ready for the road ahead - quorum dealer ... highlights 1 president’s message to the shareholders...

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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R E A D Y F O R T H E R O A D A H E A D

2nd Quarter

Our Mission

At Quorum, our mission is to be the very best atbuilding and supporting the most advancedautomotive Dealership & Customer RelationshipManagement System, and technology infrastructure,in the automotive industry to enable dealerships tostreamline their operations and better serve theircustomers.

Our Values

IntegrityWhile our abilities are considerable, we will be realistic,honest and fair in our commitments, and above all, we willfollow through.

Respect Our customers and our people are our greatest resource; weencourage, listen to, and value their contributions.

Excellence We set high standards, strive for continuous improvementin everything we do, and exceed expectations.

Knowledge Understanding our customers’ business processes, and thetechnology that supports them, is our focus.

Empowerment We empower our people with the resources needed topromote innovation and fresh thinking.

TeamworkOur success is the result of teamwork. We operate with thehighest level of cooperation and trust with our clients andthroughout our company.

‘‘‘‘Table of Contents

Financial Highlights 1

President’s Message to the Shareholders 1

Management’s Discussion & Analysis 3

Interim Consolidated Balance Sheets 10

Interim Consolidated Statements of Operations 11

Interim Consolidated Statements of Cash Flows 12

Interim Notes to Consolidated Financial Statements 13

Corporate Information 16

“XSELLERATOR is the management system we’ve been waiting for. Every other industry has been operating withadvanced 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, General Manager - Parkway Pontiac, St-Laurent, QC

“I could stay with my present system and know exactly what I’ll still have 5 years from now because it won’t change -or I could move to Quorum and get the latest technology and continually get free software enhancements to keep itcurrent. I moved.”

Dennis Langlois, General Manager - Butler Chev Olds, Pembroke, ON

“I’m amazed with the way this company does business. These guys are the only ones in the industry who actuallylisten to their dealers’ ideas – not only do they listen, they then implement our ideas and keep on rolling out newversions.”

Dewey Hall, Dealer Principal - Gananoque Chev Olds Cadillac, Gananoque, ON

“We moved to XSELLERATOR after years of having to deal with overpriced, antiquated products. We chose XSELLERATOR

for a number of reasons, one of which was we are able to do more things with our customer database that we couldn’tdo before.”

Ryan Finch, General Manager - Brian Finch Pontiac Buick GMC, London, ON

“We switched to XSELLERATOR because of its customer integration in all departments, utilization of the latest technology,and GM Integration. It has drastically reduced our monthly computer costs and it’s a single entry system.”

Mark Cullen, General Manager - Barry Cullen Chevrolet Oldsmobile Cadillac, Guelph, ON

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Dear FellowShareholders,

The second quarter of2004 proved to be a veryactive one throughout theCompany. Our OperationsGroup worked on thedevelopment of a newimplementation approach

which will be rolled out in August. By automating many ofthe processes and steps required to convert a dealershipfrom their old software to ours, we should reduce the timeit takes to implement XSELLERATOR in a dealership, and makethe transition process even easier for new dealerships.

The Support Group has just launched a new supportweb site which will be very beneficial to both the group andour customers. Dealership staff can visit the site to requestand track issue resolution, access instructional tutorials onall areas of XSELLERATOR, access information on new versionfeatures, plus a lot more.

As an added note, during the months of June and July2004, the Corporation issued 1,353,000 Common Shares on

the exercise of 1,353,000 Share Purchase Warrants at aconversion price of $0.75 each, raising gross proceeds of$1,014,750. Of the total Warrants exercised, 55% weretaken by our dealership customers. Our strong cash positionlets us continue to further develop and advance our product,our integration with GM Canada and General Motors Corp.(GM U.S.), and expand our marketing and operational reachinto the U.S. market.

Now that we are actively selling into the UnitedStates, I will report to you on our efforts, and resultsachieved, for each country. It is extremely satisfying, for allof us, to report by country; getting here has been a longroad, and this new vista is a very auspicious one.

CanadaDuring this quarter, we had five new dealerships make

the move to XSELLERATOR, and I am very pleased to welcomeeach one of them as our newest partners.

We deployed XSELLERATOR into one of the largest Metro dealerships in Canada, City Buick in Toronto. This dealership is owned by one of Quorum’s Directors, John Carmichael, who with his wife Kerry, have beeninstrumental in ensuring a successful implementation.

Financial HighlightsSix months Six months Q2 ended Q2 ended Q1 ended Q1 ended

ended ended June 30, 2004 June 30, 2003 March 31, 2004 March 31, 2003June 30, 2004 June 30, 2003

Gross revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591 Cost of products and services sold $ 1,457,884 $ 990,507 $ 840,770 $ 391,613 $ 617,114 $ 598,894

Gross profit $ 764,826 $ 856,476 $ 386,860 $ 352,779 $ 377,965 $ 503,697

Gross profit % 34% 46% 32% 47% 38% 46%

Loss before interest, taxes, depreciation and amortization (EBITDA) ($201,016) ($191,084) ($167,966) ($182,076) ($33,051) ($9,008)

Loss before discontinued operations ($193,401) ($289,699) ($99,925) ($203,468) ($93,477) ($86,231)Loss from discontinued operations — ($57,777) — ($5,658) — ($52,119)Net Loss ($193,401) ($347,476) ($99,925) ($209,126) ($93,477) ($138,350)

Loss per share from continuing operations ($0.009) ($0.018) ($0.005) ($0.013) ($0.005) ($0.006)Loss per share from discontinued operations — ($0.004) — — — ($0.003)Basic loss per share ($0.009) ($0.022) ($0.005) ($0.013) ($0.005) ($0.009)Fully diluted loss per share ($0.008) ($0.022) ($0.004) ($0.013) ($0.004) ($0.008)

Weighted average number of common sharesBasic 22,026,448 15,849,945 22,026,448 15,849,945 19,408,295 15,721,882Diluted 24,034,261 16,188,253 24,034,261 16,188,253 20,889,559 16,210,680

President’s Message

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

Officers

Larry ShelleyChairman of Board of Directors

Maury MarksPresident and Chief Executive Officer

Craig Nieboer, CAChief Financial Officer

Bill ThompsonV.P. Business Development

Corporate CounselBurnet Duckworth & PalmerCalgary, Alberta

BankersCanadian Imperial Bank of CommerceCalgary, Alberta

AuditorsBuchanan Barry LLP

Calgary, Alberta

Stock Exchange ListingTSX Venture ExchangeTrading Symbol: QIS

Registrar and Transfer AgentComputershare Trust Company of CanadaCalgary, 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

Board of Directors

Maury MarksDirectorPresident and Chief Executive Officer,Quorum Information Technologies Inc.

Larry ShelleyChairman of Board of DirectorsPresident, SRG Capital Ltd.

Dan LaplanteDirectorPresident, Continental Oilfield Supply Canada

John CarmichaelDirectorDealer Principal, City Buick Pontiac Cadillac, Toronto, Ontario

Michael CroxonDirectorPresident, North York Chevrolet Oldsmobile; Richmond Hill Pontiac Buick GMC; Open Road BMW; and Kia of Newmarket

Corporate Information


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(d) Share purchase warrantsAs at June 30, 2004 there were 3,946,200 (December 31, 2003 – 3,966,200) outstanding share purchase warrants.632,200 share purchase warrants were issued during the first quarter of 2003 in conjunction with the public offering that was

closed on March 14, 2003. Each share purchase warrant entitles the holder to acquire one additional share of the corporation at $1.40 per share and 474,000 warrants expire on January 25, 2005 and 158,200 warrants expire on March 15, 2005.

As part of an amended non-brokered Private Placement that closed on September 29, 2003, the Corporation issued 429,000 warrants on August 1, 2003, 1,132,000 warrants on August 27, 2003, 819,000 warrants on September 16, 2003 and 954,000 warrants on September 29, 2003 for an aggregate additional issue of 3,334,000 warrants. Each warrant issued entitles the holder to acquire one common share of the Corporation at a price of $0.75 per share if exercised on or before August 1, 2004, and at a price of $1.00 per share if exercised thereafter, but either on or before August 1, 2005. All 3,334,000 warrants, if unexercised, would expire on August 1, 2005. As at June 30, 2004, 20,000 of the originally issued warrants had been converted to common shares at an exercise price of $0.75.

(e) Escrowed shares7,622,970 common shares were originally under escrow restrictions. 10%, or 762,295 shares were released from escrow

when the business combination received final approval 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 month anniversaries of September 26, 2001. As at June 30, 2004 1,143,447 (December 31, 2003 – 2,286,894) common shares are subject to escrow restrictions.

5. Related Party TransactionsFor the six month period ended June 30, 2004, the Corporation incurred fees in the amount of $25,000 (June 30, 2003 - Nil) under a

consulting agreement with one director. The fees were in relation to corporate finance and governance services.Related party transactions have been recorded at their exchange amounts which represent carrying values.

6. Segmented InformationThe Corporation operates in one segment, the computer network and business software solutions industry.During the quarter ended June 30, 2004, the Corporation commenced selling into the United States marketplace. Gross revenue by

geographic area is summarized as follows:

Three months Three months Six months Six monthsended June 30, 2004 ended June 30, 2003 ended June 30, 2004 ended June 30, 2003

Canada $ 970,616 $ 744,392 $ 1,965,696 $ 1,846,983United States 257,014 — 257,014 —

Total gross revenue $ 1,227,630 $ 744,392 $ 2,222,710 $ 1,846,983

7. Discontinued OperationsOn October 29, 2003, the Board of Directors decided to divest the Corporation of the Technology Solutions Division (“TS Division”).

The sale of this division was completed on February 17, 2004 with the effective date being February 1, 2004.

8. Subsequent EventAs at August 1, 2004, an additional 1,333,000 share purchase warrants from the non-brokered private placement completed in 2003

had been converted to common shares at an exercise price of $0.75, raising additional gross proceeds of $999,750. After the described exercise, there remain 1,981,000 outstanding warrants to purchase one common share each at an exercise price of $1.00.

Many of our shareholders are unaware of the fact that ourdealers are an integral part of a successful deployment ofour software. The best conversions (replacing old softwarewith new) happen with dealers who understand that theshort term pain of change is well worth the long termbenefits gained from the new technology they are adopting.

At the time of writing, Version 4.3.2 of XSELLERATOR wassuccessfully deployed to all of our dealerships. It includedtwo exciting new integration points to GM Canada. TheVehicle Inquiry System is a welcome new feature becauseit increases dealerships’ campaign revenue. When a vehicleis put on an Appointment or Work Order, XSELLERATOR

automatically looks up outstanding campaigns from GM’ssystem and adds them to the work order. It’s very slick. Theother integration point is Vehicle Orders, which allows salesstaff to track all the on-order vehicles from General Motors.

United StatesDuring this quarter, we added our first two American

dealers and just recently, three more U.S. dealerships madethe move to XSELLERATOR, giving us a total of five to date.They tell me they are very excited with the prospect ofhaving Windows based software throughout theirdealerships.

In July, a regional marketing program was launched inthe United States. This campaign is designed to ensuremanaged growth in this market, and will be rolled out toother selected States through the third and fourth quartersof 2004.

We are moving closer to completion of requiredintegration to the GM U.S. systems. The only thingremaining is Parts integration, which is in the initial testingstage at this time. Once this has been completed, Quorumshould gain U.S. certification from GM U.S.

It’s been a very busy summer, and fall is shaping up tobe a very exciting time as we push even further into theU.S. market.

Sincerely,

Maury Marks B.Mgt., C.A.President and CEOQuorum Information Technologies Inc.


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4. Share Capital(a) Authorized

Unlimited number of Common voting sharesPreferred shares issuable in series

(b) Issued and outstandingNumber of Shares Amount

Common SharesBalance, December 31, 2003 19,313,000 $ 5,334,731Issued on private placement, March 31, 2004 5,175,000 3,105,000Issued on exercise of stock options 172,200 150,788Issued on exercise of warrants 20,000 15,000Share issue costs net of future taxes — (30,575)

Total Share Capital at June 30, 2004 24,680,200 $ 8,574,944

(c) Stock OptionsAt the 2003 Annual General Meeting the Corporation received regulatory and shareholder approval to amend the previously

adopted Stock Option Plan (“Stock Plan 2002”) which authorized the Board of Directors of the Corporation to grant options to purchase common shares of the Corporation to directors, officers, employees and consultants who are in a position to contribute to the growth and development of the Corporation. Pursuant to the amended Stock Plan 2002, options may be granted to purchase common shares of the Corporation up to a number not exceeding 3,900,000 common shares in aggregate. Prior to the approved amendment the limit was 2,400,000 common shares in aggregate. The exercise price of the options is determined by the Board of Directors in accordance with the policies of the TSX Venture Exchange (“TSXV”). The options have a maximum term of five years with a hold period of four months from the date of the initial grant, and no more than 1/3 of the stock options granted to any one individual shall vest in any twelve month period.

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

As at June 30, 2004 As at December 31, 2003

Number of Weighted Number of Weightedshares average shares average

exercise price exercise price

Options outstanding at beginning of period 2,026,660 $ 0.46 1,310,740 $ 0.41Granted 547,700 $ 0.75 945,220 $ 0.60Exercised (172,200) $ 0.52 (2,400) $ 0.55Cancelled or expired (35,350) $ 0.57 (226,900) $ 0.73Options outstanding at end of period 2,366,810 $ 0.50 2,026,660 $ 0.46Options exercisable at end of period 1,718,127 $ 0.47 1,533,605 $ 0.43

The following table summarizes information about stock options outstanding at June 30, 2004:

Range of Number Weighted average Weighted averageexercise prices outstanding remaining contractual exercise price

life in years

$0.30 - $0.49 1,245,740 2.3 $0.40$0.50 - $0.69 534,650 4.0 $0.56$0.70 - $0.90 586,420 4.4 $0.75

2,366,810 3.2 $0.50

Management’s Discussion and Analysis ofFinancial Condition and Results of Operation

The following discussion and analysis provides information that management believes is relevant to an assessment andunderstanding of the Corporation’s interim consolidated results of operations and financial condition. This “Management’sDiscussion and Analysis” should be read in conjunction with the unaudited interim consolidated financial statements for thesix months ended June 30, 2004 and the annual consolidated financial statements of the Corporation for the year endedDecember 31, 2003 and the notes thereto. Comparisons made to prior periods are to the corresponding period in the precedingyear unless otherwise indicated.

Background and Description of BusinessQuorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an Information Technology Company that

focuses on the automotive retail business, and is incorporated under the Business Corporations Act of Alberta.Quorum develops, markets, implements and supports its own software product, XSELLERATOR™, a Dealership Management

System, for the automotive market.

Q2 2004 OverviewDuring Q2 FY2004, the Corporation added seven dealership customers, including the first two sales of XSELLERATOR into the

United States, for an exit total at June 30, 2004 of 103 dealerships. New dealerships added for the six months ended June30, 2004 are 12, which is behind the annualized pace of 40 new customers expected for FY2004, but management is confidentthe Corporation will achieve its annualized growth targets.

During Q2 FY2004, the Corporation finished the beta testing of a new version of XSELLERATOR, Version 4.3.2, with positiveresults and full general release of the version is being rolled out in August 2004. XSELLERATOR is the ”next generation” ofDealership Management System (DMS) in the automotive market, and the most advanced, fully integrated Windows basedproduct in the marketplace.

The expansion of the customer base, and improvement of overall performance of the XSELLERATOR product, has allowed theCorporation to optimize the utilization of its development, support and sales personnel and provided an opportunity to achievegrowth and economies of scale.

Q2 2004 Financial Highlights• 65% increase in Gross Revenues from Q2 FY2003.• 58% increase in on-going annuity XSELLERATOR software support revenue• 7% Increase in Customer base from 96 to 103. • Net loss for Q2 FY2004 decreased to $99,925 versus $209,126 in Q2 FY2003.

Results of Operations (Dollar figures in ‘000)

Six months Six months Q2 ended Q2 ended Q1 ended Q1 endedended ended June 30, 2004 June 30, 2003 March 31, 2004 March 31, 2003

June 30, 2004 June 30, 2003

Gross revenue $ 2,223 $ 1,847 $ 1,228 $ 744 $ 995 $ 1,103Gross profit 765 856 387 353 378 504Expenses 966 1,048 555 535 411 513Operating loss before interest, taxes,

depreciation and amortization (EBITDA) (201) (192) (168) (182) (33) (9)Loss before discontinued operations (193) (289) (100) (203) (93) (87)Loss from discontinued operations — (58) — (6) — (52)Net loss $ (193) $ (347) $ (100) $ (209) $ (93) $ (138)KEY MANAGEMENT METRICSXSELLERATOR Installations – in the period 12 15 7 6 5 9XSELLERATOR Installations – to date 103 75 103 75 96 69

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Income SummaryFor Q2 FY2004, revenues from operations were $1.23 million compared to $0.74 million for Q2 FY2003, an increase of

$0.49 million or 65%. For the six months ended June 30, 2004, revenues from operations were $2.22 million compared to$1.85 million for the six months ended June 30, 2003, an increase of $0.37 million or 20%.

The net loss from operations (EBITDA) for Q2 FY2004 was $(167,966) or $(0.008) per share compared to $(182,076) or$(0.011) per share for Q2 FY2003. The net loss from operations (EBITDA) for the six months ended June 30, 2004 was$(201,016) or $(0.009) per share compared to $(191,084) or $(0.012) per share for the six months ended June 30, 2003.

The net loss for Q2 FY2004 was $(99,925) or $(0.005) per share, compared to a net loss of $(209,126) or $(0.013) for Q2FY2003. The net loss for the six months ended June 30, 2004 was $(193,401) or $(0.009) per share, compared to a net loss of$(347,476) or $(0.022) for the six months ended June 30, 2003.

Detailed Discussion On Operating Results For The Periods Ended June 30, 2004 And June 30, 2003

Revenue and Gross Profit Analysis


June 30, 2004 June 30, 2003

Gross Revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591

Cost of products and services sold 1,457,884 990,507 840,770 391,613 617,114 598,894

Gross profit $ 764,826 $ 856,476 $ 386,860 $ 352,779 $ 377,965 $ 503,697

Gross profit % 34% 46% 32% 47% 38% 46%

KEY MANAGEMENT METRICSXSELLERATOR Installations – in the period 12 15 7 6 5 9XSELLERATOR Installations – to date 103 75 103 75 96 69

Project Revenue 1,658,272 1,486,839 940,228 562,618 718,043 924,221Support Revenue 564,438 360,144 287,402 181,774 277,036 178,370Gross Revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591

RevenueFor Q2 FY2004, revenues from operations were $1.23 million compared to $0.74 million for Q2 FY2003, an increase of

$0.49 million or 65%.

XSELLERATOR revenue is made up of two main components:• Project Revenue, which is revenue associated with the initial sale and installation of the software and;• Support Revenue, which is revenue associated with the on-going maintenance and support of the software and

network infrastructure for the customer.

The three main sub-components of Project revenue include: • DISTRIBUTOR, the hardware and network solution; since XSELLERATOR is a Windows-based product run on a server based

computing model, new customers must upgrade their existing computer hardware and infrastructure to a more modern platform;

• software licenses for XSELLERATOR which are sold per seat; and • implementation revenue related to training and taking the new customer “live” on the system.

The Support revenue is the recurring annuity income stream from existing customers to support and maintain the softwareon-site, and the free upgrades that provide new and enhanced functionality to the software.

Consistent with the Corporation’s revenue recognition policy, XSELLERATOR Project revenues are recognized in the periodthat the Distributor server and the XSELLERATOR software is installed at the customer’s site, regardless of when the customer

Notes to Unaudited Interim Consolidated Financial Statements

1. Nature of OperationsQuorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an Information Technology Company that focuses on the

automotive retail business, and is incorporated under the Business Corporations Act of Alberta.Quorum develops, markets, implements and supports its own software product, XSELLERATOR™, a Dealership Management System,

for the automotive market.

2. Significant Accounting Policies and Basis of PresentationThe interim consolidated financial statements of the Corporation have been prepared by management following the same

accounting policies and methods of computation as outlined in the consolidated financial statements for the fiscal year ended December 31, 2003, except as described in Note 3. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Corporation’s annual report for the year ended December 31, 2003. The preparation of these interim 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. Further, it should be noted that the interim consolidated financial statements have not been reviewed by the Corporation’s external auditors. Certain comparative figures have been reclassified to conform to the presentations adopted during the current year. The interim consolidated financial statements have, in management’s opinion, been properly prepared using careful judgment within reasonable limits of materiality.

3. Change in Accounting PolicyStock-based compensation

Effective 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 the fair value method for other types of stock-based compensation plans. In prior periods, the Corporation had adopted the “disclosure only” provisions of the standard for stock options granted to employees, whereby pro forma net income and pro forma earnings per share were disclosed in the notes to the consolidated financial statements, as if the fair value based method of accounting had been used for options granted after January 1, 2002. Effective January 1, 2004 expenses for stock-based compensation are required to be included in the consolidated statement of operations. Further, per the transitional provisions of CICA Handbook Section 3870 this change in accounting policy should be applied retroactively.

For the six months period ended June 30, 2004 the Corporation incurred $91,124 of related expense included in the interim consolidated statement of operations, and the interim consolidated statement of operations for the period ended June 30, 2003 was restated to reflect related expenses of $13,866. In addition opening retained earnings for the year ended December 31, 2003 were restated to reflect expenses related to employee stock option benefits from the year ended December 31, 2002 of $53,291, and closing retained earnings for year ended December 31, 2003 were restated to reflect expenses for employee stock option benefits of $60,002 previously disclosed on a pro-forma basis in the Notes to the Consolidated December 31, 2003 financial statements.

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Unaudited - Interim Consolidated Statements of Cash Flows

Period ended Three months Three months Six months Six monthsended ended ended ended

June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003

Cash flow from operating activitiesCash receipts from customers $ 914,429 $ 964,096 $ 2,159,636 $ 2,049,643Cash paid to suppliers and employees (1,215,946) (936,485) (2,407,473) (2,138,856)Interest received (paid) 5,123 (9,715) 3,911 (16,680)

(296,394) 17,896 (243,926) (105,893)

Cash flow from financing activitiesIssuance of shares net of share issue costs 247,753 — 3,178,366 387,517Deferred finance costs — — — 17,268Repayment of long-term debt — — — (1,873)

247,753 — 3,178,366 402,912

Cash flow from investing activitiesPurchase of capital assets (86,195) (30,059) (116,445) (32,681)Software development costs (438,822) (185,196) (795,534) (368,625)

(525,017) (215,255) (911,979) (401,306)

Cash flow from continuing operations (573,658) (197,359) 2,022,461 (104,287)

Cash flow from discontinued operations Note 7 — (101,017) 125,184 (231,698)

Cash (Bank indebtedness), beginning of period 3,007,647 (285,456) 286,344 (247,847)

Cash (Bank indebtedness), end of period $ 2,433,989 $ (583,832) $ 2,433,989 $ (583,832)

See accompanying notes to interim consolidated financial statements.

intends to ‘go live’ with the XSELLERATOR software. The Support revenue is recognized in the period that the support servicehas been delivered to the customer.

For Q2 FY2004, Project revenues increased to $0.94 million, compared to $0.56 million for Q2 FY2003. This increase is aresult of seven new customers being added in Q2 FY2004 versus six new customers in Q2 FY2003; in addition, projectrevenues on a per new customer added basis also increased, and the Corporation expects this general trend to continue withmoderate growth in the number of new customers being added, but a continued trend to selling to larger “metro” customerswhich require more seats in their dealership. Also, with the on-going enhancements to the XSELLERATOR product, Quorumexpects a continuation in the improvement in price achieved per seat sold.

For Q2 FY2004, Support revenues increased to $0.29 million, compared to $0.18 million in Q2 FY2003. As more and morecustomers are added, this annuity stream will continue to grow. Further, now that XSELLERATOR is a more established product inthe marketplace, and as the third largest supplier of DMS software to General Motors (GM) dealers in Canada, Quorum willhave the ability to charge increased market rates for on-going monthly support fees. Currently, monthly support fees chargedby Quorum are roughly half of what is charged by its two largest competitors.

In Q2 FY2004 the Corporation has achieved its first two sales of XSELLERATOR in the United States. As of the date of thisreport, another three dealerships in the United States have been signed to purchase XSELLERATOR, bringing the total of signedU.S. dealerships to five. The Corporation has a strategic marketing plan to allow for managed growth in the United States,which will target specific regions on a rotational basis. As of the date of this report, the Corporation launched a directmarketing campaign into the first region, and will roll out the campaign to additional areas within that region in Q3 and Q4 ofFY2004. The Corporation expects to see U.S. sales exceed the six planned for FY2004. The U.S. market place has many morecustomers than there are in Canada. Further, based on the Corporation’s market research to date, the pricing environment ismore robust in the U.S., and the Corporation believes it can achieve higher margins on sales to this market.

In Q2 FY2004 the Corporation also rolled out several new lines of business under the banner of Dealer Services. DealerServices will be responsible for all after-market sales to existing customers including new service products such as businessprocess consulting, sales consulting, specific training programs, and many web-based training seminars. This group will alsosell new hardware products such as thin clients, printers, monitors and other items dealerships require. With a focused efforton the after-sales market, the Corporation expects to expand its revenue base.

Cost of Products and Services Sold and Gross ProfitFor Q2 FY2004, gross profit increased to $0.39 million or 32% compared to $0.35 million or 47% for Q2 FY2003. The

lower margin percentage reflects a higher percentage allocation in 2004 of salaries & benefits expense to cost of productsand services sold versus allocation to expenses.

Expenses


June 30, 2004 June 30, 2003

Salaries & benefits $ 530,032 $ 714,969 $ 305,316 $ 365,570 $ 224,716 $ 349,399Employee stock option benefits 91,124 13,866 56,768 11,321 34,356 2,545General & administrative 262,294 178,864 153,874 88,453 108,420 90,411Sales & marketing 82,392 139,861 38,868 69,511 43,524 70,350

Total Expenses $ 965,842 $ 1,047,560 $ 554,826 $ 534,855 $ 411,016 $ 512,705

Total expenses before interest, taxes and amortization for Q2 FY2004 were $0.55 million or 45% of sales as compared to$0.53 million or 72% of sales for Q2 FY2003. The decrease in total expenses before interest, taxes and amortization as apercentage of sales is largely due to more accurate allocation of labour related costs to cost of products and services soldwhich has reduced the salaries and benefits number between the comparative quarters by $60,254. It should also be notedthat the FY2004 results reflect the new application of CICA Handbook section 3870 – stock-based compensation, requiring therecording of the fair value of stock option awards in the consolidated statement of operations. Q2 FY2004 reflects theinclusion of $56,768 of employee stock option benefits and Q2 FY2003 has been re-stated to reflect $11,321 of relatedexpense. The employee stock option benefit expense is a non-cash expense.

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General and administrative expenses for Q2 FY2004 were $153,874 compared to $88,453 for Q2 FY2003 for an increase of$65,421 or 74%. The XSELLERATOR business was charged with more corporate overhead allocations in Q2 FY2004 versus Q2FY2003 as the TS division activity was wound down and disposed of in Q1 FY2004. As well, the Corporation has incurredincreased tax and legal consulting fees related to U.S. expansion activities.

Sales and marketing expenses for Q2 FY2004 were $38,868 or 3.2% of sales compared to $69,511 for Q2 FY2003 or 9.3%of sales. Sales and marketing expenses are as planned for FY2004, and the Corporation has been able to achieve certainefficiencies with experience and a build up of in-house materials.

Bank Charges and InterestBank charges and interest expenses for Q2 FY2004 were actually a net revenue of $5,123 compared to a net expense in

Q2 FY2003 of $6,683. The expense represents bank charges and any interest on the bank line of credit, which is at prime +1.25% per annum, net of any interest received on term deposits. With the equity placements completed in FY2003 and Q1FY2004, the Corporation has placed excess funds in a series of one-month T-Bills resulting in interest revenue in excess ofbank charges. Furthermore, based on current cash resources, and expected cash flow from operations, the Corporation doesnot expect to draw-down on the line-of-credit in FY2004.

Capitalization & AmortizationDuring FY2003 the Corporation released three new versions of XSELLERATOR. The latest version released in December 2003

was Version 4.3.1. Version 4.3.2 is in the final stages of beta testing and is expected for general release in August 2004.Version upgrades during FY2004 included a number of improved features and enhancements which facilitated new sales tolarger “metro” dealerships. In Q4 FY2003 the Corporation began work with GM U.S. building integration points to achieve GMU.S. certification of XSELLERATOR, which will allow the Corporation to expand sales of XSELLERATOR in the United States. Thiswork has continued in earnest during the first half of FY2004 and the Corporation expects the required integration points to becompleted and fully tested by end of Q3 FY2004. The Corporation continues to work with GM of Canada on new, leading edgeintegration points within its product for more seamless data flow between the dealership and the manufacturer. To achieveall of this development work to the highest quality standards, and on tight timelines, the Corporation, in line with its 2004plans, has added 5 new in-house software developers and software testers to its development team.

Summary of capitalized software development costs and related amortization for XSELLERATOR and DISTRIBUTOR.

Six months Six months Q2 ended Q2 endedended ended June 30, 2004 June 30, 2003

June 30, 2004 June 30, 2003

Software Development Costs Capitalized $ 795,534 $ 368,625 $ 438,822 $ 185,196Amortization of Software Development Costs $ 89,118 $ 105,172 $ 37,882 $ 49,095

All research and development costs are expensed as incurred unless they satisfy the generally accepted accountingcriteria for deferral and subsequent amortization. As noted above, the Corporation continues to conduct ongoing research anddevelopment towards the improvement of XSELLERATOR and has capitalized payroll costs of $378,773 and direct overheads of$60,049 for a total of $438,822 in Q2 FY2004 compared to $170,275 of capitalized payroll costs and direct overheads of$14,921 in Q2 FY2003 for a total of $185,196. XSELLERATOR is the leading edge product in the automotive DMS field and theCorporation intends to maintain this lead through continued investment in the product. The Corporation has expanded itsdevelopment efforts as it prepares to roll out additional features and functionality, more and improved integration points withthe manufacturers, and to introduce the product into the U.S. market.

Amortization for Q2 FY2004 decreased to $37,882 as compared to $49,095 for Q2 FY2003. This decrease is a result of thedecrease in XSELLERATOR software license sales during Q2 FY2004 compared to Q2 FY2003, and applicable amortization of 20%of the sale value of the XSELLERATOR software as per the amortization policy of the Corporation on XSELLERATOR.

Unaudited- Interim Consolidated Statements of Operations



Gross revenue $ 1,227,630 $ 744,392 $ 2,222,710 $ 1,846,983Cost of products and services sold 840,770 391,613 1,457,884 990,507

Gross profit 386,860 352,779 764,826 856,476

ExpensesSalaries and benefits 305,316 365,570 530,032 714,969Employee stock option benefits Note 3 56,768 11,321 91,124 13,866General and administrative 153,874 88,453 262,294 178,864Sales and marketing 38,868 69,511 82,392 139,861

Total expenses 554,826 534,855 965,842 1,047,560

Operating loss before interest, amortization, taxes and discontinued operations (167,966) (182,076) (201,016) (191,084)

Bank charges and interest (5,123) 6,683 (3,912) 11,701

Amortization:Software development costs 37,882 49,095 89,118 105,172Capital assets 28,858 11,817 52,753 36,708Deferred expenses — 5,929 1,975 11,858

Total amortization 66,740 66,841 143,846 153,738

Loss before income taxes and discontinued operations (229,583) (255,600) (340,950) (356,523)

Future income tax recovery (129,658) (52,132) (147,549) (66,824)

Net loss before discontinued operations (99,925) (203,468) (193,401) (289,699)

Loss from discontinued operations net of tax Note 7 — (5,658) — (57,777)

Net loss (99,925) (209,126) (193,401) (347,476)

Deficit, beginning of period (844,880) (268,902) (751,404) (130,552)

Deficit, end of the period $ (944,805) $ (478,028) $ (944,805) $ (478,028)Loss per share from continuing operations

Basic $ (0.005) $ (0.013) $ (0.009) $ (0.018)Diluted $ (0.004) $ (0.013) $ (0.008) $ (0.018)

Loss per share from discontinued operationsBasic $ — $ (0.000) $ — $ (0.004)Diluted $ — $ (0.000) $ — $ (0.004)

Loss per shareBasic $ (0.005) $ (0.013) $ (0.009) $ (0.022)Diluted $ (0.004) $ (0.013) $ (0.008) $ (0.022)

Weighted average number of common sharesBasic 22,026,448 15,849,945 22,026,448 15,849,945Diluted 24,034,261 16,188,253 24,034,261 16,188,253


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Unaudited – Interim Consolidated Balance Sheets

As at June 30 December 312004 2003

AssetsCurrent

Cash $ 2,433,989 $ 286,344 Accounts receivable 1,476,031 1,368,497Inventory 85,154 71,589Prepaid expenses 22,899 28,557Discontinued operations Note 7 — 271,448Future tax asset — 2,238

4,018,073 2,028,673

Future tax asset 682,912 533,124Capital assets 3,597,889 2,829,757Deferred expenses — 1,976

$ 8,298,874 $ 5,393,530

LiabilitiesCurrent

Accounts payable and accrued liabilities $ 526,704 $ 593,669Current liabilities of discontinued operations Note 7 — 103,241

526,704 696,910

Shareholders’ EquityShare capital Note 4 8,574,944 5,334,731Contributed surplus 142,031 113,293Deficit (944,805) (751,404)

7,772,170 4,696,620

$ 8,298,874 $ 5,393,530See accompanying notes to interim consolidated financial statements.

Approved on behalf of the Board:

Director Director

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

Liquidity And Financial ResourcesJune 30, December 31,

2004 2003

Current AssetsCash $ 2,433,989 $ 286,344Accounts receivable 1,476,031 1,368,497Inventory 85,154 71,589Prepaid expenses 22,899 28,557Discontinued operations — 271,448Future tax asset — 2,238

$ 4,018,073 $ 2,028,673

Current LiabilitiesAccounts payable and accrued liabilities $ 526,704 $ 593,669Current liabilities of discontinued operations — 103,241

$ 526,704 $ 696,910

Net working capital $ 3,491,369 $ 1,331,763

The Corporation expects the existing credit facilities and present and forecasted net working capital to be sufficient tosupport its capital investments and future growth prospects, in addition to meeting all other current and expected financialrequirements in FY2004.

The net working capital position of the Corporation is very solid. Net working capital at June 30, 2004 was $3,491,369compared to $1,331,763 at December 31, 2003, an increase of $2,159,606. The current ratio at June 30, 2004 is 7.63 is muchgreater than the ratio of 2.91 at December 31, 2003.

The strong current ratio is reflective of the fact that during Q1 FY2004 the Corporation raised gross proceeds of $3.1 millionthrough a non-brokered private placement which was oversubscribed.

Subsequent to the balance sheet date of June 30, 2004 and as at August 1, 2004 1,333,000 additional warrants from thenon-brokered private placement completed in 2003 had been converted to common shares at an exercise price of $0.75,resulting in additional share capital raised of $999,750.

This latest placement, and recent conversion of warrants, have bolstered the balance sheet and has the Corporation wellpositioned to fund all U.S. expansion and product development from its own resources.

Cash Flows from Continuing OperationsNet cash flow from continuing operations was $(573,658) in Q2 FY2004 compared to $(197,359) in Q2 FY2003.Cash flows from operating activities were $(296,394) in Q2 FY2004 compared to $17,896 in Q2 FY2003. The exercise of various warrants and stock options as well as the final receipt of funds from the placement in Q2 FY2004

resulted in cash inflows from financing activities of $247,753 being collected net of costs. The Corporation has a strong commitment to continually enhance and improve XSELLERATOR and invested $438,822 in

product development in Q2 FY2004. The Corporation invested a further $86,195 for computer equipment and other capitalassets, for net outflow of cash related to investing activities of $525,017.

Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities of $526,704 at June 30, 2004 are less than the $593,669 at December 31, 2003.

The current liabilities are easily absorbed by the strong current asset position, and particularly the strong cash position ofQuorum.

Share Capital For the six months ended June 30, 2004 the Corporation issued 5,175,000 additional common shares through a non-

brokered private placement, and an additional 192,200 warrant and stock option exercises, for net additional Share Capital of$3,240,213.

Material Contracts & CommitmentsDuring Q2 FY2004, the Corporation did not enter into any new material contracts or commitments.

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Off Balance Sheet Arrangements Other than the lease commitments noted in Note 9 of the 2003 Audited Financial Statements, the Corporation has not

entered into any off Balance Sheet arrangements.

Net Income and Earnings per Share Q2 FY 2004 Q2 FY 2003,

June 30 June 30

Net loss before discontinued operations $ (99,925) $ (203,468)Net loss from discontinued operations — (5,658)Net loss (99,925) (209,126)

Loss per share from continuing operationsBasic $ (0.005) $ (0.013)Diluted $ (0.004) $ (0.013)

Loss per share from discontinued operationsBasic $ — $ (0.000)Diluted $ — $ (0.000)

Loss per shareBasic $ (0.005) $ (0.013)Diluted $ (0.004) $ (0.013)

Weighted average number of common sharesBasic 22,026,448 15,849,945Diluted 24,034,261 16,188,253

The net loss before discontinued operations for Q2 FY2004 was $(99,925) or $(0.005) per share, compared to a net loss of$(203,468) or $(0.013) for Q2 FY2003.

The net loss for Q2 FY2004 was $(99,925) or $(0.005) per share, compared to a net loss of $(209,126) or $(0.013) for Q2FY2003.

Critical Accounting Policies The selection and application of accounting policies is an important process that has developed as the Corporation’s

business activities have evolved and as accounting rules have changed. The Corporation prepares its financial statements inaccordance with Canadian Generally Accepted Accounting Principles (GAAP) as published by the Canadian Institute ofChartered Accountants. Following GAAP involves the implementation and interpretation of existing rules and the use ofjudgment relative to the circumstances existing in the Corporation’s business. Every effort is made to comply with GAAP, andthe Corporation believes the proper implementation and consistent application of GAAP is critical.

The Corporation’s significant accounting policies are described in detail in Note 2 to the FY2003 audited consolidatedfinancial statements.

Change in Accounting PolicyFor FY2004 the Corporation has changed its approach to accounting for Stock-Based Compensation (Note 3 to the interim

consolidated financial statements) to reflect the new recommendations of the CICA Handbook Section 3870, Stock-BasedCompensation and Other Stock-Based Payments for fiscal years beginning on or after January 1, 2004. Beginning in FY2004expenses for stock-based compensation are included in the interim consolidated statement of operations. For Q2 FY2004 thisresulted in $56,768 of related expense, and Q2 FY2003 was restated to reflect related expenses of $11,321. In addition,opening retained earnings for FY2003 were restated to reflect expenses related to employee stock option benefits fromFY2002 of $53,291 and opening retained earnings for FY2004 were adjusted to further reflect expenses for employee stockoption benefits related to FY2003 of $60,002 previously disclosed on a pro-forma basis in the Notes to the FY2003consolidated financial statements.

OutlookThe automotive dealership market has traditionally implemented older, character-based technology for its in-house

systems. In addition, the auto manufacturers are developing numerous new electronic interfaces between their systems andthe auto dealerships’ systems. As a Windows-based, fully integrated product, XSELLERATOR is the most technologicallyadvanced software in the DMS field, and as such, is better able to implement the interfaces more quickly and effectively thanits competitors, who utilize older technology. The Corporation anticipates that there will be a considerable amount of demandfrom the auto dealership industry to upgrade to the latest technology, and for companies that utilize new technology in orderto electronically interface with the auto manufacturers. This provides a unique opportunity for the Corporation to market itsXSELLERATOR product both at the dealership and the manufacturer level.

The Corporation believes that its success depends largely upon the following factors:• Sales, installations and support of the Corporation’s XSELLERATOR product.• Continued enhancements and upgrades contained in the new version releases of the Corporation’s proprietary

software product, XSELLERATOR.• The ability of the Corporation to attract and retain top quality people and business partners.• Development of business processes and standardization of those processes, to facilitate the implementation and

support of XSELLERATOR on a global scale.• Build and maintain positive relationships with the automotive manufacturers, and in particular GM Canada and

GM U.S.

Management expects sales from XSELLERATOR will continue to grow over the next several years. Management iscommitted to enhancing its market share in the DMS software market in both Canada and, starting in FY2004, the U.S.However, it is difficult to forecast the Corporation’s sales and market 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 GM U.S.

Forward Looking StatementsForward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions

and the Corporation’s actual results may differ materially from those anticipated in these forward-looking statements. Factorswhich may cause such differences include, but are not limited to those set forth under “Business Risks”. The Corporation doesnot take any obligation to release any public information of the results of any revision to these forward-looking statements,which may be made to reflect events or circumstances occurring in the future.

Business RisksAs a young and still evolving information technology company, the Corporation faces key risks, including emergence of

superior competing technologies, retention of skilled employees, reliance on relatively few key suppliers and customers, andadequacy of capital and/or cash flow to pursue its business plan objectives. This list is not intended to be exhaustive, butmerely to communicate to shareholders certain key risks faced by the Corporation in its business.

Quorum attempts to mitigate these risks through various strategic and operating mechanisms such as ongoing researchand development to maintain XSELLERATOR’s position as the most advanced product in the automotive DMS field, fair andequitable compensation and workplace policies, flexibility in operational decision making, review and discussion ofcompetitors’ policies to maintain market advantage, and ongoing interaction with both debt and capital markets.Management believes these strategies reduce the Corporation’s business risk to an acceptable level, which will allow theCorporation to continue to grow and maximize shareholder value.

The information technology industry is subject to rapid technological change, and the products and services provided bythe Corporation are also expected to be subject to rapid technological changes. To remain competitive, the Corporation mustbe able to keep pace with the technological developments in this industry and change its product and services lines to meetnew demands. The Corporation will depend on research and development for improvements and enhancements toXSELLERATOR, and the introduction of new products and services that have not been commercially tested to accelerate its futuregrowth. The Corporation has a proven track record of success in innovative product design and enhancements, and has theexpertise and the capital backing in place to continue it.

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Unaudited – Interim Consolidated Balance Sheets

As at June 30 December 312004 2003

AssetsCurrent

Cash $ 2,433,989 $ 286,344 Accounts receivable 1,476,031 1,368,497Inventory 85,154 71,589Prepaid expenses 22,899 28,557Discontinued operations Note 7 — 271,448Future tax asset — 2,238

4,018,073 2,028,673

Future tax asset 682,912 533,124Capital assets 3,597,889 2,829,757Deferred expenses — 1,976

$ 8,298,874 $ 5,393,530

LiabilitiesCurrent

Accounts payable and accrued liabilities $ 526,704 $ 593,669Current liabilities of discontinued operations Note 7 — 103,241

526,704 696,910

Shareholders’ EquityShare capital Note 4 8,574,944 5,334,731Contributed surplus 142,031 113,293Deficit (944,805) (751,404)

7,772,170 4,696,620

$ 8,298,874 $ 5,393,530See accompanying notes to interim consolidated financial statements.

Approved on behalf of the Board:

Director Director

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

Liquidity And Financial ResourcesJune 30, December 31,

2004 2003

Current AssetsCash $ 2,433,989 $ 286,344Accounts receivable 1,476,031 1,368,497Inventory 85,154 71,589Prepaid expenses 22,899 28,557Discontinued operations — 271,448Future tax asset — 2,238

$ 4,018,073 $ 2,028,673

Current LiabilitiesAccounts payable and accrued liabilities $ 526,704 $ 593,669Current liabilities of discontinued operations — 103,241

$ 526,704 $ 696,910

Net working capital $ 3,491,369 $ 1,331,763

The Corporation expects the existing credit facilities and present and forecasted net working capital to be sufficient tosupport its capital investments and future growth prospects, in addition to meeting all other current and expected financialrequirements in FY2004.

The net working capital position of the Corporation is very solid. Net working capital at June 30, 2004 was $3,491,369compared to $1,331,763 at December 31, 2003, an increase of $2,159,606. The current ratio at June 30, 2004 is 7.63 is muchgreater than the ratio of 2.91 at December 31, 2003.

The strong current ratio is reflective of the fact that during Q1 FY2004 the Corporation raised gross proceeds of $3.1 millionthrough a non-brokered private placement which was oversubscribed.

Subsequent to the balance sheet date of June 30, 2004 and as at August 1, 2004 1,333,000 additional warrants from thenon-brokered private placement completed in 2003 had been converted to common shares at an exercise price of $0.75,resulting in additional share capital raised of $999,750.

This latest placement, and recent conversion of warrants, have bolstered the balance sheet and has the Corporation wellpositioned to fund all U.S. expansion and product development from its own resources.

Cash Flows from Continuing OperationsNet cash flow from continuing operations was $(573,658) in Q2 FY2004 compared to $(197,359) in Q2 FY2003.Cash flows from operating activities were $(296,394) in Q2 FY2004 compared to $17,896 in Q2 FY2003. The exercise of various warrants and stock options as well as the final receipt of funds from the placement in Q2 FY2004

resulted in cash inflows from financing activities of $247,753 being collected net of costs. The Corporation has a strong commitment to continually enhance and improve XSELLERATOR and invested $438,822 in

product development in Q2 FY2004. The Corporation invested a further $86,195 for computer equipment and other capitalassets, for net outflow of cash related to investing activities of $525,017.

Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities of $526,704 at June 30, 2004 are less than the $593,669 at December 31, 2003.

The current liabilities are easily absorbed by the strong current asset position, and particularly the strong cash position ofQuorum.

Share Capital For the six months ended June 30, 2004 the Corporation issued 5,175,000 additional common shares through a non-

brokered private placement, and an additional 192,200 warrant and stock option exercises, for net additional Share Capital of$3,240,213.

Material Contracts & CommitmentsDuring Q2 FY2004, the Corporation did not enter into any new material contracts or commitments.

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11

General and administrative expenses for Q2 FY2004 were $153,874 compared to $88,453 for Q2 FY2003 for an increase of$65,421 or 74%. The XSELLERATOR business was charged with more corporate overhead allocations in Q2 FY2004 versus Q2FY2003 as the TS division activity was wound down and disposed of in Q1 FY2004. As well, the Corporation has incurredincreased tax and legal consulting fees related to U.S. expansion activities.

Sales and marketing expenses for Q2 FY2004 were $38,868 or 3.2% of sales compared to $69,511 for Q2 FY2003 or 9.3%of sales. Sales and marketing expenses are as planned for FY2004, and the Corporation has been able to achieve certainefficiencies with experience and a build up of in-house materials.

Bank Charges and InterestBank charges and interest expenses for Q2 FY2004 were actually a net revenue of $5,123 compared to a net expense in

Q2 FY2003 of $6,683. The expense represents bank charges and any interest on the bank line of credit, which is at prime +1.25% per annum, net of any interest received on term deposits. With the equity placements completed in FY2003 and Q1FY2004, the Corporation has placed excess funds in a series of one-month T-Bills resulting in interest revenue in excess ofbank charges. Furthermore, based on current cash resources, and expected cash flow from operations, the Corporation doesnot expect to draw-down on the line-of-credit in FY2004.

Capitalization & AmortizationDuring FY2003 the Corporation released three new versions of XSELLERATOR. The latest version released in December 2003

was Version 4.3.1. Version 4.3.2 is in the final stages of beta testing and is expected for general release in August 2004.Version upgrades during FY2004 included a number of improved features and enhancements which facilitated new sales tolarger “metro” dealerships. In Q4 FY2003 the Corporation began work with GM U.S. building integration points to achieve GMU.S. certification of XSELLERATOR, which will allow the Corporation to expand sales of XSELLERATOR in the United States. Thiswork has continued in earnest during the first half of FY2004 and the Corporation expects the required integration points to becompleted and fully tested by end of Q3 FY2004. The Corporation continues to work with GM of Canada on new, leading edgeintegration points within its product for more seamless data flow between the dealership and the manufacturer. To achieveall of this development work to the highest quality standards, and on tight timelines, the Corporation, in line with its 2004plans, has added 5 new in-house software developers and software testers to its development team.

Summary of capitalized software development costs and related amortization for XSELLERATOR and DISTRIBUTOR.

Six months Six months Q2 ended Q2 endedended ended June 30, 2004 June 30, 2003

June 30, 2004 June 30, 2003

Software Development Costs Capitalized $ 795,534 $ 368,625 $ 438,822 $ 185,196Amortization of Software Development Costs $ 89,118 $ 105,172 $ 37,882 $ 49,095

All research and development costs are expensed as incurred unless they satisfy the generally accepted accountingcriteria for deferral and subsequent amortization. As noted above, the Corporation continues to conduct ongoing research anddevelopment towards the improvement of XSELLERATOR and has capitalized payroll costs of $378,773 and direct overheads of$60,049 for a total of $438,822 in Q2 FY2004 compared to $170,275 of capitalized payroll costs and direct overheads of$14,921 in Q2 FY2003 for a total of $185,196. XSELLERATOR is the leading edge product in the automotive DMS field and theCorporation intends to maintain this lead through continued investment in the product. The Corporation has expanded itsdevelopment efforts as it prepares to roll out additional features and functionality, more and improved integration points withthe manufacturers, and to introduce the product into the U.S. market.

Amortization for Q2 FY2004 decreased to $37,882 as compared to $49,095 for Q2 FY2003. This decrease is a result of thedecrease in XSELLERATOR software license sales during Q2 FY2004 compared to Q2 FY2003, and applicable amortization of 20%of the sale value of the XSELLERATOR software as per the amortization policy of the Corporation on XSELLERATOR.

Unaudited- Interim Consolidated Statements of Operations



Gross revenue $ 1,227,630 $ 744,392 $ 2,222,710 $ 1,846,983Cost of products and services sold 840,770 391,613 1,457,884 990,507

Gross profit 386,860 352,779 764,826 856,476

ExpensesSalaries and benefits 305,316 365,570 530,032 714,969Employee stock option benefits Note 3 56,768 11,321 91,124 13,866General and administrative 153,874 88,453 262,294 178,864Sales and marketing 38,868 69,511 82,392 139,861

Total expenses 554,826 534,855 965,842 1,047,560

Operating loss before interest, amortization, taxes and discontinued operations (167,966) (182,076) (201,016) (191,084)

Bank charges and interest (5,123) 6,683 (3,912) 11,701

Amortization:Software development costs 37,882 49,095 89,118 105,172Capital assets 28,858 11,817 52,753 36,708Deferred expenses — 5,929 1,975 11,858

Total amortization 66,740 66,841 143,846 153,738

Loss before income taxes and discontinued operations (229,583) (255,600) (340,950) (356,523)

Future income tax recovery (129,658) (52,132) (147,549) (66,824)

Net loss before discontinued operations (99,925) (203,468) (193,401) (289,699)

Loss from discontinued operations net of tax Note 7 — (5,658) — (57,777)

Net loss (99,925) (209,126) (193,401) (347,476)

Deficit, beginning of period (844,880) (268,902) (751,404) (130,552)

Deficit, end of the period $ (944,805) $ (478,028) $ (944,805) $ (478,028)Loss per share from continuing operations

Basic $ (0.005) $ (0.013) $ (0.009) $ (0.018)Diluted $ (0.004) $ (0.013) $ (0.008) $ (0.018)

Loss per share from discontinued operationsBasic $ — $ (0.000) $ — $ (0.004)Diluted $ — $ (0.000) $ — $ (0.004)

Loss per shareBasic $ (0.005) $ (0.013) $ (0.009) $ (0.022)Diluted $ (0.004) $ (0.013) $ (0.008) $ (0.022)

Weighted average number of common sharesBasic 22,026,448 15,849,945 22,026,448 15,849,945Diluted 24,034,261 16,188,253 24,034,261 16,188,253


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5

Unaudited - Interim Consolidated Statements of Cash Flows



Cash flow from operating activitiesCash receipts from customers $ 914,429 $ 964,096 $ 2,159,636 $ 2,049,643Cash paid to suppliers and employees (1,215,946) (936,485) (2,407,473) (2,138,856)Interest received (paid) 5,123 (9,715) 3,911 (16,680)

(296,394) 17,896 (243,926) (105,893)

Cash flow from financing activitiesIssuance of shares net of share issue costs 247,753 — 3,178,366 387,517Deferred finance costs — — — 17,268Repayment of long-term debt — — — (1,873)

247,753 — 3,178,366 402,912

Cash flow from investing activitiesPurchase of capital assets (86,195) (30,059) (116,445) (32,681)Software development costs (438,822) (185,196) (795,534) (368,625)

(525,017) (215,255) (911,979) (401,306)

Cash flow from continuing operations (573,658) (197,359) 2,022,461 (104,287)

Cash flow from discontinued operations Note 7 — (101,017) 125,184 (231,698)

Cash (Bank indebtedness), beginning of period 3,007,647 (285,456) 286,344 (247,847)

Cash (Bank indebtedness), end of period $ 2,433,989 $ (583,832) $ 2,433,989 $ (583,832)


intends to ‘go live’ with the XSELLERATOR software. The Support revenue is recognized in the period that the support servicehas been delivered to the customer.

For Q2 FY2004, Project revenues increased to $0.94 million, compared to $0.56 million for Q2 FY2003. This increase is aresult of seven new customers being added in Q2 FY2004 versus six new customers in Q2 FY2003; in addition, projectrevenues on a per new customer added basis also increased, and the Corporation expects this general trend to continue withmoderate growth in the number of new customers being added, but a continued trend to selling to larger “metro” customerswhich require more seats in their dealership. Also, with the on-going enhancements to the XSELLERATOR product, Quorumexpects a continuation in the improvement in price achieved per seat sold.

For Q2 FY2004, Support revenues increased to $0.29 million, compared to $0.18 million in Q2 FY2003. As more and morecustomers are added, this annuity stream will continue to grow. Further, now that XSELLERATOR is a more established product inthe marketplace, and as the third largest supplier of DMS software to General Motors (GM) dealers in Canada, Quorum willhave the ability to charge increased market rates for on-going monthly support fees. Currently, monthly support fees chargedby Quorum are roughly half of what is charged by its two largest competitors.

In Q2 FY2004 the Corporation has achieved its first two sales of XSELLERATOR in the United States. As of the date of thisreport, another three dealerships in the United States have been signed to purchase XSELLERATOR, bringing the total of signedU.S. dealerships to five. The Corporation has a strategic marketing plan to allow for managed growth in the United States,which will target specific regions on a rotational basis. As of the date of this report, the Corporation launched a directmarketing campaign into the first region, and will roll out the campaign to additional areas within that region in Q3 and Q4 ofFY2004. The Corporation expects to see U.S. sales exceed the six planned for FY2004. The U.S. market place has many morecustomers than there are in Canada. Further, based on the Corporation’s market research to date, the pricing environment ismore robust in the U.S., and the Corporation believes it can achieve higher margins on sales to this market.

In Q2 FY2004 the Corporation also rolled out several new lines of business under the banner of Dealer Services. DealerServices will be responsible for all after-market sales to existing customers including new service products such as businessprocess consulting, sales consulting, specific training programs, and many web-based training seminars. This group will alsosell new hardware products such as thin clients, printers, monitors and other items dealerships require. With a focused efforton the after-sales market, the Corporation expects to expand its revenue base.

Cost of Products and Services Sold and Gross ProfitFor Q2 FY2004, gross profit increased to $0.39 million or 32% compared to $0.35 million or 47% for Q2 FY2003. The

lower margin percentage reflects a higher percentage allocation in 2004 of salaries & benefits expense to cost of productsand services sold versus allocation to expenses.

Expenses


June 30, 2004 June 30, 2003

Salaries & benefits $ 530,032 $ 714,969 $ 305,316 $ 365,570 $ 224,716 $ 349,399Employee stock option benefits 91,124 13,866 56,768 11,321 34,356 2,545General & administrative 262,294 178,864 153,874 88,453 108,420 90,411Sales & marketing 82,392 139,861 38,868 69,511 43,524 70,350

Total Expenses $ 965,842 $ 1,047,560 $ 554,826 $ 534,855 $ 411,016 $ 512,705

Total expenses before interest, taxes and amortization for Q2 FY2004 were $0.55 million or 45% of sales as compared to$0.53 million or 72% of sales for Q2 FY2003. The decrease in total expenses before interest, taxes and amortization as apercentage of sales is largely due to more accurate allocation of labour related costs to cost of products and services soldwhich has reduced the salaries and benefits number between the comparative quarters by $60,254. It should also be notedthat the FY2004 results reflect the new application of CICA Handbook section 3870 – stock-based compensation, requiring therecording of the fair value of stock option awards in the consolidated statement of operations. Q2 FY2004 reflects theinclusion of $56,768 of employee stock option benefits and Q2 FY2003 has been re-stated to reflect $11,321 of relatedexpense. The employee stock option benefit expense is a non-cash expense.

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Income SummaryFor Q2 FY2004, revenues from operations were $1.23 million compared to $0.74 million for Q2 FY2003, an increase of

$0.49 million or 65%. For the six months ended June 30, 2004, revenues from operations were $2.22 million compared to$1.85 million for the six months ended June 30, 2003, an increase of $0.37 million or 20%.

The net loss from operations (EBITDA) for Q2 FY2004 was $(167,966) or $(0.008) per share compared to $(182,076) or$(0.011) per share for Q2 FY2003. The net loss from operations (EBITDA) for the six months ended June 30, 2004 was$(201,016) or $(0.009) per share compared to $(191,084) or $(0.012) per share for the six months ended June 30, 2003.

The net loss for Q2 FY2004 was $(99,925) or $(0.005) per share, compared to a net loss of $(209,126) or $(0.013) for Q2FY2003. The net loss for the six months ended June 30, 2004 was $(193,401) or $(0.009) per share, compared to a net loss of$(347,476) or $(0.022) for the six months ended June 30, 2003.

Detailed Discussion On Operating Results For The Periods Ended June 30, 2004 And June 30, 2003

Revenue and Gross Profit Analysis


June 30, 2004 June 30, 2003

Gross Revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591

Cost of products and services sold 1,457,884 990,507 840,770 391,613 617,114 598,894

Gross profit $ 764,826 $ 856,476 $ 386,860 $ 352,779 $ 377,965 $ 503,697

Gross profit % 34% 46% 32% 47% 38% 46%

KEY MANAGEMENT METRICSXSELLERATOR Installations – in the period 12 15 7 6 5 9XSELLERATOR Installations – to date 103 75 103 75 96 69

Project Revenue 1,658,272 1,486,839 940,228 562,618 718,043 924,221Support Revenue 564,438 360,144 287,402 181,774 277,036 178,370Gross Revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591

RevenueFor Q2 FY2004, revenues from operations were $1.23 million compared to $0.74 million for Q2 FY2003, an increase of

$0.49 million or 65%.

XSELLERATOR revenue is made up of two main components:• Project Revenue, which is revenue associated with the initial sale and installation of the software and;• Support Revenue, which is revenue associated with the on-going maintenance and support of the software and

network infrastructure for the customer.

The three main sub-components of Project revenue include: • DISTRIBUTOR, the hardware and network solution; since XSELLERATOR is a Windows-based product run on a server based

computing model, new customers must upgrade their existing computer hardware and infrastructure to a more modern platform;

• software licenses for XSELLERATOR which are sold per seat; and • implementation revenue related to training and taking the new customer “live” on the system.

The Support revenue is the recurring annuity income stream from existing customers to support and maintain the softwareon-site, and the free upgrades that provide new and enhanced functionality to the software.

Consistent with the Corporation’s revenue recognition policy, XSELLERATOR Project revenues are recognized in the periodthat the Distributor server and the XSELLERATOR software is installed at the customer’s site, regardless of when the customer

Notes to Unaudited Interim Consolidated Financial Statements

1. Nature of OperationsQuorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an Information Technology Company that focuses on the

automotive retail business, and is incorporated under the Business Corporations Act of Alberta.Quorum develops, markets, implements and supports its own software product, XSELLERATOR™, a Dealership Management System,

for the automotive market.

2. Significant Accounting Policies and Basis of PresentationThe interim consolidated financial statements of the Corporation have been prepared by management following the same

accounting policies and methods of computation as outlined in the consolidated financial statements for the fiscal year ended December 31, 2003, except as described in Note 3. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Corporation’s annual report for the year ended December 31, 2003. The preparation of these interim 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. Further, it should be noted that the interim consolidated financial statements have not been reviewed by the Corporation’s external auditors. Certain comparative figures have been reclassified to conform to the presentations adopted during the current year. The interim consolidated financial statements have, in management’s opinion, been properly prepared using careful judgment within reasonable limits of materiality.

3. Change in Accounting PolicyStock-based compensation

Effective 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 the fair value method for other types of stock-based compensation plans. In prior periods, the Corporation had adopted the “disclosure only” provisions of the standard for stock options granted to employees, whereby pro forma net income and pro forma earnings per share were disclosed in the notes to the consolidated financial statements, as if the fair value based method of accounting had been used for options granted after January 1, 2002. Effective January 1, 2004 expenses for stock-based compensation are required to be included in the consolidated statement of operations. Further, per the transitional provisions of CICA Handbook Section 3870 this change in accounting policy should be applied retroactively.

For the six months period ended June 30, 2004 the Corporation incurred $91,124 of related expense included in the interim consolidated statement of operations, and the interim consolidated statement of operations for the period ended June 30, 2003 was restated to reflect related expenses of $13,866. In addition opening retained earnings for the year ended December 31, 2003 were restated to reflect expenses related to employee stock option benefits from the year ended December 31, 2002 of $53,291, and closing retained earnings for year ended December 31, 2003 were restated to reflect expenses for employee stock option benefits of $60,002 previously disclosed on a pro-forma basis in the Notes to the Consolidated December 31, 2003 financial statements.

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4. Share Capital(a) Authorized

Unlimited number of Common voting sharesPreferred shares issuable in series

(b) Issued and outstandingNumber of Shares Amount

Common SharesBalance, December 31, 2003 19,313,000 $ 5,334,731Issued on private placement, March 31, 2004 5,175,000 3,105,000Issued on exercise of stock options 172,200 150,788Issued on exercise of warrants 20,000 15,000Share issue costs net of future taxes — (30,575)

Total Share Capital at June 30, 2004 24,680,200 $ 8,574,944

(c) Stock OptionsAt the 2003 Annual General Meeting the Corporation received regulatory and shareholder approval to amend the previously

adopted Stock Option Plan (“Stock Plan 2002”) which authorized the Board of Directors of the Corporation to grant options to purchase common shares of the Corporation to directors, officers, employees and consultants who are in a position to contribute to the growth and development of the Corporation. Pursuant to the amended Stock Plan 2002, options may be granted to purchase common shares of the Corporation up to a number not exceeding 3,900,000 common shares in aggregate. Prior to the approved amendment the limit was 2,400,000 common shares in aggregate. The exercise price of the options is determined by the Board of Directors in accordance with the policies of the TSX Venture Exchange (“TSXV”). The options have a maximum term of five years with a hold period of four months from the date of the initial grant, and no more than 1/3 of the stock options granted to any one individual shall vest in any twelve month period.

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

As at June 30, 2004 As at December 31, 2003

Number of Weighted Number of Weightedshares average shares average

exercise price exercise price

Options outstanding at beginning of period 2,026,660 $ 0.46 1,310,740 $ 0.41Granted 547,700 $ 0.75 945,220 $ 0.60Exercised (172,200) $ 0.52 (2,400) $ 0.55Cancelled or expired (35,350) $ 0.57 (226,900) $ 0.73Options outstanding at end of period 2,366,810 $ 0.50 2,026,660 $ 0.46Options exercisable at end of period 1,718,127 $ 0.47 1,533,605 $ 0.43

The following table summarizes information about stock options outstanding at June 30, 2004:

Range of Number Weighted average Weighted averageexercise prices outstanding remaining contractual exercise price

life in years

$0.30 - $0.49 1,245,740 2.3 $0.40$0.50 - $0.69 534,650 4.0 $0.56$0.70 - $0.90 586,420 4.4 $0.75

2,366,810 3.2 $0.50

Management’s Discussion and Analysis ofFinancial Condition and Results of Operation

The following discussion and analysis provides information that management believes is relevant to an assessment andunderstanding of the Corporation’s interim consolidated results of operations and financial condition. This “Management’sDiscussion and Analysis” should be read in conjunction with the unaudited interim consolidated financial statements for thesix months ended June 30, 2004 and the annual consolidated financial statements of the Corporation for the year endedDecember 31, 2003 and the notes thereto. Comparisons made to prior periods are to the corresponding period in the precedingyear unless otherwise indicated.

Background and Description of BusinessQuorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an Information Technology Company that

focuses on the automotive retail business, and is incorporated under the Business Corporations Act of Alberta.Quorum develops, markets, implements and supports its own software product, XSELLERATOR™, a Dealership Management

System, for the automotive market.

Q2 2004 OverviewDuring Q2 FY2004, the Corporation added seven dealership customers, including the first two sales of XSELLERATOR into the

United States, for an exit total at June 30, 2004 of 103 dealerships. New dealerships added for the six months ended June30, 2004 are 12, which is behind the annualized pace of 40 new customers expected for FY2004, but management is confidentthe Corporation will achieve its annualized growth targets.

During Q2 FY2004, the Corporation finished the beta testing of a new version of XSELLERATOR, Version 4.3.2, with positiveresults and full general release of the version is being rolled out in August 2004. XSELLERATOR is the ”next generation” ofDealership Management System (DMS) in the automotive market, and the most advanced, fully integrated Windows basedproduct in the marketplace.

The expansion of the customer base, and improvement of overall performance of the XSELLERATOR product, has allowed theCorporation to optimize the utilization of its development, support and sales personnel and provided an opportunity to achievegrowth and economies of scale.

Q2 2004 Financial Highlights• 65% increase in Gross Revenues from Q2 FY2003.• 58% increase in on-going annuity XSELLERATOR software support revenue• 7% Increase in Customer base from 96 to 103. • Net loss for Q2 FY2004 decreased to $99,925 versus $209,126 in Q2 FY2003.

Results of Operations (Dollar figures in ‘000)


June 30, 2004 June 30, 2003

Gross revenue $ 2,223 $ 1,847 $ 1,228 $ 744 $ 995 $ 1,103Gross profit 765 856 387 353 378 504Expenses 966 1,048 555 535 411 513Operating loss before interest, taxes,

depreciation and amortization (EBITDA) (201) (192) (168) (182) (33) (9)Loss before discontinued operations (193) (289) (100) (203) (93) (87)Loss from discontinued operations — (58) — (6) — (52)Net loss $ (193) $ (347) $ (100) $ (209) $ (93) $ (138)KEY MANAGEMENT METRICSXSELLERATOR Installations – in the period 12 15 7 6 5 9XSELLERATOR Installations – to date 103 75 103 75 96 69

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(d) Share purchase warrantsAs at June 30, 2004 there were 3,946,200 (December 31, 2003 – 3,966,200) outstanding share purchase warrants.632,200 share purchase warrants were issued during the first quarter of 2003 in conjunction with the public offering that was

closed on March 14, 2003. Each share purchase warrant entitles the holder to acquire one additional share of the corporation at $1.40 per share and 474,000 warrants expire on January 25, 2005 and 158,200 warrants expire on March 15, 2005.

As part of an amended non-brokered Private Placement that closed on September 29, 2003, the Corporation issued 429,000 warrants on August 1, 2003, 1,132,000 warrants on August 27, 2003, 819,000 warrants on September 16, 2003 and 954,000 warrants on September 29, 2003 for an aggregate additional issue of 3,334,000 warrants. Each warrant issued entitles the holder to acquire one common share of the Corporation at a price of $0.75 per share if exercised on or before August 1, 2004, and at a price of $1.00 per share if exercised thereafter, but either on or before August 1, 2005. All 3,334,000 warrants, if unexercised, would expire on August 1, 2005. As at June 30, 2004, 20,000 of the originally issued warrants had been converted to common shares at an exercise price of $0.75.

(e) Escrowed shares7,622,970 common shares were originally under escrow restrictions. 10%, or 762,295 shares were released from escrow

when the business combination received final approval 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 month anniversaries of September 26, 2001. As at June 30, 2004 1,143,447 (December 31, 2003 – 2,286,894) common shares are subject to escrow restrictions.

5. Related Party TransactionsFor the six month period ended June 30, 2004, the Corporation incurred fees in the amount of $25,000 (June 30, 2003 - Nil) under a

consulting agreement with one director. The fees were in relation to corporate finance and governance services.Related party transactions have been recorded at their exchange amounts which represent carrying values.

6. Segmented InformationThe Corporation operates in one segment, the computer network and business software solutions industry.During the quarter ended June 30, 2004, the Corporation commenced selling into the United States marketplace. Gross revenue by

geographic area is summarized as follows:

Three months Three months Six months Six monthsended June 30, 2004 ended June 30, 2003 ended June 30, 2004 ended June 30, 2003

Canada $ 970,616 $ 744,392 $ 1,965,696 $ 1,846,983United States 257,014 — 257,014 —

Total gross revenue $ 1,227,630 $ 744,392 $ 2,222,710 $ 1,846,983

7. Discontinued OperationsOn October 29, 2003, the Board of Directors decided to divest the Corporation of the Technology Solutions Division (“TS Division”).

The sale of this division was completed on February 17, 2004 with the effective date being February 1, 2004.

8. Subsequent EventAs at August 1, 2004, an additional 1,333,000 share purchase warrants from the non-brokered private placement completed in 2003

had been converted to common shares at an exercise price of $0.75, raising additional gross proceeds of $999,750. After the described exercise, there remain 1,981,000 outstanding warrants to purchase one common share each at an exercise price of $1.00.

Many of our shareholders are unaware of the fact that ourdealers are an integral part of a successful deployment ofour software. The best conversions (replacing old softwarewith new) happen with dealers who understand that theshort term pain of change is well worth the long termbenefits gained from the new technology they are adopting.

At the time of writing, Version 4.3.2 of XSELLERATOR wassuccessfully deployed to all of our dealerships. It includedtwo exciting new integration points to GM Canada. TheVehicle Inquiry System is a welcome new feature becauseit increases dealerships’ campaign revenue. When a vehicleis put on an Appointment or Work Order, XSELLERATOR

automatically looks up outstanding campaigns from GM’ssystem and adds them to the work order. It’s very slick. Theother integration point is Vehicle Orders, which allows salesstaff to track all the on-order vehicles from General Motors.

United StatesDuring this quarter, we added our first two American

dealers and just recently, three more U.S. dealerships madethe move to XSELLERATOR, giving us a total of five to date.They tell me they are very excited with the prospect ofhaving Windows based software throughout theirdealerships.

In July, a regional marketing program was launched inthe United States. This campaign is designed to ensuremanaged growth in this market, and will be rolled out toother selected States through the third and fourth quartersof 2004.

We are moving closer to completion of requiredintegration to the GM U.S. systems. The only thingremaining is Parts integration, which is in the initial testingstage at this time. Once this has been completed, Quorumshould gain U.S. certification from GM U.S.

It’s been a very busy summer, and fall is shaping up tobe a very exciting time as we push even further into theU.S. market.

Sincerely,

Maury Marks B.Mgt., C.A.President and CEOQuorum Information Technologies Inc.


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Dear FellowShareholders,

The second quarter of2004 proved to be a veryactive one throughout theCompany. Our OperationsGroup worked on thedevelopment of a newimplementation approach

which will be rolled out in August. By automating many ofthe processes and steps required to convert a dealershipfrom their old software to ours, we should reduce the timeit takes to implement XSELLERATOR in a dealership, and makethe transition process even easier for new dealerships.

The Support Group has just launched a new supportweb site which will be very beneficial to both the group andour customers. Dealership staff can visit the site to requestand track issue resolution, access instructional tutorials onall areas of XSELLERATOR, access information on new versionfeatures, plus a lot more.

As an added note, during the months of June and July2004, the Corporation issued 1,353,000 Common Shares on

the exercise of 1,353,000 Share Purchase Warrants at aconversion price of $0.75 each, raising gross proceeds of$1,014,750. Of the total Warrants exercised, 55% weretaken by our dealership customers. Our strong cash positionlets us continue to further develop and advance our product,our integration with GM Canada and General Motors Corp.(GM U.S.), and expand our marketing and operational reachinto the U.S. market.

Now that we are actively selling into the UnitedStates, I will report to you on our efforts, and resultsachieved, for each country. It is extremely satisfying, for allof us, to report by country; getting here has been a longroad, and this new vista is a very auspicious one.

CanadaDuring this quarter, we had five new dealerships make

the move to XSELLERATOR, and I am very pleased to welcomeeach one of them as our newest partners.

We deployed XSELLERATOR into one of the largest Metro dealerships in Canada, City Buick in Toronto. This dealership is owned by one of Quorum’s Directors, John Carmichael, who with his wife Kerry, have beeninstrumental in ensuring a successful implementation.

Financial HighlightsSix months Six months Q2 ended Q2 ended Q1 ended Q1 ended

ended ended June 30, 2004 June 30, 2003 March 31, 2004 March 31, 2003June 30, 2004 June 30, 2003

Gross revenue $ 2,222,710 $ 1,846,983 $ 1,227,630 $ 744,392 $ 995,079 $ 1,102,591 Cost of products and services sold $ 1,457,884 $ 990,507 $ 840,770 $ 391,613 $ 617,114 $ 598,894

Gross profit $ 764,826 $ 856,476 $ 386,860 $ 352,779 $ 377,965 $ 503,697

Gross profit % 34% 46% 32% 47% 38% 46%

Loss before interest, taxes, depreciation and amortization (EBITDA) ($201,016) ($191,084) ($167,966) ($182,076) ($33,051) ($9,008)

Loss before discontinued operations ($193,401) ($289,699) ($99,925) ($203,468) ($93,477) ($86,231)Loss from discontinued operations — ($57,777) — ($5,658) — ($52,119)Net Loss ($193,401) ($347,476) ($99,925) ($209,126) ($93,477) ($138,350)

Loss per share from continuing operations ($0.009) ($0.018) ($0.005) ($0.013) ($0.005) ($0.006)Loss per share from discontinued operations — ($0.004) — — — ($0.003)Basic loss per share ($0.009) ($0.022) ($0.005) ($0.013) ($0.005) ($0.009)Fully diluted loss per share ($0.008) ($0.022) ($0.004) ($0.013) ($0.004) ($0.008)

Weighted average number of common sharesBasic 22,026,448 15,849,945 22,026,448 15,849,945 19,408,295 15,721,882Diluted 24,034,261 16,188,253 24,034,261 16,188,253 20,889,559 16,210,680

President’s Message

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

Officers

Larry ShelleyChairman of Board of Directors

Maury MarksPresident and Chief Executive Officer

Craig Nieboer, CAChief Financial Officer

Bill ThompsonV.P. Business Development

Corporate CounselBurnet Duckworth & PalmerCalgary, Alberta

BankersCanadian Imperial Bank of CommerceCalgary, Alberta

AuditorsBuchanan Barry LLP

Calgary, Alberta

Stock Exchange ListingTSX Venture ExchangeTrading Symbol: QIS

Registrar and Transfer AgentComputershare Trust Company of CanadaCalgary, Alberta


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

Board of Directors

Maury MarksDirectorPresident and Chief Executive Officer,Quorum Information Technologies Inc.

Larry ShelleyChairman of Board of DirectorsPresident, SRG Capital Ltd.

Dan LaplanteDirectorPresident, Continental Oilfield Supply Canada

John CarmichaelDirectorDealer Principal, City Buick Pontiac Cadillac, Toronto, Ontario

Michael CroxonDirectorPresident, North York Chevrolet Oldsmobile; Richmond Hill Pontiac Buick GMC; Open Road BMW; and Kia of Newmarket

Corporate Information


Our Mission

At Quorum, our mission is to be the very best atbuilding and supporting the most advancedautomotive Dealership & Customer RelationshipManagement System, and technology infrastructure,in the automotive industry to enable dealerships tostreamline their operations and better serve theircustomers.

Our Values

IntegrityWhile our abilities are considerable, we will be realistic,honest and fair in our commitments, and above all, we willfollow through.

Respect Our customers and our people are our greatest resource; weencourage, listen to, and value their contributions.

Excellence We set high standards, strive for continuous improvementin everything we do, and exceed expectations.

Knowledge Understanding our customers’ business processes, and thetechnology that supports them, is our focus.

Empowerment We empower our people with the resources needed topromote innovation and fresh thinking.

TeamworkOur success is the result of teamwork. We operate with thehighest level of cooperation and trust with our clients andthroughout our company.

‘‘‘‘Table of Contents

Financial Highlights 1

President’s Message to the Shareholders 1

Management’s Discussion & Analysis 3

Interim Consolidated Balance Sheets 10

Interim Consolidated Statements of Operations 11

Interim Consolidated Statements of Cash Flows 12

Interim Notes to Consolidated Financial Statements 13

Corporate Information 16

“XSELLERATOR is the management system we’ve been waiting for. Every other industry has been operating withadvanced 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, General Manager - Parkway Pontiac, St-Laurent, QC

“I could stay with my present system and know exactly what I’ll still have 5 years from now because it won’t change -or I could move to Quorum and get the latest technology and continually get free software enhancements to keep itcurrent. I moved.”

Dennis Langlois, General Manager - Butler Chev Olds, Pembroke, ON

“I’m amazed with the way this company does business. These guys are the only ones in the industry who actuallylisten to their dealers’ ideas – not only do they listen, they then implement our ideas and keep on rolling out newversions.”

Dewey Hall, Dealer Principal - Gananoque Chev Olds Cadillac, Gananoque, ON

“We moved to XSELLERATOR after years of having to deal with overpriced, antiquated products. We chose XSELLERATOR

for a number of reasons, one of which was we are able to do more things with our customer database that we couldn’tdo before.”

Ryan Finch, General Manager - Brian Finch Pontiac Buick GMC, London, ON

“We switched to XSELLERATOR because of its customer integration in all departments, utilization of the latest technology,and GM Integration. It has drastically reduced our monthly computer costs and it’s a single entry system.”

Mark Cullen, General Manager - Barry Cullen Chevrolet Oldsmobile Cadillac, Guelph, ON

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

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