CALGARY, ALBERTA--(CCNMatthews - Nov. 7, 2006) - Computer Modelling Group Ltd. (TSX:CMG) ("CMG") is pleased to announce its fiscal year 2007 second quarter results for both the three months and six months ended September 30, 2006.
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$ thousands, unless otherwise
noted September 30, September 30, %
For the three months ended 2005 2006 Increase
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Total Revenue $ 3,845 $ 6,066 (1) 58
Gross Profit 2,705 4,440 (1) 64
Earnings 821 1,833 (1) 123
Earnings per share, basic $ 0.10 $ 0.22 (1) 120
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$ thousands, unless otherwise
noted September 30, September 30, %
For the six months ended 2005 2006 Increase
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Total Revenue $ 7,279 $ 10,679 (2) 47
Gross Profit 4,964 7,800 (2) 57
Earnings 1,387 2,869 (2) 107
Earnings per share, basic $ 0.18 $ 0.35 (2) 94
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(1) Quarterly record results
(2) Six month record results
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Management's Discussion and Analysis
The following discussion and analysis, presented as at November 6, 2006, is management's assessment of the financial and operating results of Computer Modelling Group Ltd. ("CMG" or the "Company") as well as its future opportunities and risks, and should be read in conjunction with the unaudited consolidated financial statements and related notes of the Company for the six months ended September 30, 2006 and the audited consolidated financial statements and MD&A for the years ended March 31, 2006 and 2005 contained in the 2006 annual report for CMG. The reader should be aware that historical results are not necessarily indicative of future performance. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com.
Funds from operations, which are determined before changes in non-cash working capital, is used by us as a key measure of performance. Funds from operations do not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable with the calculation of similar measures for other companies. Funds from operations as presented is not intended to represent operating profits for the period nor should it be viewed as an alternative to cash provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Funds from operations per share are 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 there from.
Revenues
CMG's revenues are comprised of software license sales, which provide the majority of the Company's revenues, and consulting and contract research fees. On an overall basis, CMG's revenues of $10.7 million for the six months ended September 30, 2006 reflect an increase of $3.4 million, a 47 percent increase, from the $7.3 million recorded in the comparative period last fiscal year, primarily due to increased software license sales in both perpetual and annuity/maintenance revenue streams.
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Quarterly Performance
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Fiscal Fiscal Fiscal
2005 2006 2007
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$Thousands, unless
otherwise stated Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
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Annuity/maintenance
licenses 1,997 2,223 2,315 2,389 2,447 2,634 2,805 3,111
Perpetual licenses 1,248 1,433 298 356 1,067 2,111 941 1,703
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Software licenses 3,245 3,656 2,613 2,745 3,514 4,745 3,746 4,814
Consulting and contract
research 740 1,039 821 1,100 823 859 867 1,252
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Revenues 3,985 4,695 3,434 3,845 4,337 5,604 4,613 6,066
Gross Profit 2,932 3,547 2,259 2,705 3,021 4,336 3,360 4,440
Gross Profit % 74 76 66 70 70 77 73 73
Earnings before income and
other taxes 1,512 2,142 1,033 1,285 1,497 2,589 1,622 2,796
Income and other taxes 504 656 468 464 576 911 586 963
Earnings for the quarter 1,008 1,486 565 821 921 1,678 1,036 1,833
Funds from operations 1,234 1,651 523 1,000 1,120 1,907 1,196 2,050
Cash dividends declared
and paid 309 310 1,967 399 403 403 2,449 491
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Per share amounts - $
Earnings per share - basic 0.13 0.19 0.07 0.10 0.11 0.21 0.13 0.22
Earnings per share
- diluted 0.13 0.19 0.07 0.10 0.11 0.20 0.13 0.22
Funds from operations per
share - basic 0.16 0.21 0.07 0.13 0.14 0.24 0.15 0.25
Cash dividends declared
per share 0.04 0.04 0.25 0.05 0.05 0.05 0.30 0.06
Book value per share, at
quarter end 1.54 1.70 1.52 1.60 1.67 1.84 1.68 1.87
Trading price per share,
at quarter end 4.55 5.59 6.24 6.45 7.30 7.85 7.30 8.45
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Software Licenses -
Software license revenues were $8.6 million for the six months ended September 30, 2006, up 60 percent or $3.2 million from the $5.4 million recorded in the same period last year. As we stated in our 2006 Annual Report, the growing utilization by the oil and gas industry of enhanced recovery processes and production from unconventional sources of supply of hydrocarbons have generated increased demand for CMG's advanced physics reservoir simulators. In addition, demand for CMG's parallel computing options and flexible gridding features that enable clients to run large highly complex models with reduced computational time has increased.
The annuity/maintenance component of these revenues amounted to $5.9 million for the six months ended September 30, 2006, an increase of 26 percent from the $4.7 million recorded in the same period last year. As the quarterly performance table demonstrates, this component of the software license revenue stream has reflected growth quarter over quarter. Each of the annuity and maintenance components of this revenue stream has grown due to increased sales to existing customers and sales to new customers. CMG has found that a large percentage of its customers who have acquired perpetual software licenses subsequently purchase maintenance licenses to ensure they have access to current versions of CMG software.
Software license revenues under perpetual sales amounted to $2.6 million for the six months ended September 30, 2006, which was significantly higher than the $0.7 million recorded in the comparable period last year. The decision by our customers to acquire our software through annuity or perpetual licenses is their sole decision; as is the timing of their acquisition once the customer has decided on its licensing strategy. As a result, perpetual software license sales are variable and unpredictable in nature and the magnitude thereof will fluctuate between reporting periods.
On a quarterly comparison, CMG's software license revenue in the three months ended September 30, 2006 was $4.8 million, up $2.1 million from the $2.7 million recorded in the same period last year. Of this increase, $0.8 million is attributable to growth in annuity/maintenance licenses and $1.3 million in the sale of perpetual licenses.
At September 30, 2006, CMG has pre-sold $4.2 million of software license revenue, $3.6 million of which relates to its current fiscal year ending March 31, 2007.
Consulting and Contract Research Revenues -
CMG recorded consulting and contract research revenues of $2.1 million for the six months ended September 30, 2006, up $0.2 million from the $1.9 million recorded in the same period last year. This segment's $1.0 million contribution to earnings remained relatively constant between the two reporting periods.
At September 30, 2006, CMG has recorded approximately $0.1 million of pre-sold revenue relating to consulting and contract research revenues for projects to be completed in the fiscal year ending March 31, 2007.
Expenses -
CMG's gross profit margin for the six months ended September 30, 2006 was 73 percent (2005 - 68 percent) and CMG realized a gross profit of $7.8 million, up $2.8 million from the $5.0 million recorded in the same period last year. This increase in gross profit is primarily attributable to the growth in both categories of software license sales.
CMG's total expenses, excluding depreciation and income and other taxes, amounted to $6.1 million for the six months ended September 30, 2006, up $1.2 million from the $4.9 million expended in the comparable period last year. This increase in total expenses is primarily due to higher staff costs, the occurrence of CMG's biannual technical symposium in July 2006, the SPE trade show that transpired in the second quarter of fiscal 2007 but was in the third quarter of fiscal 2006, and additional overhead costs resulting from CMG's additional research endeavors.
As a technology service company, CMG's largest area of expenditure is for its people. Approximately $4.5 million (2005 - $3.7 million) expended was directly related to staff costs; with the increased compensation due to a combination of staff additions, general staff increases, and higher variable commissions and bonus compensation that are dependent on CMG's revenue and earnings performance.
Liquidity and Capital Resources
Operating activities -
CMG generated $3.2 million ($0.40 per share) of funds from operations in the six months ended September 30, 2006, an increase of $1.7 million from the $1.5 million ($0.19 per share) generated in the comparative period last year. The changes in CMG's non-cash working capital for the six months ended September 30, 2006 are reflective of normal operations and the timing of customer purchases. In addition, due to the timing of when CMG became taxable, it was able to defer the payment of a portion of its accrued income tax liability into the first quarter of fiscal 2007.
Financing activities -
During the six months ended September 30, 2006, CMG employees and directors exercised options to purchase 141,495 Common Shares, which resulted in $0.5 million in cash proceeds.
In the six months ended September 30, 2006, CMG paid $2.9 million in dividends, representing two quarterly dividends of $0.06 Canadian per share each and a special dividend of $0.24 on its Common and Non-Voting Shares. On November 6, 2006, CMG announced the payment of a quarterly dividend of $0.07 Canadian per share on CMG's Common and Non-Voting Shares. The dividend will be paid on December 15, 2006 to shareholders of record at the close of business on December 1, 2006.
On November 17, 2005, CMG announced its intention to purchase for cancellation up to 395,000 of its Common Shares in accordance with the normal course issuer bid ("NCIB") procedures under Canadian securities law during the 12-month period commencing November 21, 2005. During the six months ended September 30, 2006, and cumulatively since adoption of the NCIB, 28,600 Common Shares were repurchased at market price for a total cost of $218,377.
Investing activities -
During the six months ended September 30 2006, CMG expended $0.2 million on property and equipment additions of its $0.6 million capital budget for its fiscal year ending March 31, 2007.
Liquidity and capital resources -
At September 30, 2006, CMG has $17.4 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker, of which US $19,000 has been drawn on for performance bonds.
During the six months ended September 30, 2006, 844,021 shares of CMG's public float were traded on the TSX Stock Exchange. CMG's share prices ranged from $6.90 to $8.49 per share and last traded on September 29, 2006 at $8.45 for a September 30, 2006 market capitalization of $69.2 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties -
CMG has entered into a two phased joint research and development agreement with Shell International Exploration and Production BV and Petroleo Brasileiro S.A. ("Petrobras") to develop the newest generation reservoir simulation software system. The first phase is anticipated to be completed prior to the end of January 2007, with CMG's funding commitment for its share of Phase 1 project costs currently estimated at $500,000. One of the deliverables of the first phase is to identify the resource requirements and the project timeline for the second phase, which will only proceed with the mutual agreement of the parties. CMG currently estimates that it could increase its staff complement by 25 individuals to meet the project requirements and that the total project could have a duration of up to five years, at an annual funding commitment of $2.0 million by the Company.
In conjunction with entering into this project, a research grant proposal was presented to CMG Reservoir Simulation Foundation ("the Foundation"), the sole holder of CMG's Non-Voting Shares, which agreed to provide $1.0 million in funding to cover 50 percent of the first $2 million of CMG's allocated project costs. CMG has reflected $0.2 million in research grants from the Foundation in consulting and contract research revenue in the six months ended September 30, 2006 with respect to this project.
CMG plans on funding 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.
The Foundation's research grant relative to this new project is in addition to a 2001 research and development commitment by the Foundation, whereby it agreed to provide CMG with research grants valued at $125,000 on a quarterly basis through January 1, 2008. During both the six months ended September 30, 2006 and 2005, the Foundation paid $250,000 to CMG, which is reflected in consulting and contract research revenues.
CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold revenues which are reflected as deferred revenue on its balance sheet. Contractual obligations for office premise leases are not considered to be significant and are estimated to be as follows: 2007 - $349,000; 2008 - $500,000; $2009 - $455,000; and 2010 - $326,000.
Outstanding Share Data as at November 6, 2006
CMG's authorized and issued share capital has remained unchanged from September 30, 2006 to November 6, 2006. CMG's issued and outstanding shares at November 6, 2006 are 5,731,726 Common Shares and 2,459,775 Non-Voting Shares.
Critical Accounting Estimates and Business Risks
These remain unchanged from the factors detailed in CMG's 2006 Annual Report.
Changes in Accounting Policies
CMG's participation in the research and development of the newest generation reservoir simulation software system is by means of a joint venture and the Company has reflected its proportionate share of the project costs in product research and development costs for the six months ended September 30, 2006, as required by Canadian accounting standards.
Outlook
The key performance drivers to CMG's continuing success are outlined in our 2006 Annual Report. With declining production using conventional extraction processes, the oil industry worldwide is implementing complex recovery techniques to increase reserve recovery after primary production declines. CMG software is the market leader in the simulation of these difficult hydrocarbon recovery techniques in petroleum reservoirs and we continue to expect CMG's market share of all petroleum recovery simulation to increase as the amount of easy to extract oil declines and as production from unconventional sources of supply increases.
CMG continues to make significant investment in the research and development of its technology, both in our existing product suite and in the development of the next generation of reservoir simulation software. We were very pleased to announce the participation of Petroleo Brasileiro S.A. in the joint venture previously established between Shell International Exploration and Production BV and CMG. The common goal for each of our three companies is to develop a new generation simulator system that will do more than optimize reservoir recovery; it will model the entire hydrocarbon recovery system through point of sale. This investment by CMG aligns with our strategy of growing our revenue base through the advancement of technological superiority.
On behalf of the Board of Directors
Kenneth M. Dedeluk, President and Chief Executive Officer
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COMPUTER MODELLING GROUP LTD.
Consolidated Balance Sheets
(unaudited)
September 30, March 31,
2006 2006
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Assets
Current assets:
Cash and cash equivalents (note 2) $ 17,440,834 $ 16,509,473
Accounts receivable 3,025,943 6,520,664
Prepaid expenses 436,273 487,903
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20,903,050 23,518,040
Property and equipment (note 3) 1,070,329 1,061,241
Future income taxes (note 5) 60,574 88,458
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$ 22,033,953 $ 24,667,739
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,533,824 $ 2,085,042
Income taxes payable 670,451 1,892,608
Deferred revenue 4,514,353 5,728,724
Future income taxes (note 5) 36,049 72,123
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6,754,677 9,778,497
Shareholders' equity:
Share capital (note 6) 12,438,709 11,815,845
Retained earnings 2,840,567 3,073,397
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15,279,276 14,889,242
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$ 22,033,953 $ 24,667,739
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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
2006 2005 2006 2005
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Revenue
Software licenses $ 4,813,544 $ 2,744,994 $ 8,559,690 $ 5,357,733
Consulting and
contract research 1,252,017 1,100,293 2,119,417 1,921,354
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6,065,561 3,845,287 10,679,107 7,279,087
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Cost of Sales
Marketing expenses 1,151,006 799,798 1,989,341 1,591,719
Direct consulting
expenses 408,517 276,500 760,482 506,281
Third-party contract
costs 66,536 63,847 129,556 217,107
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1,626,059 1,140,145 2,879,379 2,315,107
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Gross Profit 4,439,502 2,705,142 7,799,728 4,963,980
General and
administrative
expenses 629,270 467,156 1,211,580 993,576
Depreciation and
amortization 63,622 59,478 123,922 83,903
Product research and
development costs
(note 4) 1,118,531 817,121 2,150,320 1,674,312
Foreign exchange
(gain) loss (16,801) 162,590 185,624 64,768
Interest and other
income (151,587) (86,393) (290,328) (171,020)
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Earnings before
income and other
taxes 2,796,467 1,285,190 4,418,610 2,318,441
Income and other
taxes (note 5) 963,835 463,702 1,549,336 931,674
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Earnings for the
period 1,832,632 821,488 2,869,274 1,386,767
Retained earnings,
beginning of period 1,499,425 858,681 3,073,397 2,260,516
Dividends paid (491,490) (399,348) (2,940,744) (2,366,462)
Common shares
buy-back (note 6 (c)) - - (161,360) -
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Retained earnings,
end of period $ 2,840,567 $ 1,280,821 $ 2,840,567 $ 1,280,821
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Per share
Weighted average
number of shares
outstanding 8,167,725 7,936,245 8,138,098 7,867,885
Earnings for the
period
Basic $ 0.22 $ 0.10 $ 0.35 $ 0.18
Diluted $ 0.22 $ 0.10 $ 0.35 $ 0.17
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
2006 2005 2006 2005
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Cash provided by
(used for)
Operating
Earnings for the
period $ 1,832,632 $ 821,488 $ 2,869,274 $ 1,386,767
Items not involving
cash:
Depreciation and
amortization 112,852 84,890 217,047 149,828
Future income taxes 22,118 19,035 (8,190) (151,280)
Stock-based
compensation 82,738 74,299 168,499 137,133
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Funds from
operations 2,050,340 999,712 3,246,630 1,522,448
Changes in non-cash
working capital:
Accounts receivable 1,855,691 (180,341) 3,494,721 977,490
Accounts payable and
accrued liabilities 166,406 111,101 (551,218) (237,466)
Income taxes
payable 283,034 243,518 (1,222,157) 72,002
Prepaid expenses (14,652) (97,661) 51,630 (93,338)
Deferred revenue (2,217,468) (1,468,203) 3,866,119 3,394,813
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2,123,351 (391,874) 8,885,725 5,635,949
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Financing
Deferred revenue 223,193 430,084 (5,080,490) (3,840,116)
Issue of common
shares 208,442 272,726 511,382 411,348
Dividends paid (491,490) (399,348) (2,940,744) (2,366,462)
Common shares
buy-back - - (218,377) -
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(59,855) 303,462 (7,728,229) (5,795,230)
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Investing
Property and equipment
additions (144,070) (506,475) (226,135) (623,629)
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Increase (decrease)
in cash and cash
equivalents 1,919,426 (594,887) 931,361 (782,910)
Cash and cash
equivalents,
beginning of period 15,521,408 14,172,259 16,509,473 14,360,282
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Cash and cash
equivalents, end of
period $ 17,440,834 $ 13,577,372 $ 17,440,834 $ 13,577,372
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See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
Notes to Consolidated Financial Statements
For the six months ended September 30, 2006 and 2005 and as at
March 31, 2006
(unaudited)
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1. Significant Accounting Policies:
(a) Basis of Consolidation: These consolidated financial statements include the accounts of the Company and its subsidiaries, all 100% owned. All inter-company transactions have been eliminated.
(b) Revenue Recognition: Software license sales are recognized as revenue upon the fulfillment of all significant obligations under the terms of the license agreements. Any software license fees received relating to a future fiscal period are deferred and recognized in the appropriate future period. Both consulting and contract research revenues are recorded on a percentage-of-completion basis whereby revenues and costs are recorded in operations based on work completed.
(c) Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly liquid investments which have maturities of less than three months at the time of purchase. These cash equivalents consist primarily of term deposits and are stated at cost, which approximates market value.
(d) Property and Equipment: Property and equipment are recorded at cost. Leases that transfer substantially all the benefits and risks of ownership to the Company are accounted for as capital leases whereby the asset values and related obligations are recorded in the consolidated financial statements.
Depreciation is provided using the following annual rates and methods that are expected to amortize the cost of the property and equipment over their estimated useful lives:
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Computer equipment 33 1/3% straight-line
Furniture and equipment 20% straight-line
Leasehold improvements Straight-line over the lease term
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(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) Joint Research and Development Costs: The Company participates in a joint venture engaged in product research and development and accordingly records its proportionate share of costs incurred as product research and development costs.
(g) 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.
(h) Income Taxes: The Company provides for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are more likely than not to be realized. Future income tax assets and liabilities are measured using tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net future income tax assets and liabilities is included in operations in the period it occurs.
(i) 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, 85,358 shares (2005 - 222,880 shares) and 85,358 shares (2005 - 202,203 shares) were added to the weighted average number of Common and Non-Voting Shares outstanding for the three months and the six months ended September 30, 2006 respectively, for the dilutive effect of employee and directors' stock options.
(j) Stock-Based Compensation Plan: The Company has a stock-based compensation plan that is described in note 6(e). Commencing in the year ended March 31, 2004, the fair value of stock options has been expensed over the vesting period. 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.
(k) Use of Estimates and Assumptions: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the year. Actual results may differ from such estimates and the differences could be material.
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2. Cash and Cash Equivalents:
September 30, 2006 March 31, 2006
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Cash $ 740,834 $ 609,473
Term deposits 16,700,000 15,900,000
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$ 17,440,834 $ 16,509,473
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3. Property and Equipment:
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Accumulated Net Book
September 30, 2006 Cost Depreciation Value
---------------------------------------------------------------------------
Computer equipment $ 1,356,087 $ 866,786 $ 489,301
Furniture and equipment 525,600 410,039 115,561
Leasehold improvements 884,392 418,925 465,467
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$ 2,766,079 $ 1,695,750 $ 1,070,329
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Accumulated Net Book
March 31, 2006 Cost Depreciation Value
---------------------------------------------------------------------------
Computer equipment $ 1,217,525 $ 793,033 $ 424,492
Furniture and equipment 503,512 391,860 111,652
Leasehold improvements 873,320 348,223 525,097
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$ 2,594,357 $ 1,533,116 $ 1,061,241
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4. Product Research and Development Costs:
For the six months ended
September 30,
2006 2005
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Product research and development costs $ 2,169,432 $ 1,724,246
Depreciation 93,125 65,925
Scientific research and experimental development
investment tax credits (112,237) (115,859)
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$ 2,150,320 $ 1,674,312
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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,
2006 2005
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Statutory tax rate 32.12% 33.62%
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Expected income tax $ 1,419,258 $ 779,460
Non-deductible costs 62,557 55,811
Other 67,521 15,442
Change in valuation allowance - 80,961
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$ 1,549,336 $ 931,674
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Represented by:
Current income taxes $ 1,447,922 $ 1,059,532
Future income taxes (recovery) (8,190) (151,280)
Foreign withholding and other taxes 109,604 23,422
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$ 1,549,336 $ 931,674
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The components of the Company's net future income tax liability at
September 30, 2006 are as follows:
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Canada Other Total
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Investment tax credits, net of future tax
liabilities $ 229,560 $ - $ 229,560
Property and equipment 60,574 - 60,574
Benefit of operating losses - 126,175 126,175
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$ 290,134 $ 126,175 $ 416,309
Valuation allowance (391,784)
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Future income tax asset, net $ 24,525
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Represented by:
Future income tax liability, current $ (36,049)
Future income tax asset, long-term 60,574
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Future income tax asset, net $ 24,525
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The operating losses in other countries expire in varying amounts between
2007 and 2010.
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
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Balance,
March 31,
2005 4,895,256 $ 10,353,859 2,859,775 $ 367,698 $ 199,220
Issued for
cash on
exercise of
stock options 323,575 585,935
Stock-based
compensation:
- current
period
expense 309,133
- stock
options
exercised 78,197 (78,197)
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Balance,
March 31,
2006 5,218,831 11,017,991 2,859,775 367,698 430,156
Issued for
cash on
exercise of
stock options 141,495 511,382
Common shares
buy-back (28,600) (57,017)
Converted
into Common
shares 400,000 51,430 (400,000) (51,430)
Stock-based
compensation:
- current
period
expense 168,499
- stock
options
exercised 122,320 (122,320)
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Balance,
September 30,
2006 5,731,726 $ 11,646,106 2,459,775 $ 316,268 $ 476,335
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/T/
The Non-Voting Shares are convertible into an equivalent number of Common Shares at any time at the option of the holder.
On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "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 is 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 Plan was approved by the Company's shareholders on July 13, 2006.
(c) Common Shares Buy-Back: On November 17, 2005, the Company announced a Normal Course Issuer Bid ("NCIB") commencing November 21, 2005 to purchase for cancellation up to 395,000 of its Common Shares. Since commencement of the NCIB through the six months ended September 30, 2006 a total of 28,600 Common Shares were repurchased at market price for a total cost of $218,377.
(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, 2006 and 2005, the Foundation paid $250,000 in cash to the Company, which is reflected in consulting and contract research revenues. On October 1, 2006, the Foundation paid its quarterly commitment in cash and the maximum number of shares that could now potentially be surrendered for cancellation through January 1, 2008 pursuant to this Agreement is 294,906 Non-Voting Shares.
(e) Stock-Based Compensation Plan: The Company adopted a rolling stock option plan as of July 13, 2005 which allows it to grant options to acquire Common Shares of up to 10 percent of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at September 30, 2006, the Company could grant up to 819,150 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, 2005 were as follows:
/T/
For the six months ended For the year ended
September 30, 2006 March 31, 2006
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Weighted Weighted
Average Average
Options Exercise Options Exercise
Granted Price Granted Price
---------------------------------------------------------------------------
Outstanding at beginning of
period 529,175 $ 5.00 636,750 $ 2.69
Granted 316,500 7.38 216,500 7.00
Cancelled - - (500) 1.20
Exercised (141,495) (3.61) (323,575) 1.81
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Outstanding at end of period 704,180 $ 6.35 529,175 $ 5.00
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---------------------------------------------------------------------------
Options exercisable at end of
period 200,805 $ 5.22 147,925 $ 3.13
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The weighted average life of all options outstanding at September 30, 2006
is 3.5 years.
We have estimated the fair value of stock options granted using the
Black-Scholes option pricing model under the following assumptions:
For the six months
ended September 30, For the year ended March 31,
---------------------------------------------------------------------------
2006 2006 2005
---------------------------------------------------------------------------
Weighted-Average Fair
Value ($/option) $ 0.92 to $1.37 $1.30 to $2.15 $ 0.90 to $1.42
Risk-Free Interest
Rate (%) 4.1 3.0 to 3.2 3.3 to 3.9
Estimated Hold Period
Prior to Exercise
(years) 2 to 5 1.5 to 5 1.5 to 5
Volatility in the Price
of Common Shares (%) 29 to 30 40 46 to 47
Dividends per Common
Share ($/share) 0.48 0.20 0.16
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/T/
The Company recognized a total stock-based compensation expense for the three months and six months ended September 30, 2006 of $82,738 (2005 - $74,299) and $168,499 (2005 - $137,133) respectively.
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, 2006, the amounts from 5 domestic and international customers who generated 27 percent of revenues in the six months ended September 30, 2006, and represent 13 percent of the deferred revenue on the Company's balance sheet as at September 30, 2006, represent 52 percent of the Company's accounts receivable. Of this amount, 13 percent have been outstanding for over 90 days as at September 30, 2006. These customers have a long-standing history of consistently paying all invoices rendered.
(c) Foreign Currency Risk: The Company is affected by the exchange rate between the Canadian and US dollar as approximately 74 percent of its revenues in the six months ended September 30, 2006 were denominated in US dollars. Approximately 20 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, 2006, the Company has approximately $1.2 million of its working capital denominated in US dollars.
8. Other Information:
(a) Research Commitments: On May 1, 2006, the Company entered into a two phased joint research and development agreement. The first phase is anticipated to be completed prior to the end of January 2007. The Company's funding commitment to the joint venture for its share of Phase I project costs is estimated at $500,000. One of the deliverables of the first phase is to identify the resource requirements and the project timeline for the second phase, which will only proceed with the mutual agreement of the parties.
In conjunction with entering into this project, a research grant proposal was presented to the Foundation, which agreed to provide $1 million in funding to cover 50 percent of the first $2 million of the Company's allocated project costs. At September 30, 2006, the Company has reflected $197,811 in research grants from the Foundation in revenue with respect to this project.
(b) Lease Commitments: The Company has lease commitments relating to its office premises. The minimum operating lease rental payments pursuant to these contracts are estimated to be 2007 - $349,000; 2008 - $500,000; 2009 - $455,000; and 2010 - $326,000.
(c) 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, 2006, US $19,000 had been drawn on this line of credit for performance bonds.
/T/
(d) Supplemental Cash Flow Information:
For the six months ended
September 30,
2006 2005
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Interest received $ 295,323 $ 163,182
Income taxes paid $ 2,557,843 $ 871,463
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9. Segmented Information:
Operating Segments
For the three Consulting
months ended Software and Contract
September 30, 2006 Licenses Research Corporate Total
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue $ 4,813,544 $ 1,252,017 $ - $ 6,065,561
---------------------------------------------------------------------------
Gross profit 3,785,600 653,902 - 4,439,502
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General and
administrative
expenses 629,270 629,270
Depreciation and
amortization 21,203 11,199 31,220 63,622
Product research
and development
costs 1,118,531 1,118,531
Interest and other
income and foreign
exchange (168,388) (168,388)
Income and other
taxes 57,945 40,158 865,732 963,835
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Earnings (loss) for
the period $ 3,706,452 $ 602,545 $ (2,476,365) $ 1,832,632
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the three Consulting
months ended 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating Segments
For the six Consulting
months ended Software and Contract
September 30, 2006 Licenses Research Corporate Total
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue $ 8,559,690 $ 2,119,417 $ - $ 10,679,107
---------------------------------------------------------------------------
Gross profit 6,722,710 1,077,018 - 7,799,728
---------------------------------------------------------------------------
General and
administrative
expenses 1,211,580 1,211,580
Depreciation and
amortization 39,090 23,813 61,019 123,922
Product research
and development
costs 2,150,320 2,150,320
Interest and other
income and foreign
exchange (104,704) (104,704)
Income and other
taxes 59,262 50,342 1,439,732 1,549,336
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Earnings (loss)
for the period $ 6,624,358 $ 1,002,863 $ (4,757,947) $ 2,869,274
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total Assets $ 1,418,545 $ 2,023,793 $ 18,591,615 $ 22,033,953
---------------------------------------------------------------------------
Capital
Expenditures $ 51,556 $ 51,689 $ 122,890 $ 226,135
---------------------------------------------------------------------------
For the six Consulting
months ended 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
---------------------------------------------------------------------------
Geographic Segments
For the six months ended September 30,
2006 2005
---------------------------------------------------------------------------
Property and Property and
Revenue Equipment Revenue Equipment
---------------------------------------------------------------------------
Canada $ 2,495,557 $ 995,109 $ 1,996,282 $ 840,788
United States 1,648,204 33,240 1,232,496 40,987
Venezuela 753,943 36,829 926,314 51,470
Other Foreign 5,781,403 5,151 3,123,995 7,677
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$ 10,679,107 $ 1,070,329 $ 7,279,087 $ 940,922
---------------------------------------------------------------------------
---------------------------------------------------------------------------
/T/
In the six months ended September 30, 2006, the Company derived 17 percent (2005 - 18 percent) and 7 percent (2005 - 12 percent) in revenue from two customers.
Computer Modelling Group Ltd. is a computer software technology and consulting company serving the oil and gas industry. CMG, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, London, and Caracas. CMG is the leading supplier of advanced processes reservoir modelling software in the world with a blue chip client base of international oil companies and technology centers in 42 countries. CMG's shares are listed on the Toronto Stock Exchange under the symbol CMG.
Forward Looking Statements: The reader should be aware that historical results are not necessarily indicative of future performance. Certain statements in this press release 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, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results.