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 September 30, 2006 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________to_____________________
Commission File Number 000-51268
RIDGEWOOD ENERGY Q FUND, LLC
(Exact name of registrant as specified in its charter)
Delaware 84-1689138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1314 King Street, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip code)
(302) 888-7444
(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of December 4, 2006 there were 830.5577 shares of membership interest of the
registrant outstanding.
Table of Contents
Part I - FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited):
Condensed Balance Sheets as of September 30, 2006 and December 31, 2005 3
Condensed Statements of Operations for the three month period ended
September 30, 2006 and for the period from August 16, 2005 (Inception)
through September 30, 2005, for the nine month period ended
September 30, 2006, and for the period from August 16, 2005 (Inception) to
September 30, 2006 4
Condensed Statements of Cash Flows for the nine month period ended
September 30, 2006, and for the period from August 16, 2005 (Inception)
to September 30, 2006 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II - OTHER INFORMATION
Item 5. Other Information 24
Item 6. Exhibits 25
SIGNATURES 26
2
Part I - Financial Information
Item 1. Financial Statements
RIDGEWOOD ENERGY Q FUND, LLC
(An exploratory stage enterprise)
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, 2006 December 31, 2005
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 68,108,047 $ 86,240,180
Production receivable 3,305,642 -
Interest receivable 20,027 206,946
Prepaid expenses 48,630 36,891
------------- -------------
Total current assets 71,482,346 86,484,017
------------- -------------
Salvage fund 1,028,872 -
------------- -------------
Oil and gas properties
Advance to operator - 11,787,240
Proved properties 18,362,293 -
Less: accumulated depletion and amortization (1,279,704) -
------------- -------------
Oil and gas properties, net 17,082,589 11,787,240
------------- -------------
Total assets $ 89,593,807 $ 98,271,257
============= =============
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Due to operator $ 862,850 $ -
Accrued expenses payable 93,157 2,720,993
Due to affiliates (Note 7) - 3,173,232
------------- -------------
Total current liabilities 956,007 5,894,225
------------- -------------
Non-current liabilities:
Asset retirement obligations 77,744 -
------------- -------------
Total non-current liabilities 77,744 -
------------- -------------
Total liabilities 1,033,751 5,894,225
------------- -------------
Commitments and contingencies (Note 9)
Members' capital:
Manager:
Surplus/(Deficit) accumulated during the exploratory
stage 212,597 (180,100)
------------- -------------
Shareholders:
Capital contributions (1,335 shares authorized;
830.5577 shares issued and outstanding) 123,036,639 123,036,639
Subscriptions receivable - (2,964,172)
Syndication costs (14,069,525) (14,069,525)
Deficit accumulated during the exploratory stage (20,619,655) (13,445,810)
------------- -------------
Shareholders' total 88,347,459 92,557,132
------------- -------------
Total members' capital 88,560,056 92,377,032
------------- -------------
Total liabilities and members' capital $ 89,593,807 $ 98,271,257
============= =============
The accompanying notes are an integral part of these condensed financial statements.
3
RIDGEWOOD ENERGY Q FUND, LLC
(An exploratory stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the period For the period
Three months August 16, 2005 August 16, 2005
ended (Inception) Nine months (Inception)
September 30, through ended through
------------- September 30, September 30, September 30,
2006 2005 2006 2006
---- ---- ---- ----
Revenue
Oil and gas revenue $ 5,156,644 $ - $ 6,092,912 $ 6,092,912
------------ ------------ ------------ ------------
Expenses
Dry-hole costs - - 11,284,103 19,090,895
Investment fees to affiliate (Note 7) - 417,377 - 5,563,208
Management fees to affiliate (Note 7) 768,043 19,785 2,306,946 2,909,859
Lease operating expense 105,875 - 105,875 105,875
Depletion and amortization 1,135,974 - 1,279,704 1,279,704
Accretion expense 980 - 1,306 1,306
Other general and administrative expense 95,459 - 476,514 584,124
------------ ------------ ------------ ------------
Total expenses 2,106,331 437,162 15,454,448 29,534,971
------------ ------------ ------------ ------------
Income (loss) from operations 3,050,313 (437,162) (9,361,536) (23,442,059)
------------ ------------ ------------ ------------
Other income
Interest income 909,011 - 2,580,388 3,035,001
------------ ------------ ------------ ------------
Net income (loss) $ 3,959,324 $ (437,162) $ (6,781,148) $(20,407,058)
============ ============ ============ ============
Manager - Net income (loss) $ 631,921 $ (2,968) $ 392,697 $ 212,597
Shareholders - Net income (loss) $ 3,327,403 $ (434,194) $ (7,173,845) $(20,619,655)
Net income (loss) per share $ 4,006 $ (523) $ (8,637) $ (24,826)
The accompanying notes are an integral part of these condensed financial statements.
4
RIDGEWOOD ENERGY Q FUND, LLC
(An exploratory stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the period
Nine months August 16, 2005
ended (Inception) through
September 30, 2006 September 30, 2006
------------------ ------------------
Cash flows from operating activities
Net loss $ (6,781,148) $ (20,407,058)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depletion and amortization 1,279,704 1,279,704
Accretion expense 1,306 1,306
Dry-hole costs 11,284,103 19,090,894
Interest earned on salvage fund (28,872) (28,872)
Changes in assets and liabilities
Increase in production receivable (3,305,642) (3,305,642)
Decrease (increase) in interest receivable 186,919 (20,027)
Increase in prepaid expenses (11,739) (48,630)
Increase in accrued expenses payable (118,124) 93,158
(Decrease) increase in due to affiliates (1,569,757) -
------------- -------------
Net cash provided by (used in) operating activities 936,750 (3,345,167)
------------- -------------
Cash flows from investing activities
Payments to operators for working interests and expenditures - (11,787,240)
Capital expenditures for oil and gas properties (16,919,868) (24,726,660)
Funding of salvage fund (1,000,000) (1,000,000)
------------- -------------
Net cash used in investing activities (17,919,868) (37,513,900)
------------- -------------
Cash flows from financing activities
Contributions from shareholders - 123,036,639
Subscriptions receivable - (2,964,172)
Collection of subscriptions receivable 2,964,172 2,964,172
Syndication costs paid (4,113,187) (14,069,525)
------------- -------------
Net cash (used in) provided by financing activities (1,149,015) 108,967,114
------------- -------------
Net (decrease) increase in cash and cash equivalents (18,132,133) 68,108,047
Cash and cash equivalents, beginning of period 86,240,180 -
------------- -------------
Cash and cash equivalents, end of period $ 68,108,047 $ 68,108,047
============= =============
Supplemental schedule of disclosures of cash flow information:
Advances used for capital expenditures in oil
and gas properties reclassified to unproved and
proved properties $ 11,787,240 $ 11,787,240
============= =============
The accompanying notes are an integral part of these condensed financial statements.
5
RIDGEWOOD ENERGY Q FUND, LLC
(An exploratory stage enterprise)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Organization and Purpose
The Ridgewood Energy Q Fund, LLC ("Fund"), a Delaware limited liability company,
was formed on August 16, 2005 and operates pursuant to a limited liability
company agreement ("Agreement") dated as of September 6, 2005 by and among
Ridgewood Energy Corporation ("Manager") and the shareholders of the Fund.
Although the date of formation is August 16, 2005, the Fund did not begin
operations until September 6, 2005 when it began its private offering of shares.
There were no business activities prior to September 6, 2005 and as such, no
prior period comparative financial information is presented.
The Fund was organized to acquire, drill, construct and develop oil and natural
gas properties located in the United States offshore waters of Texas, Louisiana,
and Alabama in the Gulf of Mexico. The Fund has devoted most of its efforts to
raising capital and oil and natural gas exploration activities.
The Manager performs (or arranges for the performance of) the management and
administrative services required for Fund operations. Such services include,
without limitation, the administration of shareholder accounts, shareholder
relations and the preparation, review and dissemination of tax and other
financial information. In addition, the Manager provides office space, equipment
and facilities and other services necessary for Fund operations. The Manager
also engages and manages the contractual relations with outside custodians,
depositories, accountants, attorneys, broker-dealers, corporate fiduciaries,
insurers, banks and others as required (Notes 2, 6 and 7).
2. Summary of Significant Accounting Policies
Basis of presentation
These unaudited interim condensed financial statements have been prepared by the
Fund's management, in accordance with accounting principles generally accepted
in the United States of America ("GAAP") and in the opinion of management,
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the Fund's financial position, results of operations
and cash flows for the periods presented. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with GAAP have been omitted in these unaudited interim condensed
financial statements. The results of operations, financial position, and cash
flows for the periods presented herein are not necessarily indicative of future
financial results. These unaudited interim condensed financial statements should
be read in conjunction with the annual financial statements and the notes
thereto for the period ended December 31, 2005 included in the Fund's Annual
Report Amendment No. 1 on Form 10/A ("Form 10/A").
6
Exploratory stage enterprise
Management uses various criteria to evaluate whether the Fund is an exploratory
stage enterprise, including but not limited to, the success of drilling, the
timing, significance, equality and flow of production and the results of reserve
reports obtained from experts. On a case by case basis, once a project begins
production, Management performs diligent analysis at regular intervals utilizing
the various criteria noted above to determine the appropriate classification of
the Fund as an exploratory stage entity. Base on such an analysis, Management
has determined the Fund continues to be an exploratory stage enterprise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, the Manager reviews
its estimates, including those related to amounts advanced to and billed by
operators, determination of proved reserves, impairment allowances and
environmental liabilities. Actual results may differ from those estimates.
Advances to Operators for Working Interests and Expenditures
Each participation agreement the Fund executes for an exploratory project
requires the Fund to make a payment to the working interest owner for the Fund's
ownership rights and working interest in the project. The Fund will account for
such payments as advances to operators for working interests and expenditures.
As drilling costs are incurred the payments are capitalized as unproved
properties.
Oil and natural gas properties
Investments in oil and natural gas properties are operated by unaffiliated
entities ("Operators") who are responsible for drilling, administering and
producing activities pursuant to the terms of the applicable Operating
Agreements with working interest owners. The Fund's portion of exploration,
drilling, operating and capital equipment expenditures relating to the wells are
advanced and billed by Operators through authorization for expenditures.
The successful efforts method of accounting for oil and natural gas producing
activities is followed. Acquisition costs are capitalized when incurred. Other
oil and natural gas exploration costs, excluding the costs of drilling
exploratory wells, are charged to expense as incurred. The costs of drilling
exploratory wells are capitalized pending the determination of whether the wells
have discovered proved commercial reserves. If proved commercial reserves have
not been found, exploratory drilling costs are expensed to dry-hole expense.
Costs to develop proved reserves, including the costs of all development wells
and related facilities and equipment used in the production of crude oil and
natural gas, are capitalized. Expenditures for ongoing repairs and maintenance
of producing properties are expensed as incurred.
Upon the sale or retirement of a proved property (i.e. a producing well), the
cost and related accumulated depletion and amortization will be eliminated from
the property accounts, and the resultant gain or loss is recognized. On the sale
or retirement of an unproved property, gain or loss on the sale is recognized,
taking into consideration the amount of any recorded impairment if the property
had been assessed for impairment. It is not the Manager's intention to sell any
of the Fund's property interests.
Capitalized acquisition costs of producing oil and natural gas properties after
recognizing estimated salvage values are depleted by the unit-of-production
method. The Fund earned revenue for the three and nine months ended September
30, 2006, approximating $5.2 million and $6.1 million, respectively. No revenue
was earned in 2005.
7
Revenue Recognition
Oil and natural gas sales are recognized when delivery is made by the Operator
to the purchaser and title is transferred (i.e., production has been delivered
to a pipeline or transport vehicle).
The volume of oil and natural gas sold on the Fund's behalf may differ from the
volume of oil and natural gas the Fund is entitled to. The Fund will account for
such oil and natural gas production imbalances by the entitlements method. Under
the entitlements method, the Fund will recognize a receivable from other working
interest owners for volumes oversold by other working interest owners, and a
payable to other working interest owners for volumes oversold by the Fund. As of
September 30, 2006 and for the period August 16, 2005 (Inception) through
September 30, 2006, there were no material oil or natural gas balancing
arrangements between the Fund and other working interest owners.
Interest Income
Interest income is recognized when earned.
Syndication Costs
Direct costs associated with offering the Fund's shares including professional
fees, selling expenses and administrative costs payable to the Manager, an
affiliate of the Manager and outside brokers are reflected as a reduction of
shareholders' capital.
Asset Retirement Obligations
For oil and natural gas properties, there are obligations to perform removal and
remediation activities when the properties are retired. The Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.143"),
effective for years beginning after December 15, 2002. SFAS No. 143 requires the
Fund to record a separate liability for the discounted present value of the
Fund's asset retirement obligations, with an offsetting increase to the related
oil and natural gas properties on the balance sheet. When a project reaches
drilling depth and is determined to be either proved or dry, an asset retirement
obligation is recorded. Plug and abandonment costs associated with unsuccessful
projects are expensed as incurred as dry-hole costs.
8
September 30, 2006
------------------
Balance - Beginning of period $ -
Liabilities incurred 191,050
Liabilities settled (114,612)
Accretion expense 1,306
---------
Balance - End of period $ 77,744
=========
In March 2005, FASB issued FASB Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). This interpretation
clarifies that the term "conditional asset retirement obligation" as used in
FASB No. 143 refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity incurring
the obligation. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and/or method of
settlement. Thus, the timing and/or method of settlement may be conditional on a
future event. Accordingly, an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation if the fair value of
the liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability, rather than the timing of
recognition of the liability, when sufficient information exists. FIN 47 was
effective for calendar year-end entities no later than December 31, 2005. The
application of FIN 47 did not have an impact on the Fund's financial position or
results of operations.
Impairment of Long-Lived Assets
In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SASF No. 144"), long-lived assets, such as
oil and natural gas properties, are evaluated when events or changes in
circumstances indicate the carrying value of such assets may not be recoverable.
The determination of whether impairment has occurred is made by comparing the
carrying values of long-lived assets to the estimated future undiscounted cash
flows attributable to the asset. The impairment loss recognized is the excess of
the carrying value over the future discounted cash flows attributable to the
asset or the estimated fair value of the asset. As of September 30, 2006 and
December 31, 2005, no impairments were recorded.
Depletion and Amortization
Depletion and amortization of the cost of proved oil and natural gas properties
are calculated using the units of production method. Proved developed reserves
are used as the base for depleting the cost of successful exploratory drilling
and development costs. The sum of proved developed and proved undeveloped
reserves is used as the base for depleting (or amortizing) leasehold acquisition
costs, the costs to acquire proved properties and platform and pipeline costs.
In April 2006, the Main Pass 30 Project was determined to have proved reserves.
As of September 30, 2006, and December 31, 2005, the Fund had accumulated
depletion and amortization of approximately $1.3 million and nil, respectively.
9
Income Taxes
No provision is made for income taxes in the financial statements as the income
or losses are passed through and included in the tax returns of the individual
shareholders.
Cash and cash equivalents / Salvage Fund
All highly liquid investments with maturities when purchased of three months or
less are considered as cash and cash equivalents. At times, bank deposits may be
in excess of federal insured limits. As of September 30, 2006 and December 31,
2005, bank balances exceeded federally insured limits by approximately $12.2
million and $86.0 million, respectively inclusive of the salvage fund. The Fund
maintains bank deposits with accredited financial institutions to mitigate such
risk. Cash equivalents of approximately $56.7 million and nil are investments in
three month US Treasury Notes as of September 30, 2006 and December 31, 2005,
respectively.
Income and Expense Allocation
Profits and losses are to be allocated 85% to shareholders in proportion to
their relative capital contributions and 15% to the Manager, except for certain
expenses, such as dry-hole costs and fiduciary fees, and interest income which
are allocated 99% to shareholders and 1% to the Manager.
3. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
("SFAS No. 157") which applies under most other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 provides a common
definition of fair value as the price that would be received to sell an asset or
paid to transfer a liability in a transaction between market participants. The
new standard also provides guidance on the methods used to measure fair value
and requires expanded disclosures related to fair value measurements. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Fund does not expect this guidance to have a
material impact on the financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires, unless impracticable, retrospective
application to prior periods' financial statements of changes in accounting
principle where transition is not specified by a new accounting pronouncement.
SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle should be recognized in the period
of the accounting change. SFAS No. 154 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 had no impact on the financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities", ("FIN 46") which changes the criteria by which one company includes
another entity in its consolidated financial statements. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
10
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after December 31, 2003, and apply in the first fiscal
period ending after March 15, 2004, for variable interest entities created prior
to January 1, 2004. In December 2003, the FASB issued a revision of FIN 46 ("FIN
46R") to clarify some of the provisions and to exempt certain entities from its
requirements. The Fund has applied the provisions of FIN 46R effective December
21, 2004, with no impact on the financial statements.
FASB Staff Position ("FSP") 115-1 and 124-1, the Meaning of Other Than Temporary
Impairment and its Application to Certain Investments ("FSP 115-1 and 124-1").
This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary and the measurement of
the impairment loss. It also requires certain disclosures about unrealized
losses that have not been recognized as other than temporary impairments. This
guidance applies to equity securities that have a readily determinable fair
value and all debt securities. It does not apply to investments accounted for
under the equity method. An investment is impaired if its fair value is less
than its cost, as assessed at the individual security level. When an investment
is impaired, the investor is required to evaluate whether the impairment is
other than temporary. If other than temporary, the unrealized loss must be
recognized. For all investments in an unrealized loss position for which other
than temporary impairments have not been recognized, the investor should
disclose by category of investment the amount of unrealized losses and the fair
value of investments with unrealized losses and related narrative disclosures.
FSP 115-1 and 124-1 was effective for reporting periods beginning after December
15, 2005. The adoption of FSP 115-1 and 124-1 had no impact on the financial
statements.
4. Unproved Properties - Capitalized Exploratory Well Costs
In April 2005, FASB issued ("FSP") 19-1, "Accounting for Suspended Well Costs",
("FSP 19-1"). This FSP was issued to address whether there were circumstances
that would permit the continued capitalization of exploratory well costs beyond
one year, other than when further exploratory drilling is planned and major
capital expenditures would be required to develop the project. FSP 19-1 requires
the continued capitalization of suspended well costs if the well has found a
sufficient quantity of reserves to justify its completion as a producing well
and the entity is making sufficient progress assessing these reserves and the
economic and operating viability of the project. All relevant facts and
circumstances should be evaluated in determining whether an entity is making
sufficient progress assessing the reserves and FSP 19-1 provides several
indicators in this evaluation. FSP 19-1 prohibits continued capitalization of
suspended well costs on the chance that market conditions will change or
technology will be developed to make the project economic.
The Fund adopted FSP 19-1 during the third quarter of 2005. Leasehold
acquisition and exploratory drilling costs are capitalized pending determination
of whether the well has found proved reserves. Unproved properties are assessed
on a quarterly basis by evaluating and monitoring if sufficient progress is made
on assessing the reserves. Capitalization costs are expensed as dry-hole costs
in the event that reserves are not found or are not in sufficient quantities to
11
complete the well and develop the field. Dry-hole costs were approximately nil,
$11.3 million and $19.1 million, respectively for the three and nine months
ended September 30, 2006, and for the period August 16, 2005 (Inception) through
September 30, 2006, respectively. As of September 30, 2006 and December 31,
2005, the Fund had no capitalized exploratory well costs greater than one year.
5. Short-term Investments in Marketable Securities inclusive of Salvage Fund
Short-term investments are comprised of US Treasury Notes with maturities
greater than three months and are considered held-to-maturity investments.
Held-to-maturity securities are those investments that the Fund has the ability
and intent to hold until maturity. Held-to-maturity investments are recorded at
cost plus accrued income, adjusted for the amortization of premiums and
discounts, which approximate market value. Interest income is accrued as earned.
Held to maturity investments included in the salvage fund as of September 30,
2006 will mature in February 2007.
6. Distributions
Distributions to shareholders are allocated in proportion to the number of
shares held.
The Manager will determine whether Available Cash from Operations, as defined in
the Fund's Operating Agreement, is to be distributed. Such distribution will be
allocated 85% to the shareholders and 15% to the Manager, as defined in the
Fund's Operating Agreement.
Available Cash from Dispositions, as defined in the Fund's Operating Agreement,
will be paid 99% to shareholders and 1% to the Manager until the shareholders
have received total distributions equal to their capital contributions. After
shareholders have received distributions equal to their capital contributions,
85% of Available Cash from Dispositions will be distributed to shareholders and
15% to the Manager.
There have been no distributions made by the Fund.
7. Related Parties
Ridgewood Energy Corporation, the Manager, was paid a one time investment fee of
4.5% of initial capital contributions. Fees are payable for services of
investigating and evaluating investment opportunities and effecting
transactions. For the period August 16, 2005 (Inception) through September 30,
2006, investment fees were approximately $5.6 million. Of this amount
approximately nil and $1.6 million was included in due to affiliates as of
September 30, 2006 and December 31, 2005, respectively. In 2006, there were no
investment fees.
A management agreement provides that the Manager render management,
administrative and advisory services. For such services, the Manager receives an
annual management fee, payable monthly, of 2.5% of total capital contributions.
Management fees of approximately $0.8 million and $2.3 million were incurred and
paid for the three and nine months ended September 30, 2006, respectively. For
the period August 16, 2005 (Inception) through September 30, 2005 management
fees were approximately $20
12
thousand. Management fees of approximately $2.9 million were incurred and paid
for the period August 16, 2005 (Inception) through September 30, 2006.
The Manager was paid an offering fee which approximated 3.5% of capital
contributions to cover expenses incurred in the offer and sale of shares of the
Fund. Such offering fee is included in syndication costs (Note 2) of
approximately $14.1 million. Of this amount approximately nil and $1.2 million
was included in due to affiliates as of September 30, 2006 and December 31,
2005, respectively. There were no offering fees incurred in 2006.
From time to time, short-term payables and receivables, which do not bear
interest, arise from transactions with affiliates in the ordinary course of
business. As of September 30, 2006 and December 31, 2005 the Manager owed the
Fund approximately nil and $1 thousand, respectively for the overpayment of
fees, which is included in due to affiliates.
In 2005, Ridgewood Securities Corporation, a registered broker-dealer affiliated
with the Manager was paid selling commissions and placement fees of
approximately $0.2 million and $1.2 million, respectively, for shares sold of
the Fund which are reflected in syndication costs (Note 2). As of September 30,
2006 and December 31, 2005, approximately nil and $0.4 million respectively, was
included in due to affiliates.
None of the compensation to be received by the Manager has been derived as a
result of arm's length negotiations.
The Fund has working interest ownership in certain projects to acquire and
develop oil and natural gas projects with other entities that are likewise
managed by the Manager.
8. Fair Value of Financial Instruments
As of September 30, 2006 and for the period ended December 31, 2005, the
carrying value of cash and cash equivalents, short-term investments in
marketable securities, and salvage fund, approximate fair value. Cash and cash
equivalents principally consist of money market funds and short-term investments
in three month US Treasury Notes.
9. Commitment and Contingencies
Environmental Considerations
The exploration for and development of oil and natural gas involves the
extraction, production and transportation of materials which, under certain
conditions, can be hazardous or cause environmental pollution problems. The
Manager and the Operators are continually taking action they believe appropriate
to satisfy applicable federal, state and local environmental regulations and do
not currently anticipate that compliance with federal, state and local
environmental regulations will have a material adverse effect upon capital
expenditures, results of operations or the competitive position of the Fund in
the oil and natural gas industry. However, due to the significant public and
governmental interest in environmental matters related to those activities, the
Manager cannot predict the effects of possible future legislation, rule changes,
or governmental or private claims. As of September 30, 2006 and December 31,
2005, there were no known environmental contingencies that required the Fund to
record a liability.
13
Salvage Fund
Pursuant to the Fund's Operating Agreement, the Fund deposits in a separate
interest-bearing account, or a salvage fund, money to provide for dismantling
production platforms and facilities, plugging and abandoning the wells and
removing the platforms, facilities and wells after their useful lives, in
accordance with applicable federal and state laws and regulations.
Interest earned on the account will become part of the salvage fund; there are
no legal restrictions on the withdrawal of the salvage fund.
Insurance Coverage
The Fund is subject to all risks inherent in the exploration for and development
of oil and natural gas. Insurance coverage as is customary for entities engaged
in similar operations is maintained, but losses may occur from uninsurable risks
or amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact upon
earnings and financial position.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including all documents incorporated by
reference, includes "forward-looking" statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, and the "safe harbor" provisions
thereof. These forward-looking statements are usually accompanied by the words
"anticipates," "believes," "plan," "seek," "expects," "intends," "estimates,"
"projects," "will likely result," "will continue," "future" and similar terms
and expressions. The forward-looking statements in this Quarterly Report on Form
10-Q reflect our current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including, among other things, the high-risk nature of natural
gas exploratory operations, the fact that our drilling activities are managed by
third parties, the volatility of natural gas prices and extraction, and those
other risks and uncertainties discussed in the Fund's Annual Report Amendment
No. 1 on Form 10/A ("Form 10/A") filed with the Securities and Exchange
Commission that could cause actual results to differ materially from historical
results or those anticipated. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
Quarterly Report on Form 10-Q will in fact occur or prove to be accurate.
Readers should not place undue reliance on the forward-looking statements
contained herein, which speak only as of today's date. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that may arise after today. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by this section.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and operating
results is based on our financial statements. The preparation of this Quarterly
Report on Form 10-Q requires us to make estimates and assumptions that affect
the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported amount
of revenue and expenses during the reporting period. Actual results may differ
from those estimates and assumptions. See "Notes to Unaudited Condensed
Financial Statements" in Part I of this Quarterly Report on Form 10-Q for a
presentation of the Fund's critical accounting principles. No changes have been
made to our critical accounting policies and estimates since the filing of the
Form 10/A.
Overview
The Fund is an independent oil and natural gas producer. Our primary investment
objective is to generate cash flow for distribution to its shareholders through
participation in oil and natural gas exploration and development projects in the
Gulf of Mexico. The Fund began its operations by offering Shares in a private
offering on September 6, 2005. As a result of such offering, it raised capital
15
of approximately $123.0 million through the sale of 830.5577 shares of LLC
membership interests. After the payment of approximately $19.7 million in
offering fees, commissions and investment fees to Ridgewood Energy Corporation,
affiliates, and broker-dealers, the Fund retained approximately $103.3 million
available for investment. Investment fees represent a one time fee of 4.5% of
initial capital contributions. The fee is payable for the service of
investigating and evaluating investment opportunities and affecting
transactions.
The Manager performs certain duties on the Fund's behalf including the
evaluation of potential projects for investment and ongoing administrative and
advisory services associated with these projects. The Fund does not currently,
nor is there any plan, to operate any project in which the Fund participates.
The Manager enters into operating agreements with third-party operators for the
management of all exploration, development and producing operations, as
appropriate. As compensation for the above duties, the Manager is paid a onetime
investment fee (4.5%) for the evaluation of projects on the Fund's behalf and an
annual management fee (2.5%), payable monthly, for ongoing administrative and
advisory duties as well as reimbursement of expenses. The Manager also
participates in distributions as additional compensation for its administrative
and management services.
Project Update
Since inception in August 2005, the Fund has acquired an interest in two
offshore projects in the Main Pass area of the Gulf of Mexico. Chevron
Corporation ("Chevron") is the partner and Operator of both projects. The Main
Pass 221 well was determined to be a dry-hole in April 2006 and the costs
related to this property were expensed in the accompanying statements of
operations. The Main Pass 30 project has the potential for five wells. The first
well began producing in June 2006.
Main Pass 221
The Fund acquired a 35% working interest from the Operator, Chevron. In
consideration for our 35% working interest the Fund paid a promote of $2.8
million. This project was to consist of three large potential natural gas
reservoirs stacked one on top of another between 19,700 feet and 22,000 feet.
The well began drilling on November 3, 2005 and reached its total depth on
January 24, 2006, 91 days after arriving on location. The well was perforated on
April 9, 2006 and flowed at non-commercial rates. On April 10, 2006 the decision
was made to plug and abandon the well. Dry-hole costs including plug and
abandonment expenses incurred by the Fund for the three months ended September
30, 2006, the nine months ended September 30, 2006 and for the period August 16,
2005 (Inception) through September 30, 2006 were approximately nil, $11.3
million, and $19.1 million, respectively.
Main Pass 30
The Fund acquired a 45% working interest from the Operator, Chevron. In
consideration for our 45% working interest the Fund agreed to pay 90% of the
drilling costs on the first well and 75% of the drilling costs for additional
development wells. All completion costs and operating expenses will be charged
at the working interest percentage of 45%. This project has a five well
potential between 12,000 and 12,500 feet. For the three months ended September
30, 2006, for the nine months ended September 30, 2006 and for the period August
16
16, 2005 (Inception) through September 30, 2006, the Fund incurred project costs
of $0.5 million, $18.4 million, and $18.4 million, respectively, toward a total
budget of approximately $77.8 million.
The first well in the Main Pass 30 project was put in production in June 2006
and is utilizing an existing Chevron production platform and pipeline. In return
for the use of this infrastructure, the Fund will pay 15 cents per one thousand
cubic feet ("MCF") as a processing fee for production.
The current production platform equipment has the capacity to process natural
gas from the first two wells. Drilling for the second well is expected to
commence in January 2007 with results expected in April 2007. If the second well
is successful, it will be necessary to install additional equipment to the
platform that has an estimated cost to the Fund of approximately $0.5 million.
If the third well is drilled and successful, a pipeline upgrade will be
necessary. The cost to the Fund for the pipeline upgrade is estimated to be
approximately $3.2 million. All of these facility upgrades are included in the
total budget noted above.
Results of Operations
For the three months ended September 30, 2006, the income from operations was
approximately $3.1 million, primarily relating to oil and gas revenues of
approximately $5.2 million. For the nine months ended September 30, 2006, the
loss from operations was approximately $9.4 million, primarily relating to
dry-hole costs offset by $6.1 million of oil and natural gas revenue. For the
period August 16, 2005 (Inception) through September 30, 2006, the loss from
operations aggregated approximately $23.4 million, primarily related to
approximately $19.1 million of dry-hole costs, approximately $5.6 million of
investment fees, approximately $2.9 million of management fees, $0.5 million of
other general and administrative expenses, $1.3 million of depletion and
amortization, and $0.1 million of lease operating expenses offset by $6.1
million of oil and natural gas revenue.
In June 2006, the Main Pass 30 well was put in production. Oil and natural gas
revenue for the three and nine months ended September 30, 2006 and for the
period August 16, 2005 (Inception) through September 30, 2006 totaled
approximately $5.1 million and $6.1 million, respectively. Associated costs
related to the production of oil and natural gas including depletion and
amortization, accretion expense and lease operating expenses totaled $1.2
million, $1.4 million and $1.4 million for the three and nine months ended
September 30, 2006 and for the period August 16, 2005 (Inception) through
September 30, 2006, respectively. There was no similar revenue or expenses for
the period August 16, 2005 (Inception) through September 30, 2005 as the Fund
did not have any producing projects during that period.
The manager is paid a onetime investment fee of 4.5% of initial capital
contributions. The fee is payable for the service of investigating and
evaluating investment opportunities and affecting transactions. For the period
August 16, 2005 (Inception) through September 30, 2005 and for the period August
16, 2005 (Inception) through September 30, 2006 investment fees approximated
$0.4 million and $5.6 million, respectively. There were no investment fees
incurred or paid during 2006 as the Fund was closed as of December 31, 2005.
Dry-hole costs are those costs incurred to drill and develop a well that is
ultimately found to be incapable of producing either oil or natural gas in
sufficient quantities to justify completion of the well. Dry-hole costs are
recognized in the period in which the costs are incurred. The Main Pass 221
project was determined to be a dry-hole in April 2006. Dry-hole costs for the
three months and nine months ended September 30, 2006 and for the period August
16, 2005 (Inception) through September 30, 2006 totaled approximately nil, $11.3
million and $19.1 million, inclusive of plug and abandonment costs. There were
no dry-hole costs for the three months ended September 30, 2005 as the Fund was
not participating in projects at that time.
The manager receives annual management fee, payable monthly, of 2.5% of total
capital contributions. Management fees are charged to cover expenses associated
with overhead incurred by the Manager for its ongoing management, administrative
17
and advisory services. Such overhead expenses include but are not limited to
rent, payroll and benefits for employees of the Manager, and other
administrative costs. Management fees incurred and paid for the three and nine
months ended September 30, 2006, and the period August 16, 2005 (Inception)
through September 30, 2006 totaled approximately $0.8 million, $2.3 million, and
$2.9 million, respectively. Management fees incurred for the period August 16,
2005 (Inception) through September 30, 2005 totaled approximately $20 thousand.
Other general and administrative expenses represent accounting, legal, fiduciary
fees and insurance expenses specifically identifiable or allocable to the Fund.
Accounting and legal fees represent annual audit and tax preparation fees,
quarterly reviews and filing fees of the Fund. Fiduciary fees represent bank
fees associated with the management of the Fund's short-term investment
portfolio in US Treasury Notes and have increase in 2006 due to greater
investment activity. Insurance expense represents premiums related to well
control insurance and directors and officers liability policy and are allocated
to the Fund based on capital raised by all oil and natural gas funds managed by
the Manager. General and administrative expenses of approximately $0.1 million
and $0.5 million and $0.6 million, respectively, contributed to the loss from
operations for the three and nine months ended September 30, 2006 and the period
August 16, 2005 (Inception) through September 30, 2006.
Other Income
Other income is comprised solely of interest income and represents interest
earned on money market accounts and short-term US Treasury Notes. For the three
and nine months ended September 30, 2006 and for the period August 16, 2005
(Inception) through September 30, 2006, other income totaled approximately $0.9
million, $2.6 million and $3.0 million, respectively. In 2006, the average
monthly interest income increased as a result of higher interest rates in 2006
compared to 2005.
Capital Resources and Liquidity
Cash flows provided by operating activities for the nine months ended September
30, 2006 were approximately $.9 million, primarily related to cash receipts for
oil and natural gas production of approximately $2.8 million and approximately
$2.1 for interest income. Offsetting these cash inflows were approximately $2.3
million of payments for management fees and approximately $1.3 million of
depletion and amortization.
18
Cash flows used in operating activities for the period August 16, 2005
(Inception) through September 30, 2006 were approximately $3.3 million,
primarily related to cash expenditures of approximately $2.9 million and
approximately $5.6 million for management fees and investment fees,
respectively. Offsetting these cash outflows were cash receipts of approximately
$2.7 million and approximately $2.6 for oil and natural gas production and
interest income, respectively.
Cash flows used in investing activities for the nine months ended September 30,
2006 were approximately $17.9 million, primarily related to cash expenditures of
approximately $16.9 million and approximately $1.0 million for capital
expenditures and funding of the salvage fund, respectively.
Cash flows used in investing activities for the period August 16, 2005
(Inception) through September 30, 2006 were approximately $37.5 million,
primarily related to cash expenditures of approximately $11.8 million for
payments to operators for working interests to be used in exploration and
development activities, approximately $24.7 million for capital expenditures and
approximately $1.0 million for funding of the salvage fund.
Cash flows used in financing activities for the nine months ended September 30,
2006 were approximately $1.1 million, primarily related to cash expenditures of
approximately $4.1 million for payment of syndication costs, offset by
approximately $3.0 million of cash receipts from shareholders for subscriptions
receivable.
Cash flows provided by financing activities for the period August 16, 2005
(Inception) through September 30, 2006 were approximately $109.0 million,
primarily related to cash receipts of approximately $123 million obtained from
our private offering, offset by approximately $14.1 million of payments for
syndication costs.
We expect to meet our cash commitments for the next twelve months from our cash
and investments on hand.
Estimated Capital Expenditures
The Fund has entered into multiple Offshore Operating Agreements for the
drilling and development of its investment properties. The estimated capital
expenditures associated with these agreements can vary depending on the stage of
development on a property-by-property basis. As of September 30, 2006, such
estimated capital expenditures to be spent total approximately $59.6 million,
all of which is expected to be paid out of the unspent capital contribution
within the following 12 months.
The table below presents exploration and development capital expenditures from
inception as well as estimated budgeted amounts for future periods:
19
Estimated Capital Expenditures Spent Through
As of September 30, 2006 Total Project September 30, To be Spent
($ Millions) Costs 2006 Next 12 Months
----- ---- --------------
Projects
Main Pass 30 (i) $ 77.8 $ 18.2 $ 59.6
Main Pass 221 (ii) 19.1 19.1 -
------- ------- -------
$ 96.9 $ 37.3 $ 59.6
(i) Main Pass 30 Project has the potential for a total of 5 wells. Well #1
was deemed a commercial success in late April 2006 and began production
in June 2006.
(ii) Main Pass 221 was determined to be a dry-hole in April 2006.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The principal market risks to which the Fund is exposed that may adversely
impact the Fund's results of operations and financial position are changes in
oil and natural gas prices. The Fund has no market risk sensitive instruments
held for trading purposes. Information about market risks for the nine months
ended September 30, 2006, does not differ materially from that discussed under
Item 2C of the Fund's Annual Report Amendment No. 1 for 2005 on Form 10/A ("Form
10/A") filed with the SEC.
Item 4. Controls and Procedures
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
The Fund maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that the Fund
files or submits as defined in Rules 13a-15(e) of the Securities and Exchange
Act of 1934, as amended ("Exchange Act") is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO") to allow timely decisions
regarding required disclosures.
The Fund carried out the evaluation required by paragraph (b) of the Exchange
Act Rules 13a-15 and 15d-15, under the supervision and with the participation of
our management, including the CEO and CFO, of the effectiveness of our
"disclosure controls and procedures" (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e). Based upon this evaluation, the CEO and CFO have
concluded that as of September 30, 2006 ("Evaluation Date"), our disclosure
controls and procedures were not effective as of the Evaluation Date because of
the material weaknesses described below.
Subsequent to the issuance of the Fund's Form 10 originally filed with the
Securities and Exchange Commission (the "SEC") on April 21, 2006, as reported
under Item 4.02 of the Form 8-K filed by the Fund on October 24, 2006, on
October 20, 2006, Ridgewood Energy Corporation (the "Manager") of the Fund
concluded that the Fund's financial statements as of and for the period from
August 16, 2005 (Inception) to December 31, 2005 as included in the Fund's Form
10 should no longer be relied upon and should be restated to correct for errors
detected by Management. Therefore, the Fund filed Form 10/A on November 13,
2006.
(b) Changes in Internal Control over Financial Reporting
In the course of our evaluation of disclosure controls and procedures,
management considered certain internal control areas in which we have made and
are continuing to make changes to improve and enhance controls. Based upon that
evaluation, the CEO and CFO concluded that there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred
during the Fund's most recent fiscal quarter, the quarter ended September 30,
2006, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
21
As reported in Note 11 of the Fund's 2005 Form 10/A filed on November 13, 2006,
subsequent to the issuance of the Fund's financial statements as of and for the
year ended December 31, 2005, management identified accounting errors. These
accounting errors, which are the result of material weaknesses, also existed as
of September 30, 2006 and therefore are reported in this Form 10-Q.
(c) Material Weaknesses
After examining certain transactions and reviewing various reconciliations from
2005, various accounting errors were identified. Based upon management's review,
it has been determined these errors were inadvertent and unintentional. As a
result of these initial findings, on October 20, 2006, management announced the
Fund would restate its previously filed financial statements. Management
expanded the scope of the review to include pre and post-closing procedures. As
a result of this expanded review, additional items were identified and
corrected. The effects of these restatements were previously reflected in our
Form 10/A as filed with the SEC on November 13, 2006.
Other accounting errors were identified as part of the Fund's review of various
other historical transactions. The Fund concluded the reason for these errors
primarily related to the lack of sufficient control and documentation procedures
in 2005 and prior years relating to certain processing, recording, summarizing
and reporting processes.
The Fund had the following material weaknesses. These weaknesses resulted in the
restatement of our initial Form 10, filed as Form 10/A on November 13, 2006.
o Lack of sufficient communication and documentation, and lack of
appropriate procedures surrounding pre and post-closing procedures
including reconciliations and analytical reviews;
o Staff lacking sufficient technical expertise in the oil and gas
industry, as well as GAAP and SEC requirements;
o Insufficient training programs, and policies and procedures on
financial controls, to ensure the ongoing application and execution of
controls; and
o Lack of resources necessary to perform consistent, routine analytical
reviews of the financial results, including key balance sheet and
income statement account analyses.
(d) Material Weaknesses Remediation Plans
The Manager is committed to the remediation of these material weaknesses, as
well as to the continued improvement of the Fund's overall system of internal
control over financial reporting. Management has developed remediation plans for
each of the weaknesses, and has undergone efforts to strengthen the existing
finance organization and systems across the Fund. These efforts include the
addition of finance resources which provided technical support and oversight for
our financial processes. In addition, various employees have attended training
programs. The Fund has also utilized additional resources to assist in the
program management aspect of each material weakness in its remediation plan.
22
The Fund currently is executing its remediation plan that includes the
following:
o Adopting a more rigorous approach to communicate, document and
reconcile the detailed components of pre and post-closing procedures
including developing policy and procedure manuals and detailed
checklists;
o Expanding staffing and resources, including the continued use of
external third party assistance;
o Creating detailed training programs, and policies and procedures on
financial controls, to ensure ongoing application and execution of
controls; and
o Developing tools to perform consistent, routine analytical reviews of
the financial results, including key balance sheet and income
statement account analyses.
23
Part II. Other Information
Item 5. Other Information
From the date of inception of the Fund through December 4, 2006, there were no
"reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K.
24
Item 6. Exhibits
31.1 Certification of Robert E. Swanson, Chief Executive Officer,
pursuant to Securities Exchange Act Rule 13a-14(a).
31.2 Certification of Kathleen P. McSherry, Chief Financial Officer,
pursuant to Securities Exchange Act Rule 13a-14(a).
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed
by Robert E. Swanson, Chief Executive Officer of the Company and
Kathleen P. McSherry, Chief Financial Officer of the Company.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: December 4, 2006 RIDGEWOOD ENERGY Q FUND, LLC
By: /s/ ROBERT E. SWANSON
Name: Robert E. Swanson
Title: President and Chief Executive Officer
(Principal Executive Officer)
Dated: December 4, 2006
By: /s/ KATHLEEN P. MCSHERRY
Name: Kathleen P. McSherry
Title: Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
26
Exhibit Index
31.1 Certification of Robert E. Swanson, Chief Executive Officer,
pursuant to Securities Exchange Act Rule 13a-14(a).
31.2 Certification of Kathleen P. McSherry, Chief Financial Officer,
pursuant to Securities Exchange Act Rule 13a-14(a).
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed
by Robert E. Swanson, Chief Executive Officer of the Company and
Kathleen P. McSherry, Chief Financial Officer of the Company.
27