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Press release from Marketwire

Computer Modelling Group Announces First Quarter Results

Wednesday, August 11, 2010

Computer Modelling Group Announces First Quarter Results08:00 EDT Wednesday, August 11, 2010 CALGARY, ALBERTA--(Marketwire - Aug. 11, 2010) - Computer Modelling Group Ltd. (TSX:CMG) ("CMG" or the "Company") is very pleased to announce our first quarter results for the three months ended June 30, 2010. FIRST QUARTER HIGHLIGHTS For the three months ended June 30, 2010 2009 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 8,325 7,208 1,117 15% Perpetual software licenses 1,824 1,976 (152) -8% Total revenue 12,054 10,235 1,819 18% Gross profit 9,396 7,882 1,514 19% Earnings 4,230 2,689 1,541 57% Earnings per share - basic 0.24 0.16 0.08 50% ---------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSISThis Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company," "we" or "our"), presented as at August 10, 2010, should be read in conjunction with the unaudited consolidated financial statements and related notes of the Company for the three months ended June 30, 2010 and the audited consolidated financial statements and MD&A for the years ended March 31, 2010 and 2009 contained in the 2010 Annual Report for CMG. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars.FORWARD-LOOKING INFORMATIONCertain information included in this MD&A is forward-looking. Forward-looking information includes statements that are not statements of historical fact and which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as investment objectives and strategy, the development plans and status of the Company's software development projects, the Company's intentions, results of operations, levels of activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), business prospects and opportunities, research and development timetable, and future growth and performance. When used in this MD&A, statements to the effect that the Company or its management "believes", "expects", "expected", "plans", "may", "will", "projects", "anticipates", "estimates", "would", "could", "should", "endeavours", "seeks", "predicts" or "intends" or similar statements, including "potential", "opportunity", "target" or other variations thereof that are not statements of historical fact should be construed as forward-looking information. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management of the Company. The Company believes that the expectations reflected in such forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon.With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:- Future software license sales- The continued financing by and participation of its partners in the DRMS project and it being completed in a timely manner- Ability to enter into additional software license agreements- Ability to continue current research and new product development- Ability to recruit and retain qualified staffForward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company's actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are described in the MD&A of CMG's 2010 Annual Report under the heading "Business Factors":- Economic conditions in the oil and gas industry- Reliance on key clients- Foreign exchange- Economic and political risks in countries where the Company currently does or proposes to do business- Increased competition- Reliance on employees with specialized skills or knowledge- Protection of proprietary rightsShould one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.CORPORATE PROFILE CMG is a computer software technology and consulting company serving the oil and gas industry. The Company is a 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 approximately 50 countries. CMG has sales and technical support services based in Calgary, Houston, London, Caracas and Dubai. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG". QUARTERLY PERFORMANCE Fiscal 2011 Fiscal 2009 (1) Fiscal 2010 (2) (3) ($ thousands, unless otherwise stated) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 ---------------------------------------------------------------------------- Annuity/maintenance licenses 5,350 6,937 8,042 7,208 7,240 7,406 7,653 8,325 Perpetual licenses 2,882 3,383 5,023 1,976 582 2,903 4,982 1,824 ---------------------------------------------------------------------------- Software licenses 8,232 10,320 13,065 9,184 7,822 10,309 12,635 10,149 Consulting and contract research 1,353 1,340 1,364 1,050 1,262 1,383 1,657 1,905 ---------------------------------------------------------------------------- Total revenue 9,585 11,660 14,429 10,234 9,084 11,692 14,292 12,054 Gross profit 7,157 9,525 11,789 7,882 6,785 9,337 11,586 9,396 Gross profit % 75 82 82 77 75 80 81 78 Earnings before income and other taxes 4,414 7,254 8,765 3,991 3,437 5,708 7,710 6,178 Income and other taxes 1,446 2,350 2,648 1,302 1,023 1,708 2,350 1,949 Earnings for the quarter 2,968 4,904 6,117 2,689 2,414 4,000 5,360 4,230 Cash dividends declared and paid 2,073 2,422 2,588 6,975 3,179 3,194 3,209 6,274 ---------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.17 0.28 0.35 0.16 0.14 0.23 0.30 0.24 Earnings per share - diluted 0.17 0.28 0.35 0.15 0.13 0.22 0.30 0.23 Cash dividends declared and paid 0.12 0.14 0.15 0.40 0.18 0.18 0.18 0.35 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Q3 and Q4 of fiscal 2009 include $0.7 million and $1.1 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (2) Q1, Q2, Q3 and Q4 of fiscal 2010 include $0.4 million, $0.4 million, $0.3 million and $0.4 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (3) Q1 of fiscal 2011 includes $1.1 million in revenue that pertains to usage of CMG's products in prior quarters. REVENUE For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 10,149 9,184 965 11% Consulting and contract research 1,905 1,050 855 81% ---------------------------------------------------------------------------- Total revenue 12,054 10,234 1,820 18% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Software license revenue - % of total revenue 84% 90% Consulting and contract research - % of total revenue 16% 10% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and consulting and contract research fees. The 18 percent increase in total revenue in the current quarter compared to the first quarter of previous fiscal year is primarily due to higher annuity/maintenance license revenue (see further discussion below) as well as increased consulting and training activities.Software License Revenue Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products which is generally for a term of one year or less and perpetual software license sales, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and accordingly provide a reliable revenue stream while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers' needs and budgets. CMG has found that the majority of its customers who have acquired perpetual software licenses subsequently purchase maintenance licenses to ensure they have access to current versions of CMG's software. For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 8,325 7,208 1,117 15% Perpetual licenses 1,824 1,976 (152) -8% ---------------------------------------------------------------------------- Total software license revenue 10,149 9,184 965 11% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 82% 78% Perpetual as a % of total software license revenue 18% 22% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The 11 percent growth in software license revenue in the first quarter of this year compared to the first quarter of previous fiscal year is attributable to the increase in annuity/maintenance license revenue related to increased sales to new and existing customers and, in particular, due to the timing of revenue recognition associated with a large customer. This increase was partially offset by the decrease in both annuity/maintenance and perpetual license revenue as a result of the strengthening of the Canadian dollar relative to the US dollar. The following table summarizes the US dollar denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars: For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance license sales in US dollars US$ 5,685 US$ 4,350 1,335 31% Weighted average conversion rate 1.05 1.19 ---------------------------------------------------------------------------- Annuity/maintenance license sales in Canadian dollars CDN$ 5,962 CDN$ 5,190 772 15% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Perpetual license sales in US dollars US$ 1,760 US$ 1,676 84 5% Weighted average conversion rate 1.04 1.18 ---------------------------------------------------------------------------- Perpetual license sales in Canadian dollars CDN$ 1,824 CDN$ 1,976 (152) -8% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CMG's annuity/maintenance license revenue increased by 15 percent in the first quarter compared to the same period of last year. As discussed in our 2010 fiscal year end MD&A, the fourth quarter results of fiscal 2010 did not include an amount of revenue from a customer for which revenue recognition criteria are fulfilled only at the time of the receipt of cash. During the first quarter of current fiscal year, this amount was received and was included in Q1 2011 revenue. If we adjust the quarterly amounts for prior period revenue, our annuity/maintenance recurring base increased by seven percent. This increase was driven by greater take up of annuity licenses by our existing customers along with some new customers and the increased maintenance revenue tied to our strong perpetual sales in fiscal 2009 and 2010. The increase in annuity/maintenance revenue has been negatively affected by the strengthening of the Canadian dollar relative to the US dollar. As shown in the table above, the US dollar revenue increased by 31 percent, but the foreign exchange between Canadian and US dollars created a negative impact on annuity/maintenance revenue of approximately $0.8 million. Software license revenue under perpetual sales decreased by eight percent in the current quarter compared to Q1 of fiscal 2010. Software licensing under perpetual sales is a significant part of CMG's business, but may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. In comparing current quarter's results to the first quarter results of previous fiscal year, we can note that all of our perpetual sales in both comparative periods were generated in US dollars (see table above). If we compare the results in US dollars, perpetual sales increased by five percent, but the strengthening Canadian dollar in the current quarter had a negative impact on the amount of revenue recorded in Canadian dollars. The entire eight percent decrease in perpetual revenue can be solely attributed to the foreign exchange impact. Even though the dollar amounts of perpetual sales are comparable between two periods, sales were generated in different geographic regions further highlighting the unpredictability of this revenue stream. Segmented Revenue For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/Maintenance Revenue Canada 2,504 2,144 360 17% United States 1,679 1,634 45 3% Other 4,142 3,430 712 21% ---------------------------------------------------------------------------- 8,325 7,208 1,117 15% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Perpetual Revenue Canada - 42 (42) -100% United States 991 218 773 355% Other 833 1,716 (883) -51% ---------------------------------------------------------------------------- 1,824 1,976 (152) -8% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total Software Revenue Canada 2,504 2,186 318 15% United States 2,670 1,852 818 44% Other 4,975 5,146 (171) -3% ---------------------------------------------------------------------------- 10,149 9,184 965 11% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- On a geographic basis, software license sales to CMG's two most sizeable markets, Canada and the United States, continued to demonstrate strong revenue growth of 15 and 44 percent, respectively. While Canada's revenue growth was derived from annuity/maintenance licenses, the growth in the United States related mainly to perpetual licenses. CMG's other markets continue to have a stable recurring annuity/maintenance revenue base; however, current quarter's perpetual sale levels in other markets didn't match the first quarter of the previous fiscal year. This is indicative of the unpredictable nature of the timing and location of perpetual sales. Overall, our recurring annuity/maintenance revenue base continues to be strong and growing across all regions. As footnoted in the Quarterly Performance table, in the normal course of business CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG's products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance revenue stream and, to provide a normalized comparison, we specifically identify the revenue component where revenue recognition is satisfied in the current period for products provided in previous quarters. Deferred Revenue ($ thousands) 2010 2009 $ change % change ---------------------------------------------------------------------------- Deferred revenue at March 31 13,843 11,796 2,047 17% Deferred revenue at June 30 12,496 10,919 1,577 14% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CMG's deferred revenue consists of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time. The increase in deferred revenue year over year as at June 30 and March 31 is reflective of the growth in annuity/maintenance license sales. Consulting and Contract Research Revenue CMG recorded consulting and contract research revenue of $1.9 million for the three months ended June 30, 2010, up $0.8 million from the $1.1 million recorded for the same period last year. This growth reflects the increase in project activities by our clients and the associated consulting and training activities in the current quarter following the economic downturn experienced in the corresponding period of the prior 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. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within client companies.At June 30, 2010, approximately $0.1 million is included in deferred revenue relating to consulting and contract research activities. EXPENSES For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cost of sales 2,658 2,352 306 13% General and administrative expenses 1,116 1,109 7 1% Product research and development (net of SR&ED) 2,117 2,180 (63) -3% ---------------------------------------------------------------------------- Total expenses excluding depreciation and income and other taxes 5,891 5,641 250 4% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Direct employee costs(i) 4,918 4,364 554 13% Other corporate costs 973 1,277 (304) -24% ---------------------------------------------------------------------------- 5,891 5,641 250 4% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (i) Includes salaries, bonuses, stock-based compensation, benefits and commissions. CMG's total expenses, excluding depreciation and income and other taxes, increased by four percent as a result of the increases in direct employee costs, offset by the decrease in other corporate costs. Direct Employee Costs As a technology company, CMG's largest area of expenditure is for its people. Approximately 83 percent of the total expenses in the three months ended June 30, 2010 related to staff costs, compared to 77 percent of the total expenses in the comparative period of last year. Staffing levels for the first three months of the current fiscal year grew throughout the company to support our continued growth. At June 30, 2010, CMG's staff complement was 132 employees, up from 124 employees as at June 30, 2009. Direct employee costs increased during the first quarter of fiscal 2011 due to staff additions, increased levels of compensation and related benefits.Other Corporate Costs Other corporate costs decreased by $0.3 million as higher infrastructure costs related to the new leases for expanded office space were more than offset by the decrease in the use of third party consulting services. Research and Development For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Product research and development (gross) 2,401 2,440 (39) -2% SR&ED credits (284) (260) (24) 9% ---------------------------------------------------------------------------- Product research and development (net) 2,117 2,180 (63) -3% Depreciation 100 87 13 15% ---------------------------------------------------------------------------- Total product research and development 2,217 2,267 (50) -2% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total product research and development as a % of total revenue 18% 22% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes. The above product research and development includes CMG's proportionate share of joint research and development costs on the DRMS system development of $0.7 million (2009 - $0.6 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."Our research and development costs remain consistent with the first quarter of prior fiscal year demonstrating our commitment to advancement of our technology. During the three months ended June 30, 2010, increased employee-related costs were more than offset by the reduction of third party consulting costs associated with certain research initiatives resulting in a small decrease in product research and development costs. At the same time, we had a slight improvement in scientific research and experimental development ("SR&ED") credits mainly due to increases in employee costs which have a direct bearing on the amount of SR&ED credits that we can claim. Depreciation and Amortization For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Property and equipment 129 84 45 54% Product research and development 100 87 13 15% ---------------------------------------------------------------------------- Total depreciation and amortization 229 171 58 34% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The increase in depreciation and amortization reflects the increase in our asset base, mainly related to the increased office space and computing resources. Interest Income and Foreign Exchange For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Interest and other income 35 23 12 52% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Foreign exchange gain (loss) 210 (455) 665 -146% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest income increased slightly in the current quarter compared to the first quarter of the prior fiscal year due to slight improvement in interest rates and investing larger cash balances.CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 73 percent (2009 - 75 percent) of CMG's revenue for the three months ended June 30, 2010 is denominated in US dollars, whereas only approximately 25 (2009 - 21) percent of CMG's total costs are denominated in US dollars. ---------------------------------------------------------------------------- CDN$ to US$ At June 30 Three month trailing average ---------------------------------------------------------------------------- 2008 0.9817 0.9896 2009 0.8602 0.8689 2010 0.9429 0.9620 ---------------------------------------------------------------------------- The stronger Canadian dollar versus US dollar average exchange rate in the first quarter of fiscal 2011 compared to the first quarter of the prior year has negatively impacted our current period sales; however, the slight reversal of this trend near the end of the current quarter had a positive effect on the valuation of our US dollar net working capital position. CMG recorded a foreign exchange gain of $0.2 million for the three months ended June 30, 2010 compared to $0.5 million loss recorded in the same period of last year.Income and Other Taxes CMG's effective tax rate for the three months ended June 30, 2010 is reflected as 31.5 percent (2009 - 32.6 percent), whereas the prevailing Canadian statutory tax rate is now 27.63 percent. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit.The benefit recorded in CMG's books on the SR&ED investment tax credit program impacts future income taxes. The investment tax credit earned in the current fiscal period is utilized by CMG to reduce income taxes otherwise payable for the current fiscal year and the federal portion of 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. GROSS PROFIT AND EARNINGS For the three months ended June 30, 2010 2009 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- Total revenue 12,054 10,235 1,819 18% Cost of sales (2,658) (2,352) (306) 13% ---------------------------------------------------------------------------- Gross profit 9,396 7,883 1,513 19% Gross profit as a % of revenue 78% 77% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings for the period 4,230 2,689 1,541 57% Earnings for the period as a % of revenue 35% 26% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per share ($/share) 0.24 0.16 0.08 50% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CMG's gross profit for the first quarter of fiscal 2011 was at 78 percent which is comparable to 77 percent recorded in the first quarter of prior fiscal year. Earnings for the period as a percentage of revenue increased to 35 percent from 26 percent recorded in the first quarter of fiscal 2010. The increase is a result of higher revenue, the gain on foreign exchange and effective management of corporate costs. LIQUIDITY AND CAPITAL RESOURCES For the three months ended June 30, 2010 2009 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cash, beginning of period 28,826 34,701 (5,875) -17% Cash flow from (used in) Operating activities 9,730 884 8,846 1001% Financing activities (5,529) (6,022) 493 -8% Investing activities (406) (289) (117) 40% ---------------------------------------------------------------------------- Cash, end of period 32,622 29,274 3,348 11% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating ActivitiesThe increase of $8.8 million in operating activities is a result of higher net earnings recorded in the current quarter, lower accounts receivable balance reflective of the collection of the sales made during the fourth quarter of previous fiscal year, lower amount of prepaid income taxes carried on the books affected by the variation in the amount of tax installment payments made and the decrease in deferred revenue balance. Financing ActivitiesDuring the three months ended June 30, 2010, CMG employees and directors exercised options to purchase 97,074 Common Shares, which resulted in cash proceeds of $0.7 million.In the three months ended June 30, 2010, CMG paid $6.3 million in dividends, representing a quarterly dividend of $0.18 per share and a special dividend of $0.17 per share. On August 10, 2010, CMG announced the payment of a quarterly dividend of $0.19 per share on CMG's Common Shares. The dividend will be paid on September 15, 2010 to shareholders of record at the close of business on September 3, 2010. On March 22, 2010, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on March 23, 2010 to purchase for cancellation up to 1,314,686 of its Common Shares. No shares have been purchased pursuant to this NCIB through June 30, 2010.Investing ActivitiesCMG's current needs for capital asset investment relate to computer equipment and office infrastructure costs. During the three months ended June 30, 2010, CMG expended $0.4 million on property and equipment additions and has a capital budget of $2.4 million for fiscal 2011, all of which will be funded internally. Liquidity and Capital ResourcesAt June 30, 2010, CMG has $32.6 million in cash, no debt and has access to just over $0.8 million under a line of credit with its principal banker.During the three months ended June 30, 2010, 2,386,160 shares of CMG's public float were traded on the TSX Stock Exchange. As at June 30, 2010, CMG's market capitalization based upon its June 30, 2010 closing price of $16.78 was $300.8 million.COMMITMENTS, OFF BALANCE SHEET ITEMS AND TRANSACTIONS WITH RELATED PARTIES CMG committed approximately $10.6 million to the five year DRMS research and development project with its industry partners Shell International Exploration and Production BV and Petroleo Brasileiro S.A., of which $8.0 million has been incurred from inception to June 30, 2010.In conjunction with entering into this project, CMG Reservoir Simulation Foundation ("the Foundation") agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50 percent of the Company's estimated share of project costs over the duration of the project. During the three months ended June 30, 2010, CMG has reflected $0.4 million (2009 - $0.3 million) in research grants from the Foundation in revenue with respect to this project. From commencement of the project to June 30, 2010, these research grants aggregate to $4.0 million.CMG plans to fund its share of the project costs associated with the development of the newest generation reservoir simulation software system from internal cash and funding from the Foundation.CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold licenses which is reflected as deferred revenue on its balance sheet, and contractual obligations for office leases which are estimated as follows: 2011 - $1.1 million; 2012 through 2014 - $1.4 million per year; and 2015 - 1.0 million. BUSINESS RISKS AND CRITICAL ACCOUNTING ESTIMATESThese remain unchanged from the factors detailed in CMG's 2010 Annual Report. RECENT ACCOUNTING PRONOUNCEMENTS International Financial Reporting StandardsIn February 2008, the AcSB confirmed that all Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual financial reporting purposes for fiscal years beginning on or after January 1, 2011 with comparatives for the prior year. The Company will be required to report financial statements prepared in accordance with IFRS for the fiscal year ending March 31, 2012 with comparatives for fiscal year ending March 31, 2011. A project team has been set up to manage the transition and ensure successful implementation by April 1, 2011. The changeover plan has been developed and is expected to be carried out in the following phases, subject to modifications as we proceed with transition: Diagnostic Analysis Preliminary Assessment- Initial project plan considering resources, timelines and overall project approach - Identify key areas of differences between GAAP and IFRS Detailed Assessment- Identify and evaluate IFRS 1 elective and mandatory exemptions - Provide detailed assessment of the available accounting policy alternatives - Provide recommendations on the adoption of accounting policies Status: This phase is substantially complete as all IFRS standards having a potential impact on CMG have now been analyzed with the exception of financial statement presentation and disclosure. See the table below for results of our analysis. Plan and Design - Evaluate business processes and information requirements - Develop detailed project plan for the implementation for each specific item- Develop timelines, resource requirements, status reporting and training programs - Assess effects on computer systems and internal controls over financial reporting Status: This phase is ongoing throughout the process. See the table below for further details. Implement and Monitor - Implement processes for required information gathering - Prepare IFRS compliant financial statements and notes - Implement and test internal controls over financial reporting and any changes to computer systems - Provide ongoing training and education - Monitor reporting requirements on an on-going basis Status: This phase is ongoing throughout the process. See the table below for further details. Summary of Transition Progress ---------------------------------------------------------------------------- Accounting As at the date of this MD&A, we have completed our detailed polices analysis of the accounting policy choices and have drafted preliminary conclusions and recommendations. All IFRS standards that we believe could have a potential impact on us have been analyzed with the exception of financial statement presentation and disclosure. Based on our current assessment, none of the IFRS standards analyzed will likely have a material impact and we expect minimum amount of adjustments to the amounts recorded in our financial statements prepared under Canadian GAAP. We are moving ahead with the analysis of presentation and disclosure requirements as well as developing mock financial statements. We expect to complete this phase in the third quarter. Based on the current assessment, we are expecting changes to the following components: -Stock based compensation -Presentation and disclosure of financial statements Analysis of accounting policies is ongoing and may result in further changes. Accordingly, we will provide updates as they become available. ---------------------------------------------------------------------------- IFRS 1 IFRS 1 provides detailed guidance on the procedures to follow when adopting IFRS for the first time. It specifies that, in general, an entity shall apply the principles under IFRS retrospectively. Any adjustments which arise on the convergence to IFRS standards from Canadian GAAP should be directly recognized in opening retained earnings on transition. This Standard outlines optional and mandatory exemptions and exceptions for the application of IFRS. We expect to apply the following optional exemptions: -Business Combinations - IFRS 1 allows us to apply IFRS 3, Business Combinations retrospectively or prospectively from the date of transition. The retrospective application would require restatement of all business combinations that occurred prior to April 1, 2010 (our transition date). We elected not to retrospectively apply IFRS 3; hence, we will not restate any business combinations that occurred prior to April 1, 2010. -Share-based Payment Transactions - IFRS 1 provides the exemption from retrospective application of IFRS 2, Share-based Payments to: --Options granted on or before November 7, 2002 --Options granted after November 7, 2002 that vested before April 1, 2010 To apply IFRS 2 retrospectively, the following needs to be met: --Entity must have had publicly disclosed the fair value of such awards in accordance with IFRS 2 --Fair value must have been measured in a manner consistent with IFRS CMG will apply the provisions of IFRS 2 to options granted after November 7, 2002 that vest after April 1, 2010. We will apply IFRS 1 exemption to all other options. ---------------------------------------------------------------------------- Information Based on our to-date assessment, no significant changes to Technology our computer systems are necessary. Any modifications to support the new standards are insignificant and our current processes are capable of supporting such changes. We will continuously monitor any impacts on information technology resulting from IFRS conversion and provide updates accordingly. ---------------------------------------------------------------------------- Internal Based on our to-date assessment, our current control Controls over environment is sufficient to support the reporting under Financial IFRS and no significant changes are required. Reporting and Disclosure In order to satisfy the certification requirements under National Instrument 52-109, we are required to update and test all entity level, information technology, disclosure and business process controls to reflect changes which arise as a result of CMG's convergence to IFRS. Assessment is ongoing in this area, and we will provide updates accordingly. ---------------------------------------------------------------------------- Financial A project team has been set up to manage this transition and Expertise ensure successful implementation. The financial members involved in IFRS implementation have completed IFRS training hosted by the Canadian Institute of Chartered Accountants and will continue with relevant training throughout the conversion process. Prior to the implementation of IFRS, all accounting staff will be trained to understand any changes being implemented and understand how these impact their work. ---------------------------------------------------------------------------- Business As we don't expect significant changes to our financial Activities results, no changes to our business activities are expected. We will continuously monitor this area and provide updates accordingly. ---------------------------------------------------------------------------- The above analysis should not be regarded as complete or final. We will continue to monitor any changes to IFRS as issued by the International Accounting Standards Board and the AcSB. Any changes to IFRS standards or changes in the business circumstances could influence the Company's ultimate conclusions and decisions. All changes to the Company's accounting policies will be presented to the Audit Committee of the Board of Directors and are subject to its approval. The quantitative impact of the adoption of IFRS on the consolidated financial statements of the Company cannot be reasonably determined at this time. OUTSTANDING SHARE DATA AS AT AUGUST 10, 2010CMG's authorized share capital has remained unchanged from June 30, 2010 to August 10, 2010 and subsequent to June 30, 2010 the only share capital transactions were for the exercise of 14,000 stock options to acquire Common Shares of the Company. CMG's issued and outstanding shares at August 10, 2010 are 17,941,117 Common Shares. On July 13, 2005, CMG adopted a rolling stock option plan which allows the Company to grant options to its employees and directors 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 August 10, 2010, CMG could grant up to 1,794,111 stock options, of which 1,160,325 are currently issued and outstanding.DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTINGManagement is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal controls over financial reporting ("ICFR") as defined under Multilateral Instrument 52-109. These controls and procedures were reviewed and the effectiveness of their design and operation was evaluated in fiscal 2010 in accordance with the COSO control framework. The evaluation confirmed the effectiveness of the design and operation of DC&P and ICFR at March 31, 2010. During our fiscal year 2011, we continue to monitor and review our controls and procedures. During the quarter ended June 30, 2010, there have been no significant changes to the Company's ICFR that have materially affected, or are reasonably likely to materially affect, the Company's ICFR. OUTLOOK CMG continues to be committed to focusing its resources on the development and enhancement of simulation tools relevant to the challenges facing its diverse customer base. It appears that oil and natural gas prices have stabilized in a range that has allowed our customers to move forward on projects involving various types of unconventional reserves and advanced recovery processes. Despite this positive turn of events, petroleum producers continue to be faced with uncertainty related to the world wide economic recovery and environmental issues that have come to the forefront.The Company remains confident that the value that CMG technology provides to its customers is greater than ever and accordingly we continue to be cautiously optimistic that our software license revenue will remain solid. With our strong working capital position, we are well positioned to continue to invest in all aspects of our business to continue to grow and diversify our revenue base and to ultimately return value to our shareholders in the form of regular quarterly dividend payments and growth in share value.On behalf of the Board of Directors Kenneth M. Dedeluk , President and Chief Executive Officer August 10, 2010 COMPUTER MODELLING GROUP LTD. CONSOLIDATED BALANCE SHEETS (unaudited) June 30, 2010 March 31, 2010 ---------------------------------------------------------------------------- Assets Current assets: Cash $ 32,621,769 $ 28,826,173 Accounts receivable 8,581,187 16,071,989 Prepaid expenses 1,242,524 1,141,793 Prepaid income taxes 804,959 1,432,673 ---------------------------------------------------------------------------- 43,250,439 47,472,628 Property and equipment (note 3) 2,577,622 2,400,737 Future income taxes (note 5) 20,851 32,645 ---------------------------------------------------------------------------- $ 45,848,912 $ 49,906,010 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 3,841,530 $ 5,397,358 Deferred revenue 12,495,716 13,843,201 Future income taxes (note 5) 47,694 222,083 ---------------------------------------------------------------------------- 16,384,940 19,462,642 Shareholders' equity: Share capital (note 6) 21,279,304 20,390,396 Contributed surplus (note 6) 1,992,631 1,815,948 Retained earnings 6,192,037 8,237,024 ---------------------------------------------------------------------------- 29,463,972 30,443,368 ---------------------------------------------------------------------------- $ 45,848,912 $ 49,906,010 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Commitments (note 9) See accompanying notes to consolidated financial statements. COMPUTER MODELLING GROUP LTD. CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (unaudited) For the three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Revenue Software licenses $ 10,149,000 $ 9,184,360 Consulting and contract research 1,904,949 1,050,252 ---------------------------------------------------------------------------- 12,053,949 10,234,612 ---------------------------------------------------------------------------- Cost of Sales Marketing expenses 2,042,891 1,838,011 Direct consulting expenses 563,919 504,811 Third-party contract costs 51,095 9,308 ---------------------------------------------------------------------------- 2,657,905 2,352,130 ---------------------------------------------------------------------------- Gross Profit 9,396,044 7,882,482 General and administrative expenses 1,115,540 1,108,953 Depreciation and amortization 129,456 83,901 Product research and development costs (note 4) 2,217,480 2,266,527 Foreign exchange loss (gain) (209,721) 455,062 Interest and other income (34,982) (22,610) ---------------------------------------------------------------------------- Earnings before income and other taxes 6,178,271 3,990,649 Income and other taxes (note 5) 1,948,767 1,301,579 ---------------------------------------------------------------------------- Earnings for the Period 4,229,504 2,689,070 Retained earnings, beginning of period 8,237,024 10,330,873 Dividends paid (6,274,491) (6,975,127) ---------------------------------------------------------------------------- Retained earnings, end of period $ 6,192,037 $ 6,044,816 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings Per Share Basic (note 6(e)) $ 0.24 $ 0.16 Diluted (note 6(e)) $ 0.23 $ 0.15 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. COMPUTER MODELLING GROUP LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Cash provided by (used for) Operating Earnings for the period $ 4,229,504 $ 2,689,070 Items not involving cash: Depreciation and amortization 229,289 170,571 Future income taxes (note 5) (162,595) (152,789) Stock-based compensation 319,719 242,989 ---------------------------------------------------------------------------- 4,615,917 2,949,841 Changes in non-cash working capital: Accounts receivable 7,490,802 3,367,877 Accounts payable and accrued liabilities (1,555,828) (1,168,010) Income taxes payable/prepaid 627,714 (3,345,951) Prepaid expenses (100,731) (42,577) Deferred revenue (1,347,485) (877,131) ---------------------------------------------------------------------------- 9,730,389 884,049 ---------------------------------------------------------------------------- Financing Issue of common shares 745,872 952,664 Dividends paid (6,274,491) (6,975,127) ---------------------------------------------------------------------------- (5,528,619) (6,022,463) ---------------------------------------------------------------------------- Investing Property and equipment additions (406,174) (288,528) ---------------------------------------------------------------------------- Increase (decrease) in cash 3,795,596 (5,426,942) Cash, beginning of period 28,826,173 34,701,292 ---------------------------------------------------------------------------- Cash, end of period $ 32,621,769 $ 29,274,350 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental disclosure of cash flow information (note 11) See accompanying notes to consolidated financial statements. COMPUTER MODELLING GROUP LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the three months ended June 30, 2010 and 2009 and as at March 31, 2010 (unaudited).Computer Modelling Group Ltd. (the "Company") is a computer software technology and consulting firm engaged in the development and licensing of reservoir simulation software.1. SIGNIFICANT ACCOUNTING POLICIES:(a) Basis of Consolidation:These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of the Company and its subsidiaries, all 100 percent owned. All intercompany transactions have been eliminated.(b) Revenue Recognition:Revenue consists primarily of software license fees and consulting and contract research fees.Software license revenue is comprised of annuity/maintenance license fees charged for the use of the Company's software products which is generally for a term of one year or less, and perpetual software licensing fees, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Software license revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met.Annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.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) Property and Equipment:Property and equipment are recorded at cost less accumulated depreciation.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 (d) 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. Product research and development costs are recorded net of the related investment tax credits.(e) Joint Research and Development Costs:The Company participates in a joint project engaged in product research and development and accordingly records its proportionate share of costs incurred as product research and development costs.(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 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 the substantively enacted 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) Investment Tax Credits:The Company receives federal and provincial investment tax credits in Canada on qualified scientific research and experimental development expenditures. Investment tax credits are recorded as a deduction against related expenses or capital items provided that reasonable assurance over collection of the tax credits exists.(i) Earnings Per Share: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. This method assumes that proceeds received from the exercise of in-the-money stock options are used to repurchase Common Shares at the average market price during the period.(j) Stock-based Compensation Plan:The Company has a stock-based compensation plan that is described in note 6(d). The fair value of stock options is expensed over the vesting period along with a credit to contributed surplus. When the stock options are exercised for stock, the recorded amount is transferred from contributed surplus to common share capital.(k) Financial Instruments:Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets "held-to-maturity," "loans and receivables" and "other financial liabilities" are initially recorded at fair value and subsequently measured at amortized cost.(l) 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 period. Actual results may differ from such estimates and the differences could be material.2. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:Recent accounting pronouncements:In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP for fiscal years beginning on or after January 1, 2011 for profit-oriented Canadian publicly accountable enterprises. As the Company will be required to report its results in accordance with IFRS for the fiscal year ending March 31, 2012 with comparatives for fiscal year ending March 31, 2011, it has developed a convergence plan to ensure successful transition to IFRS by April 1, 2011. The impact of IFRS on the Consolidated Financial Statements is not reasonably determinable at this time. 3. PROPERTY AND EQUIPMENT: Accumulated Net June 30, 2010 Cost Depreciation Book Value ---------------------------------------------------------------------------- Computer equipment $ 3,613,369 $ 2,420,557 $ 1,192,812 Furniture and equipment 1,431,812 665,913 765,899 Leasehold improvements 1,702,580 1,083,669 618,911 ---------------------------------------------------------------------------- $ 6,747,761 $ 4,170,139 $ 2,577,622 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated Net March 31, 2010 Cost Depreciation Book Value ---------------------------------------------------------------------------- Computer equipment $ 3,386,237 $ 2,273,787 $ 1,112,450 Furniture and equipment 1,255,942 620,186 635,756 Leasehold improvements 1,699,407 1,046,876 652,531 ---------------------------------------------------------------------------- $ 6,341,586 $ 3,940,849 $ 2,400,737 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 4. PRODUCT RESEARCH AND DEVELOPMENT COSTS: For the three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Product research and development costs $ 2,401,574 $ 2,440,191 Depreciation 99,833 86,670 Scientific research and experimental development investment tax credits (283,927) (260,334) ---------------------------------------------------------------------------- $ 2,217,480 $ 2,266,527 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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 three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Statutory tax rate 27.63% 28.75% ---------------------------------------------------------------------------- Expected income tax $ 1,707,056 $ 1,147,312 Non-deductible costs 93,471 75,235 Change in valuation allowance (31,021) 85,015 Withholding taxes 177,780 82 Other 1,481 (6,065) ---------------------------------------------------------------------------- $ 1,948,767 $ 1,301,579 ---------------------------------------------------------------------------- Represented by: Current income taxes $ 1,865,496 $ 1,454,762 Future income taxes (162,595) (152,789) Foreign withholding and other taxes 245,866 (394) ---------------------------------------------------------------------------- $ 1,948,767 $ 1,301,579 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The components of the Company's net future income tax liability are as follows: June 30, March 31, 2010 2010 ---------------------------------------------------------------------------- Net tax liability on investment tax credits $ (47,694) $ (222,083) Property and equipment 20,851 32,645 Benefit of operating losses in a foreign subsidiary 55,637 86,658 ---------------------------------------------------------------------------- 28,794 (102,780) Valuation allowance (55,637) (86,658) ---------------------------------------------------------------------------- Future income tax liability, net $ (26,843) $ (189,438) Represented by: Future income tax liability, current $ (47,694) $ (222,083) Future income tax asset, long-term 20,851 32,645 ---------------------------------------------------------------------------- Future income tax liability, net $ (26,843) $ (189,438) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The operating losses in the foreign subsidiary expire over the next three fiscal years.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, 2009 14,363,572 $ 15,897,624 2,895,946 $ 186,175 $ 1,245,485 Issued for cash on exercise of stock options 570,525 3,653,785 Converted into common shares 624,517 40,149 (624,517) (40,149) Stock-based compensation: Current period expense 1,223,275 Stock options exercised 652,812 (652,812) ---------------------------------------------------------------------------- Balance, March 31, 2010 15,558,614 $ 20,244,370 2,271,429 $ 146,026 $ 1,815,948 Issued for cash on exercise of stock options 97,074 745,872 Converted into common shares 2,271,429 146,026 (2,271,429) (146,026) Stock-based compensation: Current period expense 319,719 Stock options exercised 143,036 (143,036) ---------------------------------------------------------------------------- Balance, June 30, 2010 17,927,117 $ 21,279,304 - $ - $ 1,992,631 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Non-Voting Shares were convertible into an equivalent number of Common Shares at any time at the option of the holder.Subsequent to June 30, 2010, 14,000 stock options were exercised for cash proceeds of $73,938.On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "Original Rights Plan"), whereby the Company issued 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 was not dilutive and will not affect reported earnings per share until the rights separate from the underlying shares and become exercisable or until the exercise of the rights. The Original Rights Plan was approved by the Company's shareholders on July 13, 2006.On May 21, 2009, the Board of Directors reviewed the Original Rights Plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. The Company, therefore, adopted a new shareholder rights plan (the "Rights Plan") which is identical in all respects to the Original Rights Plan, with the exception of certain minor amendments which have been made to provide for renewal or approval of the Rights Plan every three years (rather than only one three-year period as was set out in the Original Rights Plan) and to update references to statutory provisions now out of date. The Rights Plan was approved by the Company's shareholders on July 9, 2009.(c) Common Shares Buy-back:On February 27, 2009, the Company announced a Normal Course Issuer Bid ("NCIB") commencing March 3, 2009 to purchase for cancellation up to 1,114,791 of its Common Shares. No shares were purchased pursuant to this NCIB which expired on March 2, 2010.On March 22, 2010, the Company announced a NCIB commencing on March 23, 2010 to purchase for cancellation up to 1,314,686 of its Common Shares. No shares have been purchased pursuant to this NCIB through June 30, 2010.(d) Stock-based Compensation Plan:The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 10, 2008, 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 June 30, 2010, the Company could grant up to 1,792,711 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 percent after the first year anniversary, from date of grant, and then vest as to 25 percent of the total options granted after each of the second and third year anniversary dates. The following table outlines changes in options: For three months ended For the year ended June 30, 2010 March 31, 2010 ---------------------------------------------------------------------------- Weighted Weighted Average Average Options Exercise Options Exercise Granted Price Granted Price ---------------------------------------------------------------------------- Outstanding at beginning of period 1,286,049 $ 11.79 1,367,424 $ 8.10 Granted - - 511,900 15.60 Exercised (97,074) 7.68 (570,525) 6.40 Forfeited (14,650) 14.31 (22,750) 10.74 ---------------------------------------------------------------------------- Outstanding at end of period 1,174,325 $ 12.09 1,286,049 $ 11.79 ---------------------------------------------------------------------------- Options exercisable at end of period 271,575 $ 8.78 368,649 $ 8.49 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The range of exercise prices of options outstanding and exercisable at June 30, 2010 is as follows: Outstanding Exercisable ---------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Exercise Price Number of Contractual Price Number of Price ($/option) Options Life (Years) ($/option) Options ($/option) ---------------------------------------------------------------------------- 3.68 - 5.62 41,750 1.1 3.70 41,750 3.70 5.63 - 6.90 4,000 3.4 6.90 - - 6.91 - 7.40 188,825 2.2 7.39 79,575 7.39 7.41 - 11.26 445,250 3.1 11.03 150,250 10.93 11.27 - 15.60 494,500 4.1 15.60 - - ---------------------------------------------------------------------------- 1,174,325 3.3 12.09 271,575 8.78 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions: Years ended March 31, 2010 2009 2008 ---------------------------------------------------------------------------- Weighted-average fair value ($/option) 2.82 to 3.16 0.98 to 2.01 1.15 to 1.77 Risk-free interest rate (%) 1.31 to 2.61 1.50 to 3.10 3.20 to 4.25 Estimated hold period prior to exercise (years) 2 to 5 2 to 5 2 to 5 Volatility in the price of common shares (%) 37 to 43 31 to 49 30 to 33 Dividend yield per common share (%) 5.95 to 6.07 5.37 to 9.93 4.05 to 5.52 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Company recognized a total stock-based compensation expense for the three months ended June 30, 2010 of $319,719 (2009 - $242,989).(e) Earnings Per Share:The following table summarizes the earnings and weighted average number of Common and Non-Voting Shares used in calculating basic and diluted earnings per share: For three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Shares Earnings Shares Earnings Earnings Outstanding Per Share Earnings Outstanding Per Share ---------------------------------------------------------------------------- Basic $4,229,504 17,872,939 $ 0.24 $2,689,070 17,323,848 $ 0.16 Dilutive effect of stock options 375,582 400,662 ---------------------------------------------------------------------------- Diluted $4,229,504 18,248,521 $ 0.23 $2,689,070 17,724,510 $ 0.15 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the three months ended June 30, 2010, $Nil (2009 - $Nil) options were excluded from the computation of the weighted-average number of diluted shares outstanding because their exercise price was greater than the average market price of the Common Shares during the period.7. CAPITAL MANAGEMENT:The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to maximize the return to its shareholders. The capital structure of the Company consists of cash, credit facilities and shareholders' equity. The Company does not have any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.The Company's policy is to pay quarterly dividends based on the Company's overall financial performance and cash flow generation. In addition, since May 2005, the Company has declared a special dividend after review of the completion of the immediately prior fiscal year results. Decisions on dividend payments are made on a quarterly basis by the Board of Directors. There can be no assurance as to the amount or payment of such dividends in the future.Since November 2002, the Company embarked on a series of normal course issuer bids to buy back its shares. The latest normal course issuer bid is effective from March 23, 2010 to March 22, 2011. Reference is made to note 6(c).The Company makes adjustments to its capital structure in light of general economic conditions and the Company's working capital requirements. In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may pay dividends, buy back shares or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions not in the ordinary course of business.There were no changes in the Company's approach to capital management during the period. 8. FINANCIAL INSTRUMENTS: (i) Classification of financial instruments Classification Measurement ---------------------------------------------------------------------------- Cash Held for trading Fair value Accounts receivable Loans and receivables Amortized cost Accounts payable and accrued liabilities Other financial liabilities Amortized cost ---------------------------------------------------------------------------- (ii) Fair values of financial instrumentsThe carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these instruments.Overview:The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company's risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to those risks. The principal financial risks to which the Company is exposed are described below:(a) Credit Risk:Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligation and arises principally from the Company's cash and accounts receivable. The amounts reported in the balance sheet for accounts receivable are net of allowances for bad debts, estimated by the Company's management based on prior experience and their assessment of the current economic environment.The Company's accounts receivable consist primarily of balances from customers operating in the oil and gas industry, both domestically and internationally, as the Company sells its products and services in over 50 countries worldwide. Some of these countries have greater economic and political risk than experienced in North America and as a result there may be greater risk associated with sales in those jurisdictions. The Company manages this risk by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services on a percentage-of-completion basis. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met. Historically, the Company has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area; therefore, no allowance for doubtful accounts has been established at June 30, 2010.As at June 30, 2010, the Company has a concentration of credit risk with five domestic and international customers who represent 44 percent of accounts receivable. In addition, $1,436,000 of accounts receivable are over 90 days. The Company assesses the creditworthiness 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.The Company minimizes the credit risk of cash by depositing only with a reputable financial institution in highly liquid interest-bearing cash accounts.The maximum credit exposure is represented by the carrying amount of cash and accounts receivable.(b) Market Risk:Market risk is the risk that changes in market prices of the Company's foreign exchange rates and interest rates will affect the Company's income or the value of its financial instruments.The Company operates internationally and primarily prices its products in either the Canadian or US dollar. This gives rise to exposure to market risks from changes in the foreign exchange rates between the Canadian and US dollar. Approximately 73 percent of the Company's revenues for the three months ended June 30, 2010 were denominated in US dollars and at June 30, 2010, the Company had approximately $6.8 million of its working capital denominated in US dollars. The Company currently does not use derivative instruments to hedge its exposure to those risks but as approximately 25 percent of the Company's total costs are also denominated in US dollars they provide a partial economic hedge against the fluctuation in this currency exchange. In addition, the Company manages levels of foreign currency held by converting excess US dollars into Canadian dollars at spot rates.The Canadian operations are exposed to currency risk on US denominated financial assets and liabilities with fluctuations in the rate recognized as foreign exchange gains or losses in the Consolidated Statements of Earnings. It is estimated that a one cent change in the US dollar would result in a net change of approximately $47,000 on net earnings for the three months ended June 30, 2010. A weaker US dollar with respect to the Canadian dollar will result in a negative impact while the reverse would result from a stronger US dollar.The Company has significant cash balances and no interest-bearing debt. The Company's current policy is to invest excess cash in interest-bearing deposits and/or guaranteed investment certificates issued by its principal banker. The Company is exposed to interest cash flow risk from changes in interest rates on its cash balances. Based on the June 30, 2010 cash balance, each one percent change in the interest rate on the Company's cash balance would change net earnings by approximately $236,000.(c) Liquidity Risk:Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Company manages liquidity risk through the management of its capital structure as outlined in note 7. The Company's growth is financed through a combination of the cash flows from operations and its cash balances on hand. Given the Company's available liquid resources as compared to the timing of the payments of its liabilities, management assesses the Company's liquidity risk to be low. The Company monitors its expenditures by preparing annual budgets which are updated periodically. At June 30, 2010, the Company has significant cash balances in excess of its obligations and over $800,000 of the line of credit (note 10) available for its use.9. COMMITMENTS:(a) Research Commitments:On May 1, 2006, the Company entered into a two phased joint research and development agreement (the "DRMS Agreement"). Phase 1 of this project was completed in fiscal 2007 and work is ongoing on Phase 2. It is estimated that the second phase will take five years and that the Company's annual expenditures will approximate $2 million for its portion of the aggregate project costs.During Phase 2, the DRMS Agreement provides the participants with withdrawal rights upon the payment of a withdrawal fee to the other participants of an amount equal to one year of the withdrawing party's share of budgeted project costs. In addition to the withdrawal fee, the withdrawing party may be liable for (i) 100 percent of resizing costs if the project is scaled back or (ii) a proportionate share of wind down costs should the other participants decide to terminate the project as a result of the withdrawal of the participant.In conjunction with entering into this project, CMG Reservoir Simulation Foundation (the "Foundation") agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50 percent of the Company's estimated share of costs over the duration of the project. For the three months ended June 30, 2010, the Company has reflected $358,397 (2009 - $298,862) in research grants from the Foundation in revenue with respect to this project. To June 30, 2010 these research grants aggregate to $3,977,988 since commencement of the project.(b) Lease Commitments:The Company has operating lease commitments relating to its office premises with the minimum annual lease rental payments as follows: ($) ---------------------------------------------------------------------------- 2011 1,102,000 2012 1,426,000 2013 1,428,000 2014 1,429,000 2015 1,040,000 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 10. 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 June 30, 2010, US $165,000 (2009 - $Nil) had been drawn on this line of credit for performance bonds. 11. SUPPLEMENTAL CASH FLOW INFORMATION: For the three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Interest received $ 30,650 $ 39,335 Income taxes paid $ 1,224,000 $ 4,521,713 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 12. SEGMENTED INFORMATION: Operating Segments Contract For the three months Software Research and ended June 30, 2010 Licenses Consulting Corporate Total ---------------------------------------------------------------------------- Revenue $10,149,000 $ 1,072,142 $ 832,807 $12,053,949 ---------------------------------------------------------------------------- Gross profit 8,195,525 367,712 832,807 9,396,044 ---------------------------------------------------------------------------- General and administrative expenses 1,115,540 1,115,540 Depreciation and amortization 31,656 40,237 57,563 129,456 Product research and development costs 2,217,480 2,217,480 Interest and other income and foreign exchange (244,703) (244,703) Income and other taxes 242,741 2,913 1,703,113 1,948,767 ---------------------------------------------------------------------------- Earnings (loss) for the period $ 7,921,128 $ 324,562 $ (4,016,186) $ 4,229,504 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total assets $ 6,534,517 $ 2,327,660 $ 36,986,735 $45,848,912 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures $ 69,377 $ 129,103 $ 207,694 $ 406,174 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating Segments Contract For the three months Software Research and ended June 30, 2009 Licenses Consulting Corporate Total ---------------------------------------------------------------------------- Revenue $ 9,184,360 $ 358,080 $ 692,172 $10,234,612 ---------------------------------------------------------------------------- Gross profit 7,395,325 (205,015) 692,172 7,882,482 ---------------------------------------------------------------------------- General and administrative expenses 1,108,953 1,108,953 Depreciation and amortization 25,979 23,052 34,870 83,901 Product research and development costs 2,266,527 2,266,527 Interest and other income and foreign exchange 432,452 432,452 Income and other taxes 64 (392) 1,301,907 1,301,579 ---------------------------------------------------------------------------- Earnings (loss) for the period $ 7,369,282 $ (227,675) $ (4,452,537) $ 2,689,070 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total assets $ 6,822,294 $ 1,320,088 $ 31,269,166 $39,411,548 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures $ 37,180 $ 108,310 $ 143,038 $ 288,528 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Geographic Segments 2010 2009 ---------------------------------------------------------------------------- Property and Property and Revenue Equipment Revenue Equipment ---------------------------------------------------------------------------- Canada $ 3,418,833 $ 2,352,411 $ 2,933,301 $ 999,357 United States 2,765,966 138,859 1,871,455 171,242 Other Foreign 5,869,150 86,352 5,429,856 59,461 ---------------------------------------------------------------------------- $ 12,053,949 $ 2,577,622 $ 10,234,612 $ 1,230,060 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- In the three months ended June 30, 2010, the Company derived 10.4 percent (2009 - 14.0 percent) of its revenue from one customer. FOR FURTHER INFORMATION PLEASE CONTACT: Computer Modelling Group Ltd. Kenneth M. Dedeluk President & CEO (403) 531-1300 ken.dedeluk@cmgl.ca or Computer Modelling Group Ltd. John Kalman Vice President, Finance & CFO (403) 531-1300 john.kalman@cmgl.ca www.cmgl.ca