6-K 1 bbry-20131130x6k.htm 6-K BBRY-2013.11.30-6K


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, December 2013
_________________________________________________________________  
Commission File Number 000-29898
_________________________________________________________________  
BlackBerry Limited
(Translation of registrant’s name into English)
_________________________________________________________________ 
2200 University Avenue East, Waterloo, Ontario, Canada N2K 0A7
(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):  ¨





DOCUMENTS INCLUDED AS PART OF THIS REPORT
Document
1.    Consolidated Financial Statements for the Three and Nine Months Ended November 30, 2013.
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended November 30, 2013.
3.
Canadian Forms 52-109F2 - Certification of Interim Filings
This Report on Form 6-K is incorporated by reference into the Registration Statements on Form S-8 of the Registrant, which were originally filed with the Securities and Exchange Commission on March 28, 2002 (File No. 333-85294), October 21, 2002 (File No. 333-100684), April 28, 2008 (File No. 333-150470), October 3, 2011 (File No. 333-177149), July 10, 2013 (File No. 333-189880) and on December 20, 2013 (File Nos. 333-192986 and 333-192987)







BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions)(unaudited)
Consolidated Balance Sheets
 
As at
 
November 30, 2013
 
March 2, 2013
Assets
 
 
 
Current
 
 
 
Cash and cash equivalents
$
2,274

 
$
1,549

Short-term investments
788

 
1,105

Accounts receivable, net
1,242

 
2,353

Other receivables
151

 
272

Inventories
254

 
603

Income taxes receivable
299

 
597

Other current assets
623

 
469

Deferred income tax asset
31

 
139

Assets held for sale
192

 
280

 
5,854

 
7,367

Long-term investments
130

 
221

Property, plant and equipment, net
1,070

 
2,147

Intangible assets, net
1,342

 
3,430

 
$
8,396

 
$
13,165

Liabilities
 
 
 
Current
 
 
 
Accounts payable
$
750

 
$
1,064

Accrued liabilities
1,888

 
1,842

Deferred revenue
699

 
542

 
3,337

 
3,448

Long-term debt
994

 

Deferred income tax liability
25

 
245

Income taxes payable
9

 
12

 
4,365

 
3,705

Shareholders’ Equity
 
 
 
Capital stock and additional paid-in capital
 
 
 
Preferred shares: authorized unlimited number of non-voting, cumulative, redeemable and retractable

 

Common shares: authorized unlimited number of non-voting, redeemable, retractable Class A common shares and unlimited number of voting common shares
 
 
 
Issued - 526,183,689 voting common shares (March 2, 2013 - 524,159,844)
2,403

 
2,431

Treasury stock
 
 
 
November 30, 2013 - 7,830,593 (March 2, 2013 - 9,019,617)
(183
)
 
(234
)
Retained earnings
1,817

 
7,267

Accumulated other comprehensive loss
(6
)
 
(4
)
 
4,031

 
9,460

 
$
8,396

 
$
13,165

See notes to consolidated financial statements.
On behalf of the Board:
 
 
 
John S. Chen
              Barbara Stymiest
Director
Director


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Shareholders’ Equity
 
 
Capital Stock
and Additional
Paid-In Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Total
Balance as at March 2, 2013
$
2,431

 
$
(234
)
 
$
7,267

 
$
(4
)
 
$
9,460

Net loss

 

 
(5,450
)
 

 
(5,450
)
Other comprehensive loss

 

 

 
(2
)
 
(2
)
Shares issued:
 
 
 
 
 
 
 
 
 
Stock-based compensation
50

 

 

 

 
50

Exercise of stock options
1

 

 

 

 
1

Common shares issued for restricted share unit settlements

 
(16
)
 

 

 
(16
)
Tax deficiencies related to stock-based compensation
(12
)
 

 

 

 
(12
)
Treasury stock vested
(67
)
 
67

 

 

 

Balance as at November 30, 2013
$
2,403

 
$
(183
)
 
$
1,817

 
$
(6
)
 
$
4,031

See notes to consolidated financial statements.






BlackBerry Limited
(United States dollars, in millions, except per share data)(unaudited)

Consolidated Statements of Operations
 
 
Three Months Ended
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
 
November 30, 2013
 
December 1, 2012
Revenue
$
1,193

 
$
2,727

 
$
5,837

 
$
8,396

Cost of sales
2,457

 
1,897

 
6,433

 
6,036

Gross margin
(1,264
)
 
830

 
(596
)
 
2,360

Operating expenses
 
 
 
 

 

Research and development
322

 
393

 
1,040

 
1,126

Selling, marketing and administration
543

 
487

 
1,743

 
1,589

Amortization
148

 
180

 
499

 
533

Impairment of long-lived assets
2,748

 

 
2,748

 

Impairment of goodwill

 

 

 
335

 
3,761

 
1,060

 
6,030

 
3,583

Operating loss
(5,025
)
 
(230
)
 
(6,626
)
 
(1,223
)
Investment income (loss), net

 
18

 
(1
)
 
21

Loss from continuing operations before income taxes
(5,025
)
 
(212
)
 
(6,627
)
 
(1,202
)
Recovery of income taxes
(624
)
 
(226
)
 
(1,177
)
 
(480
)
Income (loss) from continuing operations
(4,401
)
 
14

 
(5,450
)
 
(722
)
Loss from discontinued operations, net of tax

 
(5
)
 

 
(22
)
Net income (loss)
$
(4,401
)
 
$
9

 
$
(5,450
)
 
$
(744
)
Earnings (loss) per share
 
 
 
 

 

Basic and diluted earnings (loss) per share from continuing operations
$
(8.37
)
 
$
0.03

 
$
(10.39
)
 
$
(1.38
)
Basic and diluted earnings (loss) per share from discontinued operations

 
(0.01
)
 

 
(0.04
)
Total basic and diluted earnings (loss) per share
$
(8.37
)
 
$
0.02

 
$
(10.39
)
 
$
(1.42
)
See notes to consolidated financial statements.


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Comprehensive Loss
 
Three Months Ended
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
 
November 30, 2013
 
December 1, 2012
Net income (loss)
$
(4,401
)

$
9

 
$
(5,450
)

$
(744
)
Other comprehensive loss
 
 
 
 



Net change in unrealized losses on available-for-sale investments

 

 

 
(1
)
Net change in fair value of derivatives designated as cash flow hedges during the period, net of income taxes of $2 million for the three months ended and income tax recovery of $4 million for the nine months ended (December 1, 2012 - income taxes of $7 million and $7 million)
(1
)
 
(23
)
 
(22
)

20

Amounts reclassified to net loss during the period for derivatives designated as cash flow hedges, net of income tax recovery of $2 million and $6 million for the three and nine months ended (December 1, 2012 - income taxes of $2 million and $20 million)
5

 
(7
)
 
20


(61
)
Other comprehensive income (loss)
4

 
(30
)
 
(2
)

(42
)
Comprehensive loss
$
(4,397
)
 
$
(21
)
 
$
(5,452
)

$
(786
)
See notes to consolidated financial statements.


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Cash Flows
 
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
Cash flows from operating activities
 
 
 
Loss from continuing operations
$
(5,450
)
 
$
(722
)
Loss from discontinued operations

 
(22
)
Net loss
(5,450
)
 
(744
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization
1,067

 
1,524

Deferred income taxes
(114
)
 
(15
)
Income taxes payable
(3
)
 
2

Stock-based compensation
50

 
63

Impairment of long-lived assets
2,748

 

Impairment of goodwill

 
335

Other
97

 
25

Net changes in working capital items
2,010

 
903

Net cash provided by operating activities
405

 
2,093

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisition of long-term investments
(228
)
 
(200
)
Proceeds on sale or maturity of long-term investments
283

 
180

Acquisition of property, plant and equipment
(241
)
 
(325
)
Acquisition of intangible assets
(837
)
 
(770
)
Business acquisitions, net of cash acquired
(7
)
 
(105
)
Acquisition of short-term investments
(1,149
)
 
(837
)
Proceeds on sale or maturity of short-term investments
1,537

 
392

Net cash used in investing activities
(642
)
 
(1,665
)
 
 
 
 
Cash flows from financing activities
 
 
 
Issuance of common shares
1

 

Tax deficiencies related to stock-based compensation
(12
)
 
(10
)
Purchase of treasury stock
(16
)
 
(25
)
Issuance of debt
1,000

 

Net cash provided by (used in) financing activities
973

 
(35
)
 
 
 
 
Effect of foreign exchange gain (loss) on cash and cash equivalents
(11
)
 
1

Net increase in cash and cash equivalents for the period
725

 
394

 
 
 
 
Cash and cash equivalents, beginning of period
1,549

 
1,516

Cash and cash equivalents, end of period
$
2,274

 
$
1,910

See notes to consolidated financial statements.


BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)






1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Basis of presentation and preparation
These interim consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”). They do not include all of the disclosures required by U.S. GAAP for annual financial statements and should be read in conjunction with BlackBerry Limited’s (the “Company”) audited consolidated financial statements (the “financial statements”) for the year ended March 2, 2013, which have been prepared in accordance with U.S. GAAP. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included in these financial statements. Operating results for the three and nine months ended November 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending March 1, 2014.
The Company’s fiscal year end date is the 52 or 53 weeks ending on the last Saturday of February, or the first Saturday of March. The fiscal years ending March 1, 2014 and March 2, 2013 both comprise 52 weeks. Certain of the comparable figures have been reclassified to conform to the current period’s presentation.
Accounting Policies
Convertible Debentures
Due to the number of embedded derivative instruments within the Company’s issued convertible debentures that would require bifurcation, as well as the possible volatility to income from the conversion option associated with the convertible debentures, the Company elected to measure the convertible debentures at fair value in accordance with the fair value option under ASC 825-10-25. Each period, the fair value of the convertible debentures will be recalculated using publicly available market information; resulting gains and losses from the change in fair value of the convertible debentures will be recognized in income.
Critical Accounting Estimates
General
The preparation of the consolidated financial statements 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 from these estimates.
Revenue Recognition
There were no changes to the Company’s revenue recognition policy during fiscal 2014. However, given the previously disclosed developments in the Company's business in the second quarter of fiscal 2014, the Company has provided further detail below on the application of its existing revenue recognition policy relating to hardware sales.
The Company considers revenue realized or realizable and earned when the following four criteria have been met: (i) when persuasive evidence of an arrangement exists, (ii) the product has been delivered to a customer and title has been transferred or the services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collection is reasonably assured. For hardware products, the determination of when the price is fixed or determinable can affect the timing of revenue recognition, as discussed further below.
The Company records reductions to revenue for estimated commitments related to price protection, rights of return and customer incentive programs. Price protection is accrued as a reduction to revenue provided that the future price reduction can be reliably estimated or based on contractual caps, provided that the Company has not granted refunds in excess of those caps and provided that all other revenue recognition criteria have been met. If refunds cannot be reliably estimated or the contractual cap is no longer valid, revenue is not recognized until reliable estimates can be made or the price protection period lapses. The Company also records reductions to revenue for rights of return based on contractual terms and conditions as it relates to quality defects only and, if the expected product returns can be reasonably and reliably estimated, based on historical experience. Where a right of return cannot be reasonably and reliably estimated, the Company recognizes revenue when the product sells through to an end user or the return period lapses. The estimated cost of customer incentive programs is accrued as a reduction to revenue and is recognized at the later of the date at

1

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





which the Company has recognized the revenue or the date at which the program is offered. If historical experience cannot support a breakage rate, the maximum rebate amount is accrued and adjusted when the incentive programs end. The Company considers several factors in determining whether it can reliably estimate future refunds or customer incentives such as levels of channel inventory, new competitor introductions, the stage of a product in the product life cycle, and potential cannibalization of future product offerings. If there is a future risk of pricing concessions and a reliable estimate cannot be made at the time of shipment, the Company recognizes the related revenue when its products are sold through to an end user.
For shipments where the Company recognizes revenue when the product is sold through to an end user, the Company determines the point at which that happens based upon internally generated reporting indicating when the devices are activated on the Company’s relay infrastructure.
Significant judgment is applied by the Company to determine whether shipments of devices have met the Company’s revenue recognition criteria, as the analysis is dependent on many facts and circumstances. During the second quarter of fiscal 2014, the Company shipped devices to its carrier and distributor partners to support new and continuing product launches and meet expected levels of end customer demand. However, the sell-through levels for BlackBerry 10 devices decreased during the second quarter of fiscal 2014, causing the number of BlackBerry 10 devices in the channel to increase above the Company's expectations. In order to improve sell-through levels and stimulate global demand for BlackBerry 10 devices, the Company continued to execute on marketing campaigns and reduced the price on new shipments of BlackBerry 10 smartphones during the second and third quarters of fiscal 2014. The Company plans to implement further sales incentives with its carrier and distributor partners to increase sell-through, which could be applicable to all BlackBerry 10 devices shipped in the second and third quarters of fiscal 2014. As previously disclosed, the Company can no longer reasonably estimate the amount of the potential sales incentives that may be offered on certain BlackBerry devices in future periods, resulting in revenues for BlackBerry 10 devices, and BlackBerry 7 devices in certain regions, being recognized when the devices sell through to end customers. See the Company's consolidated financial statements for the year ended March 2, 2013 for further details on the Company's revenue recognition policies.
Valuation of Long-Lived Assets
Long-lived assets (“LLA”) are tested for impairment if testing is warranted by changes in events and circumstances that indicate that LLA balances may not be recoverable from the Company's estimated future cash flows. These events and circumstances may include significant decreases in the market price of an asset or asset group, significant changes in the extent or manner in which an asset or asset group is being used by the Company or in its physical condition, a significant change in legal factors or in the business climate, a history or forecast of future operating or cash flow losses, significant disposal activity, a significant decline in the Company's share price, a significant decline in revenues or adverse changes in the economic environment.
The LLA impairment test prescribed by U.S. GAAP requires the Company to identify its asset groups and test impairment of each asset group separately. To conduct the LLA impairment test, the asset group is tested for recoverability using undiscounted cash flows over the remaining useful life of the primary asset. If forecasted net cash flows are less than the carrying amount of the asset group, an impairment charge is measured by comparing the fair value of the asset group to its carrying value. Determining the Company's asset groups and related primary assets requires significant judgment by management. Different judgments could yield different results.
LLA impairment is tested using a two-step process. When significant indicators of impairment exist, the Company performs a cash flow recoverability test as the first step, which involves comparing the Company's estimated undiscounted future cash flows to the carrying amount of its net assets, since the Company consists of one asset group. If the net cash flows of the Company exceed the carrying amount of its net assets, LLA are not considered to be impaired. If the carrying amount exceeds the net cash flows, there is an indication of potential impairment and the second step of the LLA impairment test is performed to measure the impairment amount. The second step involves determining the fair value of the asset group, the Company. Fair value should be determined using valuation techniques that are recognized by ASC 820, including the market approach, income approach and cost approach. If the carrying amount of the Company's net assets exceeds the fair value of the Company, then the excess represents the maximum amount of potential impairment that will be allocated to the Company's assets on a relative basis, with the limitation that the carrying value of each asset cannot be reduced to a value lower that its fair value. The total impairment amount allocated is recognized as a non-cash impairment loss.
The Company reviews any changes in events and circumstances that have occurred on a quarterly basis to determine if indicators of LLA impairment exist. During the third quarter of fiscal 2014, the Company experienced a significant decline in its share price following its pre-release of its second quarter fiscal 2014 results on September 20, 2013 as wel

2

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





l as its announcement on November 4, 2013 that Fairfax Financial Holdings Limited ("Fairfax") and other institutional investors (collectively, the “Purchasers”) were investing in the Company through the $1.0 billion private placement of convertible debentures (the "Debentures") in lieu of finalizing the purchase of the Company as contemplated in the previously-announced letter of intent. The Company further identified the continuing decline in revenues, the generation of operating losses and the decrease in cash flows from operations as indicators of potential long-lived asset (“LLA”) impairment. Further, the Company believes that its recently completed strategic review process may have increased market uncertainty as to the future viability of the Company and may have negatively impacted demand for the Company's products. Accordingly, a cash flow recoverability test was performed as of November 4, 2013 (the “Measurement Date”). The estimated undiscounted net cash flows were determined utilizing the Company's internal forecast and incorporated a terminal value of the Company utilizing its market capitalization, calculated as the number of the Company's common shares outstanding as at the interim testing date by the average market price of the shares over a 10 day period following the Measurement Date. The Company used this duration in order to incorporate the inherent market fluctuations that may affect any individual closing price of the Company's shares. As a result, the Company concluded that the carrying value of its net assets exceeded the undiscounted net cash flows as at the Measurement Date. Consequently, step two of the LLA impairment test was performed whereby the fair values of the Company's assets were compared to their carrying values. As a result, the Company recorded a non-cash, pre-tax charge against its LLA (the “LLA Impairment Charge”) of $2.7 billion ($2.5 billion after tax, $4.71 per share diluted), in the third quarter of fiscal 2014.
Inventory and Inventory Purchase Commitments
Raw materials, work in process and finished goods are stated at the lower of cost and market value. Cost includes the cost of materials plus direct labour applied to the product and the applicable share of manufacturing overhead. Cost is determined on a first-in-first-out basis.
The Company’s policy for the valuation of inventory, including the determination of obsolete or excess inventory, requires management to estimate the future demand for the Company’s products within specific time horizons. Inventory purchases and purchase commitments are based upon such forecasts of future demand and scheduled rollout of new products. The business environment in which the Company operates is subject to rapid changes in technology and customer demand. The Company performs an assessment of inventory during each reporting period, which includes a review of, among other factors, demand requirements, component part purchase commitments of the Company and certain key suppliers, product life cycle and development plans, component cost trends, product pricing and quality issues. If customer demand subsequently differs from the Company’s forecasts, requirements for inventory write-offs that differ from the Company’s estimates could become necessary. If management believes that demand no longer allows the Company to sell inventories above cost or at all, such inventory is written down to net realizable value or excess inventory is written off.
During the second quarter of fiscal 2014, the Company shipped devices to its carrier and distributor partners to support new and continuing product launches and meet expected levels of end customer demand. However, the sell-through levels for BlackBerry 10 smartphones decreased during the second quarter of fiscal 2014 due to the maturing smartphone market and very intense competition. Additionally, delays in the launch of certain functionality of the BES 10 platform and alternative competitor products in the market have resulted in a slower than anticipated rate of adoption of the BES 10 platform by enterprise customers, many of which look to deploy BlackBerry 10 hardware and software simultaneously to optimize security through the integrated BlackBerry end-to-end solution. These factors caused the number of BlackBerry 10 devices in the channel to increase above the Company’s expectations, which in turn caused the Company to reassess and revise its future demand assumptions for finished products, semi-finished goods and raw materials. Based on these revised demand assumptions, the Company recorded a primarily non-cash, pre-tax charge against inventory and supply commitments of approximately $934 million ($666 million after tax, $1.27 per share diluted), in the second quarter of fiscal 2014, which was primarily attributable to BlackBerry Z10 devices (the “Z10 Inventory Charge”).
During the third quarter of fiscal 2014, sell-through levels for BlackBerry 10 smartphones continued to decline due to the factors noted above and the number of BlackBerry 10 devices in the channel increased above the Company's expectations, which in turn caused the Company to reassess and revise its future demand assumptions for finished products, semi-finished goods and raw materials. The Company also made the decision to cancel plans to launch two devices to mitigate the identified inventory risk. Based on these revised demand assumptions, the Company recorded a primarily non-cash, pre-tax charge against inventory and supply commitments of approximately $1.6 billion ($1.3 billion after tax, $2.56 per share diluted), in the third quarter of fiscal 2014, which was primarily attributable to BlackBerry 10 devices (the “Q3 Fiscal 2014 Inventory Charge”).

3

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Valuation Allowance Against Deferred Tax Assets
The Company regularly assesses the need for a valuation allowance against its deferred tax assets.  A valuation allowance is required for deferred tax assets if it is more likely than not that all or some portion of the asset will not be realized. All available evidence, both positive and negative, that may affect the realization of deferred tax assets must be identified and considered in determining the appropriate amount of the valuation allowance.  Additionally, for interim periods, the estimated annual effective tax rate should include the valuation allowance for current year changes in temporary differences and losses or income arising during the year.  For interim periods, the Company needs to consider the valuation allowance that it expects to recognize at the end of the fiscal year as part of the estimated annual effective tax rate.  The Company used estimates including pre-tax results and ending position of temporary differences as at the end of the fourth quarter of fiscal 2014 to estimate the valuation allowance that it expects to recognize at the end of the fiscal year.  As a result, the Company was unable to recognize the benefit relating to a significant portion of deferred tax assets that arose in the third quarter of fiscal 2014, which resulted in the recognition of a $703 million valuation allowance against its deferred tax assets. The deferred tax recovery is partially offset by this deferred tax valuation allowance of $701 million and included in the income tax provision in the quarter. This accounting treatment has no effect on the Company’s actual ability to utilize deferred tax assets to reduce future cash tax payments. Different judgments could yield different results.  See Note 1 for Basis of Presentation and Note 7 for further details on the valuation allowance recorded.
Recently issued accounting pronouncements
In July 2013, the Financial Accounting Standards Board issued authoritative guidance to eliminate diversity in practice related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires that under certain circumstances, an unrecognized tax benefit is to be presented in the financial statements as a reduction to a deferred tax asset as opposed to a liability. The new authoritative guidance will become effective for fiscal years and interim reporting periods beginning after December 15, 2013, with early adoption and retrospective application permitted. The Company will adopt this guidance in the first quarter of fiscal 2015 and is currently evaluating the impact that the adoption of this guidance will have on its financial position.

2.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company’s cash equivalents and investments, other than cost method investments of $4 million (March 2, 2013 - $4 million) and equity method investments of $85 million (March 2, 2013 - $46 million), consist of money market and other debt securities, which are classified as available-for-sale for accounting purposes and are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (loss) until such investments mature or are sold. The Company uses the specific identification method of determining the cost basis in computing realized gains or losses on available-for-sale investments which are recorded in investment income. In the event of a decline in value which is other-than-temporary, the investment is written down to fair value with a charge to income. The Company does not exercise significant influence with respect to any of these investments.















4

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The components of cash, cash equivalents and investments were as follows:
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Other-than-
temporary
Impairment
 
Fair Value
 
Cash and
Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
As at November 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
541

 
$

 
$

 
$

 
$
541

 
$
541

 
$

 
$

Bankers’ acceptances/Bearer deposit notes
141

 

 

 

 
141

 
141

 

 

Commercial paper
63

 

 

 

 
63

 
63

 

 

Asset-backed commercial paper
27

 

 

 

 
27

 
17

 
10

 

Non-U.S. treasury bills/notes
254

 

 

 

 
254

 
254

 

 

U.S. treasury bills/notes
1,848

 
1

 

 

 
1,849

 
1,173

 
676

 

U.S. government sponsored enterprise notes
162

 

 

 

 
162

 
85

 
77

 

Non-U.S. government sponsored enterprise notes
25

 

 

 

 
25

 

 
25

 

Corporate notes/bonds
4

 

 

 

 
4

 

 

 
4

Auction rate securities
41

 
2

 

 
(6
)
 
37

 

 

 
37

Other investments
89

 

 

 

 
89

 

 

 
89

 
$
3,195

 
$
3

 
$

 
$
(6
)
 
$
3,192

 
$
2,274

 
$
788

 
$
130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at March 2, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
431

 
$

 
$

 
$

 
$
431

 
$
431

 
$

 
$

Money market funds
5

 

 

 

 
5

 
5

 

 

Bankers’ acceptances/Bearer deposit notes
114

 

 

 

 
114

 
114

 

 

Non-U.S. government promissory notes
50

 

 

 

 
50

 
50

 

 

Term deposits/certificates
157

 

 

 

 
157

 
132

 
25

 

Commercial paper
629

 

 

 

 
629

 
534

 
95

 

Non-U.S. treasury bills/notes
282

 

 

 

 
282

 
233

 
49

 

U.S. treasury bills/notes
619

 

 

 

 
619

 

 
602

 
17

U.S. government sponsored enterprise notes
156

 

 

 

 
156

 
10

 
146

 

Non-U.S. government sponsored enterprise notes
26

 

 

 

 
26

 
26

 

 

Corporate notes/bonds
217

 
1

 

 

 
218

 
14

 
186

 
18

Asset-backed securities
102

 

 

 

 
102

 

 
2

 
100

Auction rate securities
41

 
1

 

 
(6
)
 
36

 

 

 
36

Other investments
50

 

 

 

 
50

 

 

 
50

 
$
2,879

 
$
2

 
$

 
$
(6
)
 
$
2,875

 
$
1,549

 
$
1,105

 
$
221

There were no realized gains or losses on available-for-sale securities for the three and nine months ended November 30, 2013 ($11 million in realized gains for the three and nine months ended December 1, 2012).
 

5

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The contractual maturities of available-for-sale investments as at November 30, 2013 were as follows:
    
 
Cost Basis
 
Fair Value
Due in one year or less
$
2,520

 
$
2,521

Due in one to five years
4

 
4

Due after five years
35

 
37

 
$
2,559

 
$
2,562

As at November 30, 2013 and March 2, 2013, the Company had no investments with continuous unrealized losses.
The Company engages in limited securities lending to generate fee income. Collateral, which exceeds the market value of the loaned securities, is retained by the Company until the underlying security has been returned to the Company. As at November 30, 2013, the Company had loaned securities (which are included in cash equivalents) with a market value of approximately $124 million (March 2, 2013 - nil) consisting of non-U.S. treasury bills/notes, to major Canadian banks. The Company holds collateral with a market value that exceeds the value of securities lent, consisting of non-U.S. treasury bills/notes issued by the federal and provincial governments of Canada.

3.
FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use in pricing the asset or liability such as inherent risk, non-performance risk and credit risk. The Company applies the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value into three levels:
Level 1 - Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Recurring Fair Value Measurements
The carrying amounts of the Company’s cash and cash equivalents, accounts receivables, other receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.
In determining the fair value of investments held, the Company primarily relies on an independent third party valuator for the fair valuation of securities. Pricing inputs used by the independent third party valuator are generally received from two primary vendors. The pricing inputs are reviewed for completeness and accuracy, within a set tolerance level, on a daily basis by the independent third party valuator. The Company also reviews and understands the inputs used in the valuation process and assesses the pricing of the securities for reasonableness.
For bankers acceptances, commercial paper and asset-backed commercial paper, the independent third party valuator utilizes amortized cost, as the short-term nature of the securities approximates fair value. For non-U.S. treasury bills/notes, U.S. treasury bills/notes, U.S. government sponsored enterprise notes and non-U.S. government sponsored enterprise notes, the independent third party valuator provides fair values determined from quoted prices that it obtains from vendors. The Company then corroborates the fair values received from the independent third party valuator against the results of its internal valuation in order to corroborate the pricing provided by the independent third party valuator.
The Company corroborates the fair values provided by the independent third party valuator for bankers acceptances by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in

6

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





maturity dates, interest rates and credit ratings. The term deposits/certificates held by the Company are all issued by major banking organizations and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party valuator for commercial paper and asset-backed commercial paper by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates, dealer placed rates and credit ratings. The commercial paper held by the Company are all issued by major financing, corporate or capital organizations and have investment grade ratings. The asset-backed commercial paper held by the Company are all issued by major funding organizations and are predominantly backed by trade receivables and automobile loans and leases.
The Company corroborates the fair values provided by the independent third party valuator for U.S. treasury bills/notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities as provided by U.S. government bond dealers. All U.S. treasury bills/notes held by the Company are issued by the United States Department of the Treasury and have investment grade ratings.
The Company corroborates the fair values provided by the independent third party valuator for non-U.S. treasury bills/notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities as provided by non-U.S. government bond dealers. All non-U.S. treasury bills/notes held by the Company are issued by the Federal or Provincial governments of Canada and have investment grade ratings.
The Company corroborates the fair values provided by the independent third party valuator for U.S. government sponsored enterprise notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities as provided by U.S. government bond dealers or prices as provided by the published index of U.S. Agency securities. The U.S. government sponsored enterprise notes held by the Company are primarily agency notes and collateralized mortgage obligations issued and backed by government organizations such as the Federal Home Loan Banks and all have investment grade ratings.
The Company corroborates the fair values provided by the independent third party valuator for non-U.S. government sponsored enterprise notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates and credit ratings. The non-U.S. government sponsored enterprise notes held by the Company are primarily issued by investment banks backed by countries across the globe and all have investment grade ratings.
Fair values for all investment categories provided by the independent third party valuator that are in excess of 0.5% from the fair values determined by the Company are communicated to the independent third party valuator for consideration of reasonableness. The independent third party valuator considers the information provided by the Company before determining whether a change in the original pricing is warranted.
The fair values of corporate notes/bonds classified as Level 3, which represent investments in securities for which there is not an active market, are estimated using a discounted cash flow pricing methodology incorporating unobservable inputs such as anticipated monthly interest and principal payments received, existing and estimated defaults, and collateral value. The corporate notes/bonds classified as Level 3 held by the Company consist of securities received in a payment-in-kind distribution from a former structured investment vehicle.
The fair value of auction rate securities is estimated using a discounted cash flow model incorporating estimated weighted-average lives based on contractual terms, assumptions concerning liquidity, and credit adjustments of the security sponsor to determine timing and amount of future cash flows. Some of these inputs are unobservable.
The fair values of currency forward contracts and currency option contracts have been determined using notional and exercise values, transaction rates, market quoted currency spot rates, forward points, volatilities and interest rate yield curves. For currency forward contracts and currency option contracts, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Changes in assumptions could have a significant effect on the estimates.
The fair value of the Company’s convertible debenture has been determined using the significant inputs of principal value, interest rate spreads and curves, embedded call option dates and prices, the stock price and volatility of the Company’s listed common shares, and the Company’s implicit credit spread.


7

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis:    
As at November 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
 
Bankers acceptances
 
$

 
$
141

 
$

 
$
141

Commercial paper
 

 
63

 

 
63

Asset-backed commercial paper
 

 
27

 

 
27

Non-U.S. treasury bills/notes
 

 
254

 

 
254

U.S. treasury bills/notes
 

 
1,849

 

 
1,849

U.S. government sponsored enterprise notes
 

 
162

 

 
162

Non-U.S. government sponsored enterprise notes
 

 
25

 

 
25

Corporate notes/bonds
 

 

 
4

 
4

Auction rate securities
 

 

 
37

 
37

Total available-for-sale investments
 

 
2,521

 
41

 
2,562

Currency forward contracts
 

 
11

 

 
11

Currency option contracts
 

 
7

 

 
7

Total assets
 
$

 
$
2,539

 
$
41

 
$
2,580

Liabilities
 
 
 
 
 
 
 
 
Currency forward contracts
 
$

 
$
29

 
$

 
$
29

Currency option contracts
 

 
5

 

 
5

Convertible debentures
 

 
994

 

 
994

Total liabilities
 
$

 
$
1,028

 
$

 
$
1,028













    

8

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





As at March 2, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
 
Money market funds
 
$
5

 
$

 
$

 
$
5

Bankers’ acceptances/Bearer deposit notes
 

 
114

 

 
114

Non-U.S. government promissory notes
 

 
50

 

 
50

Term deposits/certificates
 

 
157

 

 
157

Commercial paper
 

 
629

 

 
629

Non-U.S. treasury bills/notes
 

 
282

 

 
282

U.S. treasury bills/notes
 

 
619

 

 
619

U.S. government sponsored enterprise notes
 

 
156

 

 
156

Non-U.S. government sponsored enterprise notes
 

 
26

 

 
26

Corporate notes/bonds
 

 
213

 
5

 
218

Asset-backed securities
 

 
102

 

 
102

Auction rate securities
 

 

 
36

 
36

Total available-for-sale investments
 
5

 
2,348

 
41

 
2,394

Currency forward contracts
 

 
57

 

 
57

Currency option contracts
 

 
2

 

 
2

Total assets
 
$
5

 
$
2,407

 
$
41

 
$
2,453

Liabilities
 
 
 
 
 
 
 
 
Currency forward contracts
 
$

 
$
24

 
$

 
$
24

Currency option contracts
 

 
11

 

 
11

Total liabilities
 
$

 
$
35

 
$

 
$
35

Non-Recurring Fair Value Measurements
Assets Held for Sale
As described in Note 5, the Company has decided to sell certain redundant assets and as a result, certain property, plant and equipment assets have been classified as held for sale on the Company’s consolidated balance sheets as at November 30, 2013, valued at $192 million, the lower of carrying value and fair value less costs to sell. Of the total assets held for sale, $161 million are measured at fair value less costs to sell.
The fair values of the Company’s real estate assets held for sale were determined using bids from prospective purchasers, executed purchase and sale agreements or letters of intent, and market appraisals conducted for the Company by certified appraisers. The fair value of the Company’s equipment assets held for sale was determined using executed purchase and sale agreements and bids received from prospective purchasers. Some of these inputs are unobservable.
LLA Impairment
During the third quarter of fiscal 2014, the Company conducted an LLA impairment test on its held and used assets, and as a result of that test, determined that the carrying values of certain of the Company's assets exceeded their fair values at the Measurement Date. Accordingly, the Company recorded the LLA Impairment Charge of approximately $2.7 billion and presented the impaired assets at their fair values on the Company’s balance sheets as at November 30, 2013. See Note 1 for details related to the LLA impairment test performed.
The fair values of the Company’s real estate assets were determined using market appraisals conducted by certified appraisers.
The fair values of the Company’s property, plant and equipment, other than real estate assets ("personal property"), were determined using replacement cost or sales comparison approaches with inputs including, but not limited to, original costs, inflation indices, useful lives, effective ages, and market-derived depreciation curves for similar assets. Some of these inputs are unobservable.
The fair value of certain of the Company’s licenses, representing payments relating to licensing agreements, have been determined using a volume ratio approach, including a comparison of the Company’s current average quarterly unit volumes for each license to those known at the time the Company entered into the license. Some of the inputs are unobservable.

9

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The following table presents the Company’s assets and liabilities that are measured at fair value on a non-recurring basis:
As at November 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Assets held for sale
 
 
 
 
 
 
 
 
Real estate
 
$

 
$
118

 
$

 
$
118

Equipment
 

 
43

 

 
43

Total assets held for sale
 

 
161

 

 
161

 
 
 
 
 
 
 
 
 
Assets held and used
 
 
 
 
 
 
 
 
       Property, plant and equipment
 
 
 
 
 
 
 


Real estate
 

 
633

 

 
633

Personal Property
 

 

 
394

 
394

Total property, plant and equipment
 

 
633

 
394

 
1,027

Intangible assets
 
 
 
 
 
 
 


Licenses
 

 

 
138

 
138

Total assets held and used
 
$

 
$
633

 
$
532

 
$
1,165

Total assets
 
$


$
794

 
$
532

 
$
1,326

The following table summarizes the changes in fair value of the Company’s Level 3 assets for the three and nine months ended November 30, 2013 and December 1, 2012:
 
Three Months Ended
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
 
November 30, 2013
 
December 1, 2012
Balance, beginning of period
$
41

 
$
67

 
$
41

 
$
68

Sale of Level 3 assets

 
(25
)
 

 
(25
)
Transfers into Level 3
532

 

 
532

 

Change in fair value
1

 

 
1

 

Principal repayments
(1
)
 

 
(1
)
 
(1
)
Balance, end of period
$
573

 
$
42

 
$
573

 
$
42

The Company recognizes transfers in and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurred. During the three and nine months ended November 30, 2013, $532 million of assets were transferred into Level 3 assets, representing assets written down to fair value related to the Company’s LLA Impairment Charge as noted above ($25 million transferred out of Level 3 assets for the three and nine months ended December 1, 2012).
The Company’s Level 3 assets consist of auction rate securities, corporate notes/bonds consisting of securities received in a payment-in-kind distribution from a former structured investment vehicle, personal property and licenses written down to fair value related to the LLA Impairment Charge.
The auction rate securities are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the estimated weighted-average life of each security based on its contractual details and expected paydown schedule based upon the underlying collateral, the value of the underlying collateral which would be realized in the event of a waterfall event, an estimate of the likelihood of a waterfall event and an estimate of the likelihood of a permanent auction suspension. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the probability of a waterfall event is accompanied by a directionally opposite change in the assumption used for the probability of a permanent suspension. A waterfall event occurs if the funded reserves of the securities become insufficient to make the interest payments, resulting in the disbursement of the securities’ underlying collateral, the value which is currently greater than the fair value of the securities, to the security holders.
The corporate notes/bonds are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the anticipated future monthly principal and interest payments, an estimated rate of decrease of those payments, the value of the underlying collateral, the number of

10

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





securities currently in technical default as grouped by the underlying collateral, an estimated average recovery rate of those securities and assumptions surrounding additional defaults. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the anticipated monthly payments is accompanied by a directionally similar change in the average recovery rate and a directionally opposite change in the yearly decrease in payments and additional default assumptions.
The Company’s personal property that was written down to fair value related to the LLA Impairment Charge was valued using replacement cost or sales comparison approaches, both utilizing unobservable inputs. The unobservable inputs used in the valuations are the current effective age of the personal property being valued and the estimated useful life.
The licenses that were written down to fair value related to the LLA Impairment Charge were valued using a volume ratio approach incorporating unobservable inputs. The unobservable inputs used in the valuation are the current volume of units subject to the licensing agreements and the volume of units as of the date the licenses were entered into, which represents the volume ratio. This ratio was applied to the net book value of the licenses in order to determine its fair value. Significant changes in these unobservable inputs could result in significantly different fair value measurements.
The following table presents the significant unobservable inputs used in the fair value measurement of each of the above Level 3 assets, as well as the impact on the fair value measurement resulting from a significant increase or decrease in each input in isolation:
As at November 30, 2013
 
Fair
Value
 
Valuation
Technique
 
Unobservable Input
 
Range (Weighted Average)
 
Effect of Significant
Increase/(Decrease) in
Input on Fair Value
Auction rate securities
 
$
37

 
Discounted cash flow
 
Weighted-average life
 
10 - 21 years (16 years)
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
103 - 137% (116%)
 
Increase/(decrease)
 
 
 
 
 
 
Probability of waterfall event
 
5 - 10% (8%)
 
Increase/(decrease)
 
 
 
 
 
 
Probability of permanent suspension of auction
 
5 - 10% (8%)
 
(Decrease)/increase
Corporate notes/bonds
 
$
4

 
Discounted cash flow
 
Anticipated monthly principal and interest payments
 
$0.1 million
 
Increase/(decrease)
 
 
 
 
 
 
Yearly decrease in payments
 
10%
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
166%
 
Increase/(decrease)
 
 
 
 
 
 
Current securities in technical default, by collateral grouping
 
0 - 100% (16%)
 
(Decrease)/increase
 
 
 
 
 
 
Average recovery rate of securities in technical default
 
30%
 
Increase/(decrease)
 
 
 
 
 
 
Additional default assumptions
 
0 - 40% (18%)
 
(Decrease)/increase
Personal property
 
$
394

 
Replacement cost of sales comparison
 
Effective age
 
0 - 14 years (3 years)
 
(Decrease)/increase
 
 
 
 
 
 
Useful life
 
2 - 10 years (5 years)
 
(Decrease)/increase
Licenses
 
$
138

 
Volume ratio
 
Volume ratio
 
10 - 33% (17%)
 
Increase/(decrease)

11

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)






4.
CONSOLIDATED BALANCE SHEETS DETAILS
Inventories
Inventories were comprised of the following:
 
 
As at
 
November 30, 2013
 
March 2, 2013
Raw materials
$
8

 
$
271

Work in process
170

 
278

Finished goods
76

 
54

 
$
254

 
$
603

During the second quarter of fiscal 2014, the Company recorded the Z10 Inventory Charge of approximately $934 million ($666 million after tax or $1.27 per share diluted). The Z10 Inventory Charge included a write-down of inventory of approximately $627 million and supply commitments of approximately $307 million.
During the third quarter of fiscal 2014, the Company recorded the Q3 Fiscal 2014 Inventory Charge of approximately $1.6 billion ($1.3 billion or $2.56 per share diluted). The Q3 Fiscal 2014 Inventory Charge included a write-down of inventory of approximately $1.1 billion and supply commitments of approximately $511 million.
Property, plant and equipment, net
Property, plant and equipment were comprised of the following:
 
As at
 
November 30, 2013
 
March 2, 2013
Cost
 
 
 
Land
$
68

 
$
119

Buildings, leasehold improvements and other
941

 
1,123

BlackBerry operations and other information technology
2,078

 
2,440

Manufacturing equipment, research and development equipment and tooling
386

 
486

Furniture and fixtures
556

 
559

 
4,029

 
4,727

Accumulated amortization
2,959

 
2,580

Net book value
$
1,070

 
$
2,147


12

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Intangible assets, net
Intangible assets were comprised of the following:
 
As at November 30, 2013
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
437

 
$
325

 
$
112

Intellectual property
2,676

 
1,446

 
1,230

 
$
3,113

 
$
1,771

 
$
1,342

 
As at March 2, 2013
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
432

 
$
257

 
$
175

Intellectual property
4,382

 
1,127

 
3,255

 
$
4,814

 
$
1,384

 
$
3,430

During the nine months ended November 30, 2013, the additions to intangible assets primarily consisted of payments relating to amended or renewed licensing agreements, as well as agreements with third parties for the use of intellectual property, software, messaging services and other BlackBerry related features.
Based on the carrying value of the identified intangible assets as at November 30, 2013 and assuming no subsequent impairment of the underlying assets, the annual amortization expense for the remainder of fiscal 2014 and each of the succeeding years is expected to be as follows: 2014 - $77 million; 2015 - $268 million; 2016 - $259 million; 2017 - $233 million; and 2018 - $156 million.
Impairment of long-lived assets
During the third quarter of fiscal 2014, the Company recorded the LLA Impairment Charge of approximately $2.7 billion ($2.5 billion or $4.71 per share diluted), of which $852 million of the charge was applicable to property, plant and equipment and $1.9 billion was applicable to intangible assets. See Note 1 for a description of the impairment test performed and the conclusions made by the Company.
Accrued liabilities
Accrued liabilities were comprised of the following:
 
As at
 
November 30, 2013
 
March 2, 2013
Vendor inventory liabilities
$
674

 
$
130

Warranty
217

 
318

Royalties
368

 
501

Carrier liabilities
211

 
141

Other
418

 
752

 
$
1,888

 
$
1,842


5.
COST OPTIMIZATION PROGRAMS
Cost Optimization and Resource Efficiency (“CORE”) Program
In March 2012, the Company commenced the CORE program with the objective of improving the Company’s operations and increasing efficiency. The program includes, among other things, the streamlining of the BlackBerry smartphone product portfolio, the optimization of the Company’s global manufacturing footprint, the outsourcing of global repair services, the alignment of the Company’s sales and marketing teams and a reduction in the global workforce. On September 20, 2013, the Company announced that it has commenced implementation of a further workforce reduction of approximately 4,500 positions to bring the total workforce to approximately 7,000 full-time global employees. The Company is targeting an approximate 50% reduction in operating expenditures by the end of the first quarter of fiscal

13

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





2015. The Company expects to incur approximately $475 million in pre-tax charges related to the CORE program by the end of the first quarter of fiscal 2015.
The Company incurred approximately $266 million and $363 million in total pre-tax charges related to the CORE program and strategic review process during the three and nine months ended November 30, 2013, related to one-time employee termination benefits, facilities and manufacturing network simplification costs as well as legal and financial advisory costs related to the recently completed strategic review process. Other charges and cash costs may occur as programs are implemented or changes are completed.

The following table sets forth the activity in the Company’s CORE program liability for the nine months ended November 30, 2013:
 
Employee
Termination
Benefits
 
Facilities
Costs
 
Manufacturing
Costs
 
Total
Balance as at March 2, 2013
$
9

 
$
18

 
$
2

 
$
29

Charges incurred
126

 
62

 
65

 
253

Cash payments made
(126
)
 
(23
)
 
(19
)
 
(168
)
Balance as at November 30, 2013
$
9

 
$
57

 
$
48

 
$
114

    
The CORE program charges incurred in the three and nine months ended November 30, 2013 were as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
Cost of sales
 
$
76

 
$
86

Research and development
 
37

 
54

Selling, marketing and administration
 
153

 
223

Total CORE program charges
 
$
266

 
$
363

As part of the CORE program, the Company has decided to sell certain redundant assets and discontinue certain operations to drive cost savings and efficiencies in the Company. As a result, certain property, plant and equipment assets have been classified as held for sale on the Company’s consolidated balance sheets as at November 30, 2013, valued at $192 million, the lower of carrying value and fair value less costs to sell. Further, the Company has recorded losses of approximately $35 million and $57 million in the three and nine months ended November 30, 2013 related to the write-down to fair value less costs to sell of the assets held for sale, which has been included in the selling, marketing and administration expenses on the Company’s consolidated statements of operations and included in the total CORE charges presented above. Assets held for sale are expected to be sold within the next twelve months.
In fiscal 2013, the Company sold 100% of the shares of its wholly-owned subsidiary, NewBay Software Limited (“NewBay”) and as a result, the operating results of NewBay are presented as discontinued operations in the Company’s consolidated statements of operations for the three and nine months ended December 1, 2012.
The following table sets forth the components of the Company’s loss from discontinued operations:
    
 
Three Months Ended
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
 
November 30, 2013
 
December 1, 2012
Revenues from discontinued operations
$

 
$
11

 
$

 
$
29

Loss from discontinued operations, before tax
$

 
$
(7
)
 
$

 
$
(20
)
Provision for (recovery of) income taxes

 
(2
)
 

 
2

Loss from discontinued operations, net of tax
$

 
$
(5
)
 
$

 
$
(22
)

6.
PRODUCT WARRANTY
The Company estimates its warranty costs at the time of revenue recognition based on historical experience and expectations of future return rates and unit warranty repair costs. 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

14

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





of the obligation period. Adjustments are made when the actual warranty claim experience differs from estimates. The warranty accrual is included in accrued liabilities on the Company’s consolidated balance sheets.
The changes in the Company’s warranty expense and actual warranty experience for the nine months ended November 30, 2013 as well as the accrued warranty obligations as at November 30, 2013 are set forth in the following table:    
 
 
Accrued warranty obligations as at March 2, 2013
$
318

Warranty costs incurred for the nine months ended November 30, 2013
(289
)
Warranty provision for the nine months ended November 30, 2013
239

Adjustments for changes in estimate for the nine months ended November 30, 2013
(51
)
Accrued warranty obligations as at November 30, 2013
$
217

 
7.
INCOME TAXES
For the nine months ended November 30, 2013, the Company’s net income tax recovery from continuing operations was $1.2 billion or a net effective income tax recovery rate of approximately 18% compared to a net income tax recovery from continuing operations of $480 million or a net effective income tax recovery rate of 40% for the nine months ended December 1, 2012. The Company’s effective income tax recovery rate substantially differed from the Canadian statutory tax rate of 26.5% primarily due to certain charges related to the LLA Impairment Charge resulting in the recognition of a valuation allowance for a significant portion of the Company’s deferred tax assets, the details of which are described below. The Company’s effective income tax recovery rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.
The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, the Company noted that there were significant increases in deductible temporary differences in the third quarter of fiscal 2014 in relation to the LLA Impairment Charge, which was not currently deductible for tax purposes. In addition, the magnitude of the cumulative losses for fiscal 2014 is such that the Company is expected to recover all amounts possible in its open loss carryback periods. As a result, the Company was unable to recognize the benefit relating to a significant portion of deferred tax assets that arose in the third quarter of fiscal 2014, which resulted in the recognition of a $703 million valuation allowance against its deferred tax assets. The deferred tax recovery is partially offset by this deferred tax valuation allowance of $701 million and included in the income tax provision in the third quarter of fiscal 2014. This accounting treatment has no effect on the Company’s actual ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be adjusted accordingly.
During the third quarter, the Company took steps to accelerate the receipt of a portion of the tax refund to which it is entitled. The Canadian federal and Ontario provincial Ministers of Finance had indicated to the Company that they would be prepared to recommend measures such that the acceleration would not jeopardize the entitlement to the balance of its tax refund. The Company's actions resulted in a November 3, 2013 taxation year end (triggering the entitlement to the tax refund accrued to that date). In December 2013, Remission Orders were made by the Canadian federal and Ontario provincial governments which preserved the Company's ability to carry back losses for the balance of its fiscal 2014 year and for its fiscal 2015 year on the same basis as without the November 3, 2013 taxation year end. The tax provision excludes the impact of the Remission Orders in accordance with ASC 740 because they were made after November 30, 2013. The additional income tax refund the Company can expect to ultimately access is approximately $170 million relating to the carryback year of fiscal 2011 provided there are sufficient losses in the related period.
Given the change in financial circumstances for the Company in the third quarter of fiscal 2014 (see Note 1 - Critical Accounting Estimates - Valuation of Long-Lived Assets), a determination was made that the Company no longer has plans to permanently reinvest the cumulative earnings of its foreign subsidiaries. As a result, $25 million relating to future withholding taxes was accrued as a deferred tax liability.
The Company’s total unrecognized income tax benefits as at November 30, 2013 was $10 million (March 2, 2013 - $29 million). The decrease in unrecognized income tax benefits in the nine months ended November 30, 2013 primarily

15

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





relates to the settlement of an uncertain tax position in the third quarter of fiscal 2014. As at November 30, 2013, all of the unrecognized income tax benefits of $10 million have been netted against current income taxes receivable and are included in other non-current income taxes payable on the Company’s consolidated balance sheets.
The Company is subject to ongoing examination by tax authorities in the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes as well as the provisions for indirect and other taxes and related penalties and interest. The Company does not believe it is reasonably possible that any of its unrecognized income tax benefits will be realized in the next twelve months. The Company has various income tax audits pending. While the final resolution of these audits is uncertain, the Company believes the ultimate resolution of these audits will not have a material adverse effect on its consolidated financial position, liquidity or results of operations.
The Company recognizes interest and penalties related to unrecognized income tax benefits as interest expense that is netted and reported within investment income. The amount of interest accrued as at November 30, 2013 was $1 million (March 2, 2013 - $6 million). The amount of penalties accrued as at November 30, 2013 was nominal (March 2, 2013 - nominal).

8.
LONG-TERM DEBT
Convertible Debentures
In November 2013, the Purchasers invested in the Company through a $1.0 billion private placement of Debentures, with an option to purchase an additional $250 million principal amount of Debentures. On December 12, 2013, the Company announced that the expiry of the option to purchase additional Debentures had been extended from December 13, 2013 to January 13, 2014.
Interest on the Debentures is payable quarterly in arrears at a rate of 6% per annum.  The Debentures have a term of seven years and each $1,000 of Debentures are convertible at any time into 100 common shares of the Company, for a total of 100 million common shares at a price of $10.00 per share for all Debentures, subject to adjustments.
The Company has the option to redeem the Debentures after November 13, 2016 at specified redemption prices in specified periods.  Covenants associated with the Debentures include limitations on the Company’s total indebtedness.
Under specified events of default, the outstanding principal and any accrued interest on the Debentures become immediately due and payable upon request of one quarter of the Debenture holders. During an event of default the interest rate rises to 10% per annum.
The Debentures are subject to a change of control provision whereby the Company would be required to make an offer to repurchase the Debentures at 115% of par value if a person or group (not affiliated with Fairfax Financial Holdings Limited) acquires 35% of the Company’s outstanding common shares, acquires all or substantially all of its assets, or if the Company merges with another entity and the Company’s existing shareholders hold less than 50% of the common shares of the surviving entity.
Due to the possible volatility through the Company’s Statement of Operations resulting from fluctuation in the fair value of the embedded conversion option as well as the number of other embedded derivatives within the Debentures, the Company has elected to record the Debentures, including the debt itself and all embedded derivatives, at fair value and present the Debentures as a hybrid financial instrument. No portion of the fair value of the Debentures has been recorded as equity nor would be if each component was freestanding. As of November 30, 2013, the fair value of the Company's convertible debt was $994 million. The difference between the fair value of the Debentures and the unpaid principal balance of $1.0 billion is $6 million.  For additional information about the fair value measurement of the Debentures, please see Note 3.
During the third quarter of fiscal 2014, the Company recorded a gain associated with the change in the fair value of the Debentures of $6 million.  This gain is recorded in investment income on the Statement of Operations.
During the third quarter of fiscal 2014, the Company recorded interest expense related to the Debentures of $3 million, which has been included in selling, general and administrative expenses on the Company’s Statement of Operations. The Company is required to make quarterly interest-only payments of approximately $15 million during the seven year term. 



16

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





In the course of issuing these Debentures, the Company incurred costs of $48 million. As the Company has elected the fair value option for the recording of the Debentures, these costs have been fully expensed in the period in which they were incurred and are recorded in Selling, General and Administration expenses in the Statement of Operations.

9.
STOCK-BASED COMPENSATION
Stock Option Plan
The Company recorded a charge to income and a credit to paid-in-capital of approximately $2 million and $5 million for the three and nine months ended November 30, 2013 ($1 million and $6 million for the three and nine months ended December 1, 2012) in relation to stock-based compensation expense.
The Company has presented excess tax deficiencies from the exercise of stock-based compensation awards as a financing activity in the consolidated statements of cash flows.
Stock options previously granted under the Prior Plans generally vest over a period of three years to a maximum of five years and are generally exercisable over a period of five years to a maximum of seven years from the grant date. The Company issues new shares to satisfy stock option exercises. There are 14 million shares in the equity pool available for future grants under the Company’s 2014 Plan as at November 30, 2013. Under the 2014 Plan, any shares that are issued as options shall be counted as 0.625 shares against the 2014 Plan's total shares in the equity pool available for future grants and shares issued as awards other than options (i.e., RSUs) shall be counted as one share against the 2014 Plan's total shares in the equity pool available for future grants.
A summary of option activity since March 2, 2013 is shown below:
    
 
Options Outstanding
 
Number
(in 000’s)
 
Weighted-
Average
Exercise
Price
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at March 2, 2013
7,260

 
$
27.53

 
 
 
 
Exercises during the period
(113
)
 
7.49

 
 
 
 
Forfeited/cancelled/expired during the period
(2,367
)
 
46.60

 
 
 
 
Balance as at November 30, 2013
4,780

 
$
17.90

 
3.03

 
$

Vested and expected to vest as at November 30, 2013
4,636

 
$
18.27

 
3.01

 
$

Exercisable as at November 30, 2013
2,432

 
$
27.53

 
2.27

 
$

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common shares on November 30, 2013 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on November 30, 2013. The intrinsic value of stock options exercised during the nine months ended November 30, 2013, calculated using the average market price during the year, was approximately $0.57 per share.
A summary of unvested stock options since March 2, 2013 is shown below:
 
 
Options Outstanding
 
Number
(000’s)
 
Weighted-Average Grant
Date Fair Value
Balance as at March 2, 2013
5,187

 
$
4.71

Vested during the period
(1,507
)
 
5.02

Forfeited during the period
(1,332
)
 
4.79

Balance as at November 30, 2013
2,348

 
$
4.47

As at November 30, 2013, there was $12 million of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.41 years. The total fair value of stock options vested during the nine months ended November 30, 2013 was $8 million.

17

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Cash received from the stock options exercised for the nine months ended November 30, 2013 was $1 million (December 1, 2012 - nil). Tax deficiencies incurred by the Company related to the stock options exercised was $1 million for the nine months ended November 30, 2013 (December 1, 2012 - $1 million).
During the nine months ended November 30, 2013, there were no stock options granted (December 1, 2012 - 5,252,119).    
Restricted Share Unit Plan
The Company recorded compensation expense with respect to RSUs of approximately $10 million and $45 million for the three and nine months ended November 30, 2013 ($20 million and $57 million for the three and nine months ended December 1, 2012).
A summary of RSU activity since March 2, 2013 is shown below:
     
 
RSUs Outstanding
 
Number
(000’s)
 
Weighted
Average
Grant Date
Fair Value
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at March 2, 2013
15,185

 
$
13.83

 
 
 
 
Granted during the period
17,207

 
7.37

 
 
 
 
Vested during the period
(4,744
)
 
16.78

 
 
 
 
Cancelled during the period
(6,275
)
 
11.40

 
 
 
 
Balance as at November 30, 2013
21,373

 
$
8.68

 
3.12

 
$
135

Vested and expected to vest as at November 30, 2013
20,795

 
$
8.60

 
3.16

 
$
132

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate closing share price of the Company’s common shares on November 30, 2013) that would have been received by RSU holders if all RSUs had been vested on November 30, 2013.
Tax deficiencies incurred by the Company related to the RSUs vested were $11 million for the nine months ended November 30, 2013 (December 1, 2012 - $10 million).
In order to comply with its obligation to deliver shares upon vesting, the Company purchases shares via a trustee selected by the Company or issues new common shares. During the nine months ended November 30, 2013, 1,641,447 common shares were purchased for total cash consideration of approximately $16 million (December 1, 2012 - 3,005,670 common shares were purchased for total cash consideration of approximately $25 million). The purchased shares are classified as treasury stock for accounting purposes and included in the shareholders' equity section of the Company's consolidated balance sheets.
As at November 30, 2013, there was $166 million of unrecognized compensation expense related to RSUs that will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 2.07 years.
During the nine months ended November 30, 2013, there were 17,206,570 RSUs granted (December 1, 2012 - 10,715,992 RSUs were granted), of which 14,658,073 will be settled upon vesting by the issuance of new common shares. Further, there were 10,521,418 RSUs granted as an inducement outside the Company’s 2014 Plan.
Deferred Share Unit Plan
The Company issued 101,541 DSUs during the nine months ended November 30, 2013. There were 0.3 million DSUs outstanding as at November 30, 2013 (December 1, 2012 - 0.3 million). The Company had a liability of $2 million in relation to the DSU Plan as at November 30, 2013 (December 1, 2012 - $3.1 million).

18

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





10.
CAPITAL STOCK
The following details the changes in issued and outstanding common shares for the nine months ended November 30, 2013:
 
    
 
Capital Stock and  Additional
Paid-In Capital
 
Treasury Stock
 
Stock
Outstanding
(000’s)
 
Amount
 
Stock
Outstanding
(000’s)
 
Amount
Common shares outstanding as at March 2, 2013
524,160

 
$
2,431

 
9,020

 
$
(234
)
Stock-based compensation

 
50

 

 

Exercise of stock options
113

 
1

 

 

Common shares issued for RSU settlements
1,911

 

 
1,641

 
(16
)
Tax deficiencies related to stock-based compensation

 
(12
)
 

 

Treasury stock vested

 
(67
)
 
(2,830
)
 
67

Common shares outstanding as at November 30, 2013
526,184

 
$
2,403

 
7,831

 
$
(183
)
The Company had 526 million common shares, 4.7 million options to purchase common shares, 21.2 million RSUs and 0.3 million DSUs outstanding as at December 17, 2013.

11.
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
    
 
Three Months Ended
 
Nine Months Ended
 
November 30, 2013
 
December 1, 2012
 
November 30, 2013
 
December 1, 2012
Income (loss) for basic and diluted earnings (loss) per share available to common shareholders from continuing operations
$
(4,401
)

$
14

 
$
(5,450
)

$
(722
)
Loss for basic and diluted loss per share available to common shareholders from discontinued operations
$


$
(5
)
 
$


$
(22
)
Weighted-average number of shares outstanding (000’s) - basic
525,656

 
524,160

 
524,766

 
524,160

Effect of dilutive securities (000’s) - stock-based compensation (1)(2)

 
692

 

 

Weighted-average number of shares and assumed conversions (000’s) - diluted
525,656

 
524,852

 
524,766

 
524,160

Earnings (loss) per share - reported
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share from continuing operations
$
(8.37
)

$
0.03

 
$
(10.39
)

$
(1.38
)
Basic and diluted loss per share from discontinued operations
$


$
(0.01
)
 
$


$
(0.04
)
Total basic and diluted earnings (loss) per share
$
(8.37
)

$
0.02

 
$
(10.39
)

$
(1.42
)
(1) The Company has not presented the dilutive effect of in-the-money options or RSUs that will be settled upon vesting by the issuance of new common shares in the calculation of earnings (loss) per share for the three and nine months ended November 30, 2013 as to do so would be antidilutive. As at November 30, 2013, there were 325,877 options and 16,787,284 RSUs outstanding that are in-the-money and may have a dilutive effect on earnings (loss) per share in future periods.
(2) The Company has not presented the dilutive effect of the Debentures as the conversion price was not in-the-money as at November 30, 2013. See Note 8 for details on the Debentures.


19

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





12.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in AOCI by component, net of tax, for the nine months ended November 30, 2013 were as follows:
 
 
Unrealized Gains
(Losses) on
Cash Flow Hedges
 
Unrealized Gains
on Available-for-Sale
Securities
 
Total
AOCI as at March 2, 2013
$
(6
)
 
$
2

 
$
(4
)
Other comprehensive loss before reclassifications
(22
)
 

 
(22
)
Amounts reclassified from AOCI into income
20

 

 
20

Other comprehensive loss for the period
(2
)
 

 
(2
)
AOCI as at November 30, 2013
$
(8
)
 
$
2

 
$
(6
)

The effects on net income of amounts reclassified from AOCI into income by component for the three and nine months ended November 30, 2013 were as follows:

    
 
 
Three Months Ended
 
Nine Months Ended
Location of loss reclassified from AOCI into income
 
Gains and Losses on
Cash Flow Hedges
 
Gains and Losses on
Available-for-Sale
Securities
 
Total
 
Gains and Losses on
Cash Flow Hedges
 
Gains and Losses on
Available-for-Sale
Securities
 
Total
Revenue
 
$

 
$

 
$

 
$
(7
)