NORTHERN FINANCIAL CORPORATION
ANNUAL REPORT
2003
August 12, 2003
To Our Shareholders
Year in Review
The fiscal year 2003, which ended March 31, 2003, was a period of substantial growth for Northern Financial Corporation
(“Northern” or the “Company”) and its wholly owned subsidiary Northern Securities Inc. (“Northern Securities”).
Northern opened an office in Calgary; acquired the securities business of Georgia Pacific Securities Corporation (“Georgia
Pacific”) in December 2002, with its office in Vancouver; and acquired IPO Capital Corp. (“IPO”) in March 2003, also a
brokerage firm, with offices in Toronto and Vancouver.
Northern’s Acquisitions
Northern is a product of the following acquisitions:
The Company acquired Northern Securities in June 1999
Northern Securities acquired the securities business of St. James Securities in 1999
The Company acquired CanadaInvestDirect, an online brokerage firm, in June 2001
Northern Securities acquired the securities business of Georgia Pacific in December 2002
Northern acquired IPO on March 31, 2003
The securities business of St. James Securities was acquired for $72,000 and we hired 20 members of St. James’ staff.
CanadaInvestDirect had $1,005,000 in cash, and was acquired for $250,000 in cash and $250,000 in shares, resulting in a
net amount to Northern of $505,000.
Northern paid $133,000 in shares to acquire the Georgia Pacific securities business and issued 10 million shares to
reimburse Georgia Pacific for certain expenses.
In the case of IPO, Northern paid $343,000 in cash and issued $840,000 in shares, acquiring net cash proceeds of about
$1.5 million.
We are now a small national firm with offices in Toronto, Vancouver and Calgary. Our overriding focus is to get to
breakeven profitability for the fiscal year ending March 31, 2004. This is our first and main priority before considering
any additional acquisitions. Ultimately, Northern expects to grow again by acquisition and also expects to grow
organically as more high quality people join the Company.
During current turbulent market conditions, the brokerage industry is downsizing – Northern is upsizing. This is a
deliberate strategy on the part of Northern. Northern is a public company with two key advantages: Northern can use its
public company status to raise capital; and Northern can use its stock as currency to acquire brokerage firms, as it has done
in the past.
Northern – A New Style Securities Firm
Currently, there is massive overall public distrust of the markets in general, and a lack of confidence in public companies
and market participants in particular. The events surrounding several Canadian public companies, YBM, Livent and BreX have had a negative impact on the markets. Similarly, the catastrophic and incredulous events surrounding Enron,
WorldCom, Adelphia and Tyco have very negatively affected the US markets.
High profile issues have adversely affected large securities firms in the US and some of these firms have been sanctioned
by regulatory authorities for alleged misconduct. Several have reached a large settlement with the New York Attorney
General.
These events have also forced one large securities company to separate its retail sales group and research
business into a separate entity in order to be uninfluenced by the investment banking group.
In Canada, several securities firms have been involved in similar issues: there is a major class action suit against one firm;
and there have been sanctions handed down against two firms over the YBM events.
Northern believes that the culmination of these events will lead to a stronger and healthier brokerage industry in Canada
and the United States. Despite the short-term pain, Northern considers that mid to long-term there will be positive
developments for clients, brokerage firms and regulators alike.
Northern fully supports the drive for higher standards of excellence and quality in the securities industry.
As part of these developments, Northern believes that the Canadian public is looking for new style brokerage firms to
emerge. Northern is creating a new style firm – new style with a high standard of quality services to its clients, openness
and honesty in all its communications, and the continuing standard of 100% regulatory compliance. Northern does not
yet quite meet these high standards but this is where we plan to go.
Too Many Brokers
In 2000, there were approximately 39,400 people employed by 215 securities firms in Canada. Today, the employee count
is closer to 38,100, employed by 200 firms. Northern expects, if current weak market conditions continue as expected,
that the number of securities firms will be reduced, with a corresponding drop in employees to around 32,000.
Conditions are ripe for more consolidation in the industry. Securities firms that support retail sales only are collapsing.
Northern believes that going forward, securities firms will need the twin pillars of investment banking and retail to support
a viable business. This is the Northern business model – investment banking and retail in a well defined, under-serviced
niche – the small cap arena.
The Company views the current shakedown in the brokerage industry as being very healthy long term for the industry.
Consolidation is being driven by several factors including:
the welcome trend towards higher standards of excellence and quality in the brokerage business
increased regulatory standards for brokerage firms and consequential higher operating costs
the need for sustainable capital
the cost of technology solutions to provide excellent customer service
competition from online brokerage firms
the sluggish market conditions that are expected to persist for some time
Northern welcomes the higher standards that are expected of brokerage firms – this is the key to winning trust with
investors.
Largest Small Cap Securities Firm
Northern is emerging as an independent national firm, getting closer in impact and size to the leading independent firms.
These securities firms cover a mix of small cap, mid cap and large cap companies, whereas the bank-owned firms mainly
cover mid cap to large cap companies, and occasionally small cap companies.
Northern’s unique and distinctive focus is its exclusive concentration on small cap companies. Northern is now the largest
brokerage firm in Canada that has an exclusive investment banking focus on small cap companies.
This is Northern’s market niche – an enormous, under-serviced market niche in Canada.
A large cap company that hires a large cap focused securities firm can expect to receive high quality advice. This is not
the case for small cap companies. There are many one-person, two-person and other small advisory firms, whether
brokerage firms or not, that service small cap companies. However, there is no brokerage firm the size of Northern that
can service small cap companies as well as Northern.
There is a huge disparity in the quality of financial advisory services that are provided to small cap companies among
brokerage firms and none that are known to provide excellent high quality service on a continuing and sustainable basis.
Northern wants to change that. Northern plans to provide small cap companies with the same high quality service
currently enjoyed by large cap companies. Northern is not there yet. But this is where we are going. This is where we
plan to be.
Ultimate Expansion to the United States
As a mid to long-term objective, Northern plans to expand into the United States either organically, by attracting a team
that fits the Northern culture, or by acquisition. The opportunity in the United States is substantial. Currently, no
securities firm that is exclusively focused on small cap companies has an office in both Canada and the US – our goal is to
be that securities firm.
A presence in the United States would enable Northern to offer small cap companies the ability to raise capital in both
Canada and the U.S. and to obtain concurrent cross-border small cap listings such as on the NASDAQ Small Cap market
and the TSX or the TSX Venture Exchange.
At this point, Northern has no immediate plans to expand into the U.S.; rather, we are concentrating on establishing a
stronger base in Canada, which is expected to involve further expansion by internal growth, or by acquisition, or both.
Independence From Financial Institutions
Northern is a full service, independent securities firm. Northern’s independence is the key – it is not owned by a financial
institution. There is room in Canada for emerging strong and well-financed investment banks to compete for business
with small cap or mid cap companies. As stated, Northern’s focus is entirely on small cap companies.
Strategy Behind Our Marketplace Focus
A key factor for small cap companies in the difficult process of raising capital in Canada, and receiving high quality
advisory services for corporate strategies such as mergers and acquisitions and restructurings, is the lack of high quality
investment banks dedicated to the growing small cap sector. Of the 200 member firms of the IDA, approximately 50%
service large cap companies, approximately 30% service mid cap companies and approximately 20% service small cap
companies.
Of the IDA member firms, Northern is the largest that caters exclusively to small cap companies. This is a powerful niche
in Canada since there are many small cap companies that are under-serviced in the areas where Northern is focused, such
as raising capital, mergers and acquisitions and restructurings.
The small cap niche represents a very large business opportunity for Northern in Canada. Northern defines this niche as
companies with a market value of $300 million and lower. There are many, many more small cap companies than there
are mid cap or large cap companies and there are few investment banks that focus exclusively on the small cap arena.
In current turbulent market conditions, bank owned firms are moving downstream and doing transactions with small cap
companies, however small cap companies generally receive no research coverage or trading support on a continuing basis
from bank owned firms. When market conditions return to normalcy, large cap focused brokerage firms will return to
their traditional focus and concentrate on large cap and mid cap companies, likely deserting their small cap clients.
Northern’s focus on the twin pillars of investment banking and retail in the small cap arena is key to its ability to grow its
business and its revenue. No small cap focused investment bank consistently provides high quality service to small cap
companies; Northern’s goal is to be that investment bank.
Northern excels in identifying quality small cap companies that are relatively unnoticed in the market and often
undervalued. The ability to introduce these companies to its clients is central to the Northern platform.
Northern’s Values
Northern has three key values that drive all of its relationships with its employees, clients and regulators:
we have the highest respect for our employees – we are loyal and we expect loyalty
we provide excellent service for our clients; we place the client first in everything we do
we are lean and clean – our continuing objective is to be 100% in regulatory compliance
Our business is a people business. The brokerage business is the very best business. It is an exhilarating business. It is a
fun business. It is a business where clients can do very well. It can be tough at times and from time to time, but that is the
business.
Not too many employees in the brokerage industry believe it is fun. We do. Not too many investors are doing very well
these days. Our investors are. We believe investors can do well in these tough times. The key is to be contrarian. Do not
follow the crowd. Seek out substantially undervalued opportunities. Do your homework on how businesses should be
valued. Do not rely on brokers only for your investment decisions.
Our Objectives
We have made progress in building the firm. Fiscal 2004 is a time for the Company to achieve breakeven profitability.
On behalf of the Board of Directors, we thank our employees and shareholders for their continued support and we look
forward to seeing you at our annual and special meeting to be held at 5:00 pm on Tuesday September 23, 2002 at the
Toronto Stock Exchange Conference Centre, 130 King Street West (The Exchange Tower) in Toronto.
Vic Alboini
Chairman and Chief Executive Officer
MANAGEMENT’S DISCUSSION AND ANALYSIS
General
The 2003 fiscal year was a year of significant expansion for the Company, and a period of continuing efforts to minimize
the Company’s cost structure.
In December 2003 the Company acquired the securities business of Georgia Pacific Securities Corporation (“Georgia
Pacific”), a Vancouver based securities dealer. As part of the transaction, Georgia Pacific invested $750,000 in the
Corporation. Based on current staffing, the Georgia Pacific business acquisition added approximately fifty employees,
including approximately thirty retail representatives and approximately fifteen traders. The Georgia Pacific business
acquisition was implemented in the fourth quarter, and the Company expects significant revenue growth in fiscal 2004
from the new Vancouver office.
In January 2003 the Company officially opened an office in Calgary, Alberta. The opening of the Calgary office made
Northern a true national firm, with offices in Toronto, Vancouver and Calgary. The current staffing in Calgary is
thirteen employees, including four retail representatives, three traders, two investment bankers, and an oil & gas equity
analyst. As a result of opening a Calgary office, the Company expects to be able to take advantage of the robust Alberta
resource market in fiscal 2004.
In March 2003 the Company acquired IPO Capital Corp (“IPO Capital”), a securities dealer with offices in Toronto and
Vancouver. The brokerage business of IPO Capital has been transferred to Northern. Based on current staffing, the IPO
Capital acquisition has added approximately fifteen employees, including approximately ten retail representatives. IPO
Capital also had approximately $1.5 million in cash at the date of acquisition, which the Corporation acquired. The
Company expects the additional IPO Capital staff will significantly strengthen Northern’s Toronto and Vancouver
offices in fiscal 2004.
In conjunction with its business acquisitions, the Company has continued its efforts to minimize its operating costs. The
Company has been performing a complete assessment of all costs, including systems, premises, leasing and personnel
costs. The Company has terminated two office spaces previously occupied by IPO Capital, and moved the entire
Vancouver office to a more affordable space. The Company has also recognized many other synergies in connection
with its acquisitions, including certain redundant personnel reductions, and the reduction of various overlapping system,
insurance and regulatory costs.
The Company has experienced significant revenue growth in the first quarter of 2004 based on a combination of the
Company’s expanded size and a noticeble improvement in capital market conditions. The Company’s goal is to continue
to focus on the integration of its newly acquired businesses and to concentrate on cost reductions, with a goal to reach
break even profitability by the end of fiscal 2004.
Liquidity and Capital Resources
The Company had $3,754,773 in cash, deposits and securities at March 31, 2003 compared to $1,497,612 at March 31,
2002. Included in this amount were security deposits with the Company’s carrying brokers of $1,352,599 at March 31,
2003 and $250,000 at March 31, 2002. The Company used $1,365,640 in operating activities during the year, primarily
relating to brokerage operations costs, general and administrative expenses, and interest. This represented a significant
improvement over 2002, when $2,884,443 was used in operations. The improvement relates mainly to higher revenues
in 2003, improved cost control, and lower interest and bad debts. The Company spent very little on capital assets in
2003, consistent with 2002. From a financing perspective, the Company raised in aggregate approximately $2,800,000
in a rights offering and two equity private placements, and issued debentures and loans aggregating over $1,000,000.
The Company also repaid over $1,000,000 in debentures and long term debt over the course of the year.
The Company had current liabilities of $3,931,243 at March 31, 2003, up from $2,092,950 at the previous year end. The
increase is due mainly to an increase in accounts payable and accrued liabilities to $3,087,978 from $1,005,879,
reflecting the significant expansion of the Company’s operations during the year, particularly in the fourth quarter, and
significant accrued costs relating to the integration of Georgia Pacific and IPO Capital.
The Company had no long term debt at March 31, 2003, compared to long term debt of $42,856 at March 31, 2002.
Results of Operations
Total revenue for fiscal 2003 was $6,536,428, an increase over revenue of $5,481,120 in fiscal 2002. The increase is
mainly attributable to the acquisition of the securities business of Georgia Pacific, which resulted in higher commission
and trading revenue in the fourth quarter. Underwriting and advisory revenue increased to $2,253,194 from $1,407,448,
reflecting an increase in financing activity, despite continuing poor market conditions, and a significant increase in
informal restructuring activity, due to poor economic conditions.
Operating expenses were in aggregate slightly lower than 2002, despite a significant expansion of the Company’s
operations in the final quarter. Brokerage operations costs increased to $8,177,064 from $6,267,922, largely attributable
to the opening of new offices in Vancouver and Calgary in the fourth quarter. General and administrative expenses were
reduced to $777,939 from $1,141,981, reflecting a continuing effort to minimize the Company’s overhead costs.
The Company’s operating loss improved to $2,913,855 in 2003 from $4,279,734 in 2002. The improvement was
generally a result of improved revenue combined with contained costs.
Overall, the Company recorded a net loss of $2,913,855 during fiscal 2003, similar to the net loss of $2,652,738
recorded in fiscal 2002. In 2002 the Company had recorded a one-time gain of $1,626,996 in connection with a
settlement of debt, while in 2003 the Company recorded no such gains.
The Company expects that synergies relating to the combination of Northern’s business with Georgia Pacific and IPO
Capital, the Company’s improved cost structure due to its new clearing relationship with Penson, and moderately
improving capital market conditions will enhance the Company’s ability to become breakeven profitable by the end of
fiscal 2004.
NORTHERN FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
AUDITORS' REPORT
To the Shareholders of
Northern Financial Corporation
We have audited the consolidated balance sheets of Northern Financial Corporation as at March 31, 2003 and
2002 and the consolidated statements of operations and deficit and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 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 31, 2003 and 2002 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
McGOVERN, HURLEY, CUNNINGHAM, LLP
Signed “McGovern, Hurley, Cunningham, LLP”
Chartered Accountants
TORONTO, Canada
July 25, 2003
NORTHERN FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31
2003
$
2002
$
(Note 19)
ASSETS
CURRENT
Cash and cash equivalents
Deposits with carrying brokers (Note 5)
Securities owned, at market value (Note 6)
Accounts receivable
Prepaid expenses and deposits
Income taxes recoverable
2,297,970
1,352,599
104,204
512,601
401,686
48,253
4,717,313
783,242
250,000
464,370
257,803
122,107
71,253
1,948,775
CAPITAL ASSETS (Note 7)
1,142,996
1,097,047
GOODWILL (Note 8(a))
3,024,468
3,024,468
377,000
INTANGIBLE ASSETS (Note 8(b))
9,261,777
6,070,290
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 16)
Debentures payable (Note 9)
Securities sold short
Current portion of long-term debt (Note 10)
3,087,978
784,600
7,817
50,848
1,005,879
718,925
368,146
3,931,243
2,092,950
-
LONG-TERM DEBT (Note 10)
3,931,243
TOTAL LIABILITIES
202,351
NON-CONTROLLING INTEREST (Note 4(b))
42,856
2,135,806
-
CONTINGENCIES (Note 14)
SHAREHOLDERS’ EQUITY
CAPITAL STOCK (Note 12(a))
SUBORDINATED LOAN (Note 11)
WARRANTS (Note 12(c))
CONTRIBUTED SURPLUS (Note 12(c))
DEFICIT
75,160,082
300,000
418,450
469,933
(71,220,282)
71,443,430
333,299
464,182
(68,306,427)
5,128,183
3,934,484
9,261,777
6,070,290
APPROVED ON BEHALF OF THE BOARD:
Signed
“VIC ALBOINI”
, Director
Signed
“IAN BRADLEY“
, Director
See accompanying notes to the consolidated financial statements.
NORTHERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED MARCH 31
2003
$
2002
$
(Note 19)
REVENUES
Commissions
Underwriting and advisory
Trading - net
Interest
Gain on sale of stock exchange share
Other
Total revenues
3,244,555
2,253,194
631,475
374,010
33,194
6,536,428
2,874,661
1,407,448
270,565
428,989
351,679
147,778
5,481,120
OPERATING EXPENSES
Brokerage operations
General and administrative
Bad debt provision
Interest expense
Depreciation and amortization
Total operating expenses
8,177,064
777,939
25,000
158,772
311,508
9,450,283
6,267,922
1,141,981
852,305
444,831
1,053,815
9,760,854
Loss before the undernoted
Gain on settlement of debt
(2,913,855)
-
(4,279,734)
1,626,996
NET LOSS FOR THE YEAR
(2,913,855)
(2,652,738)
DEFICIT, beginning of year
(68,306,427)
(65,653,689)
DEFICIT, end of year
(71,220,282)
(68,306,427)
(0.01)
(0.01)
268,858,868
183,234,703
LOSS PER SHARE – Basic
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
See accompanying notes to the consolidated financial statements.
NORTHERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
2003
$
2002
$
(Note 19)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) for the year
Items not involving cash:
Depreciation and amortization
Foreign exchange
Accretion of debentures
Gain on settlement of debt
Shares issued for services
Gain on sale of stock exchange share
(2,913,855)
(2,652,738)
311,508
5,000
27,215
(2,570,132)
1,053,815
(1,626,996)
100,000
(351,679)
(3,477,598)
(1,067,599)
587,166
(175,719)
(284,579)
2,137,406
7,817
1,204,492
5,572
39,523
568,526
163,500
120,180
(304,146)
593,155
(1,365,640)
(2,884,443)
(173,349)
(377,000)
-
(23,846)
(11,215)
(550,349)
(35,061)
1,376,000
790,000
(200,000)
808,594
(360,154)
1,293,000
(65,417)
300,000
(511,306)
1,005,864
920,140
(360,667)
3,094
(309,286)
1,599,157
(24,824)
381,679
-
3,430,717
3,215,157
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
1,514,728
783,242
295,653
487,589
Cash and cash equivalents, end of year
2,297,970
783,242
Changes in non-cash working capital balances:
Deposits with carrying brokers
Securities owned
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Securities sold short
Due to related party
Cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of capital assets (net)
Acquisition of intangible assets
Redemption of common shares
Cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash and cash equivalents acquired on purchase of IPO
Debentures payable issued
Debentures payable repayments
Proceeds from exercising stock options
Proceeds from rights offering, net of issue costs
Principal repayments on long-term debt
Proceeds from private placements, net of issue costs
Costs of issue of non-cash share issuances
Proceeds on sale of stock exchange share
Subordinated loan received
Investment in IPO, including costs
Cash flows from financing activities
SUPPLEMENTAL INFORMATION (Note 17)
See accompanying notes to the consolidated financial statements.
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
1.
ORGANIZATION AND BASIS OF PRESENTATION
In 1999, Northern Financial Corporation (the “Company”) acquired Northern Securities Inc. (“NSI”), a member firm of the
Investment Dealers Association (“IDA”). NSI entered into agreements to act as a Type 2 introducing broker (Note 5). The
Company carries on a traditional brokerage business in retail and institutional sales, research, corporate finance, mergers and
acquisitions, and restructurings. The Company also carries on an online brokerage business.
2.
GOING CONCERN
The Company has sustained net losses and negative cash flows from operations since its inception. At March 31, 2003, the
Company’s main operating subsidiary, NSI was in IDA Early Warning Level 2; however, NSI had positive risk adjusted capital
as at that date. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability
to achieve profitable operations or raise additional financing through public or private equity financings, or other sources of
financing to fund operations. However, there is no assurance that the Company will achieve profitable operations or that it will
be able to raise adequate financing from other sources.
These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian
generally accepted accounting principles. The going concern basis of presentation assumes that the Company will continue
operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the
normal course of business.
If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary to
the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company are in accordance with generally accepted accounting principles in Canada and are
consistent with that of the previous year. Outlined below are those policies considered particularly significant:
a)
Principles of Consolidation:
These consolidated financial statements include the accounts of the Company and all its subsidiaries.
b)
Foreign Currency Translation:
Monetary assets and liabilities are translated at the rate of exchange prevailing at the year end; capital assets are
translated at the rates prevailing at the acquisition dates; and revenue and expenses are translated at average rates of
exchange during the year, with the exception of amortization which is translated at historical exchange rates. Exchange
gains and losses are included in the consolidated statement of income and deficit.
c)
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments with an original maturity date of twelve months or less to be
cash equivalents. Included in cash and cash equivalents are amounts on deposit with the carrying brokers that can be
used in normal operations.
d)
Securities Owned:
Securities owned consist of equities and are recorded at fair value and any unrealized gains and losses are included in
trading revenues and losses. Market value is based on quoted market prices and management’s estimates of amounts
to be realized on settlement.
e)
Capital Assets:
Capital assets are recorded at cost less accumulated depreciation. Depreciation is provided on a declining-balance basis
at the following annual rates:
Equipment under capital lease
Computer software
Office equipment
Leasehold improvements
Computer hardware
f)
30%
100%
20%
20%
30%
Goodwill and Other Intangible Assets:
In August 2001, the Canadian Institute of Chartered Accountants (“CICA”) issued Handbook Section 3062, “Goodwill and
Other Intangible Assets”. Under Section 3062, goodwill is not amortized and is tested for impairment annually, or more
frequently if events or changes in circumstances indicate that 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 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 of the impairment test is unnecessary. The second step is carried out when the carrying
amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of a
reporting unit’s 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 income statement before extraordinary items and
discontinued operations.
Other intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives of three
years and are also tested for impairment.
The Company has adopted Section 3062 effective April 1, 2002. In accordance with the provisions of this section, the
Company has determined that no impairment of goodwill or other intangible assets existed on April 1, 2002 or March 31,
2003.
At April 1, 2002, the Company had unamortized goodwill, which arose on previous acquisitions of $3,024,468, which is no
longer being amortized. This change in accounting policy is not applied retroactively and the amounts presented for prior
years have not been restated for this change. If this change in accounting policy was applied retroactively to the
consolidated statement of operations, the impact of the change would have been as follows:
Net loss, as reported
Amortization of goodwill
Net loss before amortization of goodwill
Loss per share, as reported
Amortization of goodwill
Loss per share for the year before amortization of goodwill
g)
2002
$
(2,652,738)
497,044
(2,155,694)
(0.01)
0.00
(0.01)
Revenue Recognition:
Securities transactions and related revenues are recorded on a trade-date basis.
Underwriting and advisory revenues are recognized when the requirements as to performance are met and ultimate
collection is reasonably assured.
h)
Use of Estimates:
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
i)
Leases:
Leases have been classified as either capital or operating. A lease which transfers substantially all of the benefits and
risks incidental to the ownership of property is accounted for as if it were an acquisition of an asset and the incurrence of
an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental
payments are charged to operations as incurred.
j)
Stock-based Compensation Plan:
Effective April 1, 2002, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants
(“CICA”) Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments”. This Section
establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stockbased payments made in exchange for goods and services. These recommendations require that compensation for all
awards made to non-employees and certain awards made to employees be measured and recorded in the financial
statements at fair value. This Section also sets out a fair value based method of accounting for stock options issued to
employees and applies to awards granted on or after April 1, 2002.
The Company, as permitted by Section 3870, has chosen to continue its existing policy of recording no compensation
cost on the grant of stock options to employees. Any consideration paid by employees on exercise of stock options is
credited to capital stock. The Company’s stock-based compensation plan is described in Notes 12(b) and (d).
k)
Income Taxes:
The Company accounts for and measures future tax assets and liabilities in accordance with the liability method. Under
this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future
tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on future
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment
or substantive enactment of the change. When the future realization of income tax assets does not meet the test of
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
being more likely than not to occur, a valuation allowance in the amount of the potential future benefit is taken and no net
asset is recognized.
l)
Loss Per Share:
Basic per share amounts are calculated using the weighted average number of shares outstanding for the period. Under
this standard, the treasury method is used to determine the dilutive effect of stock options and other dilutive instruments.
The existence of stock options, conversion rights and warrants affects the calculation of loss per share on a fully diluted
basis. As the effect of this dilution is to reduce the reported loss per share, fully diluted loss per share has not been
shown.
4.
ACQUISITIONS
a)
On December 20, 2002, the Company purchased all of the assets of Georgia Pacific Securities Corporation (“GP”) and
assumed all of the existing client and inventory accounts, employees, and commitments effective February 1, 2003. The
assets and revenues from this purchase have been consolidated with those of the Company at the effective date. The
acquisition was accounted for using the purchase method of accounting.
The net assets acquired are summarized as follows:
Furniture and fixtures
Intangible assets
$133,640
377,000
$510,640
The consideration included 5,240,784 common shares and cash of $150,000. The amount to be paid by cash was
settled subsequent to the year end by the issuance of 10,000,000 common shares of the Company. Included in the
above is a provision for employee termination costs of $56,000, infrastructure consolidation costs of $82,000, relocation
costs of $40,000, and other exit activity costs of $49,000 related to the Company’s plan to restructure the acquired
operations of GP. The aggregate amount of $227,000 was included in accounts payable and accrued liabilities as at
March 31, 2003. The restructuring plan is expected to be completed by the end of fiscal 2004.
The Company is also contingently liable to pay 50% of the profits resulting from the GP operations for the next three
years to a maximum of approximately $2,500,000.
As part of the acquisition, GP purchased 37,500,000 common shares of the Company for $750,000.
In addition, GP advanced $500,000 to the Company to finance increased business activity. Prior to the year end, the
Company repaid $200,000 of this advance in cash, and settled the remaining $300,000 with the issuance of 20,000,000
common shares of the Company subsequent to the year end. See Notes 11 and 18(a).
b)
On March 31, 2003, and the period immediately subsequent to the year end, the Company acquired 100% of the
outstanding shares of 1279514 Ontario Inc., which owns 100% of IPO Capital Corp (collectively “IPO”), a brokerage firm
with offices in Toronto and Vancouver, for cash consideration of $343,106 and the issuance of 26,253,388 common
shares of the Company with a fair value of $840,110. The Company also incurred acquisition costs totaling $168,200.
The acquisition was accounted for by the purchase method of accounting.
As at March 31, 2003, the Company had acquired approximately 84% of IPO and had placed in escrow the total cash
consideration and a total of 27,125,930 common shares of the Company, which were subject to a post closing price
adjustment. As a result of this adjustment, a total of 872,542 common shares of the Company with a fair value of
$27,921 were cancelled subsequent to the year end. Also, subsequent to the year end, the Company acquired the
remaining 16% of IPO. (Note 18(f)).
The purchase price was allocated as follows:
Cash and cash equivalents
Other current assets
Capital assets
Current liabilities
$1,588,480
150,520
112,000
(169,000)
Fair value acquired
Purchase price
1,682,000
1,351,466
Allocation of negative goodwill to capital assets and restructuring costs
330,584
(330,584)
$
-
-
As at March 31, 2003, a non-controlling interest representing approximately 16% of the total outstanding shares of IPO
had been recorded in the consolidated financial statements.
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
In conjunction with the acquisition of IPO, the Company developed a plan to restructure the acquired operations of IPO in
order to eliminate redundant employee positions, rents, securities clearing costs, and other exit activity costs. The final
plans resulted in severance costs of $90,000, office closure costs of $68,000, securities clearing costs of $100,000, and
other exit activity costs of $11,000. As at March 31, 2003, the aggregate costs of $269,000 were included in accounts
payable and accrued liabilities. The restructuring plan is expected to be completed by the end of fiscal 2004.
The purchase price allocation determined that there was fair value greater than the purchase price. This negative
goodwill was allocated as a pro-rata reduction of assets except for financial assets, assets to be disposed of by sale,
future income tax assets and prepaid assets.
The above valuations in both acquisitions include some accruals and are management’s best estimate at the present
time. Some values may change as actual costs are incurred.
5.
INTRODUCING BROKER AGREEMENTS
As at March 31, 2003, the Company had contracted with the following carrying brokers:
National Bank Financial and Correspondent Network
National Bank Financial and Correspondent Network (“NBCN”) performs certain trading and clearing activities for the
clients of the Company, according to an Introducing Broker Agreement between NBCN and the Company. As a Type 2
Introducing Broker, the Company does not carry client accounts, nor receive, deliver or hold cash and securities in
connection with such clients. At March 31, 2003, the Company had cash and securities on deposit with NBCN having a
market value of $662,859 (2002 - $981,000). Included in this amount is a security deposit of $352,599 (2002 $250,000), which cannot be used in the normal course of operations. The remaining amount on deposit with the carrying
broker is due on demand. A substantial portion of the deposit was refunded to the Company subsequent to the year
end.
Penson Financial Services
Penson Financial Services (“Penson”), performs certain trading and clearing activities for the clients of the Company,
according to an Introducing Broker Agreement between Penson and the Company. As a Type 2 Introducing Broker, the
Company does not carry client accounts, nor receive, deliver or hold cash and securities in connection with such clients.
At March 31, 2003, the Company had cash and securities on deposit with Penson having a market value of $957,555
(2002 - $Nil). Included in this amount is security deposit of $750,000 (2002 -$Nil), which cannot be used in the normal
course of operations. The remaining amount on deposit with Penson is due on demand. $200,000 of the deposit was
refunded to the Company subsequent to the year end.
Dundee Securities Corporation
Dundee Securities Corporation (“Dundee”), performs certain trading and clearing activities for the clients of the Company,
according to an Introducing Broker Agreement between Dundee and the Company. As a Type 2 Introducing Broker, the
Company does not carry client accounts, nor receive, deliver or hold cash and securities in connection with such clients.
At March 31, 2003, the Company had cash and securities on deposit with Dundee having a market value of $1,395,534
(2002 - $Nil). Included in this amount is a security deposit of $250,000 (2002 - $Nil), which cannot be used in the normal
course of operations of the Company. The remaining amount on deposit with Dundee is due on demand.
All of the above carrying brokers perform their services for a flat fee per trade, subject to certain additional charges. Interest
related to client accounts is also split according to the Introducing Broker Agreements.
6.
SECURITIES OWNED
2003
$
Canada:
Broker warrants
Listed equities
United States:
Listed equities
7.
2002
$
104,204
440,600
-
104,204
23,770
464,370
CAPITAL ASSETS
Equipment under capital lease
Computer software
Office equipment
Leasehold improvements
2003
$
170,341
496,834
563,288
305,863
2002
$
998,936
496,843
479,645
246,588
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
Computer hardware
Art
Less: Accumulated amortization
8.
2003
$
1,319,973
11,079
2,867,378
(1,724,382)
1,142,996
2002
$
210,162
11,079
2,443,253
(1,346,206)
1,097,047
2003
$
3,024,468
3,024,468
2002
$
3,521,512
(497,044)
3,024,468
GOODWILL AND INTANGIBLE ASSETS
a)
Goodwill
Opening balance
Less: Amortization
Effective March 31, 2003, the Company has evaluated goodwill. For the impairment test, management used the fair
market value of the publicly traded stock as compared to the book value of the stock and concluded that there was no
impairment of goodwill.
b)
Intangible Assets
2003
$
Client agreements and relationships acquired during the year (Note 4(a))
9.
377,000
2002
$
-
DEBENTURES PAYABLE
As at March 31, 2003, the Company had outstanding debentures with a principal face value of $650,000, due March 28, 2004
and $140,000 due November 18, 2002. The $650,000 debentures bear interest at 5% plus a return equal to the greater of (a)
a 15% annual return on the principal amount of the debentures, and (b) a pro rata entitlement of 22.5% of the net gain
realized by the Company on certain investments. The $650,000 debentures were issued with ten common share purchase
warrants for each dollar of debenture issued, for a total of 6,500,000 warrants. $5,400 of the issue price was allocated to the
warrants. The warrants expire March 28, 2004 and are exercisable at $0.03. The $140,000 debentures bear interest at 10%,
are secured by the assets of the Company and are held by the President of the Company. Subsequent to the year end, these
debentures were repaid. See Notes 16(a) and 18(g).
As at March 31, 2002, the Company had outstanding debentures with a principal face value of $746,140. The debentures
bore interest at 10%, were secured by the assets of the Company, and were due at various dates to November 18, 2002. The
debentures were issued with four common share purchase warrants for each dollar of debentures issued. The warrants
expire May 18, 2004 and are exercisable at $0.10. During 2003, $200,000 of these debentures were repaid, and $546,140 of
the debentures were settled by the issuance of 24,272,888 common shares to the President of the Company and to a
corporation controlled by the President of the Company. See Note 16(a).
The debentures are accounted for in accordance with their substance and are presented in the financial statements in their
component parts, measured at their respective fair values at the time of issue. The entire value of the debentures, including
their interest component, has been calculated as the present value of the required interest payments and principal repayment
discounted at a rate approximating the interest rate that would have been applicable to debt excluding warrants at the time the
debentures were issued. Interest is determined on this value, and charged to income over the terms of the debentures.
10. LONG-TERM DEBT
Long-term debt, having a carrying amount which approximates fair value, consists of the following:
Obligation under capital leases (Note 14(g))
Less: Current portion
2003
$
50,848
(50,848)
-
2002
$
411,002
(368,146)
42,856
The obligations under capital lease are secured by capital assets having a net book value of approximately $64,000 (2002 $526,000).
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
11. SUBORDINATED LOAN
As at March 31, 2003, the Company had a subordinated loan, due to Georgia Pacific Securities Corporation, of $300,000
(2002 - $Nil), which is non-interest bearing, unsecured and repayable on demand. The loan has been subordinated to
the claims of the general creditors of the Company and has been issued pursuant to the standard uniform subordinated
agreements in the form required by the IDA. Repayment of the subordinated loan is subject to the prior approval of the
IDA.
The subordinated loan has been accounted for in accordance with its substance and has been classified in the financial
statements as equity. Subsequent to the year end, the subordinated loan was converted into 20,000,000 common
shares of the Company.
12. CAPITAL STOCK
a)
Share Capital:
Authorized:
Unlimited number of common shares
2,000,000 voting, convertible, redeemable preference shares
Issued and outstanding:
397,879,389 common shares
$75,160,082
Transactions during the year are as follows:
Balance, March 31, 2001
Private placement
Debt settlements
Services
Exercise of options
Redemption
Balance, March 31, 2002
Rights offering
GP acquisition and share issue (Note 4(a))
Private placement
Debenture conversion
Services
IPO acquisition (Note 4(b))
Balance issued, March 31, 2003
Less: Common shares held in escrow (Note 4(b))
Less: Common shares to be cancelled (Note 4(b))
Balance outstanding, March 31, 2003
Shares
#
169,500,857
41,837,409
9,458,692
1,538,584
170,000
(121,000)
222,384,542
55,596,135
42,740,784
28,888,888
24,272,888
3,743,539
27,125,930
404,752,706
(6,000,775)
(872,542)
397,879,389
Amount
$
69,488,534
1,407,507
497,823
96,077
3,094
(49,605)
71,443,430
1,144,981
800,140
511,000
492,640
130,133
868,030
75,390,354
(202,351)
(27,921)
75,160,082
The above share issues are net of issue costs.
b)
Stock Options:
Pursuant to a stock option plan approved by the board of directors, a total of 36,000,000 common shares have been
authorized for issuance to employees and directors of the Company. Executive compensation is paid partially in the form
of options for common shares of the Company in order to further align the interests of the officers of the Company with
the interest of the Company and its shareholders. To determine grant sizes, the board considers the quality of the
employee’s performance, the employee’s level of responsibility within the Company, and the number of options already
issued to the employee.
As at March 31, 2003, there were 33,186,940 common share purchase options outstanding, expiring at various dates to
January 21, 2013. The options have an exercise price of the Company’s market closing share price on the day prior to
the date of grant and vest over the first twenty-four or thirty months, in equal monthly installments, beginning in the month
of grant, and are exercisable over ten years.
Stock option activity for the years ended March 31, 2003 and 2002 is summarized as follows:
Balance, March 31, 2001
Granted
Exercised
Stock Options
#
26,134,940
9,325,000
(170,000)
Weighted Average
Exercise Price
$
0.30
0.05
0.04
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
Stock Options
#
(7,443,000)
27,846,940
10,190,000
(1,200,000)
(3,650,000)
33,186,940
Cancelled
Balance, March 31, 2002
Granted
Expired
Cancelled
Balance, March 31, 2003
Weighted Average
Exercise Price
$
0.21
0.24
0.04
0.60
0.12
0.19
The following is a summary of common share purchase options outstanding as at March 31, 2003:
Range of
Exercise Prices
$
0.035-0.10
0.30-0.70
c)
Common Shares
#
23,165,000
10,021,940
33,186,940
Average
Remaining Life
(Years)
9.4
4.5
7.5
Weighted
Average Price
$
0.05
0.52
0.19
Warrants:
Common share purchase warrant activity for the years ended March 31, 2003 and 2002 is summarized as follows:
Warrants
#
13,522,600
28,621,832
(12,322,600)
29,821,832
20,944,444
(1,200,000)
49,566,276
Balance, March 31, 2001
Granted
Expired
Balance, March 31, 2002
Granted
Expired
Balance, March 31, 2003
Weighted Average
Exercise Price
$
0.75
0.07
0.77
0.09
0.03
0.60
0.05
6,500,000 of the warrants issued during 2003 were issued with debentures (Note 9). The remaining 14,444,444 warrants
were issued as part of a private placement. The fair value of the private placement warrants at the date of grant was
estimated using a modified Black-Scholes option pricing model based on the following assumptions for 2003: risk-free
interest rate of 4%; expected life of one year; dividend rate of 0%; and volatility of 99%.
The following is a summary of common share purchase warrants outstanding as at March 31, 2003:
Date of Grant
Date of Expiry
May 30, 2001
May 30, 2001
June 21, 2001
August 15, 2001
September 16, 2001
November 18, 2001
December 4, 2001
December 14, 2001
December 17, 2001
December 18, 2001
December 27, 2001
March 28, 2003
May 18, 2004
April 20, 2004
June 21, 2004
August 15, 2006
September 16, 2006
November 18, 2006
December 4, 2003
December 14, 2003
December 17, 2003
December 18, 2003
December 27, 2003
March 28, 2004
Warrants
#
1,896,000
800,000
5,248,000
10,500,000
566,665
791,667
3,341,000
2,375,000
413,500
1,690,000
1,000,000
20,944,444
49,566,276
Exercise Price
$
0.10
0.10
0.10
0.05
0.05
0.04
0.06
0.06
0.06
0.06
0.12
0.03
The balance reflected as contributed surplus consists of previously issued warrants that have expired.
d)
Stock-Based Compensation:
The Company does not record compensation cost on the grant of stock options to employees, as described in Note 3(j).
Had compensation cost for the Company’s stock-based compensation plan been determined based on the fair value at
the grant dates for awards under the plan for options awarded on or after April 1, 2002, the Company’s net loss and loss
per share would have been increased to the pro forma amounts indicated below:
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
Net loss
2003
$
2,913,855
2,939,222
- As reported
- Pro forma
Loss per share - basic
- As reported
- Pro forma
(0.01)
(0.01)
The fair value of the options at the date of grant was estimated using a modified Black-Scholes option pricing model
based on the following assumptions for 2003: risk-free interest rate of 4%, expected life of ten years; dividend rate of 0%;
and volatility of 83%.
13. INCOME TAXES
a)
Provision for Income Taxes
Major items causing the Company’s income tax rate to differ from the federal statutory rate of approximately 39% (2002 42%) approximated the following:
Loss before taxes
Expected income tax (benefit) based on statutory rate
Increase (decrease) resulting from:
Finance costs
Amortization
Capital gain on sale of stock exchange share
Income in foreign jurisdictions
Current year valuation allowance
2003
$
(2,913,855)
(1,125,000)
(1,114,000)
(140,000)
121,000
1,144,000
(146,000)
(74,000)
(146,000)
1,480,000
-
b)
2002
$
(2,652,738)
-
Future Tax Balances
The tax effects of temporary differences that give rise to future income tax assets in Canada approximate the following:
2003
$
Future tax assets
Non-capital losses carried forward
Share issue costs
Capital assets
Resource deductions
Valuation allowance
Total
2002
$
7,410,000
309,000
429,000
1,823,000
9,971,000
(9,971,000)
-
7,161,000
330,000
594,000
1,963,000
10,048,000
(10,048,000)
-
The Company is not planning to incur costs to maintain its inactive U.S. companies since there is little likelihood of
utilizing the U.S. tax losses due to restrictive rules relating to ownership changes and continuation of the loss business.
Accordingly, the potential benefit of these losses has not been recognized in the accounts. The Company has loss carryforwards in Canada of approximately $19,000,000, which, under certain circumstances, may be utilized to offset future
taxable income. These losses begin to expire in 2005. The benefit of these losses has not been recognized in the
accounts.
14. COMMITMENTS AND CONTINGENCIES
a)
The Company is party to legal proceedings in the ordinary course of its operations. Management does not expect the
outcome of any of these proceedings to have a materially adverse effect on the results of the Company’s financial
position or operations. Should any losses result from the resolution of these claims and disputes, they will be charged to
operations in the year that they are determined.
b)
IPO has been named in a third party action brought by thirteen investors in the aggregate amount of approximately
US$290,400 for alleged breach of duty to take care, negligent representations, misstatements and general damages. In
the opinion of management, IPO has good defences to these actions, however it is premature to make an estimate of the
potential outcome or financial impact of this action.
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
c)
Under the terms of the asset purchase agreement with GP, the Company is contingently liable to pay 50% of the profits
resulting from the GP operations for the next three years to a maximum of approximately $2,500,000. See Note 4(a).
d)
The Company and one of its landlords have a dispute regarding additional rental space totaling approximately $118,000.
The Company contends that it did not exercise a right of first refusal on additional space and has no liability. Should any
losses result from the resolution of these claims and disputes, they will be charged to operations in the year that they are
determined.
e)
Under the terms of a debt settlement arrangement, the Company is required to issue to a law firm, of which a partner is a
former director of the Company, 9,219,080 common shares of the Company to settle debt totaling $230,477 and 300,000
common shares to settle debt totaling $7,500. Subsequent to the year end, these shares were issued. See Note 18(c).
f)
The future minimum annual payments for each fiscal year on equipment and office premises under existing operating
leases approximate the following:
2004
2005
2006
2007
$549,000
270,000
6,000
3,000
$828,000
The Company is also responsible for its share of operating costs and realty taxes with respect to the leased premises.
g)
Total future minimum lease payments (principal and interest) under capital leases of approximately $60,000 are due
within one year.
h)
See Note 18(d).
15. FINANCIAL INSTRUMENTS
Fair Value:
Canadian generally accepted accounting principles require that the Company disclose information about the fair value of
its financial assets and liabilities. Fair value estimates are made at the balance sheet date, based on relevant market
information and information about the financial instrument. These estimates are subjective in nature and involve
uncertainties in significant matters of judgement and therefore cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
The carrying amounts for cash and cash equivalents, deposits with carrying brokers, securities owned, accounts
receivable, prepaid expenses and deposits, income taxes recoverable and accounts payable and accrued liabilities on
the balance sheet approximate fair value because of the limited term of these instruments.
Risk Management:
Risk management at the Company is an integrated process with independent oversight which requires constant
communication, judgment and knowledge of specialized products and markets. The Company’s senior management
takes an active role in the risk management process and have developed policies and procedures that require specific
administration and business functions to assist in the identification, assessment and control of various risks.
Market Risk:
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities,
correlations or other market factors, such as liquidity, will result in losses. As financial instruments and investments held
are recognized at fair value or net recoverable amount, these changes affect reported earnings as they occur. The
Company manages market risk on a corporate level and on an individual product basis.
Credit Risk:
In the normal course of operations, the Company executes and settles various client transactions through carrying
brokers. The Company incurs credit risk when entering into, settling and financing various proprietary and client
transactions. Credit risk arises from the potential that investees, clients or counterparties fail to satisfy their obligations.
Credit risk is managed by dealing with counterparties the Company believes to be creditworthy and by actively monitoring
credit exposure and the financial health of the counterparties.
Interest Rate Risk:
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The
Company does not hedge its exposure to interest rate risk as it is minimal.
Foreign Exchange Risk:
Foreign exchange risk is the risk that the market value of financial instruments and the associated revenues will fluctuate
due to changes in exchange rates. The Company does not use derivatives to modify the foreign exchange risk.
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
16. RELATED PARTY TRANSACTIONS
a)
The Company had the following transactions with the President of the Company and a corporation controlled by the
President of the Company:
2003
$
b)
2002
$
Expenses paid or accrued during the year ended March 31:
Standby fee (cost of issue of rights offering)
Interest expense
Salary, excluding commissions
49,000
37,567
187,500
17,257
118,750
Amounts owing at March 31:
Accounts payable and accrued liabilities
Debentures
104,655
140,000
61,007
546,140
Transactions involving shares and warrants during
the year ended March 31, 2003 were as follows:
Settlement of debentures with shares
Settlement of advances with shares
Settlement of interest with shares
Settlement of standby fee with shares
Settlement of salary with shares
Settlement of commissions with shares
Subscription pursuant to the rights offering
24,272,888
6,556,000
2,006,720
1,960,000
3,383,539
1,875,160
3,694,002
546,140
163,900
50,168
49,000
131,250
46,879
92,350
Transactions involving shares and warrants during
the year ended March 31, 2002 were as follows:
Warrants issued with debentures
Settlement of salary with shares
Settlement of debentures with shares
Shares subscribed for cash
1,896,000
1,538,584
1,583,334
10,761,111
47,500
99,980
63,333
526,639
Legal fees payable to a law firm of which a partner is a former director of the Company totaled approximately $485,000
as at March 31, 2003 (2002 - $95,000). The Company and the law firm were also parties to a debt settlement
arrangement as described in Note 14(e).
In 2002, the Company and the law firm were parties to a settlement agreement for legal fees totaling $548,506. The
amount was settled by a cash payment of $150,000, the issuance of 2,731,325 common shares of the Company
representing $218,506, the issuance of 1,000,000 common share purchase warrants of the Company exercisable at
$0.12 to December 27, 2003 and the forgiveness of $180,000. The shares were subject to a condition whereby if the
shares were sold for less than the settled amount of $218,506, the Company would be required to pay the law firm the
total of the difference. The shares were sold in 2003 for an amount less than the settled amount. The settlement
arrangement described in Note 14(e) satisfied the shortfall liability.
c)
See Note 18(c).
All of the above transactions are recorded at the exchange amounts, being the amount established and agreed to by the
related parties.
17. SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS
Interest paid
Debt and services settled by the issuance of shares
Debentures settled by the issuance of shares
Issuance of debentures on acquisition of subsidiary
Issuance of debentures on purchase of subordinated loan
Equipment under capital lease returned for settlement of capital lease
obligation
Assets acquired by the issuance of shares
Common shares issued to acquire IPO
2003
$
75,250
448,437
546,140
133,640
637,759
2002
$
384,265
318,506
313,333
812,000
500,000
44,000
-
Continued ….
NORTHERN FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31
Cash and cash equivalents consists of the following:
Cash
Treasury bills
2003
$
952,490
1,345,480
2,297,970
2002
$
783,242
783,242
18. SUBSEQUENT EVENTS
a)
In April 2003, the Company issued 20,000,000 common shares to GP in settlement of the subordinated loan of $300,000
described in Note 11. The Company also issued 10,000,000 common shares to GP in settlement of an additional
obligation of $150,000, as described in Note 4(a).
b)
On April 30, 2003, 515,160 units were issued for gross proceeds and debt reduction totalling $12,755. Each unit consists
of one common share and one-half common share purchase warrant. 155,160 of these units, issued for gross proceeds
of $4,655, were issued to a director and officer of the Company. Each whole warrant is exercisable into one common
share of the Company at $0.03 per share to April 30, 2005.
c)
On April 30, 2003, 12,399,628 common shares of the Company were issued for gross proceeds and debt reduction
totalling $318,991. 300,000 and 500,000 of these shares, issued for gross proceeds of $7,500 and $15,000 respectively,
were issued to directors of the Company. 9,219,080 of these shares, issued for gross proceeds of $230,477, were
issued to a law firm of which a partner is a former director of the Company.
d)
In June 2003, the Company agreed to a settlement with NBCN whereby the Company is to issue to NBCN 3,600,000
common shares for fair value of $90,000. The shares are to be sold over a three-month period. If the net proceeds of
the sale of the shares is less than $90,000, the Company is required to pay NBCN, in cash, the total of any difference. If
the net proceeds of the sale of the shares is greater than $90,000, the Company is entitled to any difference.
e)
In April 2003, a total of 872,542 common shares were cancelled pursuant to the IPO purchase price adjustment (Note
4(b)).
f)
Subsequent to the year end, the remaining 16% of IPO was acquired. See Note 4(b).
g)
Debentures owing to the President of the Company totaling $140,000 (Note 9) were repaid subsequent to the year end.
19. COMPARATIVE FIGURES
Certain comparative figures have been restated to conform with the presentation of the current year consolidated financial
statements.
CORPORATE INFORMATION
HEAD OFFICE
150 York Street, Suite 1814
Toronto, Ontario M5H 3S5
Telephone:(416) 644-8180
Fax:(416) 644-6431
www.nfc.ca
BOARD OF DIRECTORS
Vic Alboini, Chairman
R. Ian Bradley
Special Assistant to the President
Intex Recreation Corp.
Wesley Roitman
Vice President of Business Systems
Sinclair Technologies Inc.
MANAGEMENT
Vic Alboini
Chairman, President & Chief Executive Officer
Roderick L. De Courcy-Ireland
Vice President, Institutional Equity Sales, Northern Securities Inc.
Rickard D.Vernon
Vice President, Head of Investment Banking, Northern Securities Inc.
SHARE INFORMATION
Listed on the Toronto Stock Exchange under the trading symbol NFC
TRANSFER AGENT
Computershare Trust Company of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Telephone:(800) 564-6853
Fax:(888) 453-0330
MAJOR SUBSIDIARY
Northern Securities Inc.
150 York Street, Suite 1814
Toronto, Ontario M5H 3S5
Telephone:(416) 644-8100
Fax:(416) 644-0270
www.northernsi.com
www.enorthern.com