Computer Modelling Group Ltd.
TSX : CMG

Computer Modelling Group Ltd.

November 08, 2005 09:30 ET

Computer Modelling Group Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 8, 2005) - Computer Modelling Group Ltd. (TSX:CMG) ("CMG") is pleased to announce its second quarter results for its 2006 fiscal year.

Message to our Shareholders

Computer Modelling Group Ltd. is pleased to announce its second quarter results for its 2006 fiscal year. CMG reported revenues of $7.3 million for the six months ended September 30, 2005, gross profit of $5.0 million and earnings of $1.4 million ($0.18 per share). These results compare to revenues of $6.5 million, gross profit of $4.0 million, and earnings of $1.0 million ($0.13 per share) for the corresponding period in fiscal 2005.

CMG's quarterly results reflect revenues of $3.8 million, gross profit of $2.7 million and earnings of $0.8 million ($0.10 per share) for the three months ended September 30, 2005. The comparative quarter results for the three months ended September 30, 2004 reflect revenues of $3.1 million, gross profit of $1.9 million and earnings of $0.3 million ($0.04 per share).

Management's Discussion and Analysis

The following interim management's discussion and analysis ("MD&A"), presented as at November 7, 2005, should be read in conjunction with the unaudited consolidated interim financial statements for the six months ended September 30, 2005 and the audited consolidated financial statements and MD&A for the year ended March 31, 2005 contained in the 2005 annual report for Computer Modelling Group Ltd. ("CMG" or the "Company"). 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.

Cash flow from operations, which is determined before changes in non-cash working capital, is used by us as a 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 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.

Revenues

Software Licenses

Software license revenues were $5.4 million in the six months ended September 30, 2005, up 16 percent or $0.8 million from the $4.6 million recorded in the same period last year. The annuity/maintenance component of these revenues amounted to $4.7 million for the six months ended September 30, 2005, an increase of 23 percent from the $3.8 million recorded in the same period last year. Software license revenues under perpetual sales amounted to $0.7 million for the six months ended September 30, 2005 compared to the $0.8 million for the same period last year.

Perpetual software license sales are variable and unpredictable in nature as the purchase decision and its timing fluctuates with customers' needs and budgets. 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.

On a quarterly comparison, CMG's software license revenues for the three months ended September 30, 2005 were $2.7 million, up $0.4 million from the $2.3 million recorded in the same period last year. The growth in CMG's software license revenues in both the three and six months ended September 30, 2005 is primarily attributable to sales to new customers and additional number of licenses and/or additional products sold to existing customers.

Consulting and Contract Research Revenues

Revenues from the consulting and contract research business segment were $1.9 million for the six months ended September 30, 2005, with a contribution of $1.0 million to earnings. This compares to revenues of $1.9 million and a $0.9 million contribution to earnings for the six months ended September 30, 2004. The net increase to this segment's contribution to earnings in the current fiscal year was due to using fewer third party consultants due to the nature and the timing of the consulting engagements this year. These cost reductions were offset by the current year increase in CMG internal staff to augment support services.



Quarterly Performance Table

------------------------------------------------------------------------
Fiscal Fiscal Fiscal
2004 2005 2006
------------------------------------------------------------------------
$Thousands, unless
otherwise stated Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------------------------------------------------------------------------
Annuity/ maintenance
licenses 1,682 1,777 1,921 1,905 1,997 2,223 2,315 2,389
Perpetual licenses 1,341 700 340 441 1,248 1,433 298 356
------------------------------------------------------------------------
Software licenses 3,023 2,477 2,261 2,346 3,245 3,656 2,613 2,745
Consulting and contract
research 916 671 1,075 802 740 1,039 821 1,100
------------------------------------------------------------------------
Revenues 3,939 3,148 3,336 3,148 3,985 4,695 3,434 3,845
Gross Profit 2,992 2,161 2,095 1,903 2,932 3,547 2,259 2,705
Gross Profit % 76 69 63 60 74 76 66 70
Earnings before income
and other taxes 1,729 1,206 987 562 1,512 2,142 1,033 1,285
Current income and
other tax (expense) (52) (307) (392) (199) (488) (637) (638) (445)
Future income tax
benefit (expense) (492) (147) 38 (16) (16) (19) 170 (19)
Earnings 1,185 752 633 347 1,008 1,486 565 821
Cash flow from
operations 1,751 632 863 574 1,234 1,651 523 1,000
Cash dividends
declared and paid - 310 311 311 309 310 1,967 399
------------------------------------------------------------------------
Per share amounts - $
Earnings per share
- basic 0.16 0.10 0.08 0.04 0.13 0.19 .07 .10
Earnings per share
- diluted 0.15 0.10 0.08 0.04 0.13 0.19 .07 .10
Cash flow from
operations per share
- basic 0.24 0.08 0.11 0.07 0.16 0.21 .07 .13
Cash dividends
declared per share - 0.04 0.04 0.04 0.04 0.04 .25 .05
Book value per share,
at quarter end 1.39 1.43 1.47 1.44 1.54 1.70 1.52 1.60
------------------------------------------------------------------------
------------------------------------------------------------------------


Expenses

CMG's gross profit margin for the six months ended September 30, 2005 was 68 percent and CMG realized a gross profit of $5.0 million, up $1.0 million from the $4.0 million recorded in the same period last year.

As a technology company, CMG's largest area of expenditure is for its people. Approximately 78 percent (2004 - 75 percent) of CMG's costs expended on marketing, direct consulting, general and administrative, and product research and development for the six months ended September 30, 2005 related to staff costs.

CMG's total expenses, excluding depreciation and income and other taxes amounted to $4.9 million, up $0.1 million from the $4.8 million expended last year. The increase in expenses between the two reporting periods is primarily due to a combination of higher staff costs as a result of both staff additions and a larger stock-based compensation expense in the six months ended September 30, 2005. This increase was offset by lower third-party contract costs and lower promotion costs due to the timing of trade show expenditures between the third quarter this year and the second quarter last year.

Income and other taxes

CMG's effective tax rate for the six months ended September 30, 2005 is reflected as 40 percent (2004 - 37 percent), whereas the prevailing Canadian statutory tax rate is 33.6 percent. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the current period valuation allowance on 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 utilized 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 it is transferred to income taxes payable.

Liquidity and Capital Resources

CMG generated $1.5 million ($0.19 per share) of cash flow from operations in the six months ended September 30, 2005, compared to $1.4 million ($0.18 per share) in the same period last year. A significant impact to the cash flow from operations between the two reporting periods results from the movement in future income taxes due to both the timing between fiscal years of recording the benefit of prior years' investment tax credits and their inclusion in current income taxes payable. The cash flow from operations for the three months ended September 30, 2005 was $1.0 million, up $0.4 million from the $0.6 million recorded in the comparable period last year.

During the six months ended September 30, 2005, CMG paid $2.4 million in dividends, which represented two quarterly dividends of $0.05 per share and a special dividend of $0.20 per share. On November 7, 2005, CMG announced a cash dividend of $0.05 Canadian per share on CMG's Common and Non-Voting Shares. The dividend will be paid on December 15, 2005 to shareholders of record at the close of business on December 1, 2005.

During the six months ended September 30, 2005, CMG's employees and directors exercised options to purchase 238,725 Common Shares, which resulted in $0.4 million in cash proceeds. During the six months ended September 30, 2005, CMG expended $0.6 million of its $0.9 million capital budget for its fiscal year ending March 31, 2006.

CMG has generated positive cash flow for over five years and as at September 30, 2005 CMG's liquidity as measured by working capital is $11.7 million. At September 30, 2005, CMG has $13.6 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker, of which US $65,000 has been drawn on for performance bonds.

CMG has very little in the way of ongoing material contractual obligations other than for pre-sold revenues which are reflected as deferred revenue on its balance sheet. Contractual obligations for office premises are not considered to be significant and are estimated to be as follows: 2006 - $0.3 million; 2007 - $0.5 million; 2008 - $0.5 million; 2009 - $0.4 million and 2010 - $0.3 million.

CMG is listed on the TSX Stock Exchange and during the six months ended September 30, 2005, 2,208,579 shares of CMG's public float were traded. CMG's share prices ranged from $5.00 to $8.50 per share and last traded on September 30, 2005 at $6.45 for a September 30, 2005 market capitalization of $51.6 million.

Outstanding Share Data as at November 7, 2005

CMG's authorized share capital has remained unchanged from March 31, 2005 to November 7, 2005 and subsequent to September 30, 2005 the only share capital transaction was for the exercise of 4,500 stock options to acquire Common Shares of the Company. CMG's issued and outstanding shares at November 7, 2005 are 5,138,481 Common Shares and 2,859,775 Non-Voting Shares.

At CMG's Annual and Special Meeting of Shareholders held on July 13, 2005, the shareholders voted in favor of amending the Company's stock option plan to a rolling plan. The rolling plan limits the total number of stock options that could be granted to 10 percent of the aggregate number of Common Shares and Non-Voting Shares outstanding at the time of granting stock options. At November 7, 2005, CMG has issued 609,525 stock options to purchase Common Shares to its employees and directors and CMG could grant a further 190,300 options to purchase Common Shares pursuant to CMG's Amended and Restated Stock Option Plan.

Critical Accounting Estimates and Business Risks

These remain unchanged from the factors detailed in CMG's 2005 Annual Report.

Outlook

CMG recorded another strong quarter and we continue to be focused on growth in our revenues from all business segments while strategically investing in our manpower and product development.

The underlying factors supporting increased demand for reservoir simulation exist and we believe that CMG is appropriately positioned with the strength of its product lines and the wealth of knowledge of CMG's staff to provide CMG growth opportunities for the future.



Kenneth M. Dedeluk
President and Chief Executive Officer
November 7, 2005


COMPUTER MODELLING GROUP LTD.
Consolidated Balance Sheets

September 30, March 31,
2005 2005
(unaudited) (audited)
------------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents (note 2) $ 13,577,372 $ 14,360,282
Accounts receivable 3,948,878 4,926,368
Prepaid expenses 493,527 400,189
------------------------------------------------------------------------
18,019,777 19,686,839

Property and equipment (note 3) 940,922 467,121

Future income taxes (note 5) 94,342 94,989
------------------------------------------------------------------------
$ 19,055,041 $ 20,248,949
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 1,300,627 $ 1,538,093
Income taxes payable 966,022 894,020
Deferred revenue 3,999,361 4,444,664
Future income taxes (note 5) 38,952 190,879
------------------------------------------------------------------------
6,304,962 7,067,656
Shareholders' equity:
Share capital (note 6) 11,469,258 10,920,777
Retained earnings 1,280,821 2,260,516
------------------------------------------------------------------------
12,750,079 13,181,293
------------------------------------------------------------------------
$ 19,055,041 $ 20,248,949
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Earnings and Retained Earnings
(unaudited)

Three months ended Six months ended
September 30 September 30
2005 2004 2005 2004
------------------------------------------------------------------------

Revenue
Software licenses $ 2,744,994 $ 2,346,055 $ 5,357,733 $ 4,607,464
Consulting and
contract research 1,100,293 802,008 1,921,354 1,877,204
------------------------------------------------------------------------
3,845,287 3,148,063 7,279,087 6,484,668
------------------------------------------------------------------------

Cost of Sales
Marketing expenses 799,798 882,540 1,591,719 1,645,730
Direct consulting
expenses 276,500 202,489 506,281 378,704
Third-party contract
costs 63,847 159,567 217,107 461,428
------------------------------------------------------------------------
1,140,145 1,244,596 2,315,107 2,485,862
------------------------------------------------------------------------

Gross Profit 2,705,142 1,903,467 4,963,980 3,998,806

General and
administrative
expenses 467,156 458,674 993,576 872,604
Depreciation and
amortization 59,478 34,212 83,903 66,483
Product research and
development costs
(note 4) 817,121 763,230 1,674,312 1,531,643
Foreign exchange
loss 162,590 146,725 64,768 95,721
Interest and other
income (86,393) (61,296) (171,020) (116,547)
------------------------------------------------------------------------
Earnings before
income and other
taxes 1,285,190 561,922 2,318,441 1,548,902
Income and other
taxes (note 5) 463,702 214,588 931,674 568,867
------------------------------------------------------------------------
Earnings for the
period 821,488 347,334 1,386,767 980,035
Retained earnings,
beginning of period 858,681 584,616 2,260,516 263,194
Dividends paid (399,348) (311,227) (2,366,462) (622,506)
Common Shares
buy-back (note 6(c)) - (235,176) - (235,176)
------------------------------------------------------------------------
Retained earnings,
end of period $ 1,280,821 $ 385,547 $ 1,280,821 $ 385,547
------------------------------------------------------------------------
------------------------------------------------------------------------

Per share
Weighted average
number of shares
outstanding 7,936,245 7,768,734 7,867,885 7,774,351
Earnings for the
period
Basic $ 0.10 $ 0.04 $ 0.18 $ 0.13
Diluted $ 0.10 $ 0.04 $ 0.17 $ 0.12

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Cash Flows
(unaudited)


Three months ended Six months ended
September 30 September 30
2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided by (used for)

Operating

Earnings for the
period $ 821,488 $ 347,334 $ 1,386,767 $ 980,035
Items not involving
cash:
Depreciation and
amortization 84,890 69,238 149,828 134,958
Future income taxes 19,035 110,270 (151,280) 266,677
Stock-based
compensation 74,299 47,581 137,133 56,083
------------------------------------------------------------------------
Cash flow from
operations 999,712 574,423 1,522,448 1,437,753
Changes in non-cash
working capital:
Accounts receivable (180,341) 1,016,144 977,490 824,292
Accounts payable and
accrued liabilities 111,101 (150,897) (237,466) (378,769)
Income taxes payable 243,518 15,551 72,002 (6,908)
Prepaid expenses (97,661) 76,463 (93,338) 18,630
Deferred revenue (1,468,203) (953,476) 3,394,813 3,093,594
------------------------------------------------------------------------
(391,874) 578,208 5,635,949 4,988,592
------------------------------------------------------------------------

Financing

Deferred revenue 430,084 468,737 (3,840,116) (3,460,707)
Issue of Common
Shares 272,726 69,578 411,348 75,578
Dividends paid (399,348) (311,227) (2,366,462) (622,506)
Common Shares
buy-back (note 6(c)) - (494,613) - (494,613)
------------------------------------------------------------------------
303,462 (267,525) (5,795,230) (4,502,248)
------------------------------------------------------------------------

Investing

Property and
equipment additions (506,475) (42,292) (623,629) (75,178)
------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents (594,887) 268,391 (782,910) 411,166
Cash and cash
equivalents,
beginning of period 14,172,259 12,853,872 14,360,282 12,711,097
------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $13,577,372 $13,122,263 $13,577,372 $13,122,263
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Notes to Consolidated Financial Statements
For the six months ended September 30, 2005 and 2004
and as at March 31, 2005
(unaudited)


1. Significant Accounting Policies:

(a) Basis of Consolidation: These consolidated financial statements include the accounts of the Company and all of 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 the balance sheet date 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 period 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 period 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 period 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, 222,880 shares (2004 - 250,996) and 202,203 (2004 - 258,650) shares were added to the weighted average number of Common and Non-Voting Shares outstanding for the three months and six months ended September 30, 2005 respectively, 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 have 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 respective period reported upon. Actual results may differ from such estimates and the differences could be material.



2. Cash and Cash Equivalents:

September 30, 2005 March 31, 2005
------------------------------------------------------------------------
Cash $ 877,372 $ 910,282
Term deposits 12,700,000 13,450,000
------------------------------------------------------------------------
$ 13,577,372 $ 14,360,282
------------------------------------------------------------------------
------------------------------------------------------------------------

3. Property and equipment:

September 30, 2005
------------------------------------------------------------------------
Accumulated
Cost Depreciation Net Book Value
------------------------------------------------------------------------
Computer equipment $ 1,133,912 $ 806,351 $ 327,561
Furniture and equipment 462,512 369,882 92,630
Leasehold improvements 814,643 293,912 520,731
------------------------------------------------------------------------
$ 2,411,067 $ 1,470,145 $ 940,922
------------------------------------------------------------------------
------------------------------------------------------------------------

March 31, 2005
------------------------------------------------------------------------
Accumulated
Cost Depreciation Net Book 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:

For the
six months
ended September 30,
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Product research and development costs $ 1,724,246 $ 1,559,461
Depreciation 65,925 68,475
Scientific research and experimental
development investment tax credits (115,859) (96,293)
------------------------------------------------------------------------
$ 1,674,312 $ 1,531,643
------------------------------------------------------------------------
------------------------------------------------------------------------

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:


For the
six months
ended September 30,
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Statutory tax rate 33.62% 33.62%
Expected income tax $ 779,460 $ 520,741
Permanent differences 55,811 25,896
Change in valuation allowance 80,961 48,101
Other 15,442 (25,871)
------------------------------------------------------------------------
$ 931,674 $ 568,867
------------------------------------------------------------------------
------------------------------------------------------------------------

Represented by:
Current income tax expense $ 1,059,532 $ 557,073
Future income taxes (benefit) (151,280) (22,263)
Foreign withholding and other taxes 23,422 34,057
------------------------------------------------------------------------
$ 931,674 $ 568,867
------------------------------------------------------------------------
------------------------------------------------------------------------


The components of the Company's net future income tax asset at September
30, 2005 are as follows:


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

Investment tax credits, net of future
tax liabilities $ 217,712 $ - $ 217,712
Property and equipment 94,342 - 94,342
Benefit of operating losses - 100,313 100,313
------------------------------------------------------------------------
$ 312,054 $ 100,313 412,367
Valuation allowance (356,977)
------------------------------------------------------------------------
Future income tax asset, net $ 55,390
------------------------------------------------------------------------

Represented by:
Future income tax liability, current $ (38,952)
Future income tax asset, long-term 94,342
------------------------------------------------------------------------
Future income tax asset, net $ 55,390
------------------------------------------------------------------------
------------------------------------------------------------------------


The operating losses in other countries expire in varying amounts between 2006 and 2026.

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,
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 238,725 411,348
Stock-based
compensation
- current
period
expense 137,133
- stock
options
exercised 48,427 (48,427)
------------------------------------------------------------------------
Balance,
September
30, 2005 5,133,981 $10,813,634 2,859,775 $ 367,698 $ 287,926
------------------------------------------------------------------------
------------------------------------------------------------------------


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.

(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 six month periods ended September 30, 2005 and 2004, the Foundation paid $250,000 in cash to the Company, which is reflected in consulting and contract research revenues. On October 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 558,470 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% of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at September 30, 2005, the Company could grant up to 799,376 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 period from March 31, 2004 were as follows:



For the For the
six months ended Year ended
September 30, 2005 March 31, 2005
------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
Granted Price Granted Price
------------------------------------------------------------------------
Outstanding at beginning
of period 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: (238,725) 1.72 (100,250) 1.22
------------------------------------------------------------------------
Outstanding at end of period 614,025 $4.59 636,750 $2.69
------------------------------------------------------------------------
Options exercisable at
end of period 227,275 $2.75 151,250 $1.24
------------------------------------------------------------------------
------------------------------------------------------------------------


The weighted average life of all options outstanding at September 30, 2005 is four 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 periods, we estimated the fair value of stock options granted using the Black-Scholes option pricing model under the following assumptions:



For the For the
six months ended Year ended
September 30, March 31,
------------------------------------------------------------------------
2005 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 three months and six months ended September 30, 2005 of $74,299 (2004 - $47,581) and $137,133 (2004 - $56,083) respectively.

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:



For the
six months
ended September 30,
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Net earnings:
As reported $ 1,386,767 $ 980,035
Pro forma $ 1,375,020 $ 945,715
Earnings per share:
As reported - Basic $ 0.18 $ 0.13
- Diluted $ 0.17 $ 0.12
Pro forma - Basic and Diluted $ 0.17 $ 0.12
------------------------------------------------------------------------
------------------------------------------------------------------------


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 September 30, 2005, the amounts from 3 domestic and international customers, who generated 18 percent of revenues in the six months ended September 30, 2005, represent a combined 41 percent of the Company's accounts receivable. Of this 41 percent, 39 percent have been outstanding for over 90 days as at September 30, 2005 with customers who have excellent collection history with the Company.

(c) Foreign Currency Risk: The Company is affected by the exchange rate between the Canadian and US dollar as approximately 75 percent of its revenues in the six months ended September 30, 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 September 30, 2005, the Company has approximately $2.5 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 - $275,000; 2007 - $537,000; 2008 - $493,000; 2009 - $446,000 and 2010 - $322,000.

(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 September 30, 2005, US $65,000 had been drawn on this line of credit for performance bonds.



(c) Supplemental Cash Flow Information:
For the
six months
ended September 30,
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Interest received $ 163,182 $ 124,038
Income taxes paid $ 871,463 $ 179,148
------------------------------------------------------------------------
------------------------------------------------------------------------

9. Segmented Information:

Operating Segments for the three months ended

Consulting
Software and Contract
September 30, 2005 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $ 2,744,994 $ 1,100,293 $ - $ 3,845,287
------------------------------------------------------------------------
Gross profit 2,044,065 661,077 - 2,705,142
------------------------------------------------------------------------
General and
administrative
expenses 467,156 467,156
Depreciation and
amortization 32,631 7,031 19,816 59,478
Product research and
development costs 817,121 817,121
Interest and other
income and foreign
exchange 76,197 76,197
Income and other
taxes 7,233 (27,811) 484,280 463,702
------------------------------------------------------------------------
Earnings (loss)
for the period $ 2,004,201 $ 681,857 $(1,864,570) $ 821,488
------------------------------------------------------------------------
------------------------------------------------------------------------

Consulting
Software and Contract
September 30, 2004 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $ 2,346,055 $ 802,008 $ - $ 3,148,063
------------------------------------------------------------------------
Gross profit 1,508,686 394,781 - 1,903,467
------------------------------------------------------------------------
General and
administrative
expenses 458,674 458,674
Depreciation and
amortization 22,955 4,649 6,608 34,212
Product research and
development costs 763,230 763,230
Interest and other
income and foreign
exchange 85,429 85,429
Income and other
taxes 3,192 8,308 203,088 214,588
------------------------------------------------------------------------
Earnings (loss) for
the period $ 1,482,539 $ 381,824 $(1,517,029) $ 347,334
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating Segments for the six months ended

Consulting
Software and Contract
September 30, 2005 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $ 5,357,733 $ 1,921,354 $ - $ 7,279,087
------------------------------------------------------------------------
Gross profit 3,946,976 1,017,004 - 4,963,980
------------------------------------------------------------------------
General and
administrative
expenses 993,576 993,576
Depreciation and
amortization 44,246 14,739 24,918 83,903
Product research and
development costs 1,674,312 1,674,312
Interest and other
income and foreign
exchange (106,252) (106,252)
Income and other
taxes 21,535 1,887 908,252 931,674
------------------------------------------------------------------------
Earnings (loss) for
the period $ 3,881,195 $ 1,000,378 $(3,494,806) $ 1,386,767
------------------------------------------------------------------------
Total Assets $ 2,779,760 $ 1,663,955 $14,611,326 $19,055,041
------------------------------------------------------------------------
Capital Expenditures $ 61,815 $ 10,737 $ 551,077 $ 623,629
------------------------------------------------------------------------
------------------------------------------------------------------------

Consulting
Software and Contract
September 30, 2004 Licenses Research Corporate Total
------------------------------------------------------------------------
Revenue $ 4,607,464 $ 1,877,204 $ - $ 6,484,668
------------------------------------------------------------------------
Gross profit 3,061,788 937,018 - 3,998,806
------------------------------------------------------------------------
General and
administrative
expenses 872,604 872,604
Depreciation and
amortization 45,066 9,326 12,091 66,483
Product research and
development costs 1,531,643 1,531,643
Interest and other
income and foreign
exchange (20,826) (20,826)
Income and other
taxes 10,060 22,647 536,160 568,867
------------------------------------------------------------------------
Earnings (loss) for
the period $ 3,006,662 $ 905,045 $(2,931,672) $ 980,035
------------------------------------------------------------------------
Total Assets $ 1,680,675 $ 757,491 $13,600,768 $16,038,934
------------------------------------------------------------------------
Capital Expenditures $ 30,582 $ 5,829 $ 38,767 $ 75,178
------------------------------------------------------------------------
------------------------------------------------------------------------


Geographic Segments
For the six months ended September 30,

2005 2004
------------------------------------------------------------------------
Property and Property and
Revenue Equipment Revenue equipment
------------------------------------------------------------------------
Canada $ 1,996,282 $ 840,788 $ 1,501,053 $ 381,042
United States 1,232,496 40,987 1,863,896 32,692
Venezuela 926,314 51,470 403,979 52,608
Other Foreign 3,123,995 7,677 2,715,740 14,652
------------------------------------------------------------------------
$ 7,279,087 $ 940,922 $ 6,484,668 $ 480,994
------------------------------------------------------------------------
------------------------------------------------------------------------

In the six months ended September 30, 2005, the Company derived 18
percent (2004 - 18 percent) and 12 percent (2004 - 3 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 41 countries.

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

Contact Information

  • Computer Modelling Group Ltd.
    Kenneth Dedeluk
    President & CEO
    (403) 531-1300
    Email: ken.dedeluk@cmgl.ca
    or
    Computer Modelling Group Ltd.
    Janet M. Taylor
    Vice President Finance & CFO
    (403) 531-1300
    (403) 282-1823 (FAX)
    Email: janet.taylor@cmgl.ca
    Website: www.cmgl.ca
    or
    Computer Modelling Group Ltd.
    Office #150
    3553 - 31 Street N.W.
    Calgary, Alberta
    Canada T2L 2K7