Notes to the Financial Statements

March 31, 2003

1. Nature of the Corporation

Effective November 1, 1997, amendments to the Securities Act continued the Ontario Securities Commission (the “Commission”) as a corporation without share capital. The Commission functions as an independent regulatory agency and administrative tribunal responsible for overseeing the securities industry in Ontario. As a Crown corporation, the Commission is exempt from income taxes.

2. Significant Accounting Policies

These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Significant accounting policies followed in the preparation of these financial statements are:

a) Capital assets
Capital assets are recorded at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful lives of the assets, beginning in the fiscal year following acquisition. The estimated useful lives of the assets are as follows:
Office furniture and equipment 5 to 10 years
Computer hardware and related applications 2 years
Computer equipment under capital leases 2 years
Leasehold improvements over term of lease

b) Revenue
Fees are recognized when earned which is normally upon receipt. The amount of revenue to be realized from prospectus filing fees is uncertain. Fees are paid based on estimated prospectus proceeds and refunds are issued, as required, based on actual proceeds in Ontario. As a result, revenue from prospectus filings is recognized net of a provision for expected refunds. At the beginning of each fiscal year the Commission establishes a percentage for the provision for expected refunds based on the experience of the previous three years. The provision is adjusted at year end. Disclosure filing fees are recognized upon receipt of filing.

Recovery of costs of investigations is netted against professional services upon date of decision unless management determines there is no reasonable assurance as to ultimate collection, in which case recovery is recognized when cash is received.

c) Use of estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenditures for the period. Actual amounts could differ from these estimates.

d) Employee Benefit Plan
The Commission provides pension benefits to its full-time employees through participation in the Public Service Pension Plan, which is a multiemployer defined benefit pension plan. This plan is accounted for as a defined contribution plan, as the Commission has insufficient information to apply defined benefit plan accounting to this pension plan.

The Commission also maintains supplementary unfunded pension plans for certain full-time members. The Commission accrues its obligations and the related costs under these supplemental unfunded pension plans. The transitional obligation is being amortized over the average remaining service period of active members expected to receive benefits under these plans. For purposes of valuation, the actuarial liability and the current service cost is determined by independent actuaries using the projected benefit method prorated on services and management’s best estimate assumptions.

Post-retirement non-pension benefits are not included in the Statement of Operations and Operating Surplus as described in Note 10(c).

3. Reserve

As part of the approval of its self-funded status, the Commission was allowed to establish a $20.0 million reserve to be used as an operating contingency against revenue shortfalls or unanticipated expenditures. The accumulated funds, at March 31, 2003, have been invested in short-term and mid-term instruments with the Ontario Financing Authority.

The Commission received approval from the Ministry of Finance to retain $12.0 million, which may only be used toward implementation costs of the proposed merger with the Financial Services Commission of Ontario as described in Note 12, and are subject to appropriate terms and conditions agreed with the Ministry of Finance, including:

i) The monies will be paid to the Consolidated Revenue Fund, in part or in full, if not required to fund the costs of the merger; and

ii) While retained by the Commission, the monies will be invested with the Ontario Financing Authority. Investments are carried at cost, which approximates market value. The prime investment consideration for the reserve is the protection of principal and the appropriate liquidity to meet cash flow needs. Interest earned on investments are credited to the operations of the Commission.

4. Commitments and contingencies

a) The Commission has guaranteed 61% of a total $12.0 million line of credit from a Canadian bank for the Mutual Fund Dealers Association of Canada (MFDA). The guarantee was signed March 19, 1999 and can be terminated by the Commission at any time. The Alberta Securities Commission and the British Columbia Securities Commission have also guaranteed a specified percentage of the total indebtedness. The MFDA has signed an agreement which requires it to use the funds only in accordance with the budget and business plan as approved by each of the Commissions, and also commits the MFDA to repay its loan by the end of the seventh year. As at March 31, 2003, the MFDA has drawn $2,963,000 (2002 — $8,913,000) on this line of credit. Interest is charged at prime plus 0.50% per annum.

b) The Commission is involved in various legal actions arising out of the ordinary course and conduct of business. Settlements, if any, concerning these contingencies will be accounted for in the period in which the settlement occurs. The outcome and ultimate disposition of these actions are not determinable at this time.

c) The National Registration Database (NRD) was launched on March 31, 2003. The Commission, together with the Alberta Securities Commission, the British Columbia Securities Commission, and the Investment Dealers Association is contingently liable for a $4.25 million assured payment in respect of the development of NRD. The Commission’s share of this contigency is $1,962,650. It is expected that the assured payment will be funded by users of NRD and no provision has been made in the financial statements for any potential cost to the Commission.

5. Capital Assets

6. Lease Obligations

Operating

The Commission is committed to operating lease payments for the next 5 years as follows:

7. Pension Plans

a) The Commission’s contribution to the Public Service Pension Plan for the year ended March 31, 2003 was $1,346,895 (2002 — $900,885) and is included in salaries and benefits.

b) The unfunded supplemental pension plans had an accrued benefit obligation of $544,565 at March 31, 2003
(2002 — $606,181). The Commission’s related expense for the year was $282,336 (2002 — $294,541) and is included in salaries and benefits. No benefits were paid during the year (2002 — $0). The average remaining service period of the active employees covered by these plans ranges from .92 to 3.85 years (2001 — 1.92 to 4.85 years). The significant actuarial assumptions adopted at March 31, 2003 include a discount rate of 6.5% (2002 — 6.75%) and a rate of compensation increase of 0.0% (2002 — 0.0%).

8. Designated Settlements

The Commission has reached a number of settlement agreements arising from enforcement proceedings where monies from these settlements are received or receivable by the Commission to be set aside and allocated to such third parties as the Commission may determine. The accumulated funds are held in a segregated bank account. As at March 31, 2003, the accumulated balance is determined as follows:

9. Investor Education Fund

a) The Investor Education Fund (the Fund) was incorporated by letters patent of Ontario dated August 3, 2000 as a non-profit corporation without share capital. The Fund is independently managed by its Board of Directors to increase knowledge and awareness among investors and potential investors and to support research and develop programs and partnerships which promote investor education. The Commission oversees the Fund as the sole voting member. The Fund is exempt from income taxes.

The Fund has not been consolidated in the Commission’s financial statements because the Commission will neither obtain future economic benefits from the Fund, nor incur related risks. Financial statements of the Fund are available on request. Financial summaries of this unconsolidated entity as at March 31, 2003 and for the year ended March 31, 2003 are as follows:

b) In the normal course of operations, the Commission entered into transactions with the Fund as follows:

i) The Board of the Commission authorized a transfer of $153,474 (2002 — $4,062,879) of the Commission’s Designated Settlements to the Fund. As at March 31, 2003, $474 (2002 — $130,879) remained to be paid.

ii) The Commission has a Management Services agreement with the Fund for the provision of administrative and management services, at cost.

For the period ended March 31, 2003, the Commission incurred costs totalling $310,923 (2002 — $181,776) for services related to the Fund. The total cost of these services has been charged back to the Fund and, of this amount, $116,288 is owing to the Commission as of March 31, 2003 (2002 — $141,257).

10. Transactions With Province of Ontario

In the course of normal operations, the Commission entered into transactions with the Province of Ontario as follows:

a) The Securities Act states that when ordered to do so by the Minister of Finance, the Commission shall remit to the Province of Ontario such surplus funds as determined by the Minister. In accordance with this provision, the Minister has requested the Commission to remit fee revenues which are in excess of its operating requirements. The Commission includes fixed asset funding in its operating requirements.

b) The Commission has a tri-party agreement with the Ontario Financing Authority to facilitate banking arrangements with a Schedule 1 Bank.

c) Costs of post-retirement non-pension employee benefits have been paid by the Management Board Secretariat and are not included in the Statement of Operations and Operating Surplus.

11. Streamlining of Fees Under the Securities Act

Commencing on March 31, 2003, the Commission introduced a new fee model under the provisions of the Securities Act. The new fee regime is designed to accomplish three primary objectives; to reduce the overall fees charged to market participants from what existed previously in Ontario; to create a clear and streamlined fee structure; and adopt fees that accurately reflect the Commission’s costs of operations.

The fee regime is based on the concept of “participation fees” and “activity fees”. Participation fees represent the benefit derived by market participants from participating in Ontario’s capital markets. Activity fees represent the direct cost of Commission staff resources expended in undertaking certain activities requested of staff by market participants.

12. Establishing a Single Financial Services Regulator

In the May 2, 2000 Budget, the Minister of Finance announced that the Ontario Securities Commission and the Financial Services Commission of Ontario would be merged into a single agency that would provide regulation of the capital markets and financial services sectors.

Legislation is required in order to create the proposed new organization and specify its regulatory responsibilities and powers. Draft legislation supporting this initiative was released for comment by the Ministry of Finance in April 2001.