Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

October 31, 2007 19:43 ET

Phoenix Technology Income Fund: Report on Financial Results for the Three and Nine-Month Periods Ended September 30, 2007

CALGARY, ALBERTA--(Marketwire - Oct. 31, 2007) - Phoenix Technology Income Fund (TSX:PHX.UN) is pleased to report on its financial and operating results for the three and nine-month period ended September 30, 2007. Due to the continued growth experienced by Phoenix in the US drilling market and its continued presence with oil well drilling in southern Saskatchewan, the Fund generated a record level of revenue and distributable cash for any given quarter in its twelve-year history. For the three-month period ended September 30, 2007 revenue increased by 12 percent to $33.6 million compared to $30.1 million in the corresponding 2006 period. Distributable cash, or cash flow from operating activities before net changes in non-cash working capital, for the three-month period ended September 30, 2007 was $9.2 million. Cash distributions made in each of the 2007 and 2006 three-month periods were $4.3 million, or $0.195 per unit, resulting in a cash payout ratio for both three-month periods of 47 percent.

The current quarter results include a large bad debt provision that was required in the amount of $1.1 million. This equates to an earnings per unit amount of $0.03 on a dilutive basis.



FINANCIAL HIGHLIGHTS

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Three Months Ended Sept. 30 Six Months Ended Sept. 30
(Stated in
thousands of
dollars except
per unit amounts % %
and percentages) 2007 2006 Chg. 2007 2006 Chg.
----------------------------------------------------------------------------
Operating (unaudited) (unaudited) (unaudited) (unaudited)
Results
Revenue 33,560 30,087 12 84,529 70,464 20
Net earnings 6,129 6,978 (12) 12,932 14,365 (10)
Per unit -
diluted 0.26 0.31 (16) 0.56 0.64 (13)
EBITDA (1) 8,428 9,872 (15) 19,253 21,341 (10)
Per unit
diluted (1) 0.36 0.44 (18) 0.83 0.96 (14)
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Cash flow from
operating
activities 2,637 3,799 (31) 16,495 17,144 (4)
Distributable
cash (1) 9,228 9,217 - 21,517 20,507 5
Per unit -
diluted (1) 0.40 0.41 (2) 0.93 0.92 1
Cash
distributions
made 4,367 4,340 1 13,062 11,983 9
Cash
distributions
per unit (2) 0.195 0.195 - 0.585 0.540 8
Cash payout
ratio (1) 47% 47% 61% 58%
Capital
expenditures 5,832 3,041 92 11,161 10,527 6
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Sept. 30, Dec. 31,
2007 2006
Financial Position (unaudited)
Working capital 15,743 19,611 (20)
Long-term debt (3) 1,775 1,775 -
Unitholders' equity 58,507 58,908 (1)
Fund units outstanding 22,409,709 22,274,773 1
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(1) Refer to Non-GAAP measures section.

(2) Cash distributions on a per unit basis paid in the period.

(3) Includes current portion of long-term debt.



RESULTS OF OPERATIONS

Due to the continued growth experienced by Phoenix in the US drilling market and its continued presence with oil well drilling in southern Saskatchewan, the Fund generated a record level of quarterly revenue of $33.6 million for the three-month period ended September 30, 2007, which was a 12 percent increase from $30.1 million in 2006. The US operations for the three-month period ended September 30, 2007 now comprise 49 percent of the Fund's consolidated revenue, an increase of ten percentage points from 2006. Phoenix's consolidated revenue increased by 20 percent to $84.5 million for the nine-month period ended September 30, 2007 compared to $70.5 million for the corresponding 2006 period. Guidance equipment utilization, on a consolidated basis, was 33 percent for the nine-month period ended September 30, 2007, based on an average of 84 guidance systems, compared to 35 percent for the 2006 period based on an average of 73 guidance systems.

For the three-month period ended September 30, 2007 cash flow from operating activities decreased by 31 percent to $2.6 million from $3.8 million in the 2006 period. Cash flow from operating activities for the nine-month period ended September 30, 2007 of $16.5 million represented a 4 percent decrease from $17.1 million in the 2006 period. Distributable cash, or cash flow from operating activities before net changes in non-cash working capital, for the three-month period ended September 30, 2007 was at a record of $9.228 million compared to $9.217 million in the 2006 period. For the nine-month period ended September 30, 2007 distributable cash increased by 5 percent to $21.5 million from $20.5 million in the 2006 period.

Distributions to unitholders in each of the three-month periods ended 2006 and 2007 were approximately $4.3 million or $0.195 per unit. The resulting cash payout ratios were 47 percent in both three-month periods. For the nine-month period ended September 30, 2007 distributions to unitholders were $13.1 million or $0.585 per unit as compared to $12.0 million or $0.54 per unit in the 2006 period. The cash payout ratio in the 2007 nine-month period was 61 percent as compared to 58 percent in the 2006 period. The Fund reviews its distribution levels on a quarterly basis and sets its rates taking into consideration its financial performance, forecasted activity levels and the industry outlook. Currently the Fund targets its annualized payout ratio at 65 percent of its distributable cash, in order to provide for sufficient funding towards capital expenditures.

The Fund's levels of net earnings and EBITDA of $6.1 million and $8.4 million, respectively, for the three-month period ended September 30, 2007 were both impacted by higher direct, and selling general and administrative costs and a bad debt provision of $1.1 million. The bad debt provision equates to an earnings per unit amount of $0.03 on a dilutive basis. If the bad debt provision were excluded, the 2007 period's EBITDA as a percentage of revenue would have been 28 percent. EBITDA and net earnings for the corresponding 2006 period were respectively $9.9 million and $7.0 million.

EBITDA for the nine-month period ended September 30, 2007 was $19.3 million or $0.83 per unit diluted, compared to $21.3 million or $0.96 per unit diluted in the 2006 period, a decrease of 10 percent. Net earnings for the nine-month period ended September 30, 2007 decreased by 10 percent to $12.9 million or $0.56 per unit diluted, compared to $14.4 million or $0.64 per unit diluted in the 2006 period.

Phoenix currently has a measurement-while-drilling ("MWD") guidance system fleet of 89 systems. During the third quarter of 2007, two pulse MWD systems were added and one was lost in a well bore and not replaced. Currently, the Fund's MWD fleet consists of 45 CLT electro-magnetic ("EM")-MWD systems and 44 pulse systems. The US operations currently deploy 39 MWD systems, with the remaining 50 systems in Canada. Phoenix plans to add one pulse MWD system and five CLT EM-MWD systems to its fleet early in the fourth quarter of 2007, leaving the Fund with 95 MWD systems by the end of the year. In the previous quarter the fund announced that it would be manufacturing an additional 10 CLT EM-MWD systems for the balance of 2007 but due to current market activity in Canada this has been reduced to five.

Revenue

The Fund reports its operations through two geographical areas: the western Canadian provinces of Alberta, Saskatchewan and British Columbia; and the Gulf Coast, Northeast and Rocky Mountain regions of the United States.

Western Canadian Revenue

The low level of natural gas prices and perceived short-term weaknesses on such future prices resulted in many natural gas exploration and production companies curtailing their capital programs and natural gas drilling activity due to poor drilling economics or difficulties encountered in obtaining project financing. As a result, industry horizontal and directional drilling activity in western Canada was three percent lower for the three-month period ended September 30, 2007 compared to the 2006 period, according to the Daily Oil Bulletin statistics of horizontal and directional wells drilled. For the 2007 period 2,014 horizontal and directional wells were drilled compared to 2,084 in 2006. In this 2007 period, the horizontal wells drilled, which are predominantly oil wells, increased by 27 percent to 740 wells while the directional wells drilled, which are predominantly natural gas wells, declined by 15 percent to 1,274 wells.

Phoenix's continued presence in the oil well drilling market and its increased drilling activity in shallow gas wells has helped the Fund surpass the overall industry trend. Approximately 43 percent of Phoenix's total third quarter Canadian activity was represented by oil well drilling activity that was predominantly in southern Saskatchewan. Aided by the successful deployment of the Fund's Remote Access Directional Drilling ("RADD") system Phoenix's drilling days in shallow gas wells increased by approximately 20 percent in the third quarter of 2007 compared to 2006. Phoenix's drilling days in western Canada for the three-month period ended September 30, 2007 declined by only one percent to 1,779 days as compared to 1,803 days in the corresponding 2006 period. Phoenix's revenue for the third quarter ended September 30, 2007 decreased by seven percent to $17.0 million from $18.2 million in 2006. Competitive pressures have caused the Fund's Canadian day rates to decline by six percent when comparing the third quarter of 2007 to that of 2006.

Western Canadian revenue for the nine-month period ended September 30, 2007 was $44.0 million compared to $43.3 million for the comparable 2006 period, an increase of 2 percent. The number of horizontal and directional wells drilled in the western Canadian industry during the nine-month period ended September 30, 2007 decreased by six percent to 5,011 wells compared to 5,313 in the 2006 period. (Source: Daily Oil Bulletin) The drilling of oil wells represented approximately 45 percent of the Fund's western Canadian activity in the 2007 nine-month period, based on drilling days.

United States Revenue

Due to a strong horizontal and directional drilling market in the US, and its continued marketing initiatives Nevis Energy Services Inc. ("Nevis"), the Fund's wholly owned subsidiary, increased its revenue in the 2007 three-month period by 40 percent to a record $16.6 million compared to $11.9 million in the 2006 period. All three of Nevis' operating regions, namely the Gulf Coast, Northeast and Rocky Mountain areas, posted revenue gains over 2006 but the growth from the Northeast operations was particularly strong. The Fund continues to be an active service provider in the Barnett Shale region in Texas, but it is has also been successful in diversifying its operations into other areas in the Gulf Coast region. The activity within the Northeast region in the quarter included a substantial amount of Coal Bed Methane ("CBM") drilling services in West Virginia and shale gas drilling in Kentucky and West Virginia. With respect to the CBM drilling services, de-gasification of the wells occurs so that the coal can be mined. These drilling applications are not sensitive to natural gas prices as the harvesting of the gas is secondary to the mining of the coal.

US operating days increased by approximately 33 percent to 1,338 days in the third quarter of 2007 and day rate pricing to customers has remained constant. Due to the strong market, Nevis has increased its day rates by approximately ten percent since the beginning of 2007. It is expected that the US operations will continue to contribute a healthy percentage of the Fund's overall activity for the balance of 2007.

In comparison to Nevis' growth, the US industry activity level, as measured by the average number of horizontal and directional rigs running on a daily basis, increased by 15 percent in the third quarter of 2007 to 803 rigs compared to 697 rigs in the comparable 2006 period. (Source: Baker Hughes) With respect to drilling days, Nevis' activity in the third quarter of 2007 was 12 percent higher than that of the second quarter.

US revenue for the nine-month period ended September 30, 2007 increased by 49 percent to $40.5 million from $27.2 million in the comparable 2006 period. The average number of horizontal and directional rigs running on a daily basis, increased by 16 percent in the nine-month period ended September 30, 2007 to 762 rigs compared to 657 rigs in the comparable 2006 period. (Source: Baker Hughes)

Operating Costs and Expenses

Direct costs are comprised of field and shop expenses and include current period research and development expenditures. Gross profit as a percentage of revenue declined in the 2007 three-month period to 40 percent compared to 41 percent in the corresponding 2006 period. This change was partially due to the decline in the overall Canadian day rates realized by the Fund in the 2007 period as compared to 2006.

The Fund currently has motor repair facilities in Calgary, Alberta and Traverse City, Michigan, and is looking at setting up a further service facility in Houston, Texas later in the fourth quarter. Although the Fund is realizing repair savings in 2007 in comparison to 2006, it is still incurring expensive third party repairs. Approximately 77 percent of the Canadian motor fleet was serviced through the Calgary facility in the three-month period ended September 30, 2007. The levels of cost savings that were expected in 2007 from internally servicing motors have not been as significant as originally expected due to the fact that, in the current competitive environment, the mud motor servicing costs have not been passed on to customers to the same extent that was done in 2006.

Gross profit as a percentage of revenue was 37 percent for the nine-month period ended September 30, 2007 compared to 39 percent in the 2006 period. This decline in the gross profit margin in the 2007 period was due primarily to higher labour and third party motor servicing costs and the declining Canadian customer day rates.

Also included in direct costs are research and development costs of $309,000 for the three-month period ended September 30, 2007 compared to $234,000 in 2006. For the nine-month period ended September 30, 2007 research and development costs were $1.0 million versus $0.6 million in the 2006 period.

SG&A costs for the three-month period ended September 30, 2007 increased by approximately $0.9 million or 38 percent to $3.3 million compared to $2.4 million in the 2006 period due primarily to initiatives that were undertaken earlier in the 2007-year to increase US marketing staff levels and other marketing related initiatives to obtain further growth in the country.

A provision for bad debts in the amount of $1.1 million for the three-month period ended September 30, 2007 was made primarily for a large receivable of a US customer who had sought Chapter 11 Bankruptcy protection late in the 2006 year. Due to the recent proceedings and current status of the bankruptcy it was determined that the original bad debt provision taken in 2006 will be insufficient.

SG&A costs for the nine-month period ended September 30, 2007 increased by 51 percent to $9.4 million compared to $6.2 million in the 2006 period due to increased marketing and administrative personnel costs incurred to support the strong growth in the US, and increased marketing personnel costs in Canada to generate increases in future activity.

As a result of Phoenix's continued capital expenditures incurred in 2007, depreciation and amortization for the three-month period ended September 30, 2007 increased by 14 percent to $1.8 million from $1.6 million in the 2006 period, and depreciation and amortization for the nine-month period ended September 30, 2007 increased to $5.3 million, up by 17 percent from $4.5 million in the 2006 period.

Stock-based compensation costs increased by 27 percent for the three-month period ended September 30, 2007 to $343,000 from $270,000 in 2006 due primarily to a re-pricing of previously issued unit options to employees at the end of 2006. For the nine-month period ended September 30, 2007 stock-based compensation costs increased by 32 percent to $1.0 million from $0.8 million in the 2006 period.

Foreign exchange losses are shown net of any gains and result primarily from the translation of US and Canadian denominated trade receivables and payable balances, and movements in US and Canadian dollar exchange rates. The increase in the foreign exchange loss to $267,000 for the three-month period ended September 30, 2007 from $34,000 in 2006 related primarily to the strengthening Canadian dollar and the loss on translation on the Canadian denominated inter-company loan between Phoenix and its US subsidiary. For the nine-month period ended September 30, 2007 there were net foreign exchanges losses of $473,000 compared to $198,000 in 2006.

Interest on long-term debt decreased to $30,000 in the three-month period ended September 30, 2007 as compared to $35,000 in the 2006 period due to lower debt levels carried in 2007 relative to 2006. No new debt was issued in the 2007 period.

The Fund realized a net gain on disposal of drilling equipment of $181,000 for the three-month period ended September 30, 2007 compared to $386,000 in 2006. The disposals relate primarily to equipment lost in well bores and are uncontrollable in nature. The gain or loss is reported net of any asset retirements that are made before the end of their useful lives and self-insured downhole equipment losses, if any.

Income Taxes

The Fund reported income tax provision of $435,000 for the three-month period ended September 30, 2007. The effective income tax rate was seven percent compared to an expected federal and provincial rate of 32 percent. The difference in the two rates was primarily due to the deductibility of declared cash distributions that are allowable in calculating taxable income of the Fund, and a reduction in the Fund's expected tax rate for the year. As an investment trust, the Fund is subject to income taxes under the Income Tax Act only on income not distributed to its unitholders.

INVESTMENTS

The Fund invested $5.8 million in drilling and other equipment in the third quarter of 2007 as compared to $3.0 million in the 2006 quarter. A large portion of the increase related to expenditures required for a customer's project in the Northeast US and the acquisition of components for five CLT EM-MWD systems. In addition, expenditures were incurred for the upgrading of the Fund's downhole motor fleet with industry leading technology.

As at September 30, 2007 the Fund had working capital of $15.7 million, which was approximately $3.9 million lower than that, reported at December 31, 2006. This decrease was due to the requirements to finance levels of capital expenditures and cash distributions during the nine-month 2007 period.

OUTLOOK

The many challenges that the industry and Phoenix faced in the second quarter of 2007 have remained, and in fact some have intensified, and additional challenges have come to light. Low natural gas prices caused further declines in Canadian rig counts and wells drilled in comparison to prior periods. Even with these negative industry factors present, the Fund is building on many positive attributes in Canada and the United States, and management is pleased that Phoenix was able to produce record levels of revenue and cash flow (distributable cash) for any quarter in its twelve-year history.

Phoenix's positive attributes include the diversification that has been built since 2000 with the Funds extensive United States operations, the Canadian exposure to horizontal oil well drilling in Saskatchewan where a large share of Canadian revenue is earned, and the strength in the Alberta shallow gas directional well drilling market. The Fund looks forward to further increases in each of these operational areas, which to date, have been growth areas for Phoenix during times of declining industry drilling activity.

Management's research and development focus has been towards the new Remote Access Directional Drilling ("RADD") system that utilizes satellite-drilling technology. The success that has been achieved in commercial applications has enabled Phoenix to expand its drilling capacity into this area. At this time an expansion is underway and soon this division will relocate into a new larger dedicated control facility that will allow up to 16 wells to be drilled concurrently, with fewer or no Phoenix personnel present at the well site. Although all the past wells have been associated with shallow gas drilling in Canada, Phoenix expects that it will deploy the technology into deeper wells in the near future and expand into its diverse operating regions in the US.

The Fund's capital expenditures have increased to allow for further growth and for the upgrading of its downhole motor fleet with industry leading technology. Phoenix will continue to invest in order to provide its clients with further opportunities to attain their performance goals.

The Fund's Alberta clients that are serviced through its Calgary based operating facility have recently been exposed to further challenges with the newly announced New Royalty Framework that the Alberta Provincial Government has proposed for enactment. The increases in royalties that would result from these proposals would most likely have a negative effect on the industry as a whole, including the horizontal and directional service sector. At this time, it is difficult to give clear guidance on the possible adverse impact on the Fund's drilling operations in Alberta. In spite of this, a portion of Phoenix's current Alberta activity is in freehold land areas where the Fund expects E&P operators to increase or re-align their capital spending.

Phoenix will strive to provide its shareholders with consistent distributions from cash flow while still maintaining one of the strongest balance sheets in the oil and gas services industry.

Non-GAAP Measures

1) EBITDA

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is not a financial measure that is recognized under Canadian GAAP. However, management believes that EBITDA provides supplemental information to net earnings that is useful in evaluating the Fund's operations before considering how it was financed or taxed in various countries. Investors should be cautioned, however, that EBITDA should not be construed as an alternative measure to net earnings determined in accordance with GAAP. Phoenix's method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.



The following is a reconciliation of net earnings to EBITDA:

Three month period ended Nine month period ended
(Stated in thousands September 30, September 30,
of dollars) 2007 2006 2007 2006
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Net earnings 6,129 6,978 12,932 14,365
Add:
Depreciation and amortization 1,821 1,596 5,289 4,529
Interest on long-term debt 30 35 79 110
Provision for income taxes 435 1,270 959 2,420
Other interest 13 (7) (6) (83)
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EBITDA as reported 8,428 9,872 19,253 21,341
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Diluted EBITDA per unit is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of EBITDA on a diluted basis does not include anti-dilutive options.

2) DISTRIBUTABLE CASH

Distributable cash is defined as cash flow generated from operating activities before net changes in non-cash working capital and is not a measure recognized under Canadian GAAP. However, management believes that distributable cash provides supplemental information to cash flow from operating activities that is useful in evaluating the Fund's operating cash flow before considering changes in working capital balances. Management uses this measure to calculate its cash payout ratio to show what percentage of its distributable cash is paid out to its unitholders. Investors should be cautioned, however, that distributable cash should not be construed as an alternative measure to cash flow from operating activities determined in accordance with GAAP. Phoenix's method of calculating distributable cash may differ from that of other organizations and, accordingly, its distributable cash may not be comparable to that of other companies.

The Fund considers its maintenance capital expenditures to be minimal. Maintenance capital would only be relevant to the Fund's retirement of tubular equipment that is subsequently replaced. Typically, lost-in-hole equipment is replaced but these losses are typically funded by the proceeds from insurance or customers. In addition, due to the nature of the industry, the Fund's drilling equipment is frequently re-conditioned to an as new state with the associated costs expensed and included in the Fund's direct costs. Consequently, the Fund will not make an adjustment to distributable cash for capital maintenance expenditures. The Fund's assumptions used with respect to maintenance capital are believed to be reasonable at the time of preparation; however, no assurance can be given that these assumptions will prove to be correct and, consequently, the Fund's distributable cash could differ materially in the future.



The following is a reconciliation of cash flow provided from operating
activities to distributable cash:

Three month period ended Nine month period ended
(Stated in thousands September 30, September 30,
of dollars) 2007 2006 2007 2006
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Cash flows from operating
activities 2,637 3,799 16,495 17,144
Changes in non-cash
working capital 6,591 5,418 5,022 3,363
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Distributable cash 9,228 9,217 21,517 20,507
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Diluted distributable cash per unit is calculated using the treasury stock method whereby deemed proceeds on the exercise of the unit options are used to reacquire fund units at an average unit price. The calculation of distributable cash per unit on a dilutive basis does not include anti-dilutive options.

3) CASH PAYOUT RATIO

The cash payout ratio is defined as cash distributions made by the Fund in the period divided by its distributable cash for the same period. The cash payout ratio is not a measure recognized under Canadian GAAP. However, management believes the cash payout ratio provides supplemental information that is useful in evaluating the level of cash distributions in relation to the Fund's distributable cash. Investors should be cautioned, however, that the cash payout ratio should not be construed as an alternative measure to other GAAP measures. Phoenix's method of calculating its cash payout ratio may differ from other organizations, and accordingly the cash payout ratio may not be comparable to other companies.


Forward-Looking Statements

Certain information set forth in this MD&A, including a discussion of future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements include statements relating to Phoenix's plans, strategies, objectives, expectations, intentions, resources and business activities, which are not guarantees as to future results since there are inherent difficulties in predicting these future results. The use of any of the words: "anticipate", "expect", "project", "may", "will", "should", "believe", "estimate", "forecast", "intends" and similar expressions identify forward-looking statements. Such statements are subject to known and unknown risks and uncertainties, many of which are beyond the Fund's control. These would include the impact of the general state of the economy, oil and natural gas energy price fluctuations, industry conditions, competition from other organizations, weather conditions and the seasonal nature of business, access to third-party suppliers and contractors, changes in government regulation, access to competent employees including senior management, and currency and interest rate fluctuations. In particular, if there is a material downturn in activity levels in the oil and natural gas industry, there may also be a sudden impact to the Fund's level of distributable cash and cash distributions. The Fund's assumptions used in these forward-looking statements are believed to be reasonable at the time of preparation; however, no assurance can be given that these assumptions will prove to be correct and consequently, the Fund's actual results could differ materially from those implied by or contained in any forward-looking statement. As a result, readers should be cautioned about placing any undue reliance on any forward-looking statement included in this report.

Phoenix is in the business of providing horizontal and directional technology and drilling services in western Canada and the US. In addition to this core business, the Fund also rents down-hole, high-performance drilling motors, drilling jars, and other ancillary equipment in western Canada. Current Loop Telemetry ("CLT") technology, which was developed in Phoenix's research and development centre, is used to manufacture CLT guidance systems for use in the Fund's internal operations, and for short-term leases to other horizontal and directional service providers within North America. Phoenix maintains full sales, service and operational centers in Calgary, Alberta; Houston, Texas; Casper, Wyoming and Traverse City, Michigan and sales offices in Oklahoma City, Oklahoma and Denver, Colorado. The Fund's head office and its research and development centre are located in Calgary.



Consolidated Balance Sheets
September 30, 2007 December 31, 2006
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ASSETS (unaudited)

Current assets
Cash and cash equivalents $ - $ 1,763,191
Accounts receivable 31,785,833 30,355,422
Inventory 2,099,398 1,189,254
Prepaid expenses 883,625 1,075,697
Income tax receivable 14,900 -
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34,783,756 34,383,564

Drilling and other equipment 38,537,291 35,208,134
Goodwill 8,876,351 8,876,351
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$ 82,197,398 $ 78,468,049
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LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities
Bank Indebtedness 2,369,860 -
Accounts payable and accrued
liabilities 15,001,664 12,130,147
Distributions payable 1,455,982 1,447,861
Current portion of long-term debt 213,000 -
Income taxes payable - 1,195,000
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19,040,506 14,773,008

Long-term debt 1,562,000 1,775,000
Future income taxes 3,088,000 3,012,000
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23,690,506 19,560,008

Unitholders' equity
Unitholders' capital 44,350,415 43,509,547
Contributed surplus 3,045,830 2,042,311
Comprehensive income
Accumulated other comprehensive
income (3,723,685) (1,615,893)
Retained earnings 14,834,332 14,972,076
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11,110,647 13,356,183
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58,506,892 58,908,041

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$ 82,197,398 $ 78,468,049
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See accompanying notes to unaudited financial statements.


Consolidated Statements of Earnings

Three month period ended Nine month period ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue $33,560,234 $30,087,375 $84,529,358 $70,464,396
Direct costs 20,294,158 17,856,277 $53,383,219 $42,648,670
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Gross profit 13,266,076 12,231,098 31,146,139 27,815,726
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Expenses
Selling, general and
administrative 3,322,967 2,440,326 9,382,440 6,199,109
Provision for (recovery
of) bad debt 1,086,287 539 1,086,287 (149,771)
Depreciation and
amortization 1,820,799 1,596,068 5,289,241 4,529,305
Stock-based compensation 343,320 270,360 1,027,511 780,418
Foreign exchange loss 266,559 33,955 473,456 198,373
Interest on long-term debt 30,075 34,555 79,117 109,886
Other interest 12,880 (6,514) (5,868) (83,326)
Gain on disposition of
drilling equipment (181,258) (386,524) (77,237) (553,489)
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6,701,629 3,982,765 17,254,947 11,030,505

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Earnings before income
taxes 6,564,447 8,248,333 13,891,192 16,785,221
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Provision for (recovery
of) income taxes
Current 708,660 539,000 253,000 1,121,000
Future (273,660) 731,000 706,000 1,299,000
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435,000 1,270,000 959,000 2,420,000
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Net earnings $ 6,129,447 6,978,333 $12,932,192 $14,365,221
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Earnings per unit
- basic $ 0.27 $ 0.31 $ 0.58 $ 0.65
Earnings per unit
- diluted $ 0.26 $ 0.31 $ 0.56 $ 0.64
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See accompanying notes to unaudited financial statements.


Consolidated Statements of Comprehensive Income

Three month period ended Nine month period ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Net earnings 6,129,447 6,978,333 $12,932,192 $14,365,221
Foreign currency adjustment (920,076) 58,916 (2,107,792) (258,284)

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Comprehensive income $ 5,209,371 $ 7,037,249 $10,824,400 $14,106,937
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See accompanying notes to unaudited financial statements.


Consolidated Statements of Unitholders Equity

Unit capital
Nine month period ended ---------------------------- Contributed
September 30, 2007 Number Amount ($) surplus
----------------------------------------------------------------------------

Balance, December 31, 2006 22,274,773 $43,509,547 $ 2,042,311

Issuance of unit capital 134,936 840,868 -

Stock-based compensation - - 1,003,519

Net earnings - - -

Foreign currency adjustment - - -

Distributions to unitholders - - -

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Balance, September 30, 2007 22,409,709 $44,350,415 $ 3,045,830
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Accumulated
other
Nine month period ended comprehensive Retained
September 30, 2007 income earnings Total
----------------------------------------------------------------------------

Balance, December 31, 2006 $(1,615,893) $14,972,076 $58,908,041

Issuance of unit capital - - 840,868

Stock-based compensation - - 1,003,519

Net earnings - 12,932,192 12,932,192

Foreign currency adjustment (2,107,792) - (2,107,792)

Distributions to unitholders - (13,069,936) (13,069,936)

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Balance, September 30, 2007 $(3,723,685) $14,834,332 $58,506,892
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Unit capital
Nine month period ended ---------------------------- Contributed
September 30, 2006 Number Amount ($) surplus
----------------------------------------------------------------------------

Balance, December 31, 2005 22,120,564 $43,377,923 $ 1,071,465

Issuance of unit capital 149,377 556,289 -

Stock-based compensation - - 685,854

Net earnings - - -

Foreign currency adjustment - - -

Distributions to unitholders - - -

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Balance, September 30, 2006 22,269,941 $43,934,212 $ 1,757,319
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Accumulated
other
Nine month period ended comprehensive Retained
September 30, 2006 income earnings Total
----------------------------------------------------------------------------

Balance, December 31, 2005 $(1,863,172) $11,001,798 $53,588,014

Issuance of unit capital - - 556,289

Stock-based compensation - - 685,854

Net earnings - 14,365,221 14,365,221

Foreign currency adjustment (258,284) - (258,284)

Distributions to unitholders - (12,324,412) (12,324,412)

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Balance, September 30, 2006 $(2,121,456) $13,042,607 $56,612,682
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See accompanying notes to unaudited financial statements.


Consolidated Statements of Cash Flows

Three month period ended Nine month period ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flows from operating
activities:
Net earnings $ 6,129,447 $ 6,978,333 $12,932,192 $14,365,221
Add (deduct) items not
affecting cash: -
Depreciation and
amortization 1,820,799 1,596,068 5,289,241 4,529,305
Future income taxes (273,660) 731,000 706,000 1,299,000
Unrealized foreign
exchange loss 302,724 27,577 553,200 235,820
Gain on disposition of
drilling equipment (181,258) (386,524) (77,237) (553,489)
Stock-based compensation 343,320 270,360 1,027,511 780,418
Provision for (recovery
of) bad debt 1,086,287 539 1,086,287 (149,771)
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9,227,659 9,217,353 21,517,194 20,506,504
Change in non-cash
working capital (6,590,554) (5,418,399) (5,022,504) (3,362,529)
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2,637,105 3,798,954 16,494,690 17,143,975
----------------------------------------------------------------------------

Cash flows from investing
activities:
Proceeds on disposition
of drilling equipment 699,675 887,095 1,301,674 1,630,843
Acquisition of drilling
and other equipment (5,832,400) (3,041,447) (11,161,046)(10,527,256)
Change in non-cash
working capital 1,619,834 (1,502,841) 1,476,572 (581,502)
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(3,512,891) (3,657,193) (8,382,800) (9,477,915)
----------------------------------------------------------------------------

Cash flows from financing
activities:
Issuance of units 144,502 66,786 816,879 461,723
Distributions to
unitholders' (4,367,260) (4,339,672) (13,061,820)(11,982,893)
Repayment of long-term
debt - (375,000) - (1,125,000)
----------------------------------------------------------------------------
(4,222,758) (4,647,886) (12,244,941)(12,646,170)
----------------------------------------------------------------------------

Decrease in cash and cash
equivalents (5,098,544) (4,506,125) (4,133,051) (4,980,110)
Cash and cash equivalents,
beginning of period 2,728,684 3,490,965 1,763,191 3,964,950
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Bank indebtedness, end of
period $(2,369,860) $(1,015,160) $(2,369,860)$(1,015,160)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to unaudited financial statements.


Contact Information

  • Phoenix Technology Services Inc.
    John Hooks
    President and CEO
    (403) 543-4466
    or
    Phoenix Technology Services Inc.
    Cameron Ritchie
    Senior Vice President Finance and CFO
    (403) 543-4466
    or
    Phoenix Technology Services Inc.
    Suite 630, 435 4th Avenue SW
    Calgary, Alberta T2P 3A8
    (403) 543-4466
    (403) 543-6025 (FAX)
    Website: www.phoenixcan.com