Computer Modelling Group Ltd.
TSX : CMG

Computer Modelling Group Ltd.

May 26, 2005 09:00 ET

Computer Modelling Group Announces Record Year End Results

CALGARY, ALBERTA--(CCNMatthews - May 26, 2005) - Computer Modelling Group Ltd. (TSX:CMG) ("CMG") is pleased to report that its fiscal year ended March 31, 2005 has been CMG's most successful fiscal year in its history, surpassing all previous record results. CMG reported revenues of $15.2 million, net earnings of $3.5 million ($0.45 per share) and cash flow from operations of $4.3 million ($0.56 per share). These results compare to revenues of $12.3 million, net earnings of $2.6 million ($0.35 per share) and cash flow from operations of $3.5 million ($0.47 per share) for the year ended March 31 2004.

Management's Discussion and Analysis

The following discussion and analysis, presented as at May 25, 2005, is an extract of CMG's MD&A presented in its 2005 annual report and reflects management's assessment of the financial and operating results of Computer Modelling Group Ltd. ("CMG" or the "Company") as well as its future opportunities and risks, and should be read in conjunction with the full MD&A, audited consolidated financial statements and related notes of the Company for the years ended March 31, 2005 and 2004 contained in CMG's 2005 annual report. The reader should be aware that historical results are not necessarily indicative of future performance. Additional information relating to CMG, including our Annual Information Form, can be found at http://www.sedar.com.

Cash flow from operations, which is determined before changes in non-cash working capital, is used by us as a key measure of performance. Cash flow from operations does not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable with the calculation of similar measures for other companies. Cash flow from operations as presented is not intended to represent operating profits for the period nor should it be viewed as an alternative to cash provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Cash flow from operations per share is calculated using the same share bases which are used in the determination of earnings per share.

The financial data contained herein have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), and unless otherwise indicated, all comments in this report are expressed in Canadian dollars.

Forward Looking Statements

Certain statements in the Management's Discussion and Analysis for CMG may constitute forward-looking statements, which can generally be identified as such because of the context of the statements including words such as the Company believes, anticipates, expects, plans, estimates or words of a similar nature. The forward-looking statements are based on current expectations and are subject to known and unknown risks and uncertainties, certain of which are beyond CMG's control, including: the impact of general economic conditions in the oil and gas industry, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange and country risk in areas in which the Company currently does, or proposes to do, business. CMG's actual results, performance or achievement could differ materially from those expressed in, or implied by these forward looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits CMG will derive there from.

Results of Operations

Quarterly Results

CMG reported revenues of $4.7 million, earnings of $1.5 million ($0.19 per share) and cash flow from operations of $1.7 million ($0.21 per share) for the three months ended March 31, 2005. These results compare to revenues of $3.1 million, earnings of $0.8 million ($0.10 per share) and cash flow from operations of $0.6 million ($0.08 per share) for the three months ended March 31, 2004.



Quarterly Performance

Fiscal 2004
------------------------------------------------------------------------
------------------------------------------------------------------------
$Thousands, unless
otherwise stated Q1 Q2 Q3 Q4
------------------------------------------------------------------------
Annuity/maintenance licenses 1,434 1,485 1,682 1,777
Perpetual licenses 546 507 1,341 700
------------------------------------------------------------------------
Software licenses 1,980 1,992 3,023 2,477
Consulting and contract research 697 579 916 671
------------------------------------------------------------------------
Revenues 2,677 2,571 3,939 3,148
Gross Profit 1,795 1,741 2,992 2,161
Gross Profit % 67 68 76 69
Earnings before income
and other taxes 339 710 1,729 1,206
Current income and other
tax (expense) (27) 1 (52) (307)
Future income tax benefit
(expense) (153) (224) (492) (147)
Earnings for the quarter 159 487 1,185 752
Cash flow from operations
for the quarter 377 776 1,751 632
Cash dividends declared and paid - - - 310
------------------------------------------------------------------------
Per share amounts - $
Earnings per share - basic 0.02 0.07 0.16 0.10
Earnings per share - diluted 0.02 0.06 0.15 0.10
Cash flow from operations
per share - basic 0.05 0.10 0.24 0.08
Cash dividends declared per share - - - 0.04
Book value per share,
at quarter end 1.18 1.24 1.39 1.43
------------------------------------------------------------------------
------------------------------------------------------------------------


Fiscal 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
$Thousands, unless
otherwise stated Q1 Q2 Q3 Q4
------------------------------------------------------------------------
Annuity/maintenance licenses 1,921 1,905 1,997 2,223
Perpetual licenses 340 441 1,248 1,433
------------------------------------------------------------------------
Software licenses 2,261 2,346 3,245 3,656
Consulting and contract research 1,075 802 740 1,039
------------------------------------------------------------------------
Revenues 3,336 3,148 3,985 4,695
Gross Profit 2,095 1,903 2,932 3,547
Gross Profit % 63 60 74 76
Earnings before income
and other taxes 987 562 1,512 2,142
Current income and other
tax (expense) (392) (199) (488) (637)
Future income tax benefit
(expense) 38 (16) (16) (19)
Earnings for the quarter 633 347 1,008 1,486
Cash flow from operations
for the quarter 863 574 1,234 1,651
Cash dividends declared and paid 311 311 309 310
------------------------------------------------------------------------
Per share amounts - $
Earnings per share - basic 0.08 0.04 0.13 0.19
Earnings per share - diluted 0.08 0.04 0.13 0.19
Cash flow from operations
per share - basic 0.11 0.07 0.16 0.21
Cash dividends declared per share 0.04 0.04 0.04 0.04
Book value per share,
at quarter end 1.47 1.44 1.54 1.70
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenues -

Software license revenues were $3.7 million in the fourth quarter of fiscal 2005, up $1.2 million from the $2.5 million recorded in the fourth quarter of fiscal 2004. Of this $1.2 million increase, $0.7 million came from the sale of software licenses under perpetual arrangements, which are variable in nature as both the purchase decision and timing thereof are dependent on clients' needs and budgets. The remaining increase in revenues from one year to the next came from the steady growth in CMG's annuity and maintenance software licenses and was derived from sales to both new and existing customers.

Consulting and contract research revenues were $1.0 million in the fourth quarter of fiscal 2005, up $0.3 million from the $0.7 million recorded in the fourth quarter of fiscal 2004. On review of the quarterly performance table the variable nature of the consulting and contract research revenue stream is apparent and is a function of the general activity level in the oil and gas industry.

Expenses -

CMG's gross profit margin for the three months ended March 31, 2005 was 76 percent (2004 - 69 percent) and CMG realized a gross profit of $3.5 million, up $1.3 million from the $2.2 million recorded in the fourth quarter of fiscal 2004.

CMG's total expenses, excluding depreciation and income and other taxes, amounted to $2.6 million for the quarter ended March 31, 2005, up $0.6 million from the $2.0 million expended in the fourth quarter of fiscal 2004. This increase in total expenses is primarily due to increases in CMG staff costs between the two respective quarters and recording the benefit of investment tax credits on CMG's product research and development expenditures for the fiscal years ended March 31, 2003 and 2004 in the fourth quarter of fiscal 2004 whereas CMG has recorded the estimated credits earned in fiscal 2005 in each quarter of fiscal 2005.

Annual Results

CMG posted record revenues and profits for its fiscal year ended March 31, 2005. CMG reported revenues of $15.2 million, net earnings of $3.5 million ($0.45 per share) and cash flow from operations of $4.3 million ($0.56 per share). These results compare to revenues of $12.3 million, net earnings of $2.6 million ($0.35 per share) and cash flow from operations of $3.5 million ($0.47 per share) for the year ended March 31 2004.

Revenues -

CMG's revenues are comprised of software license sales, which provide the majority of the Company's revenues, and consulting and contract research fees. On an overall basis, CMG's revenues of $15.2 million for its 2005 fiscal year reflect an increase of $2.9 million, a 23 percent increase, from the $12.3 million recorded in its 2004 fiscal year.

Software Licenses -

CMG's software license revenues can be categorized between annuity/maintenance software licensing, which is generally for a term of one year or less, and perpetual software licensing, whereby the customer purchases the then current version of the software product and has the right to use that version in perpetuity. CMG has found that a large percentage of its customers who have acquired perpetual software licenses are subsequently purchasing maintenance licenses to ensure they have access to current CMG technology.

Software licensing under perpetual sales is a significant part of CMG's business but it is more variable and unpredictable in nature as the purchase decision and its timing fluctuates with clients' needs and budgets. CMG has found that a number of clients prefer to acquire perpetual software licenses rather than leasing the software on an annual basis.

CMG generated $11.5 million in software license revenues, an increase of $2.0 million or 22 percent from prior year revenues of $9.5 million. CMG's annuity/maintenance licensing for the year ended March 31, 2005 was $8.0 million, representing 70 percent of fiscal 2005 total software license revenues. This reflects an increase of 26 percent from the $6.4 million (67 percent of fiscal 2004 total software license revenues) in annuity/maintenance software license revenues generated last year. Software license revenue under perpetual sales for the year ended March 31, 2005 was $3.5 million, up $0.4 million from the $3.1 million recorded in fiscal 2004.

The 22 percent growth in CMG's software license revenues in fiscal 2005 compared to fiscal 2004 was a direct result of a combination of sales to new customers and additional number of licenses and/or additional products sold to existing customers. Demand for all of CMG's software products increased in this last year. Both the growing utilization by the oil and gas industry of enhanced recovery processes and the research in unconventional sources of supply of hydrocarbons have generated increased demand for CMG's advanced physics reservoir simulators. In addition, the ease of use, functionality and performance of CMG's software products have generated increased sales in all applications.

CMG has historically maintained a significant percentage of repeat customers and expects that this will continue. At March 31, 2005, CMG has pre-sold $4.0 million of license revenue relating to its next fiscal year ending March 31, 2006.

Consulting and Contract Research Revenues -

CMG performs consulting and contract research activities on an ongoing basis but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with serving our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales.

Consulting and contract research activities are regarded by CMG as variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within client companies. In addition, demand for these services is impacted by the prevailing strength of the petroleum industry. Strong activity levels and cash flows in the petroleum industry have historically generated a strong level of consulting and contract research revenues to CMG.

CMG recorded consulting and contract research revenues of $3.7 million for the year ended March 31, 2005, compared to $2.9 million last year. The earnings contribution from this segment in fiscal 2005 was $1.8 million, up $0.1 million from the $1.7 million earned in 2004. Due to the variable nature of this business segment's consulting revenues, CMG utilizes third party consultants to complement its own staff to assist CMG in meeting client project requirements. In the year ended March 31, 2005, third-party contract costs were $0.6 million compared to $0.2 million in the prior year. In addition, due to the growth in the usage of CMG's simulators, CMG has increased internal staff to augment its support services.

At March 31, 2005, CMG has recorded approximately $0.4 million of pre-sold revenue relating to consulting and contract research revenues for projects to be completed in the fiscal year ended March 31, 2006.

Expenses -

CMG's gross profit margin for the year ended March 31, 2005 was 69 percent (2004 - 70 percent) and CMG realized a gross profit of $10.5 million, up $1.8 million from the $8.7 million recorded last year.

CMG's total expenses, excluding depreciation and income and other taxes, amounted to $9.8 million for the year ended March 31, 2005, up from the $8.0 million expended a year ago. This increase in total expenses is due to a number of factors, the more significant of which resulted from engaging third-party consultants for consulting engagements, increases in CMG staff costs and recording the benefit of investment tax credits on CMG's product research and development expenditures for the three fiscal years ended March 31, 2004 in the third and fourth quarters of fiscal 2004.

As a technology service company, CMG's largest area of expenditure is for its people. Approximately $7.1 million (2004 - $6.2 million) expended was directly related to CMG staff cost. This increase in resource costs resulted from a combination of staff additions, general salary increases, increased variable commission and bonus compensation that is dependent on growth in CMG's revenue base and earnings and the expensing of stock-based compensation.

CMG plans to continue its investment strategy to produce stronger revenues for the future and intends to add eight staff members in the marketing, consulting and product research and development areas in fiscal 2006, and has already staffed four of these positions.

Investment in Research and Development

CMG maintains its belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. Along with its leadership position in the simulation of proven advanced recovery processes, CMG has positioned itself to play an important role in experimenting with new petroleum extraction processes and technology through participation with prominent research institutions and industry sponsored consortiums. CMG works closely with its customers, and, has a history of working with its customers on a funded research basis to provide solutions to complex problems.

In March 2005, CMG announced the signing of a Memorandum of Understanding with Shell International Exploration and Production BV ("Shell") for a Shell/CMG Alliance ("Alliance") to enter into mutually funded software development projects. The common goal of this understanding is to jointly undertake the development of a new class of large-scale full-physics advanced reservoir simulators with CMG having the commercialization rights to the software that is developed. CMG anticipates that this Alliance will initially have a minimal impact on its earnings with the future potential being subject to the successful commercialization of the Alliance projects.

During the year ended March 31, 2005, CMG has recorded a gross cash investment of $3.3 million (2004 - $3.1 million) in research and development, all of which is expensed to earnings. CMG has recorded a reduction of $0.2 million in the year ended March 31, 2005 to its product research and development expenses for investment tax credits on scientific research and experimental development expenditures. The investment tax credit recorded in fiscal 2004 of $0.5 million represented claims for the three years ended March 31, 2004. The magnitude of the claim in any one year is dependent on specific research and development projects qualifying for the investment tax credits and the amount of external funding on the qualifying projects from Canadian entities and is ultimately subject to confirmation by the Canada Revenue Agency. The benefit of the scientific research and experimental development investment tax credits is utilized by CMG to reduce its Canadian federal income taxes otherwise payable.

A similar gross investment amount in product research and development expenditures, adjusted for planned increases as indicated above, is expected for the fiscal year ending March 31, 2006.

Foreign exchange -

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 80 percent (2004 - 79 percent) of CMG's revenues are denominated in US dollars whereas only approximately 25 to 30 percent of CMG's total costs, including taxes, are denominated in US dollars.



------------------------------------------------------------------------
2003 2004 2005
------------------------------------------------------------------------
US dollar per Canadian dollar
- at March 31 $0.6798 $0.7599 $0.8267
US dollar per Canadian dollar
- average for the year $0.6435 $0.7355 $0.7794
------------------------------------------------------------------------


CMG recorded a foreign exchange loss of $0.1 million for the year ended March 31, 2005 compared to a loss of $0.3 million for 2004.

Income and other taxes -

CMG's operating and financial success has moved it into a fully taxable position and as a result CMG has utilized all of the tax shields that were created from earlier years losses. CMG is receiving benefit from the federal scientific research and experimental development investment tax credit program which provides CMG with an investment tax credit at the rate of 20 percent of eligible expenditures. This investment tax credit is utilized by CMG to reduce federal taxes otherwise payable and bears an inherent tax liability as the credit utilized to reduce federal income taxes payable for the current fiscal year is then included in the subsequent year's taxable income for both federal and provincial purposes. CMG has reflected this inherent tax liability on these investment tax credits in its balance sheet as a current future income taxes liability.

Liquidity and Capital Resources

Operating activities -

CMG generated $4.3 million ($0.56 per share) of cash flow from operations in the year ended March 31, 2005, an increase of $0.8 million from the $3.5 million ($0.47 per share) generated in the year ended March 31, 2004. CMG's net investment in its non-cash working capital has increased as at March 31, 2005 as compared to March 31, 2004 by $1.2 million due to the growth in its business.

Financing activities -

At March 31, 2005, CMG has recognized an obligation of $4.4 million of deferred revenue for pre-sold revenues relating to fiscal 2006. This is up $0.4 million from March 31, 2004 and is reflective of increased software licensing revenues and the stage of completion of consulting and contract research projects at the respective balance sheet dates.

During the year ended March 31, 2005, CMG employees and directors exercised options to purchase 100,250 Common Shares, which resulted in $0.1 million in cash proceeds.

CMG paid $1.2 million in dividends, representing a quarterly dividend of $0.04 Canadian per share on its Common and Non-Voting Shares, in its year ended March 31, 2005. On May 25, 2005, CMG announced the payment of a quarterly dividend of $0.05 Canadian per share and a special dividend of $0.20 Canadian per share on CMG's Common and Non-Voting Shares. The payment of a special dividend was decided upon by CMG's Board of Directors for shareholders to immediately participate in CMG's record success. The combined dividend payment of $0.25 per share will be paid on June 15, 2005 to shareholders of record at the close of business on June 6, 2005.

During the year ended March 31, 2005, pursuant to its previously announced Normal Course Issuer Bid ("NCIB") that ended on November 12, 2004, CMG purchased 122,200 Common Shares for cancellation at a total cost of $494,613. On a cumulative basis, CMG purchased 126,000 Common Shares pursuant to this NCIB since November 13, 2003 at a total cost of $503,847.

Investing activities -

CMG's needs for capital asset investment in fiscal 2006 relate to upgrading its desk top computer equipment and expansion of its office premises. During fiscal 2005, CMG expended $0.2 million on property and equipment additions and has a capital budget of $0.9 million for fiscal 2006, all of which will be funded internally.

Overall liquidity and capital resources -

CMG has consistently generated positive cash flow from operations each quarter for over five years and at March 31, 2005 CMG's liquidity as measured by working capital is $12.6 million, an increase of $2.1 million from its position a year earlier. At March 31, 2005, CMG has $14.4 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker, of which US $54,300 has been drawn on for performance bonds.

Outlook

We believe that the underlying factors supporting increased demand for reservoir simulation exist. The use of enhanced oil recovery techniques and production from unconventional sources of supply (for example - coal bed methane, tar sands, hydrates) by the petroleum industry is growing, both as a result of need and due to high oil prices which provide the industry with the capital to experiment with new processes to increase the recovery from their reservoirs. We believe that the robustness of CMG's product lines, combined with ease of use and attractive financial alternative to our competitors will provide CMG growth opportunities for the future.



Kenneth M. Dedeluk
President and Chief Executive Officer
May 25, 2005


COMPUTER MODELLING GROUP LTD.
Consolidated Balance Sheets
March 31, 2005 and 2004
2005 2004
------------------------------------------------------------------------
(audited)
Assets

Current assets:
Cash and cash equivalents (note 2) $ 14,360,282 $ 12,711,097
Accounts receivable 4,926,368 2,807,369
Prepaid expenses 400,189 377,167
Future income taxes - 187,526
------------------------------------------------------------------------
19,686,839 16,083,159

Property and equipment (note 3) 467,121 540,774

Future income taxes (note 5) 94,989 93,499
------------------------------------------------------------------------

$ 20,248,949 $ 16,717,432
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 1,538,093 $ 1,421,022
Income taxes payable 894,020 108,536
Deferred revenue 4,444,664 4,049,474
Future income taxes (note 5) 190,879 -
------------------------------------------------------------------------
7,067,656 5,579,032
Shareholders' equity:
Share capital (note 6) 10,920,777 10,875,206
Retained earnings 2,260,516 263,194
------------------------------------------------------------------------
13,181,293 11,138,400
------------------------------------------------------------------------

$ 20,248,949 $ 16,717,432
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Earnings and Retained Earnings

Three months ended Year ended
March 31 March 31
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (audited)
Revenue
Software licenses $ 3,655,184 $ 2,477,097 $11,508,124 $ 9,471,381
Consulting and
contract research 1,039,070 671,292 3,656,367 2,862,549
------------------------------------------------------------------------
4,694,254 3,148,389 15,164,491 12,333,930
------------------------------------------------------------------------

Cost of Sales
Marketing expenses 841,092 759,792 3,218,003 2,881,436
Direct consulting
expenses 206,507 172,364 827,657 600,439
Third-party
contract costs 99,971 55,533 641,418 163,198
------------------------------------------------------------------------
1,147,570 987,689 4,687,078 3,645,073
------------------------------------------------------------------------

Gross Profit 3,546,684 2,160,700 10,477,413 8,688,857

General and
administrative
expenses 564,403 544,839 1,991,573 1,872,609
Depreciation and
amortization 44,657 37,686 148,726 143,080
Product research and
development costs
(note 4) 893,597 474,399 3,274,419 2,662,610
Foreign exchange
(gain) loss (16,545) (28,659) 129,169 287,003
Interest and other
income (81,683) (73,687) (269,435) (260,220)
------------------------------------------------------------------------
Earnings before income
and other taxes 2,142,255 1,206,122 5,202,961 3,983,775
Income and other taxes
(note 5) 656,498 453,925 1,729,104 1,400,505
------------------------------------------------------------------------
Earnings for the
period 1,485,757 752,197 3,473,857 2,583,270
Retained earnings
(deficit),
beginning of period 1,084,321 (178,724) 263,194 (2,009,797)
Dividends paid (309,562) (310,279) (1,241,359) (310,279)
Common Shares buy-back
(note 6) - - (235,176) -
------------------------------------------------------------------------
Retained earnings,
end of period $ 2,260,516 $ 263,194 $ 2,260,516 $ 263,194
------------------------------------------------------------------------
------------------------------------------------------------------------

Per share

Weighted average
number of shares
outstanding 7,738,775 7,613,685 7,754,485 7,475,601
Earnings for the
period
Basic $ 0.19 $ 0.10 $ 0.45 $ 0.35
Diluted $ 0.19 $ 0.10 $ 0.43 $ 0.33

See accompanying notes to consolidated financial statements.



COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Cash Flows

Three months ended Year ended
March 31 March 31
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (audited)
Cash provided by (used for)

Operating

Earnings for the
period $ 1,485,757 $ 752,197 $ 3,473,857 $ 2,583,270
Items not involving
cash:
Depreciation and
amortization 83,573 76,723 290,376 281,111
Future income taxes 19,337 (217,354) 376,915 651,975
Stock-based
compensation 62,583 20,399 182,711 20,399
------------------------------------------------------------------------
Cash flow from
operations 1,651,250 631,965 4,323,859 3,536,755
Changes in non-cash
working capital:
Accounts receivable (1,544,383) (823,835) (2,118,999) 227,070
Accounts payable and
accrued liabilities 358,719 323,304 117,071 163,465
Income taxes payable 523,189 108,536 785,484 108,536
Prepaid expenses (37,533) (108,997) (23,022) (125,622)
Deferred revenue (1,866,560) (2,239,916) - -
------------------------------------------------------------------------
(915,318) (2,108,943) 3,084,393 3,910,204
------------------------------------------------------------------------

Financing

Deferred revenue 2,757,618 3,430,770 395,190 668,484
Issue of Common
Shares 27,300 322,089 122,297 415,629
Dividends paid (309,562) (310,279) (1,241,359) (310,279)
Common Shares
buy-back - - (494,613) (153,951)
------------------------------------------------------------------------
2,475,356 3,442,580 (1,218,485) 619,883
------------------------------------------------------------------------

Investing

Property and equipment
additions (97,098) (51,558) (216,723) (195,650)
------------------------------------------------------------------------
Increase in cash and
cash equivalents 1,462,940 1,282,079 1,649,185 4,334,437
Cash and cash
equivalents,
beginning of period 12,897,342 11,429,018 12,711,097 8,376,660
------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $14,360,282 $12,711,097 $14,360,282 $12,711,097
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Notes to Consolidated Financial Statements
Years ended March 31, 2005 and 2004


1. Significant Accounting Policies:

(a) Basis of Consolidation: These consolidated financial statements include the accounts of the Company and its subsidiaries, all 100% owned. All inter-company transactions have been eliminated.

(b) Revenue Recognition: Software license sales are recognized as revenue upon the fulfillment of all significant obligations under the terms of the license agreements. Any software license fees received relating to a future fiscal period are deferred and recognized in the appropriate future period. Both consulting and contract research revenues are recorded on a percentage-of-completion basis whereby revenues and costs are recorded in operations based on work completed.

(c) Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly liquid investments which have maturities of less than three months at the time of purchase. These cash equivalents consist primarily of term deposits and are stated at cost, which approximates market value.

(d) Property and Equipment: Property and equipment are recorded at cost. Leases that transfer substantially all the benefits and risks of ownership to the Company are accounted for as capital leases whereby the asset values and related obligations are recorded in the consolidated financial statements.

Depreciation is provided using the following annual rates and methods that are expected to amortize the cost of the property and equipment over their estimated useful lives:



Computer equipment 33 1/3% straight-line
Furniture and equipment 20% straight-line
Leasehold improvements Straight-line over the lease term


(e) Product Research and Development Costs: All costs of product research and development are expensed to operations as incurred as the impact of both technological changes and competition require the Company to continually enhance its products on an annual basis.

(f) Foreign Currency: The Company's subsidiaries are considered to be integrated operations. Accordingly, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing at year-end while other consolidated balance sheet items are translated at historic rates.

Revenues and expenses are translated at the rate of exchange in effect on the transaction dates. Realized and unrealized foreign exchange gains and losses are included in operations in the year in which they occur.

(g) Income Taxes: The Company provides for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are more likely than not to be realized. Future income tax assets and liabilities are measured using tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net future income tax assets and liabilities is included in operations in the year it occurs.

(h) Per Share Amounts: Basic earnings per share is computed by dividing earnings by the weighted average number of Common and Non-Voting Shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments.

In computing diluted earnings per share, 246,372 shares were added to the weighted average number of Common and Non-Voting Shares outstanding during the year ended March 31, 2005 (2004 - 271,534 shares) for the dilutive effect of employee stock options.

(i) Stock-Based Compensation Plan: The Company has a stock-based compensation plan that is described in note 6(e). Commencing in the year ended March 31, 2004, the fair value of stock options has been expensed over the vesting period. For stock options issued prior to 2004, pro forma disclosure of the effect on net earnings and earnings per share had the fair value been expensed is provided. The fair value of stock options that have been expensed is credited to contributed surplus.

(j) Use of Estimates and Assumptions: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the year. Actual results may differ from such estimates and the differences could be material.



2. Cash and Cash Equivalents:

2005 2004
------------------------------------------------------------------------
Cash $ 910,282 $ 983,606
Term deposits 13,450,000 11,727,491
------------------------------------------------------------------------
$ 14,360,282 $ 12,711,097
------------------------------------------------------------------------
------------------------------------------------------------------------

3. Property and Equipment:

------------------------------------------------------------------------
Accumulated Net Book
2005 Cost Depreciation Value
------------------------------------------------------------------------
Computer equipment $ 1,056,599 $ 740,832 $ 315,767
Furniture and equipment 414,829 352,004 62,825
Leasehold improvements 348,898 260,369 88,529
------------------------------------------------------------------------
$ 1,820,326 $ 1,353,205 $ 467,121
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Accumulated Net Book
2004 Cost Depreciation Value
------------------------------------------------------------------------
Computer equipment $ 924,183 $ 602,690 $ 321,493
Furniture and equipment 412,467 320,172 92,295
Leasehold improvements 348,898 221,912 126,986
------------------------------------------------------------------------
$ 1,685,548 $ 1,144,774 $ 540,774
------------------------------------------------------------------------
------------------------------------------------------------------------

4. Product Research and Development Costs:

2005 2004
------------------------------------------------------------------------
Product research and development costs $ 3,336,553 $ 3,050,886
Depreciation 141,650 138,031
Scientific research and experimental
development investment tax credits (203,784) (526,307)
------------------------------------------------------------------------
$ 3,274,419 $ 2,662,610
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Income and Other Taxes:

The provision for income and other taxes reported differs from the amount computed by applying the combined Canadian Federal and Provincial statutory rate to the earnings before income and other taxes. The reasons for this difference and the related tax effects are as follows:


2005 2004
------------------------------------------------------------------------
Statutory tax rate 33.62% 36.12%
------------------------------------------------------------------------
Expected income tax $ 1,749,235 $ 1,438,940
Permanent differences 74,309 35,853
Change in valuation allowance (146,691) (68,406)
Other 52,251 (5,882)
------------------------------------------------------------------------
$ 1,729,104 $ 1,400,505
------------------------------------------------------------------------

Represented by:
Current income tax expense $ 1,531,983 $ 270,878
Future income taxes 12,950 1,016,340
Foreign withholding and other taxes 184,171 113,287
------------------------------------------------------------------------
$ 1,729,104 $ 1,400,505
------------------------------------------------------------------------


The components of the Company's net future income tax liability at
March 31, 2005 are as follows:

------------------------------------------------------------------------
Canada Other Total
------------------------------------------------------------------------

Investment tax credits,
net of future tax liabilities $ (70,008) $ - $ (70,008)
Property and equipment 94,989 10,047 105,036
------------------------------------------------------------------------
$ 24,981 $ 10,047 35,028
Valuation allowance (130,918)
------------------------------------------------------------------------
Future income tax liability, net $ (95,890)
------------------------------------------------------------------------

Represented by:
Future income tax liability, current $(190,879)
Future income tax asset, long-term 94,989
------------------------------------------------------------------------
Future income tax liability, net $ (95,890)
------------------------------------------------------------------------


6. Share Capital:

(a) Authorized: An unlimited number of Common Shares, an unlimited number of Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in series.

(b) Issued:



Common Shares Non-Voting Shares Contributed
Number Consideration Number Consideration Surplus
------------------------------------------------------------------------
Balance,
March 31,
2003 4,402,031 $ 10,213,216 2,954,775 $ 379,913 $ -
Issued for
cash on
exercise
of stock
options 489,175 415,629
Cancelled
pursuant to
Common Shares
buy-back (69,000) (153,951)
Converted into
Common Shares 95,000 12,215 (95,000) (12,215)
Stock-based
compensation
expense 20,399
------------------------------------------------------------------------
Balance,
March 31,
2004 4,917,206 10,487,109 2,859,775 367,698 20,399
Issued for
cash on
exercise
of stock
options 100,250 122,297
Cancelled
pursuant to
Common Shares
buy-back (122,200) (259,437)
Stock-based
compensation
- current
period 182,711
expense
- stock
options
exercised 3,890 (3,890)
------------------------------------------------------------------------
Balance,
March 31,
2005 4,895,256 $ 10,353,859 2,859,775 $ 367,698 $ 199,220
------------------------------------------------------------------------
------------------------------------------------------------------------


The Non-Voting Shares are convertible into an equivalent number of Common Shares at any time at the option of the holder.

(c) Common Shares Buy-Back: On November 3, 2003, the Company announced a Normal Course Issuer Bid ("NCIB") commencing as of November 13, 2003 to purchase for cancellation up to 300,000 of its Common Shares. The NCIB began on November 13, 2003 and ended on November 12, 2004. During the year ended March 31, 2005, a total of 122,200 Common Shares were repurchased at market price for a total cost of $494,613 and all of these shares have been cancelled. On a cumulative basis, the Company purchased 126,000 Common Shares pursuant to this NCIB at a total cost of $503,847.

Under an earlier Normal Course Issuer Bid, which commenced November 13, 2002 and ended November 12, 2003, the Company purchased 65,200 Common Shares for a total cost of $144,717 in the year ended March 31, 2004.

(d) Non-Voting Shares: On January 30, 2001, the Company and CMG Reservoir Simulation Foundation ("the Foundation"), the sole holder of the Non-Voting Shares, entered into an Amended and Restated Research and Development Agreement ("Agreement"), which was approved by the Company's shareholders on May 25, 2001. The Agreement terms as negotiated resulted in the Company receiving on a quarterly basis commencing as of April 1, 2001 through January 1, 2008: $125,000 cash; or the surrender to the Company of a specified number of shares for cancellation (starting at 108,571 per quarter through fiscal 2002 and declining through the eight years to 57,699 per quarter through fiscal 2008); or a pro-rata combination of cash and shares for cancellation. During both the years ended March 31, 2005 and 2004, the Foundation paid $500,000 in cash to the Company, which is reflected in consulting and contract research revenues. On April 1, 2005, the Foundation paid its quarterly commitment in cash and the maximum number of shares that could now potentially be surrendered for cancellation through January 1, 2008 pursuant to this Agreement is 700,938 Non-Voting Shares.

(e) Stock-Based Compensation Plan: The Company has reserved 680,198 Common Shares for issuance to employees and directors pursuant to the Company's stock option plan. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. These outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates. Changes in options in the two years ended March 31, 2005 were as follows:



2005 2004
------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
Granted Price Granted Price
------------------------------------------------------------------------
Outstanding at
beginning of year 438,000 $ 1.29 880,175 $ 1.00
Granted 305,000 4.20 49,000 2.03
Cancelled (6,000) 1.20 (2,000) 1.20
Exercised (100,250) 1.22 (489,175) 0.85
------------------------------------------------------------------------
Outstanding at
end of year 636,750 $ 2.69 438,000 $ 1.29
------------------------------------------------------------------------
Options exercisable
at end of year 151,250 $ 1.24 76,000 $ 1.15
------------------------------------------------------------------------
------------------------------------------------------------------------


The weighted average life of all options outstanding at March 31, 2005 is 3.34 years.

The Company began prospectively expensing the fair value of stock options granted in the year ended March 31, 2004 over the vesting period. In accordance with the prospective method of adoption, the Company will continue to record no compensation expense for stock options granted prior to April 1, 2003, and will continue to provide pro forma disclosure of the net effect on net earnings per share had fair value been expensed.

The weighted average fair market value of each option granted by the Company was determined as at the stock option grant date using the Black-Scholes model with the following assumptions: risk free interest rate - varied from 3.3 percent to 3.9 percent (fiscal years 2004 and 2003 - 3.9 percent to 4.1 percent and 4.1 percent to 4.9 percent respectively), expected life - 1.5 to 5 years (fiscal years 2004 and 2003 - 5 years), expected annual dividend - $0.16 per share (fiscal years 2004 and 2003 - nil), and volatility - 46 percent to 47 percent (fiscal years 2004 and 2003 - 47 percent to 51 percent and 57 percent to 60 percent respectively). The weighted average grant-date fair value of options granted varied from $0.90 to $1.42 per share (fiscal years 2004 and 2003 - $0.98 per share and $0.65 per share respectively). In 2005, the Company recognized a total stock-based compensation expense of $182,711 (2004 - $20,399).

If the fair value method had been used for options issued in the year ended March 31, 2003, the Company's net earnings and earnings per share would approximate the following pro forma amounts:



2005 2004
------------------------------------------------------------------------
Net earnings:
As reported $ 3,473,857 $ 2,583,270
Pro forma $ 3,422,894 $ 2,429,886
Earnings per share:
As reported
Basic $ 0.45 $ 0.35
Diluted $ 0.43 $ 0.33
Pro forma
Basic $ 0.44 $ 0.33
Diluted $ 0.42 $ 0.31
------------------------------------------------------------------------


7. Financial Instruments:

(a) Fair Value: The carrying values of all monetary assets and liabilities approximate their fair values due to the relatively short period to maturity of the instruments.

(b) Credit Risk: Accounts receivable includes balances from customers operating in the oil and gas industry, both domestically and internationally. The Company assesses the credit worthiness of its customers on an ongoing basis and it regularly monitors the amount and age of balances outstanding. Accordingly, the Company views the credit risks on these amounts as normal for the industry. As at March 31, 2005, amounts from two international customers, who generated 30 percent of revenues in the year ended March 31, 2005, represent a combined 40 percent of the Company's accounts receivable. Of this amount, 99 percent have been outstanding for less than 60 days at March 31, 2005 and the Company has had an excellent collection history with these two customers.

(c) Foreign Currency Risk: The Company is affected by the exchange rate between the Canadian and US dollar as approximately 80 percent of its revenues in the year ended March 31, 2005 were denominated in US dollars. Approximately 25 to 30 percent of the Company's total costs were also denominated in US dollars and provided a hedge against the fluctuation in the currency exchange. At March 31, 2005, the Company has approximately $3.4 million of its working capital denominated in US dollars.

8. Other Information:

(a) Commitments: The Company has lease commitments relating to its office premises. The minimum operating lease rental payments pursuant to these contracts are estimated to be 2006 - $547,000; 2007 - $533,000; 2008 - $488,000; 2009 - $439,000 and 2010 - $315,000.

(b) Line of Credit: The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility and/or letters of credit. As at March 31, 2005, US $54,300 had been drawn on this line of credit for performance bonds.



(c) Supplemental Cash Flow Information:

2005 2004
---------------------------------------------------------------------
Interest received $ 260,519 $ 256,353
Income taxes paid $ 179,148 $ -
---------------------------------------------------------------------


9. Segmented Information:

Consulting
Operating Segments and
Year ended Software Contract
March 31, 2005 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $11,508,124 $3,656,367 $ - $ 15,164,491
------------------------------------------------------------------------
Gross profit 8,540,375 1,937,038 - 10,477,413
------------------------------------------------------------------------
General and
administrative
expenses 1,991,573 1,991,573
Depreciation and
amortization 96,688 20,501 31,537 148,726
Product research
and development
costs 3,274,419 3,274,419
Interest and other
income and
foreign exchange (140,266) (140,266)
Income and other
taxes 66,210 115,119 1,547,775 1,729,104
------------------------------------------------------------------------
Earnings (loss)
for the year $ 8,377,477 $1,801,418 $ (6,705,038) $ 3,473,857
------------------------------------------------------------------------
Total Assets $ 4,487,797 $ 933,130 $ 14,828,022 $ 20,248,949
------------------------------------------------------------------------
Capital Expenditures $ 75,701 $ 42,884 $ 98,138 $ 216,723
------------------------------------------------------------------------
------------------------------------------------------------------------


Consulting
Operating Segments and
Year ended Software Contract
March 31, 2004 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $ 9,471,381 $2,862,549 $ - $ 12,333,930
------------------------------------------------------------------------
Gross profit 6,847,482 1,841,375 - 8,688,857
------------------------------------------------------------------------
General and
administrative
expenses 1,872,609 1,872,609
Depreciation and
amortization 103,858 16,490 22,732 143,080
Product and
development
costs 2,662,610 2,662,610
Interest and other
income and
foreign exchange 26,783 26,783
Income and other
taxes 29,666 79,534 1,291,305 1,400,505
------------------------------------------------------------------------
Earnings (loss)
for the year $ 6,713,958 $1,745,351 $ (5,876,039) $ 2,583,270
------------------------------------------------------------------------
Total Assets $ 2,504,335 $ 747,227 $ 13,465,870 $ 16,717,432
------------------------------------------------------------------------
Capital Expenditures $ 58,653 $ 30,014 $ 106,983 $ 195,650
------------------------------------------------------------------------


Geographic Segments
Years ended March 31, 2005 2004
------------------------ --------------------------
Revenue Fixed Assets Revenue Fixed Assets
------------------------ --------------------------
Canada $ 3,194,285 $ 361,624 $ 3,191,869 $ 416,500
United States 3,915,043 33,111 2,552,754 40,652
Venezuela 1,990,982 61,400 1,480,816 68,878
Other Foreign 6,064,181 10,986 5,108,491 14,744
------------------------ --------------------------
$15,164,491 $ 467,121 $12,333,930 $ 540,774
------------------------ --------------------------


In the year ended March 31, 2005, the Company derived 19 percent (2004 - 12 percent) and 11 percent (2004 - 7 percent) in revenue from two customers.

CORPORATE INFORMATION

Computer Modelling Group Ltd. is a computer software technology and consulting company serving the oil and gas industry. The Company, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, Beijing, London, and Caracas. CMG is the leading supplier of advanced processes reservoir modelling software in the world with a blue chip client base of international oil companies and technology centers in 42 countries.

The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information