Computer Modelling Group Announces First Quarter Results

Marketwired

CALGARY, ALBERTA--(Marketwire - Aug. 8, 2012) - Computer Modelling Group Ltd. ("CMG" or the "Company") (CMG.TO) is very pleased to report our first quarter results for the three months ended June 30, 2012.

FIRST QUARTER HIGHLIGHTS

For the three months ended June 30, 2012 2011 $ change % change

($ thousands, except per share data)

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Annuity/maintenance software licenses 13,179 8,997 4,182 46%

Perpetual software licenses 2,070 5,391 (3,321) -62%

Total revenue 16,465 15,939 526 3%

Operating profit 8,105 9,092 (987) -11%

Net income 6,090 6,663 (573) -9%

Earnings per share - basic 0.16 0.18 (0.02) -11%

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MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company," "we" or "our"), presented as at August 7, 2012, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three months ended June 30, 2012 and the audited consolidated financial statements and MD&A for the years ended March 31, 2012 and 2011 contained in the 2012 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 International Financial Reporting Standards ("IFRS") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars and rounded to the nearest thousand.

FORWARD-LOOKING INFORMATION

Certain 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 the Company's 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 staff

Forward-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 2012 Annual Report under the heading "Business Risks":

-- 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 rights

Should 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.

NON-IFRS FINANCIAL MEASURES

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.

"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company's largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See "Expenses" heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.

"EBITDA" refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to consideration of how those activities are amortized, financed or taxed. See "EBITDA" heading for a reconciliation of EBITDA to net income.

CORPORATE PROFILE

CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software with a blue chip client base of international oil companies and technology centers in over 50 countries. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities. 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(1)

($ thousands, unless otherwise

stated) Q2 Q3 Q4

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Annuity/maintenance licenses 7,855 7,999 8,531

Perpetual licenses 2,975 2,335 3,911

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Software licenses 10,830 10,333 12,442

Professional services 2,502 1,730 1,936

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Total revenue 13,332 12,063 14,378

Operating profit 6,695 5,516 7,532

Operating profit % 50 46 52

EBITDA(4) 6,944 5,789 7,818

Profit before income and other

taxes 6,565 5,278 7,413

Income and other taxes 1,999 1,715 2,605

Net income for the period 4,565 3,563 4,808

Cash dividends declared and paid 3,430 3,623 3,643

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Per share amounts - ($/share)

Earnings per share - basic 0.13 0.10 0.13

Earnings per share - diluted 0.13 0.10 0.13

Cash dividends declared and paid 0.095 0.10 0.10

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QUARTERLY PERFORMANCE

Fiscal

Fiscal 2012(2) 2013(3)

($ thousands, unless otherwise

stated) Q1 Q2 Q3 Q4 Q1

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Annuity/maintenance licenses 8,997 9,308 12,056 12,497 13,179

Perpetual licenses 5,391 1,596 2,321 3,416 2,070

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Software licenses 14,388 10,904 14,377 15,913 15,249

Professional services 1,551 1,078 1,521 1,302 1,216

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Total revenue 15,939 11,982 15,898 17,215 16,465

Operating profit 9,092 5,226 8,093 9,193 8,105

Operating profit % 57 44 51 53 49

EBITDA(4) 9,366 5,508 8,414 9,543 8,423

Profit before income and other

taxes 9,240 6,096 8,184 9,104 8,577

Income and other taxes 2,577 1,778 2,394 2,484 2,487

Net income for the period 6,663 4,318 5,790 6,620 6,090

Cash dividends declared and paid 7,519 4,053 4,079 4,848 9,736

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Per share amounts - ($/share)

Earnings per share - basic 0.18 0.12 0.16 0.18 0.16

Earnings per share - diluted 0.18 0.11 0.15 0.17 0.16

Cash dividends declared and paid 0.205 0.11 0.11 0.13 0.26

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(1) Q2, Q3 and Q4 of fiscal 2011 include $0.2 million, $0.3 million and $0.1

million, respectively, in revenue that pertains to usage of CMG's

products in prior quarters.    

(2) Q1, Q2, Q3 and Q4 of fiscal 2012 include $0.3 million, $0.04 million,

$2.6 million and $2.7 million, respectively, in revenue that pertains to

usage of CMG's products in prior quarters.    

(3) Q1 of fiscal 2013 includes $2.1 million in revenue that pertains to

usage of CMG's products in prior quarters.    

(4) EBITDA is defined as net income before adjusting for depreciation

expense, finance income, finance costs, and income and other taxes. See

"Non-IFRS Financial Measures".    

Note: all quarterly data contained in the above table has been prepared in

accordance with IFRS.    

Highlights

During the three months ended June 30, 2012, as compared to the same period

of prior fiscal year, CMG:

-- Increased annuity/maintenance revenue by 46%

-- Increased spending on research and development by 16%

-- Paid out a dividend per share of $0.26, representing a 27% increase

-- Realized earnings per share of $0.16

Revenue

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Software licenses 15,249 14,388 861 6%

Professional services 1,216 1,551 (335) -22%

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Total revenue 16,465 15,939 526 3%

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Software license revenue - % of total

revenue 93% 90%

Professional services - % of total

revenue 7% 10%

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CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services. Total revenue increased by 3% in the current quarter, compared to the first quarter of the previous fiscal year, due to an increase in software license sales driven by the growth in annuity/maintenance license sales. This increase was partially offset by a decrease in fees for professional services earned during the quarter.

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. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Annuity/maintenance licenses 13,179 8,997 4,182 46%

Perpetual licenses 2,070 5,391 (3,321) -62%

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Total software license revenue 15,249 14,388 861 6%

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Annuity/maintenance as a % of total

software license revenue 86% 63%

Perpetual as a % of total software

license revenue 14% 37%

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Total software license revenue grew by 6% in the current quarter, compared to the first quarter of the previous fiscal year, due to the increase in annuity/maintenance license revenue related to increased sales to new and existing customers. This increase was substantially offset by a decrease in perpetual sales.

CMG's annuity/maintenance license revenue increased by 46% during the three months ended June 30, 2012, compared to the same period of last year. This increase was driven by sales to new and existing clients as well as an increase in maintenance revenue tied to our strong perpetual sales generated in the previous two fiscal years. Part of the increase is due to the inclusion of a payment received from one of our large customers for whom revenue recognition criteria are fulfilled only at the time of the receipt of funds. The payment was received for the licenses and services provided for two quarters of the previous fiscal year (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the "Quarterly Software License Revenue" graph). Given our long-standing relationship with this client, and the multi-year nature of the contract, we expect to continue to receive payments under this arrangement, however, the amount and timing are uncertain and will continue to be recorded on a cash basis which may introduce some variability in our reported quarterly annuity/maintenance revenue results. If we were to exclude revenue received from this particular customer from the current quarter's recorded revenue to provide a normalized comparison, we would note that the annuity/maintenance revenue increased by 24% in the current quarter.

Despite some variability introduced by the described arrangement, it should be noted that our annuity/maintenance license sales, representing a recurring revenue stream, have continued to experience consecutive quarterly increases over the past several fiscal years, and this trend has continued in the first quarter of fiscal 2013.

We can observe from the table below that the exchange rates between the US and Canadian dollars during the current quarter compared to the first quarter of the previous fiscal year, had no measurable impact on our reported annuity/maintenance revenue.

Software license revenue under perpetual sales decreased by 62% or $3.3 million for the three months ended June 30, 2012, compared to the same period of the previous fiscal year. In the first quarter of the previous fiscal year, we reported an amount associated with a multi-million perpetual contract in the Eastern Hemisphere which contributed significantly to the revenue growth in the first quarter of the previous year. Even though perpetual sales increased in the Canadian market in the current quarter, we have generated fewer perpetual license sales across all other regions. 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. For this reason, even though we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year. It should be further pointed out, that strong perpetual sales in the previous quarters contributed to the increase in our recurring maintenance revenue in the current quarter.

We can observe from the table below that the exchange rates between the US and Canadian dollars during the current quarter compared to the first quarter of the previous fiscal year, had virtually no impact on our reported perpetual revenue.

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, 2012 2011 $ change % change

($ thousands)

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US dollar annuity/maintenance license

sales US$ 8,638 5,546 3,092 56%

Weighted average conversion rate 0.999 0.998

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Canadian dollar equivalent CDN$ 8,626 5,536 3,090 56%

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US dollar perpetual license sales US$ 1,346 5,621 (4,275) -76%

Weighted average conversion rate 0.995 0.953

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Canadian dollar equivalent CDN$ 1,339 5,359 (4,020) -75%

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REVENUE BY GEOGRAPHIC SEGMENT

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Annuity/maintenance revenue

Canada 4,939 3,734 1,205 32%

United States 2,392 1,991 401 20%

South America 3,162 822 2,340 285%

Eastern Hemisphere(1) 2,686 2,450 236 10%

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13,179 8,997 4,182 46%

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Perpetual revenue

Canada 561 32 529 1653%

United States 404 462 (58) -13%

South America 483 676 (193) -29%

Eastern Hemisphere 622 4,221 (3,599) -85%

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2,070 5,391 (3,321) -62%

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Total software license revenue

Canada 5,500 3,766 1,734 46%

United States 2,796 2,453 343 14%

South America 3,645 1,498 2,147 143%

Eastern Hemisphere 3,308 6,671 (3,363) -50%

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15,249 14,388 861 6%

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(1) Includes Europe, Africa, Asia and Australia.    

On a geographic basis, total software license sales increased across all regions with the exception of the Eastern Hemisphere which experienced a decline of 50%.

The Canadian market (representing 36% of the current quarter's total software revenue) experienced healthy increases in both annuity/maintenance and perpetual license sales with the recorded increases of $1.2 million and $0.5 million, respectively. These increases were supported by the sales to both new and existing clients. The Canadian market continues to be the leader in generating total software license revenue and, particularly, in generating the recurring annuity/maintenance revenue as evidenced by the consecutive quarterly increases of 49%, 51%, 40% and 17% recorded in the first, second, third and fourth quarters of the previous fiscal year, creating a trend which has continued into the first quarter of the current fiscal year.

The US market (representing 18% of the current quarter's total software revenue) grew the annuity/maintenance revenue stream by $0.4 million in the current quarter compared to the first quarter of the previous fiscal year, offset by a slight decrease in perpetual sales. Similar to the Canadian market, we have continued to see successive increases in the annuity/maintenance license sales in the US as evidenced by the increases of 19%, 19%, 20% and 26% recorded during the first, second, third and fourth quarters of the previous fiscal year. This growth trend has continued into the first quarter of the current fiscal year.

South America (representing 24% of the current quarter's total software revenue) experienced strong growth in annuity/maintenance revenue mainly due to the inclusion of the significant amount on the long-term contract for which revenue is recognized on a cash basis. The current quarter includes the revenue amount associated with licenses and services provided in two quarters of the previous fiscal year. If we were to adjust current quarter's revenue for the described amount, we would notice that South America grew annuity/maintenance revenue by more than 30% as a result of the sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by a decrease of 29% in perpetual license sales.

Eastern Hemisphere (representing 22% of the current quarter's total software revenue) grew annuity/maintenance license sales by $0.2 million, which was offset by a decrease of $3.6 million in perpetual sales. A large perpetual sale made during the first quarter of the previous fiscal year, contributed significantly to the revenue growth in the comparative period.

The movements in perpetual sales across the regions are indicative of the unpredictable nature of the timing and location of perpetual license sales. Overall, our recurring annuity/maintenance revenue base continues to be strong and growing across all regions. We will continue to focus our efforts on increasing our license sales to both existing and new clients and, supported by our product suite offering and our customer-oriented approach, we will endeavor to continue expanding our market share globally.

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.

To view the Quarterly Software License Revenue, please visit the following link: http://media3.marketwire.com/docs/808cmg1.pdf.

DEFERRED REVENUE

2012 2011 $ change % change

($ thousands)

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Deferred revenue at:

March 31 21,693 16,755 4,938 29%

June 30 18,779 15,326 3,453 23%

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CMG's deferred revenue consists primarily 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. The variation within the year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the decrease in the deferred revenue balance at the end of the first quarter (June 30) compared to fiscal year-end (March 31). Deferred revenue at June 30, 2012 increased compared to the same period of prior fiscal year due to both renewal of the existing and signing of the new annuity and maintenance contracts in the quarter.

PROFESSIONAL SERVICES REVENUE

CMG recorded professional services revenue of $1.2 million for the three months ended June 30, 2012, representing a decrease of $0.3 million from the amount recorded for the same period of the previous fiscal year. The first quarter of the previous fiscal year included $0.3 million in a grant received from the CMG Reservoir Simulation Foundation ("Foundation CMG") for the DRMS project which was fulfilled during that same quarter. Refer to the discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties." The completion of this funding is the main contributor to the decrease in professional services revenue in the current quarter compared to the first quarter of the previous fiscal year.

Professional services revenue consists of specialized consulting, training, and contract research activities. 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.

Expenses

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Sales, marketing and professional services 3,962 3,125 837 27%

Research and development 2,897 2,495 402 16%

General and administrative 1,501 1,227 274 22%

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Total operating expenses 8,360 6,847 1,513 22%

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Direct employee costs(i) 6,595 5,563 1,032 19%

Other corporate costs 1,765 1,284 481 37%

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8,360 6,847 1,513 22%

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(i)Includes salaries, bonuses, stock-based compensation, benefits and

commissions.    

CMG's total operating expenses increased by 22% for the three months ended June 30, 2012, compared to the same period of the previous fiscal year due to increases in both direct employee and other corporate costs.

DIRECT EMPLOYEE COSTS

As a technology company, CMG's largest area of expenditure is for its people. Approximately 79% of the total operating expenses in the three months ended June 30, 2012 related to staff costs, compared to 81% recorded in the comparative period of last year. Staffing levels for the first three months of the current fiscal year grew in comparison to the same period of previous fiscal year to support our continued growth. At June 30, 2012, CMG's staff complement was 164 employees, up from 144 employees as at June 30, 2011. Direct employee costs increased during the current quarter compared to the first quarter of the previous fiscal year due to staff additions, increased levels of compensation, commissions and related benefits.

OTHER CORPORATE COSTS

Other corporate costs increased by 37% for the three months ended June 30, 2012, compared to the same period of the previous fiscal year, mainly due to inclusion of the costs associated with CMG's biennial technical symposium which took place during the current quarter. Exclusive of the technical symposium costs, other corporate costs would have only increased by 21%. The remainder of the increase is attributable to the costs associated with the expansion of our office space which occurred in the third quarter of the previous fiscal year. These costs comprise additional office rent, increased computing resources and increased depreciation associated with capital spending on the new space.

RESEARCH AND DEVELOPMENT

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Research and development (gross) 3,385 2,799 586 21%

SR&ED credits (488) (304) (184) 61%

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Research and development 2,897 2,495 402 16%

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Research and development as a % of total

revenue 18% 16%

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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 research and development includes CMG's proportionate share of joint research and development costs on the DRMS system development of $0.8 million for the three months ended June 30, 2012 (2011 - $0.7 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."

The increase of 21% in our gross spending on research and development for the three months ended June 30, 2012 demonstrates our continued commitment to advancement of our technology which is the focal part of our business strategy. Research and development costs, net of research and experimental development ("SR&ED") credits, increased by 16% during the three months ended June 30, 2012 compared to the same period of the previous fiscal year, due to increased employee compensation costs, investment in computing resources and facilities costs associated with the newly leased office space.

At the same time, we had an increase in SR&ED credits driven mainly by the increases in our direct employee costs as well as the increase in the eligibility of our expenses for SR&ED credits.

DEPRECIATION

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Depreciation of property and equipment,

allocated to:

Sales, marketing and professional services 98 91 7 8%

Research and development 180 118 62 53%

General and administrative 40 65 (25) -38%

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Total depreciation 318 274 44 16%

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The current quarter's increase in depreciation, compared to the first quarter of the previous fiscal year, reflects the increase in our asset base, mainly as a result of increased spending on computing resources and expansion of the office space in the third quarter of the previous fiscal year.

Finance Income

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Interest income 145 107 38 36%

Net foreign exchange gain 327 41 286 698%

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Total finance income 472 148 324 219%

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Interest income increased in the three months ended June 30, 2012, compared to the same period of the prior fiscal year, mainly due to investing larger cash balances.

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 68% (2011 - 75%) of CMG's revenue for the three months ended June 30, 2012 is denominated in US dollars, whereas only approximately 23% (2011 - 21%) of CMG's total costs are denominated in US dollars.

CDN$ to US$ At June 30 Three month trailing average

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2010 0.9429 0.9620

2011 1.0370 1.0411

2012 0.9813 0.9861

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CMG recorded a foreign exchange gain of $0.3 million for the three months ended June 30, 2012, compared to $0.04 million foreign exchange gain recorded in the same period of last year.

We have observed increased volatility in the foreign exchange rates between the US and Canadian dollars in the first quarter of the current fiscal year compared to the first quarter of the previous fiscal year, increasing the foreign exchange gain recorded in the current quarter.

Income and Other Taxes

CMG's effective tax rate for the three months ended June 30, 2012 is reflected as 29.0% (2011 - 27.9%), whereas the prevailing Canadian statutory tax rate is now 25.0%. 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 deferred income taxes. The investment tax credit earned in the current fiscal year 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 non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.

Operating Profit and Net Income

For the three months ended June 30, 2012 2011 $ change % change

($ thousands, except per share amounts)

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Total revenue 16,465 15,939 526 3%

Operating expenses (8,360) (6,847) (1,513) 22%

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Operating profit 8,105 9,092 (987) -11%

Operating profit as a % of total revenue 49% 57%

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Net income for the period 6,090 6,663 (573) -9%

Net income for the period as a % of

total revenue 37% 42%

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Earnings per share ($/share) 0.16 0.18 (0.02) -11%

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The operating profit as a percentage of total revenue for the three months ended June 30, 2012 was at 49%, compared to 57% recorded in the same period of the previous fiscal year. The first quarter of the prior fiscal year included a large perpetual sale which had a positive impact on last year's operating profit. If we were to exclude this sale from the comparative number, we would notice that the operating profit margin held consistent between the two periods which demonstrates effective management of corporate costs.

Net income as a percentage of revenue decreased to 37% for the three months ended June 30, 2012, compared to 42% recorded in the same period of the previous fiscal year, mainly as a result of the decrease in operating profit offset by the positive effect of the changes in foreign exchange rates recorded in the current quarter.

We have continued to maintain our profitability by focusing our efforts on increasing license sales while, at the same time, effectively controlling our operating costs. Managing these variables will continue to be imperative to our future success.

EBITDA

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Net income for the period 6,090 6,663 (573) -9%

Add (deduct):

Depreciation 318 274 44 16%

Finance income (472) (148) (324) 219%

Finance costs - - - 0%

Income and other taxes 2,487 2,577 (90) -3%

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EBITDA 8,423 9,366 (943) -10%

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EBITDA decreased by 10% for the three months ended June 30, 2012, compared to the same period of the previous fiscal year. Consistent with the operating profit, the inclusion of the large perpetual sale in the first quarter of the previous fiscal year also had a positive effect on EBITDA recorded in the comparative period. If we were to remove revenue from this perpetual sale from the previous year's first quarter revenue, we would notice that EBITDA recorded in the current quarter increased in comparison to the first quarter of the previous fiscal year, which provides further indication of our ability to keep growing our recurring annuity/maintenance license sales while effectively managing corporate costs in relation to this base.

Liquidity and Capital Resources

For the three months ended June 30, 2012 2011 $ change % change

($ thousands)

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Cash, beginning of period 55,374 41,753 13,621 33%

Cash flow from (used in):

Operating activities 6,661 2,840 3,821 135%

Financing activities (10,063) (6,082) (3,981) 65%

Investing activities (437) (164) (273) 166%

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

Cash, end of period 51,535 38,347 13,188 34%

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OPERATING ACTIVITIES

Cash flow generated from operating activities increased by $3.8 million in the three months ended June 30, 2012, compared to the same period of last year, mainly due to the timing differences when the sales are made and when the resulting receivables are collected offset by a decrease in net income and an increase in tax payments made during the quarter.

FINANCING ACTIVITIES

Cash used in financing activities increased by $4.0 million in the three months ended June 30, 2012, compared to the same period of last year, as a result of paying larger dividends and buying back common shares.

During the three months ended June 30, 2012, CMG employees and directors exercised options to purchase 176,000 Common Shares, which resulted in cash proceeds of $1.2 million.

In the three months ended June 30, 2012, CMG paid $9.7 million in dividends, representing the following quarterly dividends:

($ per share) Q1

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

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Dividends declared and paid 0.16

Special dividend declared and paid 0.10

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

Total dividends declared and paid 0.26

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On August 7, 2012, CMG announced the payment of a quarterly dividend of $0.16 per share on CMG's Common Shares. The dividend will be paid on September 15, 2012 to shareholders of record at the close of business on September 7, 2012. On August 7, 2012, the Board of Directors also approved the issuance of 995,000 options to purchase CMG's Common Shares in accordance with CMG's stock option plan.

On April 6, 2011, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. During the year ended March 31, 2012, 33,000 Common Shares were purchased at market price for a total cost of $438,000.

On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares. During the three months ended June 30, 2012, a total of 91,000 Common Shares were purchased at market price for a total cost of $1,551,000.

INVESTING ACTIVITIES

CMG's current needs for capital asset investment relate to computer equipment and office infrastructure costs, all of which will be funded internally. During the three months ended June 30, 2012, CMG expended $0.4 million on property and equipment additions, primarily composed of computing equipment and leasehold improvements, and currently has a capital budget of $2.1 million for fiscal 2013.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2012, CMG has $51.5 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, 2012, 1,897,000 shares of CMG's public float were traded on the TSX. As at June 30, 2012, CMG's market capitalization based upon its June 30, 2012 closing price of $17.37 was $649.5 million.

Commitments, Off Balance Sheet Items and Transactions with Related Parties

The Company is the operator of the DRMS research and development project (the "DRMS project"), a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras"), to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company's share of costs associated with the project is estimated to be $4.0 million ($1.9 million net of overhead recoveries) for the current fiscal year. CMG plans to continue funding its share of the project costs associated with the development of the newest generation reservoir simulation software system from internally generated cash flows.

CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold licenses which are reflected as deferred revenue on its statement of financial position, and contractual obligations for office leases which are estimated as follows: 2013 - $1.5 million; 2014 to 2016 - $2.0 million per year; and 2017 - $1.0 million.

Business Risks and Critical Accounting Estimates

These remain unchanged from the factors detailed in CMG's 2012 Annual Report.

Accounting Standards and Interpretations Issued But Not Yet Effective

The following standards and interpretations have not been adopted by the Company as they apply to future periods:

Standard/Interpretation Nature of impending Impact on CMG's

change in accounting financial statements

policy

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IFRS 9 Financial IFRS 9 (2009) replaces IFRS 9 (2010) supersedes

Instruments the guidance in IAS 39 IFRS 9 (2009) and is

Financial Instruments: effective for annual

In November 2009 the IASB Recognition and periods beginning on or

issued IFRS 9 Financial Measurement, on the after January 1, 2015,

Instruments (IFRS 9 classification and with early adoption

(2009)), and in October measurement of financial permitted. For annual

2010 the IASB published assets. The Standard periods beginning before

amendments to IFRS 9 eliminates the existing January 1, 2015, either

(IFRS 9 (2010)). In IAS 39 categories of held IFRS 9 (2009) or IFRS 9

December 2011, the IASB to maturity, available- (2010) may be applied.

issued an amendment to for-sale and loans and

IFRS 9 to defer the receivable.     The Company intends to

mandatory effective date adopt IFRS 9 (2010) in

to annual periods Financial assets will be its financial statements

beginning on or after classified into one of for the annual period

January 1, 2015.     two categories on initial beginning on April 1,

recognition: 2015. The Company does

not expect IFRS 9 (2010)

- financial assets to have a material

measured at amortized impact on the financial

cost; or statements. The

- financial assets classification and

measured at fair value. measurement of the

Company's financial

Gains and losses on assets and liabilities

remeasurement of is not expected to

financial assets measured change under IFRS 9

at fair value will be (2010) because of the

recognized in profit or nature of the Company's

loss, except that for an operations and the types

investment in an equity of financial assets that

instrument which is not it holds.    

held-for-trading, IFRS 9

provides, on initial

recognition, an

irrevocable election to

present all fair value

changes from the

investment in other

comprehensive income

(OCI). The election is

available on an

individual share-by-share

basis. Amounts presented

in OCI will not be

reclassified to profit or

loss at a later date.    

IFRS 9 (2010) added

guidance to IFRS 9 (2009)

on the classification and

measurement of financial

liabilities, and this

guidance is consistent

with the guidance in IAS

39 expect as described

below.    

Under IFRS 9 (2010), for

financial liabilities

measured at fair value

under the fair value

option, changes in fair

value attributable to

changes in credit risk

will be recognized in

OCI, with the remainder

of the change recognized

in profit or loss.    

However, if this

requirement creates or

enlarges an accounting

mismatch in profit or

loss, the entire change

in fair value will be

recognized in profit or

loss. Amounts presented

in OCI will not be

reclassified to profit or

loss at a later date.    

IFRS 9 (2010) also

requires derivative

liabilities that are

linked to and must be

settled by delivery of an

unquoted equity

instrument to be measured

at fair value, whereas

such derivative

liabilities are measured

at cost under IAS 39.    

IFRS 9 (2010) also added

the requirements of IAS

39 for the derecognition

of financial assets and

liabilities to IFRS 9

without change.    

The IASB has deferred the

mandatory effective date

of the existing chapters

of IFRS 9 Financial

Instruments (2009) and

IFRS 9 (2010) to annual

periods beginning on or

after January 1, 2015.    

The early adoption of

either standard continues

to be permitted.    

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IFRS 10 Consolidated IFRS 10 replaces the The Company intends to

Financial Statements guidance in IAS 27 adopt IFRS 10 in its

Consolidated and Separate financial statements for

In May 2011, the IASB Financial Statements and the annual period

issued IFRS 10 SIC-12 Consolidation - beginning on April 1,

Consolidated Financial Special Purpose Entities. 2013. The Company does

Statements, which is IAS 27 (2008) survives as not expect IFRS 10 to

effective for annual IAS 27 (2011) Separate have a material impact

periods beginning on or Financial Statements, on the financial

after January 1, 2013, only to carry forward the statements.    

with early adoption existing accounting

permitted. If an entity requirements for separate

applies this Standard financial statements.    

earlier, it shall also

apply IFRS 11, IFRS 12, IFRS 10 provides a single

IAS 27 (2011) and IAS 28 model to be applied in

(2011) at the same time. the control analysis for

all investees, including

entities that currently

are SPEs in the scope of

SIC-12. In addition, the

consolidation procedures

are carried forward

substantially unmodified

from IAS 27 (2008).    

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IFRS 11 Joint IFRS 11 replaces the The Company intends to

Arrangements guidance in IAS 31 adopt IFRS 11 in its

Interests in Joint financial statements for

In May 2011, the IASB Ventures.     the annual period

issued IFRS 11 Joint beginning on April 1,

Arrangements, which is Under IFRS 11, joint 2013. The Company does

effective for annual arrangements are not expect IFRS 11 to

periods beginning on or classified as either have a material impact

after January 1, 2013, joint operations or joint on the financial

with early adoption ventures. IFRS 11 statements.    

permitted. If an entity essentially carves out of

applies this Standard previous jointly

earlier, it shall also controlled entities,

apply IFRS 10, IFRS 12, those arrangements which

IAS 27 (2011) and IAS 28 although structured

(2011) at the same time. through a separate

vehicle, such separation

is ineffective and the

parties to the

arrangement have rights

to the assets and

obligations for the

liabilities and are

accounted for as joint

operations in a fashion

consistent with jointly

controlled

assets/operations under

IAS 31. In addition,

under IFRS 11 joint

ventures are stripped of

the free choice of equity

accounting or

proportionate

consolidation; these

entities must now use the

equity method.    

Upon application of IFRS

11, entities which had

previously accounted for

joint ventures using

proportionate

consolidation shall

collapse the

proportionately

consolidated net asset

value (including any

allocation of goodwill)

into a single investment

balance at the beginning

of the earliest period

presented. The

investment's opening

balance is tested for

impairment in accordance

with IAS 28 (2011) and

IAS 36 Impairment of

Assets. Any impairment

losses are recognized as

an adjustment to opening

retained earnings at the

beginning of the earliest

period presented.    

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IFRS 12 Disclosure of IFRS 12 contains the The Company intends to

Interests in Other disclosure requirements adopt IFRS 12 in its

Entities for entities that have financial statements for

interests in the annual period

In May 2011, the IASB subsidiaries, joint beginning on April 1,

issued IFRS 12 Disclosure arrangements (i.e. joint 2013. The Company does

of Interests in Other operations or joint not expect the

Entities, which is ventures), associates amendments to have a

effective for annual and/or unconsolidated material impact on the

periods beginning on or structured entities.     financial statements,

after January 1, 2013, Interests are widely because of the nature of

with early adoption defined as contractual the Company's interests

permitted. If an entity and non-contractual in other entities.    

applies this Standard involvement that exposes

earlier, it needs not to an entity to variability

apply IFRS 10, IFRS 11, of returns from the

IAS 27 (2011) and IAS 28 performance of the other

(2011) at the same time. entity. The required

disclosures aim to

provide information in

order to enable users to

evaluate the nature of,

and the risks associated

with, an entity's

interest in other

entities, and the effects

of those interests on the

entity's financial

position, financial

performance and cash

flows.    

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IFRS 13 Fair Value IFRS 13 replaces the fair The Company intends to

Measurement value measurement adopt IFRS 13

guidance contained in prospectively in its

In May 2011, the IASB individual IFRSs with a financial statements for

published IFRS 13 Fair single source of fair the annual period

Value Measurement, which value measurement beginning on April 1,

is effective guidance. It defines fair 2013. The extent of the

prospectively for annual value as the price that impact of adoption of

periods beginning on or would be received to sell IFRS 13 has not yet been

after January 1, 2013.    an asset or paid to determined.    

The disclosure transfer a liability in

requirements of IFRS 13 an orderly transaction

need not be applied in between market

comparative information participants at the

for periods before measurement date, i.e. an

initial application.     exit price. The standard

also establishes a

framework for measuring

fair value and sets out

disclosure requirements

for fair value

measurements to provide

information that enables

financial statement users

to assess the methods and

inputs used to develop

fair value measurements

and, for recurring fair

value measurements that

use significant

unobservable inputs

(Level 3), the effect of

the measurements on

profit or loss or other

comprehensive income.    

IFRS 13 explains 'how' to

measure fair value when

it is required or

permitted by other IFRSs.    

IFRS 13 does not

introduce new

requirements to measure

assets or liabilities at

fair value, nor does it

eliminate the

practicability exceptions

to fair value

measurements that

currently exist in

certain standards.    

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

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

Amendments to IAS 1 The amendments require The Company intends to

Presentation of Financial that an entity present adopt the amendments in

Statements separately the items of its financial statements

OCI that may be for the annual period

In June 2011, the IASB reclassified to profit or beginning on April 1,

published amendments to loss in the future from 2013. As the amendments

IAS 1 Presentation of those that would never be only require changes in

Financial Statements: reclassified to profit or the presentation of

Presentation of Items of loss. Consequently an items in other

Other Comprehensive entity that presents comprehensive income,

Income, which are items of OCI before the Company does not

effective for annual related tax effects will expect the amendments to

periods beginning on or also have to allocate the IAS 1 to have a material

after July 1, 2012 and aggregated tax amount impact on the financial

are to be applied between these categories. statements.    

retrospectively. Early

adoption is permitted.    The existing option to

present the profit or

loss and other

comprehensive income in

two statements has

remained unchanged.    

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

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

Amendments to IAS 32 and The amendments to IAS 32 The Company intends to

IFRS 7, Offsetting clarify that an entity adopt the amendments to

Financial Assets and currently has a legally IFRS 7 in its financial

Liabilities enforceable right to set- statements for the

off if that right is: annual period beginning

In December 2011, the on April 1, 2013, and

IASB published Offsetting - not contingent on a the amendments to IAS 32

Financial Assets and future event; and in its financial

Financial Liabilities and - enforceable both in the statements for the

issued new disclosure normal course of business annual period beginning

requirements in IFRS 7 and in the event of April 1, 2014. The

Financial Instruments: default, insolvency or Company does not expect

Disclosures.     bankruptcy of the entity the amendments to have a

and all counterparties. material impact on the

The effective date for financial statements.

the amendments to IAS 32 The amendments to IAS 32

is annual periods also clarify when a

beginning on or after settlement mechanism

January 1, 2014. The provides for net

effective date for the settlement or gross

amendments to IFRS 7 is settlement that is

annual periods beginning equivalent to net

on or after January 1, settlement.    

2013. These amendments

are to be applied The amendments to IFRS 7

retrospectively.     contain new disclosure

requirements for

financial assets and

liabilities that are:

- offset in the statement

of financial position; or

- subject to master

netting arrangements or

similar arrangements.    

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

Annual Improvements to The new cycle of The Company intends to

IFRSs 2009-2011 Cycle - improvements contains adopt the amendments to

various standards amendments to the the standards in its

following four standards financial statements for

In May 2012, the IASB (excluding IFRS 1) with the annual period

published Annual consequential amendments beginning on April 1,

Improvements to IFRSs - to other standards and 2013. The extent of the

2009-2011 Cycle as part interpretations.     impact of adoption of

of its annual the amendments has not

improvements process to - IAS 1 Presentation of yet been determined.    

make non-urgent but Financial Statements

necessary amendments to -- Comparative

IFRS.     information beyond

minimum requirements

These amendments are -- Presentation of the

effective for annual opening statement of

periods beginning on or financial position

after Jan 1, 2013 with - IAS 16 Property, Plant

retrospective and Equipment

application.     -- Classification of

servicing equipment

- IAS 32 Financial

Instruments: Presentation

-- Income tax

consequences of

distributions

- IAS 34 Interim

Financial Reporting

-- Segment assets and

liabilities

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

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

Outstanding Share Data

The following table represents the number of Common Shares and options outstanding:

As at August 7, 2012

(thousands)

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

Common Shares 37,434

Options 2,679

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

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% of the outstanding Common Shares at the date of grant. Based upon this calculation, at August 7, 2012, CMG could grant up to 3,743,000 stock options.

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") as defined under National Instrument 52-109. These controls and procedures were reviewed and the effectiveness of their design and operation was evaluated in fiscal 2012 in accordance with the COSO control framework. The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2012. During our fiscal year 2013, we continue to monitor and review our controls and procedures.

During the three months ended June 30, 2012, 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

The beginning of fiscal 2013 showed continued growth in our annuity/maintenance revenue stream with increases experienced across all geographic regions. Over 70% of our software license revenue is derived from our annuity and maintenance contracts, and with a strong renewal rate, we expect to see continued growth in this revenue base.

CMG continues to focus its resources on the development, enhancement and deployment of simulation software tools relevant to the challenges and opportunities facing its diverse customer base. While oil prices continue to fluctuate, they remain at levels that should allow our customers to move forward on projects involving various types of unconventional reserves and advanced recovery processes. The greater challenges have been with natural gas prices, which have not fared as well, and petroleum producers are faced with uncertainty related to the fears of another worldwide economic recession, political unrest in several petroleum producing countries and environmental issues that have threatened to increase the costs of development and production.

CMG's joint project to develop the newest generation of dynamic reservoir modelling systems ("DRMS Project") continued to make progress in the first quarter of fiscal 2013. The problems encountered during the stabilization period, prior to the beta release, have been identified and are currently being resolved. It is still our expectation that a beta release can be completed later this year. Additionally, we are pleased to report that Rob Eastick has been promoted to the position of Vice President, DRMS and Visualization, and will be taking on the role of Project Manager for the DRMS Project. To assist Rob with his new duties, Peter Sammon has assumed the role of Senior Representative for CMG on the Joint Venture Senior Representative Team. With these changes and the tireless efforts of the entire DRMS team, we anticipate a limited commercial release of the software by the end of calendar 2013. CMG and its partners remain committed to funding the ongoing development and to the future success of the project.

We will continue to extend our reach globally and focus our efforts on increasing our license sales to both existing and new clients. The excellent reputation behind our Company and its product suite offering will continue to enable us to grow and sustain a healthy market share while generating solid software license revenue. 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.

Kenneth M. Dedeluk, President and Chief Executive Officer

August 7, 2012

COMPUTER MODELLING GROUP LTD.    

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

UNAUDITED (thousands of Canadian $) June 30, 2012 March 31, 2012

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

Assets

Current assets:

Cash 51,535 55,374

Trade and other receivables 10,933 15,494

Prepaid expenses 1,130 1,195

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

63,598 72,063

Property and equipment 2,948 2,829

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

Total assets 66,546 74,892

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

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

Liabilities and Shareholders' Equity

Current liabilities:

Trade payables and accrued liabilities 4,449 5,358

Income taxes payable 499 1,404

Deferred revenue 18,779 21,693

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

23,727 28,455

Deferred tax liability (note 7) 145 358

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

Total liabilities 23,872 28,813

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

Shareholders' equity:

Share capital 33,126 31,751

Contributed surplus 3,872 3,535

Retained earnings 5,676 10,793

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

Total shareholders' equity 42,674 46,079

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

Total liabilities and shareholders' equity 66,546 74,892

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See accompanying notes to condensed consolidated financial statements.    

COMPUTER MODELLING GROUP LTD.    

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the three months ended June 30, 2012 2011

UNAUDITED (thousands of Canadian $ except per

share amounts)

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

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

Revenue (note 4) 16,465 15,939

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

Operating expenses

Sales, marketing and professional services 3,962 3,125

Research and development (note 5) 2,897 2,495

General and administrative 1,501 1,227

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

8,360 6,847

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

Operating profit 8,105 9,092

Finance income (note 6) 472 148

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

Profit before income and other taxes 8,577 9,240

Income and other taxes (note 7) 2,487 2,577

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

Net and total comprehensive income 6,090 6,663

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Earnings Per Share

Basic (note 8(e)) 0.16 0.18

Diluted (note 8(e)) 0.16 0.18

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See accompanying notes to condensed consolidated financial statements.    

COMPUTER MODELLING GROUP LTD.    

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Common

UNAUDITED Share Contributed Retained Total

(thousands of Canadian $) Capital Surplus Earnings Equity

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Balance, April 1, 2011 24,801 2,655 8,314 35,770

Total comprehensive income for

the period - - 6,663 6,663

Dividends paid - - (7,519) (7,519)

Shares issued for cash on

exercise of stock options

(note 8(b)) 1,437 - - 1,437

Stock-based compensation:

Current period expense - 410 - 410

Stock options exercised 256 (256) - -

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Balance, June 30, 2011 26,494 2,809 7,458 36,761

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Balance, April 1, 2012 31,751 3,535 10,793 46,079

Total comprehensive income for

the period - - 6,090 6,090

Dividends paid - - (9,736) (9,736)

Shares issued for cash on

exercise of stock options

(note 8(b)) 1,224 - - 1,224

Common shares buy-back (notes

8(b) & (c)) (80) (1,471) (1,551)

Stock-based compensation:

Current period expense - 568 - 568

Stock options exercised 231 (231) - -

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Balance, June 30, 2012 33,126 3,872 5,676 42,674

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See accompanying notes to condensed consolidated financial statements.    

COMPUTER MODELLING GROUP LTD.    

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended June 30,

UNAUDITED (thousands of Canadian $) 2012 2011

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

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

Cash flows from operating activities

Net income 6,090 6,663

Adjustments for:

Depreciation 318 274

Income and other taxes (note 7) 2,487 2,577

Stock-based compensation (note 8(d)) 568 410

Interest income (note 6) (145) (107)

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

9,318 9,817

Changes in non-cash working capital:

Trade and other receivables 4,562 (2,144)

Trade payables and accrued liabilities (909) (1,441)

Prepaid expenses 65 (59)

Deferred revenue (2,914) (1,429)

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

Cash generated from operating activities 10,122 4,744

Interest received 144 106

Income taxes paid (3,605) (2,010)

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

Net cash from operating activities 6,661 2,840

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

Cash flows from financing activities

Proceeds from issue of common shares 1,224 1,437

Dividends paid (9,736) (7,519)

Common shares buy-back (note 8(c)) (1,551) -

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

Net cash used in financing activities (10,063) (6,082)

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

Cash flows used in investing activities

Property and equipment additions (437) (164)

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

Increase (decrease) in cash (3,839) (3,406)

Cash, beginning of period 55,374 41,753

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

Cash, end of period 51,535 38,347

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

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

See accompanying notes to condensed consolidated financial statements.    

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended June 30, 2012 and 2011 (unaudited).

1. Reporting Entity:

Computer Modelling Group Ltd. ("CMG") is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol "CMG". The address of CMG's registered office is Suite 200, 1824 Crowchild Trail N.W., Calgary, Alberta, Canada, T2M 3Y7. The condensed consolidated financial statements as at and for the three months ended June 30, 2012 comprise CMG and its subsidiaries (together referred to as the "Company"). The Company is a computer software technology company engaged in the development and licensing of reservoir simulation software. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities.

2.

Basis of Preparation:

(a) STATEMENT OF COMPLIANCE:

These condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and using the accounting policies disclosed in note 3 of the Company's annual consolidated financial statements as at and for the year ended March 31, 2012.

These condensed consolidated financial statements have been prepared on a going concern basis in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting. Accordingly, the condensed consolidated financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the Company's most recent annual consolidated financial statements as at and for the year ended March 31, 2012.

The unaudited condensed consolidated financial statements as at and for the three months ended June 30, 2012 were authorized for issuance by the Board of Directors on August 7, 2012.

(b) BASIS OF MEASUREMENT:

The condensed consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.

(c) FUNCTIONAL AND PRESENTATION CURRENCY:

The condensed consolidated financial statements are presented in Canadian dollars, which is the functional currency of CMG and its subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand.

(d) USE OF ESTIMATES, JUDGMENTS AND ASSUMPTIONS:

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, 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. Estimates and underlying assumptions are based on historical experience and other assumptions that are considered reasonable in the circumstances and are reviewed on an on-going basis. Actual results may differ from such estimates and it is possible that the differences could be material. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In preparing these condensed consolidated financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty are the same as those applied in the annual IFRS consolidated financial statements for the year ended March 31, 2012.

3. Significant Accounting Policies:

The condensed consolidated financial statements should be read in conjunction with the Company's annual financial statements for the year ended March 31, 2012 prepared in accordance with IFRS applicable to those annual consolidated financial statements. The same accounting policies, presentation and methods of computation have been followed in these condensed consolidated financial statements as were applied in the Company's first annual IFRS consolidated financial statements for the year ended March 31, 2012.

4. Revenue:

For the three months ended June 30, 2012 2011

(thousands of $)

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

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Software licenses 15,249 14,388

Professional services 1,216 1,551

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

16,465 15,939

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5. Research and Development Costs:

For the three months ended June 30, 2012 2011

(thousands of $)

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

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

Research and development 3,385 2,799

Scientific research and experimental

development ("SR&ED") investment tax credits (488) (304)

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

2,897 2,495

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

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6. Finance Income:

For the three months ended June 30, 2012 2011

(thousands of $)

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

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Interest income 145 107

Net foreign exchange gain 327 41

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

Finance income 472 148

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

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7. Income and Other Taxes:

The major components of income tax expense are as follows:

For the three months ended June 30, 2012 2011

(thousands of $)

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

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

Current income taxes 2,412 2,650

Deferred tax expense (213) (166)

Foreign withholding and other taxes 288 93

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2,487 2,577

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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 profit 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, 2012 2011

(thousands of $, unless otherwise stated)

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Combined statutory tax rate 25.00% 26.13%

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Expected income tax 2,144 2,415

Non-deductible costs 150 112

Withholding taxes 216 60

Other (23) (10)

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2,487 2,577

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The components of the Company's deferred tax liability are as follows:

(thousands of $) June 30, 2012 March 31, 2012

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Tax liability on SR&ED investment tax

credits (78) (267)

Tax liability on property and equipment (67) (91)

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Deferred tax liability (145) (358)

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All movement in deferred tax assets and liabilities is recognized through comprehensive income of the respective period.

8. 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:

(thousands of shares) Common Shares

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Balance, April 1, 2011 36,427

Issued for cash on exercise of stock options 274

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Balance, June 30, 2011 36,701

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Balance, April 1, 2012 37,307

Issued for cash on exercise of stock options 175

Common shares buy-back (91)

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Balance, June 30, 2012 37,391

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Subsequent to June 30, 2012, 43,000 stock options were exercised for cash proceeds of $288,000.

On May 23, 2012, the Board of Directors considered the merits of renewing the Company's shareholder rights plan on or before the third-year anniversary of shareholder approval of the plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. Upon careful review, the Board of Directors agreed to approve an amended and restated rights plan (the "Amended and Restated Rights Plan") between the Company and Valiant Trust Company, which is similar in all respects to the existing shareholder rights plan, with the exception of certain minor amendments. The Amended and Restated Rights Plan was approved by the Company's shareholders on July 12, 2012.

(c) COMMON SHARES BUY-BACK:

On April 6, 2011, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. This NCIB ended on April 6, 2012 and a total of 33,000 Common Shares were purchased at market price for a total cost of $438,000 during the year ended March 31, 2012.

On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares. During the three months ended June 30, 2012, a total of 91,000 Common Shares were purchased at market price for a total cost of $1,551,000.

(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 7, 2011, which allows it to grant options to acquire Common Shares of up to 10% of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at June 30, 2012, the Company could grant up to 3,739,000 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. The 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.

The following table outlines changes in stock options:

For the three

months ended For the year ended

(thousands except per share amounts) June 30, 2012 March 31, 2012

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Weighted Weighted

Average Average

Exercise Exercise

Options Price Options Price

Granted ($/share) Granted ($/share)

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Outstanding at beginning of period 2,903 9.85 2,825 7.41

Granted 5 17.90 1,071 13.43

Exercised (176) 6.98 (913) 6.43

Forfeited/cancelled (11) 12.24 (80) 10.57

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Outstanding at end of period 2,721 10.04 2,903 9.85

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Options exercisable at end of period 946 7.38 1,120 7.31

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The range of exercise prices of stock options outstanding and exercisable at June 30, 2012 is as follows:

Outstanding Exercisable

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Weighted Weighted Weighted

Average Average Average

Number of Remaining Exercise Number of Exercise

Exercise Price Options Contractual Price Options Price

($/option) (thousands) Life (years) ($/option) (thousands) ($/option)

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3.70 - 5.63 333 1.1 5.35 333 5.35

5.64 - 7.80 523 2.1 7.80 294 7.80

7.81 - 9.07 830 3.1 9.07 317 9.07

9.08 - 17.90 1,035 4.2 13.45 2 14.24

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2,721 3.1 10.04 946 7.38

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The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:

For the three months For the year ended

ended June 30, 2012 March 31, 2012

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Fair value at grant date ($/option) 2.66 to 3.81 1.23 to 3.42

Share price at grant date ($/share) 17.90 13.00 to 16.35

Risk-free interest rate (%) 1.14 to 1.23 0.99 to 2.06

Estimated hold period prior to

exercise (years) 3 to 4 2 to 4

Volatility in the price of common

shares (%) 28 to 36 24 to 37

Dividend yield per common share (%) 3.57 3.20 to 4.94

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The Company recognized total stock-based compensation expense for the three months ended June 30, 2012 of $568,000 (2011 - $410,000).

(e) EARNINGS PER SHARE:

The following table summarizes the earnings and weighted average number of Common Shares used in calculating basic and diluted earnings per share:

For the three months

ended June 30,

(thousands except per

share amounts) 2012 2011

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Weighted Weighted

Average Earnings Average Earnings

Earnings Shares Per Share Earnings Shares Per Share

($) Outstanding ($/share) ($) Outstanding ($/share)

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Basic 6,090 37,353 0.16 6,663 36,532 0.18

Dilutive

effect of

stock

options 1,078 1,066

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Diluted 6,090 38,431 0.16 6,663 37,598 0.18

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9. Commitments:

(a) RESEARCH COMMITMENTS:

The Company is the operator of the DRMS research and development project (the "DRMS project"), a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras"), to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company's share of costs associated with the project is estimated to be $4.0 million ($1.9 million net of overhead recoveries) for fiscal 2013.

(b) LEASE COMMITMENTS:

The Company has operating lease commitments relating to its office premises with the minimum annual lease payments as follows:

Three months ended June 30, 2012 2011

(thousands of $)

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Less than one year 1,504 1,111

Between one and five years 6,965 3,932

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8,469 5,043

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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 or may be used to support letters of credit. As at June 30, 2012, US $165,000 (2011 - US $165,000) had been reserved on this line of credit for the letter of credit supporting a performance bond.

11. Segmented Information:

The Company is organized into one operating segment represented by the development and licensing of reservoir simulation software. The Company provides professional services, consisting of support, training, consulting and contract research activities, to promote the use and development of its software; however, these activities are not evaluated as a separate business segment.

Revenues and property and equipment of the Company arise in the following geographic regions:

Property and

(thousands of $) Revenue equipment

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For the three months ended June 30, As at June 30,

2012 2011 2012 2011

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Canada 6,118 4,580 2,801 2,209

United States 2,887 2,555 67 91

South America 3,951 1,847 58 106

Eastern Hemisphere(1) 3,509 6,957 22 38

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16,465 15,939 2,948 2,444

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(1) Includes Europe, Africa, Asia and Australia.    

In the three months ended June 30, 2012, the Company derived 12.4% (2011 - 21.6%) of its revenue from one customer.

12. Joint Venture:

The Company is the operator of a joint software development project, the DRMS project, which gives the Company exclusive rights to commercialize the jointly developed software while the other partners will have unlimited software access for their internal use. Accordingly, the Company records its proportionate share of costs incurred on the project (37.04%) as research and development costs within the condensed consolidated statements of operations and comprehensive income.

For the three months ended June 30, 2012, CMG included $0.8 million (2011 - $0.8 million) of costs in its condensed consolidated statements of operations and comprehensive income related to this joint project.

Additionally, the Company is entitled to charge the project for various services provided as operator, which were recorded in revenue as professional services and amounted to $0.5 million during the three months ended June 30, 2012 (2011 - $0.4 million).

13. Subsequent Events:

On August 7, 2012, the Board of Directors declared a cash dividend of $0.16 per share on its Common Shares, payable on September 15, 2012, to all shareholders of record at the close of business on September 7, 2012.

On August 7, 2012, the Board of Directors also approved the issuance of 995,000 options to purchase CMG's Common Shares in accordance with CMG's stock option plan.

Contact:
Kenneth M. Dedeluk
Computer Modelling Group Ltd.
President & CEO
(403) 531-1300
ken.dedeluk@cmgl.ca

John Kalman
Computer Modelling Group Ltd.
Vice President, Finance & CFO
(403) 531-1300
john.kalman@cmgl.ca
www.cmgl.ca

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