Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

October 27, 2005 18:47 ET

Phoenix Technology Income Fund: Financial Results for the Three and Nine-Month Periods Ending September 30, 2005, and Distribution Increase

CALGARY, ALBERTA--(CCNMatthews - Oct. 27, 2005) - Phoenix (TSX:PHX.UN) is pleased to report on its financial and operating results for both the three and nine-month periods ended September 30, 2005. Due to the presence of strong industry fundamentals and very active drilling markets in North America, and the Fund's ability to increase its operating capacity over the past year, Phoenix experienced record revenue levels in both its Canadian and United States ("US") segments, as well as record consolidated profitability and cash flow for the three-month period ended September 30, 2005. Cash flow increased by 211 percent in the third quarter of 2005 to $6.6 million, as compared to $2.1 million in 2004. Cash distributions made to unitholders in the three-month period ended September 30, 2005, were $2.8 million or $0.135 per unit, and the cash payout ratio was 43 percent.

As a result of the Fund's strong financial performance and current financial position, the Manager of the Fund has approved an increase in the Fund's monthly cash distributions by 11% from $0.045 per fund unit to $0.05 per fund unit. This equates to an annualized increase from $0.54 per fund unit to $0.60 per fund unit. This increase will be effective for the Fund's November distribution that will be payable on December 15, 2005.



FINANCIAL HIGHLIGHTS
(Stated in thousands of dollars except per unit amounts and Fund units
outstanding)

THREE MONTHS ENDED SEPT 30 NINE MONTHS ENDED SEPT 30
2005 2004 % Chg. 2005 2004 % Chg.
------------------------------------------------------------------------
OPERATING RESULTS
------------------------------------------------------------------------
REVENUE 20,064 10,453 92 47,837 30,783 55
OPERATING INCOME (1) 5,549 666 733 10,402 3,481 199
NET EARNINGS 4,687 1,294 262 9,252 4,292 116
EARNINGS PER UNIT
- DILUTED 0.22 0.07 214 0.44 0.23 91
EBITDA (1) (2) 6,890 1,768 290 14,012 7,550 86
EBITDA PER UNIT
- DILUTED (1) 0.33 0.09 267 0.67 0.41 63

------------------------------------------------------------------------
CASH FLOW
------------------------------------------------------------------------
CASH FLOW (1) (2) (3) 6,596 2,118 211 13,580 6,421 111
CASH FLOW PER UNIT
- DILUTED (1) 0.32 0.11 191 0.65 0.35 86
CAPITAL EXPENDITURES 3,689 2,010 84 6,586 3,837 72
CASH DISTRIBUTIONS
MADE 2,807 2,232 26 7,752 2,232 247
CASH DISTRIBUTIONS
PER UNIT (1) 0.135 0.12 13 0.375 0.12 213
CASH PAYOUT RATIO
(1) (4) 43% 105% 57% 35%

------------------------------------------------------------------------
Sept. 30, Dec. 31,
FINANCIAL POSITION 2005 2004
------------------------------------------------------------------------
WORKING CAPITAL 11,914 12,213 (2)
LONG-TERM DEBT (5) 2,150 3,275 (34)
UNITHOLDERS' EQUITY 41,143 39,426 4
FUND UNITS OUTSTANDING 20,832,350 20,599,855 1
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The Fund uses operating income, earnings before interest, taxes, and
depreciation ("EBITDA"), EBITDA per unit, cash flow, cash flow per
unit, cash distributions per unit and cash payout ratio as financial
performance measures that are not recognized under GAAP. Management
believes that these measures provide supplemental financial
information that is useful in the evaluation of the Fund's
operations. Investors should be cautioned, however, that these
measures should not be construed as alternatives to net income
determined in accordance with GAAP as an indicator of Phoenix's
performance. Phoenix's method of calculating these measures may
differ from other organizations, and accordingly, these may not be
comparable.
(2) EBITDA and Cash Flow for the nine-month period ended September 30,
2004, includes income of $1.2 million related to investment tax
credits that are non-recurring.
(3) Cash flow is defined as cash provided from operations before net
changes in non-cash working capital items.
(4) Cash payout ratio is defined as cash distributions divided by cash
flow from operations, before net changes in non-cash working capital
items.
(5) Excludes current portion of long-term debt.


RESULTS OF OPERATIONS

The Fund generated record quarter revenue of $20.1 million for the three-month period ended September 30, 2005, an increase of 92 percent, as compared to $10.5 million for the corresponding 2004 period. Both the Canadian and United States ("US") operations achieved record revenue and activity levels in their respective segments in the quarter. During a time of strong commodity price levels, the Fund has continued to gain market share in both geographical regions with a substantial increase in customer demand.

Consolidated guidance equipment utilization increased to 46 percent for the three-month period ended September 30, 2005, based on an average of fifty-six guidance systems, from 36 percent for the comparable 2004 period, based on an average of forty-five guidance systems. Phoenix considers that the maximum achievable utilization rate to be 67 percent, due to the fact that time is required to mobilize and service the equipment.

For the nine-month period ended September 30, 2005, the Fund generated revenue of $47.8 million, which was 55 percent higher than revenue of $30.8 million for the corresponding 2004 period. Guidance equipment utilization, on a consolidated basis, was 42 percent for the nine-month period ended September 30, 2005, based on an average of fifty-three guidance systems, compared to 37 percent for the 2004 period, based on an average of forty-two guidance systems.

Cash flow from operations, before net changes in non-cash working capital, for the three-month period ended September 30, 2005, increased by 211 percent to a record $6.6 million, $0.32 per unit diluted, compared to $2.1 million, $0.11 per unit diluted. For the nine-month period ended September 30, 2005, cash flow from operations was $13.6 million, $0.65 per unit diluted, an increase of 111 percent from $6.4 million, $0.35 per unit diluted, for the comparable 2004 period.

Cash distributions made to unitholders for the three-month period ended September 30, 2005, was $2.8 million or $0.135 per unit. This translated into a cash payout ratio, cash distributions divided by cash flow, of 43 percent. For the nine-month period ended September 30, 2005, cash distributions made to unitholders amounted to $7.8 million, or $0.375 per unit. The cash payout ratio for the nine-month period ended September 30, 2005, was 57 percent.

EBITDA for the three-month period ended September 30, 2005, increased by 290 percent to a record of $6.9 million, $0.33 per unit diluted, compared to $1.8 million, $0.09 per unit diluted in 2004. For the nine-month period ended September 30, 2005, EBITDA was $14.0 million, $0.67 per unit diluted, compared to $7.6 million, $0.41 per unit diluted in 2004, an increase of 86 percent.

Net earnings for the three-month period ended September 30, 2005, was also a record for the Fund for a quarter, at $4.7 million, $0.22 per unit diluted, as compared to $1.3 million, $0.07 per unit diluted in the 2004 period. Net earnings for the nine-month period ended September 30, 2005, increased by 116 percent to $9.3 million, $0.44 per unit diluted as compared to $4.3 million, $0.23 per unit diluted in the 2004 period.

Included in EBITDA, net earnings and cash flow for the nine-month period ended September 30, 2004, is a non-recurring income benefit of $1.2 million associated with investment tax credits.

Revenue

Canadian segment

Canadian segment revenue increased by 105 percent to $12.7 million for the three-month period ended September 30, 2005, compared to $6.2 million in the 2004 period. Within the Canadian segment, measurement while drilling ("MWD") drilling services revenue for the three-month period ended September 30, 2005, was $12.1 million, an increase of 112 percent, as compared to $5.7 million in the respective 2004 period. The number of horizontal and directional wells drilled in Canada in the 2005 period was 1,802, as compared to 1,098, an increase of 64 percent. Phoenix was successful in further diversifying and building its client base in Canada, and due to strong customer demand, it has been successful in increasing its day rates by an average of nine percent.

JAG reported revenue of $639,000 for the three-month period ended September 30, 2005, as compared to $511,000 in the 2004 period, a 25 percent increase.

The Canadian segment's revenue for the nine-month period ended September 30, 2005, was $29.8 million as compared to $20.8 million, an increase of 43 percent. MWD drilling services revenue for the 2005 period was $28.3 million, compared to $18.7 million in 2004, a 51 per cent increase. JAG reported revenue of $1.5 million, as compared to $1.2 million in the 2004 period, a 25 percent increase. Included in the segment's revenue in the 2004 period was $0.9 million representing revenue derived from two CLT system sales.

United States segment

United States segment revenue for the three-month period ended September 30, 2005, was $7.3 million, or 74 per cent higher than $4.2 million generated in 2004. Activity in the US market remains strong and the current outlook remains extremely promising. The segment continues to expand its provision of services in the Barnett Shale region in North Texas, and focus on full service directional work for exploration and development companies, as opposed to MWD kit rentals to other service providers. Despite the significant growth in the quarter, the segment's activity has been adversely affected by the general shortage of experienced field personnel. The segment is currently developing a strategy in this regard. Through both of its facilities in Houston, Texas and Casper, Wyoming the segment has been successful in achieving increased geographical diversification within the US.

US segment revenue for the nine-month period ended September 30, 2005, increased 80 percent to $18.0 million from $10.0 million in the comparable 2004 period. US revenue for the nine-month period ended September 30, 2005, as a percent of consolidated revenue, was 38 percent, as compared to 32 percent in the comparable 2004 period.

Operating Costs and Expenses

Due to the large increase in activity in the three-month period ended September 30, 2005, direct costs increased by 82 percent to $11.8 million from $6.5 million for the comparable 2004 period. Gross profit, as a percentage of revenue, was 41 percent for the three-month period ended September 30, 2005, as compared to 38 percent for 2004. The Fund was able to realize higher day rates in the quarter, however the benefits of these increases were partially offset by increases in field labour rates. Labour and equipment repair costs were higher in the 2004-quarter due to the effects of the initial CLT system rollout that occurred in that quarter.

Gross profit, as a percentage of revenue, was 39 percent for the nine-month period ended September 30, 2005, compared to 37 percent in 2004. In 2005, despite the increase in its drilling activity, Phoenix was able to lower its third party rental requirements in Canada through past capital equipment acquisitions and increases in its CLT guidance fleet. In addition, lower mud motor repair rates were experienced in Canada in 2005.

Selling, general and administration ("SG&A") costs for the three-month period ended September 30, 2005, were $1.7 million, or 8 percent of revenue, as compared to $1.5 million, or 14 percent of revenue for the corresponding 2004 period. For the nine-month period ended September 30, 2005, SG&A cost increased by 9 per cent to $5.1 million, or 11 percent of revenue, as compared to $4.7 million, or 15 percent of revenue in 2004. The increases in 2005, in dollar terms, are a direct result of additional selling related and insurance costs associated with the increased level of activity.

Depreciation and amortization for the three-month period ended September 30, 2005, was $1.3 million, as compared to $1.0 million, an increase of 30 percent. For the nine-month period ended September 30, 2005, depreciation and amortization increased to $3.6 million, up 20 percent from $3.0 million in 2004. The increases are due to the Fund's past capital expenditure program in 2004 and 2005.

Non-recurring costs of $657,000 were incurred in the three-month period ended September 30, 2004, as a result of the reorganization of Phoenix into an income fund.

The Fund realized a net gain on disposal of drilling equipment of $395,000 for the three-month period ended September 30, 2005, compared to a net loss of $29,000 in the 2004 period. The disposals relate to insured equipment lost in well bores, and are uncontrollable in nature, net of any capital assets that are retired before the end of their useful lives.

During the nine-month period ended September 30, 2004, the Fund recognized a non-recurring $1,170,000 income benefit associated with investment tax credits that related to past years' scientific research expenditures. The portion of the investment tax credit associated with past Well Director® expenditures was $1,039,000 and these amounts have been disclosed under the classification of investment tax credits on the statement of earnings.

Income taxes

For the three-month period ended September 30, 2005, the Fund reported a net provision for income taxes of $862,000, compared to a net recovery of income taxes of $629,000 in the 2004 period. For the nine-month period ended September 30, 2005, the Fund reported a provision for income taxes of $1.2 million, compared to $0.2 million in the 2004 period. The Fund estimates its effective tax rate to be 11 percent for the 2005 year, and this has been reflected in the current quarter. This rate compares to a statutory rate of 34 percent. The lower rate results primarily from Phoenix operating as an income fund. Cash distributions are deductible in calculating taxable income of the Fund. The Fund is subject to income taxes under the Income Tax Act only on income not distributed to its unitholders.

As at September 30, 2005, the Fund had working capital of $11.9 million, as compared to $12.2 million as at December 31, 2004. Phoenix anticipates that it can generate sufficient cash flow from operations to allow it to maintain its current cash distribution rate to unitholders.

For the three-month period ended September 30, 2005, the Fund incurred $3.7 million in capital expenditures, as compared to $2.0 million in the 2004 period. In the 2005 period, expenditures of $0.9 million related to the further completion and manufacture of CLT systems, $2.5 million related to the acquisition of down hole mud motors and other drilling equipment, and $0.3 million related to JAG rental fleet additions.

Capital expenditures for the nine-month period ended September 30, 2005, amounted to $6.6 million, as compared to $3.8 million in 2004. Of the 2005 additions, $4.0 million was spent on down hole mud motors and other drilling equipment, $2.3 million on the manufacture and completion of CLT systems and $0.3 million in JAG rental equipment. Due to the strong demand in both Canada and the US the Fund has plans to increase its capital expenditure plans in 2005.

At the end of the third quarter, the Fund had the capacity to run fifty-six concurrent jobs in North America. At September 30, 2005, thirty-three measurement while drilling ("MWD") guidance kits were located in Canada and twenty-three in the United States. The Fund currently possesses twenty-four CLT guidance systems and thirty-two mud pulse systems.

SUBSEQUENT EVENTS

Acquisition

On October 21, 2005, the Fund closed the acquisition of the directional drilling assets of Wellco Energy Services Partnership ("Wellco") for cash consideration of $5.0 million, subject to future adjustments. This acquisition consists of six MWD mud pulse operating systems, twenty-nine down hole mud motors, ten automatic survey tools and other various tubular equipment.

Financing

On October 25, 2005, the Fund completed a bought deal financing by way of a short form prospectus that was comprised of an issue of 1,200,000 Fund units at $9.00 per unit for gross proceeds of $10,800,000. Proceeds of the issue are to be used to finance the acquisition of Wellco, and Phoenix's remaining 2005 and a portion of its 2006 capital expenditures programs.

OUTLOOK

Phoenix, in the third quarter, experienced record levels of activity in both Canada and the United States. The Fund's strategy to add significant capital equipment in the third quarter has resulted in lower third party rentals and increased cash flow. Phoenix anticipates, as with industry analysts, that both the Canadian and US drilling markets will continue to remain strong for the rest of 2005 through to the first quarter of 2006.

With the addition of six mud pulse MWD systems from the recent acquisition, and further additions of nine CLT and two mud pulse operating systems during the fourth quarter, Phoenix will be in a position to continue to experience solid growth and meet increasing customer demand. By the end of 2005 it is expected that the Fund will have an MWD fleet of seventy-three operating systems, thirty-three of which will be CLT units.

FORWARD-LOOKING STATEMENTS

Some matters discussed in this report may be considered to be forward-looking statements. Such statements include declarations regarding management's intent, belief or current expectations. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Such risks and uncertainties include: the possible unavailability of financing, risks related to the uncertainty inherent in the oil and gas horizontal and directional services industry, the impact of energy price fluctuations, the seasonal nature of business, the dependence on third party suppliers and contractors, changes in government regulation, the impact of competition, the successful commercialization of certain technologies, the dependence upon competent employees including senior management, and fluctuations in currency exchange rates and interest rates.

PHOENIX TECHNOLOGY INCOME FUND

Phoenix Technology Income Fund is listed on the Toronto Stock Exchange under the symbol "PHX.UN".



Consolidated Balance Sheets
September 30, 2005 and December 31, 2004

September 30 December 31
2005 2004
------------------------------------------------------------------------
ASSETS (unaudited) (audited)

Current assets
Cash and cash equivalents $ 1,013,459 $ 5,933,924
Accounts receivable 21,617,066 12,307,097
Inventory 528,704 871,316
Prepaid expenses 620,581 448,722
Income taxes recoverable 513,000 265,200
------------------------------------------------------------------------
24,292,810 19,826,259

Drilling and other equipment 24,296,700 22,163,871
Intangibles 103,125 300,000
Goodwill 8,876,351 8,876,351
Investment tax credit receivable 1,424,589 1,387,471
------------------------------------------------------------------------
$58,993,575 $52,553,952
------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities $ 9,941,124 $ 5,289,273
Distribution payable 937,456 823,994
Current portion of long-term debt 1,500,000 1,500,000
------------------------------------------------------------------------
12,378,580 7,613,267

Long-term debt 2,150,000 3,275,000
Future income taxes 3,322,000 2,239,200
------------------------------------------------------------------------
17,850,580 13,127,467

Unitholders' equity
Unitholders' capital 32,859,924 32,386,415
Contributed surplus 749,739 654,900
Foreign currency adjustment (1,863,394) (1,624,827)
Accumulated earnings 22,549,954 13,297,556
Accumulated cash distributions (13,153,228) (5,287,559)
------------------------------------------------------------------------
41,142,995 39,426,485

------------------------------------------------------------------------
$58,993,575 $52,553,952
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Earnings
Three and nine months ended September 30, 2005 and 2004


Three months Nine months
ended Sept. 30 ended Sept. 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue $ 20,064,291 $ 10,453,179 $ 47,836,878 $ 30,783,256
Direct costs 11,793,081 6,536,086 29,262,024 19,397,957
------------------------------------------------------------------------
Gross profit 8,271,210 3,917,093 18,574,854 11,385,299
------------------------------------------------------------------------

Expenses
Selling,
general and
administrative 1,727,592 1,547,814 5,119,330 4,734,982
Depreciation and
amortization 1,312,100 1,049,881 3,562,228 2,962,367
Reorganization
costs - 657,616 - 657,616
Foreign exchange
loss (gain) 48,923 (85,512) 105,220 (131,785)
Interest on
long-term debt 39,828 61,473 127,355 159,985
Interest income (10,835) (8,736) (80,259) (92,345)
(Gain) loss on
disposition
of drilling
equipment (395,192) 28,827 (661,418) (386,586)
------------------------------------------------------------------------
2,722,416 3,251,363 8,172,456 7,904,234
------------------------------------------------------------------------
Operating income 5,548,794 665,730 10,402,398 3,481,065
Investment tax
credit income - - - (1,039,000)
------------------------------------------------------------------------
Earnings before
income taxes 5,548,794 665,730 10,402,398 4,520,065
------------------------------------------------------------------------

Provision for
(recovery of)
income taxes
Current 16,000 (419,900) 36,000 670,200
Future 846,000 (208,373) 1,114,000 (441,900)
------------------------------------------------------------------------
862,000 (628,273) 1,150,000 228,300
------------------------------------------------------------------------

Net earnings $ 4,686,794 $ 1,294,003 $ 9,252,398 $ 4,291,765
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per
unit - basic $ 0.23 $ 0.07 $ 0.45 $ 0.24
Earnings per
unit - diluted $ 0.22 $ 0.07 $ 0.44 $ 0.23
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.


Consolidated Statements of Accumulated Earnings


Three months Nine months
ended Sept. 30 ended Sept. 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Accumulated
earnings,
beginning
of period 17,863,160 9,953,387 13,297,556 8,024,293
Net earnings 4,686,794 1,294,003 9,252,398 4,291,765
Amounts paid in
excess of par
value on
cancellation
of common shares - - - (1,068,668)
------------------------------------------------------------------------
Accumulated
earnings, end
of period $ 22,549,954 $ 11,247,390 $ 22,549,954 $ 11,247,390
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Cash Flows
Three and nine months ended September 30, 2005 and 2004

Three months Nine months
ended September 30 ended September 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Cash flows from
operating
activities
Net earnings $ 4,686,794 $ 1,294,003 $ 9,252,398 $ 4,291,765
Add (deduct)
items not
affecting cash
Depreciation
and
amortization 1,312,100 1,049,881 3,562,228 2,962,367
Future income
taxes 846,000 (208,373) 1,114,000 (441,900)
Unrealized
foreign
exchange
loss (gain) 60,740 (85,512) 108,642 (131,785)
(Gain) loss on
disposition
of drilling
equipment (395,192) 28,827 (661,418) (386,586)
Stock-based
compensation 85,545 38,860 203,841 126,718
------------------------------------------------------------------------
6,595,987 2,117,686 13,579,691 6,420,579
Change in
non-cash
working
capital (4,187,932) (551,611) (5,003,351) (1,165,875)
------------------------------------------------------------------------
2,408,055 1,566,075 8,576,340 5,254,704
------------------------------------------------------------------------

Cash flows from
investing
activities
Proceeds on
disposition
of drilling
equipment 923,724 76,872 1,602,878 798,210
Acquisition of
drilling and
other equipment (3,688,607) (2,010,379) (6,585,962) (3,837,333)
Business
acquisition - - - (5,503,803)
------------------------------------------------------------------------
(2,764,883) (1,933,507) (4,983,084) (8,542,926)
------------------------------------------------------------------------

Cash flows from
financing
activities
Issuance
of units 121,945 8,500 363,488 565,993
Repayment of
long-term debt (375,000) (382,599) (1,125,000) (2,734,039)
Distributions
to unitholders' (2,806,854) (2,231,583) (7,752,209) (2,231,583)
Dissenting
shareholder
disbursements - - - (1,068,668)
Issue of
long-term debt - - - 1,500,000
------------------------------------------------------------------------
(3,059,909) (2,605,682) (8,513,721) (3,968,297)
------------------------------------------------------------------------

Decrease in cash
and cash
equivalents (3,416,737) (2,973,114) (4,920,465) (7,256,519)
Cash and cash
equivalents,
beginning
of period 4,430,196 3,264,128 5,933,924 7,547,533
------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 1,013,459 $ 291,014 $ 1,013,459 $ 291,014
------------------------------------------------------------------------
------------------------------------------------------------------------
\


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
    (403) 543-6025 (FAX)
    Website: www.phoenixcan.com
    or
    Phoenix Technology Services Inc.
    Suite 630, 435 4th Avenue SW
    Calgary, Alberta T2P 3A8