U.S. Securities and Exchange Commission
Washington DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 2001
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------------------- ----------------------
Commission file number 33-95156
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Wolverine Energy 1998-1999(A) Development Company, L.L.C.,
Wolverine Energy 2001(B) Development Company, L.L.C.,
Wolverine Energy 1998-1999(C) Development Company, L.L.C.,
Wolverine Energy 1998-1999(D) Development Company, L.L.C.,
Wolverine Energy 1998-1999(E) Development Company, L.L.C.,
Wolverine Energy 1998-1999(F) Development Company, L.L.C.,
Wolverine Energy 1998-1999(G) Development Company, L.L.C.,
Wolverine Energy 1998-1999(H) Development Company, L.L.C.,
Wolverine Energy 1998-1999(I) Development Company, L.L.C.,
and Wolverine Energy 1998-1999(J) Development Company, L.L.C.
-------------------------------------------------------------
(Exact name of small business issuer in its charter)
Michigan 38-3435348 (Program A)
-------- ----------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4660 South Hagadorn Road, Suite 230, East Lansing, MI 48823
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 517-351-4444
------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: _____________________________________
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
PART I
ITEM 1. FINANCIAL STATEMENTS
In the following materials, "Program A" and "LLC" both refer to
Wolverine Energy 1998-1999(A) Development Company, L.L.C. and "the Manager" and
"WELLC" both refer to Wolverine Energy, L.L.C.
2
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT COMPANY, L.L.C.
Financial Notes and Discussion
Unaudited
BALANCE SHEET
--------------------------------------------------------
9/30/01 9/30/00 Variance
---------------- ---------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 2,619 $ (2,619)
Accounts receivable -- 1,250 (1,250)
---------------- ---------------- --------------
Total Current Assets -- 3,869 (3,869)
PROPERTY AND EQUIPMENT
Wells and related equipment and facilities 2,581,091 2,581,091 --
Accumulated depreciation and depletion (26,052) (16,206) (9,846)
---------------- ---------------- --------------
Net carrying amount 2,555,039 2,564,885 (9,846)
---------------- ---------------- --------------
TOTAL ASSETS $2,555,039 $2,568,754 $(13,715)
================ ================ ==============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,176 $ -- $ 1,176
Accounts payable 57,437 -- 57,437
Accounts payable-related party 62,039 123,425 (61,386)
Advances from related party 281,577 -- 281,577
---------------- ---------------- --------------
Total current liabilities 402,229 123,425 278,804
MEMBERS' EQUITY 2,152,810 2,445,329 (292,519)
---------------- ---------------- --------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $2,555,039 $2,568,754 $(13,715)
================ ================ ==============
3
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT COMPANY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------
2001 2000 Variance
----------------- ------------------ ------------------
REVENUE
Natural gas sales $44,986 $4,120 $ 40,866
Interest income -- 2,804 (2,804)
----------------- ------------------ ------------------
Total revenue 44,986 6,924 38,062
EXPENSES
Well operating fees 42,849 4,705 38,144
Depreciation and depletion 13,500 -- 13,500
Professional fees 83,013 11,801 71,212
General and administrative 13,360 15,734 (2,374)
----------------- ------------------ ------------------
Total expenses 152,722 32,240 120,482
----------------- ------------------ ------------------
NET LOSS $(107,736) $(25,316) $(82,420)
================= ================== ==================
4
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT COMPANY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------
2001 2000 Variance
----------------- ------------------ ------------------
REVENUE
Natural gas sales $22,773 $1,518 $21,255
Interest income -- -- --
----------------- ------------------ ------------------
Total revenue 22,773 1,518 21,255
EXPENSES
Well operating fees 20,482 1,551 18,931
Depreciation and depletion 5,500 -- 5,500
Professional fees 19,232 9,072 10,160
General and administrative (655) (4) (651)
----------------- ------------------ ------------------
Total expenses 44,559 10,619 33,940
----------------- ------------------ ------------------
NET LOSS $(21,786) $(9,101) $(12,685)
================= ================== ==================
5
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT COMPANY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------
2001 2000 Variance
-------------- -------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $44,986 $13,494 $31,492
Cash paid to suppliers and related party (83,108) (16,569) (66,539)
Interest received -- 2,804 (2,804)
-------------- -------------- ----------------
Net cash used in operating
activities (38,122) (271) (37,851)
CASH FLOWS FROM FINANCING ACTIVITIES
Syndication costs paid -- (96,876) 96,876
Repayment of short-term loan from related party -- (205,158) 205,158
Advances from related party 213,852 -- 213,852
Distributions to members (175,730) (106,004) (69,726)
-------------- -------------- ----------------
Net cash provided by (used in)
Financing activities 38,122 (408,038) 446,160
-------------- -------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (408,309) 408,309
CASH AND CASH EQUIVALENTS - Beginning of period -- 410,928 (410,928)
-------------- -------------- ----------------
CASH AND CASH EQUIVALENTS - End of period $ -- $ 2,619 $ (2,619)
============== ============== ================
6
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Wolverine Energy 1998-1999(A) Development Company, L.L.C. (the LLC) was
organized on May 30, 1998 under the laws of the State of Michigan to
engage in oil and gas exploration, drilling, production and sales of
natural gas at properties located throughout the United States. During
1999 and 2000, the LLC advanced monies for re-completion at properties
located in Kansas. By the end of 2000, the LLC had 36 net well
interests in production.
Cash and Cash Equivalents - The LLC considers all liquid investments
purchased with an original maturity date of three months or less to be
cash and cash equivalents.
Turnkey Agreements - The LLC entered into contracts with the Manager to
drill gas wells. Under the terms of the contracts, the Manager managed
the drilling of the wells and the LLC paid a fixed cost per well
working interest. The LLC advanced funds to the Manager in order to
finance the drilling activity.
Wells - The LLC uses the successful efforts method of accounting for
its gas working interests. Costs to acquire the working interest, which
include the LLC's proportionate share of acquisition, drilling and
completion costs, are capitalized. Capitalized costs of acquiring the
working interests are depreciated and depleted by the unit of
production method once the wells are completed. Costs to acquire
working interests that do not find proven reserves are expensed.
Income Taxes - No provision for Federal income taxes has been included
in the financial statements since all income and expenses of the LLC
are allocated to the members in their respective Federal income tax
returns.
Fair Value of Financial Instruments - The fair value of short-term
financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable, approximate their carrying value in
the financial statements due to the short maturity of such instruments.
Syndication - Costs and expenses incurred by the LLC in connection with
syndication have been charged to members' equity.
Use of Estimates - 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 the 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 reporting period. Actual results could differ from these
estimates.
7
NOTE 2 - STATUS OF WELLS IN PROCESS
As of December 31, 2000, all of the wells in which the LLC owns an
interest were completed and in production. The wells are connected to a
pipeline that is experiencing mechanical restraints and capacity
limitations that affect the amount of gas that can flow from the wells.
The Manager participated in a joint venture that acquired the pipeline
in 2001. In the second quarter of 2001, the joint venture undertook
certain improvements to the pipeline. Nonetheless, the volume of
production is still not meeting expectations, and the Manager is
engaged in further study of the wells and their infrastructure.
NOTE 3 - RELATED PARTY TRANSACTIONS
The LLC had acquired working interests in gas properties. Wolverine
Energy, L.L.C. (WELLC) serves as manager for the LLC and, as such, has
full and exclusive discretion in the management and control of the LLC.
The operating agreement required the investor interest holders to pay
approximately 95% of the cost of acquiring the working interests and
the Manager to pay the remaining 5% of such costs. Intangible drilling
costs are allocated 100% to the investor interest holders. Net profits
from sales of production are allocated approximately 90% to the
investor interest holders and 10% to the Manager until such time that
the investor interest holders have recovered their investment in the
LLC. Thereafter, net profits are allocated approximately 70% to the
investor interest holders and 30% to the Manager.
During 1999, the LLC incurred $1,937,629 in costs under turnkey
agreements to WELLC. WELLC has also advanced the payment of other
expenses on behalf of the Company. The Company owed WELLC $62,039 and
$123,425 respectively at September 30, 2001 and 2000.
WELLC advanced $213,852 to the LLC during the nine months ended
September 30, 2001. The balance sheet also reflects advances from WELLC
to the LLC made in 2000 in the amount of $67,725. These amounts are due
on demand.
Under the LLC's operating agreement, WELLC is entitled to receive an
administrative cost allowance equal to $6,184 per month. WELLC may
defer or waive the allowance, in its discretion. WELLC has elected to
defer the fee for the year 2001, while reserving the option of waiver
at a later point in time. The administrative cost allowance was not
booked in the first quarter. For this reason, six months worth of the
allowance was booked during the second quarter totaling $37,103. Three
months worth of the allowance was booked during the third quarter
totaling $18,552.
NOTE 4 - CASH FLOWS
The LLC still owes money associated with the expense of acquiring the
gas well working interests and drilling expense that were incurred in
1999 and 2000. Accounts payable includes $62,039 and $123,425,
respectively for this purpose, at September 30, 2001 and 2000. Accounts
payable for operations were $57,437 and $0 respectively, at September
30, 2001 and 2000.
8
WOLVERINE ENERGY, L.L.C.
Financial Notes and Discussion
Unaudited
BALANCE SHEET
-------------------------------------------
9/30/01 9/30/00
------------------- --------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $-- $852,187
Accounts Receivable:
Related entities 2,070,753 735,677
Other 585,897 340,053
Working interests held for resale 1,591,465 1,500,357
Prepaid expenses -- 18,928
------------------- --------------------
Total Current Assets 4,248,115 3,447,202
EQUIPMENT
Office equipment 56,744 44,069
Accumulated depreciation (39,219) (29,200)
------------------- --------------------
Net carrying amount 17,525 14,869
INVESTMENTS IN RELATED ENTITIES 1,534,516 1,373,390
------------------- --------------------
TOTAL ASSETS $5,800,156 $4,835,461
=================== ====================
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $89,132 $ --
Line of credit 1,075,000 325,000
Current portion of long-term debt 105,000 107,500
Accounts payable:
Trade 262,889 309,851
Operators 5,646,294 3,479,985
Accrued expenses 51,436 2,766
------------------- --------------------
Total current liabilities 7,229,751 4,225,102
LONG-TERM DEBT 207,410 283,261
MEMBER'S EQUITY (DEFICIT) (1,637,005) 327,098
------------------- --------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) $5,800,156 $4,835,461
=================== ====================
9
WOLVERINE ENERGY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------
2001 2000 Variance
------------------ ------------------ -------------------
REVENUE
Turnkey revenue $5,787,762 $5,557,337 $230,425
Management fees 74,867 116,419 (41,552)
Other income 19 196 (177)
------------------ ------------------ -------------------
Total revenue 5,862,648 5,673,952 188,696
EXPENSES
Cost of Sales 4,661,310 4,270,594 390,716
General and administrative 2,770,633 1,538,994 1,231,639
------------------ ------------------ -------------------
Total expenses 7,431,943 5,809,558 1,622,355
------------------ ------------------ -------------------
NET LOSS $(1,569,295) $(135,636) $(1,433,659)
================== ================== ===================
10
WOLVERINE ENERGY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------
2001 2000 Variance
----------------- ------------------ --------------------
REVENUE
Turnkey revenue $ 1,561,844 $ 2,948,963 $ (1,387,119)
Management fees 32,388 77,452 (45,064)
Other income -- 6 (6)
----------------- ------------------ --------------------
Total revenue 1,594,232 3,026,421 (1,432,189)
EXPENSES
Cost of Sales 1,448,585 2,204,618 (756,033)
General and administrative 760,171 306,860 453,311
----------------- ------------------ --------------------
Total expenses 2,208,756 2,511,478 (302,722)
----------------- ------------------ --------------------
NET INCOME (LOSS) $(614,524) $514,943 $(1,129,467)
================= ================== ====================
11
WOLVERINE ENERGY, L.L.C.
Financial Notes and Discussion
Unaudited
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------
2001 2000 Variance
------------------ ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and related parties
9,115,244 $5,576,286 $3,538,958
Cash paid to operators, employees and suppliers (10,821,048) (4,408,719) (6,412,329)
------------------ ----------------- ------------------
Net cash provided by (used in) (1,705,804) 1,167,567 (2,873,371)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (11,279) (4,819) (6,460)
Cash paid for investments in LLC's (119,023) (160,101) 41,078
------------------ ----------------- ------------------
Net cash used in investing activities (130,302) (164,920) 34,618
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net of repayments 1,075,000 -- 1,075,000
Payments on Long term debt (56,250) (260,090) 203,840
Contributions from member -- 267,332 (267,332)
Distributions to member (1,074,695) (741,704) (332,991)
------------------ ----------------- ------------------
Net cash used in financing activities (55,945) (734,462) 678,517
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (1,892,051) 268,185 (2,160,236)
CASH & CASH EQUIVALENTS - Beginning of period 1,892,051 584,002 1,308,049
------------------ ----------------- ------------------
CASH & CASH EQUIVALENTS - End of period $ -- $ 852,187 $(852,187)
================== ================= ==================
12
WOLVERINE ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
September 30, 2001
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Wolverine Energy, L.L.C. (WELLC) acquires working interests in natural
gas prospects throughout the United States, forms oil and gas entities
and sells them the interests on a turnkey basis. WELLC is responsible
for managing the operations of the entities.
Working Interests Held for Resale - WELLC has acquired certain oil and
gas working interests and land leases for the purpose of selling these
interests to oil and gas entities. Such working interests held for
resale are recorded at cost, but are periodically reviewed to determine
if the market value of the working interests and land leases have been
impaired. If impairment exists, a loss is recognized by recording an
impairment allowance. Abandonments of working interests and land leases
held for resale are charged to expense. As of September 30, 2001 no
reserve for impairment has been recorded.
Investments in Related Entities - Investments in related entities are
accounted for under the equity method since WELLC has significant
influence over the management of these entities. WELLC is the manager
of the oil and gas entities and makes initial capital contributions in
accordance with provisions in the respective placement memorandum or
prospectus governing the activities of the particular entity. Income or
losses are allocated to the investment accounts according to WELLC's
ownership interest in the entities. Distributions received are deducted
from the investment accounts.
Turnkey Drilling Revenue - WELLC enters into contracts with affiliated
entities to sell them oil and gas working interests under turnkey
drilling agreements. Under the terms of the agreements, the entities
pay a fixed price for acquisition, drilling and completion costs and
receive working interests in the wells. WELLC agrees to monitor the
well operators' obligation to conduct the drilling and completion of
each well. Turnkey revenue is recognized when the related services have
been performed (working interests have been sold) and substantially all
future obligations have been settled.
Cost of Sales - The Company acquires oil and gas working interests for
resale that require the Company to pay a pro rata portion of all costs
to drill and complete a well. The Company sells these oil and gas
working interests in the wells at a fixed price, generally before the
drilling is completed. Actual costs to drill and complete a well may
exceed the sales price. The Company has the burden of paying all costs
in excess of the turnkey price. Included in the accounts payable at
September 30, 2001 and 2000, and cost of sales, is the estimated total
cost that the Company will be required to pay on working interests that
have been sold. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that the Company may incur
expenses in excess of the amount recorded. Management is of the opinion
that any adjustment of the amount recorded would not have a material
adverse effect on the financial statements.
13
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organizational Fees - In connection with the organization and offering
stage of related oil and gas entities, WELLC may receive an
organizational fee ranging from 1.0% to 2.5% from investor
subscriptions, which is credited to income as earned.
Equipment - Equipment is recorded at cost. Depreciation is computed
using straight line and accelerated methods over the estimated useful
lives of the assets. Costs of maintenance and repairs are charged to
expense as incurred.
Income Taxes - No provision for Federal income taxes has been included
in the financial statements since all income and expenses of WELLC are
allocated to the member in his Federal income tax return.
Use of Estimates - 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 the 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 reporting period. Actual results could differ from these
estimates.
NOTE 2 - AFFILIATED OIL AND GAS ENTITIES
WELLC sponsors the formation of entities, typically limited liability
companies, for the purpose of conducting oil and gas exploration,
development, and production activities on oil and gas properties. WELLC
serves as manager of these entities and, as such, has full and
exclusive discretion in the management and control. The turnkey
drilling and operating agreements that WELLC enters into with the
entities provide that the entities pay for the drilling costs of the
wells at an agreed upon price per well. Profits from oil and gas
properties are allocated based on the working interest ownership
percentage of the properties.
WELLC holds the following investment interest in the following entities
at September 30:
2001 2000
---- ----
Wolverine Antrim Development 1995, LLC 18.9% 18.9%
Wolverine Antrim Development 1996-1, LLC 12.8% 12.8%
Wolverine Antrim Development 1996-2, LLC 14.5% 14.5%
Wolverine Antrim Development 1997-1, LLC 14.8% 14.8%
Wolverine Antrim Development 1997-2, LLC 14.5% 14.5%
Wolverine Antrim Development 1998-1, LLC 12.5% 12.5%
Wolverine Energy 1998-1999(A) Development Company, LLC 10.0% 10.0%
Wolverine Antrim Development 1999-1, LLC 11.5% 11.5%
Wolverine Antrim Development Spotted Horse Prospect, LLC 5.0% 5.0%
Wolverine Antrim Development Spotted Horse Prospect #2, LLC 1.0% 1.0%
Wolverine Antrim Development Spotted Horse Prospect #3, LLC 1.0% 1.0%
Wolverine Antrim Development Spotted Horse Prospect #4, LLC 1.0%
Wolverine Development 2000-1A, LLC 1.0%
14
2001 2000
---- ----
Wolverine Development Spotted Horse Prospect 2001(A), LLC 1.0%
Wolverine Powder River Basin 2001-#5, LLC 1.0%
NOTE 3 - LINE OF CREDIT
The line of credit to a bank is unsecured and due on demand. The line
of credit bears interest at 1.5% above the New York Citibank prime
rate. WELLC's credit limit is $1,075,000. The member guarantees the
line of credit. As of September, 30 2001, the full $1,075,000 had been
borrowed.
NOTE 4 - LONG TERM DEBT
Long-term debt consists of the following:
2001 2000
---- ----
Notes payable to unrelated parties due in monthly installments of
$2,500, with any remaining balance due January 2003. The note bears an
interest rate of 14%. The note is collateralized by certain investments
of the Company and is guaranteed by the member.
$200,000 $200,000
Note payable to bank due in monthly installments of $502 including
interest at a rate of 15.95%. The note is collateralized by equipment.
The balance of the note was paid during 2000.
-0- 3,351
Note payable to bank due in monthly installments of $6,250 plus interest
at a rate of prime plus 1.5%. The note is collateralized by all assets
of the Company and is guaranteed by the member. Final payment is due
April 2003.
112,410 187,410
Total $312,410 $390,761
Less current portion 105,000 107,500
Long-term portion $207,410 $283,261
NOTE 5 - RELATED PARTY TRANSACTIONS
Because of the nature of WELLC's business, a significant number of
transactions are with related parties.
During the first three quarters of 2001 and 2000, WELLC earned turnkey
revenue from related entities in the amount of $5,787,762 and
$5,557,337, respectively. The balance of turnkey revenues, allocated
expenses, administrative cost allowances, and advance reimbursements
owed to WELLC included in accounts receivable at September 30, 2001 and
2000 totaled $2,070,753 and $735,677, respectively. The administrative
cost allowances booked as income may later be waived by WELLC in its
sole discretion.
15
NOTE 6 - COMMITMENTS AND CONTINGENCIES
As managing member in various affiliated oil and gas entities, WELLC is
subject to contingencies that may arise in the normal course of
business of those entities. Management is of the opinion that
liabilities, if any, related to such contingencies that may arise would
not be material to the financial statements.
As of September 30, 2001, WELLC has two offerings it is soliciting. The
maximum investor contribution limit for the private placement offering
is $8,000,000. WELLC is required to match every capital contribution
from an investor in the private offering with a capital contribution of
1% of the investor contribution. If maximum investor contributions are
obtained, WELLC is committed to purchase an additional $80,000 in
limited company memberships. The maximum investor contribution limit
for the public offering is $12,109,408. WELLC is required to match
every capital contribution from an investor in the public offering with
a capital contribution of 5% of the investor contribution. If the
maximum investor contributions are obtained, WELLC is committed to
purchase an additional $605,470 in limited liability company
memberships.
In the first quarter of 2001, WELLC guaranteed 20% of the outstanding
$3,100,000 in debt of a related party, for a total of $620,000.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion should be read in conjunction with the financial
statements and accompanying notes.
PROGRAM A - FOR THE PERIOD ENDING SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
During the nine months ending September 30, 2001, Program A sold 11,080
mcf of gas at an average price $4.06 per mcf, compared to the sale of
1,445 mcf at an average price of $2.85 per mcf during the first nine
months of 2000. Revenues from operations were $44,986 during the first
nine months of 2001, compared with $6,924 during the first nine months
of 2000.
Operating expenses averaged $3.87 per mcf during the first nine months
of 2001 compared to $3.25 per mcf during the first nine months of 2000.
This is reflected in well operating costs for the first nine months of
2001 of $42,849 compared with $4,705 for the first nine months of 2000.
The reason for this significant increase in operating expenses during
the year 2001 was the cold winter weather combined with a wetter than
normal spring. It is impossible to predict from year to year what
weather conditions will be and what impact that may have on operating
expenses. Additionally, several wells had additional work performed to
try to increase production.
Other expenses during the first nine months of 2001 were significantly
greater than the first quarter of 2000. For example, depreciation and
depletion expense of $13,500 was recorded for the first nine months of
2001. Because production had just started during the first nine months
of 2000, there was no depreciation and depletion expense recorded in
the first nine months of 2000.
In addition, professional fees were significantly higher in the first
nine months of 2001 ($83,013 compared with $11,801 in the first nine
months of 2000). This difference in expense levels for professional
fees is explained in part by the fact that the Company's financial
statements for the year 1999 were completed late in the year of 2000,
with invoices paid during the first quarter of 2001. Additional legal
fees were also recorded because of certain regulatory problems
associated with the Company's reliance on prior counsel to register the
offering of memberships in Program A with certain state regulatory
offices and the later discovery that this had not occurred in some
cases.
Under Program A's operating agreement, the Manager is entitled to
receive an administrative cost allowance. The Manager is allowed to
waive or defer the administrative cost allowance. For the first nine
months of 2001, the Manager has elected to defer its administrative
cost allowance from Program A. Depending upon the future financial
performance of the Company, the Manager may later elect to waive or
collect these deferred fees. An administrative cost allowance in the
amount of $55,655 has been booked during the first nine months of 2001.
This is recorded on the professional fees line.
17
Expenses for general and administrative were recorded at $13,360 in the
first nine months of 2001, as compared to $15,734 in the first nine
months of 2000.
As reflected in the Company's Form 10-KSB for the fiscal year ending
December 31, 2000, CB Pipeline, L.L.C., which is owned 50% by
affiliates of the Manager and 50% by Spartan Energy, Ltd., purchased
Great Eastern Pipeline, which is intended to service the wells in
Program A. During the second quarter of 2001, CB Pipeline, L.L.C.
replaced two compressors associated with the pipeline, including the
main compressor at the Williams Tap. While there was some improvement
in overall volumes, the response did not meet the Manager's
expectations. Accordingly, the Manager contracted with Bach
Enterprises, an independent third party based in Kalkaska, Michigan, to
review all of the wells and infrastructure in the Independence
Prospect, which is where all of the wells owned by Program A are
located.
Bach Enterprises' report indicates that there are a combination of
issues contributing to the lower than anticipated levels of production.
On some of the leases the wells are being restricted because both gas
and produced water are flowing through the same gathering line. The
lines lack the capacity to transport both and the gas is being
restricted as a result. A larger problem is that a substantial number
of wells are not producing at economic levels even though the geology
of the area suggests that successful wells should be expected.
Existing well bores were used and recompleted to shallower coal seams
because of the lower cost and the Section 29 tax credits. A majority of
the wells had tubing cemented in place inside the normal production
casing. This extra steel and cement appear to have provided a
sufficient barrier that the perforation and fracturization treatment
did not adequately penetrate the coal formation. As a result, the flow
of gas and water from the formation into the well bore is less than
optimal. With this tubing cemented in place, it cannot be removed to
allow for larger downhole equipment or larger fracture treatments. The
Manager believes, after consulting with Bach, that Program A should not
spend additional program monies in an effort to produce these wells.
The Manager has hired a consulting geologist and a petroleum engineer
to provide an appraisal of the geology of Program A's lease acreage,
and to recommend the best locations and coal seams to drill if new
wells were to be drilled on the property. The Manager expects to
receive their report shortly. Unfortunately, with the current low gas
prices, low average well production, and relatively high operating
costs, Program A does not currently have the resources to drill new
wells.
There are two potential options for dealing with the current situation.
The preferred option is to find a third party partner to drill new
wells on the acreage with Program A sharing in the revenue in return
for an assignment of the leases. The objective would be to get the
partner to provide all of the development money and take the majority
working interest with Program A taking a minority interest. The
ownership interest that Program A receives in the new wells, combined
with existing production, has the potential to provide a reasonable
return to the investors. The Manager has additional leased acreage in
18
its inventory that it is willing to contribute at no cost to Program A
if this strategy is pursued. This would increase the number of wells
drilled by the third party partner and the potential return to Program
A.
A second option is to sell all of Program A's assets and liquidate. The
Manager believes a buyer can be found but is unsure at this time what
price could be realized. The Manager has retained a marketing company
to work with the Manager's consultants to put together a marketing
"package" to be used for both options.
Natural gas prices reached an all-time high of close to $10 per mcf in
January, 2001. By September 2001, gas prices had fallen to an average
of $3.32 per mcf. Various factors beyond the control of Program A and
the Manager will affect prices of gas in the future including, but not
limited to, the world wide supply of gas, political instability or
armed conflict in gas-producing regions, the price of foreign imports,
the levels of consumer demand, the price and availability of
alternative fuels, and changes in existing federal regulations and
price controls. Prices for gas have historically fluctuated greatly,
and markets for gas continue to be volatile. The generally unsettled
nature of energy markets makes it particularly difficult to estimate
future prices of gas and any assumptions about future prices may prove
to be inaccurate. Nonetheless, the Manager does anticipate that gas
prices will probably be higher during the winter heating season than
during periods of warmer weather.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2001, Program A's cash flow from
operations was $(38,122), compared to $(271) in 2000. This difference
was caused predominantly by the higher operating costs, as reflected in
the discussion above.
Program A continues to owe the Manager $62,039 as the balance due on
the turnkey price payable to the Manager for the well interests
purchased by Program A and other expense reimbursements. This compares
to a balance owed to the Manager for the turnkey price of $123,425 owed
as of September 30, 2000.
The Manager has made advances to Program A to permit distributions to
the investors. These advances are payable on demand. During the first
nine months of 2001, the Manager advanced $213,852 to Program A, and
Program A made distributions to members equal to $175,730. Program A
continues to experience shortages of cash flow due to unexpectedly low
production. To date, shortfall has been satisfied through advances from
the Manager. Program A does not currently have any line of credit or
similar debt facility.
THE MANAGER - FOR THE PERIOD ENDING SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
Total turnkey revenues earned by the Manager are approximately equal to
revenues during the same period in 2000. During the first nine months
of 2000, turnkey revenues were $5,557,337. During the first nine months
19
of 2001, turnkey revenues were $5,787,762, reflecting an increase of
$230,425 or 4%. Costs of sales associated with the turnkey revenues
also increased slightly from $4,270,594 in the first nine months of
2000 to $4,661,310 in the first nine months of 2001. This is a
difference of $390,716 or 9%. There was a resulting decrease in gross
margin from 30.13% in the first nine months of 2000 to 24.17% in the
first nine months of 2001.
The Manager also experienced a significant increase in general
administrative expense, from $1,538,994 in the first nine months of
2000, to $2,770,663 in the first nine months of 2001, an increase of
$1,231,639, or 80%. This increase reflects the Manager's focus on
growing the business during a period of strong demand for natural gas.
In addition, because of the substantial number of programs now under
management by the Manager, additional administrative support personnel
had to be added. There was also a significant increase in expenditures
for travel.
The natural gas investment programs organized by the Manager have not
begun to generate sufficient levels of production to result in
meaningful distributions of operating profits to the Manager.
Therefore, the Manager has not recognized a meaningful level of profits
from its investments in natural gas investment programs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Manager had a bank overdraft of $89,132 in
comparison with a cash balance of $852,187 available at September 30,
2000. The Manager has a line of credit in the amount of $1,075,000,
which was fully drawn at September 30, 2001. At September 30, 2000 the
Manager's line of credit was $325,000 and it was fully drawn at that
time. While the Manager's accounts payable have increased substantially
as of September 30, 2001 ($5,909,183) compared to September 30, 2000
($3,789,836), the Manager's accounts receivable have also increased
($2,656,650 at September 30, 2001 compared to $1,075,730 at September
30, 2000). The accounts receivable at September 30, 2001 are all due on
demand and include amounts due from related entities in the amount of
$2,070,753. The Manager does not contemplate having to borrow
additional moneys or open an additional line of credit.
20
PART II
Item 6. Exhibits and Reports on Form 8-K
The Exhibits listed on the Index to Exhibits immediately following the
signatures are filed as part of, or incorporated by reference, into this Report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WOLVERINE ENERGY 1998-1999(A) DEVELOPMENT
COMPANY, L.L.C.
BY: WOLVERINE ENERGY, L.L.C., MANAGER
By: //George H. Arbaugh, Jr.//
-----------------------------------------
George H. Arbaugh, Jr., Sole Manager
and Chief Executive Officer
Date: December 26, 2001
21
EXHIBIT INDEX
- ---------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description Cross-Reference
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, etc. N/A
- ---------------------------------------------------------------------------------------------------------------------------
3.1 Articles of Organization of Program A 10-KSB (12/99)
3.2 Articles of Organization of Manager Registration Statement
- ---------------------------------------------------------------------------------------------------------------------------
Instruments defining rights of security holders
4.1 (Operating Agreement - Program A) 10-KSB (12/99)
4.2 (Operating Agreement - Manager) Registration Statement
- ---------------------------------------------------------------------------------------------------------------------------
11 Statement of Computation of per-share earnings N/A
- ---------------------------------------------------------------------------------------------------------------------------
18 Letter regarding change in accounting principles N/A
- ---------------------------------------------------------------------------------------------------------------------------
19 Previously unfiled documents N/A
- ---------------------------------------------------------------------------------------------------------------------------
20 Reports furnished to security holders N/A
- ---------------------------------------------------------------------------------------------------------------------------
23 Published report regarding matters submitted to vote N/A
- ---------------------------------------------------------------------------------------------------------------------------
24 Consent of experts and counsel N/A
- ---------------------------------------------------------------------------------------------------------------------------
25 Power of Attorney N/A
- ---------------------------------------------------------------------------------------------------------------------------
22