Quoter results just came out - looking good!
Computer Modelling Group Announces Year End Results
CALGARY, ALBERTA, May 21, 2004 (CCNMatthews via COMTEX) -- (CCN Mathews)
Computer Modelling Group Ltd. ("CMG") is pleased to report that its fiscal year ended March 31, 2004 has been CMG's most successful fiscal year in its history, surpassing all previous record results.
Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") is an extract of CMG's MD&A presented in its 2004 annual report and reflects management's assessment of the financial and operating results of Computer Modelling Group Ltd. ("CMG" or the "Company") as well as its future opportunities and risks, and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended March 31, 2004 and the complete MD&A, inclusive of Business Risk analysis, for the year ended March 31, 2004 contained in CMG's 2004 annual report and the Company's most recent Annual Information Form filed with Canadian regulatory authorities. The reader should be aware that historical results are not necessarily indicative of future performance. Certain statements in the MD&A 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, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results.
Quarterly Performance Table
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Results of Operations
CMG reported revenues of $3.3 million, earnings before income and other taxes of $1.2 million ($0.16 per share), earnings of $0.8 million ($0.10 per share) and cash flow from operations of $0.6 million ($0.08 per share) for the three months ended March 31, 2004. These results compare to revenues of $2.5 million, earnings before income and other taxes of $0.2 million ($0.02 per share), earnings of $0.04 million ($0.01 per share) and cash flow from operations of $0.3 million ($0.04 per share).
CMG's fiscal 2004 year has been the most successful year in its history. The Company reported revenues of $12.3 million for the year ended March 31, 2004, earnings before income and other taxes of $4.0 million ($0.53 per share), and cash flow from operations of $3.5 million ($0.47 per share). These results compared to revenues of $11.2 million, earnings before income and other taxes of $2.0 million ($0.28 per share) and cash flow from operations of $2.4 million ($0.33 per share) for the year ended March 31, 2003.
CMG's earnings for the year ended March 31, 2004 are $2.6 million ($0.35 per share) compared to $2.4 million ($0.33 per share) a year ago. The results for the year ended March 31, 2003 include a net future income tax benefit of $0.5 million from recognizing the tax benefits of its Canadian non-capital losses and depreciable assets as an asset on CMG's balance sheet during its 2003 fiscal year whereas the results for the year ended March 31, 2004 include a charge of $1.3 million in both future and current income tax expense, resulting in a variance between the two years of $1.8 million in income tax expense.
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 $12.3 million for its 2004 fiscal year reflect an increase of $1.1 million, a 10 percent increase, from the $11.2 million recorded in its 2003 fiscal year.
Software Licenses -
CMG generated another record year in its software license sales, with $9.5 million in software license revenues recorded in the year ended March 31, 2004. These revenues reflect an increase of $1.5 million or 19 percent from prior year revenues of $8.0 million.
CMG's annuity/maintenance licensing for the year ended March 31, 2004 was $6.4 million, representing 67 percent of fiscal 2004 total software license revenues. This reflects an increase of 13 percent from the $5.7 million (71 percent of fiscal 2003 total software license revenues) in annuity/maintenance software license revenues generated last year. Software license revenues under perpetual sales for the year ended March 31, 2004 was $3.1 million, up $0.8 million from the $2.3 million recorded in fiscal 2003.
The growth in the Company's software license revenues in fiscal 2004 came from existing and new clients in both types of software license sales. CMG believes that the technological strength of its advanced process recovery simulators, combined with its pre and post processor products is the principal underlying reason for this growth. Other factors influencing the timing of increased usage of CMG's products are the impact of monies spent on additional marketing personnel and product research and development as these are factors in both getting our product in front of customers and in making the sale. Another influencing factor is the increased need by oil and gas companies for advanced process simulation due to the decreasing amount of conventional oil production in certain areas of the world.
Consulting and Contract Research Revenues -
CMG recorded consulting and contract research revenues of $2.9 million for the year ended March 31, 2004, down 15 percent from prior year revenues of $3.4 million. The earnings contribution from this segment was $1.7 million in fiscal 2004, down from the $1.8 million recorded last year. In its fiscal year ended March 31, 2004, CMG reflected a net contribution to earnings of $0.25 million for work undertaken in Venezuela in its 2003 fiscal year that had previously been reserved against in its financial statements.
Lower revenues in fiscal 2004 compared to last year is due to both varying project requests by customers between the two time periods and less work being undertaken in Venezuela in fiscal 2004 as compared to fiscal 2003 due to its difficult economic situation.
Interest and foreign exchange -
The impact of foreign exchange is included in total revenues, be it a gain or loss, as approximately 79 percent (2003 - 80 percent) of revenues are denominated in US dollars and the change in the exchange rate between the US and Canadian dollar primarily impacts the comparison of revenues from one period to the next.
Interest and foreign exchange for the year ended March 31, 2004, reflects negative revenue of $0.03 million compared to negative revenue of $0.1 million a year ago. Included in this amount is a foreign exchange loss of approximately $0.3 million (2003 - $0.3 million) resulting from the weakening of the US dollar against the Canadian dollar. At March 31, 2003 one US dollar was equivalent to $1.471 Canadian and at March 31, 2004 it was equivalent to $1.316 Canadian and the yearly average for the US dollar to the Canadian dollar was $1.554 for fiscal 2003 compared to $1.36 for fiscal 2004. Even with this decrease in the Canadian dollars realized from US dollar denominated sales, CMG was able to show an overall increase in its total revenues of 10 percent.
CMG's gross profit margin for the year ended March 31, 2004 was 70 percent and CMG realized a gross profit of $8.7 million, up $1.8 million from the $6.9 million recorded last year. CMG's total expenses, excluding depreciation and income and other taxes, amounted to $8.0 million for the year ended March 31, 2004, down $0.6 million from the $8.6 million expended a year ago. This was primarily due to lower third-party contract costs in fiscal 2004 compared to fiscal 2003 and recording the benefit of investment tax credits on CMG's product research and development expenditures for the three fiscal years ended March 31, 2004 in the third and fourth quarters of fiscal 2004, offset by higher manpower costs in fiscal 2004.
As a technology service company, CMG's largest area of expenditure is for its people. Approximately 78 percent of CMG's $8.0 million of expenses in the year ended March 31, 2004 on marketing, direct consulting, general and administrative and product research and development costs directly related to manpower. This compares to 73 percent of the $8.1 million spent in fiscal 2003 on manpower. This increase in manpower costs resulted from a combination of manpower additions, general salary increases and increased variable commission and bonus compensation that is dependent on growth in CMG's revenue base and earnings.
CMG plans to continue its investment strategy to produce stronger revenues for the future and intends to add five staff members in the marketing, consulting and product research and development areas in fiscal 2005, and has already staffed three of these positions.
Investment in Research and Development -
During the year ended March 31, 2004, CMG has recorded a gross cash investment of $3.1 million (2003 - $2.7 million) in research and development, all of which is expensed to earnings. CMG has recorded a reduction of $0.5 million (2003 and prior - $ Nil) to its product research and development expenses for investment tax credits on scientific research and experimental development expenditures, representing claims for its 2002, 2003 and 2004 fiscal years. The magnitude of the claim in any one year is dependent on specific research and development projects qualifying for the investment tax credit and the amount of external funding on the qualifying projects from Canadian entities and is ultimately subject to confirmation by the Canada Customs and Revenue Agency. The benefit of the scientific research and experimental development investment tax credits can be utilized by CMG to reduce its Canadian federal income taxes otherwise payable, and the Company anticipates utilizing $0.16 million of these investment tax credits for its fiscal year ended March 31, 2004.
A similar gross investment amount in product research and development expenditures, adjusted for planned increases as indicated above, is expected for the fiscal year ending March 31, 2005.
Depreciation and Amortization -
CMG recorded $0.3 million in depreciation expense, inclusive of the amount of depreciation reflected in product research and development costs, for the year ended March 31, 2004. This is down $0.3 million from the $0.6 million of depreciation and amortization expense for the year ended March 31, 2003. This is due to the completion of the amortization of CMG's deferred sales offices costs at March 31, 2003, which amounted to a charge of $0.4 million last year, offset by additional depreciation charges from fixed asset additions in fiscal 2004.
Income and other taxes -
During the fiscal year ended March 31, 2003, CMG recognized the full benefit of its Canadian non-capital losses and depreciable assets as an income inclusion in its six month results to September 30, 2002. With the full recognition of CMG's Canadian tax asset as at September 30, 2002, CMG's earnings in its third and fourth quarter of fiscal 2003 included a future income tax expense, representing the tax effect of the use of CMG's tax pool to shelter Canadian sourced income. Even with this however, the fiscal 2003 earnings reflected an increase in earnings of $0.5 million for the year for net future income tax benefits.
CMG's 2004 results however have been fully tax affected and reflect $1.3 million in both current and future income tax expenses, an increase in expense of $1.8 million from the net benefit of $0.5 million recorded last year.
At March 31, 2004, CMG's future income tax assets are primarily comprised of the benefit of scientific research and experimental development investment tax credits, net of the inherent tax liability resulting from their utilization to reduce federal income taxes otherwise payable, and a small amount of tax shield on its Canadian fixed assets.
Liquidity and Capital Resources
Operating activities -
CMG generated $3.5 million ($0.47 per share) of cash flow from operations in the year ended March 31, 2004, a 47 percent increase from the $2.4 million ($0.33 per share) generated in the year ended March 31, 2003. This increase in cash flow from operations has primarily resulted from increased revenues in the year ended March 31, 2004.
CMG has been able to utilize its Canadian tax pools that were created in its early years of operation to reduce its income for tax purposes to zero through the third quarter of fiscal 2004. With its 2004 fourth quarter results, CMG's earnings, other than for a small tax shield on its fixed assets, are fully taxable. This will reduce the magnitude of cash flow from operations in periods subsequent to fiscal 2004 due to the incurrence of cash income taxes.
CMG generated $0.4 million from its non-cash working capital balance sheet accounts for the year ended March 31, 2004, which is consistent with normal operations.
Financing activities -
CMG employees and directors exercised options to purchase 489,175 Common Shares, which resulted in $0.4 million in cash proceeds for the year ended March 31, 2004. On November 13, 2002, CMG announced its intention to purchase for cancellation up to 320,000 of its Common Shares in accordance with the normal course issuer bid procedures under Canadian securities law during the 12-month period commencing November 13, 2002. CMG announced a subsequent Normal Course Issuer Bid ("NCIB") as of November 13, 2003, to purchase for cancellation up to 300,000 of its Common Shares during the 12-month period commending November 13, 2003. A total of 69,000 Common Shares were purchased pursuant to the two NCIB's at a cost of $0.2 million and have been cancelled (65,200 pursuant to the November 13, 2002 NCIB and 3,800 pursuant to the November 13, 2003 NCIB).
On February 10, 2004, CMG announced its first dividend of $0.04 Canadian per share on CMG's Common and Non-Voting Shares and paid $0.3 million in cash dividends to its shareholders on March 15, 2004. On May 20, 2004, CMG announced a further cash dividend of $0.04 Canadian per share on CMG's Common and Non-Voting Shares. The dividend will be paid on June 15, 2004 to shareholders of record at the close of business on June 2, 2004.
At March 31, 2004, CMG has recognized an obligation of $4.0 million of deferred revenue for pre-sold revenues relating to fiscal 2005, this is up $0.7 million from March 31, 2003 and is reflective of increased software licensing revenues and the stage of completion of consulting and contract research projects at the balance sheet dates.
Investing activities -
CMG's current needs for capital additions primarily relates to upgrading its desk top computer equipment. During fiscal 2004, CMG expended $0.2 million on fixed asset additions and has a capital budget of $0.6 million for fiscal 2005, all of which will be funded internally from operations.
Overall liquidity and capital resources -
CMG has generated cash flow from operations for nineteen consecutive quarters and at March 31, 2004 CMG's liquidity as measured by working capital is $10.5 million, an increase of $3.5 million from its position a year ago. In addition, at March 31, 2004, CMG has $12.7 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker, of which US $33,000 has been drawn for performance bonds for consulting services projects currently being undertaken.
The business environment in the petroleum industry continues to be strong and stable. This factor, combined with the complexities of production techniques utilized by the petroleum industry and industry's absorption of technology to assist it in managing its reservoirs and evaluating varying risk scenarios to drive their business decisions, support our view that demand for CMG's products and services will continue to grow. Going into 2005, we are very excited about the strength of our products, the abilities of our employee group and the market potential for CMG products.
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1. Significant Accounting Policies:
(a) Basis of Consolidation: These consolidated financial statements include the accounts of the Company and all of its subsidiaries, all 100% owned. All inter-company transactions have been eliminated.
(b) Revenue Recognition: Software license sales are recognized as revenue upon the fulfillment of all significant obligations under the terms of the license agreements. Any software license fees received relating to a future fiscal period are deferred and recognized in the appropriate future period. Both consulting and contract research revenues are recorded on a percentage-of-completion basis whereby revenues and costs are recorded in operations based on work completed.
(c) Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly liquid investments which have maturities of less than three months at the time of purchase. These cash equivalents consist primarily of term deposits and are stated at cost, which approximates market value.
(d) Fixed Assets: Fixed assets 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 fixed assets over their estimated useful lives:
Computer equipment 33 1/3% straight-line Furniture and equipment 20% straight-line Leasehold improvements Straight-line over the lease term
(e) Product Research and Development Costs: All costs of product research and development are expensed to operations as incurred as the impact of both technological changes and competition require the Company to continually enhance its products on an annual basis.
(f) Deferred Charges: Costs associated with the establishment of new international sales offices are deferred, for a period not to exceed two years, until such offices are fully operational. After reaching operational status, the deferred sales office costs are amortized to operations over a period of five years or are written down when it is determined that the costs will not be fully recovered from related future revenues.
(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 year-end while other consolidated balance sheet items are translated at historic rates.
Revenues and expenses are translated at the rate of exchange in effect on the transaction dates. Realized and unrealized foreign exchange gains and losses are included in operations in the year in which they occur.
(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 year 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, 271,534 shares were added to the weighted average number of Common and Non-Voting Shares outstanding during the year ended March 31, 2004 (2003 - 315,680 shares) for the dilutive effect of employee stock options.
(j) Stock-Based Compensation Plan: The Company has a stock-based compensation plan that is described in note 7(d). Commencing in 2004, the fair value of stock options are expensed over the vesting period. For stock options issued prior to 2004, pro forma disclosure of the effect on net earnings and earnings per share had the fair value been expensed is provided. The fair value of stock options that have been expensed is credited to contributed surplus.
(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.
2. Change in Accounting Policies:
Effective April 1, 2003, the Company expensed stock options on a prospective basis. Prospective adoption requires that the fair value of compensation costs related to stock options granted in 2004 be expensed in the financial statements over the vesting period. For stock options granted prior to 2004, the Company will continue to provide pro forma disclosure of the effect on net earnings and earnings per share had the fair value been expensed.
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6. 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:
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(c) 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 the year ended March 31, 2004, the Foundation paid $500,000 in cash to the Company (2003 - the Foundation surrendered 97,714 Non-Voting Shares and paid $375,000 in cash to the Company), which is reflected in consulting and contract research revenues. On April 1, 2004, 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 1,009,619 Non-Voting Shares.
(d) Stock-Based Compensation Plan: The Company has reserved 580,420 Common Shares for issuance to employees and directors pursuant to the Company's stock option plan. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. These outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates. Changes in options in the two years ended March 31, 2004 were as follows:
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The exercise prices of all options outstanding at March 31, 2004 are as follows: 8,000 at $0.54 (expiry August 4, 2005); 3,000 at $0.85 (expiry February 6, 2006); 7,500 at $0.89 (expiry June 11, 2006); 9,750 at $1.45 (expiry May 30, 2007); 350,750 at $1.20 (expiry August 9, 2007); 10,000 at $1.62 (expiry October 31, 2007); 42,000 at $1.99 (expiry August 15, 2008) and 7,000 at $2.25 (expiry October 31, 2008).
As disclosed in note 2, the Company began prospectively expensing the fair value of stock options granted in 2004 over the vesting period. In accordance with the prospective method of adoption, the Company will continue to record no compensation expense for stock options granted prior to April 1, 2003, and will continue to provide pro forma disclosure of the net effect on net earnings per share had fair value been expensed.
The weighted average fair value of each option granted by the Company was determined as at each stock option grant date using the Black-Scholes model with the following assumptions: risk free interest rate - varied from 3.9% to 4.1% (2003 - 4.1 % to 4.9 %), expected life - 5 years, and volatility - varied from 47% to 51% (2003 - 57 % to 60%). The weighted average grant-date fair value of options granted was $0.98 per share (2003 - $0.65 per share). In 2004, the Company recognized a total compensation expense of $20,399 for stock options granted in 2004.
If the fair value method had been used for options issued in 2003, the Company's net earnings and earnings per share would approximate the following pro forma amounts:
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8. Other Information :
(a) Commitments: The Company has lease commitments relating to its office premises. The minimum operating lease rental payments pursuant to these contracts are estimated to be 2005 - $356,000; 2006 - $118,000; 2007 - $103,000 and 2008 - $57,000.
(b) Line of Credit: The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility and/or letters of credit. As at March 31, 2004, US $33,000 had been drawn on this line of credit for performance bonds for consulting services projects currently being undertaken.
(c) Financial Instruments: The carrying values of all monetary assets and liabilities approximate their fair values due to the relatively short period to maturity of the instruments.
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In 2004, the Company derived 12% (2003 - 18%) in revenue from one customer.
Computer Modelling Group Ltd. is a computer software technology and consulting company serving the oil and gas industry. The Company, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, Beijing, London, and Caracas. CMG is the leading supplier of advanced processes reservoir modelling software in the world with a blue chip client base of international oil companies and technology centers in 41 countries.
Computer Modelling Group Ltd. Kenneth M. Dedeluk President and CEO (403) 531-1300 Email: email@example.com or Computer Modelling Group Ltd. Janet M. Taylor Vice President Finance & CFO (403) 531-1300 Email: firstname.lastname@example.org Website: www.cmgl.ca