Item 1. Business.
Forward-looking statement advisory
This Annual Report on Form 10-K, as with some other statements made by 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 and the business climate. 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 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 (the "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. The Fund's offering began on February 9, 1998 and was discontinued in April 2000.The offering has raised approximately $65,800,000. Net of offering fees, commissions and expenses, the offering had provided as of that date approximately $54,600,000 for investments in the development and acquisition of Projects and operating expenses. The Fund has 1,182 record holders of Investor Shares (the "Investors").
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. Power VI Co has assigned and delegated all of its rights and responsibilities to Ridgewood Power and is essentially a shell 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. 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 shareholders. The Independent Panel Members do not exercise general oversight of the managing shareholders 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 Shareholders 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 Shareholders.
Robert E. Swanson and certain Swanson family trusts own 100% of the equity of the following entities:
o Ridgewood Securities Corporation - Placement Agent ("Ridgewood Securities"); o Ridgewood Power Management, LLC - Operates the Projects owned by the Fund and six other trusts ("RPM"); o Ridgewood Power LLC - Managing Shareholder of seven trusts ("Ridgewood Power"); o Ridgewood Energy Holding Corporation - Corporate Trustee for all six trusts; and o Ridgewood Capital Management LLC - A marketing affiliate and manager of six venture capital funds ("Ridgewood Capital").
Mr. Swanson has sole voting and investment power over the Swanson family trusts and is the sole manager, chief executive officer of the above entities.
In addition, the Fund is affiliated with the following trusts organized by the Ridgewood Power:
o Ridgewood Electric Power Trust I ("Power I"); o Ridgewood Electric Power Trust II ("Power II"); o Ridgewood Electric Power Trust III ("Power III"); o Ridgewood Electric Power Trust VI ("Power IV"); o Ridgewood Electric Power Trust V ("Power V" or "Trust V"); and o Ridgewood/Egypt Fund ("Egypt Fund").
(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 has invested in Projects that provide long-term cash flows. Its investments are 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 invested in a portfolio of energy and infrastructure Projects located in the United States, the United Kingdom and Egypt, including small hydroelectric projects in California and the eastern U.S., an equity investment in ZapWorld.Com, a manufacturer of electric bicycles, landfill gas electric generating Projects located in England and Scotland and water desalination and electric generating Projects located at resorts in Egypt. The Fund will not invest in nuclear power facilities.
(2) The Fund's Investments.
(i) United Kingdom Landfill Projects
The Fund and Power V have organized Ridgewood U.K. Limited, an English limited company ("Ridgewood U.K.") as a joint venture to acquire (through subsidiaries) certain operating landfill gas generating projects located in England and Scotland (the "U.K. Projects").
To date, Ridgewood U.K. has acquired 10 U.K. Projects housing a total installed capacity of approximately 20 megawatts. Ridgewood U.K. also holds an option to acquire up to an additional 21 developmental projects (representing approximately 22 megawatts) to the extent that such additional projects are approved by Ridgewood U.K. and successfully completed. The total equity provided by Ridgewood U.K. to acquire the U.K. Projects is approximately $19 million, of which $16 million was furnished by Trust V and $3 million was funded by the Fund. The remaining portion of the purchase price for the U.K. Projects (approximately $9.5 million) was furnished under a 14-year credit facility provided to Ridgewood U.K. subsidiaries by The Bank of Scotland. Ridgewood Power estimates that seven additional projects requiring approximately $5 million in additional equity will become available to Ridgewood U.K. through the end of 2001.
Each of the Fund and Power V share an undivided interest in all of the U.K. Projects in proportion to the amounts of capital contributed by each of Trust V and the Fund for the acquisition of such projects.
The following is a list of the U.K. Projects owned by Ridgewood U.K. as at December 31, 2000:
Installed Capacity Project Name Location (Megawatts) - ------------------------ ------------------- -----
Chelson Meadow ......... Devon, England 2.85 Chelson Meadow II ...... Devon, England 0.95 United Mines ........... Cornwall, England 2.85 Whiney Hill ............ Lancashire, England 3.10 Belhouse ............... Essex, England 2.85 Summerston ............. Glasgow, Scotland 2.85 ----- Total Installed Capacity 15.45
Since January 1, 2001, Ridgewood U.K. has acquired an additional four projects:
Installed Capacity Project Name Location (Megawatts) - ------------------------ ----------------------- ----
Queens York ............ Lancashire, England 1.64 Beighton ............... Sheffield, England 0.95 Cotesbach .............. Leicestershire, England 1.22 Skelbrooke ............. Yorkshire, England 0.95 ---- Total Installed Capacity 4.76
Operations and maintenance services for all the U.K. Projects are provided by Ridgewood CLP Management Limited, an English limited company owned by the Trust and by The Growth Fund ("Ridgewood Management"). Ridgewood Management has subcontracted such responsibilities to CLP Services Limited ("CLPS"), an English limited company which is affiliated with the development company which developed the projects and sold them to Ridgewood U.K. Under such subcontract, CLPS provides all operational and maintenance services for a fixed amount (approximately 1.2(cent) per kilowatt hour produced) plus an additional amount of approximately $112,000 per year for record keeping and administrative services performed for Ridgewood U.K. and the various subsidiaries which hold title to the projects. Such subcontract may be terminated by Ridgewood U.K. if the projects fail to meet certain agreed upon performance standards (generally, 90% of projected cumulative project output).
The Fund and Power V began investigating Egyptian opportunities in late 1998. The two Trusts organized Ridgewood Near East Holdings, LLC, a New Jersey limited liability company ("Holdings") as a holding company for their Egyptian investments and to date have contributed approximately $28,250,000 to Holdings. The Fund and Trust V own equity in Holdings in proportion to the capital they have contributed. Holdings in turn owns all of the equity in the Egyptian operating subsidiaries, including Ridgewood Egypt For Infrastructure LTD ("REI"). Donald Stewart, who is not an employee of Ridgewood Egypt acts as its consultant. 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 equal to 4% of the Project's cost. Since late 1998, the Fund and Power V have investigated and developed projects to supply electricity and potable water to the tourist industry on the Red Sea in Egypt. These projects consist of electric generating plants supplying either a single hotel or a series of hotels connected by a distribution network, reverse osmosis seawater desalination plants supplying either a single hotel or a series of hotels by a pipeline and combinations of the above.
As of January 31, 2001, the Fund and Power V together had 15 water plants constructed or under development, with a total capacity of 12,530 cubic meters per day of potable water production (one cubic meter equals 264.2 U.S. gallons) and 6 electric generation plants constructed or under development with a total capacity of 23,400 kilowatts. When all of the Egyptian Projects contemplated are fully completed, which is estimated to be April 30, 2001, the total investment in these projects will be approximately $27,265,000.
REI has identified additional projects, which it considers to provide attractive returns and long-term growth potential. These projects include:
1) The acquisition of a water desalination plant with a 26 mile long pipeline serving approximately 50% of the area of Sharm El Sheikh, an internationally known resort area at the southern tip of the Sinai peninsula.
2) The construction of a 528,000 gallons per day water desalination plant in Hurghada, which will serve small hotels and commercial businesses.
3) The construction of a 528,000 gallons per day water desalination plant and 5 mile long pipeline to serve a multi-hotel, tourist development south of Hurghada.
4) Expansion of existing water and electric facilities as existing hotels are expanded and new hotels constructed.
The Fund and Power V do not have any additional funds for investments. Accordingly, the Managing Shareholder has organized the Ridgewood/ Egypt Fund, which is currently offering securities. The funds raised from Ridgewood/Egypt's offering will be used to fund these additional Projects.
REI currently provides several services in Egypt:
o Construction of electric generation and/or water desalination plants for individual hotels.
o Construction of electric generation and/or water desalination plants coupled with electric distribution and/or water pipelines in new developing areas to serve multiple hotels.
o Purchase of existing electric generation and/or water desalination plants operating at existing hotels.
o Long-term operation of these electricity and water facilities.
REI produces electric power with diesel engine driven generators only. Although Egypt is a producer of natural gas, the isolated tourist areas where the Egyptian Projects are located do not have natural gas available in required quantities. Diesel fuel is readily available throughout Egypt and is supplied at a fixed price through government agencies. Diesel engine driven generators are a well-proven technology over eighty years old. There are many qualified suppliers throughout the world.
All of REI's water desalination plants employ reverse osmosis equipment ("R/O"). This is a process where seawater or brackish water (water with less salt than seawater but which is not drinkable or palatable) is pumped at high pressure (1,000 pounds per square inch) through thin, porous membranes. The pressurized water passes through but the salt and other large molecules remain behind and thus are separated from the purified water. This process has been in existence for over thirty years and is widely used throughout the world. There are many suppliers of the R/O equipment and the membranes. The Company primarily purchases R/O equipment from a U.S. company named Waterlink, because it believes Waterlink offers the best combination of price, service and quality. However the Company is not dependent on Waterlink and can build plants using other manufacturers' equipment.
REI's operating expenses, which are charged against the projects' cash flow, include, development and administrative, operation and maintenance activities for all of its Egyptian Projects. Electric generation costs that are dependent on production volume include diesel fuel, consumables, and a maintenance reserve for preventative maintenance and major repairs. At the current time, over 80% of those costs are fuel costs. At current fuel costs, which include delivery, are fixed by the Egyptian government and are uniform throughout the country, the fuel used to generate one kilowatt-hour of electricity costs approximately 3.2 U.S. cents at current exchange rates. These estimates are based on averages and will vary based on location, maintenance needs, personnel costs and training, and other factors. All of REI's electricity sales contracts provide for a 100% cost pass-through as the price of diesel fuel changes.
The average cost to produce one cubic meter (264.3 gallons) of desalinated water from seawater, at current prices and exchange rates, is approximately $ .0024 per gallon.
Where REI supplies the electricity to the customer, REI provides the electricity for the R/O equipment and includes that electricity cost in the amount billed for water. Otherwise, the customer has the responsibility for providing electric power and bears the risk of electricity price changes.
Operating costs for processing brackish water are similar except for the amount of electricity used, which can be as low as 30% of the amount used to process seawater. Capital costs for brackish water processing tend to be significantly lower because less capable equipment can be used. A R/O water desalination plant is automated and does not require a full time operator in attendance. Prompt response to problems is important, however, if the customer is not to be left without water. REI employs a central team of water specialists who visit each R/O plant periodically to perform routine maintenance and who respond to any problems.
REI's projects generally sell their electricity and drinking water output under written, long-term contracts governed by Egyptian law. The community water projects sell water to a number of hotels or commercial and residential customers. In those cases, REI sells at a fixed, published price, which it may change based on market conditions. There is no formal regulatory authority that reviews those prices or which has authority to set them.
(iii) ZAP World.Com, Inc.
The Fund invested $2,050,000 in Ridgewood ZAP, LLC in March 1999 as a holding company for its investments in ZAP World.COM, 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".
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 June 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 Shareholders), both of whom have been elected to ZAP's Board of Directors.
Two of the Fund's other three investments, the U.K. Landfill Gas Projects and the Hydroelectric Projects, have long-term, formula price contracts for their output. While purchasing Projects with long-term contracts might 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 ZAPWORLD.COM. 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 in the eastern portion of Long Island, New York. See Item 12 -- Certain Relationships and Related Transactions for additional information.
(iv) Synergics, Inc. Acquisition
Beginning in late 1999, the Managing Shareholder of the Trust, began negotiations to buy nine existing hydroelectric generating plants from Synergics, Inc. ("Synergics"). In the course of negotiations and due diligence, the Managing Shareholder learned that one of Synergics' lenders had declared a payment default against Synergics and that the lender had agreed to discharge the debt at a substantial discount from the face amount if payment were made by the end of April 2000. In order to preserve the benefit of the lender's offer and to allow completion of the acquisition on favorable terms, Trust V and the Fund, through a joint venture, acquired the debt from the lender on April 28, 2000 for a payment of $17 million to the lender. The debt remains in default, but the joint venture is not exercising its remedies against Synergics or the Synergics subsidiaries pending the proposed acquisition described below.
The joint venture intends to acquire the Synergics hydroelectric generation business by forgiving the $17 million of outstanding debt and paying an additional $1 million to the shareholders of Synergics and paying up to an additional $1.7 million of Synergics' tax liabilities that might be incurred as a result of the sale of its assets. The structuring and closing of the acquisition is to be determined after a review of certain financial, contractual and tax considerations. Until the acquisition closes, Synergics has agreed to retain all working capital for the account of the joint venture and to allow the joint venture to approve all operational decisions and expenditures. Synergics is cooperating closely with the joint venture in making operational decisions.
However, although the joint venture currently intends to acquire the Synergics hydroelectric generation business as promptly as possible, neither the joint venture nor the Fund and Power V are obligated to acquire Synergics or any of its assets. Wayne L. Rogers, the president of Synergics, agreed to vote the stock of Synergics, Inc. beneficially owned by him (approximately 69% of the voting stock) in favor of a merger or other corporate reorganization as specified by the Fund and Power V that materially complies with the provisions outlined above.
Although the joint venture now owns $17 million of the senior debt of Synergics, there is approximately $11.725 million of debt owed to Fleet Bank, N.A. Trust V and the Fund are in discussions with Fleet Bank concerning the assumption of the Fleet debt in connection with the acquisition.
Trust V supplied $5 million of the capital used by the joint venture to acquire the debt and the Fund supplied the remaining $12 million. Any additional capital needed for the acquisition will be supplied to the joint venture by the Fund. Trust V and the Fund will own the joint venture in proportion to the capital each supplies and neither will have preferred rights over the other.
(v) Mediterranean Fiber Optic Project
In September 1999, Trust V and the 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 was 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.
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 was unable to find other equity investors for the venture and the venture ceased activity in the second quarter of 2000. Accordingly, the Fund wrote off its entire investment in the Project effective March 31, 2000.
(3) Project Operation.
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.
(4) Trends in the Independent Power and Other Industries
(i) Foreign Opportunities
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., is investing 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 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 Trust 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 Egyptian 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. REI is developing the Projects itself using local engineering personnel and contractors.
Environmental, construction, legal, and labor requirements are often unclear and can change unpredictably at any time. REI may find it difficult to enforce contracts and other legal obligations against local suppliers or customers. REI 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 REI 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 Egyptian 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 Egyptian Projects are single hotels 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 hotels or 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.
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 Trust has been organized with the intention to have a somewhat diversified portfolio of investments and because the Trust will be investing in lower-risk, lower-return foreign and U.S. power Projects as well.
(5) 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.
(6) Regulatory Matters.
The Fund's Projects located in the United States 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.
(i) Energy Regulation.
(A) PURPA. The Synergics Projects, which sell electric energy, are subject to certain energy regulation including the Public Utilities Regulatory Policies Act ("PURPA"), which provides incentives for the development of cogeneration facilities and small power production facilities meeting certain criteria ("Qualifying Facilities").
Qualifying Facilities under PURPA are generally exempt from the provisions of federal and state utility 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.
(B) 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. Although the Trust believes that the exemptive provisions of the 1992 Energy Act will not materially and adversely affect its business plan, the act may result in increased competition in the sale of electricity. (C) The 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.
The FPA also provides that any hydroelectric facility that is located on a navigable stream or that affects public lands or water from a government dam may not be constructed or be operated without a license from FERC. Certain facilities that were operating before 1935 are exempt, if the waterway is non-navigable, or "grandfathered" and do not require licenses so long as the facilities are not modernized or otherwise materially altered. Licenses are granted for 30 to 50 year terms.
(D) State Regulation. State public utility regulatory commissions have broad jurisdiction over Independent Power Projects which are not Qualifying Facilities under PURPA, and which are considered public utilities in many states. In states where the wholesale or retail electricity market remains regulated, Projects that are not Qualifying Facilities may be subject to state requirements to obtain certificates of public convenience and necessity to construct a facility and could have their organizational, accounting, financial and other corporate matters regulated 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 regulatory 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.
(ii) Environmental Regulation.
The construction and operation of Independent Power 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 Trust and Projects in which it invests 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 renewing 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, which sometimes result in extensive negotiations with regulatory agencies. Meeting the requirements of each jurisdiction with authority over a Project may require extensive modifications to existing Projects.
Title V of the Clean Air Act Amendments added a new permitting requirement for existing sources that requires all significant sources of air pollution to submit new applications to state agencies. Title V implementation by the states generally does not impose significant additional restrictions on the Trust's Projects, other than requirements to continually monitor certain emissions and document compliance. The permitting process is voluminous and protracted and the costs of fees for Title V applications, of testing and of engineering firms to prepare the necessary documentation have increased. The Fund believes that all of its facilities, which require Title V compliance, are or will be in compliance with such requirements.
The Fund's Projects must comply with many federal and state laws and regulations governing wastewater and storm water discharges from the Projects. These are generally enforced by states under "NPDES" permits for point sources of discharges and by storm water permits. Under the Clean Water Act, NPDES permits must be renewed every five years and permit limits can be reduced at that time or under re-opener clauses at any time. The Projects have not had material difficulty in complying with their permits or obtaining renewals. The Projects use closed-loop engine cooling systems which do not require large discharges of coolant except for periodic flushing to local sewer systems under permit and do not make other material discharges.
The Fund's Projects are subject to the reporting requirements of the Emergency Planning and Community Right-to-Know Act that require the Projects to prepare toxic release inventory release forms. These forms list all toxic substances on site that are used in excess of threshold levels so as to allow governmental agencies and the public to learn about the presence of those substances and to assess potential hazards and hazard responses. The Trust does not anticipate that this requirement will result in any material adverse effect on it.
The Managing Shareholders expect that environmental and land use regulations may become more stringent. The Fund and the Managing Shareholders have developed a certain expertise and experience in obtaining necessary licenses, permits and approvals, but will nonetheless rely upon qualified environmental consultants and environmental counsel retained by it to assist in evaluating the status of Projects regarding such matters.
(d) Financial Information about Foreign and Domestic Operations and Export Sales. In 2000, all revenues were generated by the Egyptian Projects. Earnings form the trust's investments in GFG, Synergics and ZAPWORLD.com are included in other income (expense) in the statement of operations. All plant and equipment included on the December 31, 2000 balance sheet are located in Egypt.
Historical results of the Egyptian Projects may not be indicative of those for future periods because additional Egyptian Projects may be acquired or come into service in 2001.
Projects or investments located in one country do not have material customers from any other country.
(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. REI has approximately 12 employees located in Egypt.
Item 2.
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 at march 30, 2001.
Approximate Square Ownership Ground Approximate Footage of Description Interests Lease Acreage Project of Projects Location in Land Expiration of Land (Actual Project or Projected)
U.K. England and Leased or 2014- less than n/a Landfill gas Landfill Scotland licensed 2015 10 acres fueled gene- ration plants
Egyptian Leased by n/a less than n/a Electric gen- Site in Egypt 10 acres erating or Joint venture* water desali- nation facil- ties
*Joint venture owned by the Fund and Power V.
The Fund believes that these properties are currently adequate for current operations at those sites.
Item 3.
Item 3. Legal Proceedings.
There are no material legal proceedings involving the Fund.
Item 4.
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 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Fund sold 658.1067 Investor Shares of beneficial interest in the Fund in its private placement offering, which concluded in April 2000. There is currently no established public trading market for the Investor Shares. 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. See Item 11(d) - Description of Registrant's Securities to be Registered - Restrictions on Transfer of Investor Shares. 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 Registration Statement, no Investor Shares are sellable under Rule 144 because the requirements of Rule 144(c) have not been met.
The Managing Shareholders are considering the possibility of a combination of the Fund and six other investment programs sponsored by the Managing Shareholder 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 shareholders 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 Trust or other programs.
(b) Holders
As of the date of this Annual Report on Form 10-K, there are 1182 record holders of Investor Shares.
(c) Dividends
The Fund made distributions as follows in 2000 and 1999:
Year ended December 31, 2000 1999 Total distributions to Investors ...... $3,465,001 $ 924,760 Distributions per Investor Share .... 5,265 1,642 Distributions to Managing Shareholders ...... 35,000 9,341
In January 2001, the Fund ceased making distributions as part of their preparations for a possible Liquidity Event. The Fund was financially capable of making some distributions but Ridgewood Power concluded that it would be more beneficial to Investors for the Fund to conserve capital in the highly volatile business climate and to have additional capital to finance a potentially expensive process. This does not mean that a Liquidity Event will necessarily occur or that distributions will necessarily resume if a Liquidity Event does not happen.
If distributions do resume, the Fund's policy is to make them 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.
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.
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, December 31, 1998 1999 2000
Interest income .. $ 494,002 $ 1,447,920 $ 2,601,646 Total revenue .... - - - -- $ 2,180,231 Net income (loss) (851,745) (980,540) $ (1,904,198) Net assets (shareholders' equity) ........ 24,354,681 45,657,426 $46,091,190 Total assets ..... 25,733,430 45,881,708 $53,174,689 Per Share of Trust Interest: Revenues ........ - - - - - - 3,313 Net income (loss) (2,869) (1,741) (2,893) Net asset value . 82,035 81,074 70,186 Distributions to Investors ........ 0 1,642(F1) 5,265
(F1) Approximate. Distributions varied based on number of shares and payment of Early Investor Incentive.
Item 7.
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 Fund uses the equity method of accounting for its investments in ZapWorld.com and the Mediterranean Fiber Optic Project/GFG. The Fund's investment in the Synergics Hydro projects is in the form of a note receivable and, accordingly, the Fund's earnings are in the form of interest income.
The Fund and Trust V also purchased a note receivable from Synergics, Inc. ("Synergics") for approximately $17 million. The joint venture intends to acquire nine hydroelectric dams owned by Synergics by forgiving the $17 million of outstanding debt and paying an additional $1 million to the shareholders of Synergics and paying up to an additional $1.7 million of Synergics' tax liabilities that might be incurred as a result of the sale of its assets.
Through December 31, 1999, the Fund used the equity method of accounting for its investment in the Egypt Projects. Beginning in the first quarter of 2000, the Fund made additional investments and acquired majority ownership of the Egypt Projects. As a result, effective January 1, 2000, the Fund has consolidated the financial position and results of operations. All the Fund's consolidated revenue and cost of sales relate to the Egypt Projects.
Outlook
ZapWorld.com, a publicly-traded California based corporation, sells a wide range of electric scooters, bicycles and vehicles. The Fund owns approximately 21% of the common stock of ZapWorld.com.
In Egypt, the Fund and Trust V have constructed or are developing 15 water desalinization plants and 6 electric generation plants. When development is complete, which is expected to occur in the second quarter of 2001, the total capacity of the water and power plants is expected to be approximately 3,300,000 U.S. gallons per day and 23.4 megawatts, respectively. Each plant has a contract with a hotel or group of hotels for the sale of the water or electricity produced from the plant. These contracts generally have terms of five to thirty years.
The Fund and Trust V also purchased a 25% interest in GFG. GFG expected to be the co-developer of a large Mediterranean fiber optic project which was scheduled to close in the second quarter of 2000. The Fund and Trust V expected to fund approximately $18 million of this Mediterranean Fiber Optic project when it closed. In the first quarter of 2000, the Fund determined that GFG would probably not be able to develop the Mediterranean Fiber Optic Project or any other project. Accordingly, the Fund wrote down its investment in the project to zero in the first quarter of 2000. GFG subsequently ceased operations.
Trust V, through a subsidiary, purchased six landfill gas fired plants in the United Kingdom which have contracts to sell the electricity to a quasi autonomous non-governmental organization at an inflation adjusted price for 15 years. In 2001, the Fund has provided additional funds to the subsidiary to acquire additional plants and expects to provide additional funds as more plants are developed. To the extent that the Fund provides funds, it will receive an undivided interest in the entire package of plants.
Results of Operations The year ended December 31, 2000 compared to the year ended December 31, 1999.
In 2000, the Fund had a net loss of $1,909,0000 as compared to a net loss of $981,000 in 1999. The 2000 net loss includes $1,448,000 of charges relating to the writedown of GFG. Excluding the writedown, the 2000 results would have reflected a loss of $461,000. The 2000 and 1999 results include the following results from projects:
Project 2000 1999 - ------------------------------------------------------------------ ZapWorld.com ....... (2) (1,342,000) (640,000) Egypt Projects (1) 12,000 (198,000) Mediterranean Fiber Optic Project (2) (50,000) (49,000) Synergics Projects (3) 883,000 --
(1) Earnings, net of minority interest, in 2000. Equity interest in loss of the project in 1999. (2) Equity interest in loss of the project. (3) Interest income
The Fund recorded a loss of $1,342,000 from ZapWorld in 2000 compared to a loss of $640,000 in 1999. The increase in the loss was due to increased operating expenses relating to ZapWorld.com's expansion in 2000 compared to 1999.
The Fund recorded $12,000 of net income related to the Egypt projects compared to $198,000 of losses in 1999. In 1999, all projects in Egypt were in the development stage whereas in 2000, the majority of these projects were in operation.
The Fund recorded losses of $50,000 and $49,000 in 2000 and 1999, respectively, related to its investment in GFG. GFG was not able to develop the planned Mediterranean Fiber Optic Project and subsequently ceased operations.
The Fund recorded interest income from the note related to the Synergics Projects of $883,000. The Fund acquired the note in April 2000.
Interest income at the Fund level increased to $1,718,000 from $1,448,000 in 1999 as a result of the higher average cash balances on hand during the year.
The Fund commenced charging a management fee upon the closing of the Fund offering in April 2000. The management fee for 2000 was $1,097,000. The investment fee charged on initial contributions decreased from $561,000 in 1999 to $200,000 in 2000 due to the closing of the fund offering in April 2000. Other Trust-level expenses in 2000 were comparable to 1999.
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 begun 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 expected to be the co-developer of a large Mediterranean fiber optic project that was scheduled to close in the second quarter of 2000.
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
In 2000 and 1999, the Fund's operating activities used cash of $2,934,000 and $1,626,000, respectively. The increase use was primarily a result of the management fee which commenced in April 2000.
In 1999, the Fund used $10,181,000 in its investing activities, primarily caused by the investments in ZapWorld.com, the Egypt Projects and the Mediterranean Fiber Optic Project/GFG. In 2000, the Fund used $23,688,000 in its investing activities, primarily caused by the investments in the Egypt Projects and the purchase of the Synergics note.
In 2000 and 1999, cash from financing activities was $6,218,000 and $22,283,000, respectively. The decrease was primarily due to the closing of the fund offering in April 2000.
During 2001, the Fund anticipates making additional investments in the Egypt Projects and the United Kingdom Landfill Gas Projects.
Other than investments of available cash in Projects, obligations of the Fund are generally limited to payment of Project operating expenses, payment of a management fee to the Managing Shareholders, payments for certain accounting and legal services and distributions to shareholders.
The Fund anticipates that, during 2001, its cash flow from operations and unexpended offering proceeds will be adequate to fund its obligations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures 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 consolidated Egyptian Projects investments in financial instruments are short term pound denominated obligations of large banks and trade accounts receivable and payable.
The Fund's primary market risk exposure is limited interest rate risk caused by fluctuations in short-term interest rates. The Fund's primary market risk exposure related to its consolidated Egyptian Projects is to fluctuations in the foreign currency exchange 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 balances and related weighted average interest rates by contractual maturity dates.
December 31, 2000 Expected Maturity Date
(U.S. $) Bank Deposits and Certificates of Deposit $14,436,000 Average interest rate 5.6%
(U.S. $) Bank Deposits denominated in Egyptian Pounds $893,000 Average interest rate 5.6%
Item 8.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Accountants ............................. Consoldiated Balance Sheets at December 31, 2000 and 1999 ............. Consolidated Statement of Operations for Years Ended December 31, 2000 and 1999 and Period from February 9, 1998 through December 31, 1998 ............................................F-4 Consolidated Statement of Changes in Shareholders' Equity and Consolidated Statement of Comprehensive Loss for Years Ended December 31, 2000 and 1999 and Period from February 9, 1998 through December 31, 1998........................................F-5 Consolidated Statement of Cash Flows for Years Ended December 31, 2000 and 1999 and Period from February 9, 1998 through December 31, 1998 .....................................................F-6 Notes to Consolidated Financial Statements .................... to
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.
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 Shareholder's current accountants, PricewaterhouseCoopers LLP, have been engaged by the Fund.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
(a) General.
As Managing Shareholders of the Fund, Ridgewood Power and Power VI Co have 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. A 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. Accordingly, Power VI Co is being maintained as a shell company and all of its rights and duties have been assigned to Ridgewood Power.
(b) Managing Shareholders.
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 Power I, Power II Power III, Power IV Power V, and the Egypt Fund 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 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 six privately offered venture capital funds (the Ridgewood Capital Venture Partners, Ridgewood Capital Venture Partners II and Ridgewood Capital Venture Funds III programs), and RPM. 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 Shareholders.
Robert E. Swanson, age 54, has also served as President of the Fund since its inception in 1991 and as President of RPM, the Fund, Power I, Power II, Power III, Power IV, Power V, and Egypt Fund 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 stockholder 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 Trust 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 42, has served as Executive Vice President of the Managing Shareholder, RPM, the Power I, Power II, Power III, Power IV, Power V, the Fund and Egypt Fund 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.
Martin V. Quinn, age 53, has been the Executive Vice President and Chief Operating Officer of Ridgewood Power since April 2000. Before that, he had assumed the duties of Chief Financial Officer of Ridgewood Power in November 1996 under a consulting arrangement. In April 1997, he became a Senior Vice President and Chief Financial Officer of Ridgewood Power and the Fund.
Mr. Quinn has over 30 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, LLP, and a Bachelor of Science degree in Accounting and Finance from the University of Scranton (1969).
Daniel V. Gulino, age 40, has been Senior Vice President and General Counsel of the Managing Shareholder since August 2000. He began his legal career as an associate for Pitney, Hardin, Kipp & Szuch, a large New Jersey law firm, where his experience included corporate acquisitions and transactions. Prior to joining Ridgewood, Mr. Gulino was in-house counsel for several large electric utilities, including GPU, Inc., Constellation Power Source, and PPL Resources, Inc., where he specialized in non-utility generation projects, independent power and power marketing transactions. Mr. Gulino also has experience with the electric and natural gas purchasing of industrial organizations, having worked as in-house counsel for Alumax, Inc. (now part of Alcoa) where he was responsible for, among other things, Alumax's electric and natural gas purchasing program. Mr. Gulino is a member of the New Jersey State Bar and Pennsylvania State Bar. He is a graduate of Fairleigh Dickinson University and Rutgers University School of Law - Newark.
Christopher I. Naunton, 36, has been the Vice President and Chief Financial Officer of the Managing Shareholder since April 2000. From February 1998 to April 2000, he was Vice President of Finance of an affiliate of the Managing Shareholder. Prior to that time, he was a senior manager at the predecessor accounting firm of PricewaterhouseCoopers LLP. Mr. Naunton's professional qualifications include his certified public accountant qualification in Pennsylvania, membership in the American Institute of Certified Public Accountants and a Bachelor of Science degree in Business Administration from Bucknell University (1986).
Mary Lou Olin, age 48, has served as Vice President of the Managing Shareholder, RPM, 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 Shareholders have 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 Shareholders. 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 Shareholders.
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 Shareholders, which is entitled to remove any officer at any time. Unless otherwise specified by the Managing Shareholders, the President of the Fund has full power to act on behalf of the Fund. The managing shareholders expect 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 Shareholders rather than as officers of the Managing Shareholders.
(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 shareholders 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 Shareholders 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 Shareholders have 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 Shareholders 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 Shareholders 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 shareholders or their Affiliates and the Fund, such as the Management Agreement or temporary advances of funds by the managing shareholder to the Fund. The managing shareholders, 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 shareholders 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 shareholders.
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 Shareholders certify 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 Shareholders at any time.
John C. Belknap, age 54, has been chief financial officer of three national retail chains and their parent companies. Currently, he is a managing director of Manticore Partners, LLC, a venture advisory and development firm. From July 1997 to August 1999, he was Executive Vice President and Chief Financial Officer of Richfood Holdings, Inc., a Virginia-based food distributor and retailer. From December 1995 to June 1997 Mr. Belknap was Executive Vice President and Chief Financial Officer of OfficeMax, Inc., a national chain of office supply stores. From February 1994 to February 1995, Mr. Belknap was Executive Vice President and Chief Financial Officer of Zal Corporation, a 1large and national jewelry retail 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. Prior to 1989, Mr. Belknap served as Chief Financial Officer of Seligman & Latz, Kay Corporation and its subsidiary, Kay Jewelers, Inc.
From 1979 to 1985, Mr. Belknap served as Chief Financial Officer of Kay Corporation, the parent of Kay Jewelers, Inc. ("KJI"), a national chain of jewelry stores and leased jewelry departments in major department stores. He served as Chief Financial Officer of KJI from 1974 to 1979. Mr. Belknap was a senior auditor at Arthur Young & Company (now Ernst & Young), a national accounting firm. Mr. Belknap earned BA and MBA degrees from Cornell University.
Dr. Richard D. Propper, age 50, 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.
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 first two venture capital funds sponsored by Ridgewood Capital. He receives a fixed consulting fee from those funds and contingent compensation from Ridgewood Capital.
Seymour (Si) Robin, age 73, 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.
(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.
(i) RPM.
RPM is controlled by Robert E. Swanson and owned by him and his family trusts. For U.S. 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 RPM, under the supervision of the Managing Shareholders, will provide the management, purchasing, engineering, planning and administrative services for the Project. RPM will charge the Fund at its cost for these services and for the Fund's allocable amount of certain overhead items. RPM shares space and facilities with the Managing Shareholder and its affiliates. To the extent that common expenses can be reasonably allocated to RPM, the managing shareholders may, but are not required to, charge RPM 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 Shareholders.
Initially, the Managing Shareholders do not anticipate charging RPM for the full amount of rent, utility supplies and office expenses allocable to RPM. As a result, both initially and on an ongoing basis the Managing Shareholders believe that RPM'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. RPM 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 RPM; and allocations will be made in a manner consistent with generally accepted accounting principles.
RPM 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. RPM 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 RPM, by the Managing Shareholders 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 shareholders and RPM; however, no amendment that materially increases the obligations of the Fund or that materially decreases the obligations of RPM 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 RPM are Mr. Swanson (President), Mr. Gold (Executive Vice President), Mr. Quinn (Executive Vice President and Chief Operating Officer), Mr. Gulino (Senior Vice President and General Counsel), Mr. Naunton (Vice President and Chief Financial Officer) and Ms. Olin (Vice President.
(j) Section 16(a) Beneficial Ownership Reporting Compliance
All individuals subject to the requirements of Section 16(a) have complied with those reporting requirements during 2000.
Item 11.
Item 11. Executive Compensation.
The Fund reimburses RPM at cost for services provided by RPM'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 1999 or 2000. Information as to the fees payable to the Managing Shareholder 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. The Independent Panel Members and the Managing Shareholder 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 Trust 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 Trust expenses incurred by it which are properly reimbursable under the Declaration.
Donald C. Stewart, age 55, is a consultant to the Fund and not an employee of the Managing Shareholders or any of its affiliates. However, he serves as Ridgewood International Development, LLC's Managing Director and chief operating officer. From 1994, he had served as an advisor and consultant to Ridgewood Power and was the principal person involved in finding, reviewing and negotiating acquisitions for the six Power Trusts. Mr. Stewart has 30 years of expertise in the field of independent power generation, fuel procurement, engineering and finance. Mr. Stewart spent the first ten years of his business career as a certified public accountant with a major international firm. He has been the Chairman of Vermont Gas Systems, a regulated public utility, Vice Chairman of Consolidated Power Company, a developer of large scale cogeneration projects and President of Hercules Engines, Inc., a manufacturer of industrial engines and electrical generation equipment. Mr. Stewart has a Bachelor of Science degree from Lehigh University.
Instead of salary, Mr. Stewart, and two other consultants to the Fund, Michael Patten and Zach Girges, receive a development fee of 4% and 3%,respectively, of the capital cost of each completed Egyptian Project at the time it goes into operation (a "closing fee"), for a total development fee of 10% of Project capital cost. Mr. Stewart, Mr. Patten and Mr. Girges are not required to continue providing services to REI after a Project is completed, but they are paid annual development fees of 4/10, 3/10 and 3/10 of one percent, respectively, of the capital cost of each Project. The annual fees are not deferred or modified based on the Projects' profits or losses.
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 and Ridgewood Power does not intend to make any.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Title Name of Amount and Nature of Percent of of Class Beneficial Owner Beneficial Ownership- Class
Investor Shares Seymour Robin* 10 Shares, direct 1.6% Robert E. Swanson 1 Share, through .2 Ridgewood Power
Total beneficialownership by directors,executive officers and Independent Panel Members* 11 Shares 1.7%
Management Share Robert E. Swanson 1 Share,through 100.0% Ridgewood Power and Power VI Co.
Listing of Mr. Robin, who is an Independent Panel Member, is not an admission that he is a director or executive officer of the registrant.
Ridgewood Power purchased for cash one full Investor Share. 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, no other Panel Members 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 shareholders were issued one Management Share in the Fund representing the beneficial interests and management rights of the Managing Shareholders in theirs capacity as the Managing Shareholders (excluding its interest in the Fund attributable to Investor Shares it acquired in the offering). The management rights of the managing shareholders 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
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 shareholders are described at Item 11(a) - Description of registrant's Securities to be Registered - Distribution and Dissolution Rights.
The Fund made distributions in 1999 and 2000 to Power VI Co totaling $9,300 and $35,000, respectively. The Fund paid fees to the Managing Shareholders and their affiliates as follows:
Fee Paid to 1998 1999 2000
Investment fee Ridgewood Power $577,813 $560,650 $199,500
Placement agent fee Ridgewood and sales commis- Securities sions Corporation $304,031 $188,842 $98,950
Management Fees Ridgewood --- --- $1,096,844 Power
Organizational, Ridgewood distribution and Power offering fee $1,775,798 $1,698,842 $442,790
Due diligence Ridgewood expenses(a) Power $868,208 $708,758 ---
(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 Shareholders' 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 Shareholders and RPM at cost for expenses and fees of unaffiliated persons engaged by the Managing Shareholders for Fund business and for certain expenses related to management of Projects.
Mr. Swanson is a director of ZAP. In September 1999, he purchased a franchise to distribute ZAP's products on eastern Long Island, New York and paid $10,000 to ZAP for the franchise.
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.
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, 2000.
(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.
10.I. Letter of Intent with Synergics, Inc. for acquisition of Hydroelectric Projects
10.J. Operating Agreement between Ridgewood Egypt for Infrastructure Projects, Ltd. and Ridgewood International Development LLC.
22. Subsidiaries of the Registrant
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 March 30, 2001 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 March 30, 2001 Robert E. Swanson Executive Officer
By:/s/ Martin V. Quinn Executive Vice President March 30, 2001 Martin V. Quinn and Chief Operating Officer
By:/s/ Christopher I. Naunton Vice President and Christopher I. Naunton Chief Financial Officer March 30, 2001
RIDGEWOOD POWER LLC Managing Shareholder March 30, 2001
By:/s/ Robert E. Swanson President Robert E. Swanson
/s/ Robert E. Swanson * Independent Panel Member March 30, 2001 John C.Belknap
/s/ Robert E. Swanson * Independent Panel Member March 30, 2001 Richard D.Propper
/s/ Robert E. Swanson * Independent Panel Member March 30, 2001 Seymour Robin
As attorney-in-fact for the Independent Panel Member
Signature by Independent Panel Members is not an admission that they serve as directors of the Registrant.
The Ridgewood Power Growth Fund
Consolidated Financial Statements
December 31, 2000, 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 and comprehensive income, 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, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000 and 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 of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP New York, NY March 23, 2001
The Ridgewood Power Growth Fund Consolidated Balance Sheet -----------------------------------------------------------------------------
December 31, ---------------------------- 2000 1999 ------------ ------------ Assets: Cash and cash equivalents ................. $ 15,328,703 $ 35,732,660 Accounts receivable, net of allowance of $51,540 ..................... 715,563 -- Due from affiliates ....................... 17,403 316,833 Other current assets ...................... 104,679 156,644 ------------ ------------ Total current assets ............. 16,166,348 36,206,137
Plant and equipment ....................... 17,396,573 -- Construction in progress .................. 4,231,179 -- Office equipment .......................... 238,828 -- ------------ ------------ Total plant and equipment ................. 21,866,580 -- Accumulated depreciation .............. (545,476) -- ------------ ------------ Plant and equipment, net .................. 21,321,104 -- ------------ ------------ Investment in: Synergics Projects ........................ 13,252,342 -- Zap World.com ............................. 2,100,284 3,441,809 Egypt Projects ............................ -- 4,736,092 GFG ....................................... -- 1,497,670
Deferred due diligence costs .............. 334,611 -- ------------ ------------ Total assets ..................... $ 53,174,689 $ 45,881,708 ------------ ------------ Liabilities and shareholders' equity: Liabilities: Accounts payable and accrued expenses ..... $ 698,367 $ 216,795 Due to affiliates ......................... 86,131 7,487 ------------ ------------ Total current liabilities ................ 784,498 224,282 ------------ ------------
Minority interest in the Egypt Projects ... 6,299,001 -- Commitments and contingencies
Shareholders' equity: Shareholders' equity (658.1067 and 296.8815 investor shares issued and outstanding at December 31, 2000 and 1999, respectively) ...................... 46,189,602 46,548,589 Subscriptions receivable .................. -- (863,500) ------------ ------------ Shareholders' equity, net ........ 46,189,602 45,685,089 Managing shareholders' accumulated deficit (1 management share issued and outstanding) (98,412) (27,663) ------------ ------------ Total shareholders' equity ............... 46,091,190 45,657,426 ------------ ------------ Total liabilities and shareholders' equity $ 53,174,689 $ 45,881,708 ------------ ------------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund Consolidated Statement of Operations - -------------------------------------------------------------------------------- Commencement of Share Offering For the Year (February 9, For the Year Ended Ended December 1998) Through December 31, 2000 31, 1999 December 31, 1998 ----------- ----------- ----------- Revenues .......................... $ 2,180,231 $ -- $ --
Cost of sales ..................... 1,924,932 -- -- ----------- ----------- ----------- Gross margin ...................... 255,299 -- --
General and administrative expenses 625,514 112,765 59,276 Investment fee paid to the managing shareholders .................... 199,590 560,650 577,813 Management fee paid to the managing shareholders .................... 1,096,844 -- -- Project due diligence costs ....... -- 868,208 708,658 ----------- ----------- ----------- Total other operating expenses .. 1,921,948 1,541,623 1,345,747 ----------- ----------- -----------
Loss from operation ............... (1,666,649) (1,541,623) (1,345,747)
Other income (expense): Interest income ................... 1,718,371 1,447,920 494,002 Interest income from Synergics Projects ......................... 883,275 -- -- Equity interest in loss of: Zap World.com ................... (1,341,525) (639,915) -- Egypt Projects .................. -- (197,759) -- GFG ............................. (49,924) (49,163) -- Write down investment in GFG ...... (1,447,746) -- -- ----------- ----------- ----------- Other (expense) income, net ....... (237,549) 561,083 494,002 ----------- ----------- -----------
Net loss before minority interest . (1,904,198) (980,540) (851,745) Minority interest in the earnings of the Egypt Projects ... (5,008) -- -- ----------- ----------- ----------- Net loss .......................... $(1,909,206) $ (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 Years Ended December 31, 2000 and 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 Capital contributions, net (94.9467 investor shares) ............... 6,645,185 863,500 -- 7,508,685 Distributions .......... (3,465,001) -- (35,000) (3,500,001) Cumulative translation adjustment ............ (1,649,057) -- (16,657) (1,665,714) Net loss ............... (1,890,114) -- (19,092) (1,909,206) ------------ ---------- -------- ----------- Shareholders' equity, December 31, 2000 (658.1067 investor shares and 1 management share) ..... $ 46,189,602 $ -- $(98,412) $46,091,190 ------------ ---------- -------- -----------
The Ridgewood Power Growth Fund Consolidated Statement of Comprehensive Loss - --------------------------------------------------------------------------------
Commencement of Share Offering (Febr- For the Year Ended For the Year Ended uary 9, 1998)Through December 31, 2000 December 31, 1999 December 31, 1998 ----------- ----------- ----------- Net loss ............. $(1,909,206) $ (980,540) $ (851,745) Cumulative translation adjustment .......... (1,665,714) -- -- ----------- ----------- ----------- Comprehensive loss ... $(3,574,920) $ (980,540) $ (851,745) ----------- ----------- -----------
See accompanying notes to the consolidated financial statements.
The Ridgewood Power Growth Fund Consolidated Statement of Cash Flows - --------------------------------------------------------------------------------
Commencement of Share Off- For the Year For The Year ering (Febru- Ended December Ended December uary 9, 1998) 31, 2000 31, 1999 Through Dece- mber 31, 1998 ---------- --------- ---------- Cash flows from operating activities: Net loss ............................... $(1,909,206) $(980,540) $ (851,745) ---------- --------- ---------- Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation .......................... 588,119 -- -- Minority interest in earnings of Egypt Projects .................... 5,008 -- -- Equity interest in loss of Zap World.com ............................. 1,341,525 639,915 -- Equity interest in loss of Egypt Projects ....................... -- 197,759 -- Equity interest in loss of GFG ........ 49,924 49,163 -- Write down investment in GFG .......... 1,447,746 -- -- Interest income from Synergics Projects .................... (883,275) -- -- Changes in assets and liabilities, net of impact of consolidation of the Egypt Projects: Increase in accounts receivable ...... (845,329) -- -- Decrease (increase) in due from affiliates ....................... 299,430 (307,503) (9,330) Decrease (increase) in other current assets ........................ 51,521 (70,296) (86,348) (Decrease) increase in accounts payable and accrued expenses ................ (3,157,789) (47,825) 264,620 Increase (decrease) in due to affiliate 78,644 (1,106,642) 1,114,129 ---------- ----------- ---------- Total adjustments ................. (1,024,476) (645,429) 1,283,071 ---------- ----------- ---------- Net cash (used in) provided by operating activities ............... (2,933,682) (1,625,969) 431,326 ---------- ----------- ---------- Cash flows from investing activities: Capital expenditures ................... (11,703,970) -- -- Investment in Zap World.com ............ -- (4,081,724) -- Investment in Egypt Projects ........... -- (4,933,851) -- Investment in GFG ...................... -- (1,546,833) -- Investment in Synergics Projects ....... (12,369,067) -- -- Cash acquired by consolidation of Egypt Projects ..................... 719,794 -- -- (Increase) decrease in deferred due diligence costs .......... (334,611) 381,192 (381,192) ----------- ----------- ---------- Net cash used in investing activities ............................ (23,687,854) (10,181,216) (381,192) ----------- ----------- ---------- Cash flows from financing activities: Proceeds from shareholders' contributions ......................... 8,642,400 27,458,014 29,613,468 Selling commissions and offering costs paid ................... (1,133,715) (4,240,628) (4,407,042) Contributions to Egypt Projects by minority interest ......... 2,208,895 -- -- Cash distributions to shareholders .......................... (3,500,001) (934,101) -- ----------- ----------- ---------- Net cash provided by financing activities .................. 6,217,579 22,283,285 25,206,426 ----------- ----------- ---------- Net (decrease) increase in cash and cash equivalents ............. (20,403,957) 10,476,100 25,256,560 Cash and cash equivalents, beginning of period ................... 35,732,660 25,256,560 -- ----------- ----------- ---------- Cash and cash equivalents, end of period ......................... $15,328,703 $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 discontinued its offering in April 2000. Ridgewood Capital Management LLC ("RCC", formerly Ridgewood Capital Corporation) provided 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 affiliates owned more than 50%. All material intercompany transactions have been eliminated.
The Fund uses the equity method of accounting for its investments in affiliates in which the Fund has the ability to exercise significant influence over the operating and financial policies of the affiliate, but does not control the affiliate. The Fund's share of the earnings of the affiliates is included in the consolidated statement 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.
Revenue recognition Revenue is recognized when power or water delivered. Interest income is recorded when earned.
Foreign currency translation The financial statements of the Fund's non-United States subsidiaries are translated into United States dollars using current rates of exchange, with gains or losses included in the cumulative translation adjustment account in the shareholders' equity section of the balance sheet.
Plant and equipment Machinery and equipment, consisting principally of water desalinization and electrical generating equipment, is stated at cost. Renewals and betterments that increase the useful lives of the assets are capitalized. Repair and maintenance expenditures that increase the efficiency of the assets are expensed as incurred.
Depreciation is recorded using the straight-line method over the useful lives of the assets, which vary from 5 to 15 years. During the year ended December 31, 2000, the Fund recorded depreciation expense of $588,119.
Income taxes The Fund's Egyptian subsidiaries have a ten year income tax holiday that expires in 2009. Accordingly, no provision has been made for Egyptian income taxes in the accompanying consolidated financial statements.
No provision is made for United States income taxes in the accompanying consolidated 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 Fund has the following investments:
Investment at December 31, Accounting ------------------------- Project Name Method 2000 1999 - ------------------ -------------------------- ----------- ----------- Synergics Projects Interest $13,252,342 $ -- ZAP World.com .... Equity Method 2,100,284 3,441,809 Egypt Projects ... Consolidated/Equity Method 16,121,449 4,736,092 GFG .............. Equity Method -- 1,497,670 ----------- ----------- $31,474,075 $ 9,675,571 ----------- -----------
Synergics Projects Beginning in late 1999, RPC began negotiations with Synergics, Inc. ("Synergics") to buy nine existing hydroelectric generating plants (the "Synergics Projects"). In the course of negotiations and due diligence, RPC learned that one of Synergics' lenders had declared a payment default against Synergics and that the lender had agreed to discharge the debt at a substantial discount from the face amount if payment were made by the end of April 2000. In order to preserve the benefit of the lender's offer and to allow completion of the acquisition on favorable terms, Ridgewood Electric Power Trust V ("Trust V", whose managing shareholder is RPC) and the Fund, through a joint venture, acquired the debt from the lender on April 28, 2000 for a payment of $17 million to the lender. The debt remains in default, but the joint venture is not exercising its remedies against Synergics or the Synergics subsidiaries pending the proposed acquisition described below.
The joint venture intends to acquire the Synergics hydroelectric generation business by forgiving the $17 million of outstanding debt and paying an additional $1 million to the shareholders of Synergics and paying up to an additional $1.7 million of Synergics' tax liabilities that might be incurred as a result of the sale of its assets. In addition, if a project lease for Synergics' Box Canyon, California hydroelectric plant is extended beyond the year 2010, the joint venture will pay the Synergics shareholders the lesser of $500,000 or one-half of the agreed present value derived from the lease extension. The structuring and closing of the acquisition is to be determined after a review of certain financial, contractual and tax considerations and termination of the Hart-Scott-Rodino Act antitrust waiting period.
Until the acquisition closes, Synergics has agreed to retain all working capital for the account of the joint venture and to allow the joint venture to approve all operational decisions and expenditures. Synergics is cooperating closely with the joint venture in making operational decisions. However, although the joint venture currently intends to acquire the Synergics hydroelectric generation business as promptly as possible, neither the joint venture nor the Trust V or the Fund are obligated to acquire Synergics or any of its assets. Wayne L. Rogers, the president of Synergics, agreed to vote the stock of Synergics, Inc. beneficially owned by him (approximately 69% of the voting stock) in favor of a merger or other corporate reorganization as specified by Trust V and the Fund that materially complies with the provisions outlined above.
Although the joint venture now owns $17 million of the debt of Synergics, there is approximately $11.725 million of debt owed to Fleet Bank, N.A. Trust V and the Fund are in discussions concerning the assumption or refinancing of the Fleet debt in connection with the acquisition.
Trust V supplied $5 million of the capital used by the joint venture to acquire the debt and the Fund supplied the remaining $12 million. Any additional capital needed for the acquisition will be supplied to the joint venture by the Fund. Trust V and the Fund will own the joint venture in proportion to the capital each supplies and neither will have preferred rights over the other.
The debt accrues interest at 11% per annum. For the eight months ended December 31, 2000, the Fund recorded $883,275 of income related to the debt of Synergics.
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 21% 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 consolidated 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 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, ------------------------- 2000 1999 ----------- -----------
Current assets ..................... $ 8,750,000 $ 5,585,000 Non-current assets ................. 4,077,000 2,142,000 ----------- ----------- Total assets ....................... $12,827,000 $ 7,727,000 ----------- -----------
Liabilities ........................ $ 1,822,000 $ 1,172,000 Shareholders' equity ............... 11,005,000 6,555,000 ----------- ----------- Liabilities and shareholders' equity $12,827,000 $ 7,727,000 ----------- -----------
Statement of Operations Information
For the Year Ended December 31, ---------------------------- 2000 1999 ------------ ------------ Revenues $ 12,443,000 $ 6,437,000 Expenses 14,340,000 8,130,000 ------------ ------------ Net loss $ (1,897,000) $ (1,693,000) ------------ ------------
Egypt Projects In 1999, the Fund and Trust V jointly formed a company to develop electric power and water purification plants for resort hotels in Egypt. 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.
Beginning in the first quarter of 2000, the Fund made additional investments and acquired majority ownership of the Egypt Projects. As a result, effective January 1, 2000, the Fund has consolidated the financial position and results of operations. Trust V's interest in the Egypt Projects is presented as a minority interest in the balance sheet and statement of operations.
Prior to January 1, 2000, the Fund's investment in the Egypt Projects was accounted for under the equity method of accounting. The Fund's equity in the loss of the Egypt Projects has been included in the consolidated financial statements from the inception of the projects to December 31, 1999.
Summarized financial information for the Egypt Projects for the year ended December 31, 1999 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) ---------
GFG In September 1999, the Fund and Trust V made a joint investment of $3,000,000 in Global Fiber Group ("GFG"), which was 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, provided for a 25% ownership interest in GFG and the right to invest in projects developed by GFG. The Fund and Trust V anticipated equally funding an $18,000,000 joint venture investment in the Mediterranean Fiber Optic Project in 2000.
In the first quarter of 2000, the Fund determined that GFG would probably not be able to develop the Mediterranean Fiber Optic Project or any other project. As a result, the Fund determined that it would be unlikely to recover its investment in GFG. Accordingly, the Fund recorded a writedown of $1,447,746 in the first quarter of 2000 to reduce the estimated fair value of the investment to zero. GFG subsequently ceased operations.
The Fund's investment in the GFG is accounted for under the equity method of accounting. The Fund's equity in the loss of the GFG has been included in the consolidated financial statements since the inception of the projects.
Summarized financial information for GFG for the year ended December 31, 1999 is as follows. Financial information for the year ended December 31, 2000 is not available.
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. Plant and equipments
In Egypt, the Fund currently has 15 water desalinization plants and 6 electric generation plants constructed or under development. When construction is complete, which is expected to occur in the second quarter of 2001, the total capacity of the water and power plants is expected to be approximately 3,300,000 U.S. gallons per day and 23.4 megawatts, respectively. Each plant has a contract with a hotel or group of hotels for the sale of the water or electricity produced from the plant. These contracts generally have terms of five to thirty years and some of the contracts provide for the transfer or sale of ownership of the plant to the hotel at the expiration of the contract.
5. Consulting Agreements
The Fund's Egypt Projects have agreements with three consultants that provide marketing, construction and management services in Egypt. The consultants receive, in total, a development fee of 10% of the capital cost of any completed projects, an annual management fee of 1% of the capital cost of completed projects and reimbursement of out-of-pocket costs incurred in performing their duties under the agreements. Under the terms of the agreements, if the Fund terminates the consultants, they receive a one-time payment based on the present value of the future 1% annual management fee payments.
6. Fair Value of Financial Instruments
At December 31, 2000 and 1999, the carrying value of the Fund's cash and cash equivalents, accounts receivable and accounts payable approximated their fair value.
7. 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 years ended December 31, 2000 and 1999 and the period from February 9, 1998 to December 31, 1998, the Fund paid fees for these services to RCC of $422,790, $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 years ended December 31, 2000 and 1999 and the period from February 9, 1998 to December 31, 1998, the Fund paid investment fees to the managing shareholder of $199,590, $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 closed on April 30, 2000 and management fees of $1,096,844 were paid for the eight months ended December 31, 2000.
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, 2000.
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, 2000, commissions and placement fees of $492,873 were earned by Ridgewood Securities Corporation, an affiliate of the managing shareholders.
8. 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 received distributions equal to $1,000 for each Right earned.
9. 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.
10. 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.
11. Subsequent Event - 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 additional landfill gas plants in Great Britain. 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. In the first quarter of 2001, the Fund supplied approximately $3,100,000 of capital for four new projects. The Fund expects to supply the equity for the purchase of any additional plants.
ZAPWORLD.COM
CONSOLIDATED FINANCIAL STATEMENTS
December 31,2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors ZAPWORLD.COM
We have audited the accompanying consolidated balance sheet of ZAPWORLD.COM and Subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the two years then ended. 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 of America. 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZAPWORLD.COM and Subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
San Francisco, California March 9, 2001
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31,2000 (in thousands)
ASSETS CURRENT ASSETS Cash ..................................................... $ 3,543 Accounts receivable, net of allowance for doubtful accounts of $53,000 ............................ 1,613 Inventories .............................................. 2,898 Prepaid expenses and other assets ........................ 696 -------- Total current assets ............................ 8,750
PROPERTY AND EQUIPMENT - NET ................................. 510
OTHER ASSETS Patents and trademarks, less accumulated amortization .... 1,432 Goodwill, less accumulated amortization .................. 2,023 Deposits and other ....................................... 112 --------
Total other assets .............................. 3,567 --------
Total assets .................................... $ 12,827 ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Accounts payable ......................................... $ 398 Accrued liabilities and customer deposits ................ 1,167 Current maturities of long-term debt ..................... 99 Current maturities of obligations under capital leases ... 32 -------- Total current liabilities ....................... 1,696
OTHER LIABILITIES Long-term debt, less current maturities .................. 95 Obligations under capital leases, less current maturities 31 -------- COMMITMENT
STOCKHOLDERS' EQUITY Preferred stock, authorized 10,000 shares of no par value; issued and outstanding 4 shares ........................ 1,812 Common stock, authorized 20,000 shares of no par value; issued and outstanding 5,816 shares .................... 19,117 Accumulated deficit ...................................... (9,664) Unearned compensation .................................... (42) -------- 11,223 Less: notes receivable from shareholders ................. (218) --------
Total stockholders' equity ...................... 11,005 --------
Total liabilities and stockholders' equity ................... $ 12,827 ========
See accompanying notes to financial statements.
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, (in thousands, except per share amounts) 2000 1999 ---- ---- Net sales .................................... $ 12,443 $ 6,437
Cost of goods sold ........................... 7,860 4,446
Gross profit ...................... 4,583 1,991
Operating expenses Selling .................................. 2,204 1,187 General and administrative ............... 3,824 1,945 Research and development ................. 699 365 -------- -------- 6,727 3,497 -------- --------
Loss from operations .......... (2,144) (1,506)
Other income (expense) Interest expense ......................... (21) (267) Other income ............................. 269 81 -------- -------- 248 (186) -------- --------
Loss before income taxes .......... (1,896) (1,692)
Provision for income taxes ................... 1 1 -------- --------
NET LOSS .......................... $ (1,897) $ (1,693) ======== ========
Net loss attributable to common shares Net loss ................................. $ (1,897) $ (1,693) Preferred dividend ....................... (2,649) -- -------- -------- $ (4,546) $ (1,693) ======== ======== Net loss per common share Basic and diluted ........................ $ (0.85) $ (0.43) ======== ======== Weighted average common shares outstanding 5,362 3,928 ======== ========
See accompanying notes to financial statements.
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000 and 1999 (in thousands)
See accompanying notes to financial statements.
ZAPWORLD.COM and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, (in thousands) 2000 1999 ---- ---- Cash flows from operating activities: Net loss ............................................. $(1,897) $(1,693) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................... 629 124 Issuance of common stock for services rendered ... 42 141 Issuance of common stock for litigation settlement -- 50 Issuance of stock options for services rendered .. -- 135 Noncash charges and settlement of debt ........... -- 156 Amortization of fair value of warrants ........... 54 31 Changes in: Receivables .................................... (1,260) (69) Inventories .................................... (1,073) (878) Prepaid expenses and other ..................... (393) 24 Deposits ....................................... (18) (13) Accounts payable ............................... (545) 312 Accrued liabilities and customer deposits ...... 799 218 ------- ------- Net cash used in operating activities .................... (3,662) (1,462)
Cash flows from investing activities: Purchase of property and equipment ................... (239) (188) Purchase of Electric Motorbike, Inc. ................. (100) -- Purchase of American Scooter and Cycle Rental ........ -- (70) Purchase of Big Boy Bicycles ......................... -- (15) Proceeds from emPower acquisition .................... -- 1,033 Purchase of intangibles .............................. (209) (66) Payment advances for acquisitions .................... -- (72) Issuance of note receivable .......................... -- (20) Payments on note receivable .......................... 20 -- ------- ------- Net cash provided by (used in) financing activities ...... (528) 602
Cash flows from financing activities: Sale of preferred stock, net of preferred stock offering costs .......................................... 4,513 -- Sale of common stock, net of stock offering costs ....... 14 1,813 Issuance of common stock under employee purchase plan ... 10 6 Proceeds from issuance of long-term debt ................ -- (362) Proceeds from exercise of stock options ................. 159 2,423 Repurchase of common stock .............................. -- (11) Advances on note receivable to shareholder .............. -- (285) Proceeds from payment of note receivable from shareholder ............................................. 67 -- Payments on obligations under capital leases ............ (13) (15) Principal repayments on long-term debt .................. (201) -- ------- ------- Net cash provided by financing activities ................ 4,549 3,569 ------- -------
NET INCREASE IN CASH ......................... 359 2,709
Cash, beginning of year .................................. 3,184 475 ------- -------
Cash, end of year ........................................ $ 3,543 $ 3,184 ======= =======
See accompanying notes to financial statements.
ZAPWORLD.COM
STATEMENTS OF CASH FLOWS
Year ended December 31, (in thousands) 2000 1999 ---- ---- Supplemental cash flow information:
Cash paid during the year for: Interest ............................................ $ 21 $ 115 Income taxes ........................................ 1 1
Non-cash investing and financing activities: Conversion of debt into common stock ................ -- 475 Conversion of accounts payable into common stock .... -- 35 Equipment acquired through capital lease obligations 27 27 Notes payable used to exercise stock options ........ -- 32
Issuance of common stock upon acquisition of Electric Motorbike, Inc., and Aquatic Propulsion Technology ................. 1,522 --
Issuance of common stock upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation .............................. -- 2,264
Assets and liabilities recognized upon acquisition of Electric Motorbike, Inc. and Aquatic Propulsion Technology Inventories .................................... 100 -- Property and equipment ......................... 78 -- Other assets ................................... 19 -- Patent ......................................... 196 -- Goodwill ....................................... 1,991 -- Accounts payable ............................... 201 -- Advances from ZAPWORLD ......................... 206 --
Assets and liabilities recognized upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation Cash ........................................... -- 1,033 Inventories .................................... -- 214 Prepaid expenses and other ..................... -- 56 Property and equipment ......................... -- 70 Patent ......................................... -- 1,155 Accounts payable ............................... -- 131
See accompanying notes to financial statements.
ZAPWORLD.COM and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ZAPWORLD.COM ("the Company"), formerly the ZAP Power Systems, was incorporated in California in September, 1994. The Company designs, manufactures, and distributes electric bicycle power kits, electric bicycles and tricycles, and other low power electric transportation vehicles. Company products are sold directly to end-users and to distributors throughout the United States.
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ZAPWORLD Stores, Inc., and emPower Corporation. All significant inter-company transactions and balances have been eliminated.
2. Revenue Recognition
The Company recognizes income when products are shipped.
3. 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.
4. 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
5. Patents and Trademarks
Patents and trademarks consist of costs expended to perfect certain patents and trademarks acquired and are amortized over ten years.
6. Goodwill
Goodwill consists of the excess consideration paid over net identifiable assets acquired and is amortized over ten years.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Income Taxes
The Company accounts for income taxes using an asset and liability approach for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws.
8. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
9. Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. 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 fair value of debt is not determinable due to the terms of the debt and no comparable market for such note.
10. Net Loss Per Common Share
Net loss per common share, basic and diluted, has been computed using weighted average common shares outstanding. The potential dilutive securities of options and warrants of 2,859,000 and 1,304,000 in 2000 and 1999, respectively, and the conversion of preferred stock into common stock as described in Note I, have been excluded from the dilutive computations, as their inclusion would be anti-dilutive.
11. Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees, and complies with disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the quoted market price of the Company's stock and the amount an employee must pay to acquire the stock.
12. Segment Information
The Company operates in one reportable segment. The Company's chief operating decision maker is the Chief Executive Officer who reviews a single set of financial data that encompasses the Company's entire operations for purposes of making operating decisions and assessing performance.
13. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which defined derivatives, requires that all derivatives be carried at fair value and provides for hedge accounting when certain conditions are met. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company in fiscal 2001. Although the Company has not fully assessed the implication of SFAS No. 133 as amended, the Company does not believe that the adoption of this statement will have a material effect on its financial condition or results of operations.
NOTE B - INVENTORIES
Inventories consist of the following at December 31, 2000 (thousands):
Raw materials $ 1,960 Work-in-process 78 Finished goods 860 ---------- $ 2,898 ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2000 (thousands):
Machinery and equipment $ 371 Computer equipment 289 Demonstration bicycles 90 Office furniture and equipment 111 Leasehold improvements 94 Vehicle 118 ---------- 1,073 Less accumulated depreciation and amortization 563 ---------- $ 510 ==========
NOTE D - DEBT
Promissory note payable in monthly installments of $6,000 through June 30, 2001 and $7,000 per month through July 1, 2004. Interest accrues at 10% per year. The note is convertible into common stock at $5.00 per share and may be converted on or before December 31, 2000. At December 31, 2000, none of the note principal was converted (thousands). $ 165
Other 29 ----- Less current portion 99 ----- Long-term debt $ 95 =====
Installments due on debt principal are as follows (thousands):
Year ending December 31, ------------------------ 2001 $ 99 2002 89 2003 6 ------- $ 194 =======
NOTE E - PROVISION FOR INCOME TAXES
2000 1999 ---------- ----------- Current tax expense (thousands) Federal $ - $ - State 1 1 ---------- -----------
$ 1 $ 1 ========== ===========
Deferred tax assets (liabilities) Tax loss carryforward $ 2,057 $ 1,820 Inventory capitalization (283) (99) Other (37) (71) ----------- ------------ 1,737 1,650 Less valuation allowance (1,737) (1,650) ----------- ------------
Net deferred tax asset $ - $ - ========== ===========
The Company has available for carryforward approximately $4,549,000 and $2,660,000 of federal and state net operating losses, respectively, expiring through 2020 for federal purposes and 2010 for state purposes. 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 carryforwards 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 change in the valuation allowance at December 31, 2000 and 1999 was $87,000 and $435,000, respectively.
The difference between the income tax expense at the federal statutory rate and the Company's effective tax rate is as follows:
December 31, ----------- 2000 1999 ---- ---- Statutory federal income tax rate 34% 34% State income tax rate 6 6 Valuation allowance (40) (40) ---- ---- -% -% ==== ====
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 two or three year period, and expire ten years after the date of grant.
Option activity under the three plans is as follows (thousands, except per share amounts): 1999 Plan 1996 Plan 1995 Plan ------------------ ------------------- ------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price -------- ----- --------- ----- --------- ----- Outstanding at January 1, 1999 . -- $ -- 364 $ 1.55 419 $ 0.56 Granted ......... 481 $ 6.33 35 $ 4.06 -- -- Exercised ....... (1) $ 5.00 (259) $ 1.15 (299) $ 0.40 Canceled ........ (1) $ 5.00 (14) $ 3.50 (50) $ 1.00 ------ ----- ------ ----- ------ ----- Outstanding at December 31, 1999 479 $ 6.34 126 $ 2.85 70 $ 0.93 Granted ......... 630 $ 5.17 -- -- -- -- Exercised ....... (7) $ 5.00 (52) $ 1.23 (25) $ 1.00 Canceled ........ (4) $ 5.25 -- -- -- -- ------ ----- ------ ----- ------ ----- Outstanding at December 31, 2000 1,098 $ 5.71 74 $ 3.97 45 $ 1.00 ====== ===== ====== ===== ====== =====
The weighted average fair value of options granted during the years ending December 31, 2000 and 1999 was $3.52 and $4.33, respectively.
The following information applies to options outstanding at December 31, 2000:
Plan: 1999 1996 1995 ---- ---- ---- Range of exercise prices $4.12 - $9.87 $1.00 - 5.25 $1.00 Weighted average remaining life (years) 9.15 7.07 5.50 Options exercisable 303,000 72,000 45,000 Weighted average exercise price $5.96 $3.97 $1.00
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 2000 and 1999. 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 (thousands, except per share amounts):
2000 1999 ------------- -------------
Net loss - as reported $ (1,897) $ (1,693) Net loss - pro forma (3,448) (2,687) Loss per share - as reported (0.85) (0.43) Loss per share - pro forma (1.14) (0.68)
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: 2000 1999 ---------- -----------
Dividends None None Expected volatility 72% 86% Risk free interest rate 6% 6% Expected life 5 years 5 years
The Company granted stock options and warrants to purchase common stock to non-employees of the company. Total granted during 2000 was 1,217,000 consisting of 1,185,000 warrants to preferred shareholders and 32,000 to other non-employees. The options and warrants have exercise prices ranging from $5.93 to $5.98. Non-employee options and warrants exercisable at December 31, 2000 is 1,607,000.
During 1999, the Company granted a total of 1,138,000 options and warrants to purchase common stock to non-employees consisting of 671,000 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. The options and warrants have exercise prices ranging from $3.02 to $6.36.
The company recorded the non-employee options and grants based on the grant date for value in accordance with SFAS No. 123. The grant date fair value of each stock option was estimated using the Black-Scholes option-pricing model. The company recorded expense including amortization of unearned compensation in the amount of $54,000 and $166,000 for the years ended December 31, 2000 and 1999, respectively.
Options and warrant activity for non-employees is as follows (in thousands except per share amounts):
Weighted Average -------
Outstanding at 1/1/99 126 $4.74 Granted 1,138 4.58 Exercised (571) 3.50 Forfeited (64) 4.75 --------- Outstanding at 12/31/99 629 5.51
Granted 1,217 5.55 Exercised (83) 5.45 Forfeited (121) 5.51 -------- Outstanding at 12/31/2000 1,642 $5.37
NOTE G - MAJOR CUSTOMER
During 2000, one customer accounted for $1,112,000 or 9% of the Company's net sales. During 1999, one customer accounted for $680,000 or 11% of the Company's net sales.
During 2000, one vendor accounted for $3,054,000 or 44% of the Company's supplies and materials. During 1999, one vendor accounted for $799,000 or 12% of the Company's supplies and materials.
NOTE H - COMMITMENT
The Company rents warehouse and office space under operating leases that expire through 2005. The monthly rent is adjusted annually to reflect the average percentage increase in the Consumer Price Index. An option exists to extend each lease for an additional five- year period. Rent expense under these leases were $250,000 and $125,000 in 2000 and 1999, respectively.
Future minimum lease payments on the lease are as follows (thousands):
Year ending December 31,
2001 $ 388 2002 338 2003 332 2004 173 2005 48 ---------- Total $ 1,279 ===========
NOTE I - PREFERRED STOCK
During 2000, the Company issued 3 thousand shares of Preferred Stock Series A-1 and 2 thousand shares of Preferred Stock Series A-2. Both series are immediately convertible into common stock at the lesser of the fixed price of $4.50 for the Series A-1 and $5.91 for the Series A-2 or at the variable conversion price determined as follows: (1) on or before the first anniversary date, the amount of 85% of the average of the 3 lowest closing price over the 22 trading days prior to conversion, (2) thereafter and or before the second anniversary, the amount of 80% of the average of the 3 lowest closing prices over the 22 days prior to conversion, and (3) thereafter and on or before the day prior to the third anniversary date, the amount of 70% of the average of the 3 lowest closing prices over the 45 trading days prior to conversion. Dividends are cumulative and accrue at 6% per year and payable on June 30th of each year or on conversion date. Dividends are payable in cash or in common stock at the Company's option. During the year, 920 shares of preferred stock were converted into common stock. All preferred stockholders are subject to automatic conversion to common stock three years from the date of purchase.
During the year, the Company recorded a deemed dividend on preferred stock of approximately $2.5 million. This is a result of the effective conversion price of the convertible preferred stock issued during the year being less than the market price of the common stock on the date of the transaction. All deemed dividends related to the transaction have been recognized during the year as a result of all preferred stock being immediately convertible at the discretion of the holder.
In connection with the issuance of preferred stock, the Company granted 1,185,000 warrants to purchase common stock. The warrants are immediately exercisable and have exercise prices ranging from $5.43 to $5.98.
NOTE J - ACQUISITIONS
In October 2000, the Company purchased all assets of Electric Motorbike Inc. ("EMB") and assumed certain liabilities. The Company issued 140,000 shares of common stock at $5.68 and paid $100,000 in cash. The purchase price was allocated to assets acquired based on their estimated fair value. Results of operations for EMB have been included with those of the Company for the periods subsequent to the date of acquisition. Pro forma information is not presented as they are not significant.
The purchase price of EMB was allocated as follows (thousands):
Inventory $ 51 Goodwill 960 Advances from ZAPWORLD (63) Liabilities assumed (53) ----------- $ 895
Consideration paid (thousands):
Cash $ 100 Common stock 795 ----------- $ 895
In July 2000, the Company purchased all assets of Aquatic Propulsion Technology, Inc. ("APT") and assumed certain liabilities. The Company issued 120,000 shares of common stock at $6.05 per share. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. Results of operations for APT have been included with those of the Company for periods subsequent to the date of acquisition. Pro forma information is not presented as they are not significant.
The purchase price of APT was allocated as follows (thousands):
Inventory $ 49 Property & equipment 78 Patents 196 Other assets 19 Goodwill 1,031 Note payable assumed (356) Advances from ZAPWORLD (143) Liabilities assumed (148) ----------- $ 726 ===========
Consideration paid (thousands):
Common stock $ 726 ===========
EXHIBIT 24 -- POWERS OF ATTORNEY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, John Belknap, appoints Robert E. Swanson and Martin V. Quinn, and each of them, as his true and lawful attorneys-in-fact with full power to act and do all things necessary, advisable or appropriate, in their discretion, to execute on his behalf as an Independent Trustee of Ridgewood Electric Power Trust I, of Ridgewood Electric Power Trust IV and of The Ridgewood Power Growth Fund, the Annual Reports on Form 10-K for the year ended December 31, 2000 for each of the above-named trusts, and all amendments or documents relating thereto.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of March, 2001, at Carlsbad, California.
/s/John Belknap
John Belknap
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, Seymour Robin, appoints Robert E. Swanson and Martin V. Quinn, and each of them, as his true and lawful attorneys-in-fact with full power to act and do all things necessary, advisable or appropriate, in their discretion, to execute on his behalf as an Independent Trustee of Ridgewood Electric Power Trust I, of Ridgewood Electric Power Trust IV and of The Ridgewood Power Growth Fund, the Annual Reports on Form 10-K for the year ended December 31, 2000 for each of the above-named trusts ad all amendments or documents relating thereto.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of March, 2001, at Carlsbad, California.
/s/Seymour Robin
Seymour Robin