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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
_X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934__ For the fiscal year ended December 31, 1999
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 No. 0-25935
THE RIDGEWOOD POWER GROWTH FUND
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3495594
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
c/o Ridgewood Power Corporation, 947 Linwood Avenue, Ridgewood, New Jersey
07450
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (201) 447-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Investor Shares of Beneficial Interest
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
There is no market for the Shares. The aggregate capital contributions made
for the Registrant's voting Shares held by non-affiliates of the Registrant at
April 13, 2000 was $64,294,170.
Exhibit Index is located on page __.
PART I
Item 1. Business.
Forward-looking statement advisory
As with some other statements made by or on behalf of the Ridgewood Power Growth
Fund (the "Fund") from time to time, has forward-looking statements. These
statements discuss business trends and other matters relating to the Fund's
future results, year 2000 remediation and the business climate and are found,
among other places, at Items 1(c)(3), 1(c)(4), 1(c)(5), 1(c)(6), 1(c)(7), and
2(b). In order to make these statements, the Fund has had to make assumptions as
to the future. It has also had to make estimates in some cases about events that
have already happened, and to rely on data that may be found to be inaccurate at
a later time. Because these forward-looking statements are based on assumptions,
estimates and changeable data, and because any attempt to predict the future is
subject to other errors, what happens to the Fund in the future may be
materially different from the Fund's statements here.
The Fund therefore warns readers of this document that they should not rely
on these forward-looking statements without considering all of the things that
could make them inaccurate. This Registration Statement discusses many (but not
all) of the risks and uncertainties that might affect these forward-looking
statements.
Some of these are changes in political and economic conditions, federal or
state regulatory structures, government taxation, spending and budgetary
policies, government mandates, demand for electricity and thermal energy, the
ability of customers to pay for energy received, supplies of fuel and prices of
fuels, operational status of plant, mechanical breakdowns, availability of labor
and the willingness of electric utilities to perform existing power purchase
agreements in good faith. Some of these cautionary factors that readers should
consider are described below at Item 1(c)(5) - Trends in the Electric Utility
and Independent Power Industries.
By making these statements now, the Fund is not making any commitment to
revise these forward-looking statements to reflect events that happen after the
date of this document or to reflect unanticipated future events.
(a) General Development of Business.
The Registrant is the Ridgewood Power Growth Fund, which was organized as a
Delaware business trust in January 1998 to participate in the development,
construction and operation of independent power generating facilities and
capital facilities ("Independent Power Projects" or "Projects"). Ridgewood
Energy Holding Corporation ("Ridgewood Holding"), a Delaware corporation, is the
Corporate Trustee of the Fund.
The Fund has sold whole and fractional shares of beneficial interest in the
Fund ("Investor Shares") at $100,000 per Investor Share. Its offering began on
February 9, 1998 and is ongoing. As of April 13, 2000, it had raised
approximately $64,300,000. Net of offering fees, commissions and expenses, the
offering had provided as of that date approximately $53,400,000 for investments
in the development and acquisition of Projects and operating expenses. The Fund
has 1,143 record holders of Investor Shares (the "Investors"). As described
below in Item 1(c)(4), the Fund has invested or committed approximately $33.5
million of its assets as follows:
U.K. landfill gas generating stations ....................... $22,000,000
Egyptian resort electricity and water projects .............. 6,500,000
Mediterranean fiber optic cable project ..................... 1,500,000
ZapWorld.com (electric vehicles) ............................ 4,000,000
Total $33,500,000
The Fund is also contemplating a $10,000,000 investment in 10 operating
hydroelectric facilities with long-term sales contracts, currently owned by
Synergics Inc. and in additional projects in Egypt. The Fund is actively seeking
additional Projects for investment.
The Fund has two Managing Shareholders: Ridgewood Power LLC, a New Jersey
limited liability company ("Ridgewood Power") and Ridgewood Power VI LLC ("Power
VI Co"), which is also a New Jersey limited liability company. The Managing
Shareholders have direct and exclusive discretion in the management and control
of the affairs of the Fund. Both Ridgewood Power and Power VI Co are controlled
by Robert E. Swanson, who is the manager of each. The officers of Power VI Co
are also the same as those of Ridgewood Power and Power VI Co currently does not
conduct any business. It is anticipated that Ridgewood Power will take all
actions necessary to manage the Fund, without any participation by Power VI Co,
unless Ridgewood Power were to become unable to act as the Managing Shareholder
because of a possible reorganization of other, similar investment programs that
it manages. In that case, Power VI Co would be activated to serve as Managing
Shareholder. A further discussion of Ridgewood Power and Power VI Co is found at
Item 5(b) - Directors and Executive Officers - Managing Shareholders. In the
remainder of this Registration Statement, when a reference is made to the
"Managing Shareholder," it is to Ridgewood Power so long as it acts as Managing
Shareholder and to Power VI Co if Power VI Co is activated to serve as a
Managing Shareholder. The two Managing Shareholders and the Investors are
collectively referred to as the "Shareholders."
The Fund currently has three Independent Panel Members. Approval of a
majority of the Independent Panel Members is required for approval of
transactions between the Fund and other investment programs sponsored by the
Managing Shareholder. The Independent Panel Members do not exercise general
oversight of the Managing Shareholder or of the Fund and are not directors of
the Fund. The Independent Panel Members do not have any management or
administrative powers over the Fund or its property.
The Fund has a Corporate Trustee, Ridgewood Energy Holding Corporation. The
Corporate Trustee acts on the instructions of the Managing Shareholder and is
not authorized to take independent discretionary action on behalf of the Fund.
See Item 5 - Directors and Executive Officers of the Registrant below for a
further description of the management of the Fund.
The Managing Shareholders are controlled by Robert E. Swanson, who is
currently their sole manager and chief executive officer. For information about
the merger of the prior Managing Shareholder, Ridgewood Power Corporation, into
Ridgewood Power LLC, see Item 10(b) - Directors and Executive Officers of the
Registrant - Managing Shareholder. The following chart illustrates some of the
important relationships among the Fund, the Managing Shareholders and some of
their affiliates.
The Ridgewood Power Growth Fund and certain affiliates as of March 1, 2000 (some
entities and relationships omitted)
Robert E. Swanson Family trusts
x x (Mr. Swanson has
Sole manager x x sole voting and
Chief executive officer x x investment power)
Owner of 46% of equity x x Owners of 54% of equity
_________________X__________________X______________________________
x x x x x x
x x x x x x
x x x x x x
Ridgewood Ridgewood Power Ridgewood Ridgewood Ridgewood Ridgewood
Securities Management LLC Power LLC Energy Power VI Capital
Corporation Holding LLC Management
Corporation LLC
Operates power Corporate Manager
Placement plants for five Managing Trustee Co-Managing of two
agent power trusts Shareholder for all Shareholder venture
("Ridgewood ("RPMCo") of six six trusts (dormant) capital
Securities") trusts x of the funds &
("Ridgewood x Fund marketing
Power") x ("Power VI Co") affiliate
x x x ("Ridgewood
x x x Capital")
x x x x
______________________________x____________x_____________ x x
x x x x x x x x
x x x x x x x x
Ridgewood Ridgewood Ridgewood Ridgewood Ridgewood The Ridgewood x
Electric Electric Electric Electric Electric Power Growth x
Power Trust Power Trust Power Trust Power Trust Power Trust Fund x
I II III IV V (the x
("Power I") ("Power II")("Power III")("Power IV")("Power V") "Fund") x
x
________________________________X__
x x
x x
Ridgewood Capital Ridgewood Capital
Venture Partners Venture Partners II
(the "Venture Capital Funds")
Power I through V are referred to as the "Prior Programs."
(b) Financial Information about Industry Segments.
The Fund has been organized to operate in only one industry segment:
independent power generation and related capital, infrastructure and venture
projects.
(c) Narrative Description of Business.
(1) General Description. The Fund's investment objectives are:
providing capital appreciation over an extended period of time, either by
(a) selling all or some of the Fund's assets or (b) changing the Fund into a
more liquid investment (by combining with other companies, by a public offering,
by creating a market for the Investor Shares or otherwise) and
generating current cash flow for distribution to Investors to the extent
consistent with the capital appreciation objective.
The Fund intends to achieve its objectives by making equity investments in
"Projects" or in companies owning Projects or assets that may benefit from
industry deregulation. In many cases, the Fund may operate those Projects
itself. The Projects may include conventionally fueled, small to medium-size
independent electric power plants; landfill gas, biomass or other "waste" fueled
power plants that generate electricity or heat, or both,for sale while helping
to remedy environmental problems; cogeneration plants that produce electricity
and heat together for sale; other power generating facilities that produce
electricity, heat or motive power for sale or use; waste transfer stations,
pumping facilities and other facilities that contribute to the operation of
other Projects; o other types of capital projects, such as fuel plants,
processing facilities and recycling facilities, that are expected to have
consistent cash flows similar to those from independent electric power plants;
and equity interests in companies affected by the deregulation of the
electricity industry, including those with long-term or unconventional business
strategies.
The Fund will not invest in nuclear power facilities.
The Fund will try to invest in Projects that provide long-term cash flows.
Its investments will be structured for federal income tax purposes as "direct
participation" investments, so that income, gains, losses, deductions and
credits flow through to each Investor's personal tax return, and are subject to
tax only once. Investors will generally have limited liability for the Fund's
obligations and those of the Projects.
The Fund has decided to sell Investor Shares only to to "Accredited Investors"
(as defined by the Securities and Exchange Commission), which include
o individuals whose individual net worth, or joint net worth together with their
spouse's, exceeds $1,000,000 at the time of purchase;
o individuals whose income exceeded $200,000 in each of the two most recent
years or whose joint income with their spouses' exceeded $300,000 in each of
those years, if they reasonably expect to reach the same income level in the
current year;
o private pension funds or employee benefit plans that either have assets in
excess of $5 million or that have the investment decisions made by a plan
fiduciary that is a bank, savings and loan association, insurance company or
registered investment advisor;
o self-directed pension fund or employee benefit plan accounts, if the
investment decision is made solely by a person that is an Accredited Investor;
o banks, trust companies, savings and loan associations and certain other
financial institutions, whether acting as fiduciaries or for their own accounts;
or
o any other "Accredited Investor" as that term is defined in the Commission's
Regulation D (see DEFINITIONS-ACCREDITED INVESTOR).
The Fund may also in its discretion sell Investor Shares to certain Investors
who are not themselves accredited investors. These Investors must have family or
other relationships with other Investors who are themselves accredited
investors. The permitted relationships are defined by Rule 501(e) of the
Securities and Exchange Commission.
(2) Risk Considerations
General
Investment in the Fund involves substantial risks and potential conflicts
of interest and is suitable only for those persons who meet the investor
suitability standards on a continuing basis, have a substantial net worth, have
no need for liquidity from such investment, and are able to bear the loss of the
entire investment. Each prospective Investor should consider carefully the risk
factors attendant to the purchase of Shares, including without limitation those
discussed below, and each should review the investment with his own legal, tax
and financial advisors. In addition, each prospective Investor should understand
that the Subscription Agreement and the Declaration materially restrict
Investors from selling or otherwise disposing of their Shares.
Importance of Regulatory and Political Environments
Independent Power Projects, including cogeneration facilities, are
creatures of the regulatory and political process. Since the passage of PURPA in
1978, the Independent Power industry has grown, in large part, because
regulatory and political environments made it feasible to amass the large sums
of long-term capital needed to develop, construct and operate power plants. In
particular, the regulatory advantages currently provided by PURPA for Qualifying
Facilities are essential for the viability of most Independent Power Projects.
Modification or repeal of PURPA or the regulations thereunder could make some
Projects uneconomic.
In several states, including Massachusetts, Maine and California,
requirements may be imposed on sellers of electricity to purchase a minimum
amount of "renewable" power (generally, power from small hydroelectric plants,
geothermal, solar or wind plants, or plants that burn non-fossil fuels). These
requirements may be very advantageous for the types of Projects the Fund may
invest in, but adverse state or federal action might make those Projects
uneconomic in the future. Further, it is possible that future developments, such
as more stringent requirements of environmental laws and enforcement policies
thereunder, could affect the costs of and the manner in which Projects are
developed, built or operated. There can be no assurance that in such event the
Projects would be able to recover all or any of such increased costs or that
their businesses and financial conditions would not be materially and adversely
affected.
Deregulatory Initiatives
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act") removed
certain restrictions imposed by the Holding Company Act on the ability of
electric utility holding companies and electric utilities to control their local
markets. Since passage of the 1992 Energy Act, FERC in its Order 888 of April
1996 has deregulated the wholesale market for electricity (the market for sales
to local utilities or distributors of electricity). Further, many states are
implementing plans to further encourage investment in wholesale generators and
to facilitate utility decisions to spin off or divest generating capacity from
the transmission or distribution businesses of the utilities. As a result,
Independent Power Projects in the future will face competition not only from
other Independent Power Projects seeking to sell electricity on a wholesale
basis but also from exempt wholesale generators, electric utilities with excess
capacity and independent generators spun off or otherwise separated from their
parent utilities.
On the other hand, by expanding the potential pool of Projects in which
electric utility holding companies and electric utilities are able to invest,
the 1992 Energy Act has resulted in increased competition from the holding
companies and utilities to develop promising Projects and in increased
competition in the sale of electricity by Independent Power Projects. Further,
the 1992 Energy Act and Order 888 introduced an element of competition in the
transmission component of the electric power industry by requiring electric
utilities to make available their transmission facilities to Independent Power
Projects where it is in the public interest and does not unreasonably impair the
reliability of electricity service. In April 1996, FERC adopted Order 888, which
required electric utilities and power pools to make transmission facilities and
information available on equal terms to all generators.
The deregulation of transmission may benefit the Fund in the future in that
deregulated transmission may give Projects in which the Fund participates access
to customers that are not geographically located near the Projects. If there are
limitations on transmission capacity, however, the Fund might have to compete
and bid for capacity in order to transmit electricity to distant customers if it
is selling in a competitive market or if it is selling "renewable" power to a
distant customer. In those events, the Fund might have to compete against
companies that are far larger and more diversified than itself or that have
lower costs of operation or access to transmission facilities. If the Fund were
unsuccessful in obtaining transmission capacity, it might not be able to sell
its output except to local utilities (or in some cases, local retail customers).
There is no assurance local customers would purchase that power or that the
local price would be as advantageous as the price more distant customers would
pay.
The large scale deregulation of transmission facilities is likely to have
other far-reaching effects which may be adverse to the Independent Power
industry, generally, or to the particular facilities owned by the Fund. In
particular, because the Fund anticipates investing in small scale facilities, it
may be difficult for it in the short run to market power to end users or over
long distances. As a result, it may suffer significant competitive
disadvantages.
State initiatives to deregulate and encourage competition in the businesses
of generating electric power and transmitting it to customers are also creating
significant risks. Further, jurisdictional disputes between federal and state
regulators and proposed congressional actions have hampered the creation of a
coordinated regulatory posture and have raised significant questions as to the
allocation of electric utility costs and obligations that may not be recovered
by utilities in a competitive environment. As a result, although it appears that
competitive generating markets will be created in many states and possibly
nationally, there is uncertainty as to the eventual regulatory environment and
the risks and opportunities it will create.
As various states implement retail deregulation, a number of additional
risks are posed for Independent Power Projects. In many states, local electric
utilities are being required or encouraged to sell their generating stations.
Often, large electric utilities, affiliates of natural gas marketers or other
large entities have purchased large quantities of these assets and thus
immediately become sizable competitors in the market to sell electricity. In
some other states, local electric utilities will be permitted to retain
generating assets and sell power to themselves. In that event, they may prefer
purchases from their own plants and opportunities for Independent Power Projects
to sell electricity in a competitive market may be stifled.
Further, in a competitive market, prices for electricity may be very
volatile. If a generator is nonetheless able to obtain a long-term Power
Contract, the prices under that contract may be inadequate to cover costs and
yield a return, or the generator may lose opportunities to sell electricity at
higher prices. If a generator is unable to obtain a long-term Power Contract and
sells its output under short term contracts on in a spot or auction market, the
prices received may be inadequate to cover costs or to permit the Project to
earn a return. Prices may vary so much as to make planning impossible. There is
no assurance that the generator will be able to obtain new Power Contracts so as
to keep its Project in continuous operation and the generator may have to absorb
significant costs of Project shutdown and restart as well as lay off and rehire
its workforce, as has occurred with two Projects located in Maine in which Power
IV and Power V have invested.
These factors have caused new investment in independent power plants in the
United States to be substantially reduced, have intensified the pressures on
larger market participants to consolidate, have created additional incentives
for generating efficiency and low-cost production of power, have tended to
depress the purchase prices of existing small-scale Projects and are likely to
have additional, unpredictable effects. Recently, a number of very large
utilities, natural gas companies and independent generation companies have paid
significant premiums over book value or other measures of value to purchase
large packages of power plants being divested by utilities and others have
announced plans to construct extremely large-scale merchant power plants. These
transactions or proposals have been in the range of hundreds of millions of
dollars to billions of dollars. This may indicate that these industry
participants have concluded that very large scale is a necessary competitive
advantage.
The Fund instead will attempt to follow a diversified strategy that does
not attempt to compete head-on with these types of competitors. The Fund
believes that in many cases emphasis on scale and purchasing market share may
lead to suboptimal returns. Instead, the Fund will seek to develop niche
markets, to engage in ventures with large utilities or other participants that
need its investments for financial or regulatory reasons or to acquire equity
interests in undervalued companies. Where possible, the Fund may invest in
existing Projects with long-term Power Contracts that are less exposed to
competitive forces, or in Projects with regulatory or tax advantages. There can
be no assurance, however, that these strategies will be successful or that the
Fund will not be competitively disadvantaged by its relatively small size.
Threats to Power Contracts
The Power Contract with the local utility, industrial host or other energy
purchaser is perhaps the most important contract to an existing Independent
Power Project. Many long-term Power Contracts between local utilities and
independent power producers now provide for rates in excess of current
short-term rates for purchased power and the utilities are treating their
contractual obligations as a form of stranded cost. There has been much
speculation that in the course of deregulating the electric power industry,
federal or state regulators or utilities would attempt to invalidate these power
purchase contracts as a means of throwing some of the costs of deregulation on
the owners of independent power plants.
To date, the Federal Energy Regulatory Commission and each state regulator
that has addressed the issue have ruled that existing Power Contracts will not
be affected by their deregulation initiatives. The regulators have so far
rejected the requests of a few utilities to invalidate existing Power Contracts.
Further, no action has yet been taken by federal or state legislators to date to
impair Independent Power Projects' existing power sales contracts, and there are
federal constitutional provisions restricting actions to impair existing
contracts. There can not be any assurance, however, that the rapid changes
occurring in the industry and the economy as a whole would not cause regulators
or legislative bodies to attempt to change the regulatory structure in ways
harmful to Independent Power Projects or to attempt to impair existing
contracts. In particular, some regulatory agencies have urged utilities to
construe Power Contracts strictly and to police Independent Power Projects
compliance with those Power Contracts vigorously. Predicting the consequences of
any legislative or regulatory action is inherently speculative and the effects
of any action proposed or effected in the future may harm or help the Fund.
Because of the consistent position of the regulatory authorities to date and the
other factors discussed here, the Fund believes that so long as it performs its
obligations under the Power Contracts, it will be entitled to the benefits of
those contracts.
In recent years, many electric utilities that have entered into long-term
Power Contracts have concluded that the prices set under those contracts are
disadvantageous to them under current conditions. Accordingly, they have often
attempted to exploit all possible means of terminating these Power Contracts
with Independent Power Projects, including requests to regulatory agencies and
alleging violations of even immaterial terms of the Power Contracts as
justification for terminating those contracts. The Fund's current investment
strategy includes the purchase smaller-sized Projects with existing long-term
Power Contracts. If the prices for electricity under those contracts are in
excess of the prices charged by alternative sources, or if the electric utility
purchasers under those contracts have other incentives to terminate those
contracts, the Fund may face material costs in contesting those utility actions.
Power II, which is a previous Power Trust sponsored by Ridgewood Power, is
currently defending a legal proceeding in California which involves such a
challenge. A second Power Trust, Power I, succesfully defended a similar
challenge in 1995-1997.
Other Aspects of Power Contracts
A generating facility which uses biomass or "waste" fuel, such as landfill
gas or waste coal, may be a Qualifying Facility under PURPA. However, in order
for a cogeneration facility using conventional fuel to be a Qualifying Facility
under PURPA and current regulations, at least 5% of a Project's total energy
output must be "useful" heat energy that typically is sold or made available in
the form of steam or hot water to an entity (the "Steam Host"). Under current
regulatory interpretations, heat energy is "useful" if its use has a business
purpose independent from the sale of electricity and there is some economic
justification for the use. Typically, a Project meets its PURPA requirements by
entering into a long term contract with a Steam Host which provides that the
Steam Host will take delivery of sufficient thermal energy to permit the Project
to meet the requirements of PURPA. If a cogeneration Project did not meet the
requirements for supplying heat energy to a Steam Host because, for example, the
Steam Host went out of business, or the thermal contract is otherwise
terminated, that cogenerating Project might lose its status under PURPA as a
Qualifying Facility. If as a result of this loss of status the cogenerating
Project became subject to federal and state regulation or its Power Contract
were terminated or modified, the cogenerating Project might incur material loss.
Although PURPA provides grace periods for a cogeneration Project to find an
alternative Steam Host, potential alternate Steam Hosts may be very limited or
non-existent because of the practical necessity for a Steam Host to be located
adjacent to the Project to minimize heat loss.
Under PURPA, electric power utilities are directed to purchase electricity
output offered to them by Qualifying Facilities at a price no greater than the
utilities' avoided costs of generating electricity from another source. The
Power Contracts for many existing Projects have been negotiated with the utility
as long term agreements to purchase the Projects' output. There can be no
assurance that the rates offered to a new Project or the other terms of a Power
Contract will be sufficiently favorable to induce development and construction
of a Project or permit profitable operation of a completed Project.
Many long-term Power Contracts provide for levelized rates over the life of
the contracts or shorter periods, which are designed to stabilize projected
revenues earned by an Independent Power Project. The effect of many levelized
rate contracts is to provide that the utility will purchase electricity from a
Project at higher rates in the earlier years in exchange for an agreement from
the Project to accept lower rates to be paid by the utility in later years. If a
Project experiences operational difficulties and produces less than the expected
volume of electricity in later years, it may be required to make cash payments
to the utility to compensate for such shortfall, thereby reducing available cash
flow to the Project owner.
Although there is some risk that a utility bound by a long-term Power
Contract may be unable to meet its purchase obligations, under current federal
law and current law in most states electric utilities are required to maintain
prudent financing structures and are reviewed periodically by their regulators
for compliance with these requirements. In addition, if state regulators
approve, the payments made by a utility to an Independent Power Project may be
included as allowed costs to be passed through to the utility's retail
customers, thereby giving the utility an additional source of revenue which can
be used to make payments to the Independent Power Project. Accordingly, failure
of a utility to meet payment obligations to an Independent Power Project which
is operating in compliance with its Power Contract has been a rare occurrence.
Most deregulatory programs treat Power Contracts with prices in excess of
market prices as "stranded costs" and provide for reimbursement to utilities for
those stranded costs for an extended period of time. During these periods, which
can range from three to ten years or longer in some instances, there may be some
assurance that the utilities will pay. However, retail deregulation may impose
other financial strains on electric utilities, which will be relegated to
maintaining the distribution network and delivering power to individual
residential, commercial and industrial locations. Those utilities will have to
downsize and reorganize their workforces and resources and compete in many cases
as suppliers of electricity. It is likely that some utilities may reorganize or
enter bankruptcy if they are unable to meet these challenges. In those cases,
the Fund may be unable to collect amounts due to it or may have its Power
Contracts abrogated in bankruptcy. Industrial and other retail purchasers of
power do not have an assured source of revenue from which to make payments under
the Power Contract and a Project selling to them must rely solely on the credit
of such purchaser. Consequently, although the Fund will conduct a business
review of each purchaser's creditworthiness prior to contracting with it, there
can be no assurance that it will remain in business over time or be able to
perform its payment obligations for the duration of the Power Contract.
In the event of a default or failure to pay by an energy purchaser under a
Power Contract because of its bankruptcy or insolvency, regulatory changes,
failure of a Project to comply with the terms of its contract or other events,
there can be no assurance that the Project will be able to obtain a Power
Contract with another purchaser or to obtain a Power Contract on terms as
favorable as those of the previous contract.
The Fund expects that if it were to invest in capital facilities or other
investments outside the electric power industry, those facilities would have
output contracts providing for long-term payments by a responsible customer or
customers for the facilities' production. These contracts would likely be
structured in a manner similar to Power Contracts with non-utility customers. In
that event, the Fund would be subject to the risks of the customers'
creditworthiness and the long-term anticipated demand for the products. With
regard to investments in other types of industries, such as Zap Power Systems,
Inc., the Fund's investment is subject to the many risks of any enterprise that
markets its products to consumers. In addition, Zap's business plan contemplates
marketing its bicycles and vehicles through dealers and franchisees. Zap's
ability to do so profitably will depend upon its ability to organize an
effective dealer and franchise system and to create a mass market through
advertising and marketing efforts for its products. Zap has no significant
experience in those areas.
Reliance on Fuel Supplies at Appropriate Prices
Since the cost of fuel is usually one of the largest components of a
Project's operating costs (especially so in the case of natural gas, coal or
oil-fired electric power Projects), the success of a Project may depend not only
on the availability of fuel supplies but also on the Project's ability to obtain
long term contracts for fuel and fuel transportation at appropriate prices.
The Fund will attempt to invest in Projects which have fuel supply
arrangements which closely match the fuel adjustment provisions of the Power
Contract with the utility, industrial user or other energy purchaser, so that
changes in Project fuel costs will be offset by corresponding changes in revenue
from the sale of energy. Existing Projects that do not have favorable fuel price
adjustment provisions in fuel supply contracts may have purchase prices or
values that are significantly discounted from those of other Projects.
If fuel prices payable by a Project are relatively high compared to the
contract price of energy, the Project may not be able to generate energy on an
economic basis. On the other hand, if a Project's economic returns are based
upon the ability to generate substantial fuel savings through use of
cogeneration and other more efficient power generation technologies, lower fuel
prices may tend to reduce the value of the fuel savings and may adversely affect
the financial performance of the Project. Since cogeneration and other more
efficient technologies often require higher capital costs than conventional
power plants, periods of very low fuel prices could result in fuel savings which
are insufficient to cover the additional capital costs, thereby creating losses
from the Project.
Small scale Projects may find it difficult or uneconomical to obtain
long-term fuel supply contracts and thus may be exposed to risks of fuel price
escalations. For example, after a relatively long period of depressed prices,
natural gas prices in many areas tripled between summer 1996 and the winter
months of 1996-1997. These increases adversely affected many small Projects
operated by Prior Programs, although RPMCo was able to negotiate one-year supply
contracts for many Projects it managed at a price substantially less than peak
prices. Because the Fund may be a relatively small consumer of fuel, it may be
difficult for it to economically hedge fuel prices or purchase reliable supplies
on a long term basis. In that case, the Fund may be exposed to the risk that
fuel price increases could reduce or even eliminate profitability of its
Projects.
A separate component of a Project's overall fuel requirements is the
availability, reliability and cost of transporting the fuel to the Project. For
example, Projects fired by natural gas may be dependent upon a single pipeline
for transportation of large volumes of natural gas, and may be adversely
affected by the costs of transportation on the pipeline or by outages, capacity
restrictions, priority allocations to other customers or other events affecting
the pipeline. Some Projects are designed to operate on alternate fuels (such as
using fuel oil when natural gas is unavailable) but these alternate fuels are
also subject to similar variables of availability, cost and transportation.
In contrast to the Power Contract, which is one of the first objectives
of a Project, the fuel supply contracts are frequently obtained relatively late
in the development process or in the operating stage. There is no assurance that
adequate fuel supply arrangements for a Project will be available from
dependable sources and at acceptable prices at the time required.
It should be noted that hydroelectric Projects and landfill-gas-fueled
Projects may have little or no net fuel expense. However, hydroelectric Projects
are dependent on rainfall and snowfall to create river flow and droughts can
severely limit or cease their output. Landfill gas-fired Projects often have no
alternate source of fuel, and federal regulations effectively limit their use of
alternate fossil fuels (such as natural gas) to 25% of total fuel use per year.
Therefore an interruption for any reason of the fuel supply from the landfill
(because of equipment problems, default by the fuel supply operator,
environmental requirements or routine maintenance, for example) may reduce or
eliminate the ability of the Project to operate.
Environmental Regulation
Projects in which the Fund will participate will be subject to
environmental regulation by federal, state and local government authorities. The
failure to comply and to maintain compliance with these regulations may
potentially result in substantial liability for pollution and other damages
under statutes and regulations relating to environmental matters. Thus, the
regulatory risks associated with the environment should be considered carefully
by Investors before investing in the Fund. Environmental regulation includes the
requirement that the Projects in which the Fund will participate obtain and
maintain various regulatory approvals, licenses and permits. The process
involved in obtaining these approvals can be quite time consuming and expensive,
resulting in delays in the development or construction of a Project or imposing
operating limitations on the Project. These factors could lead to increased
costs to the Fund. If the Fund invests in Projects that were developed by others
or that have an operating history, it may become liable for pollution and
environmental discharges that occurred before it took ownership of the Project
or that the Fund had no ability to affect. As a result, the purchase of any
existing Project or any Project located on land affected by previous activities
may subject the Fund to unpredictable and material contingent liabilities.
Although the Fund through its investigation of Projects will attempt to minimize
such contingencies, there can be no assurance that it can do so.
In addition, there can be no assurance that future environmental
legislation or regulations will not affect Project economics. The imposition of
more stringent environmental laws and more effective enforcement policies
thereunder could significantly increase the costs associated with the
development, construction and operation of any Project and, thus, substantially
reduce the return which Investors could anticipate with regard to the Fund's
interest therein. For example, ongoing implementation of Title V of the Clean
Air Act Amendments of 1990 will require all existing industrial sources of air
pollution to obtain new operating permits and to comply with additional daily
operational limits.
Identifying Projects
There is no assurance that there will be a sufficient number of attractive
potential Projects available to the Fund. In seeking to participate in Projects,
in many cases the Fund is likely to encounter significant competition from
construction companies, equipment vendors, electric and gas utilities and their
affiliates, other Project Sponsors and investment groups which participate in
the development, construction and operation of Projects. Many of these
competitors have greater experience in the independent power industry or project
development or have superior capital resources.
The consolidation of the independent power industry has resulted in
increased competition for acquire most available electric generating Projects in
the United States. The process of identifying and investing in Projects can be
protracted and during that period Investors' funds are held in U.S. Government
securities, in money market funds holding those securities or in short-term
commercial paper or money market instruments at lower yields than those
anticipated from the Projects. Factors that may cause delays include lack of
funds for the Fund to begin the acquisition process, variations in the
availability of Projects and funds available to other purchasers of Projects,
negotiations and environmental and regulatory delays caused by agency action or
the need to investigate or remediate conditions before investing funds. The Fund
seeks to reduce the period necessary to invest funds, primarily through the
Early Investor Incentive, which was instituted to allow programs to begin
acquiring Projects during their offering periods. The period from the closing of
the offering to 90% investment of available funds dropped from approximately 29
months in Ridgewood Power I to 9-1/2 months in Ridgewood Power III but was 22
months for Ridgewood Power IV and is over 24 months for Ridgewood Power V.
Need for Diversification
The Fund expects that it will participate in several Projects. However,
the size of each investment may depend upon a variety of factors, including,
among other things, the amount of funds available to the Fund, the size and
timing of the proposed investment, the availability of capital from other
investors, the ability of other investment programs sponsored by the Managing
Shareholders to participate, and the requirements of other participants in the
transaction. Based on prior experience, the Fund believes that the likely range
for each major investment by the Fund may be from 10% to 33% of the Fund's total
capital, and may exceed 33% if the Fund participates in certain larger scale
Projects. There can be no assurance that any Projects will earn a return and
failure of any Project to earn a satisfactory return may have an adverse effect
on the financial performance of the Fund as a whole if that Project represents a
significant portion of the Fund's investments.
Risks of Foreign Investments
The Fund may invest in Projects located outside the United States. The
Managing Shareholders and Prior Programs have not yet invested material amounts
in foreign Projects, although they have evaluated several proposals, have
expended funds on due diligence and exploratory investments and are developing
Projects in Egypt. Neither Managing Shareholder and none of their Affiliates has
any significant experience in evaluating, investing in, developing, operating or
disposing of Projects located outside the United States. Among the risks that
the Fund will encounter in making investments outside the United States are:
risks in relying upon unknown or little-known foreign businesses as partners or
operators of projects, increased costs for legal, accounting, environmental and
other services, exposure to unfamiliar systems of governmental regulation,
electricity pricing, taxation, employment relations and economic organization,
inability to obtain goods and services from abroad or local requirements to
purchase goods and services of unknown characteristics and quality from local
suppliers, credit risks in dealing with local businesses and customers, foreign
exchange risks such as depreciation of the local currency against the dollar or
inability to transfer money to the United States, governmental and business
corruption, kidnapping, extortion and other risks to the Fund's personnel, and
difficulty in selling or disposing of Projects or assets.
Utilization of Funds for Undesignated Projects
The Fund may direct a substantial portion of the net proceeds of this
offering of Shares to Projects that have not been designated in this
Registration Statement, as it may be supplemented from time to time, and the
Fund may be unable to or may decline to participate in any specific investments
described in this Registration Statement or any supplements thereto. Further,
the Fund's investment objectives are broad and grant a great deal of discretion
to the Managing Shareholder in determining whether a potential Project is within
the Fund's objectives. Therefore, prospective Investors may not be able to
evaluate the Projects in which the Fund participates before they purchase
Shares; nor will prospective Investors have any voice in the selection of
Projects after they purchase Shares, and the Fund may invest in Projects that
differ from those described in this Registration Statement or from those that
the Prior Programs have invested in. Consequently, Investors will be relying
upon the judgment of the Managing Shareholder for such decisions.
Projects Require Large Amounts of Capital and Time for Development and
Construction The Fund may commit a significant portion of its capital to a
single Project, and it is possible that additional capital may be required to
complete a Project or make necessary alterations or additions to such Project.
There can be no assurance that the Fund will have access to any such additional
capital or that the Project can obtain any such additional capital from other
sources on satisfactory terms. Further, to the extent the Fund participates in
larger Projects, extended periods of time (one to three years) may elapse before
the Project commences operation.
Construction
The Fund may invest in the development and construction of new Projects and
if it does so, it will be exposed to the risks that arise in the construction
stage of a Project. These risks include interruptions of supplies or work
stoppages; delays caused by changes in plans and specifications; inclement
weather; subcontractor non-performance; planning error; contractor insolvency;
cost increases; regulatory changes; and other construction-related matters.
Although the Fund will attempt to reduce those risks where possible by
contracting with responsible contractors or suppliers on a turnkey or
performance incentive basis (where these risks are assumed by others), it may
not be possible to do so effectively.
Financing and Leverage
Although the Fund does not intend to borrow any funds to make its equity
investments in Projects, certain Projects may require non-recourse construction
and/or long term financing in order to be viable. There can be no assurance that
such financing will be available at the time required on satisfactory terms and
conditions, and if not available, the Project may be abandoned and all amounts
invested in the Project to that point will likely be lost. Even if commitments
for construction and/or long term financing are obtained by a Project, there is
no assurance that the Project will be able to meet all of the conditions which
are typically required by project finance lenders in order to fund such
financing commitments. Further, even if construction or long term financing is
obtained, failure by the Project to obtain and maintain expected operating
parameters may lead the holders of the debt to foreclose on the Project and
eliminate the equity investment of the owners.
The Fund will seek to limit the risks of leverage by limiting the number of
investments in Projects with leverage and/or conducting its due diligence with a
focus on the adequacy of debt service coverage (excess of cash flow over
required payments of principal and interest) and debt service reserves, and by
focusing on acquiring Projects with a record of prior performance.
Limited Transferability of Fund Assets
The Fund's interests in many Projects in which it participates may be
illiquid. When the Fund initially commits funds to a Project, it may endeavor to
negotiate the right to sell all or part of its equity interests in a Project at
a later time without the consents of other participants. However, the interests
in Project Entities in which the Fund participates with other owners will
typically be closely held and the Fund's ability to transfer its interests in
such Project entities may be restricted or prohibited by their governing
documents, or by other agreements among Project participants or by covenants in
financing documents. Even if the Fund successfully negotiates the right to sell
its interest in a project without obtaining the consents of other participants,
the Fund may find that it is unable to sell or dispose of its interests in
Projects at the times it had planned or that such transactions would be
disadvantageous to the Fund. Successful sales would depend upon, among other
things, the operating history and prospects for the Projects to be sold, the
number of potential purchasers and the economics of any bids made by them and
the state of the independent power market. In addition, sales of substantial
interests in a Project may result in adverse tax consequences.
The Managing Shareholder will have full discretion to determine whether any
of the Fund Properties should be sold and which should be held and in what
proportions, and the Fund will have no obligation to sell all or a portion of
any asset for the benefit of Investors or to retain any asset for the benefit of
Investors. Investors may be required to remain in the Fund until it is
terminated and dissolved.
General Risks of Operation
The commencement of operation by a Project does not necessarily assure
recovery of or a profit on any investment made in such Project by the Fund. If
an electric generation Project or a capital project is completed and placed into
operation, it will be subject to the general risks of the industry, including,
but not limited to, equipment failures, fuel interruption, failure of the
Project to perform according to projections, loss of a Power Contract for not
maintaining a minimum required output availability or other breaches, decreases
or escalations in Power Contract or fuel supply contract price indices in an
unexpected manner, bankruptcy of a key customer or supplier, failure to obtain
required wheeling rights or use of transmission facilities at economic rates,
liabilities in tort (which may exceed insurance coverage), environmental
obligations, inability to obtain desirable amounts of insurance at economic
rates, acts of God and other catastrophes.
Joint Activity with Others
It is anticipated that the Fund will normally participate in a larger
Project jointly with one or more other entities through a joint venture or
partnership vehicle. To the extent that other participants in a Project cannot
fulfill their obligations or have divergent interests or are in a position to
take action contrary to the policies or objectives of the Fund, the Fund's
interest in such venture may be adversely affected. In certain cases, the Fund
may participate or be deemed to participate as a general partner of the entity
developing the Project, thereby exposing the Fund to general partner liability.
The Fund will seek to limit such exposures by interposing a limited liability
entity between the Fund and the Project, or by obtaining specific agreement from
other Project participants they will not seek recourse against Fund assets
(other than the Fund's investment in the Project) for any claims.
Although the Managing Shareholder will remain closely involved in all
aspects of the Fund's activities, the Fund in some cases (typically larger
Projects) will rely upon the advice of others as to the development or
management of Projects. Thus, a substantial amount of responsibility will be
placed on third parties who function as Project Sponsors or Project managers.
The success of any Project will, to a large extent, be determined by the quality
and performance of its Project Sponsors and managers. Project Sponsors and
Project development companies may have conflicting demands on their resources or
may be adversely affected by other developments at their affiliated or
associated entities. As a result, there is the risk that such Project Sponsors
or Project development companies or their other investors may be unable to
fulfill their responsibilities.
Limited Operating Experience
Although Ridgewood Power has participated in numerous independent power
projects and executive officers of Ridgewood Power and advisors to Ridgewood
Power have extensive backgrounds in the independent power industry and the
construction and operation of Independent Power Projects, Ridgewood Power has
limited expertise in the design, construction and operation of independent power
plants. There can be no assurance that Ridgewood Power's prior experience has
given it a comprehensive knowledge of the independent power industry sufficient
enough to result in successful or profitable operations of the Fund or that such
experience extends to all of the diverse areas of the independent power industry
or capital facilities developments in which the Fund may participate.
Power VI Co has no business track record or experience whatever, is not an
operating business and has no capital resources. Its officers are those of
Ridgewood Power and Ridgewood Power will make all of its personnel and other
resources available to Power VI Co as needed to allow Power VI Co to perform its
duties to the Fund.
Projects that the Fund will operate for its own account will be managed
under contract with the Fund by Ridgewood Power Management LLC ("RPMCo"), an
affiliate of the Managing Shareholder. Although many of the officers and
personnel of Ridgewood Power also serve as officers and personnel of RPMCo,
RPMCo was organized in January 1996 and thus has only limited operating
experience. Many of its personnel, although experienced, have been recently
hired by it. Further, RPMCo also manages the operations of Projects owned and
operated by the Prior Programs, and is currently subject to substantial demands
on its organizational and management resources. It is possible that the
management of Projects to be acquired by the Fund would be impaired by these
demands, although the Managing Shareholder believes that RPMCo will have
sufficient resources and experience to operate Projects for the Fund.
Delaware Business Trust
The Fund has been organized as a Delaware business trust having limited
liability of the Shareholders of the Fund. Not every state in which the Fund may
conduct business has enacted legislation recognizing the limited liability
provisions of the Delaware business trust. Accordingly, there is a risk that
investors will not have limited liability for activities of the Fund in those
states. Such risk is substantially, if not entirely, mitigated by the Fund's
conducting its activities and holding its interest in Projects in such states
through limited liability entities such as limited partnerships or limited
liability companies.
Limitations on Liability of Managing Persons to Fund
The Declaration provides that the Fund's officers and agents, the Managing
Shareholders, the Corporate Trustee, the affiliates of the Managing Shareholders
and their respective directors, officers and agents when acting for the Managing
Shareholders or their affiliates on behalf of the Fund (collectively, "Ridgewood
Managing Persons") will be indemnified and held harmless by the Fund from any
and all claims rising out of their management of the Fund, except for claims
arising out of the recklessness or misconduct of such persons or a breach of the
Declaration by such persons. Therefore, the right of an Investor to bring an
action against any of the Ridgewood Managing Persons for a breach of its or his
fiduciary responsibility or other obligations to the Fund may be limited.
Disparity in Shareholder Contributions
Power VI Co, in its capacity as a Managing Shareholder, and its key
employees and those of the Fund and Ridgewood Power, through the Key Employee
Incentive Plan, will receive, after the preferences to Investors, 25% of the
distributions of the Fund. The Managing Shareholders and employees will not be
obligated to contribute any cash to the Fund for that interest, except to the
extent that Fund Organizational, Distribution and Offering Expenses exceed the
Organizational, Distribution and Offering Fee payable to Ridgewood Poweror to
the extent the plan requires some monetary contribution by employees. Ridgewood
Power has purchased one full share as an Investor in the Fund.
Lack of Investor Participation in Management
Investors have no right to vote on who will act as Managing Shareholder
unless both Managing Shareholders resign, are removed by special action of the
Investors or are incapable of acting as Managing Shareholders because of
bankruptcy or legal disability. Similarly, Investors have no right to vote on or
select the Independent Panel Members of the Fund unless an Independent Panel
Member resigns or is incapable of acting. Therefore, Investors have much more
limited rights to participate in control of the Fund than would stockholders of
a corporation. The Managing Shareholder has the exclusive right to manage,
control and operate the affairs and business of the Fund and to make all
decisions relating thereto and has full, complete and exclusive discretion with
respect to all such matters. Investors have no right, power or authority to
participate in the ordinary and routine management of Fund affairs or to
exercise any control over the decisions of the Fund. Accordingly, no prospective
Investor should purchase any Shares unless the prospective Investor is willing
to entrust all aspects of management of the Fund to the Managing Shareholder.
Limited Transferability of Shares
Shares in the Fund are an illiquid investment. There is no market for the
Shares, and, because there will be a limited number of persons who purchase
Shares and significant restrictions on the transferability of such Shares, it is
expected that no public market will develop. Any change in the status of the
Shares would require compliance with multiple regulatory and tax requirements
and consent from a majority in interest of Investors. Investors will generally
be prohibited from selling or transferring their Shares except in the
circumstances permitted under Article 13 of the Declaration, and all such sales
or transfers require the consent of the Fund, which may withhold such approval
in its sole discretion. Accordingly, an Investor will have no assurance that he
or she can liquidate his or her investment in the Fund and must be prepared to
bear the economic risk of the investment until the Fund is terminated and
dissolved.
The Shares have not been, and are not expected to be, registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities law in a
manner that will make the Shares freely transferable by purchasers under such
laws and, therefore, cannot be resold unless they are subsequently registered
under the Act or an exemption from such registration is available and subject to
other limitations and conditions imposed by the Declaration. The provisions of
Rule 144 under the Act would be available to Investors in connection with such
resale, if the requirements of that rule are met, but the Fund has no current
intention to allow transfers to be made on the open market pursuant to the rule.
The illiquidity of and other significant risks associated with an
investment in the Fund make the purchase of Shares suitable only for an Investor
who has substantial net worth, who has no need for liquidity with respect to
this investment, who understands the risks involved, who has reviewed this
Registration Statement and the Exhibits hereto and the risks involved with his
or her tax, legal and investment advisors, and who has adequate means of
providing for his or her current and foreseeable needs and contingencies.
Voluntary Additional Capital Contributions
There will be no mandatory assessments of the Investors and the Managing
Shareholder. Investors may, however, be called upon on a voluntary basis to make
additional Capital Contributions after the expenditure of the Initial Capital
Contributions. If an Investor elects not to make a requested additional Capital
Contribution, the Managing Shareholder may determine that the Managing
Shareholder, other Investors or other persons may do so or may supply loans
instead, which may result in a dilution of that Investor's interest in the Fund.
Failure Of Fund To Perform Funding Obligations
Although the Fund anticipates that it will be able to perform all of its
commitments to invest in Projects, in certain instances there may be adverse
consequences to the Fund if it were to fail to do so. For example, a partnership
agreement or other instrument governing the Fund's participation in a Project
might provide that, in the event the Fund fails to make a capital contribution
to the partnership or particular Project as required under such agreement, the
Fund will forfeit its entire interest in the partnership or Project, as the case
may be.
Potential Conflicts of Interest
There are material, potential conflicts of interest involved in the
operation of the Fund. Some examples of these potential conflicts include
competing demands for management resources of the Managing Shareholder and
RPMCo;
o competing demands for allocating investment or divestiture opportunities among
programs;
o competing demands for opportunities to sell electric power in competitive
markets;
o conflicts between the interests of the Managing Shareholder and its Affiliates
in receiving compensation from the Fund for investment activities, operating
activities, and divestitures, as well as reimbursement for expenses, and the
interests of the Investors;
o conflicts relating to the allocation of costs and expenses among programs;
o conflicts arising from the fact that the Managing
Shareholder will not make a capital contribution in respect of its interests as
such in the Fund and that the Investors will supply all of the capital of the
Fund;
o conflicts between the interests of the Fund and other programs sponsored
by the Managing Shareholder and its Affiliates if those programs are co-owners
of Projects with the Fund;
o conflicts as to who will supply additional capital in the event the Fund were
to require additional contributions;
o potential interests of the Managing Shareholder or its Affiliates in competing
independent power or investment ventures;
o the lack of independent representation of Investors in structuring this
offering and in determining compensation; and
o conflicts between the interests of key employees and the Managing Shareholder
and those of Investors with regard to determining compensation under the Key
Employees Incentive Plan.
Material transactions between the Fund and other Programs sponsored by the
Managing Shareholder and its Affiliates must be reviewed and approved by the
Independent Review Panel. Although the potential conflicts of interest described
here and others cannot be eliminated, the Fund believes any such potential
conflicts will not materially affect the obligation of Ridgewood Power and Power
VI Co in their capacities as Managing Shareholders to act in the best interests
of the Investors and the Fund.
Tax Risks
There are tax advantages associated with an investment in the Fund, and
there are some tax risks associated with those tax benefits. The risks include,
but are not limited to, those discussed below.
(A) Partnership Tax Status of Fund
While it is the opinion of tax counsel to Ridgewood Power that the Fund
should be recognized as a partnership for federal income tax purposes, such
opinion is not binding upon the Service and no advance ruling from the Service
as to such status has been requested, and such a request is not contemplated. If
a secondary market for the Fund's Investor Shares develops, the Service, in the
event it audits the Fund, might attempt to treat the Fund as an association
taxable as a corporation. If such challenge were successful, the Investors would
be treated as if they were corporate shareholders and, therefore, would not be
entitled to deduct their proportionate share of the Fund's operating losses.
(B) State and Local Taxes
Each Investor may be liable for state and local income taxes payable in the
state or locality in which the Investor is a resident or doing business or in a
state or locality in which the Fund conducts or is deemed to conduct business.
Thus each Investor may be required to file multiple state income tax returns as
a result of his investment in the Fund.
The state of California has instituted a withholding requirement for
distributions from organizations taxed as partnerships (such as the Fund and
limited partnerships or limited liability companies used by the Fund to invest
in Projects) to tax partners located outside California. If the Fund earns
income in California, the portion of each distribution to a non-California,
taxable Investor that is attributable to California is subject to a withholding
tax of 7%, whether or not the Investor files a California income tax return. The
Fund believes that other states may follow California's example, in which case
much of the income component of distributions to an Investor would be subject to
state withholding taxes.
Each prospective Investor is urged and expected to consult with his
personal tax advisor with respect to the tax consequences connected with an
investment in the Fund.
(3) Business Plan and Development of Projects
Business Plan.
As deregulation of the electricity industry in the United States
progresses, the uncertainties and the financial stresses that deregulation may
create may have the effect of depressing the stock price of companies that have
long-term value. Opportunities may arise to invest in undervalued industry
participants or in other businesses having unique technological advantages. If
so, the Fund may invest its funds in acquiring majority or minority equity
stakes in those companies.
Advantages of Investing in the
Independent Power Industry
Because of historical factors, many existing independent power Projects
have long-term power sales contracts that can provide consistent cash flows to
Project owners over long periods of time. Further, the side effects of the
deregulation of the electricity industry, which is just beginning, are tending
to depress the purchase price of these Projects. Finally, in several years,
those side effects might make these Projects more valuable than the current
prices for the Projects would indicate. The Fund's decision to invest its assets
in the independent power industry is based on these trends.
In 1978, Congress passed the Public Utilities Regulatory Policies Act
("PURPA"), which was intended to create additional sources of electricity and
which also created the ability for companies other than electric utilities to
generate and sell electricity. Under PURPA, each electric utility must purchase
electricity generated by certain non-utility electric generating plants
("Independent Power Projects") at a price equal to the utility's "avoided cost."
This avoided cost basically is the estimated highest cost the utility would pay
otherwise to purchase additional electricity. PURPA also exempts Independent
Power Projects from many federal and state restrictions.
PURPA does not require utilities to enter into long-term contracts to
buy electricity from Independent Power Projects, but in the 1980's and early
1990's many utilities entered into long-term power purchase contracts from
Independent Power Projects. With changes in the industry, few if any new
long-term power purchase contracts are being entered into today.
Generating facilities with existing long-term contracts thus have
unique advantages in that those contracts are for extended terms at rates that
are often equal to or higher than current spot rates for electricity.
Nevertheless, the Fund believes that these facilities are sometimes undervalued
and can be excellent investment opportunities.
First, the deregulatory movement has made many potential competitors of
the Fund uncertain about the value of small generating facilities with long-term
contracts. The federal government and state governments are deregulating the
electric power industry. These changes will allow any company that generates
electricity to sell its output to any utility to which it can transmit the
electricity, and, in most states, eventually to any retail customer. This
movement will create pressures on local utilities to buy their electricity from
the cheapest competitive source. As a result, local electrical utilities with
high-cost generating facilities, such as malfunctioning nuclear power plants or
inefficient fossil-fuel units, will find that they will not be able to use those
facilities economically. Even so, those utilities will be obligated to pay off
the capital costs incurred to build and maintain those uneconomic plants. Those
costs are called "stranded costs."
Many long-term power purchase contracts between local utilities and
independent power producers now provide for rates in excess of current
short-term rates for purchased power and the utilities are treating their
contractual obligations as a form of stranded cost. There has been much
speculation that in the course of deregulating the electric power industry,
federal or state regulators or utilities would attempt to invalidate these power
purchase contracts as a means of throwing some of the costs of deregulation on
the owners of independent power plants. To date, the Federal Energy Regulatory
Commission and each state regulator that has addressed the issue have ruled that
existing power purchase contracts will not be affected by their deregulation
initiatives. To date, the regulators have rejected the requests of a few
utilities to invalidate existing power purchase contracts. There can be no
assurance that existing power purchase contracts will not be modified. However,
because of the consistent position of the regulatory authorities, the Fund
believes that so long as it performs its obligations under the power purchase
contracts, it will be entitled to the benefits of those contracts.
Facilities without long-term power purchase contracts may also be
attractive investments. Deregulation is encouraging electric utilities to sell
off many of their existing generating plants. In many cases, state regulators
are requiring electric utilities to sell many of their plants to separate
electric generating companies, so that a competitive market for buying and
selling electricity can be created. In other cases, electric utilities are
voluntarily selling their generating plants because they believe they can obtain
power on the open market more efficiently. As a result, there is a large number
of generating plants for sale today and it is expected that many more will be on
the market soon. This tends to depress the price of all existing plants.
Further, small electric generating plants may be less attractive purchases for
large corporations and investment groups with large amounts of capital to
invest, which may further depress their current prices. The Fund believes that
these market conditions may allow it to acquire small independent power plants
at attractive prices.
Finally, the uncertainties caused by deregulation and by past failures
of demand to meet projections have deterred investments in new generating
capacity. Further, as a competitive market in generating capacity is created,
market forces are discouraging many utilities and generators from keeping as
much generating capacity in reserve as they did in prior years. While some power
marketing groups are claiming that efficiencies created by deregulation will
meet needs for additional capacity, many electric industry engineers and
consultants have expressed fears that there will be shortages of generating
capacity within the next 10 years in many areas of the United States. It should
also be noted that as deregulation forces electricity prices lower, demand for
electricity should rise, other things being equal. In addition, many
nuclear-powered and conventional electric generating plants are coming to the
end of their useful lives.
With these factors shaping the future market, a few large independent
electric power companies and their backers have announced plans to build large
new generating stations without long term power purchase contracts. They
apparently think by the time those large investments in power plants go into
operation (currently estimated through 2002) those plants will be needed. The
Fund does not intend to join in building large new power generating facilities
without firm contracts for sale of the electricity, although if an attractive
opportunity existed it would do so. Instead, the Fund believes that if it
economically and efficiently operates and maintains small generating Projects,
those Projects will increase in value from their current somewhat depressed
levels if reserve capacity tightens in the industry.
In addition, many small independent power Projects have environmentally
beneficial features. For example, some small independent power Projects use
landfill gas to power their generators. Instead of having the methane gas
produced by rotting garbage flow into the atmosphere, where it may have powerful
"greenhouse" effects that increase global warming, the methane is burned to
produce electricity and water and carbon dioxide, which are less environmentally
destructive. Small independent cogeneration power Projects can save fuel. The
Fund will look for small Projects that have these kinds of environmental
benefits, not only because of the benefit to the environment but also because it
believes that its experience with these kinds of small Projects can make them
good investments.
Advantages to Investing in Other Capital Facilities
Environmentally beneficial independent power Projects often have
similar, non-electric power facilities related to them. For example, a trash-to
energy power plant may have a waste transfer station nearby. In investigating
small independent power Projects, Ridgewood Power has found that there are other
capital projects that are similar to independent power Projects and that often
(but not necessarily) have environmental benefits. These may meet the Fund's
goals for investment because they are expected to provide long-term, reliable
cash flows and have potential for long-term appreciation. Some of the types of
Projects that may fit this profile include:
Projects to convert waste fuel or biomass into useful fuels or chemicals;
Projects to generate electricity or heat to process or destroy harmful
industrial wastes; Projects that provide pumping power or other motive power
more efficiently than electric or other motors; infrastructure facilities such
as waste transfer stations; or other types of capital projects, such as fuel
plants, processing facilities and recycling facilities, that are expected to
have consistent cash flows similar to those from Independent Power Projects.
Advantages to Investing in Other Companies
Deregulation of the electricity industry, like the deregulation of the
natural gas industry in the last 15 years, is likely to have unpredictable
effects on many utilities and electric generating companies. Instead of having
assured markets and government-determined pricing, both electric utilities and
independent power producers without long-term Power Contracts will face rapidly
changing demand and supply for electricity. Smaller companies and companies with
long-term or unconventional business strategies may find that they are
undervalued by the stock market or that deregulatory uncertainties make it
difficult to attract capital and grow. This may create opportunities for the
Fund to acquire majority or minority equity interests in those companies on
favorable conditions. Although this type of investment is not the Fund's primary
goal, the Fund will take advantage of these opportunities if they arise.
Although the Fund's primary focus is to invest for long-term appreciation,
it might also elect to invest in equity securities with the purpose of gaining
control of a company, or for effecting a merger or business combination with the
Fund, its affiliates or non-affiliated parties, or for effecting the acquisition
of assets, or for sale to a successful bidder. The Fund might effect any of
these transactions on its own, together with Affiliates, or together with
non-Affiliates, and might do so with the encouragement or consent of management
or controlling equity holders of the company or without such consent.
If the Fund were to invest a substantial amount of its assets in equity
securities of other companies and did not actively own and operate power plants,
it might become an "investment company" subject to the requirements of the
Investment Company Act of 1940. The Fund does not intend to do so and will not
make investments that would require it to be regulated under that statute
without the prior consent of the holders of a majority of the Investor Shares
and the Incentive Shares issued under the Key Employees Incentive Plan
(collectively, the "Voting Shares").
The Prior Programs have not invested in majority or minority equity interests in
other operating companies because their primary investment objective is earning
current cash flow for distribution rather than long-term capital appreciation.
Neither the Managing Shareholder nor the Fund has significant experience in
making equity investments in other operating companies.
Basic Investment Approach
When the Fund makes investments in Independent Power Projects and in
other capital Projects, it concentrates on smaller Projects in which it can buy
at least a controlling equity interest (either together or with another program
sponsored by the Managing Shareholders). Those investments should be small
enough for the Fund to make several investments and to diversify its purchases.
Therefore, these types of investments are expected to be in the range of $2 to
$20 million per investment. Many institutional investors will not make
investments of less than $10 to $15 million, which may reduce competition for
the investments the Fund is focusing on. Also, larger companies may want to sell
their smaller Projects so they can focus their capital and other resources on
other investments. In some cases, electric utilities may wish to sell all or a
portion of their interest in a Project so that they can comply with federal
requirements limiting their investment in certain facilities regulated under
PURPA to 50% of the equity.
By making equity investments, the Fund often deleverages Projects. This
decreases risk to Investors and reduces financing expenses for the Projects, and
usually frees up funds held in amortization, maintenance or debt service
reserves that lenders required. This can make more cash flow available for
distribution to Investors and in the long term if the Fund is successful in
improving the operating results of the Project. After a period of successful
operation, or based on other factors, the Fund might conclude that the balance
of returns and risks to Investors would be improved if a Project was leveraged.
In that case, the strong equity position of the Fund might make such financing
easier to obtain.
Another advantage of the Fund's approach is that it is prepared to
provide equity financing of up to 100% of the amount needed to acquire or
develop a Project and can do so quickly, without the need of obtaining
additional financing from institutions. Institutional debt financing for
projects in North America can be difficult to obtain quickly.
Where possible, the Fund prefers to invest in Projects that are already
operating to reduce development risks and delays in earning cash flow. If the
Fund commits money to develop a Project, it prefers to invest in smaller
Projects or Projects with short development periods.
Where possible, the Fund will seek to have operating control over a
Project (or share operating control with another program sponsored by the
Managing Shareholders). Ridgewood Electric Power Trusts I through V (the five
other independent power industry programs sponsored by the Managing Shareholders
and referred to as the "Prior Programs") now own interests in over 40 Projects,
primarily in California, New York and New England. Over half of these Projects
(by number and by revenues) are managed by RPMCo, which is also wholly owned by
Robert E. Swanson.
RPMCo has over 35 employees, including engineering, operating,
accounting and legal specialists. The Managing Shareholders have found that
hiring other participants in or developers of Projects to manage the Projects,
or hiring third party managers, often leads to inefficient management and lesser
total returns to the Funds. Further, common management allows savings in fuel
purchasing, cash management and personnel, creates incentives for efficiency
over the entire portfolios of Projects, and allows RPMCo to gain valuable
operating and industry experience. RPMCo is only reimbursed for its costs, with
no profit factor.
The Fund may hire other persons to manage Projects, typically in cases
where the Projects are small and difficult to manage centrally. In some cases
the prior owner or developer may retain a significant ownership interest or
insist on continuing to operate Projects as a condition for selling them. In
those situations, the Fund will seek to obtain a preferred right to net cash
flow from the Project before the other owner or developer is entitled to cash
flow or compensation materially in excess of its costs.
The Fund will also attempt to include incentive provisions in any
management contract that will encourage the manager or operator to maximize the
return to the Fund. These types of provisions often give the manager a bonus if
it exceeds performance targets while reducing compensation somewhat (or allowing
the Fund to fire the manager) if the Project's performance does not meet
specified minimums.
Finally, in acquiring a Project, the Fund ordinarily will create a
subsidiary with limited liability for its owners to hold the Project or a small
group of similar Projects. This should reduce the Fund's liability for its
subsidiaries' operations and should isolate each Project to a reasonable extent
from liabilities of other Projects.
Investment Approach for Larger Projects
The Fund might be able to invest in Projects larger than the $20
million size described above. If it participated with larger companies in buying
or developing a Project, the Fund would probably buy a minority, non-control
equity interest. These types of transactions are heavily negotiated and there is
no typical structure for the Fund.
However, the Fund believes that it could be an attractive participant
in a purchase of a larger facility, because its investment objective is
long-term appreciation for its Investors and because it has ready cash for
investment. The Fund thus can participate quickly and effectively in
negotiations. Moreover, it can enter into complicated arrangements such as
partnerships with special allocations of accounting earnings or tax benefits,
where the Fund can receive cash flow while other participants are allocated
disproportionate amounts of earnings or tax items that may be more valuable to
them. Further, because the Fund is not related to any electric utilities, when
it invests in a Project it can help any electric utility co-owners to comply
with the 50% utility ownership limitation for certain Projects.
Timetable for Trust Investments
Although the amount of time needed to invest all the funds raised varies
significantly from program to program, the Fund estimates that it will
substantially complete its investments between 12 and 18 months after the
offering closes, which is anticipated to occur in the second quarter of 2000.
These time estimates for the length of the offering and the amount of time
needed to complete buying Projects may change significantly depending upon the
progress of the offering, the amount of funds raised and the availability of
attractive investments. One of the Prior Programs had approximately $14 million
of uninvested funds as of the date of this filing. As described below, Ridgewood
Power's policy is to present investment opportunities first to the
earliest-organized program with available funds. Therefore, the Fund may have to
wait until Prior Programs are fully invested before its funds can be applied to
Project investments. See Item 1(c)(2) - Risk Considerations - Identifying
Projects for additional factors that may affect the Fund's ability to invest
funds quickly.
Until funds from the offering of Shares are invested, they will be
deposited in bank accounts, in securities issued by or guaranteed by the U.S.
Government or its agencies or in money market funds or other funds invested in
those securities, or in investments rated AAA or Aaa or A1P1 or higher (for
money market or commercial paper instruments) by nationally recognized
securities rating organizations, or in securities that are prior to those
investments.
Distributions from Operating Projects
Until the Fund has invested in a significant amount of operating
Projects, it generally will make distributions of available cash flow from
interim investments and initial Projects quarterly to Investors. When cash flow
available from operating Projects reaches an appropriate level (usually within
18 to 36 months after the offering of Shares begins), the Fund will seek to make
quarterly or monthly distributions.
Distributions of available cash flow can vary depending upon Project
operating performance, fuel prices, unexpected operating or administrative
costs, environmental requirements, scheduled and unscheduled maintenance and
costs of equipment, fees and expenses payable to outside operators or Project
participants and Trust operating costs and liabilities.
The Fund's primary goal is to provide a capital appreciation
opportunity for Investors, both by investing in assets with appreciation
potential and by positioning itself for a future public offering, merger or
other corporate event. Subject to these and other factors described in the
remainder of this Confidential Memorandum, the Fund's secondary goal is to
provide Investors with annual distributions of net cash flow, as defined in the
Declaration of Trust, of 12% of their Capital Contributions to the Fund. Because
the Fund's policy is to distribute net cash flow, a substantial portion of many
distributions will include funds that represent depreciation and amortization
charges against assets. Occasionally, distributions may include funds derived
from operating or debt service reserves or proceeds of sales of Projects. For
purposes of generally accepted accounting principles, amounts of distributions
in excess of accounting income may be considered to be capital in nature, even
though the Fund is organized to return net cash flow rather than accounting
income to Investors.
Under current law and conditions Independent Power Projects have a
relatively assured source of revenues for the length of their power purchase
contracts. When those contracts expire or terminate, or if the Independent Power
Projects do not have fixed or formula price contracts, the cash flow prospects
for the Projects will depend on market conditions and are not predictable at
this time.
Sale or Disposition of Projects
The Fund's business plan is not currently geared toward selling or
otherwise disposing of Projects before the expiration or termination of existing
power purchase contracts. The Fund believes that at or before the termination of
those contracts there may be opportunities to sell or otherwise dispose of
Projects at a positive return for Investors and two Prior Programs have done so.
However, any estimate at this time of potential returns is speculative.
Future Liquidity Alternatives
Investor Shares are an illiquid investment. However, after the Fund's
business is well-established, which is anticipated to be approximately two to
five years after this offering terminates, the Fund will seek to make the
Investor Shares more liquid. Among the alternatives that might be available
would be events ("Liquidity Events") such as a change in the Fund to create a
publicly traded entity, either as the result of a business combination with
other similar programs sponsored by Ridgewood Power or by altering the existing
securities, tax and organizational law limitations on transfer and trading of
Investor Shares. Because these types of changes have significant and possibly
adverse federal income tax, federal and state securities law and business
effects, the Fund cannot and does not assure Investors that any such change can
be made and will do so only with the consent of a majority in interest of
Investors.
Ridgewood Power intends that the five Prior Programs (the prior
business trusts organized by Ridgewood Power to invest in the independent power
industry) will eventually combine into a single corporation that will have
tradable shares that will be listed or quoted on a major U.S. securities market.
The combined corporation, which would have more equity owners, greater assets
and more diversification of assets than any single program, might be
significantly more likely to develop a market for those equity interests. This
type of Liquidity Event has become a possibility because of the success of
Ridgewood Power since 1991 in organizing five Prior Programs with significant
assets and investor bases that could join with the Fund. One consequence of this
type of combination would be that unlike the Prior Programs, the resulting
combined corporation would not be treated as a partnership for tax purposes. As
a result, it would be taxed as a separate entity on its income and its
stockholders would pay income tax as well on any dividends it paid to them.
It is thus possible for the Fund at some future date to merge or
combine with the successor public corporation to the Prior Programs or to
participate in the original combination. Ridgewood Power currently intends to
include the Fund together with the five Prior Programs in the conversion into a
single corporation. If the Fund were large enough on its own, the Fund might
also convert itself into a taxable corporation with tradable shares, although
under current conditions this second alternative is unlikely.
As an alternative Liquidity Event, the Managing Shareholders and
Investors could amend the Declaration to permit free transferability of Investor
Shares. If the Fund is registered under the Securities Exchange Act of 1934, as
it anticipates, this would allow most Investors to offer their Investor Shares
to potential purchasers under Rule 144 of the Securities and Exchange Commission
as long as the sale takes place at least two years after purchase and several
prerequisites are met, or in most cases without prerequisites three years after
purchase. Finally, subject to further review of legal and tax issues, the Fund
might change its structure into one that continues to be taxed as a flow-through
entity (a business entity that is not taxed as a corporation and thus, like the
Fund currently, avoids double taxation of amounts distributable to Investors)
but that permits free transferability of Investor Shares. This might, but not
necessarily would, permit the creation of a trading market for the Investor
Shares.
Under current law and business conditions, there are significant legal,
tax and business consequences from electing any of these alternative Liquidity
Events and the Fund accordingly will not do so without amending the Declaration
after soliciting and receiving the consent of the holders of at least a majority
of the Investor Shares. Before the Fund undertakes any action or change that
would result in a Liquidity Event, it will solicit each Investor in writing by
means of a disclosure document describing all material aspects of the proposed
action.
In general, actions that would allow Investor Shares to be marketable
would raise the question for federal income tax purposes as to whether the
Investor Shares were readily tradable on a secondary market or its equivalent.
In that case, the Fund would be considered to be an "association" taxable as a
corporation. A combination of the Fund with other programs would raise the same
tax issues as to the combined entity and its securities.
Corporation tax status might have adverse effects on the net cash
return to an Investor, in part because a corporation's income is taxed at the
corporate level and dividends derived from that income are then taxed at the
Investor level. It is also possible, however, that because of depreciation
deductions or other tax provisions that the Fund might not have significant
taxable income so that these adverse effects would be less significant. It is
impossible to predict these factors at this time. It might be possible to
convert the Fund to a different type of taxable entity that is not taxable as a
corporation, but under current law it is likely that a restructuring of the
Fund's investments to a more passive form and reduction of the Fund's management
rights, if any, over Projects would be required.
In addition, if the Fund is to be combined with other investment
programs, the process of combining the entities, obtaining necessary owner
consents and making regulatory filings may be protracted and expensive and may
involve significant conflicts of interest between the combining programs. These
transactions, which are sometimes referred to as "rollups," require special
disclosure and fairness procedures to be undertaken, may require supermajority
votes of shareholders in each program to be obtained for approval and can be
extremely complex.
There are other alternatives that the Fund currently believes are less
desirable to Investors but that might be suggested if future market conditions
were favorable. The Fund might propose to the Investors that the Declaration be
amended to provide redemption rights to Investors. If the Investors were to
approve that proposal, the Investors would be offered the opportunity to redeem
their Investor Shares or to remain as equity owners in the Fund. Because the
Fund anticipates that most of its investments in Projects will be illiquid, the
Fund would not be able to redeem a portion of its Investor Shares until it could
sell Projects or portions of Projects. The Fund would confront significant
issues of fairness between redeeming Investors and the remaining Investors if it
were to fund redemptions by selling entire Projects. For example, if the most
liquid or attractive Project were sold to maximize or accelerate returns to
redeeming Investors, the remaining Investors might be relatively disadvantaged.
Accordingly, the Managing Shareholders believe that a redemption option is
currently less desirable. If redemption rights were authorized, the Managing
Shareholders would prefer to fund them by selling fractional interests in as
many Projects as possible to minimize conflicts of interest between redeeming
Investors and remaining Investors. Therefore, if redemption rights were
authorized, the attractiveness of this option would depend on the market for
Projects, and presumably on the market at that time for minority, non-control
interests in the Projects owned by the Fund.
Finally, a majority of the Investor Shares may cause the dissolution of
the Fund, either with the Managing Shareholders' consent or by removal of the
Managing Shareholders. Dissolution would cause the mandatory liquidation of the
Fund's investments, although the time constraints of a dissolution and the need
to sell all investments concurrently tend to significantly reduce total return.
No Investor should purchase Investor Shares with the expectation that
the Fund will elect to take or will be able to take any steps to make the Shares
tradable on any market or that any other means of allowing an Investor to sell
or "cash-out" his or her investment will be available.
Potential Investments
From time to time the Fund may identify potential investments for its
available funds. The Managing Shareholder anticipates that the Fund will review
and enter into preliminary investigations or indications of interest for a
significant number of potential investments that in fact the Fund will decline
to pursue or that will not be available for the Fund to invest in. This is a
necessary part of the process of winnowing potential investments to those that
the Managing Shareholder believes are the most advantageous for the Fund. Thus,
the identification of any potential investment is not an assurance that the Fund
will acquire the investment or that it will even enter into negotiations to
effect the purchase. Further, in Ridgewood Power's experience, as a result of
investigations of the investment and the process of negotiating an acquisition,
the terms of the transaction tend to change frequently and unpredictably. There
is no assurance that any proposed investment or any variant will occur, that the
terms of the investment will be the same or similar to those proposed by any
party from time to time or that any investment will be economically advantageous
to the Fund. Investors who purchase Investor Shares while any proposed
investment transaction is pending must do so with the understanding that the
final terms and conditions of the transaction may differ from those described in
this Registration Statement or elsewhere and that their purchases cannot be
contingent upon the final terms, if any, of the transaction.
(4) The Fund's Investments.
(i) United Kingdom Landfill Projects
The Fund and Power V are participating through a joint venture in the
United Kingdom Landfill Projects, which include owning five completed landfill
gas electric generation plants in Great Britain and developing up to 20
additional sites.
The estimated cost of the package of completed plants and the 20
developmental sites, if all the developmental plants are built, is $36 to $38
million. Power V supplied the first $16 million of the purchase price and
developmental equity and the Fund is supplying the remainder of the
developmental equity. To the extent that the Fund supplies capital, it will
receive an undivided interest in the entire package of operating and
developmental projects. Power V and the Growth Fund have organized Ridgewood
U.K. Limited, an English limited company ("Ridgewood U.K.") to act as a holding
company for the British projects.
The following five plants are currently in operation:
Project Location Current Price per Installed capacity
kWh (US$)
Chelson Meadow ........ Devon, England 4.57 2.85 megawatts
United Mines .......... Cornwall, England 5.26 2.85 megawatts
Whinney Hill .......... Lancashire, England 5.28 3.10 megawatts
Bellhouse ............. Essex, England 5.28 2.85 megawatts
Summerston ............ Glasgow, Scotland 5.26 2.85 megawatts
Total capacity ........ 14.5 megawatts
Each British plant has a 15-year long term power purchase contract with
the Non-Fossil Purchasing Agency Limited, a quasi-autonomous non-governmental
organization that purchases electricity generated by renewable sources (such as
landfill gas power plants) on behalf of all English utilities in order to meet
British environmental protection goals. The Summerston plant has a similar
15-year contract under the Scottish Renewables Order with Scottish utilties. The
electricity prices will be increased annually by a factor equal to any
percentage increase in the U.K. Retail Price Index.
The first five projects named above (which include both the electricity
generating plants and the gas collection and cleaning systems) have been or were
financed with long-term bank debt, in addition to the equity interest purchased
by the Fund and Power V. The loans are non-recourse against Ridgewood U.K.,
Power V, the Fund and their intermediate subsidiaries. The Fund and Power V have
also organized Ridgewood CLP Management Limited, an English company ("RW
Management"), which will be responsible for operating the five plants and any
additional plants that are developed. The principal stockholders of CLP Services
Limited, a new company ("CLPS"), organized by the stockholders of CLP, will own
non-voting stock in RW Management. RW Management will manage the plants at cost
and will not be intended to earn any profit. CLPS, will provide day-to-day
services under subcontract to RW Management. CLPS will be paid a flat fee of
approximately 1.2 cents per kilowatt-hour for those services (adjusted for
increases in the Retail Price Index) and will be eligible for bonus payments if
a project's actual annual electricity output exceeds 90% of its capacity. CLPS
will also pay approximately $88,000 per year (also adjusted for increases in the
Retail Price Index) for management services for the various companies owning the
five existing projects. The gas extraction and cleaning systems for the
landfills will be operated by CLPS for no additional cost. RW Management may
terminate the subcontract with CLPS if at the end of any year the projects in
the aggregate have not produced at least 90% of their capacity (adjusted for
loss of time for scheduled downtime, catastrophic failures not caused by CLPS or
failures to receive landfill gas not caused by CLPS), or at any time if it can
be shown that it is physically impossible for the plants as a whole to meet the
90% standard for the current year.
CLPS will proceed to develop as many of the 18 remaining sites as may be
feasible and will bear the developmental costs itself. Its principal source of
funds for doing so will be approximately $6.4 million contributed by its
stockholders from the purchase price paid by Ridgewood U.K. for the five plants
described above. As each remaining plant is completed and commissioned,
Ridgewood U.K expects that the bank will provide long-term finance for
approximately 55% of the plant's reasonable cost, although the bank has not yet
committed to do so. If full bank financing is obtained for a plant, Ridgewood
U.K. will have the option to buy the equity interest from CLPS. Power V has
provided the equity capital necessary for Ridgewood U.K to buy and develop the
seven plants named above. The Fund has committed to provide up to $24 million
additional to develop the 18 additional proposed plants through contributions of
capital to Ridgewood U.K. By doing that, the Growth Fund will obtain an economic
interest in each of Ridgewood U.K.'s plants proportionate to the share of
Ridgewood U.K.'s total capital that it contributes. Ridgewood U.K. expects to
contract with RW Management to operate the additional plants using CLPS on terms
similar to those for the five existing plants.
The purchase price for the first five plants, $15 million, was determined
by arms-length bargaining and was paid from proceeds of the Fund's prior private
placement offering. The price reflected the estimated value of the cash flow
from the five plants, assuming production meets the 90% standard, plus estimated
adjustments for the current assets acquired by Ridgewood U.K, interest at 5.25%
per year on those amounts from an assumed purchase date of April 1, 1999, and
retention amounts held against amounts due for completion of the Chelson Meadow
and Summerston plants. The purchase price was adjusted to reflect actual results
for the April - June 1999 period.
The Fund will invest in Ridgewood U.K. from proceeds of its offering of
Investor Shares.
(ii) Egyptian Projects
In late 1998, the Managing Shareholders organized the predecessor of
Ridgewood International Development LLC ("RIDCo") to be a project developer for
the Fund and the Growth Fund. RIDCo is owned by Robert E. Swanson and family
trust of Mr. Swanson's and he is the sole manager of RIDCo. Like RPMCo, RIDCo
acts on behalf of the Fund, hires personnel for Projects and is reimbursed for
its costs and allocable overhead. The President and chief operating officer of
RIDCo, beginning in January 1999, is Donald Stewart, who from May 1994 through
December 1998 acted as an acquisition consultant to the Managing Shareholder.
Mr. Stewart is reimbursed for his expenses but does not draw a salary. Instead,
upon successful completion of a development Project, he receives a commission
based on Project cost.
Mr. Stewart has over 25 years of experience in the field of independent
power generation and finance. Mr. Stewart spent the first ten years of his
business career as a Certified Public Accountant with KPMG, a major
international accounting firm. He also served as Chairman of Vermont Gas
Systems, a regulated public utility; Vice-Chairman of Consolidated Power
Company, a developer of large scale co-generation projects; and Chairman of
Hercules Engines, Inc., a manufacturer of industrial engines and electrical
generation equipment.
Mr. Stewart holds a Bachelor of Science degree in Engineering from Lehigh
University.
In the third quarter of 1999, the Fund and the Growth Fund organized an
Egyptian development company and have loaned approximately $10.6 million to the
company, secured by the company's stock. The Fund and the Power V have supplied
this capital and as soon as governmental formalities are completed, they will
exchange the loans for all of the equity in the development company.
The capital has been used to complete one infrastructure project at the Le
Meridien Hotel in Hurghada, Egypt. Hurghada is a developing tourist resort on
the western shore of the Red Sea in southeastern Egypt distant from most
population centers. RIDCo has entered into an agreement with the hotel to
provide an electricity and desalination plant with a capacity of five megawatts
and 142,000 gallons of fresh water per day and to operate the plant for 10
years. The hotel pays for electricity at a variable rate tied to fuel costs and
pays for distilled water at a flat rate per gallon, escalated for inflation
annually. Total investment in the plant, which began operation in March 2000, is
approximately $8.25 million.
RIDCo is also developing five additional Projects or groups of Projects.
One Project is being constructed to supply electricity only (8 megawatts
capacity) at the El Malha Touristic Association, a group of hotels and
developers building a resort community approximately 50 miles south of the
Egyptian-Israeli border on the Gulf of Aqaba. Estimated cost is $6 million and
operations are scheduled to begin in April 2000. A second project is located at
the tip of the Sinai Peninsula at Sharm-el-Sheikh, for desalinating water for
three hotels. Its estimated cost is $3.2 million and estimated capacity will be
3 million gallons per day. These projects are expected to be in operation by the
end of 2000.
A third group of Projects will also be located at Hurghada. Two generating
stations will provide 5.8 megawatts of electricity to two hotels, and a series
of desalination facilities will provide up to 3.4 million gallons per day of
water to those two hotels and three others. Estimated cost will be $8.5 million
and completion is expected in 2000.
The remaining two projects are to be located at Ras Sidr and Marsa Alam on
the western shore of the Red Sea. The Ras Sidr project is for desalinating water
only while the Marsa Alam project will provide both water and electricity.
Estimated costs are $2.9 million and $3 million, respectively. These Projects
are in due diligence and it is uncertain whether they will proceed to
completion. The additional $23.6 million of capital needed to fund these
commitments will be provided by the Fund and Trust V. The El Malha and
Sharm-el-Sheikh projects are supported by contracts with associations of resort
hotels organized under Egyptian law to develop new resort sites. The members of
each association are jointly responsible for the association's obligations,
which include amounts owed to the projects for electricity and water. Each
contract with the associations is for 10 years on terms similar to those of the
Le Meridien Hotel project.
The Fund's equity in the net losses of the Egyptian Projects for 1999 was
$198,000.
(iii) Mediterranean Fiber Optic Project
In September 1999, the Fund and the Growth Fund organized Ridgewood
MedFiber LLC and each of them contributed $1.5 million to the joint venture on
equal terms. Ridgewood MedFiber then invested the $3 million in a 25% equity
interest in Global Fiber Group, a newly organized developer ("GFG"), which is
exploring a proposal to construct a 3,600 kilometer (2,200 mile) long underwater
fiber optic cable among Spain, Southern France and Italy via the Mediterranean
Sea. Ridgewood MedFiber or its designees have first refusal rights to invest in
future telecommunications facilities developed by GFG. GFG's original management
was comprised of former executives of AT&T Corp.'s underwater cable division.
In February 2000, the original management, which had been unable to
obtain additional equity financing for the Project, agreed to withdraw from the
venture. Ridgewood MedFiber informally agreed with the managers to provide some
compensation for their interest, contingent upon completion of financing for the
Project. Ridgewood MedFiber has searched for other equity investors to allow the
Project to proceed, but to date has been unsuccessful. There is a high risk that
it will be unable to find additional equity investors and that the Project
therefore will not be developed, in which case the Fund will lose its entire
investment.
GFG had entered into an agreement with Alcatel Submarine Networks, SARL
("ASN"), a subsidiary of Alcatel SA, a major European telephone equipment
manufacturer. Each of GFG and ASN owns one-half of a joint venture to construct
the Project. The joint venture was organized to enter into a turnkey
construction contract with ASN and to have ASN operate and market the Project.
The estimated cost of the Project is approximately $500 million. The
joint venture had obtained a commitment from a major European bank and an
investment bank to sell a approximately $350 million of senior secured debt in
the Project. The remaining $150 million was to be equity financing.
Approximately 60% of that equity financing would be provided as a preferred
("mezzanine") equity interest in the joint venture and the remaining 40% ($60
million) would be provided by GFG and ASN as common equity. Each of GFG and ASN
would also receive an unspecified amount of common equity in the joint venture
as developers' compensation.
The Fund and Power V had tentatively budgeted an additional investment of
$18 million through Ridgewood MedFiber in the Project for the second quarter of
2000. That would be used to provide part of the $30 million common equity
investment by GFG. The Managing Shareholder expects that decisions about
financing and whether to proceed with the Project will be made by the end of
April 2000. Intensive negotiations are in progress with regard to the financing
and operation of the Project and there may be material changes to the
arrangements described here.
There are no current commitments or agreements to purchase the
communications capacity or facilities that the Project would provide. The
Project would be developed to meet the anticipated demand for high-speed global
communications links, but there is no assurance that there will be sufficient
demand to make it profitable, that other cables, wireless links, satellite
communications or landlines will not be developed under more favorable
conditions or that the developers and investors of this Project will have
sufficient resources to complete it if there are cost overruns, delays or
unanticipated events. The Project is thus highly speculative.
(iv) ZAP Power Systems, Inc.
The Fund invested $2,050,000 in Ridgewood ZAP, LLC in March 1999 as a
holding company for its investments in ZAPWORLD.COM, Inc. (formerly Zap Power
Systems, Inc.) ("ZAP"). ZAP is headquartered in Sebastopol, California, north of
San Francisco. ZAP designs, assembles, manufactures and distributes electric
bicycle power kits, electric bicycles and tricycles, electric scooters, and
other electric transportation vehicles. ZAP's common stock is quoted on the OTC
Bulletin Board under the symbol "ZAPP".
Because ZAP's management believed that the primary barrier to widespread
use of electric vehicles was their high cost, its activity and revenue was
initially derived from development contracts from a foreign private entity and
from domestic government agencies. These contracts were set up to develop low
cost Zero Air Pollution (or ZAP) type electric vehicles. Now ZAP is focusing on
the manufacturing and distribution of these electric vehicle products.
ZAP manufactures an electric motor system that is sold as a kit to be
installed by the customer on their own bicycle. The system was designed to
assist the rider during more difficult riding situations, rather than as a
replacement for pedaling. ZAP also installs the motor system on specially
designed bicycles that the Company has manufactured under contract. The
completed bicycles, with motor, are then sold to the customer. Additionally, ZAP
produces an electric scooter, known as the ZAPPY(TM), which is manufactured by
the Company, using parts manufactured by various subcontractors. ZAP also is an
U.S. distributor of the Electricycle(TM) scooter that is imported from China and
is a distributor of an electric motorcycle.
Further information on ZAP is contained in its Annual Report on Form 10-KSB
and Quarterly Reports on Form 10-QSB, filed with the Securities and Exchange
Commission.
On March 30, 1999, Ridgewood ZAP, LLC purchased 678,808 shares of ZAP's
common stock for a total purchase price of $2,050,000 ($3.02 per share) in a
private placement.
As part of the transaction, Ridgewood ZAP, LLC was granted a warrant to
purchase additional shares of Common Stock of ZAP, which was exercised in May
1999 after the Fund contributed to Ridgewood ZAP, LCC the $2,000,000 necessary
to do so. The total exercise price under the warrant was $2,000,000 and the
exercise price per share was 85% of the average daily closing price of the
Common Stock over the 20 day period prior to the date of exercise, but not more
than $4.50 per share and not less than $3.50 per share. Ridgewood ZAP, LLC
acquired 571,249 shares of ZAP Common Stock on exercise.
Ridgewood ZAP, LLC and ZAP entered into four agreements as of March 30,
1999: a Stock and Warrant Purchase Agreement, a Common Stock Purchase Warrant, a
letter agreement regarding exercise of the warrant and an Investor's Rights
Agreement. The Stock and Warrant Purchase Agreement provided for the purchase of
the Common Stock and the issuance of the warrant and contained conventional
representations and warranties by the parties. The warrant and the letter
agreement contained the warrant provisions described above.
The Investor's Rights Agreement grants Ridgewood ZAP, LLC the following
rights: two demand registrations (provided that each registration is for at
least $7.5 million of Common Stock), piggyback registration rights and S-3 shelf
registration rights. ZAP has the right to prohibit demand registrations within
specified periods of its own registrations and to delay or limit any
registration under certain conditions. The Investor's Rights Agreement also
requires ZAP to provide Ridgewood ZAP, LLC with quarterly and annual financial
information, an annual financial plan, audit information and public
announcements. Ridgewood ZAP, LLC is also granted first refusal rights similar
to preemptive rights (except for stock issuances in connection with mergers or
acquisitions, loan or lease transactions, employee benefit plans, stock splits
or dividends, or registered public offerings of $7.5 million or more). The first
refusal rights expire on the earliest of a registered public offering of $7.5
million or more, an acquisition of ZAP or March 30, 2003.
The Investor's Rights Agreement generally terminates at such time as
Ridgewood ZAP, LLC owns less than 5% of ZAP's Common Stock. Ridgewood ZAP, LLC's
rights also relate to Common Stock that it may transfer to its affiliates.
ZAP's two largest shareholders have agreed with Ridgewood ZAP that as long
as Ridgewood ZAP, LLC owns at least 5% of ZAP's voting stock, the shareholders
will vote their shares in favor of up to two directors nominated by Ridgewood
ZAP, LLC. Ridgewood ZAP, LLC has nominated two directors, Robert E. Swanson and
Douglas Wilson (who are officers of the Fund and Ridgewood Power, see Item 5(b)
Directors and Executive Officers of the Registrant - Managing Shareholder), both
of whom have been elected to ZAP's Board of Directors.
The Fund's major investment focus will be the independent power industry,
as shown by its commitment to invest in landfill gas power plants in the United
Kingdom, in electric and water facilities in Egypt and in the Synergics
acquisition. The U.K. plants, however, have long-term, formula price contracts
for their output. Other small independent power plants and similar investments
may also have long-term contracts. While purchasing Projects with long-term
contracts may reduce the anticipated volatility of the Fund's earnings, it means
that there is not much potential for earnings growth beyond the rate of
inflation. The Fund therefore made a relatively small investment in ZAP Power
Systems. Although this investment is highly risky, if it is successful, it would
have the potential for significant capital appreciation. This addresses the
Fund's primary objective, noted above, for providing capital appreciation.
The investment in ZAP Power Systems has a significantly different
risk-return profile from those of independent electric power plants or similar
investments. ZAP's products are purchased primarily by consumers and are thus
subject to fluctuations in demand caused by publicity, fads, consumer tastes,
general economic conditions and other factors. Customer relationships tend to be
single sale transactions through retail franchisees and distributors rather than
repeated long term sales under contracts or sales through a power exchange. For
these reasons and others ZAP's revenues are expected to be much more volatile
than those of independent power plants or similar investments purchased by the
Fund. Further, as the maker of a consumer product ZAP is subject to liabilities
to consumers for defectively designed or produced products. Thus, the Fund's
investment in ZAP may be more risky than its other planned investments and there
may be a higher risk of a total loss. Conversely, the Fund believes that the ZAP
investment has a higher long-term potential payoff.
Mr. Swanson has purchased a franchise to distribute ZAP's products. See
Item 12 -- Certain Relationships and Related Transactions for additional
information.
(v) Proposed Investment in Small Hydroelectric Projects.
The Fund and Power V are in negotiations with Synergics Corporation of
Annapolis, Maryland for the purchase of a minority interest in 10 small,
operating, hydroelectric Projects located in the United States. The Projects
have a total generating capacity of 21 megawatts and each is a Qualifying
Facility with a long-term Power Contract. The proposed purchase price is $30
million. The Fund and Power V would each provide $10 million and the remaining
$10 million would be obtained from a long-term loan from the principal bank of
the Fund and Ridgewood Power. The Fund expects that a final decision on
purchasing the Projects will be made by the end of April 2000.
The Fund is actively seeking additional Projects for investment, either
by itself or in conjunction with other programs sponsored by the Managing
Shareholder if such programs are authorized to do so.
Ridgewood Power is also the managing shareholder of the Prior Programs
(Power I, Power II, Power III, Power IV and Power V), which have business
objectives similar to those of the Fund. In the future, Ridgewood Power
anticipates that it will continue to sponsor other investment programs similar
or identical in objective to that of the Fund. Further, it is possible that
affiliates of Ridgewood Power will sponsor, manage or advise other types of
investment programs. Ridgewood Capital, which is under common control with
Ridgewood Power and the Fund, is currently sponsoring two investment programs
that are making venture capital investments in a variety of industries. In this
discussion the Prior Programs, the Fund, and any other investment programs that
are sponsored by Ridgewood Power, Ridgewood Capital or their Affiliates are
referred to as "Ridgewood Programs."
These relationships could result in conflicts of interest arising from
competing demands of the Fund and other Ridgewood Programs on Ridgewood Power's
management resources, those of RPMCo or those of other Ridgewood Managing
Persons. However, as required under the Declaration, the Managing Shareholder
will devote as much attention to the Fund's activities as is reasonably
necessary to manage the Fund.
The Managing Shareholders of the Fund will use its best efforts to conduct
Fund affairs for the benefit of the Investors. However, the interests of the
Fund, its officers and agents, the Managing Shareholder, the Corporate Trustee,
the affiliates of the Managing Shareholder and their respective directors,
officers and agents when acting for the Managing Shareholder or their affiliates
on behalf of the Fund (collectively, "Ridgewood Managing Persons"), as well as
those of the Prior Programs, any future investment programs affiliated with the
Fund, and the Investors may be subject to a variety of potential conflicts,
including but not limited to the following.
Co-Investment and Similar Conflicts
A conflict of interest might arise if at any given time an opportunity to
invest in a Project would be suitable for more than one program, thus requiring
Ridgewood Power to choose among the suitable programs. It is also possible,
though unlikely, that in a future competitive electricity sales market programs
would be competing against each other for sales of power or that an opportunity
to dispose of Projects would be suitable for more than one program. Finally, the
Managing Shareholder may determine that more than one program should invest in a
Project or Projects, in which case those programs will be co-owners.
If the Fund and another program with similar investment objectives have
funds available at the same time for investment in the same or similar Projects,
and a conflict of interest thus arises as to which program will make the
investment, the Managing Shareholder will review the investment portfolio of
each program. They will make the investment decision on the basis of such
factors, among others, as the effects of the investment on the diversification
of each program's portfolio, potential alternative investments, the effects
investment by either program would have on the program's risk-return profile,
the estimated tax effects of the investment on each program, the amount of funds
available and the length of time those funds have been available for investment.
If more than one program has funds available for investment and the factors
discussed above and other considerations indicate that the Project has
approximately equal benefit for each Program, Ridgewood Power will generally
allocate the opportunity first to the Ridgewood Program that was first
organized, to the extent of its funds that can be prudently invested in that
opportunity. In general Ridgewood Power will seek to apply all uninvested funds
of that program to the opportunity, unless doing so would cause the program to
be significantly over-committed to a Project. Any remaining investment
opportunity would then be offered successively to later-organized Ridgewood
Programs on the same basis. A similar process would be followed for divestiture
opportunities or competitive electricity sales.
Ridgewood Power will seek to allow Ridgewood Programs that invest
concurrently to participate on similar terms in a Project, but reserves the
ability to have programs participate on dissimilar terms in order to meet their
investment objectives or to conform to transactional requirements. Further, if a
Ridgewood Program is only able to invest in a particular Project at a different
time than do other Ridgewood Programs because of legal or transactional
requirements or because the Program has a delayed availability of funds,
considerations of equity between Ridgewood Programs and the structuring of the
transaction may cause the Ridgewood Programs to invest on differing terms.
A similar conflict could arise where the entities make investments in
different forms, which would be the case where one entity's investment took the
form of equity and the other's took the form of debt. The Managing Shareholders
believe that in most cases these potential conflicts of interest are unlikely to
cause material adverse effects on the Fund. In cases where the Fund and another
Ridgewood Program invest concurrently in a Project, the material terms of the
transaction normally are the product of arm's length dealing with the seller,
creditors and other interested parties or regulators. Because in such instances
the Ridgewood Programs normally invest on the same terms and take proportionate
interests in the Project, conflicts between them are effectively limited only to
determining how much of the Project will be bought by each, as described above.
In cases where other Ridgewood Programs and the Fund were to invest at differing
times or on different terms, the Fund would face more difficult conflict of
interest questions. The Managing Shareholders, if practicable, would attempt to
resolve these issues by reference to the terms negotiated by other debt or
equity participants in the Project or similar Projects, by reference to similar
transactions, or by reference to current interest rates and other measures
relating to the time value of money or to risk/reward considerations. Finally,
in any material co-investment transaction, the transaction would be a Ridgewood
Program Transaction that would be reviewed by the Panel and approved by it
before consummation. Although the Managing Shareholders believe these practices
may reduce potential conflicts of interest of this type, there can be no
assurance that the interests of the entities will not diverge.
Dispositions of Assets
If the Managing Shareholders take on the responsibility of acting as a
broker or finder at the time the Fund decides to dispose of a property and if no
third person is retained by the Fund for those purposes, the Managing
Shareholders are entitled to receive (but may waive) a brokerage fee from the
proceeds of successful dispositions of Fund property only. The Managing
Shareholders believe that any potential conflict of interest in this event would
be minimal, because the Managing Shareholders have incentives to maximize
returns to the Fund (including but not limited to the Managing Shareholders'
interest in the proceeds of the disposition) and because any fee so earned may
not exceed 2% of gross proceeds.
Additional Investments in Projects
As a Project in which the Fund has participated continues its
development or expands its operations, or if a Prior Program offers its interest
in a Project to the Fund, the Fund may be requested or may wish to commit
additional funds to the Project or the purchase. If the Managing Shareholders
determine in their sole discretion that the Fund will participate in the
opportunity, it may determine to apply the Fund's funds available at that time
to the Project or the purchase, seek to raise additional Fund capital or borrow
the necessary funds. If the Managing Shareholders determine that the Fund will
not participate and applicable regulatory requirements are met, the Managing
Shareholders may make or cause another Ridgewood Managing Person or another
program to make the additional commitment of funds, which might be on terms that
are different from those of the Fund's prior investment in the Project.
Ridgewood Power accordingly may have potential conflicting duties to the Fund
and to those other entities in determining whether the Fund will participate in
the opportunity or waive or assign rights to contribute additional capital to
the Project.
Other Potential Conflicts of Interest
The Fund will reimburse RPMCo for the Fund's share of the costs
incurred by RPMCo in managing Projects. This may create conflicts of interest
among the Fund and other programs as to the allocation of costs and between the
Managing Shareholder and RPMCo, on the one hand, and the Fund and the programs,
on the other, as to the services provided by RPMCo, the expenses of RPMCo, and
the division of responsibilities between RPMCo and the Managing Shareholders.
The Managing Shareholders believe that any conflicts among programs will be
minimized by the method of allocation, which will be based where possible on
actual time and expenses incurred on behalf of the Fund and in other cases on
the relative amount of the investment of each program in the Projects being
managed. Conflicts between the interests of RPMCo and the programs will be
limited by the requirement that reimbursement not exceed actual cost.
The Managing Shareholders, key employees, RPMCo and Ridgewood
Securities are entitled to the compensation, reimbursements and payments
described below at Item 5 -- Directors and Officers of the Registrant. The
amount and terms of those arrangements were not determined through a process of
arm's length bargaining and thus do not necessarily reflect the fair market
value of the services to be rendered to the Fund.
Some of the Ridgewood Managing Persons might have business dealings with
institutional investors that may participate in competing Independent Power
Projects. The Fund might also invest in certain Projects or Project development
companies owned, developed or operated by a Ridgewood Managing Person, or a
Ridgewood Managing Person may invest in certain Projects or Project development
companies in which the Fund has participated. In addition, the terms of the
agreements governing Ridgewood Managing Persons investing in the independent
power business may be more or less favorable to their investors than those
pertaining to Investors under the Declaration.
The Managing Shareholders have the discretion at any time to cause the
Fund to make advances of costs of defense or settlement to the Managing
Shareholders, their personnel and other Ridgewood Managing Persons, regardless
of the existence of a conflict of interest.
The Managing Shareholders have provided no independent representation
of prospective Investors in connection with this offering, and each prospective
Investor should seek independent advice and counsel before making an investment
in the Fund.
While potential conflicts of interest, including those described
herein, cannot be eliminated, the Fund believes any actual conflicts that may
arise will not materially affect the obligations of the Managing Shareholder to
act in the best interests of the Investors and the Fund.
(5) Project Operation.
No projects had material operating revenues during 1999 or 1998.
The major costs of a Project while in operation will be debt service (if
applicable), fuel, taxes, maintenance and operating labor. The ability to reduce
operating interruptions and to have a Project's capacity available at times of
peak demand are critical to the profitability of a Project. Accordingly, skilled
management is a major factor in the Fund's business.
The technology involved in conventional power plant construction and
operations as well as electric and heat energy transfers and sales is widely
known throughout the world. There are usually a variety of vendors seeking to
supply the necessary equipment for any Project. So far as the Fund is aware,
there are no limitations or restrictions on the availability of any of the
components which would be necessary to complete construction and commence
operations of any Project. Generally, working capital requirements are not a
significant item in the independent power industry. The cost of maintaining
adequate supplies of fuel is usually the most significant factor in determining
working capital needs. In order to commence operations, most Projects require a
variety of permits, including zoning and environmental permits. Inability to
obtain such permits will likely mean that a Project will not be able to commence
operations, and even if obtained, such permits must usually be kept in force in
order for the Project to continue its operations.
Compliance with environmental laws is also a material factor in the
independent power industry. The Fund believes that capital expenditures for and
other costs of environmental protection have not materially disadvantaged its
activities relative to other competitors and will not do so in the future.
Although the capital costs and other expenses of environmental protection may
constitute a significant portion of the costs of a Project, the Fund believes
that those costs as imposed by current laws and regulations have been and will
continue to be largely incorporated into the prices of its investments and that
it accordingly has adjusted its investment program so as to minimize material
adverse effects. If future environmental standards require that a Project spend
increased amounts for compliance, such increased expenditures could have an
adverse effect on the Fund to the extent it is a holder of such Project's equity
securities.
(6) Trends in the Independent Power and Other Industries
There are numerous references for further information on the electric
power industry. Interested persons may particularly wish to refer to the U.S.
Department of Energy's Annual Energy Outlooks and special studies, prepared by
the department's Energy Information Administration (the "EIA"). Much of this
information is available on EIA's World Wide Web site at http://www.eia.doe.gov
under the "Electric" heading. Neither the Department of Energy nor EIA nor any
other agency of the United States Government has endorsed or approved the Fund
or the Investor Shares and the Fund takes no responsibility for the preparation
or content of the Department of Energy's publications.
Overview
The independent power industry in the United States has evolved as a
result of Congressional action to require electric utilities to purchase
electricity from non-utility generators, the perceived need for new and
replacement power capacity on the part of utilities and industrial customers and
regulatory and economic pressures to increase competition in the electric power
industry.
Although there may be a continuing long-term need for more investment
in U.S. Independent Power Projects, investment in new Independent Power Projects
in the United States has fluctuated significantly in the last two decades. The
investment strategies of the Prior Programs were to take advantage of market
trends by acquiring Projects developed in the period of rapid growth in the
1980's and early 1990's, purchasing interests in smaller-size Projects that are
being sold off by utilities and building new capacity in niche markets or in
foreign countries where the new pressures of competition may be less intense.
Recently, the independent electric power market in the U.S. has
experienced strong trends toward consolidation and pressures to maximize
economies of scale. As noted below, utility companies have tended to bid up the
prices of generating assets in efforts to maintain their total size or increase
scale. As a result, the returns on capital on purchased independent power
Projects in the United States have declined sharply in the last three years.
Accordingly, the Fund was organized with a broader investment focus than the
Prior Projects have had. The Fund's investments are focusing on niche
opportunities in the U.S. generating industry (Synergics), niche markets in the
electric generation industry outside the U.S., (U.K. Landfill and Egyptian
Projects), long-term infrastructure capital projects (Mediterranean Fiber Optic
Project), and niche technology opportunities (ZAP).
For success, among other matters discussed earlier in this Registration
Statement, these strategies will require that the Fund and the Managing
Shareholders be able to identify attractive Projects, to negotiate advantageous
terms, and in many cases to operate the acquired Projects more efficiently than
before. There can be no assurance that all of these conditions can be met or
that other factors will not prevent success.
Recent U.S. Industry Trends
As a consequence of federal and state moves to deregulate large areas
of the electric power industry and the existence, spurred by PURPA, of private
competitors to electric utilities in the market for generating electricity, a
number of interrelated trends are occurring.
Continued Deregulation of the Generating Market and Transmission Resources The
Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act") encourages
electric utilities to expand their wholesale generating capacity by removing
some, but not all, of the limitations on their ownership of new generating
facilities that qualify as "exempt wholesale generators" ("EWG's") and on their
ability to participate in Independent Power Projects. Many state electric
utility regulators are implementing plans to further encourage investment in
wholesale generators and to facilitate utility decisions to spin off or divest
generating capacity from the transmission or distribution businesses of the
utilities. apacity and independent generators spun off or otherwise separated
from their parent utilities. In addition, FERC is requiring utilities and power
pools to provide nationwide access to transmission facilities to all wholesale
power generators.
State public utility regulatory agencies must also review and approve
certain aspects of wholesale power deregulation (including certain
determinations under the 1992 Energy Act as to fairness of transactions between
exempt wholesale generators and affiliated utilities, as described below at Item
1(c)(7) - Regulatory Matters - The 1992 Energy Act, and other matters described
below at Item 1(c)(7) - Regulatory Matters - State Regulation). Those agencies
are currently holding proceedings and making determinations.
In addition to the FERC order or other Congressional or regulatory
actions that may result in freer access to transmission capacity, agreements
with Canada, and to a lesser extent with Mexico, are leading toward access for
those countries' generators to U.S. markets. As a result, there is the
possibility that a North American wholesale market will develop for electricity,
with additional competitive pressures on U.S. generators.
Proposals to Modify PURPA and Existing Power Contracts
The small-scale segment of the independent power industry in which the
Fund is likely to invest remains a creature of PURPA in many respects. The
prospects of increased competition to supply electricity, availability of
wheeling of wholesale power, supply alternatives through the conservation
initiative described above and reduced rates of increase in electricity demand
have caused many electric utilities and other industry observers to advocate
repeal or modification of PURPA and, in a few cases, to advocate changes to
existing long-term Power Contracts with Independent Power Projects.
To date, FERC has rejected proposals to modify existing Power Contracts
(except for contracts entered into under state regulations mandating payment of
prices greater than utility avoided costs at the time the contracts were
executed), and FERC's rulemaking proposals are expressly based on the principle
that existing Power Contracts that comply with current law should not be
modified by FERC. Although proposals have been introduced in Congress to amend
or repeal PURPA, no such proposal has yet been reported. However, there can be
no assurance that FERC or the Congress will not take action to reduce or
eliminate the benefits or PURPA for Independent Power Projects or that they
would not take action purporting to change or cancel existing Power Contracts or
that they would not take action making compliance with those contracts
economically or practically infeasible. If any such action were to be taken, the
value of existing Independent Power Projects with long-term Power Contracts
might be significantly impaired or even eliminated. If such action were to be
proposed with any significant prospect of adoption, the consequent uncertainty
might have similar effects.
Price and Cost Pressures
The pricing pressures that retail and wholesale deregulation are
bringing are expected to decrease the marginal cost of electricity. Competition
will force utilities and generators to reduce overhead and administrative costs,
to trim operation and maintenance costs and to more efficiently buy and use
fuel. Further, wholesale and retail deregulation and new generating technologies
discussed below are expected to significantly reduce capital costs.
As these trends continue, high-cost generators will be disadvantaged
and may fail. If the Fund were to invest in small-scale generating plants that
in the past have tended to have higher per-kilowatt hour costs than new, large
scale generating plants, it may have difficulty competing. The Fund recognizes
these pressures and intends to invest only in facilities that have competitive
costs of fuel, capital and operation or facilities that offer significant
opportunities for improvement. The Fund will also attempt to invest in
facilities, such as landfill gas power plants, that have tax or environmental
advantages that offset price pressures or that are located abroad where such
pressures may be less.
Renewable Power
The pressures of competition are expected to harm the "renewable power"
segment of the industry. "Renewable power" is a catchphrase that includes
Projects (such as solar, wind, biomass and landfill-gas) that do not use fossil
fuels or nuclear fuels and, in some cases, some other types of small Independent
Power Plants that are Qualifying Facilities (such as small hydroelectric plants,
cogeneration plants and small fossil fuel plants). Renewable power plants
typically have high capital costs and often have total costs that are well above
current costs for new gas-turbine production. Many observers believe that
renewable power plants without existing Power Contracts (with the possible
exception of biomass plants with very low fuel costs) will be non-competitive in
the new markets unless they are given governmental protection. A number of
states are requiring that retailers of electricity purchase a certain minimum
amount of electricity (often 5% to 10% of their total requirements) from
renewable power sources and the Clinton Administration has proposed a national
7.5% minimum requirement. Although this will tend to protect renewable power
Projects, unless there is a shortage of renewable capacity these state
requirements will still make low total cost an essential if a renewable power
Project is to have any ability to succeed.
Initial Effects of Trends
With these conditions in mind, many observers see two primary
strategies for Independent Power Projects to succeed in the United States:
first, Projects that have existing, firm, long-term Power Contracts may do well
so long as regulatory or legislative actions do not abrogate the contracts.
Second, Projects that are low-cost producers of electricity, either from
efficiencies or good management or as the result of successful cogeneration
technologies, will have advantages in the market. The Fund intends to focus on
both possibilities and to maintain a focus on medium-to-long-term results. It
also will consider Projects selling power to large retail users such as
industries rather than utilities.
Finally, there have been industry-wide moves toward consolidation of
participants and divestiture of Projects. A number of utilities and equipment
suppliers have proposed or entered into joint ventures to reduce risks and
mobilize additional capital for the more competitive environment, while many
electric utilities are in the process of combining, either as a means of
reducing costs and capturing efficiencies, or as a means of increasing size as
an organizational survival tactic. One recent observer has described the drive
by electric utilities to sell their existing plants and purchase comparable
plants from other utilities in areas outside their historic service areas,
combined with frequent mergers, as an industry game of "musical chairs." This
consolidation tends to create additional competitive pressures in the electric
power industry, to increase the price of power plants and thus to depress short
and mid-term returns on capital; however, this trend is also encouraging the
divestiture of smaller Projects or Projects that are deemed less central to the
operations of large, consolidated businesses. This may make attractive Projects
available for investment by the Fund.
Foreign Opportunities
Because yields on U.S. Independent Power Projects are currently depressed,
the Fund has committed a large amount of its capital to Independent Power
Projects in the United Kingdom and in Egypt. The electricity markets in the
United Kingdom were fully deregulated several years before deregulation began in
the U.S. Accordingly, the Fund, through Ridgewood U.K., will invest in a niche
area, landfill gas power plants. The Prior Programs already own interests in two
large landfill gas power plants in Rhode Island and California and the
technology and business are familiar to Ridgewood Power. Further, because of the
ecological benefits of landfill gas power plants, the U.K. government has
required utilities to enter into 15 year Power Contracts at premium prices,
through the Non-Fossil Fuels Purchasing Agency. The U.K. Landfill Gas Projects
enjoy a status similar to qualifying facilities in the U.S. with long-term Power
Contracts. They enjoy a guaranteed price and market for their output and are not
subject to price fluctuations for their fuel. The major business risks and
considerations are keeping operating costs at a minimum through good design,
preventative maintenance and attention to fuel quality, governmental policy
changes and exchange rate fluctuations affecting the pound-denominated revenues
from the Projects. Thus the Fund believes that these investments in a stable
Western European country with a guaranteed market for the output have the
potential for long-term, stable income. Because Ridgewood U.K. is not providing
any capital for development and buys Projects only after they receive bank
financing, most development risk is avoided. Ridgewood Power is investigating
hedging and other strategies to reduce exchange rate risk when revenues from the
U.K. Landfill Gas Projects become large enough to make these strategies
practical.
The Egypt Projects are substantially riskier. These projects are being
developed at remote resort hotel sites on the Red Sea which are distant from
other electric and water sources. RIDCo is developing the Projects itself using
local engineering personnel and contractors. Environmental, construction, legal,
labor and geologic requirements are often unclear and can change unpredictably
at any time. RIDCo may find it difficult to enforce contracts and other legal
obligations against local suppliers or customers. RIDCo has not engaged in
substantial development work either in the U.S. or outside the U.S. and has
little experience in developing foreign Projects. There are no backup facilities
to provide electricity or water if the Projects fail or are unusable for any
period of time. Specifications for Projects have changed suddenly and
unpredictably and in some cases it has been necessary for RIDCo to construct
additional infrastructure. Cultural, language and political differences between
Egypt and the U.S. may impair communication with personnel, cause errors and
possibly cause hostile action against the Projects by employees, residents or
governmental agencies. There have been occasional terrorist incidents in Egypt
directed against Western tourists and tourist facilities. Further such incidents
might deter tourism and make the host hotel resorts unprofitable or might even
be directed against the Egypt Projects or their personnel.
The Projects burn light fuel oil in diesel engines, which is brought in
by tanker truck. Supply interruptions, oil spills or fires are possible.
Although the Projects are exposed to world oil price variations, this risk is
mitigated because the Power Contracts contain price adjustments tied to fuel oil
prices that should substantially transfer the risk to the customers.
The customers of most of the Egypt Projects are governmentally-sponsored
associations of resort hotels under 10-year long-term Power Contracts with each
Project. Each Project provides electricity or water or both to the entire
association and bills the association for the aggregate amount. The association
in turn bills its member hotels for their consumption and their share of common
consumption for services such as street lighting, residential services for hotel
employees, and services such as security. The associations may not have
substantial assets and thus may depend on prompt payment by their members in
order to meet their obligations to the Project. Their ability to enforce payment
obligations may be limited, and although the Project has the ability to shut off
water or power to a defaulting association member, it may be practically
difficult to do so over resistance by a major employer. It is possible that the
associations would fail to bill members appropriately, that disputes between the
associations and members for other reasons might result in a failure to pay the
associations, or that the associations for political, economic or other reasons
would fail to meet their obligations to the Project. It is also possible that
adverse events in the tourist industry, such as labor disputes, airline
problems, shortages of personnel, changes in customer taste, environmental
problems, overbuilding and international political or cultural developments
could depress tourist trade to the point that the hotels or associations would
be unable to pay. Other risks include currency conversion and repatriation
risks, exchange rate fluctuations, taxation disputes, international hostilities,
arbitrary governmental action, religious tensions, anti-foreign sentiments and
legal changes. In one current case, an Egypt Project will serve a single hotel
under a 40 year contract. Although risks caused by having an association as an
intermediary do not apply to this Project, the other risks discussed here will.
Further, by serving a single hotel, there is less diversification of risk.
Because of these risks and difficulties, it has been difficult to raise
capital for these Projects and there is a great local demand for similar
Projects. The prices for the electricity and water provided by the Projects
reflect these risks and others. The Managing Shareholders believe that these
risks are acceptable, because the Fund has been organized with the intention to
have a somewhat diversified portfolio of investments and because the Fund will
be investing in lower-risk, lower-return foreign and U.S. power Projects as
well.
Other Infrastructure Technology Opportunities
The Fund has also considered the rapidly growing telecommunications
industry as an alternative to investing in independent power Projects. Demand
for high-speed data links for Internet use and private business use is high and
fiber optic cables are currently the highest-capacity and most reliable
alternative for these communications, although alternatives such as satellites,
land-based microwave transmission, and co-axial cable exist. Like the
independent power industry, these facilities require substantial up-front
capital investments, supply an essential service, and may have long-term
contracts with their customers. Unlike the independent power industry, demand is
growing rapidly. In addition to typical business risks, however, the Fund faces
risks caused by its management's lack of experience in telecommunications. So
far, the Fund's only investment in this area has been a $1.5 million exploratory
investment in the Mediterranean Fiber Optic Project.
Niche Technology Opportunities
Ridgewood Capital, which is an affiliate of Ridgewood Power, has been
organized to sponsor venture capital funds investing in Internet and other
electronics technology ventures and other high-growth areas. In the course of
its investigation it is possible that Ridgewood Capital would identify
investments in these areas that are suitable for the Fund. If a Ridgewood
Capital fund were not to take such an opportunity, it might be offered to the
Fund. At this time, no such opportunity has been identified by Ridgewood
Capital.
(7). Competition
The U.K. Landfill Projects sell their output to a government agency and are
not subject to competition. Currently, the Egyptian Projects are located in
remote coastal areas that are not linked to the national electric power network
and thus are not subject to substantial competition for providing electricity.
The water Projects do not face substantial competition except from trucked-in
water. This also means that there is no substantial backup for the Projects if
they cannot operate for any reason. It is possible that in future years the
national network may extend to some or all of the Project sites, in which case
there might be competition.
There are a large number of participants in the independent power industry.
Several large corporations specialize in developing, building and operating
independent power plants. Equipment manufacturers, including many of the largest
corporations in the world, provide equipment and planning services and provide
capital through finance affiliates. Many regulated utilities are preparing for a
competitive market, and a significant number of them already have organized
subsidiaries or affiliates to participate in unregulated activities such as
planning, development, construction and operating services or in owning exempt
wholesale generators or up to 50% of independent power plants. In addition,
there are many smaller firms whose businesses are conducted primarily on a
regional or local basis. Many of these companies focus on limited segments of
the cogeneration and independent power industry and do not provide a wide range
of products and services. There is significant competition among non-utility
producers, subsidiaries of utilities and utilities themselves in developing and
operating energy-producing projects and in marketing the power produced by such
projects.
The Fund is unable to accurately estimate the number of competitors but
believes that there are many competitors at all levels and in all sectors of the
industry. Many of those competitors, especially affiliates of utilities and
equipment manufacturers, may be far better capitalized than the Fund.
(8). Regulatory Matters.
Projects are subject to energy and environmental laws and regulations
at the federal, state and local levels in connection with development, ownership
and operation. Federal laws and regulations developed by administrative agencies
govern transactions with utility companies, the types of fuel which may be
utilized by a Project, the type of energy which may be produced by a Project and
the ownership of a Project. State utility regulatory commissions must approve
the rates and, in some instances, other terms and conditions on which public
utilities purchase electric power from Projects. Under certain circumstances
where specific exemptions are otherwise unavailable, state utility regulatory
commissions may have broad jurisdiction over Projects. Projects are also subject
to federal, state and local laws and administrative regulations which govern the
emissions and other substances produced by a Project and the geographical
location, zoning, land use and operation of a Project. Applicable federal
environmental laws typically have state and local enforcement and implementation
provisions. These environmental laws and regulations generally require that a
wide variety of permits and other approvals be obtained before the commencement
of construction or operation of an energy-producing facility and that the
facility then operate in compliance with such permits and approvals.
Energy Regulation
PURPA. The enactment in 1978 of PURPA and the adoption of regulations
thereunder by FERC provided incentives for the development of cogeneration
facilities and small power production facilities meeting certain criteria.
Qualifying Facilities under PURPA are generally exempt from the
provisions of the Holding Company Act, the Federal Power Act, as amended (the
"FPA"), and, except under certain limited circumstances, state laws regarding
rate or financial regulation. In order to be a Qualifying Facility, a
cogeneration facility must (i) produce not only electricity but also a certain
quantity of heat energy (such as steam or hot water) which is used for a purpose
other than power generation, (ii) meet certain energy efficiency standards when
natural gas or oil is used as a fuel source and (iii) not be controlled or more
than 50% owned by an electric utility or electric utility holding company. Other
types of Independent Power Projects, known as "small power production
facilities," can be Qualifying Facilities if they meet regulations respecting
maximum size (in certain cases), primary energy source and utility ownership.
Recent federal legislation has eliminated the maximum size requirement for
solar, wind, waste and geothermal small power production facilities (but not for
hydroelectric or biomass) for a fixed period of time.
PURPA provides three primary benefits to Qualifying Facilities. First,
Qualifying Facilities are relieved of compliance with extensive federal, state
and local regulation which control not only the development and operation of an
energy-producing Project, but also the prices and terms on which energy may be
sold by the Project. A Project that is not a Qualifying Facility will be subject
to the extensive regulatory requirements of the FPA, other federal and state
utility legislation and regulation, and possibly the Holding Company Act. These
requirements can delay or even preclude development of a non-Qualifying
Facility.
Second, PURPA requires that electric utilities purchase electricity
generated by Qualifying Facilities at a price equal to the purchasing utility's
full "avoided costs." Avoided costs are defined by PURPA as the "incremental
costs to the electric utility of electric energy or capacity or both which, but
for the purchase from the Qualifying Facility or Qualifying Facilities, such
utility would generate itself or purchase from another source." The FERC
regulations also permit Qualifying Facilities and utilities to negotiate
agreements for utility purchases of power at rates other than the purchasing
utility's avoided cost. While public utilities are not required by PURPA to
enter into long-term Power Contracts to meet their obligations to purchase from
Qualifying Facilities, until recently utilities and regulators encouraged use of
long-term Power Contracts.
Third, PURPA requires that each electric utility interconnect with
Qualifying Facilities and that the utility sell backup or standby power to the
Qualifying Facility on a non-discriminatory basis. This requirement enhances the
reliability of Qualifying Facilities and is especially important for
inside-the-fence facilities, whose customers would otherwise be left without
power in the event that the facility required off-line maintenance or repair.
The exemptions from extensive federal and state regulation afforded by
PURPA to Qualifying Facilities are important to the Fund and its competitors.
The Fund expects that most of the Projects in which it invests will be
Qualifying Facilities. Although some Projects may not be Qualifying Facilities,
the Fund intends to participate only in Projects that avoid the restrictions of
the Holding Company Act and most state regulation.
The Holding Company Act.
Under the Holding Company Act, any person (defined to include
corporations and partnerships and other legal entities) which owns or controls
10% or more of the outstanding voting securities of a "public utility company"
or a company which is a "holding company" of a "public utility company" is
subject to registration with the Commission and regulation under the Holding
Company Act. A holding company of a public utility company is required by the
Holding Company Act to limit its operation to a single integrated utility system
and to divest any other operations not functionally related to the operation of
that utility system. Under PURPA, Qualifying Facilities are exempt from
regulation under the Holding Company Act, and the Fund anticipates that
substantially all of its investments will be in Qualifying Facilities.
Structuring the Fund's own activities to ensure that it is not a
"holding company" of a "public utility company" under the Holding Company Act is
also important in providing financing and financial reporting flexibility to the
Fund. If the Fund pursues the development of Exempt Wholesale Generators (as
defined below) or other Independent Power Projects which will not qualify for
the benefits provided by PURPA and which ordinarily would subject the Fund to
the provisions of the Holding Company Act, it intends to do so in a manner to
qualify for exemptions under the Holding Company Act or certain no-action
positions taken by the Commission. Such a structure could, for example, consist
of the Fund's holding a limited partner interest in a limited partnership which
owns a non-Qualifying Facility.
The 1992 Energy Act.
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act")
empowered FERC to require electric utilities to make available their
transmission facilities to and wheel power for Independent Power Projects under
certain conditions and created an exemption for electric utilities, electric
utility holding companies and other independent power producers from certain
restrictions imposed by the Holding Company Act. The transmission and wheeling
provisions of the act were described above at Item 1(c)(6). The exemptive
provisions are described below.
The 1992 Energy Act created an additional exemption from the Holding
Company Act for EWG's, which are defined basically as entities certified by FERC
as engaged exclusively in the business of owning and operating electric
generation facilities which generate electricity for resale. EWG's remain
subject to rate and tariff regulation by FERC and by state regulators. Further,
EWG's may not sell electricity to electric utilities affiliated or associated
with them unless state regulators approve, and state regulators must determine
whether purchases by electric utilities from EWG's are fair to consumers and
utilities and affect utility reliability.
One set of primary beneficiaries of the EWG's category is expected to
be electric utilities and their holding companies, which are released from
Holding Company Act restrictions on owning interests in wholesale generators and
Qualifying Facilities (but which will still be subject to certain Holding
Company Act restrictions on financing EWG's and PURPA restrictions on ownership
in Qualifying Facilities). The other primary beneficiaries of the EWG provisions
of the 1992 Energy Act are expected to be developers and Project Sponsors that
wish to construct Independent Power Projects that are not Qualifying Facilities
(often because the fuel, heat energy, production or ownership requirements of
PURPA are impractical to meet). By releasing them from the Holding Company Act
regulatory environment, these developers and Project Sponsors may be better able
to proceed and in particular to enlist electric utilities and holding companies
as co-venturers. By exempting electric utilities, electric utility holding
companies, and other developers from certain restrictions imposed by the Holding
Company Act, the 1992 Energy Act has expanded the potential pool of Projects in
which they are able to invest. Although the Fund believes that the exemptive
provisions of the 1992 Energy Act will not materially and adversely affect its
business plan, it may result in increased competition from such entities to
develop promising Projects and in increased competition in the sale of
electricity by Independent Power Projects.
Regulations under the 1992 Energy Act have clarified the ability of
electric utilities and holding companies to invest in EWG's and electric power
plants outside the United States.
Federal Power Act. The FPA grants FERC exclusive rate-making
jurisdiction over wholesale sales of electricity in interstate commerce. The FPA
provides FERC with ongoing as well as initial jurisdiction, enabling FERC to
revoke or modify previously approved rates. Such rates may be based on a
cost-of-service approach or determined through competitive bidding or
negotiation. While Qualifying Facilities under PURPA are exempt from the
rate-making and certain other provisions of the FPA, non-Qualifying Facilities
are subject to the FPA and to FERC rate-making jurisdiction. Although EWG's are
subject to FERC ratemaking jurisdiction, their owners do not by virtue of that
ownership come under FERC jurisdiction.
Companies whose facilities are subject to regulation by FERC under the
FPA because they do not meet the requirements of PURPA may be limited in
negotiations with power purchasers. However, since such projects would not be
bound by PURPA's heat energy use requirement for cogeneration facilities, they
may have greater latitude in site selection and facility size. Any Projects in
which the Fund may participate that are non-Qualifying Facilities are expected
to comply with the FPA.
Fuel Use Act. Projects may also be subject to the Fuel Use Act, which
limits the ability of power producers to burn natural gas in new generation
facilities unless such facilities are also coal capable within the meaning of
the Fuel Use Act. The Fund anticipates that natural gas-fired cogeneration
Projects in which it may participate will be coal capable and thus qualify for
exemption from the Fuel Use Act.
State Regulation. State public utility commissions have broad
jurisdiction over Independent Power Projects which are not Qualifying Facilities
under PURPA, and which are considered public utilities in many states. Such
jurisdiction results in state requirements to obtain certificates of public
convenience and necessity to construct a facility and could result in regulation
of organizational, accounting, financial and other corporate matters on an
ongoing basis. Although FERC generally has exclusive jurisdiction over the rates
charged by a non-Qualifying Facility to its wholesale customers, state public
utility commissions have the practical ability to influence the establishment of
such rates by asserting jurisdiction over the purchasing utility's ability to
pass through the resulting cost of purchased power to its retail customers. In
addition, states may assert jurisdiction over the siting and construction of
non-Qualifying Facilities and, among other things, issuance of securities,
related party transactions and sale and transfer of assets. The actual scope of
jurisdiction over non-Qualifying Facilities by state public utility regulatory
commissions varies from state to state.
In recent years, many states have required or encouraged electric
utilities to undertake least cost utility planning and demand-side management.
Utilities engaging in least cost utility planning consider the costs, advantages
and disadvantages of multiple means of meeting electricity demand, such as
purchasing electric power from Independent Power Projects or other utilities,
efficiency and conservation investments, load management, renewable resources
such as hydroelectric, solar and wind power and conventional generation by the
utility, all with a view toward determining the least-cost mix of supplies. Rate
requests and accounting are to treat the alternatives on an equally favorable
basis. The 1992 Energy Act and related statutes do not compel least cost utility
planning but require it to be considered and require periodic updating of plans
adopted andpublic access to the planning process.
Demand-side management involves cooperative efforts between utilities
and large customers to change the customers' patterns of demand for electricity.
Because demand for electricity changes substantially according to the time of
day or the season, utilities must maintain large amounts of capacity to meet
peak loads that may only occur for a portion of the day or occasionally during
the year. Utilities can thus save significant capital and operating costs if
large customers can move their demand to off-peak times, or restrict demand
during peak periods, or otherwise conserve electricity. Demand-side management
has the effect of reducing utility needs for capacity generally and for
purchasing electricity to meet peak loads at premium prices from Independent
Power Projects.
Environmental Regulation
The construction and operation of energy and fuel producing projects
and the exploitation of natural resource properties are subject to extensive
federal, state and local laws and regulations adopted for the protection of
human health and the environment and to regulate land use. The laws and
regulations applicable to the Fund and Projects in which it will invest
primarily involve the discharge of emissions into the water and air and the
disposal of waste, but can also include wetlands preservation and noise
regulation. These laws and regulations in many cases require a lengthy and
complex process of obtaining licenses, permits and approvals from federal, state
and local agencies. Obtaining necessary approvals regarding the discharge of
emissions into the air is critical to the development of a Project and can be
time-consuming and difficult. Each Project requires technology and facilities
which comply with federal, state and local requirements and sometimes extensive
negotiations with regulatory agencies. Meeting the requirements of each
jurisdiction with authority over a Project may delay or sometimes prevent the
completion of a proposed Project, as well as require extensive modifications to
existing Projects.
The Clean Air Act Amendments of 1990 contain provisions which regulate
the amount of sulfur dioxide and oxides of nitrogen which may be emitted by a
Project. These emissions may be a cause of "acid rain." Qualifying Facilities
are currently exempt from the acid rain control program of the Clean Air Act
Amendments. However, other Independent Power Projects will require "allowances"
to emit sulfur dioxide after the year 2000. Under the Amendments, these
allowances may be purchased from utility companies then emitting sulfur dioxide
or from the Environmental Protection Agency. Further, an Independent Power
Project subject to the requirements has a priority over utilities in obtaining
allowances directly from the Environmental Protection Agency if (i) it is a new
facility or unit used to generate electricity, (ii) 80% or more of its output is
sold at wholesale; (iii) it does not generate electricity sold to affiliates (as
determined under the Holding Company Act) of the owner or operator (unless the
affiliate cannot provide allowances in certain cases) and (iv) it is
"nonrecourse project-financed." A Project is nonrecourse project-financed if it
is 100% equity financed or if only its assets and part or all of its revenues
from power sales contracts serve as collateral for the Project's financing and
if the providers of financing do not have the legal right to pursue an electric
utility, the assets of other Projects, or owners or other participants for loan
repayments.
The market price of an allowance cannot be predicted with certainty at
this time and there is no assurance that a market for such allowances will
develop. Projects fueled by natural gas are not expected to be materially
burdened by the acid rain provisions of the Clean Air Act Amendments.
Title IV of the Clean Air Act Amendments requires significant
reductions in nitrogen oxide emissions from power plants. The first set of
standards became applicable in 1996 for large-scale steam boilers and large coal
and oil-fired plants. The standards require reductions of 25% to 50% in nitrogen
oxide emissions. Standards for other large generating plants become effective in
2000 and would require 40% to 50% reductions. States are imposing additional
restrictions. Nitrogen oxide emissions can be particularly difficult or
expensive to reduce because nitrogen oxides are produced at higher operating
temperatures, while plant efficiencies tend to increase with operating
temperatures. The Fund anticipates that nitrogen oxide regulations will
materially increase the operating costs of generating plants and will tend to
disadvantage small Projects using internal combustion engines and fossil fuel
boilers, but that the expected costs will not cause many Projects that the Fund
will invest in to become unprofitable.
Based on current trends, the Managing Shareholder expects that
environmental and land use regulation will become more stringent. The Fund and
the Managing Shareholder have not developed expertise and experience in
obtaining necessary licenses, permits and approvals, which will be the
responsibility of each Project's managers and Project Sponsors. The Fund will
rely upon qualified environmental consultants and environmental counsel retained
by it or by developers of Projects to assist in evaluating the status of
Projects regarding such matters.
Potential Legislation and Regulation
All federal, state and local laws and regulations, including but not
limited to PURPA, the Holding Company Act, the 1992 Energy Act, the FPA, and the
Clean Air Act Amendments are subject to amendment or repeal. Future legislation
and regulation is uncertain, and could have material effects on the Fund.
It is likely that the federal government and a number of states may
consider schemes of environmental taxation that will penalize carbon dioxide
emissions or other environmental detriments. These proposals, if enacted, could
impose additional costs on the operation of the Fund's Projects. Although the
President and Vice President have announced that the United States will,
together with other nations, reduce greenhouse gas emissions significantly, it
is extremely unclear whether or how this initiative will be adopted by the
Congress. If greenhouse gas emissions were penalized, landfill gas, cogeneration
and biomass Projects of the types owned by the Prior Programs might have a
relative advantage because they reduce methane or carbon dioxide emissions.
Impact of Energy Price Changes
Market prices for natural gas, oil and, to a lesser extent, coal have
fluctuated significantly over the last few years. Such fluctuations may directly
inhibit the development of Projects because of the anticipated effects on
Project profitability and may deter lenders to Projects or result in higher
costs of financing.
In recent years there have been extraordinary fluctuations in the price
of crude oil. Because natural gas is substitutable for crude oil and oil
products under certain conditions and in certain applications, oil prices are
capable of affecting natural gas prices. It is impossible at this time to
determine if the fluctuations will have further effects on the supply and price
of petroleum products.
Natural Gas. The price of natural gas is subject to significant
fluctuation for reasons that are not yet fully understood. Nonetheless, over the
last few years the price of natural gas has frequently been low relative to
other fuels, although there can be no assurance that any these trends will
continue. The effect of fluctuating natural gas prices on Projects will vary on
a Project-by-Project basis depending on the customer to which the electric power
is being sold, the terms of the Power Contracts and steam contracts (in the case
of cogeneration facilities) for the Project, the price of natural gas to be
purchased by the Project and the effect of any long-term commitments for the
purchase of natural gas by the Project's customers. In general, cogeneration,
due to its higher efficiency, tends to be relatively more profitable as energy
costs (including natural gas) increase and relatively less profitable as such
costs decrease. Projects which use natural gas as a fuel source may attempt to
reduce the risk of gas price fluctuations adversely affecting their economics
through long-term gas purchase arrangements and possibly acquiring gas reserves.
Crude Oil. Fluctuations in the price of crude oil are not expected to
affect the cost of operations of cogeneration Projects directly since such
Projects are usually based on energy sources other than crude oil. However,
gas-fired cogeneration Projects typically use distillate oil as a back-up fuel
at times when gas is not available. Certain Projects use surplus fuels or
wastes. The prices for these fuels and wastes are affected by fluctuations in
primary fuel prices but tend to be less volatile.
Coal. Traditionally, coal prices have been more stable than oil and gas
prices due, in part, to the fact that coal is usually sold under long-term
contracts to utilities. During the 1980's coal prices trended lower as a result
of the surplus of crude oil and lower oil prices. The Clean Air Act Amendments,
which are expected to be fully implemented as to most coal burning plants by
1996, may cause prices for lower sulfur coal to increase in the future. The Fund
believes, however, that future coal prices will generally remain competitive
with the price of crude oil and natural gas and should continue to be available
to Independent Power Projects under long-term contracts.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
The Fund received no revenues from foreign sources in 1999.
Long-lived assets indirectly owned by the Fund, as of December 31, 1999, is as
follows: indirectly owned
Value as stated
Country Description of asset in financial statements
United States Investment in ZAP 3,442,000
Investment in Global Fiber
Group 1,498,000(a)
Egypt Investment in Egyptian Projects 4,736,000
(a) Represents investment in early development of Mediterranean Fiber Optic
Project principally expended for U.S. goods and services.
Projects or investments located in one country do not have material customers
from any other country.
Disclosures of risks associated with these investments are found at Items
1(c)(3) - Business - Risk Considerations and 1(c)(6) Trends in the Independent
Power and Other Industries.
(e) Employees.
The Fund has no employees. The persons described below at Item 5 -
Directors and Executive Officers of the Registrant serve as executive officers
of the Fund and have the duties and powers usually applicable to similar
officers of a Delaware corporation in carrying out the Fund business. RIDCo has
approximately 10 employees located in Egypt.
Item 2. Properties.
Pursuant to the Management Agreement between the Fund and the Managing
Shareholders (described at Item 10(c)), Ridgewood Power provides the Fund with
office space at the Managing Shareholders' principal offices at The Ridgewood
Commons, 947 Linwood Avenue, Ridgewood, New Jersey 07450.
The following table shows the material properties (relating to Projects)
owned or leased by the Fund's subsidiaries.
Approximate
Square
Ownership Ground Approximate Footage of Description
Interests Lease Acreage Project of
Projects Location in Land Expiration of Land (Actual Project
or Projected)
Egyptian five sites Leased by n/a less than n/a Electric gen-
in Egypt joint 10 acres erating or
venture* water desali-
nation facil-
ties
*Joint venture equally owned by the Fund and Power V.
The Fund believes that these properties are currently adequate for current
operations at those sites.
Item 3. Legal Proceedings.
There are no material legal proceedings involving the Fund.
Item 4. Submission of Matters to a Vote of Security Holders.
The Fund has not submitted any matters to a vote of its security holders
during the fourth quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
As of April 13, 2000 the Fund had sold 642,942 Investor Shares of
beneficial interest in the Fund in its ongoing private placement offering, which
is scheduled to end in the second quarter of 2000. There is currently no
established public trading market for the Investor Shares and the Fund does not
intend to allow a public trading market to develop. As of the date of this
Annual Report on Form 10-K, all such Investor Shares have been issued and are
outstanding. There are no outstanding options or warrants to purchase, or
securities convertible into, Investor Shares.
Investor Shares are restricted as to transferability under the Declaration,
as well as under federal and state laws regulating securities. The Investor
Shares have not been and are not expected to be registered under the Securities
Act of 1933, as amended (the "1933 Act"), or under any other similar law of any
state (except for certain registrations that do not permit free resale) in
reliance upon what the Fund believes to be exemptions from the registration
requirements contained therein. Because the Investor Shares have not been
registered, they are "restricted securities" as defined in Rule 144 under the
1933 Act. As of the date of this Annual Report, no Investor Shares are sellable
under Rule 144 because the requirements of Rule 144(c) have not been met.
The Managing Shareholder is considering the possibility of a combination of
the Fund and the five Prior Programs sponsored by Ridgewood Power (Ridgewood
Electric Power Trusts I, II, III, IV and V) into a publicly traded entity. This
would require the approval of the Investors in the Fund and the other programs
after proxy solicitations complying with requirements of the Securities and
Exchange Commission, compliance with the "rollup" rules of the Securities and
Exchange Commission and other regulations, and a change in the federal income
tax status of the combined entity from a partnership (which is not subject to
tax) to a corporation. The process of considering and effecting a combination,
if the decision is made to do so, will be very lengthy. There is no assurance
that the Managing Shareholder will recommend a combination, that the Investors
of the Fund or other programs will approve it, that economic conditions or the
business results of the participants will be favorable for a combination, that
the combination will be effected or that the economic results of a combination,
if effected, will be favorable to the Investors of the Fund or other programs.
(b) Holders
As of the date of this Annual Report on Form 10-K, there are 1,143 record
holders of Investor Shares.
(c) Dividends
The Fund made distributions as follows in 1999:
Year ended December 31,
1999
Total distributions to Investors $ 924,760
Distributions per Investor Share 1,642 (a)
Distributions to Managing Shareholder 9,341
(a) Approximate. Distributions varied based on number of shares and payment of
Early Investor Incentive.
Distributions are made on a quarterly basis. The Fund's ability to make
future distributions to Investors and their timing will depend on the net cash
flow of the Fund and retention of reasonable reserves as determined by the Fund
to cover its anticipated expenses. Because all Ridgewood Power programs have
converted their distribution schedule to a quarterly basis, the Fund will
continue quarterly distributions rather than moving to a monthly basis as
previously expected.
Beginning in 2000, the Fund will begin making distributions at the rate of
4.2% per year. It does not anticipate that distributions during most of 2000
will be at a substantially higher rate. This is because the Fund does not expect
to receive revenue from any U.K. Projects until late in 2000 and does not expect
to receive large amounts of revenue from the Egyptian Projects until more are
completed. ZAP is being held for capital appreciation and does not pay
dividends.
Occasionally, distributions may include funds derived from the release of
cash from operating or debt service reserves. Further, the Declaration of Trust
authorizes distributions to be made from cash flows rather than income, or from
cash reserves in some instances. For purposes of generally accepted accounting
principles, amounts of distributions in excess of accounting income may be
considered to be capital in nature. Investors should be aware that the Fund is
organized to return net cash flow rather than accounting income to Investors.
Item 6. Selected Financial Data.
The following data is qualified in its entirety by the financial statements
presented elsewhere in this Annual Report on Form 10-K.
As of and for the
Period from Commencement
of Share Offering
(February 9, 1998)
through Year ended
December 31, 1998 December 31, 1999
Interest income ........................ $ 494,002 $ 1,447,920
Total revenue .......................... 494,002 561,083
Net income (loss) ...................... (851,745) (980,540)
Net assets (shareholders'
equity) .............................. 24,354,681 45,657,426
Total assets ........................... 25,733,430 45,881,708
Long-term obligations .................. 0 0
Per Share of Trust
Interest:
Revenues ............................. 1,664 996
Net income (loss) .................... (2,869) (1,741)
Net asset value ...................... 82,035 81,074
Distributions to Investors ............. 0 1,642(F1)
(F1) Approximate. Distributions varied based on number of shares and payment of
Early Investor Incentive.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Introduction
The following discussion and analysis should be read in conjunction with the
Fund's financial statements and the notes thereto presented below. Dollar
amounts in this discussion are generally rounded to the nearest $1,000. The
financial statements include only the accounts of the Fund.
The Fund uses the equity method of accounting for its investments in the
ZapWorld.com, the Egyptian Projects and the Mediterranean Fiber Optic
Project/GFG.
Zap World.com, a publicly-traded California based corporation, sells a wide
range of electric scooters, bicycles and vehicles. The Growth Fund owns
approximately 27% of the common stock of Zap World.com.
The Fund and Power V are developing several projects that will sell power and
potable water to hotels in Egypt. The projects will have contracts with the
hotels with terms of 10 to 40 years. The first of these projects is expected to
begin operation in the first half of 2000.
The Fund and Power V also purchased a 25% interest in GFG. GFG expects to be the
co-developer of a large Mediterranean fiber optic project scheduled to close in
the second quarter of 2000. The Fund and Power V expect to fund approximately
$18 million of this Mediterranean Fiber Optic project when it closes.
Results of Operations
The year ended December 31, 1999 compared to the period from February 9, 1998 to
December 31, 1998
Interest income increased from $494,000 during 1998 to $1,448,000 as a result of
the Fund's higher average cash balances. In 1999, the Fund recorded a $640,000
loss from its investment in ZapWorld.com. In 1999, The Fund also recorded
$198,000 of losses in 1999 related to its 50% interest in the Egypt projects
that are under development. These projects are expected to begin operation in
the first half of 2000. In 1999, The Fund also recorded a loss of $49,000 in
1999 related to its investment in Mediterranean Fiber Optic Project / GFG. The
Fund and Power V own a 25% interest in GFG which expects to be the co-developer
of a large Mediterranean fiber optic project scheduled to close in the second
quarter of 2000. The Fund and Power V expect to fund approximately $18 million
of the Mediterranean Fiber Optic when it closes.
In 1999, the Fund had expenses of $1,542,000 compared to $1,346,000 in 1998. The
increase is primarily a result of an increase of $160,000 in due diligence costs
on potential projects that were ultimately rejected.
Liquidity and Capital Resources
As of December 31, 1999, the Fund had $35,733,000 of cash on hand. The Fund used
$1,626,000 of cash in operations compared to receiving $431,000 from operations
in 1998. The change is primarily a result of changes in working capital; at
December 31, 1998 the Fund had incurred a significant amount of liabilities that
were paid in 1999. The Fund used $10,181,000 of cash in investing activities,
primarily the purchase of its interest in the ZapWorld.com, the Egypt Projects
and the Mediterranean Fiber Optic Project/GFG.
During 2000, the Fund anticipates making additional investments in the Egypt
Projects and the Mediterranean Fiber Optic Project/GFG. Power V, through a
subsidiary, purchased five landfill gas fired plants in the United Kingdom which
have contracts to sell the electricity to a quasi autonomous non-governmental
organization an inflation adjusted price for 15 years. The Growth Fund is
expected to provide additional funds to the subsidiary to acquire additional
plants as they are developed. To the extent that the Growth Fund provides funds,
it will receive an undivided interest in the entire package of plants.
Other than investments of available cash in Projects, obligations of the Fund
are or will be generally limited to payment of Project operating expenses,
payment of a management fee to the Managing Shareholder, payments for certain
accounting and legal services to third persons and distributions to shareholders
of available operating cash flow generated by the Fund's investments. The Fund's
policy is to distribute as much cash as is prudent to Shareholders. Accordingly,
the Fund has not found it necessary to retain a material amount of working
capital.
The Fund anticipates that, during 2000, its cash flow from operations and
unexpended offering proceeds will be adequate to fund its obligations.
Financial instruments
The Fund's investments in financial instruments are short-term investments of
working capital or excess cash. Those short-term investments are limited by its
Declaration of Trust to investments in United States government and agency
securities or to obligations of banks having at least $5 billion in assets.
Currently the Fund invests only in bank obligations. Because the Fund invests
only in short-term instruments for cash management, its exposure to interest
rate changes is low.
Year 2000 Remediation
The Managing Shareholder and its affiliates began year 2000 review and
planning in early 1997. After initial remediation was completed, a more
intensive review discovered additional issues and the Managing Shareholder began
a formal remediation program in late 1997. All remediation and testing were
completed by October 31, 1999 and no material malfunctions have been discovered
through the date of this report.
The accounting, network and financial packages for the Ridgewood companies
are basically off-the-shelf packages that were remediated, where necessary, by
obtaining patches or updated versions. The Managing Shareholder estimates that
the Fund's allocable portion of the cost of upgrades that were accelerated
because of the Year 2000 problem was less than $1,000.
The Managing Shareholder has two major systems affecting the Trust that
rely on custom-written software, the subscription/investor relations and
investor distribution systems, which maintain individual investor records and
effect disbursement of distributions to Investors. These were remediated in
1999, including the elements of those systems used to generate internal sales
reports and other internal reports. Although these were not designated
mission-critical, they were also successfully remediated by October 31, 1999.
Some subsystems are being remediated using the "sliding window" technique, in
which two digit years less than a threshold number are assumed to be in the
2000's and higher two digit numbers are assumed to be in the 1900's. Although
this will allow compliance for several years beyond the year 2000, eventually
those systems will have to be rewritten again or replaced. The Managing
Shareholder expects that the ordinary course of system upgrading will eventually
cure this problem.
The Fund's share of the incremental cost for Year 2000 remediation of this
custom written software and related items for 1998 and prior years was
approximatley $12,250 and was approximately $11,500 for 1999.
Each of the Fund's Projects was reviewed in 1999 by RPMCo personnel to
determine if its electronic control systems contained software affected by the
Year 2000 problem or contain embedded components that contain Year 2000 flaws.
To date the Fund has discovered no systems having a material impact on output,
environmental compliance, recordkeeping or any other material impact that have
Year 2000 concerns. The management of ZAP has informed the Managing Shareholder
that its equipment, products and programs are year-2000 compliant and that it
and its customers and suppliers have not experienced any material year 2000
malfunctions.
The Managing Shareholder and its affiliates do not significantly rely on
computer input from suppliers and customers and thus are not directly affected
by other companies' Year 2000 compliance. No material adverse effects from
customers' or suppliers' Year 2000 problems have occurred.
Based on its internal evaluations and the risks and contexts identified by
the Commission in its rules and interpretations, the Fund believes that Year
2000 issues relating to its assets and remediation program will not have a
material effect on its facilities, financial position or operations, and that
the costs of addressing the Year 2000 issues will not have a material effect on
its future consolidated operating results, financial condition or cash flows.
However, this belief is based upon current information, and there can be no
assurance that unanticipated problems will not occur or be discovered that would
result in material adverse effects on the Fund.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Qualitative Information About Market Risk.
The Fund's investments in financial instruments are short-term investments
of working capital or excess cash. Those short-term investments are limited by
its Declaration of Trust to investments in United States government and agency
securities or to obligations of banks having at least $5 billion in assets.
Because the Fund invests only in short-term instruments for cash management, its
exposure to interest rate changes is low. The Fund has limited exposure to trade
accounts receivable and believes that their carrying amounts approximate fair
value.
The Fund's primary market risk exposure is limited interest rate risk
caused by fluctuations in short-term interest rates. The Fund does not
anticipate any changes in its primary market risk exposure or how it intends to
manage it. The Fund does not trade in market risk sensitive instruments.
Quantitative Information About Market Risk
This table provides information about the Fund's financial instruments
that are defined by the Securities and Exchange Commission as market risk
sensitive instruments. These include only short-term U.S. government and agency
securities and bank obligations. The table includes principal cash flows and
related weighted average interest rates by contractual maturity dates.
December 31, 1999
Expected Maturity Date
2000
(U.S. $)
Bank Deposits and Commercial
Paper $35,732,660
Average interest rate 5.6%
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Accountants ............................. F-2
Consoldiated Balance Sheets at December 31, 1999 and 1998 ..... F-3
Consolidated Statement of Operations for Year Ended
December 31, 1999 and Period from February 9,
1998 through December 31, 1998 .............................. F-4
Consolidated Statement of Changes in Shareholders' Equity
for Year Ended December 31, 1999
and Period from February 9, 1998
through December 31, 1998 F-5
Consolidated Statement of Cash Flows for Year Ended December
31, 1999 and Period from
February 9, 1998 through December 31, 1998 .................. F-6
Notes to Consolidated Financial Statements .................... F-7 to F-17
Financial Statements for Zapworld.com
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
The financial statements are presented in accordance with generally
accepted accounting principles for operating companies, using consolidation and
equity method accounting principles. This differs from the basis used by three
prior independent power programs sponsored by the Managing Shareholder, which
present the Fund's investments in Projects on the estimated fair value method
rather than the consolidation and equity accounting method.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Neither the Fund nor the Managing Shareholders have had an independent
accountant resign or decline to continue providing services since their
respective inceptions and neither has dismissed an independent accountant during
that period. During that period of time no new independent accountant has been
engaged by the Fund or the Managing Shareholders, and the
Managing Shareholders' current accountants, PricewaterhouseCoopers LLP, have
been engaged by the Fund.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) General.
As Managing Shareholders of the Fund, Ridgewood Power (and Power VI Co,
if Ridgewood Power turns over management rights to it) has direct and exclusive
discretion in management and control of the affairs of the Fund. The Independent
Panel Members only review certain transactions between the Fund and other
investment programs sponsored by Ridgewood Power or affiliates of Ridgewood
Power. The Managing Shareholder will be entitled to resign as Managing
Shareholder of the Fund only (i) with cause (which cause does not include the
fact or determination that continued service would be unprofitable to the
Managing Shareholder) or (ii) without cause with the consent of a majority in
interest of the Investors. It may be removed from its capacity as Managing
Shareholder as provided in the Declaration.
The purpose for having two Managing Shareholders, Ridgewood Power and Power
VI Co, was to have continuity of management. When the Fund was organized,
Ridgewood Power was considering that it might cause the five Prior Programs
(Power I through Power V) to combine into a publicly traded business. That
process might require Ridgewood Power to be a part of the combination, and
management fees paid by the Fund to the Managing Shareholder might pass to the
combined five Prior Programs in a way that might benefit the shareholders of the
five Prior Programs while leaving fewer resources for the managers of the Fund.
Therefore, when it organized the Fund, Ridgewood Power created Power VI Co's
predecessor as a stand-in entity that could replace Ridgewood Power.
Ridgewood Power now expects (although no assurance can be given) that the
Fund would also join any combination of the five Prior Programs. Accordingly, it
currently seems unlikely that it will be necessary to activate Power VI Co as a
Managing Shareholder, if a combination were to occur.
(b) Managing Shareholder.
Ridgewood Power Corporation was incorporated in February 1991 as a Delaware
corporation for the primary purpose of acting as a managing shareholder of
business trusts and as a managing general partner of limited partnerships which
are organized to participate in the development, construction and ownership of
Independent Power Projects. It organized the Fund and acted as managing
shareholder until April 1999. On or about April 21, 1999 it was merged into the
current Managing Shareholder, Ridgewood Power LLC. Ridgewood Power LLC was
organized in early April 1999 and has no business other than acting as the
successor to Ridgewood Power Corporation.
At the same time, Ridgewood Power VI Corporation, which was the other
Managing Shareholder, was merged into Ridgewood Power VI LLC, a New Jersey
limited liability company designated as Power VI Co in this Annual Report. Power
VI Co was also newly organized and has no business other than being the
successor to the dormant Ridgewood Power VI Corporation.
Robert E. Swanson has been the President, sole director and sole
stockholder of Ridgewood Power Corporation since its inception in February 1991
and is now the controlling member, sole manager and President of the Managing
Shareholders. All of the equity in the Managing Shareholders is owned by Mr.
Swanson or by family trusts. Mr. Swanson has the power on behalf of those trusts
to vote or dispose of the membership equity interests owned by them.
Ridgewood Power has also organized Ridgewood Electric Power Trust I ("Power
I"), Ridgewood Electric Power Trust II ("Power II"), Ridgewood Electric Power
Trust III ("Power III"), Ridgewood Electric Power Trust IV ("Power IV") and
Ridgewood Electric Power Trust V ("Power V") as Delaware business trusts to
participate in the independent power industry. Ridgewood Power LLC is now also
their managing shareholder. The business objectives of these five trusts are
similar to those of the Fund.
A number of other companies are affiliates of Mr. Swanson and Ridgewood
Power. Each of these also was organized as a corporation that was wholly-owned
by Mr. Swanson. In April 1999, most of them were merged into limited liability
companies with similar names and Mr. Swanson became the sole manager and
controlling owner of each limited liability company. For convenience, the
remainder of this Memorandum will discuss each limited liability company and its
corporate predecessor as a single entity.
The Managing Shareholders are affiliates of Ridgewood Energy
Corporation("Ridgewood Energy"), which has organized and operated 48 limited
partnership funds and one business trust over the last 17 years (of which 25
have terminated) and which had total capital contributions in excess of $190
million. The programs operated by Ridgewood Energy have invested in oil and
natural gas drilling and completion and other related activities. Other
affiliates of the Managing Shareholders include Ridgewood Securities Corporation
("Ridgewood Securities"), an NASD member which has been the placement agent for
the private placement offerings of the six trusts sponsored by the Managing
Shareholders and the funds sponsored by Ridgewood Energy; Ridgewood Capital
Management LLC ("Ridgewood Capital"), which assists in offerings made by the
Managing Shareholders and which is the sponsor of four privately offered venture
capital funds (the Ridgewood Capital Venture Partners and Ridgewood Capital
Venture Partners II funds); and RPMCo. Each of these companies is controlled by
Robert E. Swanson, who is their sole director or manager.
Set forth below is certain information concerning Mr. Swanson and other
executive officers of the Managing Shareholder.
Robert E. Swanson, age 53, has also served as President of the Fund since
its inception in November 1992 and as President of RPMCo, Power I, Power II,
Power III, Power IV and Power V, since their respective inceptions. Mr. Swanson
has been President and registered principal of Ridgewood Securities and became
the Chairman of the Board of Ridgewood Capital on its organization in 1998. He
also is Chairman of the Board of the Ridgewood Capital Venture Partners I and II
venture capital funds. In addition, he has been President and sole or
controlling owner of Ridgewood Energy since its inception in October 1982. Prior
to forming Ridgewood Energy in 1982, Mr. Swanson was a tax partner at the former
New York and Los Angeles law firm of Fulop & Hardee and an officer in the Fund
and Investment Division of Morgan Guaranty Trust Company. His specialty is in
personal tax and financial planning, including income, estate and gift tax. Mr.
Swanson is a member of the New York State and New Jersey bars, the Association
of the Bar of the City of New York and the New York State Bar Association. He is
a graduate of Amherst College and Fordham University Law School.
Robert L. Gold, age 41, has served as Executive Vice President of the
Managing Shareholders, the Fund, RPMCo, Power I, Power II, Power III, Power IV
and Power V since their respective inceptions, with primary responsibility for
marketing and acquisitions. He has been President of Ridgewood Capital since its
organization in 1998. As such, he is President of the Ridgewood Capital Venture
Partners I and II funds. He has served as Vice President and General Counsel of
Ridgewood Securities Corporation since he joined the firm in December 1987. Mr.
Gold has also served as Executive Vice President of Ridgewood Energy since
October 1990. He served as Vice President of Ridgewood Energy from December 1987
through September 1990. For the two years prior to joining Ridgewood Energy and
Ridgewood Securities Corporation, Mr. Gold was a corporate attorney in the law
firm of Cleary, Gottlieb, Steen & Hamilton in New York City where his experience
included mortgage finance, mergers and acquisitions, public offerings, tender
offers, and other business legal matters. Mr. Gold is a member of the New York
State bar. He is a graduate of Colgate University and New York University School
of Law.
Thomas R. Brown, age 45, joined Ridgewood Power in November 1994 as Senior
Vice President and holds the same position with the Fund, RPMCo and each of the
other trusts sponsored by the Managing Shareholders. He became Chief Operating
Officer of Ridgewood Power, RPMCo and the Ridgewood Power I through V trusts in
October 1996, and is the Chief Operating Officer of the Fund. Mr. Brown has over
20 years' experience in the development and operation of power and industrial
projects. From 1992 until joining the Managing Shareholder he was employed by
Tampella Services, Inc., an affiliate of Tampella, Inc., one of the world's
largest manufacturers of boilers and related equipment for the power industry.
Mr. Brown was Project Manager for Tampella's Piney Creek project, a $100 million
bituminous waste coal fired circulating fluidized bed power plant. Between 1990
and 1992 Mr. Brown was Deputy Project Manager at Inter-Power of Pennsylvania,
where he successfully developed a 106 megawatt coal fired facility. Between 1982
and 1990 Mr. Brown was employed by Pennsylvania Electric Company, an integrated
utility, as a Senior Thermal Performance Engineer. Prior to that, Mr. Brown was
an Engineer with Bethlehem Steel Corporation. He has an Bachelor of Science
degree in Mechanical Engineering from Pennsylvania State University and an MBA
in Finance from the University of Pennsylvania. Mr. Brown satisfied all
requirements to earn the Professional Engineer designation in 1985.
Martin V. Quinn, age 52, assumed the duties of Chief Financial Officer of
the Managing Shareholder, the Fund, the prior five trusts organized by the
Managing Shareholders and RPMCo in November 1996 under a consulting arrangement.
He became a full-time officer of Ridgewood Power and RPMCo in April 1997. He is
also the Chief Financial Officer of Ridgewood Capital and of Ridgewood Capital
Venture Partners, LLC and Ridgewood Institutional Venture Partners, LLC.
Mr. Quinn has 31 years of experience in financial management and corporate
mergers and acquisitions, gained with major, publicly-traded companies and an
international accounting firm. He formerly served as Vice President of Finance
and Chief Financial Officer of NORSTAR Energy, an energy services company, from
February 1994 until June 1996. From 1991 to March 1993, Mr. Quinn was employed
by Brown-Forman Corporation, a diversified consumer products company and
distiller, where he was Vice President-Corporate Development. From 1981 to 1991,
Mr. Quinn held various officer-level positions with NERCO, Inc., a mining and
natural resource company, including Vice President- Controller and Chief
Accounting Officer for his last six years and Vice President-Corporate
Development. Mr. Quinn's professional qualifications include his certified
public accountant qualification in New York State, membership in the American
Institute of Certified Public Accountants, six years of experience with the
international accounting firm of PricewaterhouseCoopers, and a Bachelor of
Science degree in Accounting and Finance from the University of Scranton (1969).
Mary Lou Olin, age 47, has served as Vice President of the Managing
Shareholder, RPMCo, Ridgewood Capital, the Fund, Power I, Power II, Power III,
Power IV and Power V since their respective inceptions. She has also served as
Vice President of Ridgewood Energy since October 1984, when she joined the firm.
Her primary areas of responsibility are investor relations, communications and
administration. Prior to her employment at Ridgewood Energy, Ms. Olin was a
Regional Administrator at McGraw-Hill Training Systems where she was employed
for two years. Prior to that, she was employed by RCA Corporation. Ms. Olin has
a Bachelor of Arts degree from Queens College.
(c) Management Agreement.
The Fund has entered into a Management Agreement with the Managing
Shareholders detailing how the Managing Shareholders will render management,
administrative and investment advisory services to the Fund under the terms of
the Declaration. Specifically, the Managing Shareholders will perform (or
arrange for the performance of) the management and administrative services
required for the operation of the Fund. Among other services, they will
administer the accounts and handle relations with the Investors, provide the
Fund with office space, equipment and facilities and other services necessary
for its operation and conduct the Fund's relations with custodians,
depositories, accountants, attorneys, brokers and dealers, corporate
fiduciaries, insurers, banks and others, as required. The Managing Shareholders
will also be responsible for making investment and divestment decisions (except
that Ridgewood Program Transactions require the approval of the Independent
Panel Members as described below).
The Managing Shareholders will be obligated to pay the compensation of the
personnel and all administrative and service expenses necessary to perform the
foregoing obligations. The Fund will pay all other expenses of the Fund,
including transaction expenses, valuation costs, expenses of preparing and
printing periodic reports for Investors and the Commission, postage for Fund
mailings, Commission fees, interest, taxes, legal, accounting and consulting
fees, litigation expenses, expenses of operating Projects and costs incurred by
the Managing Shareholders in so doing and other expenses properly payable by the
Fund. The Fund will reimburse the Managing Shareholders for all such Fund and
other expenses paid by it.
As compensation for the Managing Shareholders' performance under the
Management Agreement, the Fund is obligated to pay Power VI Co an annual
management fee, beginning on the Termination Date of the offering of Investor
Shares as described below at Item 7 -- Certain Relationships and Related
Transactions.
The responsibilities of the Managing Shareholders and the fees and
reimbursements of expenses it is entitled to are set out in the Declaration.
Each Investor consented to the terms and conditions of the Declaration by
subscribing to acquire Investor Shares in the Fund.
The Fund has relied and will continue to rely on the Managing Shareholders
and engineering, legal, investment banking and other professional consultants
(as needed) and to monitor and report to the Fund concerning the operations of
Projects in which it invests, to review proposals for additional development or
financing, and to represent the Fund's interests. The Fund will rely on such
persons to review proposals to sell its interests in Projects in the future.
(d) Executive Officers of the Fund.
Pursuant to the Declaration, the Managing Shareholder has appointed
officers of the Fund to act on behalf of the Fund and sign documents on behalf
of the Fund as authorized by the Managing Shareholder. Mr. Swanson has been
named the President of the Fund and the other executive officers of the Fund are
identical to those of the Managing Shareholder.
The officers have the duties and powers usually applicable to similar
officers of a Delaware business corporation in carrying out Fund business.
Officers act under the supervision and control of the Managing Shareholder,
which is entitled to remove any officer at any time. Unless otherwise specified
by the Managing Shareholder, the President of the Fund has full power to act on
behalf of the Fund. The Managing Shareholder expects that most actions taken in
the name of the Fund will be taken by Mr. Swanson and the other principal
officers in their capacities as officers of the Fund under the direction of the
Managing Shareholder rather than as officers of the Managing Shareholder.
(e) The Independent Panel Members.
The Declaration provides for an Independent Review Panel (the "Panel"),
with responsibility for independently reviewing and approving material
transactions ("Ridgewood Program Transactions") between the Fund and any other
investment programs sponsored by the Managing Shareholder or its Affiliates
("Ridgewood Programs").
All Ridgewood Program Transactions (which include material transactions
between the Fund or entities in which the Fund invests, on the one hand, and
other Ridgewood Programs or entities in which they invest or have control, on
the other), must be approved by a majority of the Panel Members (if there are
only two Panel Members, both must approve) or by a Majority of the Investors. In
reviewing and approving a Ridgewood Program Transaction, the Panel Members are
be guided by the provisions of Delaware law regarding the responsibilities of
directors of a business corporation who pass upon a transaction with an
affiliated corporation. In so doing, the Panel Members are subject to duties of
loyalty to the Fund and its Investors and care in reviewing the transaction, and
are obligated to consider the entire fairness of the transaction to the Fund.
There is no requirement, however, that the Fund participate in the transaction
on identical terms with the other Ridgewood Programs. The Declaration specifies,
in addition, that the Panel Members will be entitled to the benefits of the
"business judgment rule" of Delaware law, which exonerates directors for their
negligence or mistaken decisions in the absence of bad faith or clear conflicts
of interest.
The Independent Review Panel provisions were included in the Declaration in
recognition that the Fund's investment program anticipates significant
co-investment by the Fund in Projects in which other Ridgewood Programs will
invest. The Managing Shareholder concluded that given the potential conflicts of
interest and the additional complexities and responsibilities that characterize
co-investment decisions, the Fund should create a mechanism for independent
review and approval of co-investments.
The Managing Shareholder has designated the initial Panel of three Panel
Members. A majority of the incumbent Panel Members must consent for the Panel to
take action. A majority of the Managing Shareholder and the incumbent Panel
Members, acting together, may authorize an increase to no more than eight Panel
Members (or a decrease to not fewer than two) and may fill vacancies on the
Panel within 180 days. If there is no incumbent Panel Member, however, vacancies
must be filled by the Managing Shareholder with the approval of a Majority of
the Investors. A Panel Member may not be an Affiliate of the Fund and may not be
an investment advisor or underwriter for the Fund, a person beneficially owning
five percent or more of the Investor Shares, an entity in which the Fund
beneficially owns five percent or more of the outstanding equity securities, an
agent or employee of the Fund or its subsidiaries, a member of the immediate
family of any individual described above, or a person who served at any time
after the beginning of the second-to-last full calendar year as legal counsel to
the Fund or the Managing Shareholder, or a partner, principal or employee of
that legal counsel.
The Panel is not required to review other transactions that might involve
the Managing Shareholder or its Affiliates and the Fund, such as the Management
Agreement or temporary advances of funds by the Managing Shareholder to the
Fund. The Managing Shareholder, in its sole discretion, may refer such other
transactions to the Panel for advice, and the Panel, in its sole discretion, may
elect to review and report to the Managing Shareholder on the referred
transaction, or to decline to review it. Neither the Managing Shareholder nor
the Panel Members shall incur liability to the Fund or any Shareholder by their
decisions to refer or not to refer, or to review or not to review, any
transaction that is not a Ridgewood Program Transaction.
The Panel Members are not trustees of the Fund, have no general fiduciary
responsibility for the Fund's investments or operations, and have no continuing
oversight responsibilities for the Fund. The Panel meets only on the call of the
Managing Shareholder. Panel Members may resign and may be removed either for
cause by action of at least two-thirds of the remaining Panel Members or for any
reason by action of the holders of at least two-thirds of the Investor Shares.
Compensation of the Panel Members is set in the Declaration at $5,000 per
year, plus out-of-pocket expenses incurred.. If the Managing Shareholder
certifies in the Fund's records that there is no reasonable probability that the
Fund will engage in further Ridgewood Program Transactions, the Panel will be
suspended and will take no further action. During that period, the Panel
Members' compensation will cease. A suspended Panel may be reinstated by the
Managing Shareholder at any time.
John C. Belknap, age 52, has been chief financial officer of three national
retail chains and their parent companies. In February 2000, he joined Dr.
Propper's consulting firm, RP Associates, as a consultant. From September 1999
through February 2000, he was an independent financial consultant. From July
1997 through August 1999, he was Executive Vice President and Chief Financial
Officer of Richfood Holdings, Inc., a Virginia-based food manufacturer. From
December 1995 to June 1997 Mr. Belknap was Executive Vice President and Chief
Financial Officer of OfficeMax, Inc., an office products superstore chain. From
February 1994 to February 1995, Mr. Belknap was Executive Vice President and
Chief Financial Officer of Zale Corporation, a retail jewelry store chain. From
January 1990 to January 1994 and from February 1995 to December 1995, Mr.
Belknap was an independent financial consultant. From January 1989 through May
1993 he also served as a director of and consultant to Finlay Enterprises, Inc.,
an operator of leased fine jewelry departments in major department stores
nationwide. He also serves as an Independent Trustee of Power I and Power IV.
Dr. Richard D. Propper, age 48, graduated from McGill University in 1969
and received his medical degree from Stanford University in 1972. He completed
his internship and residency in Pediatrics in 1974, and then attended Harvard
University for post doctoral training in hematology/oncology. Upon the
completion of such training, he joined the staff of the Harvard Medical School
where he served as an assistant professor until 1983. In 1983, Dr. Propper left
academic medicine to found Montgomery Medical Ventures, one of the largest
medical technology venture capital firms in the United States. He served as
managing general partner of Montgomery Medical Ventures until 1993. He also
serves as an Independent Trustee of Power I and of Power IV.
Dr. Propper is currently a consultant to a variety of companies for medical
matters, including international opportunities in medicine. In June 1996 Dr.
Propper agreed to an order of the Commission that required him to make filings
under Sections 13(d) and (g) and 16 of the 1934 Act and that imposed a civil
penalty of $15,000. In entering into that agreement, Dr. Propper did not admit
or deny any of the alleged failures to file recited in that order. Dr. Propper
is also an acquisition consultant for Ridgewood Capital Venture Partners, LLC
and Ridgewood Institutional Venture Partners, LLC, the two venture capital funds
sponsored by Ridgewood Capital. He receives a fixed consulting fee from those
funds and contingent compensation from Ridgewood Capital. He also serves as an
Independent Trustee of Power I and of Power IV.
Seymour (Si) Robin, age 72, has been the Executive Vice President and CEO
of Sensor Systems, Inc., an antenna manufacturing company located in Chatsworth,
California. He has held this position since 1972. From 1949 to 1953, he owned
and operated United Manufacturing Company, which specialized in aircraft and
missile antennas. From 1953 to 1957, he managed Bendix Antenna Division, which
specialized in aircraft and space antennas and avionics. In 1957, he started SRA
Antenna Company as a manufacturer and technical consultant to worldwide
manufacturers or commercial and military aircraft and space vehicles. He
remained at SRA Antenna Company until 1971, at which time he became Executive
Vice President and CEO of Sensor Systems, Inc.
Mr. Robin holds degrees in mechanical and electrical engineering from
Montreal Technical Institute and U.C.L.A. He is an FAA-certified pilot
(multi-engine, instrument, land and sea ratings) since 1966. He has received the
AMC Airline Voltaire Award for the Most Outstanding Contribution to Airline
Avionics in the Past 50 Years. He also owns significant interests in commercial
and residential real estate in the southwest U.S. Mr. Robin was elected as an
Independent Trustee by the two other Independent Trustees and Mr. Swanson in
January 2000. He also serves as an Independent Trustee of Power I and of Power
IV.
(f) Corporate Trustee
The Corporate Trustee of the Fund is Ridgewood Holding. Legal title to Fund
property is now and in the future will be in the name of the Fund, if possible,
or Ridgewood Holding as trustee. Ridgewood Holding is also a trustee of Power I,
Power II, Power III, Power IV, Power V and of an oil and gas business trust
sponsored by Ridgewood Energy and is expected to be a trustee of other similar
entities that may be organized by Ridgewood Power and Ridgewood Energy. The
President, sole director and sole stockholder of Ridgewood Holding is Robert E.
Swanson; its other executive officers are identical to those of the Managing
Shareholder. The principal office of Ridgewood Holding is at 1105 North Market
Street, Suite 1300, Wilmington, Delaware 19899.
(g) Fiduciary Responsibilities of Managing Shareholders and Others
The Investors and the Fund may have a number of legal remedies against
the Managing Shareholders in the event they were to breach their duties. The
Declaration expressly states that each Managing Shareholder is jointly and
severally liable for all debts and obligations of the Fund. The intent of the
Declaration is to subject the Managing Shareholders to the liabilities of
general partners of a Delaware limited partnership as if the Fund were such a
partnership. The Declaration does so by including the liability provisions of
the Delaware Uniform Partnership Law as Sections 3.2 of the Declaration. Under
the law of Delaware, such general partners are accountable as fiduciaries and
must exercise the utmost good faith and integrity in handling partnership
affairs. In managing the Fund, however, it is likely that the Managing
Shareholders and the Corporate Trustee would be entitled to the benefits of the
"business judgment rule" of Delaware law, which provides that the courts will
not hold the manager of a business entity liable for its negligence or mistaken
decisions in the absence of bad faith or clear conflict of interests. Further,
the Declaration of Trust expressly states that the Managing Shareholders and
other Ridgewood Managing Persons have no liability for their conduct if they
determined in good faith that it was in the Fund's best interests and the
conduct was neither reckless nor willful misconduct. See ARTICLE III OF THE
DECLARATION OF TRUST.
The Declaration imposes the responsibilities of directors of a Delaware
corporation on Panel Members to the extent that they review and approve
Ridgewood Program Transactions. See Item 5(e) -INDEPENDENT REVIEW PANEL, ABOVE.
The Panel Members have no responsibility or fiduciary duty as to any other
aspect of the Fund except to the limited extent that they may report to the
Managing Shareholder on matters expressly referred to them. There is no Delaware
statute or case law addressing the extent to which approval of Ridgewood Program
Transactions or other matters by the Independent Review Panel would protect the
Managing Shareholders or other persons from liabilities to the Fund or the
Investors. As mentioned in the preceding paragraph, the Declaration states that
Ridgewood Managing Persons acting in good faith and without recklessness are not
liable for their conduct. The Managing Shareholders believe that approval by the
Independent Review Panel ordinarily should establish such good faith and lack of
recklessness. Further, Section 3.5(b) of the Declaration states that
No act of the Fund shall be affected or invalidated by the fact that a Managing
Person may be a party to or has an interest in any contract or transaction of
the Fund if . . . [it] (iii) is a Ridgewood Program Transaction authorized under
Section 12.14(d) [by vote of the Independent Panel Members] or (iv) has been
approved by the vote of an Independent Panel or (v) has been approved by the
vote of a Majority of Voting Shares.
The Delaware Act expressly provides that a Shareholder may bring an
action in the right of the Fund (i.e., a derivative action) to recover damages
from any person (which may include the Managing Shareholders, their manager or
officers, or others) if the Corporate Trustee has refused to bring the action or
an effort to cause the Trustee to do so is not likely to succeed. The Delaware
Act contains certain limitations and rights regarding the prosecution of a trust
derivative action. The common or statutory law of other jurisdictions may also
grant rights to bring a derivative action. The common or statutory law of
Delaware or other jurisdictions may also grant to an Investor the right to
institute legal action on his own behalf and that of all other similarly
situated Investors (i.e., a class action) to recover damages against the
Managing Shareholders, the Corporate Trustee, the officers of the Fund or
others.
Under the common law as in effect in many jurisdictions, an equitable
action for an accounting by a trustee and beneficiaries of a trust (such as the
Shareholders) is available. In addition, the equity powers of a court may be
invoked in proper cases to direct a trustee's actions, to replace a trustee or
to reform a trust instrument. As permitted by the Delaware Act, however, the
Declaration provides that no person will be entitled to require an accounting at
any time or to elect a judicial, administrative or executive supervisory
proceeding that is applicable to non-business trusts. The applicability of these
common law remedies to a Delaware business trust's operations in light of the
Declaration is extremely uncertain and there can be no assurance that the
Declaration's limitations of remedies would be recognized in full.
The Managing Shareholders are not trustees of the Fund, although they
have complete and exclusive power to direct the Corporate Trustee and to direct
the management of the Fund and although they may take action on behalf of the
Fund. Under the Delaware Act, neither the existence of these powers nor their
exercise causes the Managing Shareholders to be deemed trustees in the absence
of a provision in the Declaration to that effect. No such provision is included
in the Declaration. Accordingly, the Managing Shareholders are not express
trustees of the Fund and if there were legal remedies that could only be
obtained against a trustee by the Investors those remedies would not be
available to the Investors against the Managing Shareholders. The Fund does not
know of any such remedy, other than actions for an accounting and other
supervisory proceedings, which are barred by the Declaration.
The Declaration states that each Investor is entitled to obtain the
following information from the Fund upon reasonable written demand stating the
purpose of the demand (which must be reasonably related to the Investor's
interest in the Fund): (i) true and full information regarding the Fund's
business and financial condition and the contributions to the Fund; (ii) copies
of tax returns, the Declaration and the certificate of trust, as amended; and
(iii) other reasonable information regarding the Fund. The Fund may establish
reasonable standards and limitations on disclosures of information and costs of
providing that information will be borne by the requesting Investor.
(h) RPMCo.
RPMCo is wholly owned by Robert E. Swanson. For Projects for which the Fund
decides to take operating responsibility itself, the Fund will cause the Fund's
subsidiary that owns the Project to enter into an "Operation Agreement" under
which RPMCo, under the supervision of the Managing Shareholder, will provide the
management, purchasing, engineering, planning and administrative services for
the Project. RPMCo will charge the Fund at its cost for these services and for
the Fund's allocable amount of certain overhead items. RPMCo shares space and
facilities with the Managing Shareholder and its affiliates. To the extent that
common expenses can be reasonably allocated to RPMCo, the Managing Shareholder
may, but is not required to, charge RPMCo at cost for the allocated amounts and
such allocated amounts will be borne by the Fund and other programs. Common
expenses that are not so allocated will be borne by the Managing Shareholder.
The Fund does not currently own any Independent Power Projects or other
facilities managed by RPMCo and accordingly no Operation Agreement is in effect.
The Fund has not made any material payments to RPMCo.
Initially, the Managing Shareholder does not anticipate charging RPMCo for
the full amount of rent, utility supplies and office expenses allocable to
RPMCo. As a result, both initially and on an ongoing basis the Managing
Shareholder believes that RPMCo's charges for its services to the Fund are
likely to be materially less than its economic costs and the costs of engaging
comparable third persons as managers. RPMCo will not receive any compensation in
excess of its costs.
Allocations of costs will be made either on the basis of identifiable
direct costs, time records or in proportion to each program's investments in
Projects managed by RPMCo; and allocations will be made in a manner consistent
with generally accepted accounting principles.
RPMCo will not provide any services related to the administration of the
Fund, such as investment, accounting, tax, investor communication or regulatory
services, nor will it participate in identifying, acquiring or disposing of
Projects. RPMCo will not have the power to act in the Fund's name or to bind the
Fund, which will be exercised by the Managing Shareholder or the Fund's
officers.
The Operation Agreements will not have a fixed term and will be terminable
by RPMCo, by the Managing Shareholder or by vote of a majority in interest of
Investors, on 60 days' prior notice. The Operation Agreements may be amended by
agreement of the Managing Shareholder and RPMCo; however, no amendment that
materially increases the obligations of the Fund or that materially decreases
the obligations of RPMCo shall become effective until at least 45 days after
notice of the amendment, together with the text thereof, has been given to all
Investors.
The executive officers of RPMCo are Mr. Swanson (President), Mr. Gold
(Executive Vice President), Mr. Brown (Senior Vice President and Chief Operating
Officer), Mr. Quinn (Senior Vice President and Chief Financial Officer) and Ms.
Olin (Vice President). Douglas V. Liebschner, Vice President - Operations, is a
key employee.
Douglas V. Liebschner, age 51, joined RPMCo in June 1996 as Vice President
of Operations. He has over 27 years of experience in the operation and
maintenance of power plants. From 1992 until joining RPMCo, he was employed by
Tampella Services, Inc., an affiliate of Tampella, Inc., one of the world's
largest manufacturers of boilers and related equipment for the power industry.
Mr. Liebschner was Operations Supervisor for Tampella's Piney Creek project, a
$100 million bituminous waste coal fired circulating fluidized bed ("CFB") power
plant. Between 1989 and 1992, he supervised operations of a waste to energy
plant in Poughkeepsie, N.Y. and an anthracite-waste-coal-burning CFB in
Frackville, Pa. From 1969 to 1989, Mr. Liebschner served in the U.S. Navy,
retiring with the rank of Lieutenant Commander. While in the Navy, he served
mainly in billets dealing with the operation, maintenance and repair of ship
propulsion plants, twice serving as Chief Engineer on board U.S. Navy combatant
ships. He has a Bachelor of Science degree from the U.S. Naval Academy,
Annapolis, Md.
(i) Section 16(a) Beneficial Ownership Reporting Compliance
All individuals subject to the requirements of Section 16(a) have complied
with those reporting requirements during 1999.
Item 11. Executive Compensation.
The Fund reimburses RPMCo at cost for services provided by RPMCo's
employees and reimburses the Managing Shareholders at allocated cost for
services outside the scope of the Management Agreement; no such reimbursement
per employee exceeded $60,000 in 1998 or 1999. Information as to the fees
payable to the Managing Shareholders and certain affiliates is contained at Item
13 Certain Relationships and Related Transactions.
As compensation for services rendered to the Fund, pursuant to the
Declaration, each Independent Panel Member is entitled to be paid by the Fund
the sum of $5,000 annually and to be reimbursed for all reasonable out-of-pocket
expenses relating to attendance at Board meetings or otherwise performing his
duties to the Fund. Accordingly in January 1999 and following years the Fund
paid each Independent Panel Member $5,000 for his services. The Independent
Panel Members and the Managing Shareholders are entitled to review the
compensation payable to the Independent Panel Members annually and increase or
decrease it as they see reasonable. The consent of a majority of the Panel
Members and the consent of the Managing Shareholders is necessary for a change
in compensation. The Fund is not entitled to pay the Independent Panel Members
compensation for consulting services rendered to the Fund outside the scope of
their duties to the Fund without similar approval.
Ridgewood Holding, the Corporate Trustee of the Fund, is not entitled to
compensation for serving in such capacity, but is entitled to be reimbursed for
Fund expenses incurred by it which are properly reimbursable under the
Declaration.
For information concerning the Fund's Key Employee Incentive Plan, see Item
11(j) of the Fund's Registration Statement on Form 10. No awards or
determinations of eligibility have been made under the Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Ridgewood Power purchased for cash one full Investor Share (as of April 13,
2000, .156%). By virtue of its purchase of an Investor Share, Ridgewood Power is
entitled to the same ratable interest in the Fund as all other purchasers of
Investor Shares. Except for Mr. Robin, who owns 10 Investor Shares (1.56%), no
other Trustees or executive officers of the Fund acquired Investor Shares in the
Fund's offering. No person beneficially owns 5% or more of the Investor Shares.
The Managing Shareholder was issued one Management Share in the Fund
representing the beneficial interests and management rights of the Managing
Shareholder in its capacity as the Managing Shareholder (excluding its interest
in the Fund attributable to Investor Shares it acquired in the offering). The
management rights of the Managing Shareholder are described in further detail
above at Item 1 - Business and below in Item 10. Directors and Executive
Officers of the Registrant. Its beneficial interest in cash distributions of the
Fund and its allocable share of the Fund's net profits and net losses and other
items attributable to the Management Share are described in further detail below
at Item 13 -- Certain Relationships and Related Transactions.
Item 13. Certain Relationships and Related Transactions.
The Declaration provides that cash flow of the Fund, less reasonable
reserves which the Fund deems necessary to cover anticipated Fund expenses, is
to be distributed to the Shareholders from time to time as the Fund deems
appropriate. The allocation of distributions between the Investors and the
Managing Shareholder is described at Item 11(a) - Description of Registrant's
Securities to be Registered - Distribution and Dissolution Rights.
The Fund made distributions in 1999 to Power VI Co totalling $9,300. or any
other person. The Fund paid fees to the Managing Shareholders and its affiliates
as follows:
Fee Paid to 1998 1999
Investment fee Ridgewood
Power $577,813 $560,650
Placement agent fee Ridgewood
and sales commis- Securities
sions Corporation 304,031 188,842
Organizational, Ridgewood
distribution and Power
offering fee 1,776,189 1,698,842
Due diligence Ridgewood
Expenses(a) Power 868,208 708,658
(a) Includes reimbursement for fees and expenses of third parties.
The investment fee equaled 2% of the proceeds of the offering of Investor
Shares and was payable for the Managing Shareholder's services in investigating
and evaluating investment opportunities and effecting investment transactions.
The placement agent fee (1% of the offering proceeds) and sales commissions were
also paid from proceeds of the offering, as was the organizational, distribution
and offering fee (5% of offering proceeds) for legal, accounting, consulting,
filing, printing, distribution, selling, closing and organization costs of the
offering.
In addition to the foregoing, the Fund reimbursed the Managing Shareholder
and RPMCo at cost for expenses and fees of unaffiliated persons engaged by the
Managing Shareholder for Fund business and for certain expenses related to
management of Projects.
Other information in response to this item is reported in response to Item
12. Executive Compensation, which information is incorporated by reference into
this Item 13.
Mr. Swanson is a director of ZAP. In September 1999, he purchased a
franchise to distribute ZAP's products on eastern Long Island, in New York State
and paid $10,000 to ZAP for the franchise and $18,747 for inventory during 1999.
Mr. Swanson also received a warrant to purchase an additional 100,000
shares of ZAP's common stock at a price of $6.25, expiring in December 2002.
This warrant was granted to him in consideration of his services as a director
of ZAP. Mr. Swanson has assigned the warrant to Ridgewood Zap, LLC without
consideration. In so doing, he does not represent that he acts as a director on
behalf of Ridgewood Zap, LLC or the Fund or that he is obligated to assign any
compensation he receives from ZAP.
Other information in response to this item is reported in response to
Item 12. Executive Compensation, which information is incorporated by reference
into this Item 13.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements.
See the Index to Financial Statements in Item 8 hereof.
(b) Reports on Form 8-K.
No Form 8-K was filed with the Commission by the Registrant during the
quarter ending December 31, 1999.
(c) Exhibits
3.A. Certificate of Trust of the Registrant. Incorporated by reference to
the same Exhibit in the Registrant's Registration Statement on Form 10.
3.B. Amendment No. 1 to Certificate of Trust. Incorporated by reference to
the same Exhibit in the Registrant's Registration Statement on Form 10.
3.C. Declaration of Trust of the Registrant. Incorporated by reference to
the same Exhibit in the Registrant's Registration Statement on Form 10.
10.A. Stock and Warrant Purchase Agreement for ZAP Power Systems, Inc.
Incorporated by reference to the same Exhibit in the Registrant's Registration
Statement on Form 10.
10.B. Warrant for Purchase of Common Stock of ZAP Power Systems, Inc.
Incorporated by reference to the same Exhibit in the Registrant's Registration
Statement on Form 10.
10.C Investors' Rights Agreement with ZAP Power Systems, Inc. Incorporated
by reference to the same Exhibit in the Registrant's Registration Statement on
Form 10.
10.D. Milestone letter agreement with ZAP Power Systems, Inc. Incorporated
by reference to the same Exhibit in the Registrant's Registration Statement on
Form 10.
10.E. Letter agreement re board representation with ZAP Power Systems, Inc.
Incorporated by reference to the same Exhibit in the Registrant's Registration
Statement on Form 10.
10.F. Management Agreement between the Fund and Managing Shareholders
Incorporated by reference to the same Exhibit in the Registrant's Registration
Statement on Form 10.
10.G. Key Employees' Incentive Plan. Incorporated by reference to the same
Exhibit in the Registrant's Registration Statement on Form 10.
10.H. Agreement of Merger between Ridgewood Power Corporation and Ridgewood
Power LLC. Incorporated by reference to the same Exhibit in the Registrant's
Registration Statement on Form 10.
24. Powers of Attorney Page
27. Financial Data Schedule Page
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Signature Title Date
THE RIDGEWOOD POWER GROWTH FUND (Registrant)
By:/s/ Robert E. Swanson President and Chief April 14, 2000
Robert E. Swanson Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Robert E. Swanson President and Chief April 14, 2000
Robert E. Swanson Executive Officer
By:/s/ Martin V. Quinn Senior Vice President and
Martin V. Quinn Chief Financial Officer April 14, 2000
By:/s/ Christopher Naunton Director of Finance April 14, 2000
Christopher Naunton and Chief Accounting Officer
RIDGEWOOD POWER LLC Managing Shareholder April 14, 2000
By:/s/ Robert E. Swanson President
Robert E. Swanson
/s/ Robert E. Swanson * Independent Trustee April 14, 2000
John C. Belknap
/s/ Robert E. Swanson * Independent Trustee April 14, 2000
Richard D. Propper
/s/ Robert E. Swanson* Independent Trustee April 14, 2000
Seymour Robin
As attorney-in-fact for the Independent Trustee
The Ridgewood Power Growth Fund
Consolidated Financial Statements
December 31, 1999 and 1998
Report of Independent Accountants
To the Shareholders and Trustees of
The Ridgewood Power Growth Fund:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Ridgewood Power Growth Fund (the "Fund") and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
the year ended December 31, 1999 and the period February 9, 1998 (commencement
of share offering) through December 31, 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, NY
March 24, 2000
The Ridgewood Power Growth Fund
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
December 31,
----------------------------
1999 1998
------------ ------------
Assets:
Cash and cash equivalents .................. $ 35,732,660 $ 25,256,560
Due from affiliates ........................ 316,833 9,330
Other current assets ....................... 156,644 86,348
------------ ------------
Total current assets ..................... 36,206,137 25,352,238
Investment in:
Zap World.com .............................. 3,441,809 --
Egypt Projects ............................. 4,736,092 --
Mediterranean Fiber Optic Project/GFG ...... 1,497,670 --
Deferred due diligence costs ............... -- 381,192
------------ ------------
Total assets ............................. $ 45,881,708 $ 25,733,430
------------ ------------
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued expenses ...... $ 216,795 $ 264,620
Due to affiliates .......................... 7,487 1,114,129
------------ ------------
Total current liabilities ................ 224,282 1,378,749
------------ ------------
Commitments and contingencies
Shareholders' equity:
Shareholders' equity (563.16 and
296.8815 investor shares issued and
outstanding at December 31, 1999 and
1998, respectively) ....................... 46,548,589 24,388,198
Subscriptions receivable ................... (863,500) (25,000)
------------ ------------
Shareholders' equity, net ................ 45,685,089 24,363,198
Managing shareholders' accumulated
deficit (1 management share issued and .... (27,663) (8,517)
------------ ------------
Total shareholders' equity ............... 45,657,426 24,354,681
------------ ------------
Total liabilities and shareholders' equity $ 45,881,708 $ 25,733,430
------------ ------------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
Commencement
of Share Offering
For the Year Ended (February 9, 1998) Through
December 31, 1999 December 31, 1998
----------- -----------
Revenue:
Interest income .................... $ 1,447,920 $ 494,002
Equity interest in loss of:
Zap World.com ..................... (639,915) --
Egypt Projects .................... (197,759) --
Mediterranean Fiber Optic/GFG ..... (49,163) --
----------- -----------
Total revenue ..................... 561,083 494,002
----------- -----------
Expenses:
Investment fee paid to the managing
shareholders ..................... 560,650 577,813
Project due diligence costs ....... 868,208 708,658
Accounting and legal fees ......... 39,878 31,000
Other expenses .................... 72,887 28,276
----------- -----------
Total expenses .................... 1,541,623 1,345,747
----------- -----------
Net loss .......................... $ (980,540) $ (851,745)
----------- -----------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund
Consolidated Statement of Changes in Shareholders' Equity
For The Year Ended December 31, 1999 and the Period February 9, 1998
(Commencement of Share Offering) To December 31, 1998
- --------------------------------------------------------------------------------
Subscriptions Managing
Shareholders Receivable Shareholders Total
------------ ------------ ------------ ------------
Initial capital contributions, net
(296.8815 investor shares and 1
management share) .................. $ 25,231,426 $ (25,000) $ -- $ 25,206,426
Net loss for the period ............... (843,228) -- (8,517) (851,745)
------------ ------------ ------------ ------------
Shareholders' equity, December 31, 1998
(296.8815 investor shares and 1
management share) .................. 24,388,198 (25,000) (8,517) 24,354,681
Capital contributions, net (266.2785
investor shares) ................... 24,055,886 (838,500) -- 23,217,386
Distributions ......................... (924,760) -- (9,341) (934,101)
Net loss .............................. (970,735) -- (9,805) (980,540)
------------ ------------ ------------ ------------
Shareholders' equity, December 31, 1999
(563.16 investor shares and 1
management share) .................. $ 46,548,589 $ (863,500) $ (27,663) $ 45,657,426
------------ ------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Commencement of Share
Offering (February
For The Year Ended 9, 1998) Through
December 31, 1999 December 31, 1998
------------ ------------
Cash flows from operating
activities:
Net loss .................................. $ (980,540) $ (851,745)
------------ ------------
Adjustments to reconcile
net loss to net cash flows
from operating activities:
Equity interest in loss of
Zap World.com ............................ 639,915 --
Equity interest in loss of
Egypt Projects ........................... 197,759 --
Equity interest in loss of
Mediterranean Fiber Optic/GFG ............ 49,163 --
Changes in assets and
liabilities:
Increase in due from affiliates ......... (307,503) (9,330)
Increase in other current
assets ................................. (70,296) (86,348)
(Decrease) increase in
accounts payable and
accrued expenses ....................... (47,825) 264,620
(Decrease) increase in due
to affiliate ........................... (1,106,642) 1,114,129
------------ ------------
Total adjustments ..................... (645,429) 1,283,071
------------ ------------
Net cash (used in) provided
by operating activities .................. (1,625,969) 431,326
------------ ------------
Cash flows from investing
activities:
Investment in Zap World.com ............... (4,081,724) --
Investment in Egypt Projects .............. (4,933,851) --
Investment in Mediterranean
Fiber Optic/GFG .......................... (1,546,833) --
Decrease (increase) in
deferred due diligence costs ............. 381,192 (381,192)
------------ ------------
Net cash used in investing
activities ............................... (10,181,216) (381,192)
------------ ------------
Cash flows from financing activities:
Proceeds from shareholders' contributions . 27,458,014 29,613,468
Selling commissions and offering costs paid (4,240,628) (4,407,042)
Cash distributions to shareholders ........ (934,101) --
------------ ------------
Net cash provided by financing
activities ............................... 22,283,285 25,206,426
------------ ------------
Net increase in cash and
cash equivalents ......................... 10,476,100 25,256,560
Cash and cash equivalents,
beginning of period ...................... 25,256,560 --
------------ ------------
Cash and cash equivalents,
end of period ............................ $ 35,732,660 $ 25,256,560
------------ ------------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Purpose
The Ridgewood Power Growth Fund (the "Fund") was formed as a Delaware business
trust in February 1997 by Ridgewood Energy Holding Corporation acting as the
Corporate Trustee. The managing shareholders of the Fund are Ridgewood Power LLC
("RPC", formerly Ridgewood Power Corporation) and Ridgewood Power VI LLC
("RP6C", formerly Ridgewood Power VI Corporation). The Fund began offering
shares on February 9, 1998 and may issue up to a maximum of 1,000 shares.
Ridgewood Capital Management LLC ("RCC", formerly Ridgewood Capital Corporation)
provides most services required to support the offering. RPC, RP6C and RCC are
related through common ownership. The Fund had no operations prior to the
commencement of the share offering.
The Fund has been organized to invest primarily in independent power generation
facilities and other capital facilities. These independent power generation
facilities will include cogeneration facilities, which produce both electricity
and heat energy and other power plants that use various fuel sources (except
nuclear).
2. Summary of Significant Accounting Policies
Principles of consolidation and accounting for investments
The consolidated financial statements include the accounts of the Fund and a
wholly-owned affiliate. All material intercompany transactions have been
eliminated.
The Trust uses the equity method of accounting for its investments in affiliates
in which the Trust has the ability to exercise significant influence over the
operating and financial policies of the affiliate but does not control the
affiliate. The Trust's share of the earnings of the affiliates is included in
the consolidated results of operations.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 the estimates.
Cash and cash equivalents
The Fund considers all highly liquid investments with maturities when purchased
of three months or less as cash and cash equivalents. Cash and cash equivalents
consist of funds deposited in bank accounts.
Income taxes
No provision is made for income taxes in the accompanying financial statements
as the income or losses of the Fund are passed through and included in the tax
returns of the individual shareholders of the Fund.
Offering costs
Costs associated with offering Fund shares (selling commissions, distribution
and offering costs) are reflected as a reduction of the shareholders' capital
contributions.
Due diligence costs relating to potential power projects
Costs relating to the due diligence performed on potential power project
investments are initially deferred, until such time as the Fund determines
whether or not it will make an investment in the project. Costs relating to
completed projects are capitalized and costs relating to rejected projects are
expensed at the time of rejection.
These costs consist of payments for consultants and other unaffiliated parties
performing financial, engineering, legal and other due diligence procedures and
negotiations. It also includes travel and other out-of-pocket costs incurred by
employees of affiliates of the managing shareholders investigating potential
project investments.
Subscriptions receivable
Capital contributions are recorded upon receipt of the appropriate subscription
documents. Subscriptions receivable from shareholders are reflected as a
reduction of shareholders' equity.
Reclassification
Certain items in previously issued financial statements have been reclassified
for comparative purposes.
3. Investments
The Trust has the following investments:
Accounting Investment at December 31,
------------------
Project Name Method 1999 1998
- ------------------------------------- ------------- ---------- -----
ZAP World.com ....................... Equity Method $3,441,809 $--
Egypt Projects ...................... Equity Method 4,736,092 --
Mediterranean Fiber Optic Project/GFG Equity Method 1,497,670 --
---------- -----
$9,675,571 $---
---------- -----
ZAP World.com
On March 30, 1999, the Fund, through a wholly owned subsidiary, purchased
678,808 shares of common stock of ZAP World.com ("ZAP") for $2,050,000. ZAP,
headquartered in Sebastopol, California, designs, assembles, manufactures and
distributes electric power bicycle kits, electric bicycles and tricycles and
electric scooters. ZAP's common stock is quoted on the OTC Bulletin Board under
the symbol "ZAPP". The Fund also received a warrant to purchase additional
shares of ZAP's common stock at a price between $3.50 and $4.50 per share. The
Fund exercised the warrant in June 1999 and purchased 571,249 additional shares
for $2,000,000. The Fund owns approximately 27% of the outstanding common stock
of ZAP. In December 1999, the Fund received a warrant to purchase an additional
100,000 shares of ZAP at a price of $6.25 per share which expires in December
2002.
The Fund's investment in ZAP is accounted for using the equity method of
accounting. Accordingly, the accompanying statement of operations includes the
Fund's interest in ZAP's results of operations since the acquisition of the
shares.
The following pro forma information presents the results of operations of the
Fund as if the purchases had occurred on January 1, 1999:
For the Year Ended
December 31, 1999
Revenue $ 433,989
Net income (1,108,354)
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually occurred had the purchases occurred on January 1, 1999, or
of future results.
Summarized financial information for ZAP is as follows:
Balance Sheet Information
December 31, 1999
----------------------------
Current assets $ 5,418,000
Non-current assets 2,141,900
----------------------------
Total assets $ 7,559,900
----------------------------
Liabilities $ 1,172,100
Shareholders' equity 6,387,800
----------------------------
Liabilities and shareholders' equity $7,559,900
----------------------------
Statement of Operations Information
For the Year Ended December
31, 1999
----------------------------
Revenues $6,437,200
Expenses 8,223,400
----------------------------
Net loss $ (1,786,200)
----------------------------
Egypt Projects
In 1999, the Fund and Ridgewood Electric Power Trust V ("Trust V") jointly
formed a company to develop electric power and water purification plants for
resort hotels in Egypt. The first projects are expected to begin operation in
the first half of 2000. The Fund and Trust V own undivided interests in the
Egyptian projects in proportion to the capital they contributed. Through
December 31, 1999, the Fund and Trust V each contributed $4,933,851 to the Egypt
Projects.
The Fund's investment in the Egypt Projects is accounted for under the equity
method of accounting. The Fund's equity in the loss of the Egypt Projects has
been included in the financial statements since the inception of the projects.
Summarized financial information for the Egypt Projects is as follows:
Balance Sheet Information
December 31, 1999
----------------------------
Current assets $ 719,794
Non-current assets 9,567,984
----------------------------
Total assets $ 10,287,778
----------------------------
Liabilities $ 815,592
Shareholders' equity 9,472,186
----------------------------
Liabilities and shareholders' equity $ 10,287,778
----------------------------
Statement of Operations Information
For the Year Ended December
31, 1999
----------------------------
Interest income $ 7,794
Expenses 403,312
----------------------------
Net loss $ (395,518)
----------------------------
Mediterranean Fiber Optic Project/GFG
In September 1999, the Fund and Trust V made a joint investment of $3,000,000 in
Global Fiber Group ("GFG"), which is in the process of developing an underwater
fiber optic cable in the Western Mediterranean (the "Mediterranean Fiber Optic
Project"). The investment, which was funded equally by the Fund and Trust V,
provides for a 25% ownership interest in GFG and the right to invest in projects
developed by GFG. The Fund and Trust V anticipate equally funding an $18,000,000
joint venture investment in the Mediterranean Fiber Optic Project in the second
quarter of 2000.
The Fund's investment in the Mediterranean Fiber Optic Project/GFG is accounted
for under the equity method of accounting. The Fund's equity in the loss of the
Mediterranean Fiber Optic Project/GFG has been included in the financial
statements since the inception of the projects.
Summarized financial information for GFG is as follows:
Balance Sheet Information
December 31, 1999
----------------------------
Current assets $ 90,030
Non-current assets 2,826,128
----------------------------
Total assets $ 2,916,158
----------------------------
Shareholders' equity $ 2,916,158
----------------------------
Statement of Operations Information
For the Three Months Ended
December 31, 1999
----------------------------
Revenues $ 346,059
Expenses 430,001
----------------------------
Net loss $ (83,942)
----------------------------
4. Fair Value of Financial Instruments
At December 31, 1999 and 1998, the carrying value of the Fund's cash and cash
equivalents and accounts payable approximated their fair value.
5. Transactions With Managing Shareholders and Affiliates
The Fund pays RCC an organizational, distribution and offering fee up to 6% of
each capital contribution made to the Fund. This fee is intended to cover legal,
accounting, consulting, filing, printing, distribution, selling and closing
costs for the offering of the Fund. For the year ended December 31, 1999 and the
period from February 9, 1999 to December 31, 1998, the Fund paid fees for these
services to RCC of $1,698,451 and $1,776,189, respectively. These fees are
recorded as a reduction in the shareholders' capital contribution.
The Fund also pays to RPC, one of the managing shareholders, an investment fee
up to 2% of each capital contribution made to the Fund. The fee is payable to
RPC for its services in investigating and evaluating investment opportunities
and effecting transactions for investing the capital of the Fund. For the year
ended December 31, 1999 and the period from February 9, 1999 to December 31,
1998, the Fund paid investment fees to the managing shareholder of $560,650 and
$577,813, respectively.
The Fund entered into a management agreement with RP6C, one of the managing
shareholders, under which RP6C renders certain management, administrative and
advisory services and provides office space and other facilities to the Fund. As
compensation to the RP6C for such services, the Fund pays it an annual
management fee equal to 2.5% of the total capital contributions to the Fund
payable monthly upon the closing of the Fund. The Fund is not closed and no
management fees were paid through December 31, 1999. The amount of the annual
management fee will be determined when the Fund closes and the total capital
contributions are known. If the Fund were to have closed on December 31, 1999,
the annual management fee would have been $1,340,400.
The Fund reimburses the managing shareholders and affiliates for expenses and
fees of unaffiliated persons engaged by the managing shareholders for fund
business. The managing shareholders or affiliates originally paid all project
due diligence costs, accounting and legal fees and other expenses shown in the
statement of operation and were reimbursed by the Fund.
Under the Declaration of Fund, RP6C is entitled to receive each year 1% of all
distributions made by the Fund (other than those derived from the disposition of
Fund property) until the shareholders have been distributed each year an amount
equal to 12% of their equity contribution. Thereafter, RP6C is entitled to
receive 25% of the distributions for the remainder of the year. RP6C is entitled
to receive 1% of the proceeds from dispositions of Fund properties until the
shareholders have received cumulative distributions equal to their original
investment ("Payout"). After Payout, RP6C is entitled to receive 25% of all
remaining distributions of the Fund.
Income is allocated to the managing shareholders until the profits equal
distributions to the managing shareholders. Then, income is allocated to the
investors, first among holders of Preferred Participation Rights until such
allocations equal distributions from those Preferred Participation Rights, and
then among Investors in proportion to their ownership of investor shares. If the
Fund has net losses for a fiscal period, the losses are allocated 99% to the
Investors and 1% to the managing shareholders.
Where permitted, in the event the managing shareholders or an affiliate performs
brokering services in respect of an investment acquisition or disposition
opportunity for the Fund, the managing shareholders or such affiliate may charge
the Fund a brokerage fee. Such fee may not exceed 2% of the gross proceeds of
any such acquisition or disposition. No such fees have been paid through
December 31, 1999.
The corporate trustee of the Fund, Ridgewood Energy Holding Corporation, an
affiliate of the managing shareholders through common ownership, received no
compensation from the Fund.
Amounts due to and from affiliates are non-interest bearing and are usually
settled within thirty days. Such amounts arise from the delay between when
expenses are paid by the Fund or affiliates and when reimbursement occurs.
RPC purchased one investor share of the Fund for $83,000 in 1998. Through
December 31, 1999, commissions and placement fees of $492,873 were earned by
Ridgewood Securities Corporation, an affiliate of the managing shareholders.
6. Preferred Participation Rights
Preferred Participation Rights were given to each shareholder whose subscription
was fully completed and paid for and accepted prior to December 31, 1998. Each
Preferred Participation Right entitled the holder to an aggregate distribution
priority of $1,000. The number of Preferred Participation Rights earned per
investor share was equal to the number of whole or partial months from the date
of the acceptance of the subscription to December 31, 1998, except that
subscriptions from December 1 through December 31, 1998 were treated on the same
basis as subscriptions received in November 1998. A total of 1,890 Preferred
Participation Rights were issued.
During 1999, cash distributions were first allocated 99% to holders of preferred
participation rights and 1% to the managing shareholders until shareholders
receive distributions equal to $1,000 for each Right earned.
7. Management Share
The Fund granted the managing shareholders a single Management Share
representing the managing shareholders' management rights and rights to
distributions of cash flow.
8. Key Employees Incentive Agreement
The Key Employees Incentive Plan (the "Plan") was adopted by the Fund in
February 1998 and permits the managing shareholders to designate key executives
and employees of the Fund and its operating companies to receive Incentive
Shares.
The managing shareholders and persons granted Incentive Shares under the Plan
are entitled to receive a portion of the Fund's cash flow as follows:
Prior to Payout After Payout
Net Operating Managing Shareholders Managing Shareholders.
Cash Flow Up to 20% 20%
after Investors
obtain 12% Plan Participants Plan Participants
cumulative Up to 5% 5%
return
Net Cash Managing Shareholders Managing Shareholders
Flow from 1% 20%
Dispositions Plan Participants Plan Participants
Zero 5%
The managing shareholders and Plan participants will be entitled to cash flow on
a proportionate basis, meaning that if the cash flow allocable to them is less
than the maximum percentages stated in the table, that cash flow will be
distributed pro rata between the managing shareholders and Plan participants.
At the closing of the private placement offering of Investor Shares, the Fund
will create a number of Incentive Shares equal to 1/15 of the total number of
Investor Shares sold in the offering. Each Incentive Share will be entitled to a
pro-rata share of the cash flow distributable to Plan participants in the table
above.
Until Incentive Shares are actually issued, the cash flow, if any, distributable
to those Shares will be distributed to the managing shareholders. No Incentive
Shares have been issued by the managing shareholders.
Each issued and outstanding Incentive Share has voting rights equal to one
Investor Share.
9. Potential Investment in UK Landfill Gas Plants
On June 30, 1999, Trust V entered into agreements with the stockholders of
Combined Landfill Projects Limited ("CLP"), of London, England, for a $16.1
million purchase of 100% of the equity interest in six landfill gas power
plants, as well as the rights to develop and construct another 20 landfill gas
plants in Great Britain. The estimated cost of the package of completed plants
and the 20 developmental sites, if all the developmental plants are built, is
$36 to $38 million. Trust V supplied the first $16.1 million of the purchase
price and developmental equity and the Fund will supply the remainder of the
developmental equity. To the extent that the Fund supplies capital, it will
receive an undivided interest in the entire package of operating and
developmental projects.
Report of Independent Certified Public Accountant
To the Board of Directors and Stockholders
ZAPWORLD.COM
We have audited the accompanying consolidated balance sheet for ZAPWORLD.COM and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provided a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly, in
all material respects, the consolidated financial position of ZAPWORLD.COM and
subsidiaries as of December 31, 1999, and the consolidated results of their
operations and their cash flows for each of the years in the two year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
GRANT THORNTON, LLP
San Francisco, California
March 1, 2000
ZAPWORLD.COM and Subsidiaries
Consolidated Balance Sheet
December 31, 1999
(Hundreds)
ASSETS
CURRENT ASSETS
Cash .................................................... $3,183,900
Accounts receivable, less allowance
for doubtful accounts of $35,000 ....................... 352,700
Inventories ............................................. 1,725,100
Note receivable ......................................... 20,000
Prepaid expenses and other assets ....................... 303,000
----------
Total current assets .................................. 5,584,700
PROPERTY AND EQUIPMENT - less accumulated depreciation ..... 350,300
----------
OTHER ASSETS
Patents & Trademarks, less accumulated amortization ..... 1,176,100
Goodwill ................................................ 112,200
Advance to retail stores and technology companies ....... 478,800
Deposits ................................................ 24,500
----------
Total other assets ................................ 1,791,600
Total assets ...................................... $7, 726,600
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................ $ 742,200
Accrued liabilities ..................................... 367,900
Current maturities of long-term debt .................... 15,300
Current maturities of obligations under capital leases .. 9,000
----------
Total current liabilities ......................... 1,134,400
OTHER LIABILITIES
Long-term debt, less current maturities ................. 24,200
Obligations under capital leases, less current maturities 13,500
Total other liabilities ........................... 37,700
STOCKHOLDERS' EQUITY
Preferred stock, authorized
10,000,000 shares; no shares
issued or outstanding Common stock,
authorized 20,000,000 shares of
no par value; issued and outstanding 5,109,180 .......... 12,053,200
Accumulated deficit ..................................... (5,118,100)
Unearned compensation ................................... ( 95,800)
---------
6,839,300
Less: notes receivable from shareholders ................. (284,800)
Total stockholders' equity.......................... 6,554,500
Total liabilities and stockholders' equity .................. $7,726,600
The accompanying notes are an integral part of the consolidated financial
statements.
3
ZAPWORLD.COM and Subsidiaries
Consolidated Statements of Operations
Year ended December 31, 1998 and 1999
(Hundreds, except shares and per share
amounts)
1999 1998
----- ----
NET SALES ........................... $ 6,437,200 $ 3,518,600
COST OF GOODS SOLD ................... 4,446,400 2,391,300
----------- -----------
GROSS PROFIT ........... 1,990,800 1,127,300
OPERATING EXPENSES
Selling .......................... 967,700 1,186,700
General and administrative ....... 979,200 1,945,000
Research and development ......... 202,600 364,600
3,496,300 2,149,500
LOSS FROM OPERATIONS ................. (1,505,500) (1,022,200)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense ................. (100,300) (267,300)
Other income ..................... 81,000 --
Miscellaneous .................... -- 13,900
----------- -----------
(186,300) (86,400)
LOSS BEFORE INCOME TAXES (1,691,800) (1,108,600)
----------- -----------
PROVISION FOR INCOME TAXES 800 800
----------- -----------
NET LOSS ............... $(1,692,600) $(1,109,400)
============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.43) $ (0.42)
========= =========
SHARES USED IN CALCULATION OF
NET LOSS PER SHARE 3,927,633 2,614,563
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
ZAPWORLD.COM and Subsidiaries
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1999
Common Stock Accumulated Unearned Note
Receivable
Shares Amount Deficit Compensation From Total
and services Shareholder
(Hundreds, except shares)
Balance, January 1, 1998 2,542,700 $3,168,900 $(2,316,100) $ $ $852,800
Issuance of common stock
in connection with direct
public offering at $6 per
share, net of expenses of
$91,000 78,800 383,300 - 383,300
Fair value of stock options
granted to non-employees 17,600 - 17,600
Exercise of stock options 15,000 15,000 - 15,000
Conversion of notes payable
and accrued interest into
common stock at $5.25 2,700 14,300 - 14,300
Issuance of warrants in
connection with debt
payment 61,800 - 61,800
Stock issued for current
and future services 25,500 150,300 - 150,300
Net loss - - (1,109,400) (1,109,400)
-------------------------------------------------------------------------
Balance, December 31, 1998 2,664,700 3,811,200 (3,425,500) - - 385,700
Issuance of common stock:
Cash 29,833 177,900 177,900
Private placement, net
of expenses of $613,547 746,119 1,720,600 1,720,600
Acquisitions 279,600 2,264,100 2,264,100
Advance to retail stores
& technology co.'s 57,803 406,300 406,300
Employee stock purchase plan 1,139 5,600 5,600
Repurchase of shares (1,785) (10,700) (10,700)
Services 27,479 140,900 140,900
Litigation settlement 8,666 50,000 50,000
Conversion of debt 165,111 664,700 664,700
Exercise of employee stock
options 559,086 423,400 423,400
Exercise of non-employee
stock options 571,429 2,000,000 2,000,000
Fair value of stock options
issued to employees - 1,700 1,700
Fair value of stock options
and warrants issued to
non-employees - 135,000 135,000
Stock options and warrants
issued for future compensation
and services - 262,500 (95,800) 166,700
Note receivable from shareholders (284,800) (284,800)
Net loss - - (1,692,600) - - (1,692,600)
----------------------------------------------------------------------------
Balance, December 31, 1999 $5,109,180 12,053,200 $(5,118,100) $(95,800) $(284,800) $6,554,500
============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999
(Hundreds)
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss ................................... $(1,692,600) $(1,109,400)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 124,000 86,500
Allowance for doubtful accounts .......... -- (30,000)
Issuance of common stock for services
rendered ................................ 140,900 150,300
Issuance of common stock for litigation
settlement .............................. 50,000 --
Issuance of stock options for services
rendered ................................ 136,700 17,600
Noncash charges & settlement of debt ..... 154,200 --
Amortization of fair value of warrants ... 30,900 30,900
Changes in:
Accounts receivable .................. (68,900) (192,100)
Inventories .......................... (877,700) (366,600)
Prepaid expenses and other assets .... 24,100 (32,200)
Deposits ............................. (12,600) 1,600
Accounts payable ..................... 312,400 172,600
Accrued liabilities and customer
deposits ............................ 217,200 (36,600)
----------- -----------
Net cash used in operating activities ....... (1,461,400) (1,307,400)
Cash flows from investing activities:
Purchases of property and equipment ........ (188,100) (97,800)
Purchase of American Scooter and
Cycle Rental .............................. (70,000) --
Purchase of Big Boy Bicycles ............... (15,200) --
Proceeds from emPower acquisition .......... 1,033,000 --
Payment advances for acquisitions .......... (72,500) --
Issuance of note receivable ................ (20,000)
Purchase of intangibles .................... (66,200) (64,100)
----------- ---------
Net cash provided by (used in) investing .... 601,000 (161,900)
Cash flows from financing activities:
Sale of common stock, net of stock
offering costs ............................ 1,812,500 --
Issuance of common stock under
employee purchase plan .................... 5,600 --
Proceeds from issuance of long-term debt ... (361,900) 1,280,800
Proceeds from exercise of stock options .... 2,423,400 (10,700)
Repurchase of common stock ................. (10,700) (16,000)
Advances on notes receivable to
shareholders .............................. (284,800)
----------- ------------
Payments on obligations under capital leases (15,100) --
----------- -----------
Net cash provided by financing activities ... 3,569,000 1,254,100
----------- -----------
NET INCREASE/(DECREASE) IN CASH ............ 2,708,600 (215,200)
Cash, beginning of year ..................... 475,300 690,500
----------- -----------
Cash, end of year ........................... $ 3,183,900 $ 475,300
=========== ===========
7
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (contd.)
Years ended December 31, 1999
1999 1998
---- ----
Supplemental cash flow information: Cash paid
during the year for:
Interest ............................................ $115,200 $ 69,400
Income taxes ....................................... 800 800
Non-cash investing and financing activities:
Conversion of debt into common stock ............... 475,400
Conversion of accounts payable into common stock ... 35,100
Equipment acquired through capital lease obligations 26,700
Notes payable used to exercise stock options ....... 32,300
Issuance of common stock upon acquisition of
American Scooter and Cycle Rental, Big Boy Bicycles,
and emPower Corporation .......................... 2,311,700
Assets and liabilities recognized upon
acquisition of American Scooter and
Cycle Rental, Big Boy Bicycles, and empower
Corporation
Cash ............................................. 1,033,000
Inventories ...................................... 213,500
Prepaid expenses and other ........................ 56,400
Property and equipment ........................... 70,000
Patent ........................................... 1,154,600
Accounts payable ................................. 130,600
The accompanying notes are an integral part of the consolidated financial
statements.
8
ZAPWORLD.COM and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
o Nature of Operations
ZAPWORLD.COM (the "Company" or "ZAP") was incorporated in California in
September, 1994 under its original name "Zap Power Systems". The name was
changed on May 16, 1999. ZAP designs, manufactures, and distributes
electric bicycle power kits, electric bicycles and tricycles, and other
personal electric transportation vehicles. Company products are sold
directly to end-users and to distributors throughout the United States
and the world.
o Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company, ZAPWORLD Stores, Inc., and emPower Corporation. ZAPWORLD
Stores, Inc. and emPower Corporation are 100% owned by ZAPWORLD.COM. All
significant inter-company transactions and balances have been eliminated.
o Revenue Recognition
The Company recognizes income when products are shipped.
o Inventories
Inventories consist primarily of raw materials, work-in-process, and
finished goods and are carried at the lower of cost (first-in, first-out
method) or market.
o Property and Equipment
Property and equipment are stated at cost and depreciated using
straight-line and accelerated methods over the assets' estimated useful
lives. Costs of maintenance and repairs are charged to expense as
incurred. Significant renewals and betterments are capitalized. Estimated
useful lives are as follows:
Machinery and equipment 7 years
Equipment under capital leases 5 years
Demonstration bicycles 2 years
Office furniture and equipment 7 years
Vehicle 5 years
Leasehold improvements 15 years or life of lease,
whichever is shorter
o Patents & Trademarks
Patents & Trademarks consist of costs expended to perfect certain patents
and trademarks acquired in the emPower acquisition. These costs will be
amortized over an estimated useful life of ten years.
o Goodwill
Goodwill consists of the excess consideration paid over net assets. This
asset will be amortized using the straight-line method over a ten-year
period.
o Income Taxes
The Company uses an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future bases on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount
9
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change in deferred tax assets
and liabilities during the period.
o Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management of the Company to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, as well as revenues and expenses during
the reporting period. The amounts estimated could differ from
actual results.
o Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. The fair value of a
financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. For certain
of the Company's financial instruments, including cash, accounts
receivable and accounts payable, the carrying amount approximates fair
value because of the short maturities. The carrying amount of the bank
note payable and current notes payable approximate fair value as current
interest rates available to the Company for similar debt are
approximately the same. The fair value of related party debt is
impracticable to determine.
o Net Loss Per Common Share
Net loss per common share, basic and diluted, has been computed using
weighted average common shares outstanding. The effect of outstanding
stock options and warrants has been excluded from the dilutive
computation, as their inclusion would be anti-dilutive (see note F).
o Segment Information
In 1999, the company adopted SFAS No.131, "Disclosures about Segments of
an Enterprise and related Information". The Company operates in one
reportable segment, the design, assembly, manufacture and distribution of
electric bicycle power kits, electric bicycles and tricycles, electric
scooter, electric motorcycles and other personal electric transportation
vehicles.
o Reclassification
Certain reclassifications have been made to the December 31, 1998
information to conform to the December 1999 presentation.
NOTE B - INVENTORIES
Inventories consisted of the following at December 31, 1999:
Raw materials $ 661,700
Work-in-process 349,200
Finished goods 714,200
-----------
$ 1,725,100
10
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1999:
Machinery and equipment $ 187,000
Computer Equipment 209,600
Demonstration bicycles 89,600
Office furniture and equipment 52,000
Leasehold improvements 78,400
Vehicle 97,600
---------
714,200
Less accumulated depreciation and amortization 363,900
$ 350,300
NOTE D - ADVANCE TO RETAIL STORES AND TECHNOLOGY COMPANIES
During the year ended December 31, 1999 the Company issued shares common
stock and paid cash as advances toward the acquisition of retail stores and
technology companies. The Company issued 57,803 shares of common stock in
the amount of $406,300 and paid cash in the amount of $75,500.
NOTE E - PROVISION FOR INCOME TAXES
1999 1998
---------- -----------
Current tax expense
Federal $ - $ -
State 800 800
---------- -----------
$ 800 $ 800
========== ===========
Significant components of the Company's net deferred tax assets as of
December 31, 1999 are as follows:
Tax loss carryforward .......... $ 1,819,600 $ 1,263,700
Inventory capitalization ....... (99,100) (22,000)
Other .......................... (70,800) (27,400)
----------- -----------
Total .......................... 1,649,700 1,214,300
Less valuation allowance ....... (1,649,700) (1,214,300)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The Company has available carry forward of approximately $4,758,300 and
$2,819,400 of federal and state net operating losses, respectively, expiring
through 2019. The Tax Reform Act of 1986 and the California Conformity Act
of 1987 impose restrictions on the utilization of net operating losses in
the event of an "ownership change" as defined by Section 382 of the Internal
Revenue Code. There has been no determination whether an ownership change,
as defined, has taken place. Therefore, the extent of any limitation has not
been ascertained.
A valuation allowance is required for those deferred tax assets that are
not likely to be realized. Realization is dependent upon future earnings
during the period that temporary differences and carry forwards are expected
to be available. Because of the uncertain nature of their ultimate
utilization, a full valuation allowance is recorded against these deferred
tax assets. The valuation allowance increased $435,400 in 1999 and $386,700
in 1998.
The difference between the income tax expense at the federal statutory rate
and the Company's effective tax rate is as follows:
1999 1998
---- ----
Statutory federal income tax rate 34% 34%
State income tax rate 6 6
Valuation allowance (40) (40)
---- ----
-% -%
11
NOTE F - STOCK OPTIONS AND WARRANTS
Options to purchase common stock are granted by the Board of Directors under
three Stock Option Plans, referred to as the 1999, 1996 and 1995 plans.
Options granted may be incentive stock options (as defined under Section 422
of the Internal Revenue Code) or nonstatutory stock options. The number of
shares available for grant under the 1999, 1996 and 1995 Plans are
1,500,000, 600,000 and 750,000, respectively. Options are granted at no less
than fair market value on the date of grant, become exercisable as they vest
(over a 2 or 3 year period) and expire ten years after the date of grant.
Option activity under the three plans is as follows:
1999 Plan 1996 Plan 1995 Plan
Wtd Avg Wtd Avg Wtd Avg
Number Exercise Number Exercise Number Exercise
of Shares Price Of Shares Price of Shares Price
----------------- ------------------ ------------------
Outstanding at
12/31/97 383,500 1.38 446,300 0.56
Granted 20,000 4.31 - -
Exercised (12,500) 1.00 - -
Canceled (26,500) 1.48 (27,400) 0.40
12/31/98 - - 364,500 1.55 418,900 .56
Outstanding at
Granted 481,000 6.33 35,000 4.06 - -
Exercised (586) 5.00 (259,500) 1.15 (299,000) 0.40
Forfeited (1,000) 5.00 (14,500) 3.50 (49,900) 1.00
Outstanding at
12/31/99 479,414 6.34 125,500 2.85 70,000 0.93
The weighted average fair value of all options granted during the years ending
December 31, 1999 and 1998 was $4.33 and $3.66 respectively.
The following information applies to employee incentive stock options
outstanding at December 31, 1999:
Plan: 1999 1996 1995
Range of exercise prices $5.00- $7.00 $1.00-$1.00 $3.68-$5.25 $1.00-$1.00
Options outstanding 70,000 479,414 47,500 78,000
Weighted average exercise
price 6.34 1.00 3.98 1.00
Weighted average remaining
life (years) 9.79 6.58 8.03 6.50
Options exercisable 46,833 47,500 140,446 70,000
Weighted average exercise
price 6.31 1.00 3.97 1.00
The company granted stock options and warrants to purchase common stock to
non-employees of the company. The options and warrants have exercise prices
ranging from $3.02 - $6.36.
The Company granted 671,429 in options and warrants in connection with the
private placement, 200,000 in connection with the emPower acquisition,
100,000 in connection with placement fees, and 167,000 to other
non-employees.
12
The Company recorded the non-statutory options and warrants based on the
grant date for value in accordance with FAS 123. The grant date fair value
of each stock option was estimated using the Black-Scholes option-pricing
model. The company recorded expense in the amount of $135,000 and $48,500
for the year ended December 31, 1999 and 1998, respectively. As of December
31, 1999 the Company has recorded prepaid expense in the amount of $166,700
for future services.
Options and warrant activity for non-employees is as follows:
Weighted
Avg.
Outstanding at 12-31-97 46,000 $4.33
Granted 82,800 4.86
Exercised (2,500) 1.00
------------- -------------
Outstanding at 12-31-98 126,300 4.74
Granted 1,138,429 4.58
Exercised (571,429) 3.50
Forfeited (64,300) 4.75
------------- -------------
Outstanding at 12-31-99 629,000 5.51
============= =============
The Company accounted for stock options and warrants under the policy of APB
25 "Accounting for Stock Issued to Employees". The Company has adopted the
disclosure only provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation (SFAS 123)". Accordingly, no
compensation expense has been recognized for stock options issued during
1999 and 1998. Had compensation cost for the Company's options been based on
the fair value of the awards at the grant date consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have approximated the following proforma amounts:
1999 1998
------------- -------------
Net loss - as reported $ (1,692,600) $ (1,109,400)
Net loss - pro forma (2,686,700) (1,254,600)
Loss per share - as reported (.43) (.42)
Loss per share - pro forma (.68) (.48)
The fair value of each option and warrant is estimated on date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 1998
---------- -----------
Dividends None None
Expected volatility 86.00% 100%
Risk free interest rate 6.00% 6.00%
Expected life 5 years 10 years
In connection with the issuance of $800,000 of notes payable in 1998, the
Company issued 20,000 warrants at $4.00 per share, to purchase the Company's
common stock, to an entity that assisted the Company in arranging the
financing. The warrants are immediately exercisable and expire September,
2001. The fair value of warrants at the time of issuance was $61,800 and is
being amortized as additional interest expense over the term of the debt.
Amortization expense of $30,900 was recorded for both 1998 and 1999.
13
NOTE G - MAJOR CUSTOMERS and VENDORS
During 1999, one customer accounted for $680,100 or 11% of the Company's
net sales. During 1998, one customer accounted for $617,000 or 17.5% of the
Company's net sales. The Company ceased selling to this customer in late
1998.
During 1999, one vendor accounted for $798,600 or 12% of the Company's
supplies and materials. For the year ended December 31, 1998 one vendor
accounted of $440,000 or 7%,of the Companies supplies and materials.
NOTE H - COMMITMENTS
The Company rents warehouses and office space under leases that expire in
June 2001. The monthly rent of $24,100 is adjusted annually to reflect the
average percentage increase in the Consumer Price Index. An option exists to
extend the lease for an additional five-year period. Rent expense under this
lease was $54,100 and $52,800 in 1998 and 1997, respectively.
Future minimum lease payments on the leases are as follows:
Year ending December 31,
2000 $320,600
2001 222,600
2002 138,300
2003 115,200
2004 and thereafter 54,300
--------
Total $851,000
========
NOTE I - PERFERRED STOCK
The Board of Directors authorized 10,000,000 shares of Preferred Stock in
December 1999. No financial features (participation in dividends, conversion to
warrants/common stock etc.) have been specified for these "indeterminate"
preferred shares to date.
NOTE J - ACQUISITIONS
On December 30, 1999, the Company purchased all of the common stock of emPower,
Inc., a designer and manufacturing business of proprietary electric scooters,
for 265,676 shares of its common stock. The Company issued warrants to emPower's
shareholders to purchase an aggregate of 200,000 shares of the Company's common
stock. The warrants expire three years after issuance. The acquisition has been
accounted for as a purchase at $5.75 per share. The purchase was allocated to
the assets acquired, including patents, and liabilities assumed based on their
estimated fair values. The acquisition resulted in no goodwill. Results of
operations for emPower have been included with those of the company for periods
subsequent to the date of acquisition.
The purchase price of emPower was allocated as follows
Cash ................. $ 1,033,000
Inventories .......... 96,300
Property and equipment 64,100
Patents .............. 1,042,400
Liabilities assumed .. (54,200)
-----------
$ 2,181,600
Consideration paid:
Common stock ......... $ 2,181,600
14
In September 1999, the Company purchased all assets of Big Boy Bicycles and
assumed certain liabilities. The company issued 1,000 shares of common stock and
paid $15,165 in cash. The purchase price was allocated to assets acquired and
liabilities assumed based on their estimated fair value. Results of operations
for Big Boy Bicycles have been included with those of the Company for the
periods subsequent to the date of acquisition.
The purchase price of Big Boy Bicycles was allocated as follows:
Inventories .......... $ 73,800
Property and equipment 4,400
Goodwill ............. 1,300
Expenses ............. 1,900
Liabilities assumed .. (59,800)
$ 21,600
Consideration paid:
Cash ................. $ 15,200
Common stock ......... 6,400
$ 21,600
In July 1999, the Company purchased certain assets and assumed certain
liabilities of American Scooter and Cycle Rental. The Company issued 12,924
shares of common stock and paid $70,000 in cash. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for American Scooter and Cycle
Rental have been included with those of the company for periods subsequent to
the date of acquisition.
The purchase price of certain assets and liabilities of American Scooter and
Cycle Rental were allocated as follows:
Inventories .......... $ 43,300
Property and equipment 1,500
Goodwill ............. 113,300
Expenses ............. 4,600
Liabilities assumed .. (16,600)
$ 146,100
Consideration paid:
Cash ................. $ 70,000
Common stock ......... 76,100
$ 146,100
The above operations represent 5% of total revenues for the year ended December
31, 1999.
NOTE K - SUBSEQUENT EVENTS
On January 20, 2000, the Company purchased all of the common stock of Zap of
Santa Cruz, Inc. a California corporation, for $25,000 in cash and 8,803 shares
of the Company's common stock. The acquisition will be accounted for as a
purchase. The purchase price is approximately $125,000 and will be allocated to
add the assets acquired and liabilities assumed based on their estimated fair
values. The acquisition closed in the first quarter of calendar year 2000.
On February 29, 2000, the Company purchased all of the common stock of Electric
Vehicle Systems, Inc., a California corporation, for $20,000 in cash and 25,000
shares of the Company's common stock. The acquisition will be accounted for as a
purchase. The purchase price is approximately $285,000 and will be allocated to
the net assets acquired and liabilities assumed based on the estimated fair
value. The acquisition closed in the first quarter of calendar year 2000.