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Softchoice Corporation Management’s Discussion and Analysis

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Management’s Discussion and Analysis

February 29, 2012

This document has been prepared to help investors understand the financial performance of the Company in the broader context of the Company’s strategic direction, the risks and opportunities as understood by management and the key metrics that are relevant to the Company’s performance. Management has prepared this document in conjunction with its broader responsibilities for the accuracy and reliability of the financial statements, as well as the development and maintenance of appropriate information systems and internal controls to ensure that the financial information is complete and reliable. The Audit Committee of the Board of Directors, consisting solely of independent directors, has reviewed this document and all other publicly reported financial information for integrity, usefulness, reliability and consistency. This document and the related financial statements can also be viewed on the Company’s website at www.softchoice.com and at www.sedar.com. The Company’s Annual Information Form is also available on these websites. Unless otherwise stated, dollar amounts referred to in this document are expressed in U.S. dollars.

Caution Regarding Forward-Looking Statements This Management’s Discussion and Analysis contains certain forward-looking statements based on management’s current expectations. Management bases its expectations on current market conditions and forecasts published by experts, on knowledge of observed industry trends and on internal intentions based on developed business plans or budgets. The words “expect,” “intend,” “anticipate” and similar expressions generally identify forward-looking statements. These forward-looking statements entail various risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Certain of these risks are described in the Company’s current Annual Information Form. They include risks related to economic conditions, bad debts, access to credit and access to capital; risks related to debt financing; exchange rate risk; and the risk of credit card fraud. The Company also faces risks related to the information technology (IT) distribution channel such as dependence on Microsoft, reliance on financial incentives, dependence upon distributors, the inability to respond to changes to the IT distribution channel, technical innovation, competition, the risk of IT product defects and the risk of providing technology solutions offerings. There are additional risks relating to the management of the business, including the inability to successfully execute strategies; customer attrition; productivity; compliance with U.S. federal government procurement processes; sales model risks; hiring, training and retention of personnel; variability of quarterly operating results; information systems; damage to Softchoice’s computer systems; and dependence upon management. These risks are described in full in the Company’s current Annual Information Form.


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Fourth Quarter Highlights (In thousands of U.S. dollars)

The Company delivered strong operating results throughout 2011, and the fourth quarter was no exception. Total annual net sales were up 13.1 percent, to $999.4 million over the same period in the prior year. In the fourth quarter the Company reported net sales of $269.4 million, an increase of 6.2 percent, with strong reported results from the Microsoft business. Other highlights of the quarter include the following:

On December 1, 2011 the Company successfully completed the acquisition of UNIS LUMIN Inc.; a highly-regarded Canadian based Cisco networking and managed services company. The acquisition substantially broadens the Company’s technical consulting, professional services delivery and project management capabilities.

Softchoice re-negotiated its asset-backed loan agreement to more favourable terms and early repaid the Company’s term debt which carried an interest rate of 16.0 percent.

The Company achieved a gross profit of $48.7 million, representing an increase of 7.6 percent from gross profit of $45.3 million reported in the fourth quarter of 2010. Gross profit margin increased 20 basis points to 18.1 percent.

Adjusted net earnings for the quarter were $6.3 million compared to adjusted net earnings of $6.0 million for the same period of the prior year. Adjusted net earnings per share were $0.32 compared to $0.31 reported in the fourth quarter of 2010.

Cash generated from operations was $24.0 million in the quarter, compared to cash generated from operations of $10.5 million in the same quarter of the prior year.

At December 31, 2011, the Company had $33.0 million of cash on hand, and total debt of nil.

Softchoice was named Software Asset Management, Volume Licensing and Sales Management Partner of the Year at Microsoft Canada’s annual Impact Awards in Toronto on November 30, 2011.

During the year-end reporting process, management identified certain errors in the amounts recorded for rebate and marketing development funds in 2011. Management determined that further review of the accounting in this area was warranted and accordingly decided to delay the release of the Company’s earnings for the fourth quarter and year ended December 31, 2011 until this review could be completed. As a result of the review, an adjustment was made to cost of sales in the current period to correct for the errors, reducing net earnings by US$1.1 million. Management has recorded the entire amount of the adjustment in the current quarter as it was determined that the impact on previously reported periods was not material. Management has considered the adequacy of internal controls in this area, and has introduced remedial measures that are more fully described in the section “Disclosure Controls and Procedures and Internal Controls over Financial Reporting” below.


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Selected Annual Information

The following information is provided to give context to the broader comments contained elsewhere in this

report.

(In thousands of U.S. dollars)

2011 IFRS

2010 IFRS

2009 Canadian

GAAP

Net sales, as reported $ 999,400 $ 884,014 $ 754,144

Total revenue (including imputed revenue) $ 2,092,417 $ 1,874,407 $ 1,615,785

Gross profit 188,882 164,511 142,269

EBITDA 49,775 41,120 35,074

Net earnings before income taxes 34,127 30,623 31,840

Net earnings 22,120 20,065 22,263

Earnings per share

Basic $ 1.12 $ 1.01 $ 1.26

Diluted $ 1.11 $ 1.01 $ 1.26

Total assets $ 447,689 $ 351,344 $ 290,366

Term debt - 12,232 16,775

Shareholders’ equity 140,318 116,497 96,358

Dividends - - -

2011 was a year of significant growth for Softchoice Corporation. Net sales climbed 13.1 percent while gross profit increased by 14.8 percent. These results reflect the growth of our Microsoft business and enterprise software, servers, storage and networking (ESSN) business. The Company’s sales force, business development and professional services teams capitalized on the momentum that began in 2010. The addition of new pre-sales and services resources has allowed Softchoice to help customers understand the value of new computing solutions and provide project management and service expertise to support the deployment of these technologies within their environments. Softchoice’s strategy to enhance the productivity of the sales organization while shifting a greater proportion of the revenue mix to higher margin engagements is gaining traction and is reflected in strong gross profit growth for the year. The latter part of 2011 was a busy time for Softchoice. Key milestones include the refinancing of the Company’s asset-backed loan agreement, the early repayment of the term debt and the acquisition of substantially all of the assets of UNIS LUMIN Inc. (UNIS LUMIN acquisition), all of which has bolstered the Company’s balance sheet. The UNIS LUMIN acquisition accelerates the focus on professional services, enhancing value to our customers and improving the overall profitability of our business through higher margin projects. The accompanying 2011 consolidated financial statements represent the first set of annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The comparative figures for 2010 have been restated to conform to IFRS in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards. For further information on the Company’s transition to IFRS refer to the section “Transition to International Financial Reporting Standards”.


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Use of Non-IFRS Terms In our financial reporting, we refer to imputed revenue, EBITDA, and adjusted net earnings, all of which are not recognized measures under IFRS. These terms do not have standardized meaning and they are therefore unlikely to be comparable to similar measures used by other companies. Readers are cautioned that these terms should not be construed as alternatives to net earnings determined in accordance with IFRS.

Imputed Revenue

Microsoft imputed revenue is defined as the price paid by the customer to Microsoft for sales of Enterprise Agreements (EAs) that are transacted through Softchoice sales representatives plus the gross amount billed to our customers for Software Assurance agreements. Microsoft pays Softchoice an agency fee or commission for sales of EAs, and therefore Softchoice does not reflect the imputed revenue in the revenue line for these transactions but records only the agency fees earned within revenue. Microsoft imputed revenue allows for better comparability between fiscal periods since an increase in the product mix of EAs and Software Assurance would make it appear that Softchoice is selling fewer products, when that would not be the case. We believe that an EA often provides a more cost-effective solution for our customers, particularly in the small and medium business (SMB) market. Other imputed revenue includes the difference between what we invoice our customers for non-Microsoft software and hardware maintenance contracts and the net amount that is reflected in our financial statements. We believe that reporting the imputed revenue for these arrangements is helpful to investors to put our trade accounts receivable and trade payables balances into context. The Company records these arrangements on a net basis, as an agent, rather than on a gross basis, as a principal in the transaction, as the services are provided primarily by third parties. The table below shows total revenue, including imputed revenue, for the fourth quarter compared to the same period of the prior year.

(In thousands of U.S. dollars) Three months ended December 31, % Change

2011 2010

Net sales, as reported $ 269,378 $ 253,643 6.2%

Agency fees (10,887) (11,307) -3.7%

Microsoft imputed revenue 196,926 190,308 3.5%

Other imputed software revenue 68,607 50,180 36.7%

Other imputed hardware revenue 18,420 15,846 16.2%

Total revenue, including imputed revenue $ 542,444 $ 498,670 8.8%


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The table below shows total revenue, including imputed revenue, for the year ended December 31, 2011 compared to the same period of the prior year.

(In thousands of U.S. dollars) Year ended December 31, % Change

2011 2010

Net sales, as reported $ 999,400 $ 884,014 13.1%

Agency fees (49,584) (45,187) 9.7%




Total revenue, including imputed revenue $ 2,092,417 $ 1,874,407 11.6%

EBITDA

EBITDA reflects the profits of the Company after selling, marketing and administrative expenses, adjusted for depreciation and amortization, are deducted from gross profit. EBITDA, as defined in our loan agreements, is used by the Company’s bankers in establishing and measuring certain financial covenants. In addition, valuation metrics in our industry are based on multiples of EBITDA. We use our EBITDA results to compare our own valuation multiples to those of our competitors in order to evaluate how we might improve share price performance. We believe that our shareholders and potential investors use EBITDA in making investment decisions about the Company and measuring our operating results compared to others in our industry and other potential investments.


2011 2010

Gross profit $ 48,741 $ 45,302 7.6%

Selling and marketing expenses (25,769) (22,897) 12.5%

Administrative expenses (12,508) (11,345) 10.3%

Depreciation of property and equipment 626 693 -9.7%

Amortization of intangible assets 1,684 1,577 6.8%

EBITDA $ 12,774 $ 13,330 -4.2%


2011 2010

Gross profit $ 188,882 $ 164,511 14.8%

Selling and marketing expenses (102,434) (91,825) 11.6%

Administrative expenses (45,680) (41,002) 11.4%

Depreciation of property and equipment 3,018 2,797 7.9%

Amortization of intangible assets 5,989 6,639 -9.8%

EBITDA $ 49,775 $ 41,120 21.0%


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In the fourth quarter, EBITDA was $12.8 million, representing a decrease of 4.2 percent from the $13.3 million earned in the fourth quarter of 2010. The decline in EBITDA in the fourth quarter of 2011 is largely due to lower overall marketing development funds reported in the fourth quarter compared to the same period in the prior year and higher overall non-recurring costs associated with the UNIS LUMIN Inc. acquisition. For the year ended December 31, 2011, EBITDA increased a total of 21.0 percent to $49.8 million. Management believes that the improvement shown in EBITDA for the year ended December 31, 2011 reflects the strategic investments made in pre-sales resources and technical architects. In addition, the expansion of the Company’s telesales team during the year has also proven to be a very efficient model for achieving strong growth within the SMB segment and for increasing the Company’s share of the Microsoft licensing market. The growth of our professional services business has also bolstered gross profit throughout 2011.

Adjusted Net Earnings

Adjusted net earnings eliminates the after-tax impact related to transaction costs associated with the UNIS LUMIN acquisition and any foreign exchange gain or loss on the cash, intercompany debt and external debt denominated in a currency other than the Company’s functional currency. Adjusted net earnings highlights underlying business performance by adjusting for the impact of currency changes, and transaction costs associated with the UNIS LUMIN acquisition that would have been capitalized under previous Canadian GAAP.

(In thousands of U.S. dollars except per share amounts) Three months ended December 31, % Change

2011 2010

Net earnings $ 6,484 $ 7,384 -12.2%

Adjustments, net of income tax (145) (1,338) -89.2%

Adjusted net earnings $ 6,339 $ 6,046 4.9%

Adjusted net earnings per share $ 0.32 $ 0.31 3.2%

(In thousands of U.S. dollars except per share amounts) Year ended December 31, % Change

2011 2010

Net earnings $ 22,120 $ 20,065 10.2%

Adjustments, net of income tax 1,733 (2,229) -177.7%

Adjusted net earnings $ 23,853 $ 17,836 33.7%

Adjusted net earnings per share $ 1.20 $ 0.90 33.3%

Adjusted net earnings for the fourth quarter were $6.3 million compared to adjusted net earnings of $6.0 million reported for the same period of the prior year. Adjusted earnings per share (basic and diluted) were $0.32 per share compared to adjusted earnings of $0.31 per share for the same period of the prior year, reflecting an increase of 3.2 percent. On a year-to-date basis, adjusted net earnings were $23.9 million in 2011, compared to $17.8 million in 2010, an increase of 33.7 percent. The increase is due to improved gross profit which outpaced total operating expenses incurred during the year. The Company’s reported results from operations were up 24.6 percent over the previous year. Adjusted net earnings per share on a year to date basis were up 33.3 percent, from $ 0.90 per share to $1.20 per share in 2011.


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Management Comments and Business Outlook† Softchoice’s performance in 2011 was exceptional. Reported growth in net sales of 13.1 percent was 1.7 times the rate of global IT spending growth (excluding telecom) of 7.6 percent (Gartner Research, January 2012). The implication is that the Company continued to gain market share throughout 2011. Softchoice estimates its market share at less than 2 percent of the North American market for IT sales through the channel. Even with single digit market share, Softchoice is demonstrating its ability to improve efficiency. In 2011 improving gross margins and lower selling, marketing and administrative expenses as a percent of revenue resulted in an EBITDA margin improvement of 30 basis points from 4.7% to 5.0%. This margin improvement is driven by the productivity in our operating model and the return shown on investments made in the Company’s pre-sales and telesales teams. EBITDA improvement drove adjusted earnings per share growth of 33.3%, or roughly 2.5 times revenue growth. Microsoft Corporation remains a key vendor and partner. Microsoft sales accounted for over 40 percent of our gross profit in 2011. For Softchoice, total Microsoft revenue (including imputed) grew just over 8 percent in 2011. That was in-line with Microsoft’s own revenue growth for the year. The Company does not expect to grow its total Microsoft business at the same rate in 2012, the first full year following Microsoft’s enterprise fee change. We expect more of an impact in Canada as the SMB market plays a bigger role in the United States. We also expect the year to be more back-end weighted with respect to overall growth. In its IT spending outlook for 2012, Gartner expects computing hardware to grow 5 percent, software to grow 6.3 percent, IT services to grow 3.1 percent, and overall spending (not including telecom) to grow 4.8 percent. Gartner’s assumptions in this forecast include a mild recession in Europe and a continued drag on computing hardware growth due to the industry-wide shortage of hard disk drives. Management believes that the Company’s business model goal of growing faster than the overall IT spending market is achievable in 2012, driven by the continued strong growth of our enterprise software, server, storage, and networking (ESSN) business. We expect ESSN gross profit to be greater than our Microsoft gross profit in 2012. A key focus in 2012 is the Company’s expansion and growth of our services business. Services revenue grew 44.5 percent in 2011 but still remains less than 5 percent of total revenue. Softchoice is in the process of spending over $10 million on investments in critical areas of sales coverage, Microsoft, Professional Services, and Cloud. This is in addition to the recent services-focused UNIS LUMIN acquisition. The Company has been building a solution and assessment focused services business for a few years but the UNIS LUMIN acquisition is expected to accelerate this strategy due to the professional services expertise acquired. During 2011, Softchoice helped many customers with their private cloud infrastructure (conversion of data center assets like servers, storage and networking into a single shareable resource). In 2012, the Company plans to help customers move to the next stage by offering its own unique public cloud service – Softchoice Cloud. In partnership with many key vendors like Microsoft and VMWare, Softchoice Cloud will enter 2012 with a focus on offering software-as-a-service (SaaS) and exit the year also offering infrastructure-as-a-service (IaaS). In this model, Softchoice will act as an agent for our customers by helping select, deploy, administer, monitor, and manage the right cloud applications and/or IT resources for each customer. Softchoice Cloud will benefit from the Company’s national-scale local-touch model as the Company initially targets SMB customers.

† This section includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


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Seasonality

The Company’s sales tend to follow a quarterly seasonality pattern that is typical of many companies in the IT industry. In the first quarter of the year, sales to the Canadian government tend to be higher as March 31 marks the fiscal year end for the federal government. A significant portion of the Company’s revenue is derived from the sale of Microsoft products. Historically, the Company has benefited from the sales and marketing drive that has been generated by Microsoft sales representatives in the second quarter of the year leading up to Microsoft’s fiscal year end on June 30. Sales in the third quarter of the year tend to be lower than other quarters due to the general reduction in activity resulting from summer holiday schedules. This slowdown is offset somewhat by the fiscal year end of the U.S. federal government on September 30. In the fourth quarter of the year, the Company typically experiences higher sales as many customers complete their IT purchases in advance of their fiscal year end of December 31.

Summary of Quarterly Operating Results (In thousands of U.S. dollars except per share amounts)

Three months ended

December 31,

September 30,

June 30,

March 31,

December 31,

September 30,

June 30,

March 30,

2011 2011 2011 2011 2010 2010 2010 2010

Net sales $269,378 $227,364 $252,946 $249,718 $253,643 $195,484 $233,326 $201,561

Gross profit 48,741 40,715 55,512 43,914 45,302 35,828 46,933 36,448

Results from operating activities

10,085 5,536 17,566 7,027 10,958 2,254 13,775 5,276

Net earnings(loss)

6,484 (472) 10,948 5,160 7,384 2,094 6,199 4,388

Earnings (loss) per share

$0.33 ($0.02) $0.55 $0.26 $0.37 $0.11 $0.31 $0.22

Acquisition of UNIS LUMIN Inc. On December 1, 2011, the Company acquired substantially all of the assets of UNIS LUMIN Inc., a Canadian corporation specializing in Cisco networking and managed services. The acquisition is expected to enable the Company to broaden its services offerings, technical consulting, professional services delivery and project management capabilities. The fair value of the assets acquired and the liabilities assumed totaled $23.9 million. Total goodwill recognized as a result of the acquisition was $5.2 million and is attributable to synergies with existing businesses and other intangibles that do not qualify for separate recognition under IFRS. The Company incurred acquisition-related costs of $1.0 million related to professional fees, due diligence and severance costs. These were expensed in the period. During the fourth quarter of 2011, the acquisition contributed incremental revenue of $7.3 million and operating income of $0.1 million.


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Detailed Review of Operating Results for the Quarter Three-Month Period Ended December 31, 2011 compared to the Three-Month Period Ended December 31, 2010

(In thousands of U.S. dollars except per share amounts)

Three months ended December 31, %

Change 2011 2010

% of revenue % of revenue

Total revenue, including imputed revenue $ 542,444 201.4% $ 498,670 196.6% 8.8%

Net sales 269,378 100.0% 253,643 100.0% 6.2% Gross profit 48,741 18.1% 45,302 17.9% 7.6% Selling, marketing and administrative 38,277 14.2% 34,242 13.5% 11.8% Add back amortization and depreciation 2,310 0.9% 2,270 0.9% 1.8% EBITDA 12,774 4.7% 13,330 5.3% -4.2% Results from operating activities 10,085 3.7% 10,958 4.3% -8.0% Earnings before income taxes 9,558 3.5% 11,628 4.6% -17.8% Net earnings for the period $ 6,484 2.4% $ 7,384 2.9% -12.2% Adjusted net earnings $ 6,339 2.4% $ 6,046 2.4% 4.8% Net income per common share Basic and fully diluted $ 0.33 $ 0.37 Adjusted net earnings per share $ 0.32 $ 0.31

Product Analysis

The following table shows the relative mix of hardware, software and Microsoft sales for the three months ended December 31, 2011 and are discussed in greater detail below.


2011 2010

Microsoft revenue* $ 95,458 $ 74,425 28.3%

Agency fees (10,887) (11,307) -3.7%


Total Microsoft revenue, including imputed revenue $ 281,497 $ 253,426 11.1%

Other software revenue* 60,577 69,620 -13.0%

Hardware revenue* 113,343 109,598 3.4%



Total revenue including imputed revenue $ 542,444 $ 498,670 8.8%

Total net sales $ 269,378 $ 253,643 6.2%

* These amounts sum to total net sales for the period


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Revenue The Company reported consolidated net sales of $269.4 million during the fourth quarter of 2011, compared to net sales of $253.6 million during the same period of 2010. Virtually all of the growth in revenue experienced this quarter was due to sales of Microsoft products, with revenue climbing 28.3 percent from the fourth quarter of 2010. Agency fees earned on Microsoft EA agreements was down, decreasing 3.7 percent from 2010. The decline in agency fees can be attributed to changes made to the Microsoft fee structure for EA’s, which took effect in the fourth quarter of 2011. Under the new fee structure, a greater proportion of revenue is earned on a trailing basis throughout the life of the agreement, thereby decreasing the fee earned at the time the license is sold. On a consolidated basis, hardware sales grew a modest 3.4 percent, while sales of non-Microsoft software products were down 13.0 percent, the result of a larger proportion of software support sold during the quarter, which the Company records on a net basis. As a North American provider of IT hardware, software and services, revenue is attributed to customers based on where product is shipped or services are provided. The following describes performance in Canada and the United States during the quarter. Canada During the fourth quarter of 2011, net sales, when expressed in Canadian dollars, were up 8.8 percent over the same quarter in 2010. Sales of Microsoft and hardware were both higher increasing 65.6 percent and 17.0 percent respectively. Sales of non-Microsoft software were lower, down 25.2 percent in the quarter. The decline is due to anticipated changes made by a significant vendor in how certain licenses could be sold in the channel resulting in lower sales of Enterprise software to certain key accounts. Other software was also lower due to product mix with a higher overall proportion of software assurance, accounted for on a net basis, sold in the current quarter compared to the fourth quarter of 2010. Hardware sales were higher on sales of printers and tablets, the sale of which continued to gain momentum during the latter part of 2011. The growth in Microsoft sales was attributable to significant increases in sales of both Select licenses and EA agreements transacted directly through Softchoice. Investments made in telesales resources were a key driver of this growth. Higher sales of Select licenses to the public sector and key Enterprise accounts during the quarter contributed to the increase. Agency fees earned on EA’s were down slightly, the result of changes in the fee structure introduced in the current quarter by Microsoft for new EA agreements.

United States The Company recorded net sales of $154.2 million in the United States an increase of 5.2 percent compared to the prior year quarter. Sales of non-Microsoft software grew a modest 3.3 percent, while hardware sales declined 6.6 percent this quarter – the result of certain networking and server arrangements that closed in the fourth quarter of 2010, with no comparable sized transaction in 2011. Sales of Microsoft products increased by 23.2 percent, with sales of EA Indirect, Select and Open licenses all up sharply. A significant licensing deal with a public sector customer contributed to the higher overall revenue reported from Microsoft this quarter. Customers continue to invest in tools like SharePoint and make upgrades in Office 2010 and Windows 7. The Company continues to benefit from the reach provided by our Telesales resources with their focus on the SMB market; sales of Open licenses were substantially higher as a result. Agency fees earned on Enterprise agreements transacted through Microsoft were down slightly at less than 2 percent. The decline experienced as a result of the new fee structure for Enterprise Agreements was offset somewhat by the Company’s ability to take advantage of new solutions incentive programs (SIP) offered by Microsoft this year.


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Gross Profit

Gross profit increased 7.6 percent in the fourth quarter of 2011, up from $45.3 million in 2010, to $48.7 million. Gross profit margin improved 20 basis points to 18.1 percent. The improvement in margin was most notable in Canada with higher reported margin coming from sales of non-Microsoft software and hardware sales. The contribution from the Microsoft business in Canada was down slightly, largely due to lower overall EA agency revenue which is recorded on a net basis. The contribution from professional services helped improve reported margins in both Canada and the United States. Despite lower overall agency fees earned in the US this quarter, margins on the Microsoft business were up, the result of the large public sector deal, a majority of which consisted of software assurance which is recorded on a net basis.

Expenses The following table shows expenses by nature for the three months ended December 31, 2011 and December 31, 2010.

Operating expenses

(In thousands of U.S. dollars ) Three months ended December 31, % Change 2011 2010

% of gross

profit % of gross

profit

Personnel expenses $ 25,127 51.6% $ 24,320 53.7% 3.3%

General and administrative 10,840 22.2% 7,652 16.9% 41.7% Depreciation of property and equipment 626 1.3% 693 1.5% -9.7% Amortization of intangible assets 1,684 3.5% 1,577 3.5% 6.8% Total operating expenses $ 38,277 78.5% $ 34,242 75.6% 11.8%

For the three month period ended December 31, 2011, total operating expenses increased 11.8 percent largely due to higher general and administrative expenses which increased 41.7 percent over the same quarter of the previous year. General and administrative expenses were higher due to an increase in professional fees and other transaction-related costs associated with the UNIS LUMIN acquisition. Under IFRS, these fees do not make up part of the purchase price and are required to be expensed. Total fees of $1.0 million were incurred in connection with the acquisition. General and administrative costs were also higher due to increased facilities and sales expenses, consistent with overall higher headcount in the quarter, compared to 2010. Personnel expenses were higher primarily due to greater investments in headcount, and higher incentive compensation associated with our short-term and long-term executive compensation plans. Total average headcount for the fourth quarter of 2011 was 1,018, compared to average headcount of 918 in the fourth quarter of 2010. The increase reflects the addition of territory sales representatives throughout 2011, and the addition of more than 130 individuals joining Softchoice from UNIS LUMIN Inc. As a percentage of gross profit, company-wide personnel expenses were 51.6 percent, a decline from 53.7 percent in the same quarter of 2010. This decline largely reflects the return on investment associated with headcount additions in our pre-sales and telesales functions and the focus on value added services, which provide a greater overall margin to the Company.


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Other Depreciation of property and equipment was down 9.7 percent compared to the fourth quarter of 2010. Amortization of intangible assets increased by 6.8 percent in the fourth quarter of 2011, compared to 2010, due to the acquisition of intangible assets as part of the UNIS LUMIN acquisition. Net finance costs were $0.5 million in the fourth quarter of 2011 compared to net finance income of $0.7 million in the same quarter of 2010. Finance costs consist of interest costs and fees on loans, borrowings and trade payables of $0.5 million (quarter ended December 31, 2010 - $0.7 million), and amortization of financing costs of $0.8 million (quarter ended December 31, 2010 - $0.4 million). Finance costs in the fourth quarter of 2011 also include fees associated with the refinancing of the asset-backed loan (ABL) totaling $0.5 million. Finance costs also include the net foreign exchange impact on financing activities. In the fourth quarter of 2011 there was a net foreign exchange gain of $1.3 million (quarter ended December 31, 2010 – there was a net foreign exchange gain of $1.8 million), contributing to the higher net finance costs in 2011 compared to the same period in 2010. The Company recorded income tax expense of $3.1 million on pre-tax earnings of $9.6 million, resulting in an effective tax rate of approximately 32.2 percent for the fourth quarter of 2011. This compares to an income tax expense of $4.2 million on pre-tax earnings of $11.6 million, resulting in an effective tax rate of approximately 36.5 percent for the same quarter in 2010. The increase in the effective tax rate is due to the impact of realized and unrealized foreign exchange losses in the fourth quarter of 2011 compared to realized and unrealized foreign exchange gains in the same period in 2010. The Company reported net earnings for the fourth quarter of 2011 of $6.5 million compared to net earnings of $7.4 million reported in the same quarter of the prior year. Net earnings per share is $0.33(basic and diluted), compared to a net earnings per share of $0.37 (basic and diluted) reported in the same period of the prior year. On an adjusted basis, net earnings for the quarter were $6.3 million compared to $6.0 million reported in the same quarter of 2010. Adjusted net earnings per share were $0.32 per share compared to $0.31 per share in the prior year, representing an increase of 3.2 percent. At December 31, 2011 there were 19,837,211 common shares of the Company issued and outstanding, compared to 19,780,039 common shares issued and outstanding as at December 31, 2010.


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Year ended December 31, 2011 compared to the year ended December 31, 2010

(In thousands of U.S. dollars except per share amounts)

Year ended December 31, %

Change 2011 2010

% of revenue % of revenue

Total revenue, including imputed revenue $2,092,417 209.4% $1,874,407 212.0% 11.6%

Net sales 999,400 100.0% 884,014 100.0% 13.1% Gross profit 188,882 18.9% 164,511 18.6% 14.8% Selling, marketing and administrative 148,114 14.8% 132,827 15.0% 11.5% Add back amortization and depreciation 9,007 0.9% 9,436 1.1% -4.5% EBITDA 49,775 5.0% 41,120 4.7% 21.0% Results from operating activities 40,214 4.0% 32,263 3.6% 24.6% Earnings before income taxes 34,127 3.4% 30,623 3.5% 11.4% Net earnings for the period $ 22,120 2.2% $ 20,065 2.3% 10.2% Adjusted net earnings $ 23,853 2.4% $ 17,836 2.0% 33.7% Net income per common share fully diluted $ 1.11 $ 1.01 Adjusted net earnings per share $ 1.20 $ 0.90

Product Analysis The following table shows the relative mix of hardware, software and Microsoft sales for the year ended December 31, 2011 and are discussed in greater detail below.


2011 2010

Microsoft revenue* $ 341,173 $ 288,626 18.2%

Agency fees (49,584) (45,187) 9.7%


Total Microsoft revenue, including imputed revenue $ 1,166,477 $ 1,074,406 8.6%

Other software revenue* 214,739 206,609 3.9%

Hardware revenue* 443,488 388,779 14.1%



Total revenue including imputed revenue $ 2,092,417 $ 1,874,407 11.6%

Total net sales $ 999,400 $ 884,014 13.1%

* These amounts sum to total net sales for the period


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Revenue For the year ended December 31, 2011, the Company reported net sales of $999.4 million, an increase of 13.1 percent from net sales of $884.0 million reported for the year ended December 31, 2010. Total revenue, including imputed revenue, increased 11.6 percent over the same period of the prior year. On a year-to-date basis, revenue was higher in all product segments, with strong growth in hardware sales (up 14.1 percent) and Microsoft (up 18.2 percent). Agency fees earned from Microsoft EAs grew 9.7 percent compared to the previous year, with the most significant contribution coming from the true-up business in both Canada and the United States. Fees earned from our professional services business are included in reported results for hardware sales. Professional service revenue climbed 44.5 percent in 2011. The increase reflects successful execution of the Company’s strategy to focus on providing value added services to North American customers. Canada In Canada, net sales were up 6.4 percent when expressed in Canadian dollars. The Company recorded net sales in Canada of $420.8 million for the year ended December 31, 2011, compared to net sales of $395.4 million for the year ended December 31, 2010. Sales of hardware products were up 14.6 percent in Canada. Sales of Microsoft licenses increased 14.4 percent. Orders for hardware products climbed 10 percent in the year. Sales of professional services, networking, storage and notebooks and desktops all experienced double digit growth compared to the previous year. The Microsoft business in Canada was strong during the year, particularly in the Company’s public sector market. Further, throughout 2011, the Company has benefited from the increased focus on the SMB market. Sales of Open and Select licenses were significantly higher in 2011 as a result, up 15.2 percent and 26.5 percent, respectively, over 2010. Agency fees earned from Microsoft EA’s were up 7.7 percent during the year, with strong growth in the true-up business and second year scheduled billings. Sales of non-Microsoft software were down in Canada in 2011, declining 13.1 percent over the previous year. The decline is largely attributable to a greater proportion of software support sold during the year, which the Company records on a net basis. Other imputed software revenue was higher as a result.

United States In the United States, net sales were up 15.2 percent, with reported net sales of $574.5 million, compared to $498.7 million reported in the prior year. Sales of hardware, Microsoft licenses and other non-Microsoft software were all higher, increasing 9.9 percent, 20.4 percent and 20.8 percent respectively. Hardware orders were up almost 2.5 percent, with orders for networking, servers and notebooks and desktops contributing to the increase in hardware revenue. The Company executed on a number of significant networking and server solutions throughout 2011. Our US sales force was able to capitalize on an opportunity to target key software accounts and sell notebooks, thereby increasing revenue from the notebook and desktop category during the year. Sales of Microsoft were strong in this division, with sales of Open and Select licenses significantly higher over the previous year, reflecting the increase in investments in SMB coverage. Agency fees earned on the Microsoft EA business were up 8.8 percent, with orders increasing 13.5 percent. Fees earned on the second year renewal business and true-up activity contributed to the higher referral revenue recognized in 2011. Unlike in Canada, sales of non-Microsoft software were higher in the United States, with software orders climbing 7.0 percent. In particular, sales of Enterprise software and server virtualization offerings contributed to the growth and is consistent with the Company’s overall strategy of a solution based approach.


15

Gross Profit On a year-to-date basis, gross profit increased 14.8 percent to $188.9 million. Gross profit as a percentage of net sales was 18.9 percent, compared to 18.6 percent for the year ended December 31, 2010. The improved gross profit margin is attributable to higher margins earned on non-Microsoft software sales and hardware sales, particularly in Canada. The increase in our professional services business throughout 2011 is also reflected in the overall improvement in gross profit. The Company has benefited from a concerted focus on margins throughout the year.

Expenses The following table provides detail of expenses by nature for the year ended December 31, 2011 and December 31, 2010. Under IFRS, the Company has chosen to aggregate expenses by function. Disclosure of selling and marketing expenses and administrative expenses can be found in note 5 in the accompanying annual consolidated financial statements.

Operating expenses

(In thousands of U.S. dollars ) Year ended December 31, % Change 2011 2010

% of gross

profit % of gross

profit

Personnel expenses $ 101,811 53.9% $ 91,965 55.9% 10.7%

General and administrative 37,296 19.7% 31,426 19.1% 18.7% Depreciation of property and equipment 3,018 1.6% 2,797 1.7% 7.9% Amortization of intangible assets 5,989 3.2% 6,639 4.0% -9.8% Total operating expenses $ 148,114 78.4% $ 132,827 80.7% 11.5%

For the year ended December 31, 2011, total operating expenses increased 11.5 percent largely due to higher personnel and general and administrative expenses incurred during 2011, which increased 10.7 and 18.7 percent, respectively, over the previous year. Higher personnel expenses were incurred due to higher headcount levels. The average headcount grew 8.3 percent, from a 2010 average of 896 to 970 in 2011. The increase in headcount reflects the company’s expansion of personnel in its sales centers throughout 2011 which has resulted in the addition of more than 60 territory sales representatives during the year and the addition of more than 130 individuals joining Softchoice Corporation from UNIS LUMIN Inc. Personnel expenses were also higher due to increased incentive compensation, consistent with the increase in net sales for the year ended December 31, 2011. As a percentage of gross profit, total personnel expenses were 53.9 percent, compared to 55.9 percent for the year ended December 31, 2010. These efficiency gains reflect the improved gross profit in 2011 and the leverage brought about by the expansion of the pre-sales, professional services and telesales teams to increase productivity in the Company’s operating model. General and administrative expenses were 18.7 percent higher for the year ended December 31, 2011. General and administrative expenses were higher due to higher overhead expenses, consistent with the Company’s increased headcount levels. General and administrative expenses were also higher due to an increase in professional fees and other transaction related costs associated with the acquisition of UNIS LUMIN Inc.


16

Other Depreciation of property and equipment was 7.9 percent higher for the year ended December 31, 2011 compared to the prior year. The increase in depreciation expenses compared to the prior year was due to investments in property and equipment throughout the year, largely due to the expansion of the telesales organization. Amortization of intangible assets decreased by 9.8 percent this year compared to 2010. This decrease is the result of the full amortization in 2010 of intangible assets associated with the acquisition of the software division of Groupe 3-Soft Inc. Net finance costs were $6.1 million during the year ended December 31, 2011 compared to $1.6 million in the prior year. Finance costs are comprised of interest costs and fees incurred on trade payables of $2.5 million (December 31, 2010 - $3.3 million), and amortization of finance costs of $1.8 million (December 31, 2010 - $1.4 million). The increase in the amortization of the deferred finance costs is due to the early repayment of the term loan during the fourth quarter of 2011, resulting in the full amortization of these deferred fees. The Company also incurred approximately $0.5 million in fees associated with the refinancing of the asset backed facility, contributing to higher overall finance costs in 2011, when compared to the previous year. Net finance costs also include the net foreign exchange impact on financing activities. During the year ended December 31, 2011, the company incurred a net foreign exchange loss of $1.3 million contributing to higher finance costs in 2011 compared to 2010. In 2010, the Company recorded a foreign exchange gain on financing activities, thereby contributing to higher overall finance income in 2010. The effective tax rate was approximately 35.2 percent for the year ended December 31, 2011, which increased from the rate of approximately 34.5 percent reported in the same period of the prior year. The increase in the effective tax rate is primarily due to an overall increase in foreign statutory income tax rates from the prior year.

Liquidity and Capital Resources Management believes that the Company is able to generate sufficient cash through the normal course of operations to settle its financial obligations as they fall due, to maintain its current operations and to fund its planned growth and development activities.

† The Company also has access to a revolving credit

facility as described in the “Debt Financing” section below.

Operating Activities Cash generated by operating activities was $38.6 million for the year ended December 31, 2011 compared to $23.4 million in cash generated by operating activities for the year ended December 31, 2010. The increase in cash is largely attributable to higher net earnings for the period, coupled with a lower impact resulting from the change in non-cash working capital during the year. The total change in non-cash operating working capital was an inflow of $4.5 million in 2011, compared to an outflow of $5.1 million in 2010, the result of lower overall days sales outstanding (DSO

(1)) at December 31, 2011

compared to December 31, 2010, and changes in the timing of payments to significant vendors during the latter part of 2011. Trade accounts receivable balances reflect DSO

[1]) of 39 days as at December 31, 2011 compared to a

DSO of 41 days at December 31, 2010. The decrease in DSO is due to the early collection from a number of significant customers. The Company typically experiences stronger collections in the month of December leading up to our fiscal year end. The Company continues to target DSO levels of 45 days.

1] DSO is calculated based on gross billings for the year, rather than net sales. †

This sentence contains forward-looking statements. See “Caution Regarding Forward-Looking Statements”.


17

Days payable outstanding (DPO[2]) decreased from 57 days at December 31, 2010 to 52 days at December 31, 2011. The Company targets DPO levels of 45 days. †

The Company’s DSO ratio is generally consistent with the prior year and better than our target levels, indicating that accounts receivable are being collected in a timely manner. Management monitors DSO and DPO levels against expected cash flow needs, as well as target levels. Management believes that the Company will generate sufficient cash from operating activities and has sufficient available credit to finance working capital requirements and to meet obligations as they become due†. Contractual Obligations

The Company leases a variety of property and equipment under operating leases. The following table

provides details of the Company’s contractual obligations over the next five years:

2012 2013 2014 2015 2016 and

thereafter

Total

Operating Leases $ 7,702 $ 7,092 $ 5,129 $ 3,934 $ 817 $ 24,674

Total $ 7,702 $ 7,092 $ 5,129 $ 3,934 $ 817 $ 24,674

Debt Financing The table below shows the level of debt available to the Company and the amounts outstanding as at December 31, 2011. Including available cash, the net cash position at the end of the fourth quarter of 2011 was $33.0 million. Management believes that the level of debt available to Softchoice is sufficient to finance the working capital requirements of the business and the growth that we expect.

†

(In thousands of U.S. dollars) December 31, 2011

Available Carrying Value

Short-term debt

ABL $ 111,052 $ -

Term debt, current - -

111,052 -

Term debt, long term - -

Total debt $ 111,052 $ -

[2] DPO is calculated based on the total amount billed to us by our vendors, rather than cost of sales. † This sentence includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


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Cash Flow In addition to the availability of credit, at December 31, 2011 the Company had cash on hand of $33.0 million. During the quarter, the Company generated $24.0 million in cash from operating activities. The net change in working capital during the three months ended December 31, 2011 resulted in an inflow of cash of $16.2 million (compared to an outflow of $1.3 million for the same period in 2010). Disbursements associated with trade and other payables contributed to the outflow during the previous quarter. Net cash used in financing activities was $10.1 million for the quarter comprised of debt repayment compared to $1.5 million in the fourth quarter of 2010. The increase is associated with the early repayment of the Company’s term debt in November of 2011. Net cash used in investing activities was $25.5 million in the fourth quarter of 2011 compared to $0.8 million in the same quarter of the prior year. During the fourth quarter, the Company used $23.9 million for the UNIS LUMIN acquisition. The Company also made $1.5 million in investments in property and equipment and intangible assets, consistent with the Company’s increased headcount level and investments in the Cloud initiative made during the quarter. Share Capital As of February 29, 2012, 19,837,211 common shares of the Company were issued and outstanding. Options to acquire an aggregate of 40,151 common shares are outstanding under the Company’s Employee Stock Option Plan. At the end of 2006, the Board of Directors terminated the 2003 Stock Option Plan so that options could no longer be issued under this plan. This termination was executed without prejudice to the options that were already outstanding under the existing plan. As of December 31, 2011, there were 116,693 deferred share units (DSUs) outstanding under the Company’s deferred share unit plan for Directors, each of which represents the right to receive one common share when the holder ceases to be a non-executive director of the Company. On February 11, 2010, the Board of Directors adopted a 2010 Performance Stock Option (PSO) plan for the executives of the Company, which was approved by the shareholders on May 11, 2010. On March 3, 2010, the Company granted 640,000 PSOs with an exercise price of Cdn. $8.39. The PSO plan dictates that a minimum share price must be achieved for any PSO level to vest. The PSO plan has a seven year expiry term and a three year vesting period, dependent on share price attainment. Under the plan, the number of options that ultimately vest is subject to the Company attaining various market share price hurdles on the third anniversary of the grant date as established by the Board of Directors for each grant. On February 14, 2011, the Board of Directors approved a 2011 PSO grant for the executives of the Company. On June 1, 2011, the Company granted 555,000 PSOs, convertible into common shares, with an exercise price of $8.99. The plan dictates that a minimum cumulative cash earnings per share (CCEPS) result has to be achieved for any PSO level to vest. The PSO plan has a seven year expiry term and a three year vesting period, dependent on CCEPS performance. Under the plan, the number of options that ultimately vest is subject to the Company attaining various performance targets on the third anniversary of the grant date.

In August 2011, the TSX accepted a notice filed by the Company of its intention to make a normal course issuer bid (NCIB) for a one-year period commencing August 12, 2011. The Company believes that its common shares are undervalued at current market prices based on its current earnings and future prospects and that the repurchase of common shares at current market prices is an appropriate use of corporate funds.

† The NCIB permits the Company to purchase up to 1,229,801 of its issued and outstanding common shares, representing 6.2 percent of the 19,833,862 common shares that were

† This sentence includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


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issued and outstanding as of July 31, 2011, or up to 10 percent of the Company’s public float for the same period. The actual number of shares purchased, and the timing of such purchases, will be determined by the Company considering market conditions, share prices, cash position, and other factors. Any daily repurchase will be limited to a maximum of 4,233 common shares, representing 25 percent of the average daily trading volume of the common shares on the TSX for the six month period ended July 31, 2011.

During the year ended December 31, 2011, the Company repurchased 4,000 shares for cancellation under the NCIB. No additional shares have been repurchased subsequent to December 31, 2011.

Off-Balance Sheet Arrangements Management is not aware of any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on the results of operations or financial condition of the Company.

Transactions with Related Parties As at December 31, 2011, included in trade accounts receivable was $0.2 million due from a major shareholder, Ontario Teachers’ Pension Plan Board (OTPPB), for product sales with payment terms of net 30 days (December 31, 2010 - $0.4 million). Total product sales to OTPPB during the year ended December 31, 2011 and December 31, 2010 were $0.9 million and $1.4 million respectively. In the course of the refinancing that occurred in the second quarter of 2009, a portion of the long-term debt outstanding was purchased by OTPPB. During the year ended December 31, 2011 and December 31, 2010, the Company made principal repayments to OTPPB of $2.5 million (2010 - $0.8 million), and interest payments of $0.4 million (2010 - $0.5 million). The Company repaid this term debt early without penalty or termination fee on November 10, 2011. Subsequent to December 31, 2011, OTPPB announced the sale of 5,093,700 common shares of the Company, representing approximately 26 percent of the outstanding common shares of the Company. The sale reduced OTPPB’s share in the Company to nil. The Company sponsors a 401K plan which is a defined contribution plan covering substantially all employees of the Company working in the United States who have at least 90 days of service and are aged 21 or older. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Under the plan, the Company pays fixed contributions totaling 50 percent of each participant’s contributions up to 3 percent of base compensation. The Company contributions are made to a separate entity and the Company has no legal or constructive obligation to pay further amounts. During the year, the Company paid $0.8 million in contributions (2010 - $0.8 million) to the plan.


20

Critical Accounting Policies and Estimates The Company’s significant accounting policies under IFRS are described in Note 2 of the Company’s annual consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect amounts reported in the annual consolidated financial statements and accompanying notes. These estimates and assumptions are affected by management’s application of accounting policies and historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated from time to time and form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ significantly from these estimates. The Company’s critical accounting estimates are described below.

Gross versus Net Assessment In determining whether the Company acts as a principal in a transaction, and recognizes revenue based on the gross amount billed to a customer, or as an agent, and reports the sales transaction on a net basis, requires that management exercise significant judgment when considering the facts and circumstances in that evaluation. Changes to the assumptions and judgments made by management could materially impact the amount of net sales recognized in a particular period.

Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than the full amount due on its accounts receivable. The Company considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. Individual overdue accounts are reviewed, and allowances are recorded to state trade receivables at net realizable value when it is known that they are not collectible in full. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment, the Company uses historical trends of the probability of default, timing of recoveries, and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

Sales Return Provision At the end of each period, the Company records an estimate for sales returns based on historical experience. This historical estimate is recalculated throughout the year to ensure it reflects the most relevant data available.

Sales Tax Provisions The Company is subject to sales tax in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company maintains provisions for uncertain tax positions that it believes appropriately reflect its risk with respect to tax matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the best estimate of the amount expected to be paid, based on a qualitative assessment of all relevant factors and historical precedence. The Company reviews the adequacy of these provisions at the end of each reporting period.


21

Impairment The Company's non-financial assets, excluding inventories and deferred tax assets, are reviewed for an indication of impairment at each reporting date to determine if there are events, or changes in circumstances, that indicate the assets might not be recoverable. The Company is required to estimate the recoverable amount of goodwill annually or whenever events or changes in circumstances indicate that the fair value of the reporting unit is less than its book value. If an indication of impairment exists, the asset's recoverable amount is estimated at the same date. An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The impairment analysis and identification of cash-generating units requires that management make certain estimates and assumptions that, if changed, could produce a significantly different result.

Share-based Compensation Plans For equity-settled share-based payment transactions, the fair value method of accounting is used. Under this method, the cost of the goods or services received is recorded based on the estimated fair value at the grant date and charged to earnings over the vesting period. Share-based payment expense relating to cash-settled awards, including share appreciation rights is accrued at the fair value of the liability. Until the liability is settled, the Company re-measures the fair value at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the period. The fair value method of accounting for share-based compensation requires that management make certain judgments and assumptions that, if changed, could produce a significantly different result.

Multiple Element Arrangements The Company's revenue arrangements may contain multiple elements. For arrangements involving multiple elements, the Company allocates revenue to each component of the arrangement using the relative selling price method based on vendor-specific objective evidence or third-party evidence of selling price, and if both are not available, estimated selling prices are used. The allocated portion of the arrangement which is undelivered is then deferred. In some instances, a group of contracts or agreements with the same customer may be so closely related that they are, in effect, part of a single arrangement and, therefore, the Company will allocate the corresponding revenue among the various components, as described above. Changes to the assumptions and judgments made by management could materially impact the amount of revenue recognized in a particular period.

Deferred Tax Assets Income taxes are calculated using management’s best estimates. The Company records a valuation allowance to reduce the deferred tax asset. The valuation allowance is based on management’s assessment of future profitability. The amount of deferred tax assets recorded may vary in the event of changes to these profitability assumptions.


22

Financial Instruments The Company’s financial instruments are comprised of cash and restricted cash, accounts receivable, bank indebtedness and accounts payable. The carrying value of cash, restricted cash, bank indebtedness, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to the short-term nature of these instruments. The Company is exposed to liquidity risk, credit risk, market risk and supplier risk, all of which could affect the Company’s ability to achieve its strategic objectives. The following describes these risks in greater detail.

Liquidity Risk The Company manages liquidity risk through the management of its capital structure and financial leverage. Please refer to the “Liquidity and Capital Resources” section above.

Credit Risk Financial instruments exposed to concentrations of credit risk consist primarily of cash, accounts receivable and other receivables. The Company minimizes the credit risk of cash by depositing only with reputable financial institutions. The Company's objective with regard to credit risk in its operating activities is to reduce its exposure to losses. As such, the Company performs ongoing credit evaluations of its customers' financial condition to evaluate creditworthiness and to assess impairment of outstanding receivables. Approximately 9 percent of the Company's accounts receivable are greater than 31 days past due (December 31, 2010 – 13 percent). The Company's allowance for doubtful accounts is $7.2 million (December 31, 2010 - $5.3 million). Amounts not provided for are considered fully collectible.

Market Risk Market risk is the risk that the value of the Company’s financial instruments will fluctuate due to changes in foreign exchange rates and interest rates. The Company operates in both the United States and Canada. The parent company maintains its accounts in Canadian dollars while the accounts of the U.S. subsidiaries are maintained in U.S. dollars. For the parent company's intercompany debt and external debt held in U.S dollars, this may occasionally give rise to a risk that its earnings and cash flows may be affected by fluctuations in foreign exchange rates due to the balance outstanding as of the year-end, as well as debt settlements made during the year. For every 200 basis points that the Canadian dollar appreciates, the translation and revaluation impact for the full year on net earnings would be, on average, a decrease of $0.9 million (2010 – an increase of $5.2 million). For every 200 basis points that the Canadian dollar depreciates, the translation and revaluation impact for the full year on net earnings would be, on average, an increase of $0.9 million (2010 – a decrease of $5.4 million) The effect of the translation and revaluation of the intercompany and external debt held in U.S. dollars is expected to have minimal cash impact.

†

From time to time, the Company may use derivatives to manage this foreign exchange risk. The Company's policy is to use derivatives for risk management purposes only, and it does not enter into such contracts for trading purposes. The Company enters into derivatives only with high-credit-quality financial institutions. The Company did not enter into any new derivative financial instrument contracts during the year ended December 31, 2011. In addition, there were no outstanding derivative financial instruments as at December 31, 2011. The Company is exposed to interest rate risk on its bank indebtedness and loans and borrowings. On the ABL and term debt, an increase or decrease in the prime rate of 0.25 percent would result in an increase or decrease of approximately $32 thousand of interest expense during the year ended December 31,

† This section includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


23

2011. In the past, the Company has used an interest rate swap to mitigate the risk of fluctuating interest rates. The Company did not enter into any such arrangements during the year ended December 31, 2011.

Supplier Risk The Company’s top five suppliers in 2011 were Microsoft Corporation (a software publisher), Ingram Micro Inc. (a distributor), Techdata Corporation (a distributor), Synnex Corporation (a distributor) and Arrow Enterprise Computing Solutions, Inc.(a distributor). They accounted for 77 percent (2010 – 80%) of the Company’s total purchases in 2011, with the largest portion purchased from Microsoft Corporation (29 percent), Ingram Micro Inc. (17 percent) and Techdata Corporation (17 percent). While brand names and individual products are important to the business, the Company believes that competitive sources of supply are available in substantially all the product categories such that, with the exception of Microsoft, the Company is not dependent on any one partner for sourcing products. † † This sentence includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


24

Key Performance Measures The Company presents four key performance measures to help investors understand its business. The measures reflect both the growth of the business and our productivity and are consistent with the way that management evaluates the business. We use gross profit measures, instead of a more typical revenue measure, because of the number of customers selecting EA license agreements, and the Company’s revised accounting policy to net presentation of maintenance and support agreements. Management believes that the increase in our revenue mix that is recorded on a net basis would distort the results of a revenue-based analysis. Revenue or Growth Indicators:

Number of Customers

Productivity Indicators:

Gross Profit per Order

Gross Profit per Sales Employee

Gross Profit per Employee

Number of Customers

During the fourth quarter of 2011, the number of customers purchasing from Softchoice increased by 1.8 percent compared to the same period of the prior year. The increase in the number of purchasing customers, coupled with the increase in gross profit during the fourth quarter of 2011, has resulted in an increase in gross profit per customer of 5.7 percent. We segment our customers based on the size of the customers’ information technology environment. Revenue from these customers is segmented as follows:

Three months ended December 31, 2011 2010

Small and Medium Business 42%* 47%*

Enterprise 37%* 40%*

Government and Education 21%* 13%*

Total 100 % 100%

Year ended December 31,

2011 2010

Small and Medium Business 46%* 43%*

Enterprise 35%* 35%*

Government and Education 19%* 22%*

Total 100 % 100%

* Estimate


25

During the fourth quarter of 2011, the portion of sales to the public sector grew to 21 percent from 13 percent. Virtually all of the growth in the public sector market during the fourth quarter can be attributed to the increase in the Microsoft business during the quarter. The portion of sales to SMB customers increased during the year ended December 31, 2011, with 46 percent of sales to this customer base, compared to 43 percent in the prior year. This increase reflects the company’s focus on this customer segment with the growth of our territory sales resources in the past year.

Gross Profit per Order Gross profit per order increased 6.1 percent during the fourth quarter compared to the same period of the prior year. For the year ended December 31, 2011 gross profit per order also increased by 9.2 percent compared to the prior year. The improvement in gross profit per order can be attributed to the Company’s strategic focus on expanding the pre-sales and professional services teams to focus on higher margin engagements.

Gross Profit per Employee and per Sales Employee

The tables below show the employee base of the Company for the three month period and year ended December 31, 2011 compared to the same periods of the prior year.

(In thousands of U.S. dollars except headcount amounts) Three months ended December 31, 2011 2010 % Change

Sales Total Sales Total Sales Total

Average headcount 488 1,018 441 918 10.7% 10.9%

Quarter-end headcount 500 1,112 441 917 13.4% 21.3%

Gross profit per person $ 99.9 $ 47.9 $ 102.7 $ 49.3 (2.7)% (2.8)%

(In thousands of U.S. dollars except headcount amounts) Year ended December 31, 2011 2010 % Change

Sales Total Sales Total Sales Total

Average headcount 486 970 435 896 11.7% 8.3%

Quarter-end headcount 500 1,112 441 917 13.4% 21.3%

Gross profit per person $ 388.6 $ 194.7 $ 378.2 $ 183.6 2.8% 6.1%

During the fourth quarter of 2011, the average number of employees increased by 10.9 percent compared to the prior year. Average sales headcount was up 10.7 percent, consistent with the Company’s focus on expanding the telesales organization. On a year to date basis, the average headcount grew 8.3 percent. Fourth quarter headcount was also higher due to the UNIS LUMIN acquisition in December 2011. During the three months ended December 31, 2011, gross profit per sales employee decreased by 2.7 percent, and gross profit per employee declined 2.8 percent. This decline is largely due to the impact of the UNIS LUMIN acquisition on average headcount rates for the period. Management expects this measure will improve as the expected benefits arising from the acquisition are fully realized. On a year to


26

date basis, gross profit per sales employee increased by 2.8 percent. This improvement in gross profit per employee reflects the stronger overall gross profit and efficiencies brought about by the expansion of the telesales organization and increases in professional services revenue earned in the year, which contributed a higher overall portion of gross profit in the year. The Company continues to focus on these productivity measures as we enter 2012.

†

† This sentence includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


27

Recently Issued Accounting Pronouncements – IFRS The policies applied in the accompanying annual consolidated financial statements are based on IFRS issued and outstanding as of February 28, 2012, the date the Board of Directors approved the financial statements for issue. At the date of the authorization of the accompanying annual consolidated financial statements, the IASB and IFRS Interpretations Committee have issued the following new and revised standards and interpretations which are not yet effective.

IFRS 7, Financial Instrument: Disclosures The IASB amended IFRS 7, Financial Instruments: Disclosures (IFRS 7) in October 2010. IFRS 7 was amended to provide guidance relating to disclosures with respect to the transfer of financial assets that results in derecognition, and continuing involvement in financial assets. The amendments to this standard are effective for annual periods beginning on or after July 1, 2011 with earlier application permitted. Management does not believe the changes resulting from these amendments will have a significant impact on its financial statements. †

IFRS 9, Financial Instruments IFRS 9, replaces IAS 39, Financial Instruments: Recognition and Measurement, and establishes principles for the financial reporting of financial assets and financial liabilities to permit users to assess the amounts, timing and uncertainty of an entity’s future cash flows. The standard retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets. In October 2010, the IASB added the requirements for classification and measurement of financial liabilities to IFRS 9 (2010), which supersedes the previous version. The newly integrated guidance also includes those paragraphs of IAS 39 dealing with fair value measurement and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of IFRIC 9 Reassessment of Embedded Derivatives. The derecognition requirements of IAS 39 were also added formally to IFRS 9 with the release of IFRS 9 (2010). IFRS 9 (2010) is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company has not yet adopted this standard and management is currently assessing the impact of this new standard on its consolidated financial statements.

IFRS 10, Consolidated Financial Statements and amended IAS 27 (2011), Separate Financial Statements IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces Standing Interpretations Committee (SIC)-12 Consolidation – Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.

IFRS 11, Joint Arrangements and amended IAS 28(2011) Associates and Joint Ventures This new standard requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venture will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interest in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities – Non-monetary Contributions by Venturers. †This sentence includes forward-looking statements. See “Caution Regarding Forward-Looking Statements.”


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IFRS 12, Disclosure of Interests in Other Entities IFRS 12 establishes disclosure requirements for interest in other entities, such as joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interest in other entities. This suite of consolidation standards is effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted, however all of the standards must be adopted at the same time, with the exception of the disclosure requirements in IFRS 12. The Company has not adopted these standards and amendments early, and is currently assessing what impact the application of these standards or amendments will have on the consolidated financial statements of the Company.

IFRS 13, Fair Value Measurement This new standard provides guidance on the measurement of fair value, replacing fair value guidance contained in individual IFRSs. The standard provides a framework for determining fair value and clarifies the factors to be considered in estimating fair value in accordance with IFRS. The new standard establishes disclosures surrounding fair value measurement which are more extensive than current standards. IFRS 13 is effective for the Company’s interim and annual consolidated financial statements commencing January 1, 2013. The Company is assessing the impact of this new standard on its consolidated financial statements.

IAS 1, Presentation of Financial Statements IAS 1, Presentation of Financial Statements was amended to align the presentation of items in other comprehensive income with US GAAP standards. Items in other comprehensive income will be required to be presented in two categories: items that might be reclassified into profit or loss and those that will not be reclassified. The amendments to IAS 1 are effective for annual periods beginning on or after July 1, 2012. The Company is currently assessing the impact of this new standard on its consolidated financial statements.


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Disclosure Controls and Procedures and Internal Controls over Financial Reporting Internal Controls over Financial Reporting The Company’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining internal controls over financial reporting (ICFR) as defined in National Instrument 52-109-Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109). As of December 31, 2011, management, under the direction and participation of the CEO and CFO conducted an evaluation of the effectiveness of ICFR based upon the framework and criteria established in Internal Control – Integrated Framework, issued by the committee of Sponsoring Organizations of the Treadway Commission. During this process, management, including the CEO and CFO, identified the material weakness described below and as a result concluded that the Company’s ICFR was ineffective as of December 31, 2011. A material weakness in ICFR exists if there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Through its review of the accounting for rebate and marketing development funds, management concluded that they did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience and training to perform the analysis required within the time frame set by us for filing our consolidated financial statements. The complexities and volume of work, and inefficient communication of relevant information between our finance and marketing departments, placed substantial demands on the Company’s limited accounting resources in this area, which diminished the effectiveness of our internal controls over the financial reporting of marketing development funds and rebates. In light of the aforementioned material weakness, management conducted a review of significant marketing development fund and rebate transactions over the 12 month period ended December 31, 2011. Management’s review identified errors resulting in certain adjustments to the amounts or disclosures of cost of sales and accounts receivable. These errors were corrected prior to the release of the financial statements. Notwithstanding the material weakness mentioned above, management has concluded that the accompanying annual consolidated financial statements present fairly, in all material respects, the Company’s financial positions as of December 31, 2011.

Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified and are accumulated and communicated to the issuer’s management, including the CEO and CFO as appropriate to allow timely decisions regarding required disclosure. Management of the Company, including the CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in NI 52-109. Based on that evaluation, management of the Company, including the CEO and CFO, have concluded that as a result of the material weakness described above, disclosure controls and procedures were not effective as of December 31, 2011.


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Remediation In the fourth quarter of 2011 and first quarter of 2012, prior to the release of the annual consolidated financial statements, several remediation actions were implemented by management to address the control weaknesses in the area of marketing development funds and rebates, including:

hiring a senior finance manager possessing technical knowledge and public company experience in the area of marketing development funds and rebates to directly supervise and review all transactions in this area;

changes in the personnel responsible for processing marketing and rebate transactions; and

preliminary redesign and communication of revised policies, processes and controls over marketing development funds and rebates.

Management will continue remediation efforts to address the material weakness described above by taking the following actions:

adding technically competent accounting personnel to support the processing and accounting of marketing development funds and rebates;

reallocating tasks to appropriate personnel to ensure segregation of duties, increase efficiencies and supervisory review; and

ongoing development and implementation of new policies, procedures and controls over the processing and reporting of marketing development funds and rebates, including training of appropriate personnel.


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Transition to International Financial Reporting Standards (IFRS) In February 2008, Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used by publicly accountable enterprises, will be fully converged with IFRS, as issued by the International Accounting Standards Board (IASB), for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The accompanying annual consolidated financial statements for the year ended December 31, 2011 represent the first annual consolidated financial statements prepared in accordance with IFRS and include 2010 comparative figures and required reconciliations. The Company’s annual 2010 consolidated financial statements were prepared in accordance with Canadian GAAP, and accordingly comparative 2010 figures have been restated to conform to IFRS. Note 3 of the accompanying annual consolidated financial statements include reconciliations that illustrate the impact of the transition from Canadian GAAP to IFRS on the Company’s financial position and financial performance for the year ended December 31, 2010.

Update on IFRS Conversion Plan The Company’s IFRS changeover plan consisted of three major phases:

1. Scoping and diagnostic – This phase involved identifying the key differences between Canadian GAAP and IFRS. These differences were then analyzed to determine the potential effect on the Company including changes to existing accounting policies and information systems.

2. Design and solutions development – During this phase, system and process changes were developed, as well as the completion of training requirements for staff. In addition, optional exemptions for first time adopters of IFRS and accounting policy choices under IFRS were evaluated.

3. Implementation and post-implementation review – This phase included the execution of changes to information systems and business processes, as well as the approval and finalization of accounting policy choices.

The Company has adopted IFRS effective January 1, 2011, and has substantially completed all phases of its IFRS changeover plan with certain components of the post-implementation phase remaining. The Company will continue to perform a post-implementation review through 2012, including evaluating improvements for a sustainable operational IFRS model, continuing to test the internal controls environment, and tracking additional disclosures required by IFRS. Management will continue to monitor and assess the impact of changes to accounting standards currently under development by the IASB.

Policy Selection

The analysis of policy alternatives under IFRS, including certain exemptions and elections available on transition in accordance with IFRS 1, First-Time Adoption of International Financial Reporting Standards, was completed in 2010. Note 3 to the annual consolidated financial statements describes in detail the Company’s elections under IFRS 1.


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Transitional Financial Impact

The table below outlines the adjustments to the Company’s equity on adoption of IFRS on the transition date, January 1, 2010, and as at December 31, 2010.

(In thousands of U.S. dollars) Jan 1, 2010 Year ended

Dec 31, 2010

Equity under Canadian GAAP $ 96,358 $ 116,543

Share-based payments (39) (61)

Deferred tax impact 10 15

Total IFRS adjustments to equity (29) (46)

Equity under IFRS $ 96,329 $ 116,497

Comprehensive Income Impact

As a result of the policy choices the Company has selected and the changes that were required under IFRS, the Company recorded an increase in profit of $171 for the three months ended December 31, 2010 and a reduction in profit of $177 for the year ended December 31, 2010. The table below outlines the adjustments to the Company’s comprehensive income for the three months and year ended December 31, 2010 under IFRS:

Three months

ended Year ended

(In thousands of U.S. dollars) Dec 31, 2010 Dec 31, 2010

Comprehensive income under Canadian GAAP $ 6,580 $ 19,100

Profit adjustments

Share-based payments 225 (182)

Deferred tax impact (54) 5

Total profit adjustments 171 (177)

Other comprehensive income adjustments $ - $ -

Total comprehensive income adjustments 171 (177)

Comprehensive income under IFRS $ 6,751 $ 18,923


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Cash Flow Impact

Consistent with the Company’s accounting policy choice under IAS 7, Statement of Cash Flows, interest paid and income taxes paid have moved into the body of the statement of cash flows under operating activities, whereas they were previously disclosed as supplementary information. There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows presented under Canadian GAAP prior to the adoption of IFRS.

Financial Statement Presentation Changes

The transition to IFRS has resulted in a number of changes to the presentation of our financial statements, most notably to the consolidated statement of comprehensive income. The consolidated statement of comprehensive income presents expenses by function, identified as marketing and selling, and administration. Amortization of intangibles and depreciation of property, plant and equipment is now aggregated according to the function to which it relates. Other income and expenses includes items that relate to the operation of the business, such as adjustments to trade payables, sales tax refunds and gains or losses on the sale of property and equipment. Non-operating items include items that arise from financing and other activities. Finance costs include interest on loans and borrowings and amortization of financing costs. Finance income includes the foreign exchange impact associated with financing activities and interest income.

The above changes are reclassifications within our statement of income so there is no net impact to our profit as a result of these changes.

Control Activities

Changes to the Company’s internal controls over financial reporting and disclosure controls and procedures, which include enhancement of existing controls and the design and implementation of new controls have been completed. The changes resulting from the implementation of IFRS were not significant.

Business Activities and Key Performance Measures

We have assessed the impact of the IFRS transition project on our financial covenants related to our loans and borrowings. The transition did not significantly impact our covenants and key ratios. We have considered the impact of the IFRS transition on budgeting and long-range planning, and no significant modifications were deemed necessary.

Information Technology and Systems

The Company’s transition to IFRS did not result in significant changes to the Company’s information systems for the transition period, nor is it expected that significant changes are required in the post-transition periods as a result of our conversion to IFRS.

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