-----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, JE9GKMFs6XuX1cYeLTM7jxW1xZuxh+PICSvecvj3Gf2I+JWWiO69BfuYxWM6RzvX h1yDjz5EwgX8/RRZk4yXkw== 0000950172-04-001456.txt : 20040614 0000950172-04-001456.hdr.sgml : 20040611 20040614165345 ACCESSION NUMBER: 0000950172-04-001456 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040610 FILED AS OF DATE: 20040614 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: 04861973 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 tor46674.txt CURRENT REPORT FORM 6-K Securities and Exchange Commission washington, D.C. 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 under the Securities Exchange Act of 1934 For the month of JUNE 2004 ---------------------------- ----------- 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 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 the registrant by furnishing the information contained in this Form 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-_______________ DOCUMENT INDEX Document 1. Research In Motion Limited - Consolidated Financial Statements prepared in accordance with U.S. GAAP for the years ended February 28, 2004, March 1, 2003 and March 2, 2002 and the notes thereto. 2. Research In Motion Limited - Consolidated Financial Statements prepared in accordance with Canadian GAAP for the years ended February 28, 2004, March 1, 2003 and March 2, 2002 and the notes thereto. 3. Research In Motion Limited - Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended February 28, 2004 compared to the fiscal year ended March 1, 2003 DOCUMENT 1 Management's Responsibility for Financial Reporting To the Shareholders of Research In Motion Limited Management of Research In Motion Limited is responsible for the preparation and presentation of the consolidated financial statements and all of the financial information in this Annual Report. The consolidated financial statements were prepared in accordance with United States generally accepted accounting principles and include certain amounts based upon estimates and judgements required for such preparation. The financial information appearing throughout this Annual Report is consistent with the consolidated financial statements. The consolidated financial statements have been reviewed by the Audit Committee and approved by the Board of Directors of Research In Motion Limited. In fulfilling its responsibility for the reliability and integrity of financial information, management has developed and maintains systems of accounting and internal controls and budgeting procedures. Management believes these systems and controls provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and financial records are reliable for the preparation of accurate and timely consolidated financial statements. The Company's Audit Committee of the Board of Directors, which consists entirely of non-management independent directors, usually meets two times per fiscal quarter with management and the independent auditor to ensure that each is discharging its respective responsibilities, to review the consolidated financial statements and either the quarterly review engagement report or the independent auditors' report and to discuss significant financial reporting issues and auditing matters. The Company's external auditor has full and unrestricted access to the Audit Committee to discuss audit findings, financial reporting and other related matters. The Audit Committee reports its findings to the Board of Directors for consideration when the Board approves the consolidated financial statements for issuance to the shareholders. The consolidated financial statements for fiscal 2004 have been audited by Ernst & Young LLP, the independent auditor appointed by the shareholders, in accordance with United States generally accepted auditing standards. The consolidated financial statements for fiscal 2003 and fiscal 2002 have been audited by Ernst & Young LLP and Zeifman and Company LLP, the independent auditors appointed by the shareholders, in accordance with United States generally accepted auditing standards. Mike Lazaridis Dennis Kavelman President & Co-CEO Chief Financial Officer Waterloo, Ontario INDEPENDENT AUDITORS' REPORT To the Shareholders of Research In Motion Limited We have audited the consolidated balance sheet of Research In Motion Limited as at February 28, 2004 and the consolidated statement of operations, shareholders' equity and cash flows the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 2004 and the results of its operations and its cash flows the year then ended in conformity with United States generally accepted accounting principles. On March 31, 2004, we reported separately to the shareholders of the Company on the consolidated financial statements for the same period, prepared in accordance with Canadian generally accepted accounting principles. Toronto, Canada, Ernst & Young LLP March 31, 2004. Chartered Accountants INDEPENDENT AUDITORS' REPORT To the Shareholders of Research In Motion Limited We have audited the consolidated balance sheet of Research In Motion Limited as at March 1, 2003 and the consolidated statements of operations, shareholders' equity and cash flows for the years ended March 1, 2003 and March 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 1, 2003 and the results of its operations and its cash flows for the years ended March 1, 2003 and March 2, 2002 in conformity with United States generally accepted accounting principles. On March 28, 2003 we reported separately to the shareholders of the Company on the consolidated financial statements for the same periods, prepared in accordance with Canadian generally accepted accounting principles. Toronto, Canada, Zeifman & Company LLP Ernst & Young LLP March 28, 2003. Chartered Accountants Chartered Accountants Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands)
CONSOLIDATED BALANCE SHEETS As at February 28 March 1 2004 2003 ----------------- ----------------- US GAAP (note 1) ASSETS CURRENT Cash and cash equivalents (note 4) $ 1,156,419 $ 340,681 Trade receivables 95,213 40,803 Other receivables 12,149 4,538 Inventory (note 5) 42,836 31,275 Restricted cash (note 16) 36,261 -- Other current assets (note 21) 12,527 11,079 ----------- --------- 1,355,405 428,376 INVESTMENTS (note 4) 333,886 190,030 CAPITAL ASSETS (note 6) 147,709 161,183 INTANGIBLE ASSETS (note 7) 64,269 51,479 GOODWILL 30,109 30,588 ----------- --------- $ 1,931,378 $ 861,656 =========== ========= LIABILITIES CURRENT Accounts payable $ 35,570 $ 18,594 Accrued liabilities (note 20 (b)) 70,538 54,415 Accrued litigation and related expenses (note 16) 84,392 50,702 Income taxes payable (note 9) 1,684 4,909 Deferred revenue 16,498 14,336 Current portion of long-term debt (note 10) 193 6,143 ----------- --------- 208,875 149,099 LONG-TERM DEBT (note 10) 6,240 5,776 ----------- --------- 215,115 154,875 ----------- --------- SHAREHOLDERS' EQUITY CAPITAL STOCK Authorized - unlimited number of non-voting, cumulative, redeemable, retractable preferred shares; unlimited number of non-voting, redeemable, retractable Class A common shares and unlimited number of voting common shares Issued - 92,415,066 common shares (March 1, 2003 - 77,172,597) (note 11) 1,829,388 874,377 ACCUMULATED DEFICIT (119,206) (171,035) ACCUMULATED OTHER COMPREHENSIVE INCOME (note 19) 6,081 3,439 ----------- --------- 1,716,263 706,781 ----------- --------- $ 1,931,378 $ 861,656 =========== ========= Commitments and contingencies (notes 10, 12, 14, 16 and 21) See notes to the consolidated financial statements. On behalf of the Board Jim Balsillie Mike Lazaridis Director Director
Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, US GAAP, in thousands) (note 1) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMON SHARES COMMON RETAINED ACCUMULATED SHARE EARNINGS OTHER PURCHASE (ACCUMULATED COMPREHENSIVE COMMON SHARES WARRANTS DEFICIT) INCOME (LOSS) TOTAL ---------------------------------------------------------------------------- Balance February 28, 2001 $ 890,644 $ 370 $ 10,562 $ -- $ 901,576 Comprehensive income (loss): Net loss -- -- (28,321) -- (28,321) Net change in derivative fair value during the year -- -- -- (2,803) (2,803) Amounts classified to earnings during the year -- -- -- 1,325 1,325 Shares issued: Exercise of stock options 1,491 -- -- -- 1,491 Common shares issued on acquisition of subsidiary 6,325 -- -- -- 6,325 Common shares repurchased pursuant to Common Share Purchase Program (4,080) -- (1,445) -- (5,525) ---------------------------------------------------------------- Balance March 2, 2002 894,380 370 (19,204) (1,478) 874,068 Comprehensive income (loss): Net loss -- -- (148,857) -- (148,857) Net change in derivative fair value during the year -- -- -- 5,958 5,958 Amounts classified to earnings during the year -- -- -- (1,041) (1,041) Shares Issued: Exercise of stock options 1,155 -- -- -- 1,155 Common shares repurchased pursuant to Common Share Purchase Program (21,528) -- (2,974) -- (24,502) ---------------------------------------------------------------- Balance March 1, 2003 $ 874,007 $ 370 $(171,035) $ 3,439 $ 706,781 Comprehensive income (loss): Net Income -- -- 51,829 -- 51,829 Net change in unrealized gains on investments available for sale 613 613 Net change in derivative fair value during the year -- -- -- 11,941 11,941 Amounts classified to earnings during the year -- -- -- (9,912) (9,912) Shares Issued: Exercise of stock options 49,771 -- -- -- 49,771 Issue of common shares 944,869 -- -- -- 944,869 Share issue costs (39,629) -- -- -- (39,629) Exercise of warrants 370 (370) -- -- -- ---------------------------------------------------------------- Balance February 28, 2004 $ 1,829,388 $ -- $(119,206) $ 6,081 $ 1,716,263 ================================================================
See notes to the consolidated financial statements. Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended February 28 March 1 March 2 2004 2003 2002 ------------------ ------------------ ------------------ US GAAP (note 1) REVENUE $ 594,616 $ 306,732 $ 294,053 COST OF SALES 323,365 187,289 209,525 --------- --------- --------- GROSS MARGIN 271,251 119,443 84,528 --------- --------- --------- EXPENSES Research and development, net of government funding (note 14) 62,638 55,916 37,446 Selling, marketing and administration (note 20) 108,492 104,978 93,766 Amortization 27,911 22,324 11,803 Restructuring charges (note 15) -- 6,550 -- Litigation (note 16) 35,187 58,210 -- --------- --------- --------- 234,228 247,978 143,015 --------- --------- --------- EARNINGS (LOSS) FROM OPERATIONS 37,023 (128,535) (58,487) Investment income 10,606 11,430 25,738 Writedown of investments (note 17) -- -- (5,350) --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 47,629 (117,105) (38,099) --------- --------- --------- PROVISION FOR (RECOVERY OF) INCOME TAXES (note 9) Current (4,200) 3,513 7,058 Deferred -- 28,239 (16,836) --------- --------- --------- Future (4,200) 31,752 (9,778) --------- --------- --------- NET INCOME (LOSS) $ 51,829 $(148,857) $ (28,321) ========= ========= ========= EARNINGS (LOSS) PER SHARE (note 18) Basic $ 0.65 $ (1.92) $ (0.36) ========= ========= ========= Diluted $ 0.62 $ (1.92) $ (0.36) ========= ========= =========
See notes to the consolidated financial statements.
Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended February 28 March 1 March 2 2004 2003 2002 ---------------- ------------------ ----------------- US GAAP (note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 51,829 $(148,857) $ (28,321) Items not requiring an outlay of cash: Amortization 54,529 31,147 17,497 Deferred income taxes -- 29,244 (16,836) Loss on disposal of capital assets 223 502 -- Loss (gain) on foreign currency translation of long-term debt 859 (339) 4 Write-down of investments -- -- 5,350 Net changes in working capital items: Trade receivables (54,410) 1,958 7,607 Other receivables (7,611) 1,473 7,918 Inventory (11,561) 6,202 30,567 Other current assets 512 (525) (3,467) Accounts payable 16,976 7,059 1,834 Accrued liabilities 16,123 17,555 (2,333) Accrued litigation and related expenses 33,690 50,702 -- Increase in restricted cash (36,261) -- -- Income taxes payable (3,225) 2,106 (1,018) Deferred revenue 2,162 4,563 (1,097) ----------- --------- --------- 63,835 2,790 17,705 ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of share capital and warrants 994,640 1,155 1,491 Financing costs (39,629) -- -- Buyback of common shares pursuant to Common Share Purchase Program (note 11(a)) -- (24,502) (5,525) Repayment of debt (6,130) (614) (303) ----------- --------- --------- 948,881 (23,961) (4,337) ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investments (186,989) (190,030) -- Proceeds on sale or maturity of investments 43,746 -- -- Acquisition of capital assets (21,815) (39,670) (73,917) Acquisition of intangible assets (32,252) (30,997) (7,106) Acquisition of subsidiaries (note 8) 478 (21,990) (9,709) Acquisition of short-term investments (24,071) (41,900) (925,885) Proceeds on sale and maturity of short-term investments 24,071 345,983 834,907 ----------- --------- --------- (196,832) 21,396 (181,710) ----------- --------- --------- FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (146) (20) (4) ----------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR 815,738 205 (168,346) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 340,681 340,476 508,822 ----------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,156,419 $ 340,681 $ 340,476 =========== ========= =========
See notes to the consolidated financial statements. RESEARCH IN MOTION LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED FEBRUARY 28, 2004, MARCH 1, 2003 AND MARCH 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated NATURE OF BUSINESS Research In Motion Limited (the "Company" or "RIM") is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, the Company provides platforms and solutions for seamless access to time-sensitive information including email, phone, SMS messaging, Internet and intranet-based applications. The Company's technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. The Company was incorporated on March 7, 1984 under the Ontario Business Corporations Act. The Company's shares are traded on The Toronto Stock Exchange under the symbol RIM and on the Nasdaq National Market under the symbol RIMM. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL These consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles ("U.S. GAAP") on a basis consistent for all periods presented. Historically, the primary consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP with an annual reconciliation of the Company's financial position and results of operations as calculated using U.S. GAAP. In order to provide information on a more comparable basis with a majority of the industry, effective March 2, 2003, the Company initiated reporting its financial position, results of operations and cash flows under U.S. GAAP in its consolidated financial statements. The significant accounting policies used in these U.S. GAAP consolidated financial statements are as follows: (b) BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of all subsidiaries with intercompany transactions and balances eliminated. All of the Company's subsidiaries are wholly-owned and are considered to be fully integrated operations. (c) USE OF ESTIMATES The preparation of the Company's consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates relate to the determination of reserves for various litigation claims, allowance for doubtful accounts, provision for excess and obsolete inventory, fair values of assets acquired and liabilities assumed in business combinations, amortization expense, implied fair value of goodwill, realization of deferred tax assets and the related components of the valuation allowance, provision for warranty, and the fair values of financial instruments. Actual results could differ from these estimates. (d) FOREIGN CURRENCY TRANSLATION The U.S. dollar is the functional and reporting currency of the Company. Foreign currency denominated assets and liabilities of the Company and all of its subsidiaries are translated into U.S. dollars using the temporal method. Accordingly, monetary assets and liabilities are translated using the exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at historical exchange rates, and revenues and expenses at the rates of exchange prevailing when the transactions occurred. Resulting exchange gains and losses are included in income. (e) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of balances with banks and liquid short-term investments with maturities of three months or less at the date of acquisition and are carried on the balance sheet at fair value. (f) SHORT-TERM INVESTMENTS Short-term investments consist of liquid investments with maturities of between three months and one year at the date of acquisition. Such short-term investments are available for sale investments and are carried on the balance sheet at fair value. (g) TRADE RECEIVABLES Trade receivables are presented net of allowance for doubtful accounts. The allowance was $2,379 at February 28, 2004 (March 1, 2003 - $2,331). Bad debt expense (recovery) was $(548) for the year ended February 28, 2004 (March 1, 2003 - $696; March 2, 2002 - $6,236). The allowance for doubtful accounts reflects estimates of probable losses in trade receivables. The allowance is determined based on specifically identified accounts, historical experience and all other current information. (h) INVESTMENTS All investments with maturities in excess of one year are classified as long-term investments. In the event of a decline in value which is other than temporary, the investments are written down to estimated realizable value. Investments designated as held-to-maturity investments are carried at cost. The Company does not exercise significant influence with respect to any of these investments. Investments designated as available-for-sale investments are carried at fair value. Unrealized gains or losses are included in other comprehensive income. (i) DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes forward foreign exchange rate contracts and foreign exchange rate swaps to reduce exposure to fluctuations in foreign currency exchange rates. The Company does not purchase or hold derivative financial instruments for speculative purposes. The Company formally documents relationships between hedging instruments and associated hedged items. This documentation includes: identification of the specific foreign currency asset, liability or forecasted transaction being hedged; the nature of the risk being hedged; the hedge objective; and, the method of assessing hedge effectiveness. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in foreign currency denominated assets, liabilities and anticipated cash flows of hedged items. Statement of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments, as amended by SFAS 137, 138 and 149, requires all derivative instruments to be recognized at fair value on the consolidated balance sheet, and outlines the criteria to be met in order to designate a derivative instrument as a hedge and the methods for evaluating hedge effectiveness. For instruments designated as fair value hedges, changes in fair value are recognized in current earnings, and will generally be offset by changes in the fair value of the associated hedged transaction. For instruments designated as cash flow hedges, the effective portion of changes in fair value are recorded in other comprehensive income, and subsequently reclassified to earnings in the period in which the cash flows from the associated hedged transaction affect earnings. When an anticipated transaction is no longer likely to occur, the corresponding derivative instrument is de-designated as a hedge, and changes in the fair value of the instrument are recognized in net income. (j) INVENTORIES Raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable 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. (k) LONG-LIVED ASSETS The Company reviews long-lived assets such as property, plant and equipment, and intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value and carrying value of the asset. (l) CAPITAL ASSETS Capital assets are stated at cost less accumulated amortization. Amortization is provided using the following rates and methods: Buildings and leaseholds Straight-line over terms between 5 and 40 years Information technology Straight-line over 5 years Furniture, fixtures, tooling, 20% per annum declining balance and equipment (m) INTANGIBLE ASSETS Intangible assets are stated at cost less accumulated amortization. Intangible assets are amortized as follows: Acquired technology Straight-line over 2 to 5 years Licences Lesser of 5 years or on a per unit basis based upon the anticipated number of units sold during the terms of the licence agreements Patents Straight-line over 17 years (n) GOODWILL Effective March 3, 2002, the Company adopted the new recommendations in accordance with SFAS 142 with regards to goodwill and intangible assets and accordingly, goodwill is no longer amortized to earnings, but periodically tested for impairment. The Company performed the required annual impairment tests of goodwill as at February 28, 2004 and March 1, 2003 and concluded that the existing goodwill was not impaired. The Company did not have any goodwill prior to the adoption of the new recommendation, therefore, there was no impact to prior year's earnings upon its adoption. Goodwill represents the excess of the purchase price of business acquisitions over the fair value of identifiable net assets acquired in such acquisitions. Goodwill is allocated as at the date of the business combination. Goodwill is not amortized, but is tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, and the second step is considered unnecessary. In the event that the fair value of the reporting unit, including goodwill, is less than the carrying value, the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination using the fair value of the reporting unit as if it was the purchase price. When the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statements of operations and retained earnings. The Company has one reporting unit, which is the consolidated Company. (o) INCOME TAXES The liability method of tax allocation is used to account for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company continues to assess, on an on-going basis, the degree of certainty regarding the realization of deferred tax assets, and whether a valuation allowance is required. (p) REVENUE RECOGNITION The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. In addition to this general policy, the following are the specific revenue recognition policies for each major category of revenue. HANDHELD AND OTHER HARDWARE PRODUCTS Revenue from the sale of hardware, original equipment manufacturer products ("OEM") and accessories are recognized when title is transferred to the customer and all significant contractual obligations that affect the customer's final acceptance have been fulfilled. Provisions are made at the time of sale for warranties, royalties and estimated product returns. For hardware products for which the software is deemed not to be incidental, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). SERVICE Revenue is recognized rateably on a monthly basis when the service is provided. In instances where the Company bills the customer prior to performing the service, the prepayment is recorded as deferred revenue. SOFTWARE Revenue from licensed software is recognized at the inception of the licence term and in accordance with SOP 97-2. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period such items are delivered or services are provided. Technical support contracts extending beyond the current period are recorded as deferred revenue. NON-RECURRING ENGINEERING CONTRACTS Revenue is recognized as specific contract milestones are met. The attainment of milestones approximates actual performance. SHIPPING AND HANDLING COSTS Where they can be reasonably attributed to certain revenue, shipping and handling costs are included in Cost of sales, otherwise they are included in Selling, Marketing and Administration. (q) RESEARCH AND DEVELOPMENT The Company is engaged at all times in research and development work. Research and development costs, other than capital asset acquisitions, are charged as an operating expense of the Company as incurred. (r) GOVERNMENT ASSISTANCE Government assistance towards research and development expenditures is received as grants from Technology Partnerships Canada and in the form of investment tax credits on account of eligible scientific research and experimental development expenditures. Investment tax credits are recorded when there is reasonable assurance that the Company will realize the investment tax credits. Assistance related to the acquisition of capital assets used for research and development is credited against the cost of the related capital assets and all other assistance is credited against related expenses, as incurred. (s) STATEMENTS OF COMPREHENSIVE INCOME (LOSS) U.S. GAAP, SFAS 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in general-purpose financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The reportable items of comprehensive income are cash flow hedges as described in note 21, and changes in the fair value of investments available for sale as described in note 4. (t) EARNINGS (LOSS) PER SHARE Income (loss) per share is calculated based on the weighted average number of shares outstanding during the year. The treasury stock method is used for the calculation of the dilutive effect of stock options and common share purchase warrants. (u) STOCK-BASED COMPENSATION PLAN The Company has a stock-based compensation plan, which is described in note 11(b). The options are granted with an exercise price equal to the fair market value of the shares on the day of grant of the options. No compensation expense is recognized when stock options are issued to employees. Any consideration paid by employees on exercise of stock options is credited to share capital. Compensation expense is recognized when stock options are issued with an exercise price that is less than the market price on the date of grant. The difference between the exercise price and the market price on the date of grant is recorded as compensation expense ("intrinsic value method"). The exercise price of options granted by the Company is the market value of the underlying stock at the date of grant; consequently, no compensation expense is recognized. This method is consistent with U.S. GAAP, APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123, Accounting for Stock-Based Compensation, requires proforma disclosures of net income (loss) and earnings (loss) per share, as if the fair value method, as opposed to the intrinsic value method of accounting for employee stock options, had been applied. The disclosures in the following table present the Company's net income (loss) and earnings (loss) per share on a proforma basis using the fair value method as determined using the Black-Scholes option pricing model:
For the year ended February 28, March 1, March 2, 2004 2003 2002 -------------------------------------------------- Net income (loss) - as reported $ 51,829 $ (148,857) $ (28,321) Stock-based compensation costs for the year 20,033 20,296 19,773 -------------------------------------------------- Net income (loss) - proforma $ 31,796 $ (169,153) $ (48,094) ================================================== Proforma earnings (loss) per common share: Basic $ 0.40 $ (2.18) $ (0.61) Diluted $ 0.39 $ (2.18) $ (0.61) Weighted average number of shares (000's): Basic 79,650 77,636 78,467 Diluted 81,934 77,636 78,467
The weighted average fair value of options granted during the year was calculated using the Black-Scholes option-pricing model with the following assumptions:
For the year ended February 28, March 1, March 2, 2004 2003 2002 --------------------------------------------------- Number of options granted (000's) 1,574 956 2,978 --------------------------------------------------- Weighted average Black-Scholes value of each option $ 16.57 $ 8.58 $ 12.00 Assumptions: Risk free interest rate 3.0% 4.5% 4.0% Expected life in years 4.0 3.5 3.5 Expected dividend yield 0% 0% 0% Volatility 70% 70% 75%
(v) WARRANTY The Company estimates its warranty costs at the time of revenue recognition based on historical warranty claims experience and records the expense in Cost of sales. The warranty accrual balance is reviewed quarterly to assess whether 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 estimates. (w) ADVERTISING COSTS The company expenses all advertising costs as incurred. These costs are included in Selling, marketing and administration. 2. ADOPTION OF ACCOUNTING POLICIES (a) Stock Based Compensation In December, 2002 the FASB issued SFAS 148, Accounting for Stock-Based Compensation. SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. There was no effect on the Company's results of operations and financial position for SFAS 148, as the Company has not yet adopted the fair value based method. (b) Derivative Instruments In May 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement clarifies and amends accounting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company has determined that there was no effect upon the adoption of SFAS 149. (c) Financial Instruments In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Assets and Liabilities. SFAS 150 addresses the accounting for: mandatory redeemable shares, put options and forward purchase contracts of the Company's shares, and instruments that are liabilities under this Statement that can be settled for shares. This standard is effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the first interim period beginning after June 15, 2003. There was no effect on the Company's results of operations and financial position upon the adoption of SFAS 150. 3. RECENTLY ISSUED PRONOUNCEMENTS In December 2003, the FASB amended Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R requires that a variable interest entity ("VIE") be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's residual returns. For the Company, the requirements of FIN 46R apply to VIE's created after January 31, 2003. For those VIE's created before January 31, 2003, the requirements of FIN 46R apply as at February 29, 2004. The adoption of FIN 46R did not have an impact to the Company's financial statements as at and for the year ended February 28, 2004. 4. CASH, CASH EQUIVALENTS AND INVESTMENTS (a) Cash and cash equivalents are recorded at fair value and comprise: February 28, March 1, 2004 2003 --------------------------------- Balances with banks $ 2,644 $ 16,603 Money market investment funds 9,657 2,635 Certificates of deposit 255,199 111,664 Repurchase agreements 110,622 15,868 Government sponsored enterprise notes - 9,999 Commercial paper and corporate notes 778,297 183,912 --------------------------------- $ 1,156,419 $ 340,681 ================================= Cash and cash equivalents carry weighted average yields of 1.0% as at February 28, 2004 (March 1, 2003 - 1.3%). (b) Investments include securities that are held as available-for-sale and securities which the Company intends to hold to maturity. As of February 28, 2004, the contractual maturities of debt securities were as follows (at carrying value): --------------------------------------------- One to Five to No Single Total Five Years Ten Years Maturity Date ---------------------------------------------------------- Available-for-sale $ 139,266 $ 25,164 $ 23,394 $ 187,824 Held-to-maturity 79,404 - 66,658 146,062 ---------------------------------------------------------- $ 218,670 $ 25,164 $ 90,052 $ 333,886 ========================================================== Securities with no single maturity date reflect asset-backed securities. Available-for-sale investments are carried at fair value and comprise:
Amortized Unrealized Unrealized Cost Gains Losses Fair Value -------------------------------------------------------------- As at February 28, 2004 Government sponsored enterprise notes $ 80,086 $ 300 $ - $ 80,386 Asset-backed securities 23,385 25 (16) 23,394 Corporate bonds 83,740 323 (19) 84,044 -------------------------------------------------------------- $ 187,211 $ 648 $(35) $ 187,824 ============================================================== As at March 1, 2003 $ - $ - $ - $ - ==============================================================
Held-to-maturity investments are carried at amortized cost and comprise:
Unrecognized Amortized Holding Holding Cost Gains Losses Fair Value --------------------------------------------------------------- As at February 28, 2004 Government sponsored enterprise notes $ - $ - $ - $ - Asset-backed securities 66,658 1,325 - 67,983 Corporate bonds 79,404 4,074 - 83,478 --------------------------------------------------------------- $146,062 $ 5,399 $ - $151,461 =============================================================== As at March 1, 2003 Government sponsored enterprise notes $ 15,110 $ 83 $ - $ 15,193 Asset-backed securities 69,002 770 (59) 69,713 Corporate bonds 105,918 3,365 - 109,283 --------------------------------------------------------------- $190,030 $ 4,218 $ (59) $194,189 ===============================================================
During fiscal 2004, the Company sold held-to-maturity securities with a carrying value of $25,150 due to concerns with the credit quality of the issuer. The gross realized losses on these sales totaled $6. Held-to-maturity securities with a carrying value of $15,203 were called for early redemption by the issuer. The gross realized gains on these redemptions were $10. Investments carry weighted average yields of 3.1% as at February 28, 2004 (March 1, 2003 - 3.8%) 5. INVENTORY Inventory is comprised as follows: February 28, March 1, 2004 2003 ------------------------------ Raw materials $ 35,119 $ 34,446 Work in process 8,713 8,205 Finished goods 7,679 4,286 Provision for excess and obsolete inventory (8,675) (15,662) ------------------------------ $ 42,836 $ 31,275 ============================== 6. CAPITAL ASSETS Capital assets are comprised of:
February 28, 2004 Accumulated Net book Cost amortization value ----------------------------------------------- Land $ 8,850 $ - $ 8,850 Buildings and leaseholds 67,148 10,047 57,101 Information technology 91,950 47,605 44,345 Furniture, fixtures, tooling and equipment 78,955 41,542 37,413 ----------------------------------------------- $ 246,903 $ 99,194 $ 147,709 =============================================== March 1, 2003 Accumulated Net book Cost amortization value ----------------------------------------------- Land $ 8,850 $ - $ 8,850 Buildings and leaseholds 66,254 6,671 59,583 Information technology 81,319 31,893 49,426 Furniture, fixtures, tooling and equipment 68,873 25,549 43,324 ----------------------------------------------- $ 225,296 $ 64,113 $ 161,183 ===============================================
During fiscal 2004, the Company recorded additional amortization expense of $1,318 with respect to certain capital assets no longer used by the Company; $618 of this is included in Cost of sales. For the year ended February 28, 2004, amortization expense related to capital assets was $35,067 (March 1, 2003 - $27,997; March 2, 2002 - $16,753). 7. INTANGIBLE ASSETS Intangible assets are comprised of:
February 28, 2004 Accumulated Net book Cost amortization value ----------------------------------------------------- Acquired technology $ 10,012 $ 3,746 $ 6,266 Licences 52,216 15,299 36,917 Patents 25,156 4,070 21,086 ----------------------------------------------------- $ 87,384 $ 23,115 $ 64,269 ===================================================== March 1, 2003 Accumulated Net book Cost amortization value ---------------------------------------------------- Acquired technology $ 10,012 $ 1,684 $ 8,328 Licences 28,370 1,085 27,285 Patents 16,751 885 15,866 ---------------------------------------------------- $ 55,133 $ 3,654 $ 51,479 ====================================================
Acquired technology includes all licences and patents acquired by the Company as a result of the acquisitions described in note 8. Licenses include licenses or agreements that the Company has negotiated with third parties upon use of the third parties' technology. Patents includes all costs necessary to record a patent, as well as defense costs when there is perceived infringement by the Company of those patents. During fiscal 2004, the Company recorded provisions amounting to $4,327 against the carrying values of certain of its intangible assets as a result of changes in the Company's current and intended product offerings. Of this amount $2,750 is included in Cost of sales with the balance of $1,577 recorded as Amortization expense. Such charges reflect management's assessment of net realizable values. For the year ended February 28, 2004, amortization expense related to intangible assets was $19,462 (March 1, 2003 - $2,848; March 2, 2002 - $574). Total additions to intangible assets in 2004 were $32,252 (2003 - $38,324). Based on the carrying value of the identified intangible assets as at February 28, 2004, and assuming no subsequent impairment of the underlying assets, the annual amortization expense is expected to be as follows: 2005 - $16 million; 2006 - $17 million; 2007 - $13 million; 2008 - $3 million; 2009 - $2 million. Licenses are amortized over the lesser of five years or on a per unit basis based upon the anticipated number of units sold during the terms of the license agreements. 8. ACQUISITIONS During fiscal 2004, the purchase price related to one of the fiscal 2003 acquisitions was revised, resulting in a reduction to goodwill of $479 and a return of consideration. During fiscal 2003 the Company completed four acquisitions. Effective June 2002, the Company purchased the assets of a company whose proprietary software code provides capabilities to facilitate foreign language input and display on handheld products. Effective July 2002, the Company acquired 100% of the common shares of a company that will offer a secure solution for viewing email attachments with BlackBerry Wireless Handhelds. Effective August 2002, the Company acquired 100% of the common shares of a company that has software products which enable wireless access to major email systems including corporate, proprietary and POP3/IMAP4 using a handheld device. In addition, effective September 2002, the Company also acquired 100% of the common shares of a small company with expertise and technology related to wireless networks. The results of the acquirees' operations have been included in the consolidated financial statements for the periods from each respective closing date to February 28, 2004. On October 31, 2001, the Company acquired 100% of the outstanding common shares of a company for its technology and expertise in the wireless delivery of rich graphical content. This company develops Java-based media platforms for wireless devices. The results of this company's operations have been included in the consolidated financial statements since October 31, 2001. The value of the 387,353 common shares issued in 2002 was determined based on the average of the market price of the Company's common shares over the two-day period before and after the terms of the acquisition were agreed to. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. March 1, March 2, 2003 2002 ---------------------------- Assets purchased Capital assets $ 317 $ - Acquired technology 7,326 2,685 Goodwill 16,193 14,395 ---------------------------- 23,836 17,080 ---------------------------- Liabilities assumed - non-cash working capital 1,275 1,046 Deferred income tax liability 357 - ---------------------------- 1,632 1,046 ---------------------------- Net non-cash assets acquired 22,204 16,034 Cash acquired 117 152 ---------------------------- Net assets acquired $ 22,321 $ 16,186 ============================ Consideration Cash $ 22,107 $ 9,861 Assumption of acquiree long-term debt 214 - Capital stock - 6,325 ---------------------------- $ 22,321 $ 16,186 ============================ The acquisitions were accounted for using the purchase method whereby assets acquired and liabilities assumed were recorded at their 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. Of the $16,193 of goodwill acquired during fiscal 2003, $13,316 is expected to be deductible for tax purposes. If the four fiscal 2003 acquisitions had occurred on March 1, 2001, the Company's unaudited proforma consolidated revenue would have increased by $nil for the year ended February 28, 2004 (March 1, 2003 - $226; March 2, 2002 - $816) and the unaudited proforma net income (loss) would have been $51,829 (March 1, 2003 - ($151,713); March 2, 2002 - ($35,748)). 9. INCOME TAXES The difference between the amount of the provision for (recovery of) income taxes and the amount computed by multiplying income before taxes by the statutory Canadian rate is reconciled as follows:
February 28, March 1, March 2 , 2004 2003 2002 ----------------------------------------------------- Expected Canadian tax rate 36.5% 38.3% 41.2% Expected income tax provision (recovery) $ 17,394 $ (44,817) $ (15,685) Differences in income taxes resulting from: Manufacturing and processing activities (900) 3,951 1,801 Increase in valuation allowance 29,100 61,969 1,530 Non-deductible portion of unrealized capital losses - - 1,013 Foreign exchange 3,820 (1,408) 1,112 Foreign tax rate differences (45,088) 7,352 (3,192) Enacted tax rate changes (9,743) 4,835 2,960 Other differences 1,217 (130) 683 ----------------------------------------------------- $ (4,200) $ 31,752 $ (9,778) ===================================================== Income (loss) before income taxes: Canadian $ 29,309 $ (102,954) $ (46,845) Foreign 18,320 (14,151) 8,746 ----------------------------------------------------- $ 47,629 $ (117,105) $ (38,099) ===================================================== The provision for income taxes consists of the following: February 28, March 1, March 2, Provision for (recovery of) income taxes: 2004 2003 2002 ----------------------------------------------------- Current Canadian $ 484 $ (8) $ 6,756 Foreign (4,684) 3,521 302 Deferred Canadian - 27,593 (17,283) Foreign - 646 447 --------==------------------------------------------- $ (4,200) $ 31,752 $ (9,778) =====================================================
Deferred income tax assets and liabilities consist of the following temporary differences: February 28, March 1, 2004 2003 --------------------------------- Assets Financing costs $ 13,170 $ 4,398 Non-deductible reserves 3,492 6,622 Research and development incentives 45,735 24,897 Tax losses 37,428 29,938 Capital assets 18,252 2,614 Other tax carryforwards 204 186 ---------------------------------- 118,281 68,655 Less: valuation allowance 118,281 68,655 ---------------------------------- Net deferred income tax assets $ - $ - ================================== During the third quarter of fiscal 2003, the Company determined that a significant degree of uncertainty existed regarding the realization of the deferred tax assets and that a full valuation allowance was required. As a result of the increased valuation allowance, deferred tax assets of $118,281 have not been recognized for accounting purposes as of February 28, 2004. This amount remains available for use against taxes on future profits. The Company will continue to evaluate and examine the valuation allowance on a regular basis and as future uncertainties are resolved, the valuation allowance may be adjusted accordingly. At February 28, 2004, the Company has the following net operating loss carryforwards and tax credits which are not recognized for accounting purposes and are scheduled to expire in the following years: Net operating Investment tax losses credits ----------------------------------- 2005 $ 21 $ - 2006 1,259 490 2007 4,046 726 2008 12,860 2,385 2009 93,675 11 2010 976 13 2011 27 5,524 2012 - 9,306 2014 - 11,017 2020 102 - 2021 255 - 2022 359 - Indefinite carryforward 1,080 - ------------------------------------ $ 114,660 $ 29,472 ==================================== The Company has not provided for Canadian deferred income taxes or foreign withholding taxes that would apply on the distribution of the earnings of its non-Canadian subsidiaries, since these earnings are intended to be reinvested indefinitely. 10. LONG-TERM DEBT At February 28, 2004 long-term debt consisted of mortgages with interest rates ranging between 6.88% and 7.90%, against which certain land and buildings are pledged as collateral. All mortgage loans are denominated in Canadian dollars and mature on March 1, 2009. Interest expense on long-term debt for the year was $771 (March 1, 2003 - $852; March 2, 2002 - $661). The scheduled long-term debt principal payments for the fiscal years 2005 through to maturity are as follows: For the year ending 2005 $ 193 2006 207 2007 223 2008 239 2009 256 March 1, 2009 5,315 -------------- $ 6,433 ============== At February 28, 2004 the Company had demand credit facilities totalling $92.6 million (March 1, 2003 - $19.9 million). As at February 28, 2004 the Company had drawn on its available credit facilities in the amount of $64.1 million in the form of letters of credit, including $48.0 million related to litigation as described in note 16. $28.5 million of available credit facilities remains unused. The operating line portion of the facilities bear interest on the outstanding balance at the bank's prime rate. Any balance owing is due on demand and is subject to a general security agreement, general assignment of book debts and the pledge of specific securities in the Company's investment portfolio. 11. CAPITAL STOCK (a) SHARE CAPITAL The Company is authorized to issue an unlimited number of non-voting, redeemable, retractable Class A common shares, an unlimited number of voting common shares and an unlimited number of non-voting, cumulative, redeemable, retractable preferred shares. There are no Class A common shares or preferred shares outstanding. The following details the changes in issued and outstanding common shares and common share purchase warrants for the three years ended February 28, 2004:
Number of Common Shares Outstanding (000's) ------------------------------------------------------------ Common share Common purchase shares warrants Total ------------------------------------------------------------ Balance as at February 28, 2001 78,271 75 78,346 Exercise of options 503 - 503 Common shares issued on acquisition of subsidiary 387 - 387 Common shares repurchased pursuant to Common Share Purchase Program (370) - (370) ------------------------------------------------------------ Balance as at March 2, 2002 78,791 75 78,866 Exercise of options 320 - 320 Common shares repurchased pursuant to Common Share Purchase Program (1,939) - (1,939) ------------------------------------------------------------ Balance as at March 1, 2003 77,172 75 77,247 Exercise of options 3,129 - 3,129 Exercise of warrants 39 (75) (36) Common shares issued pursuant to public share offering 12,075 - 12,075 ------------------------------------------------------------ Balance as at February 28, 2004 92,415 - 92,415 ============================================================ Share Capital ----------------------------------------------------------- Common share Common purchase shares warrants Total ----------------------------------------------------------- Balance as at February 28, 2001 $ 890,644 $ 370 $ 891,014 Exercise of options 1,491 - 1,491 Common shares issued on acquisition of subsidiary 6,325 - 6,325 Common shares repurchased pursuant to Common Share Purchase Program (4,080) - (4,080) ----------------------------------------------------------- Balance as at March 2, 2002 894,380 370 894,750 Exercise of options 1,155 - 1,155 Common shares repurchased pursuant to Common Share Purchase Program (21,528) - (21,528) ----------------------------------------------------------- Balance as at March 1, 2003 874,007 370 874,377 Exercise of options 49,771 - 49,771 Exercise of warrants 370 (370) - Common shares pursuant to public share offering, net of related costs 905,240 - 905,240 ----------------------------------------------------------- Balance as at February 28, 2004 $ 1,829,388 $ - $ 1,829,388 ===========================================================
On January 22, 2004 the Company completed a public share issue of 12.1 million common shares for proceeds of $905,240, net of related issue costs of $39,629. During fiscal 2004, the Company's share purchase warrants were redeemed and converted into common shares. On October 3, 2002 the Company's Board of Directors approved the purchase during the subsequent 12 months of up to as many as 3.8 million common shares, which approximated 5% of the common shares outstanding at that date. All common shares purchased by RIM have been cancelled. No shares have been re-purchased under this Common Share Purchase Program during fiscal 2004. During the year ended March 1, 2003 the Company repurchased 1.9 million common shares pursuant to its Common Share Purchase Program at a cost of $24,502. The amount paid in excess of the carrying value of the common shares of $2,974 was charged to retained earnings. All common shares repurchased by the Company pursuant to its Common Share Purchase Program have been cancelled. During the year ended March 2, 2002 the Company repurchased 370 common shares pursuant to its Common Share Purchase Program at a cost of $5,525. The amount in excess of the carrying value of the common shares of $1,445 was charged to retained earnings. All common shares repurchased by the Company pursuant to its Common Share Purchase Program have been cancelled. (b) STOCK OPTION PLAN The Company has an incentive stock option plan for all of its directors, officers and employees. The option exercise price is the fair market value of the Company's common shares at the date of grant. These options generally vest over a period of five years after which they are exercisable for a maximum of ten years after the grant date. The Company's shareholders approved the reconstitution of the stock option plan at the Annual General Meeting on August 12, 2002. The reconstitution increased the number of common shares available for the grant of options by 2,756. As at February 28, 2004, there were 8,009 options outstanding with exercise prices ranging from $2.43 to $119.80. Options issued and outstanding for 2,640 shares are vested as at February 28, 2004 and there are 3,040 shares available for future grants under the plan. A summary of option activity since February 28, 2001 is shown below: Options Outstanding ------------------------------------ Weighted Number Average (in 000's) Exercise Price ------------------------------------ Balance as at February 28, 2001 7,920 $ 17.04 Granted during the year 2,978 $ 21.83 Exercised during the year (515) $ 3.71 Forfeited during the year (297) $ 27.92 ------------------------------------ Balance as at March 2, 2002 10,086 $ 18.81 Granted during the year 956 $ 16.41 Exercised during the year (320) $ 3.88 Forfeited during the year (621) $ 31.35 ------------------------------------ Balance as at March 1, 2003 10,101 $ 18.29 Granted during the year 1,574 $ 30.34 Exercised during the year (3,129) $ 14.12 Forfeited during the year (537) $ 27.95 ------------------------------------ Balance as at February 28, 2004 8,009 $ 21.64 ==================================== The weighted average characteristics of options outstanding as at February 28, 2004 are as follows:
Options Outstanding (000's) Options Exercisable (000's) - ------------------------------------------------------------------------------------------------------------------ Number Weighted Number Weighted Outstanding at average Weighted Outstanding at average Range of exercise February 28, remaining life average February 28, exercise prices 2004 in years exercise price 2004 price - ------------------------------------------------------------------------------------------------------------------ $2.43 - $3.62 1,192 2.7 $ 2.66 1,143 $ 2.62 $3.88 - $5.66 945 1.4 4.13 401 4.23 $5.93 - $8.78 498 2.0 7.75 191 7.78 $8.97 - $13.12 291 4.4 10.38 62 9.95 $13.55 - $20.29 2,010 5.4 16.40 74 16.87 $20.39 - $30.51 1,459 4.8 23.24 244 22.94 $30.68 - $45.51 423 4.3 37.41 69 37.65 $46.55- $68.48 669 3.6 51.97 314 50.95 $70.44 and over 522 5.4 80.33 142 87.00 - --------------------------------------------------------------------------------------------------------------- Total 8,009 4.0 $ 21.64 2,640 $ 16.90 ===============================================================================================================
12. COMMITMENTS AND CONTINGENCIES (a) LEASE COMMITMENT The Company is committed to annual lease payments under operating leases for premises as follows: Real Estate Equipment Total For the year ending 2005 $ 1,952 $ 213 $ 2,165 2006 1,842 75 1,917 2007 1,526 15 1,541 2008 1,382 - 1,382 2009 1,003 - 1,003 Thereafter 6,082 - 6,082 ---------------------------------------------- $ 13,787 $ 303 $14,090 ============================================== For the period ended February 28, 2004, the Company incurred rental expense of $2,197 (March 1, 2003 - $2,272; March 2, 2002 - $1,857). (b) OTHER LITIGATION In addition to the NTP matter discussed in note 16, the Company has been involved in patent litigation with Good Technology, Inc. ("GTI"). The Company and GTI (the "parties") entered into a agreement on March 26, 2004 whereby the parties have signed a settlement and license agreement and will consequently dismiss a series of pending lawsuits between the two companies. The companies have entered a royalty-bearing license agreement whereby RIM will receive a lump-sum settlement during the first quarter of fiscal 2005 as well as ongoing quarterly royalties. The lump-sum settlement amount was received subsequent to February 28, 2004 and will be credited to Intangible Assets in the first quarter of fiscal 2005, as a recovery of costs incurred by the Company. The settlement of this dispute will not be material to the Company's financial position. The Company is involved in a dispute with Inpro II Licensing, S.a.r.l. ("Inpro") in connection with two of Inpro's patents. In a Delaware action, Inpro is seeking a preliminary and permanent injunction and an unspecified amount of damages in relation to one of its patents. The matter is currently scheduled for trial in September 2005 and fact discovery must be complete by October 29, 2004. The Company filed an action for a declaratory judgement of non-infringement with respect to one of the two patents, which action is the subject of a motion to stay or transfer to Delaware. Although the Company has conducted a thorough review of the relevant patents held by Inpro, and is of a view that it does not infringe on such patents, at this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to all of the Inpro actions is not determinable. Accordingly, no amount has been recorded in these financial statements as at February 28, 2004. From time to time, the Company is involved in other claims in the normal course of business. Management regularly assesses such claims and when matters are considered likely to result in a material exposure and the amount of a related loss is quantifiable, a provision for loss is 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 for which the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable. 13. PRODUCT WARRANTY The Company estimates its warranty costs at the time of revenue recognition, based on historical warranty claims experience, and records the expense 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 estimates. The change in the Company's accrued warranty obligations from March 2, 2002 to February 28, 2004 was as follows: Accrued warranty obligations at March 2, 2002 $ 3,355 Actual warranty experience during 2003 (577) 2003 warranty provision 5,465 Adjustments for changes in estimate (3,073) -------------- Accrued warranty obligations at March 1, 2003 5,170 Actual warranty experience during 2004 (3,946) 2004 warranty provision 8,648 Adjustments for changes in estimate (626) -------------- Accrued warranty obligations at February 28, 2004 $ 9,246 ============== 14. GOVERNMENT ASSISTANCE The Company has previously entered into two project development agreements with Technology Partnerships Canada ("TPC"), which provide partial funding for certain research and development projects. Funding from TPC for the first agreement ("TPC-1") totalled $3,900 and was repayable in the form of royalties of 2.2% on gross product revenues resulting from the project. The Company was obligated to pay royalties on all project revenues up to February 28, 2003, after which time the royalty base is expanded to include revenues from certain additional products, and royalties will continue to be paid up to a maximum of $6,100. The Company has recorded $2,530 on account of TPC royalty repayment expense with respect to TPC-1 (March 1, 2003 - $925; March 2, 2002 - $1,575). The final payment with respect to TPC-1 is expected to be made during the first quarter of fiscal 2005. The second agreement with TPC is a three-year research and development project ("TPC-2") under which total contributions from TPC will be a maximum of $23,300 (the "contribution"). The Company is of the view that it has fulfilled all prerequisite funding conditions and has recorded all of the contribution commitment as at February 28, 2004 and no further TPC funding reimbursements are due to RIM under TPC-2. This contribution will be repayable to TPC in the form of royalties of 2.2% on gross product revenues resulting from project and then other revenues. The Company is obligated to pay royalties on all project revenues up to February 28, 2007, after which time the royalty base is expanded to include revenues from certain additional products. Royalties will continue to be paid up to a maximum of $39,300. No amounts have been recorded with respect to TPC-2 since the conditions for repayment have not yet been met. The Company also qualifies for investment tax credits ("ITC's") on eligible expenditures on account of scientific research and experimental development. The Company has not recorded the benefit of ITC's in fiscal 2003 or fiscal 2004, as in the Company's judgement, the Company does not have reasonable assurance that the Company will realize the ITC's. Government assistance, which includes both TPC funding and ITC's, has been applied to reduce gross research and development expense as follows:
For the year ended February 28, March 1, March 2, 2004 2003 2002 ------------------------------------------------ Gross research and development $ 62,638 $ 64,952 $ 49,517 Government funding 12,071 - 9,036 ------------------------------------------------ Net research and development $ 62,638 $ 55,916 $ 37,446 ================================================
15. RESTRUCTURING CHARGES During the third quarter of 2003, as part of the implementation of a plan to improve operating results (the "Plan"), the Company recorded restructuring charges that included the termination of employees, related costs and the closure and exit of certain leased facilities. The 254 employees identified in connection with the workforce reduction component of the Plan were dismissed on or about November 12, 2002. The cost of the employees was previously included as part of Cost of sales, Selling, marketing and administration, and Research and development. The Company has yet to vacate a leased facility deemed redundant as part of the Plan. The Company expects to complete the remaining elements of the Plan during fiscal 2005. The pre-tax financial components of the Plan are summarized below:
Balances as at Cash Payments Write-offs Balances as at March 1, 2003 February 28, 2004 -------------------------------------------------------------------------- Workforce reduction and related costs $ 648 $ (648) $ - $ - Excess facilities and capital assets 1,924 (431) (230) 1,263 -------------------------------------------------------------------------- $ 2,572 $ (1,079) $ (230) $ 1,263 ========================================================================== Balances as at Cash Payments Write-offs Balances as at November 12, 2002 March 1, 2003 -------------------------------------------------------------------------- Workforce reduction and related costs $ 4,056 $ (3,408) $ - $ 648 Excess facilities and capital assets 2,494 (63) (507) 1,924 -------------------------------------------------------------------------- $ 6,550 $ (3,471) $ (507) $ 2,572 ==========================================================================
The balance of the restructuring provision of $1,263 as at February 28, 2004 is included in Accrued liabilities on the Consolidated Balance Sheets. 16. LITIGATION AWARD The Company is the defendant in a patent litigation matter brought by NTP, Inc. ("NTP") alleging that the Company infringed on eight of NTP's patents (the "NTP matter"). During fiscal 2003 the Company recorded quarterly charges in the second, third and fourth quarters with respect to the NTP matter totalling $58.2 million to fully provide for enhanced compensatory damages, current and estimated future costs with respect to ongoing legal and professional fees, plaintiff's attorney fees and prejudgment interest. On May 23, 2003 the Court ruled on the issues of enhanced compensatory damages, plaintiff's attorney fees and certain other matters. During the first quarter of fiscal 2004, the Company recorded an expense of $7.5 million to provide for additional estimated enhanced compensatory damages and estimated prejudgment interest, for the period March 2, 2003 to May 31, 2003. The $6.9 million attributable to enhanced compensatory damages was classified as Restricted cash on the Consolidated Balance Sheets as at May 31, 2003 and the Company funded the $6.9 million into a cash escrow bank account subsequent to the end of the first quarter of fiscal 2003, as required by the Court. On August 5, 2003, the United States District Court for the Eastern District of Virginia (the "Court") ruled on NTP's request for an injunction with respect to RIM continuing to sell the BlackBerry solution (handhelds, software and service) in the United States as well as entered judgment with respect to several previously announced monetary awards issued in favour of NTP. The Court granted NTP the injunction requested; however, the Court then immediately granted RIM's request to stay the injunction sought by NTP pending the completion of RIM's appeal (to the Court of Appeals for the Federal Circuit). In its Final Order dated August 5, 2003, the Court awarded monetary damages of $53.7 million (the "Final Order") as of May 31, 2003, comprising the following: o Enhanced compensatory damages $ 47.5 million o Plaintiff attorney fees $ 4.2 million o Prejudgement interest $ 2.0 million -------------- o Total $ 53.7 million -------------- The Company had previously recorded provisions for all of the above components of the Final Order in fiscal 2003 and the first quarter of fiscal 2004. The Company filed its Notice to Appeal on August 29, 2003. During the second quarter of fiscal 2004, the Company recorded an expense of $5.7 million to provide for enhanced compensatory damages for the period June 1, 2003 to August 30, 2003, postjudgment interest for the period August 6, 2003 to August 30, 2003 and other net adjustments. The Company funded $7.6 million, attributable to the enhanced compensatory damages amount, into an escrow account subsequent to the end of the second quarter of fiscal 2004. The Company sought a stay of the Court proceedings in light of the fact that the patents in suit are the subject of re-examination proceedings by the U.S. Patents and Trademark Office ("PTO"). On November 4, 2003, the United States Court of Appeals for the Federal Circuit ("Appellate Court") denied the Company's request for a stay of the appeal proceedings. On November 26, 2003, the Company filed its opening appeal brief with the Appellate Court. During the third quarter of fiscal 2004, the Company recorded an expense of $9.2 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended November 29, 2003. NTP filed its Responding Brief on or about January 2, 2004. The Company filed its Reply Brief on February 3, 2004. During the fourth quarter of fiscal 2004, the Company recorded an expense of $12.9 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended February 28, 2004. The $12.9 million attributable to enhanced compensatory damages was classified as Restricted cash on the Consolidated Balance Sheets as at February 28, 2004. The Company funded the $12.9 million into an escrow account subsequent to the end of the third quarter of fiscal 2004. For the year ended February 28, 2004, the Company has recorded a total provision of $35.2 million with respect to the NTP matter, representing enhanced compensatory damages, postjudgment interest for the period August 6, 2003 to February 28, 2004 and other net adjustments. As at the end of the Company's current fiscal year, the likelihood of any further loss and the ultimate amount of loss, if any, were not reasonably determinable. Consequently, no additional amounts, from those described above, have been provided for as NTP litigation expenses as at February 28, 2004. The actual resolution of the NTP matter may materially differ from the estimates as at February 28, 2004 as a result of future appellate court rulings at the conclusion of the appeals process, therefore potentially causing future quarterly or annual financial reporting to be materially affected, either adversely or favourably. 17. WRITE-DOWN OF INVESTMENTS Periodically the Company undertakes a review of the carrying value of companies in which it holds investments. Based on such reviews, the Company determines whether impairment in the carrying values of its investments has occurred. The Company further determines whether such declines are other than temporary in nature. The Company wrote down the value of its investments in fiscal 2002 by $5,350. 18. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share.
For the year ended February 28, March 1, March 2, 2004 2003 2002 ----------------------------------------------------- Numerator for basic and diluted earnings (loss) per share available to common stockholders $ 51,829 $ (148,857) $ (28,321) ===================================================== Denominator for basic earnings (loss) per share - weighted average shares outstanding (000's) 79,650 77,636 78,467 Effect of dilutive securities: Employee stock options 4,040 - - ----------------------------------------------------- Denominator for basic and diluted earnings (loss) per share - weighted average shares outstanding (000's) 83,690 77,636 78,467 ===================================================== Earnings (loss) per share Basic $ 0.65 $ (1.92) $ (0.36) Diluted $ 0.62 $ (1.92) $ (0.36)
Stock options and share purchase warrants were excluded from the diluted (loss) per share figures for 2003 and 2002, as they were anti-dilutive. 19. COMPREHENSIVE INCOME (LOSS) The components of comprehensive net income (loss) are shown in the following table:
For the year ended February 28, March 1, March 2, 2004 2003 2002 ----------------------------------------------------- Net income (loss) $ 51,829 $ (148,857) $ (28,321) Net change in unrealized gains on available-for-sale investments 613 - - Net change in derivative fair value during the year 11,941 5,958 (2,803) Amounts reclassified to earnings during the year (9,912) (1,041) 1,325 ----------------------------------------------------- Comprehensive income (loss) $ 54,471 $ (143,940) $ (29,799) =====================================================
The components of accumulated other comprehensive income are as follows:
For the year then ended February 28, March 1, March 2, 2004 2003 2002 ---------------------------------------------------- Accumulated net unrealized gains on available-for-sale $ 613 $ - $ - investments Accumulated net unrealized gains (loss) on derivative instruments 5,468 3,439 (1,478) ---------------------------------------------------- Total accumulated other comprehensive income (loss) $ 6,081 $ 3,439 $ (1,478) ====================================================
20. SUPPLEMENTAL INFORMATION (A) STATEMENT OF CASH FLOWS The following summarizes interest and income taxes paid:
For the year ended February 28, March 1, March 2, 2004 2003 2002 --------------------------------------------------- Interest paid during the year $ 770 $ 852 $ 779 Income taxes paid (refunded) during the year (196) 1,070 967
(B) ACCRUED LIABILITIES The following items are included in the accrued liabilities balance:
As at February 28, March 1, 2004 2003 ------------------------------ Airtime purchase costs 17,486 17,109 Marketing costs 13,081 8,116 Warranty 9,246 5,170 Royalties 10,042 4,558 Other # 20,683 19,462 ------------------------------ $ 70,538 $54,415 ==============================
(C) OTHER INFORMATION Advertising expense, which includes media, agency and promotional expenses equal to $18,206 (March 1, 2003 - $15,079; March 2, 2002 - $18,549) is included in Selling, marketing and administration expense. Selling, marketing and administration expense for the fiscal year includes a foreign currency exchange gain of $2,156 (March 1, 2003 - gain of $293; March 2, 2002 - loss of $1,042). 21. FINANCIAL INSTRUMENTS Values of financial instruments outstanding at fiscal year-ends were as follows:
February 28, 2004 ----------------------------------------------- Assets (Liabilities) Notional Carrying Estimated Amount Amount Fair Value Cash and cash equivalents $ - $1,156,419 $1,156,419 Available-for-sale investments - 187,824 187,824 Held-to-maturity investments - 146,062 151,461 Long-term debt - (6,433) (6,808) Currency forward contracts 208,850 5,399 5,399 March 2, 2003 ----------------------------------------------- Assets (Liabilities) Notional Carrying Estimated Amount Amount Fair Value Cash and cash equivalents $ - $ 340,681 $ 340,681 Available-for-sale investments - - - Held-to-maturity investments - 190,030 194,189 Long-term debt - (11,919) (12,273) Currency forward contracts 69,416 3,858 3,858
For certain of the Company's financial instruments, including trade receivables, other receivables, accounts payable and accrued liabilities, the carrying amounts approximate their respective fair values due to their short maturities. The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency the U.S. dollar. The majority of the Company's revenues in fiscal 2004 are transacted in U.S. dollars. Portions of the revenues are denominated in 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 all manufacturing overhead, are incurred primarily in Canadian dollars. At February 28, 2004 approximately 2% of cash and cash equivalents, 26% of trade receivables and 18% of accounts payable and accrued liabilities are denominated in foreign currencies (March 1, 2003 - 14%, 13%, and 8%, respectively). These foreign currencies include the Canadian Dollar, British Pound, Euro, Australian Dollar, Hong Kong Dollar, and Japanese Yen. To mitigate this risk, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments. The Company does not purchase or hold any derivative instruments for speculative purposes. To hedge exposures relating to anticipated foreign currency transactions, the Company has entered into forward foreign exchange contracts to sell U.S. dollars and purchase Canadian dollars, to sell Euro 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 as other comprehensive income, and subsequently reclassified to earnings in the period in which the cash flows from the associated hedged transaction affect earnings. The maturity dates of these instruments range from March 2004 through to February 2007. These cash flow hedges were fully effective at February 28, 2004. As at February 28, 2004, the unrealized gain on these forward contracts was approximately $5,468 (March 1, 2003 - $3,439; March 2, 2002 - loss of $1,478). These amounts were included in Other current assets and Other comprehensive income. Approximately $4,791 of the unrealized gains on the forward contracts will be reclassified to earnings in fiscal 2005. To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into forward foreign exchange 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 recognized in earnings each period, offsetting the change in the U.S. dollar value of the hedged liability. The maturity dates of these instruments range from March, 2004 through to March, 2005. As at February 28, 2004, a loss of $69 was recorded in respect of these instruments (March 1, 2003 - gain of $419; March 2, 2002 - $nil). This amount was included with Selling, marketing and administration. During the prior year, to satisfy short-term cash requirements, the Company entered into a forward exchange contract to purchase U.S. dollars and sell Canadian dollars with a notional value of U.S. $1.3 million. The contract carried an exchange rate of U.S. $1.00 equals Canadian $1.5313, and it matured on March 3, 2003. Due to the short-term nature of this contract it was not designated for hedge accounting and a loss of $42 was recorded in respect to this instrument. 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 minimizes this risk by limiting counterparties to major financial institutions and by continuously monitoring their creditworthiness. As at February 28, 2004 the maximum exposure to a single counter-party was 43% of outstanding derivative instruments (March 1, 2003 - 37%). The Company is exposed to market and credit risk on its investment portfolio. The Company limits 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 February 28, 2004, no single issuer represented more than 4% of the total cash, cash equivalents and investments (March 1, 2003 - no single issuer represented more than 5% of the total cash, cash equivalents and short-term investments). 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. The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. The Company establishes an allowance for doubtful accounts that corresponds to the specific credit risk of its customers, historical trends and economic circumstances. The allowance as at February 28, 2004 is $ 2,379 (March 1, 2003 - $2,331). While the Company sells its products and services to a variety of customers, two customers comprised 24%, and 10% of trade receivables as at February 28, 2004 (2003 - three customers comprised 17%, 16% and 14%). Additionally, two customers comprised 15% and 13% of the Company's sales (March 1, 2003 - one customer comprised 12%). 22. 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. Selected financial information is as follows:
February 28, March 1, February 28, 2004 2003 2002 -------------------------------------------------------- Sales Canada $ 54,847 $ 21,788 $ 21,381 United States 446,000 255,466 239,702 Other 93,769 29,478 32,970 -------------------------------------------------------- $ 594,616 $ 306,732 $ 294,053 ======================================================== Sales Canada 9.2% 7.1% 7.3% United States 75.0% 83.3% 81.5% Other 15.8% 9.6% 11.2% -------------------------------------------------------- 100.0% 100.0% 100.0% ======================================================== February 28, March 1, February 28, Revenue mix 2004 2003 2002 -------------------------------------------------------- Handhelds $ 343,154 $ 122,711 $ 160,198 Service 171,215 129,332 88,880 Software 47,427 21,655 12,874 Other 32,820 33,034 32,101 -------------------------------------------------------- $ 594,616 $ 306,732 $ 294,053 ======================================================== Capital, intangible assets and goodwill Canada $ 209,766 $ 207,221 United States 28,206 30,759 Foreign 4,115 5,270 ------------------------------------- $ 242,087 $ 243,250 ===================================== Total assets Canada $ 333,811 $ 258,833 United States 1,561,232 588,814 Foreign 36,335 14,009 ------------------------------------- $ 1,931,378 $ 861,656 =====================================
DOCUMENT 2 INDEPENDENT AUDITORS' REPORT To the Shareholders of RESEARCH IN MOTION LIMITED We have audited the consolidated balance sheet of RESEARCH IN MOTION LIMITED as at February 28, 2004 and the consolidated statement of operations and retained earnings (deficit) and cash flows the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 2004 and the results of its operations and its cash flows the year then ended in accordance with Canadian generally accepted accounting principles. On March 31, 2004, we reported separately to the shareholders of the Company on the consolidated financial statements for the same period, prepared in accordance with United States generally accepted accounting principles. Toronto, Canada, Ernst & Young LLP March 31, 2004. Chartered Accountants 1 INDEPENDENT AUDITORS' REPORT To the Shareholders of RESEARCH IN MOTION LIMITED We have audited the consolidated balance sheet of RESEARCH IN MOTION LIMITED as at March 1, 2003 and the consolidated statements of operations and retained earnings (deficit) and cash flows for the years ended March 1, 2003 and March 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 1, 2003 and the results of its operations and its cash flows for the years ended March 1, 2003 and March 2, 2002 in accordance with Canadian generally accepted accounting principles. On March 28, 2003 we reported separately to the shareholders of the Company on the consolidated financial statements for the same periods, prepared in accordance with United States generally accepted accounting principles. Toronto, Canada, Ernst & Young LLP Zeifman & Company LLP March 28, 2003. Chartered Accountants Chartered Accountants 2
Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands) CONSOLIDATED BALANCE SHEETS As at February 28 March 1 2004 2003 ----------------- ----------------- Canadian GAAP (note 1) ASSETS CURRENT Cash and cash equivalents (note 4) $ 1,156,419 $ 340,681 Trade receivables 95,213 40,803 Other receivables 12,149 4,538 Inventory (note 5) 42,836 31,275 Restricted cash (note 16) 36,261 -- Other current assets 7,059 7,640 ----------- --------- 1,349,937 424,937 INVESTMENTS (note 4) 333,273 190,030 CAPITAL ASSETS (note 6) 147,709 162,575 INTANGIBLE ASSETS (note 7) 64,269 51,479 GOODWILL 30,109 30,588 ----------- --------- $ 1,925,297 $ 859,609 =========== ========= LIABILITIES CURRENT Accounts payable $ 35,570 $ 18,594 Accrued liabilities (note 19 (b)) 70,538 54,415 Accrued litigation and related expenses (note 16) 84,392 50,702 Income taxes payable (note 9) 1,684 4,909 Deferred revenue 16,498 14,336 Current portion of long-term debt (note 10) 193 6,143 ----------- --------- 208,875 149,099 LONG-TERM DEBT (note 10) 6,240 5,776 ----------- --------- 215,115 154,875 ----------- --------- SHAREHOLDERS' EQUITY CAPITAL STOCK Issued - 92,415,066 common shares (March 1, 2003 - 77,172,597) (note 11(a)) 1,829,388 874,377 STOCK OPTIONS (note 11(c)) 2,890 -- ACCUMULATED DEFICIT (122,096) (169,643) ----------- --------- 1,710,182 704,734 ----------- --------- $ 1,925,297 $ 859,609 =========== ========= Commitments and contingencies (notes 10, 12, 14, 16 and 20) See notes to the consolidated financial statements. On behalf of the Board Jim Balsillie Mike Lazaridis Director Director
3
Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands) CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT For the Year Ended February 28 March 1 March 2 2004 2003 2002 ------------------ ------------------ ------------------- Canadian GAAP (note 1) REVENUE $ 594,616 $ 306,732 $ 294,053 COST OF SALES 323,482 187,289 209,525 --------- --------- --------- GROSS MARGIN 271,134 119,443 84,528 --------- --------- --------- EXPENSES Research and development, net of government funding (note 14) 64,702 55,916 37,446 Selling, marketing and administration (note 19) 109,201 104,978 93,766 Amortization 29,303 22,777 12,046 Restructuring charges (note 15) -- 6,550 -- Litigation (note 16) 35,187 58,210 -- --------- --------- --------- 238,393 248,431 143,258 --------- --------- --------- EARNINGS (LOSS) FROM OPERATIONS 32,741 (128,988) (58,730) Investment income 10,606 11,430 25,738 Writedown of investments (note 17) -- -- (5,350) --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 43,347 (117,558) (38,342) --------- --------- --------- PROVISION FOR (RECOVERY OF) INCOME TAXES (note 9) Current (4,200) 3,513 7,058 Future -- 27,593 (16,921) --------- --------- --------- Future (4,200) 31,106 (9,863) --------- --------- --------- NET INCOME (LOSS) 47,547 (148,664) (28,479) ACCUMULATED DEFICIT, BEGINNING OF PERIOD (169,643) (18,005) 11,919 Common shares repurchased in excess of carrying amount -- (2,974) (1,445) --------- --------- --------- ACCUMULATED DEFICIT, END OF PERIOD $(122,096) $(169,643) $ (18,005) ========= ========= ========= EARNINGS (LOSS) PER SHARE (note 18)Basic $ 0.60 $ (1.91) $ (0.36) ========= ========= ========= Diluted $ 0.57 $ (1.91) $ (0.36) ========= ========= =========
See notes to the consolidated financial statements. 4
Research In Motion Limited Incorporated under the Laws of Ontario (United States dollars, in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended February 28 March 1 March 2 2004 2003 2002 ---------------- ---------------- ---------------- Canadian GAAP (note 1) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 47,547 $(148,664) $ (28,479) Items not requiring an outlay of cash: Amortization 55,921 31,600 17,740 Future income taxes -- 28,598 (16,921) Loss on disposal of capital assets 223 502 -- Loss (gain) on foreign currency translation of long-term debt 859 (339) 4 Paid up capital 2,890 -- -- Write-down of investments -- -- 5,350 Net changes in working capital items: Trade receivables (54,410) 1,958 7,607 Other receivables (7,611) 1,473 7,918 Inventory (11,561) 6,202 30,567 Other current assets 512 (525) (3,467) Accounts payable 16,976 7,059 1,834 Accrued liabilities 16,123 17,555 (2,333) Accrued litigation and related expenses 33,690 50,702 -- Increase in restricted cash (36,261) -- -- Income taxes payable (3,225) 2,106 (1,018) Deferred revenue 2,162 4,563 (1,097) ----------- --------- --------- 63,835 2,790 17,705 ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of share capital and warrants 994,640 1,155 1,491 Financing costs (39,629) -- -- Buyback of common shares pursuant to Common Share Purchase Program (note 11(a)) -- (24,502) (5,525) Repayment of debt (6,130) (614) (303) ----------- --------- --------- 948,881 (23,961) (4,337) ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investments (186,989) (190,030) -- Proceeds on sale or maturity of investments 43,746 -- -- Acquisition of capital assets (21,815) (39,670) (73,917) Acquisition of intangible assets (32,252) (30,997) (7,106) Acquisition of subsidiaries (note 8) 478 (21,990) (9,709) Acquisition of short-term investments (24,071) (41,900) (925,885) Proceeds on sale and maturity of short-term investments 24,071 345,983 834,907 ----------- --------- --------- (196,832) 21,396 (181,710) ----------- --------- --------- FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS (146) (20) (4) ----------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR 815,738 205 (168,346) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 340,681 340,476 508,822 ----------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,156,419 $ 340,681 $ 340,476 =========== ========= =========
See notes to the consolidated financial statements. 5 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP 1. NATURE OF BUSINESS Research In Motion Limited (the "Company" or "RIM") is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, the Company provides platforms and solutions for seamless access to time-sensitive information including email, phone, SMS messaging, Internet and intranet-based applications. The Company's technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. The Company was incorporated on March 7, 1984 under the Ontario Business Corporations Act. The Company's shares are traded on The Toronto Stock Exchange under the symbol RIM and on the Nasdaq National Market under the symbol RIMM. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") on a basis consistent for all periods presented. The significant accounting policies used in these Canadian GAAP consolidated financial statements are as follows: (b) Basis of consolidation The consolidated financial statements include the accounts of all subsidiaries with intercompany transactions and balances eliminated. All of the Company's subsidiaries are wholly-owned and are considered to be fully integrated operations. (c) Use of estimates The preparation of the Company's consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates relate to the determination of reserves for various litigation claims, allowance for doubtful accounts, provision for excess and obsolete inventory, fair values of assets acquired and liabilities assumed in business combinations, amortization expense, implied fair value of goodwill, realization of future tax assets and the related components of the valuation allowance, provision for warranty, and the fair values of financial instruments. Actual results could differ from these estimates. (d) Foreign currency translation The U.S. dollar is the functional and reporting currency of the Company. Foreign currency denominated assets and liabilities of the Company and all of its subsidiaries are translated into U.S. dollars using the temporal method. Accordingly, monetary assets and liabilities are translated using the exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at historical exchange rates, and revenues and expenses at the rates of exchange prevailing when the transactions occurred. Resulting exchange gains and losses are included in income. 6 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP (e) Cash and cash equivalents Cash and cash equivalents consist of balances with banks and liquid short-term investments with maturities of three months or less at the date of acquisition and are carried on the balance sheet at the lower of cost or market value. (f) Trade receivables Trade receivables are presented net of an allowance for doubtful accounts. The allowance was $2,379 at February 28, 2004 (March 1, 2003 - $2,331). Bad debt expense (recovery) was $(548) for the year ended February 28, 2004 (March 1, 2003 - $696; March 2, 2002 - $6,236). The allowance for doubtful accounts reflects estimates of probable losses in trade receivables. The allowance is determined based on specifically identified accounts, historical experience and all other current information. (g) Investments All investments with maturities in excess of one year are classified as long-term investments and are carried at cost. In the event of a decline in value which is other than temporary, the investments are written down to estimated realizable value. (h) Derivative financial instruments The Company utilizes forward foreign exchange rate contracts and foreign exchange rate swaps to reduce exposure to fluctuations in foreign currency exchange rates. The Company does not purchase or hold derivative financial instruments for speculative purposes. In accordance with Accounting Guideline ("AcG") 13 Hedging Relationships, the Company formally documents relationships between hedging instruments and associated hedged items. This documentation includes: identification of the specific foreign currency asset, liability or forecasted transaction being hedged; the nature of the risk being hedged; the hedge objective; and, the method of assessing hedge effectiveness. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in foreign currency denominated assets, liabilities and anticipated cash flows of hedged items. The Company utilizes derivative instruments designated as fair value hedges to manage its exchange risk related to certain assets and liabilities denominated in foreign currencies. Foreign exchange translation gains and losses on foreign currency denominated derivative financial instruments used as a fair value hedge are accrued under Other current assets on the balance sheet and recognized currently in Selling, marketing and administration expense, net, offsetting the respective translation gains and losses recognized on the underlying foreign currency asset or liability. The Company utilizes derivative instruments designated as cash flow hedges to manage the risk associated with certain anticipated transactions that will be denominated in foreign currencies. Recognition of the changes in the fair value of these derivative instruments is deferred and recorded in earnings in the period in which the hedged transaction occurs, offsetting the change in the functional currency equivalent of the hedged cash flow. 7 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other current, or non-current, assets or liabilities on the balance sheet and recognized in income in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in income. (i) Inventories Raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable 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. (j) Impairment of long-lived assets The Company reviews long-lived assets such as property, plant and equipment, and intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value and carrying value of the asset. (k) Capital assets Capital assets are stated at cost less accumulated amortization. Amortization is provided using the following rates and methods: Buildings and leaseholds Straight-line over terms between 5 and 40 years Information technology Straight-line over 5 years Furniture, fixtures, tooling, 20% per annum declining balance and equipment (l) Intangible assets Intangible assets are stated at cost less accumulated amortization. Intangible assets are amortized as follows: Acquired technology Straight-line over 2 to 5 years Licences Lesser of 5 years or on a per unit basis based upon the anticipated number of units sold during the terms of the licence agreements Patents Straight-line over 17 years 8 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP (m) Goodwill Effective March 3, 2002, the Company adopted the new recommendations of Section 3062 of the Canadian Institute of Chartered Accountants ("CICA") Handbook ("CICA 3062") with regards to goodwill and intangible assets and accordingly, goodwill is no longer amortized to earnings, but periodically tested for impairment. The Company performed the required annual impairment tests of goodwill as at February 28, 2004 and March 1, 2003 and concluded that the existing goodwill was not impaired. The Company did not have any goodwill prior to the adoption of the new recommendation, therefore, there was no impact to prior year's earnings upon its adoption. Goodwill represents the excess of the purchase price of business acquisitions over the fair value of identifiable net assets acquired in such acquisitions. Goodwill is allocated as at the date of the business combination. Goodwill is not amortized, but is tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, and the second step is considered unnecessary. In the event that the fair value of the reporting unit, including goodwill, is less than the carrying value, the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination using the fair value of the reporting unit as if it was the purchase price. When the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statements of operations and retained earnings. The Company has one reporting unit, which is the consolidated Company. (n) Income taxes The liability method of tax allocation is used to account for income taxes. Under this method, future income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company continues to assess, on an on-going basis, the degree of certainty regarding the realization of future tax assets, and whether a valuation allowance is required. (o) Revenue recognition The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. In addition to this general policy, the following are the specific revenue recognition policies for each major category of revenue. 9 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Handheld and other hardware products Revenue from the sale of hardware, original equipment manufacturer products ("OEM") and accessories are recognized when title is transferred to the customer and all significant contractual obligations that affect the customer's final acceptance have been fulfilled. Provisions are made at the time of sale for warranties, royalties and estimated product returns. For hardware products for which the software is deemed not to be incidental, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). Service Revenue is recognized rateably on a monthly basis when the service is provided. In instances where the Company bills the customer prior to performing the service, the prepayment is recorded as deferred revenue. Software Revenue from licensed software is recognized at the inception of the licence term and in accordance with SOP 97-2. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period such items are delivered or services are provided. Technical support contracts extending beyond the current period are recorded as deferred revenue. Non-recurring engineering contracts Revenue is recognized as specific contract milestones are met. The attainment of milestones approximates actual performance. Shipping and handling costs Where they can be reasonably attributed to certain revenue, shipping and handling costs are included in Cost of sales, otherwise they are included in Selling, Marketing and Administration. (p) Research and development The Company is engaged at all times in research and development work. Research and development costs, other than capital asset acquisitions, are charged as an operating expense of the Company as incurred, unless they meet the criteria for deferral under Canadian GAAP. (q) Government assistance Government assistance towards research and development expenditures is received as grants from Technology Partnerships Canada and in the form of investment tax credits on account of eligible scientific research and experimental development expenditures. Investment tax credits are recorded when there is reasonable assurance that the Company will realize the investment tax credits. Assistance related to the acquisition of capital assets used for research and development is credited against the cost of the related capital assets and all other assistance is credited against related expenses, as incurred. 10 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP (r) Earnings (loss) per share Earnings (loss) per share is calculated based on the weighted average number of shares outstanding during the year. The treasury stock method is used for the calculation of the dilutive effect of stock options and common share purchase warrants. (s) Stock-based compensation plan The Company has a stock-based compensation plan, which is described in note 11(b). The options are granted with an exercise price equal to the fair market value of the shares on the day of grant of the options. Previously, under Canadian GAAP, for any stock option with an exercise price that was less than the market price on the date of grant, the difference between the exercise price and the market price on the date of grant was recorded as compensation expense ("intrinsic value based method"). The Company grants stock options at the fair market value of the shares on the day preceding the date of the grant of the options. Consequently, no compensation expense was recognized. In November, 2003, CICA Handbook Section 3870 was amended to provide three different transitional provisions which allow for the adoption of fair value based accounting for stock options. The Company has elected the prospective method of adoption for Canadian GAAP purposes effective for the year ended February 28, 2004. In accordance with CICA 3870, the Company has recorded stock-based compensation expense for all grants issued during the current year. In addition, proforma stock-based compensation expense is calculated on all grants issued during the prior year. The disclosures in the following table show the Company's net income (loss) and earnings (loss) per share on a proforma basis using the fair value method, as determined by the Black-Scholes pricing model, amortizing the indicated value over the vesting period of the underlying option on a straight-line basis:
For the year ended February 28, March 1, 2004 2003 ---------------------------------- Net income (loss) - as reported $ 47,547 $ (148,664) Stock-based compensation included in reported net income 2,890 - Total stock-based employee compensation expense determined under fair value based method subsequent to implementation of CICA 3870 (4,334) (1,370) ---------------------------------- Net income (loss) - proforma $ 46,103 $ (150,034) ================================== Proforma earnings (loss) per common share: Basic $ 0.58 $ (1.93) Diluted $ 0.56 $ (1.93) Weighted average number of shares (000's): Basic 79,650 77,636 Diluted 82,905 77,636
11 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP The weighted average fair value of options granted during the year was calculated using the Black-Scholes option-pricing model with the following assumptions: For the year ended February 28, March 1, 2004 2003 -------------------------- Number of options granted (000's) 1,574 956 -------------------------- Weighted average Black-Scholes value $ 16.57 $ 8.58 of each option Assumptions: Risk free interest rate 3.0% 4.5% Expected life in years 4.0 3.5 Expected dividend yield 0% 0% Volatility 70% 70% (t) Warranty The Company estimates its warranty costs at the time of revenue recognition based on historical warranty claims experience and records the expense in Cost of sales. The warranty accrual balance is reviewed quarterly to assess whether 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 estimates. 3. RECENTLY ISSUED PRONOUNCEMENTS The CICA approved CICA Handbook Section 3110 Asset Retirement Obligations. This standard requires the Company to record the fair value of a liability for an asset retirement in the period in which it is incurred. This Section should be applied for fiscal years beginning on or after December 31, 2003 with earlier adoption encouraged. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations. In December, 2001, the Accounting Standards Board of the CICA issued AcG 13, Hedging Relationships, which is required to be adopted for annual periods beginning after July 1, 2003. This guideline establishes standards for documenting and assessing the effectiveness of hedging activities. The Company has adopted this standard in the current year. Adoption of the standard does not have a material impact on the Company's consolidated financial statements. In 2003, the CICA issued AcG 15 Consolidation of Variable Interest Entities to provide guidance for applying the principles in CICA Handbook Section 1590 Subsidiaries to certain entities. Although the CICA is contemplating amendments to AcG 15, it is expected to be effective for the Company's 2006 fiscal year. The Company will review the impact of AcG 15, if any, on the Company's consolidated financial statements when the CICA issues the amended AcG 15. In July 2003, the CICA issued Handbook Section 1100, Generally Accepted Accounting Principles. This section establishes standards for financial reporting in accordance with Canadian GAAP. This section describes what constitutes Canadian GAAP, and provides guidance on alternative sources to consult when selecting accounting policies and determining appropriate disclosures where the primary sources of 12 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Canadian GAAP are silent. The adoption of this standard does not have a material impact on the Company's consolidated financial statements. 4. CASH, CASH EQUIVALENTS AND INVESTMENTS (a) Cash and cash equivalents comprise: February 28, March 1, 2004 2003 ------------------------------------ Balances with banks $ 2,644 $ 16,603 Money market investment funds 9,657 2,635 Certificates of deposit 255,199 111,664 Repurchase agreements 110,622 15,868 Government sponsored enterprise notes - 9,999 Commercial paper and corporate notes 778,297 183,912 ------------------------------------ $ 1,156,419 $ 340,681 ==================================== Cash and cash equivalents carry weighted average yields of 1.0% as at February 28, 2004 (March 1, 2003 - 1.3%). (b) As of February 28, 2004, the contractual maturities of investments in debt securities were as follows (at carrying value): One to Five Years $ 218,203 Five to Ten Years 25,026 No Single Maturity Date 90,044 ------------------ $ 333,273 ================== Securities with no single maturity date reflect asset-backed securities. Investments are carried at amortized cost and comprise: 13 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP
Unrecognized Amortized Holding Holding Cost Gains Losses Fair Value --------------------------------------------------------------- As at February 28, 2004 Government sponsored enterprise notes $ 80,086 $ 300 $ - $ 80,386 Asset-backed securities 90,043 1,350 (16) 91,377 Corporate bonds 163,144 4,397 (19) 167,522 --------------------------------------------------------------- $ 333,273 $ 6,047 $ (35) $ 339,285 =============================================================== As at March 1, 2003 Government sponsored enterprise notes $ 15,110 $ 83 $ - 15,193 Asset-backed securities 69,002 770 (59) 69,713 Corporate bonds 105,918 3,365 - 109,283 --------------------------------------------------------------- $ 190,030 $ 4,218 $ (59) $ 194,189 ===============================================================
Investments carry weighted average yields of 3.1% as at February 28, 2004 (March 1, 2003 - 3.8%). 5. INVENTORY Inventory is comprised as follows: February 28, March 1, 2004 2003 ----------------------------- Raw materials $ 35,119 $ 34,446 Work in process 8,713 8,205 Finished goods 7,679 4,286 Provision for excess and obsolete inventory (8,675) (15,662) ----------------------------- $ 42,836 $ 31,275 ============================= 6. CAPITAL ASSETS Capital assets are comprised of:
February 28, 2004 Accumulated Net book Cost amortization value ------------------------------------------------- Land $ 8,850 $ - $ 8,850 Buildings and leaseholds 67,148 10,047 57,101 Information technology 91,950 47,605 44,345 Furniture, fixtures, tooling and equipment 78,955 41,542 37,413 ------------------------------------------------- $ 246,903 $ 99,194 $ 147,709 =================================================
14 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP
March 1, 2003 Accumulated Net book Cost amortization value --------------------------------------------------- Land $ 8,850 $ - $ 8,850 Buildings and leaseholds 66,254 6,671 59,583 Information technology 81,319 31,893 49,426 Furniture, fixtures, tooling and equipment 70,961 26,245 44,716 --------------------------------------------------- $ 227,384 $ 64,809 $ 162,575 ===================================================
During fiscal 2004, the Company recorded additional amortization expense of $1,318 with respect to certain capital assets no longer used by the Company; $618 of this is included in Cost of sales. Also during fiscal 2004 the Company recorded additional amortization expense of $1,392 related to start-up costs with respect to its European operations, as it was determined that there was no remaining value to these costs as a result of changes in the underlying operations. For the year ended February 28, 2004, amortization expense related to capital assets was $36,459 (March 1, 2003 - $28,449; March 2, 2002 - $16,996). 7. INTANGIBLE ASSETS Intangible assets are comprised of:
February 28, 2004 Accumulated Net book Cost amortization value ----------------------------------------------------- Acquired technology $ 10,012 $ 3,746 $ 6,266 Licences 52,216 15,299 36,917 Patents 25,156 4,070 21,086 ----------------------------------------------------- $ 87,384 $ 23,115 $ 64,269 ===================================================== March 1, 2003 Accumulated Net book Cost amortization value ----------------------------------------------------- Acquired technology $ 10,012 $ 1,684 $ 8,328 Licences 28,370 1,085 27,285 Patents 16,751 885 15,866 ----------------------------------------------------- $ 55,133 $ 3,654 $ 51,479 =====================================================
Acquired technology includes all licences and patents acquired by the Company as a result of the acquisitions described in note 8. Licenses include licenses or agreements that the Company has negotiated with third parties upon use of the third parties' technology. Patents include all costs necessary to record a patent, as well as defense costs when there is perceived infringement by the Company of those patents. 15 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP During fiscal 2004, the Company recorded provisions amounting to $4,327 against the carrying values of certain of its intangible assets as a result of changes in the Company's current and intended product offerings. Of this amount $2,750 is included in Cost of sales with the balance of $1,577 recorded as Amortization expense. Such charges reflect management's assessment of net realizable values. For the year ended February 28, 2004, amortization expense related to intangible assets was $19,462 (March 1, 2003 - $2,848; March 2, 2002 - $574). Total additions to intangible assets in 2004 were $32,252 (2003 - $38,324). 8. ACQUISITIONS During fiscal 2004, the purchase price related to one of the fiscal 2003 acquisitions was revised, resulting in a reduction to goodwill of $479 and a return of consideration. During fiscal 2003 the Company completed four acquisitions. Effective June 2002, the Company purchased the assets of a company whose proprietary software code provides capabilities to facilitate foreign language input and display on handheld products. Effective July 2002, the Company acquired 100% of the common shares of a company that will offer a secure solution for viewing email attachments with BlackBerry Wireless Handhelds. Effective August 2002, the Company acquired 100% of the common shares of a company that has software products which enable wireless access to major email systems including corporate, proprietary and POP3/IMAP4 using a handheld device. In addition, effective September 2002, the Company also acquired 100% of the common shares of a small company with expertise and technology related to wireless networks. The results of the acquirees' operations have been included in the consolidated financial statements for the periods from each respective closing date to February 28, 2004. On October 31, 2001, the Company acquired 100% of the outstanding common shares of a company for its technology and expertise in the wireless delivery of rich graphical content. This company develops Java-based media platforms for wireless devices. The results of this company's operations have been included in the consolidated financial statements since October 31, 2001. The value of the 387,353 common shares issued in 2002 was determined based on the average of the market price of the Company's common shares over the two-day period before and after the terms of the acquisition were agreed to. 16 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. March 1, March 2, 2003 2002 ----------------------------- Assets purchased Capital assets $ 317 $ - Acquired technology 7,326 2,685 Goodwill 16,193 14,395 ----------------------------- 23,836 17,080 ----------------------------- Liabilities assumed - non-cash working capital 1,275 1,046 Deferred income tax liability 357 - ----------------------------- 1,632 1,046 ---------------------------- Net non-cash assets acquired 22,204 16,034 Cash acquired 117 152 ----------------------------- Net assets acquired $ 22,321 $ 16,186 ============================= Consideration Cash $ 22,107 $ 9,861 Assumption of acquiree long-term debt 214 - Capital stock - 6,325 ----------------------------- $ 22,321 $ 16,186 ============================= The acquisitions were accounted for using the purchase method whereby assets acquired and liabilities assumed were recorded at their 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. Of the $16,193 of goodwill acquired during fiscal 2003, $13,316 is expected to be deductible for tax purposes. If the four fiscal 2003 acquisitions had occurred on March 1, 2001, the Company's unaudited proforma consolidated revenue would have increased by $nil for the year ended February 28, 2004 (March 1, 2003 - $226; March 2, 2002 - $816) and the unaudited proforma net income (loss) would have been $51,829 (March 1, 2003 - ($151,520); March 2, 2002 - ($35,906)). 17 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP 9. INCOME TAXES The difference between the amount of the provision for (recovery of) income taxes and the amount computed by multiplying income before taxes by the statutory Canadian rate is reconciled as follows:
February 28, March 1, March 2, 2004 2003 2002 ----------------------------------------------------------- Expected Canadian tax rate 36.5% 38.3% 41.2% Expected income tax provision (recovery) $ 15,822 $ (44,990) $ (15,785) Differences in income taxes resulting from: Manufacturing and processing activities (900) 3,951 1,801 Increase in valuation allowance 29,100 61,969 1,530 Non-deductible portion of unrealized capital losses - - 1,013 Non-deductible stock option expense 1,055 - - Foreign exchange 3,820 (1,408) 1,112 Foreign tax rate differences (45,088) 7,352 (3,192) Enacted tax rate changes (9,743) 4,835 2,960 Other differences 1,734 (603) 698 ----------------------------------------------------------- $ (4,200) $ 31,106 $ (9,863) =========================================================== February 28, March 1, March 2 , 2004 2003 2002 ----------------------------------------------------------- Income (loss) before income taxes: Canadian $ 26,419 $ (102,954) $ (46,845) Foreign 16,928 (14,604) 8,503 ----------------------------------------------------------- $ 43,347 $ (117,558) $ (38,342) ===========================================================
The provision for income taxes consists of the following:
February 28, March 1, March 2, Provision for (recovery of) income taxes: 2004 2003 2002 ----------------------------------------------------------- Current Canadian $ 484 $ (8) $ 6,756 Foreign (4,684) 3,521 302 Future Canadian - 27,593 (17,283) Foreign - - 362 ----------------------------------------------------------- $ (4,200) $ 31,106 $ (9,863) ===========================================================
18 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Future income tax assets and liabilities consist of the following temporary differences: February 28, March 1, 2004 2003 -------------------------------- Assets Financing costs $ 13,170 $ 4,398 Non-deductible reserves 3,492 6,622 Research and development incentives 45,735 24,897 Tax losses 37,428 29,938 Capital assets 18,252 2,614 Other tax carryforwards 204 186 --------------------------------- 118,281 68,655 Less: valuation allowance 118,281 68,655 -------------------------------- Net future income tax assets $ - $ - ================================ During the third quarter of fiscal 2003, the Company determined that a significant degree of uncertainty existed regarding the realization of the future tax assets and that a full valuation allowance was required. As a result of the increased valuation allowance, future tax assets of $118,281 have not been recognized for accounting purposes as of February 28, 2004. This amount remains available for use against taxes on future profits. The Company will continue to evaluate and examine the valuation allowance on a regular basis and as future uncertainties are resolved, the valuation allowance may be adjusted accordingly. At February 28, 2004, the Company has the following net operating loss carryforwards and tax credits which are not recognized for accounting purposes and are scheduled to expire in the following years: Net operating Investment tax losses credits ---------------------------------- 2005 $ 21 $ - 2006 1,259 490 2007 4,046 726 2008 12,860 2,385 2009 93,675 11 2010 976 13 2011 27 5,524 2012 - 9,306 2014 - 11,017 2020 102 - 2021 255 - 2022 359 - Indefinite carryforward 1,080 - ---------------------------------- $ 114,660 $ 29,472 ================================== The Company has not provided for Canadian future income taxes or foreign withholding taxes that would apply on the distribution of the earnings of its non-Canadian subsidiaries, since these earnings are intended to be reinvested indefinitely. 19 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP 10. LONG-TERM DEBT At February 28, 2004 long-term debt consisted of mortgages with interest rates ranging between 6.88% and 7.90%, against which certain land and buildings are pledged as collateral. All mortgage loans are denominated in Canadian dollars and mature on March 1, 2009. Interest expense on long-term debt for the year was $771 (March 1, 2003 - $852; March 2, 2002 - $661). The scheduled long-term debt principal payments for the fiscal years 2005 through to maturity are as follows: For the year ending 2005 $ 193 2006 207 2007 223 2008 239 2009 256 March 1, 2009 5,315 ------------------ $ 6,433 ================== At February 28, 2004 the Company had demand credit facilities totalling $92.6 million (March 1, 2003 - $19.9 million). As at February 28, 2004 the Company had drawn on its available credit facilities in the amount of $64.1 million in the form of letters of credit, including $48.0 million related to litigation as described in note 16. $28.5 million of available credit facilities remains unused. The operating line portion of the facilities bear interest on the outstanding balance at the bank's prime rate. Any balance owing is due on demand and is subject to a general security agreement, general assignment of book debts and the pledge of specific securities in the Company's investment portfolio. 11. CAPITAL STOCK (a) Share capital The Company is authorized to issue an unlimited number of non-voting, redeemable, retractable Class A common shares, an unlimited number of voting common shares and an unlimited number of non-voting, cumulative, redeemable, retractable preferred shares. There are no Class A common shares or preferred shares outstanding. 20 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP The following details the changes in issued and outstanding common shares and common share purchase warrants for the three years ended February 28, 2004:
Number of Common Shares Outstanding (000's) --------------------------------------------------- Common share Common purchase shares warrants Total --------------------------------------------------- Balance as at February 28, 2001 78,271 75 78,346 Exercise of options 503 - 503 Common shares issued on acquisition of subsidiary 387 - 387 Common shares repurchased pursuant to Commmon Share Purchase Program (370) - (370) --------------------------------------------------- Balance as at March 2, 2002 78,791 75 78,866 Exercise of options 320 - 320 Common shares repurchased pursuant to Common Share Purchase Program (1,939) - (1,939) --------------------------------------------------- Balance as at March 1, 2003 77,172 75 77,247 Exercise of options 3,129 - 3,129 Exercise of warrants 39 (75) (36) Common shares issued pursuant to public share offering 12,075 - 12,075 --------------------------------------------------- Balance as at February 28, 2004 92,415 - 92,415 ===================================================
21 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP
Share Capital -------------------------------------------------------- Common share Common purchase shares warrants Total -------------------------------------------------------- Balance as at February 28, 2001 $ 890,644 $ 370 $ 891,014 Exercise of options 1,491 - 1,491 Common shares issued on acquisition of subsidiary 6,325 - 6,325 Common shares repurchased pursuant to Common Share Purchase Program (4,080) - (4,080) -------------------------------------------------------- Balance as at March 2, 2002 894,380 370 894,750 Exercise of options 1,155 - 1,155 Common shares repurchased pursuant to Common Share Purchase Program (21,528) - (21,528) -------------------------------------------------------- Balance as at March 1, 2003 874,007 370 874,377 Exercise of options 49,771 - 49,771 Exercise of warrants 370 (370) - Common shares pursuant to public share offering, net of related costs 905,240 - 905,240 -------------------------------------------------------- Balance as at February 28, 2004 $ 1,829,388 $ - $ 1,829,388 =======================================================
On January 22, 2004 the Company completed a public share issue of 12.1 million common shares for proceeds of $905,240, net of related issue costs of $39,629. During fiscal 2004, the Company's share purchase warrants were redeemed and converted into common shares. On October 3, 2002 the Company's Board of Directors approved the purchase during the subsequent 12 months of up to as many as 3.8 million common shares, which approximated 5% of the common shares outstanding at that date. All common shares purchased by RIM have been cancelled. No shares have been re-purchased under this Common Share Purchase Program during fiscal 2004. During the year ended March 1, 2003 the Company repurchased 1.9 million common shares pursuant to its Common Share Purchase Program at a cost of $24,502. The amount paid in excess of the carrying value of the common shares of $2,974 was charged to retained earnings. All common shares repurchased by the Company pursuant to its Common Share Purchase Program have been cancelled. 22 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP During the year ended March 2, 2002 the Company repurchased 370 common shares pursuant to its Common Share Purchase Program at a cost of $5,525. The amount in excess of the carrying value of the common shares of $1,445 was charged to retained earnings. All common shares repurchased by the Company pursuant to its Common Share Purchase Program have been cancelled. (b) Stock option plan The Company has an incentive stock option plan for all of its directors, officers and employees. The option exercise price is the fair market value of the Company's common shares at the date of grant. These options generally vest over a period of five years after which they are exercisable for a maximum of ten years after the grant date. The Company's shareholders approved the reconstitution of the stock option plan at the Annual General Meeting on August 12, 2002. The reconstitution increased the number of common shares available for the grant of options by 2,756. As at February 28, 2004, there were 8,009 options outstanding with exercise prices ranging from $2.43 to $119.80. Options issued and outstanding for 2,640 shares are vested as at February 28, 2004 and there are 3,040 shares available for future grants under the plan. A summary of option activity since February 28, 2001 is shown below: Options Outstanding -------------------------------- Weighted Number Average (in 000's) Exercise Price -------------------------------- Balance as at February 28, 2001 7,920 $ 17.04 Granted during the year 2,978 $ 21.83 Exercised during the year (515) $ 3.71 Forfeited during the year (297) $ 27.92 -------------------------------- Balance as at March 2, 2002 10,086 $ 18.81 Granted during the year 956 $ 16.41 Exercised during the year (320) $ 3.88 Forfeited during the year (621) $ 31.35 -------------------------------- Balance as at March 1, 2003 10,101 $ 18.29 Granted during the year 1,574 $ 30.34 Exercised during the year (3,129) $ 14.12 Forfeited during the year (537) $ 27.95 -------------------------------- BALANCE AS AT FEBRUARY 28, 2004 8,009 $ 21.64 ================================ 23 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP The weighted average characteristics of options outstanding as at February 28, 2004 are as follows:
Options Outstanding (000's) Options Exercisable (000's) - ----------------------------------------------------------------------------------------------------------- Range of exercise Number Weighted Weighted Number Weighted prices Outstanding at average average Outstanding average February 28, remaining life exercise February 28, exercise 2004 in years price 2004 price - ----------------------------------------------------------------------------------------------------------- $2.43 - $3.62 1,192 2.7 $ 2.66 1,143 $ 2.62 $3.88 - $5.66 945 1.4 4.13 401 4.23 $5.93 - $8.78 498 2.0 7.75 191 7.78 $8.97 - $13.12 291 4.4 10.38 62 9.95 $13.55 - $20.29 2,010 5.4 16.40 74 16.87 $20.39 - $30.51 1,459 4.8 23.24 244 22.94 $30.68 - $45.51 423 4.3 37.41 69 37.65 $46.55- $68.48 669 3.6 51.97 314 50.95 $70.44 and over 522 5.4 80.33 142 87.00 - ----------------------------------------------------------------------------------------------------------- Total 8,009 4.0 $ 21.64 2,640 $ 16.90 ===========================================================================================================
(c) Stock options As described in note 1 (s), the Company has adopted the provisions of CICA 3870 which provides for the expensing of stock-based compensation. In accordance with this standard, stock-based compensation expense of $2,890 has been recognized and has been credited to stock options. Of this amount, $117, $2,064, and $709 has been included in Cost of sales, Research and development, and Selling, marketing and administration respectively. 12. COMMITMENTS AND CONTINGENCIES (a) Lease commitment The Company is committed to annual lease payments under operating leases for premises as follows: Real Estate Equipment Total For the year ending 2005 $ 1,952 $ 213 $ 2,165 2006 1,842 75 1,917 2007 1,526 15 1,541 2008 1,382 - 1,382 2009 1,003 - 1,003 Thereafter 6,082 - 6,082 ------------------------------------------------ $ 13,787 $ 303 $ 14,090 ================================================ 24 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP For the period ended February 28, 2004, the Company incurred rental expense of $2,197 (March 1, 2003 - $2,272; March 2, 2002 - $1,857). (b) Other Litigation In addition to the NTP matter discussed in note 16, the Company has been involved in patent litigation with Good Technology, Inc. ("GTI"). The Company and GTI (the "parties") entered into a agreement on March 26, 2004 whereby the parties have signed a settlement and license agreement and will consequently dismiss a series of pending lawsuits between the two companies. The companies have entered a royalty-bearing license agreement whereby RIM will receive a lump-sum settlement during the first quarter of fiscal 2005 as well as ongoing quarterly royalties. The lump-sum settlement amount was received subsequent to February 28, 2004 and will be credited to Intangible Assets in the first quarter of fiscal 2005, as a recovery of previously capitalized costs incurred by the Company. The settlement of this dispute will not be material to the Company's financial position. The Company is involved in a dispute with Inpro II Licensing, S.a.r.l. ("Inpro") in connection with two of Inpro's patents. In a Delaware action, Inpro is seeking a preliminary and permanent injunction and an unspecified amount of damages in relation to one of its patents. The matter is currently scheduled for trial in September 2005 and fact discovery must be complete by October 29, 2004. The Company filed an action for a declaratory judgement of non-infringement with respect to one of the two patents, which action is the subject of a motion to stay or transfer to Delaware. Although the Company has conducted a thorough review of the relevant patents held by Inpro, and is of a view that it does not infringe on such patents, at this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to all of the Inpro actions is not determinable. Accordingly, no amount has been recorded in these financial statements as at February 28, 2004. From time to time, the Company is involved in other claims in the normal course of business. Management regularly assesses such claims and when matters are considered likely to result in a material exposure and the amount of a related loss is quantifiable, a provision for loss is 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 for which the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable. 13. PRODUCT WARRANTY The Company estimates its warranty costs at the time of revenue recognition, based on historical warranty claims experience, and records the expense 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 estimates. The change in the Company's accrued warranty obligations from March 2, 2002 to February 28, 2004 was as follows: 25 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Accrued warranty obligations at March 2, 2002 $ 3,355 Actual warranty experience during 2003 (577) 2003 warranty provision 5,465 Adjustments for changes in estimate (3,073) ---------------- Accrued warranty obligations at March 1, 2003 5,170 Actual warranty experience during 2004 (3,946) 2004 warranty provision 8,648 Adjustments for changes in estimate (626) ---------------- Accrued warranty obligations at February 28, 2004 $ 9,246 ================ 14. GOVERNMENT ASSISTANCE The Company has previously entered into two project development agreements with Technology Partnerships Canada ("TPC"), which provide partial funding for certain research and development projects. Funding from TPC for the first agreement ("TPC-1") totalled $3,900 and was repayable in the form of royalties of 2.2% on gross product revenues resulting from the project. The Company was obligated to pay royalties on all project revenues up to February 28, 2003, after which time the royalty base is expanded to include revenues from certain additional products, and royalties will continue to be paid up to a maximum of $6,100. The Company has recorded $2,530 on account of TPC royalty repayment expense with respect to TPC-1 (March 1, 2003 - $925; March 2, 2002 - $1,575). The final payment with respect to TPC-1 is expected to be made during the first quarter of fiscal 2005. The second agreement with TPC is a three-year research and development project ("TPC-2") under which total contributions from TPC will be a maximum of $23,300 (the "contribution"). The Company is of the view that it has fulfilled all prerequisite funding conditions and has recorded all of the contribution commitment as at February 28, 2004 and no further TPC funding reimbursements are due to RIM under TPC-2. This contribution will be repayable to TPC in the form of royalties of 2.2% on gross product revenues resulting from project and then other revenues. The Company is obligated to pay royalties on all project revenues up to February 28, 2007, after which time the royalty base is expanded to include revenues from certain additional products. Royalties will continue to be paid up to a maximum of $39,300. No amounts have been recorded with respect to TPC-2 since the conditions for repayment have not yet been met. The Company also qualifies for investment tax credits ("ITC's") on eligible expenditures on account of scientific research and experimental development. The Company has not recorded the benefit of ITC's in fiscal 2003 or fiscal 2004, as in the Company's judgement, the Company does not have reasonable assurance that the Company will realize the ITC's. 26 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP Government assistance, which includes both TPC funding and ITC's, has been applied to reduce gross research and development expense as follows:
For the year ended February 28, March 1, March 2, 2004 2003 2002 ----------------------------------------------- Gross research and development $ 64,702 $ 64,952 $ 49,517 Government funding - 9,036 12,071 ----------------------------------------------- Net research and development $ 64,702 $ 55,916 $ 37,446 ===============================================
15. RESTRUCTURING CHARGES During the third quarter of 2003, as part of the implementation of a plan to improve operating results (the "Plan"), the Company recorded restructuring charges that included the termination of employees, related costs and the closure and exit of certain leased facilities. The 254 employees identified in connection with the workforce reduction component of the Plan were dismissed on or about November 12, 2002. The cost of the employees was previously included as part of Cost of sales, Selling, marketing and administration, and Research and development. The Company has yet to vacate a leased facility deemed redundant as part of the Plan. The Company expects to complete the remaining elements of the Plan during fiscal 2005. The pre-tax financial components of the Plan are summarized below:
Balances as at Balances as at March 1, 2003 Cash Payments Write-offs February 28, 2004 -------------------------------------------------------------------------- Workforce reduction and related costs $ 648 $ (648) $ - $ - Excess facilities and capital assets 1,924 (431) (230) 1,263 -------------------------------------------------------------------------- $ 2,572 $ (1,079) $ (230) $ 1,263 ========================================================================== Balances as at Balances as at November 12, 2002 Cash Payments Write-offs March 1, 2003 -------------------------------------------------------------------------- Workforce reduction and related costs $ 4,056 $ (3,408) $ - $ 648 Excess facilities and capital assets 2,494 (63) (507) 1,924 -------------------------------------------------------------------------- $ 6,550 $ (3,471) $ (507) $ 2,572 ==========================================================================
The balance of the restructuring provision of $1,263 as at February 28, 2004 is included in Accrued liabilities on the Consolidated Balance Sheets. 27 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP 16 . LITIGATION AWARD The Company is the defendant in a patent litigation matter brought by NTP, Inc. ("NTP") alleging that the Company infringed on eight of NTP's patents (the "NTP matter"). During fiscal 2003 the Company recorded quarterly charges in the second, third and fourth quarters with respect to the NTP matter totalling $58.2 million to fully provide for enhanced compensatory damages, current and estimated future costs with respect to ongoing legal and professional fees, plaintiff's attorney fees and prejudgment interest. On May 23, 2003 the Court ruled on the issues of enhanced compensatory damages, plaintiff's attorney fees and certain other matters. During the first quarter of fiscal 2004, the Company recorded an expense of $7.5 million to provide for additional estimated enhanced compensatory damages and estimated prejudgment interest, for the period March 2, 2003 to May 31, 2003. The $6.9 million attributable to enhanced compensatory damages was classified as Restricted cash on the Consolidated Balance Sheets as at May 31, 2003 and the Company funded the $6.9 million into a cash escrow bank account subsequent to the end of the first quarter of fiscal 2003, as required by the Court. On August 5, 2003, the United States District Court for the Eastern District of Virginia (the "Court") ruled on NTP's request for an injunction with respect to RIM continuing to sell the BlackBerry solution (handhelds, software and service) in the United States as well as entered judgment with respect to several previously announced monetary awards issued in favour of NTP. The Court granted NTP the injunction requested; however, the Court then immediately granted RIM's request to stay the injunction sought by NTP pending the completion of RIM's appeal (to the Court of Appeals for the Federal Circuit). In its Final Order dated August 5, 2003, the Court awarded monetary damages of $53.7 million (the "Final Order") as of May 31, 2003, comprising the following: o Enhanced compensatory damages $ 47.5 million o Plaintiff attorney fees $ 4.2 million o Prejudgement interest $ 2.0 million -------------- o Total $ 53.7 million -------------- The Company had previously recorded provisions for all of the above components of the Final Order in fiscal 2003 and the first quarter of fiscal 2004. The Company filed its Notice to Appeal on August 29, 2003. During the second quarter of fiscal 2004, the Company recorded an expense of $5.7 million to provide for enhanced compensatory damages for the period June 1, 2003 to August 30, 2003, postjudgment interest for the period August 6, 2003 to August 30, 2003 and other net adjustments. The Company funded $7.6 million, attributable to the enhanced compensatory damages amount, into an escrow account subsequent to the end of the second quarter of fiscal 2004. The Company sought a stay of the Court proceedings in light of the fact that the patents in suit are the subject of re-examination proceedings by the U.S. Patents and Trademark Office ("PTO"). On November 4, 2003, the United States Court of Appeals for the Federal Circuit ("Appellate Court") denied the Company's request for a stay of the appeal proceedings. 28 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP On November 26, 2003, the Company filed its opening appeal brief with the Appellate Court. During the third quarter of fiscal 2004, the Company recorded an expense of $9.2 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended November 29, 2003. NTP filed its Responding Brief on or about January 2, 2004. The Company filed its Reply Brief on February 3, 2004. During the fourth quarter of fiscal 2004, the Company recorded an expense of $12.9 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended February 28, 2004. The $12.9 million attributable to enhanced compensatory damages was classified as Restricted cash on the Consolidated Balance Sheets as at February 28, 2004. The Company funded the $12.9 million into an escrow account subsequent to the end of the third quarter of fiscal 2004. For the year ended February 28, 2004, the Company has recorded a total provision of $35.2 million with respect to the NTP matter, representing enhanced compensatory damages, postjudgment interest for the period August 6, 2003 to February 28, 2004 and other net adjustments. As at the end of the Company's current fiscal year, the likelihood of any further loss and the ultimate amount of loss, if any, were not reasonably determinable. Consequently, no additional amounts, from those described above, have been provided for as NTP litigation expenses as at February 28, 2004. The actual resolution of the NTP matter may materially differ from the estimates as at February 28, 2004 as a result of future appellate court rulings at the conclusion of the appeals process, therefore potentially causing future quarterly or annual financial reporting to be materially affected, either adversely or favourably. 17. WRITE-DOWN OF INVESTMENTS Periodically the Company undertakes a review of the carrying value of companies in which it holds investments. Based on such reviews, the Company determines whether impairment in the carrying values of its investments has occurred. The Company further determines whether such declines are other than temporary in nature. The Company wrote down the value of its investments in fiscal 2002 by $5,350. 29 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP 18. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share.
For the year ended February 28, March 1, March 2, 2004 2003 2002 ---------------------------------------------------- Numerator for basic and diluted earnings (loss) per share available to common stockholders $ 47,547 $ (148,664) $ (28,479) ==================================================== Denominator for basic earnings (loss) per share - weighted average shares outstanding (000's) 79,650 77,636 78,467 Effect of dilutive securities: Employee stock options 3,408 - - ---------------------------------------------------- Denominator for basic and diluted earnings (loss) per share - weighted average shares outstanding (000's) 83,058 77,636 78,467 ==================================================== Earnings (loss) per share Basic $ 0.60 $ (1.91) $ (0.36) Diluted $ 0.57 $ (1.91) $ (0.36)
Stock options and share purchase warrants were excluded from the diluted (loss) per share figures for 2003 and 2002, as they were anti-dilutive. 19. SUPPLEMENTAL INFORMATION (a) Statement of cash flows The following summarizes interest and income taxes paid:
For the year ended February 28, March 1, March 2, 2004 2003 2002 --------------------------------------------------- Interest paid during the year $ 770 $ 852 $ 779 Income taxes paid (refunded) during the year (196) 1,070 967
30 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP (b) Accrued liabilities The following items are included in the accrued liabilities balance: As at February 28, March 1, 2004 2003 ------------------------------ Airtime purchase costs 17,486 17,109 Marketing costs 13,081 8,116 Warranty 9,246 5,170 Royalties 10,042 4,558 Other 20,683 19,462 ------------------------------ $ 70,538 $ 54,415 ============================== (c) Other information Advertising expense, which includes media, agency and promotional expenses equal to $18,206 (March 1, 2003 - $15,079; March 2, 2002 - $18,549) is included in Selling, marketing and administration expense. Selling, marketing and administration expense for the fiscal year includes a foreign currency exchange gain of $2,156 (March 1, 2003 - gain of $293; March 2, 2002 - loss of $1,042). 20. FINANCIAL INSTRUMENTS Values of financial instruments outstanding at fiscal year-ends were as follows: February 28, 2004 ---------------------------------------------- ASSETS (LIABILITIES) Notional Carrying Estimated Amount Amount Fair Value Cash and cash equivalents $ - $ 1,156,419 $ 1,156,419 Investments - 333,273 339,285 Long-term debt - (6,433) (6,808) Currency forward contracts 208,850 (69) 5,399 March 2, 2003 ---------------------------------------------- ASSETS (LIABILITIES) Notional Carrying Estimated Amount Amount Fair Value Cash and cash equivalents $ - $ 340,681 $ 340,681 Investments - 190,030 194,189 Long-term debt - (11,919) (12,273) Currency forward contracts 69,416 377 3,816 31 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP For certain of the Company's financial instruments, including trade receivables, other receivables, accounts payable and accrued liabilities, the carrying amounts approximate their respective fair values due to their short maturities. The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency the U.S. dollar. The majority of the Company's revenues in fiscal 2004 are transacted in U.S. dollars. Portions of the revenues are denominated in 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 all manufacturing overhead, are incurred primarily in Canadian dollars. At February 28, 2004 approximately 2% of cash and cash equivalents, 26% of trade receivables and 18% of accounts payable and accrued liabilities are denominated in foreign currencies (March 1, 2003 - 14%, 13%, and 8%, respectively). These foreign currencies include the Canadian Dollar, British Pound, Euro, Australian Dollar, Hong Kong Dollar, and Japanese Yen. To mitigate this risk, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments. The Company does not purchase or hold any derivative instruments for speculative purposes. To hedge exposures relating to anticipated foreign currency transactions, the Company has entered into forward foreign exchange contracts to sell U.S. dollars and purchase Canadian dollars, to sell Euro and purchase U.S. dollars, and to sell British Pounds and purchase U.S. dollars. These contracts have been designated as cash flow hedges, and are recognized in earnings in the period in which the cash flows from the associated hedged transaction affect earnings. The maturity dates of these instruments range from March 2004 through to February 2007. These cash flow hedges were fully effective at February 28, 2004. As at February 28, 2004, the notional gain on these forward contracts was approximately $5,468 (March 1, 2003 - $3,439; March 2, 2002 - loss of $1,478). To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into forward foreign exchange 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 recognized in earnings each period, offsetting the change in the U.S. dollar value of the hedged liability. The maturity dates of these instruments range from March, 2004 through to March, 2005. As at February 28, 2004, a loss of $69 was recorded in respect of these instruments (March 1, 2003 - gain of $419; March 2, 2002 - $nil). This amount was included with Selling, marketing and administration. During the prior year, to satisfy short-term cash requirements, the Company entered into a forward exchange contract to purchase U.S. dollars and sell Canadian dollars with a notional value of U.S. $1.3 million. The contract carried an exchange rate of U.S. $1.00 equals Canadian $1.5313, and it matured on March 3, 2003. Due to the short-term nature of this contract it was not designated for hedge accounting and a loss of $42 was recorded in respect to this instrument. 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 minimizes this risk by limiting counterparties to major financial institutions and by continuously monitoring their creditworthiness. As at February 28, 2004 the maximum exposure to a single counter-party was 43% of outstanding derivative instruments (March 1, 2003 - 37%). The Company is exposed to market and credit risk on its investment portfolio. The Company limits this risk by investing only in liquid, investment grade securities and by limiting exposure to any one entity or 32 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP group of related entities. As at February 28, 2004, no single issuer represented more than 4% of the total cash, cash equivalents and investments (March 1, 2003 - no single issuer represented more than 5% of the total cash, cash equivalents and short-term investments). 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. The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. The Company establishes an allowance for doubtful accounts that corresponds to the specific credit risk of its customers, historical trends and economic circumstances. The allowance as at February 28, 2004 is $ 2,379 (March 1, 2003 - $2,331). While the Company sells its products and services to a variety of customers, two customers comprised 24%, and 10% of trade receivables as at February 28, 2004 (2003 - three customers comprised 17%, 16% and 14%). Additionally, two customers comprised 15% and 13% of the Company's sales (March 1, 2003 - one customer comprised 12%). 21. 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. Selected financial information is as follows: February 28, March 1, February 28, Sales 2004 2003 2002 ---------------------------------------------------- Canada $ 54,847 $ 21,788 $ 21,381 United States 446,000 255,466 239,702 Other 93,769 29,478 32,970 ---------------------------------------------------- $ 594,616 $ 306,732 $ 294,053 ==================================================== Sales Canada 9.2% 7.1% 7.3% United States 75.0% 83.3% 81.5% Other 15.8% 9.6% 11.2% ---------------------------------------------------- 100.0% 100.0% 100.0% ==================================================== 33 Research In Motion Limited Notes To The Consolidated Financial Statements For The Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 In thousands of United States dollars, except share and per share data, and except as otherwise indicated prepared in accordance with Canadian GAAP
February 28, March 1, February 28, Revenue mix 2004 2003 2002 ------------------------------------------------------ Handhelds $ 343,154 $ 122,711 $ 160,198 Service 171,215 129,332 88,880 Software 47,427 21,655 12,874 Other 32,820 33,034 32,101 ------------------------------------------------------ $ 594,616 $ 306,732 $ 294,053 ====================================================== Capital, intangible assets and goodwill Canada $ 209,766 $ 207,221 United States 28,206 30,759 Foreign 4,115 6,662 ----------------------------------- $ 242,087 $ 244,642 =================================== Total assets Canada $ 333,811 $ 258,833 United States 1,555,151 585,375 Foreign 36,335 15,401 ----------------------------------- $ 1,925,297 $ 859,609 ===================================
34 DOCUMENT 3 RESEARCH IN MOTION LIMITED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2004 COMPARED TO THE FISCAL YEAR ENDED MARCH 1, 2003 June 8, 2004 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with the audited consolidated financial statements and the accompanying notes (the "Consolidated Financial Statements") of Research In Motion Limited ("RIM" or the "Company") for the fiscal year ended February 28, 2004. The Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). To the extent applicable to the Consolidated Financial Statements, these principles conform in all material respects with Canadian generally accepted accounting principles ("Canadian GAAP"), except as described in the "Commentary on Material Differences in the Company's Fiscal 2004 Financial Statements under U.S. GAAP compared to Canadian GAAP". The comparative information in this MD&A conforms with U.S. GAAP. For fiscal years prior to 2004, the Company's consolidated financial statements and the accompanying notes have been prepared separately in accordance with U.S. GAAP reconciled to Canadian GAAP and also in accordance with Canadian GAAP reconciled to U.S. GAAP. All financial information herein 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. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including statements relating to: o the Company's plans to continue to invest in core research and development to enhance the BlackBerry product portfolio; o the Company's plans to foster new foster new international business relationships with global carriers and to extend its enterprise market leadership into the prosumer market; o the Company's plans to license the BlackBerry platform to key handset vendors through its BlackBerry Connect program and to strengthen its infrastructure to support subscriber growth; o RIM's revenue and earnings expectations; o anticipated growth in RIM's subscriber base; o monthly average revenue per unit for wireless service; and o future product developments and releases. 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, 2 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, which are discussed in greater detail in the "Risk Factors" sections of RIM's public filings with the United States Securities and Exchange Commission and securities regulators in Canada: o possible failure of RIM's appeal of the judgment in the NTP litigation; o third-party claims for infringement of intellectual property rights by RIM; o RIM's ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products; 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; o reliance on third-party suppliers; o effective management of growth and ongoing development of RIM's service and support operations; o a breach of RIM's security measures, or an inappropriate disclosure of confidential information; o competition; o reduced spending by customers due to the uncertainty of economic and geopolitical conditions; o RIM's dependence on a limited number of significant customers; o fluctuations in quarterly financial results; o reliance on third-party network developers; o foreign exchange risks; o changes in interest rates affecting RIM's investment portfolio and the creditworthiness of its investment portfolio; o the continued quality and reliability of RIM's products; o RIM's ability to manage production facilities efficiently; o risks associated with foreign operations; o dependence on key personnel; o continued use and expansion of the Internet; o regulation, certification and health risks; o control of RIM shares by management; and o tax liabilities 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. 3 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 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 email, phone, SMS (short message service), organizer, Internet and intranet-based corporate data applications. RIM also licenses its technology to industry leading handset and software vendors to enable these companies to offer wireless data services using the BlackBerry Enterprise Server ("BES") and BlackBerry Web Client ("BWC"). RIM technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity. RIM's products, services and embedded technologies are used by thousands of organizations around the world and are commercially available through a variety of offerings including the BlackBerry wireless platform, the RIM wireless handheld product line, technical support services and the BlackBerry Connect Licensing Program. 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 generated by its BlackBerry wireless solution, which includes sales of wireless handhelds, software and service. The BlackBerry wireless solution provides users with a wireless extension of their work and personal email accounts, including Microsoft Outlook, Lotus Notes, MSN/Hotmail and POP3/ISP email. In addition, the BlackBerry wireless solution, through its Mobile Data Service functionality, allows users to access data from their enterprise and intranet applications using the BlackBerry architecture. RIM generates revenues from sales of BlackBerry Wireless Handhelds, which provide users with the ability to send and receive full-length wireless messages and data from a wearable device. RIM's BlackBerry Wireless Handhelds also incorporate a personal organizer including contact and calendar functionality, which can synchronize with the user's desktop PIM system, and web-browsing capability. RIM has developed various models of its BlackBerry Wireless Handhelds, including models that integrate a mobile phone with other wireless data and PIM features. RIM generates revenues from service billings to its BlackBerry subscriber base. The Company's service revenue is generated in one of two forms: (i) a monthly infrastructure access fee to a carrier/distributor where a carrier or other distributor bills the BlackBerry subscriber; or (ii) a monthly service fee charged by RIM directly to end-customers where RIM has purchased airtime from certain carriers and resold it directly to BlackBerry subscribers. 4 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 An important part of RIM's BlackBerry wireless solution is the software that is installed on desktop personal computers and/or at the corporate server level. Software revenues include fees from (i) licensing RIM's BlackBerry Enterprise Server ("BES") software; (ii) client access licenses ("CALs"), which are charged for each subscriber using the BlackBerry service; and (iii) maintenance and upgrades to software. BlackBerry Connect is RIM's licensing program that enables mobile device manufacturers to equip their handsets with the integrated ability to connect to a BES and RIM's BlackBerry Web Client-related services using the same wireless architecture and infrastructure that is being used by RIM's BlackBerry handheld customers. The BlackBerry Connect licensing program, which has become an increasingly important component of the Company's strategy, is designed to help provide a more open, global platform and address the distinct needs of end users, IT departments, carriers and licensees. Revenues are also generated from sales of radio modems to original equipment manufacturers ("OEMs"), non-recurring engineering services ("NRE"), accessories, technical support and repair and maintenance programs. CRITICAL ACCOUNTING POLICIES AND ESTIMATES GENERAL The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect 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 have been reviewed and discussed with the Company's Audit Committee. REVENUE RECOGNITION The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. In addition to this general policy, the following are the specific revenue recognition policies for each major category of revenue. 5 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 HARDWARE Revenue from the sale of BlackBerry handhelds is recognized when title is transferred to the customer and all significant contractual obligations that affect the customer's final acceptance have been fulfilled. Provisions are made at the time of sale for warranties, royalties and estimated product returns. For hardware products for which the software is deemed not to be incidental, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). If the historical data the Company uses to estimate product returns does not properly reflect future returns, these estimates could be revised. Future returns, if they were higher than estimated, would result in a reduction of revenue. SERVICE Revenue is recognized rateably on a monthly basis when the service is provided. In instances where the Company bills the customer prior to performing the service, the prepayment is recorded as deferred revenue. SOFTWARE Revenue from licensed software is recognized at the inception of the licence term and in accordance with SOP 97-2. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period that such items are delivered or that services are provided. OTHER Revenue from the sale of OEM radios and accessories is recognized when title is transferred to the customer and all significant contractual obligations that affect the customer's final acceptance have been fulfilled. Provisions are made at the time of sale for applicable warranties, royalties and estimated product returns. Technical support contracts extending beyond the current period are recorded as deferred revenue. Revenue for non-recurring engineering contracts is recognized as specific contract milestones are met. The attainment of milestones approximates actual performance. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND BAD DEBT EXPENSE The Company evaluates the collectibility of its trade receivables based upon a combination of factors. RIM regularly reviews and updates its information with respect to significant receivable balances. RIM has historically been dependent on a small but increasing number of significant customers and on large complex contracts with respect to sales of the majority of its products. The Company expects this trend of increasing trade receivables balances with its large customers to continue as it sells an increasing number of its products and service relay access through network carriers and resellers rather than directly. 6 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 When the Company becomes aware of a specific customer's inability to meet its financial obligations to the Company, (such as in the case of bankruptcy filings or material deterioration in the customer's operating results or financial position, payment experiences and existence of credit risk insurance), RIM records a specific bad debt provision to reduce the customer's related trade receivable to its estimated net realizable value. If circumstances related to specific customers change, the Company's estimates of the recoverability of trade receivables could be further adjusted. INVENTORY Raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable 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 RIM operates is subject to rapid changes in technology and customer demand. The Company performs a detailed assessment of inventory each reporting period, which includes a review of, among other factors, demand requirements, component part purchase commitments, 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. VALUATION OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL In connection with the business acquisitions completed by the Company in fiscal 2002 and 2003, the Company identified and estimated the fair value of assets acquired including certain identifiable intangible assets other than goodwill and liabilities assumed in the acquisitions. Any excess of the purchase price over the estimated fair value of the identified net assets was assigned to goodwill. The Company assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The largest component of Intangible assets is licenses. Licenses are amortized over the lesser of five years or on a per unit basis based upon the anticipated number of units to be sold during the terms of the license agreements. See " 7 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 Results of Operations - Amortization". Unforeseen events, changes in circumstances and market conditions, and material differences in the value of licenses and other long-lived and intangible assets and goodwill due to changes in estimates of future cash flows could affect the fair value of the Company's assets and require an impairment charge. Intangible assets are reviewed quarterly to determine if any events have occurred that would warrant further review. In the event that a further assessment is required, the Company will analyze estimated future cash flows. INCOME TAXES The Company's deferred tax asset balance represents temporary differences between the financial reporting and tax bases of assets and liabilities, including research and development costs and incentives, financing costs, capital assets, non-deductible reserves, operating loss carryforwards and capital loss carryforwards, net of valuation allowances. The Company evaluates its deferred tax assets based upon cumulative losses in recent years, estimated future earnings as per internal forecasts for periods in which temporary differences become deductible as well as prudent and feasible tax planning strategies. The Company records a valuation allowance to reduce deferred income tax assets to the amount that is more likely than not to be realized. In fiscal 2003, the Company determined that it was no longer able to satisfy the "more likely than not" standard under U.S. GAAP with respect to the valuation of its deferred income tax asset balance and recorded a full valuation allowance against the entire deferred tax asset balance. Should RIM determine that it is more likely than not that it is able to realize its deferred tax assets in the future in excess of its net recorded amount, net income would increase in the reporting periods when such determinations are made. LITIGATION The Company is currently involved in patent litigation where it is seeking to protect its patents (see note 12(b) to the Consolidated Financial Statements and "Events Subsequent to February 28, 2004 Year End - Settlement of Patent Litigation") and where it is seeking to defend itself in a patent infringement suit (the "NTP matter" - see note 16 to the Consolidated Financial Statements). RIM capitalizes costs incurred for patent litigation where it is seeking to protect its patents. If the Company is not successful in such litigation, RIM will review its related intangible asset balance, including previously capitalized litigation costs, for impairment. RIM has recorded liabilities for the estimated probable costs for the resolution of the NTP matter, based upon court rulings to date and the Company's current and estimated future costs with respect to ongoing legal fees. The actual resolution of the NTP matter may differ materially from these estimates as a result of future rulings issued by the appellate courts at the conclusion of the appeals process, or by the United States Patent and Trademark Office ("PTO") in connection with its re-examinations of the five patents-in-suit. Future 8 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 quarterly or annual financial reporting may be materially affected, either adversely or favorably, as a result of future rulings by the courts and the PTO. WARRANTY The Company provides for the estimated costs of product warranties at the time revenue is recognized. BlackBerry handheld products are generally covered by a time-limited warranty for varying periods of time. The Company's warranty obligation is affected by product failure rates, material usage and other related production costs and service delivery expense. The Company's estimates of costs are based upon historical experience and expectations of future conditions when it is introducing new BlackBerry handheld products. To the extent that the Company experiences increased warranty activity or increased costs associated with servicing those obligations, revisions to the estimated warranty liability would be required. INVESTMENTS Investments classified as available for sale under SFAS 115 are carried at market value. Changes in market values are accounted for through accumulated other comprehensive income, until such investments mature or are sold. Investments with maturities in excess of one year include those categorized as available-for-sale and held-to-maturity for accounting purposes. The Company does not exercise significant influence with respect to any of these investments. In the event that a decline in the fair value of a held-to-maturity investment occurs and the decline in value is considered to be other than temporary, an appropriate write-down would be recorded. Summary Results of Operations - Fiscal 2004, Fiscal 2003 and Fiscal 2002 The following table sets forth certain consolidated statement of operations and consolidated balance sheet data for the periods indicated: 9 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004
As at and for the Fiscal Year Ended February March 1, Change March 2, 28, 2004 2003 2004/2003 2002 --------------------------------------------------------- | (in thousands, except for per share amounts) | | | | Revenue | $ 594,616 | $ 306,732 | $ 287,884 | $ 294,053 | | | | Cost of sales | 323,365| 187,289 | 136,076 | 209,525 |------------|---------------|-------------|-------------- Gross margin | 271,251| 119,443 | 151,808 | 84,528 |------------|---------------|-------------|-------------- | | | | Expenses | | | | Research and development | 62,638| 55,916 | 6,722 | 37,446 Selling, marketing and | | | | administration | 108,492| 104,978 | 3,514 | 93,766 Amortization | 27,911| 22,324 | 5,587 | 11,803 | -----------|---------------|-------------|-------------- Sub-total | 199,041| 183,218 | 15,823 | 143,015 | -----------|---------------|-------------|-------------- | | | | Restructuring charges | -| 6,550 | (6,550) | - Litigation | 35,187| 58,210 | (23,023) | - |------------|---------------|-------------|-------------- Restructuring and litigation | 35,187| 64,760 | (29,573) | - |------------|---------------|-------------|-------------- | 234,228| 247,978 | (13,750) | 143,015 |------------|---------------|-------------|-------------- | | | | Income (loss) from operations | 37,023| (128,535) | 165,558 | (58,487) | | | Investment income | 10,606| 11,430 | (824) | 25,738 | | | | Write-down of investments | -| - | - | (5,350) |------------|---------------|-------------|-------------- | | | | Income (loss) before income taxes | 47,629| (117,105) | 164,734 | (38,099) | | | | Provision for (recovery of) | | | | income tax | (4,200| 31,752 | 35,952 | (9,778) |------------|---------------|-------------|-------------- Net income (loss) | $ 51,829| $(148,857) | $ 200,686 | $ (28,321) |============| ============= |=============| ============ | | | | Earnings (loss) per share | | | | Basic | $ 0.65| $ (1.92) | $ 2.57 | $ (0.36) |============| ============= |=============| ============ | | | | Diluted | $ 0.62| $ (1.92) | $ 2.54 | $ (0.36) |============| ============= |=============| ============ | | | | Total assets | $1,931,378| $ 861,656 | $1,069,722 | $ 946,958 Total liabilities | 215,115| 154,875 | 60,240 | 72,890 Shareholders' equity | $1,716,263| $ 706,781 | $1,009,482 | $ 874,068 ------------ -------------
10 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 The following table sets forth certain consolidated statement of operations data expressed as a percentage of revenue for the periods indicated:
Fiscal Year Ended February March 1, Change March 2, 28, 2004 2003 2004/2003 2002 ---------------------------------------------------- | | | | Revenue | 100.0% | 100.0% | - | 100.0% | | | | Cost of sales | 54.4% | 61.1% | (6.7%) | 71.3% |-----------|-------------|-------------|------------ Gross margin | 45.6% | 38.9% | 6.7% | 28.7% | | | | Expenses | | | | | | | | Research and development | 10.5% | 18.2% | (7.7%) | 12.7% Selling, marketing and | | | | administration | 18.2% | 34.2% | (16.0%) | 31.9% Amortization | 4.8% | 7.3% | (2.5%) | 4.0% |-----------|-------------|-------------|------------ | | | | Sub-total | 33.5% | 59.7% | (26.2%) | 48.6% | | | | Restructuring charges | - | 2.1% | (2.1%) | - | | | | Litigation | 5.9% | 19.0% | (13.1%) | - |-----------|-------------|-------------|------------ Restructuring and litigation | 5.9% | 21.1% | (15.2%) | - |-----------|-------------|-------------|------------ | 39.4% | 80.8% | (41.4%) | 48.6% |-----------|-------------|-------------|------------ | | | | Income (loss) from operations | 6.2% | (41.9%) | 48.1% | (19.9%) | | | | Investment income | 1.8% | 3.7% | (1.9%) | 8.8% | | | | Write-down of investments | - | - | - | (1.8%) |-----------|-------------|-------------|------------ | | | | Income (loss) before income taxes | 8.0% | (38.2%) | 46.2% | (12.9%) | | | | Provision for (recovery of) | | | | income tax | (0.7%) | 10.3% | 11.0% | (3.3%) |-----------|-------------|-------------|------------ Net income (loss) | 8.7% | (48.5%) | 57.2% | (9.6%) | ==========| ========== | ========= | ========== ----------- -------------
EXECUTIVE SUMMARY As the above tables highlight, the Company's results were significantly improved in fiscal 2004 compared to fiscal 2003. The four primary fiscal 2004 "profit drivers" that contributed to this improvement are discussed below. A more comprehensive analysis of these factors is contained in "Results of Operations". 11 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 The Company's net income increased by $200.7 million to $51.8 million or $0.65 basic earnings per share and $0.62 diluted earnings per share in fiscal 2004, compared to a net loss of $148.9 million or a loss per share of $1.92 in fiscal 2003. PRIMARY FISCAL 2004 PROFIT DRIVERS REVENUE AND RESULTING GROSS MARGIN GROWTH Revenue increased by $287.9 million to $594.6 million in fiscal 2004 from $306.7 million in the preceding year. The number of BlackBerry handhelds sold increased by 643,000 to 920,000 in fiscal 2004 compared to 277,000 in fiscal 2003. Factoring in a 15.8% reduction in average selling price ("ASP"), handheld revenues increased by $220.4 million to $343.2 million in fiscal 2004. Service revenue increased by $41.9 million to $171.2 million in fiscal 2004, consistent with the Company's increase in BlackBerry subscribers during the year. Software revenue increased by $25.8 million to $47.4 million in fiscal 2004. Gross margin increased to $271.3 million or 45.6% in fiscal 2004 compared to $119.4 million or 38.9% in fiscal 2003. The increase of 6.7% in the gross margin ratio to 45.6% in fiscal 2004 was as a result of the Company's cost reduction efforts for its BlackBerry handhelds and service revenue streams, increased manufacturing cost efficiencies as a result of the increase in handheld volumes and favorable changes in BlackBerry handheld product mix. RESEARCH AND DEVELOPMENT, SELLING, MARKETING AND ADMINISTRATION AND AMORTIZATION The Company was focused on prudent cost management and maximizing the financial net income "leverage" to be obtained from the increase in revenue and gross margin. Research and development, Selling, marketing and administration and Amortization expenses increased by $15.8 million or 8.6% to $199.0 million in fiscal 2004 from $183.2 million in the preceding year. The 8.6% increase in fiscal 2004 was substantially below the increases in revenue and gross margin of 93.9% and 127.1%, respectively. RESTRUCTURING AND LITIGATION CHARGES Restructuring (nil in fiscal 2004) and litigation expenses totalled $35.2 million, a reduction of $29.6 million from $64.8 million in fiscal 2003. INCOME TAX (RECOVERY)/PROVISION The Company recorded an income tax recovery of $4.2 million in fiscal 2004 versus an income tax provision of $31.8 million in fiscal 2003, resulting in an increase of $36.0 million in fiscal 2004 net income. 12 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED The following table sets forth RIM's unaudited quarterly consolidated results of operations data for each of the eight most recent quarters ended February 28, 2004. The information has been derived from RIM's unaudited consolidated financial statements that, in management's opinion, have been prepared on a basis consistent with the Consolidated Financial Statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of information when read in conjunction with the Consolidated Financial Statements. RIM's quarterly operating results have varied substantially in the past and may vary substantially in the future. Accordingly, the information below is not necessarily indicative of results for any future quarter.
Fiscal 2004 Year Fourth Third Second First Quarter Quarter Quarter Quarter ------------------------------------------------------------------- (in thousands, except per share data) Revenue $ 210,585 $ 153,891 $ 125,679 $ 104,461 Gross margin (1) 103,476 72,398 52,968 42,409 Research and development, Selling, marketing and administration (1), and Amortization (1) 56,889 49,132 47,388 45,632 Litigation (2) 12,874 9,201 5,653 7,459 Investment income (3,624) (2,264) (2,222) (2,496) --------------- --------------- --------------- --------------- Income (loss) before income taxes 37,337 16,329 2,149 (8,186) Recovery of income taxes (4) (4,200) - - - --------------- --------------- --------------- --------------- Net income (loss) $ 41,537 $ 16,329 $ 2,149 $ (8,186) =============== =============== =============== =============== Earnings (loss) per share Basic $ 0.49 $ 0.21 $ 0.03 $ (0.11) Diluted $ 0.46 $ 0.20 $ 0.03 $ (0.11) --------------------------------------------------------------------------------------------------------- | Research and development $ 17,877 $ 15,673 $ 14,701 $ 14,387 | | | | Selling, marketing and | | administration (1) 32,310 26,233 25,423 24,526 | | | | Amortization (1) 6,702 7,226 7,264 6,719 | | --------------- --------------- --------------- --------------- | | $ 56,889 $ 49,132 $ 47,388 $ 45,632 | | =============== =============== =============== =============== | ---------------------------------------------------------------------------------------------------------
13 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004
Fiscal 2003 Year Fourth Third Second First Quarter Quarter Quarter Quarter ------------------------------------------------------------------- (in thousands, except per share data) Revenue $ 87,502 $ 74,176 $ 73,418 $ 71,636 Gross margin (1) 35,894 28,988 29,097 25,463 Research and development, Selling, marketing and administration (1), and Amortization (1) 43,948 52,434 44,872 41,964 Restructuring charge (3) - 6,550 - - Litigation (2) 25,540 27,760 4,910 - Investment income (2,498) (2,901) (2,877) (3,154) --------------- --------------- --------------- --------------- Loss before income taxes (31,096) (54,855) (17,807) (13,347) Provision for (recovery of) income taxes (4) - 37,937 (3,575) (2,610) --------------- --------------- --------------- --------------- Net loss $(31,096) $(92,792) $(14,232) $(10,737) =============== =============== =============== =============== Loss per share - basic and diluted $ (0.40) $ (1.21) $ (0.18) $ (0.14) ------------------------------------------------------------------------------------------------------- | Research and development $ 12,535 $ 16,843 $ 13,913 $ 12,625 | | | | Selling, marketing and | | administration (1) 24,979 29,979 25,213 24,807 | | | | Amortization (1) 6,434 5,612 5,746 4,532 | | --------------- --------------- --------------- --------------- | | $ 43,948 $ 52,434 $ 44,872 $ 41,964 | | =============== =============== =============== =============== | -------------------------------------------------------------------------------------------------------
Notes: - ----- (1) During the third quarter of fiscal 2004, the Company reclassified costs associated with its BlackBerry network operations centre and its technical and service support operations centre to Cost of sales. Such costs were previously included in Selling, marketing and administration expense. In addition, amortization expense related to manufacturing operations and BlackBerry network operations has been reclassified to Cost of sales. Such amortization was previously included in Amortization expense. All comparative amounts were reclassified to conform to this new presentation. There were no adjustments to previously reported net income (loss) as a result of any of these reclassifications. 14 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 (2) See "Results of Operations - Litigation" and note 16 to the Consolidated Financial Statements. (3) See "Results of Operations - Restructuring Charges" and note 15 to the Consolidated Financial Statements. (4) See "Results of Operations - Income Taxes" and note 9 to the Consolidated Financial Statements. EVENTS SUBSEQUENT TO FEBRUARY 28, 2004 YEAR END SETTLEMENT OF PATENT LITIGATION Good Technology, Inc. ("GTI") and the Company entered into an agreement on March 26, 2004 whereby the parties also signed a settlement and license agreement and a series of pending lawsuits between the two companies were consequently dismissed. The parties have also signed a royalty-bearing license agreement whereby RIM will receive a lump-sum settlement during the first quarter of fiscal 2005 as well as ongoing quarterly royalties. The lump-sum settlement amount was received subsequent to February 28, 2004 and will be credited to Intangible Assets in the first quarter of fiscal 2005, as a recovery of costs incurred by the Company. The settlement will resolve this matter and the settlement amounts will not be material to the Company's consolidated financial statements. STOCK SPLIT On April 7, 2004, the Company announced that its Board of Directors had approved a two-for-one stock split of the Company's outstanding common shares. The stock split will be implemented by way of a stock dividend whereby shareholders will receive one common share of the Company for each common share held. The stock dividend will be payable on June 4, 2004 to shareholders of record at the close of business on May 27, 2004. The total number of common shares outstanding as of February 28, 2004 was 92.4 million. Adjusting for the stock split, the total number of common shares outstanding will be 184.8 million. 15 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 RESULTS OF OPERATIONS FISCAL YEAR ENDED FEBRUARY 28, 2004 COMPARED TO THE FISCAL YEAR ENDED MARCH 1, 2003 REVENUE Revenue for fiscal 2004 was $594.6 million, an increase of $287.9 million or 93.9% from $306.7 million in the preceding year. A comparative breakdown of the significant revenue streams is set forth in the following table:
Change Fiscal 2004 Fiscal 2003 2004/2003 -------------------------------------------------------------------------------- | | | | Number of | | | | handhelds sold | 920,000 | 277,000 | 643,000 232.1% | |============== |=============== |==========================| | | | | Average selling price | $ 373 | $ 443 | $ (70) (15.8%) | |============== |=============== |==========================| | | | | Handhelds | $ 343,154 57.7%| $ 122,711 40.0% | $ 220,443 179.6% | Service | 171,215 28.8%| 129,332 42.2% | 41,883 32.4% | Software | 47,427 8.0%| 21,655 7.1% | 25,772 119.0% | Other | 32,820 5.5%| 33,034 10.7% | (214) (0.6%) | |-------------------------|----------------------------|--------------------------|- | $ 594,616 100.0%| $ 306,732 100.0% | $ 287,884 93.9% | |=========================|============================|==========================| ------------------------- -------------------------
Handheld product revenues increased by $220.4 million or 179.6% to $343.2 million or 57.7% of consolidated revenues in fiscal 2004 compared to $122.7 million or 40.0% of consolidated revenues in fiscal 2003. This increase in handheld revenues over the prior year is primarily attributable to a volume increase of 232.1% or 643,000 units to approximately 920,000 from approximately 277,000 in the prior year. The Company has launched a number of new products in the current fiscal year which operate on the GPRS, iDEN and CDMA20001X wireless networks that were not available in the prior year, which account for the volume growth. This volume increase was partially offset by a 15.8% reduction in the ASP in fiscal 2004 to $373 per unit from $443 per unit in fiscal 2003. The Company's ASP is influenced by the impact of product mix in two primary ways: (i) the percentage of new BlackBerry 6200 monochrome /7200 color handheld series versus the 6500/6700 and 7500/7700 handheld series; and (ii) the mix between monochrome and color BlackBerry handhelds as color BlackBerry handhelds are more expensive. The Company experienced a continuing increase in the percentage of color products in its overall handheld sales mix during fiscal 2004 and expects this trend to continue in fiscal 2005. The Company also expects its ASP for handhelds to continue to 16 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 decline in fiscal 2005 as a result of the continuing shift to lower priced products and new product introduction plans, some of which are expected to have lower price points. Service revenue increased $41.9 million or 32.4% to $171.2 million and comprised 28.8% of consolidated revenue in fiscal 2004, compared to $129.3 million in fiscal 2003. BlackBerry subscribers doubled to approximately 1,069,000 from approximately 534,000 as at March 1, 2003. The Company has also experienced some net migration of its direct ("full email") BlackBerry subscriber base to its carrier customers ("net migration"), for whom RIM provides lower priced "relay" services. The Company expects this net migration to continue in fiscal 2005. The monthly average revenue per unit ("ARPU") for service is expected to continue to decline in fiscal 2005 as a result of the aforementioned migration and also because the continuing net increase in the BlackBerry subscriber base represents subscribers for which RIM receives a monthly relay access fee from its carrier customers, rather than subscribers who purchase full e-mail service directly from RIM. Software revenues include fees from licensed BES software, CALs, maintenance and upgrades. Software revenues increased $25.8 million to $47.4 million in fiscal 2004 from $21.7 million in fiscal 2003, generally in line with the growth in handheld revenues during fiscal 2004. Other revenue, which includes OEM radios, accessories, non-warranty repairs, NRE, technical support and other, was effectively stable at $32.8 million in fiscal 2004 compared to $33.0 million in fiscal 2003. Growth in revenue streams such as accessories, OEM, technical support and non-warranty repair was offset by a reduction in NRE revenue as the result of the completion of a large NRE contract during the latter part of fiscal 2003. GROSS MARGIN Gross margin increased to $271.3 million or 45.6% of revenue in fiscal 2004, compared to $119.4 million or 38.9% of revenue in the preceding year. The net improvement in consolidated gross margin percentage was primarily attributable to higher margins for handheld products and service revenues. The increase in handheld products was due to reductions in component part costs, improved manufacturing efficiencies and component parts usage as a result of the higher volume of handhelds produced in fiscal 2004 over fiscal 2003 and the impact of handheld product mix, including the increasing percentage of color (versus monochrome) in the handheld product sales mix. The Company's service margin increased as the Company has realized cost efficiencies in its network operations infrastructure as a result of the increase in BlackBerry subscribers, for which the Company receives relay access fees from its carrier customers and the resulting gross margin. 17 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 RESEARCH AND DEVELOPMENT Gross research and development expenditures decreased by $2.3 million to $62.6 million in fiscal 2004 compared to $65.0 million in fiscal 2003. Research and development expenditures consist primarily of salaries and benefits for technical personnel, costs of related engineering materials, and software tools and maintenance fees. Compensation expense increased by $2.8 million as a result of the increase in employees supporting the Company's growth and new BlackBerry handheld product development. This increase in employment costs was more than offset by a reduction in external professional services in fiscal 2004 compared to fiscal 2003 expenditures. Net research and development expenditures increased by $6.7 million to $62.6 million or 10.5% of revenue in fiscal 2004 compared to $55.9 million or 18.2% of revenue in fiscal 2003. In the prior year's comparable fiscal period, the Company recorded $9.0 million in contributions from its development agreement with Technology Partnerships Canada ("TPC") as a reduction in gross research and development costs. The Company had recorded all of the contributions due to RIM from TPC over the term of the agreement as at March 1, 2003. The Company qualifies for investment tax credits ("Tics") on eligible expenditures on account of scientific research and experimental development. The Company has not recorded the benefit of Tics in fiscal 2004 or fiscal 2003. See "Income Taxes" and note 9 to the Consolidated Financial Statements. SELLING, MARKETING AND ADMINISTRATION Selling, marketing and administration expenses increased $3.5 million or 3.3% to $108.5 million for fiscal 2004 compared to $105.0 million for fiscal 2003. As a percentage of revenue, Selling, marketing and administration expenses declined to 18.2% in fiscal 2004 compared to 34.2% in the preceding year, primarily due to the increase in fiscal 2004 revenues over fiscal 2003. The net increase in Selling, marketing and administration expenses for fiscal 2004 was primarily attributable to marketing, advertising and promotion expenses. Other cost increases were for information technology support expenses, infrastructure and maintenance expenses, building maintenance and professional fees, including the costs of complying with the Sarbanes-Oxley Act of 2002 and similar Canadian regulatory initiatives. The cost increases were partially offset by a foreign exchange gain of $2.2 million in fiscal 2004, compared to a lesser foreign exchange gain of $0.3 million in fiscal 2003 (see note 20 to the Consolidated Financial Statements) and a reduction in bad debt expense. Compensation expense was approximately equal in fiscal 2004 compared to fiscal 2003 generally as a result of the Company's cost restructuring undertaken in November 2002. See "Restructuring Charge". 18 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 AMORTIZATION Amortization expense on account of certain capital and certain intangible assets increased by $5.6 million to $27.9 million for fiscal 2004 compared to $22.3 million for fiscal 2003. The increased amortization expense in fiscal 2004 reflects the impact of a full year's amortization expense with respect to capital and certain intangible asset expenditures during fiscal 2003 and also incremental amortization with respect to capital and certain intangible asset expenditures during fiscal 2004. Amortization expense with respect to capital assets employed in the Company's manufacturing operations and BlackBerry service operations was $7.9 million in fiscal 2004 compared to $7.7 million in fiscal 2003 and is charged to Cost of sales in the Consolidated Statements of Operations. See also note 6 to the Consolidated Financial Statements. The Company expects amortization expense with respect to capital assets employed in the Company's manufacturing operations and BlackBerry service operations to increase in fiscal 2005 compared to fiscal 2004 as it incurs capital expenditures necessary to expand its manufacturing and service business operations. Amortization expense with respect to licenses (a component of Intangible assets) is charged to Cost of sales and was $18.7 million in fiscal 2004 compared to $1.1 million in fiscal 2003. This increase is due generally to the increase in the number of handhelds sold in fiscal 2004 versus fiscal 2003. See "Revenue". Total amortization expense with respect to intangible assets was $19.5 million in fiscal 2004 compared to $2.8 million in fiscal 2003. See also note 7 to the Consolidated Financial Statements. RESTRUCTURING CHARGE During the third quarter of fiscal 2003, as part of the implementation of a plan to improve operating results, the Company recorded restructuring charges of $6.6 million included the costs associated with the termination of employees, related costs and the closure and exit of certain leased facilities. See note 15 to the Consolidated Financial Statements. LITIGATION See also the discussion of the NTP matter in "Liquidity and Capital Resources - NTP Litigation Funding" and note 16 to the Consolidated Financial Statements. The Company is the defendant in a patent litigation matter brought by NTP, Inc. ("NTP") alleging that the Company infringed on eight of NTP's patents (the "NTP matter"). On May 23, 2003, the Court ruled on the issues of enhanced compensatory damages, plaintiff's attorney fees and certain other matters. During the first quarter of fiscal 2004, the Company recorded an expense of $7.5 million to provide for additional estimated enhanced compensatory damages and 19 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 estimated prejudgment interest for the period March 2, 2003 to May 31, 2003. The $6.9 million attributable to enhanced compensatory damages was classified as Restricted cash on the Company's consolidated balance sheets as at May 31, 2003. On August 5, 2003, the United States District Court for the Eastern District of Virginia (the "Court") ruled on NTP's request for an injunction with respect to RIM continuing to sell the BlackBerry solution (handhelds, software and service) in the United States as well as entered judgment with respect to several previously announced monetary awards issued in favor of NTP. The Court granted NTP the injunction requested; however, the Court then immediately granted RIM's request to stay the injunction sought by NTP pending the completion of RIM's appeal to the Court of Appeals for the Federal Circuit (the "Court of Appeals"). In its Final Order dated August 5, 2003, the Court awarded monetary damages of $53.7 million (the "Final Order") as of May 31, 2003, comprising the following: o Enhanced compensatory damages $ 47.5 million o Plaintiff attorney fees $ 4.2 million o Prejudgement interest $ 2.0 million --------------- o Total $ 53.7 million --------------- The Company had previously recorded provisions for all of the above components of the Final Order in fiscal 2003 and the first quarter of fiscal 2004. The Company filed its Notice to Appeal on August 29, 2003. During the second quarter of fiscal 2004, the Company recorded an expense of $5.7 million to provide for enhanced compensatory damages for the period June 1, 2003 to August 30, 2003, postjudgment interest for the period August 6, 2003 to August 30, 2003 and other net adjustments. On November 26, 2003, the Company filed its opening appeal brief with the Court of Appeals. During the third quarter of fiscal 2004, the Company recorded an expense of $9.2 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended November 29, 2003. NTP filed its Responding Brief on January 5, 2004. The Company filed its Reply Brief on February 3, 2004. During the fourth quarter of fiscal 2004, the Company recorded an expense of $12.9 million to provide for additional estimated enhanced compensatory damages and estimated postjudgment interest, for the three months ended February 28, 2004. For the year ended February 28, 2004, the Company has recorded a total provision of $35.2 million with respect to the NTP matter, representing enhanced 20 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 compensatory damages, postjudgment interest for the period August 6, 2003 to February 28, 2004 and other net adjustments. The Company has restricted cash of $36.3 million in connection with the NTP matter as at February 28, 2004. As at the end of the Company's current fiscal year, the likelihood of any further loss and the ultimate amount of loss, if any, were not reasonably determinable. Consequently, no additional amounts, from those described above, have been provided for as NTP litigation expenses as at February 28, 2004. The actual resolution of the NTP matter may materially differ from the estimates as at February 28, 2004 as a result of future appellate court rulings at the conclusion of the appeals process, therefore potentially causing future quarterly or annual financial reporting to be materially affected, either adversely or favorably. During fiscal 2003 the Company recorded quarterly charges in the second, third and fourth quarters with respect to the NTP matter totalling $58.2 million to fully provide for enhanced compensatory damages, current and estimated future costs with respect to ongoing legal and professional fees, plaintiff's attorney fees and prejudgment interest. While the jury verdict, rulings, damages and other awards in the NTP matter remain subject to RIM's appeal, such appeal may not ultimately be successful. If the appeal is unsuccessful, the jury verdict in the NTP matter, as amended by the District Court, requiring RIM to pay a royalty in respect of all infringing revenues will have a material adverse effect on RIM's future results of operations and financial condition. In addition, if RIM is not able to overturn on the appeal the injunction, it may be unable to continue to provide BlackBerry service in the United States and to continue to use, sell or manufacture its wireless handhelds and software in, or to import them into, the United States, which is the largest market for RIM's products and services, unless RIM is able to negotiate a license with NTP at that time, which may not be available to RIM at a reasonable cost or at all. INVESTMENT INCOME Investment income decreased to $10.6 million in fiscal 2004 from $11.4 million in fiscal 2003. The decrease primarily reflects a reduction in the average interest rate yield on the investment portfolio during fiscal 2004 compared to fiscal 2003. Investment income increased for the period January 21, 2004 to February 28, 2004 as a result of the Company's equity offering of 12.1 million shares, which raised net proceeds of $905.2 million that were invested for that period. The Company expects its investment income to increase in fiscal 2005 compared to fiscal 2004 as a result of the inclusion of the $905.2 million in the Company's fiscal 2005 investment portfolio for the entire 2005 fiscal year. 21 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 INCOME TAXES The Company recorded a current tax recovery of $4.2 million or $0.05 per share diluted in the fourth quarter of fiscal 2004 to reflect the resolution of certain tax uncertainties previously provided for. The Company recorded nil deferred income tax expense in fiscal 2004 as the Company's income tax expense with respect to pre-tax income earned was offset by the utilization of previously unrecognized deferred tax assets. The Company maintained its previous determination that we still did not meet the "more likely than not" standard under U.S. and Canadian GAAP with respect to the realization of its deferred income tax asset balance and that a full valuation allowance is required as at February 28, 2004. For fiscal 2003, during the third quarter, the Company determined that it was no longer able to satisfy the "more likely than not" standard with respect to the realization of its deferred income tax asset balance. Consequently, the Company recorded an increase in its valuation allowance at the time, resulting then in a net provision for deferred income tax of $37.9 million. These net deferred tax assets have a substantially unlimited life and remain available for use against taxes on future profits. The Company will continue to evaluate and examine the valuation allowance on a regular basis and as uncertainties are resolved, the valuation allowance may be adjusted accordingly. See also Note 9 to the Consolidated Financial Statements. 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 (LOSS) Net income was $51.8 million, or $0.65 per share basic and $0.62 per share diluted, in fiscal 2004 versus a net loss of $148.9 million, or $1.92 per share basic and diluted, in the prior year. See "Executive Summary" for an analysis and reconciliation of the fiscal 2004 increase in net income and earnings per share. 22 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 LIQUIDITY AND CAPITAL RESOURCES Summary of Cash Flows The following table summarizes the Company's cash flows for the periods indicated: Fiscal 2004 Fiscal 2003 -------------- ------------- Net income (loss) $ 51,829 $ (148,857) Amortization 54,529 31,147 Deferred income taxes - 29,244 Working capital and other (42,523) 91,256 -------------- ------------- Cash flows from operating activities 63,835 2,790 Cash flows from financing activities 948,881 (23,961) Cash flows from investing activities (196,832) 21,396 Other (146) (20) -------------- ------------- Net increase in cash and cash equivalents $ 815,738 $ 205 ============== ============= Operating Activities For fiscal 2004, cash flow generated from operating activities was $63.8 million compared to $2.8 million in fiscal 2003. Net income plus amortization was $106.4 million for the current year. The majority of cash applied to cash working capital for the current fiscal year resulted from increases in trade receivables of $54.4 million (generally consistent with the Company's revenue growth), other receivables of $7.6 million and inventory of $11.6 million. These increases were partially offset by an increase in accounts payable of $17.0 million and accrued liabilities of $16.1 million. The increase in accrued litigation of $33.7 million is more than offset by the increase in restricted cash of $36.3 million, which relates to the Company's funding requirement to deposit funds into an escrow account with respect to the NTP matter. See "NTP Litigation Funding". Financing Activities During fiscal 2004, cash flow generated from financing activities was $948.9 million including $905.2 million in net proceeds from the Company's public offering of 12.1 million shares at $78.25 per share, and $49.8 million of proceeds upon the issuance of share capital related to the exercise of stock options. The Company repaid $6.1 million of debt in fiscal 2004. This compares to $24.0 million used in financing activities in the prior fiscal year, which was primarily for the buyback of 1.9 million common shares pursuant to the Company's Common Share Purchase Program. 23 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 Investing Activities For the current fiscal year, cash flow used for investing activities equalled $196.8 million, which included the acquisition of investments, net of proceeds on disposition, of $143.2 million, and the acquisitions of capital assets and intangible assets of $21.8 million and $32.3 million, respectively. For the prior fiscal year, cash flow generated by investing activities was $21.4 million. Uses included the acquisition of investments of $190.0 million, acquisitions of capital assets and intangible assets of $39.7 million and $31.0 million, respectively, and acquisitions of subsidiaries of $22.0 million. There were net proceeds from the sale of investments of $304.1 million. Cash and cash equivalents, short-term investments and investments increased by $959.6 million to $1,490.3 million as at February 28, 2004 from $530.7 million as at March 1, 2003. A comparative summary of cash and cash equivalents, short-term investments and investments is set out below. As At February 28, March 1, Change 2004 2003 2004/2003 ------------------------------------------------- Cash and cash equivalents $ 1,156,419 $ 340,681 $ 815,738 Short-term investments - - - Investments 333,886 190,030 143,856 ------------------------------------------------- Cash, cash equivalents, short-term investments and investments $ 1,490,305 $ 530,711 $ 959,594 ================================================= The majority of the Company's cash and cash equivalents and investments are denominated in U.S. dollars as at February 28, 2004. NTP Litigation Funding See also "Results of Operations - Litigation" and note 16 to the Consolidated Financial Statements. Commencing in the first quarter of fiscal 2004 and on a quarterly basis thereafter, the Company is required to deposit the current period's enhanced compensatory damages amount (the "quarterly deposit") into a bank escrow account, 30 days subsequent to the end of the quarter. The quarterly deposit is currently calculated as 8.55% of infringing revenues, plus postjudgment interest. These quarterly deposits will be set aside in escrow until the appeals process is complete. The quarterly deposit fundings for the first three quarters, and the $12.9 million obligation for the fourth quarter of fiscal 2004, are reflected as Restricted cash on the Company's consolidated balance sheet as at February 28, 2004. 24 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 The Company has obtained a $70 million Letter of Credit Facility (the "Facility") for operating requirements. Approximately $48 million of the Facility has been utilized in order to satisfy a portion the Company's liability and funding obligation with respect to the NTP matter, as described in note 16 to the Consolidated Financial Statements. During the third quarter of fiscal 2004 and pending the completion of the appeals process, the Company posted, with the approval of the Court, a $48 million Standby Letter of Credit ("LC") to guarantee the monetary damages of the Court's final order. The LC amount of $48 million excludes the fiscal 2004 quarterly deposit obligations into the escrow bank account. The Company has pledged specific investments as security for the Facility. The Company's fiscal 2004 quarterly deposit obligations total $36.3 million and are classified as Restricted cash on the Company's consolidated balance sheets as at February 28, 2004. 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 February 28, 2004:
One to Four to More Less than Three Five than Five Total One Year Years Years Years ----------------------------------------------------------------- | | Long-term debt | $ 6,433 | $ 193 $ 667 $ 5,573 $ - | | Operating lease obligations | 8,008 | 2,165 4,840 1,003 - | | Purchase obligations and | | commitments | 168,449 | 168,449 - - - |------------|---------------------------------------------------- Total | $ 182,890 | $ 170,807 $ 5,507 $ 6,576 $ - |============}==================================================== ------------
Purchase obligations and commitments of $168.4 million represent primarily purchase orders or contracts for the purchase of raw materials 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. COMMENTARY ON MATERIAL DIFFERENCES IN THE COMPANY'S FISCAL 2004 FINANCIAL STATEMENTS UNDER U.S. GAAP COMPARED TO CANADIAN GAAP The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP on a basis consistent for all periods presented. The Company has also 25 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 prepared consolidated financial statements in accordance with Canadian GAAP on a basis consistent for all periods presented. There are no material differences to reported values contained in the Company's consolidated balance sheets under U.S. GAAP and Canadian GAAP. A summary of the differences to reported values contained in the Company's consolidated statements of operations under U.S. GAAP and Canadian GAAP is set out in the table below: Fiscal Year Ended February 28, March 1, 2004 2003 --------------- -------------- Net income (loss) under U.S. GAAP $ 51,829 $ (148,857) --------------- -------------- Adjustments - Canadian GAAP Start-up costs (a) (1,392) (452) Future income taxes (a) - 646 Stock-based compensation costs (b) (2,890) - --------------- -------------- Net income (loss) under Canadian GAAP $ 47,547 $ (148,663) ================ ============== Notes: - ----- a) U.S. GAAP, Statement of Position 98-5, Reporting on the Cost of Start-up Activities, prescribes that start-up costs should be expensed as incurred. Canadian GAAP allows for the capitalization of start up costs, namely the costs incurred during the start-up of the Company's European operations. The tax affect of this adjustment is also reflected above. As of August 30, 2003, the Company has expensed all start-up costs previously incurred, as the Company determined that there is no remaining value to these costs as a result of changes in the underlying operations. b) Previously, under Canadian GAAP, for any stock option with an exercise price that was less than the market price on the date of grant, the difference between the exercise price and the market price on the date of grant was required to be recorded as compensation expense (the intrinsic value based method). As the Company grants stock options at the fair market value of the shares on the day preceding the date of the grant of the options, no compensation expense was recognized. In November 2003, Canadian Institute of Chartered Accountants ("CICA") 3870 was amended to provide transitional provisions which allow for the adoption of fair value based accounting recording of stock options. The Company has elected the prospective method of adoption for Canadian GAAP purposes effective for the year ended February 28, 2004. In accordance with CICA 3870, the Company has recorded stock-based compensation expense for all grants issued and subsequently cancelled during 26 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 the current year. In addition, proforma stock-based compensation expense was calculated on grants issued since March 2, 2003. Differences to reported values contained in the Company's consolidated statements of cash flows under U.S. GAAP and Canadian GAAP result from the differences discussed above. 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 2004 are 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 all manufacturing overhead, are incurred primarily in Canadian dollars. At February 28, 2004, approximately 2% of cash and cash equivalents, 26% of trade receivables and 18% of accounts payable and accrued liabilities are denominated in foreign currencies (March 1, 2003 - 14%, 13%, and 8%, respectively). These foreign currencies include the Canadian Dollar, British Pound, Euro, Australian Dollar, Hong Kong Dollar, and Japanese Yen. To mitigate a portion of this risk, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments. The Company does not purchase or hold any derivative instruments for speculative purposes. To hedge exposures relating to foreign currency anticipated transactions, the Company has entered into forward foreign exchange contracts to sell U.S. dollars and purchase Canadian dollars, to sell Euro 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 as 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 February 28, 2004. As at February 28, 2004, the unrealized gain on these forward contracts was approximately $5,468 (March 1, 2003 - $3,439). These amounts were included in Other current assets and Other comprehensive income. To hedge exposure relating to foreign currency denominated long-term debt, the Company has entered into forward foreign exchange contracts to sell U.S. dollars and purchase Canadian dollars. These contracts have been designated as fair value hedges, 27 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 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 liability. As at February 28, 2004, a loss of $69 was recorded in respect of this amount (March 1, 2003 - gain of $419). This amount was included with Selling, marketing and administration. Interest Rate Cash, cash equivalents and investments are invested in certain instruments of varying short-term 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 RIM has historically been dependent on a small but increasing number of significant customers and on large complex contracts with respect to sales of the majority of its products. The Company expects this trend to continue as it sells an increasing number of its products and service relay access through network carriers and resellers rather than directly. The Company is undergoing 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. The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. The Company establishes an allowance for doubtful accounts that corresponds to the specific credit risk of its customers, historical trends and economic circumstances. The Company also places insurance coverage for a portion of its foreign trade receivables. The allowance as at February 28, 2004 is $ 2.4 million (March 1, 2003 - $2.3 million). While the Company sells to a variety of customers, two customers comprised 24% and 10% of trade receivables as at February 28, 2004 (March 1, 2003 - three customers comprised 17%, 16% and 14%). Additionally, two customers comprised 15% and 13% of the Company's sales (fiscal 2003 - one customer comprised 12%). 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 minimizes this risk by limiting counterparties to major financial institutions and by continuously monitoring their creditworthiness. As at February 28, 2004, the maximum exposure to a single counter-party was 43% of outstanding derivative instruments (March 1, 2003 - 37%). The Company is exposed to market and credit risk on its investment portfolio. The Company limits 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 February 28, 2004, no single issuer represented more than 4% of the total cash, cash equivalents and 28 Research in Motion Limited Management's Discussion and Analysis of Financial Condition and Results of Operations For the Fiscal Year Ended February 28, 2004 investments (March 1, 2003 - no single issuer represented more than 5% of the total cash, cash equivalents and short-term investments). IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET IMPLEMENTED In December 2003, the FASB amended Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R requires that a variable interest entity ("VIE") be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's residual returns. For the Company, the requirements of FIN 46R apply to VIE's created after January 31, 2003. For those VIE's created before January 31, 2003, the requirements of FIN 46R apply as at February 29, 2004. The adoption of FIN 46R did not have an impact to the Company's financial statements as at and for the year ended February 28, 2004. OUTLOOK AND STRATEGY RIM's strategy is to continue to leverage the technology and infrastructure investments made over the past several years to drive BlackBerry subscriber growth and financial performance. RIM plans to extend its technical and market lead by continuing to invest in core research and development to enhance the BlackBerry product portfolio, by fostering new international business relationships, by licensing the BlackBerry platform to key handset vendors and by strengthening our infrastructure to support global subscriber growth. RIM will continue to pursue growth opportunities with global carriers to further expand BlackBerry's global footprint and to extend our enterprise market leadership into the prosumer market. Through the BlackBerry Connect program, RIM plans to increase the addressable market for BlackBerry through the strategic licensing of the BlackBerry platform. RIM anticipates strong revenue and net earnings growth for the balance of fiscal 2005 compared to fiscal 2004 and is targeting substantial increases in the BlackBerry subscriber base. RIM intends to realize this growth while continuing to manage its financial resources prudently and fostering a culture of innovation and achievement for its employees. 29 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: June 14, 2004 By: /s/ Angelo Loberto ------------------------- -------------------------------- (Signature) Angelo Loberto Vice President, Finance -----END PRIVACY-ENHANCED MESSAGE-----