“The Company exited 2007 with record factored receivables and loans outstanding. Accordingly, the prospects for improved net earnings in 2008 are good provided credit and loan losses can be kept to a minimum.”

Stuart Adair
Accord Financial Corp.

Overview

The following discussion and analysis explains trends in Accord Financial Corp.’s ("Accord" or the "Company") results of operations and financial condition for the year ended December 31, 2007 compared with the year ended December 31, 2006. It is intended to help shareholders and other readers understand the dynamics of the Company’s business and the factors underlying its financial results. Where possible, issues have been identified that may impact future results.

This MD&A should be read in conjunction with the Company’s 2007 audited consolidated financial statements (the "Statements") and notes thereto, the Ten Year Financial Summary (see page 29) and the President’s Letter to the Shareholders, all of which form part of this 2007 Annual Report. Additional information pertaining to the Company, including its Annual Information Form, is filed under the Company’s profile with SEDAR at www.sedar.com.

All amounts discussed in this MD&A are expressed in Canadian dollars unless otherwise stated and have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). Please refer to note 3(c) to the Statements regarding the Company’s use of accounting estimates in the preparation of its financial statements in accordance with GAAP.

The following discussion contains certain forward-looking statements that are subject to significant risks and uncertainties that could cause actual results to differ materially from historical results and percentages. Factors that may impact future results are discussed in the Risks and Uncertainties section below.

Accord’s Business

Accord is a leading North American provider of factoring and other asset-based financial services to businesses, including financing, collection services, credit investigation and guarantees. The Company’s financial services are discussed in more detail earlier in this Annual Report. Its clients operate in many industries, including apparel, automotive, electronics, oilfield services, temporary staffing, telecommunications, financial services, textiles, food products, furniture, sporting goods, leisure products, transportation, footwear, plastics, freight forwarding and industrial products.

The factoring industry in North America continues to be highly competitive, with the consolidation and merger of major factors and the entry of new players in niche markets. The Company continues to search for and investigate new business opportunities and acquisitions to fuel continued growth.

The Company operates three factoring companies in North America, namely, Accord Business Credit Inc. ("ABC") and Montcap Financial Corporation ("MFC") in Canada and Accord Financial, Inc. ("AFI") in the United States. ABC has been in operation since 1978. MFC and AFI were acquired on December 31, 1992.  These subsidiaries’ operations are discussed further earlier in this Annual Report.

The Company’s business principally involves: (i) recourse factoring by MFC and AFI, which entails financing or purchasing receivables on a recourse basis, as well as asset-based lending, namely, financing tangible assets, such as inventory, equipment and real estate; and
(ii) non-recourse factoring by ABC, which principally involves providing credit guarantees and collection services on a non-recourse basis, generally without financing.

Results of Operations

Fiscal 2007

Year ended December 31, 2007 compared with year ended December 31, 2006

Results of Operations

The Company achieved net earnings of $6,287,000 in 2007, 12% below 2006’s net earnings of $7,117,000. Net earnings were adversely impacted by lower revenue and higher interest expense and provision for credit and loan losses. These items are discussed below. The average value of the U.S. dollar declined by 5% against the Canadian dollar in 2007, which served to reduce the Canadian dollar equivalent of our U.S. subsidiary’s net earnings by approximately $155,000 compared to fiscal 2006. Diluted earnings per common share for 2007 were 66 cents compared with 72 cents last year. The Company’s return on average shareholders’ equity ("ROE") was a solid 16.0% in 2007 but was below last year’s 18.3%.

The volume of receivables factored by the Company in 2007 rose by 6% to a record $1.497 billion compared with $1.417 billion last year. Recourse factoring volume rose by 13%, while non-recourse volume declined by 2%. International volume, mostly cross-border business between the U.S. and Canada, rose to $336 million compared to $313 million in 2006. International volume comprised 22% of the Company’s total volume in 2007, unchanged from 2006.

Selected Annual Information
(audited, in thousands of dollars, except per share data)

Revenue declined by $518,000 or 2% to $28,346,000 in 2007 compared to $28,864,000 last year. Revenue declined despite the rise in volume and an increase in interest income from asset-based loans, principally because of somewhat reduced yields and the impact of the weaker U.S. dollar. Yields declined in 2007 largely as a result of funding larger deals at lower rates, competitive pressures and lower miscellaneous, non-recurring fees. Revenue in 2006 included $75,000 from the sale of the Company’s 25% interest in Liquid Capital Corp. ("LCC"). The Canadian dollar equivalent of our U.S. subsidiary’s revenue decreased by approximately $420,000 as a result of the decline in value of the U.S. dollar in 2007.

Interest expense rose by $601,000 or 25% to $2,992,000 in 2007 compared to $2,391,000 last year. The increase resulted from higher average borrowings (bank indebtedness and notes payable) and somewhat higher interest rates in 2007. Average borrowings rose by 19% in 2007 largely as a result of funding an increase in gross factored receivables and loans in the year. Borrowings were also utilized to repurchase shares under the Company’s normal course issuer bids (collectively referred to as "Bid") in 2007 and 2006 (see note 11(c) to the Statements and below), which increased Accord’s interest expense by approximately $210,000 in 2007 compared to 2006. The Company’s borrowing rates were higher in 2007 as the average Canadian prime rate of interest rose to 6.1% per annum, up from 5.8% in 2006, and the average U.S. prime rate of interest increased slightly to 8.1%, up from 8.0% in 2006.

General and administrative ("G&A") expenses comprise personnel costs, representing the majority of the Company’s G&A expenses, occupancy costs, commissions to third parties, marketing expenses, professional fees, data processing, travel, telephone and general overheads. G&A expenses declined by $146,000 to $13,143,000 in 2007 from $13,289,000 last year. G&A expenses decreased partly as a result of the decline in the U.S. dollar in 2007, which caused the Canadian dollar equivalent of AFI’s G&A expenses to fall by approximately $175,000 compared to 2006. In 2006, the Company incurred costs of $206,000 relating to staff and facility reductions as it concluded the consolidation of its Montreal operations. The Company continues to manage its controllable expenses closely. G&A expenses totalled 46% of revenue in 2007, the same as in 2006 and the lowest percentage in the last ten years.
 
The provision for credit and loan losses, a combination of net charge-offs and non-cash charges or recoveries related to changes in the Company’s allowances for losses, rose by 22% to $2,401,000 in 2007 from $1,961,000 last year. Net charge-offs decreased by 12% to $1,815,000 (charge-offs of $2,059,000 less recoveries of $244,000) compared with $2,072,000 (charge-offs of $2,216,000 less recoveries of $144,000) in 2006. There was a charge of $586,000 related to the increase in the Company’s total allowances for losses in 2007 compared to a recovery of $111,000 on a decrease in total allowances last year. These allowances are discussed in more detail on page 21. The $697,000 rise in this non-cash charge was a significant reason that net earnings declined in 2007. The provision for credit and loan losses, as a percentage of revenue, totalled 8.5% in 2007, the second highest percentage in the last ten years, compared to 6.8% in 2006. Net charge-offs decreased to 6.4% of revenue in 2007 compared to 7.2% last year. The 12% decline in net charge-offs in 2007 resulted from fewer significant charge-offs this year and occurred despite a 10% increase in the Company’s total portfolio (see below).
 
Depreciation on capital assets declined by $113,000 to $209,000 in 2007 compared with $322,000 in 2006 on a lower net book value of capital assets, in part as a result of fewer capital asset purchases.

Income tax expense declined by 12% to $3,313,000 in 2007 compared to $3,783,000 last year on a similar percentage decline in pre-tax earnings. The Company’s effective corporate income tax rate for 2007 was 34.5%, slightly below last year’s 34.7%. 

Table 1—Profitability Ratios (%)

Table 1 highlights the Company’s profitability in terms of returns on its average assets and shareholders’ equity. In 2007, on lower net earnings, these percentages declined to 6.6% and 16.0%, respectively.

Net revenue as a percentage of average assets declined to 26.4% compared to 30.3% in 2006. It has declined over the past ten years as the increase in assets, principally factored receivables and loans to clients, rose at a faster rate than net revenue as a result of growth in the Company’s recourse factoring and asset-based lending business. The ratio of operating expenses to average assets has declined substantially over the last ten years as average assets increased. The ratio in 2007 declined to 13.9% compared with 15.6% last year as expenses declined and average assets rose to record levels.

Canadian operations

Net earnings from Canadian operations declined by $691,000 or 14% to $4,303,000 in 2007 compared to $4,994,000 last year as a result of a higher provision for credit and loan losses and increased interest expense (see note 19 to the Statements). 

Revenue increased slightly to a record $22,085,000 in 2007 compared to $21,966,000 last year. Interest expense rose by $400,000 or 14% to $3,295,000 as average borrowings and interest rates increased. G&A expenses declined by $104,000 to $10,025,000. As noted above, costs of $206,000 were incurred in 2006 related to the consolidation of the Company’s Montreal operations. The provision for credit and loan losses rose by $912,000 or 73% to $2,169,000 as net charge-offs increased by $566,000 and the charge related to the increase in allowance for losses rose by $346,000. Canadian income tax expense decreased by 12% to $2,124,000 in 2007 on a similar fall in pre-tax earnings.

The prospects for improved net earnings from the Company’s Canadian operations in 2008 are good as it finished 2007 with substantially higher gross factored receivables and loans outstanding and, accordingly, is expecting higher revenue in 2008. However, the extent of credit and loan losses will, as always, also determine if net earnings rise in 2008.  

U.S. operations

Net earnings from U.S. operations declined by 7% to $1,984,000 in 2007 compared to $2,123,000 in 2006. In U.S. dollars, net income increased by 1% to US$1,884,000. Revenue declined by $826,000 or 11% to $6,796,000 principally as a result of reduced yields and the impact of the weaker U.S. dollar. Interest expense rose slightly to $232,000 compared with $220,000 last year. G&A expenses declined by $43,000 to $3,118,000 in 2007 as the impact of the weaker U.S. dollar offset a 3% rise in U.S. dollar denominated G&A expenses. The provision for credit and loan losses declined to $233,000 in 2007 compared to $704,000 last year; AFI had a net charge-off recovery during 2007 but was required to make a charge in respect of an increase in its allowance for losses, which resulted from a significant rise in its gross factored receivables and loans in 2007. AFI’s income tax expense fell by 13% to $1,189,000 in 2007 on a 9% decrease in pre-tax earnings and small reduction in effective tax rate.

AFI exited 2007 with significantly higher factored receivables and loans than it averaged during the year and, accordingly, is expecting to increase its revenue and net earnings in 2008. To do so, it will be necessary to efficiently manage its low cost structure and keep its credit and loan losses to a minimum.

Fourth quarter 2007

Quarter ended December 31, 2007 compared with quarter ended December 31, 2006

Net earnings for the quarter ended December 31, 2007 declined by $401,000 or 16% to $2,059,000 compared to $2,460,000 in the fourth quarter of 2006. Net earnings principally declined on a higher provision for credit and loan losses and increased interest expense. They were adversely affected by the decline in the U.S. dollar, which served to reduce the Canadian dollar equivalent of AFI’s net earnings by approximately $115,000 compared to the fourth quarter of 2006. Diluted earnings per common share were 22 cents compared to 25 cents last year.

Summary of Quarterly Financial Results

* Due to rounding the total of the quarterly earnings per share may not agree with the total for the year.

Factoring volume rose by 5% to $376 million in the quarter compared to $357 million in the fourth quarter of 2006. Volume in the Company’s recourse factoring business rose by 14%, while volume in its non-recourse business declined by 3%.

Revenue increased by $124,000 or 2% to $7,771,000 in the fourth quarter compared to $7,647,000 in the corresponding period of 2006. Revenue was adversely impacted by the decline in the U.S. dollar, which reduced the Canadian dollar value of AFI’s revenue by approximately $280,000 compared to last year’s fourth quarter. Fourth quarter revenue in 2006 included $75,000 received from the sale of the Company’s interest in LCC.

Interest expense rose by 62% to $959,000 in the fourth quarter compared to $591,000 last year as average borrowings rose by 63% to fund a substantial increase in gross factored receivables and loans. 

G&A expenses for the quarter fell by $91,000 to $3,209,000 compared to $3,300,000 last year as the decline in the U.S. dollar served to reduce the Canadian dollar equivalent of AFI’s expenses by approximately $115,000 compared to the fourth quarter of 2006.

The provision for credit and loan losses increased by $480,000 to $408,000 in the fourth quarter of 2007 compared to a recovery of $72,000 last year. The increased provision this quarter principally resulted from a $358,000 rise in net charge-offs.

Income tax expense decreased by 13% to $1,121,000 compared to $1,287,000 last year on a 15% decline in pre-tax earnings.

Canadian operations reported a 29% decline in net earnings in the fourth quarter of 2007 compared to last year. Net earnings decreased  to $1,319,000 compared to $1,853,000 in 2006 on a higher provision for credit and loan losses and interest expense. Revenue rose slightly to $6,021,000 on higher factoring volume and interest income on asset-based loans, while expenses, including income tax expense, increased by $572,000 or 14% to $4,702,000. The provision for credit and loan losses rose by $665,000 to $552,000 compared to a recovery of $113,000 last year as net charge-offs increased by $632,000. Interest expense rose by $184,000 or 24% to $954,000 on higher borrowings. G&A expenses were almost unchanged at $2,506,000, while depreciation declined by $55,000. Income tax expense decreased by 25% to $677,000 as a result of a 27% decline in pre-tax earnings.

U.S. operations reported a 22% rise in net earnings in the fourth quarter compared to last year. Net earnings from U.S. operations rose to $740,000 compared to $607,000 last year despite the weaker U.S. dollar. In U.S. dollars, net earnings rose by 41% in the fourth quarter of 2007 compared to the prior year. Revenue decreased by $119,000 or 6% to $1,806,000 as a result of the decline in the U.S. dollar, which, as noted above, reduced the Canadian dollar equivalent of AFI’s fourth quarter revenue by approximately $280,000. Expenses, including income tax expense, decreased by $252,000 or 19% to $1,066,000 in part as a result of the weaker U.S. dollar. The provision for credit and loan losses declined by $184,000 to a recovery of $143,000 compared to a provision of $41,000 in 2006, while G&A expenses, interest expense and depreciation decreased by $92,000, $20,000 and $13,000, respectively. Income tax expense rose by $57,000 or 15% to $444,000 on a 19% increase in pre-tax earnings.

Review of Balance Sheet

Shareholders’ equity at December 31, 2007 totalled $39,197,000, a decrease of $520,000 from the previous year-end. Book value per share declined to $4.15 at December 31, 2007 compared to $4.21 a year earlier. The decrease in shareholders’ equity and book value per share in 2007 principally resulted from a $4,640,000 decline in the accumulated other comprehensive loss account. This is discussed below.

Total assets increased to a year-end record $107,133,000 at December 31, 2007, 27% higher than the $84,679,000 last year-end. Total assets largely comprised factored receivables and loans. As detailed in the Ten Year Financial Summary, total assets have grown significantly in the last ten years in line with the growth in the Company’s recourse factoring and asset-based lending business. 

Table 2—Balance Sheet Composition

Table 2 highlights the composition of the Company’s balance sheet. The first two ratios in the table (36% and 37%), detailing equity as a percentage of assets, while declining in 2007 as the Company improved its leverage, are considerably higher than those of most financial companies and indicate the Company’s continued financial strength and overall low degree of leverage.

Excluding inter-company liabilities, 69% of identifiable assets were located in Canada and 31% in the United States at December 31, 2007 compared to 71% and 29%, respectively, at December 31, 2006 (see note 19 to the Statements).

Gross factored receivables and loans, before the allowance for losses, rose by a strong $24,598,000 or 30% to $105,882,000 at December 31, 2007 compared with $81,284,000 a year earlier (see note 4 to the Statements). Net of the allowance for losses, factored receivables and loans increased by $24,077,000 to $103,940,000 at December 31, 2007 compared with $79,863,000 last year-end. Factored receivables and loans principally represent advances made by our recourse factoring and asset-based lending subsidiaries, MFC and AFI, to clients in a wide variety of industries, some of which are noted above. Most of this increase occurred in the second half of 2007. Due to the recent credit crisis in the U.S., and to a lesser degree in Canada, the Company is seeing more prospective deals than previously and currently has a healthy "pipeline". The Company’s recourse factoring and asset-based lending business had approximately 170 clients at December 31, 2007, up from 140 a year earlier. Three clients each comprised over 5% of gross factored receivables and loans at December 31, 2007, of which the largest client comprised 6%.

As noted above, the Company also contracts with other clients to assume the credit risk associated with respect to their receivables without financing them. Since the Company does not take title to these receivables, they do not appear on its balance sheet. These non-recourse or "managed receivables" totalled $100 million at December 31, 2007 compared to $105 million last year-end. Managed receivables comprise the receivables of 171 clients principally in the apparel, furniture and footwear industries. The 25 largest clients comprised approximately 61% of non-recourse volume in 2007 compared to 59% in 2006. Most of the clients’ customers are retailers in Canada and the United States. At December 31, 2007, the 25 largest customers accounted for 62% of the total managed receivables. These accounts are well-rated and closely monitored.
 
The Company’s total portfolio, which comprises both gross factored receivables and loans (“owned receivables”) and managed receivables, rose by 10% to $206 million at December 31, 2007 compared to $187 million last year-end (see Table 2 and the Total Portfolio bar chart for a ten year history).

The nature of the Company's factoring and asset-based lending business requires it to fund or assume credit  risk on the receivables offered to it by its clients, as well as to fund other assets such as inventory and equipment. All credit is approved by a staff of credit officers, with larger amounts being authorized by supervisory personnel, management and, in the case of credit in excess of $1,000,000, by the Company's Board of Directors. The Company monitors and controls its risks and exposures through financial, credit and legal reporting systems and, accordingly, believes that it has in place procedures for evaluating and limiting the credit risks to which it is subject.

All credit is subject to ongoing management review. Nevertheless, for a variety of reasons, there will inevitably be defaults by customers and clients. The Company’s primary focus continues to be on the creditworthiness and collectibility of its clients’ receivables. Monitoring and communicating with its clients’ customers is measured by, among other things, an analysis which indicates the amount of receivables current and past due. The clients’ customers have varying payment terms depending on the industries in which they operate, although most customers have invoice due dates ranging from 30 to 60 days from original shipping or invoice date. Of the total managed receivables that the Company guarantees payment of, 9.5% were past due more than 60 days at December 31, 2007 compared to 9.9% last year-end. In the Company’s recourse factoring business, receivables become "ineligible" when they reach a certain pre-determined age, usually 90 days past due, and are usually charged back to clients thereby largely eliminating the Company’s credit risk on such receivables.

ABC employs a customer credit scoring system to assess the credit risk associated with those client receivables that it guarantees. MFC and AFI employ a client rating system to assess credit risk, which reviews, among other things, the financial strength of each client, its management and the Company’s underlying security, principally its clients’ receivables, inventory and equipment. Credit risk is primarily managed by ensuring that, as far as possible, the receivables factored are of the highest quality and that any inventory, equipment or other assets securing loans are professionally appraised. The Company assesses the financial strength of its clients’ customers and the industries in which they operate. Examples of the clients’ industries are set out above. For a factoring company, the financial strength of the clients’ customers is often more important than the financial strength of the clients themselves. The Company also minimizes credit risk by limiting the maximum amount it will lend (currently, the Company will not lend more than $10 million to any one client), enforcing strict margins, disallowing certain types of receivables, charging back receivables as they become older, and employing concentration limits on a customer and industry specific basis. The Company also confirms the validity of the majority of the receivables that it purchases. As a factoring company which administers and collects the majority of its clients’ receivables, the Company is quickly able to identify problems as and when they arise and act promptly to minimize credit and loan losses, which is particularly important in today’s credit environment.

Table 3—Credit Quality

*Reserves comprise the total of the allowance for losses on factored receivables and loans and on the guarantee of managed receivables.

Table 3 highlights the credit quality of the Company’s portfolio, both owned and managed. Net charge-offs of our managed receivables increased substantially to $766,000 in 2007 compared to $251,000 last year as our non-recourse business was affected by a few significant insolvencies. Net charge-offs on managed receivables grew to 11 basis points of volume in 2007, the highest in the last ten years, compared to 3 basis points in 2006, the lowest in the last ten years. Net charge-offs in the Company’s recourse factoring business declined by 42% to $1,049,000 in 2007 compared to $1,821,000 last year despite gross factored receivables and loans increasing by 30% during the year. Overall, the Company’s total net charge-offs in 2007, as discussed in the Results of Operations section above, declined by 12% to $1,815,000 compared with $2,072,000 last year.

After the customary detailed year-end review of the Company’s $206 million portfolio, all problem accounts and loans were identified and provided for. The Company maintains a separate allowance for credit and loan losses on both its factored receivables and loans and on its guarantee of managed receivables, at amounts, which, in management's judgment, are sufficient to cover the fair value of losses thereon. The allowance for losses on gross factored receivables and loans increased by $521,000 or 35% to $1,942,000 at December 31, 2007 compared to $1,421,000 at December 31, 2006 as a result of the $24.6 million or 30% increase in gross factored receivables and loans in 2007. The allowance for losses on the guarantee of managed receivables increased slightly to $725,000 at December 31, 2007 compared to $720,000 last year-end. This allowance represents the fair value of estimated payments to clients under their guarantees. As these managed receivables are off-balance sheet, this allowance is included in the total of accounts payable and other liabilities. The activity in both the allowance for losses accounts for 2007 and 2006 is set out in note 4 to the Statements. The estimate of the allowances for losses is judgmental. Management considers both the allowances for losses to be adequate.

Cash declined to $1,148,000 at December 31, 2007 compared to $2,150,000 at the end of 2006. The Company endeavors to minimize cash balances as far as possible when it has bank indebtedness outstanding. However, due to the large volume of cash being processed daily it is necessary that a certain amount of cash be held to fund daily requirements.

Other assets increased by $43,000 to $272,000 at December 31, 2007 compared with $229,000 last year-end.

Future income tax assets, net, declined by $361,000 to $223,000 at December 31, 2007 compared with $584,000 last year-end. The decrease results from utilization of the remaining tax loss carryforwards acquired as part of the
i Trade Finance Inc. purchase in 2005. These had a fair value of $381,000 last year-end.

Capital assets declined to $597,000 at December 31, 2007 from $733,000 a year earlier as depreciation expense exceeded net capital purchases. Capital assets acquired during the year, net of disposals, totalled $73,000 compared to $123,000 in 2006 and principally comprised computer and office equipment.

Goodwill, net of accumulated amortization, totalled $953,000 at December 31, 2007 compared to $1,121,000 at December 31, 2006. In accordance with GAAP, goodwill is no longer amortized (see note 3(g) to the Statements) but is subject to an annual impairment test. In 2007 and 2006, the Company determined there was no impairment to the carrying value of goodwill. The decrease in goodwill in 2007 relates to the translation of the Company’s goodwill balance of US$962,000 into Canadian dollars at a lower year-end U.S. dollar exchange rate than at December 31, 2006.

Total liabilities at December 31, 2007 rose by $22,974,000 to $67,936,000 compared to last year-end. The increase principally resulted from a rise in bank indebtedness.
 
Bank indebtedness increased by $21,520,000 or 81% to $48,207,000 at December 31, 2007 compared with $26,687,000 at December 31, 2006. Bank loans are secured primarily by factored receivables and loans to clients. The Company has no term debt outstanding. Bank indebtedness increased in 2007 as credit facilities were utilized to fund the $24.6 million rise in gross factored receivables and loans.

Amounts due to clients increased by $670,000 to $4,897,000 at December 31, 2007 compared to $4,227,000 at the end of 2006. Amounts due to clients principally consist of collections of receivables not yet remitted to clients. Contractually, the Company remits collections a day or two after receipt and amounts due tend to fluctuate.

Accounts payable and other liabilities declined by $274,000 to $3,446,000 at December 31, 2007 compared to $3,720,000 last year-end. Last year’s balance included $644,000 in respect of the fair value of an outstanding forward foreign exchange contract, which matured on June 15, 2007. 

Income taxes payable totalled $1,012,000 at December 31, 2007 compared to $221,000 at the end of 2006. The increase represents taxes payable by one of the Company’s subsidiaries, which was not required to make instalment payments in 2007.

Deferred income, which comprises the deferral of a portion of factoring commissions and discounts until collection of the underlying receivables (see note 3(d) to the Statements), declined to $806,000 at December 31, 2007 compared to $913,000 last year-end.
 
Notes payable increased by $372,000 to $9,567,000 at December 31, 2007 compared to $9,195,000 at December 31, 2006. Notes payable represent funds borrowed on an unsecured basis and repayable on demand from shareholders, management, employees, other related individuals and third parties. These notes bear interest at bank prime rate less one half of one percent per annum, which is cheaper than the rate of interest that the Company borrows from its banks. The increase in 2007 principally resulted from accrued interest on existing notes.

Capital stock increased by $225,000 in 2007 to $6,216,000 at December 31, 2007. Note 11(b) to the Statements provides details of changes in the Company’s issued and outstanding common shares during 2007 and 2006. During 2007, 53,000 stock options were exercised by directors and key management employees for proceeds of $245,000, while $7,000 was transferred to capital stock from contributed surplus upon the exercise of these stock options. Offsetting these increases was a $27,000 reduction in capital stock in respect of shares repurchased and cancelled by the Company pursuant to the terms of its Bid. Note 11(c) to the Statements provides details of the Company’s Bid. During 2007, 41,600 common shares were repurchased and cancelled under the Company’s Bid at a cost of $333,000 (an average price of $8.00 per common share). This amount was applied to reduce capital stock and retained earnings by $27,000 and $306,000, respectively.

There were 9,454,171 common shares outstanding at December 31, 2007 compared with 9,442,771 a year earlier. 

Details of the Company’s stock option plans and options outstanding at December 31, 2007 are set out in note 11(e) to the Statements. The Company has not issued any options to employees or directors since May 2004 and currently does not plan to do so. During 2007, the Company established a share appreciation rights ("SARs") plan whereby SARs may be granted to directors and key managerial employees of the Company. Details of the SARs plan are set out in note 11(f) to the Statements. No SARs have yet been granted.

Contributed surplus totalled $196,000 at December 31, 2007 compared to $201,000 at December 31, 2006. The small decrease in 2007 comprised the $7,000 that was transferred from contributed surplus to capital stock less the Company’s stock-based compensation expense for 2007. Please refer to note 11(d) to the Statements. As all of the Company’s outstanding stock options are now fully vested there will be no further stock-based compensation expense to record in future periods related to stock options unless additional options are granted, which, as noted above, is not anticipated.

Retained earnings increased by $3,900,000 in 2007 to $41,680,000 at December 31, 2007 compared to $37,780,000 at December 31, 2006. The increase in 2007 comprised net earnings of $6,287,000 less dividends paid of $2,081,000 (22 cents per common share) and the premium paid on the shares repurchased under the Bid of $306,000. Please refer to the Consolidated Statements of Retained Earnings on page 35 of this Annual Report.

Accumulated other comprehensive loss comprises the unrealized foreign exchange loss arising on the translation of the assets and liabilities of the Company’s self-sustaining U.S. subsidiary into Canadian dollars. This was formerly the cumulative translation adjustment account. This was negative $8,895,000 at December 31, 2007 compared to negative $4,255,000 at December 31, 2006. The decrease was caused by the 15% decline in value of the U.S. dollar against the Canadian dollar in 2007; the U.S. dollar declined against the Canadian dollar from 1.165 at December 31, 2006 to 0.991 at December 31, 2007. This reduced the Canadian dollar equivalent of the Company’s net investment in its U.S. subsidiary of approximately US$28 million by $4,640,000 in 2007.

Liquidity and Capital Resources

The Company’s financing and capital requirements generally increase with the level of factored receivables and loans outstanding. The collection period and resulting turnover of outstanding receivables also impact financing needs. In addition to cash flow generated from operations, the Company maintains bank lines of credit in Canada and the United States. Bank borrowings are usually margined as a percentage of outstanding factored receivables and loans. The Company can also raise funds through its notes payable program.

The Company had bank credit lines totalling approximately $90 million at December 31, 2007 and had borrowed approximately $48 million against these facilities. Funds generated through operating activities, notes payable and share issuances decrease the usage of, and dependence on, these lines.

As noted in the Review of Balance Sheet section above, the Company had cash of $1,148,000 at December 31, 2007, a decrease of $1,002,000 during 2007. Cash on hand is usually maintained at a minimum and surplus cash is used to repay bank indebtedness.

Cash inflow from earnings before changes in operating assets and liabilities totalled $7,349,000 in 2007, a decrease of 18% compared with $8,997,000 last year. After net cash flows due to changes in operating assets and liabilities are taken into account, there was a net cash outflow from operating activities of $20,271,000 in 2007, compared with a net cash inflow of $11,018,000 last year. Funding $28,993,000 of gross factored receivables and loans explains the net cash outflow in 2007. Changes in operating assets and liabilities in 2007 are discussed in the Review of Balance Sheet section above and detailed in the Company’s Consolidated Statements of Cash Flows on page 36 of this Annual Report.

Net cash outflows from investing activities totalled $86,000 in 2007 compared to $48,000 last year and comprised net capital asset additions. In 2006, cash expended on net capital asset additions of $123,000 was partially offset by the $75,000 received from the sale of the Company’s interest in LCC.

Net cash inflows from financing activities totalled $20,185,000 in 2007 compared to net cash outflows of $10,097,000 last year. In 2007, bank indebtedness increased by $21,915,000, while $439,000 was raised from the issue of notes payable and $245,000 was received from the issuance of 53,000 shares pursuant to the exercise of stock options. Offsetting these cash inflows were dividend payments of $2,081,000 and the repurchase of 41,600 common shares under the Bid at the cost of $333,000. In 2006, bank indebtedness of $5,906,000 was repaid, while 573,100 shares were repurchased under the Bid at a cost of $4,466,000 and dividends totalling $1,966,000 (20 cents per common share) were paid. Offsetting these cash outflows was cash of $1,897,000 and $344,000 received from the issue of notes payable and 86,000 common shares, respectively. 

The effect of exchange rate changes on cash in 2007 comprised a $830,000 decrease compared to a $109,000 increase in 2006. The decrease in 2007 was largely due to the decline in the value of the U.S. dollar against the Canadian dollar.

Overall, there was a net cash outflow of $1,002,000 in 2007 compared to a net cash inflow of $982,000 in 2006.

Management believes that current cash balances and existing credit lines together with cash flow from operations will be sufficient to meet the cash requirements of working capital, capital expenditures, operating expenditures, dividend payments and share repurchases and provide sufficient liquidity and capital resources for future growth in 2008.

Contractual Obligations and Commitments at December 31, 2007

Payments due in

Related Party Transactions

As noted above, the Company has borrowed funds (notes payable) on an unsecured basis from shareholders, management, employees, other related individuals and third parties. These notes are repayable on demand and bear interest at the bank prime rate less one half of one percent per annum, which is below the rate of interest charged by the Company’s banks. Notes payable at December 31, 2007 increased by $372,000 to $9,567,000 compared with $9,195,000 at December 31, 2006. Interest expense on these notes totalled $534,000 in 2007 compared to $447,000 last year. A breakdown between amounts payable to related parties and to third parties and the respective interest expense is set out in note 10 to the Statements.

During December 2006, the Company disposed of its 25% interest in LCC for $75,000, which was included in 2006 revenue. Net of tax, the Company recorded a gain of $57,000 on the sale. At December 31, 2006, the Company was owed $418,000 by LCC, which monies were advanced to fund LCC's U.S. expansion. This amount was included in the total of factored receivables and loans. During 2006 interest income of $48,000 was earned on the loan to LCC, while the Company paid commissions of $257,000 to LCC in respect of business referred to it by LCC and its franchisees. 

Financial Instruments

Financial assets, such as cash, bank indebtedness, amounts due to clients, accounts payable and other liabilities, and notes payable are recorded at fair value. Factored receivables and loans are recorded at cost but are short term in nature and, therefore, their carrying values approximate fair values. Financial liabilities that are held for trading or are derivatives or guarantees are measured at fair value on the consolidated balance sheet. Non-trading financial liabilities are measured at amortized cost.

The Company has entered into forward foreign exchange contracts with a financial institution that mature between January 3, 2008 and May 30, 2008 and oblige the Company to sell Canadian dollars and buy US$1,175,000 at an exchange rate of 0.9526. The contracts were entered into by the Company on behalf of one of its clients and similar forward foreign exchange contracts were entered into between the Company and the client whereby the Company will buy Canadian dollars from and sell the US$1,175,000 to the client. The favorable and unfavorable fair values of these contracts have been recorded on the Company’s balance sheet in other assets and accounts payable and other liabilities, respectively. There was no foreign exchange gain or loss to the Company as a result of entering into these contracts.

As at December 31, 2006, the Company had entered into a forward foreign exchange contract with a financial institution that matured on June 15, 2007 and obliged the Company to sell Canadian dollars and buy US$3,000,000 at an exchange rate of 1.398. The contract was entered into by the Company for the purpose of managing its foreign exchange exposure on a US$3,000,000 loan. The Company recognized a liability of $644,000 in respect of the fair value of the contract at December 31, 2006. This liability was included in the total of accounts payable and other liabilities at December 31, 2006. There was no gain or loss to the Company as a result of entering into this contract.

Critical Accounting Policies and Estimates

Critical accounting estimates represent those estimates that are highly uncertain and for which changes in those estimates could materially impact the Company’s financial results. The following are accounting estimates that the Company considers critical to the financial results of its business segments:

i)  the allowance for credit and loan losses on both its factored receivables and loans and   its guarantee of managed receivables. The Company maintains a separate allowance for losses on each of the above items at amounts, which, in management's judgment, are sufficient to cover the fair value of losses thereon. The allowances are based upon several considerations including current economic trends, condition of the loan and receivable portfolios and typical industry loss experience. These estimates are particularly judgmental and operating results may be adversely affected by significant unanticipated credit or loan losses, such as occur in a bankruptcy or insolvency. Management believes that its allowances for losses are sufficient and appropriate and does not consider it reasonably likely that the Company’s material assumptions will change. Please refer to note 4 to the Statements.

ii)  the extent of any provisions required for   outstanding claims. In the normal course of business there is outstanding litigation, the results of which are not normally expected to have a material effect upon the Company. However, the adverse resolution of a particular claim could have a material impact on the Company’s financial results. Management is not aware of any significant claims currently outstanding.

Adoption of New Accounting Policies

Effective January 1, 2007 the Company adopted The Canadian Institute of Chartered Accountants ("CICA") new accounting standards comprising handbook sections 3855 "Financial Instruments – Recognition and Measurement", 3865 "Hedges", 1530 "Comprehensive Income", and 3251 "Equity". These standards provide guidance on the recognition, measurement and classification of financial assets, financial liabilities and non-financial derivatives. All financial assets, including derivatives, are measured at fair value on the consolidated balance sheets with the exception of loans, receivables, investments classified as held to maturity and certain private equity investments, which are measured at cost or amortized cost. Financial liabilities that are held for trading or are derivatives or guarantees are measured at fair value on the consolidated balance sheets. Non-trading financial liabilities are measured at amortized cost. These standards also establish the accounting requirements for hedges. Any hedge ineffectiveness is charged immediately to earnings. Accumulated other comprehensive income or loss is now included on the consolidated balance sheets as a separate component of shareholders’ equity. The new standards also require that the Company present a consolidated statement of comprehensive income, which is set out on page 35 of this report. There were no changes in the carrying value of financial instruments as a result of adopting these new standards.

Future Changes in Accounting Policies

The CICA has issued two new accounting standards on financial instruments comprising  handbook sections 3862 "Financial Instruments – Disclosures" and 3863 "Financial Instruments – Presentation", which apply to interim and annual financial statements. These sections revise and enhance the current disclosure requirements but do not change the existing presentation requirements for financial instruments. These new standards will be effective for the Company commencing January 1, 2008. The new disclosures will provide additional information on the nature and extent of risks arising from financial instruments to which the Company is exposed and how it manages those risks.

Controls and Procedures

Disclosure controls and procedures

The Company’s management, including its President and Chief Financial Officer, are responsible for establishing and maintaining the Company’s disclosure controls and procedures and has designed same to provide reasonable assurance that material information relating to the Company is made known to it by others within the Company on a timely basis. The Company’s management has evaluated the effectiveness of its disclosure controls and procedures (as defined in the rules of the Canadian Securities Administrators ("CSA")) as at December 31, 2007 and has concluded that such disclosure controls and procedures are effective.

Management’s annual report on internal control over financial reporting

The following report is provided by the Company’s management, including its President and Chief Financial Officer, in respect of the Company’s internal control over financial reporting (as defined in the rules of the CSA):

(i) the Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting within the Company. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation;

(ii) the Company’s management has used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the design of the Company’s internal control over financial reporting; and

(iii) the Company’s management has designed its internal control over financial reporting as at December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP and advises that there are no material weaknesses in the design of internal control over financial reporting that have been identified by management.

Risks and Uncertainties That Could Affect Future Results

Past performance is not a guarantee of future performance. Although management remains optimistic about the Company’s long-term prospects, future results are subject to substantial risks and uncertainties which are beyond its control. Typical risk factors that may impact on the Company’s results include, but are not limited to, the factors discussed below.

Competition

The Company operates in an intensely competitive environment and its results could be significantly affected by the activities of other industry participants. The Company expects competition to persist in the future as the markets for its services continue to develop and as additional companies enter its markets. There can be no assurance that the Company will be able to compete effectively with current and future competitors. If these or other competitors were to engage in aggressive pricing policies with respect to competing services, the Company would likely lose some clients or be forced to lower its rates, both of which could have a material adverse effect on the Company’s business, operating results and financial condition. The Company will not, however, compromise its credit standards.

Economic slowdown

The Company operates in Canada and the United States. Economic weakness in either of the Company’s markets can affect its ability to do new business as quality prospects become limited. Further, the Company’s clients and their customers are often adversely affected by economic slowdowns and this can lead to increases in credit and loan losses.

Credit risk

The Company is in the business of factoring its clients’ receivables and making asset-based loans. The Company’s portfolio totalled approximately $206 million at December 31, 2007. Operating results may be adversely affected by large bankruptcies and/or insolvencies.

Interest rate risk

The Company's agreements with its clients (interest revenue) and lenders (interest expense) usually provide for rate adjustments in the event of interest rate changes so that the Company's spreads are protected to some degree.  However, as the Company’s factored receivables and loans currently substantially exceed its borrowings, the Company is exposed to some degree to interest rate fluctuations.

Foreign currency risk

The Company operates internationally. Accordingly, a portion of its financial resources are held in currencies other than the Canadian dollar. The Company’s policy is to manage financial exposure to foreign exchange fluctuations and to attempt to neutralize the impact of foreign exchange movements on its operating results where possible. In recent years, the Company has seen the weakening of the U.S. dollar against the Canadian dollar affect its operating results upon the translation of its U.S. subsidiary’s results into Canadian dollars. It has also caused a significant decrease in the value of the Company’s net Canadian dollar investment in its U.S. subsidiary, which has reduced the accumulated other comprehensive income or loss component of shareholders’ equity.

Potential acquisitions and investments

The Company seeks to acquire or invest in businesses that expand or complement its current business. Such acquisitions or investments may involve significant commitments of financial or other resources of the Company. There can be no assurance that any such acquisitions or investments will generate additional earnings or other returns for the Company, or that financial or other resources committed to such activities will not be lost. Such activities could also place additional strains on the Company’s administrative and operational resources and its ability to manage growth.

Personnel significance

Employees are a significant asset of the Company. Market forces and competitive pressures may adversely affect the ability of the Company to recruit and retain key qualified personnel. The Company mitigates this risk by providing a competitive compensation package, which includes profit sharing and medical benefits, as it continuously seeks to align the interests of employees and shareholders.

Outlook

The Company’s principal objective is managed growth – putting quality new business on the books while maintaining high standards of credit. Recent marketing initiatives and alliances are continuing to bear fruit. Among initiatives, MFC has a long-standing referral program with Bank of Nova Scotia, which includes an export factoring program marketed to the bank’s customers and future referrals. Our U.S. operation, which is active within the turnaround management industry, is starting to see accelerated deal flow as the credit market in the U.S. tightens.

Through experienced management and employees, coupled with its financial resources, the Company is well positioned to meet increased competition and develop new opportunities. It continues to look to introduce new financial and credit services to fuel growth in a very competitive and challenging environment. Finally, it continues to seek promising companies or loan portfolios to acquire. 

Stuart Adair
Chief Financial Officer
March 3, 2008

Summary of 2007 Highlights

• Net earnings, the fourth highest ever, declined by 12% to $6,287,000 in 2007.
• Diluted earnings per share fell by 8% to 66 cents.
• Return on average shareholders’ equity was a solid 16.0%.
• Factoring volume rose by 6% to a record $1.5 billion.
• Revenue decreased by 2% to $28.3 million in 2007, but was still the third highest ever.
• General and administrative expenses at 46%   of revenue in 2007, equalled the lowest percentage in the last 10 years, and, in actual dollars, were the lowest in the last 8 years.
• Gross factored receivables and loans rose by 30% to a record $106 million at Dec. 31, 2007.
• The Company repurchased 41,600 common shares pursuant to its normal course issuer bids in 2007.
• Dividends of 22 cents per common share were paid.

Five Key Benchmarks

One of our primary functions at Accord is to manage risk and to assess credit quality. As detailed in Table 3, there are five key benchmarks which tell us how well we are doing.

Portfolio turnover 

We try to minimize risk by turning our portfolio in as few days as possible. The turnover in 2007 was 49 days, compared with 50 days in 2006.

Past due receivables 

We also try to keep our past due receivables as low as possible, for obvious reasons. Over the past ten years, the percentage of managed receivables past due more than 60 days has ranged from a low of 5.6% to a high of 10.1%. At Dec. 31, 2007, the percentage was 9.5%.

Reserves to portfolio

In an effort to minimize financial risk, we try to maximize this measure. Over the past ten years, it has been relatively consistent ranging between 0.88% and 1.29%. The percentage at
Dec. 31, 2007 was the high of 1.29%.

Reserves to net charge-offs

Ideally, this percentage should be greater than 50%, which is to say that the year-end reserves would absorb about six months of charge-offs. This number has been consistently over 100% since 1998, except for the 21% at Dec. 31, 2001. At Dec. 31, 2007, it was 147%.

Net charge-offs to non-recourse volume

This is an important benchmark in our non-recourse business. The long term industry average ranges from 15 to 20 basis points. Our record has been very good since 1998. The figure in 2007 was 11 basis points, a high for the ten year period.