Computer Modelling Group Ltd.
TSX : CMG

Computer Modelling Group Ltd.

May 19, 2006 09:00 ET

Computer Modelling Group Announces Record Year End Results

CALGARY, ALBERTA--(CCNMatthews - May 19, 2006) - Computer Modelling Group Ltd. (TSX:CMG) ("CMG") is pleased to report that its fiscal year ended March 31, 2006 has been CMG's most successful fiscal year in its history, surpassing all previous record results. CMG reported revenues of $17.2 million, net earnings of $4.0 million ($0.50 per share) and funds from operations of $4.5 million ($0.57 per share). These results compare to revenues of $15.2 million, net earnings of $3.5 million ($0.45 per share) and funds from operations of $4.3 million ($0.56 per share) for the year ended March 31, 2005.

Management's Discussion and Analysis

The following discussion and analysis, presented as at May 18, 2006, is an extract of CMG's MD&A presented in its 2006 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, 2006 and 2005 contained in CMG's 2006 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 www.sedar.com.

Funds from operations, which is determined before changes in non-cash working capital, is used by us as a key measure of performance. Funds 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. Funds 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. Funds from operations per share is calculated using the same share bases which is 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 assurances 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 therefrom.

Results of Operations

Quarterly Results

CMG reported revenues of $5.6 million, earnings of $1.7 million ($0.21 per share) and funds from operations of $1.9 million ($0.24 per share) for the three months ended March 31, 2006. These results compare to revenues of $4.7 million, earnings of $1.5 million ($0.19 per share) and funds from operations of $1.7 million ($0.21 per share) for the three months ended March 31, 2005.



Quarterly Performance

------------------------------------------------------------------------
------------------------------------------------------------------------
$Thousands,
unless otherwise Fiscal 2005 Fiscal 2006
stated Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------------------------------------------------------------------------
------------------------------------------------------------------------
Annuity
/maintenance
licenses 1,921 1,905 1,997 2,223 2,315 2,389 2,447 2,634
Perpetual
licenses 340 441 1,248 1,433 298 356 1,067 2,111
------------------------------------------------------------------------
Software
licenses 2,261 2,346 3,245 3,656 2,613 2,745 3,514 4,745
Consulting and
contract
research 1,075 802 740 1,039 821 1,100 823 859
------------------------------------------------------------------------
Revenues 3,336 3,148 3,985 4,695 3,434 3,845 4,337 5,604
Gross Profit 2,095 1,903 2,932 3,547 2,259 2,705 3,021 4,336
Gross Profit % 63 60 74 76 66 70 70 77
Earnings before
income and
other taxes 987 562 1,512 2,142 1,033 1,285 1,497 2,589
Current income
and other tax
(expense) (392) (199) (488) (637) (638) (445) (563) (885)
Future income
tax benefit
(expense) 38 (16) (16) (19) 170 (19) (13) (26)
Earnings for
the quarter 633 347 1,008 1,486 565 821 921 1,678
Funds from
operations for
the quarter 863 574 1,234 1,651 523 1,000 1,120 1,907
Cash dividends
declared and
paid 311 311 309 310 1,967 399 403 403
------------------------------------------------------------------------
Per share
amounts - $
Earnings per
share - basic 0.08 0.04 0.13 0.19 0.07 0.10 0.11 0.21
Earnings per
share - diluted 0.08 0.04 0.13 0.19 0.07 0.10 0.11 0.20
Funds from
operations per
share - basic 0.11 0.07 0.16 0.21 0.07 0.13 0.14 0.24
Cash dividends
declared per
share 0.04 0.04 0.04 0.04 0.25 0.05 0.05 0.05
Book value per
share, at
quarter end 1.47 1.44 1.54 1.70 1.52 1.60 1.67 1.84
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenues -

Software license revenues were $4.7 million in the fourth quarter of fiscal 2006, up $1.0 million from the $3.7 million recorded in the fourth quarter of fiscal 2005. Of this $1.0 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 $0.9 million in the fourth quarter of fiscal 2006, down $0.1 million from the $1.0 million recorded in the fourth quarter of fiscal 2005. Upon 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, 2006 was 77 percent (2005 - 76 percent) and CMG realized a gross profit of $4.3 million, up $0.8 million from the $3.5 million recorded in the fourth quarter of fiscal 2005.

CMG's total expenses, excluding depreciation and income and other taxes, amounted to $3.1 million for the fourth quarter ended March 31, 2006, up $0.5 million from the $2.6 million expended in the fourth quarter of fiscal 2005. This increase in total expenses is primarily due to increases in CMG staff costs between the two respective quarters and legal and taxation services expended on the joint development agreement, both of which were offset by lower third-party contract costs compared to the same quarter last year.

Annual Results

CMG posted record revenues and profits for its fiscal year ended March 31, 2006. CMG reported revenues of $17.2 million, net earnings of $4.0 million ($0.50 per share) and funds from operations of $4.5 million ($0.57 per share). These results compare to revenues of $15.2 million, net earnings of $3.5 million ($0.45 per share) and funds from operations of $4.3 million ($0.56 per share) for the year ended March 31, 2005.

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 $17.2 million for its 2006 fiscal year reflect an increase of $2.1 million, a 14 percent increase, from the $15.2 million recorded in its 2005 fiscal year.

Software Licenses -

CMG generated another record year in its software license sales, with $13.6 million in software license revenues recorded in the year ended March 31, 2006. These revenues reflect an increase of $2.1 million or 18 percent from prior year revenues of $11.5 million.

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(s) 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 subsequently purchase maintenance licenses to ensure they have access to current versions of CMG software.

Software licensing under perpetual sales is a significant part of CMG's business but 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's annuity/maintenance licensing for the year ended March 31, 2006 was $9.8 million, representing 72 percent of fiscal 2006 total software license revenues. This reflects an increase of 22 percent from the $8.0 million (70 percent of fiscal 2005 total software license revenues) in annuity/maintenance software license revenues generated last year. Software license revenues under perpetual sales for the year ended March 31, 2006 was $3.8 million, up $0.3 million from the $3.5 million recorded in fiscal 2005.

The 18 percent growth in CMG's software license revenues in fiscal 2006 compared to fiscal 2005 is attributable to sales to new customers and additional 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 production from unconventional sources of supply of hydrocarbons have generated increased demand for CMG's advanced physics reservoir simulators. In addition, demand for CMG's parallel computing options and flexible gridding features to enable clients to run large highly complex models with reduced computational time has increased in this last fiscal year.

CMG has historically maintained a significant percentage of repeat customers and expects that this will continue. At March 31, 2006, CMG has pre-sold $5.4 million of software license revenue, $5.3 million of which relates to its next fiscal year ending March 31, 2007.

Consulting and Contract Research Revenues -

CMG recorded consulting and contract research revenues of $3.6 million for the year ended March 31, 2006, compared to $3.7 million last year. The earnings contribution from this segment in fiscal 2006 was $1.7 million, down slightly from the $1.8 million earned in 2005. In the fiscal year ended March 31, 2006, CMG added to its consulting and support staff to support the growth in the usage of CMG's simulators and to develop internal staff for the future. As a result, fewer third-party consultants were required in the 2006 fiscal year.

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 servicing 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.

At March 31, 2006, CMG has recorded approximately $0.2 million of pre-sold revenue relating to consulting and contract research revenues for projects to be completed in the fiscal year ending March 31, 2007.

Expenses -

CMG's gross profit margin for the year ended March 31, 2006 was 72 percent (2005 - 69 percent) and CMG realized a gross profit of $12.3 million, up $1.8 million from the $10.5 million recorded last year.

CMG's total expenses, excluding depreciation and income and other taxes, amounted to $10.8 million for the year ended March 31, 2006, up $1.0 million from the $9.8 million expended a year ago and as a technology service company, CMG's largest area of expenditure is for its people. Approximately $8.1 million (2005 - $7.1 million) expended was directly related to CMG staff cost.

The increase in total expenses is primarily due to a combination of higher staff costs as a result of staff additions, general salary increases, variable commission and bonus compensation that is dependent on growth in CMG's revenue base and earnings and a larger stock-based compensation expense for fiscal 2006. This increase was offset by lower third-party contract costs due to the nature of the current year's consulting engagements and CMG's decision to increase its own staff in this area.

Over this next fiscal year CMG is planning on adding eleven new positions to its staff complement, six in the sales and support area, three in the research and development of our current suite of products and two in the administrative area. This investment is required both to grow our revenue base for the future and to support the growth that we have experienced over the last year.

Investment in Research and Development -

During the year ended March 31, 2006, CMG has recorded a gross cash investment of $3.8 million (2005 - $3.3 million) in research and development, all of which is expensed to earnings. CMG has recorded a reduction of $0.2 million in both the years ended March 31, 2006 and 2005 to its product research and development expenses for investment tax credits on scientific research and experimental development expenditures. The benefit of the scientific research and experimental development investment tax credits is utilized by CMG to reduce Canadian federal income taxes otherwise payable.

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.

CMG became the leading specialist in advanced process simulation, especially in the heavy oil area, through its investment in research and development and we believe that it is our proven record that has attracted Shell to partner with CMG in the development of the newest generation of reservoir simulation software.

CMG, through its participation with Shell International Exploration and Production BV in the joint development of the newest generation of reservoir simulation software, has a funding commitment of approximately $500,000 for Phase 1 of the project, which we anticipate could take six to nine months in duration to complete. One of the deliverables of Phase 1 is to identify the resource requirements for Phase 2 and the project timeline. Only with the mutual agreement of both parties will Phase 2 proceed and CMG, as the project operator, currently estimates that it could increase its staff complement by 25 individuals to meet the project requirements for the second phase. Our current scoping of the project indicates that Phase 2 could be up to five years in duration and CMG currently estimates that it will contribute a further $2 million annually for its portion of the aggregate project costs during Phase 2. CMG anticipates that this project will initially have a minimal impact on its revenues with the future potential being subject to the successful commercialization of the developed reservoir simulation software.

In conjunction with entering into this project, CMG presented a research grant proposal to CMG Reservoir Simulation Foundation ("the Foundation") to fund a portion of CMG's share of the project costs. The Foundation has committed $1 million in funding to cover 50% of the first $2 million of CMG's allocated project costs. In addition, we believe that there may be further opportunities to apply for and receive additional funding from the Foundation for the joint research and development agreement in the future.

Interest income and foreign exchange -

Interest income increased to $0.4 million in the year ended March 31, 2006 from the $0.3 million recorded last year due to both larger cash balances to invest and slightly higher interest rates.

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 73 percent (2005 - 80 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.



------------------------------------------------------------------------
2004 2005 2006
------------------------------------------------------------------------
US dollar to Canadian dollar -
at March 31 $ 0.7599 $ 0.8267 $ 0.8568
US dollar to Canadian dollar -
average for the year $ 0.7355 $ 0.7794 $ 0.8383
------------------------------------------------------------------------


CMG recorded a small foreign exchange gain of $0.01 million for the year ended March 31, 2006 compared to a loss of $0.1 million in the prior year.

Income and other taxes -

CMG's effective tax rate for the year ended March 31, 2006 is reflected as 37.8% (2005 - 33.2%) whereas the prevailing Canadian statutory tax rate is 33.62%. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the current year valuation allowance on losses in foreign jurisdictions. In the year ended March 31, 2005, CMG's effective tax rate was 33.2% as the Company was able to take benefit of prior years operating losses in foreign jurisdictions.

The benefit recorded in CMG's books on the federal scientific research and experimental development investment tax credit program impacts future income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce federal income taxes otherwise payable for the current fiscal year and this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a current future income tax liability and then in the following fiscal year is transferred to income taxes payable.

Liquidity and Capital Resources

Operating activities -

CMG generated $4.5 million ($0.57 per share) of funds from operations in the year ended March 31, 2006, an increase of $0.2 million from the $4.3 million ($0.56 per share) generated in the year ended March 31, 2005. CMG's accounts receivable and accounts payable and accrued liabilities balances have increased as at March 31, 2006 due to the growth in its business. The Company's income taxes payable amount for the most part is reflective of the timing differences between when taxes are payable and required monthly installments over the year.

Financing activities -

At March 31, 2006, CMG has recognized an obligation of $5.7 million of deferred revenue for pre-sold revenues, the majority of which relates to fiscal 2007. This is up $1.3 million from March 31, 2005 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, 2006, CMG employees and directors exercised options to purchase 323,575 Common Shares, which resulted in $0.6 million in cash proceeds.

In the year ended March 31, 2006, CMG paid $3.2 million in dividends, representing a quarterly dividend of $0.05 Canadian per share and a special dividend of $0.20 on its Common and Non-Voting Shares. On May 18, 2006, CMG announced the payment of a quarterly dividend of $0.06 Canadian per share and a special dividend of $0.24 Canadian per share on CMG's Common and Non-Voting Shares. The combined dividend payment of $0.30 per share will be paid on June 15, 2006 to shareholders of record at the close of business on June 1, 2006.

On November 17, 2005, CMG announced its intention to purchase for cancellation up to 395,000 of its Common Shares in accordance with the normal course issuer bid ("NCIB") procedures under Canadian securities law during the 12-month period commencing November 21, 2005. No shares have been purchased to this NCIB through May 18, 2006.

Investing activities -

CMG's current needs for capital asset investment primarily relate to computer equipment. During fiscal 2006, CMG expended $1.0 million on fixed asset additions and has a capital budget of $0.6 million for fiscal 2007, excluding any requirements resulting from moving forward with Phase 2 of the joint development project with Shell, all of which will be funded internally.

CMG plans on funding its share of the costs to develop the newest generation of reservoir simulation software from internal cash and funding it receives from the Foundation.

Overall liquidity and capital resources -

CMG has consistently generated funds from operations over the last seven years and at March 31, 2006 CMG's liquidity as measured by working capital is $13.7 million, an increase of $1.1 million from its position a year ago. At March 31, 2006, CMG has $16.5 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker, of which US $24,000 has been drawn on for performance bonds.

Outlook

CMG's strategy is to grow its revenue base while advancing its technological superiority over its competition - two principles which yield long-term value for CMG stakeholders. To accomplish this, CMG continually advances the development of its technologies in a targeted manner to try to anticipate what innovation(s) will create the most demand for increased licensing of our software, be it by existing customers and/or new customers.

In line with this strategy, CMG entered into a joint research project to develop the newest generation of reservoir simulation software. Our goal is to develop a new generation of reservoir simulation software that will do more than optimize reservoir recovery; it will model the entire hydrocarbon recovery system through point of sale. This endeavor aligns perfectly with our corporate strategy that focuses our efforts on providing our customers with new and enhanced software products full of unique physics and features that are not offered by our competition. We believe this new software product coupled with our existing products will set the industry benchmark for future reservoir simulation technologies.

These are exciting and challenging times for CMG and we see market opportunities that support both short-term and long-term growth in both the Company's revenue base and underlying value.


Kenneth M. Dedeluk

President and Chief Executive Officer

May 18, 2006





COMPUTER MODELLING GROUP LTD.
Consolidated Balance Sheets
March 31, 2006 and 2005

2006 2005
------------------------------------------------------------------------
(audited)
Assets

Current assets:
Cash and cash equivalents (note 2) $ 16,509,473 $ 14,360,282
Accounts receivable 6,520,664 4,926,368
Prepaid expenses 487,903 400,189
------------------------------------------------------------------------
23,518,040 19,686,839
Property and equipment (note 3) 1,061,241 467,121
Future income taxes (note 5) 88,458 94,989
------------------------------------------------------------------------
$ 24,667,739 $ 20,248,949
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 2,085,042 $ 1,538,093
Income taxes payable 1,892,608 894,020
Deferred revenue 5,728,724 4,444,664
Future income taxes (note 5) 72,123 190,879
------------------------------------------------------------------------
9,778,497 7,067,656
Shareholders' equity:
Share capital (note 6) 11,815,845 10,920,777
Retained earnings 3,073,397 2,260,516
------------------------------------------------------------------------
14,889,242 13,181,293
------------------------------------------------------------------------
$ 24,667,739 $ 20,248,949
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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

Three months Year ended
ended ended
March 31 March 31
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
(unaudited) (audited)
Revenue
Software licenses $ 4,745,463 $ 3,655,184 $ 13,616,870 $ 11,508,124
Consulting and
contract research 858,648 1,039,070 3,603,533 3,656,367
------------------------------------------------------------------------
5,604,111 4,694,254 17,220,403 15,164,491
------------------------------------------------------------------------

Cost of Sales
Marketing expenses 873,038 841,092 3,417,751 3,218,003
Direct consulting
expenses 386,568 206,507 1,155,982 827,657
Third-party contract
costs 8,621 99,971 325,989 641,418
------------------------------------------------------------------------
1,268,227 1,147,570 4,899,722 4,687,078
------------------------------------------------------------------------

Gross Profit 4,335,884 3,546,684 12,320,681 10,477,413

General and
administrative
expenses 781,931 564,403 2,382,164 1,991,573
Depreciation and
amortization 53,337 44,657 204,128 148,726
Product research
and development
costs (note 4) 1,078,682 893,597 3,708,013 3,274,419
Foreign exchange
(gain) loss (60,375) (16,545) (11,327) 129,169
Interest and
other income (106,824) (81,683) (366,991) (269,435)
------------------------------------------------------------------------
Earnings before
income and other
taxes 2,589,133 2,142,255 6,404,694 5,202,961
Income and other
taxes (note 5) 911,084 656,498 2,418,963 1,729,104
------------------------------------------------------------------------
Earnings for
the period 1,678,049 1,485,757 3,985,731 3,473,857
Retained earnings,
beginning of period 1,798,823 1,084,321 2,260,516 263,194
Dividends paid (403,475) (309,562) (3,172,850) (1,241,359)
Common Shares
buy-back (note 6) - - - (235,176)
------------------------------------------------------------------------
Retained earnings,
end of period $ 3,073,397 $ 2,260,516 $ 3,073,397 $ 2,260,516
------------------------------------------------------------------------
------------------------------------------------------------------------

Per share
Weighted average
number of shares
outstanding 8,064,532 7,738,775 7,955,931 7,754,485
Earnings for
the period
Basic $ 0.21 $ 0.19 $ 0.50 $ 0.45
Diluted $ 0.20 $ 0.19 $ 0.49 $ 0.43

See accompanying notes to consolidated financial statements.



COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Cash Flows

Three months Year ended
ended ended
March 31 March 31
2006 2005 2006 2005
------------------------------------------------------------------------
(unaudited) (audited)
Cash provided by (used for)

Operating

Earnings for
the period $ 1,678,049 $ 1,485,757 $ 3,985,731 $ 3,473,857
Items not
involving cash:
Depreciation and
amortization 117,583 83,573 367,158 290,376
Future income taxes 25,954 19,337 (112,225) 376,915
Stock-based
compensation 84,943 62,583 309,133 182,711
------------------------------------------------------------------------
Funds from operations 1,906,529 1,651,250 4,549,797 4,323,859
Changes in non-cash
working capital:
Accounts receivable (2,270,948) (1,544,383) (1,594,296) (2,118,999)
Accounts payable and
accrued liabilities 411,799 358,719 546,949 117,071
Income taxes payable 636,183 523,189 998,588 785,484
Prepaid expenses (41,923) (37,533) (87,714) (23,022)
Deferred revenue (2,168,543) (1,866,560) - -
------------------------------------------------------------------------
(1,526,903) (915,318) 4,413,324 3,084,393
------------------------------------------------------------------------

Financing

Deferred revenue 3,708,457 2,757,618 1,284,060 395,190
Issue of Common Shares 50,022 27,300 585,935 122,297
Dividends paid (403,475) (309,562) (3,172,850) (1,241,359)
Common Shares buy-back - - - (494,613)
------------------------------------------------------------------------
3,355,004 2,475,356 (1,302,855) (1,218,485)
------------------------------------------------------------------------

Investing

Property and
equipment additions (240,623) (97,098) (961,278) (216,723)
------------------------------------------------------------------------
Increase in cash and
cash equivalents 1,587,478 1,462,940 2,149,191 1,649,185
Cash and cash
equivalents,
beginning of period 14,921,995 12,897,342 14,360,282 12,711,097
------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $16,509,473 $14,360,282 $16,509,473 $14,360,282
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.

Notes to Consolidated Financial Statements

Years ended March 31, 2006 and 2005

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 year. 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, 148,869 shares (2005 - 246,372 shares) were added to the weighted average number of Common and Non-Voting Shares outstanding during the year ended March 31, 2006 for the dilutive effect of employee and directors' 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. When the stock options are exercised for stock, the recorded amount is transferred from contributed surplus to common share capital.

(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:

2006 2005
------------------------------------------------------------------------
Cash $ 609,473 $ 910,282
Term deposits 15,900,000 13,450,000
------------------------------------------------------------------------
$ 16,509,473 $ 14,360,282
------------------------------------------------------------------------
------------------------------------------------------------------------

3. Property and Equipment:

------------------------------------------------------------------------
Accumulated Net Book
2006 Cost Depreciation Value
------------------------------------------------------------------------
Computer equipment $ 1,217,525 $ 793,033 $ 424,492
Furniture and equipment 503,512 391,860 111,652
Leasehold improvements 873,320 348,223 525,097
------------------------------------------------------------------------
$ 2,594,357 $ 1,533,116 $ 1,061,241
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
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
------------------------------------------------------------------------
------------------------------------------------------------------------

4. Product Research and Development Costs:

2006 2005
------------------------------------------------------------------------
Product research and development costs $ 3,769,527 $ 3,336,553
Depreciation 163,030 141,650
Scientific research and experimental
development investment tax credits (224,544) (203,784)
------------------------------------------------------------------------
$ 3,708,013 $ 3,274,419
------------------------------------------------------------------------
------------------------------------------------------------------------

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:

2006 2005
------------------------------------------------------------------------
Statutory tax rate 33.62% 33.62%
------------------------------------------------------------------------
Expected income tax $ 2,153,258 $ 1,749,235
Non-deductible costs 123,675 74,309
Change in valuation allowance 115,525 (146,691)
Other 26,505 52,251
------------------------------------------------------------------------
$ 2,418,963 $ 1,729,104
------------------------------------------------------------------------

Represented by:
Current income taxes $ 2,438,404 $ 1,531,983
Future income taxes (recovery) (112,225) 12,950
Foreign withholding and other taxes 92,784 184,171
------------------------------------------------------------------------
$ 2,418,963 $ 1,729,104
------------------------------------------------------------------------

The components of the Company's net future income tax liability at
March 31, 2006 are as follows:

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

Investment tax credits, net of
future tax liabilities $ 209,712 $ - $ 209,712
Property and equipment 88,458 - 88,458
Benefit of operating losses - 139,286 139,286
------------------------------------------------------------------------
$ 298,170 $ 139,286 $ 437,456
Valuation allowance (421,121)
------------------------------------------------------------------------
Future income tax asset, net $ 16,335
------------------------------------------------------------------------

Represented by:
Future income tax liability, current $ (72,123)
Future income tax asset, long-term 88,458
------------------------------------------------------------------------
Future income tax asset, net $ 16,335
------------------------------------------------------------------------

The operating losses in other countries expire in varying amounts
between 2007 and 2009.

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:

Contri-
Common Shares Non-Voting Shares buted
Number Consideration Number Consideration Surplus
------------------------------------------------------------------------
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
expense 182,711
- stock
options
exercised 3,890 (3,890)
------------------------------------------------------------------------
Balance,
March 31,
2005 4,895,256 10,353,859 2,859,775 367,698 199,220

Issued for
cash on
exercise of
stock options 323,575 585,935

Stock-based
compensation:
- current
period
expense 309,133
- stock
options
exercised 78,197 (78,197)
------------------------------------------------------------------------
Balance,
March 31,
2006 5,218,831 $11,017,991 2,859,775 $ 367,698 $430,156
------------------------------------------------------------------------


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

Subsequent to March 31, 2006, 400,000 Non-Voting Shares were converted to Common Shares and 10,700 stock options were exercised for cash proceeds of $12,840.

On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "Plan") whereby the Company will issue one right in respect of each share outstanding at the close of business on May 18, 2006 and for each additional share issued by the Company thereafter. The issuance of the rights is not dilutive and will not affect reported earnings or cash flow per share until the rights separate from the underlying shares and become exercisable or until the exercise of the rights. The Plan is subject to the approval of the Toronto Stock Exchange, and will be put forward for confirmation to the Company's shareholders at the 2006 annual meeting on July 13, 2006.

(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.

On November 17, 2005, the Company announced an NCIB commencing November 21, 2005 to purchase for cancellation up to 395,000 of its Common Shares. No shares have been purchased pursuant to this NCIB through March 31, 2006.

(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, 2006 and 2005, the Foundation paid $500,000 in cash to the Company, which is reflected in consulting and contract research revenues. On April 1, 2006, 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 423,126 Non-Voting Shares.

(e) Stock-Based Compensation Plan: The Company adopted a rolling stock option plan as of July 13, 2005 which allows it to grant options to acquire Common Shares of up to 10 percent of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at March 31, 2006, the Company could grant up to 807,860 stock options. 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, 2006 were as follows:



2006 2005
------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
Granted Price Granted Price
------------------------------------------------------------------------
Outstanding at beginning
of year 636,750 $ 2.69 438,000 $ 1.29
Granted 216,500 7.00 305,000 4.20
Cancelled (500) 1.20 (6,000) 1.20
Exercised (323,575) 1.81 (100,250) 1.22
------------------------------------------------------------------------
Outstanding at end of year 529,175 $ 5.00 636,750 $ 2.69
------------------------------------------------------------------------
------------------------------------------------------------------------
Options exercisable at end
of year 147,925 $ 3.13 151,250 $ 1.24
------------------------------------------------------------------------
------------------------------------------------------------------------


The weighted average life of all options outstanding at March 31, 2006 is 3.5 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.

In previous years, we estimated the fair value of stock options granted using the Black-Scholes option pricing model under the following assumptions:



For the year ended
March 31 March 31 March 31
2006 2005 2004
------------------------------------------------------------------------
Weighted-Average Fair
Value ($/option) $ 1.30 to $2.15 $ 0.90 to $1.42 $ 0.98
Risk-Free Interest
Rate (%) 3.0 to 3.2 3.3 to 3.9 3.9 to 4.1
Estimated Hold Period
Prior to Exercise
(years) 1.5 to 5 1.5 to 5 5
Volatility in the Price
of Common Shares (%) 40 46 to 47 47 to 51
Dividends per Common
Share ($/share) 0.20 0.16 -
------------------------------------------------------------------------


The Company recognized a total stock-based compensation expense for the year ended March 31, 2006 of $309,133 (2005 - $182,711).

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:



2006 2005
------------------------------------------------------------------------
Net earnings:
As reported $ 3,985,731 $ 3,473,857
Pro forma $ 3,973,924 $ 3,422,894
Earnings per share:
As reported
Basic $ 0.50 $ 0.45
Diluted $ 0.49 $ 0.43
Pro forma
Basic $ 0.50 $ 0.44
Diluted $ 0.49 $ 0.42
------------------------------------------------------------------------


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 include 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, 2006, the amounts from seven domestic and international customers who generated 30 percent of revenues in the year ended March 31, 2006, and represent 40 percent of the deferred revenue on the Company's balance sheet as at March 31, 2006, represent 57 percent of the Company's accounts receivable. Of this amount, fourteen percent have been outstanding for over 90 days as at March 31, 2006. These seven customers have either a long-standing history of consistently paying all invoices rendered thereto, or if a new customer, payment has been received in April 2006.

(c) Foreign Currency Risk: The Company is affected by the exchange rate between the Canadian and US dollar as approximately 73% percent of its revenues in the year ended March 31, 2006 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, 2006, the Company has approximately $3.8 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 2007 - $632,000; 2008 - $507,000; 2009 - $460,000; and 2010 - $331,000.

(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, 2006, US $24,000 had been drawn on this line of credit for performance bonds.



(c) Supplemental Cash Flow Information:

2006 2005
------------------------------------------------------------------------
Interest received $ 358,945 $ 260,519
Income taxes paid $ 1,213,533 $ 179,148
------------------------------------------------------------------------


9. Segmented Information:

Consulting
Operating Segments and
Year ended March Software Contract
31, 2006 Licenses Research Corporate Total
------------------------------------------------------------------------
------------------------------------------------------------------------
Revenue $13,616,870 $ 3,603,533 $ - $17,220,403
------------------------------------------------------------------------
Gross profit 10,534,629 1,786,052 - 12,320,681
------------------------------------------------------------------------
General and
administrative
expenses 2,382,164 2,382,164
Depreciation and
amortization 93,647 37,068 73,413 204,128
Product and
development costs 3,708,013 3,708,013
Interest and other
income and foreign
exchange (378,318) (378,318)
Income and other taxes 77,358 15,428 2,326,177 2,418,963
------------------------------------------------------------------------
Earnings (loss) for
the year $10,363,624 $ 1,733,556 $(8,111,449) $ 3,985,731
------------------------------------------------------------------------
------------------------------------------------------------------------
Total Assets $ 5,731,289 $ 1,340,943 $17,595,507 $24,667,739
------------------------------------------------------------------------
Capital Expenditures $ 85,164 $ 70,072 $ 806,042 $ 961,278
------------------------------------------------------------------------

Consulting
Operating Segments and
Year ended March Software Contract
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
------------------------------------------------------------------------

Geographic Segments
Years ended March 31,
2006 2005
--------------------- ------------------------
Property Property
and and
Revenue Equipment Revenue Equipment
---------------------------- ------------------------
Canada $ 5,314,714 $ 992,139 $ 3,194,285 $ 361,624
United States 3,263,421 30,447 3,915,043 33,111
Venezuela 1,229,663 37,455 1,990,982 61,400
Other Foreign 7,412,605 1,200 6,064,181 10,986
---------------------------- ------------------------
$ 17,220,403 $ 1,061,241 $ 15,164,491 $ 467,121
---------------------------- ------------------------


In the year ended March 31, 2006, the Company derived 15.2 percent (2005 - 19 percent) and 6.7 percent (2005 - 11 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, 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 research centers in 44 countries.

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

Contact Information