UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-114552
PROSPECT ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland
43-2048643
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
10 East 40th Street New York, New York
10016
(Address of principal executive offices)
(Zip Code)
(212) 448-0702
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of December 31, 2005 was 7,055,100.
PROSPECT ENERGY CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2005 TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
FINANCIAL STATEMENTS (unaudited)
Balance Sheets as of December 31, 2005 and June 30, 2005
Schedule of Investments as of December 31, 2005
4
Schedule of Investments as of June 30, 2005
6
Statements of Operations for the three and six months ended December 31, 2005, for the three and six months ended December 31, 2004 and for the twelve months ended June 30, 2005.
8
Statement of Stockholders’ Equity for the six months ended December 31, 2005 and for the twelve months ended June 30, 2005
9
Statements of Cash Flows for the six months ended December 31, 2005, for the six months ended December 31, 2004 and for the twelve months ended June 30, 2005
10
Notes to Financial Statements
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
21
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
22
Legal Proceedings
Unregistered Sales in Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
23
Item 5.
Other Information
Item 6.
Exhibits
Signatures
24
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PROSPECT ENERGY CORPORATION BALANCE SHEETS (in thousands, except share and per share amounts)
December 31, 2005
June 30, 2005
(unaudited)
Assets
Cash held in segregated account (Note 3)
$
—
9,587
Investment in controlled entity, Gas Solutions Holdings, Inc. at value (cost - $23,274 and $23,327, respectively, Note 3)
30,100
29,500
Investments in uncontrolled entities, at value (cost - $74,477 and $64,197, respectively, Note 3)
74,557
64,366
Accrued interest receivable
483
206
Due from Gas Solutions Holdings, Inc. (Note 3)
201
Due from Prospect Capital Management, LLC (Note 5)
5
Due from Prospect Administration, LLC (Note 5)
20
Prepaid expenses
219
49
Total assets
105,384
103,909
Liabilities
Accrued liabilities
592
818
Due to Prospect Capital Management, LLC (Note 5)
1,032
77
Other current liabilities
107
47
Total liabilities
1,731
942
Commitments and contingencies (Notes 3 and 7)
Stockholders’ equity (Notes 1, 4 and 6)
Common stock, par value $.001 per share (100,000,000 and 100,000,000 common shares authorized, respectively, 7,055,100 and 7,055,100 issued and outstanding, respectively)
7
Paid-in capital in excess of par
97,026
96,955
Distributions in excess of net investment income
(286
)
(337
Net unrealized appreciation
6,906
6,342
Total stockholders’ equity
103,653
102,967
Total liabilities and stockholders’ equity
Net asset value per share
14.69
14.59
See notes to financial statements.
PROSPECT ENERGY CORPORATION SCHEDULE OF INVESTMENTS (unaudited) (in thousands, except share amounts) December 31, 2005
Portfolio Investments (1)
Locale/ Industry
PrincipalAmount/Shares
Cost
Fair Value (2)
% of NetAssets
Gas Solutions Holdings, Inc. (4)
Texas/Gas gathering and processing
- Common shares
100
4,874
11,700
11.3
%
- Subordinated secured note, 18.00% due 12/23/2012
18,400
17.8
- Total
23,274
29.1
Unity Virginia Holdings, LLC (3)
Virginia/Coal production
- Preferred shares, 100%, non-voting
86
501
0.5
- Subordinated secured note, 17.65% due 1/31/2009
3,078
3,013
2,987
2.9
3,514
3,488
3.4
Stryker Energy II, LLC (3)
Ohio / Oil and gas production
- Common shares, Class A
931
0.9
- Preferred shares, Class B
539
- Senior secured note, 14.12% due 4/8/2010
13,330
13,118
13,154
12.7
14,588
14,624
14.1
Whymore Coal (3)
Kentucky/Coal production
- Preferred shares, Convertible, Series A
1,000
123
0.1
- Senior secured note, 15.00% due 3/31/2009
5,810
5.6
5,933
5.7
Natural Gas Systems, Inc. (3)
Texas/Oil and gas production
- Warrants, Expiring 2/2/2010
600,000
210
80
- Warrants, Revocable, Expiring 2/2/2010
400,000
50
0.0
- Senior secured note, 14.00% due 2/3/2010
4,000
3,757
3,729
3.6
3,967
3,859
3.7
PROSPECT ENERGY CORPORATION SCHEDULE OF INVESTMENTS (unaudited) (in thousands, except share amounts) December 31, 2005 (continued)
PrincipalAmount/ Shares
% of Net Assets
Miller Petroleum, Inc. (3)
Tennessee/Oil and gas production
- Warrants, Expiring 5/4/2010
630,000
150
190
0.2
Worcester Energy Company, Inc. (3)
Maine/Wood processing and biomass power generation
- Preferred stock, Convertible, Series A
15
- Senior secured note, 12.50% due 12/31/2012
10,750
10,494
10.1
10,509
Arctic Acquisition Corporation (3)
Texas/Oilfield services
- Warrants, Common shares, Expiring 7/19/2012
596,251
507
- Warrants, Preferred shares, Expiring 7/19/2012
1,054
- Senior secured note. 13.00% due 6/15/2009
9,250
8,109
7.8
9,123
8.8
Total Portfolio Investments
70,920
77,826
75.1
U.S. Government Security
Yield to Maturity (5)
Federal Home Loan Bank Discount Note due 1/5/2006
3.40%
21,039
21,032
20.3
Money Market Funds
Shares
First American Prime Obligation Fund (Class Y)
4,800,000
4,800
4.6
Fidelity Institutional Government Portfolio (Class I)
999,000
999
1.0
5,799
Total Investments
97,751
104,657
101.0
(1) The securities in which Prospect Energy has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended, or the “Securities Act”. These securities may be resold only in transactions that are exempt from registration under the Securities Act.
(2) Fair value is determined by or under the direction of the board of directors of Prospect Energy (Note 2).
(3) Non-control/non-affiliate position.
(4) Gas Solutions Holdings Inc. is a wholly owned and controlled investment of Prospect Energy.
(5) Yield to maturity at time of purchase.
PROSPECT ENERGY CORPORATION SCHEDULE OF INVESTMENTS (unaudited) (in thousands, except share amounts) June 30, 2005
4,927
11,100
10.7
17.9
23,327
28.6
585
0.6
3,315
3,210
3.1
3,795
947
8,330
8,177
7.9
9,647
9,663
9.3
4,885
4.7
5,008
4.8
1,000,000
175
3,746
3,939
3,921
3.8
PROSPECT ENERGY CORPORATION SCHEDULE OF INVESTMENTS (unaudited) (in thousands, except share amounts) June 30, 2005 (continued)
Principal Amount/Shares
Fair Value(2)
365
0.4
- Senior secured note, 12.50% due 8/21/2006
3,150
2,730
2,778
2.7
3,095
3,143
48,688
55,030
53.3
U.S. Government Securities
U.S. Treasury Bill due 7/7/2005
2.52%
5,518
5,516
5.4
U.S. Treasury Bill due 7/14/2005
2.49%
9,514
9,505
9.2
U.S. Treasury Bill due 7/21/2005
2.55%
22,261
22,226
21.6
Total US Government Securities
37,247
36.2
Money Market Fund
1,589,000
1,589
1.5
87,524
93,866
91.0
(4) Gas Solutions Holdings Inc. is wholly owned and controlled investments of Prospect Energy.
PROSPECT ENERGY CORPORATION STATEMENTS OF OPERATIONS (in thousands)
For the Three months ended December 31, 2005
For the Three months ended December 31, 2004
For the Six months ended December 31, 2005
For the Six months ended December 31, 2004
For the Twelve months ended June 30, 2005
Investment income
Interest income
1,855
271
3,216
537
1,882
Interest income, Gas Solutions Holdings, Inc
828
976
1,656
2,704
Dividend income
163
359
284
Dividend income, Gas Solutions Holdings, Inc (Note 3)
843
1,700
1,399
3,151
Other income
246
414
72
Total investment income
3,935
2,947
7,044
3,213
8,093
Operating expenses
Investment advisory fees
Base management fee (Note 5)
524
495
1,034
832
1,808
Income incentive fee (Note 5)
508
Total investment advisory fees
1,542
Administration costs (Note 5)
87
96
143
169
266
Legal fees (Note 3)
391
984
1,110
1,144
2,575
Valuation services
45
42
Other professional fees
229
230
Insurance expense
85
183
148
325
Director’s fees
55
110
220
Organizational costs (Note 4)
25
General and Administrative expenses
93
1
186
70
191
Total operating costs
1,895
1,718
3,589
2,418
5,682
Net investment income
2,040
1,229
3,455
795
2,411
Net realized loss
(18
(2
488
564
(7
Net increase in stockholders’ equity resulting from operations
2,528
4,001
788
8,751
Basic and diluted net increase in stockholder’s equity per common share resulting from operations (Note 6)
0.36
0.17
0.57
0.11
1.24
PROSPECT ENERGY CORPORATION STATEMENT OF STOCKHOLDERS’ EQUITY (in thousands, except share and per share amount)
Distributions in Excess of Net Investment Income
Paid in Capital in Excess of Par
Common Stock
Net Unrealized Appreciation
Total Stockholders’ Equity
Amount
Balance, June 30, 2004
(100
(99
Issuance of common stock from public offering (net of underwriting costs)
7,055,000
98,417
98,424
Offering costs
(1,463
Net increase in stockholders’ equity resulting from operations for the year ended June 30, 2005
2,409
Dividends declared ($0.38 per share) and paid to stockholders
(2,646
Balance, June 30, 2005
7,055,100
Net increase in stockholder’ equity resulting from operations for the Three months ended September 30, 2005 (unaudited)
1,397
76
1,473
Dividends declared ($0.20 per share) and paid to stockholders (unaudited)
(1,411
Balance, September 30, 2005 (unaudited)
(351
6,418
103,029
Offering Costs
71
Net increase in stockholder’ equity resulting from operations for the three months ended December 31, 2005 (unaudited)
Dividends declared ($0.28 per share) and paid to stockholders (unaudited)
(1,975
Balance, December 31, 2005 (unaudited)
See notes to financial statements
PROSPECTS ENERGY CORPORATION STATEMENTS OF CASH FLOW (in thousands)
Cash flows from operating activities:
Adjustments to reconcile net increase in stockholders’ equity resulting from operations to net cash used in operating activities:
Net unrealized appreciation on investments
(564
(6,342
Amortization of loan origination fees
(377
(72
Change in operating assets and liabilities:
Purchase of investments
(1,160,646
(112,423
(701,558
Sale / refinancing of investments
1,150,796
26,712
614,106
Increase in prepaid expenses
(170
(213
(49
Increase in accrued interest receivable
(277
(64
(206
Decrease (increase) in due from Gas Solutions Holdings, Inc.
(201
Increase in due from Prospect Capital Management, LLC
(5
Increase in due from Prospect Administration, LLC
(20
(42
Increase (decrease) in accrued liabilities
(226
1,335
Increase in other current liabilities
60
Increase (decrease) in due to Prospect Capital Management, LLC
955
491
(23
Net cash used in operating activities
(6,272
(83,409
(84,729
Cash flow from financing activities:
Net proceeds from the issuance of common stock
Offering costs from the issuance of common stock
Dividends declared and paid
(3,386
(705
Net cash (used in) provided by financing activities
(3,315
96,256
94,315
Net (decrease) increase in cash
(9,587
12,847
9,586
Cash, beginning of period
Cash, end of period
12,848
PROSPECT ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS (unaudited) (in thousands except share and per share amounts)
Note 1. Organization and Interim Financial Statements
Prospect Energy Corporation (“Prospect Energy” or the “Company”), a Maryland corporation, was organized on April 13, 2004 and is a closed-end investment company that has filed an election to be treated as a business development company under the Investment Company Act of 1940, (the “1940 Act”). On July 27, 2004, the Company completed its initial public offering and sold 7,000,000 shares of common stock at a price of $15.00 per share, less underwriting discounts and commissions totaling $1.05 per share. On August 27, 2004, an additional 55,000 shares were issued for a price of $15.00 per share, less underwriting discounts and commissions of $1.05 per share in connection with the exercise of an over-allotment option with respect to the offering.
Prospect Energy focuses primarily on investments in energy companies and will invest, under normal circumstances, at least 80.0% of its net assets (including the amount of any borrowings for investment purposes) in these companies. At December 31, 2005, 75.0% of its net assets were invested in energy companies with the remainder invested in U.S. government and money market securities. Prospect Energy is a non-diversified company within the meaning of the 1940 Act. Prospect Energy concentrates on making investments in energy companies having annual revenues of less than $250.0 million and in transaction sizes of less than $100.0 million. In most cases, these companies are privately held or have thinly traded public equity.
The accompanying financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements that were included in the Company’s Form 10-K for the year ended June 30, 2005.
In the opinion of management, all adjustments (consisting primarily of normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year.
Note 2. Significant Accounting Policies
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
The following are significant accounting policies consistently applied by Prospect Energy:
Investments:
(a) Security transactions are recorded on a trade-date basis.
(b) Valuation:
(1) Investments for which market quotations are readily available are valued at such market quotations.
(2) Short-term investments which mature in 60 days or less, such as U.S. Treasury bills, are valued at amortized cost, which approximates market value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. Short-term securities which mature in more than 60 days are valued at current market quotations by an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, or otherwise by a principal market maker or a primary market dealer). Investments in money market mutual funds are valued at their net asset value as of the close of business on the day of valuation.
(3) It is expected that most of the investments in the Company’s portfolio will not have readily available market values. Debt and equity securities whose market prices are not readily available are valued at fair value, with the assistance of an independent valuation service, using a valuation policy and a consistently applied valuation process which is under the direction of our board of directors.
The factors that may be taken into account in fairly valuing investments include, as relevant, the portfolio company’s ability to make payments, its estimated earnings and projected discounted cash flows, the nature and realizable value of any collateral, the financial environment in which the portfolio company operates, comparisons to securities of similar publicly traded companies and other relevant factors. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of these investments may differ significantly from the values that would have been used had a ready market existed for such investments, and any such differences could be material.
As part of the fair valuation process, the Audit Committee reviews the preliminary evaluations prepared by the independent valuation firm engaged by the Board of Directors, as well as management’s valuation recommendations. Management and the independent valuation firm respond to the preliminary evaluation to reflect comments provided by the Audit Committee. The Audit Committee reviews the final valuation report and management’s valuation recommendations and makes a recommendation to the Board of Directors based on its analysis of the methodologies employed and the various weights that should be accorded to each portion of the valuation as well as factors that the independent valuation firm and management may not have included in their evaluation processes. The Board of Directors then evaluates the Audit Committee recommendations and undertakes a similar analysis to determine the fair value of each investment in the portfolio in good faith.
(c) Realized gains or losses on the sale of investments are calculated using the specific identification method.
(d) Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis.
(e) Dividend income is recorded on the ex-dividend date.
(f) Loan origination, facility, commitment, consent and other advance fees received by us on loan agreements or other investments are accreted into income over the term of the loan.
Federal and State Income Taxes:
Prospect Energy has elected to be treated as a regulated investment company and intends to continue to comply with the requirements of the Internal Revenue Code of 1986 (the “Code”), applicable to regulated investment companies. Prospect Energy is required to distribute at least 90% of its investment company taxable income and currently intends to distribute or retain through a deemed distribution all of its investment company taxable income and net capital gain to shareholders; therefore, we have made no provision for income taxes.
The character of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP.
12
Dividends and Distributions:
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a dividend is approved by the board of directors each quarter and is generally based upon management’s estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
Consolidation:
As an investment company, Prospect Energy only consolidates subsidiaries which are also investment companies. At December 31, 2005, Prospect Energy did not have any consolidated subsidiaries.
Guarantees and Indemnification Agreements:
The Company follows FASB Interpretation Number 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” (“FIN 45”). FIN 45 elaborates on the disclosure requirements of a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 did not have a material effect on the financial statements. Refer to Note 3 for further discussion of guarantees and indemnification agreements.
Note 3. Portfolio Investments
As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally viewed to exist when a company or individual owns 25% or more of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through ownership of an amount greater than 5% but less than 25% of the voting securities of the investee company. The Company owns 100% of the outstanding common equity shares of Gas Solutions Holdings, Inc. (“GSHI”) and therefore, has a controlling interest. The Company has no other controlled or affiliated investments.
GSHI has indemnified Prospect Energy against any legal action arising from its investment in Gas Solutions, LP. Prospect Energy has incurred approximately $0.139 million, $0.643 million and $0.760 million in fees associated with this legal action for the three months ended December 31, 2005, for the six months ended December 31, 2005 and for the twelve months ended June 30, 2005, respectively. GSHI has reimbursed Prospect Energy $1.173 million as of December 31, 2005. Prospect Energy has no receivable from GSHI and $0.201 million as of December 31, 2005 and June 30, 2005, respectively. The $1.173 million reimbursement is reflected as dividend income, Gas Solutions Holdings, Inc. on the accompanying statement of operations for the three months ended December 31, 2005, for the six months ended December 31, 2005 and the twelve months ended June 30, 2005, respectively.
The Company provided a limited indemnity to Citibank Texas, N.A. related to Citibank’s term loan to GSHI. The limited indemnity requires us to indemnify Citibank for up to $12.0 million if it realizes losses on the term loan resulting only from potential legal claims that might or could be asserted by certain third parties. This limited indemnity was backed by segregated funds in Prospect Energy’s account valued at $12.9 million. During the quarter ended December 31, 2005 and June 30, 2005, $9.6 million and $3.3 million of previously segregated funds were released to the Company, respectively. These reductions reflected a waiver of the segregated funds requirement due to the developments related to legal claims and prior payments by GSHI to Citibank Texas, N.A., respectively.
On December 6, 2004, Dallas Gas Partners, LP (“DGP”) served Prospect Energy with a Complaint filed November 30, 2004 in the United States District for the Southern District of Texas, Galveston Division. DGP alleges that DGP was defrauded and that Prospect Energy breached its fiduciary duty to DGP and tortiously interfered with DGP’s contract to purchase Gas Solutions, Ltd. (a subsidiary of our portfolio company, GSHI) in connection with Prospect
13
Energy’s alleged agreement in September, 2004 to loan DGP funds with which DGP intended to buy Gas Solutions, Ltd. for approximately $26 million. The Complaint seeks relief not limited to $100 million (Note 7). On November 30, 2005, United States Magistrate Judge John R. Froeschner of the United States District Court for the Southern District of Texas, Galveston Division, issued a recommendation that the court grant Prospect Energy’s Motion for Summary Judgment dismissing all claims by DGP. We believe that the DGP Complaint is frivolous and without merit, and will continue to defend the matter vigorously. However, as with any litigation, the outcome remains uncertain pending final judgment and resolution of any appeals. Any eventual judgment against Prospect Energy could significantly impair the value of the investment in Gas Solutions Holdings, Inc.
Note 4. Organizational and Offering Expenses
A portion of the net proceeds of our initial public offering and the subsequent exercise of the over-allotment option was used for organizational and offering expenses of $0.125 million and $1.386 million, respectively. Organizational expenses were expensed as incurred. Offering expenses were charged against paid-in capital in excess of par. All organizational and offering expenses were borne by Prospect Energy.
Note 5. Related Party Agreements and Transactions
Investment Advisory Agreement
Prospect Energy has entered into an Investment Advisory Agreement with Prospect Capital Management LLC (the “Investment Adviser”) under which the Investment Adviser, subject to the overall supervision of Prospect Energy’s board of directors, will manage the day-to-day operations of, and provide investment advisory services to, Prospect Energy. For providing these services the Investment Adviser will receive a fee from Prospect Energy, consisting of two components--a base management fee and an incentive fee. The base management fee will be calculated at an annual rate of 2.00% on Prospect Energy’s gross assets (including amounts borrowed). The base management fee is payable quarterly in arrears based on the average value of Prospect Energy’s gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter are appropriately pro rated.
The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on Prospect Energy’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees and other fees that Prospect Energy receives from portfolio companies) accrued during the calendar quarter, minus Prospect Energy’s operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment in kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of Prospect Energy’s net assets at the end of the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). However, our Investment Adviser has voluntarily agreed that for each fiscal quarter after January 1, 2005, the quarterly hurdle rate will be equal to the greater of (a) 1.75% and (b) a percentage equal to the sum of the daily average of the “quoted treasury rate” for each month in the immediately preceding two quarters plus 0.50%. “Quoted treasury rate” means the yield to maturity (calculated on a semi-annual bond equivalent basis) at the time of computation for Five Year U.S. Treasury notes with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H). These calculations will be appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter. The voluntary agreement by the Investment Adviser that the hurdle rate be fluctuating for each fiscal quarter after January 1, 2005 (as discussed above) may be terminated by the Investment Adviser at any time upon 90 days’ prior notice. The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2% base management fee. Prospect Energy pays the Investment Adviser an income incentive
14
fee with respect to Prospect Energy’s pre-incentive fee net investment income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which Prospect Energy’s pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Prospect Energy’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7% annualized hurdle rate); and (3) 20% of the amount of Prospect Energy’s pre-incentive fee net investment income, if any, that exceeds 125% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7% annualized hurdle rate). These calculations are appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter. The investment adviser intends to use 30% of any incentive fee that it is paid to purchase shares of our common stock, generally as soon as practicable following payment of such incentive fee.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of Prospect Energy’s realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser, Prospect Energy calculates the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each of the investments in its portfolio. For this purpose, aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Aggregate realized capital losses equal the sum of the amounts by which the net sales price of each investment, when sold, is less the original cost of such investment since inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable date and the original cost of such investment. At the end of the applicable period, the amount of capital gains that serves as the basis for Prospect Energy’s calculation of the capital gains incentive fee equals the aggregate realized capital gains less aggregate realized capital losses and less aggregate unrealized capital depreciation with respect to its portfolio of investments. If this number is positive at the end of such period, then the capital gains incentive fee for such period is equal to 20% of such amount, less the aggregate amount of any capital gains incentive fees paid in respect of its portfolio in all prior periods.
The Investment Advisory fees were $0.524 million, $0.495 million, $1.034 million, $0.832 million and $1.808 million for the three months ended December 31, 2005, for the three months ended December 31, 2004, for the six months ended December 31, 2005, for the six months ended December 31, 2004 and for the twelve months ended June 30, 2005, respectively. The Income Incentive fees were $0.508 million and none for the three months ended December 31, 2005 and for the twelve months ended June 30, 2005, respectively. At December 31, 2005 the Company owed the Investment Adviser $0.524 million in investment advisory base management fees and $0.508 million in income incentive fees. Also, the Company was owed $0.005 million for legal costs and miscellaneous expenses that it paid on behalf of the Investment Advisor.
Administration Agreement
Prospect Energy has also entered into an Administration Agreement with Prospect Administration, LLC (“Prospect Administration”) under which Prospect Administration, among other things, provides administrative services and facilities for Prospect Energy. Prospect Administration has engaged Vastardis Fund Services LLC (formerly, EOS Fund Services LLC) to serve as sub-administrator of Prospect Energy. For providing these services, Prospect Energy reimburses Prospect Administration for Prospect Energy’s allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement, including rent, the fees of the sub-administrator for services provided with respect to Prospect Energy and Prospect Energy’s allocable portion of the compensation of its chief compliance officer and chief financial officer and their respective staffs. Prospect Administration also provides on Prospect Energy’s behalf managerial assistance to those portfolio companies to which Prospect Energy is required to provide such assistance. Prospect Administration is a wholly owned subsidiary of the Investment Adviser.
The Company reimbursed Prospect Administration $0.087 million, $0.096 million, $0.143 million, $0.169 million and $0.266 million for the three months ended December 31, 2005, for the three months ended December 31, 2004, for the six months ended December 31, 2005, for the six months ended December 31, 2004 and for the twelve months ended June 30, 2005, respectively, for services it provided to Prospect Energy at cost. The Company also reimbursed Prospect Administration for certain expenses which Prospect Administration initially funded on behalf of the Company. At December 31, 2005, the Company was owed $0.021 million for tax compliance fees and miscellaneous expenses that it paid on behalf of Prospect Administration.
Managerial Assistance
As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. The company received $0.065 million, and $0.077 million for the three and six months ended December 31, 2005, and for the twelve months ended June 30, 2005, respectively, of these assistance fees from GSHI. These fees are paid to the Investment Adviser.
Note 6. Financial Highlights
The following is a schedule of financial highlights for the three and six months ended December 31, 2005 and for the twelve months ended June 30, 2005:
For the three months ended December 31, 2005
For the six months ended December 31, 2005
For the twelve months ended June 30, 2005
Per share data (1):
Net asset value at beginning of period
14.60
(0.01
Proceeds from initial public offering
13.95
Costs related to the initial public offering
0.01
(0.21
0.29
0.49
0.34
0.07
0.08
0.90
(0.28
(0.48
(0.38
Net asset value at end of period
Per share market value at end of period
15.07
12.60
Total return based on market value (2)
14.98
23.65
(13.46
)%
Total return based on net asset value (2)
2.53
4.01
7.40
Shares outstanding at end of period
Ratio/supplemental data:
Net assets at end of period (in thousands)
Annualized ratio of operating expenses to average net assets
6.95
5.52
Annualized ratio of net operating income to average net assets
7.87
8.50
(1) Financial highlights as of December 31, 2005 and June 30, 2005 are based on 7,055,100 shares outstanding.
(2) Total return based on market value is based on the change in market price per share between the opening and ending market prices per share in each period and assumes that dividends are reinvested in accordance with Prospect Energy’s dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in each period and assumes that dividends are reinvested in accordance with Prospect Energy’s dividend reinvestment plan. The total return is not annualized.
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Note 7. Litigation
The Company is a defendant in two legal actions arising out of its activities. While predicting the outcome of litigation is inherently very difficult, and the ultimate resolution, range of possible loss and possible impact on operating results cannot be reliably estimated, management believes, based upon its understanding of the facts and the advice of legal counsel, that it has meritorious defenses for both actions. We continue to defend both of these actions vigorously, and believe that resolution of these actions will not have a materially adverse effect on the Company’s financial position.
On December 6, 2004, Dallas Gas Partners, LP (“DGP”) served Prospect Energy with a Complaint filed November 30, 2004 in the United States District for the Southern District of Texas, Galveston Division. DGP alleges that DGP was defrauded and that Prospect Energy breached its fiduciary duty to DGP and tortiously interfered with DGP’s contract to purchase Gas Solutions, Ltd. (a subsidiary of our portfolio company, GSHI) in connection with Prospect Energy’s alleged agreement in September 2004 to loan DGP funds with which DGP intended to buy Gas Solutions, Ltd. for approximately $26 million. The Complaint seeks relief not limited to $100 million. On August 9, 2005, we filed our Motion for Summary Judgment requesting dismissal of the DGP suit in its entirety based on a written agreement dated September 23, 2004 that Prospect and the partners of DGP negotiated under which Prospect paid $2.5 million and reimbursed all of DGP’s expenses totaling over $1.5 million in return for an assignment of DGP’s contract to purchase Gas Solutions, Ltd., and the parties exchange of mutual releases. On November 30, 2005, United States Magistrate Judge John R. Froeschner of the United States District Court for the Southern District of Texas, Galveston Division, issued a recommendation that the court grant Prospect Energy’s Motion for Summary Judgment dismissing all claims by DGP. We believe that the DGP Complaint is frivolous and without merit, and will continue to defend the matter vigorously until final judgment is entered.
On April 7, 2005 a former officer of the Company filed a complaint with the Occupational Safety and Health Administration of the Department of Labor (“OSHA”) alleging discrimination, retaliation, infliction of emotional distress and other claims. This officer seeks economic reinstatement and other relief. On September 15, 2005, OSHA issued findings, including an order dismissing this complaint. The complainant filed written objections to the order and requested a hearing before an Administrative Law Judge. On January 23, 2006, we filed a Motion for Summary Decision with the U.S. Department of Labor Office of Administrative Law Judges requesting dismissal of the complaint and affirmation of the OSHA order. Oral argument on the subject motion has been scheduled for March 16, 2006. The Company does not believe that these claims, even if ultimately resolved against the Company, would be material. The Company believes the complaint is frivolous and without merit and intends to defend itself vigorously.
Note 8. Subsequent Events
On January 23, 2006, Prospect Energy provided an additional $0.8 million of senior secured debt and acquired a controlling interest of the common equity of Worcester Energy Company, Inc.
On January 23, 2006, Prospect Energy provided an additional $0.1 million of senior secured debt to Whymore Coal.
On January 31, 2006, Prospect Energy provided an additional $1.0 million of senior secured debt to Natural Gas Systems, Inc.
On February 9, 2006, Prospect Energy provided $6.9 million of senior secured debt to Genesis Coal Company, Inc.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Prospect Energy Corporation to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations or investments, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described from time to time in our Securities and Exchange Commission, or the “SEC”, reports filed before this report.
The forward-looking statements included in this quarterly report represent our estimates as of the date of this quarterly report. We specifically disclaim any obligation to update these forward-looking statements in the future. Some of the statements in this quarterly report constitute forward-looking statements, which relate to future events or our future performance or financial condition. Such forward-looking statements contained in this quarterly report involve risks and uncertainties.
We use words such as “anticipates,” “believes,” “expects,” “future,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason. We caution you that forward-looking statements of this type are subject to uncertainties and risks, many of which cannot be predicted or quantified.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Form 10-Q.
Overview
Prospect Energy was incorporated under the Maryland General Corporation Law in April 2004. We have elected to be treated as a business development company under the 1940 Act. Accordingly, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. We will typically invest under normal circumstances, at least 80% of net assets in energy companies.
We completed our initial public offering on July 27, 2004. As of December 31, 2005, we continue to pursue our investment strategy and 75.0% of our net assets are invested in energy companies, with the remainder invested in U.S. government and money market securities.
We invest in companies in the energy industry, most of which have relatively short or no operating histories. These companies are and will be subject to all of the business risk and uncertainties associated with any new business enterprise, including the risk that these companies may not reach their investment objective and the value of our investment in them may decline substantially or fall to zero.
Our portfolio generated an annualized current yield of 18.3 % and 21.3% as of December 31, 2005 and as of June 30, 2005, respectively, across all our long-term debt and equity investments. This yield includes interest from all of our long-term investments as well as dividends from GSHI and Unity Virginia Holdings. We expect this number to decline over time as we become fully invested. Monetization of, or dividends from, other equity positions that we hold is not included in this yield estimate.
Critical Accounting Policies
In determining the fair value of our investments at December 31, 2005, the Audit Committee considered valuations from an independent valuation firm and from management having an aggregate range of $77.391 million to $81.030 million.
Results of Operations
A comparison of the current quarter and six month results to the quarter and six months ended December 31, 2004 may not necessarily be meaningful as our portfolio was largely invested in cash equivalents from our initial IPO in July of 2004. Accordingly, references and comparisons are made against our previous quarter ended September 30, 2005 in addition to the quarter and six months ended December 31, 2004.
Investment Activity
We completed our fifth full quarter of operations since completion of our initial public offering on July 30, 2004, with approximately 20.4% of our net assets invested in obligations of the Federal Home Loan Bank; 75.0% or about $77.4 million in eight long-term portfolio investments; and 5.7% in two money market funds. The remaining 1.1% represents liabilities in excess of other assets.
Long-Term Portfolio Investments
During the quarter ended December 30, 2005, we had one repayment of debt in entirety. On December 29, 2005 Miller Petroleum, Inc. repaid $3.2 million that was originally due August 21, 2006. We have retained our equity interest in Miller Petroleum, Inc.
There were no new portfolio investments made during the three months ended December 31, 2005.
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and capital gains or losses on any debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including commitment, origination, structuring or due diligence fees, and possibly consultation fees. Any such fees generated in connection with our investments are recognized as earned.
Investment income, which consists of interest income, dividend income, and origination fee accretion totaled $3.9 million for the quarter ended December 31, 2005 compared to $3.1 million for the quarter ended September 30, 2005 and $2.9 million for the quarter ended December 31, 2004. As well, investment income totaled $7.0 million for the six month ended December 31, 2005 compared to $3.2 million for the six months ended December 31, 2004. Additionally, interest income increased by 22.6% quarter-over-quarter as a result of interest received from one additional portfolio investment in Arctic, as well as two follow-on fundings made to Stryker and Whymore during the quarter and described earlier. The remaining investment income during the three months ended December 31, 2005 was generated primarily from investments in short-term United States Treasury Bills, Federal Home Loan Bank Discount Notes and cash equivalents.
Operating Expenses
Our primary operating expenses consist of investment advisory fees, legal and professional fees and other operating and overhead-related expenses. These expenses include our allocable portion of overhead under the Administration Agreement with Prospect Administration under which Prospect Administration provides administrative services and facilities for Prospect Energy. Our investment advisory fees compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions in accordance with our Administration Agreement with Prospect Administration.
Operating expenses totaled $1.9 million for the quarter ended December 31, 2005 as compared to $1.7 million for the quarter ended September 30, 2005 and $1.7 million for the quarter ended December 31, 2004. As well, operating expenses totaled $3.6 million for the six months ended December 31, 2005 compared to $2.4 million for the six months ended December 31, 2004. These expenses consisted of investment advisory and administrative services fees,
19
professional fees, insurance expenses, directors fees and other general and administrative expenses. The base management fee totaled $0.5 million for the quarter ended December 31, 2005 compared to $0.5 million for the quarter ended September 30, 2005 and $0.5 million for the quarter ended December 31, 2004. As well, the base management fee totaled $1.0 million for the six months ended December 31, 2005 compared to $0.8 million for the six months ended December 31, 2004. The current quarter is the first quarter where an income incentive fee has been earned by the Investment Adviser. The fee totaled $0.5 million. Legal and professional fees began to decrease during the three months ended December 31, 2005, as litigation related costs began to decrease.
Net Investment Income, Net Unrealized Appreciation and Net Increase in Stockholders’ Equity Resulting from Operations
Prospect Energy’s net investment income totaled $2.0 million for the quarter ended December 31, 2005 compared to $1.4 million for the quarter ended September 30, 2005 and $1.2 million for the quarter ended December 31, 2004. As well, net investment income totaled $3.5 million for the six months ended December 31, 2005 compared to $0.8 million for the six months ended December 31, 2004. Net investment income represents the difference between investment income and operating expenses and is directly impacted by the items described above. Net unrealized appreciation totaled $0.5 million for the quarter ended December 31, 2005 compared to $0.1 million for the quarter ended September 30, 2005 and none for the quarter ended December 31, 2004, primarily as a result of the increase in fair value of our investment in GSHI. As well, net unrealized appreciation totaled $0.6 million for the six months ended December 31, 2005 compared to none for the six months ended December 31, 2004. Net increase in stockholders’ equity resulting from operations represents the sum of the returns generated from net investment income, realized gains (losses) and from unrealized appreciation (depreciation).
Financial Condition, Liquidity and Capital Resources
The Company’s liquidity and capital resources were generated primarily from the remaining net proceeds of its initial public offering as well as from cash flows from operations. We generated $97.0 million in cash from the net proceeds of our initial offering. We also generated cash flows from operations totaling $3.5 million for the six months ended December 31, 2005 compared to $0.8 million for the six months ended December 31, 2004. We declared and paid dividends totaling $3.4 million for the six months ended December 31, 2005 compared to $0.7 million for the six months ended December 31, 2004. In the future, we may also fund a portion of our investments through borrowings from banks, issuances of senior securities or secondary offerings. We may also securitize a portion of our investments in mezzanine or senior secured loans or other assets. We have initiated discussions with providers of commercial credit with respect to a syndicated commercial credit facility which, together with other borrowings (which may include reverse repos and similar transactions), may be used in the future to leverage our capital. Our objective is to put in place such borrowings in order to expand our portfolio. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock.
At December 31, 2005, we held no cash in the segregated account maintained in conjunction with a limited indemnity issued to Citibank Texas, N.A. (formerly First American Bank, SSB). The limited indemnity with Citibank required us to indemnify Citibank for up to $12.0 million for any losses it realizes on its term loan to GSHI resulting only from potential legal claims that might or could be asserted by certain third parties. . This limited indemnity was backed by the funds in the segregated account. During the quarter ended December 31, 2005 and June 30, 2005, $9.6 million and $3.3 million of previously segregated funds were released to the Company, respectively. These reductions reflected a waiver of the segregated funds requirement due to the developments related to legal claims and prior payments by GSHI to Citibank Texas, N.A., respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to financial market risks, including changes in interest rates, equity price risk and some of the loans in our portfolio may have floating rates. To date, a significant, but declining, percentage of our assets have been and are invested in short-term U.S. Treasury bills. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the three and six months ended December 31, 2005 and the twelve months ended June 30, 2005, we did not engage directly in hedging activities.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, Prospect Energy carried out an evaluation, under the supervision and with the participation of Prospect Energy’s management, including Prospect Energy’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of Prospect Energy’s disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, as of January 25, 2006, the chief executive officer and the chief financial officer have concluded that Prospect Energy’s current disclosure controls and procedures are effective in timely alerting them of material information relating to Prospect Energy that is required to be disclosed by Prospect Energy in the reports it files or submits under the Securities Exchange Act of 1934.
Internal Control Over Financial Reporting
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such responsibility is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Prospect Energy’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, thought not eliminate, this risk.
At March 31, 2005, Prospect Energy’s wholly owned portfolio company, GSHI, paid certain legal fees associated with Prospect’s restructuring of the GSHI transaction in the amount of $0.414 million. At the time, Prospect Energy’s management made the determination that these legal fees should not be reimbursed to their wholly owned subsidiary, in effect triggering a distribution. This distribution was deemed to be a return of capital, reducing Prospect Energy’s basis in GSHI without determining the cumulative earnings of GSHI as defined by GAAP and whether the distribution was a dividend. Management has since conducted an analysis of the cumulative GAAP earnings of GSHI and has determined that the distribution was indeed a return of capital and that the Company appropriately reduced its basis in GSHI. At June 30, 2005, Prospect Energy was reimbursed for $0.559 million and was owed $0.201 million of legal fees with respect to the Dallas Gas Partners Litigation (Note 7). The reimbursement is not considered an arms length transaction, in effect triggering a distribution. This distribution was deemed to be an expense reimbursement, reducing Prospect Energy’s Legal Fees, not as a distribution which requires a determination of the cumulative earnings of GSHI as defined by GAAP and whether the distribution was
a dividend. Management has since conducted an analysis of the cumulative GAAP earnings of GSHI and has determined that the distribution was indeed a dividend and that the Company had to increase its dividend income and legal fees. Management has mitigated this control weakness by preparing a monthly analysis of GSHI’s cumulative GAAP earnings.
There have been no changes in Prospect Energy’s internal control over financial reporting that occurred during the six months ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not aware of any other material pending legal proceeding, and no such material proceedings are known to be contemplated, to which we are a party or of which any of our property is subject.
Item 2. Unrealized Sales of Equity Securities and Use of Proceeds.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Corporation’s annual meeting of shareholders held on November 21, 2005 for which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, the following matters were voted upon by shareholders:
Votes
% of Shares Voted
To elect two Class I directors of the Company, who will each serve for a term of three years, or until their successors are duly elected and qualified; and
Robert A. Davidson
Affirmative
6,200,982
98.554%
Withhold
90,957
1.446%
Walter V.E. Parker
6,195,132
98.461%
96,807
1.539%
To ratify the selection of BDO Seidman, LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending June 30, 2006.
For
6,268,380
99.625%
Against
9,113
0.145%
Abstain
14,446
0.230%
Item 5. Other Information.
Item 6. Exhibits
Exhibit No.
Description of Exhibit
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/l5d-14(a)
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Dated: February 9, 2006
By:
/s/ John F. Barry III
John F. Barry III
Chief Executive Officer and Chairman of the Board of Directors