1st quarter report-12/2001 - dms for · pdf fileour commitment to total customer satisfaction....

An

nu

al for the year ended December 31, 2002

Quorum Information Technologies Inc.(TSXV: QIS)

Suite 100, 2451 Dieppe Avenue S.W.Calgary, Alberta, Canada T3E 7K1Tel: 403.777.0035Fax: 403.777.0039E-mail: [email protected] Site: www.QuorumIS.com

w w w . Q u o r u m I S . c o m

R e p o r t

Quorum is a successful Information Technology Company that focuses exclusively on

mid size business. Quorum was recently recognized as Canada’s 20th fastest

growing technology company in the Deloitte & Touche Fast 50, and the 214th fastest

growing technology company in North America by their Fast 500. In the Branham

Group’s annual ranking of the top 300 Canadian Information Technology companies,

Quorum was ranked as one of the top 100 Professional IT Service companies in

Canada for 2002, and was placed in the 2002 PROFIT 100, Canada’s authoritative

ranking of high-growth companies.

Quorum’s success comes from developing, marketing, implementing and supporting

superior technology products and services specifically for the mid market, and from

our commitment to total customer satisfaction. Quorum has expertise in all aspects

of Information Technology and employs the best people in the business to deliver it

through two divisions: Enterprise Solutions and Technology Solutions.

The Enterprise Solutions Division uses its experience and expertise to take software

products from ideas to market. XSELLERATOR™, a Dealership Management System for

the automotive market, is the Company’s flagship product and its biggest seller;

doubling sales each year for the past two years. FasTrack™ is a Sales and Change

Order Tracker for the homebuilder market and is in the early stages of the marketing

process. These proprietary software products help our clients improve organizational

efficiencies by automating their internal processes. We help them to become faster,

better and far more efficient at serving the needs of their customers.

The Technology Solutions Division implements and supports a library of superior

third party technology products and services specifically chosen for mid market

organizations. As a Microsoft® Certified Partner, we specialize in providing Microsoft

Business Solutions to mid size businesses in many industries.

ContentsFinancial Highlights 1

President’s Message 1

Operations Review 4

Management’s Discussion and 8Analysis

Management’s Responsibility for 16Financial Reporting

Auditors’ Report 17

Consolidated Balance Sheets 18

Consolidated Statements of 19Operations

Consolidated Statements of 20Cash Flows

Notes to Consolidated 21Financial Statements

Corporate Information IBC

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Produced by Quorum Information Technologies Inc. Designed by Two Birds, One Stone Design

Corporate CounselBurnet Duckworth & Palmer LLP

Calgary, Alberta

BankersCanadian Imperial Bank of CommerceCalgary, Alberta

AuditorsBuchanan Barry LLP

Calgary, Alberta

Stock Exchange ListingTSX Venture Exchange (TSXV)Trading Symbol: QIS

Registrar and Transfer AgentComputershare Trust Company of CanadaCalgary, Alberta

Investor RelationsCavalcanti Hume Funfer Inc.Calgary, Alberta

Quorum Information Technologies Inc.Corporate OfficeSuite 100, 2451 Dieppe Avenue SWCalgary, Alberta, Canada T3E 7K1Phone: 403.777.0035Fax: 403.777.0039E-mail: [email protected] Site: www.QuorumIS.com

Shareholders’ MeetingThe Annual General Meeting of Shareholders of QuorumInformation Technologies Inc. will be held on June 5, 2003 at10:00 a.m. in the Oval Room, The Fairmont Palliser Hotel, LobbyLevel, 133 – 9th Avenue S.W., Calgary, Alberta. Quorumshareholders are encouraged to attend and meet the directorsand officers of the Company. Those unable to attend areencouraged to complete and return the instrument of proxymailed with this report in order to be represented at themeeting.

Board of Directors

Maury MarksDirectorPresident and Chief Executive OfficerQuorum Information Technologies Inc.

Larry ShelleyChairman of Board of DirectorsPresident of Tamarack Group Ltd. and Executive Vice President of Advisory Services of MNP LLP

Dan LaplanteDirectorPresident of Continental Oilfield Supply Canada

Ross BevinDirectorPast Vice President of Business DevelopmentQuorum Information Systems Inc.

Steve RemmingtonDirectorPresident and Chief Executive Officer Entero Corp.

Officers

Larry ShelleyChairman of Board of Directors

Maury MarksPresident and Chief Executive Officer

Swapan KakumanuChief Financial Officer

C OR P

O R A TE I N F O R M A T I O N

Quorum Information Technologies Inc.

PRES ID

ENT’ S M E S S A G E

Dear Shareholder:It has been a busy year, and we are pleased to share with youthe results of Quorum’s eventful and productive fiscal yearended December 31, 2002.

Overview

2002 has been an exciting leg of what we are sure is going tobe a long and prosperous journey for Quorum. The big news is inthe Enterprise Solutions division. We completed another 9XSELLERATOR installations in the fourth quarter, reflecting acontinuing growth trend for our XSELLERATOR product. XSELLERATOR

has now been sold to sixty dealerships across Canada atDecember 31, 2002, with nine more dealerships sold in the firstquarter of 2003, setting us up for what should be another greatyear.

For Fiscal Year (FY) 2002, combined revenues were $7.9 million

compared to $6.2 million for FY2001, an increase of $1.7 millionor 27%. Net income from operations (EBITDA) for FY2002 was$447 thousand or $0.029 per share compared to $381 thousandor $0.028 per share for FY2001.

2002 In Review

Enterprise Solutions (ES) DivisionAs the technology sector across North America continues toexperience flat growth, Quorum is doubling sales in its ESDivision, a testament to what can happen when you have thesuperior product for a specific market.

XSELLERATOR is proving to be ‘the next big thing’ for theautomotive industry as sales of our proprietary DealershipManagement System (DMS) software doubled for the secondstraight year.

Quorum is now the third largest Dealer Service Provider for GMDealerships in Canada, which is one of the goals we set out toachieve in 2002. XSELLERATOR is continuing to gain market shareacross Canada, and the Company reached another goal for 2002by opening up the Quebec market with the addition of a largemetro dealership in St-Laurent.

F I NA N

C I AL H I G H L I G H T S

Year ended Year ended Five months ended Year endedDecember 31, 2002 December 31, 2001 December 31, 2001 July 31, 2001

(Audited) (Unaudited) (Audited) (Audited)Revenue

Enterprise Solutions $ 3,521,315 $ 1,711,299 $ 973,251 $ 953,206Technology Solutions $ 4,361,432 $ 4,461,981 $ 2,216,697 $ 3,836,646

Total $ 7,882,747 $ 6,173,280 $ 3,189,948 $ 4,789,852

Gross profit $ 2,795,694 $ 2,131,045 $ 1,128,006 $ 1,516,517Gross margin 35% 35% 35% 32%Earnings (loss) before interest, taxes,

depreciation and amortization (EBITDA) $ 447,208 $ 380,620 $ 265,504 $ (83,235)

Net income / (loss) $ (80,756) $ (52,134) $ 41,053 $ (350,559)Earnings / (loss) per share $ (0.005) $ (0.004) $ 0.003 $ (0.044)Common shares outstanding at period end 15,344,400 15,104,400 15,104,400 8,100,000

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14. Segmented InformationThe Corporation operates in one segment, the computer network and business software solutions industry and operates in one geographical location, Canada.

15. Financial InstrumentsThe Corporation holds various forms of financial instruments. The nature of these instruments and the Corporation’s operations expose the Corporation to interest rate risk and industry credit risks. The Corporation manages its exposure to this risk by operating in a manner that minimizes its exposure to the extent practical.

(a) Interest rate risk managementThe Corporation’s short and long-term borrowings are subject to floating rates. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates.

As at December 31, 2002, the increase or decrease in net earnings before taxes for each 1% change in interest rates on floating rate debt amounts to approximately $2,545 (December 31, 2001 - $1,748; July 31, 2001 - $3,831).

(b) Credit riskA significant portion of the Corporation’s Enterprise Solutions Division’s trade accounts receivable are from automotive dealers and, as such the Corporation’s Enterprise Solutions Division is exposed to all the risks associated with that industry.

16. Public Offering – Subsequent EventThe Corporation conducted a public offering in Alberta and British Columbia by way of Short Form Offering to issue up to 2,000,000 Units at $0.75 each, which was ongoing at December 31, 2002. Each Unit is comprised of one (1) Common Share and one (1) Share Purchase Warrant (“Warrant”). Each Warrant will entitle the holder to acquire one (1) Common Share at a price of $1.40 per share for a period of twenty four (24) months from the date of closing of the Public Offering.

On January 24, 2003, 474,000 Units were issued for a total gross proceeds of $355,500. Share issue expenses of $17,268 incurred with respect to this public offering to December 31, 2002 have been deferred to be set off with share capital as Deferred Financing Costs on final close of the offering. On March 14, 2003 an additional 158,200 Units were issued for a total gross proceeds of $118,650 and the offering was closed.

17. Comparative FiguresCertain comparative figures have been reclassified to conform to the presentations adopted during the current year.

“XSELLERATOR is the management system we’ve been waiting for. Every otherindustry has been operating with advanced technology for a long time, but automotive dealerships have been left in the dark ages – until now. XSELLERATOR

will help us take our business to the next level.”

Richard Hoy, Dealer Principal

Parkway Pontiac, St-Laurent, Quebec

Notes to Consolidated Financial Statements - continued

A lot of hard work, combined with our customers’enthusiastic endorsement of Quorum, has had atremendous impact on our growth. We havegrown from 15 dealerships in 2000, to 30dealerships in 2001, and now to 60 dealerships in2002.

There are three key areas that ensure Quorum willcontinue to achieve healthy growth:

Sustainable Competitive AdvantageCompetitive strength is a key element of ourbusiness strategy. To stay competitive for years tocome, we did two things very differently than thecompetition.

1.) We built a superior Dealership ManagementSystem using current technology that can integrate with new technologies as theycome along. Research shows we have the only fully integrated, Windows-basedsystem available on the market.

2.) We brought a fresh approach to the automotive industry, whose DealershipManagement Systems have remained relatively static for a number of years. Welisten to our dealers, and are constantly producing new versions of XSELLERATOR inorder to integrate those ideas into the software. And, our dealers receive all newversions absolutely free over the Web as long as they are on our system.

Brand Loyalty Our dealership customers deserve a great deal of credit for the success and marketacceptance XSELLERATOR is experiencing today. They are our product’s biggestcheerleaders. Our dealers have provided testimonials, made themselves available to answer questions from dealers investigating the system, and even opened theirdealerships up to demonstrate to other dealers how well the system works. We’reattending the Canadian Automobile Dealers Association tradeshow this year, andsome have even offered to man our booth so they can show other dealers what thesystem can do! That’s loyalty.

But it’s not just the features and benefits of the system that builds brand loyalty; it’salso because we utilize technology to provide the best software support in theindustry.

Predictable Sources of Earnings GrowthCurrently, Quorum is heavily reliant on new sales to achieve profitability. Over time,this is expected to change because XSELLERATOR customers sign support andmaintenance contracts, providing Quorum with a continuous, second source ofrevenue. Once Quorum has a larger number of XSELLERATOR customers, thecombination of new sales revenue and on-going support revenue will impactpositively on the Company’s profit.

This flagship product is receivingrecognition from our customers, the market,the media and even General Motors ofCanada as the most exciting DMS productin the Canadian marketplace. Following arethe ES Division’s other key achievements for2002.• XSELLERATOR revenue increased by

105% in 2002 to $3,521,315 compared to the 12 months ended December 31, 2001.

• XSELLERATOR support revenue increased by 190% in 2002 to $320,000 compared to the 12 months ended December 31, 2001 to comprise 9% of XSELLERATOR

revenue total. • The Division grew XSELLERATOR sales from

15 dealerships at December 31, 2000 to 60 dealerships at December 31, 2002, which is a 300% growth in customers over a two year period.

• Expanded customer base has helped fund geographical growth and product improvements to further increase market share.

• Increased market share in Canada from 2.66% at December 31, 2001 to 5.31% at December 31, 2002. Fastest growth occurred in Ontario from 2.73% at December 31, 2001 to 6.06% at December 31, 2002 representing a 3.33% change.

Looking Forward

“2001 was a breakthrough year forXSELLERATOR, and we believe it is enteringthe initial stages of a significant growthcurve.” Maury Marks, 2001 Annual Report

The exciting news this year has beenXSELLERATOR, which is experiencing the salesgrowth we forecasted in last year’s annualreport. During 2002, the Company has soldthe system to a number of majordealerships in Canada, providing credibilityin the market and positioning XSELLERATOR

as a ‘safe’ buy to other dealers.

(f) Stock-based Plans – Pro Forma Disclosure

The Corporation does not record compensation expense when stock options are amended or issued, as disclosed in Note 2 (k).

During the current year the Corporation granted 185,000 stock options to purchase common shares to key employees and directors. Had compensation expense been determined based on fair value at the option grant dates, the net income and earnings per share would have been reduced to the pro forma amounts indicated below:

Net Income – as reported $ (80,756)Net Income – pro forma $ (112,296)Basic Earnings per Share – as reported $ (0.005)Basic Earnings per Share – pro forma $ (0.007)Diluted Earnings per Share – as reported $ (0.005)Diluted Earnings per Share – pro forma $ (0.007)

The fair value of the share options granted was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

Risk-free interest rate 5.00%Weighted average life 5 yearsExpected volatility in the market price of the shares 0.04Expected dividend yield Nil

(g) Employee Share Purchase Plan

During 2002, the Corporation established an Employee Share Purchase Plan (“ESPP”). Compensation expense related to the ESPP amounted to $72,000 in 2002 (December 31, 2001 – NIL; July 31, 2001 – NIL).

12. Related Party TransactionsDuring the year ended December 31, 2002, the Corporation incurred fees in the amount of $35,103 (December 31, 2001 – $223,800; July 31, 2001 – Nil) from an entity of which one director is a principal. Of this amount $8,077 remains unpaid at December 31, 2002.

The fees during December 31, 2001 were related to the services provided for the acquisition and reorganization of the Corporation and have been charged to share capital as share issue costs. During the current year the fees related to ongoing investor relations and corporate governance services and were expensed during the year.

During the year ended December 31, 2002 the Corporation sold goods and services in the amount of $9,327 (December 31, 2001 – Nil; July 31, 2001 – Nil) to an entity which is owned by one of the directors of the Corporation. Of this amount $4,448 remains to be received at December 31, 2002.

Related party transactions have been recorded at their exchange amounts which represent carrying values.

13. Operating Lease CommitmentsThe future minimum lease payments for operating lease obligations over the next five years are as follows:

2003 $ 142,0182004 134,4312005 16,1002006 8,2692007 -Total $ 300,818

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"It is refreshing to deal with a company that takes note of your ideas and suggestionsand makes the necessary changes to fulfill your requests."

Connie Clark, General Manager

Sundre Motors Ltd., Sundre, Alberta

XSELLERATOR

Sales Growth60

55

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2000 2001 2002Year ended December 31


The chart below illustrates the importance of XSELLERATOR’s on-going support revenue to total revenue.

Readers are cautioned that the projections in this chart are built with a list of assumptions which the management believes to be reasonable under thecurrent circumstances. Actual results could significantly differ depending onfuture variables. Assumptions include pricing, cost structure, U.S. marketpenetration, U.S. pricing strategy, competition threats, technology changes,etc. Please refer to the Business Risks section of the Company’s AnnualInformation Form filed on SEDAR to obtain a full list of these risks.

Technology Solutions (TS) Division

This year, Microsoft Business Solutions entered the businesssoftware market for mid market companies by purchasing thethree leading brand products for that segment. They haveidentified Business Solutions as one of their key growth areas,and Quorum’s TS Division has changed focus to take advantageof the opportunity this move presents. Following is a snapshotof the TS Division’s year.

• In light of the continued downturn in the technology sector, revenue decreased by 2% in 2002 to $4,361,432 compared to the 12 months ended December 31, 2001.

• The group completed a number of significant projects, some with larger corporations in the oil and gas sector.

• Earned accreditation as a Value Added Reseller for all three Microsoft Business Solutions products.

Looking ForwardGoing forward, we will continue to transition our sales energytowards the entire suite of Microsoft Business Solutions.Microsoft sees an enormous potential in the Business Softwaremarket, and Quorum has put all the pieces in place to capitalizeon this.

Through our alliance with Meyers Norris Penny LLP, we willexpand our geographic market to jointly service mid marketorganizations throughout Western Canada.

Awards and RecognitionDuring the year, Quorum was the recipient of a number ofawards recognizing the Company for its growth, professionalismand service.

• Deloitte and Touche ranked Quorum as one of the 50 fastest growing technology companies in Canada, and one of the 500 fastest growing in North America.

• In the Branham Group’s annual ranking of the top 300 Canadian Information Technology companies, Quorum was ranked as one of the top 100 IT Professional Services companies in Canada in 2002.

• Quorum was rated as the 39th fastest growing company in Canada, according to the 2002 PROFIT 100, Canada’s authoritative ranking of high-growth companies.

• Our client, Taylor Gas Liquids Ltd., presented Quorum with a plaque in “appreciation for the hard work performed by Quorum and for your dedication and commitment to delivering Taylor with our new accounting system, Solomon IV.”

We are pleased to receive these awards, and most pleased withthe recognition from Taylor Gas Liquids Ltd., as they reinforceour commitment to a strategy of cost effective, continual growthand world class customer service.

In Conclusion2002 was an incredible year for Quorum. XSELLERATOR is gainingmomentum, and a different set of challenges comes with thatgrowth. We are cautiously optimistic about 2003. Although wehave enormous potential for growth through our XSELLERATOR

product, we know how important it is to manage that growth.We also understand the importanceof each and every one of ourcustomers, and that they mustcontinue to receive world classservice and support as we grow. Welook forward to meeting these, andother, challenges in the years aheadas creatively, aggressively andsuccessfully as we met the manychallenges in the past.

Maury Marks, C.A.President and CEO, Quorum Information Technologies Inc.

April 22, 2003

11. Share Capital - (con’t)

(c) Stock OptionsIn conjunction with the RTO, the Corporation received regulatory approval to reserve 10% of the outstanding shares for stock options. The exercise price of the options is determined by the Board of Directors in accordance with the policies of the TSX Venture Exchange. The stock options have a maximum term of five years and have a hold period of four months from the date of the initial grant.

Stock option transactions for the respective periods and the number of stock options outstanding are summarized as follows:

Number of Optioned Weighted AverageCommon Shares Exercise Price Expiry Date

Balance, July 31, 2000 & 2001 200,000 $ 0.30 October 17, 2005Options granted, September 12, 2001 1,105,740 $ 0.40 September 12, 2006Options granted, December 14, 2001 125,000 $ 0.52 October 28, 2002Options exercised, November 30, 2001 (40,000) $ 0.30Options expired, October 10, 2001 (80,000) $ 0.30Balance, December 31, 2001 1,310,740

Options granted, January 16, 2002 40,000 $ 0.52 January 16, 2007Options granted, January 16, 2002 20,000 $ 0.52 November 29, 2002Options granted, June 3, 2002 125,000 $ 0.48 June 3, 2007Options exercised, June 27, 2002 (40,000) $ 0.30Options cancelled, August 31, 2002 (13,333) $ 0.52Options exercised, October 28, 2002 (100,000) $ 0.52Options expired, October 28, 2002 (25,000) $ 0.52Options expired, November 29, 2002 (6,667) $ 0.52Balance, December 31, 2002 1,310,740

(d) Share Purchase Warrants

As at December 31, 2002 there are 4,964,400 (December 31, 2001 – 4,964,400; July 31, 2001 – 1,502,000) outstanding share purchase warrants. Each share purchase warrant entitles the holder to acquire one additional share of QIS at $1.25 per share and the warrants expire on October 31, 2003.

(e) Escrowed Shares

7,622,970 common shares were originally under escrow restrictions. 10% or 762,295 shares were released from escrow when the business combination received final approval by TSX Venture Exchange on September 26, 2001 and a further 15% of the escrowed shares are scheduled to be released on each of the 6, 12, 18, 24, 30 and 36 months anniversaries of September 26, 2001. As at December 31, 2002, 4,573,785 (December 31, 2001 – 6,860,675; July 31, 2001 – 1,016,000) are subject to escrow restrictions.

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“Microsoft’s Solomon product, combined with the efforts of Quorum,produced a fully operational system on schedule and on budget…anextraordinary result for a full-scale system implementation.”

Brad Mattson, MBA – Controller

Taylor Gas Liquids Ltd., Calgary, Alberta


Preferred Shares – Series 1Balance, July 31, 2000 90 63,833Converted to Series 1 common shares** (90) (63,833)Balance, July 31, 2001 — —

Total Share Capital at July 31, 2001 $ 1,993,995

December 31, 2001 Number of Shares AmountCommon SharesBalance, July 31, 2001 8,100,000 $ 519,243Conversion of preferred shares (i) 2,957,400 1,474,752Share issue costs net of future taxes of $8,740 — (12,260)Balance before RTO (ii) 11,057,400 1,981,735RTO transaction net of deficiency of $1,404 (iii) 3,502,000 1,001,830Balance after RTO (ii) 14,559,400 2,983,565Issued on private placement offering 505,000 252,500Issued on exercise of stock options 40,000 12,000Share issue costs net of future taxes of $51,217 — (71,841)Balance, December 31, 2001 15,104,400 3,176,224

Preferred SharesBalance, July 31, 2001 2,957,400 1,474,752Conversion of preferred shares (i) (2,957,400) (1,474,752)Balance, December 31, 2001 — —

Total Share Capital at December 31, 2001 15,104,400 $ 3,176,224

December 31, 2002 Number of Shares AmountCommon SharesBalance, December 31, 2001 15,104,400 $ 3,176,224Issued on exercise of agent’s stock options 100,000 30,000Issued on exercise of stock options 40,000 12,000Issued on exercise of stock options 100,000 52,000Share issue costs net of future taxes of $6,135 — (7,615)Balance, December 31, 2002 15,344,400 3,262,609


(i) On the completion of the RTO, each preferred share of Quorum issued to the shareholders of 732519 Alberta Ltd. was converted into one QIS preferred share. Subsequently on September 5, 2001 each preferred share was converted into one unit of QIS comprising of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to acquire one additional share of QIS at $1.25 per share on or before October 31, 2002. Application was made and approval granted by TSX Venture Exchange during the current year to extend these warrants by a year to October 31, 2003.

(ii) 8,100,000 common shares and 2,957,400 preferred shares (see Note (i) above) were issued to the shareholders of Quorum as a result of the RTO transaction (see Note 3 (d)). 6,606,970 of these 8,100,000 common shares are subject to escrow restrictions.

(iii) 3,502,000 common shares represent the issued and outstanding shares of QIS as at the date of the RTO transaction (see Note 3(d)). 1,502,000 of the 3,502,000 shares were issued for cash at $0.50 per share pursuant to the private placement offering on July 16, 2001. 1,016,000 of the 3,502,000 common shares are subject to escrow restrictions.

Dealerships must use Windows in order to communicate withtheir manufacturers, suppliers and customers. DISTRIBUTOR is aserver-based computing solution that delivers Windows to adealership at a fraction of the cost of running PC’s. Allsoftware applications (XSELLERATOR, manufacturers’ software,Microsoft EXCEL™, etc.) are deployed, managed, and

supported 100% on a server, which is like a mainframe computer, only smaller andmuch less expensive.

Competitive AdvantagesQuorum can not only maintain each dealership’s DISTRIBUTOR server through the web,but also provides superior web-based support and training to dealerships remotelythrough DISTRIBUTOR. This saves dealerships money on travel expense, downtime,training and support, plus it enables Quorum to grow quickly geographically becausewe can service dealerships remotely. DISTRIBUTOR is also certified by GM to be fullycompatible with the GM ACCESS dealership network environment.

With DISTRIBUTOR installed, the next step to increased efficiency and better customerservice for the dealership is XSELLERATOR, Quorum’s flagship software product.

XSELLERATOR is a comprehensive automotive DealershipManagement software program developed by Quorum. Thisproprietary Windows-based product automates, streamlinesand integrates every department within a dealership and hascomprehensive Customer Relationship Management (CRM)features built right in.

Competitive Advantages• Significantly lower cost than the two main competing systems• A fully integrated, true Windows-based system – new technology• One complete system – no modules to purchase• All new versions are included for FREE as part of the dealership’s support payments• Increases dealer efficiency by at least 10%• Offers fully integrated CRM program• Recognized by General Motors as a fully integrated Dealer Service Provider

OPER AT

I ONS R E V I E W


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"Quorum is without a doubt the best systemon the market, and when you add in the factthat it saved us 50% on support costs it isthe best value system on the market by lightyears."

Terry Spack, Controller

Newport Pontiac Buick GMC Inc.

Selkirk, Manitoba

Enterprise Solutions (ES) DivisionBackground

2002 In ReviewChangesDuring 2002, Quorum announced a change of name for theirDealership Management System from AUTOMATE to XSELLERATOR.This step was taken because the trademark for AUTOMATE is forCanada only, and with the Company’s plans to expand into theU.S., a trademarked name for North America was required.

New Development

Version 4.1.1The Company made some major changes in the DevelopmentDepartment in order to produce new versions more quickly andefficiently. Quorum works with all of its dealers and buildsmany of their suggestions into each new version of XSELLERATOR.Version 4.1.1 contained over 58 new features aimed atstreamlining the workflow for all departments and at improvingthe Customer Relationship Management features in XSELLERATOR.

Version 4.2This version added an additional 64 new features to XSELLERATOR.Our focus in this version was vehicle sales and service. Weadded a number of features to make it easier to process dealsand work orders.

GM Integration Project

Quorum provides unparalleled integration to GM and isrecognized by GM as a fully integrated Dealership ManagementSystem (DMS) Provider. The following graphic illustrates howmany areas of XSELLERATOR have been integrated with GM’ssystems in order to make communications of all kinds - fromreporting to ordering parts to submitting warranty claims -between the dealer and manufacturer faster and more efficient.

The Company entered into an agreement with General Motors(GM) of Canada to develop a data exchange interface betweenXSELLERATOR and the General Motors dealership server. Thisinterface will enable critical vehicle sales data to be passedelectronically from each GM Dealership whose operations runon the XSELLERATOR Management System, to the GM ACCESSsystem within the dealership. This interface will improve theaccuracy and timeliness of vehicle sales data reporting to GM,and deliver significant time savings to every dealership on theXSELLERATOR system.

The Marketplace

The automotivedealership marketplaceis huge, with over33,000 dealerships inNorth America andover 13,000 GM andHyundai Dealershipsalone.

10. Income Taxes - (con’t)

At the end of the period, subject to confirmation by income tax authorities, the Corporation has the following tax pools available for carry forward:

December 31, 2002 December 31, 2001 July 31, 2001Undepreciated Capital Cost $ 2,604,020 $ 2,209,228 $ 1,968,951Cumulative Capital Expenditures 23,036 17,273 17,912Investment Tax Credits — — 33,286Non-capital Losses 170,931 94,310 140,575Share Issue Costs 346,341 444,094 55,851Total $ 3,144,328 $ 2,764,905 $ 2,216,575

The Corporation has approximately $206,931 of non capital losses available for income tax purposes to reduce taxable income of future years that expire as follows:

Year ended December 312007 $ 13,5742008 80,7362009 112,621Total $ 206,931

11. Share Capital(a) Authorized

Unlimited number ofCommon voting sharesPreferred shares issuable in series

(b) Issued and Outstanding

July 31, 2001 Number of Shares AmountCommon SharesBalance, July 31, 2000 7,480,866 $ 474,743Series 1 issued on conversion of preferred shares** 212,778 63,833Series 3 issued to employees exercising stock options 126,500 6,325Additional shares issued on split of Series 1 shares (1.28946 to 1) 1,877,228 —Additional shares issued on split of Series 2 (1.3332 to 1) 402,628 —Share consolidation of Series 1 shares (0.7608373 to 1) (2,000,000) —Cancellation of Series 1 shares on acquisition of Skytech (Note 3(c)) (4,241,670) (43,655)Cancellation of Series 2 shares on acquisition of Skytech (Note 3(c)) (162,976) (48,897)Issue of common shares on acquisition of Skytech (Note 3(c)) 4,404,646 92,552

8,100,000 544,901Cancellation on amalgamation with AlbCo. and Skytech (Note 3 (b) & (c)) (8,100,000) (544,901)Issue of common shares on amalgamation (Note 3(b) & (c)) 8,100,000 544,901Share issue costs net of future taxes of $23,177 — (25,658)Balance, July 31, 2001 8,100,000 519,243

Preferred SharesBalance, July 31, 2000 — —Issue of preferred shares to 732519 Alberta Ltd. on amalgamation,

net of deficit of $3,948 (Note 3(b)) 2,957,400 1,474,752Balance, July 31, 2001 2,957,400 1,474,752


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"I could stay with my present system and know exactly what I'llstill have 5 years from now because it won't change - or I couldmove to XSELLERATOR and get the latest technology, and receivefree software enhancements regularly to keep it current. I moved."

Dennis Langlois, General Manager

Butler Chev Olds, Pembroke, Ontario


8. Long-term DebtDecember 31, 2002 December 31, 2001 July 31, 2001

Finance contract bearing interest at 1.9% repayable in monthly installments of $669. The loan is due to be fully paid in 2003. $ 6,620 $ 14,735 $ 17,414

Payable to Shield Vendors (Note 3(a)) is non-interest bearing and is payable in quarterly installments. The loan has since been fully paid — 55,500 79,313

6,620 70,235 96,727Less : Current portion 6,620 63,528 69,941

$ — $ 6,707 $ 26,786

9. Due to ShareholdersAmounts due to shareholders are unsecured and due on demand. They bear interest at 6% per annum from August 29, 2001.

10. Income TaxesIncome tax expense differs from the amount that would be obtained by applying the combined Canadian Federal and Provincial statutory income tax rate to earnings before income taxes which are as follows:

December 31, 2002 December 31, 2001 July 31, 2001Estimated combined corporate tax rate 39.24% 41.62% 41.62%Income (loss) before income taxes $ (92,439) $ 53,811 $ (416,438)Calculated income tax provision (recovery) $ (36,273) $ 22,396 $ (173,321)Non deductible items for tax purposes 3,434 622 3,700Tax expense (benefit) not recognized in

the financial statements- application of public company rate — — 94,245- others 21,156 (10,260) 9,497

Net income tax expense (recovery) $ (11,683) $ 12,758 $ (65,879)

Future income taxes assets and liabilities reflect the temporary differences between the carrying amounts of certain accounts and their corresponding amounts for income tax purposes. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management expects that most of the future tax assets will be realized but their expectations could change materially in the near term based on future taxable income during the carry forward period. The principal components of these differences are as follows:

December 31, 2002 December 31, 2001 July 31, 2001Future income taxes asset (liability)

Capital assets $ (14,280) $ (25,909) $ (102,682)Loss carry forwards 86,125 46,081 88,405Share issue costs 144,147 178,002 23,245

Net future tax asset $ 215,992 $ 198,174 $ 8,968

Income tax receivable represents SR&ED claims of approximately $70,000 made by Quorum as at July 31, 2001 and investment tax credits receivable which have since been received in full during the year. $24,500 of their related SR&ED claims has been recognized in the income statement and the balance of $45,500 has been adjusted to software development costs at July 31, 2001.


6 27

Quorum captured 2.65% of the Canadian market and 0.23% of the North AmericanMarket in 2002 with the addition of 30 new dealerships, for a total of 60dealerships. The Company also expanded into Atlantic Canada and Quebec.XSELLERATOR has now been sold and/or implemented in over 60 dealerships in 8provinces across Canada. The Company passed the 5% mark of its targeted marketin 2002, becoming the third largest DMS provider for GM in Canada. The Companyhas grown sales in this division from 15 dealerships in 2000, to 30 in 2001, to 60 in2002 – effectively doubling sales for two consecutive years.

“Finally, I get to know who my customers are,and what they are worth to my dealerships.”

Wayne MacFarlane, Dealer Principal

MacFarlane Chev Olds Ltd.,

Petrolia, Ontario

XSELLERATORDealerships - 2001


Target Market Total # XSELLERATOR Share at Share at %Dealers Dealers Dec. 31/02 Dec. 31/01 Change

GM/Saturn Western Canada 272 31 11.39% 7.35% 4.04%GM/Saturn Ontario 330 20 6.06% 2.73% 3.33%GM/Saturn Quebec 193 1 0.52% — 0.52%GM/Saturn Atlantic Canada 68 5 7.35% — 7.35%Hyundai/Kia Canada 266 3 1.12% 0.36% 0.76%Current Target Market 1,129 60 5.31% 2.66% 2.65%Total North American Market 13,093 60 0.46% 0.23% 0.23%GM/Saturn & Hyundai/Kia

• Solution: Quorum proposed a two part solution. Part one of the solution entailed centralizing all of their networking requirements at an off-site data co-location centre. This included MS Exchange Server, MS SQL Server, Application Server and File & Print services. Applications are to be served to all corporate users via three load balanced Citrix Servers. Part two of the solution entailed centralizing their Management Information System (MIS), with all of its data migrated to one SQL Server Database.

• Result: The solution provides the framework for all of their ITinitiatives for at least the next 5 years, and was delivered on-time with a budget over-run of only 1.3%.

EnergyQuorum was invited to meet with a large energy company todiscuss serious issues they were having with their IT department.The company had grown rapidly over the previous two years byacquiring and merging with approximately 8 other companies. Manyof their IT staff did not have the experience to manage and run anenterprise IT environment. • Solution: Quorum restructured and took over management of the

day to day operations of the IT Department, developed the company’s IT Strategic Plan and budget for 2002 and recruited an I.T. Manager with enterprise IT experience.

• Result: Quorum provided all the hardware, software and expertise to implement this solution. The main emphasis during the implementation phase was for Quorum network specialists to pass on knowledge to the Corporation’s IT staff, allowing them tosupport the new environment at a higher level.

Oil and Gas ProductionThe company was running on a relatively inflexible, slow andunstable 16 bit MS-DOS®-based program for all of their accountingand joint venture billing purposes. The developer/vendor of theproduct had ended further development and was no longersupporting the system.

The company was looking for a system that would provideincreased integration and information reporting features that wouldimprove partner reporting, management reporting and joint venturebilling.• Solution: A Solomon business management system was

recommended. It has an interface that is friendly and intuitive and the company’s staff would be more productive using it. Also, Solomon has powerful customization capabilities and is based on industry-standard technology.

• Result: Since implementing the Solomon application, the company achieved significant increases in productivity, and automated the joint venture billing processes to new levels of efficiency. It also easily accommodated the addition of a new plant without having to add new administrative employees. The result is a tightly integrated solution that adjusts to nearly every aspect of their unique operating practices.

5. Capital Assets - (con’t)

July 31, 2001Accumulated Net book

Cost Amortization ValueSoftware Development Costs:XSELLERATOR $ 1,418,742 $ 40,076 $ 1,378,666DISTRIBUTOR 82,087 5,516 76,571Library of Solutions 493,524 70,250 423,274FasTrack — — —

$ 1,994,353 $ 115,842 $ 1,878,511Capital Assets:Computer equipment $ 284,823 $ 123,753 $ 161,070Computer software 12,900 11,879 1,021Leasehold improvements 177,716 47,709 130,007Office equipment 119,605 39,595 80,010Automotive equipment 30,048 12,169 17,879Vendor distribution rights 24,651 2,470 22,181

$ 649,743 $ 237,575 $ 412,168Total Capital Assets $ 2,644,096 $ 353,417 $ 2,290,679

6. Deferred ExpensesAccumulated Net book

Cost Amortization ValueDecember 31, 2002Marketing costs $ 71,146 $ 45,454 $ 25,692

December 31, 2001Marketing costs $ 71,146 $ 21,739 $ 49,407

July 31, 2001Marketing costs $ 71,146 $ 11,858 $ 59,288

7. Bank IndebtednessThe Corporation maintains an operating line of credit (LOC) with a commercial bank that permits the Corporation to borrow up to the lesser of $750,000 or 75% of accounts receivable outstanding for less than ninety days at the time the funds are advanced. The LOC bears interest at the bank’s prime rate plus 1.25% and is secured by a general security agreement on the Corporation’s assets.

December 31, 2002 December 31, 2001 July 31, 2001Line of credit $ (291,668) $ (660,322) $ (365,686)Cash in bank 43,821 576,330 —Net bank indebtedness $ (247,847) $ (83,992) $ (365,686)


26 7

Technology Solutions (TS) DivisionBackground

“The key to any important business relationship is trust. Quorum is a trusted partner who respects our business, genuinely understands our goals and offers true value. They go to greatlengths to ensure that an engagement is a success by our standards. With Quorum on the job, I don’t have to worry.”

Red Ortega, Manager

Information Solutions Group

PFB Corporation

Quorum has invested significant resources into defining a group of'best of class', scalable solutions for business. This group hasbecome Quorum's library of solutions. The solutions in the libraryare easily customized to meet all of a company's needs. Quorum'slibrary of solutions, and the customized technology plans weproduce from it, have been proven to be effective for many midsized businesses throughout Western Canada. The library hassolutions for e-Business, Business Software, UnifiedCommunications and Network Services.

The mid market has been largely ignored by full service ITcompanies. The Gartner Group predicted that through 2004, ITspending by leading mid sized enterprises would increase 5 - 9% asa percentage of revenue. Quorum is positioned as the IT serviceprovider of choice for mid market companies.

2002 In ReviewChangesMicrosoft has purchased Great Plains (Solomon, Dynamics &eEnterprise) and Navision (Attain & Axpata). This group of productshas been re-branded as Microsoft Business Solutions. By acquiringthese companies and their products, Microsoft has effectivelyconsolidated the best of the many business software productsgeared to the mid market. The number one software developer inthe world, and all its resources, is now behind this product group.Quorum recognized the opportunity this move presented, and hasre-directed its sales and marketing focus to Microsoft BusinessSolutions.

ProjectsOur Technology Solutions group completed a number of significantprojects. The following examples illustrate the value Quorum bringsto mid market companies.

ManufacturingQuorum was invited to discuss the long term IT strategic goals of acorporation operating eight manufacturing facilities in Canada thatproduce expanded polystyrene insulation and building products forthe construction industry. They were experiencing increasing coststo maintain a decentralized computing environment. Also, with dataspread over eight plants, and stored in an outdated proprietarydatabase structure, they had great difficulty in data mining their 15 years of historical data.


4. Long-term ReceivableThe long-term receivable is non interest bearing, unsecured and is repayable over sixty months.

December 31, 2002 December 31, 2001 July 31, 2001Long term receivable $ 105,294 $ — $ —Less : Current portion included in

Accounts receivable 22,814 — —$ 82,480 $ — $ —

5. Capital AssetsDecember 31, 2002

Accumulated Net book Cost Amortization Value

Software Development Costs:XSELLERATOR $ 2,137,939 $ 312,369 $ 1,825,570DISTRIBUTOR 103,025 20,336 82,689Library of Solutions 615,197 281,621 333,576FasTrack 103,141 12,893 90,248


$ 685,876 $ 392,592 $ 293,284Total Capital Assets $ 3,645,178 $ 1,019,811 $ 2,625,367

December 31, 2001Accumulated Net book


$ 2,218,717 $ 242,606 $ 1,976,111Capital Assets:Computer equipment $ 284,823 $ 143,887 $ 140,936Computer software 12,900 12,305 595Leasehold improvements 177,716 62,518 115,198Office equipment 120,594 46,303 74,291Automotive equipment 30,048 14,404 15,644Vendor distribution rights 24,651 3,117 21,534


The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Corporation’s consolidated results of operations and financial condition.

This “Management’s Discussion and Analysis” should be read in conjunction with the Annual Consolidated FinancialStatements of the Corporation for the year ended December 31, 2002 and the notes thereto.

Background and Description of BusinessOn August 29, 2001 Quorum Information Technologies Inc., (the “Corporation”) formerly a capital pool company pursuant to TSXVenture Exchange Policy 2.4, completed its Qualifying Transaction which was the non-arm’s length acquisition of all of the issuedand outstanding securities in the capital of Quorum Information Systems Inc. (“Quorum”). The acquisition of Quorum by theCorporation has been recorded as a Reverse Take-over Transaction (RTO) for accounting purposes. Quorum is a 100% subsidiaryof the Corporation.

Quorum is an Information Technology Company that focuses on mid size business. Quorum’s Enterprise Solutions (ES) Divisiondevelops, markets, implements and supports its own software products for specific vertical markets. These products includeXSELLERATOR™, a Dealership Management System for the automotive market, and FasTrack™, a Sales and Change Order Trackerfor the homebuilder market. The Technology Solutions (TS) Division markets, implements and supports a library of superior thirdparty technology products and services specifically chosen for mid market organizations. As a Microsoft® Certified Partner,Quorum specializes in providing a full suite of Microsoft Business Solutions.

Corporation’s Fiscal Year (FY) 2002 results presented on a Quarterly basiscompared to FY2001:

(Dollar figures in ‘000)Year / Quarter – 2002 Dec. 31 Sep. 30 June 30 March 31

Year to date Q4 Q3 Q2 Q1(Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Revenue $ 7,883 $ 1,654 $ 2,400 $ 1,852 $ 1,977Gross profit 2,795 636 780 825 554Expenses 2,348 483 617 727 521Earnings before interest, taxes,

depreciation and amortization (EBITDA) 447 153 163 98 33Net income / (loss) (81) 1 21 (22) (81)KEY MANAGEMENT METRICS# XSELLERATOR Installations – in the period 30 9 8 9 4# XSELLERATOR Installations – to date 60 60 51 43 34


Year to date Q4 Q3 Q2 Q1(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Revenue $ 6,173 $ 1,932 $ 1,686 $ 1,486 $ 1,069Gross profit 2,131 689 608 496 338Expenses 1,750 532 463 385 370Earnings before interest, tax,

depreciation and amortization (EBITDA) 381 157 145 111 (32)Net income / (loss) (52) 21 15 (3) (85)KEY MANAGEMENT METRICS# XSELLERATOR Installations – in the period 15 6 5 4 0# XSELLERATOR Installations – to date 30 30 24 19 15


8 25

MANAGE

MENT’S

DISCUSSION AND ANALYSIS

3. Business Combinations - (con’t)

(b) 732519 Alberta Ltd. (“AlbCo”)AlbCo was incorporated in the province of Alberta in 2001. The purpose of AlbCo was to raise venture capital for the acquisition of QIS. Effective June 29, 2001, all the 2,957,400 common shares of AlbCo were acquired by Quorum. AlbCo amalgamated with Quorum and the former shareholders of AlbCo received 2,957,400 convertible preferred shares of Quorum upon the amalgamation. Earnings of AlbCo are included in these financial statements since June 29, 2001.

The purchase of AlbCo was recorded by Quorum as follows:Net Assets:Cash $ 19,636Loan receivable from Quorum 1,400,000Net non-cash working capital 55,116

$ 1,474,752Consideration:Issue of 2,957,400 preferred shares of Quorum (see Note 11(b)) $ 1,474,752

$ 1,474,752

(c) Skytech Computer Systems Inc. (“Skytech”)Skytech was a Canadian Controlled Private Corporation (CCPC) incorporated in the province of Alberta. Skytech was a holding company which had invested in 4,241,670 Series 1 and 162,976 Series 2 shares of Quorum. Effective June 29, 2001, all the 1,000 common shares of Skytech were acquired. Skytech amalgamated with Quorum and the former shareholders of Skytech received 4,241,670 Series 1 and 162,976 Series 2 common shares of Quorum. Earnings of Skytech are included in these financial statements since June 29, 2001. The shares of Quorum owned by Skytech were cancelled on amalgamation.

The purchase of Skytech was recorded by Quorum as follows:Net Assets:Investment in Quorum (see Note 11(b)) $ 92,552

$ 92,552Consideration:Issue of 4,241,670 Series 1 shares of Quorum (See Note 11(b)) $ 43,655Issue of 162,976 Series 2 shares of Quorum (See Note 11(b)) 48,897

$ 92,552

For the five month period ended December 31, 2001

(d) Pursuant to a reverse takeover (“RTO”) transaction, effective August 29, 2001, QIS, the legal acquirer, issued 8,100,000 common shares and 2,957,400 preferred shares for the acquisition of Quorum at a deemed price of $0.40 per common share and $0.50 per preferred share. The preferred shares were subsequently converted to common shares following the completion of the RTO transaction (see Note 11(b)(i)). The acquisition has been accounted for as a purchase transaction with Quorum being the deemed acquirer since the transaction was a reverse takeover.

The carrying values of the assets and liabilities of QIS as at the effective date, August 29, 2001 and the consideration issued are as follows:

Net Assets:Cash $ 388,265Net non-cash working capital 471,558Future income tax asset 142,007

$ 1,001,830Consideration:Attributed to 3,502,000 common shares (see Note 11(b)) $ 1,001,830

$ 1,001,830

Comparison of Operating Resultsfor the Year Ended December 31, 2002 and 2001

OverviewThe past two years have been ‘building’ years for Quorum, inpreparation for accelerated sales growth of its proprietarysoftware product, XSELLERATOR. Following its major transactionin August 2001, through which it raised $2.5 million, theCorporation has expanded its infrastructure, development, salesand marketing resources to further improve XSELLERATOR. Duringthis period, the Corporation grew from 15 dealerships atDecember 31, 2000 to 60 dealerships at December 31, 2002,which is a 300% growth in XSELLERATOR customers over a twoyear period.

Expansion of customer base and improvement of overallperformance of XSELLERATOR has resulted in optimizing theutilization of development, support and sales personnel andprovided an opportunity for economies of scale. With most ofthe infrastructure in place, the Corporation is now in a positionto expand XSELLERATOR’s geographical reach and market share inthe coming years.

FY2002 has been an interesting year for the Corporation as awhole, and in particular for its XSELLERATOR product. XSELLERATOR

was introduced into three new Canadian Provinces: Quebec,Nova Scotia and Prince Edward Island. XSELLERATOR is nowinstalled and supported in eight out of ten Provinces. Additionaldevelopment resources are needed every time XSELLERATOR isintroduced into new geographic areas. Quorum’s developmentteam is currently working on introducingXSELLERATOR into the remaining twoProvinces, and into the U.S. In FY2002,XSELLERATOR was also installed in anumber of large “metro” dealershipswhich required numerous enhancementsto the product. During FY2002 Quorumreleased three new versions ofXSELLERATOR, and its latest Version, 4.1.1,was released in Q3 of FY2002.

During the first quarter of FY2002, Quorum developed anothersoftware product – FasTrack™, which opens up a new verticalsegment for the ES Division. This user-friendly software iscapable of managing a homebuilder’s sales, quoting andchange-order processes. FasTrack, which had been sold to aleading home builder in Calgary on a pilot basis, has beensuccessfully implemented. The Corporation is activelymarketing FasTrack software, and no further development isplanned for this product at this time.

During FY2002, the TS Division focused on Microsoft BusinessSolutions, and is now an authorized reseller for the Great Plains,Solomon and Navision mid sized Enterprise ResourceManagement (ERM) and accounting software packagesrepresented by Microsoft. As a Microsoft Gold Partner, the TSDivision continues to provide IT consulting services to mid sizedbusinesses. Its strategic alliance with Meyers Norris Penny LLP,a well established Western Canadian chartered accountancyand business advisory firm, provides access to a significantnumber of potential clients for the Corporation to grow itscustomer base in this division.

For FY2002, revenues were $7.9 million compared to $6.2million for FY2001, an increase of $1.7 million or 27%. The netincome from operations (EBITDA) for FY2002 was $447 thousandor $0.029 per share compared to $381 thousand or $0.028 pershare for FY2001.

The net loss from operations for the FY2002 was $81,000 or$(0.005) per share, compared to a net loss of $52,000 or $(0.004)per share for FY2001.


24 9


Detailed Discussion on Operating Results for the Year Ended December 31, 2002, Five Months Ended December 31, 2001 and Year Ended July 31, 2001

Results of Operations for the Last Five Years / Periods

Year ended 5 mos. ended Year ended Year ended Year ended Year endedDecember 31, December 31, July 31, July 31, July 31, July 31,

2002 2001 2001 2000 1999 1998(Audited) (Audited) (Audited) (Audited) (Audited) (Unaudited)

RevenueEnterprise Solutions $ 3,521,315 $ 973,251 $ 953,206 $ 553,530 $ 114,902 $ 19,424Technology Solutions 4,361,432 2,216,697 3,836,646 2,983,630 1,751,133 1,263,939

7,882,747 3,189,948 4,789,852 3,537,160 1,866,035 1,283,363Cost of products and services sold

Enterprise Solutions 1,882,310 434,487 579,130 232,673 258 —Technology Solutions 3,204,743 1,627,455 2,694,205 1,771,485 913,870 694,982

5,087,053 2,061,942 3,273,335 2,004,158 914,128 694,982

Gross profit 2,795,694 1,128,006 1,516,517 1,533,002 951,907 588,381Expenses 2,348,486 862,502 1,599,752 1,417,173 830,367 363,748Earnings before interest,

taxes, depreciation and amortization (EBITDA) 447,208 265,504 (83,235) 115,829 121,540 224,633

Interest 21,261 30,089 89,555 19,348 9,385 2,046Amortization 518,386 181,604 243,648 60,160 12,696 7,123Income / (loss) before income taxes (92,439) 53,811 (416,438) 36,321 99,459 215,464Income taxes / (recovery) (11,683) 12,758 (65,879) 3,528 24,122 53,056Net income / (loss) $ (80,756) $ 41,053 $ (350,559) $ 32,793 $ 75,337 $ 162,408

Earnings / (loss) per share- Basic $ (0.005) $ 0.003 $ (0.044) $ 0.003 $ 0.009 $ 0.020- Diluted $ (0.005) $ 0.003 $ — $ — $ — $ —

Weighted average number of common shares- Basic 15,206,811 13,412,293 8,009,497 9,558,460 8,323,683 8,088,138- Diluted 15,784,633 13,789,529 — — — —

income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in earnings in the period that includes the enactment date. Future income tax assets are recorded in the consolidated financial statements if realization is considered more likely than not.

(k) Stock-based compensationEffective January 1, 2002, the Corporation adopted the recommendations of CICA Handbook Section 3870, stock-based compensation and other stock-based payments. This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It requires that direct awards of stock and liabilities based on the price of common stock be measured at fair value at each reporting date, with changes in fair value reported in the statements of income and use of fair value method for other types of stock-based compensation plans. The Corporation’s stock option plan does not qualify as direct awards of stock or as a plan that creates liabilities. As a result, the implementation of the section has no impact on the financial statements. The Corporation has adopted the “disclosure only” provisions of the new standard for stock options granted to employees, whereby pro forma net income and pro forma earnings per share are disclosed in the notes to the financial statements, as if the fair value based method of accounting had been used for options granted after January 1, 2002 (see Note 11(f)).

The Corporation records no compensation expense when options are issued to employees. Any consideration paid by employees on the exercise of the options is credited to capital stock. Any modifications to the options are revalued based on the fair value method and pro forma information is disclosed.

(l) Earnings per shareThe Corporation adopted the treasury stock method of reporting earnings and other per share amounts. Basic earnings per share and cash flow from operations per common share are computed by dividing earnings and cash flow from operations by the weighted average number of common shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments, in accordance with new standards approved by Canadian Institute of Chartered Accountants. This change did not have any impact on the reported earnings per share.

3. Business CombinationsFor the year ended July 31, 2001

On June 29, 2001, Quorum amalgamated with Shield Network and Computer Services Ltd., 732519 Alberta Ltd. and Skytech Computer Systems Inc.

(a) Shield Network and Computer Services Ltd. (“Shield”)Shield was a Canadian Controlled Private Corporation (CCPC) incorporated in the province of Alberta which provided computer network services for the past five years. Effective October 31, 2000, all the 100 common shares of Shield were acquired by the Corporation and on June 29, 2001, Shield was amalgamated with Quorum. Earnings of Shield are included in these financial statements since October 31, 2000.

The purchase of Shield was recorded by Quorum as follows:Net Assets:Bank indebtedness $ (79,768)Net non-cash working capital deficiency (99,219)Capital assets 421,346Long-term loan (161,045)Goodwill* 50,196

$ 131,510Consideration:Note payable to Vendors in cash (Note 8) $ 131,510

$ 131,510

*Goodwill has been fully amortized to general and administration expenses at July 31, 2001.


10 23

2. Significant Accounting Policies - (con’t)

(d) Capital assetsCapital assets are recorded at cost, less accumulated amortization. One-half the normal amortization is taken in the year of acquisition. Amortization is provided using the following methods and rates:

Computer equipment 30% declining balanceComputer software 100% declining balanceLeasehold improvements 20% straight-lineOffice equipment 20% declining balanceAutomotive equipment 30% declining balanceVendor distribution rights 7% declining balance

(e) Software development costsAll research costs are expensed as incurred. Software development costs are expensed as incurred unless they satisfy the generally accepted accounting principles for deferral and subsequent amortization. Amortization of computer software development costs is calculated as follows:

XSELLERATOR 20% of the value of the XSELLERATOR saleDISTRIBUTOR 20% of the value of the DISTRIBUTOR saleLibrary of Solutions 25% straight-lineFasTrack 25% straight-line

(f) Impairment of long-lived assetsThe Corporation monitors the recoverability of long-lived assets, including equipment, leasehold improvements, vendor distribution rights, deferred expenses and software development costs, whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Corporation reviews factors such as current market value, future asset utilization and business climate and compares the carrying value of the assets to the future undiscounted cash flows expected to result from the use of the related assets. If such cash flows are less than the carrying value, the impairment charge to be recognized equals the amount by which the carrying amount of the assets exceeds the fair value of the asset. Fair value is generally measured equal to the estimated future discounted cash flows from the asset or assets.

(g) Deferred expensesDeferred expenses include marketing costs which are charged as an expense in the year during which they are incurred unless the benefits of those costs are identifiable and are expected to be realized in future years. Deferred marketing costs are amortized on a straight-line basis over three years.

(h) Investment tax creditsThe Corporation is entitled to Canadian federal and provincial investment tax credits that are earned as a percentage of eligible current and capital research and development expenditures incurred in each taxation year. Certain investment tax credits were fully refundable to the Corporation prior to going public in August 2001. All other investment tax credits are available to be applied against future income tax liabilities, subject to a 10-year carry forward period. Investment tax credits are accounted for as a reduction of the related research and development expenses for items of current nature and reduction of software development costs for items of long term nature, provided that the Corporation has reasonable assurance that the tax credits will be realized.

(i) Financial instrumentsThe Corporation carries a number of financial instruments. Unless otherwise indicated, it is management’s opinion that the Corporation is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted.

(j) Income taxesIncome taxes are accounted for using the liability method of tax allocation. Under this method current income taxes are recognized for the estimated income taxes payable for the current year. Future income taxes are recognized for the future

RevenueFor FY2002, revenues increased to $7.88 million, compared to$3.19 million for the five months ended December 31, 2001 and$4.79 million, for the year ended July 31, 2001. Overall net lossfor FY2002 was $80,756 (1.02% of sales) as compared to a netincome of $41,053 (1.29% of sales) for the five months endedDecember 31, 2001 and a net loss of $350,559 (7.32% of sales)for the year ended July 31, 2001. Cost of sales for FY2002 was$5.09 million or 65% of sales compared to $2.06 million or 65%of sales for the five months ended December 31, 2001 and$3.27 million or 68% of sales for the year ended July 31, 2001.The overall increase in sales for FY2002 is mainly due toincreased sales of XSELLERATOR in the ES Division.

ES Division’s revenues for FY2002 increased to $3.52 millioncompared to $0.97 million for the five months ended December31, 2001 and $0.95 million for the year ended July 31, 2001. Asexplained, this steady increase in ES Division’s revenue is due toan increased installed base of XSELLERATOR. The TS Division’srevenues have also been growing over the years, with a total of$4.36 million for FY2002 compared to $2.22 million for the fivemonths ended December 31, 2001 and $3.84 million for the yearended July 31, 2001.

Consistent with the Corporation’s revenue recognition policy,XSELLERATOR revenues continue to be recognized in the periodthat the DISTRIBUTOR server and the XSELLERATOR software isinstalled at the customer’s site, regardless of when thecustomer intends to ‘go live’ with the XSELLERATOR software.FasTrack continued to be actively marketed to the home buildingindustry in Western Canada during FY2002. The Corporationcontinues to work towards developing a market for this productand is in discussion with several home builders in Calgary.

Cost of Products and Services Soldand Gross MarginFor FY2002, gross margin was consistent at $2.80 million or35% compared to $1.13 million or 35% for the five monthsended December 31, 2001 and $1.52 million or 32% for the yearended July 31, 2001.

Gross margin from the ES Division for FY2002 was 47% ascompared to 55% for the five months ended December 31, 2001and 39% for the year ended July 31, 2001. This fluctuation ingross margin ratio is mainly due to the change in sales mix inthis division between third party products, XSELLERATOR andconsulting services which have different gross margins, withXSELLERATOR and consulting services having higher margins thanthird party products. Typically, gross margins in this division,depending on different sales mix, should range between 40% to50%.

Gross margin from the TS Division for FY2002 was 27%, whichwas consistent with 27% for the five months ended December31, 2001 and 30% for the year ended July 31, 2001. Grossmargins have slightly reduced from 30% at July 31, 2001 to27% at December 31, 2002, largely due to increasedcompetition in this division’s services, a change in sales mixbetween products and consulting revenues, and lower marginson the sale of third party products due to changes in currentmarket conditions.

ExpensesTotal expenses before interest, taxes and amortization forFY2002 was $2.35 million or 30% of sales as compared to $0.86million or 27% of sales for the five months ended December 31,2001, and $1.60 million or 33% of sales for the year ended July31, 2001. The changes in total expenses before interest, taxesand amortization as a percentage of sales is largely due tohiring new staff, incurring sales and marketing expenses tointroduce XSELLERATOR to new geographic areas, and theoptimization of those resources to the sales volumes.

During FY2002 the Corporation capitalized $687,985 (December31, 2001 - $224,364; July 31, 2001 - $1,099,139) of payroll costsand $52,600 (December 31, 2001 - $Nil; July 31, 2001 - $Nil) ofdirect overheads which represents research and developmentcosts on XSELLERATOR of $637,444 and $103,141 on FasTrack.

General and administrative expenses for FY2002 was $396,462(December 31, 2001 - $172,739; July 31, 2001 - $431,598).General and administrative expenses have been consistent overthe years, and are expected to remain at these levels.


22 11

Revenue/EBITDA

7

6

5

4

3

2

1

0DO

LLA

RS

IN

MIL

LIO

NS

Total Revenue

EBITDA

1998 1999 2000 2001 2002

YEARS ENDED DECEMBER 31


Sales and marketing expenses increased to$305,059 or 4% of sales for FY2002(December 31, 2001 - $108,820 or 4% ofsales; July 31, 2001 - $183,825 or 4% ofsales) due to the hiring of new salespersonnel which has resulted in increasedsales volumes. However, the sales andmarketing expenses ratio to total sales hasremained consistent at 4%. This level ofsales and marketing expense is expected tocontinue.

Bank Charges andInterestBank charges and interest expenses for theyear ended December 31, 2002, and the fivemonths ended December 31, 2001 representinterest on the bank line of credit which isat prime + 1.25% per annum. Interestexpenses for the year ended July 31, 2001are higher due to the interest paid on notespayable to 732519 Alberta Ltd., which wassubsequently amalgamated with theCorporation on June 28, 2001.

AmortizationAmortization for FY2002 increased to$518,386 as compared to $181,604 for thefive months ended December 31, 2001 and$243,648 for the year ended July 31, 2001.This increase is a result of the increase inXSELLERATOR sales during FY2002, and theamortization of 20% of the sale value of theXSELLERATOR software as per theamortization policy of the Corporation onXSELLERATOR.

1. Nature of Operations and Basis of PresentationQuorum Information Technologies Inc. (“QIS” or the “Corporation”) (formerly QIS Ventures Inc.) is incorporated under the laws of Alberta. The Corporation changed its name on September 17, 2001. The Corporation was party to a reverse takeover transaction (“RTO”) between QIS (the deemed acquiree) and Quorum Information Systems Inc. (“Quorum”) (the deemed acquirer), effective August 29, 2001. The corporate structure is that effective August 29, 2001, Quorum became the wholly-owned subsidiary of QIS. Quorum is incorporated under the laws of Alberta.

The July 31, 2001 comparative numbers are those of Quorum.

Quorum is an Information Technology Company that focuses on mid size business. Quorum’s Enterprise Solutions Division develops, markets, implements and supports its own software products for specific vertical markets. These products include XSellerator™, a Dealership Management System for the automotive market, and FasTrack™, a Sales and Change Order Tracker for the homebuilder market. The Technology Solutions Division markets, implements and supports a library of superior third party technology products and services specifically chosen for mid market organizations. As a Microsoft® Certified Partner, Quorum specializes in providing a full suite of Microsoft Business Solutions.

2. Significant Accounting PoliciesThe consolidated financial statements of the Corporation have been prepared by management in accordance with generally accepted accounting principles in Canada. The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management’s opinion, been properly prepared using careful judgment within reasonable limits of materiality.

(a) Principles of consolidationThe accompanying consolidated financial statements include the accounts of Quorum, and the accounts of QIS since the effective RTO date of August 29, 2001. Business acquisitions are accounted for under the purchase method and opening results are included in the consolidated financial statements as of the date of the acquisition of control. All material inter-company transactions have been eliminated.

(b) InventoryInventory is valued at the lower of cost and replacement cost. Cost is determined on the weighted average cost basis.

(c) Revenue recognitionThe Corporation recognizes revenue in accordance with the provisions of Section 3400 of the CICA Handbook and specifically as follows:

(i) Revenue from product sales is recognized when the rights of ownership of the products are transferred to the purchaser upon shipment or delivery based on the specific terms. XSELLERATOR revenues are recognized in the period that the XSELLERATOR server and the XSELLERATOR software is installed at the customer’s site, irrespective of when the customer intends to go live with the XSELLERATOR software.

(ii) Revenue from sale of customized projects is recognized using the percentage-of-completion method based on the work plan and milestones achieved.

(iii) Payments received in advance of the satisfaction of the Corporation’s revenue recognition policies are recorded as deferred revenue.


12 21

Liquidity and Financial Resources

December 31, December 31, July 31,2002 2001 2001

Current AssetsAccounts receivable $1,151,465 $1,522,908 $ 737,211Income tax receivable — 70,627 70,627Inventory 66,216 54,818 89,126Prepaid expenses 30,445 10,559 42,522

$1,248,126 $1,658,912 $ 939,486

Current LiabilitiesBank indebtedness $ 247,847 $ 83,992 $ 365,686Accounts payable and

accrued liabilities 775,110 840,203 727,918Current portion of long-term debt 6,620 63,528 69,941Due to shareholders — 76,653 151,653

$1,029,577 $1,064,376 $1,315,198

Net working capital $ 218,549 $ 594,536 $ (375,712)

Working capital at December 31, 2002 was $218,549, a decrease of $375,987 fromDecember 31, 2001 which had a working capital of $594,536, and an increase of$594,261 from July 31, 2001 which had a negative working capital of $375,712.This decrease in the liquidity position is reflected in the overall cash outflow forFY2002 with respect to continued development of XSELLERATOR and the new FasTrackproduct. The current ratio of 1.21 at December 31, 2002 is lower than the ratio of1.56 at December 31, 2001.

N O T E S TO CON SO L I DAT ED F I N AN C I A L S TAT EMEN T S

Year ended Five months ended Year endedDecember 31, 2002 December 31, 2001 July 31, 2001

Cash flows from operating activitiesCash receipts from customers $ 8,171,710 $ 2,417,871 $ 4,665,042Cash paid to suppliers and employees (7,531,916) (2,876,950) (4,687,312)Interest paid (21,261) (30,089) (89,555)Income taxes received 70,627 — 26,008

689,160 (489,168) (85,817)

Cash flows from financing activitiesCash received on issuance of shares net of share issue costs 80,250 709,442 (42,510)Deferred finance costs (17,268) — —Loan from 732519 Alberta Ltd. (Note 3(b)) — — 1,440,000Shareholders loans received / (repaid) (76,653) (75,000) 67,258Paid to Shield vendors (Note 8) (55,500) (23,813) (52,197)Repayment of long-term debt (Note 8) (8,115) (2,679) (257,416)

(77,286) 607,950 1,155,135

Cash flows from investing activitiesCash acquired on purchase of 732519 Alberta Ltd. (Note 3(b)) — — 19,636Cash acquired on RTO of QIS (Note 3 (d)) — 388,265 —Bank indebtedness acquired on purchase of Shield Network

and Computer Services Ltd. (Note 3(a)) — — (79,768)Purchase of capital assets (35,144) (989) (182,438)Proceeds on sale of capital assets — — 188,522Software development costs (740,585) (224,364) (1,099,139)Deferred expenses — — (71,146)

(775,729) 162,912 (1,224,333)

Decrease / (increase) in bank indebtedness (163,855) 281,694 (155,015)

Bank indebtedness, beginning of period (83,992) (365,686) (210,671)

Bank indebtedness, end of period (Note 7) $ (247,847) $ (83,992) $ (365,686)

See accompanying notes to consolidated financial statements.

Cash Flows from OperationsCash inflows from operating activities increased to $689,160 inFY2002 compared to cash outflow of $489,168 for the fivemonths ended December 31, 2001, and $85,817 for the yearended July 31, 2001. The reduction of overall accountsreceivable at December 31, 2002, refund of SR&ED tax creditsand increase in EBITDA by $181,704 has improved the operatingcash flows for FY2002.

Accounts ReceivableThe average accounts receivable conversion ratio has beenreduced to 53 days for FY2002 as compared to 72 days for thefive months ended December 31, 2001 and 56 days for the yearended July 31, 2001. The reduction in average number ofoutstanding receivable days is largely due to the implementationof a strict credit policy and regular follow-up of outstandingreceivables. All doubtful receivables are reviewed regularly anda provision is made for bad debts should that be required.

Long-term receivable is non-interest bearing, unsecured and isrepayable over sixty equal monthly payments and is fullypayable on or before December 1, 2007. The managementexpects the fair value of this receivable to be its carryingamount.

Income Taxes ReceivableIncome taxes receivable represents SR&ED claim made byQuorum in 2001 which has been assessed by Canada Customsand Revenue Agency (CCRA) and was fully paid during FY2002.

InventoryAverage inventory conversion ratio has remained consistent at 5 days for FY2002 as compared to 4 days for the five monthsended December 31, 2001. It was 10 days for the year endedJuly 31, 2001. Consistent with the Corporation’s inventorypolicy, no purchases are made unless the Corporation receivessigned Customer’s sales contracts as the Corporation does notstock third party products, other than some minimum / criticalitems.

Prepaid ExpensesPrepaid expenses largely represent general and administrativeexpenses paid in advance, which mostly include insurance andrent. Prepaid expenses have been consistent over the years.


20 13

Bank IndebtednessThe Corporation maintains an operating line of credit (LOC) witha commercial bank that permits the Corporation to borrow up tothe lesser of $750,000 or 75% of the accounts receivableoutstanding for less than ninety days at the time the funds areadvanced. The LOC bears interest at the bank’s prime rate plus1.25% and is secured by general security agreement on theCorporation’s assets.

Accounts Payable and AccruedLiabilitiesAverage accounts payable and accrued liabilities conversionratio has been reduced to 34 days for FY2002 as compared to 40days for the five months ended December 31, 2001 and 45 daysfor the year ended July 31, 2001.

Long-term DebtThe Corporation did not carry any long-term debt at December31, 2002. Long-term portion of the debt at December 31, 2001and July 31, 2001 has been fully serviced.

Share CapitalThe Corporation did not raise any new finances during FY2002other than the exercise of 100,000 agent options and 140,000stock options for a total aggregate amount of $94,000. Shareissue costs net of future tax benefit of $7,615 has beenrecorded during FY2002, which represented the balance of theshare issue costs pertaining to the major transaction completedin 2001.

During FY2002 a total of 185,000 stock options were issued. A total of 45,000 stock options expired or were cancelled and140,000 stock options were exercised.

As at December 31, 2002, there are 1,310,740 (December 31,2001 – 1,310,740; July 31, 2001 – 200,000) stock optionsoutstanding at an exercise price ranging between $0.30 and$0.52 and expiring between October 17, 2005 to June 3, 2007.

As at December 31, 2002, there are 4,964,400 (December 31,2001 – 4,964,400; July 31, 2001 – 1,502,000) outstanding sharepurchase warrants. Each share purchase warrant entitles theholder to acquire one additional common share of theCorporation at $1.25 per share and the warrants expire onOctober 31, 2003.

As at December 31, 2002 there are 4,573,785 (December 31,2001 – 6,860,675; July 31, 2001 – 1,016,000) shares subject toescrow restrictions that are scheduled to be released ininstallments over the next 24 months.

CONSOLI

DATED S TAT EMEN T S O F C A SH F LOWS

Ongoing Financing – ShortForm Offering DocumentThe Corporation conducted a public offering inAlberta and British Columbia by way of ShortForm Offering to issue up to 2,000,000 Unitsat $0.75 each, which was ongoing atDecember 31, 2002. Each Unit is comprised ofone (1) Common Share and one (1) SharePurchase Warrant (“Warrant”). Each Warrantwill entitle the holder to acquire one (1)Common Share at a price of $1.40 per sharefor a period of twenty four (24) months fromthe date of closing of the Public Offering.

On January 24, 2003, 474,000 Units wereissued for a total gross proceeds of $355,500.Share issue expenses of $17,268 incurred withrespect to this public offering to December 31,2002 have been deferred to be set off withshare capital as Deferred Financing Costs onfinal close of the offering. On March 14, 2003an additional 158,200 Units were issued for atotal gross proceeds of $118,650 and theoffering was closed.

Research and DevelopmentAll research and development costs areexpensed as incurred unless they satisfy thegenerally accepted accounting criteria fordeferral and subsequent amortization. TheCorporation continues to conduct ongoingresearch and development towards theimprovement of XSELLERATOR and hascapitalized payroll costs of $584,844 anddirect overheads of $52,600 in FY2002 ascompared to $81,753 of payroll costs and $Nilof direct overheads for the five months endedDecember 31, 2001 and $720,937 of payrollcosts and $Nil of direct overheads for the yearended July 31, 2001. Research anddevelopment costs on XSELLERATOR, as apercentage of ES division’s revenue,decreased in FY2002 to 18% compared to75% for the year ended July 31, 2001.


RevenueEnterprise Solutions $ 3,521,315 $ 973,251 $ 953,206Technology Solutions 4,361,432 2,216,697 3,836,646

7,882,747 3,189,948 4,789,852Cost of products and services sold

Enterprise Solutions 1,882,310 434,487 579,130Technology Solutions 3,204,743 1,627,455 2,694,205

5,087,053 2,061,942 3,273,335

Gross profit 2,795,694 1,128,006 1,516,517

ExpensesSalaries and benefits 1,646,965 580,943 984,329General and administrative 396,462 172,739 431,598Sales and marketing 305,059 108,820 183,825

Total Expenses 2,348,486 862,502 1,599,752

Operating income / (loss) before interest, amortization and taxes 447,208 265,504 (83,235)

Bank charges and interest 21,261 30,089 89,555Amortization:

Software development costs 384,613 126,764 115,842Capital assets 110,058 44,959 115,948Deferred expenses 23,715 9,881 11,858

Total Amortization 518,386 181,604 243,648

Income / (loss) before income taxes (92,439) 53,811 (416,438)Future income taxes / (recovery) (Note 10) (11,683) 12,758 (65,879)

Net income / (loss) for the period (80,756) 41,053 (350,559)

Retained earnings / (deficit), beginning of period 3,495 (37,558) 313,001

Retained earnings / (deficit), end of period $ (77,261) $ 3,495 $ (37,558)

Earnings / (loss) per share- Basic $ (0.005) $ 0.003 $ (0.044)- Diluted $ (0.005) $ 0.003 $ —

Weighted average number of common shares- Basic 15,206,811 13,412,293 8,009,497- Diluted 15,784,633 13,789,529 —



14 19

During FY2002 the Corporation released three new versions of XSELLERATOR. Thelatest Version released in FY2002 was Version 4.1.1. Version 4.2 is in the finalstages of beta testing and is expected for general release in Q1 of FY2003. Versionupgrades during FY2002 include a number of improved features which facilitatednew sales into Quebec, Nova Scotia and Prince Edward Island, and to “metro”dealerships. The Corporation continues to work with General Motors of Canada onnew integration points within its product.

Summary of capitalized software development costs and related amortization:


Software Development CostsXSELLERATOR $ 637,444 $ 81,753 $ 720,937DISTRIBUTOR — 20,938 82,087Library of Solutions — 121,673 296,115FasTrack 103,141 — —

Total Software Development Costs $ 740,585 $ 224,364 $1,099,139

AmortizationXSELLERATOR $ 203,101 $ 69,192 $ 40,076DISTRIBUTOR 14,820 — 5,516Library of Solutions 153,799 57,572 70,250FasTrack 12,893 — —

Total Amortization $ 384,613 $ 126,764 $ 115,842

Other than $103,141, all research and development costs for FasTrack have beenexpensed in FY2002 and no further development costs will be capitalized for thisproduct. FasTrack is being amortized on a straight-line basis at 25% per annum.

Material Contracts & CommitmentsDuring FY2002, the Corporation did not enter into any new material contracts orcommitments.

Related Party TransactionsDuring FY2002, the Corporation incurred fees in the amount of $35,103 (December31, 2001 - $223,800; July 31, 2001 - $Nil) from an entity of which one director is aprincipal. Of this amount $8,077 remains unpaid at December 31, 2002.

The fees during December 31, 2001 were related to the services provided for theacquisition and reorganization of the Corporation and have been charged to sharecapital as share issue costs. During FY2002, the fees related to ongoing investorrelations and corporate governance services and have been expensed during theyear.


CONSOLI

DATED S TAT EMEN T S O F OPER AT I ON S

18 15

As at December 31, 2002 December 31, 2001 July 31, 2001

AssetsCurrent

Accounts receivable (Note 4) $ 1,151,465 $ 1,522,908 $ 737,211Income tax receivable (Note 10) — 70,627 70,627Inventory 66,216 54,818 89,126Prepaid expenses 30,445 10,559 42,522

1,248,126 1,658,912 939,486

Long-term receivable (Note 4) 82,480 — —Future tax asset (Note 10) 215,992 198,174 8,968Capital assets (Note 5) 2,625,367 2,344,309 2,290,679Deferred expenses (Note 6) 25,692 49,407 59,288Deferred finance costs (Note 16) 17,268 — —

$ 4,214,925 $ 4,250,802 $ 3,298,421

LiabilitiesCurrent

Bank indebtedness (Note 7) $ 247,847 $ 83,992 $ 365,686Accounts payable and accrued liabilities 775,110 840,203 727,918Current portion of long-term debt (Note 8) 6,620 63,528 69,941Due to shareholders (Note 9) — 76,653 151,653

1,029,577 1,064,376 1,315,198

Long-term debt (Note 8) — 6,707 26,7861,029,577 1,071,083 1,341,984

Shareholders’ EquityShare capital (Note 11) 3,262,609 3,176,224 1,993,995Retained earnings / (deficit) (77,261) 3,495 (37,558)

3,185,348 3,179,719 1,956,437

$ 4,214,925 $ 4,250,802 $ 3,298,421


Approved on behalf of the Board:

Director DirectorMaury Marks, President & CEO Larry Shelley, Chairman of the Board of Directors

During FY2002, the Corporation sold goods and services in theamount of $9,327 (December 31, 2001 - $Nil; July 31, 2001 -$Nil) to an entity which is owned by one of the directors of theCorporation. Of this amount, $4,448 remains to be received atDecember 31, 2002.

Related party transactions have been recorded at their exchangeamounts which represent carrying values.

Business Risks and ProspectsForward-looking statements are not guarantees of futureperformance. They involve risks, uncertainties and assumptionsand the Corporation’s actual results may differ materially fromthose anticipated in these forward-looking statements. Factorswhich may cause such differences include, but are not limited tothose set forth under “Business Risks and Prospects.” TheCorporation does not take any obligation to release any publicinformation of the results of any revision to these forward-looking statements, which may be made to reflect events orcircumstances occurring in the future.

As a young and still evolving Information Technology Company,the Corporation faces key risks, including emergence of superiorcompeting technologies, retention of skilled employees, relianceon relatively few key suppliers and customers, and adequacy ofcapital and/or cash flow to pursue our business plan objectives.This list is not intended to be exhaustive, but merely tocommunicate to shareholders certain key risks faced by theCorporation in its business.

Quorum attempts to mitigate these risks through variousstrategic and operating mechanisms such as ongoing researchand development, growth through diversification into newproducts and services, fair and equitable compensation andworkplace policies, flexibility in operational decision making,review and discussion of competitors’ policies to maintainmarket advantage, and ongoing interaction with both debt andcapital markets. Management believes these strategies reducethe Corporation’s business risk to an acceptable level, which willallow the Corporation to continue to grow and maximizeshareholder value.

The information technology industry is subject to rapidtechnological change, and the products and services provided bythe Corporation are also expected to be subject to rapidtechnological changes. To remain competitive, the Corporationmust be able to keep pace with the technological developmentsin this industry and change its product and services lines tomeet new demands. The Corporation will depend on researchand development of new products and services that have notbeen commercially tested to accelerate its future growth.

Trends and Business ProspectsThe automotive market has traditionally implemented older,character-based technology. Additionally, the automanufacturers are developing numerous new electronicinterfaces between their systems and the auto dealerships’systems. The Corporation anticipates that there will be aconsiderable amount of demand from the auto dealershipindustry to upgrade to the latest technology, and to deal withcompanies that utilize this technology in order to electronicallyinterface with the auto manufacturers. This provides a goodopportunity for the Corporation to market its XSELLERATOR productboth at the dealership and the manufacturer level.

The Corporation believes that its success depends largely uponthe following factors:

• Sales, installations and support of the Corporation’s software products

• Sales, implementation and support of third party software products

• Enhancements and upgrades to the Corporation’s software products

• Relationships with the automotive manufacturers• Identification of software development opportunities

Management expects that its products and services, particularlyin its ES Division which caters to the automotive industry, willcontinue to grow over the next several years. Management iscommitted to enhancing its market share in this division.However, it is difficult to forecast the Corporation’s sales andmarket share pertaining to its XSELLERATOR product with precisiondue to factors such as: the nature of the automotive industry;acceptance of XSELLERATOR; the overall sales cycle; and approvalsfrom other auto manufacturers, including General Motors USA.

The Corporation will continue to monitor and control its coststructure in an effort to achieve cash positive operations, andalso believes that its TS Division will continue to increaserevenues through its strategic alliance with MNP and its focuson mid market Microsoft Business Solutions.


CONSOLI

DATED B A L AN C E SHEE T S

16


17

The accompanying financial statements and all other financial information includedin this annual report are the responsibility of the Company’s management and havebeen examined and approved by its Board of Directors. These financial statementshave been prepared by management in accordance with the accounting policiesoutlined in the notes to the financial statements and include some amounts that arebased on management’s best estimates and judgments. Management hasdetermined such amounts on a reasonable basis in order to ensure that the financialstatements are presented fairly, in all material respects. In the opinion of themanagement, the financial statements have been prepared within acceptable limitsof materiality and are in accordance with Canadian generally accepted accountingprinciples. The financial information contained elsewhere in the annual report hasbeen reviewed to ensure consistency with that in the financial statements.

The Company maintains internal control systems designed to ensure that financialinformation is relevant and accurate and that assets are safeguarded and financialrecords are properly maintained to provide reliable information for the preparation offinancial statements.

The Board of Directors supervises the financial statements and other financialinformation through its Audit Committee, which consists solely of outside directors.

Buchanan Barry LLP has audited the financial statements in accordance withgenerally accepted auditing standards. Buchanan Barry LLP are the external auditorswho were appointed by the shareholders. They have full and unrestricted access tothe Audit Committee to discuss their audit and related findings as to the integrity ofthe Company’s financial reporting.

The Audit Committee has reviewed the financial statements including notes thereto,with management and the external auditors. The financial statements have beenapproved by the Board of Directors on the recommendation of the Audit Committee.

Maury Marks Swapan KakumanuPresident and Chief Executive Officer Chief Financial Officer

To the Shareholders of Quorum Information Technologies Inc.

We have audited the consolidated balance sheets of Quorum Information Technologies Inc. as at December 31, 2002, December 31,2001 and July 31, 2001 and the consolidated statements of operations and cash flows for the year ended December 31, 2002, fivemonths ended December 31, 2001 and the year ended July 31, 2001. These financial statements are the responsibility of theCompany’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 planand perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company asat December 31, 2002, December 31, 2001 and July 31, 2001 and the results of its operations and its cash flows for the year endedDecember 31, 2002, five months ended December 31, 2001 and the year ended July 31, 2001 in accordance with Canadian generallyaccepted accounting principles.

Calgary, Alberta Buchanan Barry LLP

February 18, 2003 Chartered Accountants(Except for Note 16 which is dated March 14, 2003)

MANAGE

MENT’S R E S PON S I B I L I T Y FOR F I N AN C I A L R E PORT I NG

AUDITOR

S’ R E PORT

18 15

As at December 31, 2002 December 31, 2001 July 31, 2001

AssetsCurrent

Accounts receivable (Note 4) $ 1,151,465 $ 1,522,908 $ 737,211Income tax receivable (Note 10) — 70,627 70,627Inventory 66,216 54,818 89,126Prepaid expenses 30,445 10,559 42,522

1,248,126 1,658,912 939,486

Long-term receivable (Note 4) 82,480 — —Future tax asset (Note 10) 215,992 198,174 8,968Capital assets (Note 5) 2,625,367 2,344,309 2,290,679Deferred expenses (Note 6) 25,692 49,407 59,288Deferred finance costs (Note 16) 17,268 — —

$ 4,214,925 $ 4,250,802 $ 3,298,421

LiabilitiesCurrent

Bank indebtedness (Note 7) $ 247,847 $ 83,992 $ 365,686Accounts payable and accrued liabilities 775,110 840,203 727,918Current portion of long-term debt (Note 8) 6,620 63,528 69,941Due to shareholders (Note 9) — 76,653 151,653

1,029,577 1,064,376 1,315,198

Long-term debt (Note 8) — 6,707 26,7861,029,577 1,071,083 1,341,984

Shareholders’ EquityShare capital (Note 11) 3,262,609 3,176,224 1,993,995Retained earnings / (deficit) (77,261) 3,495 (37,558)

3,185,348 3,179,719 1,956,437

$ 4,214,925 $ 4,250,802 $ 3,298,421


Approved on behalf of the Board:

Director DirectorMaury Marks, President & CEO Larry Shelley, Chairman of the Board of Directors

During FY2002, the Corporation sold goods and services in theamount of $9,327 (December 31, 2001 - $Nil; July 31, 2001 -$Nil) to an entity which is owned by one of the directors of theCorporation. Of this amount, $4,448 remains to be received atDecember 31, 2002.

Related party transactions have been recorded at their exchangeamounts which represent carrying values.

Business Risks and ProspectsForward-looking statements are not guarantees of futureperformance. They involve risks, uncertainties and assumptionsand the Corporation’s actual results may differ materially fromthose anticipated in these forward-looking statements. Factorswhich may cause such differences include, but are not limited tothose set forth under “Business Risks and Prospects.” TheCorporation does not take any obligation to release any publicinformation of the results of any revision to these forward-looking statements, which may be made to reflect events orcircumstances occurring in the future.

As a young and still evolving Information Technology Company,the Corporation faces key risks, including emergence of superiorcompeting technologies, retention of skilled employees, relianceon relatively few key suppliers and customers, and adequacy ofcapital and/or cash flow to pursue our business plan objectives.This list is not intended to be exhaustive, but merely tocommunicate to shareholders certain key risks faced by theCorporation in its business.

Quorum attempts to mitigate these risks through variousstrategic and operating mechanisms such as ongoing researchand development, growth through diversification into newproducts and services, fair and equitable compensation andworkplace policies, flexibility in operational decision making,review and discussion of competitors’ policies to maintainmarket advantage, and ongoing interaction with both debt andcapital markets. Management believes these strategies reducethe Corporation’s business risk to an acceptable level, which willallow the Corporation to continue to grow and maximizeshareholder value.

The information technology industry is subject to rapidtechnological change, and the products and services provided bythe Corporation are also expected to be subject to rapidtechnological changes. To remain competitive, the Corporationmust be able to keep pace with the technological developmentsin this industry and change its product and services lines tomeet new demands. The Corporation will depend on researchand development of new products and services that have notbeen commercially tested to accelerate its future growth.

Trends and Business ProspectsThe automotive market has traditionally implemented older,character-based technology. Additionally, the automanufacturers are developing numerous new electronicinterfaces between their systems and the auto dealerships’systems. The Corporation anticipates that there will be aconsiderable amount of demand from the auto dealershipindustry to upgrade to the latest technology, and to deal withcompanies that utilize this technology in order to electronicallyinterface with the auto manufacturers. This provides a goodopportunity for the Corporation to market its XSELLERATOR productboth at the dealership and the manufacturer level.

The Corporation believes that its success depends largely uponthe following factors:

• Sales, installations and support of the Corporation’s software products

• Sales, implementation and support of third party software products

• Enhancements and upgrades to the Corporation’s software products

• Relationships with the automotive manufacturers• Identification of software development opportunities

Management expects that its products and services, particularlyin its ES Division which caters to the automotive industry, willcontinue to grow over the next several years. Management iscommitted to enhancing its market share in this division.However, it is difficult to forecast the Corporation’s sales andmarket share pertaining to its XSELLERATOR product with precisiondue to factors such as: the nature of the automotive industry;acceptance of XSELLERATOR; the overall sales cycle; and approvalsfrom other auto manufacturers, including General Motors USA.

The Corporation will continue to monitor and control its coststructure in an effort to achieve cash positive operations, andalso believes that its TS Division will continue to increaserevenues through its strategic alliance with MNP and its focuson mid market Microsoft Business Solutions.


CONSOLI

DATED B A L AN C E SHEE T S

Ongoing Financing – ShortForm Offering DocumentThe Corporation conducted a public offering inAlberta and British Columbia by way of ShortForm Offering to issue up to 2,000,000 Unitsat $0.75 each, which was ongoing atDecember 31, 2002. Each Unit is comprised ofone (1) Common Share and one (1) SharePurchase Warrant (“Warrant”). Each Warrantwill entitle the holder to acquire one (1)Common Share at a price of $1.40 per sharefor a period of twenty four (24) months fromthe date of closing of the Public Offering.

On January 24, 2003, 474,000 Units wereissued for a total gross proceeds of $355,500.Share issue expenses of $17,268 incurred withrespect to this public offering to December 31,2002 have been deferred to be set off withshare capital as Deferred Financing Costs onfinal close of the offering. On March 14, 2003an additional 158,200 Units were issued for atotal gross proceeds of $118,650 and theoffering was closed.

Research and DevelopmentAll research and development costs areexpensed as incurred unless they satisfy thegenerally accepted accounting criteria fordeferral and subsequent amortization. TheCorporation continues to conduct ongoingresearch and development towards theimprovement of XSELLERATOR and hascapitalized payroll costs of $584,844 anddirect overheads of $52,600 in FY2002 ascompared to $81,753 of payroll costs and $Nilof direct overheads for the five months endedDecember 31, 2001 and $720,937 of payrollcosts and $Nil of direct overheads for the yearended July 31, 2001. Research anddevelopment costs on XSELLERATOR, as apercentage of ES division’s revenue,decreased in FY2002 to 18% compared to75% for the year ended July 31, 2001.


RevenueEnterprise Solutions $ 3,521,315 $ 973,251 $ 953,206Technology Solutions 4,361,432 2,216,697 3,836,646

7,882,747 3,189,948 4,789,852Cost of products and services sold

Enterprise Solutions 1,882,310 434,487 579,130Technology Solutions 3,204,743 1,627,455 2,694,205

5,087,053 2,061,942 3,273,335

Gross profit 2,795,694 1,128,006 1,516,517

ExpensesSalaries and benefits 1,646,965 580,943 984,329General and administrative 396,462 172,739 431,598Sales and marketing 305,059 108,820 183,825

Total Expenses 2,348,486 862,502 1,599,752

Operating income / (loss) before interest, amortization and taxes 447,208 265,504 (83,235)

Bank charges and interest 21,261 30,089 89,555Amortization:

Software development costs 384,613 126,764 115,842Capital assets 110,058 44,959 115,948Deferred expenses 23,715 9,881 11,858

Total Amortization 518,386 181,604 243,648

Income / (loss) before income taxes (92,439) 53,811 (416,438)Future income taxes / (recovery) (Note 10) (11,683) 12,758 (65,879)

Net income / (loss) for the period (80,756) 41,053 (350,559)

Retained earnings / (deficit), beginning of period 3,495 (37,558) 313,001

Retained earnings / (deficit), end of period $ (77,261) $ 3,495 $ (37,558)

Earnings / (loss) per share- Basic $ (0.005) $ 0.003 $ (0.044)- Diluted $ (0.005) $ 0.003 $ —

Weighted average number of common shares- Basic 15,206,811 13,412,293 8,009,497- Diluted 15,784,633 13,789,529 —



14 19

During FY2002 the Corporation released three new versions of XSELLERATOR. Thelatest Version released in FY2002 was Version 4.1.1. Version 4.2 is in the finalstages of beta testing and is expected for general release in Q1 of FY2003. Versionupgrades during FY2002 include a number of improved features which facilitatednew sales into Quebec, Nova Scotia and Prince Edward Island, and to “metro”dealerships. The Corporation continues to work with General Motors of Canada onnew integration points within its product.

Summary of capitalized software development costs and related amortization:


Software Development CostsXSELLERATOR $ 637,444 $ 81,753 $ 720,937DISTRIBUTOR — 20,938 82,087Library of Solutions — 121,673 296,115FasTrack 103,141 — —

Total Software Development Costs $ 740,585 $ 224,364 $1,099,139

AmortizationXSELLERATOR $ 203,101 $ 69,192 $ 40,076DISTRIBUTOR 14,820 — 5,516Library of Solutions 153,799 57,572 70,250FasTrack 12,893 — —

Total Amortization $ 384,613 $ 126,764 $ 115,842

Other than $103,141, all research and development costs for FasTrack have beenexpensed in FY2002 and no further development costs will be capitalized for thisproduct. FasTrack is being amortized on a straight-line basis at 25% per annum.

Material Contracts & CommitmentsDuring FY2002, the Corporation did not enter into any new material contracts orcommitments.

Related Party TransactionsDuring FY2002, the Corporation incurred fees in the amount of $35,103 (December31, 2001 - $223,800; July 31, 2001 - $Nil) from an entity of which one director is aprincipal. Of this amount $8,077 remains unpaid at December 31, 2002.

The fees during December 31, 2001 were related to the services provided for theacquisition and reorganization of the Corporation and have been charged to sharecapital as share issue costs. During FY2002, the fees related to ongoing investorrelations and corporate governance services and have been expensed during theyear.


CONSOLI

DATED S TAT EMEN T S O F OPER AT I ON S


Cash flows from operating activitiesCash receipts from customers $ 8,171,710 $ 2,417,871 $ 4,665,042Cash paid to suppliers and employees (7,531,916) (2,876,950) (4,687,312)Interest paid (21,261) (30,089) (89,555)Income taxes received 70,627 — 26,008

689,160 (489,168) (85,817)

Cash flows from financing activitiesCash received on issuance of shares net of share issue costs 80,250 709,442 (42,510)Deferred finance costs (17,268) — —Loan from 732519 Alberta Ltd. (Note 3(b)) — — 1,440,000Shareholders loans received / (repaid) (76,653) (75,000) 67,258Paid to Shield vendors (Note 8) (55,500) (23,813) (52,197)Repayment of long-term debt (Note 8) (8,115) (2,679) (257,416)

(77,286) 607,950 1,155,135

Cash flows from investing activitiesCash acquired on purchase of 732519 Alberta Ltd. (Note 3(b)) — — 19,636Cash acquired on RTO of QIS (Note 3 (d)) — 388,265 —Bank indebtedness acquired on purchase of Shield Network

and Computer Services Ltd. (Note 3(a)) — — (79,768)Purchase of capital assets (35,144) (989) (182,438)Proceeds on sale of capital assets — — 188,522Software development costs (740,585) (224,364) (1,099,139)Deferred expenses — — (71,146)

(775,729) 162,912 (1,224,333)

Decrease / (increase) in bank indebtedness (163,855) 281,694 (155,015)

Bank indebtedness, beginning of period (83,992) (365,686) (210,671)

Bank indebtedness, end of period (Note 7) $ (247,847) $ (83,992) $ (365,686)


Cash Flows from OperationsCash inflows from operating activities increased to $689,160 inFY2002 compared to cash outflow of $489,168 for the fivemonths ended December 31, 2001, and $85,817 for the yearended July 31, 2001. The reduction of overall accountsreceivable at December 31, 2002, refund of SR&ED tax creditsand increase in EBITDA by $181,704 has improved the operatingcash flows for FY2002.

Accounts ReceivableThe average accounts receivable conversion ratio has beenreduced to 53 days for FY2002 as compared to 72 days for thefive months ended December 31, 2001 and 56 days for the yearended July 31, 2001. The reduction in average number ofoutstanding receivable days is largely due to the implementationof a strict credit policy and regular follow-up of outstandingreceivables. All doubtful receivables are reviewed regularly anda provision is made for bad debts should that be required.

Long-term receivable is non-interest bearing, unsecured and isrepayable over sixty equal monthly payments and is fullypayable on or before December 1, 2007. The managementexpects the fair value of this receivable to be its carryingamount.

Income Taxes ReceivableIncome taxes receivable represents SR&ED claim made byQuorum in 2001 which has been assessed by Canada Customsand Revenue Agency (CCRA) and was fully paid during FY2002.

InventoryAverage inventory conversion ratio has remained consistent at 5 days for FY2002 as compared to 4 days for the five monthsended December 31, 2001. It was 10 days for the year endedJuly 31, 2001. Consistent with the Corporation’s inventorypolicy, no purchases are made unless the Corporation receivessigned Customer’s sales contracts as the Corporation does notstock third party products, other than some minimum / criticalitems.

Prepaid ExpensesPrepaid expenses largely represent general and administrativeexpenses paid in advance, which mostly include insurance andrent. Prepaid expenses have been consistent over the years.


20 13

Bank IndebtednessThe Corporation maintains an operating line of credit (LOC) witha commercial bank that permits the Corporation to borrow up tothe lesser of $750,000 or 75% of the accounts receivableoutstanding for less than ninety days at the time the funds areadvanced. The LOC bears interest at the bank’s prime rate plus1.25% and is secured by general security agreement on theCorporation’s assets.

Accounts Payable and AccruedLiabilitiesAverage accounts payable and accrued liabilities conversionratio has been reduced to 34 days for FY2002 as compared to 40days for the five months ended December 31, 2001 and 45 daysfor the year ended July 31, 2001.

Long-term DebtThe Corporation did not carry any long-term debt at December31, 2002. Long-term portion of the debt at December 31, 2001and July 31, 2001 has been fully serviced.

Share CapitalThe Corporation did not raise any new finances during FY2002other than the exercise of 100,000 agent options and 140,000stock options for a total aggregate amount of $94,000. Shareissue costs net of future tax benefit of $7,615 has beenrecorded during FY2002, which represented the balance of theshare issue costs pertaining to the major transaction completedin 2001.

During FY2002 a total of 185,000 stock options were issued. A total of 45,000 stock options expired or were cancelled and140,000 stock options were exercised.

As at December 31, 2002, there are 1,310,740 (December 31,2001 – 1,310,740; July 31, 2001 – 200,000) stock optionsoutstanding at an exercise price ranging between $0.30 and$0.52 and expiring between October 17, 2005 to June 3, 2007.

As at December 31, 2002, there are 4,964,400 (December 31,2001 – 4,964,400; July 31, 2001 – 1,502,000) outstanding sharepurchase warrants. Each share purchase warrant entitles theholder to acquire one additional common share of theCorporation at $1.25 per share and the warrants expire onOctober 31, 2003.

As at December 31, 2002 there are 4,573,785 (December 31,2001 – 6,860,675; July 31, 2001 – 1,016,000) shares subject toescrow restrictions that are scheduled to be released ininstallments over the next 24 months.

CONSOLI

DATED S TAT EMEN T S O F C A SH F LOWS

Sales and marketing expenses increased to$305,059 or 4% of sales for FY2002(December 31, 2001 - $108,820 or 4% ofsales; July 31, 2001 - $183,825 or 4% ofsales) due to the hiring of new salespersonnel which has resulted in increasedsales volumes. However, the sales andmarketing expenses ratio to total sales hasremained consistent at 4%. This level ofsales and marketing expense is expected tocontinue.

Bank Charges andInterestBank charges and interest expenses for theyear ended December 31, 2002, and the fivemonths ended December 31, 2001 representinterest on the bank line of credit which isat prime + 1.25% per annum. Interestexpenses for the year ended July 31, 2001are higher due to the interest paid on notespayable to 732519 Alberta Ltd., which wassubsequently amalgamated with theCorporation on June 28, 2001.

AmortizationAmortization for FY2002 increased to$518,386 as compared to $181,604 for thefive months ended December 31, 2001 and$243,648 for the year ended July 31, 2001.This increase is a result of the increase inXSELLERATOR sales during FY2002, and theamortization of 20% of the sale value of theXSELLERATOR software as per theamortization policy of the Corporation onXSELLERATOR.

1. Nature of Operations and Basis of PresentationQuorum Information Technologies Inc. (“QIS” or the “Corporation”) (formerly QIS Ventures Inc.) is incorporated under the laws of Alberta. The Corporation changed its name on September 17, 2001. The Corporation was party to a reverse takeover transaction (“RTO”) between QIS (the deemed acquiree) and Quorum Information Systems Inc. (“Quorum”) (the deemed acquirer), effective August 29, 2001. The corporate structure is that effective August 29, 2001, Quorum became the wholly-owned subsidiary of QIS. Quorum is incorporated under the laws of Alberta.

The July 31, 2001 comparative numbers are those of Quorum.

Quorum is an Information Technology Company that focuses on mid size business. Quorum’s Enterprise Solutions Division develops, markets, implements and supports its own software products for specific vertical markets. These products include XSellerator™, a Dealership Management System for the automotive market, and FasTrack™, a Sales and Change Order Tracker for the homebuilder market. The Technology Solutions Division markets, implements and supports a library of superior third party technology products and services specifically chosen for mid market organizations. As a Microsoft® Certified Partner, Quorum specializes in providing a full suite of Microsoft Business Solutions.

2. Significant Accounting PoliciesThe consolidated financial statements of the Corporation have been prepared by management in accordance with generally accepted accounting principles in Canada. The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management’s opinion, been properly prepared using careful judgment within reasonable limits of materiality.

(a) Principles of consolidationThe accompanying consolidated financial statements include the accounts of Quorum, and the accounts of QIS since the effective RTO date of August 29, 2001. Business acquisitions are accounted for under the purchase method and opening results are included in the consolidated financial statements as of the date of the acquisition of control. All material inter-company transactions have been eliminated.

(b) InventoryInventory is valued at the lower of cost and replacement cost. Cost is determined on the weighted average cost basis.

(c) Revenue recognitionThe Corporation recognizes revenue in accordance with the provisions of Section 3400 of the CICA Handbook and specifically as follows:

(i) Revenue from product sales is recognized when the rights of ownership of the products are transferred to the purchaser upon shipment or delivery based on the specific terms. XSELLERATOR revenues are recognized in the period that the XSELLERATOR server and the XSELLERATOR software is installed at the customer’s site, irrespective of when the customer intends to go live with the XSELLERATOR software.

(ii) Revenue from sale of customized projects is recognized using the percentage-of-completion method based on the work plan and milestones achieved.

(iii) Payments received in advance of the satisfaction of the Corporation’s revenue recognition policies are recorded as deferred revenue.


12 21

Liquidity and Financial Resources


Current AssetsAccounts receivable $1,151,465 $1,522,908 $ 737,211Income tax receivable — 70,627 70,627Inventory 66,216 54,818 89,126Prepaid expenses 30,445 10,559 42,522

$1,248,126 $1,658,912 $ 939,486

Current LiabilitiesBank indebtedness $ 247,847 $ 83,992 $ 365,686Accounts payable and

accrued liabilities 775,110 840,203 727,918Current portion of long-term debt 6,620 63,528 69,941Due to shareholders — 76,653 151,653

$1,029,577 $1,064,376 $1,315,198

Net working capital $ 218,549 $ 594,536 $ (375,712)

Working capital at December 31, 2002 was $218,549, a decrease of $375,987 fromDecember 31, 2001 which had a working capital of $594,536, and an increase of$594,261 from July 31, 2001 which had a negative working capital of $375,712.This decrease in the liquidity position is reflected in the overall cash outflow forFY2002 with respect to continued development of XSELLERATOR and the new FasTrackproduct. The current ratio of 1.21 at December 31, 2002 is lower than the ratio of1.56 at December 31, 2001.

N O T E S TO CON SO L I DAT ED F I N AN C I A L S TAT EMEN T S

2. Significant Accounting Policies - (con’t)

(d) Capital assetsCapital assets are recorded at cost, less accumulated amortization. One-half the normal amortization is taken in the year of acquisition. Amortization is provided using the following methods and rates:

Computer equipment 30% declining balanceComputer software 100% declining balanceLeasehold improvements 20% straight-lineOffice equipment 20% declining balanceAutomotive equipment 30% declining balanceVendor distribution rights 7% declining balance

(e) Software development costsAll research costs are expensed as incurred. Software development costs are expensed as incurred unless they satisfy the generally accepted accounting principles for deferral and subsequent amortization. Amortization of computer software development costs is calculated as follows:

XSELLERATOR 20% of the value of the XSELLERATOR saleDISTRIBUTOR 20% of the value of the DISTRIBUTOR saleLibrary of Solutions 25% straight-lineFasTrack 25% straight-line

(f) Impairment of long-lived assetsThe Corporation monitors the recoverability of long-lived assets, including equipment, leasehold improvements, vendor distribution rights, deferred expenses and software development costs, whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Corporation reviews factors such as current market value, future asset utilization and business climate and compares the carrying value of the assets to the future undiscounted cash flows expected to result from the use of the related assets. If such cash flows are less than the carrying value, the impairment charge to be recognized equals the amount by which the carrying amount of the assets exceeds the fair value of the asset. Fair value is generally measured equal to the estimated future discounted cash flows from the asset or assets.

(g) Deferred expensesDeferred expenses include marketing costs which are charged as an expense in the year during which they are incurred unless the benefits of those costs are identifiable and are expected to be realized in future years. Deferred marketing costs are amortized on a straight-line basis over three years.

(h) Investment tax creditsThe Corporation is entitled to Canadian federal and provincial investment tax credits that are earned as a percentage of eligible current and capital research and development expenditures incurred in each taxation year. Certain investment tax credits were fully refundable to the Corporation prior to going public in August 2001. All other investment tax credits are available to be applied against future income tax liabilities, subject to a 10-year carry forward period. Investment tax credits are accounted for as a reduction of the related research and development expenses for items of current nature and reduction of software development costs for items of long term nature, provided that the Corporation has reasonable assurance that the tax credits will be realized.

(i) Financial instrumentsThe Corporation carries a number of financial instruments. Unless otherwise indicated, it is management’s opinion that the Corporation is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted.

(j) Income taxesIncome taxes are accounted for using the liability method of tax allocation. Under this method current income taxes are recognized for the estimated income taxes payable for the current year. Future income taxes are recognized for the future

RevenueFor FY2002, revenues increased to $7.88 million, compared to$3.19 million for the five months ended December 31, 2001 and$4.79 million, for the year ended July 31, 2001. Overall net lossfor FY2002 was $80,756 (1.02% of sales) as compared to a netincome of $41,053 (1.29% of sales) for the five months endedDecember 31, 2001 and a net loss of $350,559 (7.32% of sales)for the year ended July 31, 2001. Cost of sales for FY2002 was$5.09 million or 65% of sales compared to $2.06 million or 65%of sales for the five months ended December 31, 2001 and$3.27 million or 68% of sales for the year ended July 31, 2001.The overall increase in sales for FY2002 is mainly due toincreased sales of XSELLERATOR in the ES Division.

ES Division’s revenues for FY2002 increased to $3.52 millioncompared to $0.97 million for the five months ended December31, 2001 and $0.95 million for the year ended July 31, 2001. Asexplained, this steady increase in ES Division’s revenue is due toan increased installed base of XSELLERATOR. The TS Division’srevenues have also been growing over the years, with a total of$4.36 million for FY2002 compared to $2.22 million for the fivemonths ended December 31, 2001 and $3.84 million for the yearended July 31, 2001.

Consistent with the Corporation’s revenue recognition policy,XSELLERATOR revenues continue to be recognized in the periodthat the DISTRIBUTOR server and the XSELLERATOR software isinstalled at the customer’s site, regardless of when thecustomer intends to ‘go live’ with the XSELLERATOR software.FasTrack continued to be actively marketed to the home buildingindustry in Western Canada during FY2002. The Corporationcontinues to work towards developing a market for this productand is in discussion with several home builders in Calgary.

Cost of Products and Services Soldand Gross MarginFor FY2002, gross margin was consistent at $2.80 million or35% compared to $1.13 million or 35% for the five monthsended December 31, 2001 and $1.52 million or 32% for the yearended July 31, 2001.

Gross margin from the ES Division for FY2002 was 47% ascompared to 55% for the five months ended December 31, 2001and 39% for the year ended July 31, 2001. This fluctuation ingross margin ratio is mainly due to the change in sales mix inthis division between third party products, XSELLERATOR andconsulting services which have different gross margins, withXSELLERATOR and consulting services having higher margins thanthird party products. Typically, gross margins in this division,depending on different sales mix, should range between 40% to50%.

Gross margin from the TS Division for FY2002 was 27%, whichwas consistent with 27% for the five months ended December31, 2001 and 30% for the year ended July 31, 2001. Grossmargins have slightly reduced from 30% at July 31, 2001 to27% at December 31, 2002, largely due to increasedcompetition in this division’s services, a change in sales mixbetween products and consulting revenues, and lower marginson the sale of third party products due to changes in currentmarket conditions.

ExpensesTotal expenses before interest, taxes and amortization forFY2002 was $2.35 million or 30% of sales as compared to $0.86million or 27% of sales for the five months ended December 31,2001, and $1.60 million or 33% of sales for the year ended July31, 2001. The changes in total expenses before interest, taxesand amortization as a percentage of sales is largely due tohiring new staff, incurring sales and marketing expenses tointroduce XSELLERATOR to new geographic areas, and theoptimization of those resources to the sales volumes.

During FY2002 the Corporation capitalized $687,985 (December31, 2001 - $224,364; July 31, 2001 - $1,099,139) of payroll costsand $52,600 (December 31, 2001 - $Nil; July 31, 2001 - $Nil) ofdirect overheads which represents research and developmentcosts on XSELLERATOR of $637,444 and $103,141 on FasTrack.

General and administrative expenses for FY2002 was $396,462(December 31, 2001 - $172,739; July 31, 2001 - $431,598).General and administrative expenses have been consistent overthe years, and are expected to remain at these levels.


22 11

Revenue/EBITDA

7

6

5

4

3

2

1

0DO

LLA

RS

IN

MIL

LIO

NS

Total Revenue

EBITDA

1998 1999 2000 2001 2002

YEARS ENDED DECEMBER 31


Detailed Discussion on Operating Results for the Year Ended December 31, 2002, Five Months Ended December 31, 2001 and Year Ended July 31, 2001

Results of Operations for the Last Five Years / Periods

Year ended 5 mos. ended Year ended Year ended Year ended Year endedDecember 31, December 31, July 31, July 31, July 31, July 31,

2002 2001 2001 2000 1999 1998(Audited) (Audited) (Audited) (Audited) (Audited) (Unaudited)

RevenueEnterprise Solutions $ 3,521,315 $ 973,251 $ 953,206 $ 553,530 $ 114,902 $ 19,424Technology Solutions 4,361,432 2,216,697 3,836,646 2,983,630 1,751,133 1,263,939

7,882,747 3,189,948 4,789,852 3,537,160 1,866,035 1,283,363Cost of products and services sold

Enterprise Solutions 1,882,310 434,487 579,130 232,673 258 —Technology Solutions 3,204,743 1,627,455 2,694,205 1,771,485 913,870 694,982

5,087,053 2,061,942 3,273,335 2,004,158 914,128 694,982

Gross profit 2,795,694 1,128,006 1,516,517 1,533,002 951,907 588,381Expenses 2,348,486 862,502 1,599,752 1,417,173 830,367 363,748Earnings before interest,

taxes, depreciation and amortization (EBITDA) 447,208 265,504 (83,235) 115,829 121,540 224,633

Interest 21,261 30,089 89,555 19,348 9,385 2,046Amortization 518,386 181,604 243,648 60,160 12,696 7,123Income / (loss) before income taxes (92,439) 53,811 (416,438) 36,321 99,459 215,464Income taxes / (recovery) (11,683) 12,758 (65,879) 3,528 24,122 53,056Net income / (loss) $ (80,756) $ 41,053 $ (350,559) $ 32,793 $ 75,337 $ 162,408

Earnings / (loss) per share- Basic $ (0.005) $ 0.003 $ (0.044) $ 0.003 $ 0.009 $ 0.020- Diluted $ (0.005) $ 0.003 $ — $ — $ — $ —

Weighted average number of common shares- Basic 15,206,811 13,412,293 8,009,497 9,558,460 8,323,683 8,088,138- Diluted 15,784,633 13,789,529 — — — —

income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in earnings in the period that includes the enactment date. Future income tax assets are recorded in the consolidated financial statements if realization is considered more likely than not.

(k) Stock-based compensationEffective January 1, 2002, the Corporation adopted the recommendations of CICA Handbook Section 3870, stock-based compensation and other stock-based payments. This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It requires that direct awards of stock and liabilities based on the price of common stock be measured at fair value at each reporting date, with changes in fair value reported in the statements of income and use of fair value method for other types of stock-based compensation plans. The Corporation’s stock option plan does not qualify as direct awards of stock or as a plan that creates liabilities. As a result, the implementation of the section has no impact on the financial statements. The Corporation has adopted the “disclosure only” provisions of the new standard for stock options granted to employees, whereby pro forma net income and pro forma earnings per share are disclosed in the notes to the financial statements, as if the fair value based method of accounting had been used for options granted after January 1, 2002 (see Note 11(f)).

The Corporation records no compensation expense when options are issued to employees. Any consideration paid by employees on the exercise of the options is credited to capital stock. Any modifications to the options are revalued based on the fair value method and pro forma information is disclosed.

(l) Earnings per shareThe Corporation adopted the treasury stock method of reporting earnings and other per share amounts. Basic earnings per share and cash flow from operations per common share are computed by dividing earnings and cash flow from operations by the weighted average number of common shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments, in accordance with new standards approved by Canadian Institute of Chartered Accountants. This change did not have any impact on the reported earnings per share.

3. Business CombinationsFor the year ended July 31, 2001

On June 29, 2001, Quorum amalgamated with Shield Network and Computer Services Ltd., 732519 Alberta Ltd. and Skytech Computer Systems Inc.

(a) Shield Network and Computer Services Ltd. (“Shield”)Shield was a Canadian Controlled Private Corporation (CCPC) incorporated in the province of Alberta which provided computer network services for the past five years. Effective October 31, 2000, all the 100 common shares of Shield were acquired by the Corporation and on June 29, 2001, Shield was amalgamated with Quorum. Earnings of Shield are included in these financial statements since October 31, 2000.

The purchase of Shield was recorded by Quorum as follows:Net Assets:Bank indebtedness $ (79,768)Net non-cash working capital deficiency (99,219)Capital assets 421,346Long-term loan (161,045)Goodwill* 50,196

$ 131,510Consideration:Note payable to Vendors in cash (Note 8) $ 131,510

$ 131,510

*Goodwill has been fully amortized to general and administration expenses at July 31, 2001.


10 23

3. Business Combinations - (con’t)

(b) 732519 Alberta Ltd. (“AlbCo”)AlbCo was incorporated in the province of Alberta in 2001. The purpose of AlbCo was to raise venture capital for the acquisition of QIS. Effective June 29, 2001, all the 2,957,400 common shares of AlbCo were acquired by Quorum. AlbCo amalgamated with Quorum and the former shareholders of AlbCo received 2,957,400 convertible preferred shares of Quorum upon the amalgamation. Earnings of AlbCo are included in these financial statements since June 29, 2001.

The purchase of AlbCo was recorded by Quorum as follows:Net Assets:Cash $ 19,636Loan receivable from Quorum 1,400,000Net non-cash working capital 55,116

$ 1,474,752Consideration:Issue of 2,957,400 preferred shares of Quorum (see Note 11(b)) $ 1,474,752

$ 1,474,752

(c) Skytech Computer Systems Inc. (“Skytech”)Skytech was a Canadian Controlled Private Corporation (CCPC) incorporated in the province of Alberta. Skytech was a holding company which had invested in 4,241,670 Series 1 and 162,976 Series 2 shares of Quorum. Effective June 29, 2001, all the 1,000 common shares of Skytech were acquired. Skytech amalgamated with Quorum and the former shareholders of Skytech received 4,241,670 Series 1 and 162,976 Series 2 common shares of Quorum. Earnings of Skytech are included in these financial statements since June 29, 2001. The shares of Quorum owned by Skytech were cancelled on amalgamation.

The purchase of Skytech was recorded by Quorum as follows:Net Assets:Investment in Quorum (see Note 11(b)) $ 92,552

$ 92,552Consideration:Issue of 4,241,670 Series 1 shares of Quorum (See Note 11(b)) $ 43,655Issue of 162,976 Series 2 shares of Quorum (See Note 11(b)) 48,897

$ 92,552

For the five month period ended December 31, 2001

(d) Pursuant to a reverse takeover (“RTO”) transaction, effective August 29, 2001, QIS, the legal acquirer, issued 8,100,000 common shares and 2,957,400 preferred shares for the acquisition of Quorum at a deemed price of $0.40 per common share and $0.50 per preferred share. The preferred shares were subsequently converted to common shares following the completion of the RTO transaction (see Note 11(b)(i)). The acquisition has been accounted for as a purchase transaction with Quorum being the deemed acquirer since the transaction was a reverse takeover.

The carrying values of the assets and liabilities of QIS as at the effective date, August 29, 2001 and the consideration issued are as follows:

Net Assets:Cash $ 388,265Net non-cash working capital 471,558Future income tax asset 142,007

$ 1,001,830Consideration:Attributed to 3,502,000 common shares (see Note 11(b)) $ 1,001,830

$ 1,001,830

Comparison of Operating Resultsfor the Year Ended December 31, 2002 and 2001

OverviewThe past two years have been ‘building’ years for Quorum, inpreparation for accelerated sales growth of its proprietarysoftware product, XSELLERATOR. Following its major transactionin August 2001, through which it raised $2.5 million, theCorporation has expanded its infrastructure, development, salesand marketing resources to further improve XSELLERATOR. Duringthis period, the Corporation grew from 15 dealerships atDecember 31, 2000 to 60 dealerships at December 31, 2002,which is a 300% growth in XSELLERATOR customers over a twoyear period.

Expansion of customer base and improvement of overallperformance of XSELLERATOR has resulted in optimizing theutilization of development, support and sales personnel andprovided an opportunity for economies of scale. With most ofthe infrastructure in place, the Corporation is now in a positionto expand XSELLERATOR’s geographical reach and market share inthe coming years.

FY2002 has been an interesting year for the Corporation as awhole, and in particular for its XSELLERATOR product. XSELLERATOR

was introduced into three new Canadian Provinces: Quebec,Nova Scotia and Prince Edward Island. XSELLERATOR is nowinstalled and supported in eight out of ten Provinces. Additionaldevelopment resources are needed every time XSELLERATOR isintroduced into new geographic areas. Quorum’s developmentteam is currently working on introducingXSELLERATOR into the remaining twoProvinces, and into the U.S. In FY2002,XSELLERATOR was also installed in anumber of large “metro” dealershipswhich required numerous enhancementsto the product. During FY2002 Quorumreleased three new versions ofXSELLERATOR, and its latest Version, 4.1.1,was released in Q3 of FY2002.

During the first quarter of FY2002, Quorum developed anothersoftware product – FasTrack™, which opens up a new verticalsegment for the ES Division. This user-friendly software iscapable of managing a homebuilder’s sales, quoting andchange-order processes. FasTrack, which had been sold to aleading home builder in Calgary on a pilot basis, has beensuccessfully implemented. The Corporation is activelymarketing FasTrack software, and no further development isplanned for this product at this time.

During FY2002, the TS Division focused on Microsoft BusinessSolutions, and is now an authorized reseller for the Great Plains,Solomon and Navision mid sized Enterprise ResourceManagement (ERM) and accounting software packagesrepresented by Microsoft. As a Microsoft Gold Partner, the TSDivision continues to provide IT consulting services to mid sizedbusinesses. Its strategic alliance with Meyers Norris Penny LLP,a well established Western Canadian chartered accountancyand business advisory firm, provides access to a significantnumber of potential clients for the Corporation to grow itscustomer base in this division.

For FY2002, revenues were $7.9 million compared to $6.2million for FY2001, an increase of $1.7 million or 27%. The netincome from operations (EBITDA) for FY2002 was $447 thousandor $0.029 per share compared to $381 thousand or $0.028 pershare for FY2001.

The net loss from operations for the FY2002 was $81,000 or$(0.005) per share, compared to a net loss of $52,000 or $(0.004)per share for FY2001.


24 9


4. Long-term ReceivableThe long-term receivable is non interest bearing, unsecured and is repayable over sixty months.

December 31, 2002 December 31, 2001 July 31, 2001Long term receivable $ 105,294 $ — $ —Less : Current portion included in

Accounts receivable 22,814 — —$ 82,480 $ — $ —

5. Capital AssetsDecember 31, 2002

Accumulated Net book Cost Amortization Value

Software Development Costs:XSELLERATOR $ 2,137,939 $ 312,369 $ 1,825,570DISTRIBUTOR 103,025 20,336 82,689Library of Solutions 615,197 281,621 333,576FasTrack 103,141 12,893 90,248


$ 685,876 $ 392,592 $ 293,284Total Capital Assets $ 3,645,178 $ 1,019,811 $ 2,625,367

December 31, 2001Accumulated Net book


$ 2,218,717 $ 242,606 $ 1,976,111Capital Assets:Computer equipment $ 284,823 $ 143,887 $ 140,936Computer software 12,900 12,305 595Leasehold improvements 177,716 62,518 115,198Office equipment 120,594 46,303 74,291Automotive equipment 30,048 14,404 15,644Vendor distribution rights 24,651 3,117 21,534


The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Corporation’s consolidated results of operations and financial condition.

This “Management’s Discussion and Analysis” should be read in conjunction with the Annual Consolidated FinancialStatements of the Corporation for the year ended December 31, 2002 and the notes thereto.

Background and Description of BusinessOn August 29, 2001 Quorum Information Technologies Inc., (the “Corporation”) formerly a capital pool company pursuant to TSXVenture Exchange Policy 2.4, completed its Qualifying Transaction which was the non-arm’s length acquisition of all of the issuedand outstanding securities in the capital of Quorum Information Systems Inc. (“Quorum”). The acquisition of Quorum by theCorporation has been recorded as a Reverse Take-over Transaction (RTO) for accounting purposes. Quorum is a 100% subsidiaryof the Corporation.

Quorum is an Information Technology Company that focuses on mid size business. Quorum’s Enterprise Solutions (ES) Divisiondevelops, markets, implements and supports its own software products for specific vertical markets. These products includeXSELLERATOR™, a Dealership Management System for the automotive market, and FasTrack™, a Sales and Change Order Trackerfor the homebuilder market. The Technology Solutions (TS) Division markets, implements and supports a library of superior thirdparty technology products and services specifically chosen for mid market organizations. As a Microsoft® Certified Partner,Quorum specializes in providing a full suite of Microsoft Business Solutions.

Corporation’s Fiscal Year (FY) 2002 results presented on a Quarterly basiscompared to FY2001:


Year to date Q4 Q3 Q2 Q1(Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Revenue $ 7,883 $ 1,654 $ 2,400 $ 1,852 $ 1,977Gross profit 2,795 636 780 825 554Expenses 2,348 483 617 727 521Earnings before interest, taxes,

depreciation and amortization (EBITDA) 447 153 163 98 33Net income / (loss) (81) 1 21 (22) (81)KEY MANAGEMENT METRICS# XSELLERATOR Installations – in the period 30 9 8 9 4# XSELLERATOR Installations – to date 60 60 51 43 34


Year to date Q4 Q3 Q2 Q1(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Revenue $ 6,173 $ 1,932 $ 1,686 $ 1,486 $ 1,069Gross profit 2,131 689 608 496 338Expenses 1,750 532 463 385 370Earnings before interest, tax,

depreciation and amortization (EBITDA) 381 157 145 111 (32)Net income / (loss) (52) 21 15 (3) (85)KEY MANAGEMENT METRICS# XSELLERATOR Installations – in the period 15 6 5 4 0# XSELLERATOR Installations – to date 30 30 24 19 15


8 25

MANAGE

MENT’S

DISCUSSION AND ANALYSIS

• Solution: Quorum proposed a two part solution. Part one of the solution entailed centralizing all of their networking requirements at an off-site data co-location centre. This included MS Exchange Server, MS SQL Server, Application Server and File & Print services. Applications are to be served to all corporate users via three load balanced Citrix Servers. Part two of the solution entailed centralizing their Management Information System (MIS), with all of its data migrated to one SQL Server Database.

• Result: The solution provides the framework for all of their ITinitiatives for at least the next 5 years, and was delivered on-time with a budget over-run of only 1.3%.

EnergyQuorum was invited to meet with a large energy company todiscuss serious issues they were having with their IT department.The company had grown rapidly over the previous two years byacquiring and merging with approximately 8 other companies. Manyof their IT staff did not have the experience to manage and run anenterprise IT environment. • Solution: Quorum restructured and took over management of the

day to day operations of the IT Department, developed the company’s IT Strategic Plan and budget for 2002 and recruited an I.T. Manager with enterprise IT experience.

• Result: Quorum provided all the hardware, software and expertise to implement this solution. The main emphasis during the implementation phase was for Quorum network specialists to pass on knowledge to the Corporation’s IT staff, allowing them tosupport the new environment at a higher level.

Oil and Gas ProductionThe company was running on a relatively inflexible, slow andunstable 16 bit MS-DOS®-based program for all of their accountingand joint venture billing purposes. The developer/vendor of theproduct had ended further development and was no longersupporting the system.

The company was looking for a system that would provideincreased integration and information reporting features that wouldimprove partner reporting, management reporting and joint venturebilling.• Solution: A Solomon business management system was

recommended. It has an interface that is friendly and intuitive and the company’s staff would be more productive using it. Also, Solomon has powerful customization capabilities and is based on industry-standard technology.

• Result: Since implementing the Solomon application, the company achieved significant increases in productivity, and automated the joint venture billing processes to new levels of efficiency. It also easily accommodated the addition of a new plant without having to add new administrative employees. The result is a tightly integrated solution that adjusts to nearly every aspect of their unique operating practices.

5. Capital Assets - (con’t)

July 31, 2001Accumulated Net book




6. Deferred ExpensesAccumulated Net book

Cost Amortization ValueDecember 31, 2002Marketing costs $ 71,146 $ 45,454 $ 25,692

December 31, 2001Marketing costs $ 71,146 $ 21,739 $ 49,407

July 31, 2001Marketing costs $ 71,146 $ 11,858 $ 59,288

7. Bank IndebtednessThe Corporation maintains an operating line of credit (LOC) with a commercial bank that permits the Corporation to borrow up to the lesser of $750,000 or 75% of accounts receivable outstanding for less than ninety days at the time the funds are advanced. The LOC bears interest at the bank’s prime rate plus 1.25% and is secured by a general security agreement on the Corporation’s assets.

December 31, 2002 December 31, 2001 July 31, 2001Line of credit $ (291,668) $ (660,322) $ (365,686)Cash in bank 43,821 576,330 —Net bank indebtedness $ (247,847) $ (83,992) $ (365,686)


26 7

Technology Solutions (TS) DivisionBackground

“The key to any important business relationship is trust. Quorum is a trusted partner who respects our business, genuinely understands our goals and offers true value. They go to greatlengths to ensure that an engagement is a success by our standards. With Quorum on the job, I don’t have to worry.”

Red Ortega, Manager

Information Solutions Group

PFB Corporation

Quorum has invested significant resources into defining a group of'best of class', scalable solutions for business. This group hasbecome Quorum's library of solutions. The solutions in the libraryare easily customized to meet all of a company's needs. Quorum'slibrary of solutions, and the customized technology plans weproduce from it, have been proven to be effective for many midsized businesses throughout Western Canada. The library hassolutions for e-Business, Business Software, UnifiedCommunications and Network Services.

The mid market has been largely ignored by full service ITcompanies. The Gartner Group predicted that through 2004, ITspending by leading mid sized enterprises would increase 5 - 9% asa percentage of revenue. Quorum is positioned as the IT serviceprovider of choice for mid market companies.

2002 In ReviewChangesMicrosoft has purchased Great Plains (Solomon, Dynamics &eEnterprise) and Navision (Attain & Axpata). This group of productshas been re-branded as Microsoft Business Solutions. By acquiringthese companies and their products, Microsoft has effectivelyconsolidated the best of the many business software productsgeared to the mid market. The number one software developer inthe world, and all its resources, is now behind this product group.Quorum recognized the opportunity this move presented, and hasre-directed its sales and marketing focus to Microsoft BusinessSolutions.

ProjectsOur Technology Solutions group completed a number of significantprojects. The following examples illustrate the value Quorum bringsto mid market companies.

ManufacturingQuorum was invited to discuss the long term IT strategic goals of acorporation operating eight manufacturing facilities in Canada thatproduce expanded polystyrene insulation and building products forthe construction industry. They were experiencing increasing coststo maintain a decentralized computing environment. Also, with dataspread over eight plants, and stored in an outdated proprietarydatabase structure, they had great difficulty in data mining their 15 years of historical data.


8. Long-term DebtDecember 31, 2002 December 31, 2001 July 31, 2001

Finance contract bearing interest at 1.9% repayable in monthly installments of $669. The loan is due to be fully paid in 2003. $ 6,620 $ 14,735 $ 17,414

Payable to Shield Vendors (Note 3(a)) is non-interest bearing and is payable in quarterly installments. The loan has since been fully paid — 55,500 79,313

6,620 70,235 96,727Less : Current portion 6,620 63,528 69,941

$ — $ 6,707 $ 26,786

9. Due to ShareholdersAmounts due to shareholders are unsecured and due on demand. They bear interest at 6% per annum from August 29, 2001.

10. Income TaxesIncome tax expense differs from the amount that would be obtained by applying the combined Canadian Federal and Provincial statutory income tax rate to earnings before income taxes which are as follows:

December 31, 2002 December 31, 2001 July 31, 2001Estimated combined corporate tax rate 39.24% 41.62% 41.62%Income (loss) before income taxes $ (92,439) $ 53,811 $ (416,438)Calculated income tax provision (recovery) $ (36,273) $ 22,396 $ (173,321)Non deductible items for tax purposes 3,434 622 3,700Tax expense (benefit) not recognized in

the financial statements- application of public company rate — — 94,245- others 21,156 (10,260) 9,497

Net income tax expense (recovery) $ (11,683) $ 12,758 $ (65,879)

Future income taxes assets and liabilities reflect the temporary differences between the carrying amounts of certain accounts and their corresponding amounts for income tax purposes. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management expects that most of the future tax assets will be realized but their expectations could change materially in the near term based on future taxable income during the carry forward period. The principal components of these differences are as follows:

December 31, 2002 December 31, 2001 July 31, 2001Future income taxes asset (liability)

Capital assets $ (14,280) $ (25,909) $ (102,682)Loss carry forwards 86,125 46,081 88,405Share issue costs 144,147 178,002 23,245

Net future tax asset $ 215,992 $ 198,174 $ 8,968

Income tax receivable represents SR&ED claims of approximately $70,000 made by Quorum as at July 31, 2001 and investment tax credits receivable which have since been received in full during the year. $24,500 of their related SR&ED claims has been recognized in the income statement and the balance of $45,500 has been adjusted to software development costs at July 31, 2001.


6 27

Quorum captured 2.65% of the Canadian market and 0.23% of the North AmericanMarket in 2002 with the addition of 30 new dealerships, for a total of 60dealerships. The Company also expanded into Atlantic Canada and Quebec.XSELLERATOR has now been sold and/or implemented in over 60 dealerships in 8provinces across Canada. The Company passed the 5% mark of its targeted marketin 2002, becoming the third largest DMS provider for GM in Canada. The Companyhas grown sales in this division from 15 dealerships in 2000, to 30 in 2001, to 60 in2002 – effectively doubling sales for two consecutive years.

“Finally, I get to know who my customers are,and what they are worth to my dealerships.”

Wayne MacFarlane, Dealer Principal

MacFarlane Chev Olds Ltd.,

Petrolia, Ontario



Target Market Total # XSELLERATOR Share at Share at %Dealers Dealers Dec. 31/02 Dec. 31/01 Change

GM/Saturn Western Canada 272 31 11.39% 7.35% 4.04%GM/Saturn Ontario 330 20 6.06% 2.73% 3.33%GM/Saturn Quebec 193 1 0.52% — 0.52%GM/Saturn Atlantic Canada 68 5 7.35% — 7.35%Hyundai/Kia Canada 266 3 1.12% 0.36% 0.76%Current Target Market 1,129 60 5.31% 2.66% 2.65%Total North American Market 13,093 60 0.46% 0.23% 0.23%GM/Saturn & Hyundai/Kia

2002 In ReviewChangesDuring 2002, Quorum announced a change of name for theirDealership Management System from AUTOMATE to XSELLERATOR.This step was taken because the trademark for AUTOMATE is forCanada only, and with the Company’s plans to expand into theU.S., a trademarked name for North America was required.

New Development

Version 4.1.1The Company made some major changes in the DevelopmentDepartment in order to produce new versions more quickly andefficiently. Quorum works with all of its dealers and buildsmany of their suggestions into each new version of XSELLERATOR.Version 4.1.1 contained over 58 new features aimed atstreamlining the workflow for all departments and at improvingthe Customer Relationship Management features in XSELLERATOR.

Version 4.2This version added an additional 64 new features to XSELLERATOR.Our focus in this version was vehicle sales and service. Weadded a number of features to make it easier to process dealsand work orders.

GM Integration Project

Quorum provides unparalleled integration to GM and isrecognized by GM as a fully integrated Dealership ManagementSystem (DMS) Provider. The following graphic illustrates howmany areas of XSELLERATOR have been integrated with GM’ssystems in order to make communications of all kinds - fromreporting to ordering parts to submitting warranty claims -between the dealer and manufacturer faster and more efficient.

The Company entered into an agreement with General Motors(GM) of Canada to develop a data exchange interface betweenXSELLERATOR and the General Motors dealership server. Thisinterface will enable critical vehicle sales data to be passedelectronically from each GM Dealership whose operations runon the XSELLERATOR Management System, to the GM ACCESSsystem within the dealership. This interface will improve theaccuracy and timeliness of vehicle sales data reporting to GM,and deliver significant time savings to every dealership on theXSELLERATOR system.

The Marketplace

The automotivedealership marketplaceis huge, with over33,000 dealerships inNorth America andover 13,000 GM andHyundai Dealershipsalone.

10. Income Taxes - (con’t)

At the end of the period, subject to confirmation by income tax authorities, the Corporation has the following tax pools available for carry forward:

December 31, 2002 December 31, 2001 July 31, 2001Undepreciated Capital Cost $ 2,604,020 $ 2,209,228 $ 1,968,951Cumulative Capital Expenditures 23,036 17,273 17,912Investment Tax Credits — — 33,286Non-capital Losses 170,931 94,310 140,575Share Issue Costs 346,341 444,094 55,851Total $ 3,144,328 $ 2,764,905 $ 2,216,575

The Corporation has approximately $206,931 of non capital losses available for income tax purposes to reduce taxable income of future years that expire as follows:

Year ended December 312007 $ 13,5742008 80,7362009 112,621Total $ 206,931

11. Share Capital(a) Authorized

Unlimited number ofCommon voting sharesPreferred shares issuable in series

(b) Issued and Outstanding

July 31, 2001 Number of Shares AmountCommon SharesBalance, July 31, 2000 7,480,866 $ 474,743Series 1 issued on conversion of preferred shares** 212,778 63,833Series 3 issued to employees exercising stock options 126,500 6,325Additional shares issued on split of Series 1 shares (1.28946 to 1) 1,877,228 —Additional shares issued on split of Series 2 (1.3332 to 1) 402,628 —Share consolidation of Series 1 shares (0.7608373 to 1) (2,000,000) —Cancellation of Series 1 shares on acquisition of Skytech (Note 3(c)) (4,241,670) (43,655)Cancellation of Series 2 shares on acquisition of Skytech (Note 3(c)) (162,976) (48,897)Issue of common shares on acquisition of Skytech (Note 3(c)) 4,404,646 92,552

8,100,000 544,901Cancellation on amalgamation with AlbCo. and Skytech (Note 3 (b) & (c)) (8,100,000) (544,901)Issue of common shares on amalgamation (Note 3(b) & (c)) 8,100,000 544,901Share issue costs net of future taxes of $23,177 — (25,658)Balance, July 31, 2001 8,100,000 519,243

Preferred SharesBalance, July 31, 2000 — —Issue of preferred shares to 732519 Alberta Ltd. on amalgamation,

net of deficit of $3,948 (Note 3(b)) 2,957,400 1,474,752Balance, July 31, 2001 2,957,400 1,474,752


28 5

"I could stay with my present system and know exactly what I'llstill have 5 years from now because it won't change - or I couldmove to XSELLERATOR and get the latest technology, and receivefree software enhancements regularly to keep it current. I moved."

Dennis Langlois, General Manager

Butler Chev Olds, Pembroke, Ontario


Preferred Shares – Series 1Balance, July 31, 2000 90 63,833Converted to Series 1 common shares** (90) (63,833)Balance, July 31, 2001 — —

Total Share Capital at July 31, 2001 $ 1,993,995

December 31, 2001 Number of Shares AmountCommon SharesBalance, July 31, 2001 8,100,000 $ 519,243Conversion of preferred shares (i) 2,957,400 1,474,752Share issue costs net of future taxes of $8,740 — (12,260)Balance before RTO (ii) 11,057,400 1,981,735RTO transaction net of deficiency of $1,404 (iii) 3,502,000 1,001,830Balance after RTO (ii) 14,559,400 2,983,565Issued on private placement offering 505,000 252,500Issued on exercise of stock options 40,000 12,000Share issue costs net of future taxes of $51,217 — (71,841)Balance, December 31, 2001 15,104,400 3,176,224

Preferred SharesBalance, July 31, 2001 2,957,400 1,474,752Conversion of preferred shares (i) (2,957,400) (1,474,752)Balance, December 31, 2001 — —


December 31, 2002 Number of Shares AmountCommon SharesBalance, December 31, 2001 15,104,400 $ 3,176,224Issued on exercise of agent’s stock options 100,000 30,000Issued on exercise of stock options 40,000 12,000Issued on exercise of stock options 100,000 52,000Share issue costs net of future taxes of $6,135 — (7,615)Balance, December 31, 2002 15,344,400 3,262,609


(i) On the completion of the RTO, each preferred share of Quorum issued to the shareholders of 732519 Alberta Ltd. was converted into one QIS preferred share. Subsequently on September 5, 2001 each preferred share was converted into one unit of QIS comprising of one common share and one share purchase warrant. Each share purchase warrant entitles the holder to acquire one additional share of QIS at $1.25 per share on or before October 31, 2002. Application was made and approval granted by TSX Venture Exchange during the current year to extend these warrants by a year to October 31, 2003.

(ii) 8,100,000 common shares and 2,957,400 preferred shares (see Note (i) above) were issued to the shareholders of Quorum as a result of the RTO transaction (see Note 3 (d)). 6,606,970 of these 8,100,000 common shares are subject to escrow restrictions.

(iii) 3,502,000 common shares represent the issued and outstanding shares of QIS as at the date of the RTO transaction (see Note 3(d)). 1,502,000 of the 3,502,000 shares were issued for cash at $0.50 per share pursuant to the private placement offering on July 16, 2001. 1,016,000 of the 3,502,000 common shares are subject to escrow restrictions.

Dealerships must use Windows in order to communicate withtheir manufacturers, suppliers and customers. DISTRIBUTOR is aserver-based computing solution that delivers Windows to adealership at a fraction of the cost of running PC’s. Allsoftware applications (XSELLERATOR, manufacturers’ software,Microsoft EXCEL™, etc.) are deployed, managed, and

supported 100% on a server, which is like a mainframe computer, only smaller andmuch less expensive.

Competitive AdvantagesQuorum can not only maintain each dealership’s DISTRIBUTOR server through the web,but also provides superior web-based support and training to dealerships remotelythrough DISTRIBUTOR. This saves dealerships money on travel expense, downtime,training and support, plus it enables Quorum to grow quickly geographically becausewe can service dealerships remotely. DISTRIBUTOR is also certified by GM to be fullycompatible with the GM ACCESS dealership network environment.

With DISTRIBUTOR installed, the next step to increased efficiency and better customerservice for the dealership is XSELLERATOR, Quorum’s flagship software product.

XSELLERATOR is a comprehensive automotive DealershipManagement software program developed by Quorum. Thisproprietary Windows-based product automates, streamlinesand integrates every department within a dealership and hascomprehensive Customer Relationship Management (CRM)features built right in.

Competitive Advantages• Significantly lower cost than the two main competing systems• A fully integrated, true Windows-based system – new technology• One complete system – no modules to purchase• All new versions are included for FREE as part of the dealership’s support payments• Increases dealer efficiency by at least 10%• Offers fully integrated CRM program• Recognized by General Motors as a fully integrated Dealer Service Provider

OPER AT

I ONS R E V I E W


4 29

"Quorum is without a doubt the best systemon the market, and when you add in the factthat it saved us 50% on support costs it isthe best value system on the market by lightyears."

Terry Spack, Controller

Newport Pontiac Buick GMC Inc.

Selkirk, Manitoba

Enterprise Solutions (ES) DivisionBackground


The chart below illustrates the importance of XSELLERATOR’s on-going support revenue to total revenue.

Readers are cautioned that the projections in this chart are built with a list of assumptions which the management believes to be reasonable under thecurrent circumstances. Actual results could significantly differ depending onfuture variables. Assumptions include pricing, cost structure, U.S. marketpenetration, U.S. pricing strategy, competition threats, technology changes,etc. Please refer to the Business Risks section of the Company’s AnnualInformation Form filed on SEDAR to obtain a full list of these risks.

Technology Solutions (TS) Division

This year, Microsoft Business Solutions entered the businesssoftware market for mid market companies by purchasing thethree leading brand products for that segment. They haveidentified Business Solutions as one of their key growth areas,and Quorum’s TS Division has changed focus to take advantageof the opportunity this move presents. Following is a snapshotof the TS Division’s year.

• In light of the continued downturn in the technology sector, revenue decreased by 2% in 2002 to $4,361,432 compared to the 12 months ended December 31, 2001.

• The group completed a number of significant projects, some with larger corporations in the oil and gas sector.

• Earned accreditation as a Value Added Reseller for all three Microsoft Business Solutions products.

Looking ForwardGoing forward, we will continue to transition our sales energytowards the entire suite of Microsoft Business Solutions.Microsoft sees an enormous potential in the Business Softwaremarket, and Quorum has put all the pieces in place to capitalizeon this.

Through our alliance with Meyers Norris Penny LLP, we willexpand our geographic market to jointly service mid marketorganizations throughout Western Canada.

Awards and RecognitionDuring the year, Quorum was the recipient of a number ofawards recognizing the Company for its growth, professionalismand service.

• Deloitte and Touche ranked Quorum as one of the 50 fastest growing technology companies in Canada, and one of the 500 fastest growing in North America.

• In the Branham Group’s annual ranking of the top 300 Canadian Information Technology companies, Quorum was ranked as one of the top 100 IT Professional Services companies in Canada in 2002.

• Quorum was rated as the 39th fastest growing company in Canada, according to the 2002 PROFIT 100, Canada’s authoritative ranking of high-growth companies.

• Our client, Taylor Gas Liquids Ltd., presented Quorum with a plaque in “appreciation for the hard work performed by Quorum and for your dedication and commitment to delivering Taylor with our new accounting system, Solomon IV.”

We are pleased to receive these awards, and most pleased withthe recognition from Taylor Gas Liquids Ltd., as they reinforceour commitment to a strategy of cost effective, continual growthand world class customer service.

In Conclusion2002 was an incredible year for Quorum. XSELLERATOR is gainingmomentum, and a different set of challenges comes with thatgrowth. We are cautiously optimistic about 2003. Although wehave enormous potential for growth through our XSELLERATOR

product, we know how important it is to manage that growth.We also understand the importanceof each and every one of ourcustomers, and that they mustcontinue to receive world classservice and support as we grow. Welook forward to meeting these, andother, challenges in the years aheadas creatively, aggressively andsuccessfully as we met the manychallenges in the past.

Maury Marks, C.A.President and CEO, Quorum Information Technologies Inc.

April 22, 2003

11. Share Capital - (con’t)

(c) Stock OptionsIn conjunction with the RTO, the Corporation received regulatory approval to reserve 10% of the outstanding shares for stock options. The exercise price of the options is determined by the Board of Directors in accordance with the policies of the TSX Venture Exchange. The stock options have a maximum term of five years and have a hold period of four months from the date of the initial grant.

Stock option transactions for the respective periods and the number of stock options outstanding are summarized as follows:

Number of Optioned Weighted AverageCommon Shares Exercise Price Expiry Date

Balance, July 31, 2000 & 2001 200,000 $ 0.30 October 17, 2005Options granted, September 12, 2001 1,105,740 $ 0.40 September 12, 2006Options granted, December 14, 2001 125,000 $ 0.52 October 28, 2002Options exercised, November 30, 2001 (40,000) $ 0.30Options expired, October 10, 2001 (80,000) $ 0.30Balance, December 31, 2001 1,310,740

Options granted, January 16, 2002 40,000 $ 0.52 January 16, 2007Options granted, January 16, 2002 20,000 $ 0.52 November 29, 2002Options granted, June 3, 2002 125,000 $ 0.48 June 3, 2007Options exercised, June 27, 2002 (40,000) $ 0.30Options cancelled, August 31, 2002 (13,333) $ 0.52Options exercised, October 28, 2002 (100,000) $ 0.52Options expired, October 28, 2002 (25,000) $ 0.52Options expired, November 29, 2002 (6,667) $ 0.52Balance, December 31, 2002 1,310,740

(d) Share Purchase Warrants

As at December 31, 2002 there are 4,964,400 (December 31, 2001 – 4,964,400; July 31, 2001 – 1,502,000) outstanding share purchase warrants. Each share purchase warrant entitles the holder to acquire one additional share of QIS at $1.25 per share and the warrants expire on October 31, 2003.

(e) Escrowed Shares

7,622,970 common shares were originally under escrow restrictions. 10% or 762,295 shares were released from escrow when the business combination received final approval by TSX Venture Exchange on September 26, 2001 and a further 15% of the escrowed shares are scheduled to be released on each of the 6, 12, 18, 24, 30 and 36 months anniversaries of September 26, 2001. As at December 31, 2002, 4,573,785 (December 31, 2001 – 6,860,675; July 31, 2001 – 1,016,000) are subject to escrow restrictions.

30 3

“Microsoft’s Solomon product, combined with the efforts of Quorum,produced a fully operational system on schedule and on budget…anextraordinary result for a full-scale system implementation.”

Brad Mattson, MBA – Controller

Taylor Gas Liquids Ltd., Calgary, Alberta


A lot of hard work, combined with our customers’enthusiastic endorsement of Quorum, has had atremendous impact on our growth. We havegrown from 15 dealerships in 2000, to 30dealerships in 2001, and now to 60 dealerships in2002.

There are three key areas that ensure Quorum willcontinue to achieve healthy growth:

Sustainable Competitive AdvantageCompetitive strength is a key element of ourbusiness strategy. To stay competitive for years tocome, we did two things very differently than thecompetition.

1.) We built a superior Dealership ManagementSystem using current technology that can integrate with new technologies as theycome along. Research shows we have the only fully integrated, Windows-basedsystem available on the market.

2.) We brought a fresh approach to the automotive industry, whose DealershipManagement Systems have remained relatively static for a number of years. Welisten to our dealers, and are constantly producing new versions of XSELLERATOR inorder to integrate those ideas into the software. And, our dealers receive all newversions absolutely free over the Web as long as they are on our system.

Brand Loyalty Our dealership customers deserve a great deal of credit for the success and marketacceptance XSELLERATOR is experiencing today. They are our product’s biggestcheerleaders. Our dealers have provided testimonials, made themselves available to answer questions from dealers investigating the system, and even opened theirdealerships up to demonstrate to other dealers how well the system works. We’reattending the Canadian Automobile Dealers Association tradeshow this year, andsome have even offered to man our booth so they can show other dealers what thesystem can do! That’s loyalty.

But it’s not just the features and benefits of the system that builds brand loyalty; it’salso because we utilize technology to provide the best software support in theindustry.

Predictable Sources of Earnings GrowthCurrently, Quorum is heavily reliant on new sales to achieve profitability. Over time,this is expected to change because XSELLERATOR customers sign support andmaintenance contracts, providing Quorum with a continuous, second source ofrevenue. Once Quorum has a larger number of XSELLERATOR customers, thecombination of new sales revenue and on-going support revenue will impactpositively on the Company’s profit.

This flagship product is receivingrecognition from our customers, the market,the media and even General Motors ofCanada as the most exciting DMS productin the Canadian marketplace. Following arethe ES Division’s other key achievements for2002.• XSELLERATOR revenue increased by

105% in 2002 to $3,521,315 compared to the 12 months ended December 31, 2001.

• XSELLERATOR support revenue increased by 190% in 2002 to $320,000 compared to the 12 months ended December 31, 2001 to comprise 9% of XSELLERATOR

revenue total. • The Division grew XSELLERATOR sales from

15 dealerships at December 31, 2000 to 60 dealerships at December 31, 2002, which is a 300% growth in customers over a two year period.

• Expanded customer base has helped fund geographical growth and product improvements to further increase market share.

• Increased market share in Canada from 2.66% at December 31, 2001 to 5.31% at December 31, 2002. Fastest growth occurred in Ontario from 2.73% at December 31, 2001 to 6.06% at December 31, 2002 representing a 3.33% change.

Looking Forward

“2001 was a breakthrough year forXSELLERATOR, and we believe it is enteringthe initial stages of a significant growthcurve.” Maury Marks, 2001 Annual Report

The exciting news this year has beenXSELLERATOR, which is experiencing the salesgrowth we forecasted in last year’s annualreport. During 2002, the Company has soldthe system to a number of majordealerships in Canada, providing credibilityin the market and positioning XSELLERATOR

as a ‘safe’ buy to other dealers.

(f) Stock-based Plans – Pro Forma Disclosure

The Corporation does not record compensation expense when stock options are amended or issued, as disclosed in Note 2 (k).

During the current year the Corporation granted 185,000 stock options to purchase common shares to key employees and directors. Had compensation expense been determined based on fair value at the option grant dates, the net income and earnings per share would have been reduced to the pro forma amounts indicated below:

Net Income – as reported $ (80,756)Net Income – pro forma $ (112,296)Basic Earnings per Share – as reported $ (0.005)Basic Earnings per Share – pro forma $ (0.007)Diluted Earnings per Share – as reported $ (0.005)Diluted Earnings per Share – pro forma $ (0.007)

The fair value of the share options granted was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

Risk-free interest rate 5.00%Weighted average life 5 yearsExpected volatility in the market price of the shares 0.04Expected dividend yield Nil

(g) Employee Share Purchase Plan

During 2002, the Corporation established an Employee Share Purchase Plan (“ESPP”). Compensation expense related to the ESPP amounted to $72,000 in 2002 (December 31, 2001 – NIL; July 31, 2001 – NIL).

12. Related Party TransactionsDuring the year ended December 31, 2002, the Corporation incurred fees in the amount of $35,103 (December 31, 2001 – $223,800; July 31, 2001 – Nil) from an entity of which one director is a principal. Of this amount $8,077 remains unpaid at December 31, 2002.

The fees during December 31, 2001 were related to the services provided for the acquisition and reorganization of the Corporation and have been charged to share capital as share issue costs. During the current year the fees related to ongoing investor relations and corporate governance services and were expensed during the year.

During the year ended December 31, 2002 the Corporation sold goods and services in the amount of $9,327 (December 31, 2001 – Nil; July 31, 2001 – Nil) to an entity which is owned by one of the directors of the Corporation. Of this amount $4,448 remains to be received at December 31, 2002.

Related party transactions have been recorded at their exchange amounts which represent carrying values.

13. Operating Lease CommitmentsThe future minimum lease payments for operating lease obligations over the next five years are as follows:

2003 $ 142,0182004 134,4312005 16,1002006 8,2692007 -Total $ 300,818

2 31


"It is refreshing to deal with a company that takes note of your ideas and suggestionsand makes the necessary changes to fulfill your requests."

Connie Clark, General Manager

Sundre Motors Ltd., Sundre, Alberta

XSELLERATOR

Sales Growth60

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2000 2001 2002Year ended December 31

PRES ID

ENT’ S M E S S A G E

Dear Shareholder:It has been a busy year, and we are pleased to share with youthe results of Quorum’s eventful and productive fiscal yearended December 31, 2002.

Overview

2002 has been an exciting leg of what we are sure is going tobe a long and prosperous journey for Quorum. The big news is inthe Enterprise Solutions division. We completed another 9XSELLERATOR installations in the fourth quarter, reflecting acontinuing growth trend for our XSELLERATOR product. XSELLERATOR

has now been sold to sixty dealerships across Canada atDecember 31, 2002, with nine more dealerships sold in the firstquarter of 2003, setting us up for what should be another greatyear.

For Fiscal Year (FY) 2002, combined revenues were $7.9 million

compared to $6.2 million for FY2001, an increase of $1.7 millionor 27%. Net income from operations (EBITDA) for FY2002 was$447 thousand or $0.029 per share compared to $381 thousandor $0.028 per share for FY2001.

2002 In Review

Enterprise Solutions (ES) DivisionAs the technology sector across North America continues toexperience flat growth, Quorum is doubling sales in its ESDivision, a testament to what can happen when you have thesuperior product for a specific market.

XSELLERATOR is proving to be ‘the next big thing’ for theautomotive industry as sales of our proprietary DealershipManagement System (DMS) software doubled for the secondstraight year.

Quorum is now the third largest Dealer Service Provider for GMDealerships in Canada, which is one of the goals we set out toachieve in 2002. XSELLERATOR is continuing to gain market shareacross Canada, and the Company reached another goal for 2002by opening up the Quebec market with the addition of a largemetro dealership in St-Laurent.

F I NA N

C I AL H I G H L I G H T S

Year ended Year ended Five months ended Year endedDecember 31, 2002 December 31, 2001 December 31, 2001 July 31, 2001

(Audited) (Unaudited) (Audited) (Audited)Revenue

Enterprise Solutions $ 3,521,315 $ 1,711,299 $ 973,251 $ 953,206Technology Solutions $ 4,361,432 $ 4,461,981 $ 2,216,697 $ 3,836,646

Total $ 7,882,747 $ 6,173,280 $ 3,189,948 $ 4,789,852

Gross profit $ 2,795,694 $ 2,131,045 $ 1,128,006 $ 1,516,517Gross margin 35% 35% 35% 32%Earnings (loss) before interest, taxes,

depreciation and amortization (EBITDA) $ 447,208 $ 380,620 $ 265,504 $ (83,235)

Net income / (loss) $ (80,756) $ (52,134) $ 41,053 $ (350,559)Earnings / (loss) per share $ (0.005) $ (0.004) $ 0.003 $ (0.044)Common shares outstanding at period end 15,344,400 15,104,400 15,104,400 8,100,000

32 1


14. Segmented InformationThe Corporation operates in one segment, the computer network and business software solutions industry and operates in one geographical location, Canada.

15. Financial InstrumentsThe Corporation holds various forms of financial instruments. The nature of these instruments and the Corporation’s operations expose the Corporation to interest rate risk and industry credit risks. The Corporation manages its exposure to this risk by operating in a manner that minimizes its exposure to the extent practical.

(a) Interest rate risk managementThe Corporation’s short and long-term borrowings are subject to floating rates. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates.

As at December 31, 2002, the increase or decrease in net earnings before taxes for each 1% change in interest rates on floating rate debt amounts to approximately $2,545 (December 31, 2001 - $1,748; July 31, 2001 - $3,831).

(b) Credit riskA significant portion of the Corporation’s Enterprise Solutions Division’s trade accounts receivable are from automotive dealers and, as such the Corporation’s Enterprise Solutions Division is exposed to all the risks associated with that industry.

16. Public Offering – Subsequent EventThe Corporation conducted a public offering in Alberta and British Columbia by way of Short Form Offering to issue up to 2,000,000 Units at $0.75 each, which was ongoing at December 31, 2002. Each Unit is comprised of one (1) Common Share and one (1) Share Purchase Warrant (“Warrant”). Each Warrant will entitle the holder to acquire one (1) Common Share at a price of $1.40 per share for a period of twenty four (24) months from the date of closing of the Public Offering.

On January 24, 2003, 474,000 Units were issued for a total gross proceeds of $355,500. Share issue expenses of $17,268 incurred with respect to this public offering to December 31, 2002 have been deferred to be set off with share capital as Deferred Financing Costs on final close of the offering. On March 14, 2003 an additional 158,200 Units were issued for a total gross proceeds of $118,650 and the offering was closed.

17. Comparative FiguresCertain comparative figures have been reclassified to conform to the presentations adopted during the current year.

“XSELLERATOR is the management system we’ve been waiting for. Every otherindustry has been operating with advanced technology for a long time, but automotive dealerships have been left in the dark ages – until now. XSELLERATOR

will help us take our business to the next level.”

Richard Hoy, Dealer Principal

Parkway Pontiac, St-Laurent, Quebec


Quorum is a successful Information Technology Company that focuses exclusively on

mid size business. Quorum was recently recognized as Canada’s 20th fastest

growing technology company in the Deloitte & Touche Fast 50, and the 214th fastest

growing technology company in North America by their Fast 500. In the Branham

Group’s annual ranking of the top 300 Canadian Information Technology companies,

Quorum was ranked as one of the top 100 Professional IT Service companies in

Canada for 2002, and was placed in the 2002 PROFIT 100, Canada’s authoritative

ranking of high-growth companies.

Quorum’s success comes from developing, marketing, implementing and supporting

superior technology products and services specifically for the mid market, and from

our commitment to total customer satisfaction. Quorum has expertise in all aspects

of Information Technology and employs the best people in the business to deliver it

through two divisions: Enterprise Solutions and Technology Solutions.

The Enterprise Solutions Division uses its experience and expertise to take software

products from ideas to market. XSELLERATOR™, a Dealership Management System for

the automotive market, is the Company’s flagship product and its biggest seller;

doubling sales each year for the past two years. FasTrack™ is a Sales and Change

Order Tracker for the homebuilder market and is in the early stages of the marketing

process. These proprietary software products help our clients improve organizational

efficiencies by automating their internal processes. We help them to become faster,

better and far more efficient at serving the needs of their customers.

The Technology Solutions Division implements and supports a library of superior

third party technology products and services specifically chosen for mid market

organizations. As a Microsoft® Certified Partner, we specialize in providing Microsoft

Business Solutions to mid size businesses in many industries.

ContentsFinancial Highlights 1

President’s Message 1

Operations Review 4

Management’s Discussion and 8Analysis

Management’s Responsibility for 16Financial Reporting

Auditors’ Report 17

Consolidated Balance Sheets 18

Consolidated Statements of 19Operations

Consolidated Statements of 20Cash Flows

Notes to Consolidated 21Financial Statements

Corporate Information IBC

Qu

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Produced by Quorum Information Technologies Inc. Designed by Two Birds, One Stone Design

Corporate CounselBurnet Duckworth & Palmer LLP

Calgary, Alberta

BankersCanadian Imperial Bank of CommerceCalgary, Alberta

AuditorsBuchanan Barry LLP

Calgary, Alberta

Stock Exchange ListingTSX Venture Exchange (TSXV)Trading Symbol: QIS

Registrar and Transfer AgentComputershare Trust Company of CanadaCalgary, Alberta

Investor RelationsCavalcanti Hume Funfer Inc.Calgary, Alberta

Quorum Information Technologies Inc.Corporate OfficeSuite 100, 2451 Dieppe Avenue SWCalgary, Alberta, Canada T3E 7K1Phone: 403.777.0035Fax: 403.777.0039E-mail: [email protected] Site: www.QuorumIS.com

Shareholders’ MeetingThe Annual General Meeting of Shareholders of QuorumInformation Technologies Inc. will be held on June 5, 2003 at10:00 a.m. in the Oval Room, The Fairmont Palliser Hotel, LobbyLevel, 133 – 9th Avenue S.W., Calgary, Alberta. Quorumshareholders are encouraged to attend and meet the directorsand officers of the Company. Those unable to attend areencouraged to complete and return the instrument of proxymailed with this report in order to be represented at themeeting.

Board of Directors

Maury MarksDirectorPresident and Chief Executive OfficerQuorum Information Technologies Inc.

Larry ShelleyChairman of Board of DirectorsPresident of Tamarack Group Ltd. and Executive Vice President of Advisory Services of MNP LLP

Dan LaplanteDirectorPresident of Continental Oilfield Supply Canada

Ross BevinDirectorPast Vice President of Business DevelopmentQuorum Information Systems Inc.

Steve RemmingtonDirectorPresident and Chief Executive Officer Entero Corp.

Officers

Larry ShelleyChairman of Board of Directors

Maury MarksPresident and Chief Executive Officer

Swapan KakumanuChief Financial Officer

C OR P

O R A TE I N F O R M A T I O N


An

nu

al for the year ended December 31, 2002

Quorum Information Technologies Inc.(TSXV: QIS)

Suite 100, 2451 Dieppe Avenue S.W.Calgary, Alberta, Canada T3E 7K1Tel: 403.777.0035Fax: 403.777.0039E-mail: [email protected] Site: www.QuorumIS.com

w w w . Q u o r u m I S . c o m

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