UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(Amendment No. 1)
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 27, 2004
PROSPECT ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 333-114552 43-2048643
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Number) Identification Number)
10 East 40th Street, New York, New York 10016
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(Address of principal executive offices) (Zip Code)
(212) 448-0702
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(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2.):
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
INFORMATION INCLUDED IN THIS REPORT
As previously disclosed in the current report on Form 8-K filed
September 27, 2004 (the "Initial 8-K") and the quarterly report on Form 10-Q for
the period ended September 30, 2004, Prospect Energy Corporation acquired
substantially all of the assets of Gas Solutions Ltd. through its wholly owned
subsidiaries, effective as of September 24, 2004, under an Amended and Restated
Purchase and Sale Agreement executed on September 23, 2004, between Gas
Solutions Ltd. and MNW Partners, LLC. The assets involved in the acquisition of
Gas Solutions Ltd. included the operations of certain gas gathering systems in
Gregg, Upshur, Rusk and Smith counties of East Texas as well as two processing
facilities in the Longview and Chapel Hill areas of East Texas. Such assets
acquired from Gas Solutions Ltd. are held in Gas Solutions II Ltd., a wholly
owned subsidiary of Prospect Energy. The acquisition cost was $28,503,000 plus
acquisition expenses of $1,841,000, principally comprising underwriting fees and
related legal and professional fees, for a total cost of $30,344,000. In this
Amendment No. 1 to Current Report on Form 8-K/A, or the "Amended 8-K/A," we
refer to Prospect Energy Corporation as "Prospect Energy," "we," "us" or "our"
and to Gas Solutions Ltd. as "Gas Solutions."
Included in the acquisition cost as mentioned above, Gas Solutions II
Ltd. executed a Secured Promissory Note, or the Note, in the amount of $25
million payable to Prospect Energy, and executed a first mortgage and security
agreement encumbering substantially all of its assets to secure the Note. On
September 30, 2004, Prospect Energy transferred its equity investment in Gas
Solutions II, Ltd. into a wholly owned, consolidated subsidiary, Prospect Energy
Holdings, Inc., or "PEHI." Prospect Energy hereby amends the Initial 8-K to
provide the required financial statements relating to its acquisition of Gas
Solutions, all as more fully described in this Amended 8-K/A.
SECTION 8 - OTHER EVENTS
Item 8.01 Other Events
On December 6, 2004, Dallas Gas Partners, LP ("DGP") served Prospect
Energy with a complaint filed November 30, 2004 in the United States District
Court for the Southern District of Texas in Galveston. DGP alleges that DGP was
defrauded and that Prospect Energy breached its fiduciary duty to DGP and
tortiously interfered with DGP's contract with Gas Solutions in connection with
Prospect Energy's agreement with DGP. The complaint seeks relief not limited to
$100 million. Each of the principals of the predecessor general partner of DGP,
constituting all the management and ownership interests in such predecessor, and
all of the limited partners of DGP, on September 24, 2004 executed a release in
favor of Prospect Energy, forever discharging Prospect Energy from any and all
claims in connection with Prospect Energy's agreement with DGP. Prospect Energy
believes that the DGP complaint is frivolous and without merit, and Prospect
Energy intends to defend the matter vigorously.
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following financial statements of Gas Solutions are included at the
end of this Amended 8-K/A and are filed together with this Amended 8-K/A and
incorporated into this Amended 8-K/A by reference. Please see pages F1 - F12 to
this Amended 8-K/A.
(b) Pro forma financial information.
In this Amended 8-K/A, Prospect Energy furnishes the unaudited pro
forma Statements of Operations for the three months ended September 30, 2004 and
for the fiscal year ended June 30, 2004, illustrating the effects of the Gas
Solutions acquisition as if it had been consummated as of the beginning of the
period. In accordance with Rule 11-02(c)(1) of Regulation S-X of the Securities
Exchange Act of 1934, as amended, a pro forma balance sheet has not been
prepared to give effect to the first quarter acquisition of Gas Solutions as it
is already reflected in the consolidated balance sheet presented in the
quarterly report filed on Form 10-Q for the period ended September 30, 2004.
1
Prospect Energy was organized on April 13, 2004. Prospect Energy did
not conduct any operations prior to the closing of its initial public offering,
which closed on July 30, 2004, and did not close its first investment until
September 24, 2004.
The pro forma financial statements included in this Amended 8-K/A do
not purport to represent what Prospect Energy's actual results of operations or
financial position would have been had the acquisition of Gas Solutions been
consummated on or prior to such dates or for the periods indicated. You should
not view these financial statements as necessarily indicative of the effects
that may be expected to occur in the future. We have prepared these unaudited
pro forma financial statements for informational purposes only, and you should
read them in conjunction with the consolidated financial statements and notes of
Prospect Energy and the other financial information included in Prospect
Energy's quarterly report on Form 10-Q for the period ended September 30, 2004.
See pages F13 - F15 attached to this Amended 8-K/A.
(c) Exhibits.
Listed below are the exhibits that are furnished herewith as part of
this report (according to the number assigned to them in Item 601 of Regulation
S-K):
Exhibit No. Description of Document
--------------------------------------------------------------------------------
2.1 Amended and Restated Purchase and Sale Agreement between Gas
Solutions Ltd. and MNW Partners, LLC*(1)
(1) Previously filed as an exhibit to Prospect Energy's Quarterly
Report on Form 10-Q for the period ended September 30, 2004,
filed on November 12, 2004.
* Prospect Energy agrees to furnish supplementally a copy of any
omitted schedules to the SEC upon request.
This Amended Form 8-K/A may contain, among other things,
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements with respect to Prospect
Energy's plans, objectives, expectations and intentions and other statements
identified by words such as "may," "could," "would," "will," "should,"
"believes," "expects," "anticipates," "estimates," "intends," "plans" or other
similar expressions. We base such statements on currently available operating,
financial and competitive information; such statements are subject to various
risks and uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations. You should not
place undue reliance on such forward-looking statements, as they speak only as
of the date on which they are made. Additional information regarding these and
other risks and uncertainties is contained in our periodic filings with the
Securities and Exchange Commission.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Amendment No. 1 to Current Report
on Form 8-K/A to be signed on its behalf by the undersigned hereunto duly
authorized.
PROSPECT ENERGY CORPORATION
(Registrant)
By: /s/ John F. Barry III
-------------------------------
Name: John F. Barry III
Title: Chief Executive Officer
Date: December 7, 2004
TABLE OF CONTENTS OF FINANCIAL STATEMENTS
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PAGE
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GAS SOLUTIONS, LTD.
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2003 (audited) and as of
September 23, 2004 (audited) F-2
Statements of Income for the year ended December 31, 2003 (audited)
and the eight months and 23 days in the period ended September 23, 2004
(audited) F-3
Statements of Partners' Capital for the year ended December 31, 2003
(audited) and the eight months and 23 days in the period ended
September 23, 2004 (audited) F-4
Statements of Cash Flows for the year ended December 31, 2003
(audited) and the eight months and 23 days in the period ended
September 23, 2004 (audited) F-5
Notes to Financial Statements F-6
PROSPECT ENERGY CORPORATION
Pro Forma Condensed Statement of Operations for the three months ended
September 30, 2004 (unaudited) F-13
Pro Forma Condensed Statement of Operations for the fiscal year
ended June 30, 2004 (unaudited) F-14
Notes to Pro Forma Financial Statements F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Prospect Energy Corporation
New York, New York
We have audited the accompanying balance sheets of Gas Solutions, Ltd. (a Texas
Limited Partnership) as of September 23, 2004 and December 31, 2003, and the
statements of income, partners' capital, and cash flows for the eight months and
23 days in the period ended September 23, 2004 and for the year ended December
31, 2003. These financial statements are the responsibility of Prospect Energy's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gas Solutions, Ltd. as of
September 23, 2004 and December 31, 2003, and the results of its operations and
its cash flows for the eight months and 23 days in the period ended September
23, 2004 and for the year ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
December 7, 2004
F-1
GAS SOLUTIONS, LTD.
BALANCE SHEETS
September 23, December 31,
Assets 2004 2003
---------------- --------------
Current Assets
Cash and cash equivalents.............................................. $ 2,417,901 $ 908,103
Accounts receivable, net of $50,000 allowance for both periods......... 4,409,953 3,544,982
Inventory.............................................................. 185,652 92,389
Prepaid expenses....................................................... 192,735 38,424
---------------- --------------
Total current assets........................................................ 7,206,241 4,583,898
---------------- --------------
Property, Plant and Equipment
Land................................................................... 644,073 201,700
Building............................................................... 61,401 61,401
Gathering systems...................................................... 4,591,948 4,591,947
Plant equipment and vehicles........................................... 6,700,921 6,586,726
Office furniture and equipment......................................... 190,635 180,169
---------------- --------------
12,188,978 11,621,943
Less accumulated depreciation............................................... (5,990,406) (4,978,244)
---------------- --------------
Total property, plant and equipment......................................... 6,198,572 6,643,699
---------------- --------------
Other Asset
Producer contracts, net of $444,338 and $411,851 of amortization....... 205,391 237,878
---------------- --------------
Total Assets................................................................ $ 13,610,204 $ 11,465,475
================ ==============
Liabilities and Partners' Capital
Current liabilities
Accounts payable....................................................... $ 2,551,010 $ 2,301,247
Retirement contributions payable....................................... -- 59,575
Accrued expenses....................................................... 1,897,818 1,623,297
---------------- --------------
Total current liabilities................................................... 4,448,828 3,984,119
---------------- --------------
Commitments and Contingencies
Partners' Capital........................................................... 9,161,376 7,481,356
---------------- --------------
Total Liabilities and Partners' Capital..................................... $ 13,610,204 $ 11,465,475
================ ==============
See accompanying notes to financial statements.
F-2
GAS SOLUTIONS, LTD.
STATEMENTS OF INCOME
For the Eight
Months and 23
Days in the For the Year
Period Ended Ended
September 23, December 31,
2004 2003
---------------- --------------
Net Revenues................................................................ $ 12,217,641 $ 12,140,331
Operating and administrative expenses....................................... 5,795,243 6,676,352
---------------- --------------
Net income from operations.................................................. 6,422,398 5,463,979
---------------- --------------
Other Income (Expense)
Loss on disposition of assets.......................................... - (8,885)
Interest income........................................................ 7,622 8,353
Interest expense....................................................... - (66,704)
---------------- --------------
Total other income (expense)................................................ 7,622 (75,589)
---------------- --------------
Income from continuing operations........................................... 6,430,020 5,397,275
---------------- --------------
Discontinued Operations
Loss from operations of discontinued assets............................ - (13,466)
Gain on disposal of assets............................................. - 2,299,017
---------------- --------------
Total Income from Discontinued Operations.................................. - 2,285,551
---------------- --------------
Net Income.................................................................. $ 6,430,020 $ 7,682,826
================ ==============
See accompanying notes to financial statements.
F-3
GAS SOLUTIONS, LTD.
STATEMENTS OF PARTNERS' CAPITAL
General Limited
Partner Partners Total
--------------- --------------- ---------------
Partners' Capital, January 1, 2003.................... $ 79,006 $ 7,821,566 $ 7,900,572
Net income............................................ 76,828 7,605,998 7,682,826
Partner distributions................................. (81,020) (8,021,022) (8,102,042)
--------------- --------------- ---------------
Partners' Capital, December 31, 2003.................. 74,814 7,406,542 7,481,356
Net income............................................ 64,300 6,365,720 6,430,020
Partner distributions................................. (47,500) (4,702,500) (4,750,000)
--------------- --------------- ---------------
Partners' Capital, September 23, 2004................. $ 91,614 $ 9,069,762 $ 9,161,376
=============== =============== ===============
See accompanying notes to financial statements.
F-4
GAS SOLUTIONS, LTD.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
For the Eight
Months and 23
Days in the For the
Period Ended Year Ended
September 23, December 31,
2004 2003
---------------- --------------
Cash Flows from Operating Activities:
Net income.................................................................. $ 6,430,020 $ 7,682,826
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation....................................................... 1,012,162 1,251,384
Amortization of producer contracts................................. 32,487 113,742
Gain on disposition of assets...................................... -- (2,299,017)
Accounts receivable................................................ (864,971) (51,465)
Inventory.......................................................... (93,263) 38,173
Prepaid expenses................................................... (154,311) 82
Accounts payable................................................... 249,763 (416,437)
Retirement contributions payable................................... (59,575) 59,575
Accrued expenses................................................... 274,521 (94,393)
---------------- --------------
Net cash provided by operating activities................................... 6,826,833 6,284,470
---------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of assets........................................... -- 16,000,000
Purchase of property, plant and equipment.............................. (567,035) (695,470)
Purchase of Chapel Hill processing plant............................... -- (2,000,000)
---------------- --------------
Net cash provided (used) by investing activities............................ (567,035) 13,305,530
---------------- --------------
Cash Flows from Financing Activities:
Repayment of long-term debt............................................ -- (12,000,000)
Partner distributions.................................................. (4,750,000) (8,102,042)
---------------- --------------
Net cash used by financing activities....................................... (4,750,000) (20,102,042)
---------------- --------------
Net increase (decrease) in cash and cash equivalents........................ 1,509,798 (512,042)
---------------- --------------
Cash and cash equivalents at beginning of period............................ 908,103 1,420,145
---------------- --------------
Cash and cash equivalents at end of period.................................. $ 2,417,901 $ 908,103
================ ==============
See accompanying notes to financial statements.
F-5
GAS SOLUTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
Gas Solutions, Ltd., or "Gas Solutions," was formed in 1998 as a Texas limited
partnership for the purpose of purchasing and operating a natural gas pipeline
gathering system and processing plant located in Longview, Texas. Gas Solutions
began operations of the Longview plant effective March 1, 1999. A second gas
gathering system located in Price, Texas was purchased in 1999 and began
operations December 1, 1999. In addition to the two gas gathering systems and
one processing plant, Gas Solutions operates approximately 1,000 miles of
pipeline for gathering and delivery of gas and natural gas liquid products.
On February 21, 2003, Gas Solutions sold all of its interests in oil, gas and
mineral leases, along with all real and personal property used in the operations
of those properties to Danmark Energy L.P., effective January 1, 2003. Also
included in the assets sold was Gas Solutions' office building, and a 2.437%
interest in the Exxon-Mobil Corporation Dover-Hennessey Gas Products Plant
located in Kingfisher County, Oklahoma. The total consideration received for the
assets was $16,000,000.
In September 2003, Gas Solutions purchased and began operating the Chapel Hill
Plant near Winona, Texas. This operation includes approximately 100 miles of
low-pressure pipeline, which is used for gathering and processing gas from
numerous operators in Smith County. The natural gas liquid products are marketed
by truck to various customers, and the remaining gas is delivered to a major
pipeline.
In January 2004, Gas Solutions signed an agreement with Exxon-Mobil to build a
pipeline from Exxon's facilities in Hawkins, Texas to Gas Solutions' processing
plant in Longview. The terms of the agreement provide for Gas Solutions to build
and own the pipeline. Upon completion of the pipeline, Gas Solutions will
receive a fee for transporting Exxon-Mobil's products through the pipeline.
Effective as of September 24, 2004, Prospect Energy Corporation acquired,
through 100% owned entities, substantially all of the assets of Gas Solutions
pursuant to the Amended and Restated Purchase and Sale Agreement executed on
September 23, 2004, for a total purchase price of $30,344,000.
Partner Capital Accounts
Gas Solutions' partnership agreement provides that the net cash flow (as defined
in such agreement) shall be distributed to the general and limited partners in
accordance with their partnership percentage. Excess revenue over expenses shall
be allocated among the general and
F-6
limited partners in the same proportions as net cash flow described above.
Excess expenses over revenue shall be allocated, in all cases, among the general
and limited partners in accordance with their partnership percentages.
Revenue Recognition
Gas Solutions gathers casinghead gas from oil and gas well lease operators and
processes the gas for its liquid products. The natural gas liquid (NGL) products
are ethane, propane, butane and gasoline and are transported primarily by
pipeline. Gas Solutions' NGL sales are significantly concentrated in three
customers. These three customers represented 87% of total sales for the period
ended September 23, 2004, and 77% of total sales for the year ended December 31,
2003. Sales prices are tied to the Mt. Belvieu, Texas and Non-TET price indexes
for those liquid products. A significant portion of the dry residue gas is used
to fuel the operations of the plant and the remainder is sold to natural gas
pipelines or sold back to the lease operators for lease operations.
All products are metered and revenues are recognized each month based on the
pipeline meter readings for products delivered.
Environmental Issues
Gas Solutions is subject to extensive Federal, state and local environmental
laws and regulations. These laws regulate the discharge of materials into the
environment and may require Gas Solutions to remove or mitigate the
environmental effects of the disposal or release of petroleum substances at
various sites. Environmental expenditures are expensed or capitalized depending
on their future economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future economic benefit are
expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessments and/or remediation is probable, and the costs can be
reasonably estimated. Such liabilities are generally undiscounted unless the
timing of cash payments for the liability or component are fixed or reliably
determinable. Currently, Gas Solutions is only aware of a limited number of
remediation issues and those issues are not considered to be material to the
financial statements.
Management's Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. Gas
Solutions reviews all significant estimates affecting the financial statements
on a recurring basis and records the effect of any necessary adjustments prior
to their issuance.
F-7
Cash Equivalents
For purposes of the statements of cash flows, Gas Solutions considers interest
bearing investments with original maturities of three months or less to be cash
equivalents.
Income Taxes
Gas Solutions is not a taxpaying entity for federal income tax purposes;
accordingly, a provision for income taxes has not been recorded in the
accompanying financial statements. Partnership income and losses are reflected
in the partners' individual or corporate income tax returns in accordance with
their ownership percentages.
Note 2 - Operating Agreements
Gas Solutions has an agreement with Sulphur River Gathering LP (SRG) to operate
and maintain SRG's low pressure gathering system, compress and process
casinghead gas, and perform some administrative and accounting functions. This
agreement was assigned by SRG to Enbridge Pipelines, LLC (EPL) during 2002. All
costs to integrate the two systems were shared on a 50/50 basis and SRG
reimbursed Gas Solutions for those costs over the first six months of delivery
of gas. For these services EPL pays a monthly fee as specified in the contract.
Gas Solutions received monthly payments of $45,020 for the period ended
September 23, 2004 and $43,709, for the year ended December 31, 2003 for these
services. In addition, Gas Solutions receives a compression fee equal to $0.05
per mcf for each stage of compression, with approximately four stages required.
Gas Solutions also retains various percentages of the individual natural gas
liquids. The primary term of the agreement is for 10 years ending April 1, 2010,
with a year-to-year renewal thereafter.
Gas Solutions entered into an agreement with Exxon Mobil Corporation to receive
and process all gas produced from wells connected to approximately fifty-eight
miles of pipeline system and associated facilities located in Gregg and Rusk
Counties in Texas. Gas Solutions receives a compression fee equal to $0.05 per
mcf stage of compression, not to exceed a total of four stages of compression.
Gas Solutions also retains various percentages of the individual natural gas
liquids. The primary term of the agreement is for 10 years ending August 31,
2011, with a year-to-year renewal thereafter.
Note 3 - Accounts Receivable
Gas Solutions' receivables consist of amounts due from the sales of natural gas
liquid products, dry gas sales, oil and gas production and the amounts billed
for management and processing fees pursuant to operating agreements with various
customers. At September 23, 2004 and December 31, 2003, receivables from three
customers represented 63% and 71% of total receivables. Receivables are
uncollateralized with 30-day terms.
It is management's policy to review the outstanding accounts receivable at
period-end, as well as prior bad debt experience, and as a result, established
an allowance for doubtful accounts of approximately $50,000 for both periods.
F-8
Note 4 - Inventory
Inventory is stated at the lower of cost or market. Inventory consists of
chemical and lubricant supplies used in plant operations and natural gas liquids
in the pipeline at the financial statement date.
The following is a summary of inventory at September 23, 2004 and December 31,
2003:
September 23, December 31,
2004 2003
------------------- ----------------
Chemicals and lubricants............. $ 34,635 $ 31,631
NGL.................................. 7,017 10,758
Parts inventory...................... 144,000 50,000
------------------- ----------------
Total inventory...................... $ 185,652 $ 92,389
=================== ================
Note 5 - Property and Equipment
Property and equipment have been recorded at cost. The cost of bulk purchases of
assets, such as the Longview plant, the Price plant, and the Chapel Hill plant,
were allocated based on their respective fair values as set forth by the
purchase and sale agreements for each plant. Depreciation is provided over the
estimated useful lives of the assets as follows:
Description Method Life
---------------------------------------- ------------------- --------------------
Building.............................. Straight Line 15 years
Gathering systems..................... 200 DB 10 years
Plant equipment & vehicles............ 200 DB 5-10 years
Office furniture & equipment.......... 200 DB 5-10 years
Depreciation expense for the period ended September 23, 2004 and for the year
ended December 31, 2003 totaled $1,012,162 and $1,251,384, respectively.
Additions, improvements, and expenditures for repairs and maintenance on
equipment that are material in nature and significantly add to the productivity
or extend the economic life of assets are capitalized. Any immaterial amounts
incurred as recurring expenditures for repairs are charged to operations.
Note 6 - Other Asset
In connection with the acquisition of its Longview and Price plants and an
operating interest in the Dover-Hennessey Gas Products Plant, Gas Solutions
purchased existing producer contracts with oil and gas well lease operators. The
purchase price was assigned to those contracts based on their respective fair
values as set forth in the purchase and sale agreements for each plant.
Accumulated amortization on these contracts was $444,338 and $411,851 at
September 23, 2004 and December 31, 2003, respectively.
F-9
For purposes of amortization, methods and useful lives were determined by
management's assessment of asset recoverability and provided for as follows:
Description Method Life
---------------------------------------------------------- ---------------------------- ---------------
Producer contracts-Longview and Price Plants Units of Production 15 years
Producer contracts-Dover-Hennessey Plant Straight Line 10 years
Note 7 - Notes Payable
Gas Solutions had a revolving credit loan agreement with Bank of Texas, N.A. The
original proceeds were used to retire existing indebtedness and finance the
acquisition and development costs of Gas Solutions' oil and gas production
activities. The balance was paid in full in February 2003.
Note 8 - Pension Plan
Gas Solutions has adopted a Simplified Employee Pension - Individual Retirement
Accounts Contribution under section 408(k) of the Internal Revenue Code for all
employees who are at least 18 years old and are compensated $450 or more during
the year. Contributions are made at the discretion of Gas Solutions and are
limited by the provisions of the Internal Revenue Code. For the year ended
December 31, 2003, the contribution was 5% of compensation, or $59,575. For the
period ended September 23, 2004, no contribution was made.
Note 9 - Related Party Transactions
Gas Solutions contracted with Well-Pro Services, L.P. to provide certain oil and
gas well operating services. A limited partner, Daniel M. Mitchell, of Well-Pro
Services is also limited partner of Gas Solutions. Gas Solutions paid $139,317
to Well-Pro Services in 2003. This agreement was terminated in February 2003
when Gas Solutions' oil and gas production interests were sold.
Danmark Energy L.P. provides accounting and clerical support services to Gas
Solutions. Under a verbal agreement, Gas Solutions pays Danmark $2,500 per month
for these services. This agreement was terminated September 24, 2004.
Gas Solutions contracted with a limited partner, Daniel M. Mitchell, to provide
consulting services and to supervise the overall plant operations. This
agreement requires Gas Solutions to pay the limited partner $5,000 per month for
5 years beginning March 1, 2003 for these services. This agreement was
terminated September 24, 2004.
F-10
As discussed in Note 1, Gas Solutions sold substantially all of its interests in
oil and gas working interests, the Dover-Hennessey Gas Processing Plant, and
related assets to Danmark Energy L.P. for $16,000,000. The sale was effective
January 1, 2003. The interest in the Dover-Hennessey Gas Processing Plant was
reacquired in September 2003 for $700,000 and sold to an unrelated third-party
on the same day at the same price.
Note 10 - Commitments and Contingencies
Commitments
As part of an agreement with Bank of America, Gas Solutions agreed that Gas
Solutions would assign and convey to the Bank of America's designee, Lasalle
Street Natural Resources Corporation, a Net Profits Interest (NPI) in the
Longview Gas Plant. This assignment was made as additional consideration payable
to Bank of America and not as additional collateral security, and is to be
retained in perpetuity. Total NPI payments totaled $163,847 and $159,623 for the
period ended September 23, 2004 and the year ended December 31, 2003,
respectively.
Contingencies
The Longview Gas Plant is constructed on 35 acres of 111.26 acres of an
undivided tract of land referred to as 115 acres, more or less, out of the
Jefferson Mosley Survey, A-153, Gregg County, Texas. Gas Solutions owns 97.9165%
of the tract and leases the balance. Currently there exists one heir that
refuses to sign a surface lease agreement or to accept the lease payment
offered. The lease agreements currently in effect expire in 2006. Management is
attempting to purchase the remaining interests. For those not interested in
selling, management plans to seek from the courts a partitioning of the land.
Litigation
Gas Solutions is a defendant in a lawsuit claiming a royalty interest in leases
previously owned by Gas Solutions. The plaintiff has claimed an interest in the
property since the 1930's, and has included all oil companies owning the subject
lease since that time. The amount and likelihood of any loss from the lawsuit is
unknown at this time.
Gas Solutions is also a defendant in a lawsuit which alleges a property owner's
land was damaged by the activities of Gas Solutions. The property owner seeks
$36,000 in damages. The outcome of this lawsuit is unknown at this time, but
legal counsel believes that the case will ultimately be resolved for an amount
less than $36,000.
Gas Solutions is a defendant in a lawsuit which alleges property damages against
several oil companies. The 188th Judicial District Court of Gregg County, Texas,
has entered a summary judgment on Gas Solutions' behalf, because any damages
occurred prior to the time Gas Solutions acquired title to the property. The
amount of any loss from this lawsuit is unknown at this time.
Note 11 - Concentration of Credit Risk
F-11
Gas Solutions maintains a majority of its cash balances at one local financial
institution. At times such investments may be in excess of the Federal Deposit
Insurance Corporation (FDIC) limit. At September 23, 2004, the cash balances
which were not covered by FDIC insurance totaled $2,317,901.
As described in Note 1, Gas Solutions gathers casinghead gas from oil and gas
well lease operators and processes the gas for its liquid products. Gas
Solutions' NGL sales are significantly concentrated in three customers. Sales
prices are tied to the Mt. Belvieu, Texas and Non-TET price indexes for those
liquid products, and Gas Solutions' economic conditions could be affected by
fluctuations in those indexes.
Note 12 - Supplemental Cash Flow Information
For the year ended December 31, 2003, Gas Solutions paid interest in cash
totaling $88,514. There was no interest paid for the period ended September 23,
2004.
F-12
PROSPECT ENERGY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the three months ended September 30, 2004 (unaudited)
(in thousands, except per share data)
Prospect Energy Gas Solutions Adjustments Notes Pro forma
------------------- -------------- ----------------- --------- -------------
Operating income:
Interest income $ 266 -- -- $ 266
Other income -- $ 4,675 $ (4,675) 1,2 --
---------------------------------------------------- -------------
Total operating income $ 266 $ 4,675 $ (4,675) $ 266
---------------------------------------------------- -------------
Operating expenses:
Investment advisory fee $ 337 -- -- $ 337
Administration fee 73 -- -- 73
Insurance expense 61 58 (58) 2 61
Legal and professional fees 160 -- -- 160
General and administrative expenses 69 -- -- 69
Other operating expenses -- 1,922 (1,922) 2 0
---------------------------------------------------- -------------
Total operating expenses 700 1,980 (1,980) 700
---------------------------------------------------- -------------
Net investment income (loss) $ (434) $ 2,695 $ (2,695) $ (434)
---------------------------------------------------- -------------
Net unrealized depreciation $ (7) -- -- $ (7)
---------------------------------------------------- -------------
Net decrease in stockholder's equity
resulting from operations $ (441) -- -- $ (441)
==================================================== =============
Basic net decrease in stockholders'
equity per common share resulting
from operations $ (0.09) -- -- $ (0.09)
See accompanying notes to pro forma financial statements.
F-13
PROSPECT ENERGY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the fiscal year ended June 30, 2004 (unaudited)
(in thousands, except per share data)
Prospect Energy Gas Solutions Adjustments Notes Pro forma
------------------- -------------- ----------------- --------- -------------
Operating income:
Other income -- $ 15,365 $ (15,365) 1 --
---------------------------------------------------- -------------
Total operating income -- $ 15,365 $ (15,365) --
---------------------------------------------------- -------------
Operating expenses:
Insurance expense -- 194 (194) --
Legal and professional fees $ 100 -- -- $ 100
Other operating expenses -- 7,670 (7,670) --
---------------------------------------------------- -------------
Total operating expenses $ 100 7,864 (7,864) 100
---------------------------------------------------- -------------
Net investment income (loss) -- $ 7,501 $ (7,501) --
---------------------------------------------------- -------------
Net unrealized depreciation -- -- -- --
---------------------------------------------------- -------------
Net decrease in stockholder's equity
resulting from operations $ 100 -- -- $ 100
==================================================== =============
Basic net decrease in stockholders'
equity per common share resulting
from operations -- -- -- $ (1.00)
See accompanying notes to pro forma financial statements.
F-14
PROSPECT ENERGY CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. Adjustment to reflect Prospect Energy filing under the Investment Act of
1940, as amended (the "1940 Act"). Effective as of September 24, 2004,
Prospect Energy acquired through wholly owned entities substantially all of
the assets of Gas Solutions Ltd. under an Amended and Restated Purchase and
Sale Agreement executed on September 23, 2004. Such assets acquired from
Gas Solutions Ltd. are held in Gas Solutions II Ltd., a wholly owned
subsidiary of Prospect Energy. On September 30, 2004, Gas Solutions II Ltd.
was transferred to, and will be consolidated into, PEHI. Since Prospect
Energy files reports with the SEC as an investment company under the rules
and regulations of the 1940 Act, Prospect Energy reflects its investment in
Gas Solutions at fair value in this Amended 8-K/A and does not consolidate
its investment in Gas Solutions in its financial statements.
2. The financial information for Gas Solutions is reflected as of
September 23, 2004, and therefore does not reflect the purchase accounting
adjustment resulting from Prospect Energy's acquisition of substantially
all of the assets of Gas Solutions under the Amended and Restated Purchase
and Sale Agreement executed on September 23, 2004.
F-15