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Exhibit 4.5  

Consolidated
Financial Statements

(Expressed in U.S. dollars) 

SYSTEMS XCELLENCE INC.  

Years ended December 31, 2004 and 2005 

AUDITORS' REPORT TO THE DIRECTORS  

To
the Board of Directors of Systems Xcellence Inc. (the "Company") 

        We
have audited the consolidated balance sheets of the Company as at December 31, 2004 and 2005 and the consolidated statements of operations, deficit and cash flows for the years
ended December 31, 2004 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits. 

        We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 

        In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2005 and the
results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. 

  

KPMG LLP

Chartered Accountants 

Toronto,
Canada

February 17, 2006 (except as to notes 15 and 16, which are as of June 5, 2006) 

  

 
 

SYSTEMS XCELLENCE INC.    
    
    CONSOLIDATED BALANCE SHEETS
  (Expressed in U.S. dollars)    
    
    
    December 31, 2004 and 2005    
    

	 
	 	2004
	 	2005
	 
	Assets	 	 	 	 	 	 	 
	
 Current assets:	
 	
 	

 	
 	
 	

 	
 
	 	Cash and cash equivalents (note 10(a))	 	$	29,636,643	 	$	35,951,932	 
	 	Accounts receivable, net of allowance for doubtful accounts of $319,566 (2004 — $468,666)	 	 	8,641,403	 	 	8,649,801	 
	 	Unbilled revenue	 	 	—	 	 	1,001,971	 
	 	Prepaid expenses	 	 	804,614	 	 	1,191,444	 
	 	Inventory	 	 	193,631	 	 	437,674	 
	 	Future tax assets (note 8)	 	 	—	 	 	320,000	 
	 	 	
	 	
	 
	 	Total current assets	 	 	39,276,291	 	 	47,552,822	 
	
 Capital assets (note 3)	
 	
 	

4,190,463	
 	
 	

3,777,954	
 
	Deferred charges (note 4)	 	 	1,025,386	 	 	787,686	 
	Goodwill (note 5)	 	 	26,266,808	 	 	13,996,147	 
	Intangible assets (note 5)	 	 	—	 	 	12,829,000	 
	Future tax assets (note 8)	 	 	—	 	 	360,000	 
	Restricted cash (note 2)	 	 	—	 	 	2,000,000	 
	 	 	
	 	
	 
	Total assets	 	$	70,758,948	 	$	81,303,609	 
	 	 	
	 	
	 
	
Liabilities and Shareholders' Equity	
 	
 	

 	
 	
 	

 	
 
	
 Current liabilities:	
 	
 	

 	
 	
 	

 	
 
	 	Accounts payable	 	$	436,349	 	$	765,761	 
	 	Accrued liabilities	 	 	3,089,728	 	 	4,833,151	 
	 	Notes payable (note 2)	 	 	18,000,000	 	 	—	 
	 	Deferred revenue	 	 	2,496,246	 	 	3,131,031	 
	 	Current portion of long-term liabilities (note 6)	 	 	431,898	 	 	1,530,000	 
	 	 	
	 	
	 
	 	Total current liabilities	 	 	24,454,221	 	 	10,259,943	 
	
 Long-term liabilities (note 6)	
 	
 	

13,751,821	
 	
 	

11,572,858	
 
	
 Shareholders' equity:	
 	
 	

 	
 	
 	

 	
 
	 	Capital stock (note 7(a))	 	 	45,695,433	 	 	64,047,220	 
	 	Contributed surplus	 	 	874,393	 	 	1,718,372	 
	 	Deficit	 	 	(14,016,920	)	 	(6,294,784	)
	 	 	
	 	
	 
	 	Total shareholders' equity	 	 	32,552,906	 	 	59,470,808	 
	Commitments and contingencies (note 11)	 	 	 	 	 	 	 
	Subsequent event (note 16)	 	 	 	 	 	 	 
	 	 	
	 	
	 
	Total liabilities and shareholders' equity	 	$	70,758,948	 	$	81,303,609	 
	 	 	
	 	
	 

See accompanying notes to financial statements.

On
behalf of the Board: 

	/s/  MICHAEL J. CALLAGHAN      
 Michael J. Callaghan, Director	 	/s/  TERRENCE C. BURKE      
 Terrence C. Burke, Director

1

 
 
 

SYSTEMS XCELLENCE INC.    
    
    CONSOLIDATED STATEMENTS OF OPERATIONS
  (Expressed in U.S. dollars)    
    
    
    Years ended December 31, 2004 and 2005    
    

	 
	 	2004
	 	2005
	 
	Revenue	 	$	33,042,363	 	$	54,123,036	 
	Project costs	 	 	13,459,544	 	 	20,774,797	 
	 	 	
	 	
	 
	 	 	 	19,582,819	 	 	33,348,239	 
	Expenses:	 	 	 	 	 	 	 
	 	Product development costs	 	 	6,993,020	 	 	8,956,169	 
	 	Selling, general and administration	 	 	7,268,222	 	 	12,357,064	 
	 	Amortization	 	 	1,499,103	 	 	3,306,167	 
	 	Stock-based compensation (note 7(c))	 	 	579,328	 	 	843,979	 
	 	 	
	 	
	 
	 	 	 	16,339,673	 	 	25,463,379	 
	 	 	
	 	
	 
	Income before the undernoted	 	 	3,243,146	 	 	7,884,860	 
	
 Net interest:	
 	
 	

 	
 	
 	

 	
 
	 	Income	 	 	(203,313	)	 	(548,885	)
	 	Expense	 	 	1,052,204	 	 	1,895,934	 
	 	 	
	 	
	 
	 	 	 	848,891	 	 	1,347,049	 
	 	 	
	 	
	 
	 	 	 	2,394,255	 	 	6,537,811	 
	Gain on sale of land and building (note 14)	 	 	—	 	 	626,342	 
	 	 	
	 	
	 
	Income before income taxes	 	 	2,394,255	 	 	7,164,153	 
	
 Income taxes (recovery) (note 8):	
 	
 	

 	
 	
 	

 	
 
	 	Current	 	 	99,960	 	 	122,017	 
	 	Future	 	 	—	 	 	(680,000	)
	 	 	
	 	
	 
	 	 	 	99,960	 	 	(557,983	)
	 	 	
	 	
	 
	Net income	 	$	2,294,295	 	$	7,722,136	 
	 	 	
	 	
	 
	Net income per share (note 9):	 	 	 	 	 	 	 
	 	Basic	 	$	0.19	 	$	0.52	 
	 	Diluted	 	 	0.19	 	 	0.50	 
	 	 	
	 	
	 
	Weighted average number of shares used in computing net income per share (note 9):	 	 	 	 	 	 	 
	 	Basic	 	 	11,844,392	 	 	14,805,857	 
	 	Diluted	 	 	12,406,018	 	 	15,437,138	 
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.

2

  

 
 

SYSTEMS XCELLENCE INC.    
    
    CONSOLIDATED STATEMENTS OF DEFICIT
  (Expressed in U.S. dollars)    
    
    Years ended December 31, 2004 and 2005    
    

	 
	 	2004
	 	2005
	 
	Deficit, beginning of year:	 	 	 	 	 	 	 
	 	As previously reported	 	$	(16,016,150	)	$	(14,016,920	)
	 	Adjustment to reflect change in accounting for stock-based compensation (note 1(l))	 	 	(295,065	)	 	—	 
	 	 	
	 	
	 
	 	As restated	 	 	(16,311,215	)	 	(14,016,920	)
	Net income	 	 	2,294,295	 	 	7,722,136	 
	 	 	
	 	
	 
	Deficit, end of year	 	$	(14,016,920	)	$	(6,294,784	)
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.

3

 
 
 

SYSTEMS XCELLENCE INC.    
    
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  (Expressed in U.S. dollars)    
    
    Years ended December 31, 2004 and 2005    
    

	 
	 	2004
	 	2005
	 
	Cash provided by (used in):	 	 	 	 	 	 	 
	Operations:	 	 	 	 	 	 	 
	 	Net income	 	$	2,294,295	 	$	7,722,136	 
	 	Items not involving cash, net of effects from acquisition:	 	 	 	 	 	 	 
	 	 	Gain on sale of land and building	 	 	—	 	 	(626,342	)
	 	 	Amortization of capital assets	 	 	1,499,103	 	 	1,740,167	 
	 	 	Amortization of intangible assets	 	 	—	 	 	1,566,000	 
	 	 	Amortization of deferred charges	 	 	66,582	 	 	187,700	 
	 	 	Stock-based compensation	 	 	579,328	 	 	843,979	 
	 	 	Future income taxes	 	 	—	 	 	(680,000	)
	 	Change in non-cash operating working capital (note 10(b))	 	 	(1,712,173	)	 	1,066,378	 
	 	 	
	 	
	 
	 	Net cash provided by operations	 	 	2,727,135	 	 	11,820,018	 
	
 Financing:	
 	
 	

 	
 	
 	

 	
 
	 	Proceeds from issuance of warrants and common shares, net of issue costs	 	 	11,432,824	 	 	17,930,444	 
	 	Proceeds from exercise of share-purchase options	 	 	402,793	 	 	421,343	 
	 	Proceeds from long-term debt	 	 	6,000,000	 	 	—	 
	 	Financing costs related to long-term liabilities	 	 	(816,285	)	 	50,000	 
	 	Payment of mortgage principal	 	 	(24,549	)	 	—	 
	 	Repayment of long-term liabilities	 	 	(6,036	)	 	(1,080,861	)
	 	 	
	 	
	 
	 	Net cash provided by financing	 	 	16,988,747	 	 	17,320,926	 
	
 Investments:	
 	
 	

 	
 	
 	

 	
 
	 	Purchase of capital assets	 	 	(1,454,164	)	 	(2,557,556	)
	 	Acquisition of Health Business Systems, Inc., net of cash acquired	 	 	(1,546,156	)	 	(20,375,794	)
	 	Acquisition costs related to Health Business Systems, Inc.	 	 	(574,335	)	 	—	 
	 	Acquisition of rebates services line-of-business	 	 	—	 	 	(235,000	)
	 	Contingent consideration placed in escrow	 	 	—	 	 	(2,000,000	)
	 	Proceeds from disposal of capital assets	 	 	—	 	 	2,342,695	 
	 	 	
	 	
	 
	 	Net cash used in investments	 	 	(3,574,655	)	 	(22,825,655	)
	 	 	
	 	
	 
	Increase in cash and cash equivalents	 	 	16,141,227	 	 	6,315,289	 
	Cash and cash equivalents, beginning of year	 	 	13,495,416	 	 	29,636,643	 
	 	 	
	 	
	 
	Cash and cash equivalents, end of year	 	$	29,636,643	 	$	35,951,932	 
	 	 	
	 	
	 

Supplemental
cash flow information (note 10) 

See accompanying notes to consolidated financial statements.

4

  

 
 

SYSTEMS XCELLENCE INC.    
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (Expressed in U.S. dollars)    
    
    Years ended December 31, 2004 and 2005    
    

Systems Xcellence Inc. (the "Company") designs, develops and installs electronic transaction processing software solutions and provides Application Service
Provider ("ASP") services for the pharmaceutical benefits supply chain within the healthcare industry. 

1.     Significant accounting policies:  

The
accounting policies of the Company conform to those generally accepted in Canada. Significant accounting policies are summarized below: 

	(a)
	Consolidated
financial statements: 

The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated on
consolidation. 

	(b)
	Use
of estimates: 

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

	(c)
	Revenue
recognition: 

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

The
Company recognizes revenue in accordance with The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 3400, Revenue, EIC-141 Revenue Recognition, and
EIC-142, Revenue Arrangements With Multiple Deliverables, and has applied relevant U.S. accounting standards, including The American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, Software Revenue Recognition, SOP 98-9, Modification of SOP 97-2, Software Recognition, With Respect to
Certain Transactions, SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and the SEC Staff Accounting Bulletin
No. 104, Revenue Recognition. 

5

 

Transaction
processing revenue, which includes ASP and switching services, is recognized as services are provided. 

Revenue
from hardware sales and software licenses ("system sales") is recognized when the Company has an executed agreement with the customer, the hardware and/or software has been delivered, the
amount of the fees is fixed and determinable and the collection of these fees is probable. 

Software
license arrangements, which involve significant customization services, are evaluated to determine whether these services are essential to the functionality of the software license. When such
services are considered essential, the license and services revenue of such arrangements is recognized as the services are performed on the following bases: 

	(i)
	Fixed
price contracts: 

On
a percentage-of-completion method of accounting, which recognizes revenue proportionately with the degree of completion of the services under the contract. The degree of
completion is determined by reference to total time incurred relative to total estimated time to complete. 

	(ii)
	Time
and materials contracts: 

Upon
delivery of the services, consulting services are performed either on a fixed price contract basis or a time and materials contract basis, and revenue is recognized on the same basis as noted
above. 

The
Company recognizes maintenance fees as revenue on a straight-line basis over the term of the related agreement. 

Revenue
recognized in excess of amounts billed is reported as unbilled revenue. Billing in excess of revenue recognized is recorded as deferred revenue. 

6

 

	(d)
	Cash
and cash equivalents: 

The
Company considers deposits in banks, bank term deposits and short-term investments with original maturities of 90 days or less as cash and cash equivalents. 

	(e)
	Deferred
charges: 

Deferred
charges consist of deferred financing costs relating to the issuance of long-term debt. Amortization is provided on a straight-line basis over the term of the related
debt, being six years. 

	(f)
	Inventory: 

Inventory
is carried at the lower of cost or net realizable value. 

	(g)
	Capital
assets: 

Capital
assets are stated at cost less accumulated amortization. Capital assets, including assets under capital leases are amortized on the following bases and annual rates: 

	Asset 
	 	Basis
	 	Rate

	Building	 	Straight line	 	Over 20 years
	Furniture and equipment	 	Declining balance	 	20%
	Software	 	Straight line	 	Over three years
	Computer equipment	 	Straight line	 	Over three years
	Leasehold improvements	 	Straight line	 	Over lease term

7

 

	(h)
	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. As at December 31, 2004 and 2005, no events or circumstances had occurred that suggested that the carrying amounts of the long-lived assets may
not be recoverable. 

	(i)
	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 annual goodwill impairment test at December 31, 2004 and 2005 and determined no impairment existed. 

8

 

	(j)
	Intangible
assets: 

Intangible
assets acquired individually or as part of a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction,
including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair
values. 

Intangible
assets with finite useful lives are amortized over their useful lives. 

	(k)
	Research
and product development: 

Research
costs, net of related investment tax credits, are expensed as incurred. Costs related to development of software, net of related investment tax credits, are expensed as incurred unless such
costs meet the criteria for capitalization and amortization under generally accepted accounting principles. The Company has not capitalized any software development costs. 

Expenditures
on equipment, used in research and development activities, net of related investment tax credits, are recorded as capital assets. 

For
the years ended December 31, 2004 and 2005, the Company did not record any investment tax credits. 

	(l)
	Stock-based
compensation: 

The
Company has a stock-based compensation plan that is described in note 7(b). For stock options issued to employees and directors, compensation expense related to those awards is
measured based on the fair value of the options on the date of the grant that is determined by using an option pricing model. The fair value of the options expected to vest is recognized over the
service period as compensation expense and contributed surplus. 

Effective
January 1, 2004, the Company adopted, on a retroactive basis with restatement, the fair value-based method of accounting prescribed by CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments ("Section 3870"). The effect of the fair value-based method was to decrease net income for the years ended December 31, 2005 by $843,979
(2004-$579,328) and increase accumulated deficit and contributed surplus by $295,065 as at January 1, 2004. 

9

 

	(m)
	Foreign
currency: 

The
Company's measurement currency and reporting currency is the U.S. dollar. Monetary items denominated in foreign currency are translated to U.S. dollars at exchange rates in effect at
the balance sheet date and non-monetary items are translated at rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in
effect at the time of the transactions. Foreign exchange gains and losses are included in income. 

The
Company's foreign operating subsidiaries are considered to be integrated operations and are translated into U.S. dollars using current rates of exchange for monetary assets and liabilities,
historical rates of exchange for non-monetary assets and liabilities, and average rates for revenue and expenses, except amortization, which is translated at the rates of exchange
applicable to the related assets. Gains or losses resulting from these translation adjustments are included in income. 

	(n)
	Income
per share: 

Basic
income per share is computed by dividing net income by the weighted average shares outstanding during the period. Diluted income per share is computed similar to basic income per share, except
that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is
calculated by assuming that the proceeds from the exercise of in-the-money stock options and warrants were used to acquire shares of common stock at the average market price
during the year. 

10

 

	(o)
	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 years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the year 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. 

	(p)
	Deferred
leasehold inducements: 

Deferred
leasehold inducements represent cash inducements received from the Company's landlords that are amortized against rent expense on a straight-line basis over the term of the
related lease. 

	(q)
	Recently
issued accounting pronouncements yet to be adopted: 

In
January 2005, the CICA issued Section 1530, "Comprehensive Income," and Section 3855, "Financial Instruments — Recognition and
Measurement." The new standards will be effective for interim and annual financial statements commencing in 2007. Earlier adoption is permitted. Most significantly for the Company, the new standards
will require presentation of a separate statement of comprehensive income. Management is currently evaluating the impact of adopting these standards on the consolidated financial statements. 

	(r)
	Comparative
figures: 

Certain
2004 figures have been reclassified to conform with the financial statement presentation adopted in 2005. 

11

   2.     Business acquisitions:  

	(a)
	Health
Business Systems, Inc. ("HBS"): 

On
December 17, 2004, the Company, through a wholly owned subsidiary, acquired all of the outstanding shares of HBS, based in Warminster, Pennsylvania, which provides retail pharmacy management
systems and workflow technology. The acquisition of HBS was accounted for using the purchase method. The results of operations of HBS have been included in the operating results of the Company from
the date of the acquisition. 

Under
the terms of the HBS Stock Purchase Agreement (the "Agreement"), the Company will pay $20,000,000 in cash for HBS, with the final purchase price subject to working capital adjustments and
the Company paying $4,000,000 of contingent consideration dependent on HBS achieving certain calendar 2004 and 2006 financial earn-out targets. 

On
December 17, 2004, the Company paid $2,000,000, which was being held in an interest-bearing escrow account pursuant to the terms of the Agreement, and issued notes of $18,000,000 to the
shareholders of HBS. On January 3, 2005, the Company paid $18,000,000 in cash in settlement of the notes. The $2,000,000 was expected to be held in the escrow account for one year from the
Closing Date as security against certain indemnities arising under the Agreement. As at December 31, 2005, the indemnity amount has not been finalized as the Company has filed a claim against
the escrow amount. 

On
May 31, 2005, the Company paid $2,375,794 to the former shareholders of HBS, of which $2,000,000 contingent consideration was the financial 2004 earn-out payment and $375,794 was
the working capital payment. This amount was recorded as additional purchase price consideration. On June 1, 2005, the Company paid a further $2,000,000 to a second interest-bearing escrow
account pursuant to the terms of the Agreement, which will be paid to certain former HBS shareholders on December 31, 2006 subject to specified 2006 financial earn-out targets being
met. This $2,000,000 contingent consideration has been recorded as a long-term asset and will be recorded as additional purchase price consideration when the contingency is resolved. The
Company incurred $618,599 of acquisition costs. 

12

 

The
Company has made certain adjustments to the fair value measurement of net assets acquired from HBS as reported in 2004. The adjustments relate to the preliminary evaluation of the fair value of
capital assets and acquired other intangible assets and related expenses subsequent to the 2004 year-end. The preliminary purchase price allocation as reported in the Company's 2004
annual report and the adjustments are as follows: 

	 
	 	Purchase

price allocation

reported in 2004
	 	Adjustments
	 	Final purchase

price allocation
	 
	Cash	 	$	453,844	 	$	—	 	$	453,844	 
	Current assets	 	 	2,242,809	 	 	—	 	 	2,242,809	 
	Capital assets	 	 	51,067	 	 	330,719	 	 	381,786	 
	Goodwill	 	 	19,163,581	 	 	(12,305,661	)	 	6,857,920	 
	Customer relationships	 	 	—	 	 	12,800,000	 	 	12,800,000	 
	Acquired software	 	 	—	 	 	1,400,000	 	 	1,400,000	 
	Other long-term assets	 	 	21,337	 	 	—	 	 	21,337	 
	Current liabilities	 	 	(1,358,303	)	 	195,000	 	 	(1,163,303	)
	 	 	
	 	
	 	
	 
	Total purchase consideration	 	$	20,574,335	 	$	2,420,058	 	$	22,994,393	 
	 	 	
	 	
	 	
	 

In
connection with the acquisition, the Company adopted a plan to integrate the operations of HBS with that of the Company. This plan was expected to be completed during 2005. Accordingly, a liability
of approximately $195,000 for such costs was recorded by the Company in accordance with EIC-114, Liability Recognition for Costs Incurred on Purchase Business Combinations. As at
December 31, 2005, no termination benefits were paid; accordingly, the Company reversed the entire accrual of $195,000 as an adjustment to the purchase price allocation. 

Other
intangible assets consist of acquired software and customer relationships, which are being amortized over their estimated useful lives of 5 and 10 years, respectively. Goodwill, which is
deductible by the Company for tax purposes, will be amortized over a 15-year period, at approximately $450,000 per year for tax purposes. 

13

 

	(b)
	Rebate
management line-of-business: 

On
September 30, 2005, the Company acquired the intellectual property, pharmaceutical manufacturer contracts, and select personnel that support a rebate management
line-of-business relating to the administration of rebate services for $200,000. The Company incurred $35,000 of acquisition costs. Substantially all of the purchase price was
allocated to intangible assets consisting of customer contracts and acquired technology, which is being amortized over 10 years and 5 years, respectively. 

3.     Capital assets:  

	2004 
	 	Cost
	 	Accumulated

amortization
	 	Net book

value

	Land	 	$	375,635	 	$	—	 	$	375,635
	Building	 	 	2,580,096	 	 	1,184,099	 	 	1,395,997
	Furniture and equipment	 	 	1,268,940	 	 	881,016	 	 	387,924
	Software	 	 	2,381,617	 	 	1,982,654	 	 	398,963
	Computer equipment	 	 	5,195,270	 	 	3,794,807	 	 	1,400,463
	Computer equipment under capital lease	 	 	3,241,696	 	 	3,241,696	 	 	—
	Leasehold improvements	 	 	526,225	 	 	294,744	 	 	231,481
	 	 	
	 	
	 	

	 	 	$	15,569,479	 	$	11,379,016	 	$	4,190,463
	 	 	
	 	
	 	

	 

	2005 
	 	Cost
	 	Accumulated

amortization
	 	Net book

value

	Furniture and equipment	 	$	1,265,344	 	$	689,775	 	$	575,569
	Software	 	 	2,590,190	 	 	2,059,576	 	 	530,614
	Computer equipment	 	 	6,861,219	 	 	4,366,987	 	 	2,494,232
	Leasehold improvements	 	 	596,691	 	 	419,152	 	 	177,539
	 	 	
	 	
	 	

	 	 	$	11,313,444	 	$	7,535,490	 	$	3,777,954
	 	 	
	 	
	 	

14

 

4.     Deferred charges:  

	 
	 	Cost
	 	Accumulated

amortization
	 	Total
	 
	December 31, 2003	 	$	324,101	 	$	48,418	 	$	275,683	 
	Financing costs	 	 	816,285	 	 	—	 	 	816,285	 
	Amortization expense	 	 	—	 	 	66,582	 	 	(66,582	)
	 	 	
	 	
	 	
	 
	December 31, 2004	 	 	1,140,386	 	 	115,000	 	 	1,025,386	 
	Financing costs	 	 	(50,000	)	 	—	 	 	(50,000	)
	Amortization expense	 	 	—	 	 	187,700	 	 	(187,700	)
	 	 	
	 	
	 	
	 
	December 31, 2005	 	$	1,090,386	 	$	302,700	 	$	787,686	 
	 	 	
	 	
	 	
	 

5.     Goodwill and other intangible assets:  

	2004 
	 	Gross amount
	 	Accumulated

amortization
	 	Net book

value

	Goodwill	 	$	26,266,808	 	$	—	 	$	26,266,808
	 	 	
	 	
	 	

	 

	2005 
	 	Gross amount
	 	Accumulated

amortization
	 	Net book

value

	Goodwill	 	$	13,996,147	 	$	—	 	$	13,996,147
	
 Amortizable intangible assets:	
 	
 	

 	
 	
 	

 	
 	
 	

 
	 	Customer relationships	 	 	12,950,000	 	 	1,283,750	 	 	11,666,250
	 	Acquired software	 	 	1,445,000	 	 	282,250	 	 	1,162,750
	 	 	
	 	
	 	

	 	 	 	14,395,000	 	 	1,566,000	 	 	12,829,000
	 	 	
	 	
	 	

	 	 	$	28,391,147	 	$	1,566,000	 	$	26,825,147
	 	 	
	 	
	 	

15

   6.     Long-term liabilities:  

	2004 
	 	Current
	 	Long-term
	 	Total

	Long-term debt (a)	 	$	340,000	 	$	13,050,478	 	$	13,390,478
	Mortgage (b)	 	 	91,898	 	 	701,343	 	 	793,241
	 	 	
	 	
	 	

	 	 	$	431,898	 	$	13,751,821	 	$	14,183,719
	 	 	
	 	
	 	

	 

	2005 
	 	Current
	 	Long-term
	 	Total

	Long-term debt (a)	 	$	1,530,000	 	$	11,572,858	 	$	13,102,858
	 	 	
	 	
	 	

	(a)
	Long-term
debt: 

On
December 27, 2002, the Company entered into a Credit Facility Agreement with MCG Capital Corporation ("MCG"). The credit facility consisted of a $1,000,000 revolving line of credit and a
$7,600,000 term loan. The credit facility was to mature on December 27, 2008. 

The
term loan bore an interest at a base rate, which is at the choice of the Company (LIBOR or U.S. Prime rate) plus a rate margin to be determined as of the first date of each interest period,
contingent on the Company's leverage ratio at that time. The base rate was capped for the first three years of the Credit Facility Agreement. For the first two years, the Company made quarterly
interest-only payments, and thereafter, would make quarterly interest and amortized principal payments, beginning on December 31, 2004, of $380,000 until maturity. 

In
connection with the HBS acquisition (note 2), the Company amended and increased its senior secured credit facility by $6,000,000 to $13,600,000 and terminated the revolving line of credit.
The amended terms of the Company's credit facility include a new six-year term with quarterly principal payments commencing on December 31, 2005 and maturing on December 31,
2010. The interest rate on the amended credit facility is calculated in the same manner noted above. The effective interest rate for the year ended December 31, 2005 was 11.2%
(2004 — 10.5%). The higher effective interest rate in 2005 was due to the LIBOR component of the interest rate, which increased from 2.5% on March 31, 2005
to 4.0% on December 31, 2005. 

16

 

The
unamortized financing costs related to the original debt along with the costs incurred by the Company related to the amended long-term debt are being amortized over the term of the
amended debt. 

The
credit facility is a senior secured arrangement, secured by the Company's U.S. subsidiary and guaranteed by the Company. 

	(b)
	Mortgage:

The
mortgage was secured by land and buildings, was amortized over 10 years and had a maturity date of March 31, 2006. The mortgage bore interest at 6.8%
(2004 — 6.8%) and required monthly payments of approximately $10,965 including principal and interest. During 2005, the Company repaid the outstanding mortgage
amount in connection with the sale of the land and building (note 14). 

Principal
repayments required for long-term liabilities as at December 31, 2005 are as follows: 

	2006	 	$	1,530,000
	2007	 	 	2,210,000
	2008	 	 	2,720,000
	2009	 	 	2,720,000
	2010	 	 	3,922,858
	 	 	

	 	 	$	13,102,858
	 	 	

Interest
expense relates to the following: 

	 
	 	2004
	 	2005

	Long-term debt	 	$	888,785	 	$	1,582,442
	Mortgage and other bank interest charges	 	 	96,837	 	 	125,792
	Financing charges	 	 	66,582	 	 	187,700
	 	 	
	 	

	 	 	$	1,052,204	 	$	1,895,934
	 	 	
	 	

17

 

7.     Capital stock:  

	(a)
	Common
shares:

	(i)
	Authorized: 

Unlimited
voting common shares 

	(ii)
	Issued:

	 
	 	Number

of shares
	 	Amount

	Balance, December 31, 2003	 	11,608,514	 	$	33,859,816
	Exercise of special warrants (iii)	 	2,777,800	 	 	11,432,824
	Exercise of options	 	193,310	 	 	402,793
	 	 	
	 	

	Balance, December 31, 2004	 	14,579,624	 	 	45,695,433
	Issuance of common shares (iv)	 	2,250,000	 	 	17,930,444
	Exercise of options	 	109,209	 	 	421,343
	 	 	
	 	

	Balance, December 31, 2005	 	16,938,833	 	$	64,047,220
	 	 	
	 	

	(iii)
	Exercise
of special warrants: 

In
contemplation of the HBS acquisition, on December 17, 2004, the Company completed a private placement of 2,777,800 special warrants at a price of Cdn. $5.40 per special warrant for
gross proceeds of $12,206,000 (Cdn. $15,000,000). Proceeds of the private placement were used for the acquisition of HBS. Each special warrant was exercised into one common share of the Company,
without the payment of any additional consideration on December 17, 2004. Share issuance costs were $773,176. 

	(iv)
	Issuance
of common shares: 

On
November 29, 2005, the Company completed a public offering of 2,250,000 common shares at a price of Cdn. $10.00 per common share with proceeds of $19,230,769 (Cdn. $22,500,000). Share
issuance costs were $1,300,325. 

18

 

	(b)
	Share
purchase options: 

The
Company has a stock option plan. Under the terms of the plan, the Company may grant options from time to time to its officers, directors, key employees and service providers and any affiliate or
subsidiary of the Company for up to 2,937,500 shares of common stock. The exercise price of each option shall be set at the time the option is granted and shall not be lower than the market
price of the Company's common shares at the time. An option's maximum life under the Company's option plan is five years. 

	 
	 	2004
	 	2005

	 
	 	Number of

options
	 	Weighted

average

exercise

price
	 	Number of

options
	 	Weighted

average

exercise

price

	(in Cdn. dollars)	 	 	 	 	 	 	 	 	 	 
	
 Outstanding, beginning of year	
 	

1,320,251	
 	
$	

3.44	
 	

1,392,251	
 	
$	

4.40
	Granted	 	379,500	 	 	6.96	 	495,000	 	 	6.40
	Exercised	 	(193,310	)	 	2.44	 	(109,209	)	 	4.56
	Expired	 	(57,416	)	 	6.40	 	(68,203	)	 	10.04
	Cancelled	 	(56,774	)	 	3.52	 	(7,250	)	 	7.08
	 	 	
	 	
	 	
	 	

	Outstanding, end of year	 	1,392,251	 	 	4.40	 	1,702,589	 	 	4.72
	 	 	
	 	
	 	
	 	

	Options exercisable, end of year	 	764,791	 	$	7.76	 	1,255,918	 	$	4.08
	 	 	
	 	
	 	
	 	

19

 

The
following table summarizes the information about the stock options outstanding at December 31, 2005: 

	Range of exercise price 
	 	Options

outstanding
	 	Weighted

average remaining contractual life (years)
	 	Weighted

average exercise price
	 	Options

exercisable
	 	Weighted

average exercise price

	(in Cdn. dollars)	 	 	 	 	 	 	 	 	 	 	 	 
	$1.20 - $3.20	 	786,501	 	1.19	 	$	2.40	 	786,501	 	$	2.40
	$3.24 - $7.40	 	898,088	 	3.57	 	 	6.68	 	458,667	 	 	6.84
	$7.44 - $12.20	 	18,000	 	2.11	 	 	9.32	 	10,750	 	 	9.76
	 	 	
	 	
	 	
	 	
	 	

	$1.20 - $12.20	 	1,702,589	 	2.45	 	 	4.72	 	1,255,918	 	 	4.08
	 	 	
	 	
	 	
	 	
	 	

The
Company has assumed no forfeiture rate, as adjustments for actual forfeitures are made in the period they occur. The weighted average grant date fair value of options issued in the year ended
December 31, 2005 was Cdn. $3.84 (2004 — Cdn. $4.40). 

	(c)
	Stock-based
compensation: 

During
the year ended December 31, 2005, the Company recorded stock-based compensation expense of $843,979 (2004 — $579,328). The Black-Scholes option
pricing model was used to estimate the fair value of the options at grant date based on the following assumptions: 

	 
	 	2004
	 	2005

	Volatility	 	69%	 	38 - 58%
	Risk-free interest rate	 	2.75%	 	4.00%
	Expected life	 	5 years	 	5 years
	Dividend yield	 	—	 	—

20

   8.     Income taxes:  

The
income tax effects of temporary differences that give rise to significant portions of future income tax assets and liabilities are as follows. 

	 
	 	2004
	 	2005

	Future income tax assets:	 	 	 	 	 	 
	 	Non-capital loss carryforwards	 	$	4,559,000	 	$	3,234,000
	 	Deductible research and development expenses	 	 	1,583,000	 	 	1,639,000
	 	Goodwill	 	 	947,000	 	 	389,000
	 	Capital assets	 	 	1,556,000	 	 	718,000
	 	Other	 	 	1,434,000	 	 	1,653,000
	 	 	
	 	

	 	 	 	10,079,000	 	 	7,633,000
	 	Less valuation allowance	 	 	10,074,000	 	 	6,951,000
	 	 	
	 	

	 	Total future tax assets	 	 	5,000	 	 	682,000
	
 Future income tax liabilities:	
 	
 	

 	
 	
 	

 
	 	Deferred charges	 	 	5,000	 	 	2,000
	 	 	
	 	

	 	Total future income tax liabilities	 	 	5,000	 	 	2,000
	 	 	
	 	

	Net future income tax assets	 	$	—	 	$	680,000
	 	 	
	 	

At
December 31, 2005, the Company has loss carryforwards available to reduce future years' taxable income, which expire as follows: 

	 
	 	Canada
	 	U.S.A.
	 	Total

	2006	 	$	529,000	 	$	—	 	$	529,000
	2008	 	 	5,474,000	 	 	—	 	 	5,474,000
	2009	 	 	1,096,000	 	 	—	 	 	1,096,000
	2010	 	 	408,000	 	 	—	 	 	408,000
	2013 - 2024	 	 	—	 	 	1,967,000	 	 	1,967,000
	 	 	
	 	
	 	

	 	 	$	7,507,000	 	$	1,967,000	 	$	9,474,000
	 	 	
	 	
	 	

21

 

The
differences between the effective tax rate reflected in the provision for income taxes and the statutory income tax rate are as follows: 

	 
	 	2004
	 	2005
	 
	Corporate statutory rate	 	 	36.1%	 	 	36.1%	 
	 	 	
	 	
	 
	Income tax expense on income before taxes	 	$	864,805	 	$	2,586,000	 
	
 Tax effect of:	
 	
 	

 	
 	
 	

 	
 
	 	Impact of foreign tax rates	 	 	44,000	 	 	177,700	 
	 	Share issuance costs	 	 	252,000	 	 	(472,000	)
	 	Change in valuation allowance	 	 	140,000	 	 	(3,123,000	)
	 	Permanent differences	 	 	—	 	 	1,312,000	 
	 	Effect of foreign exchange	 	 	(1,296,000	)	 	(1,125,000	)
	 	Other	 	 	95,155	 	 	86,317	 
	 	 	
	 	
	 
	 	 	$	99,960	 	$	(557,983	)
	 	 	
	 	
	 

Income
(loss) from the U.S. operations, before income taxes was ($790,636) and $2,655,613 for the years ended December 31, 2004 and 2005, respectively. 

In
assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of 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 year in which those temporary differences become deductible. Management also considers projected
future taxable income uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. For the year ended December 31, 2005, the
Company recorded a future income tax recovery of $680,000. In order to fully realize the net future tax asset recognized at December 31, 2005, the Company will need to generate future taxable
income in the appropriate jurisdictions of approximately $1,889,000. 

22

 

9.     Income per share:  

	 
	 	2004
	 	2005

	Numerator:	 	 	 	 	 	 
	 	Net income available to common shareholders	 	$	2,294,295	 	$	7,722,136
	 	 	
	 	

	Denominator:	 	 	 	 	 	 
	 	Weighted average number of shares:	 	 	 	 	 	 
	 	 	Basic	 	 	11,844,392	 	 	14,805,857
	 	Effect of dilutive securities:	 	 	 	 	 	 
	 	 	Stock options	 	 	561,627	 	 	631,281
	 	 	Diluted	 	 	12,406,018	 	 	15,437,138
	 	 	
	 	

	Income per share:	 	 	 	 	 	 
	 	Basic	 	$	0.19	 	$	0.52
	 	Diluted	 	 	0.19	 	 	0.50
	 	 	
	 	

10.   Supplemental cash flow information:  

	(a)
	The
components of cash and cash equivalents were as follows: 

	 
	 	2004
	 	2005

	Cash on deposit	 	$	4,427,670	 	$	7,678,392
	Short-term investments:	 	 	 	 	 	 
	 	U.S. Money Market funds	 	 	25,179,901	 	 	3,509,513
	 	Commercial paper	 	 	—	 	 	24,733,932
	 	Canadian dollar deposit (Cdn. $35,000)	 	 	29,072	 	 	30,095
	 	 	
	 	

	 	 	$	29,636,643	 	$	35,951,932
	 	 	
	 	

23

 

	(b)
	Change
in non-cash operating working capital was as follows: 

	 
	 	2004
	 	2005
	 
	Accounts receivable	 	$	(549,674	)	$	(8,398	)
	Prepaid expenses	 	 	(142,824	)	 	(386,830	)
	Work in progress	 	 	—	 	 	(1,001,971	)
	Inventory	 	 	—	 	 	(244,043	)
	Accounts payable and accrued liabilities	 	 	(1,371,513	)	 	2,072,835	 
	Deferred revenue	 	 	351,838	 	 	634,785	 
	 	 	
	 	
	 
	 	 	$	(1,712,173	)	$	1,066,378	 
	 	 	
	 	
	 

	(c)
	Other
non-cash investing activities were as follows: 

	 
	 	2004
	 	2005

	Acquisition of HBS financed through notes payable	 	$	18,000,000	 	$	—
	Capital assets included in accounts payable	 	 	—	 	 	65,134

	(d)
	Cash
paid (received) from income taxes and interest was as follows: 

	 
	 	2004
	 	2005
	 
	Income taxes paid	 	$	99,960	 	$	122,017	 
	Interest paid	 	 	985,622	 	 	1,708,233	 
	Interest received	 	 	(203,313	)	 	(548,885	)

24

 

11.   Commitments and contingencies:  

	(a)
	Commitments: 

Aggregate
minimum payments in respect of operating lease commitments for premises and office equipment as at December 31, 2005 are as follows: 

	2006	 	$	1,311,384
	2007	 	 	1,027,650
	2008	 	 	825,004
	2009	 	 	657,988
	2010	 	 	629,353
	Thereafter	 	 	815,624
	 	 	

	 	 	$	5,267,003
	 	 	

	(b)
	Contingencies:

From
time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate
the outcome of the various proceedings at this time, management believes that adequate provisions have been recorded in the accounts where required. 

	(c)
	Guarantees: 

The
Company provides routine indemnification to its customers against liability if the Company's products infringe on a third party's intellectual property rights. The maximum amount of these
indemnifications cannot be reasonably estimated due to their uncertain nature. Historically, the Company has not made payments related to these indemnifications. 

25

 

12.   Segmented information:  

The
Company operates in a single reportable operating segment, which is providing transaction processing solutions to the pharmaceutical benefits industry. 

The
Company operates in two geographic areas as follows: 

	2004 
	 	Canada
	 	U.S.A.
	 	Total

	Revenue	 	$	933,493	 	$	32,108,870	 	$	33,042,363
	Capital assets	 	 	1,901,136	 	 	2,289,327	 	 	4,190,463
	Goodwill and intangible assets	 	 	—	 	 	26,266,808	 	 	26,266,808

	 

	2005 
	 	Canada
	 	U.S.A.
	 	Total

	Revenue	 	$	1,143,878	 	$	52,979,158	 	$	54,123,036
	Capital assets	 	 	195,264	 	 	3,582,690	 	 	3,777,954
	Goodwill	 	 	—	 	 	13,996,147	 	 	13,996,147

26

 

The
Company's revenue consists of the following: 

	 
	 	2004
	 	2005

	Recurring:	 	 	 	 	 	 
	 	Transaction processing	 	$	13,543,008	 	$	21,446,079
	 	Maintenance	 	 	6,884,402	 	 	13,343,483
	 	 	
	 	

	 	 	 	20,427,410	 	 	34,789,562
	
 Non-recurring:	
 	
 	

 	
 	
 	

 
	 	Professional services	 	 	5,563,575	 	 	11,108,772
	 	System sales	 	 	7,051,378	 	 	8,224,702
	 	 	
	 	

	 	 	 	12,614,953	 	 	19,333,474
	 	 	
	 	

	Total revenue	 	$	33,042,363	 	$	54,123,036
	 	 	
	 	

During
the year ended December 31, 2005, no one customer accounted for more than 10.0% of total revenue (2004 — one customer accounted for 10.7% of total
revenue). 

At
December 31, 2005, no one customer accounted for more than 10.0% of the total accounts receivable balance (2004 — one customer accounted for 13.9% of
total accounts receivable balance). 

27

   13.   Financial instruments:  

	(a)
	Credit
risk: 

The
Company is subject to concentrations of credit risk through cash equivalents and accounts receivable. Management monitors the credit risk and credit standing of counterparties on a regular basis.
Cash equivalents and accounts receivable are with financial institutions and large corporations. 

	(b)
	Fair
values: 

The
carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and notes payable approximate their fair values due to the relatively short periods to
maturity. The carrying values of the long-term liabilities approximate their fair values as the interest rates approximate rates currently available to the Company. 

	(c)
	Foreign
exchange risk: 

The
Company is subject to foreign exchange risk. The Company does not enter into derivative instruments to mitigate this risk. Exposure to fluctuations in Canadian-dollar denominated transactions is
partially offset by Canadian-denominated assets and liabilities. 

14.   Sale of land and building:  

On
May 31, 2005, the Company completed the sale and leaseback of its Milton, Ontario headquarters facility for cash proceeds of approximately $2,343,000 (Cdn. $2,924,000). The net proceeds
after repayment of the mortgage on the building was approximately $1,585,000 (Cdn. $1,977,000). The Company recorded a gain of $626,342 on the sale. 

Concurrent
with the sale, the Company has agreed to lease back 8,100 rentable square feet of the facility for a three-year term with one three-year renewal option
period which represents a minor portion of the property sold. 

28

 
	15.
	Reconciliation of significant differences between accounting principles generally accepted in Canada and United States:

These
consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") and conform in all material respects with
United States generally accepted accounting principles ("U.S. GAAP") except as follows: 

	(a)
	Consolidated
statements of operations: 

	 
	 	2004
	 	2005

	Net income in accordance with Canadian GAAP:	 	$	2,294,295	 	$	7,722,136
	
 Adjustments for:	
 	
 	

 	
 	
 	

 
	 	Stock-based compensation (d)	 	 	—	 	 	—
	 	 	
	 	

	Net income in accordance with U.S. GAAP	 	$	2,294,295	 	$	7,722,136
	 	 	
	 	

There
were no measurement differences between Canadian and U.S. GAAP for the periods presented. 

29

 

	(b)
	Under
U.S. GAAP, the Company is required to present a statement of changes in shareholders' equity, which is presented below: 

	 
	 	Number of

shares
	 	Amount
	 	Additional

paid-in capital
	 	Deficit
	 	Total
	 
	Balance as of December 31, 2003	 	11,608,514	 	$	33,859,816	 	$	—	 	$	(16,016,150	)	$	17,843,666	 
	Issued on the exercise of stock options	 	193,310	 	 	402,793	 	 	—	 	 	—	 	 	402,793	 
	Issued on the exercise of warrants	 	2,777,800	 	 	11,432,824	 	 	—	 	 	—	 	 	11,432,824	 
	Impact of stock-based compensation	 	—	 	 	—	 	 	579,328	 	 	—	 	 	579,328	 
	Net income	 	—	 	 	—	 	 	—	 	 	2,294,295	 	 	2,294,295	 
	 	 	
	 	
	 	
	 	
	 	
	 
	Balance as of December 31, 2004	 	14,579,624	 	 	45,695,433	 	 	579,328	 	 	(13,721,855	)	 	32,552,906	 
	Issuance of common shares	 	2,250,000	 	 	17,947,574	 	 	—	 	 	—	 	 	17,947,574	 
	Issued on the exercise of stock options	 	109,209	 	 	461,022	 	 	(39,679	)	 	—	 	 	421,343	 
	Issued on the exercise of warrants	 	—	 	 	(17,130	)	 	—	 	 	—	 	 	(17,130	)
	Impact of stock-based compensation	 	—	 	 	—	 	 	843,979	 	 	—	 	 	843,979	 
	Net income	 	—	 	 	—	 	 	—	 	 	7,722,136	 	 	7,722,136	 
	 	 	
	 	
	 	
	 	
	 	
	 
	Balance as of December 31, 2005	 	16,938,833	 	$	64,086,899	 	$	1,383,628	 	$	(5,999,719	)	$	59,470,808	 
	 	 	
	 	
	 	
	 	
	 	
	 

The
deficit as at December 31, 2003, under U.S. GAAP has been reduced by $295,065 to eliminate the effect of the change in accounting policy for stock-based compensation under Canadian
GAAP offset by a corresponding increase in the share capital number. See Note 15(d). 

30

 

	(c)
	Consolidated
comprehensive income: 

Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, requires the Company to report and display information related to comprehensive income for the
Company. Comprehensive income consists of net income and all other changes in shareholders' equity that do not result from changes from transactions with
shareholders, such as cumulative foreign currency translation adjustments and unrealized gains or losses on marketable securities. There are no adjustments to the U.S. GAAP net income required
to reconcile to the comprehensive income/loss. 

	(d)
	Stock-based
compensation: 

Under
Canadian GAAP, the Company accounts for stock-based compensation to employees and directors as described in notes 1(l) and 7(b). Under U.S. GAAP, the Company has similarly
elected to follow the fair value method in accordance with SFAS 123, Accounting for Stock-based Compensation ("SFAS 123"), as of January 1, 2004 using the modified prospective
transition method. Prior to January 1, 2004 the Company followed APB 25, Accounting for Stock Issued to Employees. Under SFAS 123, compensation expense is recorded as a charge to
income and a credit to additional paid-in-capital over the service period. The amounts that would otherwise have been recorded as compensation in the year as if the fair value
method had always been applied will be recorded in income on a prospective basis. Since, for Canadian GAAP purposes, the Company retroactively restated the stock-based compensation relating to the
fiscal years 2003 and 2004, an adjustment was made to the U.S. GAAP opening deficit and contributed surplus (APIC) accounts to remove the impacts of the Canadian restatement relating to any
unvested options as of January 1, 2004. 

31

 

Under
U.S. GAAP, the expense related to share-based payment arrangements should be presented in the same income statement line item as the cash compensation to those employees. Accordingly, the
allocation of the stock-based compensation costs would be as follows: 

	 
	 	2004
	 	2005

	Project costs	 	$	211,547	 	$	223,122
	Product development costs	 	 	92,762	 	 	118,337
	Selling, general and administrative	 	 	275,019	 	 	502,520
	 	 	
	 	

	 	 	$	579,328	 	$	843,979
	 	 	
	 	

	(e)
	Other
supplementary disclosures for U.S. GAAP purposes:

	(i)
	For
concentrations of operations located outside the entity's home country, the Company is required to disclose the amount of net assets and the geographic area in which
they are located. 

	 
	 	Canada
	 	U.S.A.
	 	Total

	2004	 	$	3,238,485	 	$	29,314,421	 	$	32,552,906
	2005	 	 	1,720,189	 	 	57,750,619	 	 	59,470,808

	(ii)
	The
total rental expense for each year for which a statement of operations is presented is as follows: 

	Year ended December 31:	 	 	 
	2004	 	$	868,820
	2005	 	 	1,280,931

32

 

	(iii)
	Under
SEC Regulation S-X, the Company is required to disclose cost of sales applicable to each category of revenue. Accordingly, the relevant
information has been presented below: 

	 
	 	2004
	 	2005

	Recurring services:	 	 	 	 	 	 
	 	Revenue	 	$	20,427,410	 	$	34,789,562
	 	Cost of sales	 	 	9,107,596	 	 	13,523,015
	 	 	
	 	

	 	 	$	11,319,814	 	$	21,266,547
	 	 	
	 	

	Non-recurring services:	 	 	 	 	 	 
	 	Revenue	 	$	12,614,953	 	$	19,333,474
	 	Cost of sales	 	 	4,351,948	 	 	7,251,782
	 	 	
	 	

	 	 	$	8,263,005	 	$	12,081,692
	 	 	
	 	

	(iv)
	Amortization
expense relating to intangible assets for the next five years is as follows: 

	2006	 	$	1,584,000
	2007	 	 	1,584,000
	2008	 	 	1,584,000
	2009	 	 	1,584,000
	2010	 	 	1,301,750
	 	 	

	 	 	$	7,637,750
	 	 	

	(v)
	The
realized foreign exchange gains and losses for each of the years presented were insignificant.

	(vi)
	Under
U.S. GAAP, components of current liabilities that are in excess of 5% of total current liabilities need to be disclosed separately. Included in accrued
liabilities are salaries and benefit accruals as at December 31, 2004 and 2005 of $1,246,971 and $2,971,564, respectively. 

33

 

	(vii)
	Under
U.S. GAAP, the amortization of the accretion charge and financing costs on the long-term debt is computed using the effective interest rate
method, which is not materially different from the amounts recorded under Canadian GAAP, which is computed using the straight-line method.

	(viii)
	The
following unaudited pro forma results of operations of the Company for the year ended December 31, 2004 assume that the acquisition of HBS had
occurred on January 1, 2004, being the beginning of the year in which the business was acquired. These unaudited pro forma results are not necessarily indicative of either the actual
results of operations that would have been achieved had the companies been combined during this period, or are they necessarily indicative of future results of operations. 

	Pro forma 
	 	2004

	Revenue	 	$	47,379,640
	Net income	 	 	3,167,355
	Earnings per share:	 	 	 
	 	Basic	 	 	0.28
	 	Fully diluted	 	 	0.24

34

 

	(d)
	Recent
accounting pronouncements under U.S. GAAP yet to be adopted: 

Accounting
changes and error corrections: 

In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("SFAS 154"), which replaces Accounting Principles Board Opinion No. 20,
Accounting Changes", and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of changes in
accounting principles and error corrections. SFAS 154 requires retrospective application to prior period's financial statements of voluntary changes in accounting principle and changes required
by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Certain disclosures are also required for restatements due to
correction of an error. SFAS 154 is effective for accounting changes and corrections of errors, made in fiscal years beginning after December 15, 2005. The Company will adopt this
standard effective January 1, 2006. The effect of the adoption of this standard will depend on the nature of future accounting changes and the nature of transitional guidance provided in future
accounting pronouncements. 

Share-based
payments: 

In
December 2004, the FASB issued SFAS No. 123R "Share-based Payments," which requires companies to recognize in the income statement the grant date fair value of stock options
and other equity-based compensation issued to employees. The standard also requires the use of an option pricing model for estimating fair value. This standard is effective for 2006 and can be adopted
using the modified prospective application method or the modified retrospective application method. We have determined that the adoption of this standard will not have a material impact on the
Company's U.S. GAAP results. 

16.   Subsequent event:  

On
June 5, 2006, the shareholders of the Company approved, and the Company filed, articles of amendment to effect a four-to-one share consolidation of the Company's
outstanding common shares. The share consolidation was approved by the shareholders of the company on May 17, 2006. Accordingly, net income per share presented on the consolidated statement of
operations and notes 7 and 9 give effect to this share consolidation. 

35

QuickLinks

SYSTEMS XCELLENCE INC. CONSOLIDATED BALANCE SHEETS (Expressed in U.S. dollars) December 31, 2004 and 2005

SYSTEMS XCELLENCE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in U.S. dollars) Years ended December 31, 2004 and 2005

SYSTEMS XCELLENCE INC. CONSOLIDATED STATEMENTS OF DEFICIT (Expressed in U.S. dollars) Years ended December 31, 2004 and 2005

SYSTEMS XCELLENCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in U.S. dollars) Years ended December 31, 2004 and 2005

SYSTEMS XCELLENCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. dollars) Years ended December 31, 2004 and 2005Exhibit 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	 	$	815,8625
	 	 	
	 	
	 	
	 	
	 	

	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. 

ADDITIONAL INFORMATION  

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

18

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