File No. 70-8867
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
AMENDMENT NO. 2
TO
FORM U-1 APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
139 East Fourth Street
Cincinnati, Ohio 45202
(Name of company filing this statement
and address of principal executive offices)
Cinergy Corp.
(Name of top registered holding company parent)
William L. Sheafer
Treasurer
Cinergy Corp.
(address above)
(Name and address of agent of service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application to:
Cheryl M. Foley
Vice President, General Counsel
and Corporate Secretary
Cinergy Corp.
(address above)
The Application in this proceeding, originally filed by Cinergy with the
Commission on May 24, 1996, as amended by Amendment No. 1, filed on June
17, 1996, is hereby restated in its entirety to read as follows:
Item 1. Description of Proposed Transactions
A. Requested Authorization
Cinergy Corp. ("Cinergy"), a registered holding company under the
Public Utility Holding Company Act of 1935 ("Act"), proposes to invest a
total of $10 million from time to time through December 31, 2002 to acquire
up to a 20% limited partnership interest in Nth Power Technologies Fund I,
L.P. ("Fund" or "Partnership"), a California limited partnership formed to
invest in energy technology companies. To fund its proposed investment in
the Fund, Cinergy intends to borrow funds under an existing credit facility
(see Rel. No. 35-26488, March 12, 1996).
B. The Fund: Investments in Energy Technology Companies
The goal of the Fund is both to create competitive advantages for
its investing partners by identifying and investing in companies in the
process of developing and commercializing energy technologies and to
generate superior investment returns. The strategic benefits are
anticipated to stem largely from the fact that Fund investors will have
access to information about the portfolio companies and their products and
exposure to their technologies before others. As competition takes root in
the energy industry, and utility companies strive to retain existing and
attract new customers, the ability not merely to provide low-cost service
but also to master technologies to differentiate products and services from
competitors will become increasingly important. Accordingly, Cinergy
believes that both its shareholders and system utility customers will
benefit from the proposed investment in the Fund.
Generally, the Fund will invest in privately-held companies within
any of three stages of development: emerging rapid growth companies
(recently-formed companies with sales ranging up to $10 million),
established growth companies (sales revenues in $10-100 million range with
established record of profitability) and division spin-offs (i.e., often by
large well-established corporations). In most cases, these companies will
have progressed beyond the proof-of-concept or "seed" funding stage and
will be on the threshold of introducing commercial products. Without the
consent of a committee composed of three to five representatives of the
limited partners (see note 5), no more than 10% of the Fund's committed
capital will be invested in any one company.
The Fund will invest in companies (none of which will consist of
any affiliate of Cinergy) engaged in developing and commercializing
electric and gas energy technologies in one or more of the following
categories. The Fund management will focus on companies within these
categories whose management has a demonstrated record of successfully
building companies.
1. Electricity Generation and Storage
Most of the opportunities in this investment category are expected
to arise in connection with distributed applications (rather than central
generation and storage), inasmuch as the potential markets are large and
the strategic implications for the utility industry are significant.
Opportunities may arise in connection with, for example, fuel conversion
technologies, fuel cells and eventually semiconductor generators.
Opportunities may also arise in kinetic, thermal and electrochemical
storage technologies.
2. Electric Power Quality
Opportunities are anticipated in connection with a wide range of
products, ranging from substation-level storage and voltage improvement
products to end-use load protection devices.
3. Energy-Related Communications, Control and Information
Technologies
This category includes opportunities that will make practicable the
delivery of advanced energy services and the realization of energy savings.
For example, information technologies may be incorporated in a broad range
of energy-efficient end-use products facilitating customer choices while
optimizing the use of electricity and gas, such as integrated residential
automation, energy security,/1/ and energy management hardware and
software. Additional opportunities may arise in connection with sensors
and control algorithms/2/as well as in connection with electric and gas-related
telecommunications and fiber optic services, such as remote meter
reading, data gathering and utility customer services, and related
specialized software./3/ Products of internal interest to electric and gas
utilities may include artificial intelligence-based monitoring and control
systems, automated billing systems, and sophisticated productivity tools
(such as advanced energy network planning and optimization software tools
that will improve reliability and lower costs of operation).
4. Energy-Savings End-Use Products
This category consists of energy-savings versions of traditional
products (such as lighting and HVAC) as well as new products intended to
save energy. Opportunities in this category will be in companies that
offer innovative energy-savings products (in such areas as advanced
lighting systems and controls, mechanical drives, drying processes,
industrial furnaces, materials processing, environmental controls,
refrigeration, HVAC, advanced domestic appliances, and energy storage
technologies and other component parts with respect to the development and
commercialization of energy-efficient electric, hybrid and natural gas
vehicles) that will compete with products from large established
manufacturers. Portfolio companies in this category may develop and
commercialize products involving an enhancement or retrofit of an existing
larger product or system already commercially available, intended to render
that product or system energy-efficient and to realize associated energy
savings. On the other hand, portfolio companies in this category may also
develop and commercialize (including by manufacture) products that are not
enhancements or retrofits of an existing larger product or system, but
rather are more appropriately characterized as stand-alone or replacement
products or systems; in all these instances, the overriding purpose of the
product would be to compete against existing generically similar products
or systems on the basis of the product's superior energy-efficiency
technologies and potential for realizing energy savings.
A practical example of such an energy-savings driven, stand-alone
end-use product - rather than an "enhancement" or "retrofit" of an existing
larger end-use product or system - concerns ductwork for residential HVAC.
At the present time, the large HVAC companies (Carrier, Trane, Lennox,
etc.) produce air conditioning equipment, but do not produce ductwork.
Ductwork components are traditionally made of sheet metal by regional
manufacturers. These duct components tend to leak, generally accounting
for over half of the energy inefficiencies in an HVAC system. The Fund may
realize opportunities to invest in start-up and other private companies
(see second paragraph under Item 1.B for basic parameters as to size and
nature of potential Fund companies) that manufacture more efficient,
significantly less leak-prone plastic ducting systems for residential HVAC
- - a revolutionary concept, analogous to the introduction of plastic pipes
to the plumbing industry, that may yield very large energy savings.
5. Transmission and Distribution
Most opportunities in this category are expected to involve
technologies to minimize power losses or reduce operational costs.
Opportunities may also arise in connection with power switching
technologies; distribution automation; superconductivity; specialized
metering technology; and noise and EMF abatement and other environmental
concerns.
C. Terms of Limited Partnership Agreement
Pursuant to the terms of a limited partnership agreement to be
executed by and among the Fund's general partner, Cinergy, and the other
limited partners ("Agreement"), Cinergy proposes to acquire up to a 20%
limited partner interest in the Fund by investing a total of $10 million
from time to time through December 31, 2002. The sole general partner will
be Nth Power Technologies Partners, L.P., a California limited partnership
whose sole general partner in turn is Nth Power Technologies, Inc., a
California corporation (collectively, "Nth Power")./4/ Nth Power's
management has experience in energy technology finance and development,
including in the case of the principals an average of 20 years' experience
in the energy, telecommunications and related industries. The remaining
limited partnership interests are being offered to one or more accredited
investors. Given the Fund's objectives, the balance of the limited
partnership interests are expected to be purchased principally by other
utility companies or similar entities involved in the energy industry.
The aggregate amount of capital to be invested in the Fund by all
investors is anticipated not to be less than $50 million (in which case
Cinergy will have a 20% limited partnership interest) nor to exceed $75
million (in which case Cinergy will have a 13% limited partnership
interest). A closing is scheduled to take place on or around September 30,
1996, on which date proposed Fund investors including Cinergy would acquire
their respective limited partnership interests.
The Partnership's term will be limited to 10 years from the later
of the initial closing and the last date (generally, not to exceed in
either case one year from the date of initial closing) on which a limited
partner is admitted to the Partnership or increases its capital commitment,
provided that the general partner may extend the term for up to two
additional two-year periods under certain circumstances (Section 2.1).
Each limited partner will be obligated to contribute an amount in cash
equal to 5% of its commitment at the initial closing, with periodic
drawdowns of the balance of the commitment as needed, provided that (1)
drawdowns will not exceed 35% of the commitment in any calendar year and
(2) the final drawdown will occur not later than 5 years after the later of
the initial closing and the last date on which a limited partner is
admitted to the Partnership or increases its capital commitment (Sections
4.2, 3.2). The general partner will contribute an aggregate amount equal
to 1% of the Partnership capital (Section 4.3).
Profits and losses with respect to investment securities of the
Partnership will be allocated 80% to all partners on the basis of committed
capital and 20% to the general partner, provided that any losses generally
will not reduce the general partner's capital account to less than 1% of
aggregate capital accounts (Article V). Distributions of cash representing
net short-term investment income of the Partnership will be made within 90
days after the end of each calendar year during the term of the Partnership
and allocated in proportion to committed capital (Section 7.6).
Distributions in cash (other than cash representing net short-term
investment income of the Partnership) or in securities of portfolio
companies that are covered by an effective registration statement or traded
on a national securities exchange or over-the-counter will be made at the
discretion of the general partner. Any such cash distributions will be
allocated 80% to the partners on the basis of committed capital and 20% to
the general partner to the extent of net profits and, thereafter, 99% to
the limited partners and 1% to the general partner. Any such distributions
of securities of portfolio companies will be allocated 80% to the partners
on the basis of committed capital and 20% to the general partner.
(Sections 7.4, 7.5) Unless it obtains Commission approval to retain such
securities, Cinergy will undertake to sell such securities as soon as
practicable.
Through the seventh anniversary of the initial closing date, the
Partnership will pay the general partner, quarterly in advance and
potentially subject to adjustment for changes in the consumer price index-urban
consumers, an annual management fee equal to 2.5% of the aggregate
committed capital; thereafter, the fee will be determined based on an
annual budget procedure (Section 6.1). The general partner will be
responsible for payment, from the management fee, of all normal operating
expenses incurred in connection with the management of the Partnership,
including salaries, wages, clerical and other expenses of employees of the
Partnership and expenses relating to investigating and evaluating
investment opportunities and managing investments of the Partnership. The
foregoing notwithstanding, the Partnership will be responsible for, among
other things, all legal, accounting and consulting fees with respect to the
Partnership, costs relating to the purchase and sale of Partnership
securities, Partnership taxes, costs of annual meetings, and fees and
expenses incurred in organizing the Partnership (Section 6.2). Both the
annual management fee and the Partnership expenses are payable from the
partners' committed capital.
Under the Agreement and applicable California law, the general
partner has the sole and exclusive right to manage, control and conduct the
affairs of the Partnership, subject to certain limited approval rights of
the limited partners (Sections 8.1, 8.3, 11.8). Such limited voting rights
are customary for limited partners in venture capital funds and in the
aggregate are less than those potentially available to limited partners
consistent with applicable California law. Specifically, under the
Agreement, the approval of the limited partners is required only in the
following circumstances:
* The vote of a majority in interest of the limited partners is
required (I) if capital commitments will exceed $75 million
(Section 3.2), (ii) for capital drawdowns that occur after the
fifth anniversary of the later of the initial closing date and
the last date on which a limited partner is admitted or
increases its commitment (Section 4.2), (iii) to approve the
general partner's management fee if the term of the
Partnership is extended beyond 10 years (Section 6.1), (iv) to
extend the term of the Partnership for up to two additional
two-year periods (Section 10.1), and (v) to terminate the
Partnership if the principals fail to devote substantially all
of their business time to the Partnership and other specified
entities (Section 14.9).
* The vote of two-thirds in interest of the limited partners is
required (I) to admit an additional general partner (Section
3.2), (ii) to admit additional limited partners after the
first anniversary of the initial closing date (Section 3.2),
(iii) for the distribution of non-marketable securities
(Section 7.5), (iv) for the Partnership to borrow (Section
8.6), and (v) for the Partnership to exercise its right of
first refusal upon certain proposed transfers by limited
partners (Section 9.4).
* The vote of 75% in interest of the limited partners is
required to terminate the Partnership in certain events
(Section 14.9).
* The vote of all limited partners is required to extend the
term of the Partnership except as described in A(iv) above
(Section 2.1).
Finally, under California law, the limited partners also have the
right to vote on certain matters relating to the merger of the Partnership
with one or more other entities./5/
Limited partners are entitled to inspect the books and records of
the Partnership upon reasonable advance notice and during normal business
hours (Section 11.2). The general partner will be required to furnish the
limited partners with annual and quarterly reports concerning the
Partnership, which reports shall include financial statements of the
Partnership (audited in the case of the annual reports) together with
relevant information concerning Partnership investments (Sections 11.3 and
11.4).
D. Statement Pursuant to Rule 54.
Under Rule 54, in determining whether to approve the issue or sale
of a security by a registered holding company for purposes other than the
acquisition of an exempt wholesale generator ("EWG") or a foreign utility
company ("FUCO"), or other transactions by such registered holding company
or its subsidiaries other than with respect to EWGs and FUCOs, the
Commission shall not consider the effect of the capitalization or earnings
of any subsidiary which is an EWG or a FUCO if the conditions in Rule
53(a), (b) and (c) are satisfied. As set forth below, all applicable
conditions of Rule 53(a) are and, upon consummation of the proposed
transactions, will be satisfied, and none of the conditions specified in
Rule 53(b) exists or, as a result thereof, will exist.
Rule 53(a)(1): At March 31, 1996, Cinergy had invested, directly or
indirectly, an aggregate of approximately $11 million in EWGs and FUCOs
(inclusive of indirect investments through Special Purpose
Subsidiaries)./6/ The average of the consolidated retained earnings of
Cinergy reported on Form 10-K or Form 10-Q, as applicable, for the four
consecutive quarters ended March 31, 1996 is $946 million. Accordingly,
based on Cinergy's "consolidated retained earnings" at March 31, 1996, the
current Rule 53 aggregate investment limitation is approximately $462
million (i.e., 50% of "consolidated retained earnings" - $473 million -
minus "aggregate investment" at March 31, 1996 - $11 million).
Rule 53(a)(2): Cinergy maintains books and records enabling it to
identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly holds an interest. At present, Cinergy does not
hold any interest in a domestic EWG; Rule 53(a)(2)(I) is therefore
inapplicable.
In accordance with Rule 53(a)(2)(ii), the books and records and
financial statements of each foreign EWG and FUCO which is a "majority-owned
subsidiary company" of Cinergy are kept in conformity with and
prepared according to U.S. generally accepted accounting principles
("GAAP"). Cinergy will provide the Commission access to such books and
records and financial statements, or copies thereof, in English, as the
Commission may request.
In accordance with Rule 53(a)(2)(iii), for each foreign EWG and
FUCO in which Cinergy directly or indirectly owns 50% or less of the voting
securities, Cinergy will proceed in good faith, to the extent reasonable
under the circumstances, to cause each such entity's books and records to
be kept in conformity with, and the financial statements of each such
entity to be prepared according to, GAAP. If such books and records are
maintained, or such financial statements are prepared, according to a
comprehensive body of accounting principles other than GAAP, Cinergy will,
upon request of the Commission, describe and quantify each material
variation from GAAP in the accounting principles, practices and methods
used to maintain such books and records and each material variation from
GAAP in the balance sheet line items and net income reported in such
financial statements, as the case may be. In addition, Cinergy will
proceed in good faith, to the extent reasonable under the circumstances, to
cause access by the Commission to such books and records and financial
statements, or copies thereof, in English, as the Commission may request,
and in any event will make available to the Commission any such books and
records that are available to Cinergy.
Rule 53(a)(3): No more than 2% of the employees of Cinergy's
operating utility subsidiaries will, at any one time, directly or
indirectly, render services to EWGs and FUCOs. Based on current staffing
levels of Cinergy's domestic operating utility subsidiaries (such companies
currently employ, in the aggregate, approximately 5736 salaried and hourly
employees), no more than 115 of the employees of these companies, in the
aggregate, on a full-time equivalent basis, will be utilized at any one
time in rendering services, directly or indirectly, to EWGs and FUCOs.
Employees of PSI Energy, Inc., an Indiana utility subsidiary of Cinergy,
have rendered services to certain Cinergy system foreign utility interests
pursuant to the Commission's order in PSI Resources, Inc., et al., Rel. No.
35-25674, 52 SEC Docket 2533, 2534-35 (Nov. 13, 1992).
Rule 53(a)(4): Cinergy will simultaneously submit a copy of this
Declaration and of any Rule 24 certificate hereunder, as well as a copy of
Cinergy's Form U5S and Exhibits H and I thereto, to each public utility
commission having jurisdiction over the retail rates of any Cinergy utility
subsidiary.
Rule 53(b): The provisions of Rule 53(a) are not made inapplicable to
the authorization herein requested by reason of the provisions of Rule
53(b).
Rule 53(b)(1): Neither Cinergy nor any subsidiary thereof is the
subject of any pending bankruptcy or similar proceeding.
Rule 53(b)(2): Cinergy's average consolidated retained earnings for
the four quarters ended March 31, 1996 are $946 million, versus $920
million for the four quarters ended March 31, 1995, a difference of
approximately $26 million (representing an increase of 3%).
Rule 53(b)(3): For the twelve months ended March 31, 1996, Cinergy
did not report operating losses attributable to its direct and indirect
investments in EWGs and FUCOs aggregating in excess of 5% of consolidated
retained earnings.
Item 2. Fees, Commissions and Expenses.
In addition to the Partnership-related fees and expenses described
above in Item 1.C, the fees, commissions and expenses to be incurred,
directly or indirectly, by Cinergy or any associate company thereof in
connection with the proposed transactions are estimated as follows:
U-1 filing fee.....................$2,000
Fees of Cinergy Services, Inc......$5,000
Fees of outside counsel............$10,000
TOTAL..............................$17,000
Item 3. Applicable Statutory Provisions.
A. Summary
Cinergy requests an order under Sections 9(a) and 10 of the Act
approving the proposed transaction. In the event that the Commission
issues an order thereunder authorizing the proposed transaction, Cinergy
asserts that the Fund will not be a "subsidiary company" or "affiliate" of
Cinergy within the meaning of the Act.
Alternatively, Cinergy believes that its proposed investment in the
Fund is exempt from Sections 9(a) and 10 pursuant to Section 9(c)(3) and
requests an order thereunder.
Rule 54 may also be applicable to the proposed transaction.
B. Cinergy's Proposed Investment in the Fund Meets the Standards
of Section 10.
1. The proposed investment is integrally related and incidental
to Cinergy's core business; the proposed investment advances
the interests of Cinergy's investors and system utility
customers and is in the public interest.
The proposed transaction satisfies the standards of Section 10 and
accordingly Cinergy requests an order thereunder approving the proposed
transaction. If the Commission determines to issue its order thereunder,
Cinergy asserts that the Fund will not be a "subsidiary company" or
"affiliate" of Cinergy within the meaning of the Act.
Under Section 10(c)(1) of the Act, the Commission cannot approve an
acquisition that would be "detrimental to the carrying out of the
provisions of Section 11." That section, in turn, directs the Commission
to limit the nonutility interests of a registered holding company to those
that are "reasonably incidental, or economically necessary or appropriate"
to such company's utility operations, including interests in any other
business which the Commission finds "necessary or appropriate in the public
interest or for the protection of investors or consumers and not
detrimental to the proper functioning of such system."
The Commission has traditionally required an operating or
"functional relationship" between the nonutility business and the system's
utility operations. The Commission's interpretation of the functional
relationship test has evolved in recent years, in response to changes in
the utility industry. In particular, at year-end 1994 the Commission
approved a proposal by the Southern Company to develop a wireless digital
communications system to provide services to system companies and regional
nonassociates./7/ In approving the transaction under the functional
relationship test, the Commission stated that the activities were
permissible under the plain meaning of Section 11, as "reasonably
incidental, or economically necessary or appropriate" to the system's core
utility operations, and "necessary or appropriate in the public interest or
for the protection of investors or consumers and not detrimental" to the
proper functioning of Southern's integrated utility system.
Shortly thereafter, the Commission issued an order approving a
request by EUA Cogenex to remove a percentage limitation previously imposed
by the Commission on the scope of its energy management services
business./8/ In finding that the proposed activities were "closely related
to the core business of the utility," the Commission further expanded its
reading of the functional relationship test, reasoning that:
The Act "creates a system of pervasive and continuing economic
regulation that must in some measure at least be refashioned from
time to time to keep pace with changing economic and regulatory
climates." The Commission is satisfied that, "On the facts of this
matter we do not believe that the proposed acquisition will lead to
a recurrence of the evils the Act was intended to address."/9/
In its June 1995 report on the regulation of public-utility holding
companies under the Act, the Division of Investment Management recommended
that the Commission adopt a more flexible approach to diversification.
Citing the Southern Company wireless communications order noted above,
among other authority, the report proposed:
an interpretation of section 11(b)(1) that would allow registered
holding companies to engage in nonutility businesses that are
economically appropriate and in the public interest, regardless of
whether such activities are ancillary to the utility business.
(emphasis added)
The progressive construction of Section 11 embodied in the orders
noted above, and endorsed in the Division's report, is reflected in the
Commission's orders issued in 1995 authorizing four registered holding
companies to invest in the EnviroTech Investment Fund I Limited Partnership
("EnviroTech Partnership")./10/ Those transactions bear a strong factual
similarity to the present proceeding and provide an ample basis under
Sections 9(a) and 10 for Cinergy's proposed investment in the Fund. In the
EnviroTech orders, the Commission authorized the various registered holding
companies to acquire minority limited partnership interests, investing in
one case up to $10 million, in a fund established to invest in emerging
companies - wherever located, without regard to the service territory of
the registered holding company investors - devoted to commercializing
energy-related technologies. The EnviroTech Partnership had a slightly
different investment objective than that of the Nth Power Technologies Fund
- - targeting companies engaged in commercializing electrotechnologies and
renewable energy technologies intended to promote environmental and
economic responsibility/11/ - but the essential fact is that that fund like
this one proposed to invest in energy technology companies wherever
located.
The EnviroTech orders, which were issued soon after the Southern
Company communications order, are silent as to the specific basis for the
Commission's finding that the standards of Sections 10(c)(1) and 11(b)(1)
were met. It should be noted, however, that the applicants argued that the
Southern Company order controlled, and that the proposed investments were
therefore permissible under the plain meaning of Section 11, as "reasonably
incidental, or economically necessary or appropriate" to the system's core
utility operations, and "necessary or appropriate in the public interest or
for the protection of investors or consumers and not detrimental" to the
proper functioning of the integrated utility system.
In the matter under consideration, the standards of Sections 10 and
11 are satisfied, whether by reference to the traditional functional
relationship test, the "closely related to core business" holding in the
EUA Cogenex order, or the "plain meaning" of Section 11 as construed in the
Southern Company communications order.
Cinergy and its subsidiary companies are in the business of
generating, transmitting, distributing and selling electric energy and
selling and transporting natural gas to retail customers principally in
Ohio, Indiana and Kentucky and at wholesale throughout the United States.
The Cinergy system also has interests in foreign utility companies./12/
The electric and gas utility business is necessarily built upon a
foundation of "technologies" - the products, processes and "know-how"
required to render commercially feasible the generation,
transmission/transportation, and distribution of electric energy and gas.
"Technology" is a linchpin of the entire industry, underpinning products
ranging from nuclear power plants to fuel cells. Cinergy devotes
substantial funds and/or personnel to the research and development of new
energy technologies and to improving, perfecting, and maximizing the
efficient utilization of existing energy technologies in its every-day
business.
As described in detail in Item 1, and as provided in the Fund's
organic documents (see Agreement, Section 8.6), the Fund would invest
exclusively (other than temporary short-term investments) in energy
technology companies meeting various criteria. The Fund would invest in
portfolio companies to assist them in developing and commercializing their
proprietary energy technologies. Because of its exclusive focus on energy
technology companies, the Fund is being marketed solely to utility
companies and other players in the industry.
Therefore, inasmuch as Cinergy's business is driven by energy
technologies - which dependence Cinergy believes will become even more
acute as competition intensifies in the utility industry - together with
the fact that the Fund is being established exclusively to invest in energy
technology companies - viz., companies engaged in the development and
commercialization of electric and gas technologies related to the
generation and storage of electricity; electric power quality; energy-related
communications, control and information technologies; energy
savings end-use products; and transmission and distribution - the Fund is
unquestionably closely related - "functionally related" - to Cinergy's
utility business.
As pointed out in Item 1, Cinergy is motivated to make the proposed
investment in part because of the prospect for a favorable return on its
investment, thereby benefiting its shareholders. Obviously, there can be
no assurance thereof. In this regard, it should be noted that Cinergy is
proposing to make only a relatively small investment, equating to less than
1% of Cinergy's consolidated retained earnings of $950 million at December
31, 1995 and to approximately 3% of Cinergy's consolidated net income of
$347 million for the year ended December 31, 1995. In view of Cinergy's
overall financial size and resources, the proposed investment is clearly
"reasonably incidental, or economically necessary or appropriate" to the
operations of the Cinergy system within the meaning of Section 11(b)(1).
In any event, Cinergy will not seek recovery through higher rates to the
Cinergy system's utility customers in order to compensate Cinergy for any
losses that it may sustain by reason of its proposed investment in the Fund
or for any inadequate return that Cinergy may realize on its investment.
Consequently, Cinergy's shareholders will bear all the risks associated
with this investment.
As further discussed in Item 1, the goal of the Fund is not only to
produce superior investment returns but also to provide competitive
advantages to its investors through the Fund's investments in energy
technology companies. Since the Fund will be a private fund, restricted as
to the number of its beneficial owners (see Item 4), Fund investors will
have access to detailed information about the portfolio companies and their
proprietary technologies and products before the general public, including
competitors in the utility industry. As the utility industry becomes
increasingly competitive, and companies compete on the basis of both low-cost
basic utility service and a variety of innovative energy products and
services intended to meet customer needs, a premium will be placed on
utility companies' staying abreast of new and enhanced energy technologies
with a view to potentially incorporating those technologies into their
businesses./13/ The Fund will afford Cinergy a vehicle for pursuing this
strategic goal, for the benefit of both Cinergy's shareholders and system
utility customers. Moreover, to the extent that the Fund is successful in
its investments, benefits should accrue not merely to Fund investors such
as Cinergy, but ultimately to the utility industry and utility consumers
and the public generally, through the introduction into the marketplace of
innovative, commercially viable energy technologies which, among other
things, promote energy savings and energy efficiency. Accordingly, the
proposed transaction is "necessary or appropriate in the public interest or
for the protection of investors or consumers and not detrimental to the
proper functioning" of the Cinergy system within the meaning of Section
11(b)(1).
In conclusion, to the extent that Cinergy's proposed investment may
be deemed to involve the acquisition of an interest in an "other business"
within the meaning of Section 9(a) of the Act, that interest is clearly one
that Cinergy may acquire pursuant to the standards of Sections 10 and
11(b)(1). A plain reading of the relevant statutory provisions as applied
to the proposed transaction compels that result; so do the relevant
Commission precedent discussed above, including the four Commission orders
issued by delegated authority in 1995 permitting investments in the
EnviroTech Partnership.
2. The proposed investment is a passive investment: Cinergy will
acquire no "voting securities"; a fortiori, the Fund will not
be a "subsidiary company" or "affiliate" of Cinergy.
Cinergy's proposed $10 million investment in the Fund and
acquisition of up to a 20% limited partnership interest therein is a
"passive" investment. By virtue thereof, Cinergy will not acquire any
"voting security" within the meaning of the Act. As a corollary, the Fund
will not be an "affiliate" or "subsidiary company" of Cinergy within the
meaning of the Act.
Specifically, as a limited partner, Cinergy will not be entitled to
take part in the control, management or investment decisions of the
Partnership (or, through the Partnership, any portfolio company), all of
which matters are vested exclusively in the Fund's general partner, Nth
Power. As previously noted, Nth Power's management has extensive
experience in energy technology finance and development. As a limited
partner, Cinergy will be entitled only to receive notices and other
information from the general partner, to inspect the Partnership's books
and records, and to vote on a limited number of matters that could
fundamentally change the structure and purposes of the Partnership and its
relationship with the general partner. Such limited voting rights are
customary for limited partners in a venture capital fund and in the
aggregate are fewer than those potentially available to limited partners
consistent with applicable California law. Moreover, as stated in Item 1,
Cinergy will not consent to serve on the Fund Committee - divesting itself
of this right solely to allay any potential concerns under the Act - and
therefore will have fewer voting rights than those of the other limited
partners, who will be eligible to serve on that committee and potentially
to vote on the matters within the committee's purview. Finally, Cinergy
will be a minority (i.e., not more than 20%) limited partner. Because its
capital commitment to and corresponding limited partnership interest in the
Fund will be relatively small, and actions of the Fund's limited partners
require the assent of at least a majority in interest thereof (and often a
supermajority vote of the limited partners), Cinergy will have no practical
ability - assuming it were so disposed - unilaterally to direct or
otherwise control the action of the Fund's limited partners with respect to
those isolated matters over which the limited partners exercise voting
rights.
For these reasons Cinergy asserts that the Fund will not be a
subsidiary company or affiliate of Cinergy within the meaning of the Act.
B. In the Alternative, Section 9(c)(3) is Applicable to Cinergy's
Proposed Investment in the Fund.
Cinergy believes that Section 9(c)(3) of the Act is available as an
independent basis for Commission authorization of the proposed transaction,
and requests that the Commission issue an appropriate order thereunder in
the event the Commission does not issue an order authorizing the proposed
investment pursuant to Sections 9(a) and 10.
By its terms, Section 9(c)(3) exempts from Sections 9(a) and 10 any
acquisition of securities by a registered holding company or subsidiary
thereof that the Commission determines to be appropriate "in the ordinary
course of business" of the registered holding company or its subsidiary and
not detrimental to the public interest or the interest of investors or
consumers. In addition, emphasizing that Section 9(c)(3) cannot be used to
circumvent Section 11(b)(1), the Commission has construed Section 9(c)(3)
to permit only acquisitions of securities that involve passive investments
in, and not ownership, management or control of another business./14/
Therefore, in order to approve the proposed transaction under Section
9(c)(3), the Commission must find that Cinergy's proposed investment in the
Fund (1) is merely a passive investment, (2) is in the ordinary course of
Cinergy's business, and (3) is not detrimental to the protected interests
under the Act. The proposed transaction clearly satisfies each of these
requirements.
1. The proposed investment is a passive investment.
By virtue of its proposed investment in the Fund, and acquisition
of an up to 20% limited partnership interest therein, Cinergy will not
acquire "any security presently entitling the owner or holder thereof to
vote in the direction or management of the affairs of a company." Since
Cinergy will not acquire any "voting security" of the Partnership, and will
not otherwise have the right or power to exert a controlling influence,
directly or indirectly, with respect to the management or policies of the
Partnership, with which entity Cinergy's relationship will be at arm's
length, it follows automatically that the Partnership will not be a
"subsidiary company" of Cinergy or an "affiliate" thereof. The relevant
points, already discussed at length herein, are recapitulated below.
In the first place, as a limited partner, Cinergy will not be
entitled to take part in the control, management or investment decisions of
the Partnership (or, through the Partnership, any portfolio company), all
of which matters are vested exclusively in the Fund's general partner,
whose management has extensive experience in energy technology finance and
development. To be sure, as a limited partner, Cinergy will be entitled to
vote on a limited number of matters that could fundamentally change the
structure and purposes of the Partnership and its relationship with the
general partner - such limited voting rights are customary for limited
partners in a venture capital fund and in the aggregate are fewer than
those potentially available to limited partners consistent with applicable
California law. In this regard, to allay any potential concerns under the
Act, Cinergy has relinquished its right to serve on the Fund Committee, and
therefore will have fewer voting rights than those of the other limited
partners, who will be eligible to serve on that committee and potentially
to vote on the matters within the committee's purview. Another salient
fact is that Cinergy will be a minority (i.e., not more than 20%) limited
partner./15/ Because its capital commitment to and corresponding limited
partnership interest in the Fund will be relatively small, and actions of
the Fund's limited partners require the assent of at least a majority in
interest thereof (and often a supermajority vote of the limited partners),
Cinergy will thus have no practical ability - even if it were so inclined -
unilaterally to direct or otherwise control the action of the Fund's
limited partners with respect to those isolated matters over which the
limited partners exercise voting rights.
Given these facts and circumstances, there can be no question that
the proposed investment is passive within the meaning of Section 9(c)(3) as
construed by the Commission and is not intended as a mechanism for Cinergy
"to evade the proscription of Section 11(b)(1) prohibiting the acquisition
... of an interest in a business unrelated to its businesses."/16/
2. The proposed investment is in the ordinary course of Cinergy's
business.
As previously stated, Cinergy and its subsidiary companies are in
the business of generating, transmitting, distributing and selling electric
energy and selling and transporting natural gas to retail customers
principally in Ohio, Indiana and Kentucky and at wholesale throughout the
United States. The electric and gas utility business is necessarily built
upon a foundation of "technologies" - the products, processes and "know-how"
required to render commercially feasible the generation,
transmission/transportation, and distribution of electric energy and gas.
"Technology" is the lifeblood of the entire industry, nurturing products
ranging from nuclear power plants to fuel cells. Cinergy devotes
substantial funds and/or personnel to the research and development of new
energy technologies and to improving, perfecting, and maximizing the
efficient utilization of existing energy technologies in its every-day
business.
The Fund would invest exclusively (other than temporary short-term
investments) in energy technology companies meeting various criteria. The
Fund would infuse capital in portfolio companies to advance the development
and commercialization of their proprietary energy technologies. Because of
its exclusive focus on energy technology companies, the Fund is being
marketed solely to utility companies and other players in the industry.
Therefore, given the nature of Cinergy's business and the purpose
of the Fund, the proposed transaction is, unequivocally and on its face, in
the ordinary course of Cinergy's business.
Existing precedent under Section 9(c)(3) supports this common-sense
reading. In Georgia Power, supra, the Commission issued an order under
Section 9(c)(3) authorizing Georgia Power Company, a subsidiary of The
Southern Company, to invest up to $5 million to acquire all of the limited
partnership units in ATV/GP Parallel Fund, Limited Partnership, a Delaware
limited partnership to be formed for the purpose of making venture capital
investments in start-up companies located within Georgia Power's service
territory and organized to commercialize technologies in information and
life sciences, including genetics. The order stated that Georgia Power had
represented that through its investments the ATV/GP Fund would help to
stimulate business activity and economic development, primarily in Georgia,
including the creation and retention of jobs, while seeking to realize
attractive returns on invested funds. Apparently, the ATV/GP Fund's focus
on start-up companies located within Georgia Power's service territory and
the potential for promoting local economic development was the critical
factor in the Commission's determination that the acquisition was within
the ordinary course of Georgia Power's business - offsetting the fact that
the ATV/GP Fund's purpose of investing in life-sciences technology
companies, as such, presumably bore no direct or intrinsic relationship to
the public utility functions of Georgia Power.
In CSW, supra, the Commission issued an order under Section 9(c)(3)
authorizing Central and South West Corporation to establish and invest $200
million in a new subsidiary ("Leasco"), to be jointly owned with
Manufacturers Hanover Leasing Corporation, whose sole activity would be to
act as equity participant in leveraged leasing transactions involving
equipment, manufacturing or processing facilities, provided that no leases
of utility assets would be undertaken. Leasco would be structured to
permit CSW to claim all the tax credits and deductions arising from
Leasco's ownership of the leased property. Other economic benefits
accruing to Leasco as equity participant would be allocated between CSW and
Manufacturers Hanover in a manner that would compensate the latter for the
disproportionate tax benefits to be made available to CSW.
Unlike in Georgia Power, supra, the Commission's rationale for
permitting CSW's proposed $200 million investment in Leasco as "ordinary
course" for purposes of Section 9(c)(3) did not turn on potential stimulus
to the local economy. In fact, such an emphasis would have been entirely
misplaced since the Commission placed no restrictions whatsoever on the
geographic scope of Leasco's leveraged leasing activities. Rather, the
Commission held that the proposed transaction was "ordinary course"
because, on the merits, it had a direct relationship to CSW's utility
business:
It can hardly be argued that for a business to attempt to reduce
its tax liability is anything but an indication of prudent
management and is not uncommon in the non-regulated business
sector. For such businesses to attempt such reductions can fairly
be characterized as being in the ordinary course of business.
Leveraged lease transactions are one such common device to reduce
tax liability. The Commission can think of no argument which
suggests that attempting to reduce one's tax liability should not
also be considered to be in the ordinary course of business for a
regulated utility holding company such as CSW./17/
Cinergy's proposal to invest funds to encourage the development of
new technologies, or enhancements to existing technologies, that are
closely related to Cinergy's core business is no less "an indication of
prudent management and is not uncommon in the non-regulated business
sector." The Commission's memorandum opinion and order in the CSW
leveraged leasing matter thus squarely supports the plain reading of the
statutory provision as applied here: Cinergy's proposal to invest in
energy technology companies is "in the ordinary course of business of a
registered holding company." Indeed, proposed Rule 58 reflects the
Commission's own determination that investments in energy technology
companies are in the ordinary course of business./18/
Because there is a direct nexus between the energy technology
companies in which the Fund would invest and Cinergy's day-to-day business
operations, just as there was between the proposed leveraged leasing
investment program of CSW and its day-to-day business operations, Section
9(c)(3) does not require that such investments be localized within the
service territory of the registered holding company system. In contrast,
such geographical restrictions are appropriate in matters such as the
Georgia Power order discussed above, in which there is no nexus with the
system's core business as such and the primary rationale for the investment
is the company's involvement as a "good neighbor" or "good corporate
citizen" in its local community./19/
Accordingly, based on the plain meaning of Section 9(c)(3) and
applicable precedent, the proposed transaction is within "the ordinary
course" of Cinergy's business.
3. The proposed investment is not detrimental to the protected
interests under the Act
The Commission must also determine that a proposed acquisition of
securities under Section 9(c)(3) is "not detrimental to the public interest
or the interest of investors or consumers." The proposed investment in the
Fund will not be detrimental to these protected interests under the Act.
As discussed, Cinergy proposes to invest in the Fund, among other
reasons, to realize a favorable return on its investment, thereby
benefiting Cinergy's shareholders. Of course, there can be no assurance
that the investment will in fact prove a financial success. Cinergy is
proposing to make a relatively small investment, in line with the magnitude
of other investments authorized by the Commission under Section
9(c)(3)./20/ The $10 million proposed investment equates to less than 1%
of Cinergy's consolidated retained earnings of $950 million at December 31,
1995 and to approximately 3% of Cinergy's consolidated net income of $347
million for the year ended December 31, 1995. Cinergy's proposed $10
million investment over an approximate seven and one-half year period is
dwarfed by CSW's authority to invest up-front a total of $200 million in
leveraged leases pursuant to the Commission's Section 9(c)(3) order
discussed above. In any event, Cinergy will not seek recovery through
higher rates to the Cinergy system's utility customers in order to
compensate Cinergy for any losses that it may sustain by reason of its
proposed investment in the Fund or for any inadequate return that Cinergy
may realize on its investment. Consequently, Cinergy's shareholders will
bear all the risks associated with this investment.
As explained throughout this application, Cinergy believes that its
proposed investment will benefit, most directly, its system utility
customers and its shareholders. The goal of the Fund is both to produce
superior investment returns and to yield competitive advantages to its
investors through the Fund's investments in energy technology companies.
Since the Fund will be a private fund, restricted as to the number of its
beneficial owners (see Item 4), Fund investors will have access to detailed
information about the portfolio companies and their proprietary
technologies and products before the general public, including competitors
in the utility industry. As the utility industry becomes increasingly
competitive, with companies competing on the basis of low-cost service and
the variety of their energy products and services available to meet
customer needs, an even greater responsibility will rest on utility
companies to understand and master "cutting edge" energy technologies, with
a view to adopting these technologies in their day-to-day businesses. The
Fund will afford Cinergy a vehicle for pursuing this strategic goal, for
the benefit of Cinergy's shareholders and system utility customers. Beyond
the immediate benefits to Cinergy, to the extent that the Fund is
successful in its investments, benefits should accrue to the utility
industry and utility consumers and the public generally, through the
introduction into the marketplace of innovative, commercially viable energy
technologies which, among other things, promote energy savings and energy
efficiency.
For these reasons, the proposed transaction is not detrimental to
the public interest or the interest of investors or consumers. The
preceding sections of this analysis have established that the proposed
transaction entails merely a passive investment and is within the ordinary
course of Cinergy's business. Therefore, Cinergy requests, as an
alternative basis for approval of the proposed transaction, that the
Commission issue an order under Section 9(c)(3) authorizing Cinergy's
proposed investment in the Fund.
Item 4. Regulatory Approval.
No state or federal regulatory agency other than the Commission under
the Act has jurisdiction over the proposed transactions.
The Partnership will not register as an investment company under the
Investment Company Act of 1940 by virtue of the exception contained in
Section 3(c)(1) thereof, which excludes from the definition of an
investment company any issuer whose outstanding securities (other than
short-term paper) are beneficially owned by not more than 100 persons. To
that end, the Partnership will limit the number of beneficial owners of
interests in the Partnership to 100 or less. In that regard, the
Partnership and its counsel will rely upon certain factual representations
of the limited partners regarding their status for purposes of Section
3(c)(1) (see Exhibit B-2, paragraphs 5.B, 5.I).
Item 5. Procedure.
Cinergy requests that the Commission issue and publish not later
than June 7, 1996 the requisite notice under Rule 23 with respect to the
filing of this Application. Cinergy further requests that such notice
specify a date not later than July 2, 1996 as the date after which the
Commission may issue an order granting this Application.
Cinergy waives a recommended decision by a hearing officer or other
responsible officer of the Commission; consents that the Staff of the
Division of Investment Management may assist in the preparation of the
Commission's order; and requests that there be no waiting period between
the issuance of the Commission's order and its effectiveness.
Item 6. Exhibits and Financial Statements.
(a) Exhibits:
A Not applicable
B-1(a) Revised Draft of Fund Limited Partnership
Agreement (filed herewith)
B-2 Draft of Fund Subscription Agreement and Investor
Questionnaire (filed herewith)
C Not applicable
D Not applicable
E Not applicable
F Preliminary opinion of counsel (previously filed)
G Form of Federal Register notice (previously filed)
(b) Financial Statements:
FS-1 Cinergy Consolidated Financial Statements, dated
March 31, 1996 (previously filed).
FS-2 Cinergy Financial Statements, dated March 31, 1996
(previously filed).
FS-3 Cinergy Consolidated Financial Data Schedule
(included in electronic submission only - previously filed).
FS-4 Cinergy Financial Data Schedule (included in
electronic submission only - previously filed).
Item 7. Information as to Environmental Effects.
(a) The Commission's action in this matter will not constitute
major federal action significantly affecting the quality of the human
environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
<PAGE> SIGNATURE
Pursuant to the requirements of the Act, the undersigned company
has duly caused this amended Application to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 27, 1996
Cinergy Corp.
By: /s/ William L. Sheafer
Treasurer
<PAGE>
ENDNOTES
/1/ Security and safety products would include the incorporation into the
utility communications network of energy-related safety monitoring features
such as gas leak, carbon monoxide, smoke and fire detectors that
automatically report to the utility's central monitoring system; the
utility will then use the same security system to dispatch to emergency
agencies, as well as to turn off gas and electricity at the affected
location.
/2/ Many products and processes waste energy because they are controlled
in unsophisticated ways. Investment opportunities for the Fund may arise
as microelectronic technologies are developed that bring increasing levels
of sophistication to energy processes. For example, heating and air
conditioning systems are traditionally controlled by means of simple
thermostats, because thermostats have long been commercially available.
However, great improvements will result when more sophisticated control
devices become available, sensing such variables as humidity, carbon
dioxide, carbon monoxide, etc. Combined with new control algorithms (i.e.,
software), these new devices will greatly improve the operation of air
conditioning, resulting in greater levels of occupant comfort as well as
considerable energy savings.
/3/ Telecommunications technologies will become increasingly important as
a utility's customers become increasingly geographically dispersed. In the
past, the utility industry has been characterized by contiguous customers
in discrete service territories, which served to mitigate or avoid entirely
communications problems. However, utilities are now moving towards
national and even global market strategies, and so economical and reliable
communications is becoming increasingly important. For example, a utility
may decide to offer a special energy savings rate plan to residential
customers all over the Midwest, which might provide for lower rates if the
customer would shift large appliance loads to the early morning or late
evening, resulting in environmental benefits as well as economic benefits
to the customer. However, such an energy savings rate plan necessarily
assumes that the utility has the means to measure both the amount and time
of energy consumption. A telecommunications-based technology that would
facilitate these measuring and communications tasks would be of great
benefit to the utility and its customers.
/4/ Cinergy does not propose to acquire a limited partnership or equity
interest or otherwise to acquire securities of or to invest in Nth Power.
/5/ The approval of a majority of the Partnership's "Fund Committee"
(composed of three to five representatives of the limited partners) is
required to approve, inter alia, any investment inconsistent with the
Partnership's business plan (Section 8.6) and any investment of more than
10% of the Partnership's capital in any one company or in public securities
(Section 8.6). For the duration of its investment in the Partnership,
Cinergy will decline to be represented on or otherwise to participate in
the Fund Committee.
/6/ As of May 14, 1996, Cinergy had indirectly invested an additional $372
million in Midlands Electricity plc ("Midlands"), one of 12 regional
electric companies in the United Kingdom, headquartered in Birmingham,
England, in connection with a pending cash offer for the acquisition of
Midlands by a joint venture entity controlled equally by Cinergy and
General Public Utilities Corporation. As of said date, the joint venture
entity owned or had agreed to acquire 114.9 million shares of Midlands,
representing approximately 29% of the issued share capital of Midlands.
For further information with respect to this transaction, reference is made
to Cinergy's Quarterly Report on Form 10-" for the quarter ended March 31,
1996 in Commission File No. 1-11377.
/7/ The Southern Company, Rel. No. 35-26211, December 30, 1994.
/8/ Eastern Utilities Associates, et al., Rel. No. 35-26232, February 15,
1995.
/9/ Id., quoting Union Electric Company, 45 SEC 489, 503 n. 52 (1974),
aff'd sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir.
1975), and The Southern Company, Rel. No. 35-25639, September 23, 1992
(approving acquisition of foreign public utility companies).
/10/ See The Southern Company, et al., Rel. No. 35-26240, Feb. 28, 1995;
General Public Utilities Corporation, et al., Rel. No. 35-26230, February
8, 1995; Allegheny Power System, Inc., et al., Rel. No. 35-26225, Feb. 1,
1995; American Electric Power Company, Inc., et al., Rel. No. 35-26222,
January 26, 1995.
/11/ As stated in the Commission's order in the proceeding permitting the
Southern Company to invest in the EnviroTech fund:
A key objective of the EnviroTech Partnership is to make
investments in companies ... that will contribute to the reduction,
avoidance or sequestering of greenhouse gas emissions; help
utilities and their customers handle waste by-products more
effectively or produce or manufacture production, storage,
transmission, and delivery of energy; and provide investors with
attractive opportunities relating to the evolving utility business
climate which meet the above objectives.
In selecting suitable investments, the EnviroTech Partnership
will focus on the following technology sectors, among others:
alternate and renewable energy technologies; environmental and
waste treatment technologies and services; energy efficiency
technologies, processes and services; electrotechnologies used in
the reduction of medical waste; technologies and processes
promoting alternative energy for transportation; and other
technologies related to improving the generation, transmission and
delivery of electricity.
/12/ The Cinergy system is comprised of Cinergy and its direct and
indirect subsidiaries. The Cinergy system utility subsidiaries consist of
The Cincinnati Gas & Electric Company, PSI Energy, Inc., The Union Light,
Heat and Power Company, The West Harrison Gas and Electric Company,
Lawrenceburg Gas Company and Miami Power Corporation. Nonutility
subsidiaries in the Cinergy system consist of Tri-State Improvement
Company, KO Transmission Company, South Construction Company, Inc., Power
Equipment Supply Company, Wholesale Power Services, Inc., Power
International, Inc., CGE ECK, Inc., Cinergy Resources, Inc., Cinergy
Technology, Inc., PSI Sunnyside, Inc., PSI International, Inc., PSI Power
Resource Development, Inc., PSI Power Resource Operations, Inc., PSI T&D
International, Inc., PSI Yacyreta, Inc., PSI Argentina, Inc., Costanera
Power Corp., PSI Energy Argentina, Inc., Cinergy Cooling Corp., M. E.
Holdings, Inc., Avon Energy Partners Holdings, Avon Energy Partners plc,
and Midlands. Certain of the foregoing nonutility companies are foreign
utility companies or are presently inactive. Cinergy's direct subsidiary,
Cinergy Investments, Inc., is a holding company with respect to the
majority of the system's nonutility companies. Cinergy has a service
company subsidiary, Cinergy Services, Inc. For further information with
respect to the Cinergy system, reference is made to Cinergy's Annual Report
on Form U5S for the year ended December 31, 1995.
/13/ The pivotal role that technological developments are likely to assume
in the evolving utility industry was stressed by both Cinergy's President
and Chief Executive Officer, James E. Rogers, and Charles Bayless,
President and Chief Executive Officer of Tucson Electric Power Company, at
a recent industry conference in Washington, D.C. sponsored by The Energy
Daily. See The Energy Daily, June 18, 1996, "Past No Guide to the Future -
Rogers, Bayless", at 1-2:
Both men also agreed that major technological changes could
rewrite all the rules in the years ahead.
The current regulatory regime has been an impediment to
technology development,' Rogers said. But with deregulation that
is almost certain to change, he added, pointing to the example in
the telecommunications industry. In that industry, roughly $50
million in venture capital was put up in 1978 for R&D activities;
that figure blossomed to $500 million in 1996. A similar rise is
likely in the electric industry following deregulation.
In some ways, the two added, the technological revolution already
has begun. Rogers pointed out that in certain situations it
already may be cheaper to run a natural gas remote pipeline to a
remote site and use the gas to run a fuel cell than it is to extend
an electric transmission line.
/14/ Michigan Consolidated Gas Company, 44 SEC 361 (1970)("Michigan
Consolidated"), aff'd, 444 F.2d 913 (6th Cir. 1971); Central and South West
Corporation, Rel. No. 35-23578, January 23, 1985 (memorandum opinion and
order)("CSW").
/15/ Cinergy notes that the Commission recently issued an order under
Section 9(c)(3) authorizing a registered holding company subsidiary to
acquire all of the limited partnership interests of a venture capital fund.
See Georgia Power Company, Rel. No. 35-25949, December 15, 1993 ("Georgia
Power")(order under Section 9(c)(3) authorizing acquisition of 100% of
limited partnership units in venture capital fund).
/16/ Michigan Consolidated, supra, at 366 (footnote omitted).
/17/ CSW, supra, 32 SEC Docket at 415.
/18/ See Rel. No. 35-26313, June 20, 1995 (defining proposed "energy-related
company" as any company deriving substantially all its revenues,
exclusive of revenues from temporary investments, from any one or more of
certain enumerated businesses, including "[t]he development and
commercialization of electro-technologies related to energy conservation,
storage and conversion, energy efficiency, waste treatment, greenhouse gas
reduction, and similar innovations").
/19/ Cf. Rule 40(a)(5) under the Act, adopted by the Commission pursuant
to Section 9(c)(3), permitting limited acquisitions of securities of
industrial or other nonutility enterprises located within the service
territory of the acquiring registered holding company system; the
Commission has characterized Rule 40(a)(5) as "intended to facilitate
certain limited good citizen' investments." See Rel. No. 35-26031, May
13, 1994.
/20/ See, e.g., Georgia Power Company, Rel. No. 35-26220, January 24,
1995 ($10 million investment in limited partnership formed to invest in
affordable housing projects); General Public Utility Corporation, et al.,
Rel. No. 35-26230, February 8, 1995 ($10 million investment in limited
partnership formed to invest in energy technology companies).
<PAGE>
Exhibit B-1(a)
DRAFT
Nth POWER TECHNOLOGIES FUND I, L.P.
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
Nth POWER TECHNOLOGIES FUND I, L.P.
LIMITED PARTNERSHIP AGREEMENT
This Agreement is made and entered into as of the ____ day of
____________ 1996, by and among Nth Power Technologies Partners, L.P., a
California limited partnership (the "General Partner"), and each of the
persons listed as limited partners on the Schedule of Partners attached
hereto as Exhibit A (the "Limited Partners"), who hereby form Nth Power
Technologies Fund I, L.P. (the "Partnership"), pursuant to the provisions
of the California Uniform Partnership Act (the "Act"), as follows:
Article I
Name, Purpose And Offices
Of Partnership
1.1 Name. The name of the Partnership is Nth Power Technologies Fund
I, L.P. The affairs of the Partnership shall be conducted under the
Partnership name.
1.2 Purpose. The primary purpose of the Partnership is to make
capital investments, principally by investing in equity or equity-oriented
securities of privately held corporations that create products or provide
services that offer significant strategic benefits to the electric utility
industry. The general purposes of the Partnership are to: buy, sell,
hold, and otherwise invest in securities of every kind and nature and
rights and options with respect thereto, including, but not limited to,
stock, notes, bonds, debentures, partnership interests, interests in
limited liability companies and evidence of indebtedness; exercise all
rights, powers, privileges, and other incidents of ownership or possession
with respect to securities held or owned by the Partnership; enter into,
make, and perform all contracts and other undertakings; and engage in all
activities and transactions as may be necessary, advisable, or desirable to
carry out the foregoing.
1.3 Principal Office. The principal office of the Partnership shall
be located at 50 California Street, Suite 1500, San Francisco, California
94111, or at such other place or places as the General Partner may from
time to time designate by written notice to the Limited Partners.
1.4 Registered Agent And Office. The name of the registered agent
for service of process of the Partnership and the address of the
Partnership's registered office in the State of California shall be Maurice
E.P. Gunderson, Nth Power Technologies, Inc., 50 California Street, Suite
1500, San Francisco, California, 94111, or such other agent or office in
the State of California as the General Partner may from time to time
designate.
Article II
Term Of Partnership
2.1 Term. The term of the Partnership shall commence upon the later
of the date first above written or the date of the filing of the
Certificate of Limited Partnership of the Partnership with the office of
the Secretary of State of the State of California (which date shall be
hereinafter referred to as the "Formation Date"). The term of the
Partnership shall continue until the tenth anniversary of the later of
(i) the Formation Date or (ii) the last date on which a Limited Partner is
admitted to the Partnership (or increases its Capital Commitment) pursuant
to paragraph 3.2(b)(i), unless extended by a Notice of Extension or by
unanimous agreement of the Partners or sooner dissolved upon the occurrence
of an Event of Early Termination.
2.2 Events Affecting A Partner Of The General Partner. The death,
bankruptcy, withdrawal, insanity, incompetency, temporary or permanent
incapacity, expulsion or removal of any partner of the General Partner
shall not dissolve the Partnership.
2.3 Events Affecting A Limited Partner. The death, temporary or
permanent incapacity, insanity, incompetency, bankruptcy, liquidation,
dissolution, reorganization, merger, sale of all or substantially all of
the stock or assets of, or other change in the ownership or nature of a
Limited Partner shall not dissolve the Partnership.
2.4 Events Affecting The General Partner. Except in the case of an
Event of Early Termination, the bankruptcy, liquidation, dissolution,
reorganization, merger, sale of all or substantially all the stock or
assets of, or other change in the ownership or nature of the General
Partner shall not dissolve the Partnership, and upon the happening of any
such event, the affairs of the Partnership shall be continued automatically
by a successor entity formed by the continuing general partners of the
General Partner, including any newly admitted general partner, or by the
remaining general partner(s) of the Partnership, if any.
Article III
Name And Admission Of Partners
3.1 Name And Address. The name and address of the General Partner
and each Limited Partner (hereinafter the General Partner and the Limited
Partners shall be referred to collectively as the "Partners" and
individually as a "Partner"), the amount of such Partner's Capital
Commitment to the Partnership and such Partner's Partnership Percentage are
set forth on Exhibit A hereto. The General Partner shall cause Exhibit A
to be amended from time to time to reflect the admission of any new
Partner, the withdrawal or substitution of any Partner, the transfer of
interests among Partners, receipt by the Partnership of notice of any
change of address of a Partner, or a change in the Capital Commitment or
Partnership Percentage of any Partner. An amended Exhibit A shall
supersede any prior Exhibit A and become a part of this Agreement. A copy
of the most recent amended Exhibit A shall be kept on file at the principal
office of the Partnership.
3.2 Admission Of Additional Partners.
(a) An additional person may be admitted as a General Partner to
the Partnership only with the consent of the General Partner and Two-Thirds
in Interest of the Limited Partners prior to an Event of Early Termination.
(b) (i) An additional person may be admitted as a Limited
Partner (or an existing Limited Partner may increase its Capital
Commitment) with the consent of the General Partner until the first
anniversary of the Formation Date; provided, however, that without the
consent of a Majority in Interest of the Limited Partners, the General
Partner shall not admit an additional person to the Partnership or allow a
Limited Partner to increase its Capital Commitment to the Partnership if
such admission or increase would cause the total Capital Commitments of the
Limited Partners to exceed seventy-five million dollars ($75,000,000).
(ii) Subsequent to the first anniversary of the Formation
Date, an additional person may be admitted as a Limited Partner (or an
existing Limited Partner may increase its Capital Commitment) with the
consent of the General Partner and Two-Thirds in Interest of the Limited
Partners.
(iii) Each such additional Limited Partner (or Limited
Partner increasing its Capital Commitment) shall not be admitted as a
Limited Partner (or be allowed to increase its Capital Commitment) until it
contributes to the Partnership the sum of (A) its pro rata share of all
previous capital contributions to the Partnership made by the Partners and
(B) an interest component on its pro rata share of all previous capital
contributions at the prime rate charged by the Partnership's primary
banking facility for the periods from the Partners' previous capital
contributions to the date such additional person is admitted as a Limited
Partner (or increases its Capital Commitment) with such interest rate
adjusted on each day on which capital is contributed to the Partnership.
Each person admitted as an additional Limited Partner (or increasing its
Capital Commitment) shall not be entitled to share in the income or gain of
the Partnership with respect to its new or increased Capital Commitment
attributable to the period prior to such admission as a Limited Partner (or
increase in Capital Commitment).
(iv) The interest component paid by a Limited Partner
pursuant to clause (iii) above (A) shall not be included in determining
such Limited Partner's Capital Commitment or Partnership Percentage and
shall not be included in determining the amount of capital contributed to
the Partnership, and (B) shall be distributed to the Partners (excluding
Partners admitted to the Partnership on the date such interest component is
due) pro rata based on all previous capital contributions as adjusted to
reflect the dates on which such previous capital contributions were made.
(v) Each additional person admitted as a Partner shall
execute and deliver to the Partnership a counterpart of this Agreement or
otherwise become bound by the terms of this Agreement.
Article IV
Capital Accounts, Capital Contributions,
And Noncontributing Partners
4.1 Capital Accounts. An individual Capital Account shall be
maintained for each Partner.
4.2 Capital Contributions Of The Limited Partners.
(a) Upon the date hereof, each Limited Partner shall contribute
cash to the Partnership in the amount set forth opposite its name under the
heading "Initial Capital Contributions" on Exhibit A, which amount shall be
equal to five percent (5%) of such Partner's Capital Commitment.
(b) Subsequent to its Initial Capital Contribution, each Limited
Partner shall make additional contributions to the Partnership's capital
(up to its respective Capital Commitment) in cash. The amount of each such
additional capital contribution shall be made to the Partnership upon
thirty (30) days' advance written notice by the General Partner with
respect to each contribution; provided, however, that (i) no Limited
Partner shall be required to contribute more than thirty-five percent (35%)
of its Capital Commitment in any calendar year, (ii) except with respect to
contributions used to fund Partnership expenses and follow-on investments
in existing portfolio companies, the final contribution will occur not
later than the fifth anniversary of the later of (A) the Formation Date, or
(B) the last date on which a Limited Partner is admitted to the Partnership
(or increases its Capital Commitment) pursuant to paragraph 3.2(b)(i)
except with the written consent of a Majority in Interest of the Limited
Partners, and (iii) capital shall only be called in anticipation of
reasonable investment requirements of the Partnership or to provide funds
for the payment of Partnership expenses. Contributions pursuant to this
paragraph 4.2(b) shall be made by all the Limited Partners in proportion to
Partnership Percentages.
4.3 Capital Contributions Of The General Partner. The General
Partner shall make contributions to the capital of the Partnership in an
amount equal to one percent (1%) of the total amount contributed by the
Limited Partners and the General Partner on each date on which any Limited
Partner makes a contribution. The General Partner's contributions shall,
at its option, be in the form of cash or in the form of a full-recourse
promissory note substantially in the form attached hereto as Exhibit B.
4.4 Acquisition Of An Additional Interest By The General Partner. In
the event that the General Partner (a) acquires a Limited Partner's
interest pursuant to the terms of this Agreement or (b) contributes to the
capital of the Partnership an amount greater than one percent (1%) of the
total amount contributed by the Partners, (A) the General Partner shall
have two (2) Partnership Percentages and two (2) Capital Account balances
for purposes of making Partnership allocations (including any reallocation
of Contingent Losses pursuant to paragraph 5.2) as if such additional
interest were held by a separate entity that is a Limited Partner, although
for all other purposes the General Partner shall have only one (1) Capital
Account, and (B) upon the admission of additional Limited Partners, the
General Partner's Capital Commitment as a Limited Partner shall
automatically be converted to a Capital Commitment as a General Partner as
necessary to maintain a one percent (1%) interest as General Partner.
4.5 Noncontributing Partners.
(a) The Partnership shall be entitled to enforce the obligations
of each Limited Partner to make the contributions to capital set forth on
Exhibit A, and the Partnership shall have all remedies available at law or
in equity in the event any such contribution is not so made. If any legal
proceedings relating to the failure of a Limited Partner to make such a
contribution are commenced, such Limited Partner shall pay all costs and
expenses incurred by the Partnership, including attorneys' fees, in
connection with such proceedings but such payments shall not be treated as
capital contributions to the Partnership.
(b) Additionally, should any Limited Partner fail to make any of
the contributions required of it under this Agreement, such Limited Partner
(the "Optionor"), shall be in default and the other Limited Partners (the
"Optionees") and the General Partner shall have the right and option to
acquire the Partnership interest of the Optionor as follows:
(i) The General Partner shall notify the Optionor within
ten (10) days of the default. If the default continues for twenty (20) or
more days after notice of the default, the General Partner shall notify the
Optionees of the default within twenty (20) days of the expiration of the
aforesaid twenty (20) day notice period. Such notice shall advise each
Optionee of the portion and the price of the Optionor's interest available
to it. The portion available to each Optionee shall be that portion of the
Optionor's interest that bears the same ratio to the Optionor's entire
interest as each Optionee's Partnership Percentage bears to the aggregate
Partnership Percentages of all Optionees. The aggregate price for the
Optionor's interest shall be the lesser of (A) the amount of the Optionor's
Capital Account calculated as of the due date of the additional
contribution and adjusted to reflect the allocation of the appropriate
proportion of the Partnership's accrued income and expenses and
unrecognized gains and losses as of the due date of such defaulted
contribution, or (B) the aggregate amount of the Optionor's capital
contributions actually made to the Partnership less any distributions
(valued at their fair market value on the date of distribution) on or prior
to the due date of such default in contribution. The price for each
Optionee shall be prorated according to the portion of the Optionor's
interest purchased by each such Optionee. The option granted hereunder
shall be exercisable at any time within thirty (30) days of the date of the
notice from the General Partner to the Optionees by delivery to the
Optionor in care of the General Partner of a notice of exercise of option
together with a nonrecourse promissory note for the purchase price and a
security agreement in accordance with subparagraph (v) below, which notice
and documents the General Partner shall forward to the Optionor.
(ii) Should any Optionee not exercise its option within said
fifty (50) day period provided in subparagraph (i), the General Partner
shall immediately notify the other Optionees who have elected to exercise
their option, which Optionees shall have the right and option ratably among
them to acquire the portion of the Optionor's interest not so acquired (the
"Remaining Portion") within thirty (30) days of the date of the notice
specified in this subparagraph (ii) on the same terms as provided in
subparagraph (i).
(iii) The amount of the Remaining Portion not acquired by the
Optionees pursuant to subparagraph (ii) may be acquired by the General
Partner within thirty (30) days of the expiration of the thirty (30) day
period specified in subparagraph (ii) on the same terms as set forth in
subparagraph (i).
(iv) The amount of the Remaining Portion not acquired by the
Optionees and the General Partner pursuant to subparagraphs (ii) or (iii)
may, if the General Partner deems it in the best interest of the
Partnership, be sold by the General Partner to any other investor on terms
not more favorable to such parties than those applicable to the Optionees'
option, and any such purchaser shall become a Limited Partner to the extent
of the interest purchased hereunder. Any consideration received by the
Partnership for the Optionor's interest in excess of the price payable to
the Optionor therefor shall be retained by the Partnership and allocated
among the Partners' Capital Accounts (excluding the defaulting Partner) in
accordance with their Partnership Percentages as determined prior to the
defaulted contribution.
(v) The price due from each of the General Partner and the
Optionees shall be payable by a noninterest-bearing, nonrecourse promissory
note (in such form as the General Partner shall designate) due one hundred
eighty (180) days after the final dissolution of the Partnership. Each
such note shall be secured by the portion of the Optionor's Partnership
interest so purchased by its maker pursuant to a security agreement in a
form designated by the General Partner and shall be enforceable by the
Optionor only against such security.
(vi) Upon exercise of any option hereunder, each Optionee
(and, if applicable, the General Partner and any third party purchaser
pursuant to subparagraph (iv)) shall be obligated (A) to contribute to the
Partnership that portion of the additional capital then due from the
Optionor equal to the percentage of the Optionor's interest purchased by
such person and (B) to pay the same percentage of any further contributions
otherwise due from such Optionor. Each person who purchases a portion of
the Optionor's Partnership interest shall be deemed to have acquired such
portion as of the due date of the additional capital contribution with
respect to which the Optionor defaulted, and any distributions made after
the due date on account of the Optionor's interest shall be distributed
among such purchasers (and, unless the entire interest was purchased, the
Optionor) in accordance with their ultimate respective interests in the
Optionor's interest. Distributions otherwise allocable to the Optionor
under the preceding sentence shall first be used to offset any defaulted
contribution of the Optionor still due to the Partnership. Upon completion
of any transaction hereunder, the General Partner shall cause Exhibit A to
be amended to reflect all necessary changes resulting therefrom including,
without limitation, adjustment of Partnership Percentages.
(c) Notwithstanding any other provision of this Agreement, if at
any time before a date on which any unpaid capital contribution is payable
hereunder, any ERISA Partner shall obtain and deliver to the General
Partner an opinion of independent legal counsel reasonably acceptable to
the General Partner to the effect that, as a result of applicable statutes,
regulations, case law, administrative interpretations, or similar
authority, the payment by such ERISA Partner of such unpaid capital
contribution would result, or there is a material likelihood that such
payment would result, in a material violation of ERISA or any comparable
state statute or in the fiduciaries of such ERISA Partner being deemed
under ERISA or any comparable state statute to have delegated investment
discretion over plan assets (as determined by or under ERISA or any
comparable state statute) to any person or entity that is not an
"investment manager" (as determined by or under ERISA or any comparable
state statute), then such ERISA Partner shall be released from any further
obligation to make further capital contributions under paragraph 4.2, and
thereafter for purposes of this Agreement such ERISA Partner's obligation
to make capital contributions to the Partnership shall be deemed to be
equal to the total capital contributions theretofore made by such Partner
to the Partnership. The General Partner shall cause Exhibit A to be
amended to reflect all necessary changes resulting from this
subparagraph (c) including, without limitation, adjustments to such ERISA
Partner's Capital Commitment and Partnership Percentage.
Article V
Partnership Allocations
5.1 Allocation Of Profit And Loss. Except as hereinafter provided in
this Article V:
(a) Profit of the Partnership for each Accounting Period shall
be allocated as follows:
(i) Twenty percent (20%) of the Partnership's Profit shall
be allocated to the Capital Accounts of all of the Partners to the extent
that such accounts were previously allocated a Contingent Loss that has not
been restored by previous allocations pursuant to this paragraph or
paragraph 7.5(c). Such Profit shall be allocated to a Partner's Capital
Account on the basis of the proportion that the unrestored Contingent
Losses contained in such Partner's Capital Account bear to the aggregate
unrestored Contingent Losses contained in all of the Partners' Capital
Accounts. Any balance of said twenty percent (20%) of the Partnership's
Profit shall be allocated to the Capital Account of the General Partner.
(ii) Eighty percent (80%) of the Partnership's Profit shall
be allocated to the Capital Accounts of all of the Partners in proportion
to their respective Partnership Percentages.
(b) Loss of the Partnership for each Accounting Period shall be
allocated as follows:
(i) Twenty percent (20%) of the Partnership's Loss shall be
allocated to the Capital Account of the General Partner.
(ii) Eighty percent (80%) of the Partnership's Loss shall be
allocated to the Capital Accounts of all of the Partners in proportion to
their respective Partnership Percentages.
(c) Money Market Income received by the Partnership during an
Accounting Period and expenses borne by the Partnership pursuant to
subparagraphs 6.2(b) through 6.2(e) during such Accounting Period (other
than (i) expenses properly allocated and charged to purchases, sales or
exchanges of securities and (ii) expenses specially allocated pursuant to
paragraph 5.3(c)) shall be allocated among the Capital Accounts of all of
the Partners in proportion to their respective Partnership Percentages.
5.2 Reallocation Of Contingent Losses. If, for any Accounting
Period, after the allocations provided in this Article V have been made,
the Adjusted Capital Account Balance of the General Partner has been
reduced to less than one percent (1%) of the sum of the Adjusted Capital
Account Balances of all Partners, an amount (the "Contingent Loss") shall
be reallocated from the General Partner's Capital Account to all of the
Partners' Capital Accounts (in proportion to each Partner's respective
Partnership Percentage) so that the General Partner's Adjusted Capital
Account Balance is equal to one percent (1%) of the sum of the Adjusted
Capital Account Balances of all Partners. Solely for purposes of this
paragraph 5.2, the General Partner's Capital Account shall not be deemed to
include any amounts attributable to any Limited Partner's interest held by
the General Partner and shall be deemed to include (i) any promissory note
contributed to the Partnership by the General Partner and not otherwise
included in the General Partner's Capital Account and (ii) any outstanding
obligations of the General Partner to contribute capital to the Partnership
pursuant to paragraph 7.5(b)(i).
5.3 Other Allocations. Notwithstanding the foregoing, the
allocations provided in this Article V shall be subject to the following
exceptions:
(a) (i) Any loss or expense otherwise allocable to a Limited
Partner that exceeds the balance in such Limited Partner's Capital Account
shall instead be allocated first to all Partners who have positive balances
in their Capital Accounts in proportion to such positive balances, and when
all Partners' Capital Accounts have been reduced to zero (0), then to the
General Partner.
(ii) In the event any Limited Partner unexpectedly receives
any adjustments, allocations, or distributions described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (d)(6), that causes the
balance in such Partner's Capital Account to be reduced below zero (0),
items of Partnership income and gain shall be specially allocated to such
Limited Partner in an amount and manner sufficient to eliminate the deficit
balance in its Capital Account created by such adjustments, allocations, or
distributions as quickly as possible.
(iii) For purposes of this subparagraph (a), the balance in a
Partner's Capital Account shall take into account the adjustments provided
in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (d)(6).
(iv) Any special allocations of items of profit, income,
gain, loss or expense pursuant to this subparagraph (a) shall be taken into
account in computing subsequent allocations, so that the net amount of any
items so allocated and the profit, gain, loss, income, expense, and all
other items allocated to each Partner shall, to the extent possible, be
equal to the net amount that would have been allocated to each such Partner
if such special allocations pursuant to this subparagraph (a) had not
occurred.
(b) To the extent the Partnership has taxable interest income or
expense with respect to any promissory note (excluding any note contributed
by the General Partner pursuant to paragraph 4.3) between any Partner and
the Partnership as holder and maker or maker and holder pursuant to Section
483, Sections 1271 through 1288, or Section 7872 of the Code, such interest
income or expense shall be specially allocated to the Partner to whom such
promissory note relates, and such Partner's Capital Account adjusted if
appropriate.
(c) In the event that additional persons are admitted to the
Partnership as Limited Partners subsequent to the Formation Date (or
existing Limited Partners increase their Capital Commitments),
organizational costs, fees (including the incremental management fee
described in paragraph 6.1(c)), and expenses of the Partnership that are
allocated to the Partners on or after the effective date of such admission
(or increase) shall be allocated first to such Partners to the extent
necessary to cause such persons to be treated with respect to such items as
if they had been Partners (or had such increased Capital Commitments) from
the Formation Date.
(d) Except for the allocations provided for in paragraph
5.3(a)(ii), the interest of the General Partner in each material item of
Partnership income, gain, loss, deduction, or credit shall equal at least
one percent (1%) of each such item at all times during the existence of the
Partnership. For purposes of the preceding sentence, in determining the
General Partner's interest in such items, any interest treated as a limited
partnership interest for purposes of determining allocations which is owned
by the General Partner or partners of the General Partner shall be taken
into account.
5.4 Income Tax Allocations.
(a) Except as otherwise provided in this paragraph or as
otherwise required by the Code and the rules and Treasury Regulations
promulgated thereunder, a Partner's distributive share of Partnership
income, gain, loss, deduction, or credit for income tax purposes shall be
the same as is entered in the Partner's Capital Account pursuant to this
Agreement.
(b) In accordance with Code Section 704(c) and the Treasury
Regulations thereunder, income, gain, loss and deduction with respect to
any asset contributed to the capital of the Partnership shall, solely for
tax purposes, be allocated among the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership
for federal income tax purposes and its initial Adjusted Asset Value.
(c) In the event the Adjusted Asset Value of any Partnership
asset is adjusted pursuant to the terms of this Agreement, subsequent
allocations of income, gain, loss and deduction with respect to such asset
shall take account of any variation between the adjusted basis of such
asset for federal income tax purposes and its Adjusted Asset Value in the
same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
Article VI
Management Fee; Partnership Expenses
6.1 Management Fee.
(a) Nth Power Technologies, Inc., a California corporation,
shall act as administrative management agent for the Partnership (the
"Management Agent"), and shall be compensated in advance and on a quarterly
basis for services rendered during the term of the Partnership by the
payment by the Partnership on the first day of each calendar quarter (or
portion thereof) of a management fee. The Management Agent shall provide
administrative services to the Partnership and the General Partner and
shall be responsible for the expenses described in paragraph 6.2(a).
Notwithstanding the foregoing, the appointment of the Management Agent
shall not in any way relieve the General Partner of its responsibilities,
duties or authority as the general partner of the Partnership.
(b) (i) Through the seventh (7th) anniversary of the Formation
Date, the management fee for each calendar quarter shall be an amount equal
to five-eighths of one percent (.625%) of the aggregate Capital Commitments
of all Partners as of the first day of each such quarter: the management
fee will be adjusted on January 1st of each year for increases or decreases
in the consumer price index--urban consumers occurring during the previous
twelve (12) month period, provided however, that the cumulative compounded
adjustment for changes in the consumer price index shall in no event exceed
thirty percent (30%).
(ii) After the seventh (7th) anniversary of the Formation
Date and through the scheduled termination date of the Partnership as set
forth in paragraph 2.1, the management fee shall be determined based on an
annual budget prepared by the General Partner and the Management Agent and
approved by the Fund Committee, which approval shall not be unreasonably
withheld.
(iii) In the event that the term of the Partnership is
extended pursuant to paragraph 10.1, the management fee during the
extension period shall be determined based on an annual budget prepared by
the General Partner and the Management Agent and approved by a Majority of
Interest of the Limited Partners, which approval shall not be unreasonably
withheld.
(iv) The management fee for the Partnership's first and last
quarters shall be proportionately reduced based upon the ratio the number
of days in each such period bears to ninety (90).
(c) In addition to the foregoing, in the event that additional
persons are admitted to the Partnership as Limited Partners (or existing
Partners increase their Capital Commitments) subsequent to the Formation
Date, the Management Agent shall be entitled to receive an additional
management fee payment at the time of such admission (or increase) equal to
the incremental amount of management fee that would have been paid to the
Management Agent from the Formation Date through such admission (or
increase) had such person been a Partner (or had such increased Capital
Commitment) from the Formation Date.
(d) The amount of management fee otherwise due for any quarter
shall be reduced by any compensation received, in the preceding quarter, by
the General Partner, the Principals or an Affiliate of the Principals, the
Management Agent or any employee of the General Partner, the Management
Agent or any Affiliate of the Principals from any entity in which the
Partnership has an interest for services typically performed by venture
capital fund managers and for monitoring, advisory or consulting fees and
any break-up fees, investment banking fees and litigation proceeds if such
compensation is related to the performance of any such service for a
portfolio company; provided, however, that (i) if other investment funds
managed by the General Partner, the Principals, general partners of the
General Partner or their Affiliates also hold an interest in such an
entity, the management fee hereunder shall be reduced only by the
Partnership's allocable portion, based on the cost basis of each investment
fund's interest, of such compensation and (ii) the Principals, and the
general partner and employees of the General Partner or the Management
Agent who serve as directors for any entity in which the Partnership has an
interest will be permitted to participate in standard stock incentive
programs designed for the board members of such entity without causing an
offset to the management fee otherwise due and payable to the Management
Agent. In the event that the fees referred to in the first sentence of
this subparagraph 6.1(d) exceed the management fee otherwise payable by the
Partnership in the subsequent calendar quarter, the amount of any such
excess shall be deducted from the management fee otherwise payable by the
Partnership in future calendar quarters.
(e) In the event that the Principals, the General Partner or the
Management Agent form a subsequent investment fund with at least
forty million dollars ($40,000,000) in committed capital and receive a
management fee from such fund prior to the seventh (7th) anniversary of the
Formation Date, the management fee payable pursuant to paragraph 6.1(b)(i)
shall be reduced by twenty percent (20%) of the amount otherwise payable
thereunder.
6.2 Expenses.
(a) From the management fee, the Management Agent shall bear all
expenses incurred in connection with the management of the Partnership,
except for those expenses borne directly by the Partnership set forth in
the immediately following subparagraphs, including all organizational fees
and expenses not borne by the Partnership pursuant to subparagraph (c) and
including all fees associated with retaining an independent escrow agent
pursuant to paragraph 7.5(e)(i) hereof. Such expenses to be borne by the
Management Agent shall include, without limitation, expenditures on account
of: salaries, wages, clerical, and other expenses relating to and incurred
by the employees of the Partnership, the General Partner and the general
partners of the General Partner; rentals payable for space used by the
Partnership, the General Partner and the Management Agent; computers and
other office equipment; bookkeeping services and preparing and distributing
reports to the Partners; travel and entertainment; and investigating and
evaluating investment opportunities in, and managing investments of, the
Partnership.
(b) The Partnership shall bear all costs and expenses incurred
in the holding and purchase, sale or exchange of securities (whether or not
ultimately consummated), including, but not by way of limitation, third
party fees, interest on borrowed money, real property or personal property
taxes on investments, brokerage fees, taxes applicable to the Partnership
on account of its operations, fees incurred in connection with the
maintenance of bank or custodian accounts, and all expenses incurred in
connection with the registration of the Partnership's securities under
applicable securities laws or regulations. The Partnership shall also bear
expenses incurred by the General Partner in serving as the tax matters
partner, the cost of liability and other insurance premiums for insurance
in which the Partnership is the named beneficiary, expenses related to any
escrow established pursuant to paragraph 7.5, costs associated with
Partnership meetings and the Partnership's Fund Committee, the management
fee paid to the Management Agent, all legal, accounting and consulting
fees, all costs and expenses arising out of the Partnership's
indemnification obligation pursuant to this Agreement, and all expenses
that are not normal operating expenses.
(c) The Partnership shall bear all organizational fees and
expenses incurred by or on behalf of the General Partner or the Partnership
in connection with the syndication, formation and organization of the
Partnership and the General Partner, up to a maximum of one hundred fifty
thousand dollars ($150,000), including legal and accounting fees, printing
costs, travel and communication costs and consulting or similar fees
incurred in connection with such organization and formation.
(d) The Partnership shall bear all fees and expenses relating to
any insurance policies or surety protection that the General Partner, in
its sole discretion, may deem appropriate to purchase.
(e) The Partnership shall bear all liquidation costs, fees, and
expenses incurred by the General Partner (or its designee) in connection
with the liquidation of the Partnership at the end of the Partnership's
term, specifically including but not limited to legal and accounting fees
and expenses.
Article VII
Withdrawals By And Distributions To The Partners
7.1 Interest. Except as specifically provided for herein, no
interest shall be paid to any Partner on account of its interest in the
capital of or on account of its investment in the Partnership.
7.2 Withdrawals By The Partners. No Partner may withdraw any amount
from its Capital Account unless such withdrawal is made pursuant to this
Article VII or Article XIII.
7.3 Partners' Obligation To Repay Or Restore. Except as required by
law or the terms of this Agreement, no Partner shall be obligated at any
time to repay or restore to the Partnership all or any part of any
distribution made to it from the Partnership in accordance with the terms
of this Article VII or Article X.
7.4 Cash Distributions. Ordinary income, other than Money Market
Income, and cash proceeds received by the Partnership from the disposition
of its long-term investments (which investments shall be made in accordance
with the Partnership's purpose and the terms of this Agreement) shall be
distributed at such times and in such amounts as determined in the sole
discretion of the General Partner. It is the intent of the General Partner
to distribute proceeds from the disposition of long-term investments and
portfolio income as soon as reasonably practicable; provided, however, that
no such distribution shall be made unless the General Partner determines,
in its sole discretion, that the distribution is consistent with the cash
needs of the Partnership, including the maintenance of reasonable reserves;
and, provided further, in no event shall the Partnership invest in long-term
investments more than an amount equal to the total Capital Commitments
of all Partners. Any distribution under this paragraph 7.4 shall be
allocated among the Partners (i) first in proportion to the amount of net
recognized capital gains and ordinary income, other than Money Market
Income, previously allocated to each Partner and not distributed and
(ii) thereafter in proportion to Partnership Percentages; provided,
however, that unless (A) there are no unrestored Contingent Losses
allocated to the Limited Partners' Capital Accounts, (B) after a
distribution the value of the Partnership portfolio will equal or exceed
one hundred twenty percent (120%) of the cost basis of the portfolio, and
(C) distributions will have been made to the Limited Partners in an amount
at least equal to the Limited Partners' prior capital contributions (with
in kind distributions valued at their fair market value at the time of
their distributions), the General Partner's portion of the distribution
described in the foregoing clause (i), in excess of that portion that is
based on the General Partner's Partnership Percentage, shall be retained by
the Partnership and distributed to the General Partner only upon the
satisfaction of conditions (A), (B) and (C) or, subject to paragraph 10.4,
upon liquidation of the Partnership or pursuant to the following sentence.
Notwithstanding the proviso in the previous sentence, in the event the sum
of (a) the balance in the General Partner's Capital Account plus (b) the
aggregate Return Value (as defined in paragraph 10.4) of the assets held in
escrow exceeds twenty and eight-tenths percent (20.8%) of the excess, if
any, of (1) the sum of (x) previous capital contributions to the
Partnership plus (y) Capital Commitments to the Partnership that have not
yet been contributed, over (2) previous distributions to the Partners that
were allocated among the Partners in accordance with Partnership
Percentages, said excess amount may be distributed to the General Partner
pursuant to this paragraph 7.4.
7.5 Discretionary In Kind Distributions.
(a) At the discretion of the General Partner, distributions of
Marketable Securities may be made in kind to the Partners as follows:
(i) In kind distributions of securities whose fair market
value exceeds their Adjusted Asset Value shall be distributed (A) twenty
percent (20%) to the General Partner, and (B) eighty percent (80%) to all
of the Partners in proportion to their Partnership Percentages, provided
that there are at the date of such distribution no Contingent Losses in the
Limited Partners' Capital Accounts that have not previously been restored
or are not restored by adjustments to such distribution as provided in
clause (ii) and, provided further, that unless, after the distribution,
(X) the value of the Partnership portfolio will equal or exceed one hundred
twenty percent (120%) of the cost basis of the portfolio, and
(Y) distributions will have been made to the Limited Partners in an amount
at least equal to the Limited Partners' prior capital contributions (with
in kind distributions valued at their fair market value at the time of the
distributions), the General Partner's portion of the distribution described
in the foregoing clause (A) shall, subject to the following sentence, be
placed in escrow pursuant to the terms of paragraph 7.5(e).
Notwithstanding the proviso in the previous sentence, in the event the sum
of (a) the balance in the General Partner's Capital Account plus (b) the
aggregate Return Value (as defined in paragraph 10.4) of the assets held in
escrow exceeds twenty and eight-tenths percent (20.8%) of the excess, if
any, of (1) the sum of (x) previous capital contributions to the
Partnership plus (y) Capital Commitments to the Partnership that have not
yet been contributed, over (2) previous distributions to the Partners that
were allocated among the Partners in accordance with Partnership
Percentages, said excess amount may be distributed to the General Partner
pursuant to this paragraph 7.5.
(ii) If there are Contingent Losses in the Limited Partners'
Capital Accounts that have not been previously restored, in kind
distributions described in clause (A) of subsection (i) shall be
distributed in accordance with Partnership Percentages until allocations
made pursuant to paragraph 7.5(c) have restored such Contingent Losses.
(iii) In kind distributions of securities whose fair market
value is less than their Adjusted Asset Value shall be distributed to all
of the Partners in proportion to Partnership Percentages.
(b) In order to maintain its proportionate share of Partnership
capital, the General Partner receiving a distribution in kind pursuant to
subparagraph (a)(i)(A) of this paragraph (including a distribution which is
placed in escrow) shall, at its option, either (i) be obligated to
contribute cash to the capital of the Partnership in an amount equal to the
tax basis of the securities distributed to the General Partner in such
distribution, which obligation shall be secured by the securities to be
distributed in kind to the General Partner and shall be due upon
liquidation of the Partnership; or (ii) contribute to the capital of the
Partnership in cash concurrently with such distribution an amount equal to
the amount described in the foregoing clause (i).
(c) Immediately prior to any distribution in kind, the
difference between the fair market value and the Adjusted Asset Value of
any securities distributed shall be allocated to the Capital Accounts of
the Partners as a Profit or Loss pursuant to Article V.
(d) Securities distributed in kind shall be subject to such
conditions and restrictions as the General Partner determines are legally
required or appropriate. Whenever classes of securities are distributed in
kind, each Partner shall receive its ratable portion of each class of
securities distributed in kind; provided, however, that in the event any
Limited Partner would receive an amount of any security that would cause
such Limited Partner to own or control in excess of the amount of such
security that it may lawfully own or control or may own or control without
tax penalty, then, upon receipt of notice to such effect from a Limited
Partner, the General Partner shall vary the method of distribution, in an
equitable manner, so as to avoid such excessive ownership or control.
(e) (i) In the event that the General Partner's portion of a
distribution is required to be placed in escrow pursuant to paragraph
7.5(a)(i), the securities distributed to the General Partner shall be
deposited with an independent escrow agent. The escrow agent shall hold
the securities pursuant to an escrow agreement that reflects the terms of
this subparagraph (e). The General Partner hereby grants to the
Partnership a security interest in all securities distributed by the
Partnership to the escrow agent. Assets held by the escrow agent shall be
managed at the direction of the General Partner. The General Partner and
its partners shall be liable for all taxes and other charges levied upon
the assets held by the escrow agent or any income or distributions thereon.
The General Partner shall have the benefit, and bear the risk, of all
distributions of income, dividends, cash, or other property on or relating
to the assets held in escrow or any other change in the character of any of
the assets therein. All distributions on assets held in escrow shall also
be held by the escrow agent.
(ii) The escrow agreement shall provide that the funds,
securities and other assets held in escrow shall be distributed by the
escrow agent upon request by the General Partner as follows:
(A) In the event that conditions (X) and (Y) of the
first sentence of paragraph 7.5(a)(i) are satisfied, all or a portion of
the assets held in escrow may be distributed to the General Partner;
(B) In the event the sum of (a) the balance in the
General Partner's Capital Account plus (b) the aggregate Return Value (as
defined in paragraph 10.4) of the assets held in escrow exceeds twenty and
eight-tenths percent (20.8%) of the excess, if any, of (1) the sum of (x)
previous capital contributions to the Partnership plus (y) Capital
Commitments to the Partnership that have not yet been contributed, over (2)
previous distributions to the Partners that were allocated among the
Partners in accordance with Partnership Percentages, said excess amount
held in escrow may be distributed to the General Partner.
(C) As of the first day of March of each year (and
upon termination of the Partnership), the escrow agreement shall provide
that the General Partner shall have the right to cause the escrow agent to
distribute cash to the General Partner in an amount equal to the product of
forty percent (40%) (with such percentage to be adjusted in good faith by
the General Partner to reflect changes in federal or California income tax
rates on long-term capital gains occurring after the date of this
Agreement) and the taxable income accruing to the General Partner in
respect of the assets held in escrow during the prior calendar year;
(D) Upon final liquidation of the Partnership, the
assets held by the escrow agent shall be contributed by the escrow agent to
the Partnership in satisfaction of and to the extent of the General
Partner's obligations pursuant to subparagraph 10.4(b), if any, and
distributed in accordance therewith. The balance, if any, shall be
distributed to the General Partner; and
(E) Except as provided in paragraph (e)(ii)(C), if
assets held in escrow are to be distributed to the General Partner, a pro
rata portion of each asset held in escrow (determined by reference to the
Return Value of such assets) shall be distributed.
(f) Non-Marketable Securities may be distributed only with the
prior written consent of the General Partner and Two-Thirds in Interest of
the Limited Partner.
7.6 Mandatory Distributions.
(a) Within ninety (90) days after the end of each calendar year
during the Partnership term, each Partner shall be paid in cash, to the
extent of cash reasonably available to the Partnership, an amount equal to
the excess, if any, of Money Market Income over Partnership expenses
allocated to it for such calendar year pursuant to paragraph 5.1(c).
(b) Within ninety (90) days after the end of each calendar year
during the Partnership term, each Partner shall be paid in cash an amount
representing a tax distribution equal to the product of (A) the taxable
income included in such Partner's allocation of Profit during such calendar
year and (B) forty percent (40%) (with such percentage to be adjusted in
good faith by the General Partner to reflect changes in federal or
California income tax rates on long-term capital gains occurring after the
date of this Agreement); provided, however, that, other than distributions
made pursuant to this paragraph 7.6, cash distributions made (Y) during the
calendar year in which such Profit is recognized and (Z) on or before March
31st of the year following the calendar year in which such Profit is
recognized (excluding distributions by reason of sales occurring in such
subsequent year) shall reduce the distributions otherwise required by this
subparagraph 7.6(b).
7.7 Withholding Obligations.
(a) The Partnership shall make payments with respect to any
Partner in amounts required to discharge any legal obligation of the
Partnership to withhold or make payments to any governmental authority with
respect to any federal, state or local tax liability, including penalties
and interest, of such Partner arising as a result of such Partner's
interest in the Partnership ("Tax Payments"). The amount of any such Tax
Payments shall be deemed to be a loan by the Partnership to such Partner.
The amount of such loan, plus interest at an annual rate equal to the prime
rate then being charged by the Partnership's primary bank plus (i) two (2)
percentage points from the date of any such Tax Payment and (ii) any costs
of collection incurred by the Partnership (including legal fees), shall be
repaid to the Partnership on demand or, at the election of the General
Partner, by offset to distributions otherwise allocable to the debtor
Partner.
(b) If and to the extent the Partnership is required to make any
Tax Payments with respect to any distribution in kind to a Partner pursuant
to paragraph 7.5 or otherwise, at the option of the General Partner, either
(i) such Partner's proportionate share of such distribution shall be
reduced by securities equal in value to the amount of such Tax Payments, or
(ii) such Partner shall pay to the Partnership prior to such distribution
an amount of cash equal to such Tax Payments. The securities described in
clause (i) may, in the discretion of the General Partner, either (A) be
distributed to the Partners in accordance with this paragraph or (B) be
sold by the Partnership to generate the cash necessary to satisfy such Tax
Payments. If the securities are sold, then for purposes of income tax
allocations only under this Agreement, any gain or loss on such sale or
exchange shall be allocated to the Partner to whom the Tax Payments relate.
Article VIII
Management Duties And Restrictions
8.1 Management. The General Partner shall have the sole and
exclusive right to manage, control, and conduct the affairs of the
Partnership and to do any and all acts on behalf of the Partnership,
including exercise of rights to elect to adjust the tax basis of
Partnership assets and to revoke such elections and to make such other tax
elections as the General Partner shall deem appropriate in furtherance of
and consistent with the purposes of the Partnership as set forth in
paragraph 1.2. If the General Partner elects to adjust the tax basis of
Partnership assets upon request of one (1) or more of the Limited Partners,
the incremental accounting costs incurred by the Partnership as a result of
such election shall be charged to the requesting Limited Partner or
Partners.
8.2 Time Commitment. For so long as any natural person remains (a) a
general partner of the General Partner or (b) an officer or director of the
general partner of the General Partner or the Management Agent, the General
Partner shall use its best efforts to cause each such person to devote
substantially all of his or her business time to the Partnership, the
Subsequent Funds, entities whose securities are held or were held by any of
the foregoing and entities in which such person serves as a director on the
Formation Date or on the date such person is admitted as a general partner
of the General Partner or becomes an officer of the general partner of the
General Partner.
8.3 No Control By The Limited Partners; No Withdrawal. The Limited
Partners shall take no part in the control or management of the affairs of
the Partnership nor shall the Limited Partners have any authority to act
for or on behalf of the Partnership except as is specifically permitted by
this Agreement. Except as specifically set forth in this Agreement, the
Limited Partners shall have no right to withdraw from the Partnership.
8.4 Subsequent Funds. The General Partner, the Management Agent and
the officers, directors and employees of the General Partner or the
Management Agent (for so long as such individuals serve as officers,
directors or employees of the General Partner or the Management Agent) may
not form or otherwise participate in the management of another venture
capital fund until the earlier of (i) such time that at least eighty
percent (80%) of the Partnership's aggregate Capital Commitments have been
invested, expensed, committed for investment in portfolio companies or
reserved for expenses or (ii) five (5) years after the Formation Date. A
subsequent fund formed in accordance with this paragraph shall be referred
to herein as a "Subsequent Fund." In the event that a Subsequent Fund has
been formed, the General Partner will allocate subsequent investment
opportunities between the Partnership and such Subsequent Fund in such a
manner as it reasonably determines to reflect the investment objectives and
remaining term of each entity. Each of the Limited Partners hereby
consents and agrees to the formation of Subsequent Funds and further
consents and agrees that neither the Partnership nor any of its Partners
shall have any rights in or to such Subsequent Funds, or any profits
derived therefrom.
8.5 Compliance With Partnership Agreement; Detrimental Acts. No
Partner, Principal nor any general partner of the General Partner shall
enter into any agreement the result of which would be for another person,
firm, or corporation to become directly interested in the Partnership other
than as provided for in this Agreement and no Partner, Principal nor any
partner of the General Partner shall do any act in contravention of this
Agreement, or that would be detrimental to the best interests of the
Partnership, or that would make it impossible to carry on the affairs of
the Partnership.
8.6 Investment Opportunities And Restrictions.
(a) Each of the Limited Partners hereby agrees that (i) the
General Partner may provide, but is under no obligation to provide, co-
investment opportunities to one (1) or more of the Limited Partners when
the General Partner believes that it is appropriate and in the best
interest of the Partnership; (ii) the General Partner may offer the right
to participate in investment opportunities of the Partnership to other
private investors, groups, partnerships, or corporations whenever the
General Partner, in its sole discretion, after reasonably considering the
Partnership's investment objectives, determines, and (iii) the General
Partner, its partners and the Principals may, in the General Partner's sole
discretion and subject to the approval of the Fund Committee, invest in
parallel with the Partnership; provided, however, that the co-investments
described in clauses (i), (ii) and (iii) above will be on terms and
conditions substantially identical (exclusive of amount) to those governing
the Partnership's investments.
(b) The General Partner and its general partner and their
Affiliates will not engage in any transaction that might reasonably be
viewed by an independent observer as trading against or in any way contrary
to the best interests of the Partnership and its portfolio companies.
(c) Unless approved by the Fund Committee, (i) not more than ten
percent (10%) of the Partnership's Committed Capital shall be invested in
any single portfolio company, (ii) the Partnership shall not invest in any
entity in which the General Partner, a Principal or Limited Partner (or an
Affiliate of any of the foregoing) has previously invested or otherwise has
a material direct or indirect economic interest, provided, however, that
this restriction will not prevent follow-on investments in existing
portfolio companies of the Partnership, and (iii) the General Partner shall
not cause the Partnership to make any investment that is inconsistent with
the Partnership's Business Plan dated ___________.
(d) The General Partner shall not borrow money or otherwise
incur indebtedness (including guarantees of loans to portfolio companies)
on behalf of the Partnership, including by acquiring property subject to
indebtedness, except (i) with the approval of Two-Thirds in Interest of the
Limited Partners, or (ii) on a short-term basis in anticipation of the
receipt of Additional Capital Contributions in an aggregate principal
amount at any one time not in excess of an amount equal to ten (10%) of the
aggregate Capital Commitments of all Partners.
(e) The General Partner will use its best efforts to operate the
Partnership in a manner that will not subject the income of any Partner, or
any partner of any Partner, subject to Section 511 of the Code to taxation
of such income as unrelated business taxable income, including unrelated
debt financed income, as defined in Sections 512 and 514 of the Code. The
General Partner shall not cause the Partnership to invest in any operating
partnership or other entity the operations of which would subject the
income of any Partner, or any partner of any Partner, subject to Section
511 of the Code to taxation of such income as unrelated business taxable
income, including unrelated debt financed income, as defined in Sections
512 and 514 of the Code.
(f) The General Partner will use its reasonable best efforts to
conduct the affairs of the Partnership so as to avoid having the
Partnership, or any Partner or partner thereof, treated as engaged in a
trade or business within the United States for purposes of Sections 871,
875, 882, 884 and 1446 of the Code.
(g) The General Partner shall not cause the Partnership to
invest in any other investment fund (excluding investments in money market
or similar funds) in which the manager thereof receives, as compensation, a
portion of the profits of such fund.
(i) Except with the prior approval of the Fund Committee, the
General Partner shall use its best efforts to ensure that not more than ten
percent (10%) of the Partnership's Capital Commitments shall be invested in
securities that are publicly traded when acquired by the Partnership
(excluding securities received in exchange for other securities that were
not publicly traded when acquired by the Partnership).
8.7 Business Opportunities. Consistent with the General Partner's
approach of adding value to the portfolio companies of the Partnership, the
General Partner will use reasonable efforts to identify and to refer, at
its discretion, any indirect business opportunities relating to portfolio
companies to one or more of the Limited Partners.
Article IX
Investment Representation And
Transfer Of Partnership Interests
9.1 Investment Representation Of The Limited Partners. This
Agreement is made with each of the Limited Partners in reliance upon each
Limited Partner's representation to the Partnership, which by executing
this Agreement each Limited Partner hereby confirms, that its interest in
the Partnership is to be acquired for investment, and not with a view to
the sale or distribution of any part thereof, and that it has no present
intention of selling, granting participation in, or otherwise distributing
the same, and each Limited Partner understands that its interest in the
Partnership has not been registered under the Securities Act and that any
transfer or other disposition of the interest may not be made without
registration under the Securities Act or pursuant to an applicable
exemption therefrom. Each Limited Partner further represents that it does
not have any contract, undertaking, agreement, or arrangement with any
person to sell, transfer, or grant participations to such person, or to any
third person, with respect to its interest in the Partnership.
9.2 Qualifications Of The Limited Partners. Each Limited Partner
represents that it is an "accredited investor" within the meaning of that
term as defined in Regulation D promulgated under the Securities Act.
9.3 Transfer By Limited Partner.
(a) No Limited Partner shall sell, assign, pledge, mortgage, or
otherwise dispose of or transfer its interest in the Partnership without
the prior written consent of the General Partner. Notwithstanding the
foregoing, after delivery of the opinion of counsel hereinafter required by
this Article IX, a Limited Partner may sell, assign, pledge, mortgage, or
otherwise dispose of or transfer its interest in the Partnership without
such consent (i) to any corporation directly or indirectly holding eighty
percent (80%) or more of the shares of the Limited Partner or any
corporation of which eighty percent (80%) or more of the shares are held
directly or indirectly by such corporation, including any corporation of
which the Limited Partner holds, directly or indirectly, eighty percent
(80%) or more of the shares; or (ii) pursuant to a merger, plan of
reorganization, sale or pledge of, or other general encumbrance on all or
substantially all of the Limited Partner's stock or assets; (iii) as may be
required by any law or regulation; or (iv) to a successor trust or trustee
of any Limited Partner that is an "employee benefit plan" within the
meaning of, and subject to the provisions of, ERISA.
(b) In addition to other restrictions on transfer contained
herein, a Limited Partner that is not a United States person, as defined in
the Securities Act, shall in no event transfer its Partnership interest to
a United States person for a period of one (1) year after the acquisition
of such interest.
(c) Notwithstanding anything in this Agreement to the contrary,
no interest in the Partnership may be subdivided for assignment or transfer
into interests smaller than an interest the aggregate initial offering
price of which would have been less than twenty-thousand dollars ($20,000).
9.4 Right Of First Refusal. If at any time a Limited Partner wishes
to transfer its Partnership interest, in whole or in part (and such
transfer is not permitted by, or consented to by the General Partner
pursuant to the other provisions of this Article IX), such Limited Partner
shall send a written notice to the General Partner and the other Limited
Partners indicating its desire to transfer all or part of its Partnership
interest, the price at which it proposes to make such transfer, and the
identity, if known, of the proposed transferee or transferees. At any time
within thirty (30) days after the sending of such notice, the General
Partner, with the consent of Two-Thirds in Interest of the Limited
Partners, may cause the Partnership to agree to purchase such interest at
the price stated in such notice, or, subject to such procedures as the
General Partner may determine, the other Limited Partners may agree to
purchase such interest at such price. If the Partnership or the Limited
Partners do not agree to purchase such interest at such price, the General
Partner may purchase it at such price not sooner than thirty (30) but
within sixty (60) days after the sending of the notice. If the entire
interest being offered by such Limited Partner is not so purchased, then
the Limited Partner may, within ninety (90) days of the original notice to
the Partners and subject to the general requirements of transfers
hereinafter set forth, sell any portion of such interest not so purchased
to any institution, of quality and standing comparable to the other Limited
Partners and approved by the General Partner, on terms that are
economically no more favorable to such buyer than were stated in such
Limited Partner's initial notice to the other Partners.
9.5 Requirements For Transfer. Notwithstanding the foregoing, unless
consented to by the General Partner, the transfer or other disposition of
the interest of a Limited Partner shall not be permitted if such transfer
or disposition would:
(i) result in the Partnership's assets being considered, in the
opinion of counsel for the Partnership, as "plan assets" within the meaning
of ERISA or any regulations proposed or promulgated thereunder;
(ii) result in the termination of the Partnership's tax year
under Section 708(b)(1)(B) of the Code;
(iii) result in violation of the Securities Act or any
comparable state law;
(iv) require the Partnership to register as an investment company
under the Investment Company Act of 1940, as amended;
(v) require the Partnership, the Principals, the General
Partner, or any partner of the General Partner to register as an investment
adviser under the Investment Advisers Act of 1940, as amended;
(vi) result in a termination of the Partnership's status as a
partnership for tax purposes;
(vii) result in a violation of any law, rule, or regulation
by the Limited Partner, the Partnership, the Principals, the General
Partner, or any partner of the General Partner; or
(viii) result in the Partnership being considered a publicly traded
partnership under Section 7704 of the Code.
Prior to effecting any transfer of Limited Partner interests the
General Partner shall have received an opinion satisfactory to it, or shall
have waived the requirement of such an opinion, covering the substance of
(i) through (viii). Such legal opinion shall be provided to the General
Partner by the transferring Limited Partner or the proposed transferee, and
any costs associated therewith, as well as all costs incurred by the
Partnership in connection with the transfer, shall be borne by the
transferring Limited Partner or the proposed transferee.
9.6 Substitution As A Limited Partner. A transferee of a Limited
Partner's interest pursuant to this Article IX shall become a substituted
Limited Partner only with the consent of the General Partner, which consent
may be withheld for any reason or for no reason, and only if such
transferee (a) elects to become a substituted Limited Partner by delivering
a notice of such election to the Partnership and (b) executes, acknowledges
and delivers to the Partnership such other instruments as the General
Partner may deem necessary or advisable to effect the admission of such
transferee as a substituted Limited Partner, including, without limitation,
the written acceptance and adoption by such transferee of the provisions of
this Agreement.
9.7 Transfer Of General Partnership Interest. The General Partner
may not sell, assign, pledge, mortgage, or otherwise dispose of its
Partnership interest without the prior written consent of Two-Thirds in
Interest of the Limited Partners.
Article X
Dissolution And Liquidation Of The Partnership
10.1 Extension Of Partnership Term. On the tenth anniversary of the
later of (i) the Formation Date or (ii) the last date on which a Limited
Partner is admitted to the Partnership (or increases its Capital
Commitment) pursuant to paragraph 3.2(b)(i), the General Partner may with
the consent of a Majority in Interest of the Limited Partners, extend the
Partnership term for not more than two (2) successive two (2) year periods
by delivery of notice to the Limited Partners (a "Notice of Extension").
During said two (2) year extension periods, the General Partner shall use
its best efforts to convert the Partnership's Nonmarketable Securities into
Marketable Securities or cash. The General Partner shall not purchase the
securities of any new portfolio company during such period; provided,
however, that the General Partner may (a) purchase additional securities of
an existing portfolio company if it deems such a purchase to be in the best
interest of the Partnership and (b) exchange the securities of an existing
portfolio company for other securities. The management fee payable to the
Management Agent during any extension period shall be as determined by the
General Partner and approved by the Fund Committee, which approval shall
not be unreasonably withheld.
10.2 Liquidation After An Event Of Early Termination. In the event of
liquidation of the Partnership after an Event of Early Termination, a
Majority in Interest of the Limited Partners shall (i) elect one (1) or
more liquidators to manage the liquidation of the Partnership and
(ii) determine the amount of any fees to be paid to such liquidator(s).
10.3 Winding Up Procedures.
(a) Promptly upon final dissolution of the Partnership, the
affairs of the Partnership shall be wound up and the Partnership
liquidated. The closing Capital Accounts of all the Partners shall be
computed as of the date of final dissolution as if the date of final
dissolution were the last day of an Accounting Period in accordance with
Article V, and then adjusted in the following manner:
(i) All assets and liabilities of the Partnership shall be
valued as of the date of final dissolution. For purposes of this
paragraph, the amount of any obligation of the General Partner to the
Partnership shall be deemed an asset of the Partnership.
(ii) The Partnership's assets as of the date of final
dissolution shall be deemed to have been sold at their fair market values
and the resulting Profit or Loss shall be allocated to the Partners'
Capital Accounts in accordance with the provisions of Article V.
(iii) With respect to any obligations on the part of the
General Partner pursuant to any promissory notes contributed to the
Partnership under paragraph 4.3 or to contribute capital pursuant to
paragraph 7.5(b)(i) that are outstanding at the time of the Partnership's
final dissolution, the General Partner may elect to satisfy such
obligations either (A) in cash or in securities previously received by the
General Partner from the Partnership (with such securities valued pursuant
to paragraph 12.1 and 12.2(e) at the time they are transferred to the
Partnership) within ninety (90) days after the partnership's dissolution,
(B) by reducing the General Partner's closing Capital Account, but not
below zero, or (C) by a combination of the foregoing.
The result for each Partner shall be its closing Capital Account. The
amount of each Partner's closing Capital Account divided by the sum of the
closing Capital Accounts for all of the Partners as of such date shall be
such Partner's "Final Partnership Percentage."
(b) Distributions in liquidation may be made in cash or in kind
or partly in cash and partly in kind. The General Partner or the
liquidator shall use its best judgment as to the most advantageous time for
the Partnership to sell investments or to make distributions in kind. All
cash and each security distributed in kind after the date of final
dissolution of the Partnership shall be distributed ratably in accordance
with the General Partner and the Limited Partners' Final Partnership
Percentages, unless such distribution would result in a violation of a law
or regulation applicable to a Limited Partner or a tax penalty to such
Limited Partner, in which event, upon receipt by the General Partner of
notice to such effect, such Limited Partner may designate a different
entity to receive the distribution, or designate, subject to the approval
of the General Partner, an alternative distribution procedure (provided
such alternative distribution procedure does not prejudice any of the other
Partners). Each security so distributed shall be subject to reasonable
conditions and restrictions necessary or advisable in order to preserve the
value of such security or for legal reasons.
10.4 Payments In Liquidation.
(a) The assets of the Partnership shall be distributed in
liquidation of the Partnership in the following order:
(i) to the creditors of the Partnership, other than
Partners, in the order of priority established by law, either by payment or
by establishment of reserves;
(ii) to the Partners, in repayment of any loans made to, or
other debts owed by, the Partnership to such Partners;
(iii) to the General Partner and the Limited Partners in
respect of the positive balances in their Capital Accounts in compliance
with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).
(b) (i) If, upon liquidation of the Partnership, it is
determined that distributions made to the General Partner with respect to
its twenty percent (20%) interest in Partnership Profit or Loss have
exceeded twenty percent (20%) of the aggregate distributions of cumulative
net Profit of the Partnership over its entire term (with distributions in
kind valued at the time of distribution and reduced to the extent the
General Partner has previously made or is obligated to make a contribution
pursuant to paragraph 7.5(b)), the General Partner shall promptly return
such part or all of the distributions made to it with respect to its twenty
percent (20%) interest, excluding distributions made pursuant to paragraph
7.6(b) (and other distributions to the extent said distributions reduce
distributions under paragraph 7.6(b)), to the extent of such excess.
Returns made by the General Partner pursuant to this paragraph 10.4(b)
shall be distributed promptly to all Partners in accordance with their
Final Partnership Percentages.
(ii) Notwithstanding the foregoing clause (i), distributions
made to the General Partner pursuant to paragraph 7.6(b) shall be subject
to return pursuant to the foregoing clause (i) to the extent that
additional Loss allocations to the General Partner required to reflect such
return obligation and any resulting loss allocation to the Principals by
reason of their interests in the General Partner would give rise to a tax
benefit to the Principals by reason of a Principal's ability to (A) offset
such additional Loss against net gains otherwise reportable by the
Principal in the year such Loss is allocated, or (B) deduct such Losses
against net taxable income otherwise reportable by the Principal in the
year such Loss is allocated. For purposes of determining whether such Loss
allocations would give rise to tax benefits to a Principal, (A) such
Principal's tax liability will initially be computed without taking into
account any such Loss allocation, (B) such Principal's tax liability will
then be computed taking into account any such Loss allocation, and (C) the
tax benefit to the Principal shall be equal to the excess, if any, of the
amount determined under clause (A) over the amount determined under clause
(B). The calculations required under this subparagraph 10.4 (b)(ii) shall
be calculated and reported by a certified public accountant and no Partner
will have any right to review a Principal's tax returns in connection with
this subparagraph 10.4(b)(ii).
(iii) Any return obligation pursuant to clauses (b)(i) and
(b)(ii) shall be satisfied first out of any assets held in escrow pursuant
to paragraph 7.5(e), and the balance of such return obligation, if any, may
be satisfied, at the election of the General Partner, in cash or by the
return of securities previously distributed to the General Partner. To the
extent assets held in escrow are used to satisfy the return obligation,
unless otherwise agreed to by the General Partner and a Majority in
Interest of the Limited Partners, a pro rata portion of each such asset
(calculated by reference to the Return Value of such assets as defined
below) shall be returned to the Partnership. Upon the return of any assets
other than cash to the Partnership, such assets shall be valued at their
Return Value for purposes of determining when the General Partner has
satisfied its return obligation pursuant to clauses (b)(i) and (b)(ii). In
the case of assets held in escrow pursuant to paragraph 7.5(e) prior to
transfer to the Partnership, the Return Value shall be equal to the greater
of the fair market value (determined pursuant to paragraph 12.1) of such
assets determined (1) on the dates such assets were distributed by the
Partnership, and (2) on the date such assets are transferred to the
Partnership. In the case of assets transferred to the Partnership directly
from the General Partner, the Return Value shall be equal to the fair
market value (determined pursuant to paragraph 12.1) of such assets on the
date returned to the Partnership.
Article XI
Financial Accounting,
Reports, Meetings And Voting
11.1 Financial Accounting; Fiscal Year. The books and records of the
Partnership shall be kept in accordance with the provisions of this
Agreement and otherwise in accordance with generally accepted accounting
principles consistently applied, and shall be audited at the end of each
fiscal year by a nationally recognized independent certified public
accounting firm selected by the General Partner. The Partnership's fiscal
year shall be the calendar year.
11.2 Supervision; Inspection Of Books. Proper and complete books of
account of the business of the Partnership, copies of the Partnership's
federal, state and local tax returns for each fiscal year, the schedule of
partners set forth in Exhibit A, this Agreement and the Partnership's
Certificate of Limited Partnership shall be kept under the supervision of
the General Partner at the principal office of the Partnership. Such books
and records shall be open to inspection by the Limited Partners, or their
authorized representatives, at any reasonable time during normal business
hours after reasonable advance notice.
11.3 Quarterly Reports. Beginning with the first full calendar
quarter of Partnership operations, the General Partner shall transmit to
the Limited Partners within thirty (30) days after the close of each of the
first three (3) calendar quarters of each year, unaudited financial
statements (including each Partner's Capital Account as adjusted for its
allocable share of unrealized gains and losses), a summary of acquisitions
and dispositions of investments made by the Partnership during that
quarter, and a list of investments then held, together with a valuation of
such investments.
11.4 Annual Report; Financial Statements Of The Partnership. The
General Partner shall transmit to the Limited Partners within seventy-five
(75) days after the close of the Partnership's fiscal year audited
financial statements of the Partnership prepared in accordance with the
terms of this Agreement and otherwise in accordance with generally accepted
accounting principles, including an income statement for the year then
ended and balance sheet as of the end of such year, a statement of changes
in the Partners' Capital Accounts (as adjusted for unrealized gains and
losses), and a list of investments then held. The financial statements
shall be accompanied by a report from the General Partner to the Limited
Partners, which shall include a status report on investments then held, a
summary of acquisitions and dispositions of investments made by the
Partnership during the preceding quarter, a valuation of each such
investment, and a brief statement on the affairs of the Partnership during
the fiscal year then ended.
11.5 Tax Returns And Information. The General Partner shall cause the
Partnership's tax return and IRS Form 1065, Schedule K-1, to be prepared
and delivered to the Limited Partners within seventy-five (75) days after
the close of the Partnership's fiscal year. The Partnership shall upon the
request of any Limited Partner promptly furnish to such Limited Partner any
information such Limited Partner may require or reasonably request in order
to withhold tax or to file tax returns and reports or to furnish tax
information to any of its partners.
11.6 Tax Matters Partner. The General Partner shall be the
Partnership's tax matters partner under the Code and under any comparable
provision of state law. The tax matters partner shall employ experienced
tax counsel to represent the Partnership in connection with any audit or
investigation of the Partnership by the Internal Revenue Service and in
connection with all subsequent administrative and judicial proceedings
arising out of such audit. If the tax matters partner is required by law
or regulation to incur fees and expenses in connection with tax matters not
affecting all the Partners, then the tax matters partner may, in its sole
discretion, seek reimbursement from those Partners on whose behalf such
fees and expenses were incurred. The tax matters partner shall keep the
Partners informed of all administrative and judicial proceedings, as
required by Section 6223(g) of the Code, and shall furnish to each Partner,
if such Partner so requests in writing, a copy of each notice or other
communication received by the tax matters partner from the Internal Revenue
Service, except such notices or communications as are sent directly to such
requesting Partner by the Internal Revenue Service. The relationship of
the tax matters partner to the Limited Partners is that of a fiduciary, and
the tax matters partner has fiduciary obligations to perform its duties as
tax matters partner in such manner as will serve the best interest of the
Partnership and all of the Partnership's Partners. To the fullest extent
permitted by law, the Partnership agrees to indemnify the tax matters
partner and its agents and save and hold them harmless, from and in respect
to all (i) fees, costs and expenses in connection with or resulting from
any claim, action, or demand against the tax matters partner, the General
Partner or the Partnership that arise out of or in any way relate to the
tax matters partner's status as tax matters partner for the Partnership,
and (ii) all such claims, actions, and demands and any losses or damages
therefrom, including amounts paid in settlement or compromise or any such
claim, action, or demand; provided that this indemnity shall not extend to
conduct by the tax matters partner adjudged (i) not to have been undertaken
in good faith to promote the best interest of the Partnership or (ii) to
have constituted recklessness or intentional wrongdoing by the tax matters
partner.
11.7 Annual Meetings. An annual meeting of the Partners shall be held
during each full calendar year of the Partnership's term at such time and
place as the General Partner may designate in a notice to the Limited
Partners delivered at least thirty (30) days in advance of the scheduled
date of each such meeting. The purpose of each such meeting shall be to
present the annual report and to discuss issues and opportunities
associated with the Partnership. The Partners shall bear their own costs
associated with attending such annual meetings.
11.8 Voting. Except as specifically set forth in this Agreement, the
Limited Partners shall have no right to vote on any matter relative to the
Partnership and its affairs.
Article XII
Valuation And Fund Committee
12.1 Valuation. Subject to the specific standards set forth below and
any valuation guidelines adopted by the General Partner and approved by the
Fund Committee, which guidelines shall not be inconsistent with the terms
of this Agreement, the valuation of securities and other assets and
liabilities under this Agreement shall be at fair market value. Except as
may be required under applicable Treasury Regulations, no value shall be
placed on the goodwill or the name of the Partnership in determining the
value of the interest of any Partner or in any accounting among the
Partners.
(a) The following criteria shall be used for determining the
fair market value of securities:
(i) Securities not subject to investment letter or other
similar restrictions on free Marketability:
(A) If traded on one (1) or more securities exchanges
of any country or quoted on the NASDAQ National Market System, the value
shall be deemed to be the securities' average closing price for the five
(5) trading days immediately preceding the valuation date as reported in
the Wall Street Journal or another nationally recognized publication or
service that reports such data.
(B) If actively traded over-the-counter in any country
but not quoted on the NASDAQ National Market System, the value shall be
deemed to be the average closing bid price of such securities for the five
(5) trading days immediately preceding the valuation date reflecting an
appropriate discount, if any, for the illiquidity of the Partnership's
position.
(C) If there is no active public market, the General
Partner shall make a determination of the fair market value, taking into
consideration the cost basis of the securities, developments concerning the
issuing company subsequent to the acquisition of the securities, any
financial data and projections of the issuing company provided to the
General Partner, and such other factor or factors as the General Partner
may deem relevant.
(ii) Securities subject to investment letter or other
restrictions on free Marketability shall be valued by making an appropriate
adjustment from the value determined under (A), (B), or (C) above to
reflect the effect of the restrictions on transfer.
(b) If the General Partner in good faith determines that,
because of special circumstances, the valuation methods set forth in this
paragraph do not fairly determine the value of a security, the General
Partner shall make such adjustments or use such alternative valuation
method as it deems appropriate.
12.2 Fund Committee.
(a) The Partnership shall have a Fund Committee appointed by the
General Partner and comprised of not fewer than three (3) nor more than
five (5) voting members who shall be representatives of the Limited
Partners; provided, however, that a Limited Partner shall not be required
to accept an appointment by the General Partner to the Fund Committee. The
chair of the Fund Committee shall be designated by the General Partner.
The Fund Committee shall be responsible for:
(i) approving any valuation guidelines adopted by the
General Partner pursuant to paragraph 12.1 and approving, pursuant to the
provisions of paragraph 12.2(e), the General Partner's determination of the
fair market value of the Partnership's assets and liabilities (for this
purpose the Fund Committee may request such information concerning the
Partnership's assets and liabilities as is reasonable);
(ii) reviewing the status of the Partnership's portfolio
companies;
(iii) approving investments as described in paragraph 8.6(a);
(iv) evaluating the Partnership's investments and
dispositions;
(v) providing the Partnership and the General Partner with
such counsel and advice as the General Partner shall reasonably request,
including advice with respect to any potential conflicts of interest
between the General Partner and the Partnership and advice regarding
potential investments and investment opportunities; and
(vi) performing such other functions as may be provided for
herein or as otherwise agreed to by the General Partner and the Fund
Committee.
(b) The Fund Committee shall conduct its affairs in such manner
and by such procedures as a majority of its members deems appropriate;
provided, however, that the Fund Committee shall not schedule meetings more
often than annually unless called more frequently by the General Partner
or, in exceptional circumstances, by a majority of the Fund Committee. All
actions taken by the Fund Committee shall be taken by majority vote.
Notice to Fund Committee members shall be made pursuant to the procedures
set forth in this Agreement for notices to Partners.
(c) The reasonable out-of-pocket expenses incurred by the Fund
Committee and its Members shall be an expense to be borne by the
Partnership.
(d) The Fund Committee shall take no part in the control or
management of the Partnership's affairs, nor shall the Fund Committee have
any power or authority to act for or on behalf of the Partnership. Members
of the Fund Committee shall be entitled to the benefits of the exculpation
and indemnification provisions of paragraphs 15.3 and 15.4 as provided
therein.
(e) Subject to the provisions of this paragraph 12.2(e), the
General Partner shall have the power at any time to determine, for all
purposes of this Agreement, the fair market value of any of the assets and
liabilities of the Partnership. A statement setting forth in writing in
reasonable detail such fair market value, with necessary explanations
thereof, shall be sent to each member of the Fund Committee when a
determination of such value is necessary pursuant to the terms of this
Agreement, who shall have thirty (30) days after the transmittal of such
notice to approve or disapprove such valuation of specific assets and
liabilities. Approval of such valuation in accordance with valuation
guidelines established under paragraph 12.1 shall not be unreasonably
withheld. If within thirty (30) days of delivery of such statement a
majority of the Fund Committee members fail to notify the General Partner
of their disapproval of any such determination, or if a majority of the
members notify the General Partner of their approval, such valuation shall
be final and conclusive with respect to all of the Partners. If within
thirty (30) days of delivery of such statement a majority of the Fund
Committee members notify the General Partner of their disapproval of any
such determination, the General Partner shall either submit a new
determination in place of the one disapproved or request a meeting with the
Fund Committee to discuss a mutually satisfactory valuation. If within
thirty (30) days of the end of such first-mentioned thirty (30) day period
values satisfactory to the General Partner and the Fund Committee shall not
have been determined, the General Partner shall submit the dispute to
arbitration in San Francisco, California, in accordance with the rules,
then obtaining, of the American Arbitration Association. In such
arbitration, the General Partner and the Fund Committee shall each select
an arbitrator and the two arbitrators so selected shall choose a third
arbitrator to resolve the dispute. The fees and expenses of any arbitrator
retained in accordance with the provisions hereof shall be borne by the
Partnership.
Article XIII
Partners Subject To Special Regulation
13.1 ERISA Partners.
(a) Each Limited Partner that is an "employee benefit plan" or
is an entity that is deemed to hold "plan assets" (the "ERISA Partner"),
each within the meaning of, and subject to the provisions of, ERISA hereby
(i) acknowledges that, for so long as the Partnership is a venture capital
operating company within the meaning of Section 2510.3-101(d) of Title 29
of the Code of Regulations, it is its understanding that neither the
Partnership, the General Partner, nor any of the Affiliates of the General
Partner, are "fiduciaries" of such Limited Partner within the meaning of
ERISA by reason of the Limited Partner investing its assets in, and being a
Limited Partner of, the Partnership; (ii) acknowledges that it has been
informed of and understands the investment objectives and policies of, and
the investment strategies that may be pursued by, the Partnership;
(iii) acknowledges that it is aware of the provisions of Section 404 of
ERISA relating to the requirements for investment and diversification of
the assets of employee benefit plans and trusts subject to ERISA;
(iv) represents that it has given appropriate consideration to the facts
and circumstances relevant to the investment by that ERISA Partner's plan
in the Partnership and has determined that such investment is reasonably
designed, as part of such portfolio, to further the purposes of such plan;
(v) represents that, taking into account the other investments made with
the assets of such plan, and the diversification thereof, such plan's
investment in the Partnership is consistent with the requirements of
Section 404 and other provisions of ERISA; (vi) acknowledges that it
understands that current income will not be a primary objective of the
Partnership; and (vii) represents that, taking into account the other
investments made with the assets of such plan, the investment of assets of
such plan in the Partnership is consistent with the cash flow requirements
and funding objectives of such plan; provided, however, that the
representations in clauses (iv), (v) and (vii) shall apply only to
"employee benefit plan" Limited Partners.
(b) Notwithstanding any provision contained herein to the
contrary, each ERISA Partner may elect to withdraw from the Partnership, or
upon demand by the General Partner shall withdraw from the Partnership, at
the time and in the manner hereinafter provided, if either the ERISA
Partner or the General Partner shall obtain an opinion of counsel (which
counsel shall be reasonably acceptable to both the ERISA Partner and the
General Partner) to the effect that, as a result of applicable statutes,
regulations, case law, administrative interpretations, or similar authority
(i) the continuation of the ERISA Partner as a Limited Partner of the
Partnership or the conduct of the Partnership will result, or there is a
material likelihood the same will result, in a material violation of ERISA,
or (ii) all or any portion of the assets of the Partnership constitute
assets of the ERISA Partner for the purposes of ERISA and are subject to
the provisions of ERISA to substantially the same extent as if owned
directly by the ERISA Partner. In the event of the issuance of such
opinion of counsel, a copy of such opinion shall be given to all the
Partners, together with the written notice of the election of the ERISA
Partner to withdraw or the written demand of the General Partner for
withdrawal, whichever the case may be. Thereupon, unless within one
hundred twenty (120) days after receipt of such written notice and opinion
the General Partner is able to eliminate the necessity for such withdrawal
to the reasonable satisfaction of the ERISA Partner and the General
Partner, whether by correction of the condition giving rise to the
necessity of the Limited Partner's withdrawal, or the amendment of this
Agreement, or otherwise, such Limited Partner shall withdraw its entire
interest in the Partnership, such withdrawal to be effective upon the last
day of the fiscal quarter during which such one hundred twenty (120) day
period expired.
(c) The withdrawing Limited Partner shall be entitled to receive
within one hundred twenty (120) days after the date of such withdrawal an
amount equal to the amount of such Partner's Capital Account, adjusted to
reflect unrealized gains and losses of the Partnership, as of the effective
date of such withdrawal.
(d) Any distribution or payment to a withdrawing Limited Partner
pursuant to this paragraph may, in the sole discretion of the General
Partner, be made in cash, in a pro rata distribution of securities, in the
form of a promissory note, the terms of which shall be mutually agreed upon
by the General Partner and the withdrawing Limited Partner and which shall
provide for partial payments, as if such promissory note represented an
equity interest in the Partnership, at the time of cash distributions to
the Partners, or any combination thereof. In determining the form of
payment to be made to the withdrawing Limited Partner, the General Partner
will use reasonable efforts to make payments in cash to the extent
reasonably available and subject to the ongoing cash requirements of the
Partnership as determined by the General Partner.
Article XIV
Certain Definitions
14.1 Accounting Period. An Accounting Period shall be (i) a calendar
year if there are no changes in the Partners' respective interests in the
Profits or Losses of the Partnership during such calendar year except on
the first day thereof, or (ii) any other period beginning on the first day
of a calendar year, or any other day during a calendar year upon which
occurs a change in such respective interests, and ending on the last day of
a calendar year, or on the day preceding an earlier day upon which any
change in such respective interest shall occur.
14.2 Adjusted Asset Value. The Adjusted Asset Value with respect to
any asset shall be the asset's adjusted basis for federal income tax
purposes, except as follows:
(a) The initial Adjusted Asset Value of any asset contributed by
a Partner to the Partnership shall be the gross fair market value of such
asset at the time of contribution, as determined by the contributing
Partner and the Partnership.
(b) In the discretion of the General Partner, the Adjusted Asset
Values of all Partnership assets may be adjusted to equal their respective
gross fair market values, as determined by the General Partner, and the
resulting unrecognized profit or loss allocated to the Capital Accounts of
the Partners pursuant to Article V, as of the following times: (i) the
acquisition of an additional interest in the Partnership by any new or
existing Partner in exchange for more than a de minimis capital
contribution; and (ii) the distribution by the Partnership to a Partner of
more than a de minimis amount of Partnership assets, unless all Partners
receive simultaneous distributions of either undivided interests in the
distributed property or identical Partnership assets in proportion to their
interests in Partnership distributions as provided in paragraphs 7.4, 7.5
and 7.6.
(c) The Adjusted Asset Values of all Partnership assets shall be
adjusted to equal their respective gross fair market values, as determined
by the General Partner, and the resulting unrecognized profit or loss
allocated to the Capital Accounts of the Partners pursuant to Article V, as
of the following times: (i) the termination of the Partnership for federal
income tax purposes pursuant to Code Section 708(b)(1)(B); and (ii) the
termination of the Partnership either by expiration of the Partnership's
term or the occurrence of an Event of Termination.
14.3 Adjusted Capital Account Balance. The Adjusted Capital Account
Balance for each Partner shall be equal to the balance in the Partner's
Capital Account as of the end of the relevant Accounting Period, after
giving effect to the following adjustments:
(a) Credit to such Capital Account any amounts which the Partner
is obligated to restore, including, without limitation, amounts described
in clause (i) of paragraph 7.5(b) and in paragraph 10.4(b), or is deemed to
be obligated to restore pursuant to the penultimate sentence of Treasury
Regulations Section 1.704-1(b)(4)(iv)(f); and
(b) Debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)
(d)(6) of the Treasury Regulations.
14.4 Affiliate. An Affiliate of any person shall mean any person that
directly, or indirectly through one (1) or more intermediaries, controls,
or is controlled by or is under common control with the person specified;
provided, however, that the definition of Affiliate vis a vis the General
Partner shall include the Principals, the Management Agent and the officers
and managers of the Management Agent.
14.5 Capital Account. The Capital Account of each Partner shall
consist of its original capital contribution (i) increased by any
additional capital contributions, its share of income or gain that is
allocated to it pursuant to this Agreement, and the amount of any
Partnership liabilities that are assumed by it or that are secured by any
Partnership property distributed to it, and (ii) decreased by the amount of
any withdrawals by it, its share of expense or loss that is allocated to it
pursuant to this Agreement, and the amount of any of its liabilities that
are assumed by the Partnership or that are secured by any property
contributed by it to the Partnership. The foregoing provision and the
other provisions of this Agreement relating to the maintenance of Capital
Accounts are intended to comply with Treasury Regulation Section 1.704-1(b)(2)
(iv), and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the General Partner shall determine
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, the General Partner may make such modification, provided that
it is not likely to have more than an insignificant effect on the total
amounts distributable to any Partner pursuant to Article VII and Article X.
14.6 Capital Commitment. A Partner's Capital Commitment shall mean
the aggregate amount of capital that such Partner has agreed to contribute
to the Partnership.
14.7 Code. The Code is the Internal Revenue Code of 1986, as amended
(or any corresponding provisions of succeeding law).
14.8 ERISA. ERISA shall mean the Employee Retirement Income Security
Act of 1974, as amended.
14.9 Event Of Early Termination. An Event of Early Termination shall
mean: (a) the withdrawal, bankruptcy, or dissolution and commencement of
winding up of the sole remaining general partner of the Partnership; or
(b) the election by Two-Thirds in Interest of the Limited Partners to
terminate the Partnership in the event that the principal officers or
directors of the general partner of the General Partner or the Management
Agent (i) fail, in the aggregate, to devote substantially all of their
business time to the business of the Partnership or the Subsequent Funds,
(ii) engage, individually or collectively, in fraud with respect to the
operation of the Partnership, or (iii) substantially neglect, in the
aggregate, their duties arising under this Agreement to the material
detriment of the Partnership; or (c) the election by a Majority in Interest
of the Limited Partners to terminate the Partnership in the event that both
of the Principals fail to devote substantially all of their business time
to the business of the Partnership, the Subsequent Funds, entities whose
securities are held or were held by the Partnership or the Subsequent Funds
and entities in which a Principal serves as a director on the Formation
Date; or (d) the election by Seventy-Five Percent in Interest of the
Limited Partners to terminate the Partnership in the event that the entire
interest of one or more ERISA Partners in the Partnership is withdrawn
pursuant to, and in accordance with, Article XIII provided that such
interest(s) represent a Partnership Percentage of more than twenty-five
percent (25%).
14.10 Marketable; Marketable Securities; Marketability. These
terms shall refer to securities that are (a) registered under the
Securities Act, (b) traded on a national securities exchange or over-the-counter
in any country, (c) currently the subject of an effective issuer-filed
Securities Act registration statement or similar registration
statement outside of the United States, or (d) direct obligations of, or
obligations guaranteed as to principal and interest by, the United States,
certificates of deposit maturing within one (1) year or less issued by an
institution insured by the Federal Deposit Insurance Corporation or the
Federal Savings and Loan Insurance Corporation, or similar securities.
14.11 Money Market Income. Money Market Income shall be income
received from any of the following: (a) bonds or interest-bearing notes or
obligations which are issued or guaranteed by the United States or any
agency thereof for the payment of which the full faith and credit of the
United States is pledged (b) commercial paper of "prime" quality, as
defined by either a rating of A-1 by Standard & Poor's Corporation or P-1
by Moody's Investor's Service, Inc., (c) bills of exchange or time drafts
drawn on and accepted by a commercial bank having undivided capital and
surplus in excess of $500,000,000; (d) negotiable certificates of deposit
issued by a Federal- or State-chartered bank or savings and loan
association or by a branch of a foreign bank licensed by the State of
California, each having (i) undivided capital and surplus in excess of
$500,000,000 and (ii) debt rated no lower than A by Standard & Poor's
Corporation or A by Moody's Investors Service, Inc.; (e) repurchase
agreements secured or guaranteed by bonds or interest-bearing notes or
obligations delivered to a third party custodian issued or guaranteed by
the United States or any agency thereof for the payment of which the full
faith and credit of the United States is pledged; (f) any money market
mutual funds with assets of not less than $750,000,000; (g) any cash, bank
or money market account at one or more banks meeting the criteria contained
in clause (d) above that the General Partner may select; and (h) the
interest on any promissory notes contributed by the General Partner
pursuant to paragraph 4.3. Money Market Income shall not include other
interest income or dividends or other non-liquidating corporate
distributions which are not a return of capital for federal income tax
purposes.
14.12 Nonmarketable Securities. Nonmarketable Securities are all
securities other than Marketable Securities.
14.13 Partnership Percentage. The Partnership Percentage for each
Partner shall be determined by dividing the amount of each Partner's
Capital Commitment by the sum of the Capital Commitments of all of the
Partners. The sum of the Partners' Partnership Percentages shall be one
hundred percent (100%).
14.14 Percentage In Interest; Majority In Interest. A specified
fraction or percentage in interest of the Partners or of the Limited
Partners shall mean Partners or Limited Partners whose Partnership
Percentages exceed the required fraction or percentage of the Partnership
Percentages of all such Partners or Limited Partners; provided, however,
that (a) if a Limited Partner interest is held by the General Partner, a
Principal, the Management Agent or an Affiliate of the General Partner, a
Principal, or the Management Agent, the Partnership Percentage held by such
Limited Partner shall not be considered as outstanding in making such
calculation. A Majority in Interest shall mean 50.01% in interest or more.
14.15 Principals. Principals shall mean Nancy C. Floyd and
Maurice E.P. Gunderson.
14.16 Profit Or Loss. Profit or Loss shall be an amount computed
for each Accounting Period as of the last day thereof that is equal to the
Partnership's taxable income or loss for such Accounting Period, determined
in accordance with Section 703(a) of the Code (for this purpose, all items
of income, gain, loss, or deduction 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 Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profit or Loss
pursuant to this paragraph shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i) and not
otherwise taken into account in computing Profit or Loss pursuant to this
paragraph shall be subtracted from such taxable income or loss;
(c) Gain or loss resulting from any disposition of a Partnership
asset with respect to which gain or loss is recognized for federal income
tax purposes shall be computed by reference to the Adjusted Asset Value of
the asset disposed of rather than its adjusted tax basis;
(d) The difference between the gross fair market value of all
Partnership assets and their respective Adjusted Asset Values shall be
added to such taxable income or loss in the circumstances described in
paragraph 14.2; and
(e) Items which are specially allocated pursuant to
paragraphs 5.1(c) and 5.3 hereof shall not be taken into account in
computing Profit or Loss.
14.17 Securities Act. Securities Act is the Securities Act of
1933, as amended.
14.18 Treasury Regulations. Treasury Regulations shall mean the
Income Tax Regulations promulgated under the Code, as such Regulations may
be amended from time to time (including corresponding provisions of
succeeding Regulations).
Article XV
Other Provisions
15.1 Governing Law; Consent To Jurisdiction. This Agreement shall be
governed by and construed under the laws of the State of California as
applied to agreements among the residents of such state made and to be
performed entirely within such state. Each of the parties hereto consents
to the personal jurisdiction of, and agrees venue shall be proper in, the
state and federal courts located in the State of California with respect to
any lawsuit arising from, or relating to, this Agreement.
15.2 Limitation Of Liability Of The Limited Partners. Except as
required by law, no Limited Partner shall be bound by, nor be personally
liable for, the expenses, liabilities, or obligations of the Partnership in
excess of its Capital Commitment to the Partnership.
15.3 Exculpation. Neither the General Partner, any member of the Fund
Committee, the Principals nor their respective partners, employees, or
Affiliates shall be liable to any Limited Partner or the Partnership for
honest mistakes of judgment, or for action or inaction, taken in good faith
for a purpose that was reasonably believed to be in the best interest of
the Partnership, or for losses due to such mistakes, action, or inaction,
or to the negligence, dishonesty, or bad faith of any employee, broker, or
other agent of the Partnership, provided that such employee, broker, or
agent was selected, engaged, or retained with reasonable care. The General
Partner may consult with counsel and accountants in respect of Partnership
affairs and be fully protected and justified in any action or inaction that
is taken in accordance with the advice or opinion of such counsel or
accountants, provided that they shall have been selected with reasonable
care. Exculpation pursuant to this paragraph 15.3 shall not be available
in the case of a breach of this Agreement to the extent that the covered
party benefitted financially from the breach. Notwithstanding any of the
foregoing to the contrary, the provisions of this paragraph and the
immediately following paragraph shall not be construed so as to relieve (or
attempt to relieve) any person of any liability by reason of gross
negligence or intentional wrongdoing or to the extent (but only to the
extent) that such liability may not be waived, modified, or limited under
applicable law, but shall be construed so as to effectuate the provisions
of such paragraphs to the fullest extent permitted by law.
15.4 Indemnification. The Partnership agrees to indemnify, out of the
assets of the Partnership only, the General Partner, the Principals each
member of the Fund Committee, and their respective partners, employees and
Affiliates (collectively, the "Indemnified Parties") to the fullest extent
permitted by law and to save and hold them harmless from and in respect of
all (a) reasonable fees, costs, and expenses paid in connection with or
resulting from any claim, action, or demand against an Indemnified Party
that arise out of or in any way relate to the Partnership, its properties,
business, or affairs and (b) such claims, actions, and demands and any
losses or damages resulting from such claims, actions, and demands,
including amounts paid in settlement or compromise (if recommended by
attorneys for the Partnership) of any such claim, action or demand;
provided, however, that this indemnity shall not extend to (i) conduct not
undertaken in good faith to promote the best interest of the Partnership or
the portfolio companies of the Partnership or (ii) conduct which is grossly
negligent or intentionally wrongful. Expenses incurred by any Indemnified
Party in defending a claim or proceeding covered by this paragraph shall be
paid by the Partnership in advance of the final disposition of such claim
or proceeding provided the Indemnified Party undertakes to repay such
amount if it is ultimately determined that such Indemnified Party was not
entitled to be indemnified. The provisions of this paragraph shall remain
in effect as to each Indemnified Party whether or not such Indemnified
Party continues to serve in the capacity that entitled such person to be
indemnified.
15.5 Execution. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one (1) and the same instrument.
15.6 Other Instruments And Acts. The Partners agree to execute any
other instruments or perform any other acts that are or may be necessary to
effectuate and carry on the partnership created by this Agreement.
15.7 Binding Agreement. This Agreement shall be binding upon the
transferees, successors, assigns, and legal representatives of the
Partners.
15.8 Notices. Any notice or other communication that one Partner
desires to give to another Partner shall be in writing, and shall be deemed
effectively given upon personal delivery or three (3) days after deposit in
any United States mail box, by registered or certified mail, postage
prepaid, upon confirmed transmission by facsimile or upon confirmed
delivery by an overnight commercial courier service addressed to the other
Partner at the address shown on Exhibit A or at such other address as a
Partner may designate by fifteen (15) days' advance written notice to the
other Partners.
15.9 Power Of Attorney. By signing this Agreement, each Limited
Partner designates and appoints the General Partner its true and lawful
attorney, in its name, place, and stead to make, execute, sign, and file
the Certificate of Limited Partnership and any amendment thereto and such
other instruments, documents, or certificates that may from time to time be
required of the Partnership by the laws of the United States of America,
the laws of the state of the Partnership's formation, or any other state or
jurisdiction in which the Partnership shall do business in order to qualify
or otherwise enable the Partnership to do business in such states or
jurisdictions. Such attorney is not hereby granted any authority on behalf
of the Limited Partners to amend this Agreement except that as attorney for
each of the Limited Partners, the General Partner shall have the authority
to amend this Agreement and the Certificate of Limited Partnership (and to
execute any amendment to the Agreement or the Certificate of Limited
Partnership on behalf of itself and as attorney-in-fact for each of the
Limited Partners) as may be required to effect:
(a) Admission of additional Partners pursuant to Article III;
(b) Transfers of Limited Partnership interests pursuant to
Article IX;
(c) Additional capital commitments pursuant to Article IV;
(d) Extensions of the Partnership term pursuant to Article X; or
(e) Withdrawal of Partners pursuant to Article XIII.
This power of attorney granted by each Limited Partner shall expire as
to such Partner immediately after the amendment of the Partnership's
Exhibit A to reflect the complete withdrawal of such Partner as a Partner
of the Partnership.
15.10 Amendment; Waiver.
(a) Except as provided by the immediately preceding paragraph,
this Agreement may be amended only with the written consent of the General
Partner and Two-Thirds in Interest of the Limited Partners. No term or
condition contained in the Exhibits to this Agreement or in any note or
security agreement entered into pursuant to this Agreement may be waived,
discharged, terminated, or modified without the consent of the General
Partner and Two-Thirds in Interest of the Limited Partners.
(b) Notwithstanding the above and except as provided in
paragraph 14.5:
(i) No amendment of this Agreement may modify the method of
making Partnership allocations, modify the method of determining the
Partnership Percentage or Final Partnership Percentage of any Partner,
modify any provision requiring the consent of all of the Partners or all of
the Limited Partners to a specified action, or modify the restrictions
contained in this subparagraph (b), unless each Partner materially and
adversely affected thereby has expressly consented in writing to such
amendment; and
(ii) No amendment of this Agreement may modify Article XIII
or paragraph 8.6(e) unless each ERISA Partner has expressly consented in
writing to such amendment.
(c) Notwithstanding the above, the Partnership's or General
Partner's (or its partners' or employees') noncompliance with any provision
hereof in any single transaction or event may be waived in writing by Two-Thirds
in Interest of the Limited Partners (not including the General
Partner); provided, however, that no such waiver of noncompliance with any
provision specifically requiring the approval of more than Two-Thirds in
Interest of the Limited Partners shall be effective without the approval of
such larger percentage in Interest of the Limited Partners; provided
further, that no such waiver shall be effective if such noncompliance
directly injures some but not all of the Limited Partners unless the
Limited Partners directly injured waive such noncompliance. No waiver
shall be deemed a waiver of any subsequent event of noncompliance.
15.11 Legal Counsel. Each Partner hereby agrees and acknowledges
that:
(a) Cooley Godward Castro Huddleson & Tatum ("Cooley Godward")
has been retained by the General Partner in connection with the formation
of the Partnership and the offering of Limited Partner interests and in
such capacity has provided legal services to the General Partner and the
Partnership. The General Partner expects to retain Cooley Godward to
provide legal services to the General Partner and the Partnership in
connection with the management and operation of the Partnership.
(b) Cooley Godward is not and will not represent the Limited
Partners in connection with the formation of the Partnership, the offering
of Limited Partner interests, the management and operation of the
Partnership, or any dispute that may arise between the Limited Partners on
the one hand and the General Partner and the Partnership on the other (the
"Partnership Legal Matters").
(c) Each Limited Partner will, if it wishes counsel on a
Partnership Legal Matter, retain its own independent counsel with respect
thereto and, except as otherwise specifically provided by this Agreement,
will pay all fees and expenses of such independent counsel.
(d) Each Limited Partner hereby agrees that Cooley Godward may
represent the General Partner and the Partnership in connection with any
and all Partnership Legal Matters (including any dispute between the
General Partner or the Partnership and one (1) or more Limited Partners)
and waives any present or future conflict of interest with Cooley Godward
regarding Partnership Legal Matters arising by virtue of any representation
or deemed representation of such Limited Partner or the Partnership on
account of Cooley Godward's representation described in paragraph 15.11(a)
above; provided, however, that the Limited Partners are not hereby agreeing
to Cooley Godward's representation of the Partnership in a derivative
action on their behalf against the General Partner.
15.12 Entire Agreement. This Agreement and each subscription
agreement executed by the Limited Partners in connection with an investment
in the Partnership constitute the full,
complete, and final agreement of the Partners and supersede all prior
agreements between the Partners with respect to the Partnership.
15.13 Titles; Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and shall not be considered in the
interpretation of this Agreement.
15.14 Partnership Name. The Partnership shall have the exclusive
right to use the Partnership name as long as the Partnership continues.
Upon termination of the Partnership, the Partnership shall assign whatever
rights it may have in such name to the General Partner. No value shall be
placed upon the name or the goodwill attached to it for the purpose of
determining the value of any Partner's Capital Account or interest in the
Partnership.
In Witness Whereof, the Partners have executed this Agreement
as of the date first written above.
General Partner: Limited Partner:
Nth Power Technologies Partners, L.P.
by its general partner,
Nth Power Technologies, Inc.
By: By:
(signature)
Name:
(print name)
Title:
THE SECURITIES EVIDENCED BY THIS PARTNERSHIP AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO
SEC RULE 144 OR THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT COVERING SUCH SECURITIES OR THE GENERAL PARTNER RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
GENERAL PARTNER, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE 1933 ACT.
SIGNATURE PAGE FOR
LIMITED PARTNERSHIP AGREEMENT
Nth POWER TECHNOLOGIES FUND I, L.P.
__________ __, 1996<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit A Schedule of Partners
Exhibit A
SCHEDULE OF PARTNERS
Initial
Capital Capital
Partnership
Name and Address Commitment Contribution Percentage/1/
<S> <C> <C> <C>
General Partner:
Nth Power Technologies Partners, L.P.
c/o Nth Power Technologies, Inc.
50 California Street
Suite 1500
San Francisco, CA 94111
Limited Partners:
Total 100.0000%
</TABLE>
<PAGE>
Exhibit B
$_____________ __________, 1996
San Francisco, California
PROMISSORY NOTE
For value received, Nth Power Technologies Partners, L.P., a California
limited partnership ("Payor"), hereby promises to pay to Nth Power
Technologies Fund I, L.P., a California limited partnership ("Payee") at 50
California Street, Suite 1500, San Francisco, California, 94111, or at
such other place as Payee may designate, the aggregate principal sum of
____________________ Dollars ($_________) according to the following
terms and conditions:
1. Interest. This Note shall bear interest at the rate of ____
percent (__%) per annum initially which rate shall be adjusted on the
1st banking day of January and July of each year during the term of this
Note to the prime rate then being charged by Payee's primary banking
facility. Interest shall compound annually.
2. Payment. This Note and all accrued but unpaid interest shall
become due and payable upon the final liquidation of Payee. This Note
and all accrued but unpaid interest may be paid, in whole or in part, at
any time prior to such due date without penalty. All payments by Payor
toward the satisfaction of this Note shall be applied first to the
payment of interest and then to the retirement of the principal.
Payments by Payor toward the satisfaction of this Note may be paid, at
the option of Payor, in either: (a) lawful money of the United States of
America and in immediately available funds; (b) securities received by
Payor in any distribution from Payee, or (c) any combination of the
methods of payment specified in clauses (a) and (b) above. In the event
that payment is made in whole or in part in securities, the amount of
such payment shall be equal to the value of the securities transferred
to Payee on the date of payment valued in accordance with the valuation
procedures set forth in paragraphs 12.1 and 12.2(e) of that certain
limited partnership agreement dated _________, 1996, by and among Payee,
Payor and the limited partners named therein (the "Partnership
Agreement"). In addition to the foregoing, upon dissolution of the
Partnership Payor may elect to reduce the amount outstanding under this
Note, in whole or in part, by effecting a corresponding reduction in
Payor's capital account in Payee as provided for in paragraph 10.3 of
the Partnership Agreement.
3. Type of Debt. Payor hereby represents and agrees that the
amounts due under this Note are not consumer debt, and are not incurred
primarily for personal, family or household purposes, but are for
business and commercial purposes only.
4. Waiver. Payor hereby waives presentment, protest and notice of
protest, demand for payment, notice of dishonor and all other notices or
demands in connection with the delivery, acceptance, performance,
default or endorsement of this Note.
5. Costs of Collection. In the event that any payment under this
Note is not made when due, Payee shall be entitled to recover, and Payor
agrees to pay when incurred, all costs and expenses of collection of
this Note, including without limitation, reasonable attorneys' fees.
6. Binding Agreement. This Note shall be binding upon the
undersigned, its successors and assigns, and any subsequent holders of
this Note.
7. Governing Law. This Note shall be governed by, and construed
under the laws of, the State of California as applied to agreements
between California residents entered into and to be performed entirely
within California.
Nth Power Technologies Partners, L.P.
by its general partner,
Nth Power Technologies, Inc.
By:
Name:
Title:
Accepted:
Nth Power Technologies Fund I, L.P.
By: Nth Power Technologies Partners, L.P.
by its general partner,
Nth Power Technologies, Inc.
By:
Name:
Title:
Endnotes
/1/ Partnership Percentages shown on this Exhibit A are rounded. Actual
Partnership Percentages are determined pursuant to paragraph 14.13 of
this Agreement.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
TABLE OF CONTENTS
Page
<S> <C>
Article I Name, Purpose And Offices Of Partnership. . . . . . . . . 1
1.1 Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Principal Office. . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Registered Agent And Office . . . . . . . . . . . . . . . . . 1
Article II Term Of Partnership . . . . . . . . . . . . . . . . . . . 2
2.1 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Events Affecting A Partner Of The General Partner . . . . . . 2
2.3 Events Affecting A Limited Partner. . . . . . . . . . . . . . 2
2.4 Events Affecting The General Partner. . . . . . . . . . . . . 2
Article III Name And Admission Of Partners . . . . . . . . . . . . 2
3.1 Name And Address. . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Admission Of Additional Partners. . . . . . . . . . . . . . . 3
Article IV Capital Accounts, Capital Contributions, And Noncontributing
Partners. . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1 Capital Accounts. . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Capital Contributions Of The Limited Partners . . . . . . . . 4
4.3 Capital Contributions Of The General Partner. . . . . . . . . 4
4.4 Acquisition Of An Additional Interest By The General
Partner.. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.5 Noncontributing Partners. . . . . . . . . . . . . . . . . . . 5
Article V Partnership Allocations . . . . . . . . . . . . . . . . . 7
5.1 Allocation Of Profit And Loss . . . . . . . . . . . . . . . . 7
5.2 Reallocation Of Contingent Losses . . . . . . . . . . . . . . 8
5.3 Other Allocations . . . . . . . . . . . . . . . . . . . . . . 8
5.4 Income Tax Allocations. . . . . . . . . . . . . . . . . . . . 9
Article VI Management Fee; Partnership Expenses. . . . . . . . . . . 10
6.1 Management Fee. . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article VII Withdrawals By And Distributions To The Partners . . 12
7.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.2 Withdrawals By The Partners. . . . . . . . . . . . . . . . . . 12
7.3 Partners' Obligation To Repay Or Restore . . . . . . . . . . . 13
7.4 Cash Distributions . . . . . . . . . . . . . . . . . . . . . . 13
7.5 Discretionary In Kind Distributions. . . . . . . . . . . . . . 13
7.6 Mandatory Distributions. . . . . . . . . . . . . . . . . . . . 16
7.7 Withholding Obligations. . . . . . . . . . . . . . . . . . . . 16
Article VIII Management Duties And Restrictions . . . . . . . . . 17
8.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Time Commitment. . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 No Control By The Limited Partners; No Withdrawal. . . . . . . 17
8.4 Subsequent Funds . . . . . . . . . . . . . . . . . . . . . . . 17
8.5 Compliance With Partnership Agreement; Detrimental Acts. . . . 18
8.6 Investment Opportunities And Restrictions. . . . . . . . . . . 18
8.7 Business Opportunities . . . . . . . . . . . . . . . . . . . . 19
Article IX Investment Representation And Transfer Of Partnership Interests 19
9.1 Investment Representation Of The Limited Partners. . . . . . . 19
9.2 Qualifications Of The Limited Partners . . . . . . . . . . . . 20
9.3 Transfer By Limited Partner. . . . . . . . . . . . . . . . . . 20
9.4 Right Of First Refusal . . . . . . . . . . . . . . . . . . . . 20
9.5 Requirements For Transfer. . . . . . . . . . . . . . . . . . . 21
9.6 Substitution As A Limited Partner. . . . . . . . . . . . . . . 22
9.7 Transfer Of General Partnership Interest . . . . . . . . . . . 22
Article X Dissolution And Liquidation Of The Partnership. . . . . . 22
10.1 Extension Of Partnership Term. . . . . . . . . . . . . . . . . 22
10.2 Liquidation After An Event Of Early Termination. . . . . . . . 22
10.3 Winding Up Procedures. . . . . . . . . . . . . . . . . . . . . 22
10.4 Payments In Liquidation. . . . . . . . . . . . . . . . . . . . 23
Article XI Financial Accounting, Reports, Meetings And Voting. . . . 25
11.1 Financial Accounting; Fiscal Year. . . . . . . . . . . . . . . 25
11.2 Supervision; Inspection Of Books . . . . . . . . . . . . . . . 25
11.3 Quarterly Reports. . . . . . . . . . . . . . . . . . . . . . . 25
11.4 Annual Report; Financial Statements Of The Partnership . . . . 25
11.5 Tax Returns And Information. . . . . . . . . . . . . . . . . . 26
11.6 Tax Matters Partner. . . . . . . . . . . . . . . . . . . . . . 26
11.7 Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . 26
11.8 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Article XII Valuation And Fund Committee . . . . . . . . . . . . 27
12.1 Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
12.2 Fund Committee . . . . . . . . . . . . . . . . . . . . . . . . 28
Article XIII Partners Subject To Special Regulation . . . . . . . 29
13.1 ERISA Partners . . . . . . . . . . . . . . . . . . . . . . . . 29
Article XIV Certain Definitions. . . . . . . . . . . . . . . . . 31
14.1 Accounting Period. . . . . . . . . . . . . . . . . . . . . . . 31
14.2 Adjusted Asset Value . . . . . . . . . . . . . . . . . . . . . 31
14.3 Adjusted Capital Account Balance . . . . . . . . . . . . . . . 31
14.4 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14.5 Capital Account. . . . . . . . . . . . . . . . . . . . . . . . 32
14.6 Capital Commitment . . . . . . . . . . . . . . . . . . . . . . 32
14.7 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14.8 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14.9 Event Of Early Termination . . . . . . . . . . . . . . . . . . 32
14.10 Marketable; Marketable Securities; Marketability. . . . . 33
14.11 Money Market Income . . . . . . . . . . . . . . . . . . . 33
14.12 Nonmarketable Securities. . . . . . . . . . . . . . . . . 33
14.13 Partnership Percentage. . . . . . . . . . . . . . . . . . 34
14.14 Percentage In Interest; Majority In Interest. . . . . . . 34
14.15 Principals. . . . . . . . . . . . . . . . . . . . . . . . 34
14.16 Profit Or Loss. . . . . . . . . . . . . . . . . . . . . . 34
14.17 Securities Act. . . . . . . . . . . . . . . . . . . . . . 34
14.18 Treasury Regulations. . . . . . . . . . . . . . . . . . . 35
Article XV Other Provisions. . . . . . . . . . . . . . . . . . . . . 35
15.1 Governing Law; Consent To Jurisdiction . . . . . . . . . . . . 35
15.2 Limitation Of Liability Of The Limited Partners. . . . . . . . 35
15.3 Exculpation. . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . 35
15.5 Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
15.6 Other Instruments And Acts . . . . . . . . . . . . . . . . . . 36
15.7 Binding Agreement. . . . . . . . . . . . . . . . . . . . . . . 36
15.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
15.9 Power Of Attorney. . . . . . . . . . . . . . . . . . . . . . . 36
15.10 Amendment; Waiver . . . . . . . . . . . . . . . . . . . . 37
15.11 Legal Counsel . . . . . . . . . . . . . . . . . . . . . . 38
15.12 Entire Agreement. . . . . . . . . . . . . . . . . . . . . 38
15.13 Titles; Subtitles . . . . . . . . . . . . . . . . . . . . 38
15.14 Partnership Name. . . . . . . . . . . . . . . . . . . . . 39
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Index of Definitions
INDEX OF DEFINITIONS
Term Paragraph Page
<S> <C> <C>
Accounting Period 14.1 29
Accredited Investor 9.2 18
Act -- 1
Additional Capital Contributions 4.2(b) 4
Adjusted Asset Value 14.2 29
Adjusted Capital Account Balance 14.3 30
Affiliate 14.4 30
Capital Account 14.5 30
Capital Commitment 14.6 30
Code 14.7 30
Cooley Godward 15.11 35
Contingent Loss 5.2 8
ERISA 14.8 30
ERISA Partner 13.1 27
Event of Early Termination 14.9 31
Final Partnership Percentage 10.3(a) 22
Formation Date 2.1 2
General Partner -- 1
Indemnified Parties 15.4 33
Initial Capital Contributions 4.2(a) 4
Limited Partners -- 1
Management Agent 6.1(a) 10
Marketable 14.10 31
Marketable Securities 14.10 31
Marketability 14.10 31
Majority in Interest 14.18 32
Money Market Income 14.11 31
Nonmarketable Securities 14.12 31
Notice of Extension 10.1 21
Optionee 4.5(b) 5
Optionor 4.5(b) 5
Partners 3.1 2
Partnership -- 1
Partnership Legal Matters 15.11 35
Partnership Percentage 14.13 31
Principals 14.14 31
Profit or Loss 14.15 32
Remaining Portion 4.5(b)(ii) 6
Return Value 10.4(b)(ii) 24
Securities Act 14.16 32
Subsequent Funds 8.3 16
Tax Payments 7.7(a) 15
Treasury Regulations 14.17 32
Percentage in Interest 14.18 32
</TABLE>
<PAGE>
Exhibit B-2
DRAFT
SUBSCRIPTION AGREEMENT
AND INVESTOR QUESTIONNAIRE
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY
OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE
SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR
AN INDEFINITE PERIOD OF TIME.
<PAGE>
SUBSCRIPTION AGREEMENT
AND INVESTOR QUESTIONNAIRE
This Subscription Agreement and Investor Questionnaire (the
"Agreement") is made and entered into by and between Nth Power
Technologies Partners, L.P., a California limited partnership (the
"General Partner"), and the person or entity identified in Section 5G
hereof (the "Investor"), as of the ____ day of _________, 1996.
Recitals
Whereas, the General Partner is in the process of forming Nth Power
Technologies Fund I, L.P., a California limited partnership (the
"Partnership");
Whereas, the Investor desires to purchase from the Partnership and the
Partnership desires to sell to the Investor a partnership interest in
the Partnership; and
Whereas, the Investor desires to be admitted as a limited partner of the
Partnership pursuant to the terms and conditions of the Partnership's
limited partnership agreement (the "Partnership Agreement").
Now, Therefore, in consideration of the foregoing recitals and the
mutual promises, representations, covenants and conditions set forth in
this Agreement, the parties hereto, intending to be legally bound, do
hereby agree as follows:
Agreement
1. Contribution. In consideration of being admitted as a
limited partner of the Partnership, the Investor agrees to contribute to
the Partnership Ten Million Dollars (US $10,000,000) pursuant to the
terms of, and at the times required by, the Partnership Agreement.
2. Adoption. Upon admission to the Partnership as a limited
partner, the Investor hereby agrees to be bound by, and specifically
adopts each and every provision of, the Partnership Agreement.
3. Admission as a Limited Partner. The Partnership interest to
be created on account of the subscription arising from this Agreement
(the "Interest") will only be created in the name of the Investor, and
the Investor agrees to comply with the terms of the Partnership
Agreement and to execute any and all further documents necessary in
connection with becoming a limited partner of the Partnership.
4. Closing Date; Delivery.
A. Subject to the terms of Section 7, the closing of the
sale and purchase of the Interest arising under this Agreement shall be
held at 9:00 a.m. (Pacific Time), at the offices of Cooley Godward
Castro Huddleson & Tatum, One Maritime Plaza, 20th Floor, San Francisco,
California, on the ____________, 1996, or at such other time and place
as the General Partner and the Investor may agree (the "Closing Date").
B. On the Closing Date, subject to the terms and
conditions hereof, the General Partner will deliver to the Investor an
executed copy of the Partnership Agreement, and the Investor will
deliver to the General Partner (or the Partnership) an executed copy of
the Partnership Agreement and its Initial Capital Contribution (as such
term is defined in the Partnership Agreement).
5. Investor's Representations. In connection with the
Investor's purchase of the Interest, the Investor makes the following
representations and warranties on which the General Partner and its
counsel are entitled to rely:
A. The Interest will be held under the following type of
ownership (Please check the applicable box):
( ) Trust
( ) Partnership
(X ) Corporation
B. The Investor is acquiring the Interest solely for its
own account and not directly or indirectly for the account of any other
person whatsoever (or, if the Investor is acquiring the Interest as a
trustee, solely for the account of the trust or trust account named
below) for investment and not with a view to, or for sale in connection
with, any distribution of the Interest. The Investor does not have any
contract, undertaking or arrangement with any person to sell, transfer
or grant a participation to any person with respect to the Interest.
C. The Investor has such knowledge and experience in
financial and business matters that the Investor is capable of
evaluating the merits and risks of the investment evidenced by its
purchase of the Interest, and the Investor is able to bear the economic
risk of such investment.
D. The Investor has had access to such information
concerning the Partnership as the Investor deems necessary to enable it
to make an informed decision concerning its purchase of the Interest.
The Investor has had access to the General Partner, its general partner
and the principals of its general partner and the opportunity to ask
questions of, and receive answers from, said persons concerning the
Partnership generally and the offering of interests in the Partnership.
The Investor has obtained all additional information requested by the
Investor to verify the accuracy of all information furnished in
connection with the offering of interests in the Partnership.
E. The Investor is aware that it must bear the economic
risk of investment in the Interest for an indefinite period of time
because: the Interest has not been registered under the Securities Act
of 1933 (the "1933 Act"); there is currently no public market for the
Interest; and the Interest cannot be sold unless subsequently registered
under the 1933 Act or an exemption from such registration is available.
The Investor understands that the Partnership is under no obligation,
and does not intend, to effect any such registration at any time. The
Investor also understands that sales or transfers of the Interest are
further restricted by the provisions of the Partnership Agreement and,
as applicable, state securities laws.
F. The Interest will not be transferred or disposed of
except in accordance with the terms of the Partnership Agreement and
will not be sold or transferred without registration under the 1933 Act,
or pursuant to an applicable exemption therefrom.
G. The Investor's full name, primary address, phone number
and taxpayer identification number are:
Cinergy Corp.
139 East Fourth Street
Cincinnati, OH 45202
513-381-2000
31-1385023
H. The Investor is a corporation, not formed for the
purpose of acquiring an Interest, with total assets in excess of
$5,000,000.
I. After consultation with counsel, the Investor represents
that the value of all securities owned by the Investor of all issuers
(I) that are an "investment company" as defined in subsection 3(a) of
the United States Investment Company Act of 1940 (the "Investment
Company Act") but which are excepted from the definition of "investment
company" in the Investment Company Act solely by virtue of paragraph
3(c)(1) of such Act (because such issuers are not beneficially owned by
more than one hundred persons and are not making and do not propose to
make a public offering of securities) or (ii) that are an "investment
company" as defined in subsection 3(a) of the Investment Company Act
because of the inability to qualify for the exception set forth in
paragraph 3(c)(1) by virtue of the limitations contained in paragraph
3(c)(1)(A) (because of the look-through provisions contained in said
paragraph) does not exceed 10% of the value of the total assets of the
Investor.
The Investor agrees to deliver promptly to the General Partner of
the Partnership any information or documents that the General Partner
may reasonably request to verify the foregoing and, for so long as the
Investor owns 10% or more of the interests in the Partnership, to ensure
compliance with the Investment Company Act and the availability of an
exemption of the Partnership from registration thereunder.
J. The Investor was not organized for the purpose of
acquiring an interest in the Partnership, and the Investor's interest in
the Partnership will not constitute more than 40% of the capital of the
Investor.
K. The Investor is not (I) an "employee welfare benefit
plan" or (ii) an "employee pension benefit plan" as defined in sections
3(1) and 3(2), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). The assets invested by Investor are
not "plan assets" within the meaning of ERISA or applicable regulations
thereunder.
L. The execution and delivery of the Partnership Agreement
and this Agreement, the consummation of the transactions contemplated
hereby and thereby and the performance of the obligations hereunder and
thereunder will not conflict with, or result in any violation of, or
default under, any provision of any other agreement or instrument to
which the Investor is a party or any license, permit, franchise,
judgment, order, writ or decree, or any statute, rule or regulation,
applicable to the Investor.
M. No suit, action, claim, investigation or other
proceeding is pending or, to the best of the Investor's knowledge, is
threatened against the Investor that questions the validity of the
Partnership Agreement or this Agreement or any action taken or to be
taken pursuant to the Partnership Agreement or this Agreement.
N. The information contained herein is complete and
accurate, shall be complete and accurate upon the date of acquisition of
the Interest, may be relied upon by the Partnership, the General
Partner, the general partner of the General Partner, and counsel to any
of the foregoing, and shall survive delivery of the Partnership
Agreement. The Investor will notify the Partnership of any material
change in any of such information.
O. This Agreement and upon its execution the Partnership
Agreement create valid and binding obligations of the Investor and are
enforceable against the Investor in accordance with their terms, except
as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to general equity principles and to
limitations on availability of equitable relief, including specific
performance.
P. The Investor has received an affirmative order from the
Securities and Exchange Commission ("SEC") under the Public Utility
Holding Company Act of 1935 regarding the Investor's application filed
with the SEC (No. 70-8867) regarding the Investor's proposal to purchase
the Interest.
6. General Partner's Representations. The General Partner makes
the following representations and warranties on which the Investor and
its counsel are entitled to rely:
A. The execution and delivery of the Partnership Agreement
and this Agreement, the consummation of the transactions contemplated
hereby and thereby and the performance of the obligations hereunder and
thereunder will not conflict with, or result in any violation of, or
default under, any provision of any other agreement or instrument to
which the General Partner or the general partner of the General Partner
are a party or any license, permit, franchise, judgment, order, writ or
decree, or any statute, rule or regulation, applicable to the General
Partner or the general partner of the General Partner.
B. No suit, action, claim, investigation or other
proceeding is pending or, to the best of the General Partner's
knowledge, is threatened against the General Partner or the general
partner of the General Partner that questions the validity of the
Partnership Agreement or this Agreement or any action taken or to be
taken pursuant to the Partnership Agreement or this Agreement.
C. This Agreement and upon its execution the Partnership
Agreement create valid and binding obligations of the General Partner
and are enforceable against the General Partner in accordance with their
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar
laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief,
including specific performance.
7. Conditions To Closing.
A. Conditions to Obligations of the Investor at Closing.
The Investor's obligation to deliver an executed copy of the Partnership
Agreement and to contribute its Initial Capital Contribution on the
Closing Date is subject to the fulfillment to the Investor's reasonable
satisfaction, on or prior to the Closing Date, of all of the following
conditions, any of which may be waived by the Investor:
(i) The representations and warranties made by the General
Partner in Section 6 hereof shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they
had been made on and as of said date.
(ii) The General Partner shall have performed and complied
with all obligations and conditions herein required to be performed or
complied with by it on or prior to the Closing Date.
(iii) Subscriptions aggregating Forty Million Dollars
($40,000,000) shall have been committed to the Partnership from limited
partners exclusive of the Investor.
B. Conditions to Obligations of the General Partner. The
General Partner's obligation to deliver an executed Partnership
Agreement to the Investor on the Closing Date is subject to the
fulfillment to the General Partner's reasonable satisfaction, on or
prior to the Closing Date, of the following conditions, any of which may
be waived by the General Partner:
(i) The representations and warranties made by the
Investor in Section 5 hereof shall be true and correct in all material
respects at the date of the Closing Date with the same force and effect
as if they had been made on and as of said date.
(ii) The Investor shall have performed and complied with
all agreements and conditions herein required to be performed or
complied with by it on or before the Closing Date.
8. Legends. The Investor consents to the placement of the
legend contained on the signature page of the Partnership Agreement and
any other legend required by applicable state law.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
regard to conflicts of laws principles or to the domicile or residence
of any party.
Investor:
Cinergy Corp.
By:
Title:
General Partner:
Nth Power Technologies Partners, L.P.
by its general partner, Nth Power
Technologies, Inc.
By:
Title:
