Financial Instruments

6 Months Ended

Jun. 30, 2011

17. Financial Instruments

(a) Financial Instruments

The Company maintains cash with various major financial institutions. The Company’s cash is invested with highly rated financial institutions.

The Company’s accounts receivables and financing receivables are subject to credit risk. The Company’s accounts receivable and financing receivables are concentrated with the theater exhibition industry and film entertainment industry. To minimize the Company’s credit risk, the Company retains title to underlying theater systems leased, performs initial and ongoing credit evaluations of its customers and makes ongoing provisions for its estimate of potentially uncollectible amounts. The Company believes it has adequately provided for related exposures surrounding receivables and contractual commitments.

(b) Fair Value Measurements

The carrying values of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due within one year approximate fair values due to the short-term maturity of these instruments. The Company’s other financial instruments are comprised of the following:


	As at June 30, 2011				As at December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Borrowings under Credit Facility	$	34,583	$	34,583	$	17,500	$	17,500
Net financed sales receivable	$	57,428	$	56,628	$	43,620	$	43,615
Net investment in sales-type leases	$	22,130	$	23,324	$	29,981	$	32,613
Available-for-sale investment	$	1,012	$	1,012	$	1,500	$	1,500
Foreign exchange contracts — designated forwards	$	292	$	292	$	664	$	664
Foreign exchange contracts — non-designated forwards	$	480	$	480	$	1,249	$	1,249

The carrying value of borrowings under the Credit Facility approximates fair value as the interest rates offered under the Credit Facility are close to June 30, 2011 and December 31, 2010 market rates for the Company for debt of the same remaining maturities (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011 and December 31, 2010, respectively.

The estimated fair values of the net financed sales receivable and net investment in sales-type leases are estimated based on discounting future cash flows at currently available interest rates with comparable terms (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011 and December 31, 2010, respectively.

The fair value of the Company’s available-for-sale investment is determined using more recent securities with similar characteristics, the present value of expected cash flows based on projected earnings and other information readily available from the business venture (Level 3 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011 and December 31, 2010, respectively.

The fair value of foreign currency derivatives are determined using quoted prices in active markets (Level 2 input in accordance with the Fair Value Measurements Topic of the FASB ASC hierarchy) as at June 30, 2011 and December 31, 2010, respectively. These identical instruments are traded on a closed exchange.

The table below sets forth a summary of changes in the fair value of the Company’s available-for-sale investment measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period:


	Available
	For Sale
	Investments
Beginning balance, January 1, 2011	$	1,500
Transfers into/out of Level 3		—
Total gains or losses (realized/unrealized)
Included in earnings		—
Included in other comprehensive income		(488	)
Purchases, issuances, sales and settlements		—

Ending balance, June 30, 2011	$	1,012


The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—

(c) Financing Receivables

The Company’s net investment in leases and its net financed sale receivables are subject to the disclosure requirements of the FASB ASC 310 “Receivables”. Due to differing risk profiles of its net investment in leases and its financed sales receivables, the Company views its net investment in leases and its financed sale receivables as separate classes of financing receivables. The Company does not aggregate financing receivables to assess impairment.

The Company monitors the credit quality of each customer on a frequent basis through collections and aging analyses. The Company also holds meetings monthly in order to identify credit concerns and whether a change in credit quality classification is required for the customer. A customer may improve in their credit quality classification once a substantial payment is made on overdue balances or the customer has agreed to a payment plan with the Company and payments have commenced in accordance to the payment plan. The change in credit quality indicator is dependant upon management approval.

The Company classifies its customers into three categories to indicate their credit quality internally:

Good standing — Theater continues to be in good standing with the Company as the client’s payments and reporting are up-to-date.

Pre-approved transactions only — Theater operator has begun to demonstrate a delay in payments with little or no communication with the Company. All service or shipments to the theater must be reviewed and approved by management. These financing receivables are considered to be in better condition than those receivables related to theaters in the “All transactions suspended” category, but not in as good of condition as those receivables in “Good standing”. Depending on the individual facts and circumstances of each customer, finance income recognition may be suspended if management believes the receivable to be impaired.

All transactions suspended — Theater is severely delinquent, non-responsive or not negotiating in good faith with the Company. Once a theater is classified as “All transactions suspended”, the theater is placed on nonaccrual status and all revenue recognitions related to the theater are stopped.

The following table discloses the recorded investment in financing receivables by credit quality indicator as at June 30, 2011:


	Minimum		Financed
	Lease		Sales
	Payments		Receivables		Total
In good standing	$	19,077	$	54,799	$	73,876
Pre-approved transactions		943		1,094		2,037
Transactions suspended		4,702		1,601		6,303

	$	24,722	$	57,494	$	82,216

While recognition of finance income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectibility issues are resolved and the customer has returned to being in good standing, the Company will resume recognition of finance income.

The Company’s investment in financing receivables on nonaccrual status as at June 30, 2011 is as follows:


	Recorded		Related
	Investment		Allowance
Net investment in leases	$	4,702	$	(2,475	)
Net financed sales receivables		1,601		(66	)


Total	$	6,303	$	(2,541	)

The Company considers financing receivables with aging between 60-89 days as indications of theaters with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the theater regarding payment status. Once a theater’s aging exceeds 90 days, the Company’s policy is to review and assess collectibility on the theater’s past due accounts. Over 90 days past due is used by the Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for dispute resolution or for the provision of further information or supporting documentation to the customer.

The Company’s aged financing receivables as at June 30, 2011 are as follows:


									Related							Recorded
							Billed		Unbilled		Total					Investment
							Financing		Recorded		Recorded		Related			Net of
	Current		30-89 Days		90+ Days		Receivables		Investment		Investment		Allowances			Allowances
Net investment in leases	$	418	$	357	$	1,922	$	2,697	$	22,025	$	24,722	$	(2,592	)	$	22,130
Net financed sales receivables		960		551		639		2,150		55,344		57,494		(66	)		57,428

Total	$	1,378	$	908	$	2,561	$	4,847	$	77,369	$	82,216	$	(2,658	)	$	79,558

The Company’s recorded investment in past due financing receivables for which the Company continues to accrue finance income as at June 30, 2011 is as follows:


									Related					Recorded
							Billed		Unbilled					Investment
							Financing		Recorded		Related			Past Due
	Current		30-89 Days		90+ Days		Receivables		Investment		Allowance			and Accruing
Net investment in leases	$	70	$	108	$	546	$	724	$	2,988	$	(116	)	$	3,596
Net financed sales receivables		281		254		459		994		15,403		—			16,397

Total	$	351	$	362	$	1,005	$	1,718	$	18,391	$	(116	)	$	19,993

The Company considers financing receivables to be impaired when it believes it to be probable that it will not recover the full amount of principal and interest owing under the arrangement. The Company uses its knowledge of the industry and economic trends, as well as its prior experiences to determine the amount recoverable for impaired financing receivables. The following table discloses information regarding the Company’s impaired financing receivables:


	Impaired Financing Receivables
	For the Three and Six Months Ended June 30, 2011
								Average		Interest
	Recorded		Unpaid		Related			Recorded		Income
	Investment		Principal		Allowance			Investment		Recognized
Recorded investment for which there is a related allowance:
Net financed sales receivables		232		195		(66	)		232		—

Total recorded investment in impaired loans:

Net financed sales receivables	$	232	$	195	$	(66	)	$	232	$	—

The Company’s activity in the allowance for credit losses for the period and the Company’s recorded investment in financing receivables is as follows:


	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011
	Net Investment		Net Financed		Net Investment			Net Financed
	in Leases		Sales Receivables		in Leases			Sales Receivables
Allowance for credit losses:

Beginning balance	$	2,558	$	66	$	4,838		$	66
Charge-offs		—		—		(2,445	)		—
Provision		34		—		199			—

Ending balance	$	2,592	$	66	$	2,592		$	66

Ending balance: individually evaluated for impairment	$	2,592	$	66	$	2,592		$	66


Financing receivables:

Ending balance: individually evaluated for impairment	$	24,722	$	57,494	$	24,722		$	57,494

(d) Foreign Exchange Risk Management

The Company is exposed to market risk from changes in foreign currency rates. A major portion of the Company’s revenues is denominated in U.S. dollars while a substantial portion of its costs and expenses is denominated in Canadian dollars. A portion of the net U.S. dollar cash flows of the Company is periodically converted to Canadian dollars to fund Canadian dollar expenses through the spot market. In Japan, the Company has ongoing operating expenses related to its operations in Japanese yen. Net Japanese yen cash flows are converted to U.S. dollars generally through the spot market. The Company also has cash receipts under leases denominated in Japanese yen, Canadian dollar and Euros which are converted to U.S. dollars generally through the spot market. The Company’s policy is to not use any financial instruments for trading or other speculative purposes.

The Company entered into a series of foreign currency forward contracts to manage the Company’s risks associated with the volatility of foreign currencies. Certain of these foreign currency forward contracts met the criteria required for hedge accounting under the Derivatives and Hedging Topic of the FASB ASC at inception, and continue to meet hedge effectiveness tests at June 30, 2011 (the “Foreign Currency Hedges”), with settlement dates throughout 2011. In addition, at June 30, 2011, the Company held foreign currency forward contracts to manage foreign currency risk on future anticipated Canadian dollar expenditures that were not considered Foreign Currency Hedges by the Company. Foreign currency derivatives are recognized and measured in the balance sheet at fair value. Changes in the fair value (gains or losses) are recognized in the condensed consolidated statement of operations except for derivatives designated and qualifying as foreign currency hedging instruments. For foreign currency hedging instruments, the effective portion of the gain or loss in a hedge of a forecasted transaction is reported in other comprehensive income (“OCI”) and reclassified to the condensed consolidated statement of operations when the forecasted transaction occurs. Any ineffective portion is recognized immediately in the condensed consolidated statement of operations.

The following tabular disclosures reflect the impact that derivative instruments and hedging activities have on the Company’s condensed consolidated financial statements:

Notional value foreign exchange contracts as at:


	June 30,		December 31,
	2011		2010
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards	$	4,062	$	12,671

Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards		6,984		28,842

	$	11,046	$	41,513

Fair value of derivatives in foreign exchange contracts as at:


		June 30,		December 31,
	Balance Sheet Location	2011		2010
Derivatives designated as hedging instruments:
Foreign exchange contracts — Forwards	Other assets	$	292	$	664

Derivatives not designated as hedging instruments:
Foreign exchange contracts — Forwards	Other assets		480		1,249

		$	772	$	1,913

Derivatives in Foreign Currency Hedging relationships for the:


		Three Months Ended June 30,					Six Months Ended June 30,
		2011		2010			2011		2010
Foreign exchange contracts — Forwards	Derivative Gain (Loss) Recognized in OCI (Effective Portion)	$	49	$	(387	)	$	351	$	(179	)

		$	49	$	(387	)	$	351	$	(179	)


	Location of Derivative Gain
	(Loss) Reclassified from
	AOCI into Income	Three Months Ended June 30,					Six Months Ended June 30,
	(Effective Portion)	2011		2010			2011		2010
Foreign exchange contracts - Forwards	Selling, general and administrative expenses	$	466	$	(7	)	$	724	$	542

		$	466	$	(7	)	$	724	$	542

Non Designated Derivatives in Foreign Currency relationships for:


	Location of Derivative Gain	Three Months Ended June 30,					Six Months Ended June 30,
	(Loss)	2011		2010			2011		2010
Foreign exchange contracts - Forwards	Selling, general and administrative expenses	$	93	$	(602	)	$	721	$	(178	)

		$	93	$	(602	)	$	721	$	(178	)

(e) Investments in New Business Ventures

The Company accounts for investments in new business ventures using the guidance of the FASB ASC 323 and the FASB ASC 320, as appropriate. As at June 30, 2011, the equity method of accounting is being utilized for an investment with a carrying value of $3.3 million (December 31, 2010 — $1.6 million). For the three months ended June 30, 2011, gross revenues, cost of revenue and net loss for the investment were $0.3 million, $2.4 million and $4.4 million, respectively (2010 — $nil, $nil and $nil, respectively). For the six months ended June 30, 2011, gross revenues, cost of revenue and net loss for the investment were $0.5 million, $3.8 million and $8.6 million, respectively (2010 — $nil, $nil and $nil, respectively). The Company has determined it is not the primary beneficiary of this VIE, and therefore it has not been consolidated. In addition, during 2010, the Company made an investment in preferred stock of another business venture of $1.5 million which meets the criteria for classification as a debt security under the FASB ASC 320 and is recorded at its fair value of $1.0 million at June 30, 2011 (December 31, 2010 — $1.5 million). This investment is classified as an available-for-sale investment. The total carrying value of investments in new business ventures at June 30, 2011 is $4.3 million (December 31, 2010 — $3.1 million) and is recorded in Other Assets.