Destiny Resource Services Corp.

Destiny Resource Services Corp.

August 10, 2006 16:00 ET

Destiny Resource Services Corp. Announces Q2'06 Results; $0.24 per Share Dividend Declaration; Management Changes and Best Safety Performer Awards

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - Destiny Resource Services Corp. (TSX:DSC) -

"This report is a touch more challenging to write than the purely glowing ones of the past several quarters" said Bruce Libin, Executive Chairman and Chief Executive Officer. "Q2'06 saw a blip in the steady rise in profit parameters we have been experiencing. Part of the problem is we are comparing ourselves to the exceptional second quarter of 2005 (described in our August 2005 report to shareholders as one where "the stars seemed to line up for us in the quarter"). Part of the problem is this year the stars didn't fully align as we encountered some delays, generally regulatory, in programs getting fully underway in the most timely manner."


Three Months Ended Six Months Ended
June 30, June 30,
($000s, except per 2006 2005 Change 2006 2005 Change
share amounts) $ $ % $ $ %
Revenue 16,934 14,793 +14 43,133 31,397 +37
Net income for the period 504 1,979 -75 3,817 4,069 -6
Per share - basic and
diluted 0.09 0.36 -75 0.68 0.74 -8
EBITDA (1) 1,611 1,971 -18 7,185 5,001 +44
Per share - basic 0.29 0.36 -19 1.29 0.91 +42
Per share - diluted 0.29 0.35 -17 1.28 0.90 +42
Weighted average shares
outstanding for the
Basic (2) 5,575 5,548 +0.5 5,575 5,522 +1
Diluted (2) 5,596 5,571 +0.4 5,595 5,526 +1

June 30, Dec. 31,
2006 2005 Change
As at $ $ %
Working capital 3,230 601 +438
Total assets 28,890 21,744 +33
Shareholders' equity 12,928 11,787 +10
Book value per share outstanding 2.32 2.13 +9

(1) EBITDA is provided to assist investors in determining the ability of
Destiny to generate cash from operations. EBITDA is calculated from
the consolidated statement of income as gross margin less general
and administrative expenses (not including gain on disposal of
property and equipment). This measures do not have any standardized
meaning prescribed by GAAP and may not be comparable to similar
measures presented by other companies; however, Destiny is
consistent in its calculation of EBITDA for each reporting period.

(2) There are 5,575,081 shares and 53,000 (50,000 are in-the-money)
options outstanding as at August 10, 2006.


The Board of Directors declared a dividend of $0.24 per share on each of the 5,575,081 shares outstanding. The dividend will be paid September 15, 2006 to shareholders of record September 10, 2006.

This dividend, consistent with the increase to $0.24 in Q1'06, is the seventh consecutive quarterly dividend since the adoption of a dividend policy in late 2004. It is the intent of Destiny to pay a dividend each quarter. The Board of Directors will determine the dividend, if any, each quarter in light of operating and financial factors, results to date and our outlook for the balance of the year. At present, our outlook for 2006 is positive. We are subject to the risks and uncertainties attendant with businesses like ours, including commodity prices and weather. As such, no assurance can be given of the Company's ability to sustain the dividend at this or any level.


As a part of our continuing attempt to best anticipate and respond to the changing environment and the requirements of our clients, our Board of Directors has appointed Jim Holt as Chief Operating Officer of Destiny. Jim has 30 years experience in Front-End Seismic Services, 20 with Destiny, including the last 4 as Vice-President, Drilling of Destiny. Jim will continue to have direct responsibility for our Double R Drilling division and will now also be the primary direct report for the senior management of our other operating divisions. Jim McLellan, Advanced Technology Manager, will continue to report to the CEO in his undertaking to develop and commercialize the products of our Kodiak Nav Solutions division. Ed Kapala has joined Destiny as Safety Manager and Tom Stewart has accepted the position of Information Technology Manager. Steve Matthews, Vice-President of Kodiak, will be leaving Destiny in mid-August to pursue other business ventures, for which we wish him well.


Destiny's Canadian survey division, Wolf Survey & Mapping, and our line clearing division, Destiny Resources, have each been selected for the Work Safe Alberta 2005 Best Safety Performer Awards "for exceptional performance in workplace health and safety". For Wolf Survey & Mapping, this is the third consecutive year of being so honoured. A special thank you and congratulations to the men and women in these businesses, being recognized in the top one-quarter of 1 % of all businesses in Alberta.

Mr. Libin continued with the balance of the Letter to Shareholders from the Q2'06 Report:

"As you will see from our numbers, revenue was up, our gross margin percentage was down and our overall cost of doing business was up, all in comparing Q2'06 to Q2'05. The margin issues relate as much to the delays and comparison to the unique Q2'05 and are not, in our view, cause for concern. The cost increases reflect the reality of what is happening in our market place, the increased amortization of the capital expenditures we have made to accommodate the increased volumes and a full accruing for our profit sharing plan. We have taken pride in the last few years in our ability to control costs, and I can report to you we still do - even though things just cost more these days.

"Our six month numbers are, from any historical perspective, strong. Our activity continues at a high level and we are confident of the expected quality of the year overall.

"Some investors in Destiny have asked if the decline in the first half of the year in the prices for natural gas, and the apparent consequent reduction in drilling of some natural gas wells, has negatively affected Destiny. In response, we have said that since our work is almost entirely exploration driven (or oil sands related) there is little impact from short term gas prices. My sense is our clients are looking at the forward strip for the next few years and make their investment decisions on that basis. Our summer is more affected by access issues and forest fires than the spot market.

H1'06 Review; Outlook for 2006

"The first half of 2006 was very strong for Destiny in all respects. Our numbers are strong and our book of business is large. Each of our 3 "legacy" divisions, Wolf Survey & Mapping, Destiny Resources and Double R Drilling, is experiencing growing demand for their services. Wolf Survey & Mapping US, now in its second year, is showing strong growth and is gaining in market share and reputation. While Kodiak Nav Solutions is busier this year than last operationally, we are still working towards the commercial reality of some of its products.

"Our reporting on income tax calculations has been a bit confusing. You will note what appears to be an effective tax rate, combining current and future taxes, of 43% for Q2'06 and 33% for H1'06. The way I now look at it is: Destiny has now fully using up the tax losses carried forward from past misadventures; Destiny will have little, if any, current tax to pay in 2007 with respect to our Company's fiscal year ending December, 2006. If nothing else changes, we will have tax to pay, at roughly the 33% rate, in 2008.

"It appears the balance of 2006 will also be strong. As reported previously, we believe the year as a whole will be meaningfully better overall than 2005, with the exception of the income tax expense line. Capital spending and activity by the exploration segment of the oil and gas industry continue to appear to be moving to new levels, and we anticipate enjoying at least our fair share of that.

"Current indications are for a very busy winter and for 2007 as a whole to be very strong. We are working to have the resources, people and equipment, to grow our businesses with the market.

Thank you to our people

"As in every service business, we are only as good as the people who do the work for our clients. Destiny works very hard to retain and attract men and women, for the field, in our shops and in our offices, who deliver quality and safety every day. Any success within Destiny is owed to each of them. On behalf of Destiny's shareholders and Board of Directors, I say thank you to each of them."

On behalf of the Board of Directors,

Bruce R. Libin, Q.C.
Executive Chairman and
Chief Executive Officer


June 30 December 31,
2006 2005
$ $

ASSETS (note 2)

Accounts receivable (note 5) 15,709,928 9,124,205
Inventory 1,175,748 734,760
Prepaid expenses 806,514 434,820
17,692,190 10,293,785

Property and equipment (note 3) 11,198,241 11,450,537
28,890,431 21,744,322


Bank indebtedness (note 2) 4,672,320 1,946,126
Accounts payable and accrued
liabilities 9,789,502 7,746,828
14,461,822 9,692,954

Future income taxes 1,500,339 264,544

Contingencies and commitments (note 7)

Shareholders' equity
Share capital 8,349,935 8,349,935
Retained earnings 4,578,335 3,436,889
12,928,270 11,786,824
28,890,431 21,744,322

See accompanying notes to the interim consolidated financial statements.


Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
(unaudited) $ $ $ $
Revenue 16,934,140 14,792,810 43,132,951 31,397,084
Direct expenses 14,427,638 12,232,720 33,355,095 24,819,593
Gross margin 2,506,502 2,560,090 9,777,856 6,577,491
Other expense (income)
General and
administrative 895,217 588,803 2,593,066 1,576,276
Amortization of property
and equipment 775,045 471,437 1,527,284 862,714
Loss (gain) on disposal
of property and
equipment 10,305 (35,697) (15,110) (38,183)
Interest expense 85,852 43,378 140,230 60,145
Other expense (income) (144,147) 7,400 (182,880) (38,679)
1,622,272 1,075,321 4,062,590 2,422,273
Income before income
taxes 884,230 1,484,769 5,715,266 4,155,218
Income tax expense
(recovery) 380,180 (494,000) 1,897,785 86,000
Net income for the
period 504,050 1,978,769 3,817,481 4,069,218
Retained earnings,
beginning of period 5,412,302 1,627,914 3,436,889 646,980
Dividends (note 4) (1,338,017) (1,109,515) (2,676,035) (2,219,030)

Retained earnings, end
of period 4,578,335 2,497,168 4,578,335 2,497,168

Basic and diluted per
share amounts (note 5)
Net income for the
period per common share
Basic and diluted 0.09 0.36 0.68 0.74

See accompanying notes to the interim consolidated financial statements.


Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
(unaudited) $ $ $ $

Operating activities:
Net income 504,050 1,978,769 3,817,481 4,069,218
Items not involving
Amortization of property
and equipment 775,045 471,437 1,527,284 862,714
Loss (gain) on disposal
of property and
equipment 10,305 (35,697) (15,110) (38,183)
Future income taxes 669,651 (494,000) 1,235,795 86,000
Funds from operations 1,959,051 1,920,509 6,565,450 4,979,749
Net change in non-cash
working capital
(note 8) 1,369,994 (293,350) (5,884,433) (4,357,088)
3,329,045 1,627,159 681,017 622,661

Financing activities:
Net increase (decrease)
in bank indebtedness (1,158,253) 701,886 2,726,194 3,705,218
Dividends paid (note 4) (1,338,017) (1,109,515) (2,676,035) (2,219,030)
(2,496,270) (407,629) 50,159 1,486,188
Investing activities:
Purchase of property and
equipment (837,684) (1,854,092) (1,291,780) (4,006,220)
Proceeds on sale of
property and equipment 31,902 61,953 31,902 81,453
Net change in non-cash
working capital (note 8) (26,993) 572,609 528,702 617,914
(832,775) (1,219,530) (731,176) (3,306,853)
Decrease in cash for the
period --- --- --- (1,198,004)
Cash, beginning of period --- --- --- 1,198,004
Cash, end of period --- --- --- ---

See accompanying notes to the interim consolidated financial statements.


The following discussion and analysis of financial results for the three month and six month periods ended June 30, 2006 ("Q2'06" and "2006 YTD") and June 30, 2005 ("Q2'05" and "2005 YTD") is based on information available until August 10, 2006 (unless otherwise noted) and upon the Company's consolidated interim financial statements for the periods presented, which were prepared in accordance with Canadian generally accepted accounting principles with the exception of a complete set of notes, and should be read in conjunction with the Company's consolidated financial statements and Annual Report for the prior fiscal year ended December 31, 2005.

Forward-looking Information

Statements in this Management's Discussion and Analysis relating to matters that are not historical facts are forward-looking statements. Such forward-looking statements involve known (see Business Risks section) and unknown risks and uncertainties which may cause the actual results, performances or achievements of the Company to be materially different from any future results implied by such forward-looking statements.


Revenue for Q2'06 at $16.9 million increased by 14.4% from $14.8 million in Q2'05. 2006 YTD revenue at $43.1 million represented a 37.3% increase from $31.4 million over the same period last year. 53% of revenue for the first half of the current year was represented by one client compared to 57% last year (for additional information refer to the Working Capital section). Commodity prices remain high and exploration is a growing focus within the industry, which in turn has translated into increased overall revenues for the Company.


Gross margin for Q2'06 was $2.5 million representing 14.8% of revenues compared to $2.6 million representing 17.3% of revenues over the same quarter last year. Delays in job starts due to government actitivities, such as military exercises and provincial permitting processes, was the primary cause for the decrease. Costs were incurred for keeping working crews on standby during this time for which no revenues were generated.

Gross margin for 2006 YTD was $9.8 million representing 22.6% of revenues compared to $6.6 million representing 20.9% of revenues over the same period last year. The increase in 2006 YTD gross margin dollars compared to 2005 YTD arises from:

- Favourable Q1'06 greater activity levels and modest price increase over Q1'05,

- Offset by delays in job starts causing outlays in costs without any related revenues in Q2'06.


General and administrative expenses, which represent primarily the costs associated with the corporate head office and the lease of the Survey & Mapping division's shop and office, were $0.9 million for Q2'06 compared to $0.6 million over the same period last year. 2006 YTD expenses were $2.6 million compared to $1.6 million over the same period last year which represented an overall increase of $1.0 million. Current year to date accruals for the profit sharing plans were $0.8 million higher than last year (being a full accrual this year compared to only partial last year) and represented 80% of this increase. The remaining difference can be attributed to increased infrastructure costs in response to increased business activities.

The profit sharing plans have been instituted to align the Company's incentive compensation for key employees with the interests of shareholders. The plans, which replace bonuses and the grant of stock options, are intended to have the participating employees more focused on the Company's bottom line performance and to enable the Company to retain and attract operating and executive management in a competitive environment. Awards are made one-half in cash and one-half in shares, to be purchased in the market.


Amortization of property and equipment increased by $0.3 million to $0.8 million for Q2'06 from $0.5 million over the same period last year. For 2006 YTD this amount was $1.5 compared to $0.9 million for 2005 YTD. Amortization is dependant on the timing of additions to property and equipment. Over the last half of 2005, $4.7 million was invested in purchases of property and equipment. These purchases were amortized at the full rate in 2006. Disposals of property and equipment in 2006 resulted from normal course business activities with no specific noteworthy items.


Interest expense for 2006 YTD at $0.1 million was slightly higher than the amount incurred in 2005 YTD. Usage of the operating lines has increased due to higher business activities.


The Company expects to have a small loss for tax purposes for fiscal 2006 resulting in no current income tax expense for the year. For fiscal 2007 all non-capital tax loss carry-forwards will be fully utilized. The future income tax liability as at June 30, 2006 is at $1.5 million, increased from the $0.8 million at the end of Q1'06 to reflect operations.


A summary of operating results by quarter for the last 2 years is as
(000's, except
per share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
amounts) 2006 2006 2005 2005 2005 2005 2004 2004
Total Revenue 16,934 26,199 11,844 21,216 14,793 16,604 7,430 12,200
Income (loss)
from continuing
operations 504 3,313 1,842 1,325 1,979 2,091 (421) 1,057
Income (loss)
operations --- --- --- --- --- --- 72 ---

Income (loss)
for the period 504 3,313 1,842 1,325 1,979 2,091 (349) 1,057
Basic & diluted
earnings (loss)
per share:

From continuing
operations 0.09 0.59 0.33 0.24 0.36 0.38 (0.16) 0.40

From discontinued
operations --- --- --- --- --- --- 0.03 ---

For the period 0.09 0.59 0.33 0.24 0.36 0.38 (0.13) 0.40

Number of shares
weighted average
Basic 5,575 5,575 5,568 5,554 5,548 5,495 2,664 2,636
Diluted 5,596 5,596 5,591 5,567 5,571 5,500 2,664 2,636

The above noted Summary of Quarterly Results highlights the following:

1. The Company's business is seasonal with Q1 and Q3 traditionally
being the two strongest quarters and Q2 and Q4 normally being the
weakest quarters. The underlying causes of the seasonality are
weather conditions, the Company being restricted from entering and
conducting work in designated wildlife areas at certain times of the
year, and the timing of client capital spending programs.

2. The Company discontinued operations in several businesses in 2003.
Amounts in 2004 represent recoveries relating to insurance and bad
debts for these discontinued operations.


Destiny's capital requirements consist primarily of working capital necessary to fund operations, capital expenditures related to the purchase and manufacture of operating equipment, payment of dividends and capital to finance strategic acquisitions. Sources of funds available to meet these capital requirements include cash flow from operating activities, external lines of credit, equipment financing, term loans and access to equity markets.

During 2005, the Company increased its bank facility from $5 million to $10 million, with the ability to draw to $18 million during the months of June through September. In addition, the rate on the facility was reduced to bank prime plus 1%. During 2006, the bank facility maximum is at $10 million and the rate on this facility has been further reduced by to bank prime plus 0.75%.

The Company believes that it has the capital resources and availability to meet its working capital and capital expenditure requirements and to pay dividends in accordance with its dividend policy for 2006 and beyond.


At June 30, 2006 net working capital was at $3.2 million compared to $0.6 million at December 31, 2005. Significant components that contributed to this increase include: funds from operations of $6.6 million, year to date net capital expenditures of $1.3 million, and the payment of cash dividends of $2.7 million.

Approximately 79% of trade accounts receivable at June 30, 2006, (67% at December 31, 2005) were represented by one client. Destiny provides services to this client both directly for the client's own account (for the development of seismic data for the client to sell) and for work for third party exploration and production companies, most of which are substantial oil companies and several of which specify Destiny as their sub-contractor of choice when contracting with Destiny's client. Approximately 75% of trade accounts receivable at June 30, 2006 was less than 60 days old (49% are less than 30 days old). Bad debt expenses for the Company's businesses have been negligible over the past three years.


Property and equipment assets totaled $11.2 million at the end of Q2'06, compared to $11.5 million as at December 31, 2005 reflecting a net decrease $0.3 million for the year. Activity for 2006 consisted of: purchases of $1.3 million, amortization of $1.5 million, disposals of less than $0.1 million.


Destiny's future contractual payment obligations are in the form of operating leases on premises and equipment. The Company has no hedging, capital leases or other "off balance sheet" contractual obligations.

Payments Due by Future Year
less than 2-3 4-5 After
total 1 year years years 5 years
Operating Leases 2,064,816 773,962 851,442 439,412 -


Shareholders' equity was $12.9 million at the end of Q2'06 reflecting an increase of $1.1 million from year end 2005 of $11.8 million. The major components within this increase were: net income of $3.8 million, and cash dividends of $2.7 million.

As at August 10, 2006, the number of issued and outstanding common shares is 5,575,081 with 53,000 additional common shares reserved for potential future issuance pursuant to options outstanding under the Company's stock option plan.


The Canadian Institute of Chartered Accountants ("CICA") has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods. See the 2005 Annual Report and the Q1'06 interim report.


Destiny is subject to the risks and variables inherent in the oilfield services industry. Demand for the Company's products and services depend on the exploration, development and production activities of energy companies. These activities are directly affected by factors such as oil and gas commodity prices, weather, changes in legislation, exchange rates, the general state of domestic and world economies, concerns regarding fuel surpluses or shortages, substitution through imports or alternative energy sources, changes to taxation or regulatory regimes and the broad sweep of international political risks such as war, civil unrest, nationalization and expropriation or confiscation, which are all beyond the control of the Company and cannot be accurately predicted. The oil market is influenced by global supply and demand considerations and by the supply management practices of OPEC. The natural gas market is primarily influenced by North American supply and demand and by the price of competing fuels. The risks associated with external competition are minimized by concentrating Company activities in areas where it has demonstrated technical and operational advantages and by employing highly competent professional staff. Environmental standards and regulations are continually becoming more stringent in this industry and Destiny is committed to maintaining its high standards. Destiny also mitigates business risks by establishing strategic alliances with reputable partners, developing new technologies and methodologies as well as investigating new business opportunities.

The risks inherent in the oilfield services industry could impact the Company's ability to meet its financial covenants on its revolving, bank operating loan facility. Bank lines were drawn by $4.7 million as at June 30, 2006 and were well below the maximum allowable limit at that time.


Destiny believes that it has adequate working capital, cash flow from operations and access to capital to fund ongoing business requirements. Management believes the Company has a cost structure that has sufficient variability to adapt to the volatility of its industry. The Company has experienced management, at all levels of sales, operations and administration, who are motivated to achieve success in both the short- and long-term. The Company provides services principally in connection with the exploration for oil and natural gas.

Destiny periodically encounters expansion opportunities to consider. These involve, in each case, the requirement for capital expenditures beyond the normal course for the Company. Destiny may pursue any or all of these opportunities, and others that may present themselves. In doing so the Company may incur term debt, issue equity, and retain cash that might otherwise be paid as dividends or any combination of the foregoing.


As defined in Multilateral Instrument 52-109, disclosure controls and procedures require that controls and other procedures be designed to provide reasonable assurance that financial and non-financial information required to be disclosed is duly recorded, processed, summarized, accumulated and communicated to management. It must be disclosed on a timely basis and be in accordance with provincial and territorial securities legislation.

The Company has designed and evaluated the effectiveness of its disclosure controls and procedures, as defined, and has concluded they were effective as of the end of the period covered by this report.

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