SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
THE RIDGEWOOD POWER GROWTH FUND
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3495594
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
c/o Ridgewood Power Corporation, 947 Linwood Avenue, Ridgewood, New Jersey 07450
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (201) 447-9000
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Investor Shares of Beneficial Interest
Preferred Participation Rights
(Title of Class)
Exhibit Index is located on page 49.
<PAGE>
PART I
Item 1. Business.
Forward-looking statement advisory
This Registration Statement on Form 10, as with some other statements made
by or on behalf of the Ridgewood Power Growth Fund (the "Fund") from time to
time, has forward-looking statements. These statements discuss business trends
and other matters relating to the Fund's future results, year 2000 remediation
and the business climate and are found, among other places, at Items 1(c)(3),
1(c)(4), 1(c)(5), 1(c)(6), 1(c)(7), and 2(b). In order to make these statements,
the Fund has had to make assumptions as to the future. It has also had to make
estimates in some cases about events that have already happened, and to rely on
data that may be found to be inaccurate at a later time. Because these
forward-looking statements are based on assumptions, estimates and changeable
data, and because any attempt to predict the future is subject to other errors,
what happens to the Fund in the future may be materially different from the
Fund's statements here.
The Fund therefore warns readers of this document that they should not rely
on these forward-looking statements without considering all of the things that
could make them inaccurate. This Registration Statement discusses many (but not
all) of the risks and uncertainties that might affect these forward-looking
statements.
Some of these are changes in political and economic conditions, federal or
state regulatory structures, government taxation, spending and budgetary
policies, government mandates, demand for electricity and thermal energy, the
ability of customers to pay for energy received, supplies of fuel and prices of
fuels, operational status of plant, mechanical breakdowns, availability of labor
and the willingness of electric utilities to perform existing power purchase
agreements in good faith. Some of these cautionary factors that readers should
consider are described below at Item 1(c)(5) - Trends in the Electric Utility
and Independent Power Industries.
By making these statements now, the Fund is not making any commitment to
revise these forward-looking statements to reflect events that happen after the
date of this document or to reflect unanticipated future events.
<PAGE>
(a) General Development of Business.
The Registrant is the Ridgewood Power Growth Fund, which was organized as a
Delaware business trust in January 1998 to participate in the development,
construction and operation of independent power generating facilities and
capital facilities ("Independent Power Projects" or "Projects"). Ridgewood
Energy Holding Corporation ("Ridgewood Holding"), a Delaware corporation, is the
Corporate Trustee of the Fund.
The Fund has sold whole and fractional shares of beneficial interest in the
Fund ("Investor Shares") at $100,000 per Investor Share. Its offering began on
February 9, 1998 and is ongoing. As of April 20, 1999, it had raised
approximately $38,000,000. Net of offering fees, commissions and expenses, the
offering had provided as of that date approximately $31,500,000 for investments
in the development and acquisition of Projects and operating expenses. The Fund
has approximately 740 record holders of Investor Shares (the "Investors"). As
described below in Item 1(c)(4), the Fund has invested approximately $2 million
of its assets in common stock of ZAP Power Systems, Inc., a manufacturer of
electric bicycles and similar personal vehicles, and is considering an
investment in a portfolio of landfill gas fueled electric generating Projects in
England. The Fund is actively seeking additional Projects for investment.
The Fund has two Managing Shareholders: Ridgewood Power LLC, a New Jersey
limited liability company ("Ridgewood Power") and Ridgewood Power VI LLC ("Power
VI Co"), which is also a New Jersey limited liability company. The Managing
Shareholders have direct and exclusive discretion in the management and control
of the affairs of the Fund. Both Ridgewood Power and Power VI Co are controlled
by Robert E. Swanson, who is the manager of each. The officers of Power VI Co
are also the same as those of Ridgewood Power and Power VI Co currently does not
conduct any business. It is anticipated that Ridgewood Power will take all
actions necessary to manage the Fund, without any participation by Ridgewood
Power VI Co, unless Ridgewood Power were to become unable to act as the Managing
Shareholder because of a possible reorganization of other, similar investment
programs that it manages. In that case, Power VI Co would be activated to serve
as Managing Shareholder. A further discussion of Ridgewood Power and Power VI Co
is found at Item 5(b) - Directors and Executive Officers - Managing
Shareholders. In the remainder of this Registration Statement, when a reference
is made to the "Managing Shareholder," it is to Ridgewood Power so long as it
acts as Managing Shareholder and to Power VI Co if Power VI Co is activated to
serve as a Managing Shareholder. The two Managing Shareholders and the Investors
are collectively referred to as the "Shareholders."
The Fund currently has three Independent Panel Members. Approval of a
majority of the Independent Panel Members is required for approval of
transactions between the Fund and other investment programs sponsored by the
Managing Shareholder. The Independent Panel Members do not exercise general
oversight of the Managing Shareholder or of the Fund and are not directors of
the Fund. The Independent Panel Members do not have any management or
administrative powers over the Fund or its property.
The Fund has a Corporate Trustee, Ridgewood Energy Holding Corporation. The
Corporate Trustee acts on the instructions of the Managing Shareholder and is
not authorized to take independent discretionary action on behalf of the Fund.
See Item 5 - Directors and Executive Officers of the Registrant below for a
further description of the management of the Fund.
The Managing Shareholders are controlled by Robert E. Swanson, who is
currently their sole manager and chief executive officer. The following chart
illustrates some of the important relationships among the Fund, the Managing
Shareholders and some of their affiliates. For additional information, see Item
5 -- Directors and Executive Officers of the Registrant.
<PAGE>The Ridgewood Power Growth Fund and certain affiliates
(some entities and relationships omitted)
Robert E. Swanson Family trusts Two indivi-
x x (Mr. Swanson has duals x
Sole manager x x sole voting and 1% each x
Chief executive officer x x investment power) x
Owner of 46% of equity x x Owners of 52% of equity x
_________________X__________________X____________________________X_
x x x x x x
x x x x x x
x x x x x x
Ridgewood Ridgewood Power Ridgewood Ridgewood Ridgewood Ridgewood
Securities Management LLC Power LLC Energy Power VI Capital
Corporation Holding LLC Management
Corporation LLC
Operates power Corporate Manager
Placement plants for five Managing Trustee Co-Managing of two
agent power trusts Shareholder for all Shareholder venture
("Ridgewood ("RPMCo") of six six trusts (dormant) capital
Securities") trusts x of this funds and
("Ridgewood x Fund marketing
Power") x ("Power VI Co") affiliate
x x x ("Ridgewood
x x x Capital")
x x x x
______________________________x____________x_____________ x x
x x x x x x x x
x x x x x x x x
Ridgewood Ridgewood Ridgewood Ridgewood Ridgewood The Ridgewood x
Electric Electric Electric Electric Electric Power Growth x
Power Trust Power Trust Power Trust Power Trust Power Trust Fund x
I II III IV V (the x
("Power I") ("Power II") ("Power ("Power IV") ("Power V") "Fund") x
III") x
x
________________________________X__
x x
x x
Ridgewood Capital Ridgewood Institutional
Venture Partners Venture Partners, LLC
LLC
(the "Venture Capital Funds")
(b) Financial Information about Industry Segments.
The Fund has been organized to operate in only one industry segment:
independent power generation and related capital, infrastructure and venture
projects.
(c) Narrative Description of Business.
(1) General Description. The Fund's investment objectives are:
providing capital appreciation over an extended period of time, either by
(a) selling all or some of the Fund's assets or (b) changing the Fund into a
more liquid investment (by combining with other companies, by a public offering,
by creating a market for the Investor Shares or otherwise) and
generating current cash flow for distribution to Investors to the extent
consistent with the capital appreciation objective.
The Fund intends to achieve its objectives by making equity investments in
"Projects" or in companies owning Projects or assets that may benefit from
industry deregulation. In many cases, the Fund may operate those Projects
itself. The Projects may include:
o conventionally fueled, small to medium-size independent electric power plants;
o landfill gas, biomass or other "waste" fueled power plants that generate
electricity or heat, or both,for sale while helping to remedy environmental
problems;
o cogeneration plants that produce electricity and heat together for sale;
o other power generating facilities that produce electricity, heat or motive
power for sale or use;
o waste transfer stations, pumping facilities and other facilities that
contribute to the operation of other Projects;
o other types of capital projects, such as fuel plants, processing facilities
and recycling facilities, that are expected to have consistent cash flows
similar to those from independent electric power plants; and equity interests in
companies affected by the deregulation of the electricity industry, including
those with long-term or unconventional business strategies.
The Fund will not invest in nuclear power facilities.
The Fund will try to invest in Projects that provide long-term cash flows.
Its investments will be structured for federal income tax purposes as "direct
participation" investments, so that income, gains, losses, deductions and
credits flow through to each Investor's personal tax return, and are subject to
tax only once. Investors will generally have limited liability for the Fund's
obligations and those of the Projects.
(2) Risk Considerations
General
Investment in the Fund involves substantial risks and potential conflicts
of interest and is suitable only for those persons who meet the investor
suitability standards on a continuing basis, have a substantial net worth, have
no need for liquidity from such investment, and are able to bear the loss of the
entire investment. Each prospective Investor should consider carefully the risk
factors attendant to the purchase of Shares, including without limitation those
discussed below, and each should review the investment with his own legal, tax
and financial advisors. In addition, each prospective Investor should understand
that the Subscription Agreement and the Declaration materially restrict
Investors from selling or otherwise disposing of their Shares.
Importance of Regulatory and Political Environments
Independent Power Projects, including cogeneration facilities, are
creatures of the regulatory and political process. Since the passage of PURPA in
1978, the Independent Power industry has grown, in large part, because
regulatory and political environments made it feasible to amass the large sums
of long-term capital needed to develop, construct and operate power plants. In
particular, the regulatory advantages currently provided by PURPA for Qualifying
Facilities are essential for the viability of most Independent Power Projects.
Modification or repeal of PURPA or the regulations thereunder could make some
Projects uneconomic.
In several states, including Massachusetts, Maine and California,
requirements may be imposed on sellers of electricity to purchase a minimum
amount of "renewable" power (generally, power from small hydroelectric plants,
geothermal, solar or wind plants, or plants that burn non-fossil fuels). These
requirements may be very advantageous for the types of Projects the Fund may
invest in, but adverse state or federal action might make those Projects
uneconomic in the future. Further, it is possible that future developments, such
as more stringent requirements of environmental laws and enforcement policies
thereunder, could affect the costs of and the manner in which Projects are
developed, built or operated. There can be no assurance that in such event the
Projects would be able to recover all or any of such increased costs or that
their businesses and financial conditions would not be materially and adversely
affected.
Deregulatory Initiatives
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act") removed
certain restrictions imposed by the Holding Company Act on the ability of
electric utility holding companies and electric utilities to control their local
markets. Since passage of the 1992 Energy Act, FERC in its Order 888 of April
1996 has deregulated the wholesale market for electricity (the market for sales
to local utilities or distributors of electricity). Further, many states are
implementing plans to further encourage investment in wholesale generators and
to facilitate utility decisions to spin off or divest generating capacity from
the transmission or distribution businesses of the utilities. As a result,
Independent Power Projects in the future will face competition not only from
other Independent Power Projects seeking to sell electricity on a wholesale
basis but also from exempt wholesale generators, electric utilities with excess
capacity and independent generators spun off or otherwise separated from their
parent utilities.
On the other hand, by expanding the potential pool of Projects in which
electric utility holding companies and electric utilities are able to invest,
the 1992 Energy Act has resulted in increased competition from the holding
companies and utilities to develop promising Projects and in increased
competition in the sale of electricity by Independent Power Projects. Further,
the 1992 Energy Act and Order 888 introduced an element of competition in the
transmission component of the electric power industry by requiring electric
utilities to make available their transmission facilities to Independent Power
Projects where it is in the public interest and does not unreasonably impair the
reliability of electricity service. In April 1996, FERC adopted Order 888, which
required electric utilities and power pools to make transmission facilities and
information available on equal terms to all generators.
The deregulation of transmission may benefit the Fund in the future in that
deregulated transmission may give Projects in which the Fund participates access
to customers that are not geographically located near the Projects. If there are
limitations on transmission capacity, however, the Fund might have to compete
and bid for capacity in order to transmit electricity to distant customers if it
is selling in a competitive market or if it is selling "renewable" power to a
distant customer. In those events, the Fund might have to compete against
companies that are far larger and more diversified than itself or that have
lower costs of operation or access to transmission facilities. If the Fund were
unsuccessful in obtaining transmission capacity, it might not be able to sell
its output except to local utilities (or in some cases, local retail customers).
There is no assurance local customers would purchase that power or that the
local price would be as advantageous as the price more distant customers would
pay.
The large scale deregulation of transmission facilities is likely to have
other far-reaching effects which may be adverse to the Independent Power
industry, generally, or to the particular facilities owned by the Fund. In
particular, because the Fund anticipates investing in small scale facilities, it
may be difficult for it in the short run to market power to end users or over
long distances. As a result, it may suffer significant competitive
disadvantages.
State initiatives to deregulate and encourage competition in the businesses
of generating electric power and transmitting it to customers are also creating
significant risks. Further, jurisdictional disputes between federal and state
regulators and proposed congressional actions have hampered the creation of a
coordinated regulatory posture and have raised significant questions as to the
allocation of electric utility costs and obligations that may not be recovered
by utilities in a competitive environment. As a result, although it appears that
competitive generating markets will be created in many states and possibly
nationally, there is uncertainty as to the eventual regulatory environment and
the risks and opportunities it will create.
As various states implement retail deregulation, a number of additional
risks are posed for Independent Power Projects. In many states, local electric
utilities are being required or encouraged to sell their generating stations.
Often, large electric utilities, affiliates of natural gas marketers or other
large entities have purchased large quantities of these assets and thus
immediately become sizable competitors in the market to sell electricity. In
some other states, local electric utilities will be permitted to retain
generating assets and sell power to themselves. In that event, they may prefer
purchases from their own plants and opportunities for Independent Power Projects
to sell electricity in a competitive market may be stifled.
Further, in a competitive market, prices for electricity may be very
volatile. If a generator is nonetheless able to obtain a long-term Power
Contract, the prices under that contract may be inadequate to cover costs and
yield a return, or the generator may lose opportunities to sell electricity at
higher prices. If a generator is unable to obtain a long-term Power Contract and
sells its output under short term contracts on in a spot or auction market, the
prices received may be inadequate to cover costs or to permit the Project to
earn a return. Prices may vary so much as to make planning impossible. There is
no assurance that the generator will be able to obtain new Power Contracts so as
to keep its Project in continuous operation and the generator may have to absorb
significant costs of Project shutdown and restart as well as lay off and rehire
its workforce, as has occurred with two Projects located in Maine in which Power
IV and Power V have invested.
These factors have caused new investment in independent power plants in the
United States to be substantially reduced, have intensified the pressures on
larger market participants to consolidate, have created additional incentives
for generating efficiency and low-cost production of power, have tended to
depress the purchase prices of existing small-scale Projects and are likely to
have additional, unpredictable effects. Recently, a number of very large
utilities, natural gas companies and independent generation companies have paid
significant premiums over book value or other measures of value to purchase
large packages of power plants being divested by utilities and others have
announced plans to construct extremely large-scale merchant power plants. These
transactions or proposals have been in the range of hundreds of millions of
dollars to billions of dollars. This may indicate that these industry
participants have concluded that very large scale is a necessary competitive
advantage.
The Fund instead will attempt to follow a diversified strategy that does
not attempt to compete head-on with these types of competitors. The Fund
believes that in many cases emphasis on scale and purchasing market share may
lead to suboptimal returns. Instead, the Fund will seek to develop niche
markets, to engage in ventures with large utilities or other participants that
need its investments for financial or regulatory reasons or to acquire equity
interests in undervalued companies. Where possible, the Fund may invest in
existing Projects with long-term Power Contracts that are less exposed to
competitive forces, or in Projects with regulatory or tax advantages. There can
be no assurance, however, that these strategies will be successful or that the
Fund will not be competitively disadvantaged by its relatively small size.
Threats to Power Contracts
The Power Contract with the local utility, industrial host or other energy
purchaser is perhaps the most important contract to an existing Independent
Power Project. Many long-term Power Contracts between local utilities and
independent power producers now provide for rates in excess of current
short-term rates for purchased power and the utilities are treating their
contractual obligations as a form of stranded cost. There has been much
speculation that in the course of deregulating the electric power industry,
federal or state regulators or utilities would attempt to invalidate these power
purchase contracts as a means of throwing some of the costs of deregulation on
the owners of independent power plants.
To date, the Federal Energy Regulatory Commission and each state regulator
that has addressed the issue have ruled that existing Power Contracts will not
be affected by their deregulation initiatives. The regulators have so far
rejected the requests of a few utilities to invalidate existing Power Contracts.
Further, no action has yet been taken by federal or state legislators to date to
impair Independent Power Projects' existing power sales contracts, and there are
federal constitutional provisions restricting actions to impair existing
contracts. There can not be any assurance, however, that the rapid changes
occurring in the industry and the economy as a whole would not cause regulators
or legislative bodies to attempt to change the regulatory structure in ways
harmful to Independent Power Projects or to attempt to impair existing
contracts. In particular, some regulatory agencies have urged utilities to
construe Power Contracts strictly and to police Independent Power Projects
compliance with those Power Contracts vigorously. Predicting the consequences of
any legislative or regulatory action is inherently speculative and the effects
of any action proposed or effected in the future may harm or help the Fund.
Because of the consistent position of the regulatory authorities to date and the
other factors discussed here, the Fund believes that so long as it performs its
obligations under the Power Contracts, it will be entitled to the benefits of
those contracts.
In recent years, many electric utilities that have entered into long-term
Power Contracts have concluded that the prices set under those contracts are
disadvantageous to them under current conditions. Accordingly, they have often
attempted to exploit all possible means of terminating these Power Contracts
with Independent Power Projects, including requests to regulatory agencies and
alleging violations of even immaterial terms of the Power Contracts as
justification for terminating those contracts. The Fund's current investment
strategy includes the purchase smaller-sized Projects with existing long-term
Power Contracts. If the prices for electricity under those contracts are in
excess of the prices charged by alternative sources, or if the electric utility
purchasers under those contracts have other incentives to terminate those
contracts, the Fund may face material costs in contesting those utility actions.
Power II, which is a previous Power Trust sponsored by Ridgewood Power, is
currently defending a legal proceeding in California which involves such a
challenge. A second Power Trust, Power I, succesfully defended a similar
challenge in 1995-1997.
Other Aspects of Power Contracts
A generating facility which uses biomass or "waste" fuel, such as landfill
gas or waste coal, may be a Qualifying Facility under PURPA. However, in order
for a cogeneration facility using conventional fuel to be a Qualifying Facility
under PURPA and current regulations, at least 5% of a Project's total energy
output must be "useful" heat energy that typically is sold or made available in
the form of steam or hot water to an entity (the "Steam Host"). Under current
regulatory interpretations, heat energy is "useful" if its use has a business
purpose independent from the sale of electricity and there is some economic
justification for the use. Typically, a Project meets its PURPA requirements by
entering into a long term contract with a Steam Host which provides that the
Steam Host will take delivery of sufficient thermal energy to permit the Project
to meet the requirements of PURPA. If a cogeneration Project did not meet the
requirements for supplying heat energy to a Steam Host because, for example, the
Steam Host went out of business, or the thermal contract is otherwise
terminated, that cogenerating Project might lose its status under PURPA as a
Qualifying Facility. If as a result of this loss of status the cogenerating
Project became subject to federal and state regulation or its Power Contract
were terminated or modified, the cogenerating Project might incur material loss.
Although PURPA provides grace periods for a cogeneration Project to find an
alternative Steam Host, potential alternate Steam Hosts may be very limited or
non-existent because of the practical necessity for a Steam Host to be located
adjacent to the Project to minimize heat loss.
Under PURPA, electric power utilities are directed to purchase electricity
output offered to them by Qualifying Facilities at a price no greater than the
utilities' avoided costs of generating electricity from another source. The
Power Contracts for many existing Projects have been negotiated with the utility
as long term agreements to purchase the Projects' output. There can be no
assurance that the rates offered to a new Project or the other terms of a Power
Contract will be sufficiently favorable to induce development and construction
of a Project or permit profitable operation of a completed Project.
Many long-term Power Contracts provide for levelized rates over the life of
the contracts or shorter periods, which are designed to stabilize projected
revenues earned by an Independent Power Project. The effect of many levelized
rate contracts is to provide that the utility will purchase electricity from a
Project at higher rates in the earlier years in exchange for an agreement from
the Project to accept lower rates to be paid by the utility in later years. If a
Project experiences operational difficulties and produces less than the expected
volume of electricity in later years, it may be required to make cash payments
to the utility to compensate for such shortfall, thereby reducing available cash
flow to the Project owner.
Although there is some risk that a utility bound by a long-term Power
Contract may be unable to meet its purchase obligations, under current federal
law and current law in most states electric utilities are required to maintain
prudent financing structures and are reviewed periodically by their regulators
for compliance with these requirements. In addition, if state regulators
approve, the payments made by a utility to an Independent Power Project may be
included as allowed costs to be passed through to the utility's retail
customers, thereby giving the utility an additional source of revenue which can
be used to make payments to the Independent Power Project. Accordingly, failure
of a utility to meet payment obligations to an Independent Power Project which
is operating in compliance with its Power Contract has been a rare occurrence.
Most deregulatory programs treat Power Contracts with prices in excess of
market prices as "stranded costs" and provide for reimbursement to utilities for
those stranded costs for an extended period of time. During these periods, which
can range from three to ten years or longer in some instances, there may be some
assurance that the utilities will pay. However, retail deregulation may impose
other financial strains on electric utilities, which will be relegated to
maintaining the distribution network and delivering power to individual
residential, commercial and industrial locations. Those utilities will have to
downsize and reorganize their workforces and resources and compete in many cases
as suppliers of electricity. It is likely that some utilities may reorganize or
enter bankruptcy if they are unable to meet these challenges. In those cases,
the Fund may be unable to collect amounts due to it or may have its Power
Contracts abrogated in bankruptcy. Industrial and other retail purchasers of
power do not have an assured source of revenue from which to make payments under
the Power Contract and a Project selling to them must rely solely on the credit
of such purchaser. Consequently, although the Fund will conduct a business
review of each purchaser's creditworthiness prior to contracting with it, there
can be no assurance that it will remain in business over time or be able to
perform its payment obligations for the duration of the Power Contract.
In the event of a default or failure to pay by an energy purchaser under a
Power Contract because of its bankruptcy or insolvency, regulatory changes,
failure of a Project to comply with the terms of its contract or other events,
there can be no assurance that the Project will be able to obtain a Power
Contract with another purchaser or to obtain a Power Contract on terms as
favorable as those of the previous contract.
The Fund expects that if it were to invest in capital facilities or other
investments outside the electric power industry, those facilities would have
output contracts providing for long-term payments by a responsible customer or
customers for the facilities' production. These contracts would likely be
structured in a manner similar to Power Contracts with non-utility customers. In
that event, the Fund would be subject to the risks of the customers'
creditworthiness and the long-term anticipated demand for the products. With
regard to investments in other types of industries, such as Zap Power Systems,
Inc., the Fund's investment is subject to the many risks of any enterprise that
markets its products to consumers. In addition, Zap's business plan contemplates
marketing its bicycles and vehicles through dealers and franchisees. Zap's
ability to do so profitably will depend upon its ability to organize an
effective dealer and franchise system and to create a mass market through
advertising and marketing efforts for its products. Zap has no significant
experience in those areas.
Reliance on Fuel Supplies at Appropriate Prices
Since the cost of fuel is usually one of the largest components of a
Project's operating costs (especially so in the case of natural gas, coal or
oil-fired electric power Projects), the success of a Project may depend not only
on the availability of fuel supplies but also on the Project's ability to obtain
long term contracts for fuel and fuel transportation at appropriate prices.
The Fund will attempt to invest in Projects which have fuel supply
arrangements which closely match the fuel adjustment provisions of the Power
Contract with the utility, industrial user or other energy purchaser, so that
changes in Project fuel costs will be offset by corresponding changes in revenue
from the sale of energy. Existing Projects that do not have favorable fuel price
adjustment provisions in fuel supply contracts may have purchase prices or
values that are significantly discounted from those of other Projects.
If fuel prices payable by a Project are relatively high compared to the
contract price of energy, the Project may not be able to generate energy on an
economic basis. On the other hand, if a Project's economic returns are based
upon the ability to generate substantial fuel savings through use of
cogeneration and other more efficient power generation technologies, lower fuel
prices may tend to reduce the value of the fuel savings and may adversely affect
the financial performance of the Project. Since cogeneration and other more
efficient technologies often require higher capital costs than conventional
power plants, periods of very low fuel prices could result in fuel savings which
are insufficient to cover the additional capital costs, thereby creating losses
from the Project.
Small scale Projects may find it difficult or uneconomical to obtain
long-term fuel supply contracts and thus may be exposed to risks of fuel price
escalations. For example, after a relatively long period of depressed prices,
natural gas prices in many areas tripled between summer 1996 and the winter
months of 1996-1997. These increases adversely affected many small Projects
operated by Prior Programs, although RPMCo was able to negotiate one-year supply
contracts for many Projects it managed at a price substantially less than peak
prices. Because the Fund may be a relatively small consumer of fuel, it may be
difficult for it to economically hedge fuel prices or purchase reliable supplies
on a long term basis. In that case, the Fund may be exposed to the risk that
fuel price increases could reduce or even eliminate profitability of its
Projects.
A separate component of a Project's overall fuel requirements is the
availability, reliability and cost of transporting the fuel to the Project. For
example, Projects fired by natural gas may be dependent upon a single pipeline
for transportation of large volumes of natural gas, and may be adversely
affected by the costs of transportation on the pipeline or by outages, capacity
restrictions, priority allocations to other customers or other events affecting
the pipeline. Some Projects are designed to operate on alternate fuels (such as
using fuel oil when natural gas is unavailable) but these alternate fuels are
also subject to similar variables of availability, cost and transportation.
In contrast to the Power Contract, which is one of the first objectives
of a Project, the fuel supply contracts are frequently obtained relatively late
in the development process or in the operating stage. There is no assurance that
adequate fuel supply arrangements for a Project will be available from
dependable sources and at acceptable prices at the time required.
It should be noted that hydroelectric Projects and landfill-gas-fueled
Projects may have little or no net fuel expense. However, hydroelectric Projects
are dependent on rainfall and snowfall to create river flow and droughts can
severely limit or cease their output. Landfill gas-fired Projects often have no
alternate source of fuel, and federal regulations effectively limit their use of
alternate fossil fuels (such as natural gas) to 25% of total fuel use per year.
Therefore an interruption for any reason of the fuel supply from the landfill
(because of equipment problems, default by the fuel supply operator,
environmental requirements or routine maintenance, for example) may reduce or
eliminate the ability of the Project to operate.
Environmental Regulation
Projects in which the Fund will participate will be subject to
environmental regulation by federal, state and local government authorities. The
failure to comply and to maintain compliance with these regulations may
potentially result in substantial liability for pollution and other damages
under statutes and regulations relating to environmental matters. Thus, the
regulatory risks associated with the environment should be considered carefully
by Investors before investing in the Fund. Environmental regulation includes the
requirement that the Projects in which the Fund will participate obtain and
maintain various regulatory approvals, licenses and permits. The process
involved in obtaining these approvals can be quite time consuming and expensive,
resulting in delays in the development or construction of a Project or imposing
operating limitations on the Project. These factors could lead to increased
costs to the Fund. If the Fund invests in Projects that were developed by others
or that have an operating history, it may become liable for pollution and
environmental discharges that occurred before it took ownership of the Project
or that the Fund had no ability to affect. As a result, the purchase of any
existing Project or any Project located on land affected by previous activities
may subject the Fund to unpredictable and material contingent liabilities.
Although the Fund through its investigation of Projects will attempt to minimize
such contingencies, there can be no assurance that it can do so.
In addition, there can be no assurance that future environmental
legislation or regulations will not affect Project economics. The imposition of
more stringent environmental laws and more effective enforcement policies
thereunder could significantly increase the costs associated with the
development, construction and operation of any Project and, thus, substantially
reduce the return which Investors could anticipate with regard to the Fund's
interest therein. For example, ongoing implementation of Title V of the Clean
Air Act Amendments of 1990 will require all existing industrial sources of air
pollution to obtain new operating permits and to comply with additional daily
operational limits.
Identifying Projects
There is no assurance that there will be a sufficient number of attractive
potential Projects available to the Fund. In seeking to participate in Projects,
in many cases the Fund is likely to encounter significant competition from
construction companies, equipment vendors, electric and gas utilities and their
affiliates, other Project Sponsors and investment groups which participate in
the development, construction and operation of Projects. Many of these
competitors have greater experience in the independent power industry or project
development or have superior capital resources.
The consolidation of the independent power industry has resulted in
increased competition for acquire most available electric generating Projects in
the United States. The process of identifying and investing in Projects can be
protracted and during that period Investors' funds are held in U.S. Government
securities, in money market funds holding those securities or in short-term
commercial paper or money market instruments at lower yields than those
anticipated from the Projects. Factors that may cause delays include lack of
funds for the Fund to begin the acquisition process, variations in the
availability of Projects and funds available to other purchasers of Projects,
negotiations and environmental and regulatory delays caused by agency action or
the need to investigate or remediate conditions before investing funds. The Fund
seeks to reduce the period necessary to invest funds, primarily through the
Early Investor Incentive, which was instituted to allow programs to begin
acquiring Projects during their offering periods. The period from the closing of
the offering to 90% investment of available funds dropped from approximately 29
months in Ridgewood Power I to 9-1/2 months in Ridgewood Power III but was 22
months for Ridgewood Power IV and is estimated to be at least 15 months for
Ridgewood Power V.
Need for Diversification
The Fund expects that it will participate in several Projects. However,
the size of each investment may depend upon a variety of factors, including,
among other things, the amount of funds available to the Fund, the size and
timing of the proposed investment, the availability of capital from other
investors, the ability of other investment programs sponsored by the Managing
Shareholders to participate, and the requirements of other participants in the
transaction. Based on prior experience, the Fund believes that the likely range
for each major investment by the Fund may be from 10% to 33% of the Fund's total
capital, and may exceed 33% if the Fund participates in certain larger scale
Projects. There can be no assurance that any Projects will earn a return and
failure of any Project to earn a satisfactory return may have an adverse effect
on the financial performance of the Fund as a whole if that Project represents a
significant portion of the Fund's investments.
Risks of Foreign Investments
The Fund may invest in Projects located outside the United States. The
Managing Shareholders and Prior Programs have not yet invested material amounts
in foreign Projects, although they have evaluated several proposals, have
expended funds on due diligence and exploratory investments and are developing
Projects in Egypt and South America. Neither Managing Shareholder and none of
their Affiliates has any significant experience in evaluating, investing in,
developing, operating or disposing of Projects located outside the United
States. Among the risks that the Fund will encounter in making investments
outside the United States are: risks in relying upon unknown or little-known
foreign businesses as partners or operators of projects, increased costs for
legal, accounting, environmental and other services, exposure to unfamiliar
systems of governmental regulation, electricity pricing, taxation, employment
relations and economic organization, inability to obtain goods and services from
abroad or local requirements to purchase goods and services of unknown
characteristics and quality from local suppliers, credit risks in dealing with
local businesses and customers, foreign exchange risks such as depreciation of
the local currency against the dollar or inability to transfer money to the
United States, governmental and business corruption, kidnapping, extortion and
other risks to the Fund's personnel, and difficulty in selling or disposing of
Projects or assets.
Utilization of Funds for Undesignated Projects
The Fund may direct a substantial portion of the net proceeds of this
offering of Shares to Projects that have not been designated in this
Registration Statement, as it may be supplemented from time to time, and the
Fund may be unable to or may decline to participate in any specific investments
described in this Registration Statement or any supplements thereto. Further,
the Fund's investment objectives are broad and grant a great deal of discretion
to the Managing Shareholder in determining whether a potential Project is within
the Fund's objectives. Therefore, prospective Investors may not be able to
evaluate the Projects in which the Fund participates before they purchase
Shares; nor will prospective Investors have any voice in the selection of
Projects after they purchase Shares, and the Fund may invest in Projects that
differ from those described in this Registration Statement or from those that
the Prior Programs have invested in. Consequently, Investors will be relying
upon the judgment of the Managing Shareholder for such decisions.
Projects Require Large Amounts of Capital and Time for Development and
Construction
The Fund may commit a significant portion of its capital to a single
Project, and it is possible that additional capital may be required to complete
a Project or make necessary alterations or additions to such Project. There can
be no assurance that the Fund will have access to any such additional capital or
that the Project can obtain any such additional capital from other sources on
satisfactory terms. Further, to the extent the Fund participates in larger
Projects, extended periods of time (one to three years) may elapse before the
Project commences operation.
Construction
The Fund may invest in the development and construction of new Projects and
if it does so, it will be exposed to the risks that arise in the construction
stage of a Project. These risks include interruptions of supplies or work
stoppages; delays caused by changes in plans and specifications; inclement
weather; subcontractor non-performance; planning error; contractor insolvency;
cost increases; regulatory changes; and other construction-related matters.
Although the Fund will attempt to reduce those risks where possible by
contracting with responsible contractors or suppliers on a turnkey or
performance incentive basis (where these risks are assumed by others), it may
not be possible to do so effectively.
Financing and Leverage
Although the Fund does not intend to borrow any funds to make its equity
investments in Projects, certain Projects may require non-recourse construction
and/or long term financing in order to be viable. There can be no assurance that
such financing will be available at the time required on satisfactory terms and
conditions, and if not available, the Project may be abandoned and all amounts
invested in the Project to that point will likely be lost. Even if commitments
for construction and/or long term financing are obtained by a Project, there is
no assurance that the Project will be able to meet all of the conditions which
are typically required by project finance lenders in order to fund such
financing commitments. Further, even if construction or long term financing is
obtained, failure by the Project to obtain and maintain expected operating
parameters may lead the holders of the debt to foreclose on the Project and
eliminate the equity investment of the owners.
The Fund will seek to limit the risks of leverage by limiting the number of
investments in Projects with leverage and/or conducting its due diligence with a
focus on the adequacy of debt service coverage (excess of cash flow over
required payments of principal and interest) and debt service reserves, and by
focusing on acquiring Projects with a record of prior performance.
Limited Transferability of Fund Assets
The Fund's interests in many Projects in which it participates may be
illiquid. When the Fund initially commits funds to a Project, it may endeavor to
negotiate the right to sell all or part of its equity interests in a Project at
a later time without the consents of other participants. However, the interests
in Project Entities in which the Fund participates with other owners will
typically be closely held and the Fund's ability to transfer its interests in
such Project entities may be restricted or prohibited by their governing
documents, or by other agreements among Project participants or by covenants in
financing documents. Even if the Fund successfully negotiates the right to sell
its interest in a project without obtaining the consents of other participants,
the Fund may find that it is unable to sell or dispose of its interests in
Projects at the times it had planned or that such transactions would be
disadvantageous to the Fund. Successful sales would depend upon, among other
things, the operating history and prospects for the Projects to be sold, the
number of potential purchasers and the economics of any bids made by them and
the state of the independent power market. In addition, sales of substantial
interests in a Project may result in adverse tax consequences.
The Managing Shareholder will have full discretion to determine whether any
of the Fund Properties should be sold and which should be held and in what
proportions, and the Fund will have no obligation to sell all or a portion of
any asset for the benefit of Investors or to retain any asset for the benefit of
Investors. Investors may be required to remain in the Fund until it is
terminated and dissolved.
General Risks of Operation
The commencement of operation by a Project does not necessarily assure
recovery of or a profit on any investment made in such Project by the Fund. If
an electric generation Project or a capital project is completed and placed into
operation, it will be subject to the general risks of the industry, including,
but not limited to, equipment failures, fuel interruption, failure of the
Project to perform according to projections, loss of a Power Contract for not
maintaining a minimum required output availability or other breaches, decreases
or escalations in Power Contract or fuel supply contract price indices in an
unexpected manner, bankruptcy of a key customer or supplier, failure to obtain
required wheeling rights or use of transmission facilities at economic rates,
liabilities in tort (which may exceed insurance coverage), environmental
obligations, inability to obtain desirable amounts of insurance at economic
rates, acts of God and other catastrophes.
Joint Activity with Others
It is anticipated that the Fund will normally participate in a larger
Project jointly with one or more other entities through a joint venture or
partnership vehicle. To the extent that other participants in a Project cannot
fulfill their obligations or have divergent interests or are in a position to
take action contrary to the policies or objectives of the Fund, the Fund's
interest in such venture may be adversely affected. In certain cases, the Fund
may participate or be deemed to participate as a general partner of the entity
developing the Project, thereby exposing the Fund to general partner liability.
The Fund will seek to limit such exposures by interposing a limited liability
entity between the Fund and the Project, or by obtaining specific agreement from
other Project participants they will not seek recourse against Fund assets
(other than the Fund's investment in the Project) for any claims.
Although the Managing Shareholder will remain closely involved in all
aspects of the Fund's activities, the Fund in some cases (typically larger
Projects) will rely upon the advice of others as to the development or
management of Projects. Thus, a substantial amount of responsibility will be
placed on third parties who function as Project Sponsors or Project managers.
The success of any Project will, to a large extent, be determined by the quality
and performance of its Project Sponsors and managers. Project Sponsors and
Project development companies may have conflicting demands on their resources or
may be adversely affected by other developments at their affiliated or
associated entities. As a result, there is the risk that such Project Sponsors
or Project development companies or their other investors may be unable to
fulfill their responsibilities.
Limited Operating Experience
Although Ridgewood Power has participated in numerous independent power
projects and executive officers of Ridgewood Power and advisors to Ridgewood
Power have extensive backgrounds in the independent power industry and the
construction and operation of Independent Power Projects, Ridgewood Power has
limited expertise in the design, construction and operation of independent power
plants. There can be no assurance that Ridgewood Power's prior experience has
given it a comprehensive knowledge of the independent power industry sufficient
enough to result in successful or profitable operations of the Fund or that such
experience extends to all of the diverse areas of the independent power industry
or capital facilities developments in which the Fund may participate.
Power VI Co has no business track record or experience whatever, is not an
operating business and has no capital resources. Its officers are those of
Ridgewood Power and Ridgewood Power will make all of its personnel and other
resources available to Power VI Co as needed to allow Power VI Co to perform its
duties to the Fund.
Projects that the Fund will operate for its own account will be managed
under contract with the Fund by Ridgewood Power Management LLC ("RPMCo"), an
affiliate of the Managing Shareholder. Although many of the officers and
personnel of Ridgewood Power also serve as officers and personnel of RPMCo,
RPMCo was organized in January 1996 and thus has only limited operating
experience. Many of its personnel, although experienced, have been recently
hired by it. Further, RPMCo also manages the operations of Projects owned and
operated by the Prior Programs, and is currently subject to substantial demands
on its organizational and management resources. It is possible that the
management of Projects to be acquired by the Fund would be impaired by these
demands, although the Managing Shareholder believes that RPMCo will have
sufficient resources and experience to operate Projects for the Fund.
Delaware Business Trust
The Fund has been organized as a Delaware business trust having limited
liability of the Shareholders of the Fund. Not every state in which the Fund may
conduct business has enacted legislation recognizing the limited liability
provisions of the Delaware business trust. Accordingly, there is a risk that
investors will not have limited liability for activities of the Fund in those
states. Such risk is substantially, if not entirely, mitigated by the Fund's
conducting its activities and holding its interest in Projects in such states
through limited liability entities such as limited partnerships or limited
liability companies.
Limitations on Liability of Managing
Persons to Fund
The Declaration provides that the Fund's officers and agents, the Managing
Shareholders, the Corporate Trustee, the affiliates of the Managing Shareholders
and their respective directors, officers and agents when acting for the Managing
Shareholders or their affiliates on behalf of the Fund (collectively, "Ridgewood
Managing Persons") will be indemnified and held harmless by the Fund from any
and all claims rising out of their management of the Fund, except for claims
arising out of the recklessness or misconduct of such persons or a breach of the
Declaration by such persons. Therefore, the right of an Investor to bring an
action against any of the Ridgewood Managing Persons for a breach of its or his
fiduciary responsibility or other obligations to the Fund may be limited.
Disparity in Shareholder Contributions
Power VI Co, in its capacity as a Managing Shareholder, and its key
employees and those of the Fund and Ridgewood Power, through the Key Employee
Incentive Plan, will receive, after the preferences to Investors, 25% of the
distributions of the Fund. The Managing Shareholders and employees will not be
obligated to contribute any cash to the Fund for that interest, except to the
extent that Fund Organizational, Distribution and Offering Expenses exceed the
Organizational, Distribution and Offering Fee payable to Ridgewood Poweror to
the extent the plan requires some monetary contribution by employees. Ridgewood
Power has purchased one full share as an Investor in the Fund.
Lack of Investor Participation in Management
Investors have no right to vote on who will act as Managing Shareholder
unless both Managing Shareholders resign, are removed by special action of the
Investors or are incapable of acting as Managing Shareholders because of
bankruptcy or legal disability. Similarly, Investors have no right to vote on or
select the Independent Panel Members of the Fund unless an Independent Panel
Member resigns or is incapable of acting. Therefore, Investors have much more
limited rights to participate in control of the Fund than would stockholders of
a corporation. The Managing Shareholder has the exclusive right to manage,
control and operate the affairs and business of the Fund and to make all
decisions relating thereto and has full, complete and exclusive discretion with
respect to all such matters. Investors have no right, power or authority to
participate in the ordinary and routine management of Fund affairs or to
exercise any control over the decisions of the Fund. Accordingly, no prospective
Investor should purchase any Shares unless the prospective Investor is willing
to entrust all aspects of management of the Fund to the Managing Shareholder.
Limited Transferability of Shares
Shares in the Fund are an illiquid investment. There is no market for the
Shares, and, because there will be a limited number of persons who purchase
Shares and significant restrictions on the transferability of such Shares, it is
expected that no public market will develop. Any change in the status of the
Shares would require compliance with multiple regulatory and tax requirements
and consent from a majority in interest of Investors. Investors will generally
be prohibited from selling or transferring their Shares except in the
circumstances permitted under Article 13 of the Declaration, and all such sales
or transfers require the consent of the Fund, which may withhold such approval
in its sole discretion. Accordingly, an Investor will have no assurance that he
or she can liquidate his or her investment in the Fund and must be prepared to
bear the economic risk of the investment until the Fund is terminated and
dissolved.
The Shares have not been, and are not expected to be, registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities law in a
manner that will make the Shares freely transferable by purchasers under such
laws and, therefore, cannot be resold unless they are subsequently registered
under the Act or an exemption from such registration is available and subject to
other limitations and conditions imposed by the Declaration. The provisions of
Rule 144 under the Act would be available to Investors in connection with such
resale, if the requirements of that rule are met, but the Fund has no current
intention to allow transfers to be made on the open market pursuant to the rule.
The illiquidity of and other significant risks associated with an
investment in the Fund make the purchase of Shares suitable only for an Investor
who has substantial net worth, who has no need for liquidity with respect to
this investment, who understands the risks involved, who has reviewed this
Registration Statement and the Exhibits hereto and the risks involved with his
or her tax, legal and investment advisors, and who has adequate means of
providing for his or her current and foreseeable needs and contingencies.
Voluntary Additional Capital Contributions
There will be no mandatory assessments of the Investors and the Managing
Shareholder. Investors may, however, be called upon on a voluntary basis to make
additional Capital Contributions after the expenditure of the Initial Capital
Contributions. If an Investor elects not to make a requested additional Capital
Contribution, the Managing Shareholder may determine that the Managing
Shareholder, other Investors or other persons may do so or may supply loans
instead, which may result in a dilution of that Investor's interest in the Fund.
Failure Of Fund To Perform Funding Obligations
Although the Fund anticipates that it will be able to perform all of its
commitments to invest in Projects, in certain instances there may be adverse
consequences to the Fund if it were to fail to do so. For example, a partnership
agreement or other instrument governing the Fund's participation in a Project
might provide that, in the event the Fund fails to make a capital contribution
to the partnership or particular Project as required under such agreement, the
Fund will forfeit its entire interest in the partnership or Project, as the case
may be.
Potential Conflicts of Interest
There are material, potential conflicts of interest involved in the operation of
the Fund. Some examples of these potential conflicts include:
o competing demands for management resources of the Managing Shareholder and
RPMCo;
o competing demands for allocating investment or divestiture opportunities among
programs;
o competing demands for opportunities to sell electric power in competitive
markets;
o conflicts between the interests of the Managing Shareholder and its Affiliates
in receiving compensation from the Fund for investment activities, operating
activities, and divestitures, as well as reimbursement for expenses, and the
interests of the Investors;
o conflicts relating to the allocation of costs and expenses among programs;
o conflicts arising from the fact that the Managing Shareholder will not make a
capital contribution in respect of its interests as such in the Fund and that
the Investors will supply all of the capital of the Fund;
o conflicts between the interests of the Fund and other programs sponsored by
the Managing Shareholder and its Affiliates if those programs are co-owners of
Projects with the Fund;
o conflicts as to who will supply additional capital in the event the Fund were
to require additional contributions;
o potential interests of the Managing Shareholder or its Affiliates in competing
independent power or investment ventures;
o the lack of independent representation of Investors in structuring this
offering and in determining compensation; and
o conflicts between the interests of key employees and the Managing Shareholder
and those of Investors with regard to determining compensation under the Key
Employees Incentive Plan.
Material transactions between the Fund and other Programs sponsored by the
Managing Shareholder and its Affiliates must be reviewed and approved by the
Independent Review Panel. Although the potential conflicts of interest described
here and others cannot be eliminated, the Fund believes any such potential
conflicts will not materially affect the obligation of Ridgewood Power and Power
VI Co in their capacities as Managing Shareholders to act in the best interests
of the Investors and the Fund.
Tax Risks
There are tax advantages associated with an investment in the Fund, and
there are some tax risks associated with those tax benefits. The risks include,
but are not limited to, those discussed below.
(A) Partnership Tax Status of Fund
While it is the opinion of tax counsel to Ridgewood Power that the Fund
should be recognized as a partnership for federal income tax purposes, such
opinion is not binding upon the Service and no advance ruling from the Service
as to such status has been requested, and such a request is not contemplated. If
a secondary market for the Fund's Investor Shares develops, the Service, in the
event it audits the Fund, might attempt to treat the Fund as an association
taxable as a corporation. If such challenge were successful, the Investors would
be treated as if they were corporate shareholders and, therefore, would not be
entitled to deduct their proportionate share of the Fund's operating losses.
(B) State and Local Taxes
Each Investor may be liable for state and local income taxes payable in the
state or locality in which the Investor is a resident or doing business or in a
state or locality in which the Fund conducts or is deemed to conduct business.
Thus each Investor may be required to file multiple state income tax returns as
a result of his investment in the Fund.
The state of California has instituted a withholding requirement for
distributions from organizations taxed as partnerships (such as the Fund and
limited partnerships or limited liability companies used by the Fund to invest
in Projects) to tax partners located outside California. If the Fund earns
income in California, the portion of each distribution to a non-California,
taxable Investor that is attributable to California is subject to a withholding
tax of 7%, whether or not the Investor files a California income tax return. The
Fund believes that other states may follow California's example, in which case
much of the income component of distributions to an Investor would be subject to
state withholding taxes.
Each prospective Investor is urged and expected to consult with his
personal tax advisor with respect to the tax consequences connected with an
investment in the Fund.
(3) Business Plan and Development of Projects
Business Plan.
As deregulation of the electricity industry in the United States
progresses, the uncertainties and the financial stresses that deregulation may
create may have the effect of depressing the stock price of companies that have
long-term value. Opportunities may arise to invest in undervalued industry
participants or in other businesses having unique technological advantages. If
so, the Fund may invest its funds in acquiring majority or minority equity
stakes in those companies.
Advantages of Investing in the Independent Power Industry
Because of historical factors, many existing independent power Projects
have long-term power sales contracts that can provide consistent cash flows to
Project owners over long periods of time. Further, the side effects of the
deregulation of the electricity industry, which is just beginning, are tending
to depress the purchase price of these Projects. Finally, in several years,
those side effects might make these Projects more valuable than the current
prices for the Projects would indicate. The Fund's decision to invest its assets
in the independent power industry is based on these trends.
In 1978, Congress passed the Public Utilities Regulatory Policies Act
("PURPA"), which was intended to create additional sources of electricity and
which also created the ability for companies other than electric utilities to
generate and sell electricity. Under PURPA, each electric utility must purchase
electricity generated by certain non-utility electric generating plants
("Independent Power Projects") at a price equal to the utility's "avoided cost."
This avoided cost basically is the estimated highest cost the utility would pay
otherwise to purchase additional electricity. PURPA also exempts Independent
Power Projects from many federal and state restrictions.
PURPA does not require utilities to enter into long-term contracts to
buy electricity from Independent Power Projects, but in the 1980's and early
1990's many utilities entered into long-term power purchase contracts from
Independent Power Projects. With changes in the industry, few if any new
long-term power purchase contracts are being entered into today.
Generating facilities with existing long-term contracts thus have
unique advantages in that those contracts are for extended terms at rates that
are often equal to or higher than current spot rates for electricity.
Nevertheless, the Fund believes that these facilities are sometimes undervalued
and can be excellent investment opportunities.
First, the deregulatory movement has made many potential competitors of
the Fund uncertain about the value of small generating facilities with long-term
contracts. The federal government and state governments are deregulating the
electric power industry. These changes will allow any company that generates
electricity to sell its output to any utility to which it can transmit the
electricity, and, in most states, eventually to any retail customer. This
movement will create pressures on local utilities to buy their electricity from
the cheapest competitive source. As a result, local electrical utilities with
high-cost generating facilities, such as malfunctioning nuclear power plants or
inefficient fossil-fuel units, will find that they will not be able to use those
facilities economically. Even so, those utilities will be obligated to pay off
the capital costs incurred to build and maintain those uneconomic plants. Those
costs are called "stranded costs."
Many long-term power purchase contracts between local utilities and
independent power producers now provide for rates in excess of current
short-term rates for purchased power and the utilities are treating their
contractual obligations as a form of stranded cost. There has been much
speculation that in the course of deregulating the electric power industry,
federal or state regulators or utilities would attempt to invalidate these power
purchase contracts as a means of throwing some of the costs of deregulation on
the owners of independent power plants. To date, the Federal Energy Regulatory
Commission and each state regulator that has addressed the issue have ruled that
existing power purchase contracts will not be affected by their deregulation
initiatives. To date, the regulators have rejected the requests of a few
utilities to invalidate existing power purchase contracts. There can be no
assurance that existing power purchase contracts will not be modified. However,
because of the consistent position of the regulatory authorities, the Fund
believes that so long as it performs its obligations under the power purchase
contracts, it will be entitled to the benefits of those contracts.
Facilities without long-term power purchase contracts may also be
attractive investments. Deregulation is encouraging electric utilities to sell
off many of their existing generating plants. In many cases, state regulators
are requiring electric utilities to sell many of their plants to separate
electric generating companies, so that a competitive market for buying and
selling electricity can be created. In other cases, electric utilities are
voluntarily selling their generating plants because they believe they can obtain
power on the open market more efficiently. As a result, there is a large number
of generating plants for sale today and it is expected that many more will be on
the market soon. This tends to depress the price of all existing plants.
Further, small electric generating plants may be less attractive purchases for
large corporations and investment groups with large amounts of capital to
invest, which may further depress their current prices. The Fund believes that
these market conditions may allow it to acquire small independent power plants
at attractive prices.
Finally, the uncertainties caused by deregulation and by past failures
of demand to meet projections have deterred investments in new generating
capacity. Further, as a competitive market in generating capacity is created,
market forces are discouraging many utilities and generators from keeping as
much generating capacity in reserve as they did in prior years. While some power
marketing groups are claiming that efficiencies created by deregulation will
meet needs for additional capacity, many electric industry engineers and
consultants have expressed fears that there will be shortages of generating
capacity within the next 10 years in many areas of the United States. It should
also be noted that as deregulation forces electricity prices lower, demand for
electricity should rise, other things being equal. In addition, many
nuclear-powered and conventional electric generating plants are coming to the
end of their useful lives.
With these factors shaping the future market, a few large independent
electric power companies and their backers have announced plans to build large
new generating stations without long term power purchase contracts. They
apparently think by the time those large investments in power plants go into
operation (currently estimated through 2002) those plants will be needed. The
Fund does not intend to join in building large new power generating facilities
without firm contracts for sale of the electricity, although if an attractive
opportunity existed it would do so. Instead, the Fund believes that if it
economically and efficiently operates and maintains small generating Projects,
those Projects will increase in value from their current somewhat depressed
levels if reserve capacity tightens in the industry.
In addition, many small independent power Projects have environmentally
beneficial features. For example, some small independent power Projects use
landfill gas to power their generators. Instead of having the methane gas
produced by rotting garbage flow into the atmosphere, where it may have powerful
"greenhouse" effects that increase global warming, the methane is burned to
produce electricity and water and carbon dioxide, which are less environmentally
destructive. Small independent cogeneration power Projects can save fuel. The
Fund will look for small Projects that have these kinds of environmental
benefits, not only because of the benefit to the environment but also because it
believes that its experience with these kinds of small Projects can make them
good investments.
Advantages to Investing in Other Capital Facilities
Environmentally beneficial independent power Projects often have
similar, non-electric power facilities related to them. For example, a trash-to
energy power plant may have a waste transfer station nearby. In investigating
small independent power Projects, Ridgewood Power has found that there are other
capital projects that are similar to independent power Projects and that often
(but not necessarily) have environmental benefits. These may meet the Fund's
goals for investment because they are expected to provide long-term, reliable
cash flows and have potential for long-term appreciation. Some of the types of
Projects that may fit this profile include:
Projects to convert waste fuel or biomass into useful fuels or chemicals;
Projects to generate electricity or heat to process or destroy harmful
industrial wastes; Projects that provide pumping power or other motive power
more efficiently than electric or other motors; infrastructure facilities such
as waste transfer stations; or other types of capital projects, such as fuel
plants, processing facilities and recycling facilities, that are expected to
have consistent cash flows similar to those from Independent Power Projects.
Advantages to Investing in Other Companies
Deregulation of the electricity industry, like the deregulation of the
natural gas industry in the last 15 years, is likely to have unpredictable
effects on many utilities and electric generating companies. Instead of having
assured markets and government-determined pricing, both electric utilities and
independent power producers without long-term Power Contracts will face rapidly
changing demand and supply for electricity. Smaller companies and companies with
long-term or unconventional business strategies may find that they are
undervalued by the stock market or that deregulatory uncertainties make it
difficult to attract capital and grow. This may create opportunities for the
Fund to acquire majority or minority equity interests in those companies on
favorable conditions. Although this type of investment is not the Fund's primary
goal, the Fund will take advantage of these opportunities if they arise.
Although the Fund's primary focus is to invest for long-term
appreciation, it might also elect to invest in equity securities with the
purpose of gaining control of a company, or for effecting a merger or business
combination with the Fund, its affiliates or non-affiliated parties, or for
effecting the acquisition of assets, or for sale to a successful bidder. The
Fund might effect any of these transactions on its own, together with
Affiliates, or together with non-Affiliates, and might do so with the
encouragement or consent of management or con-trolling equity holders of the
company or without such consent.
If the Fund were to invest a substantial amount of its assets in equity
securities of other companies and did not actively own and operate power plants,
it might become an "investment company" subject to the requirements of the
Investment Company Act of 1940. The Fund does not intend to do so and will not
make investments that would require it to be regulated under that statute
without the prior consent of the holders of a majority of the Investor Shares
and the Incentive Shares issued under the Key Employees Incentive Plan
(collectively, the "Voting Shares").
Basic Investment Approach
When the Fund makes investments in Independent Power Projects and in
other capital Projects, it concentrates on smaller Projects in which it can buy
at least a controlling equity interest (either together or with another program
sponsored by the Managing Shareholders). Those investments should be small
enough for the Fund to make several investments and to diversify its purchases.
Therefore, these types of investments are expected to be in the range of $2 to
$20 million per investment. Many institutional investors will not make
investments of less than $10 to $15 million, which may reduce competition for
the investments the Fund is focusing on. Also, larger companies may want to sell
their smaller Projects so they can focus their capital and other resources on
other investments. In some cases, electric utilities may wish to sell all or a
portion of their interest in a Project so that they can comply with federal
requirements limiting their investment in certain facilities regulated under
PURPA to 50% of the equity.
By making equity investments, the Fund often deleverages Projects. This
decreases risk to Investors and reduces financing expenses for the Projects, and
usually frees up funds held in amortization, maintenance or debt service
reserves that lenders required. This can make more cash flow available for
distribution to Investors and in the long term if the Fund is successful in
improving the operating results of the Project. After a period of successful
operation, or based on other factors, the Fund might conclude that the balance
of returns and risks to Investors would be improved if a Project was leveraged.
In that case, the strong equity position of the Fund might make such financing
easier to obtain.
Another advantage of the Fund's approach is that it is prepared to
provide equity financing of up to 100% of the amount needed to acquire or
develop a Project and can do so quickly, without the need of obtaining
additional financing from institutions. Institutional debt financing for
projects in North America can be difficult to obtain quickly.
Where possible, the Fund prefers to invest in Projects that are already
operating to reduce development risks and delays in earning cash flow. If the
Fund commits money to develop a Project, it prefers to invest in smaller
Projects or Projects with short development periods.
Where possible, the Fund will seek to have operating control over a
Project (or share operating control with another program sponsored by the
Managing Shareholders). Ridgewood Electric Power Trusts I through V (the five
other independent power industry programs sponsored by the Managing Shareholders
and referred to as the "Prior Programs") now own interests in over 40 Projects,
primarily in California, New York and New England. Over half of these Projects
(by number and by revenues) are managed by RPMCo, which is also controlled by
Robert E. Swanson.
RPMCo has over 35 employees, including engineering, operating,
accounting and legal specialists. The Managing Shareholders have found that
hiring other participants in or developers of Projects to manage the Projects,
or hiring third party managers, often leads to inefficient management and lesser
total returns to the Funds. Further, common management allows savings in fuel
purchasing, cash management and personnel, creates incentives for efficiency
over the entire portfolios of Projects, and allows RPMCo to gain valuable
operating and industry experience. RPMCo is only reimbursed for its costs, with
no profit factor.
The Fund may hire other persons to manage Projects, typically in cases
where the Projects are small and difficult to manage centrally. In some cases
the prior owner or developer may retain a significant ownership interest or
insist on continuing to operate Projects as a condition for selling them. In
those situations, the Fund will seek to obtain a preferred right to net cash
flow from the Project before the other owner or developer is entitled to cash
flow or compensation materially in excess of its costs.
The Fund will also attempt to include incentive provisions in any
management contract that will encourage the manager or operator to maximize the
return to the Fund. These types of provisions often give the manager a bonus if
it exceeds performance targets while reducing compensation somewhat (or allowing
the Fund to fire the manager) if the Project's performance does not meet
specified minimums.
Finally, in acquiring a Project, the Fund ordinarily will create a
subsidiary with limited liability for its owners to hold the Project or a small
group of similar Projects. This should reduce the Fund's liability for its
subsidiaries' operations and should isolate each Project to a reasonable extent
from liabilities of other Projects.
Investment Approach for Larger Projects
The Fund might be able to invest in Projects larger than the $20
million size described above. If it participated with larger companies in buying
or developing a Project, the Fund would probably buy a minority, non-control
equity interest. These types of transactions are heavily negotiated and there is
no typical structure for the Fund.
However, the Fund believes that it could be an attractive participant
in a purchase of a larger facility, because its investment objective is
long-term appreciation for its Investors and because it has ready cash for
investment. The Fund thus can participate quickly and effectively in
negotiations. Moreover, it can enter into complicated arrangements such as
partnerships with special allocations of accounting earnings or tax benefits,
where the Fund can receive cash flow while other participants are allocated
disproportionate amounts of earnings or tax items that may be more valuable to
them. Further, because the Fund is not related to any electric utilities, when
it invests in a Project it can help any electric utility co-owners to comply
with the 50% utility ownership limitation for certain Projects.
Timetable for Trust Investments
The Fund anticipates that its offering of Shares will continue for
about 16 to 20 months and that it will start buying major Projects in the second
or third quarters of 1999, approximately 14 to 18 months after the offering
began. Although the amount of time needed to invest all the funds raised varies
significantly from program to program, the Fund estimates that it will
substantially complete its investments between 12 and 18 months after the
offering closes.
These time estimates for the length of the offering and the amount of time
needed to complete buying Projects may change significantly depending upon the
progress of the offering, the amount of funds raised and the availability of
attractive investments. One of the Prior Programs had a total of approximately
$36 million of uninvested funds as of the date of this Registration Statement.
As described below, Ridgewood Power's policy is to present investment
opportunities first to the earliest-organized program with available funds.
Therefore, the Fund may have to wait until Prior Programs are fully invested
before its funds can be applied to Project investments. See Item 1(c)(2) - Risk
Considerations - Identifying Projects for additional factors that may affect the
Fund's ability to invest funds quickly.
Until funds from the offering of Shares are invested, they will be
deposited in bank accounts, in securities issued by or guaranteed by the U.S.
Government or its agencies or in money market funds or other funds invested in
those securities, or in investments rated AAA or Aaa or A1P1 or higher (for
money market or commercial paper instruments) by nationally recognized
securities rating organizations, or in securities that are prior to those
investments.
Distributions from Operating Projects
Until the Fund has invested in a significant amount of operating
Projects, it generally will make distributions of available cash flow from
interim investments and initial Projects quarterly to Investors. When cash flow
available from operating Projects reaches an appropriate level (usually within
18 to 36 months after the offering of Shares begins), the Fund will seek to make
quarterly or monthly distributions.
Distributions of available cash flow can vary depending upon Project
operating performance, fuel prices, unexpected operating or administrative
costs, environmental requirements, scheduled and unscheduled maintenance and
costs of equipment, fees and expenses payable to outside operators or Project
participants and Trust operating costs and liabilities.
The Fund's primary goal is to provide a capital appreciation
opportunity for Investors, both by investing in assets with appreciation
potential and by positioning itself for a future public offering, merger or
other corporate event. Subject to these and other factors described in the
remainder of this filing, the Fund's secondary goal is to provide Investors with
annual distributions of net cash flow, as defined in the Declaration of Trust,
of 12% of their Capital Contributions to the Fund. Because the Fund's policy is
to distribute net cash flow, a substantial portion of many distributions will
include funds that represent depreciation and amortization charges against
assets. Occasionally, distributions may include funds derived from operating or
debt service reserves or proceeds of sales of Projects. For purposes of
generally accepted accounting principles, amounts of distributions in excess of
accounting income may be considered to be capital in nature, even though the
Fund is organized to return net cash flow rather than accounting income to
Investors.
Under current law and conditions Independent Power Projects have a
relatively assured source of revenues for the length of their power purchase
contracts. When those contracts expire or terminate, or if the Independent Power
Projects do not have fixed or formula price contracts, the cash flow prospects
for the Projects will depend on market conditions and are not predictable at
this time.
Sale or Disposition of Projects
The Fund's business plan is not currently geared toward selling or
otherwise disposing of Projects before the expiration or termination of existing
power purchase contracts. The Fund believes that at or before the termination of
those contracts there may be opportunities to sell or otherwise dispose of
Projects at a positive return for Investors and two Prior Programs have done so.
However, any estimate at this time of potential returns is speculative.
Future Liquidity Alternatives
Investor Shares are an illiquid investment. However, after the Fund's
business is well-established, which is anticipated to be approximately two to
five years after this offering terminates, the Fund will seek to make the
Investor Shares more liquid. Among the alternatives that might be available
would be events ("Liquidity Events") such as a change in the Fund to create a
publicly traded entity, either as the result of a business combination with
other similar programs sponsored by Ridgewood Power or by altering the existing
securities, tax and organizational law limitations on transfer and trading of
Investor Shares. Because these types of changes have significant and possibly
adverse federal income tax, federal and state securities law and business
effects, the Fund cannot and does not assure Investors that any such change can
be made and will do so only with the consent of a majority in interest of
Investors.
Ridgewood Power intends that the five Prior Programs (the prior
business trusts organized by Ridgewood Power to invest in the independent power
industry) will eventually combine into a single corporation that will have
tradable shares that will be listed or quoted on a major U.S. securities market.
The combined corporation, which would have more equity owners, greater assets
and more diversification of assets than any single program, might be
significantly more likely to develop a market for those equity interests. This
type of Liquidity Event has become a possibility because of the success of
Ridgewood Power since 1991 in organizing five Prior Programs with significant
assets and investor bases that could join with the Fund. One consequence of this
type of combination would be that unlike the Prior Programs, the resulting
combined corporation would not be treated as a partnership for tax purposes. As
a result, it would be taxed as a separate entity on its income and its
stockholders would pay income tax as well on any dividends it paid to them.
It is thus possible for the Fund at some future date to merge or
combine with the successor public corporation to the Prior Programs or to
participate in the original combination. Ridgewood Power currently intends to
include the Fund together with the five Prior Programs in the conversion into a
single corporation. If the Fund were large enough on its own, the Fund might
also convert itself into a taxable corporation with tradable shares, although
under current conditions this second alternative is unlikely.
As an alternative Liquidity Event, the Managing Shareholders and
Investors could amend the Declaration to permit free transferability of Investor
Shares. If the Fund is registered under the Securities Exchange Act of 1934, as
it anticipates, this would allow most Investors to offer their Investor Shares
to potential purchasers under Rule 144 of the Securities and Exchange Commission
as long as the sale takes place at least two years after purchase and several
prerequisites are met, or in most cases without prerequisites three years after
purchase. Finally, subject to further review of legal and tax issues, the Fund
might change its structure into one that continues to be taxed as a flow-through
entity (a business entity that is not taxed as a corporation and thus, like the
Fund currently, avoids double taxation of amounts distributable to Investors)
but that permits free transferability of Investor Shares. This might, but not
necessarily would, permit the creation of a trading market for the Investor
Shares.
Under current law and business conditions, there are significant legal,
tax and business consequences from electing any of these alternative Liquidity
Events and the Fund accordingly will not do so without amending the Declaration
after soliciting and receiving the consent of the holders of at least a majority
of the Investor Shares. Before the Fund undertakes any action or change that
would result in a Liquidity Event, it will solicit each Investor in writing by
means of a disclosure document describing all material aspects of the proposed
action.
In general, actions that would allow Investor Shares to be marketable
would raise the question for federal income tax purposes as to whether the
Investor Shares were readily tradable on a secondary market or its equivalent.
In that case, the Fund would be considered to be an "association" taxable as a
corporation. A combination of the Fund with other programs would raise the same
tax issues as to the combined entity and its securities.
Corporation tax status might have adverse effects on the net cash
return to an Investor, in part because a corporation's income is taxed at the
corporate level and dividends derived from that income are then taxed at the
Investor level. It is also possible, however, that because of depreciation
deductions or other tax provisions that the Fund might not have significant
taxable income so that these adverse effects would be less significant. It is
impossible to predict these factors at this time. It might be possible to
convert the Fund to a different type of taxable entity that is not taxable as a
corporation, but under current law it is likely that a restructuring of the
Fund's investments to a more passive form and reduction of the Fund's management
rights, if any, over Projects would be required.
In addition, if the Fund is to be combined with other investment
programs, the process of combining the entities, obtaining necessary owner
consents and making regulatory filings may be protracted and expensive and may
involve significant conflicts of interest between the combining programs. These
transactions, which are sometimes referred to as "rollups," require special
disclosure and fairness procedures to be undertaken, may require supermajority
votes of shareholders in each program to be obtained for approval and can be
extremely complex.
There are other alternatives that the Fund currently believes are less
desirable to Investors but that might be suggested if future market conditions
were favorable. The Fund might propose to the Investors that the Declaration be
amended to provide redemption rights to Investors. If the Investors were to
approve that proposal, the Investors would be offered the opportunity to redeem
their Investor Shares or to remain as equity owners in the Fund. The
attractiveness of this option depends upon the market at that time for minority,
non-control interests in the Projects owned by the Fund. Finally, a majority of
the Investor Shares may cause the dissolution of the Fund, either with the
Managing Shareholders' consent or by removal of the Managing Shareholders.
Dissolution would cause the mandatory liquidation of the Fund's investments,
although the time constraints of a dissolution and the need to sell all
investments concurrently tend to significantly reduce total return.
No Investor should purchase Investor Shares with the expectation that
the Fund will elect to take or will be able to take any steps to make the Shares
tradable on any market or that any other means of allowing an Investor to sell
or "cash-out" his or her investment will be available.
Potential Investments
From time to time the Fund may identify potential investments for its
available funds. The Managing Shareholder anticipates that the Fund will review
and enter into preliminary investigations or indications of interest for a
significant number of potential investments that in fact the Fund will decline
to pursue or that will not be available for the Fund to invest in. This is a
necessary part of the process of winnowing potential investments to those that
the Managing Shareholder believes are the most advantageous for the Fund. Thus,
the identification of any potential investment is not an assurance that the Fund
will acquire the investment or that it will even enter into negotiations to
effect the purchase. Further, in Ridgewood Power's experience, as a result of
investigations of the investment and the process of negotiating an acquisition,
the terms of the transaction tend to change frequently and unpredictably. There
is no assurance that any proposed investment or any variant will occur, that the
terms of the investment will be the same or similar to those proposed by any
party from time to time or that any investment will be economically advantageous
to the Fund. Investors who purchase Investor Shares while any proposed
investment transaction is pending must do so with the understanding that the
final terms and conditions of the transaction may differ from those described in
this Registration Statement or elsewhere and that their purchases cannot be
contingent upon the final terms, if any, of the transaction.
(4) The Fund's Investments.
(i) ZAP Power Systems, Inc.
The Fund invested $2,000,000 in Ridgewood ZAP, LLC ("Ridgewood ZAP") in
March 1999 as a holding company for its investments in ZAP Power Systems, Inc.
("ZAP"). ZAP is headquartered in Sebastopol, California, north of San Francisco.
ZAP designs, assembles, manufactures and distributes electric bicycle power
kits, electric bicycles and tricycles, electric scooters, and other electric
transportation vehicles. ZAP's common stock is quoted on the OTC Bulletin Board
under the symbol "ZAPP".
Because ZAP's management believed that the primary barrier to widespread
use of electric vehicles was their high cost, its activity and revenue was
initially derived from development contracts from a foreign private entity and
from domestic government agencies. These contracts were set up to develop low
cost Zero Air Pollution (or ZAP) type electric vehicles. Now ZAP is focusing on
the manufacturing and distribution of these electric vehicle products.
ZAP manufactures an electric motor system that is sold as a kit to be
installed by the customer on their own bicycle. The system was designed to
assist the rider during more difficult riding situations, rather than as a
replacement for pedaling. ZAP also installs the motor system on specially
designed bicycles that the Company has manufactured under contract. The
completed bicycles, with motor, are then sold to the customer. Additionally, ZAP
produces an electric scooter, known as the ZAPPY(TM), which is manufactured by
the Company, using parts manufactured by various subcontractors. ZAP also is an
U.S. distributor of the Electricycle(TM) scooter that is imported from China and
is a distributor of an electric motorcycle.
Further information on ZAP is contained in its Annual Report on Form 10-KSB
and Quarterly Reports on Form 10-QSB, filed with the Securities and Exchange
Commission.
On March 30, 1999, Ridgewood ZAP 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 was granted a warrant to purchase
additional shares of Common Stock of ZAP. If the warrant is exercised, the Fund
will contibute to Ridgewood ZAP the $2,000,000 necessary to do so. The total
exercise price under the warrant is $2,000,000 and the exercise price per share
equals 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. The warrant has customary anti-dilution
provisions. The warrant is exercisable at any time but only in its full amount
by Ridgewood ZAP through December 29, 1999, if in its reasonable judgment it
decides that all of the following conditions have been met:
ZAP has not experienced a material adverse change in its financial
condition or business prospects; and
ZAP has satisfied all of the following milestones of performance:
(x) Completion of the acquisition of a model bike rental unit which has
gross income of at least $400,000 per annum for the last two calendar years;
(y) Completion of at least three of the following six joint marketing
agreements that are currently being pursued by the Company: MTV Networks;
Baywatch Television Series; Ford Motor Company; KOA, Disney and Huffy Bikes; and
(z) Completion of the following financial milestones for the period
commencing on January 1, 1999: net sales of $8,500,000; gross profit of
$2,500,000; and net profit of $350,000.
If ZAP informs Ridgewood ZAP that all the above conditions have been
met and if Ridgewood ZAP in its reasonable judgment concludes that the
conditions have been met, Ridgewood ZAP will exercise the Warrant no later than
December 29, 1999.
The conditions have not been met as of the date of this Schedule 13D
and Ridgewood ZAP is unable at this time to anticipate whether it will exercise
the warrant.
Ridgewood ZAP 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 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 with quarterly and annual financial
information, an annual financial plan, audit information and public
announcements. Ridgewood ZAP 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 owns less than 5% of ZAP's Common Stock. Ridgewood ZAP'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 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.
Ridgewood ZAP will nominate two directors, Douglas Wilson and Thomas Brown (who
are officers of the Fund and Ridgewood Power, see Item 5(b) - Directors and
Executive Officers of the Registrant - Managing Shareholder) for election to
ZAP's Board of Directors at its coming annual meeting of shareholders, scheduled
for May 16, 1999.
(iii) Proposed Investments,
Ridgewood Power is considering two additional investments for the Fund: the
purchase of an interest in up to 12 landfill-gas-fueled electric generating
stations in the United Kingdom in partnership with Power V and the development
of several electric generating stations at resort hotels in Egypt. Preliminary
negotiations for these transactions are underway but no commitment has yet been
made to invest in these Projects. Ridgewood Power is also considering a number
of potential investments for the Fund that are at earlier stages of evaluation.
The Fund is actively seeking additional Projects for investment, either by
itself or in conjunction with other programs sponsored by the Managing
Shareholder if such programs are authorized to do so.
(iv) Co-investment Issues and Conflicts of Interest.
Ridgewood Power is also the managing shareholder of the Prior Programs
(Power I, Power II, Power III, Power IV and Power V), which have business
objectives similar to those of the Fund. In the future, Ridgewood Power
anticipates that it will continue to sponsor other investment programs similar
or identical in objective to that of the Fund. Further, it is possible that
affiliates of Ridgewood Power will sponsor, manage or advise other types of
investment programs. Ridgewood Capital, which is under common control with
Ridgewood Power and the Fund, is currently sponsoring two investment programs
that are making venture capital investments in a variety of industries. In this
discussion the Prior Programs, the Fund, and any other investment programs that
are sponsored by Ridgewood Power, Ridgewood Capital or their Affiliates are
referred to as "Ridgewood Programs."
These relationships could result in conflicts of interest arising from
competing demands of the Fund and other Ridgewood Programs on Ridgewood Power's
management resources, those of RPMCo or those of other Ridgewood Managing
Persons. However, as required under the Declaration, the Managing Shareholder
will devote as much attention to the Fund's activities as is reasonably
necessary to manage the Fund.
The Managing Shareholder of the Fund will use its best efforts to conduct
Fund affairs for the benefit of the Investors. However, the interests of the
Fund, its officers and agents, the Managing Shareholder, the Corporate Trustee,
the affiliates of the Managing Shareholder and their respective directors,
officers and agents when acting for the Managing Shareholder or their affiliates
on behalf of the Fund (collectively, "Ridgewood Managing Persons"), as well as
those of the Prior Programs, any future investment programs affiliated with the
Fund, and the Investors may be subject to a variety of potential conflicts,
including but not limited to the following.
Co-Investment and Similar Conflicts
A conflict of interest might arise if at any given time an opportunity to
invest in a Project would be suitable for more than one program, thus requiring
Ridgewood Power to choose among the suitable programs. It is also possible,
though unlikely, that in a future competitive electricity sales market programs
would be competing against each other for sales of power or that an opportunity
to dispose of Projects would be suitable for more than one program. Finally, the
Managing Shareholder may determine that more than one program should invest in a
Project or Projects, in which case those programs will be co-owners.
If the Fund and another program with similar investment objectives have
funds available at the same time for investment in the same or similar Projects,
and a conflict of interest thus arises as to which program will make the
investment, the Managing Shareholder will review the investment portfolio of
each program. They will make the investment decision on the basis of such
factors, among others, as the effects of the investment on the diversification
of each program's portfolio, potential alternative investments, the effects
investment by either program would have on the program's risk-return profile,
the estimated tax effects of the investment on each program, the amount of funds
available and the length of time those funds have been available for investment.
If more than one program has funds available for investment and the factors
discussed above and other considerations indicate that the Project has
approximately equal benefit for each Program, Ridgewood Power will generally
allocate the opportunity first to the Ridgewood Program that was first
organized, to the extent of its funds that can be prudently invested in that
opportunity. In general Ridgewood Power will seek to apply all uninvested funds
of that program to the opportunity, unless doing so would cause the program to
be significantly over-committed to a Project. Any remaining investment
opportunity would then be offered successively to later-organized Ridgewood
Programs on the same basis. A similar process would be followed for divestiture
opportunities or competitive electricity sales.
Ridgewood Power will seek to allow Ridgewood Programs that invest
concurrently to participate on similar terms in a Project, but reserves the
ability to have programs participate on dissimilar terms in order to meet their
investment objectives or to conform to transactional requirements. Further, if a
Ridgewood Program is only able to invest in a particular Project at a different
time than do other Ridgewood Programs because of legal or transactional
requirements or because the Program has a delayed availability of funds,
considerations of equity between Ridgewood Programs and the structuring of the
transaction may cause the Ridgewood Programs to invest on differing terms.
A similar conflict could arise where the entities make investments in
different forms, which would be the case where one entity's investment took the
form of equity and the other's took the form of debt. The Managing Shareholders
believe that in most cases these potential conflicts of interest are unlikely to
cause material adverse effects on the Fund. In cases where the Fund and another
Ridgewood Program invest concurrently in a Project, the material terms of the
transaction normally are the product of arm's length dealing with the seller,
creditors and other interested parties or regulators. Because in such instances
the Ridgewood Programs normally invest on the same terms and take proportionate
interests in the Project, conflicts between them are effectively limited only to
determining how much of the Project will be bought by each, as described above.
In cases where other Ridgewood Programs and the Fund were to invest at differing
times or on different terms, the Fund would face more difficult conflict of
interest questions. The Managing Shareholders, if practicable, would attempt to
resolve these issues by reference to the terms negotiated by other debt or
equity participants in the Project or similar Projects, by reference to similar
transactions, or by reference to current interest rates and other measures
relating to the time value of money or to risk/reward considerations. Finally,
in any material co-investment transaction, the transaction would be a Ridgewood
Program Transaction that would be reviewed by the Panel and approved by it
before consummation. Although the Managing Shareholders believe these practices
may reduce potential conflicts of interest of this type, there can be no
assurance that the interests of the entities will not diverge.
Dispositions of Assets
If the Managing Shareholders take on the responsibility of acting as a
broker or finder at the time the Fund decides to dispose of a property and if no
third person is retained by the Fund for those purposes, the Managing
Shareholders are entitled to receive (but may waive) a brokerage fee from the
proceeds of successful dispositions of Fund property only. The Managing
Shareholders believe that any potential conflict of interest in this event would
be minimal, because the Managing Shareholders have incentives to maximize
returns to the Fund (including but not limited to the Managing Shareholders'
interest in the proceeds of the disposition) and because any fee so earned may
not exceed 2% of gross proceeds.
Additional Investments in Projects
As a Project in which the Fund has participated continues its
development or expands its operations, or if a Prior Program offers its interest
in a Project to the Fund, the Fund may be requested or may wish to commit
additional funds to the Project or the purchase. If the Managing Shareholders
determine in their sole discretion that the Fund will participate in the
opportunity, it may determine to apply the Fund's funds available at that time
to the Project or the purchase, seek to raise additional Fund capital or borrow
the necessary funds. If the Managing Shareholders determine that the Fund will
not participate and applicable regulatory requirements are met, the Managing
Shareholders may make or cause another Ridgewood Managing Person or another
program to make the additional commitment of funds, which might be on terms that
are different from those of the Fund's prior investment in the Project.
Ridgewood Power accordingly may have potential conflicting duties to the Fund
and to those other entities in determining whether the Fund will participate in
the opportunity or waive or assign rights to contribute additional capital to
the Project.
Other Potential Conflicts of Interest
The Fund will reimburse RPMCo for the Fund's share of the costs
incurred by RPMCo in managing Projects. This may create conflicts of interest
among the Fund and other programs as to the allocation of costs and between the
Managing Shareholder and RPMCo, on the one hand, and the Fund and the programs,
on the other, as to the services provided by RPMCo, the expenses of RPMCo, and
the division of responsibilities between RPMCo and the Managing Shareholders.
The Managing Shareholders believe that any conflicts among programs will be
minimized by the method of allocation, which will be based where possible on
actual time and expenses incurred on behalf of the Fund and in other cases on
the relative amount of the investment of each program in the Projects being
managed. Conflicts between the interests of RPMCo and the programs will be
limited by the requirement that reimbursement not exceed actual cost.
The Managing Shareholders, key employees, RPMCo and Ridgewood
Securities are entitled to the compensation, reimbursements and payments
described below at Item 5 -- Directors and Officers of the Registrant. The
amount and terms of those arrangements were not determined through a process of
arm's length bargaining and thus do not necessarily reflect the fair market
value of the services to be rendered to the Fund.
Some of the Ridgewood Managing Persons might have business dealings with
institutional investors that may participate in competing Independent Power
Projects. The Fund might also invest in certain Projects or Project development
companies owned, developed or operated by a Ridgewood Managing Person, or a
Ridgewood Managing Person may invest in certain Projects or Project development
companies in which the Fund has participated. In addition, the terms of the
agreements governing Ridgewood Managing Persons investing in the independent
power business may be more or less favorable to their investors than those
pertaining to Investors under the Declaration.
The Managing Shareholders have the discretion at any time to cause the
Fund to make advances of costs of defense or settlement to the Managing
Shareholders, their personnel and other Ridgewood Managing Persons, regardless
of the existence of a conflict of interest.
The Managing Shareholders have provided no independent representation
of prospective Investors in connection with this offering, and each prospective
Investor should seek independent advice and counsel before making an investment
in the Fund.
While potential conflicts of interest, including those described
herein, cannot be eliminated, the Fund believes any actual conflicts that may
arise will not materially affect the obligations of the Managing Shareholder to
act in the best interests of the Investors and the Fund.
(5) Trends in the Electric Utility and Independent Power Industries
There are numerous references for further information on the electric
power industry. Interested persons may particularly wish to refer to the U.S.
Department of Energy's Annual Energy Outlooks and special studies, prepared by
the department's Energy Information Administration (the "EIA"). Much of this
information is available on EIA's World Wide Web site at http://www.eia.doe.gov
under the "Electric" heading. Neither the Department of Energy nor EIA nor any
other agency of the United States Government has endorsed or approved the Fund
or the Investor Shares and the Fund takes no responsibility for the preparation
or content of the Department of Energy's publications.
Overview
The independent power industry has evolved as a result of Congressional
action to require electric utilities to purchase electricity from non-utility
generators, the perceived need for new and replacement power capacity on the
part of utilities and industrial customers and regulatory and economic pressures
to increase competition in the electric power industry. In the decades before
1978, electricity that was sold to persons other than who produced it was almost
exclusively generated in the United States by electric utilities. The energy
crises of the 1970's led to the enactment of PURPA, which, by reducing
regulatory procedures, encouraging more efficient use of energy and requiring
electric utilities to buy electricity from companies other than electric
utilities, encouraged non-utility generators to enter the electric power
business. PURPA and the subsequent Energy Policy Act of 1992 forced state
regulators and electric utilities to consider the advantages of electricity
generation by Independent Power Projects and to make room in the market for
those Projects by requiring the utilities to purchase the output of "Qualifying
Facilities" at the "avoided cost" that the utility would otherwise pay for
incremental power supplies. PURPA did not, however, require that the purchase be
made for any particular period of time.
Until very recently in the United States, local electric utilities
combined the functions of generating electricity, transmitting it to the areas
where it was to be used, and distributing that electricity to customers.
Electric utilities created regional power pools, which are organizations that
administer interconnections among utilities and provide systems for exchanging
power among the members. Members of a power pool can buy and sell electricity
among themselves and transport electricity on a barter basis to any area served
by the pool or interconnected pools. Sales through power pools or otherwise to
utilities or other organizations (such as municipal power systems) that
distribute to customers are referred to as "wholesale" transactions, while sales
from the ultimate supplier to the user of electricity are "retail" transactions.
The regulatory structure governing these transactions is complex.
Although many federal agencies have jurisdiction over aspects of the electric
power industry, FERC is the primary regulator, with the powers to regulate the
prices, volumes and conditions of all interstate sales and transmission of
electricity, to authorize hydroelectric licenses and supervise nationwide
reliability and service concerns. State public utility commissions or similar
state regulators generally have granted exclusive franchises to utilities to
serve geographic areas, set prices charged and conditions of service to
consumers of electricity and determine the need for and method of cost recovery
for new generating, transmission and distribution facilities. The Securities and
Exchange Commission has broad authority over all financial aspects of "public
utility holding companies," which include owners of electric utilities in
multiple states.
In the early 1980's, projections of significant increases in demand for
electricity and forecasts of continually increasing prices for fossil fuels
(which made cogeneration and other small power production technologies
attractive), as well as regulatory and economic pressures on electric utilities
that inhibited their ability to raise capital for new power plant capacity,
caused those utilities and their governmental regulators to favor wholesale
purchases of electricity from non-utility generators under long-term Power
Contracts. With these contracts available, developers of Independent Power
Projects were enabled to obtain significant financing and to expand rapidly. By
summer of 1995, an industry trade magazine estimated that independent power
producers represented 7% of total U.S. generating capacity and 9-10% maximum of
total wholesale sales.
Government reviews of the industry anticipate continued long-term
expansion of the independent power industry in the United States. The EIA, in
its The Changing Structure of the Electric Power Industry - An Update (December
1996), estimated that non-utility capacity in 1995 was 70,300 Megawatts,
representing approximately 8.5% of total output capacity in the United States.
Five years earlier, non-utility capacity was only 42,900 Megawatts. As to energy
capacity additions, the EIA forecasts in its Annual Energy Outlook 1997 that by
the year 2015, non-utility generating capacity (including self-generation) will
increase to approximately 245,000 Megawatts. According to EIA forecasts,
non-utility generating capacity will represent approximately 25% of total output
capability in the United States by the year 2015 and will account for at least
58% of new capacity from all sources. The EIA projections are based on, among
other assumptions, a continuation of current applicable law and regulations,
including wholesale and retail deregulation. The EIA projections also have
significant uncertainties, as described in the underlying publications.
A large part of non-utility capacity will replace worn-out or outdated
generating capacity. The EIA estimates that an additional 319,000 Megawatts of
capacity will have to be added by 2015, of which 38,000 Megawatts will be needed
to replace retiring nuclear power plants and 71,000 Megawatts to replace steam
plants fired by fossil fuels.
Although these studies indicate a continuing long-term need for more
investment in Independent Power Projects, investment in new Independent Power
Projects in the United States has fluctuated significantly in the last two
decades. In the early 1990's economic recessions and increased efficiency by
electricity users and utilities caused the demand for new generating capacity to
be less than anticipated. Further, fossil fuel prices did not increase
consistently and in some cases went to and remained at depressed levels. Many
utilities concluded that they could acquire additional capacity more cheaply
than through long-term Power Contracts with non-utility generators, and
regulators, as described below, initiated changes that will tend to emphasize
short-term electricity supply arrangements. Finally, electricity deregulation
added uncertainties that deterred investment.
Although there are still significant uncertainties in the industry,
during 1997 and 1998 a significant amount of proposed new capacity additions
were announced, almost all of which is to be fueled by natural gas as described
below. Many utilities are auctioning off their generating assets and many new
participants are entering national and local electricity markets. Further, many
industry observers believe that competition and shifts to more efficient
generating technologies will drive down the cost of generation, especially at
large, natural-gas fueled generating plants.
The investment strategies of the Fund and the other electric power
programs being sponsored by the Managing Shareholder aim to take advantage of
these market trends by acquiring Projects developed in the period of rapid
growth, purchasing interests in smaller-size Projects that are being sold off by
utilities and building new capacity in niche markets or in foreign countries
where the new pressures of competition may be less intense. It is also possible
that those same pressures may make it possible for the Fund to acquire other
generating companies that are underperforming or that need additional capital.
For success, among other matters discussed earlier in this Registration
Statement, these strategies will require that the Fund and the Managing
Shareholders be able to identify attractive Projects, to negotiate advantageous
terms, and in many cases to operate the acquired Projects more efficiently than
before. There can be no assurance that all of these conditions can be met or
that other factors will not prevent success.
Recent Industry Trends
As a consequence of federal and state moves to deregulate large areas
of the electric power industry and the existence, spurred by PURPA, of private
competitors to electric utilities in the market for generating electricity, a
number of interrelated trends are occurring.
Continued Deregulation of the Generating Market
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act")
encourages electric utilities to expand their wholesale generating capacity by
removing some, but not all, of the limitations on their ownership of new
generating facilities that qualify as "exempt wholesale generators" ("EWG's")
and on their ability to participate in Independent Power Projects. Many state
electric utility regulators are considering plans to further encourage
investment in wholesale generators and to facilitate utility decisions to spin
off or divest generating capacity from the transmission or distribution
businesses of the utilities. As a result, Independent Power Projects in the
future will face competition not only from other Independent Power Projects
seeking to sell electricity on a wholesale basis but also from EWG's, electric
utilities with excess capacity and independent generators spun off or otherwise
separated from their parent utilities.
Wholesale-level Access to Transmission Capacity
Without access to transmission capacity, an Independent Power Project
or other wholesale generator can only sell to the local electric utility or to a
facility on which it is located (or, in some states, which adjoins its
location). The most important changes occurring in the electric power industry
are the efforts of FERC to compel utilities and power pools to provide
nationwide access to transmission facilities to all wholesale power generators.
When combined with the increased competition in the generating area, this new
electricity supply market is profoundly changing the operations of electric
utilities, consumers and Independent Power Projects.
The 1992 Energy Act empowered FERC to require electric utilities and
power pools to transmit electric power generated by other wholesale generators
to wholesale customers. This process is referred to as "wheeling" the electric
power. Essentially, the generator contributes power to a utility or power pool
and is credited with that contribution, and the utility or power pool serving
the wholesale customer makes available that amount of electric power to the
customer and debits the generator. Wheeling is effected between power pools on a
similar basis.
FERC initially dealt with wheeling requests on a case-by-case basis as
constrained by provisions of the 1992 Energy Act that require all costs of the
transmitting utility to be recovered in the transmission charge and that
prohibit wholesale competitors from wheeling power to customers of an electric
utility under generating contracts or tariffs. On April 24, 1996 the Federal
Energy Regulatory Commission adopted Order 888, which requires electric
utilities and power pools to provide wholesale transmission facilities and
information to all power producers on the same terms, and endorses the recovery
by utilities of uneconomic capital costs from wholesale customers who change
suppliers. The utilities would also be required to furnish ancillary services,
such as scheduling, load dispatch, and system protection, as needed. These
rights, however, would apply only to sales of new electric power over and above
existing utility supply arrangements. Non-utility wholesale deliveries of
electricity have grown vigorously and according to the EIA grew at the rate of
21% per year in the ten years from 1986 to 1996.
Numerous regulatory issues must be addressed under this proposal of
which one of the most contentious is the treatment of utility so-called
"stranded costs." Utilities that own generating plants with relatively high
costs of production would be under severe competitive and regulatory pressure to
purchase cheaper wholesale electricity, but in that event the utilities would
not receive sufficient revenue to meet debt service requirements or other
capital costs (the stranded costs) relating to the high-cost plants. This might
significantly impair utility cash flows and some utilities might be at risk of
insolvency in that event. The FERC order requires some mitigation efforts on the
utility's part, but primarily requires wholesale customers who acquire
electricity from a new supplier to compensate their former utility supplier for
revenue lost. This might require a customer who changes suppliers to pay a
substantial additional fee to the prior utility supplier, thus inhibiting
changes of supplier.
The order takes no action to modify existing power purchase contracts.
The order intends to create a competitive national market in electricity
generation and thus may create additional pressure on electric utilities to seek
changes to long-term power purchase contracts, as described further below. The
Fund has developed its business plan in anticipation of the order and will
pursue its investment program to take advantage of opportunities as they arise
in the changing industry. The Fund is unable to predict the long-term
consequences of the order on its eventual operations or on the independent power
industry.
State public utility regulatory agencies must also review and approve
certain aspects of wholesale power deregulation, and those agencies are
currently holding proceedings and making determinations.
In addition to the FERC order or other Congressional or regulatory
actions that may result in freer access to transmission capacity, agreements
with Canada, and to a lesser extent with Mexico, are leading toward access for
those countries' generators to U.S. markets. In particular, certain Canadian
suppliers, such as HydroQuebec (the Quebec provincial utility) are already
offering substantial amounts of electricity in the U.S., and more may be offered
if sufficient transmission capacity can be approved and built. These agreements
may also afford access to those countries' markets in the future for Independent
Power Projects. As a result, there is the possibility that a North American
wholesale market will develop for electricity, with additional competitive
pressures on U.S. generators.
Proposals to Modify PURPA and Existing Power Contracts
The small-scale segment of the independent power industry in which the
Fund is likely to invest remains a creature of PURPA in many respects. The
prospects of increased competition to supply electricity, availability of
wheeling of wholesale power, supply alternatives through the conservation
initiative described above and reduced rates of increase in electricity demand
have caused many electric utilities and other industry observers to advocate
repeal or modification of PURPA and, in a few cases, to advocate changes to
existing long-term Power Contracts with Independent Power Projects. These
utilities have alleged that PURPA requires them to purchase electricity at
higher prices than they could acquire new capacity themselves and that existing
Power Contracts, signed when utilities anticipated much higher fuel and capital
costs and higher demand, provide for prices substantially above current
wholesale prices. The independent power industry has pointed out that PURPA does
not require utilities to purchase new supplies from Independent Power Projects
at rates above alternative sources' prices (although a few state regulators have
imposed such requirements from time to time) and that existing long-term Power
Contracts were generally entered into on the basis of good faith estimates by
the utilities of future conditions with the expectation that sponsors would rely
upon them.
To date, FERC has rejected proposals to modify existing Power Contracts
(except for contracts entered into under state regulations mandating payment of
prices greater than utility avoided costs at the time the contracts were
executed), and FERC's rulemaking proposals are expressly based on the principle
that existing Power Contracts that comply with current law should not be
modified by FERC. Although proposals have been introduced in Congress to amend
or repeal PURPA, no such proposal has yet been reported. However, there can be
no assurance that FERC or the Congress will not take action to reduce or
eliminate the benefits or PURPA for Independent Power Projects or that they
would not take action purporting to change or cancel existing Power Contracts or
that they would not take action making compliance with those contracts
economically or practically infeasible. If any such action were to be taken, the
value of existing Independent Power Projects with long-term Power Contracts
might be significantly impaired or even eliminated. If such action were to be
proposed with any significant prospect of adoption, the consequent uncertainty
might have similar effects.
In a related phenomenon, some electric utilities that are parties to
long-term Power Contracts with rates substantially above current replacement
costs have entered into buy-out arrangements with the owners of those
Independent Power Projects. Under these agreements, the Power Contracts are
terminated in exchange for a payment by the utility to the Project. The Fund
does not anticipate investing in Projects with the expectation of soliciting or
receiving a buy-out arrangement, but it will consider potential arrangements if
conditions warrant.
Retail-level Competition
An even more radical prospect for the electric power industry is
retail-level competition, in which generators are allowed to sell directly to
customers by using (and paying a fee for) the local utility's distribution
facilities. Retail-level competition presupposes the ability to wheel power in
the appropriate amounts at economic costs from the generating Project to the
electric utility whose wires link to the retail customer (typically a large
industrial, commercial or governmental unit) and the ability to use the local
utility's facilities to deliver the electricity to the customer. In addition to
the business and regulatory issues arising from wholesale wheeling, retail-level
competition raises fundamental concerns as to the ability of utilities to
recover stranded costs at the generating and distribution levels, the
possibility that smaller customers will have less ability to demand pricing
concessions, incentives for governmental agencies to act as intermediaries for
consumers and the functions of state-level regulatory agencies in a
price-competitive environment which may be inconsistent with their traditional
price-setting and service-prescribing roles.
Although retail deregulation is being implemented currently on a
state-by-state basis, there are some common elements. First, most deregulating
states will require that local utilities will be the "suppliers of last resort,"
which are required to serve any customers in their existing territories who do
not purchase generated electricity from another source and which are required to
obtain adequate generating capacity to meet those needs. Second, most
deregulating states are requiring that utilities and other suppliers of
electricity work through "independent system operators" ("ISO's"), which are
non-profit associations who operate regional transmission grids and who
coordinate purchase, transmission and sale of electricity between generators and
distribution utilities. ISO's have significant responsibility for supply
reliability.
Third, most deregulating states are requiring that utilities be
compensated for stranded costs (which include long-term Power Contracts with
Independent Power Project that are above current and anticipated market prices)
for a transition period. This is typically done by imposing a transition fee or
surcharge on rates that is paid to the utility. In some states, utilities are
being encouraged or ordered to issue bonds or other financial instruments to
retire stranded cost assets or contracts, supported by transition charges.
Fourth, many states are requiring local utilities to divest a large portion or
all of their generating assets or to sell their rights under long-term Power
Contracts. The states have cited concerns such as the anti-competitive effects
of allowing the utilities, which retain a monopoly over the wires that take
electricity the last stages to the customer, to own generating assets. Further,
the sale of assets (or above-market Power Contracts) sets a market price for
those assets and allows a somewhat objective computation of the stranded costs
related to those assets or contracts. For example, the true stranded cost of a
nuclear plant is approximately the difference between the value assigned to it
under state regulation and the price someone will pay for it at auction.
Fifth, utilities having stranded costs are expected to mitigate those
costs by buying out contracts or selling costly assets. Finally, many states are
attempting to protect generators who use "renewable fuels" or that are
considered to have environmental or social benefits.
Price and Cost Pressures
The pricing pressures that retail and wholesale deregulation are
bringing are expected to decrease the marginal cost of electricity. Competition
will force utilities and generators to reduce overhead and administrative costs,
to trim operation and maintenance costs and to more efficiently buy and use
fuel. Further, wholesale and retail deregulation and new generating technologies
discussed below are expected to significantly reduce capital costs. For example,
electric utilities currently maintain large amounts of generating capacity in
reserve to meet peak loads (for example, to serve customers during a heat wave
in July). According to the EIA, competition may lead to pricing strategies that
reduce these peak loads. Competition may also force utilities to stop
maintaining high-cost reserve capacity and to take greater risks. Finally, the
widening wholesale market for electricity may increase efficiency by allowing
utilities and power consumers to obtain distant, lower-cost capacity for reserve
purposes rather than maintain local, higher cost, underutilized reserve
capacity. For these and other reasons, the EIA currently estimates that national
average electricity rates in real terms (adjusted for inflation) will decline to
about 6.3 cents per kilowatt-hour in 2015 from the 1996 average level of 7.1
cents per kilowatt-hour.
As these trends continue, high-cost generators will be disadvantaged
and may fail. If the Fund were to invest in small-scale generating plants that
in the past have tended to have higher per-kilowatt hour costs than new, large
scale generating plants, it may have difficulty competing. The Fund recognizes
these pressures and intends to invest only in facilities that have competitive
costs of fuel, capital and operation or facilities that offer significant
opportunities for improvement. The Fund will also attempt to invest in
facilities, such as landfill gas power plants, that have tax or environmental
advantages that offset price pressures or that are located abroad where such
pressures may be less.
New Generating Technologies and New Industry Participants
Recent improvements in turbine technology, coupled with what is seen as
the ample supply and relative cheapness of natural gas, have made gas turbines
the favored technology for new electric generating plants. The EIA estimates
that 80% of the new electric generating capacity to be added from 1995 to 2015
will be fueled by natural gas and that the amount of generation fueled by
natural gas will increase from the current 10% to 29%. According to the EIA, new
gas turbines only need 15 days per year of maintenance, on the average, compared
with 30 days a year for steam turbines. Although gas turbines historically have
been used to meet peak demand rather than baseload demand, new "combined cycle"
units (which use heat from the turbine's exhaust to drive a second steam or gas
turbine) have thermal efficiencies approaching 60% (60% of the theoretical
maximum heat from the burning gas is converted to electricity) and can be used
as baseload units. In contrast, steam turbines fired by coal have efficiencies
in the 36% range and have operating and maintenance costs higher than those of
combined cycle plants. The EIA estimates that combined cycle gas turbine plants
alone will account from 96,000 to 143,000 Megawatts of the 319,000 Megawatts of
additional capacity to be added in the next 17 years.
Combined cycle gas turbine plants reach their maximum efficiency at
sizes of 400 Megawatts. Projects of that size are too large for the Fund to
acquire or construct with its own capital and, even if the Fund were to borrow
to finance a combined cycle Project, it is likely that the Fund would be
overcommitted to a single Project if it tried to develop a combined cycle plant
on its own. Accordingly, the Fund could only participate in this type of Project
as a minority investor. The Fund might also invest in smaller gas turbine
Projects (which according to the EIA can be as small as 10 Megawatts in
capacity), although smaller turbines are more suited for peak load, short period
operations.
The new emphasis on natural gas-fired generation is causing large
natural gas transmission or brokering companies to enter the electricity
generation market rapidly. They have access to large volumes of gas and have the
ability to raise large amounts of capital. Accordingly, most new investment in
combined cycle gas Projects and other large-scale gas turbine Projects is being
made by these natural gas/energy companies or by large utilities that are
entering the competitive generation industry.
Many of the proposed natural gas-fired generating plants are intended
to be merchant power plants that are not built with the benefit of long-term
Power Contracts. There have also been reports, especially from the northeastern
states, that large non-utility generating companies and utilities entering the
competitive generating market outside their existing service territories are
buying large numbers of older plants from local utilities with the intention of
replacing them on site with new, large, natural gas-fueled plants. It is unclear
whether many of the announced merchant power plants will actually be built,
given the uncertainties of the market for electricity and the possibility that
there may be insufficient gas pipeline capacity or supplies to fuel all of the
recently announced plants.
Many companies, including affiliates of fuel suppliers and utilities,
have applied to FERC to act as electric power marketers, because they anticipate
that if wholesale wheeling becomes significant there will be strong demand for
brokers or market makers in electric power. It is uncertain whether power
marketers will become significant factors in the electric power market. A
related development is the creation of derivative contracts for hedging of and
speculation in electricity supplies, which may offer generators, utilities and
large industrial or commercial consumers the ability to reduce the volatility of
competitive prices. To date, the effects of derivative contracts on the market
for electricity have not been material.
Renewable Power
The pressures of competition are expected to harm the "renewable power"
segment of the industry. "Renewable power" is a catchphrase that includes
Projects (such as solar, wind, biomass and landfill-gas) that do not use fossil
fuels or nuclear fuels and, in some cases, some other types of small Independent
Power Plants that are Qualifying Facilities (such as small hydroelectric plants,
cogeneration plants and small fossil fuel plants). Renewable power plants
typically have high capital costs and often have total costs that are well above
current costs for new gas-turbine production. Many observers believe that
renewable power plants without existing Power Contracts (with the possible
exception of biomass plants with very low fuel costs) will be non-competitive in
the new markets unless they are given governmental protection. A number of
states are requiring that retailers of electricity purchase a certain minimum
amount of electricity (often 5% to 10% of their total requirements) from
renewable power sources and the Clinton Administration has proposed a national
7.5% minimum requirement. Although this will tend to protect renewable power
Projects, unless there is a shortage of renewable capacity these state
requirements will still make low total cost an essential if a renewable power
Project is to have any ability to succeed.
Initial Effects of Trends
With these conditions in mind, many observers see two primary
strategies for Independent Power Projects to succeed in the United States:
first, Projects that have existing, firm, long-term Power Contracts may do well
so long as regulatory or legislative actions do not abrogate the contracts.
Second, Projects that are low-cost producers of electricity, either from
efficiencies or good management or as the result of successful cogeneration
technologies, will have advantages in the market. The Fund intends to focus on
both possibilities and to maintain a focus on medium-to-long-term results. It
also will consider Projects selling power to large retail users such as
industries rather than utilities.
Finally, there have been industry-wide moves toward consolidation of
participants and divestiture of Projects. A number of utilities and equipment
suppliers have proposed or entered into joint ventures to reduce risks and
mobilize additional capital for the more competitive environment, while many
electric utilities are in the process of combining, either as a means of
reducing costs and capturing efficiencies, or as a means of increasing size as
an organizational survival tactic. One recent observer has described the drive
by electric utilities to sell their existing plants and purchase comparable
plants from other utilities in areas outside their historic service areas,
combined with frequent mergers, as an industry game of "musical chairs." This
consolidation tends to create additional competitive pressures in the electric
power industry; however, this trend is also encouraging the divestiture of
smaller Projects or Projects that are deemed less central to the operations of
large, consolidated businesses. This may make attractive Projects available for
investment by the Fund.
(6). 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.
Please also review the discussion of changes in the industry above at (6) -
Trends in the Electric Utility and Independent Power Industries.
(7). Regulatory Matters.
Projects are subject to energy and environmental laws and regulations
at the federal, state and local levels in connection with development, ownership
and operation. Federal laws and regulations developed by administrative agencies
govern transactions with utility companies, the types of fuel which may be
utilized by a Project, the type of energy which may be produced by a Project and
the ownership of a Project. State utility regulatory commissions must approve
the rates and, in some instances, other terms and conditions on which public
utilities purchase electric power from Projects. Under certain circumstances
where specific exemptions are otherwise unavailable, state utility regulatory
commissions may have broad jurisdiction over Projects. Projects are also subject
to federal, state and local laws and administrative regulations which govern the
emissions and other substances produced by a Project and the geographical
location, zoning, land use and operation of a Project. Applicable federal
environmental laws typically have state and local enforcement and implementation
provisions. These environmental laws and regulations generally require that a
wide variety of permits and other approvals be obtained before the commencement
of construction or operation of an energy-producing facility and that the
facility then operate in compliance with such permits and approvals.
Energy Regulation
PURPA. The enactment in 1978 of PURPA and the adoption of regulations
thereunder by FERC provided incentives for the development of cogeneration
facilities and small power production facilities meeting certain criteria.
Qualifying Facilities under PURPA are generally exempt from the
provisions of the Holding Company Act, the Federal Power Act, as amended (the
"FPA"), and, except under certain limited circumstances, state laws regarding
rate or financial regulation. In order to be a Qualifying Facility, a
cogeneration facility must (i) produce not only electricity but also a certain
quantity of heat energy (such as steam or hot water) which is used for a purpose
other than power generation, (ii) meet certain energy efficiency standards when
natural gas or oil is used as a fuel source and (iii) not be controlled or more
than 50% owned by an electric utility or electric utility holding company. Other
types of Independent Power Projects, known as "small power production
facilities," can be Qualifying Facilities if they meet regulations respecting
maximum size (in certain cases), primary energy source and utility ownership.
Recent federal legislation has eliminated the maximum size requirement for
solar, wind, waste and geothermal small power production facilities (but not for
hydroelectric or biomass) for a fixed period of time.
PURPA provides three primary benefits to Qualifying Facilities. First,
Qualifying Facilities are relieved of compliance with extensive federal, state
and local regulation which control not only the development and operation of an
energy-producing Project, but also the prices and terms on which energy may be
sold by the Project. A Project that is not a Qualifying Facility will be subject
to the extensive regulatory requirements of the FPA, other federal and state
utility legislation and regulation, and possibly the Holding Company Act. These
requirements can delay or even preclude development of a non-Qualifying
Facility.
Second, PURPA requires that electric utilities purchase electricity
generated by Qualifying Facilities at a price equal to the purchasing utility's
full "avoided costs." Avoided costs are defined by PURPA as the "incremental
costs to the electric utility of electric energy or capacity or both which, but
for the purchase from the Qualifying Facility or Qualifying Facilities, such
utility would generate itself or purchase from another source." The FERC
regulations also permit Qualifying Facilities and utilities to negotiate
agreements for utility purchases of power at rates other than the purchasing
utility's avoided cost. While public utilities are not required by PURPA to
enter into long-term Power Contracts to meet their obligations to purchase from
Qualifying Facilities, until recently utilities and regulators encouraged use of
long-term Power Contracts.
Third, PURPA requires that each electric utility interconnect with
Qualifying Facilities and that the utility sell backup or standby power to the
Qualifying Facility on a non-discriminatory basis. This requirement enhances the
reliability of Qualifying Facilities and is especially important for
inside-the-fence facilities, whose customers would otherwise be left without
power in the event that the facility required off-line maintenance or repair.
The exemptions from extensive federal and state regulation afforded by
PURPA to Qualifying Facilities are important to the Fund and its competitors.
The Fund expects that most of the Projects in which it invests will be
Qualifying Facilities. Although some Projects may not be Qualifying Facilities,
the Fund intends to participate only in Projects that avoid the restrictions of
the Holding Company Act and most state regulation.
The Holding Company Act.
Under the Holding Company Act, any person (defined to include
corporations and partnerships and other legal entities) which owns or controls
10% or more of the outstanding voting securities of a "public utility company"
or a company which is a "holding company" of a "public utility company" is
subject to registration with the Commission and regulation under the Holding
Company Act. A holding company of a public utility company is required by the
Holding Company Act to limit its operation to a single integrated utility system
and to divest any other operations not functionally related to the operation of
that utility system. Under PURPA, Qualifying Facilities are exempt from
regulation under the Holding Company Act, and the Fund anticipates that
substantially all of its investments will be in Qualifying Facilities.
Structuring the Fund's own activities to ensure that it is not a
"holding company" of a "public utility company" under the Holding Company Act is
also important in providing financing and financial reporting flexibility to the
Fund. If the Fund pursues the development of Exempt Wholesale Generators (as
defined below) or other Independent Power Projects which will not qualify for
the benefits provided by PURPA and which ordinarily would subject the Fund to
the provisions of the Holding Company Act, it intends to do so in a manner to
qualify for exemptions under the Holding Company Act or certain no-action
positions taken by the Commission. Such a structure could, for example, consist
of the Fund's holding a limited partner interest in a limited partnership which
owns a non-Qualifying Facility.
The 1992 Energy Act.
The Comprehensive Energy Policy Act of 1992 (the "1992 Energy Act")
empowered FERC to require electric utilities to make available their
transmission facilities to and wheel power for Independent Power Projects under
certain conditions and created an exemption for electric utilities, electric
utility holding companies and other independent power producers from certain
restrictions imposed by the Holding Company Act. The transmission and wheeling
provisions of the act were described above at Item 1(c)(6). The exemptive
provisions are described below.
The 1992 Energy Act created an additional exemption from the Holding
Company Act for EWG's, which are defined basically as entities certified by FERC
as engaged exclusively in the business of owning and operating electric
generation facilities which generate electricity for resale. EWG's remain
subject to rate and tariff regulation by FERC and by state regulators. Further,
EWG's may not sell electricity to electric utilities affiliated or associated
with them unless state regulators approve, and state regulators must determine
whether purchases by electric utilities from EWG's are fair to consumers and
utilities and affect utility reliability.
One set of primary beneficiaries of the EWG's category is expected to
be electric utilities and their holding companies, which are released from
Holding Company Act restrictions on owning interests in wholesale generators and
Qualifying Facilities (but which will still be subject to certain Holding
Company Act restrictions on financing EWG's and PURPA restrictions on ownership
in Qualifying Facilities). The other primary beneficiaries of the EWG provisions
of the 1992 Energy Act are expected to be developers and Project Sponsors that
wish to construct Independent Power Projects that are not Qualifying Facilities
(often because the fuel, heat energy, production or ownership requirements of
PURPA are impractical to meet). By releasing them from the Holding Company Act
regulatory environment, these developers and Project Sponsors may be better able
to proceed and in particular to enlist electric utilities and holding companies
as co-venturers. By exempting electric utilities, electric utility holding
companies, and other developers from certain restrictions imposed by the Holding
Company Act, the 1992 Energy Act has expanded the potential pool of Projects in
which they are able to invest. Although the Fund believes that the exemptive
provisions of the 1992 Energy Act will not materially and adversely affect its
business plan, it may result in increased competition from such entities to
develop promising Projects and in increased competition in the sale of
electricity by Independent Power Projects.
Regulations under the 1992 Energy Act have clarified the ability of
electric utilities and holding companies to invest in EWG's and electric power
plants outside the United States.
Federal Power Act. The FPA grants FERC exclusive rate-making
jurisdiction over wholesale sales of electricity in interstate commerce. The FPA
provides FERC with ongoing as well as initial jurisdiction, enabling FERC to
revoke or modify previously approved rates. Such rates may be based on a
cost-of-service approach or determined through competitive bidding or
negotiation. While Qualifying Facilities under PURPA are exempt from the
rate-making and certain other provisions of the FPA, non-Qualifying Facilities
are subject to the FPA and to FERC rate-making jurisdiction. Although EWG's are
subject to FERC ratemaking jurisdiction, their owners do not by virtue of that
ownership come under FERC jurisdiction.
Companies whose facilities are subject to regulation by FERC under the
FPA because they do not meet the requirements of PURPA may be limited in
negotiations with power purchasers. However, since such projects would not be
bound by PURPA's heat energy use requirement for cogeneration facilities, they
may have greater latitude in site selection and facility size. Any Projects in
which the Fund may participate that are non-Qualifying Facilities are expected
to comply with the FPA.
Fuel Use Act. Projects may also be subject to the Fuel Use Act, which
limits the ability of power producers to burn natural gas in new generation
facilities unless such facilities are also coal capable within the meaning of
the Fuel Use Act. The Fund anticipates that natural gas-fired cogeneration
Projects in which it may participate will be coal capable and thus qualify for
exemption from the Fuel Use Act.
State Regulation. State public utility commissions have broad
jurisdiction over Independent Power Projects which are not Qualifying Facilities
under PURPA, and which are considered public utilities in many states. Such
jurisdiction results in state requirements to obtain certificates of public
convenience and necessity to construct a facility and could result in regulation
of organizational, accounting, financial and other corporate matters on an
ongoing basis. Although FERC generally has exclusive jurisdiction over the rates
charged by a non-Qualifying Facility to its wholesale customers, state public
utility commissions have the practical ability to influence the establishment of
such rates by asserting jurisdiction over the purchasing utility's ability to
pass through the resulting cost of purchased power to its retail customers. In
addition, states may assert jurisdiction over the siting and construction of
non-Qualifying Facilities and, among other things, issuance of securities,
related party transactions and sale and transfer of assets. The actual scope of
jurisdiction over non-Qualifying Facilities by state public utility regulatory
commissions varies from state to state.
In recent years, many states have required or encouraged electric
utilities to undertake least cost utility planning and demand-side management.
Utilities engaging in least cost utility planning consider the costs, advantages
and disadvantages of multiple means of meeting electricity demand, such as
purchasing electric power from Independent Power Projects or other utilities,
efficiency and conservation investments, load management, renewable resources
such as hydroelectric, solar and wind power and conventional generation by the
utility, all with a view toward determining the least-cost mix of supplies. Rate
requests and accounting are to treat the alternatives on an equally favorable
basis. The 1992 Energy Act and related statutes do not compel least cost utility
planning but require it to be considered and require periodic updating of plans
adopted andpublic access to the planning process.
Demand-side management involves cooperative efforts between utilities
and large customers to change the customers' patterns of demand for electricity.
Because demand for electricity changes substantially according to the time of
day or the season, utilities must maintain large amounts of capacity to meet
peak loads that may only occur for a portion of the day or occasionally during
the year. Utilities can thus save significant capital and operating costs if
large customers can move their demand to off-peak times, or restrict demand
during peak periods, or otherwise conserve electricity. Demand-side management
has the effect of reducing utility needs for capacity generally and for
purchasing electricity to meet peak loads at premium prices from Independent
Power Projects.
Environmental Regulation
The construction and operation of energy and fuel producing projects
and the exploitation of natural resource properties are subject to extensive
federal, state and local laws and regulations adopted for the protection of
human health and the environment and to regulate land use. The laws and
regulations applicable to the Fund and Projects in which it will invest
primarily involve the discharge of emissions into the water and air and the
disposal of waste, but can also include wetlands preservation and noise
regulation. These laws and regulations in many cases require a lengthy and
complex process of obtaining licenses, permits and approvals from federal, state
and local agencies. Obtaining necessary approvals regarding the discharge of
emissions into the air is critical to the development of a Project and can be
time-consuming and difficult. Each Project requires technology and facilities
which comply with federal, state and local requirements and sometimes extensive
negotiations with regulatory agencies. Meeting the requirements of each
jurisdiction with authority over a Project may delay or sometimes prevent the
completion of a proposed Project, as well as require extensive modifications to
existing Projects.
The Clean Air Act Amendments of 1990 contain provisions which regulate
the amount of sulfur dioxide and oxides of nitrogen which may be emitted by a
Project. These emissions may be a cause of "acid rain." Qualifying Facilities
are currently exempt from the acid rain control program of the Clean Air Act
Amendments. However, other Independent Power Projects will require "allowances"
to emit sulfur dioxide after the year 2000. Under the Amendments, these
allowances may be purchased from utility companies then emitting sulfur dioxide
or from the Environmental Protection Agency. Further, an Independent Power
Project subject to the requirements has a priority over utilities in obtaining
allowances directly from the Environmental Protection Agency if (i) it is a new
facility or unit used to generate electricity, (ii) 80% or more of its output is
sold at wholesale; (iii) it does not generate electricity sold to affiliates (as
determined under the Holding Company Act) of the owner or operator (unless the
affiliate cannot provide allowances in certain cases) and (iv) it is
"nonrecourse project-financed." A Project is nonrecourse project-financed if it
is 100% equity financed or if only its assets and part or all of its revenues
from power sales contracts serve as collateral for the Project's financing and
if the providers of financing do not have the legal right to pursue an electric
utility, the assets of other Projects, or owners or other participants for loan
repayments.
The market price of an allowance cannot be predicted with certainty at
this time and there is no assurance that a market for such allowances will
develop. Projects fueled by natural gas are not expected to be materially
burdened by the acid rain provisions of the Clean Air Act Amendments.
Title IV of the Clean Air Act Amendments requires significant
reductions in nitrogen oxide emissions from power plants. The first set of
standards became applicable in 1996 for large-scale steam boilers and large coal
and oil-fired plants. The standards require reductions of 25% to 50% in nitrogen
oxide emissions. Standards for other large generating plants become effective in
2000 and would require 40% to 50% reductions. States are imposing additional
restrictions. Nitrogen oxide emissions can be particularly difficult or
expensive to reduce because nitrogen oxides are produced at higher operating
temperatures, while plant efficiencies tend to increase with operating
temperatures. The Fund anticipates that nitrogen oxide regulations will
materially increase the operating costs of generating plants and will tend to
disadvantage small Projects using internal combustion engines and fossil fuel
boilers, but that the expected costs will not cause many Projects that the Fund
will invest in to become unprofitable.
Based on current trends, the Managing Shareholder expects that
environmental and land use regulation will become more stringent. The Fund and
the Managing Shareholder have not developed expertise and experience in
obtaining necessary licenses, permits and approvals, which will be the
responsibility of each Project's managers and Project Sponsors. The Fund will
rely upon qualified environmental consultants and environmental counsel retained
by it or by developers of Projects to assist in evaluating the status of
Projects regarding such matters.
Potential Legislation and Regulation
All federal, state and local laws and regulations, including but not
limited to PURPA, the Holding Company Act, the 1992 Energy Act, the FPA, and the
Clean Air Act Amendments are subject to amendment or repeal. Future legislation
and regulation is uncertain, and could have material effects on the Fund.
It is likely that the federal government and a number of states may
consider schemes of environmental taxation that will penalize carbon dioxide
emissions or other environmental detriments. These proposals, if enacted, could
impose additional costs on the operation of the Fund's Projects. Although the
President and Vice President have announced that the United States will,
together with other nations, reduce greenhouse gas emissions significantly, it
is extremely unclear whether or how this initiative will be adopted by the
Congress. If greenhouse gas emissions were penalized, landfill gas, cogeneration
and biomass Projects of the types owned by the Prior Programs might have a
relative advantage because they reduce methane or carbon dioxide emissions.
Impact of Energy Price Changes
Market prices for natural gas, oil and, to a lesser extent, coal have
fluctuated significantly over the last few years. Such fluctuations may directly
inhibit the development of Projects because of the anticipated effects on
Project profitability and may deter lenders to Projects or result in higher
costs of financing.
In recent years there have been extraordinary fluctuations in the price
of crude oil. Because natural gas is substitutable for crude oil and oil
products under certain conditions and in certain applications, oil prices are
capable of affecting natural gas prices. It is impossible at this time to
determine if the fluctuations will have further effects on the supply and price
of petroleum products.
Natural Gas. The price of natural gas is subject to significant
fluctuation for reasons that are not yet fully understood. Nonetheless, over the
last few years the price of natural gas has frequently been low relative to
other fuels, although there can be no assurance that any these trends will
continue. The effect of fluctuating natural gas prices on Projects will vary on
a Project-by-Project basis depending on the customer to which the electric power
is being sold, the terms of the Power Contracts and steam contracts (in the case
of cogeneration facilities) for the Project, the price of natural gas to be
purchased by the Project and the effect of any long-term commitments for the
purchase of natural gas by the Project's customers. In general, cogeneration,
due to its higher efficiency, tends to be relatively more profitable as energy
costs (including natural gas) increase and relatively less profitable as such
costs decrease. Projects which use natural gas as a fuel source may attempt to
reduce the risk of gas price fluctuations adversely affecting their economics
through long-term gas purchase arrangements and possibly acquiring gas reserves.
Crude Oil. Fluctuations in the price of crude oil are not expected to
affect the cost of operations of cogeneration Projects directly since such
Projects are usually based on energy sources other than crude oil. However,
gas-fired cogeneration Projects typically use distillate oil as a back-up fuel
at times when gas is not available. Certain Projects use surplus fuels or
wastes. The prices for these fuels and wastes are affected by fluctuations in
primary fuel prices but tend to be less volatile.
Coal. Traditionally, coal prices have been more stable than oil and gas
prices due, in part, to the fact that coal is usually sold under long-term
contracts to utilities. During the 1980's coal prices trended lower as a result
of the surplus of crude oil and lower oil prices. The Clean Air Act Amendments,
which are expected to be fully implemented as to most coal burning plants by
1996, may cause prices for lower sulfur coal to increase in the future. The Fund
believes, however, that future coal prices will generally remain competitive
with the price of crude oil and natural gas and should continue to be available
to Independent Power Projects under long-term contracts.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
The Fund has invested its funds to date only in ZAP, which is located in
California.
The Fund is considering investments in Projects in Egypt and Great Briitain
and from time to time has investigated potential investments in East Asia,
Europe and South America. No material operations or income have yet been taken
or earned outside the United States.
(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.
Item 2. Financial Information
(a) Selected Financial Data.
The following data is qualified in its entirety by the financial statements
presented elsewhere in this Registration Statement on Form 10.
<TABLE>
<CAPTION>
As of and for the
Period from Commencement
of Share Offering
(February 9, 1998)
through
December 31, 1998
<S> <C>
Interest income $ 494,002
Total revenue 494,002
Net income (loss) (851,745)
Net assets (shareholders'
equity) 24,354,681
Total assets 25,733,430
Long-term obligations 0
Per Share of Trust
Interest:
Revenues 1,664
Net income (loss) (2,869)
Net asset value 82,035
Distributions to Investors 0
</TABLE>
(b) Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion and analysis should be read in conjunction with the
Fund's financial statements and the notes thereto presented below. Dollar
amounts in this discussion are generally rounded to the nearest $1,000. The
financial statements include only the accounts of the Fund.
Results of Operations
The period from February 9, 1998 to December 31, 1998
In 1998, the Fund had a net loss of $852,000. The Fund's sole source of revenue
in 1998 was interest income of $494,000. Expenses of $1,346,000 were primarily
composed of $578,000 of investment fees paid to the Managing Shareholder on
capital contributions and $709,000 of due diligence costs on potential projects
that were ultimately rejected.
Liquidity and Capital Resources
As of December 31, 1998, the Fund had $25,257,000 of cash on hand. The Fund
anticipates investing most of these funds in new projects in 1999. As of
December 31, 1998, the Fund had not invested in any power generation projects.
Other than investments of available cash in power generation Projects,
obligations of the Fund are or will be generally limited to payment of Project
operating expenses, payment of a management fee to the Managing Shareholder,
payments for certain accounting and legal services to third persons and
distributions to shareholders of available operating cash flow generated by the
Fund's investments. The Fund's policy is to distribute as much cash as is
prudent to Shareholders. Accordingly, the Fund has not found it necessary to
retain a material amount of working capital.
The Fund anticipates that, during 1999, its cash flow from operations and
unexpended offering proceeds will be adequate to fund its obligations.
Financial instruments
The Fund's investments in financial instruments are short-term investments of
working capital or excess cash. Those short-term investments are limited by its
Declaration of Trust to investments in United States government and agency
securities or to obligations of banks having at least $5 billion in assets.
Currently the Fund invests only in bank obligations. Because the Fund invests
only in short-term instruments for cash management, its exposure to interest
rate changes is low.
Year 2000 Remediation
The Managing Shareholder and its affiliates began year 2000 and planning in
early 1997. After initial remediation was , a more intensive review discovered
additional issues and the Managing Shareholder began a formal remediation
program in late 1997. The Managing Shareholder has assessed problems, has a
written plan for remediation and is implementing the plan.
The accounting, network and financial packages for the Ridgewood companies
are basically off-the-shelf packages that will be remediated, where necessary,
by obtaining patches or updated versions. The Managing Shareholder expects that
updating will be complete before the end of May 1999 with ample time for
implementation, testing and custom changes to some modifications made by
Ridgewood to those programs. To a large extent, these software packages would
have been upgraded within a three to five year time frame, even absent the Year
2000 problem. The Managing Shareholder estimates that the Fund's allocable
portion of the cost of upgrades that were accelerated because of the Year 2000
problem is less than $1,000.
The Managing Shareholder has identified two major systems affecting the
Fund that rely on custom-written software, the subscription/investor relations
and investor distribution systems, which maintain individual investor records
and effect disbursement of distributions to Investors. In late 1998, the
Managing Shareholder's outside computer consultant reviewed the remediation
completed for those systems and advised the Managing Shareholder that material
additional work was required for these systems to work efficiently after 1999.
The Managing Shareholder accordingly employed a new specialist for Year 2000
remediation of those systems and other software and for information systems
support generally. The Managing Shareholder's plan calls for completion of
changes to the distribution system and testing of that system by the end of May
1999 and the Managing Shareholder believes that this effort is ahead of
schedule. The plan also targets completion by the end of the second quarter of
1999 of minor changes to the elements of the subscription/investor relations
system that will allow it to handle individual investors' records, and of all
testing of those modifications. Elements of that system used to generate
internal sales reports and other internal reports (but which do not affect
investors' records) will require major remediation. Remediation of the internal
report generating programs is expected to be completed by the end of the third
quarter of 1999 with testing and any additional modifications to be completed no
later than the end of 1999.
The Managing Shareholder is confident that all software systems necessary
to maintain investor records will be remediated and tested well before the end
of 1999. If the systems used to generate internal reports from the
subscription/investor relations system are not remediated by the end of 1999,
the Managing Shareholder is developing a contingency plan to use the existing
systems together with manual entry of data and checking of results until
remediation is complete. The Managing Shareholder has done this in the past when
system problems have occurred and it thus believes that there will be no
material or noticeable effect on the accuracy of its records or generation of
internal reports, although it may experience delays in generating internal
reports of a few days.
Some systems are being remediated using the "sliding window" technique, in
which two digit years less than a threshold number are assumed to be in the
2000's and higher two digit numbers are assumed to be in the 1900's. Although
this will allow compliance for several years beyond the year 2000, eventually
those systems will have to be rewritten again or replaced. The Managing
Shareholder expects that the ordinary course of system upgrading will eventually
cure this problem.
The Fund's share of the incremental cost for Year 2000 remediation of this
custom written software and related items for 1998 and prior years is estimated
to be less than $12,250 and is estimated to be approximately $11,500 for 1999.
ZAP has advised the Fund that it has reviewed its products for Year 2000
problems and has found that they are Year 2000 compliant. ZAP has also reviewed
its principal supply chains and has determined that all essential sources are
Year 2000 compliant or that there are adequate alternate sources for those
supplies.
The Managing Shareholder and its affiliates do not significantly rely on
computer input from suppliers and customers and thus are not directly affected
by other companies' year 2000 compliance. However, if customers' payment systems
or suppliers' systems were adversely affected by year 2000 problems, the Fund
could be affected. For example, if customers were unable to accept products
because of system malfunctions or transmission failures caused by Year 2000
non-compliance by them or other persons, the Fund would lose revenues that could
not be recouped at a later date. Similarly, if customers' payment systems were
to malfunction, the Fund's revenues might be delayed. In addition, suppliers
might be unable to provide necessary fuel or parts. Because the Fund currently
does not own any operating businesses other than ZAP, it is not possible to
predict the probability or magnitude of any such problems.
Based on its internal evaluations and the risks and contexts identified by
the Commission in its rules and interpretations, the Fund believes that Year
2000 issues relating to its assets and remediation program will not have a
material effect on its facilities, financial position or operations, and that
the costs of addressing the Year 2000 issues will not have a material effect on
its future consolidated operating results, financial condition or cash flows.
However, this belief is based upon current information, and there can be no
assurance that unanticipated problems will not occur or be discovered that would
result in material adverse effects on the Fund.
The Fund is unable to predict reliably what, if anything, will happen after
December 31, 1999 with regard to Year 2000 problems caused by the inability of
other businesses and government agencies to complete Year 2000 remediation. The
Fund knows of no specific problems identified by customers or suppliers that
would have a material adverse effect on the Fund.
Quantitative and Qualitative Disclosures Concerning Market Risk
Qualitative Information About Market Risk.
The Fund's investments in financial instruments are short-term investments
of working capital or excess cash. Those short-term investments are limited by
its Declaration of Trust to investments in United States government and agency
securities or to obligations of banks having at least $5 billion in assets.
Because the Fund invests only in short-term instruments for cash management, its
exposure to interest rate changes is low. The Fund has limited exposure to trade
accounts receivable and believes that their carrying amounts approximate fair
value.
The Fund's primary market risk exposure is limited interest rate risk
caused by fluctuations in short-term interest rates. The Fund does not
anticipate any changes in its primary market risk exposure or how it intends to
manage it. The Fund does not trade in market risk sensitive instruments.
Quantitative Information About Market Risk
This table provides information about the Fund's financial instruments
that are defined by the Securities and Exchange Commission as market risk
sensitive instruments. These include only short-term U.S. government and agency
securities and bank obligations. The table includes principal cash flows and
related weighted average interest rates by contractual maturity dates.
December 31, 1998
Expected Maturity Date
1999
(U.S. $)
Bank Deposits and Commercial
Paper $ 25,256,560
Average interest rate 5.225%
Item 3. Properties.
Pursuant to the Management Agreement between the Fund and the Managing
Shareholder (described at Item 10(c)), the Managing Shareholder provides the
Fund with office space at the Managing Shareholder's principal office at The
Ridgewood Commons, 947 Linwood Avenue, Ridgewood, New Jersey 07450.
The Fund and its subsidiaries do not own any material real property or
buildings.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
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. No
other executive officers of the Fund acquired Investor Shares in the Fund's
offering and neither the executive officers (other than Mr. Swanson) nor the
Independent Panel Members nor the Corporate Trustee beneficially own any
securities of the Fund. No person beneficially owns 5% or more of the Investor
Shares.
Ridgewood Power received 10 Preferred Participation Rights in connection
with its purchase of an Investor Share. No person beneficially owns 5% or more
of the Preferred Participation Rights.
Power VI Co was issued one Management Share in the Fund representing the
beneficial interests and management rights of the Managing Shareholders in its
capacity as the Managing Shareholder (excluding its interest in the Fund
attributable to Investor Shares it acquired in the offering). Mr. Swanson has
beneficial ownership of the Management Share issued to Power VI Co. No other
Management Shares are issuable and neither any other executive officer nor any
Independent Panel Member nor the Corporate Trustee beneficially owns any
Management Share.
The management rights of the Managing Shareholder are described in further
detail above at Item 1 - Business and below in Item 5 - 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 7 -- Certain Relationships and Related Transactions. The Management
Share does not have voting rights but the consent of the Managing Shareholder is
required for certain actions affecting it as described at Item 11(b) - Voting
Rights.
Item 5. Directors and Executive Officers of the Registrant.
(a) General.
As Managing Shareholder of the Fund, Ridgewood Power (and Power VI Co, if
Ridgewood Power turns over management rights to it) has direct and exclusive
discretion in management and control of the affairs of the Fund. The Independent
Panel Members only review certain transactions between the Fund and other
investment programs sponsored by Ridgewood Power or affiliates of Ridgewood
Power. The Managing Shareholder will be entitled to resign as Managing
Shareholder of the Fund only (i) with cause (which cause does not include the
fact or determination that continued service would be unprofitable to the
Managing Shareholder) or (ii) without cause with the consent of a majority in
interest of the Investors. It may be removed from its capacity as Managing
Shareholder as provided in the Declaration.
The purpose for having two Managing Shareholders, Ridgewood Power and Power
VI Co, was to have continuity of management. When the Fund was organized,
Ridgewood Power was considering that it might cause the five Prior Programs
(Power I through Power V) to combine into a publicly traded business. That
process might require Ridgewood Power to be a part of the combination, and
management fees paid by the Fund to the Managing Shareholder might pass to the
combined five Prior Programs in a way that might benefit the shareholders of the
five Prior Programs while leaving fewer resources for the managers of the Fund.
Therefore, when it organized the Fund, Ridgewood Power created Power VI Co's
predecessor as a stand-in entity that could replace Ridgewood Power.
Ridgewood Power now expects (although no assurance can be given) that the
Fund would also join any combination of the five Prior Programs. Accordingly, it
currently seems unlikely that it will be necessary to activate Power VI Co as a
Managing Shareholder, if a combination were to occur.
Ridgewood Holding, which was incorporated in April 1992, is the Corporate
Trustee of the Fund.
(b) Managing Shareholder.
Ridgewood Power Corporation was incorporated in February 1991 as a Delaware
corporation for the primary purpose of acting as a managing shareholder of
business trusts and as a managing general partner of limited partnerships which
are organized to participate in the development, construction and ownership of
Independent Power Projects. It organized the Fund and acted as managing
shareholder until April 1999. On or about April 20, 1999 it was merged into the
current co-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 Registration
Statement. Ridgewood Power VI LLC was also newly organized and has no business
other than being the successor to the dormant Ridgewood Power VI Corporation.
Robert E. Swanson was 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 each Managing Shareholder.
Approximately 98% of the equity in each Managing Shareholder is or will be 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. The
remaining 2% of the equity interests in each are expected to be owned by Robert
L. Gold and Randall D. Holmes. Mr. Swanson is designated as the manager of each
Managing Shareholder in its operating agreement. If he were to become
incapacitated, insolvent or unable to personally manage the Managing
Shareholders (and thus the Fund), it is anticipated that the operating
agreements of the Managing Shareholders will provide that Mr. Gold, Mr. Holmes
and/or possibly other persons to be designated would become the controlling
persons of the Managing Shareholders and thus the Fund. The members of Ridgewood
Capital and the Investors in the Fund would not be entitled to vote on this
question.
The Managing Shareholder has also organized Power I, Power II, Power III,
Power IV and Power V as Delaware business trusts to participate in the
independent power industry. Ridgewood Power LLC is now also their managing
shareholder. The business objectives of these five trusts are similar to those
of the Fund.
A number of other companies are affiliates of Mr. Swanson and Ridgewood
Power. Each of these also was organized as a corporation that was wholly-owned
by Mr. Swanson. In April 1999, each was merged into a limited liability company
with a similar name and Mr. Swanson became the sole manager and controlling
owner of each limited liability company. For convenience, the remainder of this
Registration Statement will discuss each limited liability company and its
corporate predecessor as a single entity.
Ridgewood Power is an affiliate 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 Shareholder
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 Shareholder
and the funds sponsored by Ridgewood Energy; Ridgewood Capital Management LLC
("Ridgewood Capital"), organized in 1998, which assists in offerings made by the
Managing Shareholder and which is the sponsor of two privately offered venture
capital funds (Ridgewood Capital Venture Partners, LLC and Ridgewood
Institutional Venture Partners, LLC) and RPMCo.
Set forth below is certain information concerning Mr. Swanson and other
executive officers of the Managing Shareholders.
Robert E. Swanson, age 52, has also served as President of the Fund since
its inception in February 1998 and as President of RPMCo, Power I, Power II,
Power III, Power IV and Power V since their respective inceptions. Mr. Swanson
has been President and registered principal of Ridgewood Securities and became
the Chairman of the Board of Ridgewood Capital on its organization in
1998. He also is Chairman of the Board of Ridgewood Capital Venture Partners,
LLC and Ridgewood Institutional Venture Partners, LLC. In addition, he has been
President and sole or controlling owner of Ridgewood Energy since its inception
in October 1982. Prior to forming Ridgewood Energy in 1982, Mr. Swanson was a
tax partner at the former New York and Los Angeles law firm of Fulop & Hardee
and an officer in the Fund and Investment Division of Morgan Guaranty Fund
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 40, has served as Executive Vice President of the
Managing Shareholders, RPMCo, Power I, the Fund, Power II, Power III, Power IV
and Power V since their respective inceptions, with primary responsibility for
marketing and acquisitions. He has been President of Ridgewood Capital since its
organization in 1998. As such, he is President of Ridgewood Capital Venture
Partners, LLC and Ridgewood Institutional Venture Partners, LLC. He has served
as Vice President and General Counsel of Ridgewood Securities Corporation since
he joined the firm in December 1987. Mr. Gold has also served as Executive Vice
President of Ridgewood Energy since October 1990. He served as Vice President of
Ridgewood Energy from December 1987 through September 1990. For the two years
prior to joining Ridgewood Energy and Ridgewood Securities Corporation, Mr. Gold
was a corporate attorney in the law firm of Cleary, Gottlieb, Steen & Hamilton
in New York City where his experience included mortgage finance, mergers and
acquisitions, public offerings, tender offers, and other business legal matters.
Mr. Gold is a member of the New York State bar. He is a graduate of Colgate
University and New York University School of Law.
Thomas R. Brown, age 44, joined the Managing Shareholder in November 1994
as Senior Vice President and holds the same position with the Fund, RPMCo and
each of the other trusts sponsored by the Managing Shareholder. He became Chief
Operating Officer of the Managing Shareholder, RPMCo and the Power I through V
trusts in October 1996, and is the Chief Operating Officer of the Fund. He is
also Senior Vice President of Ridgewood Capital and of the two venture capital
funds it manages. Mr. Brown has over 20 years' experience in the development and
operation of power and industrial projects. From 1992 until joining the Managing
Shareholder he was employed by Tampella Services, Inc., an affiliate of
Tampella, Inc., one of the world's largest manufacturers of boilers and related
equipment for the power industry. Mr. Brown was Project Manager for Tampella's
Piney Creek project, a $100 million bituminous waste coal fired circulating
fluidized bed power plant. Between 1990 and 1992 Mr. Brown was Deputy Project
Manager at Inter-Power of Pennsylvania, where he successfully developed a 106
megawatt coal fired facility. Between 1982 and 1990 Mr. Brown was employed by
Pennsylvania Electric Company, an integrated utility, as a Senior Thermal
Performance Engineer. Prior to that, Mr. Brown was an Engineer with Bethlehem
Steel Corporation. He has an Bachelor of Science degree in Mechanical
Engineering from Pennsylvania State University and an MBA in Finance from the
University of Pennsylvania. Mr. Brown satisfied all requirements to earn the
Professional Engineer designation in 1985.
Martin V. Quinn, age 51, assumed the duties of Chief Financial Officer of
the Managing Shareholder, the prior five trusts organized by the Managing
Shareholder and RPMCo in November 1996 under a consulting arrangement. He became
a full-time officer of the Managing Shareholder and RPMCo in April 1997 and
became Chief Financial Officer of the Fund at its inception. He is also the
Chief Financial Officer of Ridgewood Capital and of Ridgewood Capital Venture
Partners, LLC and Ridgewood Institutional Venture Partners, LLC.
Mr. Quinn has 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 Price Waterhouse, and a Bachelor of Science
degree in Accounting and Finance from the University of Scranton (1969).
Mary Lou Olin, age 46, has served as Vice President of the Managing
Shareholder, RPMCo, Ridgewood Capital, the Fund, Power I, Power II, Power III,
Power IV and Power V since their respective inceptions. She has also served as
Vice President of Ridgewood Energy since October 1984, when she joined the firm.
Her primary areas of responsibility are investor relations, communications and
administration. Prior to her employment at Ridgewood Energy, Ms. Olin was a
Regional Administrator at McGraw-Hill Training Systems where she was employed
for two years. Prior to that, she was employed by RCA Corporation. Ms. Olin has
a Bachelor of Arts degree from Queens College.
(c) Management Agreement.
The Fund has entered into a Management Agreement with the Managing
Shareholder detailing how the Managing Shareholder will render management,
administrative and investment advisory services to the Fund under the terms of
the Declaration. Specifically, the Managing Shareholder will perform (or arrange
for the performance of) the management and administrative services required for
the operation of the Fund. Among other services, it 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 Shareholder 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 Shareholder 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 Shareholder in so doing and other expenses properly payable by the
Fund. The Fund will reimburse the Managing Shareholder for all such Fund and
other expenses paid by it.
As compensation for the Managing Shareholder's performance under the
Management Agreement, the Fund is obligated to pay the Managing Shareholder 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 Shareholder 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 Shareholder
and engineering, legal, investment banking and other professional consultants
(as needed) and to monitor and report to the Fund concerning the operations of
Projects in which it invests, to review proposals for additional development or
financing, and to represent the Fund's interests. The Fund will rely on such
persons to review proposals to sell its interests in Projects in the future.
(d) Executive Officers of the Fund.
Pursuant to the Declaration, the Managing Shareholder has appointed
officers of the Fund to act on behalf of the Fund and sign documents on behalf
of the Fund as authorized by the Managing Shareholder. Mr. Swanson has been
named the President of the Fund and the other executive officers of the Fund are
identical to those of the Managing Shareholder.
The officers have the duties and powers usually applicable to similar
officers of a Delaware business corporation in carrying out Fund business.
Officers act under the supervision and control of the Managing Shareholder,
which is entitled to remove any officer at any time. Unless otherwise specified
by the Managing Shareholder, the President of the Fund has full power to act on
behalf of the Fund. The Managing Shareholder expects that most actions taken in
the name of the Fund will be taken by Mr. Swanson and the other principal
officers in their capacities as officers of the Fund under the direction of the
Managing Shareholder rather than as officers of the Managing Shareholder.
(e) The Independent Panel Members.
The Declaration provides for an Independent Review Panel (the "Panel"),
with responsibility for independently reviewing and approving material
transactions ("Ridgewood Program Transactions") between the Fund and any other
investment programs sponsored by the Managing Shareholder or its Affiliates
("Ridgewood Programs").
All Ridgewood Program Transactions (which include material transactions
between the Fund or entities in which the Fund invests, on the one hand, and
other Ridgewood Programs or entities in which they invest or have control, on
the other), must be approved by a majority of the Panel Members (if there are
only two Panel Members, both must approve) or by a Majority of the Investors. In
reviewing and approving a Ridgewood Program Transaction, the Panel Members are
be guided by the provisions of Delaware law regarding the responsibilities of
directors of a business corporation who pass upon a transaction with an
affiliated corporation. In so doing, the Panel Members are subject to duties of
loyalty to the Fund and its Investors and care in reviewing the transaction, and
are obligated to consider the entire fairness of the transaction to the Fund.
There is no requirement, however, that the Fund participate in the transaction
on identical terms with the other Ridgewood Programs. The Declaration specifies,
in addition, that the Panel Members will be entitled to the benefits of the
"business judgment rule" of Delaware law, which exonerates directors for their
negligence or mistaken decisions in the absence of bad faith or clear conflicts
of interest.
The Independent Review Panel provisions were included in the Declaration in
recognition that the Fund's investment program anticipates significant
co-investment by the Fund in Projects in which other Ridgewood Programs will
invest. The Managing Shareholder concluded that given the potential conflicts of
interest and the additional complexities and responsibilities that characterize
co-investment decisions, the Fund should create a mechanism for independent
review and approval of co-investments.
The Managing Shareholder has designated the initial Panel of three Panel
Members. A majority of the incumbent Panel Members must consent for the Panel to
take action. A majority of the Managing Shareholder and the incumbent Panel
Members, acting together, may authorize an increase to no more than eight Panel
Members (or a decrease to not fewer than two) and may fill vacancies on the
Panel within 180 days. If there is no incumbent Panel Member, however, vacancies
must be filled by the Managing Shareholder with the approval of a Majority of
the Investors. A Panel Member may not be an Affiliate of the Fund and may not be
an investment advisor or underwriter for the Fund, a person beneficially owning
five percent or more of the Investor Shares, an entity in which the Fund
beneficially owns five percent or more of the outstanding equity securities, an
agent or employee of the Fund or its subsidiaries, a member of the immediate
family of any individual described above, or a person who served at any time
after the beginning of the second-to-last full calendar year as legal counsel to
the Fund or the Managing Shareholder, or a partner, principal or employee of
that legal counsel.
The Panel is not required to review other transactions that might involve
the Managing Shareholder or its Affiliates and the Fund, such as the Management
Agreement or temporary advances of funds by the Managing Shareholder to the
Fund. The Managing Shareholder, in its sole discretion, may refer such other
transactions to the Panel for advice, and the Panel, in its sole discretion, may
elect to review and report to the Managing Shareholder on the referred
transaction, or to decline to review it. Neither the Managing Shareholder nor
the Panel Members shall incur liability to the Fund or any Shareholder by their
decisions to refer or not to refer, or to review or not to review, any
transaction that is not a Ridgewood Program Transaction.
The Panel Members are not trustees of the Fund, have no general fiduciary
responsibility for the Fund's investments or operations, and have no continuing
oversight responsibilities for the Fund. The Panel meets only on the call of the
Managing Shareholder. Panel Members may resign and may be removed either for
cause by action of at least two-thirds of the remaining Panel Members or for any
reason by action of the holders of at least two-thirds of the Investor Shares.
Compensation of the Panel Members is set in the Declaration at $5,000 per
year, plus out-of-pocket expenses incurred.. If the Managing Shareholder
certifies in the Fund's records that there is no reasonable probability that the
Fund will engage in further Ridgewood Program Transactions, the Panel will be
suspended and will take no further action. During that period, the Panel
Members' compensation will cease. A suspended Panel may be reinstated by the
Managing Shareholder at any time.
The current Panel Members are Richard Propper, M.D., John Belknap and
Seymour Robin. Dr. Propper and Mr. Belknap also serve as independent trustees of
two Prior Programs, Ridgewood Power I and Ridgewood Power IV. Both are
independent power programs sponsored by Ridgewood Power. Independent panel
members must approve transactions between their program and the Managing
Shareholder or companies affiliated with the Managing Shareholder, but have no
other responsibilities. Neither Mr. Belknap nor Mr. Robin is otherwise
affiliated with the Fund, any of the Fund's officers or agents, the Managing
Shareholder, any other Trustee, any affiliates of the Managing Shareholder and
any other Trustees, or any director, officer or agent of any of the foregoing.
Dr. Propper acts as an adviser to the two venture capital funds sponsored by
Ridgewood Capital as described below.
John C. Belknap, age 52, has been chief financial officer of three national
retail chains and their parent companies. Since July 1997, he has been Executive
Vice President and Chief Financial Officer of Richfood Holdings, Inc., a
Virginia-based food manufacturer. From December 1995 to June 1997 Mr. Belknap
was Executive Vice President and Chief Financial Officer of OfficeMax, Inc., an
office products superstore chain. From February 1994 to February 1995, Mr.
Belknap was Executive Vice President and Chief Financial Officer of Zale
Corporation, a retail jewelry store chain. From January 1990 to January 1994 and
from February 1995 to December 1995, Mr. Belknap was an independent financial
consultant. From January 1989 through May 1993 he also served as a director of
and consultant to Finlay Enterprises, Inc., an operator of leased fine jewelry
departments in major department stores nationwide.
Seymour (Si) Robin, age 71, 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 wordlwide aircraft
maufacturers of commercial, space and military aircraft. 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 Electric Engineering from
Montreal Technical Institute and UCLA. He is a certified FAA pilot
(multi-engine, instruments, land and sea) 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 Soutwest U.S.
Dr. Richard D. Propper, age 48, graduated from McGill University in 1969
and received his medical degree from Stanford University in 1972. He completed
his internship and residency in Pediatrics in 1974, and then attended Harvard
University for post doctoral training in hematology/oncology. Upon the
completion of such training, he joined the staff of the Harvard Medical School
where he served as an assistant professor until 1983. In 1983, Dr. Propper left
academic medicine to found Montgomery Medical Ventures, one of the largest
medical technology venture capital firms in the United States. He served as
managing general partner of Montgomery Medical Ventures until 1993.
Dr. Propper is currently a consultant to a variety of companies for medical
matters, including international opportunities in medicine. In June 1996 Dr.
Propper agreed to an order of the Commission that required him to make filings
under Sections 13(d) and (g) and 16 of the 1934 Act and that imposed a civil
penalty of $15,000. In entering into that agreement, Dr. Propper did not admit
or deny any of the alleged failures to file recited in that order. Dr. Propper
is also an acquisition consultant for Ridgewood Capital Venture Partners, LLC
and Ridgewood Institutional Venture Partners, LLC, the two venture capital funds
sponsored by Ridgewood Capital. He receives a fixed consulting fee from those
funds and contingent compensation from Ridgewood Capital.
(f) Corporate Trustee
The Corporate Trustee of the Fund is Ridgewood Holding. Legal title to Fund
property is now and in the future will be in the name of the Fund, if possible,
or Ridgewood Holding as trustee. Ridgewood Holding is also a trustee of Power I,
Power II, Power III, Power IV, Power V and of an oil and gas business trust
sponsored by Ridgewood Energy and is expected to be a trustee of other similar
entities that may be organized by Ridgewood Power and Ridgewood Energy. The
President, sole director and sole stockholder of Ridgewood Holding is Robert E.
Swanson; its other executive officers are identical to those of the Managing
Shareholder. The principal office of Ridgewood Holding is at 1105 North Market
Street, Suite 1300, Wilmington, Delaware 19899.
(g) RPMCo.
RPMCo is controlled by Robert E. Swanson. For Projects for which the Fund
decides to take operating responsibility itself, the Fund will cause the Fund's
subsidiary that owns the Project to enter into an "Operation Agreement" under
which RPMCo, under the supervision of the Managing Shareholder, will provide the
management, purchasing, engineering, planning and administrative services for
the Project. RPMCo will charge the Fund at its cost for these services and for
the Fund's allocable amount of certain overhead items. RPMCo shares space and
facilities with the Managing Shareholder and its affiliates. To the extent that
common expenses can be reasonably allocated to RPMCo, the Managing Shareholder
may, but is not required to, charge RPMCo at cost for the allocated amounts and
such allocated amounts will be borne by the Fund and other programs. Common
expenses that are not so allocated will be borne by the Managing Shareholder.
The Fund does not currently own any Independent Power Projects or other
facilities managed by RPMCo and accordingly no Operation Agreement is in effect.
The Fund has not made any material payments to RPMCo.
Initially, the Managing Shareholder does not anticipate charging RPMCo for
the full amount of rent, utility supplies and office expenses allocable to
RPMCo. As a result, both initially and on an ongoing basis the Managing
Shareholder believes that RPMCo's charges for its services to the Fund are
likely to be materially less than its economic costs and the costs of engaging
comparable third persons as managers. RPMCo will not receive any compensation in
excess of its costs.
Allocations of costs will be made either on the basis of identifiable
direct costs, time records or in proportion to each program's investments in
Projects managed by RPMCo; and allocations will be made in a manner consistent
with generally accepted accounting principles.
RPMCo will not provide any services related to the administration of the
Fund, such as investment, accounting, tax, investor communication or regulatory
services, nor will it participate in identifying, acquiring or disposing of
Projects. RPMCo will not have the power to act in the Fund's name or to bind the
Fund, which will be exercised by the Managing Shareholder or the Fund's
officers.
The Operation Agreements will not have a fixed term and will be terminable
by RPMCo, by the Managing Shareholder or by vote of a majority in interest of
Investors, on 60 days' prior notice. The Operation Agreements may be amended by
agreement of the Managing Shareholder and RPMCo; however, no amendment that
materially increases the obligations of the Fund or that materially decreases
the obligations of RPMCo shall become effective until at least 45 days after
notice of the amendment, together with the text thereof, has been given to all
Investors.
The executive officers of RPMCo are Mr. Swanson (President), Mr. Gold
(Executive Vice President), Mr. Brown (Senior Vice President and Chief Operating
Officer), Mr. Quinn (Senior Vice President and Chief Financial Officer) and Ms.
Olin (Vice President). Douglas V. Liebschner, Vice President - Operations, is a
key employee.
Douglas V. Liebschner, age 51, joined RPMCo in June 1996 as Vice President
of Operations. He has over 27 years of experience in the operation and
maintenance of power plants. From 1992 until joining RPMCo, he was employed by
Tampella Services, Inc., an affiliate of Tampella, Inc., one of the world's
largest manufacturers of boilers and related equipment for the power industry.
Mr. Liebschner was Operations Supervisor for Tampella's Piney Creek project, a
$100 million bituminous waste coal fired circulating fluidized bed ("CFB") power
plant. Between 1989 and 1992, he supervised operations of a waste to energy
plant in Poughkeepsie, N.Y. and an anthracite-waste-coal-burning CFB in
Frackville, Pa. From 1969 to 1989, Mr. Liebschner served in the U.S. Navy,
retiring with the rank of Lieutenant Commander. While in the Navy, he served
mainly in billets dealing with the operation, maintenance and repair of ship
propulsion plants, twice serving as Chief Engineer on board U.S. Navy combatant
ships. He has a Bachelor of Science degree from the U.S. Naval Academy,
Annapolis, Md.
Item 6. Executive Compensation.
The Fund will reimburse RPMCo at cost for services provided by RPMCo's
employees and reimburses the Managing Shareholder at allocated cost for services
outside the scope of the Management Agreement; no such reimbursement per
employee exceeded $60,000 in 1998. 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. Accordingly in March 1998 and January 1999 the Fund paid
each Independent Panel Member $5,000 for his services. 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 Shareholder is necessary for a change in compensation.
The Fund is not entitled to pay the Independent Panel Members compensation for
consulting services rendered to the Fund outside the scope of their duties to
the Fund without similar approval.
Ridgewood Holding, the Corporate Trustee of the Fund, is not entitled to
compensation for serving in such capacity, but is entitled to be reimbursed for
Fund expenses incurred by it which are properly reimbursable under the
Declaration.
For information concerning the Fund's Key Employee Incentive Plan, see Item
11(j) of this Registration Statement. No awards or determinations of eligibility
have been made under the Plan.
Item 7. Certain Relationships and Related Transactions.
The Declaration provides that cash flow of the Fund, less reasonable
reserves which the Fund deems necessary to cover anticipated Fund expenses, is
to be distributed to the Shareholders from time to time as the Fund deems
appropriate. The allocation of distributions between the Investors and the
Managing Shareholder is described at Item 11(a) - Description of Registrant's
Securities to be Registered - Distribution and Dissolution Rights.
The Fund did not make any distributions in 1998 to the Managing Shareholder
(which is a member of the Board of the Fund) or any other person. The Fund paid
fees to the Managing Shareholder and its affiliates as follows:
Fee Paid to 1998
Investment fee Ridgewood
Power $577,813
Placement agent fee Ridgewood
and sales commis- Securities
sions Corporation 304,031
Organizational, Ridgewood
distribution and Power
offering fee 1,776,189
Due diligence Ridgewood
expenses Power
The investment fee equaled 2% of the proceeds of the offering of Investor
Shares and was payable for the Managing Shareholder's services in investigating
and evaluating investment opportunities and effecting investment transactions.
The placement agent fee (1% of the offering proceeds) and sales commissions were
also paid from proceeds of the offering, as was the organizational, distribution
and offering fee (5% of offering proceeds) for legal, accounting, consulting,
filing, printing, distribution, selling, closing and organization costs of the
offering.
In addition to the foregoing, the Fund reimbursed the Managing Shareholder
and RPMCo at cost for expenses and fees of unaffiliated persons engaged by the
Managing Shareholder for Fund business and for certain expenses related to
management of Projects.
Other information in response to this item is reported in response to Item
6. Executive Compensation, which information is incorporated by reference into
this Item 7.
Item 8. Legal Proceedings.
There are no legal proceedings involving the Fund.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information.
The Fund has sold approximately 380 Investor Shares of beneficial interest
in the Fund in its private placement offering, which is ongoing. There is
currently no established public trading market for the Investor Shares and the
Fund does not intend to allow a public trading market to develop. As of the date
of this Registration Statement on Form 10, 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 Shareholder is considering the possibility of a combination of
the Fund and five other investment programs sponsored by the Managing
Shareholder (Power I through Power V) into a publicly traded entity. This would
require the approval of the Investors in the Fund and the other programs after
proxy solicitations complying with requirements of the Securities and Exchange
Commission, compliance with the "rollup" rules of the Securities and Exchange
Commission and other regulations, and a change in the federal income tax status
of the Fund from a partnership (which is not subject to tax) to a corporation.
The process of considering and effecting a combination, if the decision is made
to do so, will be very lengthy. There is no assurance that the Managing
Shareholder will recommend a combination, that the Investors of the Fund or
other programs will approve it, that economic conditions or the business results
of the participants will be favorable for a combination, that the combination
will be effected or that the economic results of a combination, if effected,
will be favorable to the Investors of the Fund or other programs.
(b) Holders
As of April 22, 1999, there were 743 record holders of Investor Shares and
566 record holders of Preferred Participation Rights.
(c) Dividends
The Fund made no distributions in 1998. 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.
Item 10. Recent Sales of Unregistered Securities.
(a) Securities sold. As of April 22, 1999 the Fund had sold a total of
381.6015 Investor Shares in a best-efforts offering under Rule 506 of Regulation
D that began April 12, 1996. The Fund also has issued a total of 1,890 Preferred
Participation Rights for no additional consideration to certain Investors in
connection with their purchases of Investor Shares that occurred prior to
December 31, 1998. The Fund also granted the Managing Shareholder a single
Management Share representing the Managing Shareholder's management rights and
rights to distributions of cash flow.
(b) Underwriters and other purchasers. Ridgewood Securities Corporation, an
affiliate of the Fund and the Managing Shareholder, was the placement agent for
the best efforts offering. The Regulation D offering was limited to accredited
investors and to a limited number of persons described in Rule 501(e) under
Regulation D.
(c) Consideration. All Investor Shares were sold for cash at a price of
$100,000 per Investor Share. No additional consideration was paid for Preferred
Participation Rights. The following amounts are as of April 22, 1999.
Aggregate offering price of Investor Shares $ 38,160,150
Aggregate sales commissions 3,052,812
Placement agent fees 381,602
The Management Share was issued in exchange for the Managing Shareholder's
services under the Declaration.
(d) Exemption from registration claimed. The offering of the Investor
Shares and associated Preferred Participation Rights was exempt under Section
4(2) of the Securities Act of 1933, as provided by Rule 506 of Regulation D
under that Act. The offering was made only to accredited investors and a limited
number of persons described in Rule 501(e) of Regulation D, without the use of
general advertising or solicitation.
The issuance of the Management Share was exempt under Section 4(2) of the
Securities Act of 1933 as an issuance to a controlling person of the Fund.
(e) Not applicable
(f) Use of proceeds. Although this subitem is required under Item 701(f) of
Regulation S-K only for offerings registered under the Securities Act of 1933,
the Fund is voluntarily including this information.
This information is as of December 31, 1998.
<TABLE>
<CAPTION>
Amounts Paid to
Related Persons* Other
Source or use Amount of Fund Persons
of proceeds
<S> <C> <C> <C>
Sale of 296.8815
Investor Shares $29,688,150 n/a n/a
Less: Sales
commissions and
placement agent fee 2,630,853 304,031 $2,326,822
Organizational,
offering and
distribution fee 1,850,871 1,850,871 0
Investment fee 577,813 577,813 0
Net offering
proceeds to Fund 24,628,613 n/a n/a
Temporary investments** 23,479,389 0 23,479,389
Due diligence expenses 1,089,848 0 1,089,848
Accounting and legal fees 31,000 0 31,000
Other expenses 28,276 0 28,276
</TABLE>
* Related persons are the following: the Managing Shareholders, Ridgewood
Securities Corporation, RPMCo, Ridgewood Energy, the director and officers of
each of those corporations and their associates, and all other affiliates of the
Fund. No person beneficially owns 10% or more of any class of the equity
securities of the Fund.
** As of December 31, 1998. All temporary investments mature less than one year
from the date of issuance. Temporary investments are limited to U.S. Treasury
securities and obligations of banks with at least $5 billion in assets.
Item 11. Description of Registrant's Securities to be Registered.
The Fund is registering Investor Shares and Preferred Participation Rights.
Each of these is a class of shares of beneficial interest in the Fund without a
par value. The Investor Shares are the only securities having most of the
characteristics of an equity security and are described in Items 11(a)-(i. The
Preferred Participation Rights have limited rights. The Preferred Participation
Rights are described at Item 11(a) - Preferred Participation Rights.
(a) Distribution and dissolution rights.
Net Cash Flow of the Fund, defined as the Fund's gross receipts less cash
operating expenses and other cash expenditures of the Fund, less debt service,
if any, and less reasonable reserves as determined by the Fund to cover its
anticipated expenses, will be distributed to the Shareholders to the extent and
at such times as the Fund deems advisable.
Prior to Payout (the point at which Investors have received cumulative
distributions equal to the amount of their capital contributions), each year all
distributions from the Fund, other than distributions of the revenues from
dispositions of Fund Property, are to be allocated 99% to the Investors and 1%
to the Managing Shareholder until Investors have been distributed during the
year an amount equal to 12% of their total capital contributions (a "12%
Priority Distribution"), and thereafter all remaining distributions from the
Fund during the year, other than distributions of the revenues from dispositions
of Fund Property, are to be allocated 75% to Investors and 25% to the Managing
Shareholder. If the Key Employees Incentive Plan is activated, up to 5% of the
distributions that otherwise would go to the Managing Shareholder will be
allocated to plan participants. See Item 11(j). The Managing Shareholder may
Revenues from dispositions of Fund Property are to be distributed 99% to
Investors and 1% to the Managing Shareholder until Payout. In all cases, after
Payout, Investors are to be allocated 75% of all distributions and the Managing
Shareholder 25% (subject to allocations to plan participants).
Net Cash Flow that the Fund determines to distribute from the proceeds of a
sale or other disposition of Fund Property that (a) is not in the ordinary
course of the operation of the Fund Properties and (b) is not from the sale or
exchange of temporary investments will be distributed as follows: until Payout,
99% of this Net Cash Flow will be distributed to the Investors and 1% to the
Managing Shareholder, and after Payout, 75% of this Net Cash Flow will be
distributed to Investors, 20% to the Managing Shareholder and the remaining 5%
either to the Managing Shareholder or to key employees designated by it as an
equity incentive.
On liquidation of the Fund, the remaining assets of the Fund after
discharge of its obligations, including any loans owed by the Fund to the
Shareholders, will be distributed, first, to the Investors entitled to declared
but unpaid distributions under the 12% priority return provisions, in proportion
to the amounts due to them, until all such accrued but unpaid distributions are
satisfied and then to the Shareholders, in proportion to their respective
positive capital accounts, after taking account of all adjustments thereto
through the time of dissolution. See -Capital Accounts and Allocations below.
General Provisions
Distributions to Investors under the foregoing provisions will be
apportioned among them in proportion to their ownership of Investor Shares, as
the case may be. The Managing Shareholder has the sole discretion to determine
the amount and frequency of any distributions; provided, however, that a
distribution may not be made selectively to one Shareholder or group of
Shareholders but must be made ratably to all Shareholders entitled to that type
of distribution at that time. The Managing Shareholder in its discretion
nevertheless may credit select persons with a portion of its compensation from
the Fund or distributions otherwise payable to it.
Because distributions, if any, will be dependent upon the earnings and
financial condition of the Fund, its anticipated obligations, the Managing
Shareholder's discretion and other factors, there can be no assurance as to the
frequency or amounts of any distributions that the Fund may make.
If the Fund creates additional classes or series of Shares, distributions
of net cash flow generated by Fund Properties acquired with the proceeds of
those additional classes or series of Shares will be made as provided in the
instruments creating those classes or series.
Return of Capital
If the Fund for any reason at any time does not find it necessary or
appropriate to retain or expend all Capital Contributions, in its sole
discretion it may return any or all such excess Capital Contributions ratably to
Investors. The Investors will be notified of the source of the payment and as to
the amounts of fees charged against the original Capital Contributions that are
being returned therewith. Any such return of capital will decrease the
Investors' Capital Contributions and thus will affect the computation of
Investor preferences to distributions.
Capital Accounts and Allocations
Each Shareholder will have a capital account, which will have an initial
balance equal to the Shareholder's Capital Contribution. Capital accounts will
be adjusted in accordance with Regulations under Internal Revenue Code Section
704. The capital account balance will be increased by any additional Capital
Contributions by the Shareholder and by profits allocated to the Shareholder; it
will be decreased by the amount of distributions to the Shareholder, returns of
capital and by losses allocated to the Shareholder. An Investor's Capital
Contribution includes the amount of any fees or commissions on the sale of
Shares to the Investor that are waived or reduced by the Fund, the Managing
Shareholder or their Affiliates. Contributions of property by a Shareholder, if
any, or distributions of property to a Shareholder, if any, are valued at fair
market value, net of liabilities. The Fund does not currently anticipate that
any contributions or distributions of property will be made. Certain additional
adjustments to capital accounts will be made if necessary to account for the
effects of non-recourse debt incurred by the Fund or contributions of property,
if any, to the Fund.
For any fiscal period, all net profits, if any, earned by the Fund will be
allocated first 100% to the Managing Shareholder until the profits so allocated
in that period and all prior periods in which there were profits equal the
cumulative distributions payable to the Managing Shareholder for those periods.
Then, 100% of such net profits will be allocated to the Investors, first ratably
among holders of Rights until such allocations cumulatively equal total
distributions in respect of those Rights, and then ratably among Investors in
proportion to their ownership of Shares. If the Fund has net losses for a fiscal
period, the losses will be allocated 99% to the Investors and 1% to the Managing
Shareholder, except that if an allocation of a loss would cause an Investor to
have a negative amount in the Investor's capital account, the loss will be
allocated to the Managing Shareholder instead in the amount necessary to prevent
the creation of a negative balance in the Investor's capital account.
Allocations in respect of additional series of Shares will be made in accordance
with the terms thereof.
If, however, the application of the allocation rules causes or would cause
the Managing Shareholder to have a negative capital account balance at the end
of any fiscal period, gains from any concurrent or subsequent sale or
disposition of Fund Property outside the normal course of operation will be
allocated 100% to the Managing Shareholder until the deficit is eliminated, and
thereafter in accordance with the rules described above. Gain or loss allocable
to Shareholders from such sales or dispositions will be adjusted accordingly.
For federal income tax purposes only, any deduction allowed to the Fund on the
ground that the Managing Shareholder received its Fund interest as compensation
for services will be allocated solely to the Managing Shareholder.
Preferred Participation Rights and Early Investment Incentive.
In recognition of the benefits the Fund will receive from early
subscriptions for Investor Shares, the Fund provided Investors who subscribed
promptly with an "Early Investment Incentive." The Early Investment Incentive
was given to each Investor whose subscription was fully completed and paid for
and accepted prior to December 31, 1998. Investor Shares subscribed to after
such date are not eligible for the incentive. An Investor qualifying for the
incentive (an "Early Investor") was entitled to preferred distributions payable
out of the Fund's distributable operating net cash flow (which includes
investment interest on unapplied funds) beginning in 1999. The amount of the
Early Investment Incentive was determined by the number of "Preferred
Participation Rights" granted to each Early Investor. Each Right entitled the
holder to an aggregate distribution priority of $1,000 (i.e., 1% of the purchase
price of one $100,000 Investor Share). The number of Rights earned by each Early
Investor was determined by multiplying the number of whole or fractional
Investor Shares subscribed to by the Investor by 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. Approximately
1,890 Rights were issued.
During calendar years 1999 and 2000, all distributable operating net cash
flow of the Fund will be distributed 99% to the Early Investors and 1% to the
Managing Shareholder until the Qualifying Investors receive in each year
distributions equal to $500 for each Right earned. Thereafter, all distributable
operating net cash flow will be distributed to all Shareholders in accordance
with the normal distribution allocation provisions of the Declaration.
(b) Voting rights.
The Fund does not have a board of directors or trustees elected by
Investors and the Investors have no rights to vote on the management of the Fund
except through amending the Declaration or removing the Managing Shareholder as
described below.
The Managing Shareholder may amend the Declaration without notice to or
approval of the Investors for the following purposes: to cure ambiguities or
errors; to conform the Declaration to the description in the Confidential
Registration Statement for the offering of Investor Shares, to equitably resolve
issues arising under the Declaration so long as similarly situated Investors are
not treated materially differently; to comply with law; to make other changes
that will not materially and adversely affect any Investor's interest; to
maintain the federal income tax status of the Fund; or to make modifications to
the computation of items affecting the Investors' capital accounts to comply
with the Code or to reflect the creation of an additional class or series of
Shares and the terms thereof.
Other amendments to the Declaration may be proposed either by the Managing
Shareholder or holders of at least 10% of the Investor Shares, either by calling
a meeting of the Shareholders or by soliciting written consents. The procedure
for such meetings or solicitations is found at Section 15.2 of the Declaration.
Such proposed amendments require the approval of a majority in interest of the
Investors given at a meeting of Shareholders or by written consents. Any
amendment requiring Investor action may not increase any Shareholder's
liability, change the Capital Contributions required of him or her or the
Investor's rights in interest in the Fund's profits, losses, deductions,
credits, revenues or distributions in more than a de minimis matter, or change
his rights on dissolution or any voting rights without the Shareholder's
consent. Any amendment which changes the Managing Shareholder's management
rights requires its consent.
The consent of all Investors is required for the following additional
actions by the Fund: actions contravening the Declaration or the Certificate of
Fund of the Fund; actions making it impossible to carry on ordinary business;
confessing a judgment in excess of 10% of the Fund's assets; dissolving or
terminating the Fund, other than as provided by the Declaration; allowing the
Managing Shareholder to possess or hold Fund Property for other than a Fund
purpose or adding a new Managing Shareholder except as described below.
Removal of Managing Shareholder
The holders of at least 10% of the Investor Shares may propose the removal
of a Managing Shareholder, either by calling a meeting or soliciting consents in
accordance with the terms of the Declaration. Removal of a Managing Shareholder
requires the affirmative vote of a majority of the Investor Shares (excluding
Investor Shares held by the Managing Shareholder which is the subject of the
vote or by its affiliates). Removal of a Managing Shareholder causes a
dissolution of the Fund unless any remaining Managing Shareholder and a majority
in interest of the Investors (or if there is no remaining Managing Shareholder,
a majority in interest of the Investors) elect to continue the Fund. The
Investors may replace a removed Managing Shareholder or fill a vacancy by vote
of a majority in interest of the Investors.
If a Managing Shareholder is removed, resigns (other than voluntarily
without cause) or is unable to serve, it may elect to exchange its Management
Share for a series of cash payments from the Fund in amounts equal to the
amounts of distributions to which the Managing Shareholder would otherwise have
been entitled under the Declaration in respect of investments made by the Fund
prior to the date of any such removal, resignation or other incapacity. The
Managing Shareholder would continue to receive its pro rata share of all
allocations to Investors as provided in the Declaration which are attributable
to Investor Shares owned by the Managing Shareholder.
Alternatively, the Managing Shareholder may elect to engage a qualified
independent appraiser and cause the Fund to engage another qualified independent
appraiser (at the Fund's expense in each case) to value the Fund Property as of
the date of such removal, resignation or other incapacity as if the property had
been sold at its fair market value so as to include all unrealized gains and
losses. If the two appraisers cannot agree on a value, they would appoint a
third independent appraiser (whose cost would be borne by the Fund) whose
determination, made on the same basis, would be final and binding.
Based on the appraisal, the Fund would make allocations to the Managing
Shareholder's capital account of Profits, Losses and other items resulting from
the appraisal as of the date of such removal, resignation or other incapacity as
if the Fund's fiscal year had ended, solely for the purpose of determining the
Managing Shareholder's capital account. If the Managing Shareholder has a
positive capital account after such allocation, the Fund would deliver a
promissory note of the Fund to the Managing Shareholder, the principal amount of
which would be equal to the Managing Shareholder's capital account and which
would bear interest at a rate per annum equal to the prime rate in effect at
Chase Manhattan Bank, N.A. on the date of removal, resignation or other
incapacity, with interest payable annually and unpaid principal payable only
from 20% of any available cash before any distributions thereof are made to the
Investors under the Declaration.
If the capital account of the Managing Shareholder has a negative balance
after such allocation, the Managing Shareholder would be obligated to contribute
to the capital of the Fund in its sole discretion either cash in an amount equal
to the negative balance in its capital account or a promissory note to the Fund
in such principal amount maturing five years after the date of such removal,
resignation or other incapacity, bearing interest at the rate specified above.
If the Managing Shareholder chose to elect the appraisal alternative, its entire
interest in the Fund would be terminated other than the right to receive the
promissory note and payments thereunder as provided above.
(c) Other rights and obligations.
The Investor Shares have no preemptive rights. The Fund intends but is not
required to give existing Investors the first opportunity for a limited time to
purchase any additional Shares offered unless, in the sole discretion of the
Fund, market conditions or the need to raise additional capital on an expedited
basis precludes an offering to all Investors. In those cases, the Fund shall
determine, in its sole discretion, the persons to whom additional Shares will be
offered and sold. Investors have no liability for further calls for capital or
to assessment by the Fund. No liabilities of the Fund can be generally imposed
on its Shareholders under Delaware law. See - Liability of Investors below.
(d) Restrictions on Transfer of Investor Shares
No Investor may assign or transfer all or any part of his interest in the
Fund and no transferee will be deemed a substituted Investor or be entitled to
exercise or receive any of the rights, powers or benefits of an Investor other
than the right to receive distributions attributable to the transferred interest
unless (i) such transferee has been approved and accepted by the Fund, in its
sole and absolute discretion, as a substituted Investor, and (ii) certain other
requirements set forth in the Declaration have been satisfied. As explained
below at - Tax Aspects, the Fund does not intend to allow free transferability
of Investor Shares or to allow the creation of a trading market in Investor
Shares.
(e) Liability of Investors
Assuming compliance with the Declaration and applicable formative and
qualifying requirements in Delaware and any other jurisdiction in which the Fund
conducts its business, an Investor will not be personally liable under Delaware
law for any obligations of the Fund, except to the extent of any unpaid Capital
Contributions that he or she agrees to contribute to the Fund and except for
indemnification liabilities arising from any misrepresentation made by him or
her in the Investor Subscription Booklet submitted to the Fund. The Fund will,
to the extent practicable, endeavor to limit the liability of the Investors in
each jurisdiction in which the Fund operates.
The law governing whether a jurisdiction other than Delaware will honor the
limitation of liability extended under Delaware law to the Investors is
uncertain. A number of states have adopted specific legislation permitting
business trusts to limit the liability of their beneficiaries and it is likely
that those states would similarly honor the Fund's limitations on liability of
Investors. In other states, there has been no authoritative legislative or
judicial determination as to whether the limitation of liability would be
honored and in some states the courts have held that the beneficiaries of a
business trust could be liable for the Fund's activities, regardless of their
lack of participation in its management. The Fund intends to make all
investments in Projects through subsidiaries, such as limited partnerships or
limited liability companies, that afford their owners limited liability in the
relevant jurisdictions. Therefore, regardless of the local treatment of business
trusts, the Fund believes that the Investors will not be subject to personal
liability for Project liabilities and that with regard to the operation of the
Fund itself the limitation of Investors' liability under Delaware law will
govern.
Under certain federal and state environmental laws of general application,
entities that own or operate properties contaminated with hazardous substances
may be liable for cleanup liabilities regardless of other limitations of
liability. The Fund is not aware of any case where such environmental
liabilities were imposed on non-management participants in a business trust.
The Delaware Act does not contain any provision imposing liability on an
Investor for participation in the control of the Fund, although no Investor has
any rights to do so except through the rights to propose and vote on matters
described above. The Delaware Act does not require an Investor who receives
distributions that are made when the Fund is or would be rendered insolvent to
return those distributions under equitable principles enforced by courts. Under
Delaware decisions, a trust beneficiary who receives overpayments from a trust
is obligated to return those payments, with interest, subject to equitable
defenses. The application of these cases to beneficiaries of a business trust is
uncertain.
(f) Issuance of additional classes of shares.
The Fund intends that all of its activities will be funded from the
proceeds of this offering and earnings thereon. In the future, the Fund may deem
it to be necessary or in the Fund's best interests, however, for the Fund to
commit additional funds to Projects in which it has previously participated or
to further diversify its activities by participating in new Projects. If the
Fund determines that these additional commitments should not be financed from
Fund earnings, and, as is currently anticipated, the Fund does not borrow funds
for these purposes, the Fund may sell additional Shares.
Beginning six months and one day after the Termination Date, the Fund from
time to time may create and sell additional Investor Shares or additional
classes or series of Shares if the Managing Shareholder determines that the best
interests of the Fund so require. Additional classes or series may but are not
required to be limited to the assets and cash flow of Projects or Project
Entities that represent less than all of the entire Fund Property. The Managing
Shareholder is authorized to determine or alter any or all of the powers,
preferences and rights, and the qualifications, limitations or restrictions
granted to or imposed upon any unissued class or series of additional Shares,
and to fix, alter or reduce the number of Shares comprising any such class or
series and the designation thereof, or any of them, and to provide for the
rights and terms of redemption or conversion of the Shares of any such class or
series. The Managing Shareholder's designation of the Shares and the terms and
conditions of any new class or series of Shares shall be deemed an amendment of
the Declaration and shall be effective without any notice to, action by or
approval of the Investors. Any Shares so designated or any additional Investor
Shares may be offered to such persons and on such terms and conditions as the
Fund may determine.
Any additional Shares or classes or series of Shares shall have voting
rights as designated by the Managing Shareholder; however, no such Share shall
have more than one vote per $100,000 of Capital Contributions for that Share on
matters in which the holders of those Shares vote with the holders of Investor
Shares, without the consent of the holders of a Majority of the Investor Shares.
All Profits, Losses and other items attributable to additional classes or
series of Shares shall be allocated as specified in the determination of the
Managing Shareholder creating those Shares, except that any such allocation
shall not unreasonably reduce allocations to existing Investors of Profits,
Losses, Net Cash Flow and other items to the extent attributable to their
Capital Contributions. The Managing Shareholder's election in good faith of
allocation methods (which may include subjective elements) shall be conclusive
in the absence of willful misconduct or gross negligence.
If the Fund does not raise sufficient additional capital to participate in
additional activities or does not choose to do so, the Fund may offer the
Managing Shareholder, its affiliates or partnerships or funds organized by any
of them the right to so participate in place of the Fund.
(g) Tax matters. There are many material tax aspects to the Investor
Shares. The Fund is an entity treated as a partnership for federal income tax
purposes and under many state income tax laws. As such, its income is not taxed
separately and its income, gains, losses, deductions and tax credits are passed
through to the Investors and the Managing Shareholder as described at --
Distribution and Liquidation Rights above. The Fund would lose partnership
status for federal income tax purposes if it became a "publicly traded
partnership."
In order not to become a publicly traded partnership, the Fund may not
permit any of the following to occur:
(i) Interests in the partnership are regularly quoted by any person, such
as a broker or dealer, making a market in the interests;
(ii) Any person regularly makes available to the public (including
customers or subscribers) bid or offer quotes with respect to interests in the
partnership and stands ready to effect buy or sell transactions at the quoted
prices for itself or on behalf of others;
(iii) the holder of an interest in the partnership has a readily available,
regular and ongoing opportunity to sell or exchange the interest through a
public means of obtaining or providing information of offers to buy, sell, or
exchange interests in the partnership; or
(iv) Prospective buyers and sellers otherwise have the opportunity to buy,
sell or exchange interests in the partnership in a time frame and with the
regularity and continuity that is comparable to that described in the other
provisions of this paragraph . .
. .
The Managing Shareholder has represented to its tax counsel that it will
not allow any transfer of Shares which, in the opinion of its counsel, will
cause the Fund's Shares to be treated as readily tradable on such market without
the consent of a Majority of the Investors.
(i) Provisions that might impede a change of control.
As discussed above at -- Voting Rights, the Investors do not have the right
to vote routinely upon the management of the Fund. Any amendment to the
Declaration that would modify the Managing Shareholder's management rights
requires the Managing Shareholder's consent. A decision to remove the Managing
Shareholder requires the calling of a special meeting or solicitation of
consents from Investors, a majority vote of the Investor Shares. Removal of the
Managing Shareholder causes a dissolution of the Fund unless a new Managing
Shareholder is concurrently elected. Because the removed Managing Shareholder is
entitled to compensation for its equity interest in the Fund, it might be
difficult for the Fund to offer a new Managing Shareholder a comparable equity
interest in the Fund. All these provisions may have the effect of impeding a
change of control of the Fund.
(j) Key Employees Incentive Plan.
The Key Employees Incentive Plan was adopted by the Fund in February 1998
as a means of giving key employees incentives to improve the value of the Fund's
equity, to better align their financial interests with those of the Investors
and to encourage superior employees to remain long-term with the Fund and the
Managing Shareholders, especially because of the new opportunities being created
for independent power executives by industry deregulation.
The Plan permits the Managing Shareholder to designate key executives and
employees of the Fund and its operating companies to receive "Incentive Shares."
Mr. Swanson is not eligible to participate in the Plan. As of the date of this
Registration Statement, approximately five officers and executives and up to
five other employees might be eligible for participation under the Plan, but no
decision has yet been made as to eligibility or participation. As of that date,
it was not possible to determine the amount of benefits, if any, that might be
allocated to any individual or group. The Managing Shareholder expects to
include the other officers and executives of the Fund named in this Registration
Statement as the initial participants in the Plan.
Power VI Co 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 Power VI Co. Power VI Co.
Cash Flow Up to 20% 20%
after Investors
obtain 12% Plan Participants Plan Participants
cumulative Up to 5% 5%
return
Net Cash Power VI Co. Power VI Co
Flow from 1% 20%
Dispositions
Plan Participants Plan Participants
0% 5%
The Managing Shareholder 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 Power VI Corporation and Plan participants. (The 1%
minimum amount of cash flow allocable to the Managing Shareholder will not be
split with 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. Thus, if 1000 Investor Shares (the
expanded maximum) are sold, 66-2/3 Incentive Shares will be created. If the
minimum of 15 Investor Shares were sold, only 1 Incentive Share would be
created. Each Incentive Share will be entitled to a pro-rata share of the cash
flow distributable to Plan participants in the table above. This computation is
intended to make the cash flow distributable to the holder of an Incentive Share
after Payout equivalent to the cash flow distributable after Payout to the
holder of an Investor Share.
Under the Key Employees Incentive Plan, the Managing Shareholder may grant
the Incentive Shares or fractional Incentive Shares to participants as share
bonuses, without any payment by the recipient to the Fund or further obligation,
restricted shares, under which the recipient would pay an amount per Incentive
Share specified by the Managing Shareholder (which could be nominal), but with
the shares being forfeitable by the recipient if he or she did not continue
employment or meet performance standards for a period of up to five years after
grant, pursuant to tax-advantaged incentive share options granted by the
Managing Shareholder at exercise prices and for terms (not exceeding 10 years)
specified by it, pursuant to non-qualified share options granted by the Managing
Shareholder at exercise prices and for terms (not exceeding 10 years) specified
by it, or stock appreciation rights, which entitle the participant to receive
the difference between the fair market value of the Incentive Shares subject to
the rights on the date of exercise and the fair market value of those Incentive
Shares on the date the rights were granted. Stock appreciation rights may be
granted in tandem with share options at any time before the options are
exercised. This permits the participant to surrender the related option,
exercise the rights and receive the difference between the fair market value of
the Incentive Shares subject to the rights on the date of exercise and the
option exercise price (which might be more or less than the fair market value of
the Incentive Shares on the date of grant). In all cases, the recipient may
elect to receive Incentive Shares or a cash payment.
The Plan will be administered and participation and grant decisions will be
made by the Managing Shareholder's Manager (Mr. Swanson) or a special
compensation committee, which will be composed of a person or persons not
eligible to be granted Incentive Shares or options under the Plan. The Managing
Shareholder may at any time amend, suspend or terminate the Key Employee
Incentive Plan or any grant made under the Plan. If any change in or affecting
Investor Shares or Incentive Shares occurs (such as a rollup, initial public
offering, merger or acquisition), the Managing Shareholder may make appropriate
amendments to or adjustments to the Plan or grants made under the Plan,
including changes in the number or class of shares that may be issued and the
price per share subject to outstanding options or stock appreciation rights. The
Managing Shareholder may not cancel or reduce any grant after it is made (except
to make adjustments described above) without the consent of the participant
affected. Further, the Managing Shareholder may not change the class of persons
eligible to receive incentive share options, increase the number of Incentive
Shares that may be issued or transferred under the Plan (unless those shares or
the equity interest underlying them are transferred from Power VI Co) or make
any other change that materially increases the benefits available under the Plan
without the approval of a Majority of the Investors.
Until Incentive Shares are actually issued, the cash flow, if any,
distributable to those Shares will be distributed to Power VI Co.
Tax Matters. A brief summary of the material federal income tax
consequences of benefits under the Key Employees Incentive Plan
follows:
The fair market value of any Incentive Shares granted as bonuses will be
ordinary income to the recipient in the year of grant.
Participants normally do not recognize taxable income when restricted
Incentive Shares are awarded. As the restrictions end, the participant
recognizes ordinary income equal to the difference between the fair market value
of the unrestricted Incentive Shares and the amount he or she paid for them,
plus the amount of any accumulated distributions paid at that time. The
participant may elect to recognize ordinary income at the time of award equal to
the difference between fair market value and the amount paid for the Incentive
Shares, determined without regard to the restrictions.
The grant of an incentive share option will not result in any immediate tax
consequences to participants or Investors. The exercise of the option will not
result in any taxable income to participants and Investors will not be entitled
to a deduction, but the excess of the fair market value of the Incentive Shares
over the option exercise price will be includable in the participant's
"alternative minimum taxable income" for purposes of the alternative minimum
tax. Incentive share options may not be issuable by the Fund so long as it
remains taxable as a partnership rather than as a corporation for federal income
tax purposes.
If the participant disposes of Incentive Shares that he or she acquired on
the exercise of an incentive share option within one year after exercise or
within two years after the option was granted, he or she will recognize ordinary
income equal to the lesser of (i) the excess of the fair market value of the
Incentive Shares on the date of exercise over the exercise price or (ii) the
amount of any gain realized. If the participant holds those Incentive Shares for
a longer period before disposing of them, any gain recognized by the participant
will be taxable at a capital gain rate of not more than 28% if the Incentive
Shares were held for 18 months or less or not more than 20% if the Inventive
Shares were held for a longer period.
The grant of a non-qualified stock option has no immediate tax consequences
to the participant or Investors. On exercise, the participant recognizes
ordinary income equal to the difference between the option exercise price and
the fair market value of the Incentive Shares acquired as of the date of
exercise.
The grant of a stock appreciation right has no immediate tax consequences
to the participant or Investors. On exercise, the participant recognizes
ordinary income equal to the fair market value of the Incentive Shares acquired
as of the date of exercise plus any cash received.
Until the Fund becomes a public company with tradable shares, the
Investors, Power VI Co and plan participants will be entitled to deductions in
the same amounts, of the same type (ordinary or capital loss) and at the same
time as the participants realize income or gain. To the extent that any
deductions allocable to Investors constitute capital losses, the Investors will
be able to use those deductions only against their capital gains, if any, and a
very limited amount, if any, of ordinary income. After such an event, it is
unlikely that deductions will be passed through to Investors. The Fund does not
anticipate that any substantial amount of Incentive Shares will be sold prior to
such an event in a way that would generate capital losses for Investors, but no
assurance can be made that this will be the case.
Other Matters.
The Managing Shareholders may increase the cash flow distributable to
participants in the Plan by granting to the Plan a portion of cash flow
otherwise distributable to Power VI Co (but not in excess of 3% of Trust
distributable cash flow). A grant may be temporary or permanent. Additional
Incentive Shares will be created in proportion to the additional cash flow so
granted.
Each issued and outstanding Incentive Share has voting rights equal to one
Investor Share. Restricted Incentive Shares, whether vested or not, have all the
voting and distribution rights of Incentive Shares, but distributions will be
held by the Fund for the participant's account until the Shares vest.
Item 12. Indemnification of Directors and Officers.
Under the Declaration, the Fund's officers and agents, the Managing
Shareholder, RPMCo, the Corporate Trustee, the Panel Members and other Ridgewood
Managing Persons when acting on behalf of the Fund (provided they act within the
scope of the Declaration) may be indemnified by the Fund as determined by the
Managing Shareholder in its sole discretion, which may be exercised at any time,
regardless of whether or not a claim is pending or threatened, against liability
for errors in judgment or other acts or omissions taken in good faith and not
amounting to recklessness or willful misconduct. The Managing Shareholder may
make such determination regardless of the existence of a conflict of interest.
Expenses of defense or settlement may be advanced to a Ridgewood Managing
Person in advance of a determination that indemnification will be provided if
(i) the Ridgewood Managing Person provides appropriate security for the
undertaking; (ii) the Ridgewood Managing Person is insured against losses or
expenses of defense or settlement so that the advances may be recovered or (iii)
independent legal counsel in a written opinion determines, based upon a review
of the then readily-available facts, that there is reason to believe that the
Managing Person will be found to be entitled to indemnification. Counsel may
rely as to matters of business judgment or as to other matters not involving
determinations of law upon the advice of a committee of persons not affiliated
with the Fund that may be appointed by the Managing Shareholder for that
purpose.
In addition, the Placement Agent will be indemnified and held harmless by
the Fund against any losses or claims, based upon the assertion that the
Placement Agent has any continuing duty or obligation, subsequent to any
offering of Shares, to the Fund, the Panel Members, the Corporate Trustee or any
Shareholder or otherwise to monitor Fund operations or report to Investors
concerning Fund operations.
It is the position of the Securities and Exchange Commission and certain
state securities administrators that any attempt to limit the liability of a
general partner or persons controlling an issuer under the federal securities
laws or state securities laws, respectively, is contrary to public policy and,
therefore, unenforceable.
The Managing Shareholder is not required to take action on behalf of the
Fund unless the Fund has sufficient funds to meet obligations that might arise
from that action. The Managing Shareholder is not required to advance or expend
its own funds for ordinary Fund business but is entitled to reimbursement from
the Fund if it does so consistent with the Declaration. The Managing Shareholder
is not required to devote its time exclusively to the Fund and may engage in any
other venture.
The Managing Shareholder has obtained directors' and officers' liability
insurance covering the Fund, the Managing Shareholder and all other Ridgewood
Managing Persons.
Item 13. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Accountants F-2
Balance Sheets at December 31, 1998 F-3
Statement of Operations for Period
from Commencement of Share Offering
(February 9, 1998) through December 31, 1998 F-4
Statement of Changes in Shareholders'
Equity for Period from Commencement of
Share Offering through December 31, 1998 F-5
Statement of Cash Flows for Period
from Commencement of Share Offering
through December 31, 1998 F-6
Notes to Financial Statements F-7 to F-8
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.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Neither the Fund nor the Managing Shareholder has 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 Shareholder, and the Managing Shareholder's
current accountants, PricewaterhouseCoopers LLP, have been engaged by the Fund.
Item 15. Financial Statements and Exhibits
(a) Financial Statements.
See the Index to Financial Statements in Item 13 hereof.
(b) Exhibits
3.A. Certificate of Trust of the Registrant. Page 59
3.B. Amendment No. 1 to Certificate of Trust. Page 60
3.C. Declaration of Trust of the Registrant. Page 61
10.A. Stock and Warrant Purchase Agreement for
ZAP Power Systems, Inc. Page 83
10.B. Warrant for Purchase of Common Stock of
ZAP Power Systems, Inc. Page 96
10.C Investors' Rights Agreement with ZAP
Power Systems, Inc. Page 102
10.D. Milestone letter agreement with ZAP Power
Systems, Inc. Page 113
10.E. Letter agreement re board representation
with ZAP Power Systems, Inc. Page 114
10.F. Management Agreement between the Fund and
Ridgewood Power. Page 115
10.G. Key Employees' Incentive Plan Page 118
10.H. Agreement of Merger between Ridgewood Power
Corporation and Ridgewood Power LLC Page 127
10.I Agreement of Merger between Ridgewood Power
VI Corporation and Ridgewood Power VI LLC Page 132
21. Subsidiaries of the Registrant Page 138
27. Financial Data Schedule Page 139
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/ Martin V. Quinn Senior Vice President and April 30, 1999
Martin V. Quinn Chief Financial Officer
<PAGE>
The Ridgewood Power Growth Fund
Financial Statements
December 31, 1998
-F1-
<PAGE>
Report of Independent Accountants
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10036
[Letterhead of PricewaterhouseCoopers LLP]
March 23, 1999
To the Shareholders and Trustee of
Ridgewood Power Growth Fund
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Ridgewood Power Growth
Fund (the "Fund") at December 31, 1998, and the results of their operations
and their cash flows for the period February 9, 1998 (commencement of share
offering) through December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards 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 audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
-F2-
<PAGE>
The Ridgewood Power Growth Fund
Balance Sheet
- --------------------------------------------------------------------------------
December 31, 1998
------------
Assets:
Cash and cash equivalents ..................................... $ 25,256,560
Due from affiliates ........................................... 9,330
Interest receivable ........................................... 80,500
Other current assets .......................................... 5,848
------------
Total current assets ................................. 25,352,238
Deferred due diligence costs .................................. 381,192
------------
Total assets ......................................... $ 25,733,430
------------
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued expenses ......................... $ 264,620
Due to affiliates ............................................. 1,114,129
------------
Total current liabilities ............................ 1,378,749
------------
Commitments and contingencies
Shareholders' equity:
Shareholders' equity (296.8815 shares issued and outstanding ) 24,363,198
Managing shareholders' accumulated deficit .................... (8,517)
------------
Total shareholders' equity ........................... 24,354,681
------------
Total liabilities and shareholders' equity ........... $ 25,733,430
------------
See accompanying notes to the financial statements.
-F3-
<PAGE>
The Ridgewood Power Growth Fund
Statement of Operations
- --------------------------------------------------------------------------------
Commencement
of Share Offering
(February 9, 1998)
Through December 31, 1998
------------------------
Revenue:
Interest income ........... $ 494,002
-----------
Expenses:
Investment fee ............ 577,813
Project due diligence costs 708,658
Accounting and legal fees . 31,000
Other expenses ............ 28,276
-----------
Total expenses ...... 1,345,747
-----------
Net loss ............ $ (851,745)
-----------
See accompanying notes to the financial statements.
-F4-
<PAGE>
The Ridgewood Power Growth Fund
Statement of Changes in Shareholders' Equity
For The Period February 9, 1998 (Commencement of
Share Offering) To December 31, 1998
- --------------------------------------------------------------------------------
Managing
Shareholders Shareholders Total
------------ ------------ ------------
Initial capital contributions, net
(296.8815 shares) ................. $25,206,426 -- $25,206,426
Net loss for the period ............. (843,228) $ (8,517) (851,745)
----------- ------ ----------
Shareholders' equity, December
31, 1998 (296.8815 shares) ........ $24,363,198 $ (8,517) $24,354,681
----------- ------- ----------
See accompanying notes to the financial statements.
-F5-
<PAGE>
The Ridgewood Power Growth Fund
Statement of Cash Flows
- --------------------------------------------------------------------------------
Commencement
of Share Offering
(February 9, 1998) Through
December 31, 1998
----------------------------
Cash flows from operating activities:
Net loss .......................................... $ (851,745)
------------
Adjustments to reconcile net loss to net cash
flows from operating activities:
Changes in assets and liabilities:
Increase in due from affiliates .................... (9,330)
Increase in interest receivable .................... (80,500)
Increase in other current assets ................... (5,848)
Increase in accounts payable and accrued expenses .. 264,620
Increase in due to affiliate ....................... 1,114,129
------------
Total adjustments ..................................... 1,283,071
------------
Net cash provided by operating activities ............. 431,326
------------
Cash flows from investing activities:
Increase in deferred due diligence costs ............. (381,192)
------------
Net cash used in investing activities ................ (381,192)
------------
Cash flows from financing activities:
Proceeds from shareholders' contributions ............ 29,613,468
Selling commissions and offering costs paid .......... (4,407,042)
------------
Net cash provided by financing activities ............ 25,206,426
------------
Net increase in cash and cash equivalents .............. 25,256,560
Cash and cash equivalents, beginning of period ......... --
------------
Cash and cash equivalents, end of period ............... $ 25,256,560
------------
See accompanying notes to the financial statements.
-F6-
<PAGE>
The Ridgewood Power Growth Fund
Notes to 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
Corporation ("RPC") and Ridgewood Power VI Corporation ("RP6C"). The Fund began
offering shares on February 9, 1998 and may issue up to a maximum of 1,000
shares. Ridgewood Capital Corporation ("RCC") provides most services needed to
support the offering. RPC, RP6C and RCC are related through common ownership.
The Fund has been organized to invest primarily in independent power generation
facilities and in the development of these 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
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.
Income taxes
No provision is made for income taxes in the accompanying financial statements
as the income or losses of the Fund are passed through and included in the tax
returns of the individual shareholders of the Fund.
Offering costs
Costs associated with offering Fund shares (selling commissions, distribution
and offering costs) are reflected as a reduction of the shareholders' capital
contributions.
Due diligence costs relating to potential power projects
Costs relating to the due diligence performed on potential power project
investments are initially deferred, until such time as the Fund determines
whether or not it will make an investment in the project. Costs relating to
completed projects are capitalized and costs relating to rejected projects are
expensed at the time of rejection.
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. At December 31, 1998, the Fund had
subscriptions receivable of $25,000.
3. Fair Value of Financial Instruments
At December 31, 1998, the carrying value of the Fund's cash and cash
equivalents, receivables and accounts payable approximated their fair value.
-F7-
<PAGE>
4. Transactions With Managing Shareholder 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 period ended December 31, 1998, the
Fund paid fees for these services to RCC of $1,776,189. 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 period
ended December 31, 1998, the Fund paid investment fees to the managing
shareholder of $577,813.
The Fund entered into a management agreement with RP6C, one of the managing
shareholders, under which RP6C renders certain management, administrative and
advisory services and provides office space and other facilities to the Fund. As
compensation to the RP6C for such services, the Fund pays it an annual
management fee equal to 2.5% of the total capital contributions to the Fund
payable monthly upon the closing of the Fund. The Fund is not closed and no
management fees were paid for the period ending December 31, 1998.
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.
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, 1998.
RPC purchased one share of the Fund for $83,000 in 1998. Through December 31,
1998, commissions and placement fees of $304,031 were earned by Ridgewood
Securities Corporation, an affiliate of the managing shareholders.
5. Subsequent Event (unaudited)
On March 30, 1999, the Fund, through a wholly owned subsidiary, purchased
678,808 shares of common stock of ZAP Power Systems, Inc ("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
total exercise price of the warrant is $2,000,000 and the Fund can be required
to exercise the warrant by December 31, 1999 if ZAP meets certain performance
goals. If the Fund were to exercise its warrant, it would own approximately 30%
of the outstanding common stock of ZAP.
-F8-
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED
CERTIFICATE OF TRUST
OF
RIDGEWOOD ELECTRIC POWER TRUST VI
This Certificate of Trust ("Certificate") is being executed
as of February 6, 1997, for the purpose of forming a business trust
pursuant to the Delaware Business Trust Act, Del. Code. Ann. Tit.
12, ch. 38, Sections 3810 et seq.
NOW, THEREFORE, the undersigned hereby certifies as follows:
1. Name. The name of the trust is Ridgewood Electric Power
Trust VI (the "Trust").
2. Name and Business Address of the Trustee. The name of the Trustee of the
Trust is Ridgewood Energy Holding Corporation, a Delaware corporation, having
its principal place of business at 1105 North Market Street, Suite 1300,
Wilmington, Delaware
19899.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate as
of the day and year first above written.
RIDGEWOOD ENERGY HOLDING CORPORATION
/s/Robert E. Swanson
Robert E. Swanson,
President
FIRST AMENDMENT TO
CERTIFICATE OF TRUST OF
RIDGEWOOD ELECTRIC POWER TRUST VI
This First Amendment to Certificate of Trust of Ridgewood Electric Power
Trust VI, a Delaware business trust (the "Trust"), is executed as of February 6,
1998 pursuant to Section 3810(b) of the Delaware Business Trust Act.
NOW, THEREFORE, the undersigned certifies as follows:
1. The undersigned is the sole trustee of the Trust.
2. The name of the Trust is changed to "The Ridgewood Power Growth Fund."
IN WITNESS WHEREOF, the undersigned has executed this First Amendment
to Certificate of Trust on February 6, 1998.
RIDGEWOOD ENERGY HOLDING
CORPORATION
By /s/Mary Louise Olin
Mary Louise Olin, Vice President
and Secretary
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES ACT. THESE SECURITIES MUST BE ACQUIRED
FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY AND MAY NOT BE TRANSFERRED
OR SOLD EXCEPT IN CONFORMANCE WITH THE RESTRICTIONS CONTAINED IN ARTICLE 13 OF
THIS AGREEMENT.
DECLARATION OF TRUST
FOR
THE RIDGEWOOD POWER GROWTH FUND
This DECLARATION OF TRUST (the "Declaration"), is made as of January 4,
1998 by Ridgewood Energy Holding Corporation, a Delaware corporation ("Ridgewood
Holding"), who, with its successors as trustees under this Declaration, is
referred to as the "Corporate Trustee," for the benefit of those persons who are
accepted as holders of shares of beneficial interest under this Declaration.
WHEREAS, the Corporate Trustee has organized THE RIDGEWOOD POWER GROWTH
FUND (the "Fund") as a business trust under the Delaware Business Trust Act, to
provide for the management of the Fund by Ridgewood Power Corporation
("Ridgewood Power"), a Delaware corporation, and Ridgewood Power VI Corporation
("Ridgewood Power VI"), a Delaware corporation (collectively "Managing
Shareholders" and individually a "Managing Shareholder" when acting hereunder in
such capacity), and to provide for the sale of beneficial interests in the Fund,
the operation of the Fund and the rights of the Corporate Trustee and owners of
beneficial interests; and
WHEREAS, a Certificate of Trust (the "Certificate") was filed by the
Corporate Trustee on February 18, 1997 with the Secretary of State of Delaware
to evidence the existence of the Fund and a First Amendment thereto was filed
February 6, 1998 to change the Fund's name; and
WHEREAS, the Corporate Trustee is executing this Declaration for the
benefit of those persons accepted as holders of shares of beneficial interest.
NOW, THEREFORE, the Corporate Trustee declares that it constitutes and
appoints itself trustee of the sum of $10.00 owned by it, together with all
other property that it acquires under this Declaration as trustee, together with
the proceeds thereof, to hold, IN TRUST, to manage and dispose of for the
benefit of the holders, from time to time, of beneficial interests in the Fund,
subject to the provisions of this Declaration as follows: ARTICLE 1 ORGANIZATION
AND POWERS
1.1 Trust Estate; Name. The Fund, comprised of the trust estate created
under this Declaration and the business conducted hereunder, shall be designated
as "The Ridgewood Power Growth Fund," which name shall refer to the trust estate
and to the Corporate Trustee in its capacity as trustee of the trust estate but
not in any other capacity and which shall not refer to the officers, agents,
other trustees or beneficial owners of the Fund. To the extent possible, the
Corporate Trustee shall conduct all business and execute all documents relating
to the Fund in the name of the Fund and not as trustee. The Corporate Trustee
may conduct the business of the Fund or hold its property under other names as
necessary to comply with law or to further the affairs of the Fund as it deems
advisable in its sole discretion. This Declaration, the Certificate and any
other documents, and any amendments of any of the foregoing, required by law or
appropriate, shall be recorded in all offices or jurisdictions where the Fund
shall determine such recording to be necessary or advisable for the conduct of
the business of the Fund.
1.2 Purpose. (a) The Fund's purposes are to invest in and to operate where
appropriate projects in the independent electric power, energy, environmental
compliance and capital facilities development industries. However, the Fund will
not invest in, develop or operate nuclear facilities that produce electricity.
The Fund may participate in pre-development or preparatory activities for any of
these types of projects, including without limitation evaluation, planning,
permitting or development. Illustrations of some of the types of projects in
which the Fund may invest, without limitation, include cogeneration facilities
producing electricity and useful heat energy; other independent electric
generation facilities using non-nuclear sources of energy; facilities related to
the production, transmission, distribution or disposal of energy or
environmentally sensitive substances; motive power facilities, processing
facilities; or infrastructure facilities.
(b) The Fund may also invest in debt or equity securities of another entity
which is not in common control with the Fund. It may do so for the purposes of
making a long-term passive or active investment, gaining control of a company,
effecting a merger or business combination with the Fund, its affiliates or
non-affiliated parties, effecting the acquisition of assets, or selling the
entity, its assets, or those of the Fund to a third person by bid or otherwise.
The Fund may effect any of these transactions on its own, together with
Affiliates, or together with non-Affiliates, and may do so with the
encouragement or consent of management or controlling equity holders of the
entity or without such consent. Without the prior consent of a Majority of the
Investors, the Fund will not make any investment in assets that would cause it
to become an "investment company" subject to the requirements of the Investment
Company Act of 1940 and will not hold itself out as an "investment company."
(c) In carrying out its purposes, the Fund has the power to perform any act
that is necessary, advisable, customary or incidental thereto. It may invest in
a passive or active manner in, develop, plan, construct, manage, operate,
advise, transfer or dispose of any facility or interest and produce or market
products or services. The Fund may act independently, through subsidiary
organizations, in cooperation with others or through business entities in which
others have interests whether as principal, agent, partner, owner, member,
associate, joint venturer or otherwise. When related to its trust purposes, the
Fund may also guarantee obligations of other persons, supply collateral for
those obligations or for the issuance of letters of credit or surety bonds
benefiting other persons, enter into leases as lessor or lessee or acquire goods
or services for the use or benefit of other persons.
(d) The Fund may make interim investments of funds in any vehicle permitted
by this Declaration and may take all action necessary, advisable or appropriate
to maintain its existence, enforce this Declaration and its rights or the rights
of the Shareholders and comply with legal requirements.
1.3 Relationship among Shareholders; No Partnership. As among the Fund, the
Corporate Trustee, the Shareholders and the officers and agents of the Fund, a
trust and not a partnership is created by this Declaration irrespective of
whether any different status may be held to exist as far as others are concerned
or for tax purposes or in any other respect. The Shareholders hold only the
relationship of trust beneficiaries to the Corporate Trustee with only such
rights as are conferred on them by this Declaration.
1.4 Organization Certificates. The parties hereto shall cause to be
executed and filed (a) the Certificate,(b) such certificates as may be required
by so-called "assumed name" laws in each jurisdiction in which the Fund has a
place of business, (c) all such other certificates, notices, statements or other
instruments required by law or appropriate for the formation and operation of a
Delaware business trust in all jurisdictions where the Fund may elect to do
business, and (d) any amendments of any of the foregoing required by law or
appropriate.
1.5 Principal Place of Business. The principal place of business of the
Fund shall be The Ridgewood Commons, 947 Linwood Avenue, Ridgewood, New Jersey
07450 or such other place as the Fund may from time to time designate by notice
to all Investors. The Fund's office in the State of Delaware and the principal
place of business of Ridgewood Holding are 1105 North Market Street, Suite 1300,
Wilmington, Delaware 19899, or such other place as the Fund may designate from
time to time by notice to all Investors. The Fund may maintain such other
offices at such other places as the Fund may determine to be in the best
interests of the Fund.
1.6 Admission of Investors. (a) The Fund shall have the unrestricted right
at all times prior to the Termination Date (as defined in Article 2) to admit to
the Fund such Investors as it may deem advisable, provided the aggregate
subscriptions received for Capital Contributions (as defined in Article 2) of
the Investors and accepted by the Fund do not exceed $50,000,000 immediately
following the admission of such Investors. The Fund in its sole discretion may
increase the $50,000,000 amount to not more than $100,000,000 at any time prior
to the Termination Date. One Investor Share will be issued for each $100,000 of
Capital Contributions and fractional Shares may be issued in the Managing
Shareholders' sole discretion for proportional amounts of Capital Contributions.
After the Termination Date, the sale of Shares or different series of Shares is
governed by Section 9.5.
(b) Each Investor shall execute a Subscription Agreement (as defined in
Article 2) and make such Capital Contributions to the Fund as subscribed by the
Investor. Subject to the acceptance thereof by the Fund, each Investor who
executes a Subscription Agreement shall be admitted to the Fund as an Investor.
All funds received from such subscriptions will be deposited in the Fund's name
in an interest-bearing escrow account at a commercial bank until the Escrow Date
(as defined in Article 2).
(c) If, by the close of business on July 31, 1998, Investor Shares
representing Capital Contributions in the aggregate amount of at least
$1,500,000 have not been sold or if the Fund withdraws the offering of Investor
Shares in accordance with the terms of this Declaration, the Fund shall be
immediately dissolved at the expense of the Managing Shareholders and all
subscription funds shall be forthwith returned to the respective subscribers
together with any interest earned thereon. As soon after the Termination Date as
practicable, the Fund shall advise each Investor of the Termination Date and the
aggregate amount of Capital Contributions made by all Investors.
(d) The full cash price for Shares must be paid to the Fund at the time of
subscription, unless, after subscriptions for at least an aggregate of 15
Investor Shares have been accepted by the Fund, a subsequent subscriber obtains
the consent of the Fund (which may be refused in its sole discretion) to delay
full payment until not later than the Termination Date in anticipation of
obtaining financing from other sources.
1.7 Term of the Fund. For all purposes, this Declaration shall be effective
on and after its date and the Fund shall continue in existence until the
fortieth anniversary of that date, at which time the Fund shall terminate unless
sooner terminated under any other provision of this Declaration.
1.8 Powers of the Fund. Without limiting any powers granted to the Fund
under this Declaration or applicable law, in carrying out its purposes the Fund
has all powers granted to a corporation incorporated under the Delaware General
Corporation Law, including, without limitation:
(a) To borrow money or to loan money and to pledge or mortgage any and all
Fund Property and to execute conveyances, mortgages, security agreements,
assignments and any other contract or agreement deemed proper and in furtherance
of the Fund's purposes and affecting it or any Fund Property (including without
limitation the Management Agreement (as defined in Article 2)); provided,
however, that the Fund shall not loan money to the Managing Shareholders, any
Trustee or any other Managing Person;
(b) To pay all indebtedness, taxes and assessments due or to be due with
regard to Fund Property and to give or receive notices, reports or other
communications arising out of or in connection with the Fund's business or Fund
Property;
(c) To collect all monies due the Fund;
(d) To establish, maintain and supervise the deposit of funds or Fund
Property into, and the withdrawals of the same from, Fund bank accounts or
securities accounts;
(e) To employ accountants to prepare required tax returns and provide other
professional services and to pay their fees as a Fund expense;
(f) To make any election relating to adjustments in basis on behalf of the
Fund or the Shareholders which is or may be permitted under the Code,
particularly with respect to Sections 743, 754 and 771 of the Code;
(g) To employ legal counsel for Fund purposes and to pay their fees and
expenses as a Fund expense; and
(h) To conduct the affairs of the Fund with the general objective of
achieving capital appreciation and distributable cash flow from the Fund
Property.
1.9. Preferred Participation Rights. (a) Investors whose subscriptions are
accepted by the Fund and who have made full payment for those Shares not later
than July 31, 1998 (or at an earlier or later date chosen by the Managing
Shareholders in their sole discretion if by that date the Fund has accepted
Share subscriptions for at least $5 million) will be issued Preferred
Participation Rights for those Shares. Each qualifying Investor will receive
Preferred Participation Rights at the rate of one right for each qualifying
Share, multiplied by the number of whole months (a fractional month being
considered to be a whole month) from the date the subscription is accepted by
the Fund through December 31, 1998. Fractional Preferred Participation Rights
will be issued. If for any reason a subscription or full payment for Shares is
not received by the deadline, Preferred Participation Rights for those Shares
will not be issued.
(b) The holders of Preferred Participation Rights shall be entitled to
distributions as provided under Section 8.1(d) but shall have no voting,
liquidation or other rights in respect of the Preferred Participation Rights,
except for the class voting provision of this Section 1.9(b) and the right to
receive, if available, any unpaid balance in respect of the Preferred
Participation Rights. Preferred Participation Rights are not transferable apart
from and must be transferred with the Shares with which they are associated.
Each Preferred Participation Right may be repurchased at any time by the Fund,
subject to applicable law, at a price per Preferred Participation Right equal to
$1,000 minus any distributions made in respect of that Preferred Participation
Right. The rights of holders of Preferred Participation Rights may not be
modified except by an amendment to this Declaration that is also consented to by
the affirmative vote of the holders of at least a majority of the outstanding
Preferred Participation Rights, voting as a class.
1.10. Incentive Shares. At the time that the offering of the Investor
Shares is closed, a number of Incentive Shares shall be authorized equal to 1/15
of the total number of Investor Shares issued and outstanding at that date.
Incentive Shares shall be issued solely under the Key Employees Incentive Plan
as described in Section 9.7 and Capital Contributions, if any, shall be made in
respect of the Incentive Shares as specified in the Plan. ARTICLE 2 DEFINITIONS
The following terms, whenever used herein, shall have the meanings assigned
to them in this Article 2 unless the context indicates otherwise. References to
sections and articles without further qualification denote sections and articles
of this Declaration. The singular shall include the plural and the masculine
gender shall include the feminine, and vice versa, as the context requires, and
the terms "person" and "he" and their derivations whenever used herein shall
include natural persons and entities, including, without limitation,
corporations, partnerships and trusts, unless the context indicates otherwise.
"Act"-The federal Securities Act of 1933, as amended, and any rules and
regulations promulgated thereunder.
"Adjusted Capital Account"-A Shareholder's Capital Account at any time
(determined before any allocations for the current fiscal period) (a) increased
by (i) the amount of the Shareholder's share of partnership minimum gain (as
defined in Regulation Section 1.704-2(d)) at such time, (ii) the amount of the
Shareholder's share of the minimum gain attributable to a partner nonrecourse
debt (as defined in Regulation Section 1.704-2(b)(4)) and (iii) the amount of
the deficit balance in the Shareholder's Capital Account which the Shareholder
is obligated to restore under Regulation Section 1.704-1(b)(2)(ii)(c), if any,
and (b) decreased by reasonably expected adjustments, allocations and
distributions described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and
(6) (taking into account the adjustments required by Regulation Sections
1.704-2(g)(ii) and 1.704-2(i)(5)).
"Affiliate"-An "Affiliate" of, or person "Affiliated" with, a specified
person is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
"Average Annual Capital Contributions"-For any calendar year or shorter
period, the Fund will compute as of each day an amount equal to the total
Capital Contributions of the Investors (excluding Capital Contributions made in
respect of additional classes or series of Shares under Section 9.5) minus all
prior distributions made under Section 8.1(c) to Investors and minus all amounts
of Capital Contributions that are returned to Investors under Section to
Investors. The "Average Annual Capital Contributions" will equal the sum of the
amounts computed under the preceding sentence on each day in the year or period,
divided by the actual number of days in the year or period.
"Capital Account"-The amount representing a Shareholder's capital interest
in the Fund, as determined under Article 6 hereof.
"Capital Contributions"-The aggregate capital contributions of the
Investors accepted by the Fund in payment of the purchase price of one or more
whole or fractional Investor Shares (inclusive of the amount of any fee or other
compensation waived by the Fund, the Managing Shareholders or the Placement
Agent) plus any amounts contributed by the Managing Shareholders pursuant to
Section 14.7, plus any amounts contributed by Incentive Plan Participants in
respect of Incentive Shares and minus any return of capital by the Fund.
"Certificate"-The Certificate of Trust of the Fund, as amended from time to
time.
"Code"-The Internal Revenue Code of 1986, as amended from time to time, and
any rules and regulations promulgated thereunder.
"Corporate Trustee"-Ridgewood Holding or its successors as Corporate
Trustee. The Corporate Trustee acts as legal title holder of the Fund Property,
subject to the terms of this Declaration.
"Declaration"-This Declaration of Trust, as amended from time to time.
"Delaware Act"-The Delaware Business Trust Act, as amended from time to
time (currently codified as title 12, Chapter 38 of the Delaware Code).
"Escrow Date"-The later of the dates on which the Fund (i) accepts the
subscription that causes Capital Contributions in the initial offering to
Investors to be at least $1,500,000, (ii) deposits at least $1,500,000 in
collected funds in escrow under Section 1.6(b), provided, however, the Escrow
Date shall not be later than July 31, 1998.
"Fund"-The Ridgewood Power Growth Fund, a Delaware business trust.
"Fund Property"-All property owned or acquired by the Corporate Trustee as
part of the trust estate underthis Declaration.
"Incentive Plan Participant"-A key executive or employee of the Fund, its
subsidiaries or companies operating Projects for the Fund who is designated
under the Key Employees Incentive Plan as a participant.
"Incentive Share"-A beneficial interest in the Fund granted under the Key
Employees Incentive Plan representing the right to receive a pro rata portion of
cash flow allocable to participants in that Plan.
"Investor"-A purchaser of Investor Shares (which will includes a Managing
Shareholder to the extent it acquires Investor Shares) whose subscription is
accepted by the Fund.
"Investor Share"-Beneficial interests in the Fund representing an initial
Capital Contribution of $100,000. "Key Employees Incentive Plan"-The
employee equity incentive plan authorized under Section 9.7.
"Losses"-Defined at "Profits or Losses."
"Majority"-A majority in interest of a class of Shares for voting purposes,
subject to the requirements ofSection 15.2(d).
"Management Agreement"-The management agreement between the Fund and the
Managing Shareholders as described in the Memorandum, and as may be amended.
"Management Share"-An interest in the Fund that represents the beneficial
interests and management rights of the Managing Shareholders in their capacity
as Managing Shareholders, but excluding a Managing Shareholder's interest, if
any, attributable to Investor Shares acquired by it.
"Managing Person"-Any of the following: (a) Fund officers, agents, or
Affiliates, a Managing Shareholder, the Corporate Trustee, Panel Members, RPMC ,
Ridgewood Capital, or other Affiliates of the Managing Shareholders or the
Corporate Trustee and (b) any directors, officers or agents of any organizations
named in (a) above when acting for the Corporate Trustee, a Managing Shareholder
or any of their Affiliates on behalf of the Fund.
"Managing Shareholder"-Ridgewood Power or Power VI Corp. and any substitute
or different Managing Shareholder as may subsequently be created under the terms
of this Declaration.
"Memorandum"-The Confidential Memorandum dated February 9, 1998 of the
Fund, as the same may be amended or supplemented from time to time, to which
this Declaration is an Exhibit.
"Net Cash Flow"-The total gross receipts of the Fund, less cash operating
expenses, all other cash expenditures of the Fund and reasonable reserves as
determined by the Fund to cover anticipated Fund expenses. For purposes of
determining Net Cash Flow, gross receipts shall mean proceeds from any source
whatsoever, including, but not limited to, income from operations and the
temporary investment of Fund funds under Section 10.5 and any proceeds from the
sale, exchange, financing or refinancing of Fund Property, but excluding any
Capital Contributions of the Shareholders.
"1940 Act"-The federal Investment Company Act of 1940, as amended, and any
rules and regulations promulgated thereunder.
"Operation Agreement"-Any Operation Agreement, by and among the Fund or its
Project Entities, the Managing Shareholders and RPMC, under which RPMC will
operate specified Projects for the Fund.
"Panel"-The Independent Review Panel created by Section 12.14 of this
Declaration, comprised of the Panel Members, for the purpose of reviewing
Ridgewood Program Transactions.
"Panel Member"-An individual serving under Section 12.14 as a member of the
Panel. Panel Members are not trustees of the Fund.
"Plan Holder"-An Incentive Plan Participant who has acquired Incentive
Shares (whether as restricted shares, as bonus shares or on exercise of options
or share appreciation rights).
"Payout"-The point at which total cumulative distributions to Investors
from the Fund (exclusive of distributions in respect of Preferred Participation
Rights and distributions under Section 9.5) equal their total Capital
Contributions (exclusive of Capital Contributions made on the sale of a new
series of Shares under Section 9.5).
"Placement Agent"-Ridgewood Securities Corporation, a Delaware corporation,
with its principal place of business at The Ridgewood Commons, 947 Linwood
Avenue, Ridgewood, New Jersey 07450.
"Power VI Corp."-Ridgewood Power VI Corporation, a Delaware corporation
that is one of the initial Managing Shareholders.
"Preferred Participation Right"-A right issued by the Fund under Section
1.9 to an Investor. A Preferred Participation Right entitles the holder to
special distributions under Section 8.1(d) in recognition of the extra benefits
the Fund receives from early subscriptions for Shares.
"Profits" or "Losses"-For a given fiscal period, an amount equal to the
Fund's taxable income or loss for such period, determined in accordance with
Code Section 703(a) (for this purpose, all items of income, gain, expense, loss,
deduction or credit required to be stated separately pursuant to Code Section
703(a)(1) shall be included in taxable income or loss), with the following
adjustments:
(a) Any income of the Fund that is exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to this
definition and any income and gain described in Regulation Section
1.704-1(b)(2)(iv)(i)(1) shall be added to such taxable income or loss;
(b) Any expenditures of the Fund described in Code Section 705(a)(2)(B) or
treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulation Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits
or Losses pursuant to this definition shall be subtracted from such taxable
income or loss;
(c) In the event of a distribution in kind under Section 8.2, the amount of
any unrealized gain or loss deemed to have been realized on the property
distributed shall be added or subtracted from such taxable income or loss; and
(d) Notwithstanding any other provision of this definition, any items which
are specially allocated pursuant to Sections 4.5, 4.6, 4.7 and 7.4 shall not be
taken into account in computing Profits or Losses.
"Project"-A facility that generates, transmits or distributes electric
power or heat energy (including a cogeneration facility), or that supplies
products or services for the environmental remediation, energy or public service
or capital facilities development industries, except for nuclear facilities that
produce electricity. Projects include the preparatory, engineering, legal,
siting, financial and permitting work undertaken in anticipation of construction
or acquisition of any such facility.
"Project Entity"-The limited liability company or other legal entity that
develops or will own a Project and holds title to its assets.
"Purchase Right"-A right to purchase additional Shares granted to an
Investor pursuant to Section 9.5(c).
"Regulation"-A final or temporary Treasury regulation promulgated under the
Code.
"Ridgewood Capital"-Ridgewood Power Capital Corporation, a Delaware
corporation that is an Affiliate of the Managing Shareholders.
"Ridgewood Holding"-Ridgewood Energy Holding Corporation, a Delaware
corporation having its principal office at 1105 North Market Street, Suite 1300,
Wilmington, Delaware 19899, which is the initial Corporate Trustee.
"RPMC"-Ridgewood Power Management Corporation, a Delaware corporation which
is an Affiliate of Ridgewood Power and Power VI Corp. "Ridgewood
Power"-Ridgewood Power Corporation, a Delaware corporation that is one of
the initial Managing Shareholders. "Ridgewood Program"-Another investment
program sponsored by a Managing Shareholder or an Affiliate of the Managing
Shareholders. "Ridgewood Program Transaction"-A "Ridgewood Program
Transaction" is any transaction material to the Fund in which both the Fund
(or an entity in which the Fund has invested) and either (a) a Ridgewood Program
or (b) an entity controlled by a Ridgewood Program or Programs or (c) an entity
in which a Ridgewood Program has invested is a party. Ridgewood Program
Transactions do not include any transaction authorized by Section 12.5 of this
Declaration.
"Share"-An Investor Share, an Incentive Share or a Management Share.
"Shareholder"-An owner of a beneficial interest in the Fund.
"Subscription Agreement"-The form of subscription agreement (contained in
Exhibit F to the Memorandum, which is separately bound) which each prospective
Investor must execute in order to subscribe for an interest in the Fund.
"Termination Date"-The date on which the initial offering of Investor
Shares is ended, as set or extended from time to time by the Fund in its sole
discretion, provided that the Termination Date may not occur before the Escrow
Date, and that if the offering is withdrawn, the Termination Date is the date
the Fund elects to do so.
ARTICLE 3
LIABILITIES
3.1 Liability and Obligations of Corporate Trustee. (a) To the fullest
extent permitted by the Delaware Act, the Corporate Trustee in its capacity as a
trustee of the Fund shall not be personally liable to any person other than the
Fund and its Shareholders for any act or omission of the Fund, or any obligation
of the Fund. The trust estate shall be directly liable for the payment or
satisfaction of all obligations and liabilities of the Fund incurred by the
Corporate Trustee, the Managing Shareholders, and the officers and agents of the
Fund within their authority or in a manner that would entitle them to
indemnification under Section 3.6.
(b) The Corporate Trustee shall not exercise any management or
administrative powers in respect of the Fund except on the direction of the
Managing Shareholders.
(c) The Corporate Trustee, as trustee, may be made party to any action,
suit or proceeding to enforce an obligation, liability or right of the Fund, but
it shall not solely on account thereof be liable separate from the Fund and it
shall be a party in that case only insofar as may be necessary to enable such
obligation or liability to be enforced against the trust estate.
3.2 Liability of Managing Shareholders to Third Parties. (a) The Managing
Shareholders shall be jointly and severally liable for any wrongful act or
omission of the Corporate Trustee or the Fund taken in the ordinary course of
the Fund's business or with the authority of the Managing Shareholders, that
causes loss or injury to any person who is not a Shareholder or that incurs any
penalty.
(b) The Managing Shareholders shall be jointly and severally liable for
losses resulting from (i) the misapplication by the Managing Shareholders of
money or property received from a person who is not a Shareholder by the
Managing Shareholders within the scope of the Managing Shareholders' apparent
authority or (ii) the misapplication of money or property received by the Fund
in the course of its business from a person who is not a Shareholder while the
money or property is in the custody of the Fund.
(c) Subject to the remaining provisions of this Article 3, each Managing
Shareholder shall be jointly and severally liable for all other debts and
obligations of the Fund, but it may enter into a separate obligation to perform
a Fund contract.
3.3 Liability of Investors and Plan Holders in General. No Investor or Plan
Holder in his capacity as such shall have any liability for the debts and
obligations of the Fund in any amount beyond the unpaid amount, if any, of the
Capital Contributions subscribed for by him. Each Investor and Plan Holder shall
have the same limitation on his liability for the Fund's debts and obligations
as a stockholder of a Delaware corporation has for debts and obligations of the
corporation.
3.4 Liability of Investors and Plan Holders to Trustee, Fund and
Shareholders. No Investor or Plan Holder in his capacity as such shall be
liable, responsible or accountable in damages or otherwise to any other
Shareholder, the Corporate Trustee or the Fund for any claim, demand, liability,
cost, damage and cause of action of any nature whatsoever that arises out of or
that is incidental to the management of the Fund's affairs.
3.5 Liability of Managing Persons to Fund and Shareholders. (a) No Managing
Person shall have liability to the Fund or to any other Shareholder for any loss
suffered by the Fund that arises out of any action or inaction of the Managing
Person if the Managing Person, in good faith, determined that such course of
conduct was in the Fund's best interest and such course of conduct did not
constitute recklessness or willful misconduct of the Managing Person.
(b) No act of the Fund shall be affected or invalidated by the fact that a
Managing Person may be a party to or has an interest in any contract or
transaction of the Fund if the (i) interest of the Managing Person has been
disclosed or is known to the Shareholders or (ii) such contract or transaction
is at prevailing rates or is on terms at least as favorable to the Fund as those
available from persons who are not Managing Persons or (iii) is a Ridgewood
Program Transaction authorized under Section 12.14(d) or (iv) has been approved
by the vote of an Independent Panel or (v) has been approved by the vote of a
Majority of Voting Shares.
3.6 Indemnification of Managing Persons. (a) Each Managing Person shall be
indemnified from the Fund Property against any losses, liabilities, judgments,
expenses and amounts paid in settlement of any claims sustained by him in
connection with the Fund or claims by the Fund, in right of the Fund or by or in
right of any Shareholders, if the Managing Person would not be liable under the
standards of Section 3.5 and, in the case of Managing Persons other than the
Corporate Trustee and the Managing Shareholders, they were acting within the
scope of authority validly delegated to them by the Corporate Trustee or the
Managing Shareholders or the Declaration. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Managing Person charged did not act in good faith and in a
manner that he reasonably believed was in the Fund's best interests. To the
extent that any Managing Person is successful on the merits or otherwise in
defense of any action, suit or proceeding or in defense of any claim, issue or
matter therein, the Fund shall indemnify that Managing Person against the
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith. The Managing Shareholders shall have full and complete
discretion to authorize indemnification of any Managing Person consistent with
the requirements of this Declaration at any time, regardless of whether a claim
is pending or threatened and regardless of any conflict of interest between the
Managing Shareholders and the Fund that may arise in regard to the decision to
indemnify a Managing Person.
(b) Notwithstanding the foregoing, no Managing Person nor any broker-dealer
shall be indemnified, nor shall expenses be advanced on its behalf, for any
losses, liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws, unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnity, or (ii) those claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnity or (iii) a court of competent jurisdiction approves
a settlement of the claims against the particular indemnity. In any claim for
federal or state securities law violations, the party seeking indemnification
shall place before the court the positions of the Securities and Exchange
Commission and other securities administrators to the extent required by them
with respect to the issue of indemnification for securities law violations.
(c) Notwithstanding any other provision of this Declaration, Panel Members
shall be indemnified by the Fund against any loss, liability, judgment, expense
or amount paid in settlement of any claim sustained by them in connection with
the Fund or claims by the Fund, in right of the Fund or by or in right of any
Shareholders, if the Panel Member would not be liable under the standards of
Section 3.5. The last three sentences of Section 3.6(a), the last sentence of
Section 3.6(b) and Section 3.7(a) shall apply to Panel Members' rights to
indemnification, regardless of whether any condition under Section
3.7(a)(i)-(iii) is fulfilled.
3.7 General Provisions. The following provisions shall apply to all rights
of indemnification and advances of expenses under this Declarationand all
liabilities described in this Article 3:
(a) Expenses, including attorneys' fees, incurred by a Managing Person in
defending any action, suit or proceeding shall be paid by the Fund in advance of
the final disposition of the action, suit or proceeding upon receipt of an
undertaking by the recipient to repay such amount if it shall ultimately be
determined that the Managing Person is not entitled to be indemnified by the
Fund under this Declaration or otherwise and if at least one of the following
conditions is satisfied:
(i) The Managing Person provides appropriate security for the undertaking;
or
(ii) The Managing Person is insured against losses or expenses of defense
or settlement so that the advances may be recovered or
(iii) Independent legal counsel in a written opinion determines, based upon
a review of the then readily-available facts, that there is reason to believe
that the Managing Person will be found to be entitled to indemnification under
Section 3.6. In so doing, it shall not be necessary to employ hearing or
trial-like procedures. Counsel may rely as to matters of business judgment or as
to other matters not involving determinations of law upon the advice of the
Independent Review Panel or a committee of persons not affiliated with the Fund
that may be appointed by the Managing Shareholders for that purpose.
(b) Rights to indemnification and advances of expenses under this
Declaration are not exclusive of any other rights to indemnification or advances
to which a Managing Person or Investor may be entitled, both as to action in a
representative capacity or as to action in another capacity taken while
representing another.
(c) Each Managing Person shall be entitled to rely upon the opinion or
advice of or any statement or computation by any counsel, engineer, accountant,
investment banker or other person retained by such Managing Person or the Fund
which he believes to be within such person's professional or expert competence.
In so doing, he will be deemed to be acting in good faith and with the requisite
degree of care unless he has actual knowledge concerning the matter in question
that would cause such reliance to be unwarranted.
3.8 Dealings with Trust. With regard to all rights of the Fund and all
actions to be taken on its behalf, the Fund and not the Corporate Trustee, nor
the Managing Shareholders, nor the Panel Members, nor the Fund's officers and
agents, nor the Investors or Plan Holders shall be the principal and the Fund
shall be entitled as such to the extent permitted by law to enforce the same,
collect damages and take all other action. All agreements, obligations and
actions of the Fund shall be executed or taken in the name of the Fund, by an
appropriate nominee, or by the Corporate Trustee as trustee but not in its
individual capacity. Money may be paid and property delivered to any duly
authorized officer or agent of the Fund who may receipt therefor in the name of
the Fund and no person dealing in good faith thereby shall be bound to see to
the application of any moneys so paid or property so delivered. No entity whose
securities are held by the Fund shall be affected by notice of such fact or be
bound to see to the execution of the Fund or to ascertain whether any transfer
of its securities by or to the Fund or the Corporate Trustee is authorized.
ARTICLE 4
ALLOCATION OF PROFIT AND LOSS
4.1. Profits. Profits for any fiscal period shall be allocated among the
Shareholders as follows:
(a) First, 100% to Power VI Corp. until the Profits so allocated to Power
VI Corp. plus the cumulative Profits allocated to Power VI Corp. for prior
fiscal periods during which a Profit was earned by the Fund equal the cumulative
amounts distributable to Power VI Corp. under Article 8 hereof for the current
and prior periods; and
(b) The balance, if any, to the Investors and to the Incentive Plan
Participants in proportion to the distributions made to the Investors and to the
Incentive Plan Participants for the fiscal period.
4.2. Losses. Losses for any fiscal period shall be allocated 99% to the
Investors and 1% to Power VI Corp.; provided that Losses shall not be allocated
pursuant to this Section 4.2 to the extent that such allocation would cause any
Investor to have a negative amount in the Investor's Adjusted Capital Account at
the end of this fiscal period.
4.3 General Allocation Provisions. (a) Except as otherwise provided in this
Declaration, all items of Fund income, gain, expense, loss, deduction and credit
for a particular fiscal period and any other allocations not otherwise provided
for shall be divided among the Shareholders in the same proportions as they
share Profits or Losses, as the case may be, for the fiscal period.
(b) The Shareholders shall be bound by the provisions of this Declaration
in reporting their shares of Fund income and loss for income tax purposes.
(c) The Fund may use any permissible method under Code Section 706(d) and
the Regulations thereunder to determine Profits, Losses and other items on a
daily, monthly or other basis for any fiscal period in which there is a change
in a Shareholder's interest in the Fund.
(d) The definition of "Capital Account" and certain other provisions of
this Declaration are intended to comply with Regulations Sections 1.704-1(b) and
1.704-2 and shall be interpreted and applied in a manner consistent with such
Regulations. These Regulations contain additional rules governing maintenance of
Capital Accounts that may not have been provided for in this Declaration
because, in part, these rules may relate to transactions that are not expected
to occur and in some instances are prohibited by this Declaration. If the Fund
after consultation with its regular accountants or tax counsel determines that
it is prudent to modify the manner in which the Capital Accounts, or any debits
or credits thereto, are computed in order to comply with such Regulations, or to
avoid the effects of unanticipated events that might otherwise cause this
Declaration not to comply with such Regulations, the Fund shall make such
modification without the need of prior notice to or consent of any Shareholder;
so long as no such modification is likely to have a material effect on the
amounts distributable to any Shareholder.
4.4 Among Investors. Each Investor shall be allocated that percentage part
of the aggregate amounts allocated to all Investors or to a subgroup of
Investors, as the case may be, as the number of Shares owned by the Investor
bears to the aggregate number of Shares owned by all Investors or Investors in
the subgroup. Allocations under Section 4.1(b) of Profits shall be made among
Investors as follows: first, all Profits so allocated shall be allocated to the
holders of Preferred Participation Rights in proportion to their holdings until
the amounts so allocated, together with prior allocations under this sentence,
equal the cumulative distributions made in respect of Preferred Participation
Rights. All remaining Profits allocated under Section 4.1(b) to Investors shall
be allocated among the Investors as prescribed by the first sentence of this
Section 4.4.
4.5 Minimum Allocation. Notwithstanding anything to the contrary in this
Declaration, in no event shall Power VI Corp.'s allocable share of each material
item of Fund income, gain, expense, loss, deduction or credit be less than 1% of
such item.
4.6 Tax Allocation. Notwithstanding anything to the contrary in this
Declaration, to the extent that Power VI Corp. is treated for federal income tax
purposes as having received an interest in the Fund as compensation for services
which constitutes income to Power VI Corp. under Code Section 61, any amount
allowed as a deduction for federal income tax purposes to the Fund (whether as
an ordinary and necessary business expense or as a depreciation or amortization
deduction) as a result of such characterization shall be allocated solely for
federal income tax purposes to Power VI Corp.
4.7 Allocation of Gains from Dispositions. Prior to the allocation of
Profits under Section 4.1, all gains derived by the Fund during any fiscal
period from any sale, transfer, injury, destruction or other disposition of Fund
Property or an interest therein, other than in the ordinary course of operation
of Fund Property (including, without limitation, proceeds from insurance,
refinancing or condemnation) shall be allocated to Power VI Corp. to the extent
that the Capital Account of Power VI Corp. would have otherwise been negative as
of the end of such fiscal period. Gain or loss allocable to each Shareholder
will be adjusted accordingly.
4.8. Among Incentive Plan Participants. Profits and other items allocable
to the Incentive Plan Participants shall be allocated among the authorized
Incentive Shares on a pro rata basis. Amounts allocable to issued and
outstanding Incentive Shares shall be allocated to their holders. Amounts
allocable to authorized Incentive Shares that are not issued and not outstanding
shall be allocated to Power VI Corp. in respect of its Management Share. ARTICLE
5 CAPITAL CONTRIBUTIONS OF SHAREHOLDERS
5.1 Additional Capital Contributions. There shall be no additional Capital
Contributions by the Investors except as provided in Section 9.5.
5.2 Managing Shareholders' Capital Contributions. Power VI Corp. as a
Managing Shareholder shall make Capital Contributions in accordance with Section
14.7.
5.3. Incentive Plan Participants' Capital Contributions. Incentive Plan
Participants shall make Capital Contributions in respect of Incentive Shares
solely as specified by the Key Employees Incentive Plan.
5.4. Returns of Capital. If the Fund for any reason at any time does not
find it necessary or appropriate to retain or expend all Capital Contributions
made by Investors or Incentive Plan Participants, the Managing Shareholders in
their sole discretion may cause the Fund to return any or all such excess
Capital Contributions ratably to Investors or those Participants, as the case
may be. The Investors will be notified of the source of the payment. The Fund is
not obligated to return the amount of any fees charged in connection with the
Capital Contribution and the return of a Capital Contribution is net of any fees
so charged.
ARTICLE 6
CAPITAL ACCOUNTS
6.1 Capital Accounts. A Capital Account shall be established and maintained
for each Shareholder and shall be adjusted as follows:
(a) The Capital Account of each Shareholder shall be increased by:
(1) The amount of such Shareholder's Capital Contributions to the Fund;
(2) The amount of Profits allocated to such Shareholder pursuant to
Articles 4 and 7 and Section 9.5;
(3) The fair market value of property contributed by the Shareholder to the
Fund (net of liabilities secured by the contributed property that the Fund under
Code Section 752 is considered to have assumed or taken subject to); and
(4) Any items in the nature of revenues, income or gain that are specially
allocated to such Shareholder or adjusted pursuant to Sections 4.5, 4.6, 4.7 and
7.4.
(b) The Capital Account of each Shareholder shall be decreased by:
(1) The amount of Losses allocated to such Shareholder pursuant to Articles
4 and 7 and Section 9.5;
(2) All amounts of money and the fair market value of property paid or
distributed to such Shareholder pursuant to the terms hereof (other than
payments made with respect to loans made by such Shareholder to the Fund), net
of liabilities secured by that property that the Shareholder under Code Section
752 is considered to have assumed or taken subject to, as well as returns of
capital under Section 5.3;
(3) Any items in the nature of expenses or losses that are specially
allocated to such Shareholder pursuant to Sections 4.5, 4.6, 4.7 and 7.4; and
(4) Any return of a Capital Contribution under Section 5.4.
6.2 Calculation of Capital Account. Whenever it is necessary to determine
the Capital Account of any Shareholder, the Capital Account of such Shareholder
shall be determined in accordance with the rules of Regulation Sections 1.704-1
(b) (2) (iv) and 1.704-2 (as amended from time to time). If necessary to comply
with the Code, an Adjusted Capital Account may be employed.
6.3 Effect of Loans. Loans by any Shareholder to the Fund shall not be
considered contributions to the capital of the Fund. 6.4 Withdrawal of
Capital. No Shareholder shall be entitled to withdraw any part of his
Capital Account or to receive any
distribution from the Fund, except as specifically provided herein.
6.5 Capital Accounts of New Shareholders. Any person who shall acquire
Shares in accordance with the terms and conditions of Article 13 of this
Declaration shall have the Capital Account of his transferor after adjustments
reflecting the transfer, if any, except as specifically provided herein.
6.6 Limitation. Neither the Corporate Trustee, the Managing Shareholders
nor any other Managing Person shall be required or shall have any personal
liability to fund any or all of any negative Capital Account of any Investor or
Incentive Plan Participant, including without limitation Capital Contributions.
ARTICLE 7 ADDITIONAL PROVISIONS APPLICABLE TO ALLOCATIONS
7.1 Determination of Income and Loss. At the end of each Fund fiscal year,
and at such other times as the Fund shall deem necessary or appropriate, each
item of Fund income, gain, expense, loss, deduction and credit shall be
determined for the period then ending and shall be allocated to the Capital
Account of each Shareholder in accordance with this Declaration. With respect to
the admission of Shareholders, the Fund will use the "interim closing date"
method of accounting as permitted by the Regulations.
7.2 Determination of Income and Loss in the Event of Transfer. In the event
that a Shareholder transfers his interest in the Fund in accordance with the
terms of this Declaration, the determination and allocation described in Section
7.1 shall be made as of the date of such transfer and thereafter all such
allocations shall be made to the account of the transferee of such interest;
provided, however, that the Fund may determine that such determination and
allocation shall be pro rata to the Shareholders based upon the actual number of
days in such fiscal year that each such Shareholder held an interest in the
Fund. In the event of a pro rata determination and allocation, the foregoing
provisions of this Section relating to a pro rata determination and allocation
will not be applicable to the distributive shares, with respect to the Shares
transferred, of items of Fund income, gain, expense, loss, deduction and credit
arising out of (a) the sale or other disposition of all or substantially all
Fund Property, or (b) other extraordinary nonrecurring items, all of which will
be allocated to the holder of such Trust interest on the date such items of Fund
income, gain, expense, loss, deduction and credit are earned or incurred.
7.3 Allocation of Net Income and Net Losses. All items of income, gain,
expense, loss, deduction and credit of the Fund from operations and in the
ordinary course of operation of Fund Property shall be allocated among the
Shareholders in accordance with Article 4.
7.4 Qualified Income Offset and Other Allocation Provisions. (a) If there
is a net decrease in "partnership minimum gain" (within the meaning of
Regulation Section 1.704-2(d)) during a fiscal period, then there shall be
allocated to each Shareholder items of income and gain for such fiscal period
(and, if necessary, subsequent fiscal periods) in proportion to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in partnership minimum gain during such fiscal period that is allocable
to the disposition of Fund Property subject to one or more nonrecourse
liabilities of the Fund. However, such allocation shall be reduced to the extent
(i) the Shareholder contributes capital to the Fund that is used to repay the
nonrecourse liability and (ii) the Shareholder's share of the net decrease in
partnership minimum gain is caused by the repayment. The foregoing is intended
to be a "minimum gain chargeback" provision as described in Regulation Section
1.704-2(f), and shall be interpreted and applied in all respects in accordance
with such Regulation. If there is a net decrease in the minimum gain
attributable to a "partner nonrecourse debt" (as defined in Regulation Section
1.704-2(b) (4)) for a fiscal period, then, in addition to the amounts, if any,
allocated pursuant to the first sentence of this Subsection 7.4(a), there shall
be allocated to each Shareholder with a share of such minimum gain attributable
to a "partner nonrecourse debt" items of income and gain for such fiscal period
(and, if necessary, subsequent fiscal periods) in proportion to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in the minimum gain attributable to a partner nonrecourse debt during
such fiscal period that is allocable to the disposition of Trust Property
subject to one or more nonrecourse liabilities of the Fund. However, such amount
shall be reduced to the extent (i) the Shareholder contributes capital to the
Fund that is used to repay the nonrecourse liability and (ii) the Shareholder's
share of the net decrease in the minimum gain attributable to a partner
nonrecourse debt is caused by the repayment.
(b) If during any fiscal period of the Fund a Shareholder unexpectedly
receives an adjustment, allocation or distribution described in Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases a deficit
balance in the Shareholder's Adjusted Capital Account, there shall be allocated
to the Shareholder items of income and gain (consisting of a pro rata portion of
each item of Fund income, including gross income, and gain for such period) in
an amount and manner sufficient to eliminate such deficit balance as quickly as
possible. The foregoing is intended to be a "qualified income offset" provision
as described in Regulation Section 1.704-1(b)(2)(ii)(d), and shall be
interpreted and applied in all respects in accordance with such Regulation.
(c) Notwithstanding anything to the contrary in Article 4 or this Article
7, any item of deduction, loss or Code Section 705(a)(2)(B) expenditure that is
attributable to "partner nonrecourse debt" shall be allocated in accordance with
the manner in which the Shareholders bear the economic risk of loss for such
debt (determined in accordance with Regulation Section 1.704-2(i)).
(d) To the extent that any item of income, gain, loss or deduction has been
specially allocated pursuant to paragraph (a), (b) or (c) of this Section 7.4
("Required Allocations") and such allocation is inconsistent with how the same
amount otherwise would have been allocated under Sections 4.1 and 4.2,
subsequent allocations under Sections 4.1 and 4.2 shall be made, to the extent
possible, in a manner consistent with paragraphs (a), (b) and (c) of this
Section 7.4 which negates as rapidly as possible the effect of all previous
Required Allocations.
(e) Solely for federal, state and local income and franchise tax purposes
and not for book or Capital Account purposes, income, gain, loss and deduction
with respect to property carried on the Fund's books at a value other than its
tax basis shall be allocated (i) in the case of property contributed in kind, in
accordance with the requirements of Code Section 704(c) and such Regulations as
may be promulgated thereunder from time to time, and (ii) in the case of other
property, in accordance with the principles of Code Section 704(c) and the
Regulations thereunder, in each case, as incorporated among the requirements of
the relevant provisions of the Regulations under Code Section 704(b).
(f) All or a portion of the remaining items of Fund income or gain for the
fiscal period, if any, shall be specially allocated to the Investors in
proportion to the cumulative distributions each has received pursuant to Section
8.1(e) from the commencement of the Fund, until the aggregate amounts allocated
to each Investor pursuant to this Section 7.4(f) for such period and all prior
periods equal the cumulative amount of such distributions to such Investor.
ARTICLE 8 INTEREST OF SHAREHOLDERS IN CASH DISTRIBUTIONS
8.1 Distribution of Net Cash Flow. Subject to the terms of this
Declaration, the Fund shall make distributions of Net Cash Flow out of the
Fund's cash, to the extent and at such times as it deems advisable, in the
following manner:
(a) Indebtedness to Shareholders. First, Net Cash Flow shall be applied pro
rata (in accordance with the percentage of total loans that are owing to each
Shareholder) to the payment to the Shareholders of interest and principal, in
that order, on loans, if any, made by the Shareholders to the Fund.
(b) Special Provisions. Distributions of Net Cash Flow in respect of an
additional series of Shares under Section 9.5 are governed by the Managing
Shareholders' designation under that Section and distributions made in
connection with the dissolution and termination of the Fund under Section 14.1
are governed by Section 8.1(g). Net Cash Flow distributed under those provisions
shall be excluded from consideration under Sections 8.1(c)-(f).
(c) Proceeds from Dispositions of Property. All Net Cash Flow remaining
after the application of Sections 8.1(a) and (b) from the sale, transfer,
injury, destruction or other disposition of Fund Property or an interest
therein, other than in the ordinary course of operation of Fund Property (and
including, without limitation, proceeds from insurance, refinancing or
condemnation, but excluding sales or resales of interim investments under
Section 10.5) which the Fund determines to distribute, shall be distributed as
follows:
(1) Prior to Payout, 99% to the Investors and 1% to Power VI Corp.; and
(2) After Payout, 75% to the Investors, 5% to Incentive Plan Participants
and 20% to Power VI Corp.
(d) Satisfaction of Preferred Participation Rights. All Net Cash Flow
remaining after the application of Sections 8.1(a)-(c) that the Fund determines
to distribute during a calendar year or shorter period shall first be applied to
the redemption of any outstanding Preferred Participation Rights in the
following order:
(1) Ninety-nine percent of Net Cash Flow subject to this Section 8.1(d) and
distributed during 1999 shall be distributed pro rata among the holders of
Preferred Participation Rights and the remaining 1% shall be distributed to
Power VI Corp. until total cumulative distributions to those holders under this
Section 8.1(d) equal $500 per outstanding Preferred Participation Right, and the
remaining Net Cash Flow distributed during 1999, if any, shall be distributed
under Sections 8.1(e)-(f);
(2) Ninety-nine percent of Net Cash Flow subject to this Section 8.1(d) and
distributed during 2000 shall be distributed pro rata among the holders of
Preferred Participation Rights and the remaining 1% shall be distributed to
Power VI Corp. until total cumulative distributions to those holders under this
Section 8.1(d) equal $1,000 per outstanding Preferred Participation Right, and
the remaining Net Cash Flow distributed during 2000, if any, shall be
distributed under Sections 8.1(e)-(f); and
(3) If after 2000 cumulative distributions under this Section 8.1(d) to
holders of Preferred Participation Rights are less than $1,000 per outstanding
Preferred Participation Right, 99% of all Net Cash Flow subject to this Section
8.1(d) that is distributed thereafter shall be distributed pro rata to the
holders of outstanding Preferred Participation Rights and the remaining 1% shall
be distributed to Power VI Corp. until total cumulative distributions to the
holders under this Section 8.1(d) equal $1,000 per Preferred Participation
Right, and all remaining Net Cash Flow shall be distributed under the remaining
provisions of this Article 8.
(e) Investor Priority for Distributions-Pre-Payout. Until Payout is
achieved, all Net Cash Flow that remains after the application of Sections
8.1(a)-(d) and that the Fund determines to distribute shall be distributed as
follows:
(1) Until total distributions of Net Cash Flow subject to this Section
8.1(e) during a calendar year to Investors equal the greater of (A) 12% of the
Investors' Average Annual Capital Contributions or (B) 75% of Net Cash Flow
distributed in that year after deducting amounts governed by Sections
8.1(a)-(d), 99% of all distributions made under this Section 8.1(e) in that year
(or shorter period ending on Payout) shall be made to the Investors and the
remaining 1% shall be made to Power VI Corp.; and
(2) Thereafter, 80% of distributions made during the remainder of the
calendar year (or shorter period ending on Payout) shall be made to Power VI
Corp. and 20% shall be made to the Incentive Plan Participants.
(f) Distributions-Post-Payout. After Payout is achieved, 75% of all
distributions made in any calendar year or portion thereof after the application
of Sections 8.1(a)-(e) shall be made to the Investors, 5% shall be made to the
Incentive Plan Participants and the remaining 20% shall be made to Power VI
Corp.
(g) Proceeds Available Upon Dissolution. Upon dissolution and termination
of the Fund under Section 14.1, the proceeds of the sale or other disposition of
the Fund Property shall be paid or distributed in the following orderof
priority:
(1) First, there shall be paid to the Fund's creditors, other than
Shareholders, funds, to the extent available, sufficient to extinguish current
Fund liabilities and obligations, including costs and expenses of liquidation
(or provision for payment shall be made, which provision may include a
distribution of assets subject to the obligations in question); provided,
however, that all loans made to fund expenditures under Section 9.5 shall be
paid only from assets allocable to the Shareholders who benefited from such
expenditures and only in proportion to such benefit;
(2) Second, any loans owed by the Fund to the Shareholders shall be paid in
proportion thereto; provided, however, that all loans made to fund expenditures
under Section 9.5 shall be paid only from assets allocable to the Shareholders
who benefited from such expenditures and only in proportion to such benefit;
(3) Third, to the Shareholders in proportion to, and to the extent of the
excess, if any, of (i) the cumulative distributions to which a Shareholder is
entitled under Sections 8.1(d) and (e) from the inception of the Fund until the
date on which the liquidating distribution is made over (ii) the sum of all
prior distributions made to the Shareholders under Sections 8.1(d),(e) and
(g)(3); provided, however, that no distribution shall be made under this Section
8.1(g)(3) that creates or increases a negative amount in the Investor's Adjusted
Capital Account at the end of this fiscal period. This proviso shall be
determined as follows: distributions shall be first determined tentatively
pursuant to this Section 8.1(g)(3) without regard to the Shareholders' Capital
Accounts and then the allocation provisions of Article 4 shall be applied
tentatively as if such tentative distributions had been made. If any Investor
shall thereby have a negative amount in the Investor's Adjusted Capital Account,
the actual distribution to the Investor under this Section 8.1(g)(3) shall be
equal to the tentative distribution to the Investor less the negative amount in
the Adjusted Capital Account after application of the tentative allocation; and
(4) Fourth, the balance, if any, to the Shareholders, in accordance with
their Capital Accounts, after giving effect to all adjustments to Capital
Accounts for all fiscal periods through and including the fiscal period in which
dissolution occurs.
(h) Limitation. Notwithstanding any other provision of this Declaration, no
distribution may be made selectively to one Shareholder or group of Shareholders
but must be made ratably to all Shareholders entitled to that type of
distribution at that time, except as provided by Section 12.11(b). This Section
8.1(h) does not waive any claim, right of set-off, right to receive money or
other right that the Fund may have against any Shareholder and does not compel
the Fund to make distributions to a Shareholder notwithstanding the Trust's
assertion of such claims or rights.
8.2 Distribution in Kind. If the Fund elects to make distribution in kind
of any of the assets of the Fund, it shall give notice of its election to each
Shareholder, specifying the nature and value of all such assets to be
distributed in kind, the deadline for giving notice of refusal to accept a
distribution in kind and to the extent advisable, the estimated time necessary
for the Fund to liquidate assets if those assets are not distributed and other
information as required. In making such election, the Fund shall not arbitrarily
value assets to be distributed in kind nor shall it specify assets to be
distributed in kind in such a manner as to unreasonably advantage or
disadvantage any Shareholder. A Shareholder may refuse to accept a distribution
in kind by giving written notice to the Fund not later than 30 days after the
effective date of the Fund's notice of distribution. If a Shareholder refuses
distribution in kind, the Fund shall retain in the Fund's name the portion of
the assets which were to be distributed in kind and which were to be allocated
to the refusing Shareholder (the "Retained Assets") and shall liquidate the
Retained Assets in accordance with this Declaration. Upon liquidation of the
Retained Assets, the sum realized shall be distributed to the Shareholder
refusing distribution in kind in full discharge of the Fund's obligation to
distribute the Retained Assets. In determining the Capital Accounts of the
Shareholders, a distribution of assets in kind shall be considered a sale of the
property distributed so that any unrealized gain or loss with respect to such
property shall be deemed to have been realized and allocated among the
Shareholders in accordance with Article 4.
8.3 Amounts Withheld. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to the Fund or the Shareholders shall be treated as amounts
distributed to the Shareholders pursuant to this Article 8 for all purposes
under this Declaration. The Fund may allocate any such amounts among the
Shareholders in any manner that is in accordance with applicable law.
8.4 Limitation. Distributions to Shareholders shall not be made to the
extent they are prohibited by restrictions contained in the Delaware Act or
other provisions of this Declaration.
ARTICLE 9
OPERATION OF TRUST
9.1 Investment Fee. The Fund shall pay Ridgewood Power out of Fund Property
an investment fee in an amount equal to 2% of each Capital Contribution from the
initial offering or any future offering of Investor Shares. The investment fee
payable in respect of Investors whose subscriptions for Shares are accepted by
the Managing Shareholders in 1998 is for Ridgewood Power's services in
investigating and evaluating investment opportunities and effecting transactions
for investing the capital contributed through 1998, and the fee payable by
Investors whose subscriptions for Shares are accepted by the Managing
Shareholders in a later year is for those services for capital contributed in
that year. The fee shall be payable on the Escrow Date as to Shares purchased
through that date and on each date thereafter on which the Fund receives and
collects full payment for additional accepted subscriptions for Shares. In
addition, an investment fee shall be paid to Ridgewood Power in an amount equal
to 2% of additional Capital Contributions received under Section 9.5, for
similar services rendered by Ridgewood Power during the year in which such funds
are received by the Fund. The fee in respect of services performed by Ridgewood
Power during any year in which such additional funds are received by the Fund
under Section 9.5 shall be payable upon the later of each date on which payment
is accepted by the Fund or the fulfillment of any applicable escrow conditions.
9.2 Selling Commissions and Placement Agent Fee. The Fund shall pay out of
Fund Property to Ridgewood Securities Corporation or to any broker-dealer who
effects the sale of one or more whole or fractional Shares, cash selling
commissions in an aggregate amount equal to 8% of each Capital Contribution. For
serving as Placement Agent, Ridgewood Securities Corporation shall also be
entitled to receive out of Fund Property a fee in an amount equal to 1% of each
Capital Contribution. Such commissions and fees payable in respect of sales of
Shares under the initial offering of Shares shall be due and payable promptly
after the latest to occur of (i) acceptance by the Fund of an Investor's
subscription, (ii) the Escrow Date or (iii) the receipt by the Fund of the gross
purchase price for the Shares. Such commissions and fees in respect of
additional Capital Contributions shall be due and payable upon the later of such
date on which funds are accepted by the Fund or the fulfillment of any
applicable escrow conditions.
9.3 Other Expenses. (a) The Fund shall enter into an agreement with
Ridgewood Capital under which Ridgewood Capital will provide informational
materials and services, support for marketing efforts by broker-dealers, and
coordination for the offering of the Investor Shares. The Fund shall pay
Ridgewood Capital out of Fund Property an organizational, distribution and
offering fee in an amount equal to 6% of each Capital Contribution to cover all
expenses incurred in the offer and sale of Shares, including legal, accounting,
and consulting fees, printing, filing, postage and other expenses of organizing
the Fund, distribution and selling costs and closing costs for the offering. The
fee shall be payable on the Escrow Date as to Shares purchased through that date
and on each date thereafter on which the Fund receives and collects full payment
for additional accepted subscriptions for Shares. If these expenses exceed 6% of
the aggregate Capital Contributions, Ridgewood Power shall pay such excess.
(b) The Fund shall reimburse the Managing Shareholders for all other actual
and necessary direct expenses paid or incurred in connection with the operation
of the Fund, including but not limited to accounting, legal and consulting fees,
to the extent that those expenses were incurred by the Managing Shareholders in
carrying out responsibilities assigned to them by this Declaration, were
consistent with this Declaration and do not constitute Organizational,
Distribution and Offering Fees. The Fund shall reimburse the Corporate Trustee
for all actual and necessary expenses paid or incurred in connection with the
operation of the Fund, including the Fund's allocable share of the Corporate
Trustee's overhead.
(c) In respect of the disposition of all or a portion of the investments
that the Fund may make in Projects or Project Entities on its own behalf (rather
than through its participation in any entity organized to develop multiple
Projects), the Fund may be required to or may find it most advantageous to
engage a broker or similar adviser and to pay a brokerage fee to the broker or
other persons responsible for bringing the disposition opportunity to the Fund's
attention or for investigating, evaluating or negotiating the acquisition or
disposition of the Fund's interest therein. However, if a Managing Shareholder
or an Affiliate performs those services in respect of an investment acquisition
or disposition opportunity for the Fund relating to a particular Project or
Project Entity, the Managing Shareholder or Affiliate so providing those
services shall be entitled to receive a brokerage fee from the Fund for such
services in an amount not in excess of 2% of the gross proceeds of that
disposition.
(d) If the Fund engages RPMC or another Affiliate of a Managing Shareholder
to manage Projects under Section 12.5 of this Declaration, it shall reimburse
that person for its actual costs incurred (which may include a reasonable
allocation of overhead items and of expenses incurred commonly with the Managing
Shareholder or their Affiliates) as an expense of the Fund.
9.4. Management Fee. For each 12-month period beginning on the Termination
Date and ending upon the winding up of the Fund's business, the Fund shall pay
Power VI Corp. from Fund Property a Management Fee, payable in advance in equal
monthly installments, at the annual rate of 2.5% of the aggregate Capital
Contributions. The Management Fee shall be in lieu of any reimbursement to the
Managing Shareholders for administrative and overhead expenses, including
without limitation postage, communication, computer service, accounting,
regulatory reporting and compensation costs of the Managing Shareholders
allocable to the Fund. Those administrative and overhead expenses do not include
fees, expenses and payments made by the Fund to persons other than the Managing
Shareholders (such as legal, outside accounting and consulting expenses) or
extraordinary expenses incurred by the Managing Shareholder. The Fund may enter
into a management agreement with the Managing Shareholders regarding the
services to be provided and compensated from the Management Fee.
9.5 Additional Offers of Shares. (a) Beginning six months and one day after
the Termination Date, the Fund from time to time may create and sell additional
Investor Shares or additional classes or series of Shares if the Managing
Shareholders determine that the best interests of the Fund so require.
Additional classes or series may but are not required to be limited to the
results of Projects or Project Entities that are not coextensive with the entire
Fund Property. The Managing Shareholders are authorized to determine or alter
any or all of the powers, preferences and rights, and the qualifications,
limitations or restrictions granted to or imposed upon any unissued class or
series of additional Shares, and to fix, alter or reduce the number of Shares
comprising any such class or series and the designation thereof, or any of them,
and to provide for the rights and terms of redemption or conversion of the
Shares of any such class or series. The Managing Shareholders' designation of
the Shares and the terms and conditions of any new class or series of Shares
shall be deemed an amendment of this Declaration and shall be effective without
any notice to, action by or approval of the Investors. Any Shares so designated
may be offered to such persons and on such terms and conditions as the Fund may
determine.
(b) Any additional Shares or classes or series of Shares shall have voting
rights as designated by the Managing Shareholders; however, no such Share shall
have more than one vote per $100,000 of Capital Contributions for that Share on
matters in which the holders of those Shares vote with the holders of Investor
Shares, without the consent of the holders of a Majority of the Investor Shares.
(c) The Fund may but is not required to offer all Investors the right (a
"Purchase Right") to acquire additional Shares of any type to be offered by the
Fund; however, no Investor who declined to subscribe to a previous series of
Shares whose net proceeds were invested in a Project or Project Entity in which
any net proceeds of the proposed series are to be invested shall be entitled to
a Purchase Right for the proposed series. A Purchase Right may be exercisable
prior to or concurrent with the offering of the series to other persons. If the
Fund offers a Purchase Right, the Fund shall give each Investor entitled thereto
a notice specifying the total Shares of the additional series that it is
offering and the terms and conditions of the offering, together with any other
required information. The Fund will require the Investors to notify the Fund of
their decision to exercise the Purchase Right and to deliver the subscription
documents and the price for the Shares offered within a reasonable period set by
the Fund and specified in the notice, which shall not be less than 10 days after
the effective date of the notice.
(d) If a Purchase Right is offered and the Investors do not purchase all
the offered Shares within the period specified in the Fund's notice, the Fund
may dispose of the remaining offered Shares in its sole discretion or may modify
its plan of activity accordingly.
(e) All Profits, Losses and other items attributable to additional Shares
shall be allocated as specified in the determination of the Managing
Shareholders creating those Shares, except that any such allocation shall not
unreasonably reduce allocations to existing Investors of Profits, Losses, Net
Cash Flow and other items to the extent attributable to their Capital
Contributions. The Managing Shareholders' election in good faith of allocation
methods (which may include subjective elements) shall be conclusive in the
absence of willful misconduct or gross negligence.
9.6 Payment and Recoupment of Fees. As soon as funds have been released to
the Fund from the escrow account referred to in Section 1.6, they may be used to
pay the fees referred to in Sections 9.1, 9.2 and 9.3 then due. If the Managing
Shareholders withdraw the offering of Shares, any person that has received
payments from the proceeds of the offering shall return such payments to the
Fund upon demand by the Managing Shareholders.
9.7. Key Employee Incentive Plan. (a) The Managing Shareholders at any time
may institute a Key Employee Incentive Plan as a means of allowing key officers
and employees of the Fund and its subsidiaries, or employees of the Managing
Shareholders and Affiliates of the Managing Shareholders who perform significant
duties for the Fund or its subsidiaries, to obtain an equity interest in the
Fund through the issuance of Incentive Shares. At the close of the initial
offering of Investor Shares, a number of Incentive Shares shall be authorized
for issuance under the Plan equal to 1/15 of the number of Investor Shares
issued and outstanding. The interest in distributions appertaining to the
Incentive Shares is specified in Article 8. Until Incentive Shares are issued
and outstanding, the distributions appertaining thereto shall be assigned to
Power VI Corp. The consideration, if any, for the issuance of Incentive Shares
or rights to acquire Incentive Shares shall be determined by the Managing
Shareholders.
(b) In its sole discretion, Power VI Corp. may transfer a portion of its
interest in any distributions and a proportionate part of its allocations of
Profits (but not Losses) to the Plan, whereupon an additional number of
Incentive Shares shall be created in proportion to the ratio of the interest in
post-Payout distributions so transferred to the 5% interest in post-Payout
distributions allotted to the Plan under other provisions of this Declaration.
Power VI Corp. shall not transfer an interest that causes the number of
Incentive Shares to increase by more than 60%. ARTICLE 10 ACCOUNTING
10.1 Elections. The Fund shall elect the calendar year as its fiscal year.
The Fund shall adopt the accrual method of accounting or such other method of
accounting as the Fund shall determine. The Fund shall elect to be taxed only as
a partnership. The Fund may but shall not be required to make an election under
Section 754 of the Code or corresponding state taxation laws. The Managing
Shareholders are empowered to make any other election permitted by law,
including without limitation an election under Code Section 771, without prior
notice to or consent by any other Shareholder.
10.2 Books and Records. The Fund's books and records shall be kept at the
principal place of business of the Fund and shall be maintained in accordance
with generally accepted accounting principles, consistently applied. The Fund
shall maintain supplemental records on the basis utilized in preparing the
Fund's federal income tax return with such adjustments in accounting as are
required by this Declaration or as the Fund determines would be in the best
interests of the Fund.
10.3 Reports. (a) The Fund will keep each Investor and assignees complying
with Article 13 currently advised as to activities of the Fund by reports
furnished at least quarterly. An independent certified public accounting firm
selected by the Fund will prepare the Fund's federal income tax return as soon
as practicable after the conclusion of each year and each Shareholder will be
furnished, at that time, with the necessary accounting information for each
Shareholder to take into account and report separately such Shareholder's
distributive share of the income and deductions of the Fund. The Fund will use
its reasonable best efforts to obtain the information necessary for the
accounting firm as soon as practicable and to transmit the resulting accounting
and tax information to the Shareholders as soon as possible after receipt from
the accounting firm. The Fund shall make available to each Shareholder as soon
as practicable after the conclusion of each year annual financial statements of
the Fund which have been audited by the Fund's independent certified public
accounting firm. The annual financial statements will include in the notes
thereto a reconciliation of net income as reported therein to the annual
reported cash flow from operations and to net income for tax purposes.
(b) Within 180 days after the end of each year following the fourth
anniversary of the Termination Date, the Fund shall make available to the
Investors an estimated valuation per Share based, if possible, upon a generally
accepted method or methods of valuation of the Fund Property.
10.4 Bank Accounts. The Fund shall maintain separate segregated accounts in
its name at one or more commercial banks, and the cash funds of the Fund shall
be kept in any of those accounts as determined by the Fund.
10.5 Interim Assets. The Fund may purchase, to the extent the Fund's funds
are not otherwise committed to transactions or required for other purposes,
either or both of the following:
(a) Obligations of banks or savings and loan associations that either (i)
have assets in excess of $5 billion or (ii) are insured in their entirety by
agencies of the United States government;
(b) Obligations of or guaranteed by the United States government or its
agencies; and
(c) Money market or other short-term obligations (having a maturity of nine
months or less) rated at least A1 or P1 by a nationally recognized securities
rating organization.
ARTICLE 11
RIGHTS AND OBLIGATIONS OF INVESTORS
11.1 Participation in Management. No Investor (other than the Managing
Shareholders acting in their capacity as such) shall have the right, power,
authority or responsibility to participate in the ordinary and routine
management of the Fund's affairs or to bind the Fund in any manner.
11.2 Rights to Engage in Other Ventures. No Investor or Incentive Plan
Participant or any officer, director, shareholder or other person holding a
legal or beneficial interest in any Investor shall, by virtue of his ownership
of a direct or indirect interest in the Fund, be in any way prohibited from or
restricted in engaging in, or possessing an interest in, any other business
venture of a like or similar nature including any venture involving the
independent power industry.
11.3 Limitations on Transferability. The interest of an Investor shall not
be transferable except under the conditions set forth in Article 13 hereof.
11.4 Information. (a) Each Investor's rights to obtain information from the
Fund from time to time are set forth in this Section. In addition to information
provided under Section 10.3, each Investor shall be provided on request with the
following:
(1) True and full information regarding the status of the Fund's business
and financial condition;
(2) Promptly after becoming available, a copy of the Fund's federal, state
and local income tax returns or information returns for the preceding year and
prior years to the extent reasonably available;
(3) A current list of the name and last known business, residence or
mailing address of each Shareholder and of any confidential representative of
each Shareholder, if specifically designated as such in writing (unless such
Shareholder has specified that the Fund is not to disclose such information, in
which case the Fund, at the requesting Investor's cost, shall forward
communications, sealed or unsealed, from the requesting Investor to such
Shareholder or representative upon assertion by the Investor in writing to the
Fund of a proper purpose for the communication);
(4) A copy of the Certificate and this Declaration and all amendments
thereto;
(5) True and full information regarding the amount of cash and a
description and statement of the agreed value of any other property or services
contributed by each Shareholder and which any Shareholder has agreed to
contribute in the future, and the date on which each current Shareholder
acquired his Shares; and
(6) Such other information regarding the Fund's affairs as is just and
reasonable.
(b) The Fund shall establish reasonable standards governing without
limitation the information and documents to be furnished and the time and the
location, if appropriate, of furnishing that information and documents. Costs of
providing information and documents shall be borne by the requesting Investor
except for de minimis amounts consistent with the Fund's ordinary practices. The
Fund shall be entitled to reimbursement for its direct, out-of-pocket expenses
incurred in declining unreasonable requests (in whole or in part) for
information.
(c) The Fund may keep confidential from Investors for such period of time
as it deems reasonable any information that it reasonably believes to be in the
nature of trade secrets or other information that the Fund in good faith
believes would not be in the best interests of the Fund to disclose or that
could damage the Fund or its business or that the Fund is required by law or by
agreement with a third party to keep confidential.
(d) The Fund may keep its records in other than written form if capable of
conversion into written form within a reasonable time.
(e) All demands or requests for information under this Section shall be
solely for a purpose reasonably related to the Investor's interest in the Fund.
All requests or demands for information under this Section shall be in writing
and shall state the purpose of the demand; the Fund's acceptance of oral
requests shall not waive or limit the scope of this provision. Any action to
enforce rights under this Section may be brought in the Delaware Court of
Chancery. ARTICLE 12 POWERS, DUTIES AND LIMITATIONS OF MANAGING SHAREHOLDERS AND
CORPORATE TRUSTEE
12.1 Management of the Fund. (a) The Managing Shareholders shall have full,
exclusive and complete discretion in the management and control of the Fund,
except as otherwise provided herein. The Managing Shareholders agree to manage
and control the affairs of the Fund to the best of its ability and to conduct
the operations contemplated under this Declaration in a careful and prudent
manner and in accordance with good industry practice. The Managing Shareholders
may bind the Fund.
(b) Each Managing Shareholder has full authority to act on behalf of the
Fund without notice to or consent by the other. The fact that this Declaration
or another document states that action is to be taken by "the Managing
Shareholders" does not preclude a single Managing Shareholder from acting
unilaterally. If the Managing Shareholders disagree on a course of action,
decision or other determination, the decision of Ridgewood Power will control.
12.2 Acceptance of Subscriptions. The Managing Shareholders shall not cause
the Fund to accept any subscription for Shares except as provided in Article 1
or in Sections 9.5 or 9.7, as the case may be.
12.3 Specific Limitations. (a) The Managing Shareholders shall not take any
of the following actions without the approval of all Investors:
(1) Any act that would make it impossible to carry on the Fund's ordinary
business;
(2) Causing the dissolution or termination of the Fund prior to the
expiration of its term, except as provided under Article 14; (3) Possessing
Fund Property or assigning rights in specific Fund Property for other than
a Fund purpose; or (4) Constituting any other person as a Managing
Shareholder, except as provided in Article 14. (b) The Managing
Shareholders shall not sell, exchange, lease, mortgage, pledge or transfer
all or substantially all of the
Fund's assets if not in the ordinary course of operation of Fund Property
without the approval of a Majority of Voting Shares. (c) The Corporate
Trustee, the Fund and the Fund's agents shall not take any action that is
prohibited to the Managing
Shareholders by this or any other provision of this Declaration.
12.4 Specific Powers. In addition to the powers and duties otherwise
provided for in this Declaration, the Managing Shareholders have the following
powers and duties:
(a) To direct or supervise the Corporate Trustee, the Fund and the Fund's
agents in the exercise of any action relating to the Fund's affairs, including
without limitation the powers described in Section 1.8;
(b) To take the actions specified in Section 12.3 if the approvals
specified therein are obtained; (c) To amend this Declaration as specified
in Section 15.8(a) or other provisions of this Declaration; (d) To lend
money to the Fund (without being obligated to do so) if such loan bears
interest at a reasonable rate not exceeding
the interest cost to the Managing Shareholder lending the money or the amount
that would be charged to the Fund by an unrelated lender on a comparable loan
for the same purpose (without reference to the financial abilities or guarantees
of the Managing Shareholder lending the money). The Managing Shareholder may not
receive points or other financing charges or fees regardless of the amount
loaned to the Fund. Before a Managing Shareholder makes any loans to the Fund,
the Managing Shareholders will attempt to obtain a loan from an unrelated lender
secured, if at all, only by Fund Property;
(e) To approve in their sole discretion any transfer of Investor Shares;
(f) To terminate the offering of Shares at any time prior to the
Termination Date, provided that the Escrow Date has occurred; (g) To
withdraw the offering of Shares at any time as provided in Section 1.6; (h)
To acquire such assets or properties, real or personal, as the Managing
Shareholders in their sole discretion deem necessary
or appropriate for the conduct of the Fund's business and to sell, exchange or
distribute to Shareholders in kind or otherwise dispose of any part of the Fund
Property;
(i) To operate any Project or other Fund Property acquired by the Fund, or
to contract for operation under Section 12.5, or to engage non-Affiliates to
operate any Project or other Fund Property on such terms as they may determine
in their sole discretion;
(j) To waive any fees or compensation payable to them and to credit such
waived amount in their discretion against any obligations they may have to
contribute capital under Section 14.7;
(k) To provide, or arrange for the provision of, managerial assistance to
those persons in which the Fund invests; and (l) To establish valuation
principles and to periodically apply such principles to the Fund's
investment portfolio. 12.5. Operation by Affiliate. The Fund, by action of
the Managing Shareholders, may engage RPMC or another Affiliate of a
Managing Shareholder to provide management, purchasing, planning and
administrative services for any or all Projects operated by the Fund. A manager
under this Section 12.5 shall act under the supervision and direction of the
Managing Shareholders and does not have the authority to bind the Fund or act
directly in its name except as authorized by the Managing Shareholders or an
officer of the Fund. A manager under this Section 12.5 shall be reimbursed for
all costs incurred by it as provided in Section 9.3(d) but shall not receive any
compensation in excess of its costs. A manager under this Section 12.5 may
provide services to the Managing Shareholders, their Affiliates or other
entities sponsored by the Managing Shareholders or their Affiliates and costs
and expenses shall be reasonably allocated among those entities. The Fund may
enter into an Operation Agreement or other agreements to implement this Section
12.5. A manager under this Section 12.5 shall not be compensated or reimbursed
for any services related to the administration of the Fund as a whole, to
relations with Investors or the offering of Shares or to the identification,
acquisition or disposition of Projects.
12.6 Officers of Trust. (a) The Managing Shareholders shall appoint a
President, one or more Vice Presidents as designated by the Managing
Shareholders, a Secretary and such other officers and agents of the Fund as the
Managing Shareholders may from time to time consider appropriate, none of whom
need be a Shareholder. Except as otherwise prescribed by the Managing
Shareholders or in this Declaration, each officer shall have the powers and
duties usually appertaining to a similar officer of a Delaware corporation under
the direction of the Managing Shareholders and shall hold office during the
pleasure of the Managing Shareholders. Any two or more offices may be held by
the same person. Any officer may resign by delivering a written resignation to
the Managing Shareholders and such resignation shall take effect upon delivery
or as specified therein.
(b) All conveyances of real property or any interest therein by the Fund
may be made by the Corporate Trustee, which shall execute on behalf of the Fund
any instruments necessary to effect the conveyance. A certificate of the
Secretary of the Fund stating compliance with this Section 12.6(b) shall be
conclusive in favor of any person relying thereon.
(c) All other documents, agreements, instruments and certificates that are
to be made, executed or endorsed on behalf of the Fund shall be made, executed
or endorsed by such officers of the Fund, or a Managing Shareholder or persons
as the Managing Shareholders shall from time to time authorize and such
authority may be general or confined to specific instances. In the absence of
other provisions, the President is authorized to execute any document, to take
any action on behalf of the Fund within this Section 12.6(c), and to authorize
other officers to execute confirmatory documents or certificates.
12.7 Presumption of Power. The execution by the Corporate Trustee, the
Managing Shareholders or the officers on behalf of the Fund of leases,
assignments, conveyances, contracts or agreements of any kind whatsoever shall
be sufficient to bind the Fund. No person dealing with the Managing Shareholders
or the Fund's officers shall be required to determine their authority to make or
execute any undertaking on behalf of the Fund, nor to determine any fact or
circumstances bearing upon the existence of their authority nor to see the
application or distribution of revenues or proceeds derived therefrom, unless
and until such person has received written notice to the contrary.
12.8 Obligations Not Exclusive. The Managing Shareholders, the Panel
Members and the Corporate Trustee shall be required to devote only such part of
their time as is reasonably needed to manage the business of the Fund or
discharge their duties, it being understood that the Managing Shareholders, the
Panel Members and the Corporate Trustee have and shall have other business
interests and therefore shall not be required to devote their time exclusively
to the Fund. The Managing Sharehollders, the Panel Members and the Corporate
Trustee shall in no way be prohibited from or restricted in engaging in, or
possessing an interest in, any other business venture of a like or similar
nature including any venture involving the independent power industry. Nothing
in this Section 12.8 shall relieve the Managing Shareholders of other fiduciary
obligations to the Investors, except as limited in Article 3. Notwithstanding
anything to the contrary contained in this Article or elsewhere in this
Declaration, the Managing Shareholders shall have no duty to take any
affirmative action with respect to management of the Fund business or the Fund
Property which might require the expenditure of monies by the Fund or the
Managing Shareholders unless the Fund is then possessed of such monies available
for the proposed expenditure. Under no circumstances shall the Managing
Shareholders be required to expend their own funds in connection with the day to
day operation of Fund business.
12.9. Allocation of Duties and Fees. The Managing Shareholders may agree
between themselves as to the working division of responsibilities and may assign
or transfer amounts payable to a Managing Shareholder among them.
12.10 Management Share. Power VI Corp. shall be credited with a Management
Share which shall have no voting rights and shall be deemed to have attached to
it the distribution and allocation rights appertaining to the Managing
Shareholders under this Declaration. No Management Share shall be held by or
transferred to a person who is not a Managing Shareholder except as provided by
Section 13.1.
12.11 Removal or Incapacity of a Managing Shareholder. (a) The holders of
at least 10% of the Investor Shares may propose the removal of a Managing
Shareholder, either by calling a meeting or soliciting consents in accordance
with the terms of this Declaration. On the affirmative vote of a Majority of the
Voting Shares that Managing Shareholder shall be removed effective as of the
date the vote is completed.
(b) In the event of a removal or other incapacity (other than voluntary
resignation without cause) of a Managing Shareholder as enumerated in Section
14.1(c), the former Managing Shareholder may elect in its sole discretion to
take and to cause the Fund to take one of the following courses of action:
(1) The former Managing Shareholder may elect to exchange its Management
Share for a series of cash payments from the Fund to the former Managing
Shareholder in amounts equal to the amounts of distributions to which the former
Managing Shareholder would otherwise have been entitled under this Declaration
in respect of investments made by the Fund prior to the date of the removal or
other incapacity. Such payments shall be payable out of the Fund's available
cash before any distributions are made to the Investors pursuant to this
Declaration. For purposes of this Section 12.11(b)(1), from and after the date
of any such removal or other incapacity: (i) the former Managing Shareholder's
interest in the Fund attributable to its Management Share shall be terminated
and its Capital Account shall be reduced by the amount which is attributable to
its Management Share and (ii) the former Managing Shareholder shall continue to
receive its pro rata share of all allocations to Investors provided in this
Declaration that are attributable to Investor Shares acquired by the Managing
Shareholder.
(2) In the alternative, the former Managing Shareholder may elect to engage
a qualified independent appraiser and cause the Fund to engage a separate
qualified independent appraiser (at the Fund's expense in each case), who shall
value the Fund Property as of the date of such removal or other incapacity as if
the Fund Property had been sold at its fair market value so as to include all
unrecognized gains or losses. If the two appraisers cannot agree on a value,
they shall appoint a third independent appraiser (whose cost shall be borne by
the Fund) whose determination, made on the same basis, shall be final and
binding. Based on the appraisal, the Fund shall make allocations to the former
Managing Shareholder's Capital Account of Profits, Losses and other items
resulting from the appraisal as of the date of such removal or other incapacity
as if the Fund's fiscal year had ended solely for the purpose of determining the
former Managing Shareholder's Capital Account. If the former Managing
Shareholder has a positive Capital Account after such allocation, the Fund shall
deliver a promissory note of the Fund to the former Managing Shareholder, with a
principal amount equal to the former Managing Shareholder's Capital Account and
which shall bear interest at a rate per annum equal to the prime rate in effect
at Chase Manhattan Bank, N.A. on the date of removal or other incapacity, with
interest payable annually and principal payable only from 20% of any available
cash before any distributions thereof are made to the Investors under this
Declaration. If the Capital Account of the former Managing Shareholder has a
negative balance after such allocation, the former Managing Shareholder shall
contribute to the capital of the Fund in its discretion either cash in an amount
equal to the negative balance in its Capital Account or a promissory note to the
Fund in such principal amount maturing five years after the date of such removal
or other incapacity, bearing interest at the rate specified above. For purposes
of this Section 12.11(b)(2), from and after the date of any such removal or
other incapacity, the former Managing Shareholder's interest in the Fund shall
be terminated and the former Managing Shareholder shall no longer have any
interest in the Fund other than the right to receive the promissory note and
payments thereunder as provided above.
(c) In the event that a Managing Shareholder is removed or no longer serves
as a Managing Shareholder due to an incapacity enumerated in Section 14.1(c),
the former Managing Shareholder shall not be entitled to any uncollected fees
specified in Article 9 to the extent not accrued before the date of such removal
or other incapacity.
12.12 Indemnification of Placement Agent. (a) The Placement Agent shall not
have any duty, responsibility or obligation to the Fund, the Panel Members, the
Corporate Trustee or any Shareholder as a consequence of its right to receive
any selling commissions or placement agent fees from the Fund in connection with
any offering of Shares, except to the extent provided under the Act. The
Placement Agent has not assumed, and will not assume, any responsibility with
respect to the Fund nor will it be permitted by the Fund to assume any duties,
responsibilities or obligations regarding the management, operations or any of
the business affairs of the Fund, subsequent to any offering of Shares.
(b) The Placement Agent shall be indemnified and held harmless by the Fund
against any losses, damages, liabilities or costs (including attorneys' fees)
arising from any threatened, pending or completed action, suit, claim or
proceeding by any Shareholder against the Placement Agent (except as may be
limited by the Act or applicable state statutes, including, but not limited to,
the Massachusetts Securities Act and the Tennessee Securities Act), based upon
the assertion that the Placement Agent has any continuing duty or obligation,
subsequent to any offering of Shares, to the Fund, the Panel Members, the
Corporate Trustee or any Shareholder or otherwise to monitor Trust operations or
report to Investors concerning Trust operations.
12.13 Contribution. Each of the initial Managing Shareholders and
subsequent Managing Shareholders agrees that it shall remain jointly or jointly
and severally liable as required by law for any obligation or recourse liability
of the Fund incurred during the period in which it is a Managing Shareholder.
However, the existing and subsequent Managing Shareholders hereby agree among
themselves to contribute to each other the amount of funds necessary to
effectuate a sharing of Fund obligations and recourse liabilities in proportion
to each Managing Shareholder's share of such obligations and liabilities as they
accrue.
12.14. Independent Review Panel. (a) There shall be a standing Independent
Review Panel comprised of at least two Panel Members. The number of Panel
Members may be increased (but to not more than eight) or decreased (but to not
fewer than two) from time to time by action of both of the Managing Shareholders
and at least one-half of the incumbent Panel Members. No Panel Member shall be
(i) an Affiliate of the Fund (although by serving as such he or she shall
not be deemed to be an Affiliate); (ii) an investment advisor or
underwriter of the Fund; (iii) a person beneficially owning five percent or
more of the Investor Shares, or an entity, five percent or more of whose
outstanding equity securities are beneficially owned by the Fund;
(iv) any officer, director, general partner or employee of the Fund or its
subsidiaries; (v) any member of the immediate family of any individual
named in (i)-(iv); or
(vi) any person who has acted as legal counsel for the Fund or a Managing
Shareholder at any time since the beginning of the second-to-last completed
fiscal year of the Fund, or a principal, officer, partner, counsel or employee
of that counsel.
(b) If at any time a Panel Member fails to meet the foregoing requirements,
either he or she or the Fund will take action under Section 12.14(c) within 180
days to correct that condition. The Panel Members shall have terms of indefinite
duration, subject only to removal, incapacity or resignation under this Section
12.14.
(c) Vacancies, however caused, in the authorized number of Panel Members
shall be filled by a majority of the remaining Panel Members and the Managing
Shareholders. If no Panel Member remains and if the Managing Shareholders do not
elect to suspend the Panel under Section 12.14(i), the Managing Shareholders
shall nominate Panel Members and not later than 120 days after the last vacancy
results they shall either request written consents from Investors or call a
special meeting of Investors for the purpose of electing Panel Members.
(d) The Fund shall not consummate any Ridgewood Program Transaction without
the approval of a majority of the incumbent Panel Members (if there are two
Panel Members, both shall be required to approve) or approval by a Majority of
the Voting Shares. The Managing Shareholders, in their sole discretion, may
elect to refer to the Panel other transactions in which a Managing Shareholder
or Affiliates of a Managing Shareholder may have an interest. In that event, the
Panel in its sole discretion may elect not to review the transaction, or to
review the transaction and report to the Managing Shareholder. The Panel Members
shall incur no liability to the Fund or any Shareholders by their decision to
review or not to review and the concurrence of the Panel shall not be required
for the consummation of any transaction other than a Ridgewood Program
Transaction referred to the Panel.
(e) The Panel Members are not trustees of the Fund and have no
responsibility for any action or failure to take action by the Fund other than
to review Ridgewood Program Transactions referred to them. They have no general
responsibility for oversight of the Fund and are not charged with fiduciary
responsibility for the investments of the Fund.
(f) The Panel shall meet on the call of the Managing Shareholders. Except
to the extent conflicting with the Delaware Act or this Declaration, the law of
Delaware governing meetings of directors of corporations shall govern meetings,
voting and consents by the Panel Members.
(g) As compensation for services rendered to the Fund, each Panel Member
shall be paid by the Fund the sum of $5,000 annually in quarterly installments
and shall be reimbursed for all reasonable out-of-pocket expenses relating to
attendance at meetings or otherwise performing his duties hereunder. The
Managing Shareholders and the Panel may review the compensation payable to the
Panel Members no more often than annually and may increase or decrease it as
they find to be reasonable, upon approval by both the Managing Shareholders and
a majority of the incumbent Panel Members. No compensation for consulting
services shall be paid to a Panel Member without prior approval of both the
Managing Shareholders and a majority of the remaining Panel Members.
(h) Any Panel Member may resign if he or she gives notice to the Fund of
the intent to resign and cooperates fully with any successor Panel Member
appointed under Section 12.5(b), effective on the designation of the successor
Panel Member.
(i) Any Panel Member may be removed (x) for cause by the action of at least
two-thirds of the remaining Panel Members or (y) by action of the holders of at
least two-thirds of the Voting Shares. The Panel may be suspended by the
Managing Shareholders, upon their certification recorded in the minutes of the
Fund that there is no reasonable probability that the Fund will engage in future
Ridgewood Program Transactions. In that case the annual stipend for Panel
Members shall cease during the period of suspension. The Managing Shareholders
may reinstate the Panel at any time after a suspension. Removal of a Panel
Member shall not affect the validity of any actions taken prior to the date of
removal. ARTICLE 13 TRANSFERS OF SHARES
13.1 Transfer or Resignation by a Managing Shareholder. (a) A Managing
Shareholder shall not sell, assign or otherwise transfer its Management Share or
resign without cause (which cause shall not include the fact or the
determination that continued service would be unprofitable to the Managing
Shareholder) without first obtaining the consent of a Majority of the Voting
Shares, except that (i) Section 13.1(b) permits certain withdrawals by Ridgewood
Power; (ii) a Managing Shareholder may pledge its Management Share for a loan to
either Managing Shareholder provided that such pledge does not reduce the cash
flow of the Fund distributable to other Shareholders and (iii) either Managing
Shareholder may waive or assign compensation or fees payable to it.
(b) If each of the following conditions is satisfied:
(i) Ridgewood Power is a party to any transaction or proposed transaction
with a Prior Program described in Rule 901(c)(1) of and not excepted by Rules
901(c)(2) and (3) of Regulation S-K of the Securities and Exchange Commission,
or otherwise is a party to a transaction or proposed transaction involving a
Prior Program which will cause the securities of the Prior Program to become
freely tradable (either by registration under the Securities Act of 1933 or
through a business combination or by a change in business entity or tax status),
and
(ii) Power VI Corp. has assets of at least $100,000 and is, in the written
opinion of its Board of Directors, adequately capitalized and has adequate
resources (either of its own or by contractual access to personnel and property
of its Affiliates) to carry out all duties and responsibilities of the Managing
Shareholders, then Ridgewood Power may withdraw as a Managing Shareholder in its
sole discretion by giving prior written notice to Power VI Corp. on behalf of
the Fund, specifying the effective date of the withdrawal. The withdrawal shall
be effective as of the effective date of the transaction unless counsel for
Ridgewood Power advises it and the Fund that an earlier date is advisable for
consummating the transaction or reducing conflicts of interest, in which case an
earlier date may be specified. The Fund shall give written notice to all
Investors and Plan Holders (which may be in periodic communications with
Investors) of the withdrawal not later than 60 days after receipt of the notice
of withdrawal from Ridgewood Power.
(c) Ridgewood Power shall cease to have any authority to act on behalf of
the Trust or to receive any compensation for periods beginning on and after the
effective date of its withdrawal under Section 13.1(b), but it will be entitled
to accrued but unpaid compensation for periods ending before the effective date.
Ridgewood Power shall have no obligation to compensate the Trust in the event of
its withdrawal under Section 13.1(b). Power VI Corp. shall succeed to all rights
and responsibilities of Ridgewood Power in the event of a withdrawal under
Section 13.1(b) and on and after the effective date of the withdrawal any
reference in this Declaration to Ridgewood Power, to action by Ridgewood Power,
to the Managing Shareholders or action by the Managing Shareholders shall refer
to Power VI Corp. alone.
13.2 Transfers by Investors and Incentive Plan Participants. An Investor
may sell, exchange or transfer his Shares except as restricted by and upon
compliance with all applicable laws and all of the following provisions of this
Section 13.2:
(a) Shares may not be transferred to any person or entity if, as determined
by the Fund, such assignment would have adverse regulatory consequences to the
Fund or any Fund Property.
(b) Within 30 days after written notice of a proposed sale or assignment is
received by the Fund from an Investor, the Fund may request in its sole
discretion an opinion of counsel acceptable to the Fund that the proposed
transfer (i) would not invalidate the exemption afforded by Section 4(2) of the
Act or by Regulation D promulgated under the Act and the exemption afforded by
any applicable state securities laws as to any offering of interests in the Fund
and (ii) complies with the exemption afforded by Section 4(1) of the Act and
qualifies for an exemption from registration under any applicable state
securities laws (including any investor suitability standard applicable to the
transferee or the Fund).
(c) The written approval of the Managing Shareholders must be obtained, the
granting or denial of which shall be within their sole and absolute discretion.
(d) The transferor and transferee must deliver a dated notice in writing
signed by each, confirming that (i) the transferee accepts and agrees to comply
with all the terms of this Declaration and (ii) the transfer was made in
compliance with this Declaration and all applicable laws and regulations.
(e) The transferor, transferee and the Fund must execute all other
certificates, instruments and documents and take all such additional action as
the Fund may deem appropriate.
(f) The Fund may require as a condition to any transfer that may create a
future interest that an opinion of counsel acceptable to the Fund be delivered
to the Fund confirming that the proposed transfer does not have adverse effects
on the Fund under the rule against perpetuities or similar provisions of law.
Transfers shall be effective and recognized upon fulfillment of the requirements
of clauses (a) through (f) above and the transferee shall be an Investor owning
Investor Shares with the same rights as appertained to the transferor. Any
purported sale or transfer consummated without first complying with this Section
13.2 shall be void.
(g) Transfers of Incentive Shares are subject to the restrictions of the
Key Employees Incentive Plan and any instrument or agreement of grant
thereunder. In addition to those restrictions, no transfer of Incentive Shares
may be made without compliance with Sections 13.2(a)-(f) above.
13.3 Assignments by Operation of Law. If any Investor or Plan Holder shall
die, with or without leaving a will, or become non compos mentis, bankrupt or
insolvent, or if a corporate, partnership or trust Investor dissolves during the
Fund term or if any other involuntary transfer of an Investor's or Plan Holder's
Shares is made, the legal representatives, heirs and legatees (and spouse, if
the Shares have been community property of such Investor and his or her spouse),
bankruptcy assignees, successors, assigns and corporate, partnership or trust
distributees or such other involuntary transferees shall not become transferees
but shall have (subject to the other terms and provisions hereof) such rights as
are provided with respect to such persons under the law; provided, however, that
such legal representatives, heirs and legatees, spouse, bankruptcy assignees,
successors, assigns and corporate, partnership or trust distributees or
involuntary transferees may become transferees in accordance with the provisions
of Section 13.2.
13.4 Expenses of Transfer. In the sole discretion of the Fund, the person
acquiring Shares pursuant to any of the provisions of this Article 13 may be
required to bear all costs and expenses necessary to effect a transfer of such
Shares including, without limitation, reasonable attorney's fees incurred in
preparing any required amendments to this Declaration and the Certificate to
reflect such transfer or acquisition and the cost of filing such amendments with
the appropriate governmental officials.
13.5 Survival of Liabilities. No sale or assignment of Shares shall release
the transferor from those liabilities to the Fund which survive such assignment
or sale as a matter of law or that are imposed under Section 3.4.
13.6 No Accounting. No transfer of Shares, whether voluntary, involuntary
or by operation of law, shall entitle the transferor or transferee to demand or
obtain immediate valuation, accounting or payment of the transferred Shares.
ARTICLE 14
DISSOLUTION, TERMINATION AND LIQUIDATION
14.1 Dissolution. Unless the provisions of Section 14.2 are elected, the
Fund shall be dissolved and its business shall be wound up upon the decision of
the Managing Shareholders to withdraw the offering of Shares described in the
Memorandum in accordance with Section 12.4(g) or on the earliest to occur of:
(a) Forty years from the effective date of this Declaration; (b) The sale
of all or substantially all of the Fund Property;
(c) The death, removal, dissolution, resignation, insolvency, bankruptcy or
other legal incapacity of both Managing Shareholders or any other event which
would legally disqualify both Managing Shareholders from acting hereunder;
(d) The decision of all Investors or the Managing Shareholders and a
Majority of Investors; or (e) The occurrence of any other event which, by
law, would require the Fund to be dissolved. 14.2 Continuation of the Fund.
Upon the occurrence of any event of dissolution described in Sections 14.1
(a) through (e),
inclusive, the Fund shall be dissolved and wound up unless (i) the Managing
Shareholders and a Majority of the Voting Shares within 90 days after the
occurrence of any such event of dissolution elect to continue the Fund or, (ii)
if there are no remaining Managing Shareholders within 90 days after the
occurrence of any such event of dissolution, holders of a Majority of the Voting
Shares shall elect, in writing, that the Fund shall be continued on the terms
and conditions herein contained and shall designate one or more persons willing
to be substituted as a Managing Shareholder or Managing Shareholders. In the
event there are no remaining Managing Shareholders and a Majority of the Voting
Shares elect to continue the Fund, it shall be continued with the new Managing
Shareholder or Managing Shareholders who shall succeed to and assume all of the
powers, privileges and obligations of the previous Managing Shareholder or
Managing Shareholders hereunder except as specified in Section 12.11. In the
event of a dissolution under this Section 14.2, the former Managing Shareholder
or Managing Shareholders shall have the rights specified in Section 12.11.
14.3 Obligations on Dissolution. The dissolution of the Fund shall not
release any of the parties hereto from their contractual obligations under this
Declaration.
14.4 Liquidation Procedure. Upon dissolution of the Fund for any reason:
(a) A reasonable time shall be allowed for the orderly liquidation of the
assets of the Fund and the discharge of liabilities to creditors so as to enable
the Fund to minimize the losses normally attendant to a liquidation;
(b) The Shareholders shall continue to receive Net Cash Flow, subject to
the other provisions of this Declaration and to the provisions of subsection (c)
hereof, and shall share Profits and Losses for all tax and other purposes during
the period of liquidation; and
(c) Ridgewood Power shall act as liquidating Managing Shareholder (or, in
its absence, any other Managing Shareholder shall act) and shall proceed to
liquidate the Fund Properties to the extent that they have not already been
reduced to cash unless the liquidating Managing Shareholder elects to make
distributions in kind to the extent and in the manner herein provided and such
cash, if any, and property in kind, shall be applied and distributed in
accordance with Article 8 and Section 9.5 (if applicable).
14.5 Liquidating Trustee. (a) If the dissolution of the Fund is caused by
circumstances under which no Managing Shareholders shall be acting as Managing
Shareholders or if all liquidating Managing Shareholders are unable or refuse to
act, the holders of a Majority of the Voting Shares shall appoint a liquidating
trustee who shall proceed to wind up the business affairs of the Fund. If no
liquidating trustee is appointed within 180 days after the event of dissolution,
any Shareholder may petition the Court of Chancery of Delaware to appoint a
liquidating trustee. The liquidating trustee shall have no liability to the Fund
or to any Shareholder for any loss suffered by the Fund which arises out of any
action or inaction of the liquidating trustee if the liquidating trustee, in
good faith, determined that such course of conduct was in the best interests of
the Shareholders and such course of conduct did not constitute negligence or
misconduct of the liquidating trustee. The liquidating trustee shall be
indemnified by the Fund against any losses, judgments, liabilities, expenses and
amounts paid in settlement of any claims sustained by it in connection with the
Fund, provided that the same were not the result of negligence or misconduct of
the liquidating trustee.
(b) Notwithstanding the above, the liquidating trustee shall not be
indemnified and no expenses shall be advanced on its behalf for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws, unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to the
particular indemnitee, or (2) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular indemnitee,
or (3) a court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee.
(c) In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission or other applicable
securities administrators if required, with respect to the issue of
indemnification for securities law violations.
(d) The Fund shall not incur the cost of that portion of any insurance,
other than public liability insurance, which insures any party against any
liability the indemnification of which is herein prohibited.
14.6 Death, Insanity, Dissolution or Insolvency of an Investor or Trustee.
The death, insanity, dissolution, winding up, insolvency, bankruptcy,
receivership or other legal termination of a Trustee, an Investor who is not a
Managing Shareholder or an Incentive Plan Participant shall have no effect on
the life of the Fund and the Fund shall not be dissolved thereby.
14.7 Managing Shareholders' Capital Contributions. Upon or prior to the
first distribution in liquidation, Power VI Corp. shall contribute to the
capital of the Fund an amount equal to any deficit in the Capital Account of
such Power VI Corp. calculated just prior to the date of such distribution, to
the extent not previously contributed.
14.8 Withdrawal of Offering. Dissolution of the Fund resulting from
withdrawal of the offering of Shares is governed by Section 1.6(c) and Section
12.4(g).
ARTICLE 15
MISCELLANEOUS
15.1 Notices. Notices or instruments of any kind which may be or are
required to be given hereunder by any person to another shall be in writing and
deposited in the United States Mail, certified or registered, postage prepaid,
addressed to the respective person at the address appearing in the records of
the Fund. Any Investor or Plan Holder may change his address by giving notice in
writing, stating his new address, to the Fund. Any notice shall be deemed to
have been given effective as of 72 hours, excluding Saturdays, Sundays and
holidays, after the depositing of such notice in an official United States Mail
receptacle. Notice to the Fund may be addressed to its principal office.
15.2 Meetings of Shareholders. (a) Meetings. The Managing Shareholders may
call meetings of the Shareholders, the Investors, the Plan Holders or any
subgroup thereof concerning any matter on which they may vote as provided by
this Declaration or by law or to receive and act upon a report of the Managing
Shareholders on matters pertaining to the Fund's business and activities.
Investors holding 10% or more of the outstanding securities or Shares entitled
to vote on the matter may also call meetings by giving notice to the Fund
demanding a meeting and stating the purposes therefor. After calling a meeting
or within 20 days after receipt of a written request or requests meeting the
requirements of the preceding sentence, the Fund shall mail to all Shareholders
entitled to vote on the matter written notice of the place and purposes of the
meeting, which shall be held on a date not less than 15 days nor more than 45
days after the Fund mails the notice of meeting to the Shareholders. Any
Shareholder entitled to vote on the matter may appear and vote or consent at a
meeting by proxy, provided that such authority is granted by a writing signed by
the Shareholder and delivered to the Fund at or prior to the meeting.
(b) Consents. Any consent required by this Declaration or any vote or
action by the Shareholders or any subgroup thereof may be effected without a
meeting by a consent or consents in writing signed by the persons required to
give such consent, to vote or to take action. The Managing Shareholders may
solicit consents or Investors holding 10% or more of the outstanding securities
or Shares entitled to vote on the matter may demand a solicitation of consents
by giving notice to the Fund stating the purpose of the consent and including a
form of consent. The Fund shall effect a solicitation of consents by giving
those Shareholders who may vote a notice of solicitation stating the purpose of
the consent, a form of consent and the date on which the consents are to be
tabulated, which shall be not less than 15 days nor more than 45 days after the
Fund transmits the notice of solicitation for consents. If Investors holding 10%
or more of the outstanding securities or Shares entitled to vote on the matter
demand a solicitation, the Fund shall transmit the notice of solicitation not
later than 20 days after receipt of the demand.
(c) General. To the extent not inconsistent with this Declaration, Delaware
law governing stockholders' meetings, proxies and consents for corporations
shall apply as to the procedure, validity and use of meetings, proxies and
consents. Any Shareholder may waive notice of or attendance at any meeting or
notice of any consent, whether before or after any action is taken. The date on
which the Fund transmits the notice of meeting or notice soliciting consents
shall be the record date for determining the right to vote or consent. A list of
the names, addresses and shareholdings of all Shareholders shall be maintained
as part of the Fund's books and records.
(d) Interested Parties. A Shareholder may vote Shares owned by it on any
question permitted under this Declaration regardless of whether that
Shareholder, Affiliates of that Shareholder or other persons associated with or
related to that Shareholder have a personal interest in the subject matter of
the transaction. Delaware law governing the voting of shares in a corporation
shall determine the legal effect of a vote by a Shareholder having an interest
described in the preceding sentence.
15.3 Loan to Trust by Shareholder. If any Shareholder shall, in addition to
his Capital Contribution to the Fund, lend any monies to the Fund, the amount of
any such loan shall not increase his Capital Account nor shall it entitle him to
any increase in his share of the distributions of the Fund, but the amount of
any such loan shall be an obligation on the part of the Fund to such Shareholder
and shall be repaid to him on the terms and at the interest rate negotiated at
the time of the loan, and the loan shall be evidenced by a promissory note
executed by the Fund except that no Shareholder shall be personally obligated to
repay the loan, which shall be payable and collectible only out of the assets of
the Fund.
15.4 Delaware Laws Govern. This Declaration shall be governed and construed
in accordance with the laws of the State of Delaware, and venue for any
litigation between or against any of the parties hereto may be maintained in New
Castle County, Delaware.
15.5 Power of Attorney. Each Investor irrevocably constitutes and appoints
the Managing Shareholders as his true and lawful attorneys-in-fact and agents to
effectuate and to act in his name, place and stead, in effectuating the purposes
of the Fund including the execution, verification, acknowledgment, delivery,
filing and recording of this Declaration as well as all authorized amendments
thereto and hereto, all assumed name and doing business certificates, documents,
bills of sale, assignments and other instruments of conveyances, leases,
contracts, loan documents and counterparts thereof, and all other documents
which may be required to effect a continuation of the Fund and which the Fund
deems necessary or reasonably appropriate, including documents required to be
executed in order to correct typographical errors in documents previously
executed by such Investor and all conveyances and other instruments or other
certificates necessary or appropriate to effect an authorized dissolution and
liquidation of the Fund. The power of attorney granted herein shall be deemed to
be coupled with an interest, shall be irrevocable and shall survive the death,
incompetency or legal disability of an Investor.
15.6 Disclaimer. In forming this Fund, all Investors recognize that the
independent power business is highly speculative and that neither the Fund nor
the Managing Shareholders nor the Corporate Trustee nor any other Managing
Person makes any guaranty or representation to any Investor as to the
probability or amount of gain or loss from the conduct of Fund business.
15.7 Corporate Trustee Resignation and Replacement. The Managing
Shareholders may increase or decrease the number of Corporate Trustees so long
as there is at least one Corporate Trustee which meets the requirements of
Section 3807 of the Delaware Act. A Corporate Trustee may resign by delivering a
written resignation to the Managing Shareholders not less than 60 days prior to
the effective date of the resignation. The Managing Shareholders may remove a
Corporate Trustee at any time, provided that if there is no incumbent, at least
one new Corporate Trustee is concurrently appointed. In the event of the
absence, death, resignation, removal, dissolution, insolvency, bankruptcy or
legal incapacity of a Corporate Trustee or if an additional Corporate Trustee is
to be appointed, the Managing Shareholders shall appoint the Corporate Trustee
in writing and shall subsequently give notice to the Investors, although such
notice is not necessary to the validity of the appointment. A Corporate Trustee
so appointed shall qualify by filing his written acceptance at the Fund's
principal place of business. If there are multiple Corporate Trustees, each is
vested with an undivided interest in the trust estate and may exercise all
powers vested in the Corporate Trustee as directed by the Managing Shareholders.
15.8 Amendment and Construction of Declaration. (a) This Declaration may be
amended by the Managing Shareholders, without notice to or the approval of the
Investors, from time to time for the following purposes: (1) to cure any
ambiguity, formal defect or omission or to correct or supplement any provision
herein that may be inconsistent with any other provision contained herein or in
the Memorandum or to effect any amendment without notice to or approval by
Investors or Incentive Plan Participants, as specified in other provisions of
this Declaration; (2) to make such other changes or provisions in regard to
matters or questions arising under this Declaration that will not materially and
adversely affect the interest of any Investor or Incentive Plan Participants;
(3) to otherwise equitably resolve issues arising under the Memorandum or this
Declaration so long as similarly situated Investors or Incentive Plan
Participants are not treated materially differently; (4) to maintain the federal
tax status of the Fund and any of its Shareholders (so long as no Investor's or
Incentive Plan Participant's liability is materially increased without his
consent) or as provided in Section 4.3(d); (5) to authorize additional Shares or
new classes or series of Shares under Section 9.5, (6) as otherwise provided in
this Declaration or (7) to comply with law.
(b) Other amendments to this Declaration may be proposed by either the
Managing Shareholders or persons owning 10% or more of the outstanding Voting
Shares, in each case by calling a meeting or requesting consents under Section
15.2 and specifying the text of the amendment and the reasons therefor. No
amendment under this Section 15.8(b) that increases any Shareholder's liability,
changes the Capital Contributions required of him or his rights in interest in
the Profits, Losses, deductions, credits, revenues or distributions of the Fund
in more than a de minimis manner, his rights on dissolution, or any voting or
management rights set forth in this Declaration shall become effective as to
that Shareholder without his written approval thereof. Unless otherwise provided
herein, all other amendments must be approved by the holders of a Majority of
the outstanding Voting Shares and, if the terms of a series of Shares or
securities so require, by the vote of the holders of such class, series or group
specified therein.
(c) The Managing Shareholders have power to construe this Declaration and
to act upon any such construction. Its construction of the same and any action
taken pursuant thereto by the Fund or a Managing Person in good faith shall be
final and conclusive.
15.9 Bonds and Accounting. The Corporate Trustee and other Managing Persons
shall not be required to give bond or otherwise post security for the
performance of their duties and the Fund waives all provisions of law requiring
or permitting the same. No person shall be entitled at any time to require the
Corporate Trustee, the Panel Members, the Fund or any Shareholder to submit to a
judicial or other accounting or otherwise elect any judicial, administrative or
executive supervisory proceeding applicable to non-business trusts.
15.10 Binding Effect. This Declaration shall be binding upon and shall
inure to the benefit of the Shareholders (and their spouses if the Shares of
such Shareholders shall be community property) as well as their respective
heirs, legal representatives, successors and assigns. This Declaration
constitutes the entire agreement among the Fund, the Corporate Trustee, the
Panel Members, and the Shareholders with respect to the formation and operation
of the Fund, other than the Subscription Agreement entered into between the Fund
and each Investor and the Management Agreement.
15.11 Headings. Headings of Articles and Sections used herein are for
descriptive purposes only and shall not control or alter the meaning of this
Declaration as set forth in the text.
15.12 Tax Matters Partner. Power VI Corp. is the tax matters partner of the
Fund under Code Section 6221. IN WITNESS WHEREOF, the undersigned have
signed this Declaration as of the date first above written.
RIDGEWOOD ENERGY HOLDING CORPORATION,
Grantor and Corporate Trustee
By: /s/ ROBERT E. SWANSON
Robert E. Swanson, President
RIDGEWOOD POWER CORPORATION,
Managing Shareholder
By: /s/ ROBERT E. SWANSON
Robert E. Swanson, President
RIDGEWOOD POWER VI CORPORATION,
Managing Shareholder
By: /s/ ROBERT E. SWANSON
Robert E. Swanson, President
STOCK AND WARRANT PURCHASE AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of the 29th day of March,
1999 by and between ZAP Power Systems, a California corporation having its
principal place of business at 117 Morris Street, Sebastopol, California 95472
("Seller"), and Ridgewood ZAP, LLC, a Delaware limited liability company having
its principal place of business at 947 Linwood Avenue, Ridgewood, New Jersey
07450 ("Buyer").
Preliminary Statement. Buyer desires to purchase and acquire and Seller desires
to issue and sell to Buyer a variable number of shares of Common Stock of Seller
(depending on the price of the stock in the open market) and a Warrant for
Common Stock of Seller in the amount, for the consideration and on the terms and
conditions set forth in this Agreement.
Agreement. In consideration of the mutual covenants and agreements contained in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties covenant and agree as
follows:
ARTICLE ONE
Definitions and Construction
1.1 Definitions. The following terms shall have the meanings set forth below:
"Affiliate" shall mean, when used with reference to a specified person, any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person. For purposes of this definition, the
term "person" means an individual, corporation, partnership, proprietorship,
limited liability company, limited liability partnership or other entity, and
the term "control" means the power to direct the management and policies of the
specified person.
"Articles of Incorporation" means the Articles of Incorporation of Seller, as
amended, dated September 25, 1994.
"Audited Balance Sheet" shall have the meaning given in Section 4.14.
"Balance Sheets" shall have the meaning given in Section 4.14.
"Buyer" shall have the meaning given in the first paragraph hereof.
"Closing" shall have the meaning given in Section 2.4.
"Closing Date" shall have the meaning given in Section 2.4.
"Closing Documents" mean this Agreement, the Warrant and the Investor's Rights
Agreement.
"Contract" shall have the meaning given in Section 4.27.
"Environmental Laws" means, collectively, all federal, state, local and other
applicable laws, statute and regulation, which in any way relate to health,
safety or the environment.
"Financial Statements" shall have the meaning given in Section 4.14.
"GAAP" means generally accepted accounting principles, applied on a basis
consistent with Seller's most recent audited financial statements.
"Governmental Approval" means any applicable authorization, approval, consent,
license, lease, ruling, permit, tariff, certification, exemption, notice, filing
or registration by or with any Governmental Person.
"Governmental Person" means any federal, state, local or other government, any
political subdivision or any governmental, judicial, public or statutory
instrumentality, tribunal, agency (including those pertaining to health, safety
or the environment), authority, body or entity, or other regulatory bureau,
authority, body or entity having legal jurisdiction over the matter or Person in
question.
"Governmental Rule" means any applicable federal, state, local or other law,
statute, treaty, rule, regulation, ordinance, order, code, judgment, decree,
directive, injunction, writ or similar action or decision duly implementing any
of the foregoing by any Governmental Person, but does not include Governmental
Approvals.
"Hazardous Substances" means any material which by reason of its composition or
characteristics is a hazardous substance, toxic substance or hazardous waste
under any Environmental Law or which would give rise to liability to the owner
or operator of the Facility under any Environmental Law.
"Investment Company Act" means the Investment Company Act of 1940, as amended.
"Investor's Rights Agreement" means the Investor's Rights Agreement of even date
herewith by and between Seller and Buyer substantially in the form attached
hereto as Exhibit A.
"Knowledge," "known" and "knows," whether or not capitalized herein and when
used with respect to matters covered by any representation, warranty, covenant
or other provision of this Agreement applicable to any party to this Agreement
means the actual knowledge and beliefs of each of the officers of such party who
are responsible for such matters.
"Laws" shall mean all federal, state, territorial, municipal or local statutes,
regulations or by-laws applicable to the parties hereto, including all orders,
notices, rules, decisions, codes, guidelines, policies, directions, permits,
approvals, licenses and similar authorizations issued, rendered or imposed by
any level of government including any ministry, department or administrative or
regulatory agency or authority.
"Licensed Intellectual Property" has the meaning given in Section 4.24.
"Lien" means any lien, mortgage, encumbrance, charge, pledge, lease, security
interest, claim, option or right of any kind (including any conditional sale or
other title retention agreement).
"Person" shall mean a natural person, corporation, limited partnership, general
partnership, joint stock company, joint venture, association, company, trust,
bank, trust company, and trust, business trust or other organization, whether or
not a legal entity, or a government or agency or any political subdivision
thereof.
"Purchase Price" shall have the meaning given in Section 2.2 of this Agreement.
"Schedules" means the schedules appended to this Agreement.
"Securities" shall mean the Shares and all Common Stock of the Company issuable
upon exercise of the Warrant.
"Securities Act" means the Securities Act of 1933, as amended, and all rules and
regulations adopted thereunder.
"Seller" shall have the meaning given in the first paragraph hereof.
"Seller's Intellectual Property" has the meaning given in Section 4.23.
"Shares" shall have the meaning given in Section 2.1.
"Tax Liabilities" means all income, excise, sales, unemployment, employer and
employee withholding, social security, occupation, franchise, customs and other
taxes, duties or charges that are levied, assessed or imposed upon, or accrued
or attributed to the operation of Seller.
"Tax Returns" has the meaning set forth in Section 4.17(a).
"Unaudited Balance Sheet" shall have the meaning given in Section 4.14.
"Warrant" shall have the meaning given in Section 2.3.
1.2 Interpretations.2 Interpretations. For purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise necessarily
requires:
(a) the terms "herein," "herewith" and "hereof" are references to this
Agreement, taken as a whole;
(b) the terms "include," "includes" and "including" shall mean "including,
without limitation";
(c) references to a "Section," "Article", "Exhibit" or "Schedule" shall mean a
Section, Article, Exhibit or Schedule of this Agreement, as the case may be;
(d) references to a given agreement, instrument or other document shall be a
reference to that agreement, instrument or other document (including all
exhibits and schedules) as modified, amended, supplemented and restated through
the date as of which such reference is made;
(e) references to a Person includes its permitted successors and permitted
assigns;
(f) the singular shall include the plural and the masculine shall include the
feminine and neuter, and vice versa;
(g) reference to a given Governmental Rule is a reference to that Governmental
Rule as amended, modified, supplemented or restated as of the date on which the
reference is made; and
(h) accounting terms have the meaning given to them by GAAP applied on a
consistent basis by the Person to which they relate.
ARTICLE TWO
Agreement to Sell; Actions at Closing
2.1 Agreement to Purchase and Sell the Shares. Upon the terms and subject to the
conditions set forth in this Agreement and upon the representations and
warranties made herein, Seller shall sell, grant, convey, assign, transfer and
deliver to Buyer, and Buyer shall purchase and acquire from Seller, the number
of shares of Common Stock of Seller, having no par value, with the rights,
preferences, privileges and restrictions set forth in the Articles of
Incorporation (the "Shares") that result from the division of $2,050,000 by the
number equal to seventy-five percent (75%) of the average closing price of the
Shares as reported on the "Bulletin Board" for the twenty (20) days prior to the
date of the Closing, subject to a maximum cap on the average closing price of
$4.50 per share and a minimum floor on the average closing price of $3.50 per
share. Proceeds of Ridgewood's investment shall be used in accordance with
Schedule 2.1 to this Agreement.
2.2 Purchase Price. In consideration for issuance of the Shares and Warrant,
Buyer agrees to pay to Seller Two Million Fifty Thousand Dollars ($2,050,000)
(the "Purchase Price") on the Closing Date.
2.3 Warrant. Buyer is purchasing a Warrant in form and substance as attached
hereto as Exhibit B. The warrant must be exercised in whole for Two Million
Dollars ($2,000,000) in the event Seller meets the milestones prescribed in the
Warrant. The period in which the milestones must be met ends on December 29,
1999. Buyer may, at its option, exercise the Warrant at any time prior to
December 29, 1999.
The number of Shares to be received upon exercise of the Warrant will be
determined by dividing Two Million Dollars ($2,000,000) by 85% of the average
closing price of the shares for the twenty (20) days prior to the exercise of
the Warrant, subject to a maximum cap on the average closing price of $4.50 per
share and a minimum floor on the average closing price of $3.50 per share.
2.4 Closing. The closing of the purchase and sale of the Shares provided herein
(the "Closing") will be at the office of seller located at 117 Morris Street,
Sebastopol, California at 10:00 a.m., local time, on April 15, 1999, or at such
other place or at such other date and time as Seller and Buyer may mutually
agree. Such date and time of Closing is herein referred to as the "Closing
Date."
2.5 Closing Actions. Subject to the conditions set forth in this Agreement,
at the Closing:
(a) Seller shall:
(i) execute and deliver to Buyer this Agreement and the other Closing
Documents to be signed by it;
(ii) deliver to Buyer an original stock certificate executed by Seller
evidencing the shares issued in the name of Buyer or its designee; and
(iii) deliver to Buyer or its designee the original Warrant executed by Seller
issued in the name of Buyer or its designee.
(b) Buyer shall:
(i) execute and deliver to Seller this Agreement and the other Closing
Documents to be signed by it; and
(ii) pay the Purchase Price to Seller by wire transfer to an account designated
by Seller. (iii)
ARTICLE THREE
Conditions to Closing
3.1 Buyer's Conditions of Closing. The obligation of Buyer to purchase and pay
for the Shares and the Warrant shall be subject to and conditioned upon the
satisfaction at the Closing of each of the following conditions:
(a) All representations and warranties of Seller contained in this Agreement
shall be true and correct as of the Closing Date and Seller shall have performed
all agreements and covenants and satisfied all conditions on its part to be
performed or satisfied by the Closing Date pursuant to the terms of this
Agreement.
(b) Seller shall have completed the actions referenced in Sections 2.4(a) of
this Agreement to the satisfaction of Buyer, and Seller shall have performed in
all material respects all of its covenants and agreements under this Agreement
and the other Closing Documents prior to the Closing Date.
(c) There shall have been no material adverse change since the date of the
Unaudited Balance Sheet in the financial condition, business or affairs of
Seller, and Seller shall not have suffered any material loss (whether or not
insured) by reason of physical damage caused by fire, earthquake, accident or
other calamity which substantially affects the value of its assets, properties
or business.
(d) Seller shall have delivered to Buyer:
(i) copies of all instruments, agreements, certificates and other documents
referenced in the Schedules;
(ii) evidence of all necessary corporate action of Seller to authorize and
approve the execution, delivery and performance of the Closing Documents by
Seller and all other documents and agreements contemplated thereby and the
consummation of the transactions contemplated thereby;
(iii) a certificate of incumbency of its officers executing the Closing
Documents;
(iv) a certificate of good standing from the office of the Secretary of State of
California and the department of taxation for each jurisdiction in which Seller
is required to qualify to do business or file a Tax Return; and
(v) such other documents as Buyer may reasonably request in connection with the
consummation of the transactions contemplated at the Closing. (e) Buyer shall
have received from Seller's counsel opinion with respect to the matters set
forth in Exhibit C attached hereto, addressed to Buyer, dated the Closing Date
and in form and substance satisfactory to Buyer.
(f) Seller shall have obtained all government consents, if any, necessary to
allow the transaction to be completed.
(g) No action or proceeding before any court or government body will be pending
wherein a judgment, decree or order would prevent any of the transactions
contemplated hereby or cause such transactions to be declared unlawful or
rescinded.
(h) All proceedings to be taken by Seller in connection with the consummation of
the Closing on the Closing Date and the other transactions contemplated hereby
and all documents required to be delivered by Seller in connection with the
transactions contemplated hereby shall be reasonably satisfactory in form and
substance to Buyer.
(i) The management team of Seller shall have entered into employment and
non-competition agreements and invention assignments and proprietary information
agreements acceptable to Buyer.
(j) Seller shall have delivered a certificate to Buyer certifying that all
conditions set forth in this Section 3.1 have been satisfied (except to the
extent waived by Buyer in writing).
Any condition specified in this Section 3.1 may be waived by Buyer provided that
no such waiver will be effective unless it is set forth in writing executed by
Buyer.
3.2 Seller's Conditions of Closing. The obligation of Seller to sell the Shares
shall be subject to and conditioned upon the satisfaction at the Closing of each
of the following conditions:
(a) All representations and warranties of Buyer contained in this Agreement
shall be true and correct as of the Closing Date and Buyer shall have performed
all agreements and covenants and satisfied all conditions on its part to the
performed or satisfied by the Closing Date pursuant to the terms of this
Agreement.
(b) Buyer shall have completed the actions referenced in Section 2.4(b) of this
Agreement to the satisfaction of Seller and shall have performed in all material
respects all of its covenants and agreements under this Agreement and the other
Closing Documents prior to the Closing Date.
(c) Buyer shall have delivered to Seller:
(i) resolutions of its Manager authorizing the execution, delivery and
performance of the Closing Documents and of all other agreements contemplated
thereby to which Buyer is a party and the consummation of the transactions
contemplated thereby;
(ii) such other documents as Seller may reasonably request in connection with
the consummation of the transactions contemplated at the Closing.
(d) No action or proceeding before any court or government body will be pending
wherein a judgment, decree or order would prevent any of the transactions
contemplated hereby or cause such transactions to be declared unlawful or
rescinded.
(e) All proceedings to be taken by Buyer in connection with the consummation of
the Closing on the Closing Date and the other transactions contemplated hereby
and all documents required to be delivered by Buyer in connection with the
transactions contemplated hereby shall be reasonably satisfactory in form and
substance to Seller.
(f) Buyer shall have a delivered a certificate to Seller certifying that all
conditions set forth in this Section 3.2 have been satisfied (except to the
extent waived by Seller in writing).
Any condition specified in this Section 3.2 may be waived by Seller provided
that no such waiver will be effective unless it is set
forth in writing executed by Seller.
ARTICLE FOUR
Representations and Warranties of Seller
As of the date of this Agreement and the Closing Date, Seller represents and
warrants to Buyer as follows:
4.1 Organization and Authority. Seller is a corporation validly existing and in
good standing under the laws of the State of California, with full power and
authority to enter into and perform this Agreement and the other agreements
contemplated hereby to which it is a party. Seller is duly licensed or qualified
to do business as a foreign corporation and is in good standing in all
jurisdictions in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except for jurisdictions where failure to so qualify could not
reasonably be expected to have a material adverse effect on the business and
operations of the Seller taken as a whole. Seller has all requisite corporate
power and authority to own its properties, to carry on its business as now
conducted, and to enter into and perform its obligations under the Closing
Documents.
4.2 Authorization; Binding Effect. Seller has taken all corporate actions which
are necessary to authorize the execution, delivery and performance of this
Agreement and the other agreements contemplated hereby to which it is a party,
and the consummation of the transactions contemplated hereby and thereby. This
Agreement and the other agreements contemplated hereby to which Seller is a
party constitute the legal and binding obligations of such party, enforceable in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting creditors' rights and the enforcement of debtors' obligations
generally and by general principles of equity, regardless of whether enforcement
is pursuant to a proceeding in equity or at law.
4.3 No Breach; No Default. Neither the execution, delivery or performance of
this Agreement or the other agreements contemplated hereby to which Seller is a
party, nor the consummation of the transactions contemplated hereby or thereby
by Seller, (a) conflicts with or results in any breach of, (b) constitutes a
default under, (c) results in a violation of, or (d) gives any third party any
right to accelerate any obligation under any Contract (as defined below) to
which Seller is a party or by which any of its assets are bound.
4.4 No Bankruptcy or Insolvency. Seller has not .4 No Bankruptcy or Insolvency.
Seller has not filed any voluntary petition in bankruptcy or been adjudicated a
bankrupt or insolvent, filed any petition or answer seeking any reorganization,
liquidation, dissolution or similar relief under any federal bankruptcy,
insolvency, or other debtor relief law, or sought or consented to or acquiesced
in the appointment of any trustee, receiver, conservator or liquidator of all or
any substantial part of its properties. No court of competent jurisdiction has
entered an order, judgment or decree approving a petition filed against Seller
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any federal bankruptcy act, or other debtor
relief law, and no other liquidator has been appointed of Seller or of all or
any substantial part of its properties.
4.5 No Litigation. There are no actions, suits or proceedings of any type
pending or, to the knowledge of Seller, threatened, against Seller which if
adversely determined could have an adverse effect on the Seller's ability to
perform the obligations contemplated under the Closing Documents. To the
knowledge of Seller, Seller is not operating under, or subject to, or in default
with respect to, any order, writ, injunction or decree affecting the ability of
Seller to enter into this Agreement or perform its obligations contemplated
under the Closing Documents to which it is a party.
4.6 Investment Company. Seller is not, and is not controlled by, an
"Investment Company" within the meaning of the Investment
Company Act.
4.7 Governmental Consents and Notices. No Governmental Approval is necessary or
appropriate in connection with the execution and delivery by Seller of this
Agreement or the other Closing Documents to which it is a party or the
consummation by Seller of the transactions contemplated hereby and thereby.
4.8 Additional Consents and Notices. No filing, registration, qualification,
notice, consent, approval or authorization to, with or from any Person is
necessary or appropriate in connection with the execution and delivery by Seller
of this Agreement or the other Closing Documents to which it is a party, or the
consummation by Seller of the transactions contemplated hereby and thereby.
4.9 No Brokers. Except as previously disclosed to Buyer regarding the fees to be
paid to Preferred Capital Equities Corporation and Harry Kraatz, Seller has not
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of Seller to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby, and Seller is not aware of any claim or basis for any claim
for payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
4.10 Compliance with Laws. Seller is not in violation of or in default under any
order of any court, governmental authority or arbitration board or tribunal to
which Seller is a party or is subject. To the Seller's knowledge, except for any
violations that individually or in the aggregate would not have a material
adverse impact on the Seller's business, Seller is in compliance with all Laws
applicable to it, its business operations and its properties, including without
limitation Environmental Laws. Seller has made all filings, registrations, has
obtained all governmental consents, permits and other authorizations, and has
taken all actions required by applicable Laws or governmental approvals and
regulations in connection with its business as now conducted.
4.11 Business Activities; Affiliates. Seller has not engaged in any business or
activities other than the manufacture, sale and marketing of two and three wheel
bicycles and scooters and components therefor. Seller does not have any
Affiliates other than its individual shareholders, which are disclosed on
Schedule 4.18 hereto.
4.12 Jurisdiction. California is the only jurisdiction in which Seller is doing
business to the extent necessary to be qualified and Seller is presently
licensed or qualified to do business in California. Seller has not been denied
admission to conduct any type of business in any jurisdiction in which it is not
presently admitted, has not had its license or qualification to conduct business
in any jurisdiction revoked or suspended, and has not been involved in any
proceeding to revoke or suspend a license or qualification.
4.13 Corporate Records. The corporate minute book of Seller delivered to Buyer
at Closing contains true and complete copies of the articles of incorporation,
bylaws, and the minutes of all meetings of directors and shareholders and
consent resolutions reflecting all actions taken by the directors or
shareholders without a meeting, from the date of incorporation of Seller to the
Closing Date. The officers and directors of Seller are as set forth in Schedule
4.13.
4.14 Financial Statements. Seller has furnished to Buyer (a) an audited income
statement and balance sheet and notes thereto of Seller as of the fiscal year
ended December 31, 1998 (the "Audited Balance Sheet"), (b) an audited statement
of operations of Seller for the fiscal year ended December 31, 1998, and (c) an
unaudited income statement and balance sheet and notes thereto for the period
ending ________________ (the "Unaudited Balance Sheet"). The documents
referenced in (a), (b) and (c) above are collectively referred to as the
"Financial Statements." The Audited Balance Sheet and the Unaudited Balance
Sheet are collectively referred to as the "Balance Sheets." The Financial
Statements present fairly the financial condition of Seller as of the dates
indicated, and the results of its operations for the periods indicated, in
accordance with GAAP consistently applied, except as otherwise stated therein.
4.15 Indebtedness; Undisclosed Liabilities. Schedule 4.15 sets forth a true and
complete schedule of all of Seller's indebtedness for borrowed money, including
amounts owed to shareholders of Seller. Seller has no liabilities or
obligations, either accrued, absolute, contingent or otherwise, which are not
reflected or provided for in the Financial Statements, except (i) liabilities
not in an excess of $25,000 in the aggregate arising after the date of the
Unaudited Balance Sheet which are incurred in the ordinary course of business,
and none of which is materially adverse, and (ii) as and to the extent
specifically described in Schedule 4.15 attached hereto.
4.16 No Adverse Changes. Except as disclosed on Schedule 4.16, since the
date of the Unaudited Balance Sheet, Seller has not:
(a) except as disclosed in Section 4.15 above, incurred any obligation or
liability (fixed or contingent);
(b) discharged or satisfied any lien, security interest or encumbrance or paid
any obligation or liability (fixed or contingent), other than in the ordinary
course of business and consistent with past practice;
(c) mortgaged, pledged or subjected to any lien, security interest or other
encumbrance any of its assets or properties.
(d) transferred, leased or otherwise disposed of any of its assets or properties
except for a fair consideration in the ordinary course of business and
consistent with past practice or, except in the ordinary course of business and
consistent with past practice, acquired any assets or properties;
(e) canceled or compromised any debt or claim, except in the ordinary course of
business and consistent with past practice; (f) waived or released any rights of
material value;
(g) except pursuant to those contracts listed on Schedule 4.25 hereto,
transferred or granted any rights under any concessions, leases, licenses,
agreements, patents, inventions, trademarks, trade names, service marks or
copyrights or with respect to any know-how;
(h) made or granted any wage or salary increase applicable to any group or
classification of employees generally, entered into any employment contract
with, or made any loan to, or entered into any material transaction of any other
nature with, any officer or employee of Seller;
(i) entered into any transaction, contract, or commitment, except (i)
contracts listed on Schedules 4.24, 4.25 and 4.27 hereto and (ii) this
Agreement and the transactions contemplated hereby;
(j) suffered any casualty loss or damage (whether or not such loss or damage
shall have been covered by insurance) which affects in any material respect its
ability to conduct business; or
(k) declared any dividends or bonuses, or authorized or affected any amendment
or restatement of the articles of incorporation (except for the Articles of
Incorporation) or by-laws of Seller or taken any steps looking toward the
dissolution or liquidation of Seller.
4.17 Taxes. Seller (a) has duly and timely filed or caused to be filed all
federal, state, local and foreign tax returns including, without limitation,
consolidated and/or combined tax returns) required to be filed by it prior to
the date of this Agreement which relate to Seller or with respect to which
Seller is liable or to which the assets or properties of Seller are in any way
subject (the "Tax Returns") (b) has paid or fully accrued for all taxes shown to
be due and payable under the laws and regulations pursuant to which the Tax
Returns were filed, and (c) has properly accrued for all such taxes accrued in
respect of Seller or the assets and properties of Seller for periods subsequent
to the periods covered by the Tax Returns. No deficiency in payment of taxes for
any period has been asserted by any taxing body and remains unsettled at the
date of this Agreement. Copies of all of Seller's Tax Returns have been made
available for inspection by Buyer.
4.18 Capitalization. The Seller's authorized capital consists solely of
10,000,000 shares of Common Stock without par value. There are 2,710,321 shares
of Common Stock outstanding prior to the Closing. Assuming complete exercise of
all warrants, options and other rights, including conversion of preferred stock
the total outstanding common stock of Seller would consist of 3,762,016 shares
of Common Stock. Schedule 4.18(A) sets forth a true, accurate and complete
capitalization table setting forth (i) all outstanding capital stock of Seller,
including the name and address of the holders of more than 5% of the issued and
outstanding stock, the class or series issued, the price paid, and the date of
issuance; (ii) all outstanding warrants, options, subscriptions other rights to
purchase capital stock of Seller or any note or security convertible into
capital stock of the Seller, including the name and address of the holder, the
class or series issuable, the exercise price, and the expiration date of the
instrument; and (iii) the common stock of Seller reserved for issuance to
holders of instruments referenced in Subsection (ii) above. Except as set forth
on Schedule 4.18(A), Seller has not authorized or issued any other class or
series of capital stock and there are no outstanding rights, warrants, options,
subscriptions, agreements or commitments giving anyone any right to require
Seller to sell or issue any capital stock or other equity interest in Seller.
Except as set forth on Schedule 4.18(B), neither Seller, nor, to Seller's
knowledge, any of Seller's shareholders are party to any shareholders agreements
or other agreements providing voting rights, rights of first refusal or similar
rights. All options to purchase stock granted by Seller are in the form
previously delivered to Buyer.
4.19 Title to Shares. The Shares are duly authorized, and, upon issuance to
Buyer under this Agreement, shall be validly issued, fully paid and
nonassessable. Based in part on the representations and warranties made by Buyer
in Article 5 hereof, the Shares are subject to no restrictions with respect to
transferability to Buyer in accordance with the terms of this Agreement. Upon
issuance of the Shares to Buyer by Seller in accordance with the terms of this
Agreement, Buyer will receive good and marketable title to all of the Shares,
free and clear of all security interests, liens, encumbrances, charges,
assessments, restrictions and adverse claims, except as set forth in the
Investor's Rights Agreement, the Articles of Incorporation and applicable law.
4.20 Title to Property and Assets. Seller has good and marketable title to all
of the properties and assets used by it in the conduct of its business
(including, without limitation, the properties and assets reflected in the
Balance Sheets except any thereof since disposed of for value in the ordinary
course of business). Except as set forth on Schedule 4.20, none of such
properties or assets is subject to a contract of sale not in the ordinary course
of business, or subject to security interests, mortgages, encumbrances, liens or
charges, except for (i) statutory liens for the payment of current taxes that
are not yet delinquent and (ii) liens, encumbrances and security interests which
arise in the ordinary course of business (other than in connection with the
incurrence of debt by the Seller), and which, in the case of (i) or (ii) above,
do not affect material properties and assets of the Seller.
4.21 Condition of Personal Property. All tangible personal property, equipment,
fixtures and inventories included within the assets of Seller or required to be
used in the ordinary course of business are in good, merchantable or in
reasonably repairable condition and are suitable for the purposes for which they
are used. No value in excess of applicable reserves has been given to any
inventory with respect to obsolete or discontinued products. All of the
inventories and equipment, including equipment leased to others, are well
maintained and in good operating condition. 4.22 Real Property. Schedule 4.22
contains a list of all real property owned by Seller or in which Seller has a
leasehold or other interest and of any Lien thereupon. Schedule 4.22 also
contains a legal description of all such real property and the principal terms
(including rents, termination dates and renewal conditions) of any rental, lease
or other arrangements affecting such property. The improvements upon such
properties and use thereof by Seller conforms to all applicable land use laws,
regulations and ordinances and any applicable deed, easement or lease
restrictions.
4.23 Seller's Intellectual Property. Schedule 4.23 sets forth a list of each
patent, trademark, servicemark, tradename, copyright, trade secret or other item
of intellectual property, including any and all registrations and applications
therefor, which are owned by Seller. In each case, the registration number, date
of issuance or registration, and a brief description of such property is set
forth in Schedule 4.23. The property referenced in Schedule 4.23, together with
all designs, methods, inventions and know-how related thereto and all
trademarks, trade names, service marks, and copyrights claimed or used by Seller
which have not been registered is hereinafter referred to as "Seller's
Intellectual Property."
4.24 Licensed Intellectual Property. Schedule 4.24 lists all licenses held by
Seller authorizing Seller to use computer software, patents, trademarks,
servicemarks, tradenames, copyrights, trade secrets or other items of
intellectual property used or useful to Seller's business ("Licensed
Intellectual Property").
4.25 Licenses and Rights Granted by Seller. Schedule 4.25 lists any licenses,
purchase options or other interests held by any Person in Seller's Intellectual
Property.
4.26 Intellectual Property Rights and Interests. Seller's Intellectual Property
and the Licensed Intellectual Property constitutes all such proprietary rights
which are owned or held by Seller and which are reasonably necessary to, or used
in the conduct of, the business of Seller. Seller has taken all reasonably
necessary steps required under applicable law to protect its trade secrets.
Seller owns or has valid rights to use Seller's Intellectual Property and the
Licensed Intellectual Property without conflict with the rights of others.
Except as set forth in Schedule 4.26, no person or corporation has made or, to
the knowledge of Seller, threatened to make any claim that Seller's use of
Seller's Intellectual Property and the Licensed Intellectual Property is in
violation of any license held by Seller or infringes any proprietary right or
interest of any third party. To the knowledge of Seller, no third party is
infringing upon any of Seller's Intellectual Property or is in violation of any
license to use Seller's Intellectual Property granted by Seller. Seller holds
Seller's Intellectual Property and the Licensed Intellectual Property free and
clear of all Liens.
4.27 Contracts and Agreements. Schedule 4.27 sets forth a description of each of
the following, and, in each case, Seller has furnished Buyer with true and
complete copies of all documents and complete descriptions of all oral
agreements and understandings, if any, referred to in this Section 4.27
(collectively, the "Contracts"): (a) deeds, lease agreements or other documents
relating to the ownership or lease of real property;
(b) equipment leases or other documents permitting Seller to use personal
property owned by a third party (other than leases which in the aggregate do not
require payment in excess of $10,000 per year and which are not otherwise
material to the operation, affairs or prospects of Seller);
(c) all notes, loan agreements, indentures, commitments or debt arrangements
under which Seller has incurred a debt obligation to any person or under which
Seller is entitled to borrow money from any Person;
(d) all collective bargaining agreements, employment and consulting agreements,
executive compensation plans, bonus plans, profit-sharing plans, deferred
compensation agreements, employee pension or retirement plans, employee stock
purchase and stock option plans, group life insurance, hospitalization insurance
or other plans or arrangements providing for benefits to employees of Seller;
and
(e) any other contracts, understandings and commitments to which Seller is a
party, or to which it or any of its assets or properties are subject (other than
contracts, understandings and commitments which do not involve payments in
excess of $10,000 individually or in excess of $10,000 in the aggregate and
which in any event are not material to the operation, affairs or prospects of
Seller)
4.28 No Breach or Default. Seller is not in default under any Contract to which
it is a party or by which it is bound, nor has any event occurred which, after
the giving of notice or the passage of time or both, would constitute a default
under any such Contract, which default could reasonably be expected to have a
materially adverse effect on the Company's business, financial condition or
assets. Seller has no reason to believe that the parties to such Contracts will
not fulfill their obligations under such Contracts in all material respects or
are threatened with insolvency.
4.29 Labor Controversies. Seller is not a party to any collective bargaining
agreement. There are no disputes or controversies between Seller and any of its
employees which might reasonably be expected to materially adversely affect the
conduct of its business, or any unresolved labor union grievances or unfair
labor practice or labor arbitration proceedings pending or, to the Seller's
knowledge, threatened relating to its business, and there are no organizational
efforts presently being made or, to the Seller's knowledge, or threatened
involving any of Seller's employees. Seller has not received notice of any claim
that Seller has not complied with any laws relating to the employment of labor,
including any provisions thereof relating to wages, hours, collective
bargaining, the payment of social security and similar taxes, equal employment
opportunity, employment discrimination and employment safety, or that Seller is
liable for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
4.30 Litigation. Except as set forth in Schedule 4.30, there are no actions,
suits or proceedings with respect to Seller involving claims by or against
Seller or Seller which are pending, or to the knowledge of Seller, threatened
against Seller, at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality. To the knowledge of Seller, no basis for any action, suit or
proceeding exists, and there are no orders, judgments, injunctions or decrees of
any court or governmental agency with respect to which Seller has been named or
to which Seller is a party, which apply, in whole or in part, to the business of
Seller, or to any of the assets or properties of Seller, or the Shares or which
would result in any material adverse change in the business or prospects of
Seller.
4.31 Environmental Matters. Without limiting the generality of Section 4.10, (i)
Seller and its properties are in compliance in all material respects with all
Environmental Laws, and (ii) during the time that Seller has leased or owned its
properties or owned or operated any facilities, there has not been any release,
emission, seepage, disposal, spill or discharge at or to any property owned,
leased or operated by Seller, whether onto or into the ground, water, air or
otherwise, of any Hazardous Substance, and to the best of knowledge of Seller,
none is reasonably expected to occur imminently, other than those which (A) are
not material, (B) are permitted under all applicable Environmental Laws,
Governmental Approvals and Governmental Rules, and (C) are not reasonably
expected to have any material adverse impact on Seller or its properties.
4.32 Bank Accounts. Schedule 4.32 also sets forth the name of each bank, savings
institution or other person with which Seller has an account or safe deposit box
and the names and identification of all persons authorized to drawn thereon or
to have access thereto.
4.33 Insurance. Schedule 4.33 contains a list and description of all insurance
policies of any type (other than title insurance policies) which are held by
Seller (or which otherwise insure Seller's properties) specifying the insurer,
amount of coverage, type of insurance, policy number and any pending claims
thereunder. Except as disclosed on Schedule 4.31, no claim of any type
(exceeding $5,000) has been made and remains unresolved under any of such
policies.
ARTICLE FIVE
Representations and Warranties of Buyer
As of the date of this Agreement and the Closing Date, Buyer represents and
warrants to Seller as follows:
5.1 Organization and Authority. Buyer is a limited liability company validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority to enter into and perform this Agreement and the other
agreements contemplated hereby to which it is a party.
5.2 Authorization; Binding Effect. Buyer has taken all limited liability company
actions which are necessary to authorize the execution, delivery and performance
of this Agreement and the other agreements contemplated hereby to which it is a
party, and the consummation of the transactions contemplated hereby and thereby.
This Agreement and the other agreements contemplated hereby to which Buyer is a
party constitute the legal and binding obligations of such party, enforceable in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting creditors' rights and the enforcement of debtors' obligations
generally and by general principles of equity, regardless of whether enforcement
is pursuant to a proceeding in equity or at law.
5.3 No Breach; No Default. Neither the execution, delivery or performance of
this Agreement or the other agreements contemplated hereby to which Buyer is a
party, nor the consummation of the transactions contemplated hereby or thereby
by Buyer, (a) conflicts with or results in any breach of, (b) constitutes a
default under, (c) results in a violation of, or (d) gives any third party any
right to accelerate any obligation under any agreement or instrument to which
Buyer is a party or by which any of its assets are bound.
5.4 No Bankruptcy or Insolvency. Buyer has not .4 No Bankruptcy or Insolvency.
Buyer has not filed any voluntary petition in bankruptcy or been adjudicated a
bankrupt or insolvent, filed any petition or answer seeking any reorganization,
liquidation, dissolution or similar relief under any federal bankruptcy,
insolvency, or other debtor relief law, or sought or consented to or acquiesced
in the appointment of any trustee, receiver, conservator or liquidator of all or
any substantial part of its properties. No court of competent jurisdiction has
entered an order, judgment or decree approving a petition filed against Buyer
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any federal bankruptcy act, or other debtor
relief law, and no other liquidator has been appointed of Buyer or of all or any
substantial part of its properties.
5.5 No Litigation. There are no actions, suits or proceedings of any type
pending or, to the knowledge of Buyer, threatened, against Buyer, which, if
adversely determined could have an adverse effect on the Buyer's ability to
perform the obligations contemplated under the Closing Documents. Buyer is not
operating under, or subject to, or in default with respect to, any order, writ,
injunction or decree affecting the ability of Buyer to enter into this Agreement
or perform its obligations contemplated under the Closing Documents to which it
is a party.
5.6 Investment Company. Buyer is not, and is not controlled by, an "Investment
Company" within the meaning of the Investment Company Act.
5.7 Governmental Approvals. No Governmental Approval is necessary or appropriate
in connection with the execution and delivery by Buyer of this Agreement or the
other Closing Documents to which it is a party or the consummation by Buyer of
the transactions contemplated hereby and thereby.
5.8 Additional Consents and Notices. No filing, registration, qualification,
notice, consent, approval or authorization to, with or from any Person
(excluding Governmental Persons) is necessary or appropriate in connection with
the execution and delivery by Buyer of this Agreement or the other Closing
Documents to which it is a party, or the consummation by Buyer of the
transactions contemplated hereby and thereby.
5.9 No Brokers. Buyer has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of
Seller to pay any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby, and , other than the
Preferred Capital Equities Corporation and Harry Kraatz fees to be paid by
Seller, Buyer is not aware of any claim or basis for any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
5.10 Purchase for Own Account. The Securities will be acquired for investment
purposes and for Buyer's own account, not as a nominee or agent, and not with a
view to the public resale or distribution thereof within the meaning of the 1933
Act, and Buyer has no present intention of selling, granting any participation
in, or otherwise distributing the same.
5.11 Disclosure of Information. Buyer has received or has had full access to all
the information it considers necessary or appropriate to make an informed
investment decision with respect to the Securities to be purchased by it under
this Agreement. Buyer further has had an opportunity to ask questions and
receive answers from Seller regarding the terms and conditions of the offering
of the Securities and to obtain additional information (to the extent Seller
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify any information furnished to Buyer or to which it
had access. The foregoing, however, does not in any way limit or modify the
representations and warranties made by Seller in Section 4.
5.12 Investment Experience. Buyer understands that the purchase of the
Securities involves substantial risk. Buyer has experience as an investors in
securities of companies in the development stage and acknowledges that Buyer is
able to fend for itself, can bear the economic risk of its investment in the
Securities and has such knowledge and experience in financial or business
matters that Buyer is capable of evaluating the merits and risks of this
investment in the Securities and protecting its own interests in connection with
this investment.
5.13 Accredited Investor Status. Buyer is an "accredited investor" within the
meaning of Regulation D promulgated under the 1933 Act. 5.14 Restricted
Securities. Buyer understands that the Securities are characterized as
"restricted securities" under the 1933 Act inasmuch as they are being acquired
from Seller in a transaction not involving a public offering and that under the
1933 Act and applicable regulations thereunder such Securities may be resold
without registration under the 1933 Act only in certain limited circumstances.
In this connection, Buyer represents that it is familiar with Rule 144 of the
U.S. Securities and Exchange Commission (the "SEC"), as presently in effect, and
understands the resale limitations imposed thereby and by the 1933 Act. Buyer
understands that Seller is under no obligation to register any of the Securities
sold hereunder except as provided in the Investor's Rights Agreement.
ARTICLE SIX
Pre-Closing Covenants
6.1 Pre-Closing Covenants. Prior to the Closing, Seller hereby covenants
and agrees to take the following actions:
(a) Conduct the business of Seller in the ordinary course and refrain from
taking any action that would cause any representation or warranty made herein to
be untrue or materially misleading;
(b) Comply in all material respects with contractual obligations of Seller and
legal requirements applicable to Seller;
(c) Permit Buyer and any of its employees, agents and representatives and their
representatives to have reasonable access to Seller's books and records of
account;
(d) Permit Buyer and any of its employees, agents and representatives and their
representatives to contact Seller's accountants and certain key employees of
Seller for the purpose of completing its due diligence;
(e) Provide Buyer with copies of all documents referenced on the Schedules
(including, without limitation, contracts, deeds, lease agreements, intellectual
property license agreements, intellectual property registrations, environmental
site assessments, and real property title search results); and
(f) Provide Buyer with such other instruments, agreements and documents as Buyer
may reasonably request in order to complete its due diligence review of Seller.
ARTICLE SEVEN
Termination
7.1 Termination Prior to Closing. This Agreement may be terminated at any
time prior to the Closing:
(a) by mutual written consent of the parties;
(b) by Buyer on one hand, or by Seller on the other hand, if there has been a
material misrepresentation or material breach of warranty or covenant on the
part of the other party with respect to the representations, warranties or
covenants set forth in this Agreement given by such other party or parties; or
(c) by any party if the Closing has not occurred on or before June 1,1999.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1 hereof, this Agreement will forthwith become void and
there will be no continuing liability on the part of Buyer or Seller, except
that, to the extent that any of such parties has made material
misrepresentations or has committed a material breach of warranty or covenant
prior to the date of termination, such party shall remain fully liable therefor.
Notwithstanding any termination of this Agreement, the parties shall treat as
confidential and not disclose, or use whatsoever, or permit others under its
control to disclose or use any information concerning another party to this
transaction obtained pursuant to or in connection with the transaction which is
the subject of this Agreement which is not generally known to the trade or a
matter of public knowledge, for a period of one year after termination.
ARTICLE EIGHT
Additional Provisions
8.1 Survival. The representations, warranties, covenants and agreements of Buyer
and Seller set forth in this Agreement will survive the Closing Date and the
consummation of the transactions contemplated hereby, notwithstanding any
examination made for or on behalf of Buyer or Seller, the knowledge of Buyer or
Seller, or any of their officers, directors, shareholders, employees or agents,
or the acceptance of any certificate or opinion.
8.2 Indemnification.
(a) Seller agrees to indemnify Buyer and hold it harmless against any loss,
liability, damage or expense (including reasonable legal expenses and costs)
which Buyer may suffer, sustain or become subject to, as the result of a breach
of any representation, warranty, covenant, or agreement by Seller contained in
this Agreement or in any other agreement, instrument, certificate or other
document delivered in connection with the transactions contemplated in this
Agreement.
(b) Buyer agrees to indemnify Seller and hold it harmless against any loss,
liability, damage or expense (including reasonable legal expenses and costs)
which Seller may suffer, sustain or become subject to, as the result of a breach
of any representation, warranty, covenant, or agreement by Buyer contained in
this Agreement or in any other agreement, instrument, certificate or other
document delivered in connection with the transactions contemplated in this
Agreement.
(c) Any party seeking indemnity pursuant to this Section 8.2 shall give notice
to the other party promptly after such party seeking indemnity has actual
knowledge of any claim as to which indemnity may be sought hereunder. The
failure of the party seeking indemnity to give such notice shall relieve the
party that does not receive such notice of its obligations under this Section
8.2 to the extent that such failure to give notice is prejudicial.
(d) After the indemnifying party has acknowledged in writing that it is
indemnifying another party to this Agreement with respect to litigation
involving any claim to the full extent of such claim, the indemnifying party
will be entitled to assume the defense of any such litigation, provided that the
other party may at its election participate in any such defense to the extent
that it in its sole discretion believes that such litigation will materially
affect its ongoing business. At the indemnifying party's reasonable request, the
other party will cooperate with the indemnifying party in the preparation of any
such defense, and the indemnifying party will reimburse the other party for any
expenses incurred in connection with such request. The indemnifying party shall
not enter into any settlement of any claim which is the subject of
indemnification without the written consent of the indemnified party.
(e) Payment with respect to either party's indemnification obligations hereunder
shall be due and payable within thirty (30) days of receipt of written notice by
the indemnifying party. The rights of the parties hereunder are cumulative and
shall be in addition to all other rights and remedies available at law or in
equity.
8.3 Expenses. At Closing, Seller will pay Buyer the sum of $50,000 as partial
reimbursement of expenses incurred by Buyer in connection with the transactions
contemplated herein. Except as otherwise provided in this Agreement or the other
Closing Documents, each party will pay all of its expenses, including attorneys'
and accountants' fees, in connection with the negotiation of this Agreement and
the other Closing Documents, the performance of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated by this
Agreement and the other Closing Documents.
8.4 Press Releases and Announcements. Neither party shall issue a press release
or announcement regarding this Agreement without the prior written consent of
the other parties to this Agreement.
8.5 Third-Party Beneficiaries. This Agreement does not create any rights in
any parties who are not otherwise a party to this Agreement.
ARTICLE NINE
Miscellaneous
9.1 Entire Agreement; Amendment and Waiver. This Agreement, together will all
exhibits and schedules referenced herein, constitutes the full and entire
understanding and agreement between the parties with regard to the subject
hereof and thereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by
Seller and Buyer.
9.2 Notices. Except as otherwise expressly set forth in this Agreement, all
notices, demands and other communications to be given or delivered under or by
reason of the provisions of this Agreement will be in writing and will be deemed
to have been given when delivered personally, or by documented overnight
delivery service. Notices, demands and communications to Buyer or Seller will,
unless another address is specified in writing, be sent to the address indicated
below. All such notices and other written communications shall be effective (i)
if mailed, five (5) days after mailing, (ii) if sent by a nationally recognized
overnight courier, one business day after delivery to such courier, and (iii) if
faxed or delivered, upon fax or delivery.
Notices to Buyer with a copy to:
Ridgewood ZAP, LLC Downs Rachlin & Martin PLLC
Ridgewood Commons 199 Main Street
947 Linwood Avenue PO Box 190
Ridgewood, NJ 07450 Burlington, VT 05402-0190
Attn: Robert E. Swanson, President Attn: Thomas H. Moody, Esq.
Fax: (201) 947-0474 Fax: (802) 860-3948
Notices to Seller: with a copy to:
ZAP Power Systems Evers & Hendrickson, LLP
117 Morris Street 155 Montgomery St., 12th Floor
Sebastopol, California 95472 San Francisco, CA 94104
Attn: Gary Starr Attn: William D. Evers, Esq.
Fax: 707-824-4159 Fax: 415-772-8101
9.3 Assignment. This Agreement and all of the provisions hereof will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by either party without prior
written consent of the other party; provided, however, that Buyer may assign its
rights but not its obligations hereunder to an Affiliate.
9.4 Severability. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provisions will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
9.5 No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties hereto to express their mutual intent,
and no rule of strict construction will be applied against any party.
9.6 Captions. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement will be enforced and construed
as if no caption had been used in this Agreement.
9.7 Governing Law. Disputes arising under this Agreement shall be governed by
and interpreted and construed in accordance with the substantive law (and not
the law of conflicts) of the State of California.
9.8 Jurisdiction and Venue. The parties hereto agree that courts located within
the State of California shall have exclusive jurisdiction over any dispute
arising under this Agreement and the parties hereby consent to such courts as
having venue and personal and subject matter jurisdiction as to all matters
arising under this Agreement and to service of process by registered mail,
return receipt requested, or by any other manner provided by law, and the
prevailing party or parties in a suit for breach of this Agreement shall be
entitled to all costs of such suit, including attorneys' fees.
9.9 Counterparts. This Agreement may be executed in one or more counterparts,
any one of which need not contain the signatures of more than one party, but all
such counterparts taken together will constitute one and the same instrument.
Confirmation of execution of this Agreement by telefax shall be binding upon any
party so confirming.
9.10 Further Assurances. The parties recognize that the consummation of this
Agreement and the transactions contemplated hereby will require the ongoing
cooperation of the parties, and each hereby agrees to comply in good faith with
the reasonable requests of any other party which may be made from time to time
in furtherance of the objectives of the parties in entering into this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Stock and Warrant
Purchase Agreement on the day and year first above written.
ZAP POWER SYSTEMS
By:_____________________________
Name:___________________________
Title:____________________________
RIDGEWOOD ZAP, LLC
By: Ridgewood Management Corporation,
Manager
By:_____________________________
Name:___________________________
Title:____________________________
::ODMA\PCDOCS\BURLINGTON\126824\4
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
*****************************************
ZAP POWER SYSTEMS
COMMON STOCK PURCHASE WARRANT
*****************************************
This certifies that, for good and valuable consideration, ZAP Power Systems, a
California corporation (the "Company"), grants to Ridgewood ZAP, LLC, a Delaware
limited liability company (the "Warrantholder"), the right to subscribe for and
purchase from the Company the number of fully paid and nonassessable shares (the
"Warrant Shares") of the Company's Common Stock, no par value (the "Common
Stock") specified herein, at the purchase price per share Exercise Price
determined as set forth herein, exercisable, subject to the restrictions set
forth herein, during the Exercise Period (as such term is defined in Section 1.4
hereof), all subject to the terms, conditions and adjustments herein set forth.
Capitalized terms used herein shall have the meanings assigned to them in
Section 8 hereof.
1. Exercise of Warrant.
1.1 Duration and Exercise of Warrant.
(a) Cash Exercise. This Warrant may be exercised by the Warrantholder at any
time during the Exercise Period by (i) the surrender of this Warrant to the
Company, with a duly executed Exercise Form (attached hereto as Exhibit A)
specifying the number of Warrant Shares to be purchased, during normal business
hours on any Business Day during the Exercise Period and (ii) the delivery of
payment to the Company, for the account of the Company, by wire transfer of
immediately available funds to a bank account specified by the Company or by
certified or bank cashier's check, of the Exercise Price for the number of
Warrant Shares specified in the Exercise Form in lawful money of the United
States of America.
The Company agrees that Warrant Shares shall be deemed to be issued to the
Warrantholder as the record holder of such Warrant Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for the Warrant Shares as aforesaid. As promptly as practicable on
or after such date and in any event within ten (10) days thereafter, the Company
at its expense shall issue and deliver to the Warrantholder a stock certificate
or certificates for the Warrant Shares specified in the Exercise Form. If this
Warrant shall have been exercised only in part, the Company shall, at the time
of delivery of the stock certificate or certificates, deliver to the
Warrantholder a new Warrant evidencing the rights to purchase the remaining
Warrant Shares, which new Warrant shall in all other respects be identical with
this Warrant. No adjustments shall be made on Warrant Shares issuable on the
exercise of this Warrant for any cash dividends paid or payable to holders of
record of Common Stock prior to the date as of which the Warrantholder shall be
deemed to be the record holder of such Warrant Shares.
1.2 Number of Warrant Shares. This Warrant shall entitle the Warrantholder to
purchase that number of Warrant Shares as is determined according to the
following formula, as such number shall be adjusted from time to time pursuant
to Section 6 hereof:
X= $2,000,000 divided by the Exercise Price (as defined below) Where X = the
number of shares of Common Stock which may be purchased.
1.3 Exercise Price. The price at which this Warrant may be exercised shall be an
amount equal to eighty-five percent (85%) of the average daily closing price of
the Common Stock for the twenty (20) days prior to the date of exercise (or, for
purposes of Section 6 hereof, twenty (20) days prior to the relevant measurement
date) (provided that, for purposes of this calculation, the average closing
price shall be no higher than $4.50 per share and no lower than $3.50 per
share), as such exercise price shall be adjusted from time to time pursuant to
Section 6 hereof (the "Exercise Price").
1.4 Term of Warrant and Exercisability.
(a) Term of Warrant. Subject to the terms and conditions set forth herein, this
Warrant shall be exercisable, in whole or in part, during the term commencing on
the date hereof and ending at 5 p.m., Pacific Standard Time on December 29, 1999
and shall be void thereafter (the "Exercise Period").
(b) Exercisability. This Warrant shall be exercisable in whole or in part during
the Exercise Period.
1.5 Payment of Taxes. The issuance of certificates for Warrant Shares shall be
made without charge to the Warrantholder for any stock transfer or other
issuance tax in respect thereto; provided, however, that the Warrantholder shall
be required to pay any and all taxes which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the then Warrantholder as reflected upon the books of the
Company.
1.6 Information. Upon receipt of a written request from a Warrantholder, the
Company agrees to deliver promptly to such Warrantholder a copy of its currently
available financial statements and to provide such other information concerning
the Company as such Warrantholder may reasonably request in order to assist the
Warrantholder in evaluating the merits and risks of exercising the Warrant and
to make an informed investment decision in connection with such exercise.
2. Restrictions on Transfer; Restrictive Legends.
2.1 Restrictions on Transfer; Compliance with Securities Laws. This Warrant and
the Warrant Shares issued upon the exercise of the Warrant may not be
transferred or assigned in whole or in part without compliance with all
applicable federal and state securities laws by the transferor and transferee
(including the delivery of investment representation letters and legal opinions
reasonably satisfactory to the Company, if such are requested by the Company).
The Warrantholder, by acceptance hereof, acknowledges that this Warrant and the
Warrant Shares to be issued upon exercise hereof are being acquired solely for
the Warrantholder's own account and not as a nominee for any other party, and
for investment, and that the Warrantholder will not offer, sell or otherwise
dispose of any Warrant Shares to be issued upon exercise hereof except under
circumstances that will not result in a violation of the Securities Act or any
state securities laws. Upon exercise of this Warrant, the Warrantholder shall,
if requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
Warrantholder's own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale.
2.2 Restrictive Legends. This Warrant shall (and each Warrant issued upon
transfer in whole or in part of this Warrant pursuant to this Section 2 or
issued in substitution for this Warrant pursuant to Section 4 shall) be stamped
or otherwise imprinted with a legend in substantially the following form:
"THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT."
Except as otherwise permitted by this Section 2, each stock certificate for
Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT." Notwithstanding the
foregoing, the Warrantholder may require the Company to issue a stock
certificate for Warrant Shares without a legend if (i) such Warrant Shares, as
the case may be, have been registered for resale under the Securities Act or
sold pursuant to Rule 144 under the Securities Act (or a successor rule thereto)
or (ii) the Warrantholder has received an opinion of counsel reasonably
satisfactory to the Company that such registration is not required with respect
to such Warrant Shares.
3. Reservation and Registration of Shares, Etc.
The Company covenants and agrees that all Warrant Shares which are issuable upon
the exercise of this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable and free from all taxes, liens, security interests, charges
and other encumbrances with respect to the issue thereof, other than taxes in
respect of any transfer occurring contemporaneously with such issue. The Company
further covenants and agrees that, during the Exercise Period, the Company will
at all times have authorized and reserved, and keep available free from
preemptive rights, a sufficient number of shares of Common Stock to provide for
the exercise of the rights represented by this Warrant and will, at its expense,
upon each such reservation of shares, procure such listing of such shares of
Common Stock (subject to issuance or notice of issuance) as then may be required
on all stock exchanges on which the Common Stock is then listed or on Nasdaq.
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
4. Exchange, Loss or Destruction of Warrant.
Upon receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may require, and, in
the case of such mutilation, upon surrender and cancellation of this Warrant,
the Company will execute and deliver a new Warrant of like tenor and amount. The
term "Warrant" as used in this Agreement shall be deemed to include any Warrants
issued in substitution or exchange for this Warrant.
5. Ownership of Warrant.
The Company may deem and treat the person in whose name this Warrant is
registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary.
6. Certain Adjustments. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
6.1 Merger, Sale of Assets, etc. If at any time while this Warrant, or any
portion thereof, is outstanding and unexpired there shall be (a) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (b) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, or (c) a sale or transfer of the Company's properties and assets as,
or substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 6. The foregoing provisions of this Section 6.1 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application of
the provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
6.2 Reclassification, etc. If the Company, at any time while this Warrant, or
any portion thereof, remains outstanding and unexpired by reclassification of
securities or otherwise, shall change any of the securities as to which purchase
rights under this Warrant exist into the same or a different number of
securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 6.
6.3 Split, Subdivision or Combination of Shares. If the Company at any time
while this Warrant, or any portion thereof, remains outstanding and unexpired
shall split, subdivide or combine the securities as to which purchase rights
under this Warrant exist, into a different number of securities of the same
class, then (a) in the case of a split or subdivision, the Exercise Price for
such securities shall be proportionately decreased and the securities issuable
upon exercise of this Warrant shall be proportionately increased, and (b) in the
case of a combination, the Exercise Price for such securities shall be
proportionately increased and the securities issuable upon exercise of this
Warrant shall be proportionately decreased.
6.4 Adjustments for Dividends in Stock or Other Securities or Property. If while
this Warrant, or any portion hereof, remains outstanding and unexpired the
holders of the securities as to which purchase rights under this Warrant exist
at the time shall have received, or, on or after the record date fixed for the
determination of eligible stockholders, shall have become entitled to receive,
without payment therefor, other or additional stock or other securities or
property (other than cash) of the Company by way of dividend, then and in each
case, this Warrant shall represent the right to acquire, in addition to the
number of shares of the security receivable upon exercise of this Warrant, and
without payment of any additional consideration therefor, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company that such holder would hold on the date of such exercise had it been
the holder of record of the security receivable upon exercise of this Warrant on
the date hereof and had thereafter, during the period from the date hereof to
and including the date of such exercise, retained such shares and/or all other
additional stock available by it as aforesaid during such period, giving effect
to all adjustments called for during such period by the provisions of this
Section 6.
6.5 Certificate as to Adjustments. Upon the occurrence of each adjustment or
readjustment pursuant to this Section 6, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each Holder of this Warrant a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written
request, at any time, of any such Holder, furnish or cause to be furnished to
such Holder a like certificate setting forth: (a) such adjustments and
readjustments; (b) the Exercise Price at the time in effect; and (c) the number
of shares and the amount, if any, of other property that at the time would be
received upon the exercise of the Warrant.
6.6 No Impairment. The Company will not, by any voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this Section 6 and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the Holders of this Warrant against impairment.
6.7 Fractional Shares. No fractional shares of Common Stock or scrip shall be
issued to any Warrantholder in connection with the exercise of this Warrant.
Instead of any fractional shares of Common Stock that would otherwise be
issuable to such Warrantholder, the Company will pay to such Warrantholder a
cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the fair market value of one share of Common Stock
as of the date of exercise. 6.8 Carryover. Notwithstanding any other provision
of this Section 6, no adjustment shall be made to the number of shares of Common
Stock to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than 1% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which together with any
adjustments so carried forward shall amount to 1% or more of the number of
shares to be so delivered.
7. Notices of Corporate Action.
In the event of:
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any Change of Control,
or
(c) any voluntary or involuntary dissolution, liquidation or winding-up of
the Company, or
(d) any redemption or conversion of any outstanding Preferred Stock or
Common Stock, or
(e) the filing of the Company's first registration statement with the SEC,
the Company will mail to the Warrantholder a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right and the amount and character of any such
dividend, distribution or right, (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, Change of Control,
dissolution, liquidation or winding-up is to take place and the time, if any
such time is to be fixed, as of which the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, Change of Control,
dissolution, liquidation or winding-up and (iii) that in the event of a Change
of Control, the Warrants are exercisable immediately prior to the consummation
of such Change of Control. Such notice shall be mailed at least 20 days prior to
the date therein specified, in the case of any date referred to in the foregoing
subdivision (i), and at least 20 days prior to the date therein specified, in
the case of the date referred to in the foregoing subdivision (ii).
8. Definitions.
As used herein, unless the context otherwise requires, the following terms have
the following respective meanings:
Business Day: any day other than a Saturday, Sunday or a day on which national
banks are authorized by law to close in the City of
San Francisco, State of California.
Change of Control: shall mean (i) the consolidation of the Company with or
merger of the Company with or into any other person in which the Company is not
the surviving corporation, (ii) the sale of all or substantially all of the
assets of the Company to any other person or (iii) any sale or transfer of any
capital stock of the Company after the date of this Warrant, following which 50%
of the combined voting power of the Company becomes beneficially owned by one
person or group (other than the Warrantholder) acting together. For purposes of
this definition of Change of Control, "group" shall have the meaning as such
term is used in Section 13(d)(1) under the Exchange Act.
Common Stock: the meaning specified on the cover of this Warrant.
Company: ZAP Power Systems, a California corporation.
Exchange Act: the Securities Exchange Act of 1934, as amended, or any successor
federal statute, and the rules and regulations of the SEC thereunder, all as the
same shall be in effect at the time. Reference to a particular section of the
Securities Exchange Act of 1934, as amended, shall include a reference to a
comparable section, if any, of any successor federal statute.
Exercise Form: an Exercise Form in the form annexed hereto as Exhibit A.
Exercise Period: the meaning specified in Section 1.4(a).
Exercise Price: the meaning specified on the cover of this Warrant, as such
price may be adjusted pursuant to Section 1 or Section 6
hereof.
Nasdaq: the Nasdaq National Market or the Nasdaq SmallCap Market.
Preferred Stock: shall mean any and all series of Preferred Stock of the
Company, whether currently existing or created in the
future.
SEC: the Securities and Exchange Commission or any other federal agency at the
time administering the Securities Act or the Exchange Act, whichever is the
relevant statute for the particular purpose.
Securities Act: the Securities Act of 1933, as amended, or any successor federal
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time. Reference to a particular section of the
Securities Act of 1933, as amended, shall include a reference to the comparable
section, if any, of any successor federal statute.
Trading Day: any day other than a day on which securities are not traded,
listed or reported on the principal securities exchange or
securities market on which the Common Stock is traded, listed or reported.
Warrantholder: the meaning specified on the cover of this Warrant.
Warrant Shares: the meaning specified on the cover of this Warrant, subject to
the provisions of Section 1 or Section 6 hereof.
9. Miscellaneous.
9.1 Entire Agreement. This Warrant constitutes the entire agreement between
the Company and the Warrantholder with respect to
this Warrant.
9.2 Binding Effects; Benefits. This Warrant shall inure to the benefit of and
shall be binding upon the Company and the Warrantholder and their respective
successors. Nothing in this Warrant, expressed or implied, is intended to or
shall confer on any person other than the Company and the Warrantholder, or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Warrant.
9.3 Amendments and Waivers. This Warrant may not be modified or amended except
by an instrument or instruments in writing signed by the Company and the
Warrantholder. Either the Company or the Warrantholder may, by an instrument in
writing, waive compliance by the other party with any term or provision of this
Warrant on the part of such other party hereto to be performed or complied with.
The waiver by any such party of a breach of any term or provision of this
Warrant shall not be construed as a waiver of any subsequent breach.
9.4 Section and Other Headings. The section and other headings contained in this
Warrant are for reference purposes only and shall not be deemed to be a part of
this Warrant or to affect the meaning or interpretation of this Warrant.
9.5 Further Assurances. Each of the Company and the Warrantholder shall do and
perform all such further acts and things and execute and deliver all such other
certificates, instruments and documents as the Company or the Warrantholder may,
at any time and from time to time, reasonably request in connection with the
performance of any of the provisions of this Agreement.
9.6 Notices. All notices and other communications required or permitted to be
given under this Warrant shall be in writing and shall be deemed to have been
duly given if delivered personally or sent by United States mail, postage
prepaid, or by facsimile (with electronic confirmation of successful
transmission) to the parties hereto at the following addresses or to such other
address as any party hereto shall hereafter specify by notice to the other party
hereto:
(a) if to the Company, addressed to:
ZAP Power Systems
117 Morris Street
Sebastopol, CA 95472
Attention: Managing Director
Telecopier: (707) 824-4159
(b) if to the Warrantholder, addressed to:
Ridgewood ZAP, LLC
c/o Ridgewood Capital Corporation
947 Linwood Avenue
Ridgewood, NJ 07450
Attention: President
Telecopier: (201) 447-0474
Except as otherwise provided herein, all such notices and communications shall
be deemed to have been received on the date of delivery thereof, if delivered
personally, or on the third Business Day after the mailing thereof.
9.7 Separability. Any term or provision of this Warrant which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the terms and provisions of this Warrant or affecting the
validity or enforceability of any of the terms or provisions of this Warrant in
any other jurisdiction.
9.8 Governing Law. This Warrant shall be deemed to be a contract made under the
laws of the State of California (irrespective of its choice of law principles).
9.9 No Rights or Liabilities as Stockholder. Nothing contained in this Warrant
shall be determined as conferring upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities are asserted by the Company
or by creditors or stockholders of the Company or otherwise.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer.
Dated: March 29, 1999.
ZAP POWER SYSTEMS
By:__________________________
Gary Starr
Managing Director
Exhibit A
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant, to purchase Warrant Shares:
___ herewith tenders payment for _______ of the Warrant Shares to the order of
ZAP Power Systems in the amount of $_________ in accordance with the terms of
this Warrant.
The undersigned requests that a certificate (or certificates) for such Warrant
Shares be registered in the name of the undersigned and that such certificate
(or certificates) be delivered to the undersigned's address below.
In exercising this Warrant, the undersigned hereby confirms and acknowledges
that the Warrant Shares are being acquired solely for the account of the
undersigned and not as a nominee for any other party, or for investment, and
that the undersigned will not offer, sell or otherwise dispose of any such
Warrant Shares except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
Dated: ___________________.
RIDGEWOOD ZAP, LLC
By:_____________________
Name:___________________
Title:____________________
If said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the shares purchasable thereunder.
::ODMA\PCDOCS\BURLINGTON\126822\3
INVESTOR'S RIGHTS AGREEMENT
THIS AGREEMENT made and entered into as of the 29th day of March, 1999, by and
between ZAP Power Systems, a California corporation having a principal place of
business at 117 Morris Street, Sebastopol, California 95472 (the "Company"), and
Ridgewood ZAP LLC, a Delaware limited liability company having a principal place
of business at 947 Linwood Avenue, Ridgewood, New Jersey 07450 (the "Investor").
W I T N E S S E T H:
WHEREAS, the Company and the Investor have entered into a certain Stock and
Warrant Purchase Agreement of even date herewith (the "Purchase Agreement"),
under which the Investor has agreed to purchase Common Stock of the Company and
the Company has agreed to issue a warrant to purchase additional shares of
Common Stock of the Company;
WHEREAS, the Company and the Investor desire to set forth their agreement as to
registration rights and other matters;
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, and other good and valuable consideration the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
SECTION 1
Restrictions on Transferability of Securities; Registration Rights
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(c) "Holder" shall mean the Investor (to the extent that the Investor holds
Registrable Securities), and any other holder of Registrable Securities that
have not been sold to the public or sold pursuant to Rule 144 to whom the
registration rights conferred by this Agreement have been transferred by Holder
in accordance with Section 1.11 hereof.
(d) "Indemnified Party" shall have the meaning given in Section 1.7(c) hereof.
(e) "Indemnifying Party" shall have the meaning given in Section 1.7(c) hereof.
(f) "Initiating Holders" shall mean any Holder or Holders who in the aggregate
hold not less than twenty-five percent (25%) of the outstanding Registrable
Securities.
(g) "Investor" shall have the meaning set forth in the preamble of this
Agreement.
(h) "Purchase Agreement" shall have the meaning set forth in the recitals of
this Agreement.
(i) "Registrable Securities" shall mean (i) Shares issued to Investor in
accordance with the Purchase Agreement and shares issued pursuant to the
Warrant), and (ii) any Shares issued as a dividend or other distribution with
respect to or in exchange for or in replacement of such Shares described in
clause (i) of this subsection; provided, however, that Registrable Securities
shall not include (x) any Shares which have previously been registered or which
have been sold to the public, (y) any Registrable Securities sold by a person in
a transaction in which registration rights have not been assigned in accordance
with this Agreement, or (z) any Registrable Securities that may immediately be
sold under Rule 144 during any 90-day period.
(j) The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(k) "Registration Expenses" shall mean all expenses incurred in effecting any
registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses and except as
otherwise provided herein, fees and disbursements of counsel for the Holders
(but excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company).
(l) "Rule 144" shall mean Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(m) "Rule 145" shall mean Rule 145 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(n) "Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar successor federal statute and the rules and regulations thereunder, all
as the same shall be in effect from time to time.
(o) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Shares and fees and disbursements of
counsel for any Holder (other than the fees and disbursements of counsel
included in Registration Expenses).
(p) "Shares" means shares of the Common Stock of the Company.
(q) "Significant Holder" shall have the meaning given in Section 3.2 hereof.
(r) "Warrant" shall mean the Warrant issued to the Investor pursuant to the
Purchase Agreement.
1.2 Demand Registration.
(a) Request for Registration. Upon receipt by the Company of written demand from
the Initiating Holders that the Company effect a registration with respect to
all or a part of the Registrable Securities having an anticipated aggregate
offering price, net of underwriting discounts and commissions, equal to or
greater than $7,500,000, the Securities Act), the Company shall:
(i) within twenty (20) days after the receipt of such request, give written
notice of the proposed registration to all other Holders; and
(ii) as soon as practicable after receipt of such demand (and if possible within
90 days after such demand), use its best efforts to effect the registration
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act) of such Registrable Securities
as would permit or facilitate the sale and distribution of all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within twenty (20)
days after such written notice from the Company is mailed or delivered.
The Company shall not be obligated to effect, or to take any action to effect,
any such registration pursuant to this Section 1.2:
(A) Made sooner than March 15, 2000;
(B) After the Company has initiated two such registrations pursuant to this
Section 1.2(a) (counting for these purposes only registrations which have been
declared or ordered effective);
(C) During the period starting with the date sixty (60) days prior to the
Company's good faith estimate of the date of filing of, and ending on a date one
hundred eighty (180) days after the effective date of, a Company initiated
registration; provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
(D) If the Initiating Holders propose to dispose of Registrable Securities which
may be immediately registered on Form S-3 pertinent to a request made under
Section 1.6 hereof;
(E) If the Initiating Holders do not request that such offering be firmly
underwritten by underwriters selected by the Initiating Holders (subject to the
consent of the Company, which consent will not be unreasonably withheld) or the
Company and the Initiating Holders are unable to obtain the commitment of such
underwriter to firmly underwrite such offering.
(b) Deferral by Company. Subject to the foregoing clauses (A) through (E), the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Initiating Holders; provided, however, that if (i) in
the good faith judgment of the Board of Directors of the Company, such
registration would be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is essential to defer
the filing of such registration statement at such time, and (ii) the Company
shall furnish to such Holders a certificate signed by the Managing Director of
the Company stating that, in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company for such
registration statement to be filed in the near future and that it is, therefore,
essential to defer the filing of such registration statement, then the Company
shall have the right to defer such filing for the period during which such
disclosure would be seriously detrimental, provided that (except as provided in
clause (C) above) the Company may not defer the filing for a period of more than
one hundred eighty (180) days after receipt of the request of the Initiating
Holders, and, provided further, that the Company shall not defer its obligation
in this manner more than once in any twelve-month period.(b) Deferral by
Company. Subject to the foregoing clauses (A) through (E), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Initiating Holders; provided, however, that if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the Managing Director of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company for such registration statement to
be filed in the near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall have the right to
defer such filing for the period during which such disclosure would be seriously
detrimental, provided that (except as provided in clause (C) above) the Company
may not defer the filing for a period of more than one hundred eighty (180) days
after receipt of the request of the Initiating Holders, and, provided further,
that the Company shall not defer its obligation in this manner more than once in
any twelve-month period.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Sections 1.2(b) and (d) hereof,
include other securities of the Company, with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(c) Underwriting. The right of any Holder to registration pursuant to this
Section 1.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. A Holder may elect to include in
such underwritings all or a part of the Registrable Securities he holds.
(d) Procedure. If the Company shall request inclusion in any registration
pursuant to Section 1.2 of securities being sold for its own account, or if
other persons shall request inclusion in any registration pursuant to Section
1.2, the Initiating Holders shall, on behalf of all Holders, offer to include
such securities in the underwriting and may condition such offer on the
acceptance of and compliance with the further applicable provisions of this
Agreement by the Company and such other persons. The Company shall (together
with all Holders and other persons proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by a
majority in interest of the Initiating Holders, which underwriters are
reasonably acceptable to the Company. Notwithstanding any other provision of
this Section 1.2, if the representative of the underwriters advises the
Initiating Holders in writing that marketing factors require a limitation on the
number of shares to be underwritten, the Initiating Holders may limit, to the
extent advised by the managing underwriter(s), the amount of securities to be
included in the registration by the Company's Shareholders (including the
Holders); provided, however, that the aggregate rate of securities (including
Registrable Securities) to be included in such registrations by the Holders may
not be so reduced to less than thirty-three percent (33%) of the total value of
all securities included in such registration. If a person who has requested
inclusion in such registration as provided herein does not agree to the terms of
any such underwriting, such person shall be excluded therefrom by written notice
from the Company, the underwriter or the Initiating Holders. The securities so
excluded shall also be withdrawn from registration. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall also be
withdrawn from such registration. If Shares are so withdrawn from the
registration and if the number of Shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
1.2(d), then the Company shall offer to all Holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
Shares so withdrawn, with such Shares to be allocated among such Holders
requesting additional inclusion in accordance with this Section 1.12(d).
1.3 Company Registration.
(a) Piggyback Rights. If the Company shall determine to register any of its
securities either for its own account or for the account of a security holder or
holders exercising their respective demand registration rights (other than
pursuant to this Agreement), other than a registration relating solely to
employee benefit plans, or a registration relating solely to a Rule 145 (or its
successor rule under the Securities Act) transaction, or a registration on any
registration form that does not permit secondary sales, the Company will:
(i) at least thirty (30) days prior to filing any such registration statement
under the Securities Act, give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made by any Holder and received by the Company within twenty (20)
days after the written notice from the Company described in clause (i) above is
mailed or delivered by the Company. Such written request may specify all or a
part of a Holder's Registrable Securities.
(b) Underwriting. If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
1.3(a)(i). In such event, the right of any Holder to registration pursuant to
this Section 1.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders of securities of the Company with registration rights to
participate therein distributing their securities through such underwriting)
enter into an underwriting agreement in customary form for offerings of the type
proposed with the representative of the underwriter or underwriters selected by
the Company.
(c) Procedures. Notwithstanding any other provision of this Section 1.3, if the
managing underwriter(s) advises the Company in writing that marketing factors
require a limitation on the number of Shares to be underwritten, the managing
underwriter(s) may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. The Company may limit, to the
extent so advised by the managing underwriter(s), the amount of securities to be
included in the registration by the Company's shareholders (including the
Holders); provided, however, that the aggregate value of securities (including
Registrable Securities) to be included in such registration by the Holders may
not be so reduced to less than thirty-three percent (33%) of the total value of
all securities included in such registration. If any Holder does not agree to
the terms of any such underwriting, he shall be excluded therefrom by written
notice from the Company or the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration. If securities are so withdrawn from the registration and if
the number of Shares of Registrable Securities to be included in such
registration was previously reduced as a result of marketing factors, the
Company shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among the persons requesting additional
inclusion in accordance with this Section 1.3 hereof.
1.4 Expenses of Registration. All registration expenses incurred in connection
with any registration, qualification or compliance pursuant to Sections 1.2, 1.3
and 1.5 hereof, and reasonable fees of one counsel for all selling shareholders
in the case of registrations pursuant to Section 1.2 hereof, shall be borne by
the Company (but excluding underwriter(s) and banker's discounts and
commissions); provided, however, that unless the Holders bear the registration
expenses for any registration proceeding begun pursuant to Section 1.2 and
subsequently withdrawn by the Holders registering Shares therein, such
registration proceeding shall be counted as a requested registration pursuant to
Section 1.2 hereof for all Holders, except in the event that such withdrawal is
based upon material adverse information relating to the Company that is
different from the information known or available (upon request from the Company
or otherwise) to the Holders requesting registration at the time of their
request for registration under Section 1.2 and have withdrawn their request for
registration with reasonable promptness after learning of such material adverse
information, in which event such registration shall not be treated as a counted
registration for purposes of Section 1.2 hereof, even though the Holders do not
bear the registration expenses for such registration. All Selling Expenses
relating to securities so registered shall be borne by the Holders of such
securities pro rata on the basis of the number of Shares of securities so
registered on their behalf.
1.5 Registration on Form S-3.
(a) The Company shall use its best efforts to qualify for the use of Form S-3 to
register its shares or any comparable or successor form or forms. After the
Company has qualified for the use of Form S-3 to register its shares, in
addition to the rights contained in the foregoing provisions of this Section 1,
the Holders of Registrable Securities shall have the right to request
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
methods of disposition of such shares by such Holder or Holders), provided,
however, that the Company shall not be obligated to effect any such registration
if (i) the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) on Form S-3 at an aggregate price
to the public of less than $1,000,000, or (ii) in the event that the Company
shall furnish the certification described in Section 1.2(b)(ii) (but subject to
the limitations set forth therein) or (iii) in a given twelve-month period, the
Company has effected one (1) such registration in such period or (iv) it is to
be effected more than five (5) years after the Company's initial public offering
or (v) in any particular jurisdiction in which the Company would be required to
do business or execute a general consent to service of process in effecting such
registration, qualification or compliance or (vi) Form S-3 is not available for
such offering.
(b) If a request complying with the requirements of Section 1.5(a) hereof is
delivered to the Company, the provisions of Sections 1.2(a)(i) and (ii) and
hereof shall apply to such registration. If the registration is for an
underwritten offering, the provisions of Sections 1.2(c) and 1.2(d) hereof shall
apply to such registration.
(c) Form S-3 registrations shall not be deemed to be demand registrations as
described in Section 1.2 or 1.3.
1.6 Registration Procedures. In the case of each registration effected by the
Company pursuant to Section l, the Company will keep each Holder advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of ninety (90) days or until
the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
however, that (i) such 90-day period shall be extended for a period of time
equal to the period the Holder refrains from selling any securities included in
such registration at the request of an underwriter of Shares (or other
securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 90-day period shall be extended, if necessary,
for a period of up to one year, to keep the registration statement effective
until all such Registrable Securities are sold, provided that Rule 415, or any
successor rule under the Securities Act, permits an offering on a continuous or
delayed basis, and provided further that applicable rules under the Securities
Act governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment that (I) includes any prospectus required
by Section l0(a)(3) of the Securities Act or (II) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (I) and (II) above to be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the
registration statement;
(b) Prepare and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident thereto,
including any amendment of or supplement to the prospectus, as a Holder from
time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein necessary to make the statements therein not
misleading or incomplete in the light of the circumstances then existing, and at
the request of any such seller, prepare and furnish to such seller a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such shares,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed; (f) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such registration statement and a
CUSIP number for all such Registrable Securities, in each case not later than
the effective date of such registration;
(g) Otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the first
month after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
and
(h) In connection with any underwritten offering pursuant to a registration
statement filed pursuant to Section 1.2 hereof, the Company and the Holders
registering Registrable Securities will enter into an underwriting agreement in
form reasonably necessary to effect the offer and sale of Shares, provided such
underwriting agreement contains customary underwriting provisions and provided
further that if the underwriter so requests the underwriting agreement will
contain customary contribution provisions.
1.7 Indemnification.
(a) To the extent permitted by law, the Company will indemnify each Holder, each
of its officers, directors and partners, legal counsel, and accountants and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification, or compliance
has been effected pursuant to this Section 1, and each underwriter (as defined
in the Securities Act) for such Holder, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any such underwriter,
against all expenses, claims, losses, damages, and liabilities (or actions,
proceedings, or settlements in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular, or other document (including any related
registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act, Exchange Act or any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification, or compliance,
and will reimburse each such Holder, each of its officers, directors, partners,
legal counsel, and accountants and each person controlling such Holder, each
such underwriter, and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending or settling any such claim, loss, damage, liability,
proceeding, or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability, or expense
arises out of or is based on any untrue statement (or alleged untrue statement)
or omission (or alleged omission) based upon written information furnished to
the Company by such Holder, officer, director, partner, underwriter for such
Holder, or controlling person of such Holder and stated to be specifically for
use therein. It is agreed that the indemnity agreement contained in this Section
1.7(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent has not been unreasonably withheld).
(b) To the extent permitted by law, each Holder will, if Registrable Securities
held by him are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, each other such Holder and Other
Shareholder, and each of their officers, directors, and partners, and each
person controlling such Holder or Other Shareholder, against all expenses,
claims, losses, damages and liabilities (or actions, proceedings or settlements
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or any violation, by the Company of the Securities Act or
Exchange Act or any rule or regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, qualification, or compliance, and will reimburse the Company
and such Holders, Other Shareholders, directors, officers, partners, legal
counsel, and accountants, persons, underwriters, or control persons for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability, proceeding, or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, or other document or such
other alleged violation by the Company of the Securities Act or Exchange Act is
committed in reliance upon and in conformity with written information furnished
to the Company by such Holder and stated to be specifically for use therein
provided, however, that the obligations of such Holder hereunder shall not apply
to amounts paid in settlement of any such claims, losses, damages, or
liabilities (or actions in respect thereof) if such settlement is effected
without the consent of such Holder, which consent shall not be unreasonably
withheld.
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense. The failure of any Indemnified Party to give
notice as provided herein shall relieve the Indemnifying Party of its
obligations under this Section 1 to the extent such failure is prejudicial. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held by a court
of competent jurisdiction to be unavailable to an Indemnified Party with respect
to any loss, liability, claim, damage, or expense referred to therein, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, liability, claim, damage, or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions that resulted in such loss, liability, claim, damage, or
expense as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
(f) The foregoing indemnity agreements of the Company and the Holder are subject
to the condition that, insofar as they relate to any untrue statement of a
material fact or an omission of a material fact made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity agreement shall not inure to be benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(g) The obligations of the Company and the Holder under this Section 1.7 shall
survive the completion of any offering of Registrable Securities in a
registration statement and otherwise.
1.8 Information By Holder. It is a condition precedent to the Company's
obligations under Sections 1.2, 1.3 and 1.5 that each Holder of Registrable
Securities shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Section 1.
1.9 Limitations on Registration of Issues of Securities. From and after the date
of this Agreement, the Company shall not, without the prior written consent of
Holders holding a majority of the then outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company giving such holder or prospective holder any registration rights
which are inconsistent with the provisions of this Agreement.
1.10 Rule 144 Reporting. With a view to making available the benefits of certain
rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, after such time as a
public market exists for the Shares of Company, the Company agrees to use its
best efforts to:
(a) Make and keep public information regarding the Company available as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times from and after ninety (90) days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) File with the Commission in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act at any
time after it has become subject to such reporting requirements;
(c) So long as a Holder owns any Registrable Securities, furnish to the Holder
forthwith upon written request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the 1934 Act).
1.11 Transfer or Assignment of Registration Rights. The rights to cause the
Company to register securities granted to a Holder by the Company under this
Section 1 may be transferred or assigned by a Holder only to a transferee or
assignee of not less than 5% of the outstanding voting stock of the Company (on
a fully diluted basis), provided that the Company is given written notice prior
to the time of such transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes in writing prior to such
transfer or assignment, the obligations of such Holder under this Section 1.
1.12 "Market Stand-Off" Agreement. If requested by the Company and an
underwriter of Shares (or other securities) of the Company, each Holder shall
not sell or otherwise transfer or dispose of any Shares (or other securities) of
the Company then owned by such Holder (other than those included in the
registration) during the one hundred eighty (180) day period following the
effective date of a registration statement of the Company filed under the
Securities Act, provided that:
(a) such agreement shall only apply to the first such registration statement of
the Company which covers securities to be sold on its behalf to the public in an
underwritten offering; and
(b) all officers and directors of the Company then holding Common Stock of the
Company are bound by and have entered into similar agreements.
The obligations described in this Section 1.12 shall not apply to a registration
relating solely to employee benefit plans on Form S-1 or Form S-8 or similar
forms that may be promulgated in the future, or a registration relating solely
to a Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. In order to enforce the above covenant, the Company
shall have the right to place restrictive legends on the certificates
representing the Shares subject to this Section and to impose stop-transfer
instructions with respect to the shares (or securities) subject to the foregoing
restriction until the end of such one hundred eighty (180) day period.
1.13 Delay of Registration. No Holder shall have any right to take any action to
restrain, enjoin, or otherwise delay any registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 1.
SECTION 2
Financial Information
2.1 Basic Financial Information. The Company hereby covenants and agrees, so
long as any Holder owns not less than 5% of the outstanding voting stock of the
Company (on a fully diluted basis), it will furnish the following reports to
each Holder:
(a) As soon as practicable after the end of each fiscal year of the Company, and
in any event within ninety (90) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such fiscal year, and
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such year, prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year (if any), all
in reasonable detail and certified by Grant Thornton LLP or independent public
accountants of recognized national standing selected by the Company.
(b) As soon as practicable after the end of the first, second, and third
quarterly accounting periods in each fiscal year of the Company, and in any
event within forty-five (45) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as of the end of each such quarterly
period, and consolidated statements of income and cash flows of the Company and
its subsidiaries for such period and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year and to the Company's operating
plan then in effect and approved by its Board of Directors, subject to changes
resulting from normal year-end audit adjustments, all in reasonable detail and
certified by the principal financial or accounting officer of the Company,
except that such financial statements need not contain the notes required by
generally accepted accounting principles.
(c) As soon as practical after the end of each month and in any event within
thirty (30) days thereafter a consolidated balance sheet of the Company and its
subsidiaries, if any, as at the end of such month and consolidated statements of
income and cash flows of the Company and its subsidiaries, for each month and
for the current fiscal year of the Company to date, all subject to normal
year-end audit adjustments, prepared in accordance with generally accepted
accounting principles consistently applied and certified by the principal
financial or accounting officer of the Company, together with a comparison of
such statements to the corresponding periods of the prior fiscal year and to the
Company's operating plan then in effect and approved by its Board of Directors.
(d) Annually (but in any event at least thirty (30) days prior to the
commencement of each fiscal year of the Company) the financial plan of the
Company, in such manner and form as approved by the Board of Directors of the
Company, which financial plan shall include a projection of income and a
projected cash flow statement for such fiscal year and a projected balance sheet
as of the end of such fiscal year. Any material changes in such business plan
shall be submitted as promptly as practicable after such changes have been
approved by the Board of Directors of the Company.
(e) Within 30 days of receipt by the Company, a copy of the annual management
review letter of the Company's independent public accountants.
(f) As soon as practicable after transmission or occurrence and in any event
within ten days thereof, copies of any reports or communications delivered to
any class of the Company's security holders or broadly to the financial
community, including any filings by the Company with any securities exchange,
the Securities and Exchange Commission or the National Association of Securities
Dealers, Inc.
2.2 Limitations on Information Rights.
(a) The provisions of Section 2.1 shall not be in limitation of any rights which
any Holder or Significant Holder may have with respect to the books and records
of the Company and its subsidiaries, or to inspect their properties or discuss
their affairs, finances and accounts, under the laws of the jurisdictions in
which they are incorporated.
(b) Anything in Section 2 to the contrary notwithstanding, no Holder or
Significant Holder by reason of this Agreement shall have access to any trade
secrets or classified information of the Company. Each Significant Holder hereby
agrees to hold in confidence and trust and not to disclose any confidential
information provided pursuant to this Section 2.2 and to use such confidential
information only in connection with its rights hereunder.
(c) The rights granted under Section 2.1 may be transferred or assigned by a
Holder only to a transferee or assignee of not less than 5% of the outstanding
capital stock of the Company (on a fully diluted basis), provided that the
Company is given written notice prior to the time of such transfer or
assignment, stating the name and address of the transferee or assignee and
identifying the securities with respect to which such registration rights are
being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes in writing, prior to such transfer or
assignment, the obligations of such Holder under Section 2.1.
SECTION 3
Right of First Refusal
3. Right of First Refusal. The Company hereby grants to any Holder who owns not
less than 5% of the voting stock of the Company on a fully diluted basis (a
"Significant Holder"), the right of first refusal to purchase a pro rata share
of New Securities (as defined in this Section 3) which the Company may, from
time to time, propose to sell and issue. A Significant Holder's pro rata share,
for purposes of this right of first refusal, is the ratio of the number of
Shares owned by such Holder immediately prior to the issuance of New Securities,
assuming full conversion of any convertible securities of the Company held by
such Holder, and exercise of any options or warrants held by such Holder, to the
total number of Shares outstanding immediately prior to the issuance of New
Securities, assuming full conversion of any outstanding preferred stock of the
Company, including those held by such Holder, and exercise of all outstanding
rights, options and warrants to acquire Shares of the Company. This right of
first refusal shall be subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including Shares and/or any
preferred stock) of the Company whether now authorized or not, and rights,
options or warrants to purchase such capital stock, and securities of any type
whatsoever that are, or may become, convertible into capital stock; provided
that the term "New Securities" does not include (i) Shares purchased under the
Purchase Agreement or Shares issuable upon exercise of the Warrant (ii)
securities issued pursuant to the acquisition of another business entity or
business segment of any such entity by the Company by merger, purchase of
substantially all the assets or other reorganization whereby the Company will
own more than fifty percent (50%) of the voting power of such business entity or
business segment of any such entity immediately following closing such transfer;
(iii) any borrowings, direct or indirect, from financial institutions or other
persons by the Company, whether or not presently authorized, including any type
of loan or payment evidenced by any type of debt instrument, provided such
borrowings do not have any equity features including warrants, options or other
rights to purchase capital stock and are not convertible into capital stock of
the Company; (iv) securities issued to employees, consultants, officers or
directors of the Company pursuant to any stock option, stock purchase or stock
bonus plan, agreement or arrangement approved by the Company's Board of
Directors; (v) securities issued in connection with any commercial transaction
or any equipment leases, real property leases, loans, credit lines, guarantees
of indebtedness or similar financing; (vi) securities issued in any new public
offering pursuant to a registration under the Securities Act with aggregate net
proceeds of at least $7,500,000; (vii) securities issued in connection with any
stock split, stock dividend or recapitalization of the Company; and (viii) any
right, option or warrant to acquire any security convertible into, or
exercisable for, the securities excluded from the definition of New Securities
pursuant to subsections (i) through (vii) above. (a) New Securities shall mean
any capital stock (including Shares and/or any preferred stock) of the Company
whether now authorized or not, and rights, options or warrants to purchase such
capital stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock; provided that the term New Securities does not
include (i) Shares purchased under the Purchase Agreement or Shares issuable
upon exercise of the Warrant (ii) securities issued pursuant to the acquisition
of another business entity or business segment of any such entity by the Company
by merger, purchase of substantially all the assets or other reorganization
whereby the Company will own more than fifty percent (50%) of the voting power
of such business entity or business segment of any such entity immediately
following closing such transfer; (iii) any borrowings, direct or indirect, from
financial institutions or other persons by the Company, whether or not presently
authorized, including any type of loan or payment evidenced by any type of debt
instrument, provided such borrowings do not have any equity features including
warrants, options or other rights to purchase capital stock and are not
convertible into capital stock of the Company; (iv) securities issued to
employees, consultants, officers or directors of the Company pursuant to any
stock option, stock purchase or stock bonus plan, agreement or arrangement
approved by the Company's Board of Directors; (v) securities issued in
connection with any commercial transaction or any equipment leases, real
property leases, loans, credit lines, guarantees of indebtedness or similar
financing; (vi) securities issued in any new public offering pursuant to a
registration under the Securities Act with aggregate net proceeds of at least
$7,500,000; (vii) securities issued in connection with any stock split, stock
dividend or recapitalization of the Company; and (viii) any right, option or
warrant to acquire any security convertible into, or exercisable for, the
securities excluded from the definition of New Securities pursuant to
subsections (i) through (vii) above. (b) In the event the Company proposes to
undertake an issuance of New Securities, it shall give each Significant Holder
written notice of its intention, describing the type of New Securities, and
their price and the general terms upon which the Company proposes to issue the
same. Each Significant Holder shall have ten (10) days after any such notice is
mailed or delivered to agree to purchase such Holder's pro rata share of such
New Securities for the price and upon the terms specified in the notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
(c) In the event the Significant Holders fail to exercise fully the right of
first refusal within such ten (10) day period, the Company shall have one
hundred twenty (120) days thereafter to sell or enter into an agreement
(pursuant to which the sale of New Securities covered thereby shall be closed,
if at all, within one hundred twenty (120) days from the date of such agreement)
to sell the New Securities respecting which the Holders' right of first refusal
option set forth in this Section 3.1 was not exercised, at a price and upon
terms no more favorable to the purchasers thereof than specified in the
Company's notice to the Significant Holders pursuant to Section 3.1(b). In the
event the Company has not sold within such 120-day period or entered into an
agreement to sell the New Securities in accordance with the foregoing within one
hundred twenty (120) days from the date of such agreement, the Company shall not
thereafter issue or sell any New Securities, without first again offering such
securities to the Holders in the manner provided in Section 3.1(b) above.
(d) The rights granted under Section 3 of this Agreement shall expire upon the
earliest of, and shall not be applicable to (i) the first sale of Common Stock
of the Company to the public after the date of this Agreement effected pursuant
to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission (the "Commission") under the Securities Act,
with proceeds of more than $7,500,000, (ii) four (4) years from the date of this
Agreement, and (iii) (A) the acquisition of all or substantially all the assets
of the Company or (B) an acquisition of the Company by another corporation or
entity by consolidation, merger or other reorganization in which the holders of
the Company's outstanding voting stock immediately prior to such transaction
own, immediately after such transaction, securities representing less than fifty
percent (50%) or more of the voting power of the corporation or other entity
surviving such transaction. (d) The rights granted under Section 3 of this
Agreement shall expire upon the earliest of, and shall not be applicable to (i)
the first sale of Common Stock of the Company to the public after the date of
this Agreement effected pursuant to a registration statement filed with, and
declared effective by, the Securities and Exchange Commission (the Commission)
under the Securities Act, with proceeds of more than $7,500,000, (ii) four (4)
years from the date of this Agreement, and (iii) (A) the acquisition of all or
substantially all the assets of the Company or (B) an acquisition of the Company
by another corporation or entity by consolidation, merger or other
reorganization in which the holders of the Company's outstanding voting stock
immediately prior to such transaction own, immediately after such transaction,
securities representing less than fifty percent (50%) or more of the voting
power of the corporation or other entity surviving such transaction. (e) The
right of first refusal set forth in this Section 3 may be assigned or
transferred by any Holder only to a transferee or assignee of not less than 5%
of the outstanding capital stock of the Company (on a fully diluted basis),
provided that the Company is given written notice prior to the time of such
transfer or assignment, stating the name and address of the transferee or
assignee identifying the securities with respect to which registration rights
are being transferred or assigned and provided further that the transferee or
assignee of such rights assumes, in writing, prior to such transfer or
assignment, the obligation of such Holder under Section 3. (e) The right of
first refusal set forth in this Section 3 may be assigned or transferred by any
Holder only to a transferee or assignee of not less than 5% of the outstanding
capital stock of the Company (on a fully diluted basis), provided that the
Company is given written notice prior to the time of such transfer or
assignment, stating the name and address of the transferee or assignee
identifying the securities with respect to which registration rights are being
transferred or assigned and provided further that the transferee or assignee of
such rights assumes, in writing, prior to such transfer or assignment, the
obligation of such Holder under Section 3. SECTION 4
Miscellaneous
4.1 Governing Law. This Agreement shall be governed in all respects by the laws
of the State of California, as if entered into by and between California
residents exclusively for performance entirely within California.
4.2 Successors and Assigns. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
4.3 Entire Agreement; Amendment; Waiver. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated, except by a written instrument signed
by the Company and the holders in interest of at least sixty-six and two-thirds
percent (66 _%) of the then Registrable Securities and any such amendment,
waiver, discharge or termination shall be binding on all the Holders and other
parties hereto and beneficiaries hereof, but in no event shall the obligation of
any Holder hereunder be materially increased, except upon the written consent of
such Holder.
4.4 Notices, etc. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United States first-class
mail, postage prepaid, or delivered personally by hand or nationally recognized
courier addressed (a) if to a Holder, to the address set forth in the first
paragraph of this Agreement, or at such other address as such Holder or
permitted transferee shall have furnished to the Company in writing, or (b) if
to the Company, at, or at such other address as the Company shall have furnished
to each holder in writing. All such notices and other written communications
shall be effective (i) if mailed, five (5) days after mailing, (ii) if sent by a
nationally recognized overnight courier, one business day after delivery to such
courier, and (iii) if faxed or delivered, upon fax or delivery.
4.5 Delays or Omissions. No delay or omission to exercise any right, power or
remedy accruing to any Holder, upon any breach or default of the Company under
this Agreement shall impair any such right, power or remedy of such Holder nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under this Agreement or any waiver on the part
of any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or By law or otherwise
afforded to any Holder, shall be cumulative and not alternative.
4.6 Rights; Separability. Unless otherwise expressly provided herein, a Holder's
rights hereunder are several rights, not rights jointly held with any of the
other Holders. In case any provision of the Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
4.7 Information Confidential. Each Holder acknowledges that the information
received by them pursuant hereto may be confidential and for its use only, and
it will not use such confidential information in violation of the Exchange Act
or reproduce, disclose or disseminate such information to any other person
(other than its employees or agents having a need to know the contents of such
information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
4.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
4.9 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
4.10 Severability. If one or more provisions of this Agreement are held to be
unenforceable under applicable law, then such provision(s) shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision(s) were so excluded and shall be enforceable in accordance with
its terms.
4.11 Third Parties. Nothing in this Agreement, express or implied, is intended
to confer upon any person, other than the parties hereto and their successors
and assigns, any rights or remedies under or by reason of this Agreement. 4.12
Costs and Attorneys' Fees. In the event that any action, suit or other
proceeding is instituted concerning or arising out of this Agreement or any
transaction contemplated hereunder, the prevailing party shall recover all of
such party's costs and attorneys' fees incurred in each such action, suit or
other proceeding, including any and all appeals or petitions therefrom.
4.13 Adjustment for Stock Splits, Etc. Wherever in this Agreement there is a
reference to a specific number of shares of Common Stock or preferred stock of
the Company of any class or series, then, upon the occurrence of any
subdivision, combination or stock dividend of such class or series of stock, the
specific number of shares so referenced in this Agreement shall automatically be
proportionally adjusted to reflect the affect on the outstanding shares of such
class or series of stock by such subdivision, combination or stock dividend.
4.14 Aggregation of Stock. All shares held or acquired by affiliated entities or
persons shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have executed this Investor's Rights
Agreement effective as of the day and year first above written.
ZAP POWER SYSTEMS
By:________________________________
Name:_____________________________
Title:______________________________
RIDGEWOOD ZAP, LLC
By: Ridgewood Management Corporation, Manager
By:_______________________________
Name:____________________________
Title:_____________________________
BTV\125807.4
RIDGEWOOD ZAP, LLC
947 Linwood Avenue
Ridgewood, New Jersey 07450
as of March 29, 1999
Gary Starr, Managing Director
ZAP Power Systems, Inc.
117 Morris Street
Sebastopol, California 95472
Re: Common Stock Purchase Warrant
Dear Gary:
This letter agreement is intended to constitute a binding contract with respect
to our obligation to the exercise of the Common Stock Purchase Warrant dated as
of March 29, 1999 (the "Warrant") for the purchase of Common Stock of ZAP Power
Systems, Inc.
We hereby agree that the Warrant shall be exercised totally for all shares, not
partially, prior to December 29, 1999 ("Exercise Date") if, in the reasonable
judgment of the Warrantholder,
1. The Company has not experienced a material adverse change in its
financial condition or business prospects; and
2. The Company has satisfied the following milestones of performance:
(a) Completion of the acquisition of a model bike rental unit which has gross
income of at least $400,000 per annum for the last two calendar years;
(b) Completion of at least three of the following six joint marketing agreements
that are currently being pursued by the Company: MTV Networks; Baywatch
Television Series; Ford Motor Company; KOA, Disney and Huffy Bikes; and
(c) Completion of the following financial milestones for the period commencing
on January 1, 1999: Net Sales of $8,500,000; Gross Profit of $2,500,000; and Net
Profit of $350,000.
In the event that we wish to exercise the Warrant before the Exercise Date, we
will notify you of the proposed exercise date and you agree to furnish us with a
written certification from you, as Managing Director of ZAP Power Systems, that
the conditions set forth above have been satisfied. To the extent required by
us, you also agree to furnish us with copies of joint marketing agreements and
with a balance sheet dated within 30 days prior to the proposed exercise date
and an income statement for the 12-month period ending within 30 days prior to
the proposed exercise date.
Unless we have exercised the Warrant sooner, you agree to furnish us with the
information referenced in the preceding paragraph within 20 days prior to the
Exercise Date. If the conditions set forth in paragraphs numbered 1 and 2 above
are met, in our reasonable judgment, we will exercise the Warrant in accordance
with the procedures set forth in the Warrant.
This letter agreement shall be deemed a contract governed by the laws of
California. Please countersign below as an indication of your acceptance and
approval of the terms of this letter.
Sincerely yours,
RIDGEWOOD ZAP, LLC
By: Ridgewood Management Corporation
its Manager
By:_____________________
Authorized Agent
Accepted and Agreed:
ZAP POWER SYSTEMS
By:_____________________
Authorized Agent
BTV\126823.1
as of March 29, 1999
Ridgewood ZAP, LLC
947 Linwood Avenue
Ridgewood, New Jersey 07450
Attn: Robert L. Gold
Dear Gentlemen:
In order to induce Ridgewood ZAP, LLC ("Ridgewood") to enter into a certain
Stock and Warrant Purchase Agreement dated as of March 29, 1999 with ZAP Power
Systems ("ZAP"), for so long as Ridgewood owns not less than 5 percent of the
outstanding voting stock of ZAP, the undersigned shareholders of ZAP hereby
agree to vote all or such portion of their stock of ZAP as may be necessary to
cause to be elected to the Board of Directors of ZAP up to two persons nominated
by Ridgewood. In the event of the resignation of a director nominated by
Ridgewood, or a vacancy in any such position arising for any reason, the
undersigned shareholders agree to cause such vacancy to be filled with a person
nominated by Ridgewood. Ridgewood shall provide written or verbal notification
to the undersigned shareholders of its nominee(s) at or immediately prior to any
meeting called for the purpose of electing directors.
As of the date of this letter agreement, Ridgewood nominates, and the
undersigned shareholders agree to cause to be elected to the Board of Directors
the following individuals: Robert L. Gold and Douglas Wilson.
This letter agreement shall be deemed a contract governed by the laws of
California and shall be binding on the undersigned and any purchaser of shares
held by the undersigned.
Sincerely yours,
/s/ Gary D. Starr
Gary D. Starr, individually
/s/ James McGreen
James McGreen, individually
Accepted and Agreed:
RIDGEWOOD ZAP, LLC
By: Ridgewood Management Corporation
By:_____________________
MANAGEMENT AGREEMENT
AGREEMENT made as of the 9th day of February, 1998 by and between THE
RIDGEWOOD POWER GROWTH FUND, a Delaware business trust (the "Trust"), and
Ridgewood Power Corporation, a Delaware corporation (hereinafter referred to as
the "Management Company").
W I T N E S S E T H:
WHEREAS, the Trust is a business trust organized under The Delaware
Business Trust Act, as amended, and is engaged in business to invest in and
operate independent electric power projects and other projects as provided in
its Declaration of Trust, as amended (the "Declaration"); and
WHEREAS, the Management Company is the managing shareholder of the Trust
and will engage principally in rendering management, administrative and
investment advisory services to the Trust; and
WHEREAS, the Trust desires to retain the Management Company to render
management, administrative and certain investment advisory services to the Trust
in the manner and on the terms hereinafter set forth; and
WHEREAS, the Management Company is willing to provide management,
administrative and investment advisory services to the Trust on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Management Company hereby agree as
follows:
ARTICLE I
Duties of the Management Company
The Trust hereby employs the Management Company to furnish, or arrange for
affiliates of the Management Company to furnish, the management, administrative
and investment advisory services described below. The Management Company hereby
accepts such employment and agrees during such period, at its own expense, to
render, or arrange for the rendering of, such services and to assume the
obligations herein set forth for the compensation provided for herein.
(a) Management Services. The Management Company shall perform (or arrange
for the performance of) the management and administrative services necessary for
the operation of the Trust, including providing managerial assistance to
portfolio companies of the Trust and such other services related to investments
in non-utility generating facilities which sell electric and/or thermal power
and in other non-utility facilities, as shall be necessary for the operation of
the Trust. The Management Company shall also perform services related to
administering the accounts and handling relations with all holders of beneficial
interests in the Trust. The Management Company shall provide the Trust with
office space, equipment and facilities and such other services as the Management
Company shall from time to time determine to be necessary or useful to perform
its obligations under this Agreement. The Management Company shall also, on
behalf of the Trust, conduct relations with custodians, depositories, transfer
agents, other shareholder service agents, accountants, attorneys, underwriters,
brokers and dealers, corporate fiduciaries, insurers, banks and such other
persons in any such other capacity deemed to be necessary or desirable. The
Management Company shall furnish advice and recommendations with respect to such
other aspects of the business and affairs of the Trust as the Management Company
shall determine to be desirable.
(b) Investment Advisory Services. Pursuant to the Declaration, the
Management Company in its capacity as the managing shareholder of the Trust is
responsible for providing investment advisory services in connection with the
Trust's power and other project investments and in connection with the money
market securities or other non-power liquid investments held by the Trust (such
investments being referred to herein as the "Investments"). The Management
Company shall also provide the Trust with such investment research, advice and
supervision as the latter may from time to time consider necessary for the
proper supervision of the Investments and shall determine from time to time
which Investments shall be purchased, sold or exchanged and what portion of the
Trust's assets shall be held in the various money market securities or cash,
subject always to any restrictions of the Declaration, as amended from time to
time, and the Trust's investment objectives, investment policies and investment
restrictions as the same are set forth in the reports filed by the Trust under
the Securities Exchange Act of 1934, as amended. The Management Company shall
also make determinations with respect to the manner in which voting rights,
rights to consent to corporate action and any other rights pertaining to the
Trust's Investments shall be exercised. The Management Company shall take, on
behalf of the Trust, all actions which it deems necessary to implement its
investment policies. Subject to applicable provisions of law, the Management
Company may select brokers or dealers with which it or the Trust is affiliated
to effect the purchase or sale of Investments. The Management Company, in its
sole discretion, may engage professionals, consultants and other persons whose
expertise or qualifications may assist the Management Company or the Trust in
connection with the Trust's business and, if such persons are not affiliated
with the Management Company, may treat the costs and expenses so incurred as a
Trust expense.
ARTICLE II
Allocation of Charges and Expenses
(a) The Management Company. The Management Company assumes and shall pay
the expense for maintaining the staff and personnel necessary to perform its
obligations under this Agreement and shall at its own expense, provide the Trust
with office space, facilities, equipment and personnel necessary to carry out
its obligations hereunder. The Management Company will bear the administrative
and service expenses associated with the management services it is to provide
for the Investments of the Trust pursuant to the terms of this Agreement.
(b) The Trust. The Trust assumes and shall pay or cause to be paid all
other expenses of the Trust not expressly assumed by the Management Company,
including, without limitation: expenses of portfolio transactions, valuation
costs (including the quarterly calculation of net asset value), expenses of
printing reports and other documents distributed to the Securities and Exchange
Commission and holders of beneficial interests, Securities and Exchange
Commission and other regulatory fees, interest, taxes, fees and actual
out-of-pocket expenses of the Independent Panel Members of the Trust, fees for
legal, auditing and consulting services, litigation expenses, costs of printing
proxies and other expenses related to meetings of holders of beneficial
interest, postage and other expenses properly payable by the Trust.
ARTICLE III
Compensation of the Management Company
(a) Management Fee. For the services rendered, the facilities furnished and
the expenses assumed by the Management Company, the Trust shall pay to the
Management Company compensation which shall be at the annual rate of 2.5% of the
Capital Contributions of the Trust determined in the manner set forth in the
Confidential Memorandum ("Memorandum") of the Trust dated February 9, 1998. Such
fee is payable monthly in advance. To the extent that the Trust does not have
cash or readily marketable securities in an amount sufficient to pay the
management fee, the Trust will accrue such fee as a liability and pay the
accrued fee at such time as it has sufficient cash available to it. Interest on
the amount of the accrued fee will be assessed at the annual rate of ten percent
(10%).
(b) Other Fees. In connection with the offering of shares of beneficial
interest in the Trust ("Shares"), the Management Company is entitled to receive
an organizational, distribution and offering fee of 6% of each capital
contribution to the Trust to defray expenses incurred in the offer and sale of
the shares. In connection with the initial management of the capital
contributions, the Management Company is also entitled to receive an investment
fee of 2% of each capital contribution to the Trust for services in
investigating and evaluating investment opportunities. If the Management Company
or an affiliate performs brokerage services in connection with the acquisition
or disposition of Trust investments in the independent power industry (other
than the Trust's participation in or investments made through any entity
organized to develop multiple independent power projects), the entity providing
those services will be entitled to a brokerage fee of up to 2% of the gross
proceeds of the acquisition or disposition. Ridgewood Securities Corporation, an
affiliate of the Management Company, is acting as placement agent for the
offering of Shares and is entitled to a 1% placement fee from each capital
contribution and, to the extent it effects the sales of Shares as a
broker-dealer, to an 8% selling commission on each such Share. The Trust will
reimburse Ridgewood Energy Holding Corporation, the corporate trustee of the
Trust, for all actual and necessary expenses paid or incurred in connection with
the operation of the Trust, including the Trust's allocable share of the
corporate trustee's overhead. All these fees and expenses are to be paid
pursuant to the provisions of the Declaration.
(c) Expense Limitations. In the event the operating expenses of the Trust,
including amounts payable to the Management Company pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed any expense limitations applicable to the Trust imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Management Company shall reduce
its management fee hereunder by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Trust in the amount
of such excess; provided, however, to the extent permitted by law, there shall
be excluded from such expenses the amount of any interest, taxes, portfolio
transaction costs and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Trust. Whenever the expenses of the Trust exceed
a pro rata portion of the applicable annual expense limitations, the estimated
amount of reimbursement under such limitations shall be applicable as an offset
against the monthly payment of the fee due to the Management Company. Should two
or more such expense limitations be applicable as at the end of the last
business day of the month, that expense limitation which results in the largest
reduction in the Management Company's management fee shall be applicable.
ARTICLE IV
Limitation of Liability of the Management Company
(a) As more fully described in Article 3 of the Declaration, the Management
Company shall not be liable for any loss suffered by the Trust that arises out
of any action or inaction of the Trust, any Trust officers, agents or
affiliates, the Independent Panel Members, the Management Company, the Corporate
Trustee, or any affiliate of the Management Company or a Trustee, or any
director, officer or agent of those entities (collectively, "Managing Persons")
or out of any error of judgment or mistake of law, if the Managing Person
responsible, in good faith, determined that such course of action was in the
Trust's best interest and such course of conduct was within the scope of this
Management Agreement or the Declaration of Trust and did not constitute
negligence or misconduct of the Managing Persons involved.
(b) Indemnification. The provisions of Section 3.7 of the Declaration are
hereby incorporated by reference into this Management Agreement. The Management
Company shall be entitled to indemnification hereunder in each instance where
the "Managing Shareholder" is entitled to indemnification under said Section
3.7.
ARTICLE V
Activities of the Management Company
The services of the Management Company of the Trust to be performed under
this Management Agreement are not deemed to be exclusive, the Management Company
being free to render services to others. It is understood that affiliates of the
Trust (other than the Independent Panel Members) and holders of beneficial
interest of the Trust are or may become interested in the Management Company as
directors, officers, employees or shareholders of the Management Company or
otherwise and that the Management Company or its directors, officers, employees
or shareholders are or may become interested in the Trust as controlling persons
or officers (other than as an Independent Panel Member), holders of beneficial
interests or otherwise.
ARTICLE VI
Duration and Termination of this Contract
This Agreement shall become effective as of the date first above written
and shall remain in force indefinitely. This Agreement may be terminated at any
time, without the payment of any penalty, by vote of a majority of the
outstanding voting securities of the Trust, or by the Management Company, on
sixty days' written notice to the other party.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by the Independent Panel Members of the Trust by a vote
cast in person at a meeting called for the purpose of voting on such approval or
by the vote of a majority of the holders of outstanding voting securities of the
Trust.
ARTICLE VIII
Governing Law
This Agreement shall be construed in accordance with the laws of the State
of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
THE RIDGEWOOD POWER GROWTH FUND
By:
Robert E. Swanson
President
RIDGEWOOD POWER CORPORATION
By:
Robert E. Swanson
President
THE RIDGEWOOD POWER GROWTH FUND
KEY EMPLOYEES INCENTIVE PLAN
1. General. This Key Employees Incentive Plan (the "Plan") is adopted by
The Ridgewood Power Growth Fund, a Delaware business trust (the "Fund"). The
Plan will give certain individual key employees designated below ("Incentive
Plan Participants") of the Fund and its subsidiaries and affiliates an incentive
based upon the Fund's Incentive Shares ("Incentive Shares"). The Plan provides
for the grant of non-transferable options ("Share Options") for the purchase of
Incentive Shares, the grant of nontransferable Share appreciation rights based
on the appreciation of Incentive Shares ("SAR's"), the grant of restricted
Incentive Shares ("Restricted Shares") and the grant of bonus Incentive Shares
("Share Bonuses"). Capitalized terms not defined in this Plan shall have the
meanings assigned to them by the Fund's Declaration of Trust, as amended from
time to time.
1.1. Incentive Share Options. Share Options under the Plan may be granted
as incentive Share Options ("Incentive Share Options") that qualify under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
Share Options that do not so qualify ("Non-qualified Share Options"). No
provision of the Plan is intended or shall be construed to grant employees
alternative rights in any Incentive Share Option granted under the Plan so as to
prevent such Option from qualifying under Section 422 of the Code.
1.2. Federal Securities Laws. The Plan is intended to conform to the extent
necessary with all provisions of the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and any and all regulations and rules promulgated by the
Securities and Exchange Commission thereunder, including without limitation,
Rule 16b-3. Notwithstanding anything herein to the contrary, the Plan shall be
administered, and Share Options shall be granted and may be exercised, only in
such a manner as to conform to such laws, rules and regulations. To the extent
permitted by applicable law, the Plan and Share Options granted hereunder shall
be deemed amended to the extent necessary to conform to such laws, rules and
regulations.
1.3. Definitions. For purposes of the Plan
"affiliate" means any person or entity which is controlled by, controls or
is under common control with the Fund, including without limitation the Managing
Shareholders of the Fund;
"fair market value" of a Incentive Share on a particular date is the
average of the high and low sale prices on that date or the last preceding date
on which the Incentive Shares are traded (the "Trade Date") on the principal
securities exchange on which they are listed. If no such price exists, the fair
market value is computed as the average of the lowest bid price and highest ask
price on the Incentive Shares on the Trade Date in their principal medium of
quotation. If no such price exists, the fair market value shall be determined by
the Fund in good faith in a manner complying with the requirements of the
Internal Revenue Code of 1986, as amended, for valuation in connection with
Share Options, SAR's, Restricted Shares or Share Bonuses;
"Grants" mean grants of Share Options, SAR's, Restricted Shares or Share
Bonuses;
"incentive Share Option requirements" mean the provisions of the Internal
Revenue Code of 1986, as amended, or any successor statute, and all related
regulations, revenue rulings, case law and other legal authority governing the
granting of Incentive Share Options; and
a "subsidiary" consists of any corporation or business entity in which the
Fund directly or indirectly owns or controls 50% or more of the outstanding
stock or equity interests by value.
2. Effective Date of the Plan. The Plan is effective February 9, 1998. Each
Investor in the Fund consents to the Plan as a condition of subscribing for
Investor Shares. No further shareholder approval shall be required with respect
to the making of Grants pursuant to the Plan, except as provided in Section 12
hereof.
3. Administration of the Plan. The Plan shall be administered by the Boards
of Directors of the Managing Shareholders, acting together as a single group
(the "Board") or by a committee selected by the Board. The committee, or the
Board when acting in the absence of the committee, is referred to as the
"Committee" in this Plan.
3.1. Membership after Exchange Act Registration. At any time after
Incentive Shares are registered pursuant to the Exchange Act, (a) at least two
members of the Board must be members of the Committee, (b) the Committee shall
have no member who, during the one-year period immediately preceding such
person's election or appointment to the Committee, has received any Grants under
the Plan or any similar Share Option or stock incentive plan, other than a
formula-based plan as defined in Rule 16b-3 under the Exchange Act, maintained
by the Fund or any subsidiary or affiliated corporation and (c) no member of the
Committee shall be eligible to participate in the Plan while serving on the
Committee.
3.2. Procedure. A majority of the members of the Committee shall constitute
a quorum. The acts of a majority of the members present at any meeting at which
a quorum is present (or acts unanimously approved in writing by the members of
the Committee) shall constitute binding acts of the Committee.
3.3. Powers of the Committee. Subject to the terms and conditions of the
Plan, the Committee is authorized and empowered (a) To select the Incentive
Plan Participants to whom Grants may be made; (b) To determine the number
of Incentive Shares to be covered by any Grant; (c) To prescribe the terms
and conditions of any Grants made under the Plan, and the forms and
agreements used in connection
with such Grants, which shall include agreements governing the granting of Share
Options, SAR's and Restricted Shares, which may provide that the stock which is
the subject of any such Grant shall be subject to the restrictions on transfer
contained in any agreement in effect among the Fund and one or more of its
shareholders;
(d) To determine the time or times when Share Options and/or SAR's will be
granted and when they will terminate in whole or in part;
(e) To determine the time or times when Share Options and SAR's that are
granted may be exercised;
(f) To determine, at the time a Share Option is granted under the Plan,
whether such Share Option is an Incentive Share Option entitled to the Benefits
of Section 422 of the Code;
(g) To establish any other Share Option agreement provisions not
inconsistent with the terms and conditions of the Plan or, where the Share
Option is an Incentive Share Option, with the terms and conditions of Section
422 of the Code;
(h) To determine whether SAR's will be made part of any Grants consisting
of Share Options;
(i) To determine the terms and conditions of any Grant of Restricted Share
and the conditions under which the Grant vests; and (j) To determine the
circumstances under which the Trust will repurchase Incentive Shares
granted under the Plan upon the
cessation of any Incentive Plan Participant's employment with the Fund or its
Affiliates.
4. Employees Eligible for Grants. Incentive Plan Participants under the
Plan are key employees of the Fund or a subsidiary or an Affiliate whose
business benefits the Fund and who are designated from time to time by the
Committee in its sole and exclusive discretion. The Committee may designate or
terminate the designation of any individual at any time in its sole and complete
discretion. Designation, without more, shall not entitle any Incentive Plan
Participant to a Grant. Incentive Plan Participants may include, but shall not
necessarily be limited to, members of the Board of Directors (excluding members
of the Committee after Exchange Act registration) and officers of the Fund and
any subsidiary or Affiliate. Robert E. Swanson, however, is ineligible to be an
Incentive Plan Participant.
5. Shares Subject to the Plan. A number of Incentive Shares equal to 1/15
of the number of Investor Shares issued and outstanding as of the date the
initial offering of Investor Shares terminates, adjusted thereafter as described
in the Plan, have been reserved for issuance and are available for Grants.
Either Incentive Shares held as treasury stock or authorized and unissued
Incentive Shares, or both, may be so issued, in such amount or amounts within
the maximum limits of the Plan as the Committee shall from time to time
determine.
5.1. Exercised Shares not Available for Further Grant. If SAR's are granted
in tandem with a Share Option pursuant to Section 7 and such SAR's are
thereafter exercised in whole or in part, then such Share Option or the portion
thereof to which the duly exercised SAR's relate shall be deemed to have been
exercised for purposes of such Share Option. In the event SAR's are granted
other than in tandem with a Share Option and such SAR's are thereafter exercised
in whole or in part, the number of Incentive Shares available for issuance under
the Plan shall be reduced by the number of Incentive Shares covered by such
exercised SAR's.
5.2. Adjustments to Number of Shares. If, at any time subsequent to the
date of adoption of the Plan by the Board, the number of Incentive Shares are
increased or decreased, or changed into or exchanged for a different number or
kind of shares of stock or other securities of the Fund or of another
corporation (whether as a result of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation, merger, consolidation, recapitalization or
otherwise):
(a) there shall automatically be substituted for each Incentive Share
available for grant under the Plan or that have been granted as unvested
Restricted Shares, the number and kind of shares of stock or other securities
into which each outstanding Incentive Share shall be changed or for which each
such Incentive Share shall be exchanged;
(b) there shall automatically be substituted for each Incentive Share
subject to an unexercised Share Option or SAR (in whole or in part) granted
under the Plan, the number and kind of shares of stock or other securities into
which each outstanding Incentive Share shall be changed or for which each such
Incentive Share shall be exchanged and
(c) the option price per Incentive Share or unit of securities shall be
increased or decreased proportionately so that the aggregate purchase price for
the securities subject to a Share Option or SAR shall remain the same as
immediately prior to such event.
In addition to the foregoing, the Committee shall be entitled in the event of
any such increase, decrease or exchange of Incentive Shares to make other
adjustments to unvested Restricted Shares or the securities subject to a Share
Option or SAR, the provisions of the Plan, and to any related Restricted Share,
Share Option or SAR agreements (including adjustments which may provide for the
elimination of fractional shares), where necessary (under Section 422(a)(2) of
the Code or otherwise) to preserve the terms and conditions of any Grants
hereunder.
6. Share Option Provisions.
6.1. Conditions of Grant.
6.1.1. General. The Committee may grant to Incentive Plan Participants
(also referred to as "optionees") nontransferable Share Options that either
qualify as Incentive Share Options under Section 422 of the Code or do not so
qualify. The Committee may grant more than one Share Option, with or without
SAR's, to the same Incentive Plan Participant. The day on which the Committee
approves the granting of a Share Option shall be considered the date on which
such Option is granted.
6.1.2. Incentive Share Options. Any Incentive Share Option shall only be
granted within 10 years from February 9, 1998. Incentive Share Options shall
only be granted to Incentive Plan Participants while actually employed by the
Fund or a subsidiary or Affiliate.
6.2. Share Option Price.
6.2.1. Incentive Share Options. The option price per Incentive Share which
may be purchased under an Incentive Share Option under the Plan shall be
determined by the Committee at the time of Grant, but shall not be less than
100% of the fair market value of a Incentive Share, determined as of the date
such Option is granted; however, if a Incentive Plan Participant to whom an
Incentive Share Option is granted is, at the time of the grant of such Option,
the owner of more than 10% of the combined voting power of all classes of stock
of the Fund or any parent or subsidiary (a "Substantial Shareholder"), the price
per Incentive Share of such Option shall not be less than 110% of the fair
market value of a Incentive Share on the date such Option is granted.
6.2.2. Other Share Options. The option price per Incentive Share under each
Share Option granted pursuant to the Plan which is not an Incentive Share Option
shall be determined by the Committee at the time of Grant.
6.3. Period of Share Option. The Committee shall determine when each Share
Option is to expire. However, no Incentive Share Option shall be exercisable
after the expiration of 10 years from the date upon which such Option is
granted. Further, no Incentive Share Option granted to an employee who is a
Substantial Shareholder at the time of the grant of such Option shall be
exercisable after the expiration of five years from the date of grant of such
Option.
6.4. Limitation on Exercise and Transfer of Share Options. Only the person
to whom a Share Option is granted may exercise such Option, except where a
guardian or other legal representative has been duly appointed for such person,
and except as otherwise provided in the case of the optionee's death. No Share
Option granted hereunder shall be transferable by an optionee other than by will
or the laws of descent and distribution. No Share Option granted hereunder may
be pledged or hypothecated, nor shall any such Option be subject to execution,
attachment or similar process.
6.5. Employment, Holding Period Requirements For Certain Options. The
Committee may condition any Share Option granted hereunder upon the continued
employment of the optionee by the Fund or by a subsidiary corporation or
affiliated corporation, and may make any such Share Option immediately
exercisable. However, the Committee will require that, from and after the date
of grant of any Incentive Share Option granted hereunder until the day three
months prior to the date such Option is exercised, such optionee must be an
employee of the Fund or of a subsidiary or Affiliate, but always subject to the
right of the Fund or any such subsidiary or Affiliate to terminate such
optionee's employment during such period (except if the optionee's employment is
terminated due to death or permanent and total disability, in which event such
period shall be one year). Each Share Option shall be subject to such additional
restrictions as to the time and method of exercise as shall be prescribed by the
Committee. Upon compliance with any condition or requirement imposed by the
Committee pursuant to the foregoing, a Share Option or the appropriate portion
thereof may be exercised in whole or in part from time to time during the option
period; however, such exercise right(s) shall be limited to whole shares.
6.6. Payment for Share Option Price. A Share Option shall be exercised by
an optionee giving written notice to the Fund of his intention to exercise the
same, the exercise date and sufficient information to allow the Fund to
determine which Grant and the amount of the Grant that are being exercised. The
notice shall be accompanied by full payment of the purchase price in cash or by
check or, with the consent of the Committee, in whole or in part with a
surrender of Incentive Shares having a fair market value on the date of exercise
equal to that portion of the purchase price for which payment in cash or check
is not made. The Committee may, in its sole discretion, approve other methods of
exercise for a Share Option or payment of the option price, provided that no
such method shall cause any option granted under the Plan as an Incentive Share
Option to not qualify under Section 422 of the code, or cause any Incentive
Share issued in connection with the exercise of an option not to be a fully paid
and non-assessable Incentive Share.
6.7. Cancellation and Replacement of Share Options and Related Rights. The
Committee may at any time or from time to time permit the voluntary surrender by
an optionee who is the holder of any outstanding Share Options under the Plan,
where such surrender is conditioned upon the granting to such optionee of new
Share Options for such number of shares as the Committee shall determine, or may
require such a voluntary surrender as a condition precedent to the grant of new
Share Options. The Committee shall determine the terms and conditions of new
Share Options, including the prices at and periods during which they may be
exercised, in accordance with the provisions of the Plan, all or any of which
may differ from the terms and conditions of the Share Options surrendered. Any
such new Share Options shall be subject to all the relevant provisions of this
Plan. The Incentive Shares subject to any Share Option so surrendered, and/or
any Incentive Shares subject to any Share Option that has lapsed, been
forfeited, or been canceled and extinguished in connection with the exercise of
an SAR, shall no longer be charged against the limitation provided in Section 5
of this Plan and may again become shares subject to the Plan. The granting of
new Share Options in connection with the surrender of outstanding Share Options
under this Plan shall be considered for the purposes of the Plan as the granting
of new Share Options and not an alteration, amendment or modification of the
Plan or of the Share Options being surrendered.
6.8. Limitation on Exercisable Incentive Share Options. If the aggregate
fair market value of the Incentive Shares first becoming subject to exercise as
Incentive Share Options by a Incentive Plan Participant during any given
calendar year exceeds the sum of $100,000, such Share Option shall be treated,
to the extent of such excess, as an option which does not qualify as an
Incentive Share Option. Such aggregate fair market value shall be determined as
of the date such Option is granted, taking into account, in the order in which
granted, any other incentive Share Options granted by the Fund, or by a parent
or subsidiary thereof.
6.9. Withholding of Taxes. The Committee may, in its sole discretion,
require, as a condition to any Grant or to the delivery of certificates for
shares issued hereunder, that the optionee pay to the Fund, in cash, any
federal, state or local taxes of any kind required by law to be withheld with
respect to any Grant or any delivery of Incentive Shares upon exercise thereof.
The Committee, in its sole discretion, may permit optionees to pay such taxes
through the withholding of Incentive Shares otherwise deliverable to such
optionee in connection with such Grant or the delivery to the Fund of Incentive
Shares otherwise acquired by the optionee. The Fair Market Value of Incentive
Shares withheld by the Fund or tendered to the Fund for the satisfaction of tax
withholding obligations under this Section 6.10 shall be determined on the date
such Incentive Shares are withheld or tendered. The Fund, to the extent
permitted or required by law, shall have the right to deduct from any payment of
any kind (including salary, bonus, severance or insurance proceeds) otherwise
due to an optionee any federal, state or local taxes of any kind required by law
to be withheld with respect to any Grant or to the delivery of Incentive Shares
under the Plan, or to retain or sell without notice a sufficient number of
Incentive Shares to be issued to such optionee to cover any such taxes, provided
that the Fund shall not sell any such Incentive Shares if such sale would be
considered a sale by such optionee for purposes of Section 16 of the Exchange
Act.
7. Stock Appreciation Rights. A Incentive Plan Participant may be granted
the right to receive a payment based on the increase in the value of Incentive
Shares occurring after the date of such Grant. Such rights shall be known as
Share Appreciation Rights ("SAR's"). SAR's may (but need not) be granted to a
Incentive Plan Participant in tandem with, and exercisable in lieu of
exercising, a Grant of Share Options. No optionee shall be entitled to SAR
rights solely as a result of the grant of a Share Option to him.
7.1. Procedure for Grant. SAR's will be specifically granted upon terms and
conditions specified by the Committee, if the Fund is the employer of the
Incentive Plan Participant, or by a subsidiary or affiliated corporation subject
to the Committee's approval, if such subsidiary or affiliated corporation is the
employer of the Incentive Plan Participant. The terms of SAR's granted in tandem
with a Share Option will be contained in the Share Option agreement in forms
approved by the Committee and not inconsistent with this Plan. Each of those
agreements will include the option price per share, which shall be the "Base
Price" against which the SAR will be valued, the periods during which the SAR
can be exercised, the amounts exercisable at each time and any other conditions.
If an SAR is granted independent of Share Options, the Base Price will be
determined by the Committee and that price and the other information described
above will be contained in an SAR agreement to be executed by the holder and the
Fund.
7.2. Valuation of SAR's . When granted in tandem with a Share Option, an
SAR shall provide that the holder of a Share Option shall have the right to
receive an amount equal to 100% of the excess, if any, of the fair market value
of the Incentive Shares covered by such Option, determined as of the date of
exercise of such SAR by the Committee (in the same manner as such value is
determined for purposes of the granting of Share Options), over the price to be
paid for such Incentive Shares under such Option. If SAR's are granted
independently of a Share Option, they will be granted with respect to a fixed
number of Incentive Shares available for Grant under the Plan. In that event,
the SAR will entitle its holder to receive the excess, if any, of the fair
market value of the Incentive Shares covered by the SAR as of the exercise date
of the SAR over the SAR Base Price.
7.3. Exercise of SAR's. SAR's, if granted, may only be exercised by the
holder thereof, and, unless otherwise provided in the applicable SAR agreement,
may be exercised either with respect to all, or a portion, of the amount of the
Grant exercisable at that time. A SAR shall be exercised by its holder's giving
written notice to the Fund of the intention to exercise the same, the exercise
date and sufficient information to allow the Fund to determine which Grant and
the amount of the Grant that are being exercised. If a SAR is granted in tandem
with a Share Option, it cannot be exercised unless (i) such person is then
permitted to exercise the Share Option or the portion thereof with respect to
which such SAR's relate, and (ii) the fair market value of the Incentive Shares
covered by the Share Option, determined as provided above, exceeds the option
price of such Incentive Shares.
7.4. Payment under SAR. Payment on exercise of a SAR shall be made by the
employer of the Incentive Plan Participant, in one or more of the following
manners, as determined by the Committee:
(a) cash (or check);
(b) fully paid Incentive Shares having a fair market value equal to such
amount; or (c) a combination of cash (or check) and Incentive Shares.
A SAR granted in tandem with a Share Option shall be modified under Sections
6.7-6.9 at the same time and to the extent that the underlying Share Option is
modified. Other SAR's are subject to Sections 6.7 and 6.9 as if the exercise of
the SAR was the exercise of a Share Option.
7.5. Other Provisions. Upon the exercise of any SAR's, the Share Option, or
that portion thereof to which such SAR's relate, shall be canceled and
automatically extinguished. The granting of a Share Option or SAR shall impose
no obligation upon the optionee to exercise such Share Option or SAR. The Fund's
or a subsidiary corporation's obligation to satisfy SAR's shall not be funded or
secured in any manner. No SAR granted hereunder shall be transferable by the
Incentive Plan Participant granted such SAR, other than by will or the laws of
descent and distribution.
7.6. Section 16 Compliance. After the Grant of an SAR, an optionee
intending to rely on an exemption from Section 16(b) of the Exchange Act shall
be required to hold such SAR for six months from the date the price for such SAR
is fixed to the date of cash settlement. Additionally, in order to remain exempt
from Section 16(b) of the Exchange Act, a SAR must be exercised by an optionee
subject to such Section only during the period beginning on the third business
day following the release of a summary statement of the Fund's quarterly or
annual sales and earnings and ending on the twelfth business day following said
date.
8. Restricted Shares.
(a) Grant. The Committee shall determine the Incentive Plan Participants to
whom, and the time or times at which, Grants of Restricted Shares will be made,
the number of Restricted Shares to be granted, the price (if any) to be paid by
such Incentive Plan Participants (subject to Section 8(b)), the time or times
within which such Restricted Share grants may be subject to forfeiture, and the
other terms and conditions of the grants in addition to those set forth in
Section 8(b). The Committee may condition the grant of Restricted Shares upon
the attainment of specified performance goals or such other factors as the
Committee may determine in its sole discretion.
(b) Terms and Conditions. Restricted Shares granted under the Plan shall
contain any terms and conditions, not inconsistent with the provisions of the
Plan, which are deemed desirable by the Committee. A Incentive Plan Participant
who receives a grant of Restricted Shares shall not have any rights with respect
to such Grant unless and until such Incentive Plan Participant has executed an
agreement evidencing such Grant in the form approved from time to time by the
Committee, has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such Grant. In
addition, Restricted Shares granted under the Plan shall be subject to the
following terms and conditions:
(i) The purchase price for Restricted Shares will be specified by the
Committee.
(ii) Grants of Restricted Shares shall only be accepted by executing a
Restricted Share agreement and paying, in cash or by check, whatever price (if
any) if required under Section 8(b)(i).
(iii) Each Incentive Plan Participant granted Restricted Shares shall be
issued a Share certificate in respect of such Restricted Shares. Such
certificate shall be registered in the name of such Incentive Plan Participant
and shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such Grant.
(iv) Any Share certificates evidencing Restricted Shares shall either (A)
be held in custody by the Fund until the employment and other restrictions
thereon shall all have lapsed; or (B) be affixed with a legend, identifying such
Shares as Restricted Shares and expressly prohibiting the sale, transfer,
tender, pledge, assignment or encumbrance of such Shares, as the Committee shall
determine. With respect to any Restricted Shares held in custody by the Fund,
the Incentive Plan Participant granted such Restricted Share shall deliver to
the Fund a Share power, endorsed in blank, relating to the Restricted Shares.
With respect to any Restricted Shares held by a Incentive Plan Participant under
legend, the Incentive Plan Participant granted such Restricted Shares shall
deliver to the Fund an acknowledgment that such Shares remain subject to a
substantial risk of forfeiture in the event of termination of employment under
certain circumstances, and that the certificates representing ownership of such
Shares will be surrendered to the Fund immediately upon any such termination of
employment.
(v) Subject to the provisions of the Plan and the Restricted Share
agreement, during a temporal period set by the Committee and commencing with the
date of such Grant (the "Restriction Period"), a Incentive Plan Participant
shall not be permitted to sell, transfer, tender, pledge, assign or otherwise
encumber any Restricted Share granted under the Plan. However, the Committee, in
its sole discretion, may provide for the lapse of such transfer or other
restrictions in installments, or accelerate or waive such restrictions in whole
or in part, based on service, performance or other factors and criteria selected
by the Committee.
(vi) Except as provided in this Section 8(b)(vi) and in Section 8(b)(v), a
Incentive Plan Participant shall have, with respect to Restricted Shares granted
to him, all of the rights of a shareholder of the Fund, including the right to
vote such Shares. Any distributions thereon shall be held by the Fund until the
restrictions on those Shares terminate, at which time they shall be paid without
interest to the Incentive Plan Participant. The Committee, in its sole
discretion and as determined at the time of a Grant of Restricted Shares, may
permit or require cash dividends otherwise due and payable to be reinvested
either in additional Restricted Shares (to the extent available). Share
dividends issued with respect to Restricted Shares shall be treated as
additional Restricted Shares. As Restricted Shares, such additional Shares will
be subject to the same restrictions, terms and conditions applicable to the
Restricted Shares with respect to which such additional Shares were issued.
(vii) No Restricted Share shall be transferable by a Incentive Plan
Participant other than by will or by the laws of descent and distribution.
(viii) In the event Restricted Shares are forfeited by a Incentive Plan
Participant, the Fund will refund to such Incentive Plan Participant any
payment(s) made by such Incentive Plan Participant to purchase such Share,
promptly upon such forfeiture (and any corresponding surrender of Share
certificates).
(c) Minimum Value Provisions. To ensure that Grants of Restricted Shares
actually reflect the performance of the Fund and service of the Incentive Plan
Participant, the Committee may provide, in its sole discretion, for a tandem
performance-based award, or other grant, designed to guarantee a minimum value,
payable in cash or Incentive Shares, to the recipient of a Restricted Share
Grant, subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
9. Share Bonuses. The Committee at any time may award a Share Bonus to an
Incentive Plan Participant. Incentive Plan Participants are not required to make
any payment for Share Bonuses but may be required to pay income taxes on the
fair market value of the Grant. The Fund may require the Participant to make a
cash payment to the Fund equal to the amount of tax withholding required on the
Grant or may withhold a portion of the Share Bonus to fund the withholding
requirement, in the Committee's discretion.
10. Termination of Employment. If a Incentive Plan Participant ceases to be
an employee of the Fund or any of its subsidiaries or affiliates, for a reason
other then death, retirement, permanent and total disability (as defined below),
his Grants of Stock Options and SAR's shall, unless extended by the Committee on
or before his date of termination of employment, terminate on the effective date
of such termination of employment. Neither the Incentive Plan Participant nor
any other person shall have any right after such date to exercise all or any
part of his Share Options or SAR's.
10.1. Automatic Extension of Exercise Period. If termination of employment
is due to death or permanent and total disability, then outstanding Share
Options and SAR's may be exercised within the one year period ending on the
anniversary of such death or permanent and total disability In the case of
death, such outstanding Share Options and SAR's may be exercised by the holder's
personal representative, or the person designated by such Incentive Plan
Participant by will, or as otherwise designated by the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Share Option
or SAR be exercisable after the expiration of the option period, and in the case
of exercises made after a Incentive Plan Participant's death, not to any greater
extent than such Incentive Plan Participant would have been entitled to exercise
such Option or SAR at the time of his death..
10.2. Retirement. Subject to the discretion of the Committee, in the event
a Incentive Plan Participant terminates employment with the Fund and all
subsidiary or affiliated corporations because of normal or early retirement
under any pension plan or retirement plan hereafter adopted by the Fund or the
employer, (a) any then-outstanding Share Options and/or SAR's held by such
Incentive Plan Participant shall lapse at the end of the term of such Share
Option or SAR, or 30 days after such retirement, whichever first occurs.
10.3. Definitions. For purposes hereof, "permanent and total disability"
means a permanent and total disability as defined in Section 22(e)(3) of the
Code. In the event an employee of the Fund or one of its subsidiary corporations
is granted a leave of absence by the Fund or such subsidiary corporation to
enter military service or because of sickness, his employment with the Fund or
such subsidiary corporation shall not be considered terminated, and he shall be
deemed an employee of the Fund or such subsidiary corporation during such leave
of absence or any extension thereof granted by the Fund or such subsidiary
corporation.
11. Amendments to Plan. The Committee is authorized to interpret this Plan
and from time to time adopt any rules and regulations for carrying out this Plan
that it may deem advisable. The Board may at any time amend, modify, suspend or
terminate this Plan or the Committee may take such action with the approval of
the Board. In no event, however, without the approval of shareholders, shall any
action of the Committee or the Board of Directors result in:
(a) Materially amending, modifying or altering the eligibility requirements
provided in Section 4 hereof;
(b) Increasing, except as provided in Section 5 hereof, the maximum number
of Incentive Shares or SAR's that may be made subject to Grants; or
(c) Materially increasing the benefits accruing to participants under
this Plan; except to conform this Plan and any agreements made hereunder to
changes in the Code or required by governing law.
12. Investment Representation, Approvals and Listing. The Committee may, if
it deems appropriate, condition its grant of any
Share Option, SAR, Restricted Shares or Share Bonuses hereunder upon receipt of
the following investment representation from the optionee: "I agree that any
Incentive Shares of [the issuer] (the "Fund") which I may acquire by virtue of
this [Share Option] shall be acquired for investment purposes only and not with
a view to distribution or resale, and may not be transferred, sold, assigned,
pledged, hypothecated or otherwise disposed of by me unless (i) a registration
statement or post-effective amendment to a registration statement under the
Securities Act, with respect to said Incentive Shares has become effective so as
to permit the sale or other disposition of said shares by me; or (ii) there is
presented to the Fund. an opinion of counsel satisfactory to the Fund and its
counsel to the effect that the sale or other proposed disposition of said
Incentive Shares by me may lawfully be made otherwise than pursuant to an
effective registration statement or post-effective amendment to a registration
statement relating to the said shares under the Securities Act of 1933, as
amended." The Fund shall not be required to issue any certificate or
certificates for Incentive Shares on any Grant or upon the exercise of any Share
Option or an SAR granted under this Plan prior to (a) the obtaining of any
approval from any governmental agency which the Committee shall, in its sole
discretion, determine to be necessary or advisable; (b) the admission of such
shares to listing on any national securities exchange on which the Incentive
Shares may be listed; (c) the completion of any registration or other
qualifications of the Incentive Shares under any state or federal law or ruling
or regulations of any governmental body which the Committee shall, in its sole
discretion, determine to be necessary or advisable or the determination by the
Committee, in its sole discretion, that any registration or other qualification
of the Incentive Shares is not necessary or advisable; or (d) the obtaining of
an investment representation from the optionee in the form stated above or in
such other form as the Committee, in its sole discretion, shall determine to be
adequate.
13. General Provisions. The form and substance of Share Option agreements,
SAR agreements and Restricted Stock agreements made hereunder, whether granted
at the same or different times, need not be identical. Nothing in this Plan or
in any Share Option, SAR or Restricted Stock agreement shall confer upon any
employee any right to continue in the employ of the Fund or any of its
subsidiary corporations or Affiliates or to interfere with or limit the right of
the Fund or any subsidiary or Affiliate to terminate his employment at any time,
with or without cause. Nothing contained in this Plan or in any Share Option,
SAR or Restricted Stock agreement shall be construed as entitling any Incentive
Plan Participant to any rights of a shareholder as a result of the Grant of a
Share Option or an SAR, until such time as Incentive Shares are actually issued
to such optionee pursuant to the exercise of such Option or SAR. This Plan may
be assumed by the successors and assigns of the Fund. The liability of the Fund
under this Plan and any sale made hereunder is limited to the obligations set
forth herein with respect to such sale and no term or provision of this Plan
shall be construed to impose any liability on the Fund in favor of any employee
(or any other party acting on his behalf or in his stead) with respect to any
loss, cost or expense which such employee or party may incur in connection with
or arising out of any transaction in connection with this Plan. The expense of
administering this Plan shall be borne by the Fund. The captions and section
numbers appearing in this Plan are inserted only as a matter of convenience.
They do not define, limit, construe or describe the scope or intent of the
provisions of this Plan. This Plan and the agreements issued under it are the
entire agreement among the Fund and the Incentive Plan Participants. This Plan
shall be governed by the law of the State of Delaware. All actions taken by the
Committee or the Fund under the Plan or with respect to Share Options, SAR's,
Restricted Shares or Incentive Shares thereunder are final and binding on all
persons, and no member of the Committee or person acting on behalf of the Fund
or an employer shall be liable for any action taken or determination made
relating to the Plan, except for willful misconduct.
14. Provisions Applicable Solely to Insiders. The following provisions
shall apply only to persons who are subject to Section 16 of the Exchange Act
with respect to securities of the Fund ("Insiders"), and shall apply to Insiders
notwithstanding any provisions of the Plan to the contrary:
14.1 Compliance with Statute. No Insider shall be permitted to transfer any
security of the Fund acquired by him, except to the extent permitted by Section
16(b) of the Exchange Act and the regulations promulgated thereunder.
14.2. Limitation on Satisfying Withholding Obligations with Incentive
Shares. An Insider may elect to have shares withheld from a Grant or tender
shares to the Fund in order to satisfy the tax withholding consequences of a
Grant only during the period beginning on the third business day following the
date on which the Fund releases the financial information specified in 17 C.F.R.
Section 240.16b-3(e)(1)(ii) and ending on the twelfth business day following
such date. Notwithstanding the foregoing, an Insider may elect to have shares
withheld from a Grant in order to satisfy tax withholding consequences thereof
by providing the Fund with a written election to so withhold at least six months
in advance of the withholding of shares otherwise issuable upon exercise of a
Share Option.
15. Provisions Affecting Incentive Plan Participants Prior to Liquidity
Event. If for any reason a Share Option or SAR becomes exercisable and is held
by a person who is not, or who does not claim through, an employee of the Fund
or its successor or an Affiliate or subsidiary of the Fund or its successor, and
if the Incentive Shares are not listed or quoted on a national securities
exchange or a national quotation system during the period beginning 90 days
before the Share Option or SAR becomes exercisable and ending upon an exercise,
the Fund or the employer of the optionee shall have the option but not the
obligation to redeem the Share Option or SAR in cash for an amount equal to the
amount, in the case of a Share Option, payable on an SAR granted in tandem with
the Share Option and exercised on the later of the date the Share Option became
exercisable or the date on which the Fund elected to exercise this right, and,
in the case of an SAR, the value of the SAR.
16. Termination of this Plan. This Plan shall terminate on February 8,
2008, and thereafter no Share Options, Restricted Shares, Share Bonuses or SAR's
shall be granted hereunder. All Share Options, SAR's and Restricted Shares
outstanding at the time of termination of this Plan shall continue in full force
and effect according to their terms and the terms and conditions of this Plan.
AGREEMENT OF MERGER
This AGREEMENT OF MERGER, dated, this ___ day of April, 1999, entered
into pursuant to Section 264 of Title 8 of the General Corporation Law of
Delaware and Section 2B-20(b) of Title 42 of the New Jersey Limited Liability
Company Act, is between Ridgewood Power Corporation, a Delaware corporation (the
"Non-Surviving Corporation") and Ridgewood Power LLC, a New Jersey limited
liability company (the "Surviving Company").
WITNESSETH that:
WHEREAS, the Non-Surviving Corporation and the Surviving Company desire
to merge into a single limited liability company;
NOW, THEREFORE, the parties to this Agreement, in consideration of the
mutual covenants, agreements and provisions hereinafter contained, do hereby
prescribe the terms and conditions of said merger and mode of carrying the same
into effect as follows:
FIRST: The Non-Surviving Corporation hereby merges itself into and with
the Surviving Company, which shall be the surviving company and which shall be
governed by the laws of the State of New Jersey.
SECOND: Upon the filing of the appropriate Certificate of Merger in the
Office of the Secretary of State of Delaware, the separate corporate existence
of the Non-Surviving Corporation shall terminate.
THIRD: The manner of converting the outstanding shares of the capital
stock of the Non-Surviving Corporation, and the membership interests in the
Surviving Company existing prior to the effective date of the merger, into
membership interests in the Surviving Company after the effective date of the
mergers shall be as follows:
<PAGE>
(a) All shares of common stock of the Non-Surviving
Corporation which shall be issued and outstanding on the effective date of this
merger, and all rights in respect thereof, shall from and after the effective
date of the merger be converted into 100% of the membership interests in the
Surviving Company, with each such share representing a proportional membership
interest. The rights and obligations of the holders of such shares as members of
the Surviving Company are as set forth in the operating agreement of the
Surviving Company.
(b) Each membership interest of the Surviving Company which
shall be issued and outstanding on the effective date of the merger, and all
rights in respect thereof, shall from and after the effective date of the merger
be converted to cash in the amount of $100.00.
FOURTH: The terms and conditions of the merger are as follows:
(a) The operating agreement of the Surviving Company as it shall exist
on the effective date of this merger shall be and remain the operating agreement
of the Surviving Company after the effective date of the merger until the same
shall be altered, amended or repealed as therein provided.
(b) The manager and officers of the Surviving Company holding offices
immediately prior to the effective date of the merger shall continue in such
offices as the manager and officers of the Surviving Company after the effective
date of the merger until their respective successors shall have been designated
or elected and qualified.
(c) The merger shall become effective upon filing a Certificate of
Merger with the Secretary of State of Delaware and a Certificate of Merger with
the Secretary of State of New Jersey.
<PAGE>
(d) Upon the merger becoming effective, all the property, rights,
privileges, franchises, patents, trademarks, licenses, registrations and other
assets of every kind and description of the Non-Surviving Corporation shall be
transferred to, vested in and devolve upon the Surviving Company without further
act or deed and all property, rights and every other interest of the
Non-Surviving Corporation and the Surviving Company shall be as effectively the
property of the Surviving Company after the effective date of the merger as they
were of the Non-Surviving Corporation and the Surviving Company respectively
immediately prior to the effective date of the merger. The Non-Surviving
Corporation hereby agrees from time to time, as and when requested by the
Surviving Company or by its successors or assigns, to execute and deliver or
cause to be executed and delivered all such deeds and instruments and to take or
cause to be taken such further or other action as the Surviving Company may deem
necessary or desirable in order to vest in and confirm to the Surviving Company
title to and possession of any property of the Non-Surviving Corporation
acquired or to be acquired by reason of or as a result of the merger herein
provided for and otherwise to carry out the intent and purposes hereof, and the
proper officers and directors of the Non-Surviving Corporation and the proper
officers and directors of the Surviving Company are fully authorized in the name
of the Non-Surviving Corporation or otherwise to take any and all such action.
<PAGE>
(e) The Surviving Company may be served with process in the State of
Delaware in any proceeding for enforcement of any obligation of Non-Surviving
Corporation as well as for enforcement of any obligation of the Surviving
Company arising from the merger, including any suit or other proceeding to
enforce the right of any stockholder as determined in appraisal proceedings
pursuant to the provisions of Section 262 of the General Corporation Law of
Delaware, and the Surviving Company does hereby irrevocably appoint the
Secretary of State of Delaware as its agent to accept service of process in any
such suit or other proceeding. The address to which a copy of such process shall
be mailed by the Secretary of State of Delaware is Ms. Mirna Valdes, Assistant
Secretary, Ridgewood Power LLC, 947 Linwood Avenue, Ridgewood, New Jersey,
07450, until the Surviving Company shall have hereafter designated in writing to
the said Secretary of State a different address for such purpose. Service of
such process may be made by personally delivering to and leaving with the
Secretary of State of Delaware duplicate copies of such process, one of which
copies the Secretary of State of Delaware shall forthwith send by registered
mail to Ridgewood Power LLC at the above address.
FIFTH: Anything herein or elsewhere to the contrary notwithstanding,
this Agreement may be terminated and abandoned by the President or the Executive
Vice President of any constituent entity at any time prior to the time that this
merger becomes effective.
IN WITNESS WHEREOF, the parties to this Agreement, have caused these
presents to be executed by the President of each party hereto as the respective
act, deed and agreement of each of said entities, on this ___ day of April,
1999.
Ridgewood Power Corporation, a Delaware Corporation
By:__________________________________
Robert E. Swanson, President
Ridgewood Power LLC, a New Jersey Limited Liability Company
By: __________________________________
Robert E. Swanson, President
BTV\128508.2
AGREEMENT OF MERGER
This AGREEMENT OF MERGER, dated, this ___ day of April, 1999, entered
into pursuant to Section 264 of Title 8 of the General Corporation Law of
Delaware and Section 2B-20(b) of Title 42 of the New Jersey Limited Liability
Company Act, is between Ridgewood Power VI Corporation, a Delaware corporation
(the "Non-Surviving Corporation") and Ridgewood Power VI LLC, a New Jersey
limited liability company (the "Surviving Company").
WITNESSETH that:
WHEREAS, the Non-Surviving Corporation and the Surviving Company desire
to merge into a single limited liability company;
NOW, THEREFORE, the parties to this Agreement, in consideration of the
mutual covenants, agreements and provisions hereinafter contained, do hereby
prescribe the terms and conditions of said merger and mode of carrying the same
into effect as follows:
FIRST: The Non-Surviving Corporation hereby merges itself into and with
the Surviving Company, which shall be the surviving company and which shall be
governed by the laws of the State of New Jersey.
SECOND: Upon the filing of the appropriate Certificate of Merger in the
Office of the Secretary of State of Delaware, the separate corporate existence
of the Non-Surviving Corporation shall terminate.
THIRD: The manner of converting the outstanding shares of the capital
stock of the Non-Surviving Corporation, and the membership interests in the
Surviving Company existing prior to the effective date of the merger, into
membership interests in the Surviving Company after the effective date of the
mergers shall be as follows:
<PAGE>
(a) All shares of common stock of the Non-Surviving
Corporation which shall be issued and outstanding on the effective date of this
merger, and all rights in respect thereof, shall from and after the effective
date of the merger be converted into 100% of the membership interests in the
Surviving Company, with each such share representing a proportional membership
interest. The rights and obligations of the holders of such shares as members of
the Surviving Company are as set forth in the operating agreement of the
Surviving Company.
(b) Each membership interest of the Surviving Company which
shall be issued and outstanding on the effective date of the merger, and all
rights in respect thereof, shall from and after the effective date of the merger
be converted to cash in the amount of $100.00.
FOURTH: The terms and conditions of the merger are as follows:
(a) The operating agreement of the Surviving Company as it shall exist
on the effective date of this merger shall be and remain the operating agreement
of the Surviving Company after the effective date of the merger until the same
shall be altered, amended or repealed as therein provided.
(b) The manager and officers of the Surviving Company holding offices
immediately prior to the effective date of the merger shall continue in such
offices as the manager and officers of the Surviving Company after the effective
date of the merger until their respective successors shall have been designated
or elected and qualified.
(c) The merger shall become effective upon filing a Certificate of
Merger with the Secretary of State of Delaware and a Certificate of Merger with
the Secretary of State of New Jersey.
<PAGE>
(d) Upon the merger becoming effective, all the property, rights,
privileges, franchises, patents, trademarks, licenses, registrations and other
assets of every kind and description of the Non-Surviving Corporation shall be
transferred to, vested in and devolve upon the Surviving Company without further
act or deed and all property, rights and every other interest of the
Non-Surviving Corporation and the Surviving Company shall be as effectively the
property of the Surviving Company after the effective date of the merger as they
were of the Non-Surviving Corporation and the Surviving Company respectively
immediately prior to the effective date of the merger. The Non-Surviving
Corporation hereby agrees from time to time, as and when requested by the
Surviving Company or by its successors or assigns, to execute and deliver or
cause to be executed and delivered all such deeds and instruments and to take or
cause to be taken such further or other action as the Surviving Company may deem
necessary or desirable in order to vest in and confirm to the Surviving Company
title to and possession of any property of the Non-Surviving Corporation
acquired or to be acquired by reason of or as a result of the merger herein
provided for and otherwise to carry out the intent and purposes hereof, and the
proper officers and directors of the Non-Surviving Corporation and the proper
officers and directors of the Surviving Company are fully authorized in the name
of the Non-Surviving Corporation or otherwise to take any and all such action.
<PAGE>
(e) The Surviving Company may be served with process in the State of
Delaware in any proceeding for enforcement of any obligation of Non-Surviving
Corporation as well as for enforcement of any obligation of the Surviving
Company arising from the merger, including any suit or other proceeding to
enforce the right of any stockholder as determined in appraisal proceedings
pursuant to the provisions of Section 262 of the General Corporation Law of
Delaware, and the Surviving Company does hereby irrevocably appoint the
Secretary of State of Delaware as its agent to accept service of process in any
such suit or other proceeding. The address to which a copy of such process shall
be mailed by the Secretary of State of Delaware is Ms. Mirna Valdes, Assistant
Secretary, Ridgewood Power VI LLC, 947 Linwood Avenue, Ridgewood, New Jersey,
07450, until the Surviving Company shall have hereafter designated in writing to
the said Secretary of State a different address for such purpose. Service of
such process may be made by personally delivering to and leaving with the
Secretary of State of Delaware duplicate copies of such process, one of which
copies the Secretary of State of Delaware shall forthwith send by registered
mail to Ridgewood Power VI LLC at the above address.
FIFTH: Anything herein or elsewhere to the contrary notwithstanding,
this Agreement may be terminated and abandoned by the President or the Executive
Vice President of any constituent entity at any time prior to the time that this
merger becomes effective.
IN WITNESS WHEREOF, the parties to this Agreement, have caused these
presents to be executed by the President of each party hereto as the respective
act, deed and agreement of each of said entities, on this ___ day of April,
1999.
Ridgewood Power VI Corporation, a Delaware Corporation
By:__________________________________
Robert E. Swanson, President
Ridgewood Power VI LLC, a New Jersey Limited Liability Company
By: __________________________________
Robert E. Swanson, President
BTV\128508.3
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary Type of entity Jurisdiction of organization
ZAP, LLC limited liability company Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted
from the Registrant's audited financial statements for the year ended December
31, 1998 and is qualified in its entirety by reference to those
financialstatements.
</LEGEND>
<CIK> 0001057076
<NAME> THE RIDGEWOOD POWER GROWTH FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,256,560
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,352,238<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,733,430
<CURRENT-LIABILITIES> 1,378,749<F2>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,354,681<F3>
<TOTAL-LIABILITY-AND-EQUITY> 25,733,430
<SALES> 0
<TOTAL-REVENUES> 494,002
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,345,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (851,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (851,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (851,745)
<EPS-PRIMARY> (2,869)
<EPS-DILUTED> (2,869)
<FN>
<F1>Includes $9,330 due from affiliates.
<F3>Includes $1,114,129 due to affiliates.
<F4>Represents Investor Shares of beneficial interestin Trust with
capital accounts of $24,363,198 less managing shareholder's accumulated deficit
of $8,517.
</FN>
</TABLE>
