8. Financial Instruments
The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk and liquidity risk.
Credit Risk
Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.
The Company provides credit to some licensees in the normal course of its operations. The Company's credit risk review includes performing periodic credit evaluations of its most significant licensees. In certain circumstances, the Company may utilize letters of guarantee or credit insurance to mitigate certain credit risks. The Company's licensees are, for the most part, large national and international public companies. Due to the nature of the Company's operations, provisions for doubtful accounts are made on a licensee-by- licensee basis, based upon on-going review of licensee financial status.
Many of the Company's current licensees' operations are focused in the semiconductor industry. The semiconductor industry, particularly the DRAM memory segment, has been suffering, for some time, from economic difficulties due to pricing pressure as a result of an oversupply of memory devices.
During Q3 fiscal 2009, Qimonda AG (Qimonda), a company representing more than 10% of the Company's consolidated revenues, filed for insolvency protection in Germany and defaulted on a payment due to the Company. The Company has in place a credit insurance policy which covers 90% of such payment and 90% of each of the subsequent 3 payments. As a result, the Company has recorded, as revenue, 90% of the current amount due from Qimonda, which is expected to be recovered via insurance. There is a risk that amounts due in future from Qimonda to the Company, that are not covered by credit insurance, may become uncollectible, resulting in a materially adverse impact to the Company.
Further, during Q3 fiscal 2009, another licensee defaulted on a fixed payment of U.S. $1.0 million due during the quarter. The Company has recorded the amount as accounts receivable but has deferred recognition of the amount as revenue due to the uncertainty regarding ultimate collection.
Due to the long-term nature of many of the Company's licensing arrangements and the prolonged downturn in the semiconductor industry, in certain circumstances, the Company may not be able to obtain at reasonable cost credit insurance or other forms of credit risk mitigation instruments. A default of the remaining payments by one of the Company's licensees could have a materially adverse impact on the Company's future revenues, earnings, cash flow and financial position.
The Company limits its exposure to credit risk from counter-parties to derivative instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.
The Company invests its excess cash in investment grade securities with a maturity date not exceeding 12 months. The Company relies upon the credit rating of the counter-party to limit its credit risk. The Company does not invest in asset-backed commercial paper.
The carrying amount of financial assets represents the maximum credit exposure. The maximum credit exposure to credit risk at the reporting date was:
January 31, 2009 April 30, 2008
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Cash $43,444 $22,133
Marketable securities 18,788 36,246
Accounts receivable 5,892 12,304
Other liability (459) (318)
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$67,665 $70,365
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The aging of accounts receivable at the reporting date was:
January 31, 2009 April 30, 2008
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Current $1,789 $12,101
Past due 4,103 203
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--------------------------------------------------------- $5,892 $12,304
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Of the amount past due, a portion has been recognized as revenue as the Company expects to collect the amount under a credit insurance policy, and a portion has been recorded as deferred revenue as there is uncertainty regarding ultimate collection.
Marketable securities comprise the following:
January 31, 2009 April 30, 2008
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Bonds & debentures $5,738 $18,980
Discount notes 13,050 17,266
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$18,788 $36,246
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Carrying values of bonds and debentures and discount notes include accrued interest and approximate market value. Investments in bonds and debentures and discount notes represent holdings in corporate and government short-term marketable securities as at January 31, 2009 and have a maturity date of one year or less.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's income or the value of its holding of financial instruments.
Foreign Exchange Risk
The Company's revenues are denominated primarily in U.S. dollars, giving rise to exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuations on its accounts receivable and future cash flows related to licensing arrangements denominated in U.S. dollars, as well as certain operating expenses and its other long-term liabilities obligations.
The Company's foreign exchange risk management includes the use of foreign exchange forward contracts to fix the exchange rates on certain foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments or anticipated transactions.
The Company also formally assesses, both at the inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.
The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. The Company had the following forward exchange contracts.
(In thousands of dollars) January 31, 2009
Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value
Sell $5,750 USD less than 3 months $6,315 ($486)
Sell $4,700 USD 3-12 months $5,797 $27
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($459)
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(In thousands of dollars) April 30, 2008
Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value
Sell $6,400 USD less than 3 months $6,222 ($141)
Sell $18,700 USD 3-12 months $18,656 ($123)
Buy $4,000 USD 3-12 months $4,117 ($54)
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($318)
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A one cent strengthening (weakening) of the U.S. dollar against the Canadian dollar would have decreased (increased) other comprehensive income by approximately $265,000; pro forma income would have increased (decreased) by approximately $18,000.
