Document:

exv10w1

 

			
	May 17, 2006
	 	

Mr. Lawrence D. Firestone

Dear Lawrence:

I am delighted to offer you the position of Executive Vice President and Chief Financial Officer with Advanced Energy Industries, Inc., reporting to Hans Betz, President and Chief Executive Officer. This offer is subject to satisfactory completion of Advanced Energy’s pre-employment screening process, excluding references which have already been covered.

Assuming a satisfactory background check and drug screen, your employment will commence on a date to be agreed which will be as soon as possible subject to your commitments to your current employer. It is expected that a target start date will be agreed within ten days of your acceptance of this offer.

Your starting salary will be $270,000.00 on an annualized basis and will be paid semi-monthly. A sign-on bonus of $30,000.00 before taxes will be paid within one week following your start of employment as detailed in the attached Employee Sign-on Bonus Reimbursement Agreement. You will also receive a car allowance of $650.00 per month as detailed in the attached Auto Policy. Compensation is reviewed annually and adjustments are made appropriate to the market, Advanced Energy’s achievements and your personal achievements.

Management of Advanced Energy will request that the Board of Directors, at the next regular meeting after your start date, grant you an option to purchase 80,000 shares of Advanced Energy’s common stock. You must be an employee of Advanced Energy at the time any such grant is made. The exercise price of the option will be the fair market value of the stock at the time of grant, which would be the closing price quoted on Nasdaq on the date of the grant. The stock option will vest as to 25% per year over 4 years, commencing on the first anniversary of the grant date. Other terms will be defined in the document that provides the grant.

You will be eligible for the 2006 Leadership Incentive Plan, which rewards performance related to corporate and individual objectives. Under this plan you may be awarded a bonus of up to 50% of your annual base salary, prorated for the partial year and subject to upward or downward adjustment as set forward in the plan. The individual modifier allows for up to 150% of the 50%. These amounts may vary based on the actual level of corporate profitability and in 2006 the Compensation Committee of the Board of Directors exercised it’s discretion in setting the bonus pool to a level such that it is unlikely to fund an award of 50%. A copy of the 2006 leadership Incentive Plan will be provided to you, if you accept this offer of employment.

Benefits become effective the first day of the month following your hire date. Benefit programs are re-evaluated and are subject to change at any time, at the discretion of the company. You will be provided with additional information if you accept this offer of employment, and will have an opportunity to enroll in benefits when your employment commences.

As an executive of Advanced Energy you will be expected to manage your personal time off in an efficient manner. You will not accrue paid time off but will be able to take time off at your own discretion. Advanced Energy also recognizes seven (7) company-sponsored holidays during each calendar year.

 

 

Please return the following documents as soon as possible by faxing to (970) 407-6296 or return them in the provided Fed Ex package:

	 	•	 	ADP Release Authorization -The pre-employment screening process includes reference checks, a criminal history investigation, and education confirmation by a third party.
	 
	 	•	 	Fair Credit Reporting Act Disclosure & Authorization
	 
	 	•	 	Applicant Release Form — A Forensic Drug Testing Custody and Control form along with instructions are also included. A satisfactory pre-employment drug screen is required and must be taken within 48 hours of acceptance of this offer.

Please bring the following documents with you on your first day of employment:

	 	•	 	Code of Ethical Conduct
	 
	 	•	 	New Employee Confidential Information Form
	 
	 	•	 	Designated Medical Provider
	 
	 	•	 	Key Employee Confidentiality Agreement
	 
	 	•	 	Employment Eligibility Verification form — In order to comply with the Immigration Reform and Control Act of 1986, you will be required to present documentation authorizing your right to work in the United States. A list of acceptable documents is enclosed for your review. Please bring original documents with you on your first day of employment
	 
	 	•	 	W-4 form — Employee’s Withholding Allowance Certificate.
	 
	 	•	 	Invitation to Self-Identify — Submission of this form is voluntary and refusal to provide it will not subject you to any adverse treatment
	 
	 	•	 	Automated Deposits Authorization

The information in this letter is not intended to constitute a contract of employment,
either express or implied. Your employment with Advanced Energy Industries. Inc. is at will. This confirmation of your at-will status supersedes
any contrary statement or representation.

I hope to hear from you soon and very much look forward to you accepting this offer.
Please do not hesitate to call with any questions or concerns you have.

Sincerely,

Fiona Wood

SVP of Human Resources

Advanced Energy IndustriesExhibit 4.6  

        This amended Management Discussion and Analysis ("MD&A") has been prepared and (except as noted) is current as at March 15, 2006. It should be read in
conjunction with the amended audited consolidated financial statements as at and for the year ended December 31, 2005, including the notes thereto. Information regarding the number of common
shares outstanding, common shares issued for treasury, stock options granted or outstanding and issue and/or exercise prices gives effect to the four-to-one share consolidation
effected on June 2, 2006. This MD&A also contains forward looking statements and should be read in conjunction with the risk factors described below under "Risk
Factors".

OVERVIEW  

        Systems Xcellence Inc. (or "the Company") is a leading provider of healthcare information technology solutions to the pharmaceutical supply chain in
the United States. The Company's product offerings include a wide range of application service provider ("ASP") solutions, standardized and customized software applications and professional
services to payers and providers of pharmacy healthcare services. Payers of pharmacy healthcare services include managed care organizations, health insurance companies, and intermediaries such as
pharmacy benefit management organizations. Providers of pharmacy healthcare services include primarily independent and regional retail and mail-order pharmacy chains. The Company believes
that its products and services empower these organizations to more effectively manage their costs and improve the efficiency of their operations. All figures are in U.S. dollars unless
otherwise stated. 

OVERALL PERFORMANCE  

        During the year ended December 31, 2005, the Company's financial position and growth prospects continued to strengthen in a number of key areas. 

Equity Financing: 

        The
Company completed a bought-deal equity offering of 2,250,000 common shares at a price of CDN $10.0 per common share for total gross proceeds of CDN
$22.5 million ($19.2 million). The common shares were sold by a syndicate of underwriters led by MGI Securities Inc. and included Versant Partners Inc., Clarus
Securities Inc., Paradigm Capital Inc. and Blackmont Capital Inc. The Company plans to use the proceeds from the offering for general corporate purposes and to support the
Company's growth initiatives. 

Continued increase in Pharmacy Benefit Management Administration Services to Commercial Accounts: 

        The
Company continued to build its InformedRx pharmacy benefit administration service offering that expands on the adjudication of prescription drug claims to include the design of
healthcare benefit plans for drug plan members, managing the reimbursement of retail pharmacies in a pharmacy network, analyzing drug utilization, managing rebate contracts with pharmaceutical
manufacturers and establishing web portals to extend the point-of-contact with their members. In addition, certain customers have been able to leverage off of the Company's
pharmacy network to process prescription drug benefits generated by their Medicare-approved discount drug card program. 

 

Expansion of Public Sector Market Base: 

        During
2005, the Company began several initiatives that helped expand its market base directly into the Medicare & Medicaid arenas. 

	•
	Medicare — Development of Medicare Part D ("Part D")
functionality:  

	•
	The
Part D program being administered for the U.S. federal government by the Center for Medicare and Medicaid Services ("CMS") was established to offer
qualified Medicare beneficiaries a funded pharmacy benefit plan commencing January 1, 2006. The Company developed and delivered certain Part D functionality for its license and
transactions processing customers participating in the program on behalf of its qualifying members.

	•
	Medicaid:  

	•
	On
July 14, 2005, the Company announced a five-year subcontract with Client Network Services, Inc. ("CNSI") to provide prescription drug claims
applications and systems hosting services for the State of Washington's Medicaid program. The initial five-year term of the agreement is valued at approximately $10 million. The
contract has three one-year renewal options, and if all options are exercised, the contract would have a value of more than $19.0 million.

	•
	On
January 9, 2006, the Company announced an agreement to provide information technology and claims adjudication support to MedMetrics Health Partners, Inc. as
it administers drug benefits to the State of Vermont's 147,000 Medicaid members beginning in January 2006. Under the three-year, approximately $2.0 million contract,
MedMetrics will be utilizing the Company's claims processing system to help the state better control the rapidly rising cost of the prescription drug benefits that it provides to Medicaid
beneficiaries, as well as to seniors eligible for the new Medicare Part D drug coverage which began January 1, 2006.

	•
	Canadian Provincial Government — Membership in DIS Consortium:  

	•
	The
Company was selected as part of a consortium to negotiate an exclusive agreement with The Newfoundland and Labrador Centre for Health Information for the development and
implementation of a comprehensive pharmacy network or drug information system (DIS). Neither the outcome, nor the scope of the negotiations, nor the value of any potential resulting contract can be
evaluated at this time. Drug information systems are a key component of the electronic health record program that Canadian Provincial governments will be implementing in the coming years with support
of the Federal government. DIS provides, amongst other things, authorized physicians and pharmacists with a secure access to a complete medication profile of patients, allowing the secure exchange of
relevant and current pharmaceutical information. 

2

 

Integration of Acquisitions: 

Health Business Systems, Inc. ("HBS")  

        On December 17, 2004, the Company completed the acquisition of HBS, a leading provider of retail pharmacy management systems and workflow technology. The
acquisition has increased the Company's revenues, solidified the Company's strategic position as a provider of pharmacy work flow systems, and significantly enhanced the functionality of the Company's
pharmacy offerings. HBS' strength in supporting independent and chain pharmacies complements the Company's strength in the mail-order segment of the provider market. An important
consideration in this acquisition was the significant recurring revenue stream that HBS maintains, which is primarily comprised of maintenance contracts, switching revenue, and a host of recurring
services across a broad customer base. 

        During
2005, HBS announced an agreement to provide licensed software, support and maintenance services to a 62-store supermarket pharmacy chain (the "Chain") based in
the southwestern U.S. Under the terms of the agreement the Chain will purchase all related hardware, software licenses, and implementation services from HBS. In addition, the maintenance
agreement includes bundled services for software support, clinical updates and transaction switching services. 

        HBS'
solution will create a centralized database for all stores allowing the Chain's head office to view and manage store-wide data including, claim reconciliation and
management of patient and corporate accounting information. The HBS Pharmacy Management system will enable the Chain to centrally manage its growing business services, while allowing the stores to
implement workflow solutions designed to increase productivity and enhance service in the pharmacy. The corporate systems implementation is expected to begin in the first quarter of 2006 with store
implementations continuing into the fourth quarter of 2006. 

Pharmaceutical Horizons, Inc. ("PHI")  

        Effective September 30, 2005, through a cash transaction, the Company acquired the intellectual property and selected personnel that support PHI's
pharmaceutical manufacturer contracts and rebate processing services. PHI will continue to operate its clinical consulting business, provide disease management and pharmaceutical care programs, and
support formulary activities of clients through a value-added reseller relationship with SXC Health Solutions, Inc. The selected personnel are focused on continuing to develop the Company's
rebate program offering and on building its transparent suite of à la carte PBM services branded as InformedRx. 

Increase in Recurring Revenue 

        Comparing
the year ended December 31, 2005 to the year ended December 31, 2004 results, the Company increased recurring revenue by $14.4 million, or from 61.8% to
64.3% of total revenue. Recurring revenue also remained a cornerstone of the Company's business model. Growth in revenue from recurring sources has been driven primarily by growth in the Company's
transaction processing business in the form of claims processing and pharmacy benefit administrative services (InformedRx) for its payer customers and switching services for its provider customers.
Through the Company's transaction processing business where the Company is generally paid on a volume basis, the Company continues to benefit from the growth in pharmaceutical drug use in the
United States, which has grown 8-10% annually for the last several years. In addition to benefiting from this inherent industry growth, the Company continues its focus on increasing
the transaction processing segment of its recurring revenue base by adding new transaction processing clients to the Company's existing customer base. The Company continues to make capital investments
in its data center operations to position it for continued growth in transaction processing revenue in the coming year. 

3

 

SELECTED ANNUAL INFORMATION  

        To assist investors in assessing past and future financial performance on a calendar basis, presented below is the Company's Selected Annual Information for the
ten months ended December 31, 2003 ("fiscal 2004"), the twelve months ended December 31, 2004 ("calendar 2004") and 2005 ("calendar 2005"). The calendar 2005 and 2004 information is
derived from the Company's amended audited consolidated financial statements for the years ended December 31, 2005 and December 31, 2004. On October 14, 2003, the Board of
Directors of the Company approved a change in the Company's year-end from February 28 to December 31. Consequently, the information for fiscal 2004 represents a ten month
period rather than a typical twelve month fiscal year. 

	 
	 	 
	 	For the years ended December 31
	 
	(US $000's, except income per share) 
	 	 
	 	2005
	 	2004
	 	2003(1)
	 
	 
	 	 
	 	 
	 	 
	 	(10 month period)
 
	 
	Revenue	 	 	 	 	 	 	 	 	 	 	 	 
	 	Transaction processing	 	 	 	 	21,446	 	 	13,543	 	 	7,888	 
	 	Maintenance	 	 	 	 	13,344	 	 	6,884	 	 	6,646	 
	 	 	 	 	
	 	
	 	
	 
	Total Recurring	 	%	 	 	34,790	 	 	20,427	 	 	14,534	 
	 	 	 	 	 	64	%	 	62	%	 	51	%
	System sales	 	 	 	 	8,224	 	 	7,051	 	 	8,475	 
	Professional services	 	 	 	 	11,109	 	 	5,564	 	 	5,680	 
	 	 	 	 	
	 	
	 	
	 
	Total Non-Recurring	 	%	 	 	19,333	 	 	12,615	 	 	14,155	 
	 	 	 	 	 	36	%	 	38	%	 	49	%
	Total Revenue	 	 	 	$	54,123	 	$	33,042	 	$	28,689	 
	 	 	 	 	
	 	
	 	
	 
	Gross Profit	 	 	 	$	33,348	 	$	19,583	 	$	17,011	 
	 	 	 	 	
	 	
	 	
	 
	Expenses:	 	%	 	 	62	%	 	59	%	 	59	%
	 	Product development costs	 	 	 	 	8,956	 	 	6,993	 	 	5,543	 
	 	Selling, general and administrative	 	 	 	 	12,357	 	 	7,268	 	 	5,945	 
	 	Amortization	 	 	 	 	3,306	 	 	1,499	 	 	1,555	 
	 	Stock-based compensation	 	 	 	 	844	 	 	579	 	 	216	 
	 	 	 	 	
	 	
	 	
	 
	 	 	 	 	 	25,463	 	 	16,339	 	 	13,259	 
	Income before the undernoted:	 	 	 	 	7,885	 	 	3,244	 	 	3,752	 
	Net interest:	 	 	 	 	 	 	 	 	 	 	 	 
	 	Income	 	 	 	 	(549	)	 	(203	)	 	(90	)
	 	Expense	 	 	 	 	1,896	 	 	1,052	 	 	805	 
	 	 	 	 	 	1,347	 	 	849	 	 	715	 
	Gain on sale of land and building	 	 	 	 	626	 	 	—	 	 	—	 
	 	 	 	 	
	 	
	 	
	 
	Income before income taxes	 	 	 	 	7,164	 	 	2,395	 	 	3,037	 
	Income taxes	 	 	 	 	(558	)	 	100	 	 	127	 
	Net income	 	 	 	$	7,722	 	$	2,295	 	$	2,910	 
	 	 	 	 	
	 	
	 	
	 
	Basic income per share	 	 	 	$	0.52	 	$	0.19	 	$	0.28	 
	Diluted income per share	 	 	 	$	0.50	 	$	0.19	 	$	0.24	 
	 	 	 	 	
	 	
	 	
	 
	Total assets	 	 	 	$	81,304	 	$	70,759	 	$	31,989	 
	Long-term liabilities	 	 	 	$	11,573	 	$	13,752	 	$	7,823	 

	
(1)
	Restated
 to give effect to stock-based compensation 

RESULTS OF OPERATIONS  

        The discussion and analysis that follows relates to the results of operations of the Company and should be read in conjunction with the consolidated financial
statements and accompanying notes for the years ended December 31, 2005 and 2004. The financial statements, including comparative information, related footnotes, and the following management
discussion & analysis, unless otherwise stated, are expressed in U.S. dollars. 

4

 

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004  

Revenue 

        Consolidated
revenue increased $21.1 million or 63.8% to $54.1 million for the year ended December 31, 2005 from $33.0 million for the year ended
December 31, 2004. This increase consists of a $7.9 million increase in transaction processing revenue (consisting of claims adjudication, benefits processing, and switching revenue), a
$1.2 million increase in systems sales revenue (consisting of hardware and software license revenue), a $5.5 million increase in professional services revenue, and a $6.5 million
increase in maintenance revenue (consisting of hardware and software maintenance and certain pharmacy services). The increase in software license revenue is largely the result of work performed for a
variety of customers under the Medicare Part D program and for the RxHUB product. The increase in transaction processing revenue was a result of increased switching revenue generated from
provider customers obtained in connection with the HBS acquisition and new payer customers choosing the Company's outsourced transaction processing offering, as well as the organic growth of existing
payer customers. 

        The
increase in transaction processing revenue was primarily the result of increases in transactional activity, rather than price increases, however, the Company has been able to raise
pricing by offering additional value-added services and expects this trend to continue. The increase in maintenance revenue was primarily a result of revenue generated from customers obtained in
connection with the HBS acquisition. The increase in professional services was primarily the result of consulting and implementation services performed related to the implementation of a large public
sector customer and the Medicare Part D program for certain existing customers. 

Gross Profit 

        Gross
profit was 61.6% for the year ended December 31, 2005 compared to 59.3% for the year ended December 31, 2004. This increase in gross profit margin was primarily a
result of the increase in the sale of higher margin transaction processing services in 2005. 

Product Development Costs 

        Product
development costs consist of staffing expenses in support of the Company's payer and provider products. In general, such costs are not directly related to specific customer
products or deliverables, but rather to enhancements and new initiatives. Product development for the year ended December 31, 2005 were $9.0 million, representing 16.5% of revenue,
compared to $7.0 million or 21.2% of revenue for the year ended December 31, 2004. The increased product development costs were primarily the result of costs associated with the
development of the Medicare Part D functionality and the addition of HBS product development resources resulting from the December 2004 HBS acquisition. 

5

 

Selling, General and Administration Costs 

        Selling,
general and administrative costs (SG&A) relate to selling expenses, commissions, marketing, network administration and administrative costs that legal, accounting, investor
relations and corporate development costs. SG&A costs for the year ended December 31, 2005 were $12.4 million or 22.8% of revenue, compared to $7.3 million or 22.0% of revenue for
the year ended December 31, 2004. The selling, general and administrative costs remained fairly constant as a percentage-of-revenue primarily as a result of the
continued focus on cost control and improving operational efficiencies. The increased dollar amount is primarily a result of the acquisition of HBS, and increased legal, infrastructual and recruiting
expenses in 2005 to support the Company's growth. 

Amortization 

        Amortization
expense (consisting of depreciation and amortization) increased by $1.8 million to $3.3 million for the year ended December 31, 2005 from
$1.5 million for the year ended December 31, 2004. The increase relates primarily to an increase in the amortization of intangible assets and deferred charges arising from the
acquisition of HBS. The intangible assets consist of acquired software and customer relationships, which are being amortized over their useful lives of 5 and 10 years, respectively. 

Stock-based Compensation 

        The
Company has a stock-based compensation plan and accounts for all stock-based payments to employees and non-employees using the fair value based method. Under the fair
value based method, compensation cost is measured at fair value at the grant date and recognized over the vesting period. Stock compensation expense increased from $0.6 million for the year
ended December 31, 2004 to $0.8 million for the year ended December 31, 2005. This increase was primarily the result of stock options that were issued in May 2005 in
connection with the Company's stock option incentive plan. 

Interest Income and Expense 

        Interest
income increased from $0.2 million for the year ended December 31, 2004 to $0.5 million for the year ended December 31, 2005 due to increased average
cash balances available for investment from both operations and the Company's equity offering in the fourth quarter of calendar 2005. Interest expense increased from $1.1 million for the year
ended December 31, 2004 to $1.9 million for the year ended December 31, 2005. This increase was primarily due to the refinancing of the MCG credit facility from
$7.6 million to $13.6 million on December 17, 2004 in connection with the HBS acquisition and to increased LIBOR-based rates between the periods. 

Tax Provision 

        For
the year ended December 31, 2005, the Company recorded a tax recovery of ($0.6) million compared to tax provision of $0.01 million for the year ended
December 31, 2004. As of December 31, 2005, the Company recognized future tax assets, net of valuation allowances, of $0.7 million (December 31, 2004—Nil). The
principal components of the Company's gross future tax asset of $7.6 million primarily consist of accumulated operating loss carry forwards of $3.2 million and $1.6 million
deductible research and development expenses. Based on the Company's assessment of factors such as historical levels of income, expectations and risks associated with estimates of future taxable
income, the character of the income tax assets and ongoing tax planning strategies, the Company assessed that a valuation allowance of $7.0 million was required at December 31, 2005
(December 31, 2004—$10 million). 

6

 

        The
Company will continue to assess the realizability of the future assets based on actual and forecasted operating results. Once the available evidence, in the opinion of management,
make it more likely than not that additional realization will occur, a reduction in the valuation allowance will be recorded and the carrying value of the deferred tax assets will be increased,
resulting in a non-cash credit to earnings. 

Net Income 

        The
Company reported net income of $7.7 million or $0.50 per share (fully-diluted) for the year ended December 31, 2005, compared to net income of $2.3 million or
$0.19 per share (fully-diluted) for the year ended December 31, 2004. The $5.4 million increase in net income was primarily due to an increase in revenue of $21.1 million and a
gain on the sale and leaseback of the Company's Canadian headquarters of $0.6 million plus a decrease in income tax expense of $0.6 million offset by an increase in project costs of
$7.3 million, an increase in product development costs of $2.0 million, an increase in selling, general and administrative costs of $5.1 million, an increase in amortization
expense of $1.8 million, an increase in stock-based compensation of $0.3 million and a net increase in interest expense of $0.5 million. 

Share data information 

        As
of December 31, 2005, there were 16,938,833 common shares issued and outstanding, 1,255,918 options outstanding which are currently exercisable into
1,255,917 common shares. There are no warrants or compensation options that are convertible into common stock. 

For the Twelve-Month Period Ended December 31, 2004, compared to the Ten-Month Period Ended December 31, 2003.

Revenue 

        Consolidated
revenue increased $4.4 million or 15.2% to $33.0 million from $28.7 million in fiscal 2004. This increase consists of a $5.7 million increase in
ASP/switching revenue, a $1.4 million decrease in software license revenue, a $0.1 million decrease in integration and consulting services revenue, and a $0.2 million increase in
maintenance revenue. 

        The
decrease in software license revenue is largely the result of work performed for one customer under a software license and maintenance contract that was completed in
mid-calendar 2004. The increase in ASP/switching revenue was a result of continued growth in the transaction processing customer base. The increased dollar amount is also a result of
comparing twelve months of financial results in calendar 2004 to ten months of results in fiscal 2004. Maintenance and consulting revenue were relatively constant between the two periods, taking into
account the fact that twelve months of financial results in calendar 2004 are being compared to ten months of results in fiscal 2004. 

        In
calendar 2004, revenue of a recurring nature, consisting of ASP/switching and maintenance revenue, was $20.4 million or 62% of consolidated revenue, compared to
$14.5 million or 51% of consolidated revenue in fiscal 2004. As a percentage of total revenue, recurring revenue increased by 11% and the dollar amount increased by $5.9 million. The
increased dollar amount is primarily a result of increased transaction processing volume and comparing twelve months of financial results in calendar 2004 to ten months of results in
fiscal 2004. 

7

 

Gross Profit 

        Gross
profit remained consistent at 59.3% of revenue for both periods, as the Company continued to replace high margin, but more non-recurring software license revenue with
economically leveraged ASP/switching revenue. 

Product Development Costs 

        Product
development costs in calendar 2004 were $7.0 million, representing 21.2% of revenue, compared to $5.5 million or 19.3% of revenue in fiscal 2004. The increased
product development costs on a percentage of revenue basis was primarily
due to increased development costs spent on the RxEXPRESS for Windows product suite during the first three quarters of calendar 2004. In the fourth quarter of calendar 2004, the Company reduced its
RxEXPRESS product development staff in anticipation of the HBS acquisition. With the acquisition of HBS, development will be refocused on integrating the core functionality of the RxEXPRESS and HBS
suite of software as well as converting certain legacy RxEXPRESS customers to the HBS suite of products and services. 

Selling, General and Administration Costs 

        Selling,
general and administrative costs in calendar 2004 were $7.3 million or 22.0% of revenue, compared to $5.9 million or 20.7% of revenue for fiscal 2004. The selling,
general and administrative costs remained fairly constant as a percentage-of-revenue primarily as a result of the continued focus on cost control and improving operational
efficiencies. The increased dollar amount is primarily a result of increased staffing and sales and marketing costs, increased legal and professional fees and the result of comparing twelve months of
financial results in calendar 2004 to ten months of results in fiscal 2004. 

Net Income 

        For
calendar 2004, the Company reported net income of $2.3 million or $0.19 per share (fully-diluted), compared to net income of $2.9 million or $0.25 per share
(fully-diluted) for fiscal 2004. For calendars 2004 and 2003, the weighted average number of shares (fully-diluted) was 12,406,018 and 11,588,051, respectively. 

SUMMARY OF QUARTERLY RESULTS:  

        The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended
December 31, 2005: 

	 
	 	2005
	 	2004

	(US in $000's, except basic & diluted EPS)
 

	 	Q4
	 	Q3
	 	Q2
	 	Q1
	 	Q4
	 	Q3
	 	Q2
	 	Q1

	Revenue	 	$	16,611	 	$	14,730	 	$	12,209	 	$	10,573	 	$	8,526	 	$	8,239	 	$	8,515	 	$	7,762
	Recurring revenue ($)	 	 	9,393	 	 	8,770	 	 	8,434	 	 	8,193	 	 	5,782	 	 	4,787	 	 	4,998	 	 	4,860
	Recurring revenue (%)	 	 	57%	 	 	60%	 	 	69%	 	 	78%	 	 	68%	 	 	58%	 	 	59%	 	 	63%
	Operating income ($)	 	 	3,783	 	 	2,379	 	 	1,323	 	 	400	 	 	877	 	 	1,102	 	 	720	 	 	478
	Net Income ($)	 	 	3,950	 	 	2,210	 	 	1,546	 	 	16	 	 	647	 	 	881	 	 	492	 	 	274
	 	 	
	 	
	 	
	 	
	 	
	 	
	 	
	 	

	EPS — Basic	 	$	0.26	 	$	0.15	 	$	0.11	 	$	0.00	 	$	0.05	 	$	0.08	 	$	0.04	 	$	0.02
	 	 	
	 	
	 	
	 	
	 	
	 	
	 	
	 	

	EPS — Diluted	 	$	0.24	 	$	0.14	 	$	0.10	 	$	0.00	 	$	0.05	 	$	0.07	 	$	0.04	 	$	0.02
	 	 	
	 	
	 	
	 	
	 	
	 	
	 	
	 	

8

 

For the Eight Quarters Ended December 31, 2005  

        During the fourth quarter of calendar 2005, revenue and recurring revenue increased $1.9 million compared to the third quarter of calendar 2005, primarily
due to $0.5 million in new transaction processing revenue commencing in the fourth quarter. In addition, software license revenue increased by $1.4 million, primarily from the
recognition of Medicare Part D license revenue. Recurring revenue as a percent of total revenue decreased primarily because of the large increase in software license revenue
(non-recurring) compared with the increase in transaction processing revenue (recurring). The increases in operating income, net income, and EPS were primarily a result of these revenue
increases.    In addition, net income was positively impacted in the fourth quarter due to the $0.7 million recognition of a future tax recovery resulting from the
set-up of a deferred tax asset. 

        During
the third quarter of calendar 2005, revenue increased $2.5 million compared to the second quarter of calendar 2005, primarily due to $1.0 million of software license
revenue, related primarily to Medicare Part D and $1.2 million of professional service revenue, related primarily to several fixed-bid consulting projects performed
for customers. The remaining increase of $0.3 million was primarily related to an increase in recurring transaction processing revenue from new customers. The increases in operating income, net
income, and EPS were primarily a result of these revenue increases. 

        During
the first and second quarter of calendar 2005, recurring revenue was higher compared to prior quarters in calendar 2004 primarily due to the acquisition of HBS, effective
December 17, 2004, and to continued growth in the Company's transaction processing business. Net income was positively impacted in the second quarter of calendar 2005 by the $0.6 million
gain on the sale and leaseback of the Canadian headquarters and in the fourth quarter of calendar 2005 by the $0.7 million tax provision credit. 

LIQUIDITY AND CAPITAL RESOURCES  

        As of December 31, 2005, the Company had a working capital position of $37.3 million and net cash and cash equivalents of $36.0 million,
compared with $14.8 million of working capital and $29.6 million of cash and cash equivalents at December 31, 2004. The $6.3 million improvement in the Company's cash
position was primarily related to cash generated from operations of $11.8 million, plus cash generated from financing of $17.3 million, less cash used for investment purposes of
$22.8 million. The Company believes that cash from operating activity together with cash on hand is sufficient to fund anticipated working capital, planned capital expenditures and required
debt service over the next twelve months. 

        In
calendar 2005, the Company generated $11.8 million of cash through its operations, which primarily consisted of net income of $7.7 million, plus $3.4 million in
amortization of capital and intangible assets and $0.8 million in stock-based compensation expense and a $1.1 million dollar increase in non-cash working capital which was
reduced by a gain on the sale of the Milton building of $0.6 million and the establishment of a future tax asset of $0.7 million. This is compared to cash generated in calendar 2004 of
$2.7 million through its operations, which primarily consisted of net income of $2.3 million, plus $1.5 million in amortization of capital assets and $0.6 million in stock
based compensation expense, which was reduced by a $1.7 million decrease in non-cash working capital. 

9

 

        The
Company generated $17.3 million of cash from financing activities during calendar 2005, which primarily consisted of net proceeds from a private placement of
$18.0 million, $0.4 million of cash received from the exercise of options offset by
the repayment of long-term liabilities of $1.1 million. This compared to cash generated from financing activities in calendar 2004 of $17.0 million, which primarily consisted
of net proceeds from a private placement of $11.4 million, $5.2 million of net cash from additional debt financing, and $0.4 million in cash received from the exercise of options
and warrants. 

        The
Company utilized $22.8 million of cash in investing activities during calendar 2005, which consisted primarily of $20.0 million for the acquisition of HBS,
$0.2 million for the acquisition of a rebate line of business, $2.0 million of contingent consideration for HBS put in escrow, $2.6 million in the purchase of capital assets
offset by $2.3 million in the proceeds from the disposal of capital assets. This compared to cash used in investing activities of $3.6 million in calendar 2004, which consisted primarily
of $2.1 million related to the acquisition of HBS net of cash acquired and $1.5 million in capital expenditures. 

CONTRACTUAL OBLIGATIONS  

        Contractual obligations of the Company, which include payments of principal only unless otherwise noted, are as follows: 

	 
	 	Total
	 	Less than

1 Year
	 	Years

1-3
	 	Years

4-5
	 	After

Year 5

	Long-Term Debt(1)	 	$	13,260,000	 	$	1,530,000	 	$	4,930,000	 	$	6,800,000	 	$	—
	Operating Leases	 	$	5,267,003	 	$	1,311,384	 	$	1,852,654	 	$	1,287,341	 	$	815,625
	 	 	
	 	
	 	
	 	
	 	

	Total Contractual Obligations	 	$	18,527,003	 	$	2,841,384	 	$	6,782,654	 	$	8,087,341	 	$	815,625
	 	 	
	 	
	 	
	 	
	 	

	(1)
	Includes
warrant amortization expense of $57,142 

OFF BALANCE SHEET ARRANGEMENTS  

        The Company has no off balance sheet arrangements or derivative financial instruments that have or are reasonably likely to have a current or future effect on the
results of operations. 

CHANGES IN ACCOUNTING POLICY  

        The Company did not change or adopt any new accounting policies during calendar 2005. 

ACCOUNTING ESTIMATES  

        The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the period.
Significant items subject to such estimates and assumptions include revenue recognition, preliminary purchase price allocation in connection with acquisitions, the carrying amount of capital assets,
intangibles, goodwill, and valuation allowances for receivables and future income taxes. Actual results could differ from those estimates. 

10

 

Revenue Recognition: 

        The
Company's revenue is derived from transaction processing services, software license sales, hardware sales, maintenance, and professional services. 

        Revenue
from transaction processing includes ASP and switching services and is recognized as services are provided. 

        Revenue
from software licenses is recognized when a license agreement is executed with the customer, the software product has been delivered, the amount of the fees to be paid by the
customer is fixed and determinable, and collection of these fees is deemed probable. Fees are reviewed related to arrangements with significant payment due beyond normal trading terms, to evaluate
whether they are fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as the payments become due from the customer. If collectibility is not considered probable,
revenue is recognized when the fee is collected. One of the critical judgments we make is our assessment of the probability of collecting the related accounts receivable balance on a
customer-by-customer basis. As a result, the timing or amount of revenue recognition may have been different if different assessments of the probability of collection had been
made at the time that the transactions were recorded in revenue. In cases where collectibility is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been
met. 

        Typically,
software license agreements are multiple element arrangements as they also include consulting, related maintenance and/or implementation services fees. Arrangements that
include consulting services are evaluated to determine whether those services are considered essential. License and service revenue under such arrangements are recognized as services are performed
under the percentage of completion method of accounting. 

        When
services are not considered essential, the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence ("VSOE")
of the fair value of each element. VSOE used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar quantities to a
customer of similar size and nature. VSOE used in determining fair value for installation, integration and training is based on the standard daily rates for the type of services being provided
multiplied by the estimated time to complete the task. VSOE used in determining the fair value of maintenance and technical support is based on the annual renewal rates. The revenue allocable to the
consulting services is recognized as the services are performed. In instances where VSOE exists for undelivered elements but does not exist for delivered elements of a software arrangement, the
Company uses the residual method of allocation of the arrangement fees for revenue recognition purposes. 

        Professional
services revenues are recognized as the services are performed, generally on a time and material basis. Professional services revenues attributed to fixed price arrangements
are recognized using the percentage of total estimated direct labour costs to complete the project. 

        Revenue
from fixed price professional service contracts is recognized on a proportional performance basis, which requires us to make estimates and is subject to risks and uncertainties
inherent in projecting future events. A number of internal and external factors can affect our estimates, including the nature of the services being performed, the complexity of the customer's
environment and the utilization and efficiency of our professional services employees. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that give rise to the revision become known. If we do not have a sufficient basis to estimate the progress towards completion,
revenue is recognized when the project is complete or when we receive final acceptance from the customer. 

11

 

        For
arrangements that do not meet the criteria described above, both the license revenues and professional services revenues are recognized using the
percentage-of-completion method where reasonably dependable estimates of progress toward completion of a contract can be made. We estimate the
percentage-of-completion on contracts utilizing costs incurred to date as a percentage of the total costs at project completion, subject to meeting agreed milestones. In the
event that a milestone has not been reached, the associated cost is deferred and revenue is not recognized until the customer has accepted the milestone. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in profit estimates are charged to earnings in the period in which the facts that give rise to the revision become known. It should be
noted that a significant number of our license and services revenue are recognized under the percentage of completion method. 

Goodwill 

        Goodwill
is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed,
based on their fair values. Goodwill is allocated as of the
date of the business combination to the Company's reporting units that are expected to benefit from the synergies of the business combination. 

        Goodwill
is not amortized, but 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 compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value
of goodwill is determined in the same manner as the value of goodwill is determined in a business combination using the fair value of the reporting unit as if it was the purchase price. When the
carrying amount of reporting unit 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 consolidated statement of operations. The Company completed its goodwill impairment test at December 31, 2005 and 2004 and determined no impairment existed. 

Impairment of Long-lived Assets 

        Long-lived
assets, including capital assets and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the estimated undiscounted future cash flows expected to be
generated by the use and disposal of the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. 

12

 

Income Taxes 

        The
Company uses the asset and liability method of accounting for income taxes. Future tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to apply to taxable income in the periods 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. 

        In
assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all the future tax assets will not be realized. The
ultimate realization of future tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers
projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. 

Valuation of Allowance for Doubtful Accounts 

        In
assessing the valuation of the allowance for doubtful accounts, management reviews the collectibility of accounts receivable greater than 90 days past due in aggregate and on
individual account-basis. The Company calculates a valuation allowance equal to one-hundred percent of the aggregate balance of receivables past due more than 120 days and fifty
percent of the aggregate balance of receivables past due between 90 and 120 days. Management then reviews the accounts receivable on an individual customer-basis to determine if events such as
subsequent collections, discussions with management of the debtor companies, or other activities lead to the conclusion to either increase or decrease the calculated allowance. Any increases or
decreases to the allowance are expensed to the income statement as a bad debt expense. 

Financial Instruments and Other Instruments 

        The
Company entered into a credit facility agreement with MCG Capital Corporation ("MCG") in December 2002 as a result of a refinancing of existing debt. The credit facility
consisted of a $1.0 million revolving line of credit and a $7.6 million term loan. In connection with the HBS acquisition, in December 2004 the Company refinanced its credit
facility by terminating the revolving credit facility, expanding the term loan to $13.6 million and renegotiating its covenants. 

        Throughout
the term of the credit facility the Company has been in good standing with its covenants and expects to continue to be for the foreseeable future. Along with equity and
working capital, the Company views credit as one tool with which to finance potential acquisitions while maintaining a balanced, risk-moderated capital structure. 

        The
Company has not entered into any hedging activities owing to its limited foreign exchange exposure and preference for more conservative investing instruments. 

13

 

RISK FACTORS  

        This report contains forward-looking statements. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements.
There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include, but may not be limited to
the ability of the Company to adequately address: the risks associated with acquisitions, the Company's dependence on key customers and key personnel, competition from both existing and new sources,
expanding its service offerings, the impact of technological change on its product/service offerings, potential fluctuations in financial results, the sufficiency of its liquidity and capital needs,
the indebtedness of the Company, the volatility of its share price, the Company's limited history of profitability, the continued viability of its proprietary technology, its product liability and
insurance needs, its reliance on key suppliers if any, continued confidence in e-commerce as an on-line delivery mechanism for information, and the impact of government
regulation on the business. 

Risks Associated with Acquisitions 

        During
calendar 2004, the Company completed the acquisition of HBS, a supplier of pharmacy software and workflow systems, and it is the Company's second acquisition in three years. While
the Company believes it has the experience and know-how to integrate acquisitions, such efforts entail significant risks including, but not limited to: a diversion of management's
attention from other business concerns; failure to effectively assimilate the acquired technology or assets into the business of the Company; the potential loss of key employees from either the
Company's current business or the business of HBS; and the assumption of significant and/or unknown liabilities of HBS. There can be no assurances that the Company will be able to successfully
integrate future acquisitions into its operations. However, the Company continues to believe that its patience in executing this strategy will be rewarded in the long term. 

        The
Company continues to seek acquisitions that are a good fit for its strategic direction, primarily within the Company's current market sectors. While the Company believes it has the
experience and resources to continue to execute this strategy, the Company does not have control over the market conditions prevailing or likely to prevail in the future, which may impact its ability
to execute this strategy. These variations include market valuations of potential targets, stock price volatility of the Company, general market valuation issues of public versus private concerns, all
of which may impact the timing of executing this strategy. There can be no assurances that the Company will be able to identify suitable acquisition candidates available for sale at reasonable
valuations, consummate any acquisition or successfully integrate any acquired business into its operations. 

Dependence on Key Customers 

        The
Company sells most of its computer software and services to pharmacy benefit managers, Blue Cross/Blue Shield organizations, managed care organizations and
retail/mail-order pharmacy chains. If the healthcare benefits industry or the Company's customers in the healthcare benefits industry experience problems, the Company's business and
financial results could be adversely affected. For example, the Company may suffer a loss of customers if there is any significant consolidation among firms in the healthcare benefits industry or if
demand for pharmaceutical claims processing services should decline. 

Dependence on Key Personnel 

        The
Company's business is dependent upon its ability to retain and attract highly skilled persons. Competition for qualified personnel is considerable and the Company's future success
will depend in large part on its continuing ability to attract and retain qualified employees. The Company's business is also dependent on the expertise provided by its Chief Executive Officer and
other members of its management team. 

14

 

Competition 

        The
market for the software and products supplied by the Company is highly competitive and subject to rapid change. Many of the Company's current and potential competitors have larger
technical staffs, more established and larger sales and marketing organizations and significantly greater financial resources than does the Company. Additionally, there can be no assurance that
competitors will not develop systems and products that are superior to the Company's systems or products or that achieve greater market acceptance due to pricing, access to distributors or other
factors. Pricing is an important element of competition and is regularly reviewed by the Company in response to changes in market conditions. There can be no assurance that the Company's pricing
strategy will be successful or that any price changes will not have an adverse effect on the Company's gross margins. 

Expanding Service Offerings 

        The
Company continues to expand its InformedRx pharmacy benefit service offerings by developing and offering health plan sponsors a wide variety of pharmacy benefit administrative
services. These service offerings consist of benefit plan design, management and claims adjudication, retail pharmacy network management, formulary management and clinical services and rebate
management. The Company is developing this business by leveraging its existing managed care customer base, industry leading technology and processing infrastructure. Since the Company does not have
significant experience with certain aspects of this proposed service offering, there are considerable risks involved in its development and further commercialization. In addition, the Company's
InformedRx pharmacy network offering is dependent on customers paying in full before disbursements are made by the pharmacy network. Although the Company minimizes these risks by mandating that before
any disbursements are made to the network, the network must first be fully funded by the customer, and by disclaiming liabilities thereof, there remain significant collection risks. In addition, there
remains the risk of continuing to fund the pharmacy network on a recurring basis following payments by the Company's customers in a timely and accurate manner. 

Technological Change 

        The
Company's ability to continue to develop and introduce new systems and products or enhancements of existing systems and products may require significant additional research and
development expenditures. The Company's future success in these areas will depend substantially on its ability to develop new or enhanced systems and products which achieve market acceptance.
Technology continues to advance at a rapid pace which requires the timely introduction of new systems and products and technologies. Management has no knowledge that there are existing or upcoming
technologies which would make obsolete or significantly displace the technologies utilized by the Company. However, such a risk exists and, if it materializes, would have an adverse impact on the
future growth of the Company. 

15

 

Potential Fluctuations in Results 

        The
Company recognizes revenue from product sales upon execution of a license agreement and shipment of the software, as long as all vendor obligations have been satisfied and collection
of license fees is probable. As the costs associated with product sales are minimal, revenue and income may vary significantly based on the timing of recognition of revenue. While the Company has
moved away from the exclusive development, delivery and maintenance of software systems tailored to particular customers to the sale of more standard software solutions available on an outsourced
(transactions processing) basis, the Company nonetheless continues to develop systems for individual customers. Given that revenue from these projects is often recognized using the percentage of
completion method, the Company's revenue from these projects can vary substantially on a monthly and quarterly basis. Accordingly, the timing and delivery requirements of customers' orders may have a
material effect on the Company's operations and financial results during any reporting period. In addition, to the extent that the costs required completing a fixed price contract exceeds the price
quoted by the Company, the results may be adversely affected. 

Liquidity and Capital Needs 

        The
Company's future capital requirements will depend on many factors, including its product development programs. In order to meet such capital requirements, the Company will consider
additional public or private financings (including the issuance of additional equity securities) to fund all or part of its requirements. There can be no assurance that additional funding will be
available or, if available, that it will be available on acceptable terms. If adequate funds are not available, the Company may have to substantially reduce or eliminate expenditures for marketing,
research and development and testing of its proposed products, or obtain funds through arrangements with partners that require the Company to relinquish rights to certain of its technologies or
products. There can be no assurance that the Company will be able to raise additional capital if its capital resources are exhausted. 

Indebtedness of the Company 

        The
Company has debt obligations that are subject to various financial operating covenants, including requirements to maintain certain financial ratios. The Company's ability to meet its
debt service obligations will depend on the Company's future operations which are subject to prevailing industry conditions and other factors, many of which are beyond the control of the Company.
Further, the Company's indebtedness is secured by substantially all of the Company's assets. In the event of a violation by the Company of any of its loan covenants or any other default by the Company
on its obligations relating to its indebtedness, the lender could declare such indebtedness to be immediately due and payable and, in certain cases, foreclose on the Company's assets. 

Volatility of Share Price 

        The
Common Shares currently trade on the Toronto Stock Exchange. Factors such as announcements of technological innovation or the introduction of new products by the Company or its
competitors, actual or anticipated fluctuations in the Company's operating results, changes in estimates of the Company's future operating results by securities analysts or developments with respect
to proprietary rights may have a significant impact on the market price of the Common Shares. In addition, the stock market has experienced volatility which has particularly affected the market prices
of equity securities of many high technology companies and which often has been unrelated to the operating performance of such companies. These market fluctuations may materially and adversely affect
the market price of the Common Shares. Shareholders of some high technology companies that have seen a significant decline in stock price have recently instituted class action lawsuits against such
companies. A lawsuit against the Company could cause the Company to incur substantial costs and could divert the time and attention of the Company's management and other resources. 

16

 

Limited History of Profitability 

        The
Company has only a limited history of achieving profitability following a period of significant losses. Future results of operations may fluctuate significantly based upon numerous
factors including the timing of new product introductions, the timing of delivery of products to customers, activities of competitors and the ability of the Company to penetrate new markets. 

Proprietary Technology 

        The
Company's success will depend, in part, on its ability to maintain copyright and trademark protection, trade secret protection and operate without infringing the proprietary rights
of third parties. There can be no assurance that the Company's intellectual property rights, copyright and/or trademarks will not be challenged by any third parties, or that the intellectual property
rights of others will not have a material adverse effect on the ability of the Company to do business. Furthermore, there can be no assurance that others will not independently develop products
similar to those developed by the Company or duplicate any of the Company's products. The Company may be required to obtain licences for proprietary rights of third parties. No assurance can be given
that any licences required will be available on terms acceptable to the Company. If the Company does not obtain such licences, it could encounter delays in introducing one or more of its products to
the market or could find that the development, manufacture or sale of products requiring such licences could be precluded. In addition, the Company could incur substantial time, effort and/or costs in
policing unauthorized use of its intellectual property and/or in defending itself in suits brought against it or in suits in which the Company attempts to enforce its own intellectual property rights
against other parties. 

Product Liability and Insurance 

        The
sale and use of the Company's products or its products under development may entail risk of product liability. A major product liability claim could materially adversely affect the
business of the Company because of the costs of defending against these types of lawsuits, diversion of key employees' time and attention from the business and potential damage to the Company's
reputation. The Company's license agreements with its customers contain provisions designed to limit exposure to potential liability claims. Limitation of liability provisions contained in the
Company's license agreements may not be effective under the laws of some jurisdictions if local laws treat them as unenforceable. As a result, the Company may be required to pay substantial amounts of
damages in settlement or upon the determination of any of these types of claims. 

        Although
the Company considers that it currently has adequate coverage for any product liability claim, as the Company expands and introduces new products there can be assurance that it
will be able to obtain appropriate levels of product liability insurance prior to any use of its products. An inability to obtain insurance on commercially reasonable terms or to otherwise protect
against potential product liability claims could inhibit or prevent the commercialization of products developed by the Company or expose the Company to significant product liability risks. The
obligation to pay any product liability claim or a recall of a product could have a material adverse effect on the business, financial condition, operating results or prospects of the Company. 

17

 

Reliance on Suppliers 

        If
suppliers of software and other products should, for any reason, adjust the availability of their products, the Company's delivery of systems may be affected. 

Confidence in E-Commerce 

        Participants
in the pharmacy benefits supply chain will not adopt on-line healthcare benefits services if they are not confident that such transactions over the Internet can
be undertaken securely and confidentially. Although there is security technology currently available for on-line transactions, many Internet users do not use the Internet for commercial
transactions because of continued security concerns. These concerns may be heightened by well-publicized security breaches of any Internet-related service, which could deter potential
customers from adopting, directly or indirectly, the Company's transaction-based software and services. If potential customers do not gain
confidence in the security for on-line transactions that the current technologies provide, the Company's revenue may not increase. 

        Despite
the Company's efforts to maintain Internet security, it may not be able to stop unauthorized attempts to gain access to or disrupt transactions between its customers and the
consumers of their services. Specifically, computer viruses, break-ins and other disruptions could lead to interruptions, delays, loss of data, or the inability to accept and confirm the
receipt of information. Any of these events could substantially damage the Company's reputation. The Company relies on encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to achieve secure transmission of confidential information. The Company cannot guarantee that this technology or future advances in this technology or other
developments will be able to prevent security breaches. The Company may need to expend further capital and other resources to protect against the threat of security breaches or to alleviate problems
caused by these breaches. 

Government Regulation 

        The
Company's products and services are designed for use by healthcare organizations which are subject to government regulation. In particular, many of the Company's clients are subject
to federal laws in the United States, including, the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which prescribes certain standards for electronic transactions,
healthcare information, privacy and security and the Medicare Part D program that became effective in the U.S. on January 1, 2006. The Company's ability to ensure that its
products and services are HIPAA and/or Medicare Part D compliant or changes in government regulation of the healthcare industry could materially adversely affect the Company's competitive
market position. 

DISCLOSURE CONTROLS AND PROCEDURES  

        As required by Canadian securities laws, management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of December 31, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures, as defined in Multilateral Instrument 52-109 — Certification of Disclosure in
Issuer's Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports filed or submitted by us under Canadian securities laws is
recorded, processed, summarized and reported within the time periods specified in those rules. 

18

 

ADDITIONAL INFORMATION:  

        Additional information regarding the Company's financial statements and activities are available at www.sedar.com. 

19

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