Phoenix Technology Income Fund
TSX : PHX.UN

Phoenix Technology Income Fund

July 28, 2005 18:35 ET

Phoenix Technology Income Fund: Financial Results for the Three and Six-Month Periods Ending June 30, 2005

CALGARY, ALBERTA--(CCNMatthews - July 28, 2005) - Phoenix Technology Income Fund (TSX:PHX.UN) is pleased to report on its financial and operating results for both the three and six-month periods ended June 30, 2005. The Fund has experienced significant growth in the three-month period ended June 30, 2005, despite activity levels being adversely affected by the excessive rain and flooding that occurred in certain southern regions of Alberta and Saskatchewan in June. The United States segment has generated record revenue to date and has demonstrated six-month revenue growth in excess of 84 per cent over 2004. Currently the Fund is operating at or near capacity in both Canada and the United States.

Cash flow from operations increased by 673 percent in the three-month period ended June 30, 2005, to $2.2 million from $0.3 million in 2004. During the first six-months of 2005, the Fund has paid out cash distributions to unitholders in the amount of $5.0 million, or $0.24 per unit that has equated to a cash payout ratio of 71 percent.



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

THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2005 2004 % Chg. 2005 2004 % Chg.
------------------------------------------------------------------------
OPERATING RESULTS
------------------------------------------------------------------------
REVENUE 11,681 7,930 47 27,773 20,330 37
OPERATING INCOME (1) 1,038 158 557 4,854 2,815 72
NET EARNINGS 1,053 (33) n.m. 4,566 2,998 52
EARNINGS PER UNIT
- DILUTED 0.05 0.00 n.m. 0.22 0.16 38
EBITDA (1) (2) 2,227 1,247 79 7,122 5,782 23
EBITDA PER UNIT
- DILUTED (1) 0.11 0.07 57 0.34 0.31 10
------------------------------------------------------------------------
CASH FLOW
------------------------------------------------------------------------
CASH FLOW (1) (2) (3) 2,172 281 673 6,984 4,303 62
CASH FLOW PER UNIT
- DILUTED (1) 0.10 0.01 900 0.34 0.23 48
CAPITAL EXPENDITURES 1,496 804 86 2,897 1,827 59
CASH DISTRIBUTIONS
MADE 2,473 - n.a. 4,945 - n.a.
CASH DISTRIBUTIONS
PER UNIT (1) 0.12 - n.a. 0.24 - n.a.
CASH PAYOUT RATIO 114% - n.a. 71% - n.a.
------------------------------------------------------------------------
FINANCIAL POSITION,
AS AT JUNE 30
------------------------------------------------------------------------
WORKING CAPITAL 11,404 10,903 5
LONG-TERM DEBT (4) 2,525 4,120 (39)
UNITHOLDERS' EQUITY 39,422 34,321 15
FUND UNITS OUTSTANDING 20,761,522 18,589,855 12
------------------------------------------------------------------------
------------------------------------------------------------------------

n.m. - not meaningful.
n.a. - not applicable.

(1) The Fund uses operating income, earnings before interest, taxes,
and depreciation ("EBITDA"), EBITDA per unit, cash flow, cash flow
per unit and cash distributions per unit 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 six-month period ended June 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 changes
in non-cash working capital items.

(4) Excludes current portion of long-term debt.


RESULTS OF OPERATIONS

The Fund generated revenue of $11.7 million for the three-month period ended June 30, 2005, 47 percent higher than $7.9 million that was realized in the comparable 2004 period. The level of revenue achieved in the three-month period ended June 30, 2005, was the highest ever reached by the Fund in a second quarter. Operations in both Canada and the United States increased significantly in the period due to continued strong demand for services and increased drilling activity in the sector driven by strong commodity prices. The increased operating capacity created from the manufacture of CLT systems and an acquisition in 2004 has allowed Phoenix to meet increasing customer demand.

Consolidated guidance equipment utilization increased to 32 percent for the three-month period ended June 30, 2005, based on an average of fifty-three guidance systems, from 31 percent for the comparable 2004 period, based on an average of forty-three 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. Due to the impact of spring breakup in western Canada, the second quarter is traditionally the slowest quarter of the year for Phoenix and other oil and natural gas service companies.

For the six-month period ended June 30, 2005, the Fund generated revenue of $27.8 million, which was 37 percent higher than revenue of $20.3 million for the corresponding 2004 period. Guidance equipment utilization, on a consolidated basis, was 39 percent for the six-month period ended June 30, 2005, based on an average of fifty-two guidance systems, compared to 38 percent for the 2004 period, based on an average of forty-one guidance systems.

Cash flow from operations, before net changes in non-cash working capital, for the three-month period ended June 30, 2005, increased by 673 percent to $2.2 million, $0.10 per unit diluted, compared to $0.3 million, $0.01 per unit diluted. For the six-month period ended June 30, 2005, cash flow from operations was $7.0 million, $0.34 per unit diluted, an increase of 62 percent from $4.3 million, $0.23 per unit diluted, for the comparable 2004 period. Included in cash flow for the 2004 period is the non-recurring pre tax income benefit of $1.2 million associated with investment tax credits. Cash distributions made to unitholders for the three-month period ended June 30, 2005, was $2.5 million or $0.12 per unit. This translated into a cash payout ratio (cash distributions divided by cash flow) of 114 percent. The high payout ratio in the second quarter was expected due to lower activity associated with the impact of spring break up. For the six-month period ended June 30, 2005, cash distributions made to unitholders amounted to $5.0 million, or $0.24 per unit. The cash payout ratio for the six-month period ended June 30, 2005, was 71 percent.

As a result of the strong financial performance and financial condition of Phoenix, the Fund on June 7, 2005, increased its monthly distributions by 12.5 percent to $0.045 per unit from $0.04 per unit. This increase was effective for the June distribution that was made on July 15, 2005.

EBITDA for the three-month period ended June 30, 2005, increased by 79 percent to $2.2 million, $0.11 per unit diluted, compared to $1.2 million, $0.07 per unit diluted in 2004. For the six-month period ended June 30, 2005 EBITDA, increased by 23 percent to $7.1 million, $0.34 per unit diluted, compared to $5.8 million, $0.31 per unit diluted in 2004. Net earnings for the three-month period ended June 30, 2005, was $1.1 million, $0.05 per unit diluted as compared to a net loss of $33,000, $0.00 per unit diluted in the 2004 period. For the six-month period ended June 30, 2005, net earnings increased by 52 percent to $4.6 million, $0.22 per unit diluted as compared to $3.0 million, $0.16 per unit diluted in the 2004 period. Included in net earnings and EBITDA for the 2004 period is the pre-tax benefit associated with investment tax credit income of $1.2 million that is non-recurring.

Revenue

The Fund reports its operating segments on a geographical basis through the regions of Canada and the United States. Within the Canadian segment, the Fund had two operating divisions, measurement while drilling ("MWD") drilling services and JAG.

Canadian segment

Segment revenue in Canada increased by 29 percent to $5.4 million for the three-month period ended June 30, 2005, compared to $4.2 million in 2004. Included in the segment's revenue in the 2004 period is $0.5 million representing revenue that was derived from a CLT system sale. If the proceeds on this sale were removed from 2004, revenue would have increased by 46 percent in the 2005 period as compared to 2004. MWD drilling services revenue for the three-month period ended June 30, 2005, was $5.2 million, an increase of 44 per cent, as compared to $3.6 million in the respective 2004 period. Although demand for services increased in 2005, Phoenix's drilling activity was adversely impacted by the significant amount of rain and flooding that occurred in June in southern Alberta and southeastern Saskatchewan. Several of Phoenix's major customers had no drilling activity in these areas during this time and, as a result, revenue that was expected to be realized in the second quarter of 2005 was deferred into the third quarter. JAG reported revenue of $249,000, as compared to $158,000 in the 2004 period, a 58 percent increase. JAG's rental activity as with the MWD drilling services division, was affected by the poor weather conditions that prevailed in June.

Revenue within the Canadian segment for the six-month period ended June 30, 2005, was $17.1 million as compared to $14.5 million, an increase of 18%. Included in the segment's revenue in the 2004 period was $0.9 million representing revenue derived from two CLT system sales. If these sales were excluded, revenue would have increased by 26%. MWD drilling services revenue for the six-month period ended June 30, 2005, increased by 25 percent to $16.2 million, compared to $13.0 million in 2004. In comparison, the number of horizontal and directional wells drilled within Canada in the first six months of 2005 was 2,885 as compared to 2,378, a 21 percent increase(1). JAG reported revenue of $0.9 million, as compared to $0.6 million in the 2004 period, a 50 percent increase.

United States segment

Nevis Energy Services Inc. ("Nevis"), Phoenix's wholly owned subsidiary, has continued to gain market share as a result of the strengthening of its marketing department and increasing its presence at its Casper, Wyoming based operation. Nevis reported revenue of $6.3 million in the three-month period ended June 30, 2005, that was 70% higher than revenue of $3.7 million for the comparable 2004 period. This revenue achieved in the second quarter for Nevis was the highest quarterly total ever recorded by the operation. Nevis has been extremely active in providing full service work within the very active Barnett Shale region in Texas with several operators. The operation has been focused on providing full service drilling services in favor of guidance system rentals to other horizontal and directional service providers. Due to the fact that Nevis's activity is not impacted by the effects of spring break up, and their continual strong growth, revenue generated in the second quarter of 2005 was 43 percent higher than the first quarter of this year.

For the six-month period ended June 30, 2004, the US operation's revenue increased 84 percent to $10.7 million from $5.8 million in the comparable 2004 period. US revenue represents 38 per cent of consolidated revenue for the six-month period ended June 30, 2005, as compared to 29 percent in the comparable 2004 period.

Operating Costs and Expenses

For the three-month period ended June 30, 2005, direct costs increased by 44 percent to $7.9 million from $5.5 million for the comparable 2004 period. Gross profit, as a percentage of revenue, was 32 percent for the three-month period ended June 30, 2005, as compared to 30 percent for 2004. Included in gross profit for the 2004 period was profit realized from the sale of one CLT system. If this profit was excluded from the 2004 result, the 2004 gross profit, as a percentage of revenue, would have been 28 percent. Lower mud motor repair rates in Canada contributed to the improved gross margin percentage result in 2005. Gross profit in the 2005 period was negatively impacted by the necessity to incur third party mud motor equipment rentals to meet the strong customer demand in the US. Phoenix will inject the US operation with additional capital equipment early in the third quarter to reduce rental requirements in the future.

Gross profit, as a percentage of revenue, was 37 percent for both six-month periods ended June 30, 2005 and 2004. Included in gross profit in 2004 is earnings realized from the sale of two CLT systems to a service provider in the US. If this profit were excluded from the 2004 result, the 2004 period gross profit, as a percentage of revenue, would have been 35 percent.

SG&A costs for the three-month period ended June 30, 2005, were $1.7 million as compared to $1.5 million for the corresponding 2004 period. For the six-month period ended June 30, 2005, SG&A costs were $3.4 million, as compared to $3.2 million for the corresponding 2004 period, an increase of 6 percent. The increases in SG&A is a direct result of additional costs associated with the current level of activity.

Depreciation and amortization for the three-month period ended June 30, 2005, increased by 9 percent to $1.2 million from $1.1 million in 2004. For the six-month period ended June 30, 2005, depreciation and amortization for the six-month period ended June 30, 2005, increased to $2.3 million up 21% from $1.9 million in 2004. The increases in both 2005 periods are due to the Fund's past capital expenditure program in 2004 and 2005.

The Fund realized a net gain on disposal of drilling equipment of $138,000 for the three-month period ended June 30, 2005, compared to $333,000 in the 2004 period. The disposals relate to insured equipment lost in well bores and are uncontrollable in nature.

During the six-month period ended June 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 June 30, 2005, the Fund reported a net income tax recovery of $15,000, compared to a net provision for taxes of $191,000 in the 2004 period. The tax recovery in the 2005 period results primarily from Phoenix operating as an income fund. Cash distributions are deductible in calculating taxable income of the Fund. Phoenix's effective income tax rate for the 2004 period was 120%, as compared to the expected statutory rate of 34% at that time. The higher effective rate related to an adjustment made to the income tax provision relating to the accounting for the recognition of future income tax benefits that were associated with a previously unrecognized future income tax asset that arose from an earlier acquisition. For the six-month period ended June 30, 2005, the Fund reported a provision for income taxes of $0.3 million, compared to $0.9 million in the 2004 period. The effective tax rate for the 2005 period was 6 percent, compared to a statutory rate of 34 percent.

There was no new long-term debt issued in the period ended June 30, 2005, and the Fund made long-term debt repayments of $0.4 million.

As at June 30, 2005, the Fund had working capital of $11.4 million, as compared to $12.2 million as at December 31, 2004. Phoenix anticipates that it will be able to fund its 2005 capital expenditure program through a portion of its cash flow from operations, its working capital, and the utilization of its unused debt capacity if required.

For the three-month period ended June 30, 2005, the Fund incurred $1.5 million in capital expenditures, as compared to $0.8 million in the 2004 period. In the 2005 period, expenditures related to the completion of CLT systems, systems in work in progress and the acquisition of other down hole drilling and miscellaneous equipment.

As at June 30, 2005, Phoenix had the capacity to run fifty-four concurrent jobs in North America. Almost one half of the MWD guidance system fleet is currently deployed in the United States to meet the exceptional high level of demand in that region. The Fund currently possesses twenty-two CLT guidance systems and thirty-two mud pulse systems. During the three-month period ended June 30, 2005, the Fund manufactured an additional two CLT systems for field use, with another system in the process of manufacture. A total of four CLT systems have been manufactured and placed in service in the 2005 year. In the third quarter of 2005, the Fund plans on building a further ten CLT systems and purchasing an additional two mud pulse systems. By the end of 2005 it is expected that the Fund will possess a MWD fleet totaling sixty-seven guidance systems of which thirty-three would be CLT units.

OUTLOOK

Despite a slowdown in Phoenix's activity caused by excessive rain and flooding that occurred in southern Alberta and southeastern Saskatchewan in June, Phoenix expects that its Canadian horizontal and directional drilling activity will continue to produce exceptional growth throughout the remainder of 2005. The US operations continue to exceed internal growth expectations and it is anticipated that their current rate of expansion will continue. The Fund has committed to deploy significant capital investment into the US operation in the third quarter to support their level of activity. This investment will help to alleviate third party equipment rentals and maximize profitability. The Fund is currently experiencing demand in the US and Canada that is nearing maximum job capacity.

Industry analysts are expecting the drilling markets to be very active for the balance of 2005 and into 2006. In order to meet the expected service demand for the balance of the year Phoenix has committed to manufacture and place into service an additional eleven CLT systems and purchase at least two additional mud pulse systems along with numerous downhole mud motors and other equipment. By the end of 2005 it is expected that Phoenix will have a guidance fleet of sixty-seven systems.

The Fund continues to work on the development and commercialization of certain technologies that will open up new markets for Phoenix in both Canada and the United States. Testing results to date on these technologies have been very encouraging and it is hoped that benefits from these projects will commence in the second half of 2005.

FORWARD-LOOKING STATEMENTS

Some matters discussed in this report may be considered 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".

(1) Source: Daily Oil Bulletin



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

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

Current assets
Cash and cash equivalents $ 4,430,196 $ 5,933,924
Accounts receivable 13,250,771 12,307,097
Inventory 704,396 871,316
Prepaid expenses 759,496 448,722
Income taxes recoverable 356,000 265,200
------------------------------------------------------------------------
19,500,859 19,826,259

Drilling and other equipment 22,579,089 22,163,871
Intangibles 168,750 300,000
Goodwill 8,876,351 8,876,351
Investment tax credit receivable 1,424,589 1,387,471
------------------------------------------------------------------------
$ 52,549,638 $ 52,553,952
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities $ 5,662,781 $ 5,289,273
Distributions payable 934,268 823,994
Current portion of long-term debt 1,500,000 1,500,000
------------------------------------------------------------------------
8,097,049 7,613,267

Long-term debt 2,525,000 3,275,000
Future income taxes 2,506,000 2,239,200
------------------------------------------------------------------------
13,128,049 13,127,467

Unitholders' equity
Unitholders' capital 32,646,198 32,386,415
Contributed surplus 755,977 654,900
Foreign currency adjustment (1,500,560) (1,624,827)
Accumulated earnings 17,863,160 13,297,556
Accumulated cash distributions (10,343,186) (5,287,559)
------------------------------------------------------------------------
39,421,589 39,426,485

------------------------------------------------------------------------
$ 52,549,638 $ 52,553,952
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Earnings
Three and six months ended June 30, 2005 and 2004

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue $ 11,680,991 $ 7,929,668 $ 27,772,587 $ 20,330,077
Direct costs 7,897,628 5,530,859 17,468,943 12,861,871
------------------------------------------------------------------------
Gross profit 3,783,363 2,398,809 10,303,644 7,468,206
------------------------------------------------------------------------

Expenses
Selling,
general and
administrative 1,644,702 1,470,923 3,391,738 3,187,168
Depreciation and
amortization 1,185,622 1,050,042 2,250,128 1,912,486
Foreign exchange
loss (gain) 50,162 13,588 56,297 (46,273)
Interest on
long-term debt 43,107 54,566 87,527 98,512
Interest income (40,216) (15,482) (69,424) (83,609)
Gain on
disposition of
drilling equipment (138,342) (332,636) (266,226) (415,413)
------------------------------------------------------------------------
2,745,035 2,241,001 5,450,040 4,652,871
------------------------------------------------------------------------
Operating income 1,038,328 157,808 4,853,604 2,815,335
Investment tax
credit income - - - (1,039,000)
------------------------------------------------------------------------
Earnings before
income taxes 1,038,328 157,808 4,853,604 3,854,335
------------------------------------------------------------------------

Provision for
(recovery of)
income taxes
Current 20,000 645,100 20,000 1,090,100
Future (35,000) (454,527) 268,000 (233,527)
------------------------------------------------------------------------
(15,000) 190,573 288,000 856,573
------------------------------------------------------------------------

Net earnings
(loss) $ 1,053,328 $ (32,765) $ 4,565,604 $ 2,997,762
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per
unit - basic $ 0.05 $ 0.00 $ 0.22 $ 0.17
Earnings per
unit - diluted $ 0.05 $ 0.00 $ 0.22 $ 0.16
------------------------------------------------------------------------
------------------------------------------------------------------------



Consolidated Statements of Accumulated Earnings

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Accumulated
earnings,
beginning
of period 16,809,832 11,054,820 13,297,556 8,024,293
Amounts paid in
excess of par
value on
cancellation of
common shares - (1,068,668) - (1,068,668)
Net earnings
(loss) 1,053,328 (32,765) 4,565,604 2,997,762
------------------------------------------------------------------------
Accumulated
earnings, end
of period $ 17,863,160 $ 9,953,387 $ 17,863,160 $ 9,953,387
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Cash Flows
Three and six months ended June 30, 2005 and 2004

Three months Six months
ended June 30 ended June 30
2005 2004 2005 2004
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Cash flows from
operating
activities
Net earnings
(loss) $ 1,053,328 $ (32,765) $ 4,565,604 $ 2,997,762
Add (deduct)
items not
affecting cash
Depreciation and
amortization 1,185,622 1,050,042 2,250,128 1,912,486
Future income
taxes (35,000) (454,527) 268,000 (233,527)
Unrealized
foreign exchange
(gain) loss 47,291 13,588 47,902 (46,273)
Gain on
disposition of
drilling
equipment (138,342) (332,636) (266,226) (415,413)
Stock-based
compensation 59,148 37,419 118,296 87,858
------------------------------------------------------------------------
2,172,047 281,121 6,983,704 4,302,893
Change in non-cash
working capital 2,760,067 1,754,835 (815,419) (614,264)
------------------------------------------------------------------------
4,932,114 2,035,956 6,168,285 3,688,629
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash flows from
investing activities
Proceeds on
disposition of
drilling
equipment 442,457 517,146 679,154 721,338
Acquisition of
drilling and
other equipment (1,495,751) (804,159) (2,897,355) (1,826,954)
Business
acquisition - - - (5,503,803)
------------------------------------------------------------------------
(1,053,294) (287,013) (2,218,201) (6,609,419)
------------------------------------------------------------------------

Cash flows from
financing activities
Issuance of units 232,160 481,526 241,543 557,493
Repayment of
long-term debt (375,000) (382,599) (750,000) (2,351,440)
Distributions
to unitholders' (2,473,172) - (4,945,355) -
Dissenting
shareholder
disbursements - (909,265) - (1,068,668)
Issue of
long-term debt - - - 1,500,000
------------------------------------------------------------------------
(2,616,012) (810,338) (5,453,812) (1,362,615)
------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents 1,262,808 938,605 (1,503,728) (4,283,405)
Cash and cash
equivalents,
beginning of
period 3,167,388 2,325,523 5,933,924 7,547,533
------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 4,430,196 $ 3,264,128 $ 4,430,196 $ 3,264,128
------------------------------------------------------------------------
------------------------------------------------------------------------


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)
    or
    Phoenix Technology Services Inc.
    Suite 630, 435 4th Avenue SW
    Calgary, Alberta T2P 3A8