Document:

Exhibit 4.1  

  

Systems Xcellence Inc.  

INTERIM

FINANCIAL

INFORMATION
  First Quarter Fiscal Year 2006 

For
the three months ended

March 31, 2006

(UNAUDITED) 

   To Our Shareholders  

Dear Shareholder:  

        We are extremely pleased with our start to 2006 and reported record quarterly revenue, EBITDA and net income in Q1. Financial results exceeded our expectations
due primarily to increased transaction processing revenue generated from both the Medicare Part D program and new customers that began processing on January 1, 2006. To a lesser extent,
significant professional service and software license revenue from clients that are participating in the Part D program also contributed to this growth. 

Financial highlights for Q1 included:  

	•
	Revenue
increased 83% to $19.3 million from $10.6 million in Q1 fiscal 2005

	•
	Transaction
processing revenue, which is the primary driver of recurring revenue, increased 77% to $8.8 million from $5.0 million

	•
	Revenue
from recurring sources increased 52% to $12.4 million from $8.2 million

	•
	Earnings
before interest, taxes, depreciation and amortization (EBITDA) increased 343% to $5.8 million or 30% of revenue from $1.3 million, or 12% of revenue

	•
	Net
income was $0.08 per share, compared to $0.00 per share last year

	•
	Positive
cash from operations of $1.8 million compared to $0.7 million last year 

        Of
particular note: recurring revenue was 64% of total revenue and from a diversification perspective, 74% of revenue was generated from our payer group and 26% coming from our provider
group. 

        Due
to our strong start to the year, we have revised our financial target for the year upward to the following: consolidated revenue of $70-73 million, EBITDA of
$17.5-19 million and earnings per share (fully-diluted) of $0.16-0.18. 

        Payer
revenue surged in the quarter due primarily to revenue related to Medicare Part D Program as well as new InformedRx and ASP processing customers that launched on
January 1, 2006. At the beginning of February we announced that via 11 of our ASP customers, we were processing Part D transactions for 1.3 million individuals. Today this number
stands at 1.6 million with the potential to climb even higher by year-end. Initially our forecasts were set at a target of 30 million Part D transactions to be
processed in 2006, but as a result of Q1 activity, we are increasing this target to 55 million. 

        In
fact, overall transaction volume in Q1 was 65 million, up 71% from Q4 of fiscal 2005 and 95% from Q1 of fiscal 2005. This strong start has led us to revise our forecast
for transaction volume upward from 230 million to 275 million for the year. A good portion of this increase is due to Part D volume exceeding expectations so far in 2006; however,
this upward revision also reflects strength in our core transaction processing business with a host of other InformedRx customers. As reflected by these numbers, Part D activity
year-to-date has been intense and our ability to manage this escalating level of business is a true testament to the commitment of our staff to meet our high standards for
providing superior customer service. 

        Also
in our payer market, we added four new InformedRx customers bringing our total to 19. In January we achieved a significant milestone within this group as we went live with the
University of Michigan. This was important as it represented our first activation with a "self-insured employer group". With its transparent pricing model and ability to provide
full-service pharmacy benefits management services, we believe that InformedRx is ideally suited for this marketplace. 

        Another
ongoing initiative in the payer market is our work in the public sector. In January we went live in Vermont where we are providing sub-contracted IT and prescription
drug claims adjudication support to Vermont's Medicaid members. Our work with the State of Washington is progressing well and we are targeting to "go-live" with them on a transaction
processing basis in mid-2007. Other State proposals are expected to emerge over the next 12 - 18 months and we look to be actively involved in the bid
process for several of them. In Canada, we continue our work in partnership with Emergis related to the Drug Information System in Newfoundland, and we look to partner on similar projects in other
provinces as they materialize. 

1

 

        On
the provider side of our business, we are investing in product upgrades and are enhancing our delivery capability by adding personnel to the team. During the quarter we added
36 new pharmacies to our customer base and we continue to add new chains and independents to our prospect pipeline. We believe our provider group has a strong future as the market remains
fragmented with no real dominating participant. 

        At
a corporate level, we made several major announcements during the quarter. From an investor perspective we continue to proactively take our message to investors on both sides of the
border and in February we presented to a predominantly institutional investor audience at the UBS Global Healthcare Services Conference in New York. We will continue to leverage our growing
awareness both in Canada and the US to earn speaking engagements at other investor-oriented events. 

        At
the Board level, in February, we announced that Mark Thierer joined our Board of Directors. Mark is currently President of Physicians Interactive, a division of
Allscripts, Inc., a NASDAQ listed company that provides of Electronic Health Records, ePrescribing, and information solutions for physicians. We expect that Mark will play a key roll in shaping
the strategy for our InformedRx® benefits management services and pharmacy systems offerings. 

        Within
the executive ranks, Jeff Park, was named CFO in March. A Chartered Accountant by training, Jeff was most recently Senior Vice President of Covington Capital Corporation, a
private equity venture capital firm with assets of more than $600 million under management. Jeff was a member of the board of directors of a number of public and private Covington-backed
companies, including SXC, where he was chairman of the audit committee. Jeff has an in-depth understanding of our firm, our goals and our strategic objectives, and we look to tap his
expertise in the area of mergers and acquisitions, as we pursue opportunities to accelerate our growth. 

        This
is a very exciting time for SXC. As evidenced by our financial results and our pipeline of opportunities, there is considerable opportunity for us to leverage our expertise in
prescribing, dispensing and managing prescription drug benefits to help organizations in both the public and private sector provide more effective drug therapies while controlling the associated
costs. 

        In
effect, the business landscape for managing prescription drug plans began a fundamental shift several years ago as drug costs became the fastest growing part of healthcare. It is in
this environment that SXC has emerged with a unique suite of healthcare IT solutions that address the core issues — rising drug costs and lack of transparency in
outsourced drug benefit plans — confronting organizations that provide drug benefits. Based on our reputation, longevity and unique transparent pricing model, our
pipeline of opportunities has never been stronger — we're now in an enviable position where prospects are coming direct to us and we can rely less on missionary
tactics to build our sales pipeline. 

        In
summary, we look to drive our growth by expanding our InformedRx full-service PBM offerings in the commercial sector, pursuing long-term and multi-million
dollar public sector PBM deals, capturing enterprise pharmacy management business with larger pharmacy chains and seeking strategic acquisitions. We will pursue these initiatives with the
over-arching objectives of increasing our base of recurring revenues and expanding operating our margins. 

Sincerely,

	 

[sig] 

Gordon
S. Glenn

President and CEO 

2

   Management's Discussion & Analysis  

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 healthcare services. Payers of healthcare services include managed care organizations, health insurance companies, and intermediaries such as pharmacy benefit
management organizations ("PBM"). Providers of 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. 

Risk Factors  

        The Company operates in a dynamic, rapidly changing environment that involves risks and uncertainties. Readers are urged to carefully consider the risks and
uncertainties that are detailed in our Annual Information Form filed on March 31, 2006 with Canadian securities regulatory authorities. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations. If any of the risks as described in our filings occur, our business, financial condition, liquidity or results of
operations could be materially harmed. 

        This
report contains forward-looking statements. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements
are not guarantees as to the Company's future results since there are inherent difficulties in predicting future results. Accordingly, actual results could differ from those expressed or implied in
the forward-looking statements. 

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 notes for the three-month period ended March 31, 2006 ("first quarter of fiscal 2006"), the three-month period ended March 31, 2005 ("first quarter of fiscal 2005"), and
the Company's annual financial statements for the year ended December 31, 2005, which are all available on www.sedar.com. The MD&A is as of April 21, 2006. 

For the Three-Month Period Ended March 31, 2006 Compared to the Three-Month Period Ended March 31, 2005  

        Highlights for the three-month period ended March 31, 2006 included: 

	•
	83%
increase in total revenue, from $10.6 million to $19.3 million

	•
	52%
increase in revenue from recurring sources, from $8.2 million to $12.4 million

	•
	77%
increase in transaction processing revenue, from $5.0 million to $8.8 million

	•
	Increase
of net income from $15,606 or $0.00 per share, to $5.6 million or $0.08 per share 

Revenue 

        Consolidated
revenue increased $8.8 million or 82.9% to $19.3 million in the first quarter of fiscal 2006 from $10.6 million in the first quarter of fiscal 2005.
Revenue increased between the periods primarily because transaction processing revenue (consisting of claims adjudication, benefits processing, and switching revenue) increased $3.8 million or
76.8%, professional services revenue increased by $3.1 million or 242.1%, systems sales revenue (consisting of hardware and software license revenue) increased by $1.5 million or 131.7%
while maintenance revenue (consisting of hardware and software maintenance and certain pharmacy services) increased by $0.4 million or 12.8%. 

        The
increase in transaction processing revenue was primarily a result of the introduction of Medicare Part D prescription benefit coverage, new payer customers choosing the
Company's outsourced transaction processing offering, as well as the organic growth of existing payer customers. The increase in professional services was primarily the result of consulting and
implementation services performed in regards to the Medicare Part D program for existing customers as well as some larger, long-term consulting projects for existing customers.
System sales revenue is primarily the result of work performed for customers under the Medicare Part D program. The increase in maintenance was primarily a result of new system sales compared
to the prior period. 

        On
a percentage basis, recurring revenue accounted for 64% and 78% of consolidated revenue in the first quarters of fiscal 2006 and 2005, respectively. Recurring revenue consists of
transaction processing and maintenance revenue. The decrease on a percentage basis was primarily a result of the significant percentage increase in non-recurring revenues. 

3

 

Gross Profit 

        Gross
profit was 60.7% for the first quarter of fiscal 2006 compared to 57.3% for the first quarter of fiscal 2005. This increase in gross profit margin was primarily a result of the
increase in the sale of higher margin transaction processing services and an increase in the sale of high margin software licenses during the period. 

Product Development Costs 

        Product
development costs for the first quarter of fiscal 2006 were $2.1 million, representing 10.9% of revenue. Product development costs for the first quarter of fiscal 2005
were $2.2 million, or 20.4% of revenue. The decrease in product development costs is the result of increased utilization of the Company's employees for professional services projects. 

Selling, General and Administrative Costs 

        Selling,
general and administrative costs ("SG&A") for the first quarter of fiscal 2006 were $3.9 million or 20.0% of revenue compared to $2.6 million, or 24.4% of revenue
for the prior comparable period. The selling, general and administrative costs decreased as a percentage-of-revenue primarily as a result of the continued focus on cost control
and improving operational efficiencies. The $1.3 million increase in costs relates to increased consulting, infrastructural and recruiting expenses to support the Company's growth. 

Amortization 

        Amortization
expense (consisting of depreciation and amortization expense) increased by $0.1 million, to $0.9 million in the first quarter of fiscal 2006 from
$0.8 million in the first quarter of 2005. The increase in depreciation expense relates to an increase in the number of assets purchased in fiscal 2005 and in the first quarter of fiscal 2006. 

Lease termination charge 

        On
March 24, 2006, the Company entered into a new operating lease agreement for new office space in Lisle, IL. The lease is effective February 1, 2007 with a term of
11 years. As part of the agreement, the Company received certain leasehold inducements including a cash inducement of $0.8 million, which will be recognized over the term of the lease
against rent expense. 

        The
minimum payments under the lease agreement are as follows: 

	2007	 	$	829,127
	2008	 	 	934,653
	2009	 	 	967,544
	2010	 	 	1,000,435
	2011	 	 	1,033,326
	Thereafter	 	 	6,993,448
	 	 	

	 	 	$	11,758,533
	 	 	

        Coterminous
with this new lease agreement, the Company gave notice to the lessor of the U.S. Headquarters, located in Lombard, IL, to terminate the lease effective
March 31, 2007. The Company paid $0.8 million for this lease termination option which was expensed in the period. 

Stock-based Compensation 

        The
Company has a stock-based compensation plan and accounts for all stock-based payments to employees and nonemployees 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 $0.1 million in the first quarter of
fiscal 2005 to $0.5 million in the first quarter of fiscal 2006. This increase was due to the issuance of 1.8 million options in May 2005 and an additional 1.8 million
options issued in March 2006, in connection with the Company's stock option incentive plan. 

Interest Income and Expense 

        Interest
income increased $0.4 million to $0.5 million for the first quarter of fiscal 2006 from $0.1 million in the first quarter of fiscal 2005. This was due to
increased cash balances available for investment from both operations and the Company's equity offering in the fourth quarter of calendar 2005. Interest expense remained constant at
$0.4 million for the quarters ended March 31, 2006 and 2005. 

4

 

Income Taxes 

        During
the first quarter of fiscal 2006, it was determined by management that the company will be able to utilize a taxable benefit from historical net operating losses
("NOL's") and tax-related timing, in accordance with CICA Handbook Section 3465, "Income Taxes". As a result, approximately $3.2 million of previously
unrecognized future income tax assets ("FTA's") were recognized. At December 31, 2005, approximately $0.7 million of FTA's already existed on the Company's balance sheet. 

        Future
tax expense of $0.7 million and current tax expense of $0.7 million were recognized in the first quarter of fiscal 2006. The current tax expense related to
U.S. pre-tax net income in excess of available U.S. NOL's. 

Net income 

        The
Company reported net income of $5.6 million for the first quarter of fiscal 2005 compared to $15,606 in the first quarter of fiscal 2005. This increase in net income was
primarily the result of an increase in revenue of $8.8 million, a decrease of income taxes of $1.9 million, and an increase in net interest income of $0.4 million offset by an
increase in project costs of $3.1 million, an increase in operating expenses of $1.2 million, an increase in lease termination charges of $0.8 million, an increase in stock-based
compensation of $0.3 million, and an increase in amortization of $0.1 million. 

        The
increase in revenue was primarily the result of additional revenue generated from growth in the Company's transaction processing revenue, and consulting, implementation and system
sales related to Medicare Part D. The increase in project costs was primarily the result of additional costs taken on from Medicare Part D work. The increase in operating expenses is the
result of the $1.3 million increase in SG&A relating to consulting, infrastructural and recruiting fees. 

Outstanding Shares  

        As at April 21, 2006, the Company had outstanding 67,883,331 common shares and 8,563,834 share-purchase options outstanding at a weighted
average exercise price of CDN $1.70. 

Liquidity and Capital Resources  

        As at March 31, 2006, the Company had a working capital position of $41.2 million, with cash and cash-equivalents of
$36.9 million, compared with $37.3 million of working capital and $36.0 million of cash and cash-equivalents at December 31, 2005. The $0.9 million
increase in the Company's cash position was primarily the result of $1.8 million in cash generated from operations, $0.5 million of cash generated from financing activities, and
$1.4 million in cash used for investment purposes. 

        The
Company generated cash from operations of $1.8 million, in the first quarter of fiscal 2006, which primarily consisted of $5.6 million of net income, offset by
$0.9 million in amortization of capital and intangible assets, $0.5 million in stock-based compensation expense, a future tax asset decrease of $2.6 million and a
$2.6 million decrease in non-cash working capital. This compares to $0.7 million of cash generated through operations in fiscal 2005, which primarily consisted of net income
of $15,606, $0.8 million in amortization of capital assets, $0.1 million of stock-based compensation expense, and a $0.2 million decrease in non-cash working capital. 

        The
Company generated $0.5 million of cash resources for financing activities during the first quarter of fiscal 2006, which primarily consisted of the $0.8 million in
leasehold inducements received offset by $0.3 million in payments in accordance with the MCG loan. This compares to $18.0 million of cash used for financing activities during the first
quarter of fiscal 2005, which consisted of payments to former shareholders in relation to the HBS acquisition. 

        The
Company used $1.4 million of cash in investing activities during the first quarter of fiscal 2006, consisting primarily of capital purchases to support increased ASP activity
related to Medicare Part D. During the first quarter of fiscal 2005, the Company used $0.2 million of cash in investing activities for capital purchases. 

        The
company believes that cash flow generated from operations will be sufficient to fund working capital requirements and anticipated capital expenditures in 2006. 

5

 

Summary of Quarterly Results (unaudited)  

        The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended March 31, 2006: 

	 
	 	2006
	 	2005
	 	2004

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

	 	Q1
	 	Q4
	 	Q3
	 	Q2
	 	Q1
	 	Q4
	 	Q3
	 	Q2

	Revenue	 	$	19,337	 	$	16,611	 	$	14,730	 	$	12,209	 	$	10,573	 	$	8,526	 	$	8,239	 	$	8,515
	Recurring revenue ($)	 	 	12,411	 	 	9,393	 	 	8,770	 	 	8,434	 	 	8,193	 	 	5,782	 	 	4,787	 	 	4,998
	Recurring revenue (%)	 	 	64%	 	 	57%	 	 	60%	 	 	69%	 	 	78%	 	 	68%	 	 	58%	 	 	59%
	Operating income ($)	 	 	3,624	 	 	3,783	 	 	2,379	 	 	1,323	 	 	400	 	 	877	 	 	1,102	 	 	720
	Net income ($)	 	 	5,577	 	 	3,950	 	 	2,210	 	 	1,546	 	 	16	 	 	647	 	 	881	 	 	492
	Basic & diluted EPS	 	$	0.08	 	$	0.06	 	$	0.04	 	$	0.03	 	$	0.00	 	$	0.01	 	$	0.02	 	$	0.01

For the Eight Quarters Ended December March 31, 2006  

        Recurring revenue dollars has increased over the past eight quarters from $5.0 million to $12.4 million, as a result of increased transaction
processing revenue from the introduction of Medicare Part D prescription benefit coverage, new payer customers choosing the Company's outsourced transaction processing offering, as well as the
organic growth of existing payer customers. 

        The
recurring revenue percentage has fluctuated both up and down over the past eight quarters while the total revenue dollars has steadily increased from $8.5 million to
$19.3 million. The recurring revenue percentage from the third and fourth
quarters of fiscal 2005 were down compared to prior quarters primarily because both quarters had a larger mix of systems sales related to revenue from Medicare Part D modules being recognized
during those two quarters. The recurring revenue percent increased in the first quarter of fiscal 2006, primarily due to a higher mix of transaction processing revenue compared with the remaining
recognition of the Medicare Part D system sales. 

        Operating
income steadily increased from $0.4 million in the first quarter of fiscal 2005 to $3.8 million in the fourth quarter of fiscal 2005. Operating income declined
slightly in the first quarter of fiscal 2006, primarily due to the recognition of a one-time lease breakage charge of $0.8 million. Without this one-time charge, the
operating income amount for the first quarter of fiscal 2006 would have been $4.4 million, or an increase of $0.6 million compared to the fourth quarter of fiscal 2005. 

        Net
income has increased from $16 thousand in the first quarter of fiscal 2005 to $5.6 million in the first quarter of fiscal 2006. Net income was positively impacted by
the set-up of future tax assets related to future taxable benefits that were determined by management to "more likely than not" be realizable in the future, offsetting taxable income
$0.7 million and $2.5 million in Q4 of fiscal 2005 and fiscal 2006, respectively. Without these future tax assets being set-up, net income would have been $3.3 million
and $3.0 million for Q4 of fiscal 2005 and Q1 of fiscal 2006, respectively. Net income for the first quarter of 2006 was negatively impacted by an increase in stock compensation expense from
$0.3 million to $0.5 million between Q4 of fiscal 2005 and Q1 of 2006. This was primarily the result of 1.8 million new options being issued in March 2006. 

Commitments and Contractual Obligations  

        At March 31, 2006, contractual obligations of the Company are as follows. The long-term debt below contains principal payments only. Interest
on the long-term debt fluctuates based on business performance. 

	 
	 	Total
	 	Less than 1 Year
	 	Years 1-3
	 	Years 4-5
	 	After Year 5

	Long-Term Debt	 	$	12,920,000	 	$	1,700,000	 	$	5,100,000	 	$	6,120,000	 	—
	Operating Leases	 	 	13,677,783	 	 	1,379,054	 	 	2,504,299	 	 	2,023,931	 	7,770,499
	 	 	
	 	
	 	
	 	
	 	

	Total Contractual Obligations	 	$	26,597,783	 	$	3,079,054	 	$	7,604,299	 	$	8,143,931	 	7,770,499
	 	 	
	 	
	 	
	 	
	 	

6

 

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  

        On March 24, 2006, in accordance with a lease provision, the Company gave notice to the lessor of the U.S. Headquarters, located in Lombard, IL, to
terminate the lease, effective March 31, 2007. The Company paid $0.8 million for this lease termination option and entered into a new eleven year lease agreement with a different lessor
in Lisle, Illinois which is effective February 1, 2007 and ends on January 31, 2018. As part of a lease inducement, the lessor of the Lisle building paid the Company $0.8 million
to cover the expenses incurred to terminate the Lombard lease. 

        In
accordance with EIC-21, "Accounting for Lease Inducements by the Lessee" and EIC-135, "Accounting for Costs Associated with Exit and Disposal Activities, ' the
lease inducement amount was recorded as a "Deferred lease inducement" liability on the balance sheet and will be amortized over the life of the Lisle lease term while the Lombard lease termination
option payment was recognized as a one-time expense in the first quarter of fiscal 2006. 

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. These items are unchanged from those discussed in the
Company's annual MD&A for the year ended December 31, 2005. 

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 it 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 balance, 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. 

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. The primary risks affecting the Company are substantially unchanged from those discussed in the Company's MD&A for the year ended December 31, 2005. 

Disclosure Controls and Procedures:  

        Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management,
including the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. As at
March 31, 2006, Belzberg's management, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Multilateral
Instrument 52-109 of the Canadian Securities Administrators and concluded that such controls and procedures were effective. 

7

 

Outlook  

        The three-month period ended March 31, 2006 was a record quarter for the Company. It reflects the first 3 months following the introduction of the
new Medicare Part D benefits. This Federal program allows for prescription drug coverage for seniors and has translated into a significant increase in the Transaction Processing of the Company.
Transaction Processing revenues grew 76.8% from the first quarter in 2005. This growth drives our recurring revenues, which provides the Company with an expanding foundation for the business. The
Company continues to believe that the aging demographics, and the increased utilization for prescription drugs will maintain steady growth rates for our
Transaction Processing business. The Company continues to invest in our infrastructure which supports this expanding foundation, including $1.3 million in capital expenditures to upgrade our
back-up processing capabilities. 

        The
Company also continued to support its existing license customers by providing Professional Services. These services were targeted at assisting customers with continuous development
or expansion for their businesses as well as activities related to Part D integration and preparations. Throughout the remainder of the 2006, we do not expect these Professional Service
projects to continue at the same rate as has been experienced over the last 12 months, as our customers have largely absorbed the Part D related projects. 

        SXC
continues to see increasing support and awareness for our InformedRx offering. Our ability to allow customers to better control their prescription drug plans in a more efficient and
transparent manner has continued to drive interest and support for the Company's solutions. With prescription drug spending comprising the fastest growing healthcare cost facing companies, we continue
to see strong momentum in this area of our business. 

        In
the Provider markets, we continue to develop and expand our retail and mail functionality. We expect to continue to progress in our ability to penetrate both independent and
mid-sized pharmacies with our comprehensive offering. 

        The
Company remains well positioned in the marketplace to continue to expand our current offerings in both the Payer and Provider markets. With growth from Part D, we have
continued to provide both transaction processing, and well as on-going support for existing and new license customers. With continued focus on cost controls and providing customer focused
support, we believe the Company is well positioned to benefit from the growing market dynamics. We believe we remain well positioned to provide healthcare organizations the proper solutions to enable
them to reduce the cost and enhance the efficiency associated with the processing of prescription drug claims. 

Additional information  

        Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com. 

8

   Consolidated Balance Sheets  

	(All amounts are in US dollars)
 
	 	March 31, 2006

(unaudited)
	 	December 31, 2005
	 
	ASSETS	 	 	 	 	 	 	 
	Current assets:	 	 	 	 	 	 	 
	 	Cash and cash equivalents (note 5(a))	 	$	36,853,736	 	$	35,951,932	 
	 	Accounts receivable	 	 	13,550,433	 	 	8,649,801	 
	 	Unbilled revenue	 	 	1,243,103	 	 	1,001,971	 
	 	Prepaid expenses	 	 	1,117,518	 	 	1,191,444	 
	 	Inventory	 	 	423,553	 	 	437,674	 
	 	Future tax asset	 	 	806,805	 	 	320,000	 
	 	 	
	 	
	 
	 	 	 	53,995,148	 	 	47,552,822	 
	Capital assets	 	 	4,663,713	 	 	3,777,954	 
	Deferred charges	 	 	740,674	 	 	787,686	 
	Goodwill and other intangible assets	 	 	26,427,711	 	 	26,825,147	 
	Future tax asset	 	 	2,410,000	 	 	360,000	 
	Other assets (note 7)	 	 	2,000,000	 	 	2,000,000	 
	 	 	
	 	
	 
	 	 	$	90,237,246	 	$	81,303,609	 
	 	 	
	 	
	 
	
LIABILITIES AND SHAREHOLDERS' EQUITY	
 	
 	

 	
 	
 	

 	
 
	Current liabilities:	 	 	 	 	 	 	 
	 	Accounts payable and accrued liabilities	 	$	7,434,036	 	$	5,598,912	 
	 	Deferred revenue	 	 	3,661,248	 	 	3,131,031	 
	 	Current portion of long-term debt	 	 	1,700,000	 	 	1,530,000	 
	 	 	
	 	
	 
	 	 	 	12,795,284	 	 	10,259,943	 
	
 Long-term debt	
 	
 	

11,075,953	
 	
 	

11,572,858	
 
	Deferred leasehold inducements (note 6)	 	 	757,815	 	 	—	 
	Shareholders' equity:	 	 	 	 	 	 	 
	 	Capital stock	 	 	64,129,217	 	 	64,047,220	 
	 	Contributed surplus	 	 	2,197,229	 	 	1,718,372	 
	 	Deficit	 	 	(718,252	)	 	(6,294,784	)
	 	 	
	 	
	 
	 	 	 	65,608,194	 	 	59,470,808	 
	 	 	
	 	
	 
	 	 	$	90,237,246	 	$	81,303,609	 
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

9

 

Consolidated Statements of Operations
  (Unaudited) 

	(All amounts are in US dollars)
 
	 	Three Months ended March 31, 2006
	 	Three Months ended March 31, 2005
	 
	Revenue (note 4)	 	$	19,337,153	 	$	10,572,667	 
	Project costs	 	 	7,605,479	 	 	4,519,916	 
	 	 	
	 	
	 
	 	 	 	11,731,674	 	 	6,052,751	 
	
Expenses:	
 	
 	

 	
 	
 	

 	
 
	 	Product development costs	 	 	2,105,361	 	 	2,161,309	 
	 	Selling, general and administration	 	 	3,868,605	 	 	2,577,935	 
	 	Amortization	 	 	896,625	 	 	775,388	 
	 	Lease termination (note 6)	 	 	757,815	 	 	—	 
	 	Stock-based compensation (note 3)	 	 	478,857	 	 	138,537	 
	 	 	
	 	
	 
	 	 	 	8,107,263	 	 	5,653,169	 
	 	 	
	 	
	 
	Income before the undernoted	 	 	3,624,411	 	 	399,582	 
	
Net interest:	
 	
 	

 	
 	
 	

 	
 
	 	Income	 	 	(483,801	)	 	(72,106	)
	 	Expense	 	 	390,478	 	 	426,082	 
	 	 	
	 	
	 
	 	 	 	(93,323	)	 	353,976	 
	
Income before income taxes	
 	
 	

3,717,734	
 	
 	

45,606	
 
	Income tax expense (recovery):	 	 	 	 	 	 	 
	 	Current	 	 	678,007	 	 	30,000	 
	 	Future	 	 	(2,536,805	)	 	—	 
	 	 	
	 	
	 
	 	 	 	(1,858,798	)	 	30,000	 
	
Net income	
 	
$	

5,576,532	
 	
$	

15,606	
 
	 	 	
	 	
	 
	Income per share:	 	 	 	 	 	 	 
	 	Basic	 	$	0.08	 	$	0.00	 
	 	Diluted	 	$	0.08	 	$	0.00	 
	
Weighted average number of shares used in computing net income per share:	
 	
 	

 	
 	
 	

 	
 
	 	Basic	 	 	67,804,330	 	 	58,334,867	 
	 	Diluted	 	 	72,148,240	 	 	60,441,866	 

Consolidated Statements of Deficit
  (Unaudited) 

	 
	 	Three Months ended March 31, 2006
	 	Three Months ended March 31, 2005
	 
	Deficit, beginning of period	 	$	(6,294,784	)	$	(14,016,920	)
	Net income	 	 	5,576,532	 	 	15,606	 
	 	 	
	 	
	 
	Deficit, end of period	 	$	(718,252	)	$	(14,001,314	)
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.
These interim financial statements should be read in conjunction with the annual consolidated financial
statements.

10

 

Consolidated Statements of Cash Flows
  (Unaudited) 

	(All amounts are in US dollars)
 
	 	Three Months ended March 31, 2006
	 	Three Months ended March 31, 2005
	 
	Cash provided by (used in):	 	 	 	 	 	 	 
	
Operations:	
 	
 	

 	
 	
 	

 	
 
	 	Net income	 	$	5,576,532	 	$	15,606	 
	 	Items not involving cash, net of effects from acquisition:	 	 	 	 	 	 	 
	 	 	Amortization of capital assets	 	 	499,189	 	 	396,223	 
	 	 	Amortization of intangible assets	 	 	397,436	 	 	332,500	 
	 	 	Amortization of deferred charges	 	 	47,012	 	 	46,665	 
	 	 	Stock-based compensation	 	 	478,857	 	 	138,537	 
	 	 	Future tax asset	 	 	(2,536,805	)	 	—	 
	 	Changes in non-cash operating working capital (note 5(b))	 	 	(2,688,376	)	 	(213,711	)
	 	 	
	 	
	 
	 	Net cash provided by operations	 	 	1,773,845	 	 	715,820	 
	
Financing:	
 	
 	

 	
 	
 	

 	
 
	 	Proceeds from exercise of share-purchase options	 	 	81,997	 	 	6,160	 
	 	Repayment of short-term liabilities	 	 	—	 	 	(18,000,000	)
	 	Increase in deferred leasehold inducements	 	 	757,815	 	 	—	 
	 	Financing costs related to long-term liabilities	 	 	—	 	 	50,000	 
	 	Repayment of long-term liabilities	 	 	(326,905	)	 	(12,939	)
	 	 	
	 	
	 
	 	Net cash provided by (used in) financing	 	 	512,907	 	 	(17,956,779	)
	
Investing:	
 	
 	

 	
 	
 	

 	
 
	 	Purchase of capital assets	 	 	(1,384,948	)	 	(247,572	)
	 	 	
	 	
	 
	 	Net cash used in investments	 	 	(1,384,948	)	 	(247,572	)
	 	 	
	 	
	 
	Increase in cash and cash equivalents	 	 	901,804	 	 	(17,488,531	)
	Cash and cash equivalents, beginning of period	 	 	35,951,932	 	 	29,636,643	 
	 	 	
	 	
	 
	Cash and cash equivalents, end of period	 	$	36,853,736	 	$	12,148,112	 
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

11

   Notes to Consolidated Financial Statements
  For the three months ended March 31, 2006 

1.     Significant accounting principles:  

The
disclosures contained in these unaudited interim consolidated financial statements do not include all requirements of Canadian generally accepted accounting principles for annual financial
statements. The unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2005. 

The
unaudited interim consolidated financial statements reflect all adjustments consisting only of normal recurring accruals, which are, in the opinion of management, necessary to present fairly the
financial position of the Company as at March 31, 2006 and the results of operations and deficit and cash flows for the three-month periods ended March 31, 2006 and 2005. The unaudited
interim consolidated financial statements are based upon accounting principles consistent with those used and described in the annual consolidated financial statements except for the following: 

	(a)
	Deferred leasehold inducements:

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

2.     Outstanding shares:  

As
at March 31, 2006, the Company had outstanding common shares of 67,883,331 and 8,563,834 share purchase options outstanding at a weighted average exercise price of Canadian $1.70. 

3.     Stock-based compensation:  

During
the three month period ended March 31, 2006, the Company granted 1,881,500 stock options at a weighted average exercise price of Canadian $3.50, which vest over a period of three
years. 

During
the three month period ended March 31, 2006, the Company recorded stock-based compensation expense of $478,857 (2005 — $138,537). The Black-Scholes
option pricing model was used to estimate the fair value of the options at grant date based on the following assumptions: 

	 
	 	2006
	 	2005

	Volatility	 	38%	 	66%
	Risk-free interest rate	 	4.75%	 	4.00%
	Expected life	 	5 years	 	5 years
	Dividend yield	 	—	 	—

4.     Segmented information:  

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

The
Company's operates in two geographic areas as follows: 

	Three months ended March 31, 2006
 
	 	Canada
	 	U.S.
	 	Total

	Revenue	 	$	315,399	 	19,021,754	 	19,337,153
	Capital assets	 	$	177,801	 	4,485,912	 	4,663,713
	Goodwill and other intangible assets	 	$	—	 	26,427,711	 	26,427,711

	Three months ended March 31, 2006
 
	 	Canada
	 	U.S.
	 	Total

	Revenue	 	$	223,941	 	10,348,726	 	10,572,667
	Capital assets	 	$	195,264	 	3,582,690	 	3,777,954
	Goodwill and other intangible assets	 	$	—	 	26,825,147	 	26,825,147

12

 

The
Company's revenue breaks down into the following components: 

	 
	 	Three months ended March 31, 2006
	 	Three months ended March 31, 2005

	Recurring:	 	 	 	 	 	 
	Transaction processing	 	$	8,754,170	 	$	4,951,241
	Maintenance	 	 	3,656,662	 	 	3,241,330
	 	 	
	 	

	Total Recurring	 	 	12,410,832	 	 	8,192,571
	
Non-Recurring:	
 	
 	

 	
 	
 	

 
	Professional Services	 	 	4,372,418	 	 	1,277,941
	System Sales	 	 	2,553,903	 	 	1,102,155
	 	 	
	 	

	Total Non-Recurring	 	 	6,926,321	 	 	2,380,096
	 	 	
	 	

	Total Revenue	 	$	19,337,153	 	$	10,572,667
	 	 	
	 	

During
the three month periods ended March 31, 2006 and 2005, no one customer accounted for more than 10% of total revenue. 

At
March 31, 2006, one customer accounted for 10% of the total accounts receivable balance, while at December 31, 2005, no one customer accounted for more than 10% of the total accounts
receivable balance. 

5.     Supplemental cash flow information:  

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

	 
	 	March 31, 2006
	 	December 31, 2005

	Cash on deposit	 	$	2,379,298	 	$	7,678,392
	Short-term investments:	 	 	 	 	 	 
	 	U.S. money market funds	 	 	4,658,218	 	 	3,509,513
	 	Commercial paper	 	 	29,786,254	 	 	24,733,932
	 	Canadian dollar deposits (Cdn. 35,000 at $1.1680; December 31, 2005 — Cdn. $35,000 at 1.1630)	 	$	29,966	 	 	30,095
	 	 	
	 	

	 	 	$	36,853,736	 	$	35,951,932
	 	 	
	 	

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

	 
	 	Three months ended March 31, 2006
	 	Three months ended March 31, 2005
	 
	Accounts receivable	 	$	(4,900,632	)	$	863,974	 
	Unbuilt revenue	 	 	(241,132	)	 	—	 
	Inventories	 	 	14,121	 	 	(132,297	)
	Prepaid expenses	 	 	73,926	 	 	(36,470	)
	Accounts payable & accrued liabilities	 	 	1,835,124	 	 	(418,701	)
	Deferred revenue	 	 	530,217	 	 	(490,217	)
	 	 	
	 	
	 
	 	 	$	(2,688,376	)	$	(213,711	)
	 	 	
	 	
	 

13

 

	(c)
	Supplemental
cash flow information 

	 
	 	Three months ended March 31, 2006
	 	Three months ended March 31, 2005

	Interest received	 	$	483,801	 	$	72,106
	Interest paid	 	 	390,478	 	$	426,082

6.     Deferred leasehold inducement:  

On
March 24, 2006, the Company entered into a new operating lease agreement for new office space in Lisle, IL. The lease is effective February 1, 2007 with a term of 11 years. The
minimum payments under the lease agreement are as follows: 

	2007	 	$	829,127
	2008	 	 	934,653
	2009	 	 	967,544
	2010	 	 	1,000,435
	2011	 	 	1,033,326
	Thereafter	 	 	6,993,448
	 	 	

	 	 	$	11,758,533
	 	 	

As
part of the agreement, the Company received certain leasehold inducements including a cash inducement of $757,815, which will be recognized over the term of the lease as a reduction of rent
expense. 

Coterminous
with this new lease agreement, the Company gave notice to the lessor of the U.S. Headquarters, located in Lombard, IL, to terminate the lease effective March 31, 2007. The
Company paid $757,815 for this lease termination option which was expensed in the period. 

7.     Other assets:  

On
December 17, 2004, the Company, through a wholly owned subsidiary, acquired all of the outstanding shares of Health Business Systems ("HBS"), based in Warminster, Pennsylvania, which
provides retail pharmacy management systems and workflow technology. 

Under
the terms of the HBS Stock Purchase Agreement, on June 1, 2005 the Company paid $2,000,000 to an interest-bearing escrow account which will be paid to the former HBS shareholders on
December 31, 2006, subject to specified earn-out targets being met. The $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. 

14

  

Systems Xcellence, Inc.

555 Industrial Drive

Milton, Ontario L9T 5E1

T (905) 876-4741

F (905) 878-8869

Toll Free 1-800-622-3111 

Investor Contacts:  

Jeff Park

Chief Financial Officer

investors@sxc.com

www.sxc.com 

Dave Mason

The Equicom Group, Inc.

dmason@equicomgroup.com

www.equicomgroup.com

F (905) 878-8869

T (416) 815-0700 x237Exhibit 4.2  

Management's Discussion & Analysis  

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 healthcare services. Payers of healthcare services include managed care organizations, health insurance companies, and intermediaries such as pharmacy benefit
management organizations ("PBM"). Providers of 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. 

Risk Factors  

        The Company operates in a dynamic, rapidly changing environment that involves risks and uncertainties. Readers are urged to carefully consider the risks and
uncertainties that are detailed in our Annual Information Form filed on March 31, 2006 with Canadian securities regulatory authorities. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations. If any of the risks as described in our filings occur, our business, financial condition, liquidity or results of
operations could be materially harmed. 

        This
report contains forward-looking statements. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements
are not guarantees as to the Company's future results since there are inherent difficulties in predicting future results. Accordingly, actual results could differ from those expressed or implied in
the forward-looking statements. 

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 notes for the three-month period ended March 31, 2006 ("first quarter of fiscal 2006"), the three-month period ended March 31, 2005 ("first quarter of fiscal 2005"), and
the Company's annual financial statements for the year ended December 31, 2005, which are all available on www.sedar.com. The MD&A is as of April 21, 2006. 

For the Three-Month Period Ended March 31, 2006 Compared to the Three-Month Period Ended March 31, 2005  

        Highlights for the three-month period ended March 31, 2006 included: 

	•
	83%
increase in total revenue, from $10.6 million to $19.3 million

	•
	52%
increase in revenue from recurring sources, from $8.2 million to $12.4 million

	•
	77%
increase in transaction processing revenue, from $5.0 million to $8.8 million

	•
	Increase
of net income from $15,606 or $0.00 per share, to $5.6 million or $0.08 per share 

Revenue 

        Consolidated
revenue increased $8.8 million or 82.9% to $19.3 million in the first quarter of fiscal 2006 from $10.6 million in the first quarter of fiscal 2005.
Revenue increased between the periods primarily because transaction processing revenue (consisting of claims adjudication, benefits processing, and switching revenue) increased $3.8 million or
76.8%, professional services revenue increased by $3.1 million or 242.1%, systems sales revenue (consisting of hardware and software license revenue) increased by $1.5 million or 131.7%
while maintenance revenue (consisting of hardware and software maintenance and certain pharmacy services) increased by $0.4 million or 12.8%. 

        The
increase in transaction processing revenue was primarily a result of the introduction of Medicare Part D prescription benefit coverage, new payer customers choosing the
Company's outsourced transaction processing offering, as well as the organic growth of existing payer customers. The increase in professional services was primarily the result of consulting and
implementation services performed in regards to the Medicare Part D program for existing customers as well as some larger, long-term consulting projects for existing customers.
System sales revenue is primarily the result of work performed for customers under the Medicare Part D program. The increase in maintenance was primarily a result of new system sales compared
to the prior period. 

        On
a percentage basis, recurring revenue accounted for 64% and 78% of consolidated revenue in the first quarters of fiscal 2006 and 2005, respectively. Recurring revenue consists of
transaction processing and maintenance revenue. The decrease on a percentage basis was primarily a result of the significant percentage increase in non-recurring revenues. 

3

 

Gross Profit 

        Gross
profit was 60.7% for the first quarter of fiscal 2006 compared to 57.3% for the first quarter of fiscal 2005. This increase in gross profit margin was primarily a result of the
increase in the sale of higher margin transaction processing services and an increase in the sale of high margin software licenses during the period. 

Product Development Costs 

        Product
development costs for the first quarter of fiscal 2006 were $2.1 million, representing 10.9% of revenue. Product development costs for the first quarter of fiscal 2005
were $2.2 million, or 20.4% of revenue. The decrease in product development costs is the result of increased utilization of the Company's employees for professional services projects. 

Selling, General and Administrative Costs 

        Selling,
general and administrative costs ("SG&A") for the first quarter of fiscal 2006 were $3.9 million or 20.0% of revenue compared to $2.6 million, or 24.4% of revenue
for the prior comparable period. The selling, general and administrative costs decreased as a percentage-of-revenue primarily as a result of the continued focus on cost control
and improving operational efficiencies. The $1.3 million increase in costs relates to increased consulting, infrastructural and recruiting expenses to support the Company's growth. 

Amortization 

        Amortization
expense (consisting of depreciation and amortization expense) increased by $0.1 million, to $0.9 million in the first quarter of fiscal 2006 from
$0.8 million in the first quarter of 2005. The increase in depreciation expense relates to an increase in the number of assets purchased in fiscal 2005 and in the first quarter of fiscal 2006. 

Lease termination charge 

        On
March 24, 2006, the Company entered into a new operating lease agreement for new office space in Lisle, IL. The lease is effective February 1, 2007 with a term of
11 years. As part of the agreement, the Company received certain leasehold inducements including a cash inducement of $0.8 million, which will be recognized over the term of the lease
against rent expense. 

        The
minimum payments under the lease agreement are as follows: 

	2007	 	$	829,127
	2008	 	 	934,653
	2009	 	 	967,544
	2010	 	 	1,000,435
	2011	 	 	1,033,326
	Thereafter	 	 	6,993,448
	 	 	

	 	 	$	11,758,533
	 	 	

        Coterminous
with this new lease agreement, the Company gave notice to the lessor of the U.S. Headquarters, located in Lombard, IL, to terminate the lease effective
March 31, 2007. The Company paid $0.8 million for this lease termination option which was expensed in the period. 

Stock-based Compensation 

        The
Company has a stock-based compensation plan and accounts for all stock-based payments to employees and nonemployees 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 $0.1 million in the first quarter of
fiscal 2005 to $0.5 million in the first quarter of fiscal 2006. This increase was due to the issuance of 1.8 million options in May 2005 and an additional 1.8 million
options issued in March 2006, in connection with the Company's stock option incentive plan. 

Interest Income and Expense 

        Interest
income increased $0.4 million to $0.5 million for the first quarter of fiscal 2006 from $0.1 million in the first quarter of fiscal 2005. This was due to
increased cash balances available for investment from both operations and the Company's equity offering in the fourth quarter of calendar 2005. Interest expense remained constant at
$0.4 million for the quarters ended March 31, 2006 and 2005. 

4

 

Income Taxes 

        During
the first quarter of fiscal 2006, it was determined by management that the company will be able to utilize a taxable benefit from historical net operating losses
("NOL's") and tax-related timing, in accordance with CICA Handbook Section 3465, "Income Taxes". As a result, approximately $3.2 million of previously
unrecognized future income tax assets ("FTA's") were recognized. At December 31, 2005, approximately $0.7 million of FTA's already existed on the Company's balance sheet. 

        Future
tax expense of $0.7 million and current tax expense of $0.7 million were recognized in the first quarter of fiscal 2006. The current tax expense related to
U.S. pre-tax net income in excess of available U.S. NOL's. 

Net income 

        The
Company reported net income of $5.6 million for the first quarter of fiscal 2005 compared to $15,606 in the first quarter of fiscal 2005. This increase in net income was
primarily the result of an increase in revenue of $8.8 million, a decrease of income taxes of $1.9 million, and an increase in net interest income of $0.4 million offset by an
increase in project costs of $3.1 million, an increase in operating expenses of $1.2 million, an increase in lease termination charges of $0.8 million, an increase in stock-based
compensation of $0.3 million, and an increase in amortization of $0.1 million. 

        The
increase in revenue was primarily the result of additional revenue generated from growth in the Company's transaction processing revenue, and consulting, implementation and system
sales related to Medicare Part D. The increase in project costs was primarily the result of additional costs taken on from Medicare Part D work. The increase in operating expenses is the
result of the $1.3 million increase in SG&A relating to consulting, infrastructural and recruiting fees. 

Outstanding Shares  

        As at April 21, 2006, the Company had outstanding 67,883,331 common shares and 8,563,834 share-purchase options outstanding at a weighted
average exercise price of CDN $1.70. 

Liquidity and Capital Resources  

        As at March 31, 2006, the Company had a working capital position of $41.2 million, with cash and cash-equivalents of
$36.9 million, compared with $37.3 million of working capital and $36.0 million of cash and cash-equivalents at December 31, 2005. The $0.9 million
increase in the Company's cash position was primarily the result of $1.8 million in cash generated from operations, $0.5 million of cash generated from financing activities, and
$1.4 million in cash used for investment purposes. 

        The
Company generated cash from operations of $1.8 million, in the first quarter of fiscal 2006, which primarily consisted of $5.6 million of net income, offset by
$0.9 million in amortization of capital and intangible assets, $0.5 million in stock-based compensation expense, a future tax asset decrease of $2.6 million and a
$2.6 million decrease in non-cash working capital. This compares to $0.7 million of cash generated through operations in fiscal 2005, which primarily consisted of net income
of $15,606, $0.8 million in amortization of capital assets, $0.1 million of stock-based compensation expense, and a $0.2 million decrease in non-cash working capital. 

        The
Company generated $0.5 million of cash resources for financing activities during the first quarter of fiscal 2006, which primarily consisted of the $0.8 million in
leasehold inducements received offset by $0.3 million in payments in accordance with the MCG loan. This compares to $18.0 million of cash used for financing activities during the first
quarter of fiscal 2005, which consisted of payments to former shareholders in relation to the HBS acquisition. 

        The
Company used $1.4 million of cash in investing activities during the first quarter of fiscal 2006, consisting primarily of capital purchases to support increased ASP activity
related to Medicare Part D. During the first quarter of fiscal 2005, the Company used $0.2 million of cash in investing activities for capital purchases. 

        The
company believes that cash flow generated from operations will be sufficient to fund working capital requirements and anticipated capital expenditures in 2006. 

5

 

Summary of Quarterly Results (unaudited)  

        The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended March 31, 2006: 

	 
	 	2006
	 	2005
	 	2004

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

	 	Q1
	 	Q4
	 	Q3
	 	Q2
	 	Q1
	 	Q4
	 	Q3
	 	Q2

	Revenue	 	$	19,337	 	$	16,611	 	$	14,730	 	$	12,209	 	$	10,573	 	$	8,526	 	$	8,239	 	$	8,515
	Recurring revenue ($)	 	 	12,411	 	 	9,393	 	 	8,770	 	 	8,434	 	 	8,193	 	 	5,782	 	 	4,787	 	 	4,998
	Recurring revenue (%)	 	 	64%	 	 	57%	 	 	60%	 	 	69%	 	 	78%	 	 	68%	 	 	58%	 	 	59%
	Operating income ($)	 	 	3,624	 	 	3,783	 	 	2,379	 	 	1,323	 	 	400	 	 	877	 	 	1,102	 	 	720
	Net income ($)	 	 	5,577	 	 	3,950	 	 	2,210	 	 	1,546	 	 	16	 	 	647	 	 	881	 	 	492
	Basic & diluted EPS	 	$	0.08	 	$	0.06	 	$	0.04	 	$	0.03	 	$	0.00	 	$	0.01	 	$	0.02	 	$	0.01

For the Eight Quarters Ended December March 31, 2006  

        Recurring revenue dollars has increased over the past eight quarters from $5.0 million to $12.4 million, as a result of increased transaction
processing revenue from the introduction of Medicare Part D prescription benefit coverage, new payer customers choosing the Company's outsourced transaction processing offering, as well as the
organic growth of existing payer customers. 

        The
recurring revenue percentage has fluctuated both up and down over the past eight quarters while the total revenue dollars has steadily increased from $8.5 million to
$19.3 million. The recurring revenue percentage from the third and fourth quarters of fiscal 2005 were down compared to prior quarters primarily because both quarters had a larger mix of
systems sales related to revenue from Medicare Part D modules being recognized during those two quarters. The recurring revenue percent increased in the first quarter of fiscal 2006, primarily
due to a higher mix of transaction processing revenue compared with the remaining recognition of the Medicare Part D system sales. 

        Operating
income steadily increased from $0.4 million in the first quarter of fiscal 2005 to $3.8 million in the fourth quarter of fiscal 2005. Operating income declined
slightly in the first quarter of fiscal 2006, primarily due to the recognition of a one-time lease breakage charge of $0.8 million. Without this one-time charge, the
operating income amount for the first quarter of fiscal 2006 would have been $4.4 million, or an increase of $0.6 million compared to the fourth quarter of fiscal 2005. 

        Net
income has increased from $16 thousand in the first quarter of fiscal 2005 to $5.6 million in the first quarter of fiscal 2006. Net income was positively impacted by
the set-up of future tax assets related to future taxable benefits that were determined by management to "more likely than not" be realizable in the future, offsetting taxable income
$0.7 million and $2.5 million in Q4 of fiscal 2005 and fiscal 2006, respectively. Without these future tax assets being set-up, net income would have been $3.3 million
and $3.0 million for Q4 of fiscal 2005 and Q1 of fiscal 2006, respectively. Net income for the first quarter of 2006 was negatively impacted by an increase in stock compensation expense from
$0.3 million to $0.5 million between Q4 of fiscal 2005 and Q1 of 2006. This was primarily the result of 1.8 million new options being issued in March 2006. 

Commitments and Contractual Obligations  

        At March 31, 2006, contractual obligations of the Company are as follows. The long-term debt below contains principal payments only. Interest
on the long-term debt fluctuates based on business performance. 

	 
	 	Total
	 	Less than 1 Year
	 	Years 1-3
	 	Years 4-5
	 	After Year 5

	Long-Term Debt	 	$	12,920,000	 	$	1,700,000	 	$	5,100,000	 	$	6,120,000	 	—
	Operating Leases	 	 	13,677,783	 	 	1,379,054	 	 	2,504,299	 	 	2,023,931	 	7,770,499
	 	 	
	 	
	 	
	 	
	 	

	Total Contractual Obligations	 	$	26,597,783	 	$	3,079,054	 	$	7,604,299	 	$	8,143,931	 	7,770,499
	 	 	
	 	
	 	
	 	
	 	

6

 

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  

        On March 24, 2006, in accordance with a lease provision, the Company gave notice to the lessor of the U.S. Headquarters, located in Lombard, IL, to
terminate the lease, effective March 31, 2007. The Company paid $0.8 million for this lease termination option and entered into a new eleven year lease agreement with a different lessor
in Lisle, Illinois which is effective February 1, 2007 and ends on January 31, 2018. As part of a lease inducement, the lessor of the Lisle building paid the Company $0.8 million
to cover the expenses incurred to terminate the Lombard lease. 

        In
accordance with EIC-21, "Accounting for Lease Inducements by the Lessee" and EIC-135, "Accounting for Costs Associated with Exit and Disposal Activities, ' the
lease inducement amount was recorded as a "Deferred lease inducement" liability on the balance sheet and will be amortized over the life of the Lisle lease term while the Lombard lease termination
option payment was recognized as a one-time expense in the first quarter of fiscal 2006. 

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. These items are unchanged from those discussed in the
Company's annual MD&A for the year ended December 31, 2005. 

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 it 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 balance, 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. 

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. The primary risks affecting the Company are substantially unchanged from those discussed in the Company's MD&A for the year ended December 31, 2005. 

Disclosure Controls and Procedures:  

        Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management,
including the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. As at
March 31, 2006, Belzberg's management, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Multilateral
Instrument 52-109 of the Canadian Securities Administrators and concluded that such controls and procedures were effective. 

7

 

Outlook  

        The three-month period ended March 31, 2006 was a record quarter for the Company. It reflects the first 3 months following the introduction of the
new Medicare Part D benefits. This Federal program allows for prescription drug coverage for seniors and has translated into a significant increase in the Transaction Processing of the Company.
Transaction Processing revenues grew 76.8% from the first quarter in 2005. This growth drives our recurring revenues, which provides the Company with an expanding foundation for the business. The
Company continues to believe that the aging demographics, and the increased utilization for prescription drugs will maintain steady growth rates for our Transaction Processing business. The Company
continues to invest in our infrastructure which supports this expanding foundation, including $1.3 million in capital expenditures to upgrade our back-up processing capabilities. 

        The
Company also continued to support its existing license customers by providing Professional Services. These services were targeted at assisting customers with continuous development
or expansion for their businesses as well as activities related to Part D integration and preparations. Throughout the remainder of the 2006, we do not expect these Professional Service
projects to continue at the same rate as has been experienced over the last 12 months, as our customers have largely absorbed the Part D related projects. 

        SXC
continues to see increasing support and awareness for our InformedRx offering. Our ability to allow customers to better control their prescription drug plans in a more efficient and
transparent manner has continued to drive interest and support for the Company's solutions. With prescription drug spending comprising the fastest growing healthcare cost facing companies, we continue
to see strong momentum in this area of our business. 

        In
the Provider markets, we continue to develop and expand our retail and mail functionality. We expect to continue to progress in our ability to penetrate both independent and
mid-sized pharmacies with our comprehensive offering. 

        The
Company remains well positioned in the marketplace to continue to expand our current offerings in both the Payer and Provider markets. With growth from Part D, we have
continued to provide both transaction processing, and well as on-going support for existing and new license customers. With continued focus on cost controls and providing customer focused
support, we believe the Company is well positioned to benefit from the growing market dynamics. We believe we remain well positioned to provide healthcare organizations the proper solutions to enable
them to reduce the cost and enhance the efficiency associated with the processing of prescription drug claims. 

Additional information  

        Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com. 

8

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}]]