6-K 1 bbry-20140830x6k.htm 6-K BBRY-2014.08.30-6K


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 6-K
_________________________________________________________________
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of, September 2014
_________________________________________________________________  
Commission File Number 000-29898
_________________________________________________________________  
BlackBerry Limited
(Translation of registrant’s name into English)
_________________________________________________________________ 
2200 University Avenue East, Waterloo, Ontario, Canada N2K 0A7
(Address of principal executive offices)
_________________________________________________________________ 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F:
Form 20-F  ¨            Form 40-F  x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨





DOCUMENTS INCLUDED AS PART OF THIS REPORT
Document
1.    Consolidated Financial Statements for the Three and Six Months Ended August 30, 2014.
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended August 30, 2014.
3.
Canadian Forms 52-109F2 - Certification of Interim Filings
This Report on Form 6-K is incorporated by reference into the Registration Statements on Form S-8 of the Registrant, which were originally filed with the Securities and Exchange Commission on March 28, 2002 (File No. 333-85294), October 21, 2002 (File No. 333-100684), April 28, 2008 (File No. 333-150470), October 3, 2011 (File No. 333-177149), July 10, 2013 (File No. 333-189880), December 20, 2013 (File Nos. 333-192986 and 333-192987) and on July 25, 2014 (File No. 333-197636).







BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions)(unaudited)
Consolidated Balance Sheets
 
As at
 
August 30, 2014
 
March 1, 2014
Assets
 
 
 
Current
 
 
 
Cash and cash equivalents
$
1,523

 
$
1,579

Short-term investments
1,178

 
950

Accounts receivable, net
658

 
972

Other receivables
162

 
152

Inventories
113

 
244

Income taxes receivable
124

 
373

Other current assets
297

 
505

Deferred income tax asset
38

 
73

Assets held for sale
31

 
35

 
4,124

 
4,883

Long-term investments
329

 
129

Restricted cash
68

 

Property, plant and equipment, net
582

 
1,101

Intangible assets, net
1,433

 
1,439

 
$
6,536

 
$
7,552

Liabilities
 
 
 
Current
 
 
 
Accounts payable
$
217

 
$
474

Accrued liabilities
870

 
1,214

Deferred revenue
435

 
580

 
1,522

 
2,268

Long-term debt
1,507

 
1,627

Deferred income tax liability
32

 
32

 
3,061

 
3,927

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

 

Common shares: authorized unlimited number of non-voting, redeemable, retractable Class A common shares and unlimited number of voting common shares
 
 
 
Issued - 527,429,331 voting common shares (March 1, 2014 - 526,551,953)
2,438

 
2,418

Treasury stock
 
 
 
August 30, 2014 - 7,424,081 (March 1, 2014 - 7,659,685)
(173
)
 
(179
)
Retained earnings
1,210

 
1,394

Accumulated other comprehensive loss

 
(8
)
 
3,475

 
3,625

 
$
6,536

 
$
7,552

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


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

Consolidated Statements of Shareholders’ Equity
 
 
Capital Stock
and Additional
Paid-In Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Total
Balance as at March 1, 2014
$
2,418

 
$
(179
)
 
$
1,394

 
$
(8
)
 
$
3,625

Net loss

 

 
(184
)
 

 
(184
)
Other comprehensive income

 

 

 
8

 
8

Shares issued:
 
 
 
 
 
 
 
 
 
Stock-based compensation
22

 

 

 

 
22

Exercise of stock options
4

 

 

 

 
4

Treasury shares released for restricted share unit settlements
(6
)
 
6

 

 

 

Balance as at August 30, 2014
$
2,438

 
$
(173
)
 
$
1,210

 
$

 
$
3,475

See notes to consolidated financial statements.






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

Consolidated Statements of Operations
 
 
Three Months Ended
 
Six Months Ended
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Revenue
$
916

 
$
1,573

 
$
1,882

 
$
4,644

Cost of sales
 
 
 
 
 
 
 
Cost of sales
484

 
1,013

 
978

 
3,042

Inventory write-down
7

 
627

 
28

 
627

Supply commitment charges

 
307

 

 
307

 
491

 
1,947

 
1,006

 
3,976

Gross margin
425

 
(374
)
 
876

 
668

Operating expenses
 
 
 
 

 

Research and development
186

 
360

 
423

 
718

Selling, marketing and administration
195

 
527

 
595

 
1,200

Amortization
75

 
171

 
156

 
351

Debentures fair value adjustment
167

 

 
(120
)
 

 
623

 
1,058

 
1,054

 
2,269

Operating loss
(198
)
 
(1,432
)
 
(178
)
 
(1,601
)
Investment loss, net
(20
)
 
(6
)
 
(46
)
 
(1
)
Loss before income taxes
(218
)
 
(1,438
)
 
(224
)
 
(1,602
)
Recovery of income taxes
(11
)
 
(473
)
 
(40
)
 
(553
)
Net loss
$
(207
)
 
$
(965
)
 
$
(184
)
 
$
(1,049
)
Loss per share
 
 
 
 
 
 
 
Basic
$
(0.39
)
 
$
(1.84
)
 
$
(0.35
)
 
$
(2.00
)
Diluted
$
(0.39
)
 
$
(1.84
)
 
$
(0.41
)
 
$
(2.00
)
See notes to consolidated financial statements.


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

Consolidated Statements of Comprehensive Loss
 
Three Months Ended
 
Six Months Ended
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Net loss
$
(207
)
 
$
(965
)
 
$
(184
)
 
$
(1,049
)
Other comprehensive income (loss)
 
 
 
 

 

Net change in fair value of derivatives designated as cash flow hedges during the period, net of income taxes of nil and income tax recovery of $2 million for the three and six months ended (August 31, 2013 - income tax recovery of $7 million)
(1
)
 
(23
)
 
3

 
(21
)
Amounts reclassified to net loss during the period for derivatives designated as cash flow hedges, net of income tax recovery of nil and $1 million for the three and six months ended (August 31, 2013 - income tax recovery of $4 million and $5 million)

 
12

 
5

 
14

Other comprehensive income (loss)
(1
)
 
(11
)
 
8

 
(7
)
Comprehensive loss
$
(208
)
 
$
(976
)
 
$
(176
)
 
$
(1,056
)
See notes to consolidated financial statements.


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

Consolidated Statements of Cash Flows
 
 
Six Months Ended
 
August 30, 2014
 
August 31, 2013
Cash flows from operating activities
 
 
 
Net loss
$
(184
)
 
$
(1,049
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization
362

 
756

Deferred income taxes
35

 
(32
)
Income taxes payable

 
(3
)
Stock-based compensation
22

 
38

Loss on disposal of property, plant and equipment
119

 
29

Debentures fair value adjustment
(120
)
 

Other
13

 
10

Net changes in working capital items:
 
 
 
Accounts receivable, net
314

 
610

Other receivables
(10
)
 
49

Inventories
131

 
(338
)
Income taxes receivable
249

 
135

Other current assets
199

 
(231
)
Accounts payable
(257
)
 
66

Accrued liabilities
(311
)
 
154

Deferred revenue
(145
)
 
292

Net cash provided by operating activities
417

 
486

Cash flows from investing activities
 
 
 
Acquisition of long-term investments
(214
)
 
(220
)
Proceeds on sale or maturity of long-term investments
14

 
180

Acquisition of property, plant and equipment
(48
)
 
(200
)
Proceeds on sale of property, plant and equipment
348

 
5

Acquisition of intangible assets
(266
)
 
(603
)
Business acquisitions, net of cash acquired
(9
)
 
(7
)
Acquisition of short-term investments
(1,252
)
 
(917
)
Proceeds on sale or maturity of short-term investments
1,024

 
930

Net cash used in investing activities
(403
)
 
(832
)
Cash flows from financing activities
 
 
 
Issuance of common shares
4

 

Tax deficiencies related to stock-based compensation

 
(2
)
Purchase of treasury stock

 
(16
)
Transfer to restricted cash
(68
)
 

Net cash used in financing activities
(64
)
 
(18
)
Effect of foreign exchange loss on cash and cash equivalents
(6
)
 
(4
)
Net decrease in cash and cash equivalents during the period
(56
)
 
(368
)
Cash and cash equivalents, beginning of period
1,579

 
1,549

Cash and cash equivalents, end of period
$
1,523

 
$
1,181

See notes to consolidated financial statements.


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






1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Basis of Presentation and Preparation
These interim consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”). They do not include all of the disclosures required by U.S. GAAP for annual financial statements and should be read in conjunction with the audited consolidated financial statements of BlackBerry Limited (the “Company”) for the year ended March 1, 2014 (the “Annual Financial Statements”), which have been prepared in accordance with U.S. GAAP. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included in these interim consolidated financial statements. Operating results for the three and six months ended August 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending February 28, 2015.
The Company’s fiscal year end date is the 52 or 53 weeks ending on the last Saturday of February, or the first Saturday of March. Most fiscal years, including the fiscal years ending February 28, 2015 and March 1, 2014, comprise 52 weeks. However, if the date that is 52 weeks following the most recent fiscal year end is earlier than the last Saturday of February, then such fiscal year comprises 53 weeks. Certain of the comparable figures have been reclassified to conform to the current period’s presentation.
Significant Accounting Policies and Critical Accounting Estimates
There have been no changes to the Company’s significant accounting policies or critical accounting estimates from those described in the Annual Financial Statements.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a new accounting standard on the topic of revenue contracts, which replaces the existing revenue recognition standard. The new standard amends the number of requirements that an entity must consider in recognizing revenue and requires improved disclosures to help readers of financial statements better understand the nature, amount, timing and uncertainty of revenue recognized. For public entities, the new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company will adopt this guidance in the first quarter of fiscal 2018 and is currently evaluating the impact that the adoption will have on its results of operations, financial position and disclosures.
In August 2014, the FASB issued a new accounting standards update on the topic of going concern. The amendments in this update provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will adopt this guidance in the fourth quarter of fiscal 2017.

2.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company’s cash equivalents and investments, other than cost method investments of $14 million (March 1, 2014 - $4 million) and equity method investments of $75 million (March 1, 2014 - $85 million), consist of money market and other debt securities, which are classified as available-for-sale for accounting purposes and are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (loss) (“AOCI”) until such investments mature or are sold. The Company uses the specific identification method of determining the cost basis in computing realized gains or losses on available-for-sale investments which are recorded in investment income. In the event of a decline in value which is other-than-temporary, the investment is written down to fair value with a charge to income. The Company does not exercise significant influence with respect to these available-for-sale investments.
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use in pricing the asset or liability such as inherent risk, non-performance risk and credit risk. The Company applies the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value into three levels:
Level 1 - Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

1

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





Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The components of cash, cash equivalents and investments by fair value level as at August 30, 2014 were as follows:
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Other-than-
temporary
Impairment
 
Fair Value
 
Cash and
Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
 
Restricted Cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
727

 
$

 
$

 
$

 
$
727

 
$
727

 
$

 
$

 
$

Other investments
89

 

 

 

 
89

 

 

 
89

 

 
816

 

 

 

 
816

 
727

 

 
89

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1

 

 

 

 
1

 
1

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term deposits, certificates of deposit, and GICs
355

 

 

 

 
355

 
201

 
86

 

 
68

Bankers’ acceptances/bearer deposit notes
297

 

 

 

 
297

 
297

 

 

 

Commercial paper
170

 

 

 

 
170

 
130

 
40

 

 

Asset-backed commercial paper
23

 

 

 

 
23

 
23

 

 

 

Non-U.S. promissory notes
101

 

 

 

 
101

 
44

 
57

 

 

Non-U.S. treasury bills/notes
411

 

 

 

 
411

 
100

 
311

 

 

U.S. treasury bills/notes
867

 

 

 

 
867

 

 
665

 
202

 

Corporate bonds
19

 

 

 

 
19

 

 
19

 

 

 
2,243

 

 

 

 
2,243

 
795

 
1,178

 
202

 
68

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
3

 

 

 

 
3

 

 

 
3

 

Auction rate securities
40

 
1

 

 
(6
)
 
35

 

 

 
35

 

 
43

 
1

 

 
(6
)
 
38

 

 

 
38

 

 
$
3,103

 
$
1

 
$

 
$
(6
)
 
$
3,098

 
$
1,523

 
$
1,178

 
$
329

 
$
68











2

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





The components of cash, cash equivalents and investments by fair value level as at March 1, 2014 were as follows:
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Other-than-
temporary
Impairment
 
Fair Value
 
Cash and
Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
708

 
$

 
$

 
$

 
$
708

 
$
708

 
$

 
$

Other investments
89

 

 

 

 
89

 

 

 
89

 
797

 

 

 

 
797

 
708

 

 
89

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bankers’ acceptances/bearer deposit notes
392

 

 

 

 
392

 
332

 
60

 

Commercial paper
15

 

 

 

 
15

 
15

 

 

U.S. treasury bills/notes
879

 

 

 

 
879

 
253

 
626

 

Non-U.S. treasury bills/notes
480

 

 

 

 
480

 
241

 
239

 

Non-U.S. government sponsored enterprise notes
55

 

 

 

 
55

 
30

 
25

 

 
1,821

 

 

 

 
1,821

 
871

 
950

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
4

 

 

 

 
4

 

 

 
4

Auction rate securities
41

 
1

 

 
(6
)
 
36

 

 

 
36

 
45

 
1

 

 
(6
)
 
40

 

 

 
40

 
$
2,663

 
$
1

 
$

 
$
(6
)
 
$
2,658

 
$
1,579

 
$
950

 
$
129

There were no realized gains or losses on available-for-sale securities for the three and six months ended August 30, 2014 or the three and six months ended August 31, 2013.
The Company has restricted cash, consisting of cash and securities pledged as collateral to major banking partners in support of the Company's requirements for letters of credit. These letters of credit support certain leasing arrangements entered into in the ordinary course of business, for terms ranging from 1 month to 9 years. The Company is legally restricted from accessing these funds during the term of the leases for which the letters of credit have been issued; however, the Company can continue to invest the funds and receive investment income thereon.
The contractual maturities of available-for-sale investments as at August 30, 2014 and March 1, 2014 were as follows:
 
As At
 
August 30, 2014
 
March 1, 2014
 
Cost Basis
 
Fair Value
 
Cost Basis
 
Fair Value
Due in one year or less
$
1,973

 
$
1,973

 
$
1,821

 
$
1,821

Due in one to five years
204

 
204

 
4

 
4

Due after five years
103

 
104

 
35

 
36

No fixed maturity
1

 
1

 

 

 
$
2,281

 
$
2,282

 
$
1,860

 
$
1,861

As at August 30, 2014 and March 1, 2014, the Company had no investments with continuous unrealized losses.
The Company engages in limited securities lending to generate fee income. Collateral which exceeds the market value of the loaned securities is retained by the Company until the underlying security has been returned to the Company. As at August 30, 2014, the Company had securities on loan (which are included in short-term investments) with a market value of approximately $73 million (March 1, 2014 - $100 million) consisting of non-U.S. treasury bills/notes to major Canadian banks. The Company holds collateral with a market value that exceeds the value of securities lent, consisting of non-U.S. treasury bills/notes issued by the federal and provincial governments of Canada and non-U.S. government sponsored enterprise notes issued by organizations backed by the federal or provincial governments of Canada.



3

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





3.
FAIR VALUE MEASUREMENTS
For a description of the fair value hierarchy, please see Note 2.
Recurring Fair Value Measurements
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.
In determining the fair value of investments held (other than those classified as Level 3), the Company primarily relies on an independent third party valuator for the fair valuation of securities. Pricing inputs used by the independent third party valuator are generally received from two primary vendors and are reviewed for completeness and accuracy, within a set tolerance level, on a daily basis by the independent third party valuator. The Company also reviews and understands the inputs used in the valuation process and assesses the pricing of the securities for reasonableness after conducting its own internal collection of quoted prices from brokers. Fair values for all investment categories provided by the independent third party valuator that differ by greater than 0.5% from the fair values determined by the Company are communicated to the independent third party valuator for consideration of reasonableness. The independent third party valuator considers the information provided by the Company before determining whether a change in the original pricing is warranted.
The Company's investments (other than those classified as Level 3) largely consist of securities issued by major corporate and banking organizations, the provincial and federal governments of Canada and the United States Department of the Treasury, and are all investment grade.
The following table summarizes the changes in fair value of the Company’s Level 3 assets for the three and six months ended August 30, 2014 and August 31, 2013:
 
Three Months Ended
 
Six Months Ended
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Balance, beginning of period
$
39

 
$
41

 
$
40

 
$
41

Principal repayments
(1
)
 

 
(2
)
 

Balance, end of period
$
38

 
$
41

 
$
38

 
$
41

The Company recognizes transfers in and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurred. There were no significant transfers in or out of Level 3 assets during the three and six months ended August 30, 2014 and August 31, 2013.
The Company’s Level 3 assets measured on a recurring basis include auction rate securities as well as corporate bonds consisting of securities received in a payment-in-kind distribution from a former structured investment vehicle.
The auction rate securities are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the estimated weighted-average life of each security based on its contractual details and expected paydown schedule based upon the underlying collateral, the value of the underlying collateral which would be realized in the event of a waterfall event, an estimate of the likelihood of a waterfall event and an estimate of the likelihood of a permanent auction suspension. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the probability of a waterfall event is accompanied by a directionally opposite change in the assumption used for the probability of a permanent auction suspension. A waterfall event occurs if the funded reserves of the securities become insufficient to make the interest payments, resulting in the disbursement of the securities’ underlying collateral to the security holders.
The corporate bonds are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the anticipated future monthly principal and interest payments, an estimated rate of decrease of those payments, the value of the underlying collateral, the number of securities currently in technical default as grouped by the underlying collateral, an estimated average recovery rate of those securities and assumptions surrounding additional defaults. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the anticipated monthly payments is accompanied by a directionally similar change in the average recovery rate and a directionally opposite change in the yearly decrease in payments and additional defaults assumptions.

4

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





The following table presents the significant unobservable inputs used in the fair value measurement of the above Level 3 assets, as well as the impact on the fair value measurement resulting from a significant increase or decrease in each input in isolation:
As at August 30, 2014
 
Fair
Value
 
Valuation
Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
Effect of Significant
Increase/(Decrease) in
Input on Fair Value
Auction rate securities
 
$
35

 
Discounted cash flow
 
Weighted-average life
 
8 - 19 years (14 years)
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
101 - 133% (117%)
 
Increase/(decrease)
 
 
 
 
 
 
Probability of waterfall event
 
5 - 10% (8%)
 
Increase/(decrease)
 
 
 
 
 
 
Probability of permanent auction suspension
 
5 - 10% (8%)
 
(Decrease)/increase
Corporate bonds
 
$
3

 
Discounted cash flow
 
Anticipated monthly principal and interest payments
 
$0.1 million
 
Increase/(decrease)
 
 
 
 
 
 
Yearly decrease in payments
 
10%
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
138%
 
Increase/(decrease)
 
 
 
 
 
 
Current securities in technical default, by collateral grouping
 
0 - 100% (13%)
 
(Decrease)/increase
 
 
 
 
 
 
Average recovery rate of securities in technical default
 
30%
 
Increase/(decrease)
 
 
 
 
 
 
Additional defaults assumption
 
0 - 44% (18%)
 
(Decrease)/increase

4.
DERIVATIVE FINANCIAL INSTRUMENTS
The notional amounts and fair values of financial instruments outstanding were as follows:
 
As at August 30, 2014
  
Balance Sheet Location
 
Fair Value of Derivatives Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Designated as Hedging Instruments
 
Fair Value of Derivatives Not Subject to Hedge Accounting
 
Total Estimated Fair Value
 
Notional
Amount
Derivative Assets(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other current assets
 
$

 
$
6

 
$
12

 
$
18

 
$
816

Currency option contracts
Other current assets
 
1

 

 

 
1

 
82

Total
 
 
$
1

 
$
6

 
$
12

 
$
19

 
$
898

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
$

 
$

 
$
(4
)
 
$
(4
)
 
$
628

Currency option contracts
Accrued liabilities
 
(2
)
 

 

 
(2
)
 
197

Total
 
 
$
(2
)
 
$

 
$
(4
)
 
$
(6
)
 
$
825

______________________________ 
(1) The fair values of derivative assets and liabilities are measured using Level 2 fair value inputs.


5

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





 
As at March 1, 2014
  
Balance Sheet Location
 
Fair Value of Derivatives Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Designated as Hedging Instruments
 
Fair Value of Derivatives Not Subject to Hedge Accounting
 
Total Estimated Fair Value
 
Notional
Amount
Derivative Assets(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other current assets
 
$

 
$

 
$
5

 
$
5

 
$
585

Currency option contracts
Other current assets
 
1

 

 
1

 
2

 
186

Total
 
 
$
1

 
$

 
$
6

 
$
7

 
$
771

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
$
(7
)
 
$
(4
)
 
$
(15
)
 
$
(26
)
 
$
1,304

Currency option contracts
Accrued liabilities
 
(1
)
 

 
(1
)
 
(2
)
 
72

Total
 
 
$
(8
)
 
$
(4
)
 
$
(16
)
 
$
(28
)
 
$
1,376

 
 
 
 
 
 
 
 
 
 
 
 
Currency option contracts - premiums
Accumulated other comprehensive loss
 
$
(1
)
 
$

 
$

 
$
(1
)
 
$

______________________________ 
(1) The fair values of derivative assets and liabilities are measured using Level 2 fair value inputs.

Foreign Exchange
For a description of the Company's usage of derivatives and related accounting policy for these instruments, see the Annual Financial Statements.
The Company enters into forward and option contracts to hedge exposures relating to anticipated foreign currency transactions. These contracts have been designated as cash flow hedges, with the effective portion of the change in fair value initially recorded in AOCI and subsequently reclassified to income in the period in which the cash flows from the associated hedged transactions affect income. Any ineffective portion of the change in fair value of the cash flow hedge is recognized in current period income. For the three and six months ended August 30, 2014, there were realized losses of nil on forward and option contracts which were ineffective upon maturity (three and six months ended August 31, 2013 - $4 million in realized losses). As at August 30, 2014 and August 31, 2013, the outstanding derivatives designated as cash flow hedges were considered to be fully effective. The maturity dates of these instruments range from September 2014 to August 2015. As at August 30, 2014, the net unrealized loss on these forward and option contracts (including option premiums paid) was $1 million (March 1, 2014 - net unrealized loss of $8 million). As at August 30, 2014, the Company estimates that approximately $1 million of net unrealized losses including option premiums on these forward and option contracts will be reclassified into income within the next twelve months.

6

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





The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statements of operations and the consolidated statements of comprehensive loss for the three and six months ended August 30, 2014:    
 
Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)
 
Amount of Gain  (Loss)
Reclassified from AOCI into
Income (Effective Portion)
Three Months Ended August 30, 2014
 
Six Months Ended August 30, 2014
Currency forward contracts
$

 
Cost of sales
 
$

 
$
(1
)
Currency forward contracts

 
Selling, marketing and administration
 

 
(1
)
Currency option contracts
(1
)
 
Selling, marketing and administration
 

 

Currency forward contracts

 
Research and development
 

 
(4
)
The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statements of operations and the consolidated statements of comprehensive loss for the three and six months ended August 31, 2013:    
 
Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)
 
Amount of Gain  (Loss)
Reclassified from AOCI into
Income (Effective Portion)

Three Months Ended August 31, 2013
 
Six Months Ended August 31, 2013
Currency forward contracts
$
(4
)
 
Revenue
 
$
(1
)
 
$

Currency option contracts
(2
)
 
Revenue
 
(4
)
 
(7
)
Currency forward contracts
(2
)
 
Cost of sales
 
(1
)
 
(1
)
Currency forward contracts
(3
)
 
Selling, marketing and administration
 
(1
)
 
(2
)
Currency forward contracts
(6
)
 
Research and development
 
(1
)
 
(1
)
 
Amount of Gain (Loss)
Recognized in Income on
Derivative Instruments
(Ineffective Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Ineffective Portion)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Ineffective Portion)
 
Three Months Ended August 31, 2013
 
Six Months Ended August 31, 2013
Currency forward contracts
$

 
Selling, marketing and administration
 
$
(4
)
 
$
(4
)
 
Amount of Gain (Loss)
Recognized in Income on
Derivative Instruments
(Unqualified Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Unqualified Portion)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Unqualified Portion)
 
Three Months Ended August 31, 2013
 
Six Months Ended August 31, 2013
Currency forward contracts
$

 
Selling, marketing and administration
 
$
(2
)
 
$
(2
)
 
Amount of Gain (Loss)
Recognized in Income on
Derivative Instruments
(De-designated/Trading Derivative Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(De-designated/Trading Derivative
 Portion)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(De-designated/Trading Derivative
 Portion)
 
Three Months Ended August 31, 2013
 
Six Months Ended August 31, 2013
Currency forward contracts
$

 
Selling, marketing and administration
 
$
(2
)
 
$
(2
)
In addition to the outstanding forward and option contracts hedging exposures relating to anticipated foreign currency transactions that qualify for hedge accounting, the Company has also entered into other forward and option contracts hedging anticipated foreign currency transactions on which it did not apply hedge accounting. Any realized and unrealized gains and losses on these contracts are recognized in income each period. The maturity dates of these

7

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





instruments range from September 2014 to August 2015. As at August 30, 2014, there were unrealized gains (net of premiums paid) of $6 million recorded in respect of these instruments (March 1, 2014 - unrealized losses of $6 million).
As part of its currency risk management strategy, the Company may maintain net monetary asset and/or liability balances in foreign currencies. The Company enters into foreign currency forward contracts to hedge certain monetary assets and liabilities that are exposed to foreign currency risk. The principal currencies hedged include the Canadian dollar, Euro, and British Pound. These contracts are not subject to hedge accounting and any realized and unrealized gains or losses are recognized in income each period, offsetting the change in the U.S. dollar value of the asset or liability upon balance sheet revaluation. The maturity dates of these instruments range from September 2014 to February 2015. As at August 30, 2014, there were unrealized gains (net of premiums paid) of $8 million recorded in respect of these instruments (March 1, 2014 - net unrealized losses of $10 million).
The following table shows the impact of all derivative instruments that are not subject to hedge accounting on the consolidated statements of operations for the three and six months ended August 30, 2014 and August 31, 2013:    
 
 
 
Amount of Gain (Loss) in Income on
Derivative Instruments
 
 
 
Three Months Ended
 
Six Months Ended
 
Location of Gain (Loss) Recognized in
Income on Derivative Instruments
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Currency forward contracts
Selling, marketing and administration
 
$
19

 
$
(7
)
 
$
(3
)
 
$
(18
)
Currency option contracts
Selling, marketing and administration
 

 
3

 

 
6

Selling, marketing and administration expense for the three and six months ended August 30, 2014 included $12 million and $2 million in gains with respect to foreign exchange net of balance sheet revaluation (three and six months ended August 31, 2013 - $8 million in gains and $11 million in losses with respect to foreign exchange net of balance sheet revaluation).
Credit Risk
The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations. The Company mitigates this risk by limiting counterparties to highly rated financial institutions and by continuously monitoring their creditworthiness. The Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange rates. The Company measures its counterparty credit exposure as a percentage of the total fair value of the applicable derivative instruments. Where the net fair value of derivative instruments with any counterparty is negative, the Company deems the credit exposure to that counterparty to be nil. As at August 30, 2014, the maximum credit exposure to a single counterparty, measured as a percentage of the total fair value of derivative instruments with net unrealized gains, was 68% (March 1, 2014 - 100%). As at August 30, 2014, the Company had a total credit risk exposure across all counterparties with outstanding or unsettled foreign exchange derivative instruments of $13 million on a notional value of $1.9 billion (March 1, 2014 - nil total credit risk exposure on a notional value of $11 million).
The Company maintains Credit Support Annexes (“CSAs”) with several of its counterparties. These CSAs require that the outstanding net position of all contracts be made whole by the paying or receiving of collateral to or from the counterparties on a daily basis, subject to exposure and transfer thresholds. As at August 30, 2014, the Company had paid collateral of nil to counterparties (March 1, 2014 - $15 million), which approximated the fair value of those contracts. As with the derivatives recorded in an unrealized loss position, this amount is recorded in other current liabilities.
The Company is exposed to market risk and credit risk on its investment portfolio. The Company reduces these risks by investing in liquid, investment grade securities and by limiting exposure to any one entity or group of related entities. As at August 30, 2014, no single issuer represented more than 28% of the total cash, cash equivalents and investments (March 1, 2014 - no single issuer represented more than 33% of the total cash, cash equivalents and investments), and that issuer was the United States Department of the Treasury.
Interest Rate Risk
Cash and cash equivalents and investments are invested in certain instruments of varying maturities. Substantially all of these investments carry fixed interest rates. Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying maturities and fixed interest rates. The fair value of investments, as well as the

8

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





investment income derived from the investment portfolio, will fluctuate with changes in prevailing interest rates. The Company has also issued unsecured convertible debentures due in 2020 (the “Debentures”) with a fixed interest rate. Consequently, the Company is exposed to interest rate risk as a result of the long term of the Debentures. The fair value of the Debentures will fluctuate with changes in prevailing interest rates. The Company does not currently utilize interest rate derivative instruments to hedge its investment portfolio.

5.
CONSOLIDATED BALANCE SHEETS DETAILS
Accounts receivable, net
The allowance for doubtful accounts as at August 30, 2014 was $20 million (March 1, 2014 - $17 million).
There were no individual customers that comprised more than 10% of accounts receivable as at August 30, 2014 or March 1, 2014.

Inventories
Inventories were comprised of the following:
 
As at
 
August 30, 2014
 
March 1, 2014
Raw materials
$
74

 
$
51

Work in process
22

 
156

Finished goods
17

 
37

 
$
113

 
$
244

For the three and six months ended August 30, 2014, the Company recorded non-cash, pre-tax charges of $7 million and $28 million relating to the write down of certain inventories (three and six months ended August 31, 2013 - $627 million in inventories and $307 million in supply commitments primarily attributable to BlackBerry Z10 devices).
Property, plant and equipment, net
Property, plant and equipment were comprised of the following:
 
As at
 
August 30, 2014
 
March 1, 2014
Cost
 
 
 
Land
$
26

 
$
108

Buildings, leasehold improvements and other
414

 
876

BlackBerry operations and other information technology
1,321

 
1,297

Manufacturing equipment, research and development equipment and tooling
245

 
558

Furniture and fixtures
20

 
27

 
2,026

 
2,866

Accumulated amortization
1,444

 
1,765

Net book value
$
582

 
$
1,101






9

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





Intangible assets, net
Intangible assets were comprised of the following:
 
As at August 30, 2014
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
404

 
$
311

 
$
93

Intellectual property
2,429

 
1,089

 
1,340

 
$
2,833

 
$
1,400

 
$
1,433

 
As at March 1, 2014
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
410

 
$
292

 
$
118

Intellectual property
2,176

 
855

 
1,321

 
$
2,586

 
$
1,147

 
$
1,439

During the second quarter of fiscal 2015, the additions to intangible assets primarily consisted of payments relating to licensing agreements, as well as agreements with third parties for the use of intellectual property, software, messaging services and other BlackBerry related features.
Based on the carrying value of the identified intangible assets as at August 30, 2014 and assuming no subsequent impairment of the underlying assets, the annual amortization expense for the remainder of fiscal 2015 and each of the four succeeding years is expected to be as follows: 2015 - $232 million; 2016 - $296 million; 2017 - $181 million; 2018 - $144 million; and 2019 - $130 million.
Accrued liabilities
Accrued liabilities were comprised of the following:
 
As at
 
August 30, 2014
 
March 1, 2014
Vendor inventory liabilities
$
139

 
$
244

Warranty
161

 
204

Royalties
89

 
106

Carrier liabilities
78

 
153

Other
403

 
507

 
$
870

 
$
1,214

Product warranty
The changes in the Company’s warranty expense and actual warranty experience for the six months ended August 30, 2014 as well as the accrued warranty obligations as at August 30, 2014 are set forth in the following table:    
Accrued warranty obligations as at March 1, 2014
$
204

Warranty costs incurred for the six months ended August 30, 2014
(96
)
Warranty provision for the six months ended August 30, 2014
58

Adjustments for changes in estimate for the six months ended August 30, 2014
(5
)
Accrued warranty obligations as at August 30, 2014
$
161



10

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





6.
BUSINESS ACQUISITIONS
On July 31, 2014, the Company paid $9 million for all the assets constituting the business of a provider of cloud-based software technology allowing users to connect devices and build an ecosystem with their data. With this acquisition, the Company obtained technology closely aligned to its announced cloud-based business initiatives.
Pro forma results of operations for the acquisition have not been presented because the effect of the operations are not considered to be material to the Company's consolidated results.
Subsequent Event - Movirtu Limited
On September 8, 2014, the Company acquired all of the issued and outstanding shares of Movirtu Limited, a Virtual SIM solutions company based in the United Kingdom, for $32.5 million of cash consideration. The acquisition will provide the basis for a variety of innovative service offerings, including a Virtual SIM platform which enables multiple numbers to be active on a single standard SIM card. The Company has not completed the accounting for the acquisition and therefore has not included detailed purchase accounting in this note. The Company expects most of the purchase price will be allocated to identifiable intangible assets and goodwill.

7.
RESTRUCTURING
Cost Optimization and Resource Efficiency (“CORE”) Program
In fiscal 2013, the Company commenced the CORE program with the objective of improving the Company’s operations and increasing efficiency. The Company previously announced a workforce reduction of approximately 4,500 positions to bring the total workforce to approximately 7,000 full-time global employees as well as its plans to divest the majority of its Canadian real estate portfolio, as described below. During the three and six months ended August 30, 2014, the Company incurred approximately $33 million and $259 million in total pre-tax charges related to the CORE program related to employee termination benefits, facilities and manufacturing network simplification costs. Other charges and cash costs may occur as programs are implemented or changes are completed. As previously disclosed, the CORE program is substantially complete; however, the Company expects to continue to incur additional restructuring costs during the remainder of fiscal 2015.

The following table sets forth the activity in the Company’s CORE program liability for the six months ended August 30, 2014:
 
Employee
Termination
Benefits
 
Facilities
Costs
 
Manufacturing
Costs
 
Total
Balance as at March 1, 2014
$
13

 
$
53

 
$
26

 
$
92

Net charges incurred
93

 
28

 
21

 
142

Cash payments made
(89
)
 
(30
)
 
(46
)
 
(165
)
Balance as at August 30, 2014
$
17

 
$
51

 
$
1

 
$
69

    
The CORE program charges incurred for the three and six months ended August 30, 2014 and August 31, 2013 were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Cost of sales
 
$
10

 
$
10

 
$
22

 
$
10

Research and development
 
19

 
8

 
60

 
17

Selling, marketing and administration
 
4

 
54

 
177

 
71

Total CORE program charges
 
$
33

 
$
72

 
$
259

 
$
98

As part of the CORE program, the Company has decided to sell certain redundant assets and discontinue certain operations to drive cost savings and efficiencies in the Company. As a result, certain property, plant and equipment assets have been classified as held for sale on the Company’s consolidated balance sheets as at August 30, 2014, valued at $31 million (March 1, 2014 - $35 million), the lower of carrying value and fair value less costs to sell. Further, the Company has recorded losses of approximately $2 million and $11 million for the three and six months ended August 30, 2014 related to the write-down to fair value less costs to sell of the assets held for sale, which has been included in the selling,

11

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





marketing and administration expenses on the Company’s consolidated statements of operations and included in the total CORE program charges presented above. Assets held for sale are expected to be sold within the next twelve months.
The Company has completed various sales of real estate assets in the second quarter of fiscal 2015 as part of the CORE program. In fiscal 2015, the Company strategically divested the majority of its Canadian commercial real estate portfolio, offering properties comprising over 3 million square feet of space through a combination of sale-leaseback and vacant asset sales. On January 21, 2014, the Company reached an agreement with Spear Street Capital, LLC to sell the properties for approximately $278 million and lease back a portion of the space for the Company's operations (the “Real Estate Sale”). In the first quarter of fiscal 2015, the Company completed the sale of properties valued at approximately 80% of the Real Estate Sale. In the second quarter of fiscal 2015, the Company completed the sale of the remaining properties valued at approximately 20% of the total Real Estate Sale. In the second quarter of fiscal 2015, the Company recorded proceeds of approximately $51 million and incurred a net gain on disposal of approximately $12 million on these properties for a total net loss on disposal of $137 million for the Real Estate Sale, the remainder of which was recorded in prior periods when certain of the Real Estate properties were classified as held for sale and were written down to fair value less costs to sell.  As part of the Real Estate Sale, the Company is leasing back office space with remaining lease terms of 1 month to 7 years.
In addition, during the second quarter of fiscal 2015 the Company completed sales of assets previously classified as held for sale that were not included in the Real Estate Sale, and received proceeds of approximately $5 million. A net loss on disposal of approximately $1 million was incurred on these assets and the total net loss on disposal for these assets was $5 million, the remainder of which was recorded in prior periods when the assets were initially classified as held for sale and written down to fair value less costs to sell.
All losses on disposal or on write-down to fair value less costs to sell have been included in the selling, marketing and administration expenses on the Company’s consolidated statements of operations and included in the total CORE program charges presented above in the second quarter of fiscal 2015 and prior periods.
The carrying amounts of the major classes of assets disposed of in the second quarter of fiscal 2015, prior to their write-down to fair value less costs to sell, were as follows:
Asset Class
Carrying Value
Land
$
9

Buildings, leasehold improvements and other
46

BlackBerry operations and other information technology
1

Manufacturing equipment, research and development equipment and tooling
10

Furniture and fixtures
1

Total
$
67

Non-Recurring Fair Value Measurements
The fair values of the Company’s building, leasehold improvements and other assets held for sale were determined using offers and executed purchase and sale agreements. The fair values of the Company’s manufacturing equipment, research and development equipment and tooling assets held for sale were determined using bids or letters of intent received from prospective purchasers. Some of these inputs are unobservable.
The following table presents the Company’s assets and liabilities that are measured at fair value on a non-recurring basis:
As at August 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets held for sale
 
 
 
 
 
 
 
 
Buildings, leasehold improvements and other
 
$

 
$
29

 
$

 
$
29

Manufacturing equipment, research and development equipment and tooling

 

 

 
2

 
2

Total assets held for sale
 
$

 
$
29

 
$
2

 
$
31


8.
INCOME TAXES
For the six months ended August 30, 2014, the Company’s net effective income tax recovery rate was approximately 18% compared to a net effective income tax recovery rate of 35% for the six months ended August 31, 2013. The Company’s effective income tax recovery rate reflects the fact that the Company expects an income tax recovery of its cash tax paid in fiscal 2012 due to a loss carryback of its fiscal 2015 anticipated tax loss. That current tax recovery will be limited to fiscal 2012 cash tax paid and not previously recovered. The Company’s income tax recovery rate also reflects the fact that the Company has a significant valuation allowance in place against its deferred tax assets, and in

12

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





particular, due to this valuation allowance, the significant income statement impact of the Debenture fair value was offset by a corresponding adjustment of the valuation allowance. The Company’s net effective income tax recovery rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.
The Company’s total unrecognized income tax benefits as at August 30, 2014 were $8 million (March 1, 2014 - $8 million). As at August 30, 2014, all of the unrecognized income tax benefits have been netted against deferred income tax assets on the Company’s consolidated balance sheets.
The Company is subject to ongoing examination by tax authorities in certain jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes as well as the provisions for indirect and other taxes and related penalties and interest. While the final resolution of these audits is uncertain, the Company believes the ultimate resolution of these audits will not have a material adverse effect on its consolidated financial position, liquidity or results of operations.

9.
LONG-TERM DEBT
Convertible Debentures
In fiscal 2014, Fairfax Financial Holdings Limited (“Fairfax”) and other institutional investors invested in the Company through a $1.25 billion private placement of Debentures.
Interest on the Debentures is payable quarterly in arrears at a rate of 6% per annum.  The Debentures have a term of seven years maturing on November 13, 2020, and each $1,000 of Debentures is convertible at any time into 100 common shares of the Company for a total of 125 million common shares at a price of $10.00 per share for all Debentures, subject to adjustments.
The Company has the option to redeem the Debentures after November 13, 2016 at specified redemption prices in specified periods.  Covenants associated with the Debentures include limitations on the Company’s total indebtedness.
Under specified events of default, the outstanding principal and any accrued interest on the Debentures become immediately due and payable upon request of one quarter of the Debenture holders. During an event of default the interest rate rises to 10% per annum.
The Debentures are subject to a change of control provision whereby the Company would be required to make an offer to repurchase the Debentures at 115% of par value if a person or group (not affiliated with Fairfax) acquires 35% of the Company’s outstanding common shares, acquires all or substantially all of its assets, or if the Company merges with another entity and the Company’s existing shareholders hold less than 50% of the common shares of the surviving entity.
Due to the possible volatility through the Company’s statement of operations resulting from fluctuation in the fair value of the embedded conversion option as well as the number of other embedded derivatives within the Debentures, the Company has elected to record the Debentures, including the debt itself and all embedded derivatives, at fair value and present the Debentures as a hybrid financial instrument. No portion of the fair value of the Debentures has been recorded as equity, nor would be if each component was freestanding. As at August 30, 2014, the fair value of the Debentures was $1.5 billion. The difference between the fair value of the Debentures and the unpaid principal balance of $1.25 billion is $257 million.  The fair value of the Debentures is measured using Level 2 fair value inputs.
The Company recorded a non-cash charge associated with the change in the fair value of the Debentures of $167 million in the second quarter of fiscal 2015 and non-cash income of $120 million for the six months ended August 30, 2014 (the “Fiscal 2015 Debentures Fair Value Adjustments”). These adjustments are presented on a separate line in the Company's statement of operations. The fair value adjustments do not impact the key terms of the Debentures such as the face value, the redemption features or the conversion price.
During the second quarter of fiscal 2015, the Company recorded interest expense related to the Debentures of $19 million, which has been included in investment loss on the Company’s statement of operations. The Company is required to make quarterly interest-only payments of approximately $19 million during the seven years.


13

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





10.    STOCK-BASED COMPENSATION
Stock Option Plan
The Company recorded a charge to income and a credit to paid-in-capital of approximately nil and $1 million for the three and six months ended August 30, 2014 ($2 million and $3 million for the three and six months ended August 31, 2013) in relation to stock-based compensation expense.
A summary of option activity since March 1, 2014 is shown below:
    
 
Options Outstanding
 
Number
(in 000’s)
 
Weighted-
Average
Exercise
Price
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at March 1, 2014
3,267

 
$
12.08

 
 
 
 
Exercises during the period
(500
)
 
7.13

 
 
 
 
Forfeited/cancelled/expired during the period
(1,034
)
 
19.02

 
 
 
 
Balance as at August 30, 2014
1,733

 
$
9.65

 
3.00

 
$
5

Vested and expected to vest as at August 30, 2014
1,676

 
$
9.72

 
3.00

 
$
5

Exercisable as at August 30, 2014
497

 
$
15.31

 
2.77

 
$
1

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common shares on August 30, 2014 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on August 30, 2014. The intrinsic value of stock options exercised during the six months ended August 30, 2014, calculated using the average market price during the quarter, was approximately $1.74 per share.
As at August 30, 2014, there was $6 million of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.01 years. The total fair value of stock options vested during the six months ended August 30, 2014 was $1 million.
Cash received from the stock options exercised for the six months ended August 30, 2014 was $4 million (six months ended August 31, 2013 - nil).
Restricted Share Unit Plan
The Company recorded compensation expense with respect to restricted share units (“RSUs”) of approximately $8 million and $21 million for the three and six months ended August 30, 2014 ($18 million and $35 million for the three and six months ended August 31, 2013).
A summary of RSU activity since March 1, 2014 is shown below:    
 
RSUs Outstanding
 
Number
(000’s)
 
Weighted-
Average
Grant Date
Fair Value
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at March 1, 2014
24,345

 
$
8.15

 
 
 
 
Granted during the period
4,374

 
9.05

 
 
 
 
Vested during the period
(612
)
 
15.19

 
 
 
 
Forfeited/cancelled during the period
(3,320
)
 
9.99

 
 
 
 
Balance as at August 30, 2014
24,787

 
$
7.54

 
2.61

 
$
252,317

Expected to vest as at August 30, 2014
24,045

 
$
7.87

 
2.64

 
$
244,780

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate closing share price of the Company’s common shares on August 30, 2014) that would have been received by RSU holders if all RSUs had vested on August 30, 2014.

14

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





As at August 30, 2014, there was $145 million of unrecognized compensation expense related to RSUs that will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.98 years.
During the six months ended August 30, 2014, there were 4,373,720 RSUs granted (six months ended August 31, 2013 - 4,206,570 RSUs were granted), of which 3,819,231 will be settled upon vesting by the issuance of new common shares.

11.
CAPITAL STOCK
The following details the changes in issued and outstanding common shares for the six months ended August 30, 2014:    
 
Capital Stock and  Additional
Paid-In Capital
 
Treasury Stock
 
Stock
Outstanding
(000’s)
 
Amount
 
Stock
Outstanding
(000’s)
 
Amount
Common shares outstanding as at March 1, 2014
526,552

 
$
2,418

 
7,660

 
$
(179
)
Stock-based compensation

 
22

 

 

Exercise of stock options
500

 
4

 

 

Common shares issued for RSU settlements
378

 

 

 

Treasury shares released for RSU settlements

 
(6
)
 
(236
)
 
6

Common shares outstanding as at August 30, 2014
527,430

 
$
2,438

 
7,424

 
$
(173
)
The Company had 527 million common shares, 2 million options to purchase common shares, 24 million RSUs and 0.3 million deferred share units outstanding as at September 22, 2014. In addition, 125 million common shares are issuable upon conversion in full of the Debentures.


15

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





12.
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:    
 
Three Months Ended
 
Six Months Ended
 
August 30, 2014
 
August 31, 2013
 
August 30, 2014
 
August 31, 2013
Net loss for basic and diluted loss per share available to common shareholders
$
(207
)
 
$
(965
)
 
$
(184
)
 
$
(1,049
)
Less: Debentures fair value adjustment (1)(2)

 

 
(120
)
 
 
Add: interest expense on Debentures (1)(2)

 

 
38

 
 
Net loss for diluted loss per share available to common shareholders
$
(207
)
 
$
(965
)
 
$
(266
)
 
$
(1,049
)
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding (000’s) - basic
527,218

 
524,481

 
526,980

 
524,320

Effect of dilutive securities (000’s) (3)
 
 
 
 
 
 
 
Conversion of Debentures (1)(2)

 

 
125,000

 

Weighted-average number of shares and assumed conversions (000’s) - diluted
527,218

 
524,481

 
651,980

 
524,320

Loss per share - reported
 
 
 
 
 
 
 
Basic
$
(0.39
)
 
$
(1.84
)
 
$
(0.35
)
 
$
(2.00
)
Diluted
$
(0.39
)
 
$
(1.84
)
 
$
(0.41
)
 
$
(2.00
)
______________________________ 
(1) The Company has not presented the dilutive effect of the Debentures using the if-converted method in the calculation of earnings (loss) per share for the three months ended August 30, 2014 as to do so would be antidilutive.
(2) The Company has presented the dilutive effect of the Debentures using the if-converted method, assuming conversion at the beginning of fiscal 2015 for the six months ended August 30, 2014. Accordingly, to calculate diluted loss per share, the Company adjusted net loss by eliminating the Fiscal 2015 Debentures Fair Value Adjustments and interest expense incurred on the Debentures in the six months ended August 30, 2014 and added the number of shares that would have been issued upon conversion to the diluted weighted average number of shares outstanding. See Note 9 for details on the Debentures.
(3) The Company has not presented the dilutive effect of in-the-money options or RSUs that will be settled upon vesting by the issuance of new common shares in the calculation of earnings (loss) per share for the three and six months ended August 30, 2014 as to do so would be antidilutive. As at August 30, 2014, there were 849,598 options and 17,419,446 RSUs outstanding that may have a dilutive effect on earnings (loss) per share in future periods.

13.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in AOCI by component, net of tax, for the six months ended August 30, 2014 were as follows:
 
 
 
Unrealized Gains
(Losses) on
Cash Flow Hedges
 
Unrealized Gains
on Available-for-Sale
Securities
 
Total
AOCI as at March 1, 2014
 
$
(9
)
 
$
1

 
$
(8
)
Other comprehensive income before reclassifications
 
3

 

 
3

Amounts reclassified from AOCI into income
 
5

 

 
5

Other comprehensive income for the period
 
8

 

 
8

AOCI as at August 30, 2014
 
$
(1
)
 
$
1

 
$



16

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