of $18.3 million as well as an expense of $7.9 million to account for incremental current and estimated legal and professional fees in connection with this litigation. In November 2003, Inpro II Licensing S.a.r.l. ("Inpro II") filed an action in the United States District Court for the District of Delaware (the "U.S. Inpro Action") asserting United States Patent No. 6,523,079 against both RIM and one of its customers. RIM was successful in the District Court, and the matter was heard on appeal on December 8, 2005 at the Federal Circuit. On May 11, 2006, the Federal Circuit released its decision which affirmed the District Court's dismissal. On May 25, 2006, Inpro II filed a petition for panel rehearing and rehearing en banc with the Federal Circuit, which petition was denied on June 19, 2006. Inpro II did not file a petition for certiorari with the United States Supreme Court within the time allowed and therefore the final judgment dismissing the U.S. Inpro Action in its entirety is final and binding, and Inpro II has no further appeal rights. As a result, no amount has been recorded in these consolidated financial statements as at December 2, 2006 as the action has been dismissed. Eatoni Ergonomics, Inc. ("Eatoni") has alleged that RIM's BlackBerry 7100 Series infringes the claims of United States Patent No. 6,885,317. Proceedings are currently pending. At this time, the likelihood of damages or recoveries and the ultimate amount, if any, with respect to this action is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at December 2, 2006. On August 31, 2005, Morris Reese ("Reese") filed a complaint in the United States District Court for the Eastern District of Texas, Marshall Division, against Research In Motion Corporation, along with 7 other defendants alleging infringement of United States Patent No. 6,427,009. A definitive settlement agreement was entered into between RIM and Reese on June 29, 2006. The amount of the settlement is not material to these financial statements. Reese agreed to a dismissal of the litigation and all claims against RIM and its customers as part of the settlement. The action was dismissed by the court on July 12, 2006. By letter dated February 16, 2004, T-Mobile Deutschland GmbH ("TMO-DG") and T-Mobile International AG (collectively, "TMO") served RIM's wholly-owned UK subsidiary, Research In Motion UK Limited ("RIM-UK"), with a third party notice in relation 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 Dusseldorf 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 Dusseldorf. A decision on the BGH appeal is expected within twelve months. At this time, the 30 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 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 December 2, 2006. On May 9, 2005, RIM-UK filed an action against Inpro Licensing S.a.r.l. ("Inpro") in the High Court of Justice (Chancery Division, Patents Court) (the "High Court") in London, England. The action sought a declaration that the UK patent, designated under European Patent EP 0892947B1 ("the B1 Patent"), was invalid and an order that the patent be revoked. On February 2, 2006, the High Court ruled in favor of RIM that all patent claims in the B1 Patent are invalid. Inpro has appealed the High Court's decision and a hearing is scheduled to begin on January 15, 2007. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation (or any related litigation) is not determinable. Accordingly, no amount has been recorded in these consolidated financial statements as at December 2, 2006. 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 Dusseldorf, 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. On January 27, 2006, the court declared the B1 Patent invalid. Inpro has appealed the court's decision and an appeal will not be heard until some time in 2008. On March 21, 2006, the 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 December 2, 2006. 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 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 complaint filed by RIM in the Dallas District Court against Visto's United States Patents Nos. 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 has been 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) has been 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's 6,389,457 and 6,219,694 patents to the Marshall District Court action is now pending in the Marshall District Court. 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 December 2, 2006. 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. 31 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 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. 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. EP 0996905 invalid and declare 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 Northern District of Texas 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. Proceedings are currently pending. 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 December 2, 2006. 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 alleging infringement of United States Patent No. 4,809,297 (the `297 patent). Williams Wireless seeks 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. 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 December 2, 2006. From time to time, the Company is involved in other claims in the normal course of business. 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. 32 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006 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. Selected financial information is as follows:
For the three months ended For the nine months ended ------------------------------------------------------------------ December 2, November 26, December 2, November 26, Revenue 2006 2005 2006 2005 ------------------------------------------------------------------ Canada $ 72,505 $ 39,536 $ 169,151 $ 124,436 United States 460,680 389,101 1,208,532 983,520 Other 301,868 131,959 729,027 396,670 ----------------------------------------------------------------- $ 835,053 $ 560,596 $ 2,106,710 $1,504,626 ================================================================= Revenue Canada 8.7% 7.1% 8.0% 8.3% United States 55.2% 69.4% 57.4% 65.4% Other 36.1% 23.5% 34.6% 26.4% ----------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% =================================================================
33 Research In Motion Limited Additional Financial Information on the Preliminary Results For the Three Months Ended and Nine Months Ended December 2, 2006
For the three months ended For the nine months ended -------------------------------------------------------------------- December 2, November 26, December 2, November 26, Revenue mix 2006 2005 2006 2005 -------------------------------------------------------------------- Devices $ 625,626 $ 391,880 $ 1,533,185 $ 1,048,713 Service 142,532 103,839 387,985 266,349 Software 43,235 39,594 123,928 127,588 Other 23,660 25,283 61,612 61,976 -------------------------------------------------------------------- $ 835,053 $ 560,596 $ 2,106,710 $ 1,504,626 ==================================================================== As at --------------------------------- December 2, March 4, Capital assets, intangible assets and goodwill 2006 2006 --------------------------------- Canada $ 595,905 $ 398,965 United States 53,108 26,378 Other 37,725 15,925 --------------------------------- $ 686,738 $ 441,268 ================================= Total assets Canada $ 963,458 $ 745,691 United States 762,108 629,980 Other 1,043,954 936,485 --------------------------------- $ 2,769,520 $ 2,312,156 =================================
CASH FLOW INFORMATION Net changes in working capital items:
For the three months ended For the nine months ended --------------------------------------------------------------------- December 2, November 26, December 2, November 26, 2006 2005 2006 2005 --------------------------------------------------------------------- Trade receivables $ (72,144) $ (43,806) $ (130,430) $ (71,968) Other receivables (2,157) (7,500) (2,461) (21,232) Inventory (20,410) (27,956) (81,406) (19,389) Restricted cash - (33,334) - (84,158) Other current assets (1,782) (6,605) (9,075) (9,054) Accounts payable (9,912) 29,325 28,128 62,300 Accrued liabilities 49,854 28,549 75,894 47,235 Accrued litigation - 25,010 - 31,173 Income taxes payable 39,794 76,008 61,153 82,266 Deferred revenue 1,877 (535) 4,745 (60) ---------------------------------------------------------------- $ (14,880) $ 39,156 $ (53,452) $ 17,113 ================================================================
34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESEARCH IN MOTION LIMITED -------------------------------------- (Registrant) Date: January 16, 2007 By: /S/ DENNIS KAVELMAN ------------------------- --------------------------------- Name: Dennis Kavelman Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----