UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number: 0-25935
THE RIDGEWOOD POWER GROWTH FUND
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 22-3495594 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) |
| 1314 King Street, Wilmington, DE 19801 | ||
| (Address of Principal Executive Offices, including Zip Code) |
| (302) 888-7444 | ||
| (Registrant’s telephone number, including area code) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Investor Shares of Beneficial Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes oNo x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YesoNox
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YesoNox
There is no market for the Investor Shares. As of February 28, 2006, number of shares outstanding was 658.1067.
EXPLANATORY NOTE
The Ridgewood Power Growth Fund (the “Fund”) is filing this amendment to its Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2006 (the “Form 10-K”), to amend Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “MD&A”) and Part II, Item 8. “Financial Statements and Supplementary Data” of the Form 10-K. This Amendment No. 1 to the Form 10-K is being filed to correct errors that occurred during the EDGARization process including (i) the incorrect insertion into the Report of Independent Registered Public Accounting Firm delivered by Perelson Weiner LLP of certain text that was intended to be inserted into the Report of Independent Registered Public Accounting Firm of PricewaterhouseCoopers LLP, and the revision of the Report of Independent Registered Public Accounting Firm delivered by PricewaterhouseCoopers LLP to reflect the appropriate heading (ii) the truncation of certain amounts in the contractual obligations table and the principal repayment of long-term debt schedule contained in the MD&A, (iii) the omission of the typed signature of Perelson Weiner LLP from their report and (iv) revision of Note 7 of the Fund’s audited consolidated financial statements for the year ended December 31, 2003 and the MD&A to change the amount of the expense in connection with a certain consulting agreement to $567,534 from $550,560. These issues only affected the text of the respective audit reports and the amounts set forth in the contractual obligations table and the principal repayment of long-term debt schedule and did not affect any amounts or balances presented.
Additionally, this amendment revises Item 15. “Exhibits and Financial Statement Schedules” of the Form 10-K to indicate that Exhibit 3(i)(D) is incorporated by reference to Fund’s definitive proxy statement filed with the SEC on November 5, 2001, to remove the reference to former Exhibit 10I, to clarify the description of former Exhibit 10J (current Exhibit 10I), and to indicate that former Exhibits 10J and 10K (current Exhibits 10I and 10J, respectively) and Exhibit 99.2 were filed as exhibits to the Form 10-K.
As a result of this amendment, the certifications, pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Form 10-K, have been re-executed and re-filed as of the date of this Form 10-K/A.
Except as described above, no other changes have been made to the Form 10-K. This Form 10-K/A does not amend or update any other information set forth in the Form 10-K.
FORM 10-K/A
TABLE OF CONTENTS
PART II
| Item 7. Management's Dicussion and Analysis of Financial Condition and Results of Operation | |
| Item 8. Financial Statements and Supplementary Data |
PART IV
| Item 15. Exhibits and Financial Statement Schedules | |
| SIGNATURES |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis should be read in conjunction with the Fund's financial statements and the notes thereto presented below. See Item 8. Financial Statements and Supplementary Data. Dollar amounts in this discussion are generally rounded to the nearest $1,000.
The Fund uses the equity method of accounting for its investments in the UK Projects and for ZAP (until the third quarter of 2001). In 2001, the Fund’s investment in the Ridgewood US Hydro projects was in the form of a note receivable and, accordingly, the Fund’s earnings were in the form of interest income. In 2002, the Fund completed its acquisition of the Ridgewood US Hydro projects and as a result, the Fund has consolidated the financial position and results of operations effective November 23, 2002.
Through December 31, 1999, the Fund used the equity method of accounting for its investment in the Egypt Projects. Beginning in the first quarter of 2000, the Fund made additional investments and acquired majority ownership of certain Egypt Projects. As a result, effective January 1, 2000, the Fund has consolidated the financial position and results of operations of certain Egypt Projects. In the first quarter of 2002, the balance of the Egypt Projects were consolidated as a result of acquisition. For the year ended 2001, all the Fund’s consolidated revenue and cost of sales relate to the Egypt Projects.
Outlook
The adoption of the Renewable Portfolio Standards (“RPS”) legislation in various states is indicative of the significant activity and movement in the industry, as well as at state and federal government, to increase the amount of renewable power that is supplied to utilities that serve end-use customers in such states. For example, in Massachusetts, legislation and regulations have been passed requiring such retail electric suppliers to have in their electric portfolio one (1%) from “new renewable power” for 2003. This renewable generation percentage requirement increases each year until the renewable generation amount equals four (4%) percent. New Jersey, Nevada, California and Connecticut have passed similar RPS legislation.
Notwithstanding the development of a renewable energy market in many states, the general trends in the electric power industry have continued to reflect an attitude of caution and restraint. Throughout the United States, memories of the California energy crises, Enron Corp.’s bankruptcy proceedings before the FERC regarding certain questionable practices of other energy producers and marketers, as well as the US and world economy and the Iraq War, have led many to call for a more regulated electric industry, with strict reporting requirements and cost of service regulation. However, many legislators, regulators and market participants have not disavowed deregulation.
The Projects owned by the Funds’ UK operations, which are not subject to the PowerBank arrangements, operate under long-term contracts with the Non-Fossil Fuels Purchasing Agency, a quasi-governmental agency. They enjoy a guaranteed price and market for their output and are not subject to price fluctuations for their fuel. The UK Projects are relatively unaffected by developments in the United Kingdom electricity markets, which included the introduction in 2001 of the New Electricity Trading Arrangements (“NETA”). NETA replaced the electricity pool with a competitive wholesale energy market. While NETA has not impacted the income stream for the UK Projects, the attendant disruption has caused a realignment and consolidation within the UK utility industry. The industry regulator, Office of Gas & Electricity Markets (“OFGEM”), monitors these developments on a continuous basis.
The Egyptian Projects are developed at remote resort hotel sites on the Red Sea, which are distant from other electric and water sources. As a result, REFI is relatively unaffected by trends in the Egyptian water and power industry, which is concentrated along the Nile River and Mediterranean Coast. Prices for power and water delivered to the Egyptian Projects’ hotels in certain instances are based on contracted rates. Some arrangements are short-term and in other cases, hotels may attempt to renegotiate the terms of their arrangements. The market price for water not under contract varies depending on many factors, including fuel cost, availability of other sources of supply (primarily other desalination plants or the Nile River), demand (which is heavily dependant on temperature) and availability of transportation (primarily trucks and pipelines).
In connection with the acquisition of US Hydro, the Fund and Power V, through a joint venture, purchased a note receivable from US Hydro for approximately $17 million. At the time, the joint venture intended to acquire US Hydro’s nine hydroelectric plants by forgiving the then outstanding debt and $0.8 million of accrued interest, paying an additional $1 million to the shareholders of US Hydro, and paying up to an additional $1.7 million of US Hydro related but contingent tax liabilities that might be incurred as a result of a tax strategy The then president of US Hydro agreed to vote the stock of US Hydro beneficially owned by him (approximately 69% of the voting stock) in favor of a merger or other corporate reorganization as specified by the Fund and Power V that materially complied with the provisions outlined above. After further negotiations, however, on November 22, 2002, through another joint venture owned in the same proportion as the joint venture that acquired the debt of US Hydro, the Fund and Power V acquired 100% of the outstanding stock of US Hydro through structured tax reorganization. As part of the tax structured reorganization, the former shareholders of US Hydro received 100% of the outstanding shares of a subsidiary of US Hydro in exchange for selling the stock of US Hydro to Power V and the Fund for a nominal amount.
Additional trends affecting the independent power industry generally are described in Item 1. Business.
Significant Accounting Policies
The Fund’s plant and equipment is recorded at cost and is depreciated over its estimated useful life. The estimated useful lives of the Fund’s plant and equipment range from 3 to 20 years. A significant decrease in the estimated useful life of a material amount of plant and equipment could have a material adverse impact on the Fund’s operating results in the period in which the estimate is revised and in subsequent periods. The Fund evaluates the impairment of its long-lived assets based on projections of undiscounted cash flows at least annually or when events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Estimates of future cash flows used to test the recoverability of specific long-lived assets are based on expected cash flows from the use and eventual disposition of the assets. A significant reduction in estimated future cash flows may have a material adverse impact on the Fund’s operating results and financial condition.
Power generation and water revenue is recorded in the month of delivery, based on the estimated volumes sold to customers at rates stipulated in the power sales contract and for water output at prevailing market rates. Adjustments are made to reflect actual volumes delivered when the actual information subsequently becomes available. Billings to customers for power generation generally occurs during the month following delivery. Final billings do not vary significantly from estimates.
Accounts receivable are carried at original invoice amount less allowance made for uncollectibility of these receivables. Allowance for uncollectibility of accounts receivable is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of receivables. The amount of allowance is the difference between the carrying amount and the recoverable amount, being the expected cash flows. When material, expected cash flows are discounted at the market rate of interest for similar borrowers.
Results of Operations
The year ended December 31, 2003 compared to the year ended December 31, 2002
Revenues increased by $4,415,000, or 76%, to $10,245,000 in 2003, as compared to $5,830,000 in 2002. The acquisition of the Ridgewood US Hydro Projects in the fourth quarter of 2002 provided the current year results with additional revenues of $5,473,000. Revenues from the Egyptian operations in local currency were comparable to 2002. Due to the decrease in the exchange rate of the Egyptian pound in 2003, revenues from the Egyptian operations decreased $1,059,000.
Cost of revenue increased by $1,739,000, or 32%, to $7,142,000 in 2003, from $5,403,000 in 2002. This is primarily due to the increase in depreciation and amortization expense related to US Hydro Projects acquired in November 2002. In addition, as a result of review of impairment and change in circumstances, certain US Hydro Projects lives have been adjusted.
Gross Profit increased by $2,675,000 to $3,102,000 in 2003, from $427,000 in 2002. The increase is due to the consolidation of the Ridgewood US Hydro Projects for the full year in 2003. The Ridgewood US Hydro Projects provided a gross profit of $2,686,000 in 2003, an increase of $2,526,000. Gross Profit from the Egyptian operations was $416,000, an increase of approximately $149,000 compared to 2002. The increase in gross profit from the Egyptian operations is primarily attributed to the improved efficiency of the Sinai operations.
General and administrative expenses increased $1,272,000 or 63%, to $3,302,000 in 2003 from $2,030,000 in 2002. The increase is primarily due to the consolidation of the Ridgewood US Hydro Projects in November 2002 and also due to the settlement of a breach of contract claim resulting in a charge of $568,000, which represents the present value of the future discounted payments.
The management fee of $823,000 in 2003 was comparable to 2002.
Write-down of power generation Projects increased by $2,197,000, from $298,000 in 2002 to $2,495,000 in 2003. The increase is primarily due to write-down of $527,000 for certain assets acquired in the Sinai acquisition and also due to the impairment of power sales contract of $1,902,000 as a result of a decrease in future cash flow of certain US Hydro Projects resulting from the exercise of certain rights of the off take party on various power agreements and the restructuring of power agreement at the Blackstone Project. In 2002, the Fund recorded a write-down of $298,000 for certain of its on-site plants in the Egypt that were shut down or sold.
In 2003, the Fund recorded a goodwill impairment charge of $556,000 compared to $0 in 2002. Goodwill, resulting from the deferred tax liability associated with the acquisition of US Hydro, was not supported by discounted future cash flow of the underlying projects to the extent of the impairment.
Provision for bad debts increased $398,000 to $536,000 in 2003 from $138,000 in 2002. The provision recorded for bad debts is attributable to the Egyptian operations.
The Fund’s loss from operations increased by $1,749,000, or 61%, to $4,610,000 in 2003 from $2,861,000 in 2002. The increase in loss reflects the increase in the write-down of power generation projects, impairment of goodwill and general and administrative expenses, partially offset by the increase in gross profit.
Interest income of $58,000 in 2003 was comparable to the prior year. Interest expense decreased $127,000 to $861,000 in 2003 from $988,000 in 2002. The decrease is the result of the lower outstanding debt balances.
In 2003, the Fund recorded an equity loss of $627,000 from its investment in the UK Projects, compared to an equity loss of $845,000 in 2002. The decrease in equity loss is due to the increase in revenue resulting from the increase in the UK Projects operating capacity, in addition to the decrease in maintenance costs.
The Fund recorded a loss on sale of equipment of $499,000 in 2003 as a result of the sale of certain equipment by the Egyptian operations.
Other income decreased $59,000, or 39%, from $152,000 in 2002 to $93,000 in 2003 due to a decrease in Egyptian foreign exchange gains resulting from purchase of equipment from various international parties.
The increase on gain on sale of investment in ZAP securities reflects the 118,000 shares sold at $1.00 per share and the full proceeds was recorded as a gain. The Fund had written-off the investment in ZAP securities in 2001.
In 2003, the Fund incurred an income tax benefit of $1,054,000 on behalf of the Ridgewood US Hydro Projects compared to income tax expense of $13,000 in 2002. The increase in the 2003 income tax benefit is primarily attributable to the decrease in deferred tax liabilities relating to the US Hydro Projects. The Fund’s Egyptian subsidiaries have a ten year income tax holiday that expires in 2010. Accordingly, no provision has been made for Egyptian income taxes in the years presented.
Minority interest in the loss of subsidiary increased by $283,000 or 24%, from $1,201,000 in 2002 to $1,484,000 in 2003. The increase is due to the Fund’s impairment of goodwill and long-lived assets, partially offset by the increase in income tax benefit. In addition, obligation to fund the Sinai losses as the minority shareholder’s share of accumulated losses exceeded its basis in 2003. Accordingly, the minority shareholder’s equity in Sinai is reduced to zero and the reporting of Sinai’s losses is fully absorbed by the Fund.
The Fund’s net loss increased $459,000 or 14% from a loss of $3,331,000 in 2002 to $3,790,000 in 2003, primarily reflecting the increase in the loss from operations offset by increase in income tax benefit.
The year ended December 31, 2002 compared to the year ended December 31, 2001
Revenues increased by $1,592,000, or 38%, to $5,830,000 in 2002, as compared to $4,238,000 in 2001. The increase in revenues is a result of a $334,000 increase from existing operations in Egypt, $887,000 due to the acquisition of Sinai on February 16, 2002, and $371,000 due to the acquisition of the US Hydro Projects on November 22, 2002. The increase in existing operation revenue is attributable to the increase in the capacity and number of completed facilities.
Cost of Revenue increased by $2,147,000 or 66%, to $5,404,000 in 2002, from $3,257,000 in 2001. The increase is primarily due to increase in depreciation and amortization expense and also due to increase in Egypt operating expense due to purchase of Sinai in February 2002.
Gross Profit decreased from $981,000 in 2001, to $427,000 in 2002. The decrease is primarily attributed to the increase in maintenance and depreciation expense incurred as a result of the completion of facilities and their operation, as compared to the prior year when some facilities were still under construction.
General and administrative expenses increased $728,000 or 56%, to $2,029,000 in 2002 from $1,301,000 in 2001. The increase is primarily due to the acquisition of the US Hydro Projects and Sinai in 2002.
The management fee charged by the Managing Shareholder decreased $822,000, or 50%, to $823,000 in 2002 from $1,645,000 in 2001. The decrease reflects the Managing Shareholder waiving the third and fourth quarter fees, whereas in 2001 the Fund was charged for a full year of management fees.
In 2002, the Fund recorded a write-down of $298,000 for several of its on-site plants in Egypt that were shut down or sold. The Fund did not record any write-downs of projects in 2001.
The Fund’s loss from operations increased by $673,000, or 31%, to $2,861,000 in 2002 from $2,188,000 in 2001. The increase reflects the higher general and administrative charges, the write-down of investments and lower gross profit, partially offset by the decrease in the management fee in 2002 (see above).
The Fund recorded interest income from the note related to the US Hydro Projects of $994,000 in 2001. During the second half of 2001, drought conditions affected many of the US Hydro Projects, reducing revenues and cash flows recorded by US Hydro. As a result of these reduced cash flows experienced by US Hydro, the Fund ceased accruing interest effective as of October 1, 2001.
Interest income, excluding interest related to the US Hydro Projects note, decreased by $246,000 or 80% to $60,000 in 2002 from $306,000 in 2001 reflecting lower average cash balances on hand.
In the fourth quarter of 2001, the Fund recorded a loss of $1,282,000 relating to the write down of its investment in ZAP. In 2001 the Fund recorded an equity loss from its investment in ZAP of $818,000.
Other income decreased $46,000, or 23%, from $198,000 in 2001 to $152,000 in 2002. The decrease relates to the reduction of foreign exchange gains from the Egyptian Projects.
In 2002 the Fund recorded an equity loss of $845,000 from its investment in the UK Projects, compared to an equity loss of $165,000 in 2001. The increase in equity loss is a result of the UK Projects experiencing an increase in maintenance costs to repair some of the facilities.
The Fund’s Egyptian subsidiaries have a ten year income tax holiday that expires in 2010. Accordingly, no provision has been made for Egyptian income taxes in the years presented. In 2002, the Fund incurred $13,000 in income tax expense on behalf of the US Hydro Projects.
The Fund’s net loss increased $294,000 or 10% from a loss of $3,037,000 in 2001 to $3,331,000 in 2002, primarily reflecting lower income from operations and lower interest income in 2002.
Interim Periods
Increase in loss from operations in the fourth quarter of 2003 is primarily due to the write-down of $527,000 as a result of an appraisal of the equipment acquired in the Sinai acquisition. During the fourth quarter of 2003, the Fund also recorded an impairment of goodwill of $556,000 as the goodwill resulting from the deferred tax liability associated with the acquisition of US Hydro, was not supported by discounted future cash flow of the underlying projects to the extent of impairment. In addition, the Fund recorded impairment of long-lived assets of $1,902,000 due to decrease in future undiscounted cash flow for certain US Hydro Projects resulting from the exercise of certain rights of the off take party on various power agreements and the restructuring of power agreement at the Blackstone Project. In addition, the Fund recorded a charge of $551,000 resulting from the settlement of a breach of contract claim.
As a result of the change in the estimated life of certain electric power sales contracts, the Fund recorded an additional $630,000 of amortization expense in the fourth quarter of 2003. The Fund also recorded a $288,000 provision for bad debt from its Egyptian operations in the fourth quarter of 2003. This was partially offset by increase in income tax benefit of $1,054,000 due to decrease in deferred tax liability of certain US Hydro Projects.
In the fourth quarter of 2002, increase in loss from operations and net loss is primarily attributable to the increase in general and administrative expenses by $200,000, provision for bad debt expense by $150,000 and write-down of assets in power generation projects by $200,000. In addition, equity loss in UK landfill gas projects increased by $300,000 from the second quarter of 2002 to the third quarter of 2002.
Liquidity and Capital Resources
At December 31, 2003, the Fund had cash and cash equivalents of $801,000, a decrease of $119,000 as compared to December 31, 2002. The cash flows for the year 2003 were $2,132,000 provided by operating activities, $1,285,000 provided by investing activities, $3,308,000 used in financing activities and $228,000 loss due to the effect of the exchange rate on cash and cash equivalents.
In 2003 the Fund’s operating activities generated cash of $2,132,000 compared to a cash usage of $971,000 in 2002. The increase in cash flow is primarily due to increase in revenue.
In 2003, the Fund provided $1,285,000 from its investing activities. In 2003, the Fund received $938,000 in distributions from the UK Projects, $389,000 from the proceeds of the sale of certain assets of the Egypt projects, $200,000 of proceeds from the Ridgewood US Hydro note receivable, $118,000 of proceeds from investment in ZAP securities, partially offset by capital expenditure of $360,000. In 2002, investing activities provided $209,000 partly as a result of capital expenditure of $1,067,000 and cash received in the Ridgewood US Hydro acquisition offset by the cash invested in the Egypt Projects and Sinai in the net amount of $1,281,000.
In 2003, the Fund used $3,308,000 of cash in financing activities, primarily the result of $1,978,000 used to repay bank loans and $1,330,000 used in distributions to shareholders. In 2002, the Fund generated $628,000 of cash from financing activities primarily as a result of borrowings of $2,688,000 from the Egyptian subsidiaries bank loan, offset by loan repayments of $554,000 and advances to affiliates of $1,505,000.
The Fund expects that its cash flows from operations and cash on hand will be sufficient to fund its obligations and any declared distributions through January 31, 2007. The Fund has historically financed its operations from cash generated from its subsidiaries’ operations. Obligations of the Fund are generally limited to payment of debt to third parties and management fee to the Managing Shareholder as well as payments for certain administrative, accounting and legal services to third parties. Accordingly, the Fund has not found it necessary to retain a material amount of working capital.
On June 26, 2003, the Managing Shareholder of the Fund, entered into a $5,000,000 Revolving Credit and Security Agreement with Wachovia Bank, National Association. The agreement allows the Managing Shareholder to obtain loans and letters of credit for the benefit of the trusts and funds that it manages. As part of the agreement, the Fund agreed to limitations on its ability to incur indebtedness, liens and provide guarantees. On February 20, 2004, the Managing Shareholder and Wachovia Bank amended the agreement increasing the amount to $6,000,000. During 2005, Wachovia Bank agreed to further extend the Managing Shareholder’s Line of credit through September 30, 2006.
The following schedule represents the Fund’s total contractual obligations as of December 31, 2003:
| 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | ||
| Contractual Obligations: | ||||||||
| Long-term debt | ||||||||
| Sinai | $ 65,850 | $ 194,209 | $ 231,813 | $ 232,373 | $ 321,625 | $ 1,267,934 | $ 2,313,803 | |
| REFI | 505,410 | 505,410 | 505,410 | 126,353 | - | - | 1,642,583 | |
| US Hydro | 4,312,723 | 472,451 | 432,413 | 432,413 | - | - | 5,650,000 | |
| Minimum lease payment | 670,000 | 685,000 | 695,000 | 700,000 | 710,000 | 6,216,477 | 9,676,477 | |
| Consulting Agreement Settlement | 36,591 | 40,422 | 44,655 | 49,331 | 54,497 | 325,064 | 550,560 | |
During the third quarter of 2002, REFI executed a term loan agreement with its principal bank. The bank provided a loan of 12,500,000 Egyptian pounds (approximately US $2,022,000), which will mature on March 31, 2007. The loan will be repaid in quarterly installments of 781,250 Egyptian pounds (approximately US $126,000) starting June 2003. Outstanding borrowings bear interest at the bank’s medium term loan rate plus 0.5% (12.5% at December 31, 2003 and 2002).
Sinai has outstanding loans and interest payable of 14,292,806 Egyptian pounds (approximately US $2,314,000). The loan bears interest at 11.0% per annum. The provision of the loan restricts Sinai from paying dividends to its shareholders or obtaining credit from other banks. As the loan has been in default since 1999, Sinai entered into a new agreement in April 2005 in order to resolve all issues, cure the default, and reschedule the installment payments of the debt. At December 31, 2005, Sinai was in compliance with the terms of the modified loan.
Five of the US Hydro Project’s hydro-electric power plants are financed by a term loan. The Fund has a choice of variable or fixed interest rates on the term loan. Variable rates are LIBOR (1.16375% and 1.45% at December 31, 2003 and 2002, respectively) plus 1¾% or the Lenders Corporate Base Rate plus ½%. At the Fund’s option, a fixed interest rate can be selected, payable on any portion of the debt in excess of $1,000,000, for any period of time from two to seven years. Such fixed rate shall be based on the US Treasury note rate at the date of election plus 2¾%. The variable rate of 2.91375% and 3.2% were the effective interest rates at December 31, 2003 and 2002, respectively. Although the Fund is current in its interest and principal payments, it is technically in default under the covenants of the term loan as a result of not providing its lender a copy of its current audited financial statements. As per the terms of the term loan agreement, the default does not allow the lender to accelerate or call the loan.
This credit facility is collateralized by five hydroelectric plants and the notes receivable owned by the US Hydro Projects. As additional compensation to the lender, the Fund is required to pay to the lender an additional amount equal to 10% of the cash flow, as defined, of the financed projects plus 10% of any net proceeds, as defined, from the sale or refinancing of any of the financed projects. No additional interest payments were required for the years ended December 31, 2003 and 2002.
Scheduled principal repayments of the Fund’s long-term debt, as revised for the Sinai loan modification, are as follows:
| Sinai | REFI | US Hydro | Total | |
| 2004 | $ 65,850 | $ 505,410 | $ 4,312,723 | $ 4,883,983 |
| 2005 | 194,209 | 505,410 | 472,451 | 1,172,070 |
| 2006 | 231,813 | 505,410 | 432,413 | 1,169,635 |
| 2007 | 232,373 | 126,353 | 432,413 | 791,139 |
| 2008 | 321,625 | - | - | 321,625 |
| Thereafter | 1,267,934 | - | - | 1,267,934 |
| Total | $ 2,313,803 | $ 1 ,642,583 | $ 5,650,000 | $ 9,606,386 |
The UK Projects have collateralized long-term debt, without recourse to the Fund, with scheduled principal payments as follows:
| Year Ended | Scheduled |
| December 31, | Payment |
| 2004 | $ 1,562,972 |
| 2005 | 1,747,275 |
| 2006 | 1,941,484 |
| 2007 | 2,088,025 |
| 2008 | 2,118,153 |
| Thereafter | 13,298,153 |
| Total | $ 22,756,062 |
The long-term debt is repayable in semi annual installments each March 31st and September 30th through September 30, 2014. $9,698,121 of the outstanding debt bears interest at 7.08%, while $9,182,979 of the outstanding debt bears interest at 7.73% and $3,874,962 bears interest at LIBOR plus 1.4% (5.48% at December 31, 2003). The notes are collateralized by substantially all of the assets of the projects and the credit agreement requires that a debt service coverage ratio of 1.3 to 1 (as defined) be maintained as well as certain other ratios. At December 31, 2005, the UK Projects outstanding debt was current and in good standing with its bank.
The UK Projects has substantially reduced its interest rate variability to the bank loan by entering into near term forward notional swap agreements with its bank. Each year the UK Projects can reset and fix the interest rate it is charged on the long term portion of its bank loan or be charged the UK Projects prevailing available interest rate, approximately LIBOR plus 1.4%. On March 31, 2005, the UK Projects reset the interest rate to 5.88% on the long term portion with the fixed rate expiring on March 31, 2006.
The UK Projects have certain long-term agreements that require delivery of unspecified volumes of energy at fixed prices. The long-term contract is not guaranteed by the Fund. The Egypt Projects generally sell their electricity and water output at prevailing market rates.
Commencing in 2002, Ridgewood UK began to develop and construct expansion of certain existing facilities in order to take advantage of the RO programs. As Ridgewood UK required financing to maintain its expansion, it was decided to raise the necessary financing from affiliates. Accordingly, Ridgewood Power formed Ridgewood Renewable PowerBank LLC (“PB I”) and began offering shares in the fourth quarter of 2002. During the second quarter of 2003, Ridgewood Power formed Ridgewood Renewable PowerBank II LLC (“PB II”); in the third quarter of 2003, Ridgewood Power formed Ridgewood Renewable PowerBank III LLC (“PB III”) and during the third quarter of 2004, Ridgewood Power formed Ridgewood Renewable PowerBank IV LLC (“PB IV”). Shortly after the formation of PBI, PBII, PBIII and PBIV (collectively, the “PowerBank Funds”), all affiliates of Ridgewood UK, the offering period began for each respective PowerBank Fund. The proceeds raised by PowerBank Funds, less the offering costs incurred by the PowerBank Funds, were initially provided to Ridgewood UK in the form of construction advances.
As of December 31, 2003 and 2004, Ridgewood UK received construction advances of $41,806,478 and $53,770,169, respectively from the PowerBank Funds with the expectation to develop 29 projects with an operating capacity of 37.6 MW. The following table reflects the construction advances and anticipated development per PowerBank Fund as of December 31, 2005.
Offering | Net Funds | Anticipated | Anticipated | |
Fund | Period | Available For | No. of Projects | Capacity |
Ended (Closed) | Construction * | to be Developed | (MW) | |
| PBI | Apr 2003 | $ 9,478,645 | 5 | 7 |
| PBII | Jun 2003 | 16,227,833 | 10 | 11.6 |
| PBIII | Mar 2004 | 18,880,696 | 11 | 13 |
| PBIV | Nov 2004 | 9,182,995 | 3 | 6 |
| Total | $ 53,770,169 | 29 | 37.6 |
* In original $US, not impacted by currency translation
During the construction phase, Ridgewood UK will pay construction period interest at a rate of 10% on the construction period advances to the PowerBank Funds for each respective project. Upon completion of construction and commencement of operations of a project (“commissioning”), construction period interest charges will cease, each respective facility site will be sold to the respective PowerBank Fund at a predetermined price (£850,000 per MW), and said project will be leased back to Ridgewood UK subject to a 10 year minimum lease pursuant to sale-lease back agreements. Accordingly, the outstanding construction advances will convert to capital leases, determined on a project by project basis. The minimum term of the respective capital leases will run for 10 years and are payable in quarterly installments at a rate of 12% with no guaranteed residuals. At December 31, 2003, capital lease obligation principal payments are as follows:
| Year Ended | |
| December 31, | Repayment |
| 2004 | $ 772,554 |
| 2005 | 832,040 |
| 2006 | 864,530 |
| 2007 | 954,404 |
| 2008 | 1,070,301 |
| Thereafter | 6,477,044 |
| Total | $ 10,970,873 |
Two of the US Hydro Projects hydroelectric plants have leased the site at its facility under a long term lease which terminates in 2024. Rent expense for the year ended December 31, 2003 and the period November 23, 2002 to December 31, 2002 was $794,720 and $12,083, respectively.
Minimum lease payments are as follows:
| 2004 | $ 670,000 |
| 2005 | 685,000 |
| 2006 | 695,000 |
| 2007 | 700,000 |
| 2008 | 710,000 |
| Thereafter | 6,216,477 |
| Total for Minimum Lease Payments | $ 9,676,477 |
The Fund has certain other leases that require payments based upon a percentage of annual gross revenue of the hydroelectric plant less any taxes or other fees paid to the lessors. There are no minimum rents required and these commitments are not included in the amounts presented above. Rent expense for these hydroelectric plants for the year ended December 31, 2003 and the period November 23, 2002 to December 31, 2002 was $6,982 and $451, respectively.
One of the US Hydro electric plants is subject to a second mortgage lien in the amount of $2,017,000, in the event the plant defaults on its electric power sales contract with a utility.
In February 2003, a complaint was filed against Ridgewood Near East by a corporation claiming breach of consulting contract. In November 2003, the parties reached an agreement whereby Ridgewood Near East paid the corporation a one-time payment of $280,750, representing commissions and penalties, and agreed to continue making required commission payments as per the original agreement of $900,000 payable in monthly installments of $7,500. The Fund recorded the liability by discounting the future payments at the rate of 10% resulting in total expense of $567,534.
Schedule of future discounted principal payments are as follows:
| Year Ended | |
| December 31, | Payment |
| 2004 | $ 36,591 |
| 2005 | 40,422 |
| 2006 | 44,655 |
| 2007 | 49,331 |
| 2008 | 54,497 |
| Thereafter | 325,064 |
| Total | $ 550,560 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Qualitative Information About Market Risk.
The Fund's investments in financial instruments are short-term investments of working capital or excess cash. These short-term investments are limited by its Declaration of Fund to invest in United States government and agency securities or to obligations of banks having at least $5 billion in assets. Since the Fund invests only in short-term instruments for cash management, its exposure to interest rate changes is low. The Fund has limited exposure to trade accounts receivable and believes that their carrying amounts approximate fair value.
The Fund’s consolidated Egyptian Projects’ investments in financial instruments are short-term pound denominated obligations of large banks and trade accounts receivable and payable.
The Fund's primary market risk exposure is limited to interest rate risk caused by fluctuations in short-term interest rates. The Fund's primary market risk exposure related to its consolidated Egyptian Projects is to fluctuations in the foreign currency exchange rates and the secondary market risk exposure relates to UK projects. The Fund does not anticipate any changes in its primary market risk exposure or how it intends to manage it. The Fund does not trade in market risk sensitive instruments.
The Fund’s 2003 long-term debt includes approximately 70.6% of debt on a fixed rate and 29.4% on variable rate. This is consistent with the Fund’s approach to matching the Fund’s assets and liabilities. The following schedule summarizes the interest rate risk by stating the effective interest rate at balance sheet date.
Average Interest Rate | |||||
| 2003 | Variable Interest rate | Fixed Interest rate | Variable | Fixed | |
Long-term debt (1) | |||||
| Sinai | $ - | $ 2,313,803 | - | 11.0% | |
| REFI | - | 1,642,583 | 12.5% | - | |
| US Hydro | 5,650,000 | - | 2.9% | - | |
| UK Projects (2) | 3,874,962 | 18,881,100 | 5.5% | 7.4% | |
| 2002 | |||||
Long-term debt (1) | |||||
| Sinai | $ - | $ 3,244,465 | - | 12.0% | |
| REFI | - | 2,688,172 | 12.5% | - | |
| US Hydro | 7,100,000 | - | 3.2% | - | |
| UK Projects (3) | - | 21,779,850 | - | 7.5% | |
| (1) | The amounts above include the total long-term debt of the UK Projects. The Fund owns a 30% interest in the UK Projects through a joint venture with Power V and accounts for this investment using the equity method (see Note 2 of the financial statements presented elsewhere in this Annual Report on Form 10-K). |
| (2) | UK Projects include fixed interest rate on outstanding debt of $9,698,121 at 7.08% and $9,182,979 at 7.73%. |
| (3) | UK Projects include fixed interest rate on outstanding debt of $10,714,793 at 7.17% and $11,065,057 at 7.82%. |
Quantitative Information About Market Risk
This table provides information about the Fund's financial instruments that are defined by the Securities and Exchange Commission as market risk sensitive instruments. These include only short-term US government and agency securities and bank obligations. The table includes principal cash balances and related weighted average interest rates by contractual maturity dates.
| December 31, 2003 | December 31, 2002 | |
| Expected Maturity Date | Expected Maturity Date | |
| 2004 | 2003 | |
| (US $) | (US $) | |
| Bank Deposits and Certificates of Deposit | $ 55,000 | $ 13,000 |
| Average interest rate | 1.07% | 1.04% |
| (US $) | (US $) | |
| Bank Deposits denominated in Egyptian Pounds | $ 747,000 | $ 907,000 |
| Average interest rate | 7.0% | 1.05% |
Item 8. Financial Statements and Supplementary Data.
A. Index to Consolidated Financial Statements
| Report of Independent Registered Public Accounting Firm | F-2 |
Report of Independent Registered Public Accounting Firm | F-3 |
| Consolidated Balance Sheets at December 31, 2003 and 2002 | F-4 |
| Consolidated Statements of Operations for the three years ended December 31, 2003 | F-5 |
| Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2003 | F-6 |
Consolidated Statements of Comprehensive Loss for the three years ended December 31, 2003 | F-6 |
| Consolidated Statements of Cash Flows for the three years ended December 31, 2003 | F-7 |
Notes to Consolidated Financial Statements | F-9 to F-26 |
F-1
Report of Independent Registered Public Accounting Firm
Managing Shareholder and Shareholders
The Ridgewood Power Growth Fund
We have audited the accompanying consolidated balance sheet of The Ridgewood Power Growth Fund (the “Fund”) as of December 31, 2003 and the related consolidated statements of operations, changes in shareholders’ equity, comprehensive loss and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ridgewood Power Growth Fund as of December 31, 2003 and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Perelson Weiner LLP
New York, New York
January 31, 2006
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders of
The Ridgewood Power Growth Fund:
In our opinion, the accompanying consolidated balance sheet and related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of The Ridgewood Power Growth Fund and its subsidiaries (the “Fund”) at December 31, 2002, and the results of operations and cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
May 29, 2003
F-3
Consolidated Balance Sheets | |||||||
December 31, | |||||||
Assets: | 2003 | 2002 | |||||
| Cash and cash equivalents | $ | 801,233 | $ | 919,903 | |||
| Accounts receivable, net of allowance of $105,106 | |||||||
| and $327,491, respectively | 1,055,229 | 1,586,394 | |||||
| Current portion of note receivable | 4,269,020 | 200,000 | |||||
| Due from affiliates | 2,491,141 | 1,726,435 | |||||
| Deferred income taxes | 1,435,129 | - | |||||
| Other current assets | 679,580 | 483,135 | |||||
| Total current assets | 10,731,332 | 4,915,867 | |||||
| Investment in United Kingdom Landfill Gas Projects | 3,710,032 | 5,184,870 | |||||
| Property, plant and equipment: | |||||||
| Plant and equipment | 25,493,317 | 33,788,290 | |||||
| Construction in progress | 598,880 | 1,543,911 | |||||
| Office equipment | 792,878 | 1,042,367 | |||||
| 26,885,075 | 36,374,568 | ||||||
| Accumulated depreciation | (4,283,674 | ) | (3,382,907 | ) | |||
| 22,601,401 | 32,991,661 | ||||||
| Electric power sales contract | 17,558,501 | 17,430,794 | |||||
| Accumulated amortization | (1,888,661 | ) | (82,247 | ) | |||
| 15,669,840 | 17,348,547 | ||||||
| Note receivable, less current portion | - | 6,549,822 | |||||
| Other assets | 6,186 | 126,435 | |||||
| Goodwill | 5,153,145 | - | |||||
Total assets | $ | 57,871,936 | $ | 67,117,202 | |||
Liabilities and Shareholders’ Equity: | |||||||
| Accounts payable | $ | 604,112 | $ | 1,135,873 | |||
| Accrued expenses | 676,490 | 1,687,234 | |||||
| Current portion of long-term debt | 4,883,983 | 5,030,468 | |||||
| Due to affiliates | 1,888,394 | 558,254 | |||||
| Total current liabilities | 8,052,979 | 8,411,829 | |||||
| Long-term debt, less current portion | 4,722,403 | 8,002,169 | |||||
| Other liabilities | 513,969 | - | |||||
| Deferred rent | 134,720 | - | |||||
| Deferred income taxes | 5,826,098 | - | |||||
| Minority interest | 10,908,676 | 14,387,234 | |||||
| Total liabilities | 30,158,845 | 30,801,232 | |||||
| Commitments and contigencies | |||||||
| Shareholders’ equity (deficit): | |||||||
| Shareholders’ equity (658.1067 investor shares | |||||||
| issued and outstanding) | 27,995,283 | 36,512,134 | |||||
| Managing shareholder's accumulated deficit | |||||||
| (1 management share issued and outstanding) | (282,192 | ) | (196,164 | ) | |||
| Total shareholders’ equity | 27,713,091 | 36,315,970 | |||||
Total liabilities and shareholders’ equity | $ | 57,871,936 | $ | 67,117,202 | |||
See accompanying notes to the consolidated financial statements.
F-4
The Ridgewood Power Growth Fund | ||||||||||
Consolidated Statements of Operations | ||||||||||
For the Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Revenues | $ | 10,244,684 | $ | 5,830,356 | $ | 4,237,676 | ||||
| Cost of revenues, including depreciation and amortization | ||||||||||
| of $3,628,238, $2,076,939 and $1,025,620 in 2003, 2002 | ||||||||||
| and 2001, respectively | 7,142,351 | 5,403,596 | 3,256,555 | |||||||
| Gross profit | 3,102,333 | 426,760 | 981,121 | |||||||
| Other operating expenses: | ||||||||||
| General and administrative expenses | 3,302,304 | 2,029,485 | 1,301,015 | |||||||
| Management fee to the managing shareholders | 822,633 | 822,633 | 1,645,267 | |||||||
| Write down of assets in power generation projects, net | 2,495,178 | 297,652 | - | |||||||
| Impairment of goodwill | 555,502 | - | - | |||||||
| Provision for bad debts | 536,472 | 138,233 | 222,862 | |||||||
| Total other operating expenses | 7,712,089 | 3,288,003 | 3,169,144 | |||||||
| Loss from operations | (4,609,756 | ) | (2,861,243 | ) | (2,188,023 | ) | ||||
| Other (expense) income: | ||||||||||
| Interest income | 58,395 | 59,678 | 305,746 | |||||||
| Interest income from US Hydro Projects | - | - | 993,685 | |||||||
| Interest expense | (860,659 | ) | (987,602 | ) | (29,698 | ) | ||||
| Equity interest in loss from: | ||||||||||
| Sinai Environmental Services | - | (37,287 | ) | - | ||||||
| Investment in ZAP | - | - | (818,043 | ) | ||||||
| United Kingdom Landfill Gas Projects | (627,057 | ) | (845,164 | ) | (164,559 | ) | ||||
| Loss on sale of property, plant and equipment | (499,443 | ) | - | - | ||||||
| Other income | 92,839 | 152,314 | 197,629 | |||||||
| Gain on sale of investment in ZAP securities | 117,980 | - | - | |||||||
| Write-down of investment in ZAP securities | - | - | (1,282,241 | ) | ||||||
| Total other expense, net | (1,717,945 | ) | (1,658,061 | ) | (797,481 | ) | ||||
| Loss before income taxes and minority interest | (6,327,701 | ) | (4,519,304 | ) | (2,985,504 | ) | ||||
| Income tax (benefit) expense | (1,053,744 | ) | 12,622 | - | ||||||
| Loss before minority interest | (5,273,957 | ) | (4,531,926 | ) | (2,985,504 | ) | ||||
| Minority interest in the loss (earnings) of subsidiaries | 1,483,914 | 1,200,553 | (51,907 | ) | ||||||
| Net loss | $ | (3,790,043 | ) | $ | (3,331,373 | ) | $ | (3,037,411 | ) | |
| Managing Shareholder - Net loss | $ | (37,900 | ) | $ | (33,314 | ) | $ | (30,374 | ) | |
| Shareholders - Net loss | $ | (3,752,143 | ) | $ | (3,298,059 | ) | $ | (3,007,037 | ) | |
| Net loss per investor share | $ | (5,701 | ) | $ | (5,011 | ) | $ | (4,569 | ) | |
See accompanying notes to the consolidated financial statements.
F-5
The Ridgewood Power Growth Fund | ||||||||||
Consolidated Statements of Changes in Shareholders’ Equity | ||||||||||
For The Years Ended December 31, 2003, 2002 and 2001 | ||||||||||
Total | ||||||||||
Managing | Shareholders' | |||||||||
Shareholders | Shareholder | Equity (Deficit) | ||||||||
| Shareholders’ equity (deficit), January 1, 2001 | $ | 46,189,602 | $ | (98,412 | ) | $ | 46,091,190 | |||
| Foreign currency translation adjustment | (3,702,603 | ) | (37,400 | ) | (3,740,003 | ) | ||||
| Net loss | (3,007,037 | ) | (30,374 | ) | (3,037,411 | ) | ||||
| Shareholders’ equity (deficit), December 31, 2001 | 39,479,962 | (166,186 | ) | 39,313,776 | ||||||
| Foreign currency translation adjustment | 330,231 | 3,336 | 333,567 | |||||||
| Net loss | (3,298,059 | ) | (33,314 | ) | (3,331,373 | ) | ||||
| Shareholders’ equity (deficit), December 31, 2002 | 36,512,134 | (196,164 | ) | 36,315,970 | ||||||
| Cash Distributions | (1,316,418 | ) | (13,297 | ) | (1,329,715 | ) | ||||
| Foreign currency translation adjustment | (3,448,290 | ) | (34,831 | ) | (3,483,121 | ) | ||||
| Net loss | (3,752,143 | ) | (37,900 | ) | (3,790,043 | ) | ||||
| Shareholders’ equity (deficit), December 31, 2003 | $ | 27,995,283 | $ | (282,192 | ) | $ | 27,713,091 | |||
The Ridgewood Power Growth Fund | ||||||||||
Consolidated Statements of Comprehensive Loss | ||||||||||
For the Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Net loss | $ | (3,790,043 | ) | $ | (3,331,373 | ) | $ | (3,037,411 | ) | |
| Foreign currency translation adjustment | (3,483,121 | ) | 333,567 | (3,740,003 | ) | |||||
| Comprehensive loss | $ | (7,273,164 | ) | $ | (2,997,806 | ) | $ | (6,777,414 | ) | |
See accompanying notes to the consolidated financial statements.
F-6
The Ridgewood Power Growth Fund | ||||||||||
Consolidated Statements of Cash Flows | ||||||||||
For The Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Cash flows from operating activities: | ||||||||||
| Net loss | $ | (3,790,043 | ) | $ | (3,331,373 | ) | $ | (3,037,411 | ) | |
| Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: | ||||||||||
| Non-cash adjustments to acquired assets and | ||||||||||
| assumed liabilities, net | (371,531 | ) | - | - | ||||||
| Depreciation and amortization | 3,628,238 | 2,076,939 | 1,025,620 | |||||||
| Provision for bad debts | 536,472 | 138,233 | 222,862 | |||||||
| Write-down of assets in power generation projects, net | 2,495,178 | 297,652 | - | |||||||
| Impairment of goodwill | 555,502 | - | - | |||||||
| Minority interest in (loss) earnings of subsidiaries | (1,483,914 | ) | (1,200,553 | ) | 51,907 | |||||
| Equity interest in loss from United Kingdom Landfill Gas Projects | 627,057 | 845,164 | 164,559 | |||||||
| Equity interest in loss from Sinai Environmental Services | - | 37,287 | - | |||||||
| Equity interest in loss from ZAP | - | - | 818,043 | |||||||
| Gain on sale of investment in ZAP securities | (117,980 | ) | - | - | ||||||
| Write-down investment in ZAP | - | - | 1,282,241 | |||||||
| Loss on sale of assets | 499,443 | - | - | |||||||
| Interest income from US Hydro Projects | - | - | (993,685 | ) | ||||||
| Changes in assets and liabilities, net of acquired businesses: | ||||||||||
| Increase in accounts receivable | (232,149 | ) | (355,234 | ) | (216,166 | ) | ||||
| Increase in other current assets | (290,185 | ) | (23,465 | ) | (185,860 | ) | ||||
| Decrease (increase) in other assets | 57,152 | (126,435 | ) | - | ||||||
| Decrease in accounts payable | (120,502 | ) | (940,911 | ) | (165,377 | ) | ||||
| Increase (decrease) in accrued expenses | 89,256 | 1,517,352 | (48,999 | ) | ||||||
| Increase in due to/from affiliate, net | 719,157 | 94,126 | 174,209 | |||||||
| Increase in other liabilties | 513,969 | - | - | |||||||
| Increase in deferred rent | 134,720 | - | - | |||||||
| Decrease in deferred income taxes | (1,317,678 | ) | - | - | ||||||
| Total adjustments | 5,922,206 | 2,360,155 | 2,129,354 | |||||||
| Net cash provided by (used in) operating activities | 2,132,162 | (971,218 | ) | (908,057 | ) | |||||
| Cash flows from investing activities: | ||||||||||
| Capital expenditures | (360,010 | ) | (1,067,390 | ) | (10,354,301 | ) | ||||
| Proceeds from sale of assets | 388,989 | - | - | |||||||
| Collections of notes receivable | 200,000 | - | - | |||||||
| Proceeds from sale of investment in ZAP securities | 117,980 | - | - | |||||||
| Cash paid for acquisition of Sinai Environmental Services | - | (981,267 | ) | (1,086,913 | ) | |||||
| Cash received in acquisition of US Hydro Projects, net | - | 2,261,686 | - | |||||||
| Investment in United Kingdom Landfill Gas Projects | - | (4,491 | ) | (5,476,886 | ) | |||||
| Distributions from United Kingdom Landfill Gas Projects | 938,088 | - | - | |||||||
| Net cash provided by (used in) investing activities | 1,285,047 | 208,538 | (16,918,100 | ) | ||||||
See accompanying notes to the consolidated financial statements.
F-7
The Ridgewood Power Growth Fund |
Consolidated Statements of Cash Flows (Continued) |
For The Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Cash flows from financing activities: | ||||||||||
| Borrowings under bank loan | - | 2,688,172 | - | |||||||
| Repayments under bank loan | (1,978,353 | ) | (554,008 | ) | - | |||||
| Short term advances to affiliates, net | - | (1,505,244 | ) | - | ||||||
| Distribution to minority interest | - | - | (1,399,982 | ) | ||||||
| Contributions to Egypt Projects by minority member | - | - | 5,037,526 | |||||||
| Cash distributions to shareholders | (1,329,715 | ) | - | - | ||||||
| Net cash (used in) provided by financing activities | (3,308,068 | ) | 628,920 | 3,637,544 | ||||||
| Effect of exchange rate on cash and cash equivalents | (227,811 | ) | 5,347 | (91,774 | ) | |||||
| Net decrease in cash and cash equivalents | (118,670 | ) | (128,413 | ) | (14,280,387 | ) | ||||
| Cash and cash equivalents, beginning of year | 919,903 | 1,048,316 | 15,328,703 | |||||||
| Cash and cash equivalents, end of year | $ | 801,233 | $ | 919,903 | $ | 1,048,316 | ||||
| Supplemental Disclosures: | ||||||||||
| Dividend receivable | $ | 342,756 | $ | - | $ | - | ||||
| Operating assets and liabilities included in business acquisitions: | ||||||||||
| Accounts receivable | - | 780,137 | - | |||||||
| Deferred income tax assets | 1,435,129 | - | - | |||||||
| Electric power sales contracts | 1,649,822 | - | - | |||||||
| Goodwill | 5,708,647 | - | - | |||||||
| Notes receivable | - | 6,749,822 | - | |||||||
| Other assets | - | 248,478 | - | |||||||
| Loans payable | - | 10,898,473 | - | |||||||
| Accounts payable and accrued expenses | 1,100,000 | 1,766,868 | - | |||||||
| Deferred income tax liabilities | 7,143,776 | - | - | |||||||
See accompanying notes to the consolidated financial statements.
F-9
1. Organization and Purpose
The Ridgewood Power Growth Fund (the “Fund”) was formed as a Delaware business trust in February 1997. The Fund began offering shares on February 9, 1998 and discontinued its offering in April 2000. Ridgewood Capital Management LLC (“RCC”, formerly Ridgewood Capital Corporation) provided most services required to support the offering. The managing shareholders of the Fund are Ridgewood Renewable Power LLC (“RPC”) and Ridgewood Power VI LLC (“Power VI”) (collectively the “Managing Shareholder”). Subsequently, Power VI has assigned and delegated all of its rights and responsibilities to RPC and is essentially an entity that contains nominal activity. The Managing Shareholder and RCC are related through common ownership. The Fund had no operations prior to the commencement of the share offering.
The Fund has been organized to invest primarily in independent power generation facilities, water desalinization plants and other capital facilities. These independent power generation facilities will include cogeneration facilities, which produce both electricity and heat energy and other power plants that use various fuel sources (except nuclear). In the past, the Fund invested in opportunities outside of independent power generation facilities.
Christiana Bank & Trust Company, a Delaware trust company, is the Corporate Trustee of the Fund. The Corporate Trustee acts on the instructions of the Managing Shareholder and is not authorized to take independent discretionary action on behalf of the Fund.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Fund and its controlled subsidiaries. All material intercompany transactions have been eliminated.
The Fund uses the equity method of accounting for its investments in affiliates which are 50% or less owned if the Fund has the ability to exercise significant influence over the operating and financial policies of the affiliates but does not control the affiliate. The Fund’s share of the earnings of the affiliates is included in the consolidated financial statements.
Use of estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, requires the Fund to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Fund evaluates its estimates, including provision for bad debts, carrying value of investments, amortization/depreciation of plant and equipment and intangible assets, and recordable liabilities for litigation and other contingencies. The Fund bases its estimates on historical experience, current and expected conditions and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
New Accounting Standards and Disclosures
SFAS 143
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 143, Accounting for Asset Retirement Obligations, on the accounting for obligations associated with the retirement of long-lived assets. SFAS 143 requires a liability to be recognized in the consolidated financial statements for retirement obligations meeting specific criteria. Measurement of the initial obligation is to approximate fair value, with an equivalent amount recorded as an increase in the value of the capitalized asset. The asset will be depreciated in accordance with normal depreciation policy and the liability will be increased for the time value of money, with a charge to the income statement, until the obligation is settled. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Fund adopted SFAS 143 effective January 1, 2003, with no material impact on the consolidated financial statements.
SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Fund adopted SFAS 145 effective January 1, 2003, with no material impact on the consolidated financial statements.
SFAS 146
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. The Fund adopted SFAS 146 effective January 1, 2003, with no material impact on the consolidated financial statements.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Fund adopted FIN 45 during the fourth quarter of 2002 with no material impact to the consolidated financial statements.
FIN 46R
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after December 31, 2003, and apply in the first fiscal period ending after March 15, 2004, for variable interest entities created prior to January 1, 2004. The Fund adopted the disclosure provisions of FIN 46 effective December 31, 2003, with no material impact to the consolidated financial statements. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions and to exempt certain entities from its requirements. The Fund implemented the full provisions of FIN 46R effective January 1, 2004, with no material impact on the consolidated financial statements.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Fund adopted SFAS 149 effective July 1, 2003, with no material impact on the consolidated financial statements.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. The Fund adopted SFAS 150 effective July 1, 2003, with no material impact on the consolidated financial statements.
F-10
SFAS 153
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (“Opinion 29”), is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in Opinion 29, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Fund adopted SFAS 153 effective June 15, 2005, with no material impact on the consolidated financial statements.
Significant Accounting Policies
Cash and cash equivalents
The Fund considers all highly liquid investments with maturities when purchased of three months or less to be cash and cash equivalents. Cash and cash equivalents consist of commercial paper and funds deposited in bank accounts. Cash balances with bank exceeded insured limits by $747,000 at December 31, 2003.
Accounts receivables
Trade receivables are recorded at invoice price and do not bear interest. The Fund recorded an allowance for doubtful accounts of $105,106 and $327,491 in 2003 and 2002, respectively, based upon historical write-off experience, evaluation of customer credit condition and the general economic status of the customer. For the years ended December 31, 2003, 2002 and 2001, the Fund recorded provision for bad debts of $536,472, $138,233 and $222,862, respectively.
Revenue recognition
Power generation and water revenues are recorded in the month of delivery, based on the estimated volumes sold to customers. Adjustments are made to reflect actual volumes delivered when the actual information subsequently becomes available. Billings to customers for power generation generally occur during the month following delivery. Final billings do not vary significantly from estimates.
Foreign currency translation
The consolidated financial statements of the Fund’s non-United States subsidiaries utilize local currency as their functional currency and are translated into United States dollars using current rates of exchange, gains or losses on conversion are included in the foreign currency translation adjustment account in the shareholders’ equity section of the Consolidated Balance Sheets.
On January 30, 2003, the Egyptian government discontinued the regulation of its monetary currency rate and decided to allow the currency rate to float. As a result of this change in policy, the Egyptian pound decreased 15% against the US dollar on January 30, 2003. As of December 31, 2003, the Fund’s investment in the Egyptian operations decreased by approximately 27% due to the decrease in the exchange rate from January 1, 2003 through December 31, 2003. The cumulative foreign currency translation adjustment, which represents total accumulated other comprehensive loss and is included in shareholders’ equity, at December 31, 2003 and 2002 amounts to a loss of $8,555,271 and $5,072,150, respectively.
Impairment of Goodwill and Long-Lived Assets
In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or disposal of Long-Lived Assets, the Fund evaluates goodwill and long-lived assets, such as plant and equipment and amortizable intangibles, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Goodwill represents the excess cost over fair value of the net assets of purchased businesses. Goodwill and long-lived assets are assessed annually for impairment in the first quarter of each year or more frequently if impairment indicators arise, based on the fair value. To perform annual goodwill impairment testing, the Fund compared the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded. Fair values are determined by taking into account future estimated discounted cash flows which are based on detailed cash flow forecast of each reporting unit at the estimated cost of capital of approximately 6.6%.
The Fund performed its annual impairment evaluation, which resulted in goodwill impairment expense of approximately $556,000 and long-lived assets impairment of approximately $1,902,000, which is included in write-down of assets in power generation projects, for the year ended December 31, 2003. Goodwill, resulting from the deferred tax liability associated with the acquisition of US Hydro, was not supported by discounted future cash flow of the underlying projects to the extent of impairment. The impairment of long-lived assets impacting the loss from operations is primarily due to decrease in future undiscounted cash flow of certain US Hydro projects resulting from the exercise of certain rights of the off take party on various power agreements and the restructuring of power agreement at the Blackstone Project. All of the impairments relate to assets included in the Fund’s Power segment. At December 31, 2003 and 2002, the gross and net amount of intangible assets were:
| Amortized intangibles: | 2003 | 2002 |
| Electric power sales contract - gross | $ 17,558,501 | $ 17,430,794 |
Less accumulated amortization expense | 1,888,661 | 82,247 |
| Electric power sales contract - net | $ 15,699,840 | $ 17,348,547 |
| Unamortized intangibles: | ||
| Goodwill | $ 5,153,145 | $ --- |
Electric power sales contract is being amortized over the duration of the contracts (from 4 to 22 years) on a straight-line basis. During the years ended December 31, 2003, 2002 and 2001, the Fund recorded amortization expense of $1,806,414, $82,247 and $0, respectively. The Fund expects to record amortization expense during the next five years as follows:
| Year Ended | |
| December 31, | Amortization |
| 2004 | $ 1,503,658 |
| 2005 | 1,351,486 |
| 2006 | 1,049,158 |
| 2007 | 919,589 |
| 2008 | 870,665 |
Plant and equipment
Plant and equipment, consisting principally of electrical generating equipment and water desalinization facilities, are stated at cost. Major renewals and betterments that increase the useful lives of the assets are capitalized. Repair and maintenance expenditures that increase the efficiency of the assets are expensed as incurred.
Depreciation is recorded using the straight-line method over the useful lives of the assets, which vary from 3 to 20 years with a weighted average of 17 and 15 years at December 31, 2003 and 2002, respectively. During the years ended December 31, 2003, 2002 and 2001, the Fund recorded depreciation expense of $1,821,824, $1,994,692 and $1,025,620, respectively.
F-11
Income taxes
The Fund’s Egyptian subsidiaries have ten year income tax holidays that expire in 2008 through 2010. Accordingly, no provision has been made for Egyptian income taxes in the accompanying consolidated financial statements.
The US Hydro Projects, for federal income tax purposes, file on a consolidated basis using the accrual method of accounting on a calendar year basis. The US Hydro Projects, for state income tax purposes, file on an individual entity basis. The US Hydro Projects use the liability method in accounting for income taxes. Deferred income tax reflects, where required, the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes.
Except for the US Hydro Projects, no provision is made for US income taxes in the accompanying consolidated financial statements as the income or losses of the Fund are passed through and included in the income tax returns of the individual shareholders of the Fund.
Supplemental cash flow information
Total interest paid during the years ended December 31, 2003, 2002, and 2001 was $807,735, $1,057,866, and $29,698, respectively.
For the years ended December 31, 2003 and 2002, the Fund paid income taxes of $166,920 and $0, respectively.
Significant Customers
The Fund’s largest customers accounted for 27.9% and 16.9% of revenue in 2003, 20.6% and 10.1% of revenue in 2002 and 28.9% and 17.4% of revenue in 2001.
Reclassification
Certain items in previously issued financial statements have been reclassified for comparative purposes. This had no effect on net loss.
| 3. | Projects |
The Fund is comprised of several projects consisting of the following:
Accounting | Percent | ||
Method | Ownership | ||
| Egypt Projects | Consolidation | 68.1% | |
| US Hydro Projects | Consolidation | 70.8% | |
| United Kingdom Landfill Gas Projects | Equity | 30.0% |
Egypt Projects
In 1999, the Fund and Ridgewood Electric Power Trust V ("Trust V") jointly formed Ridgewood Near East Holdings LLC (“Ridgewood Near East”) to develop electric power and water purification plants for resort hotels in Egypt. In 2000, the Fund made additional investments and acquired majority ownership of Ridgewood Near East which wholly owns Ridgewood Egypt For Infrastructure, LLC (“REFI”). The Fund and Trust V own Ridgewood Near East in proportion to the capital they contributed, net of distributions and allocated profits and losses. Accordingly, the Fund has consolidated the financial position and results of operations since 2000. In 2001, Ridgewood/Egypt Fund (“Egypt Fund”), an affiliate of Trust V and the Fund, made contributions to Ridgewood Near East in exchange for a minority interest. At December 31, 2003 and 2002, the Fund owns 68.1% of Ridgewood Near East. Trust V and the Egypt Fund’s interests in Ridgewood Near East are presented as minority interest in the consolidated balance sheets and consolidated statements of operations.
Currently REFI consists of 8 water desalinization plants, 1 electric generation plant and 8 combination electric generation/water plants. The projects generally sell their electricity and drinking water output under contracts and other arrangements at prevailing market rates. In 2002, REFI shut down and removed the equipment from two of its water desalinization plants. As a result of these transactions, REFI recorded a writedown of $297,652 in 2002 to adjust the carrying value of the projects to reflect their current fair market value. In the first quarter of 2003, REFI sold another of its on-site power plants to the hosting hotel. As a result of the sale, REFI recorded a loss on sale of assets of $499,443 in 2003. The writedown and loss on sale of assets have been presented as separate line items in the consolidated statements of operations.
On December 30, 2001, Ridgewood Near East, through REFI, purchased a 28% equity interest in Sinai Environmental Services S.A.E. (“Sinai”), a 1,585,000 gallons per day water desalinization plant, for 4,999,800 Egyptian pounds (approximately US $1,087,000 in 2001). At December 31, 2001, the Fund accounted for this investment under the equity method of accounting because it had the ability to exercise significant influence, but not control. In February of 2002, the Fund made an additional investment of 4,379,637 Egyptian pounds (approximately US $939,000 in 2002) to increase its ownership to 53% and gain control of Sinai. As a result of the additional investment, effective February 16, 2002, REFI accounts for its investment in Sinai under the consolidation method of accounting. REFI is currently entitled to additional interest in Sinai in return for providing Sinai with certain machinery and equipment. On REFI, a minority interest receivable related to this subsidiary was not recorded as of December 31, 2003, as no obligation to fund the losses by the minority shareholder exists.
At the time of acquisition in February 2002, Sinai had plant and equipment with a net book value of approximately $5,906,000, accounts receivable of $214,000 and other assets with an approximate book value of $32,000. In accordance with the purchase agreement, the Fund assumed liabilities of approximately $450,000 and a non-recourse loan of approximately $3,417,000 (approximately $2,314,000 at December 31, 2003), which was in default (Note 4). Ridgewood Near East has ascribed the excess purchase price of $777,000 (on its 53% interest) to plant and equipment which is being amortized over the 20 year life of the assets.
In 2003, the Fund hired an independent third party engineering firm to analyze, value and determine the economic life of the recorded plant and equipment of the Sinai Company. As a result of the analysis, Ridgewood Near East recorded a writedown of $527,416. The writedown has been presented as separate line item in the consolidated statements of operations.
Since the effective date of the acquisition of Sinai was February 16, 2002, the pro forma results of operations as if the merger had taken place on January 1, 2002 would not be significantly different than the current results included in the consolidated statements of operations.
US Hydro Projects
Beginning in 1999, the Fund and Trust V began negotiations with Synergics, Inc. (“Synergics”) to buy seven of its hydroelectric generating plants (the “US Hydro Projects”). In the course of negotiations and due diligence, the Fund and Trust V learned that one of Synergics’ lenders had declared a payment default against Synergics and that the lender had agreed to discharge the debt at a substantial discount from the face amount (approximately $23.5 million) if payment were made by the end of April 2000. In order to preserve the benefit of the lender’s offer and to allow completion of the acquisition on favorable terms, the Fund and Trust V, through a joint venture (the “debt joint venture”), acquired the debt from the lender on April 28, 2000 for a payment of approximately $17 million to the lender. The Fund supplied $12 million of the capital used by the debt joint venture to acquire the debt and Trust V supplied the remaining $5 million. The Fund and Trust V own the debt joint venture 70.8% and 29.2%, respectively, which is in proportion to the capital each supplied. Neither entity has preferred rights over the other. The Fund accounted for its investment in the initial $17 million of debt acquired as a note receivable through November 21, 2002.
F-12
On November 22, 2002, through another joint venture (the “acquisition joint venture”) owned in the same proportion as the debt joint venture that acquired the debt of Synergics, the Fund and Trust V completed its acquisition of the U.S. Hydro Projects and acquired 100% of the outstanding stock of Synergics through a structured tax reorganization. As part of the structured tax reorganization, the former shareholders of Synergics received 100% of the outstanding shares of a subsidiary of Synergics in exchange for selling the stock of Synergics to the Fund and Trust V for a nominal amount. Upon completion of the acquisition, Synergics was renamed Ridgewood U.S. Hydro Corporation, the Fund accounted for its 70.8% interest in the US Hydro Projects as a purchase and the results of operations of the US Hydro Projects have been included in the Fund’s consolidated financial statements.
The aggregate acquisition price of the US Hydro Projects (collectively, the debt joint venture, the acquisition joint venture, and Synergics) was approximately $20.3 million. As a result of the acquisition, the Fund and Trust V received seven hydroelectric generating plants with a market value of approximately $1.8 million, $2.7 million in cash and other current assets, and notes receivable with a market value of $4.0 million (approximately $6.7 million value was initially assigned to the note at December 31, 2002). In accordance with the purchase agreement, the Fund and Trust V assumed approximately $7.5 million of other bank debt, income taxes payable of $0.1 million and agreed to a contingent income tax obligation initially estimated at approximately $1 million. As of December 31, 2002, the Fund and Trust V initially ascribed the approximate excess purchase price of $17.4 million to electric power sales contracts, which in 2003 was adjusted to approximately $19.4 million (before the $1.9 million impairment charge - Note 2) and will be amortized over the remaining life of the respective contracts.
As part of the purchase agreement, the Fund and Trust V had the option to treat the acquisition of the Synergics stock as an acquisition of assets in accordance with Internal Revenue Code (“IRC”) Section 338 (h) 10. By electing IRC Section 338, the tax basis of the assets acquired would be stepped up and there would be little if any difference between the financial reporting basis and the income tax basis of the assets acquired. If the election were made it was agreed that a contingent income tax obligation would be due the seller of the US Hydro Projects as compensation for their increased tax cost. At acquisition, a $1 million contingent income tax obligation was recorded as part of the purchase price. However, after further analysis, the income tax obligation due under IRC Section 338 was estimated to be $1.7 million.
During the third quarter of 2003, the Fund and Trust V chose not to exercise the IRC Section 338 h (10) election it had originally intended to make at the time of the acquisition of the US Hydro Projects. The Fund and Trust V’s change in position on IRC Section 338 was determined in part by the revised $1.7 million contingent tax obligation that would be due upon the filing of the election, compared to the minimal income taxes that would be due over the life of the projects. As a result of not exercising the IRC Section 338 h (10) election, the Fund and Trust V reversed the $1 million contingent tax obligation (along with other purchase price adjustments) and also recorded deferred taxes on the temporary differences between the financial reporting basis and the income tax basis of the assets acquired, which amounted to approximately $5.7 million of net deferred tax liabilities. The Fund and Trust V assigned $5.7 million of additional net deferred tax liabilities to goodwill.
The unaudited pro forma consolidated financial information of the Fund shown below has been prepared based upon the historical consolidated income statements of the Fund and the US Hydro Projects, giving effect to the Fund’s acquisition of the US Hydro Projects as if it had occurred at the beginning of the period presented. The historical information has been adjusted to reflect the elimination of intercompany transactions as well as the interest income earned on notes receivable from third parties. The pro forma information is not necessarily indicative of the results that the Fund would have had if its acquisition of the US Hydro Projects had been completed prior to November 23, 2002, or the results that the Fund will have in the future.
Pro forma Combined Statements of Operations
For the Year Ended December 31, | ||||
2002 | 2001 | |||
| Revenue | $ 10,154,427 | $ 8,032,301 | ||
| Cost of sales | 7,427,470 | 5,517,871 | ||
| Operating loss | (1,237,795) | (1,772,033) | ||
| Minority interest | (809,912) | (13,340) | ||
| Net loss | (2,384,203) | (4,125,520) | ||
| Net loss per investor share | (3,623) | (6,269) | ||
United Kingdom Landfill Gas Projects
On May 26, 1999, Ridgewood UK, LLC (“Ridgewood UK”) was formed as a Delaware limited liability company, which in turn formed a subsidiary Ridgewood UK Ltd. (“UK Ltd”). On June 30, 1999, Trust V contributed $16,667,567 to Ridgewood UK; in turn UK Ltd., purchased six landfill gas power plants located in the United Kingdom. During 2001, the Fund contributed $5,817,006 to Ridgewood UK in return for an approximate equity share of 30%. Approximately $3,400,000 of the contributed funds, along with bank financing, was used to acquire four landfill gas power plants in the United Kingdom with a capacity of 10.6 megawatts (“MWs”). Approximately $2,100,000 of the total purchase price of the acquired plants was assigned to the electric power sales contracts acquired and is being amortized over the life of the contracts (15 years).
On October 16, 2001, UK Ltd., through the issuance of approximately 24% of its shares and $2,000,000 cash under the terms of a merger agreement (the “UK Merger”), acquired certain of the assets and liabilities of CLP Services, Ltd., CLP Development, Ltd and CLP Envirogas, Ltd. (collectively the "Management and Development Companies") and the equity and debt of new landfill projects. The Management and Development Companies previously developed the various landfill gas projects that were sold to UK Ltd. pursuant to the UK Merger. As a result of the acquisition, which totaled seven plants, UK Ltd. provides its own operation, management and development services. UK Ltd. was renamed CLPE Holdings Ltd. (“CLP”) in 2001. In return for the stock issuance and $2,000,000 cash, CLP received plant and equipment valued at approximately $4,201,000, a 50% equity interest in landfill projects valued at approximately $744,000, cash of $454,000 and other assets with an approximate value of $1,000,000. CLP also assumed liabilities of approximately $3,058,000. CLP assigned the electric power sales contracts and other intangibles acquired a value of $6,781,000, which is being amortized over the 15 year life of the underlying power sales contracts.
Since 2001, the members of Ridgewood UK are Trust V and the Fund, both Delaware business trusts. Trust V, which owns 70% of Ridgewood UK, is managed by RPC, its managing shareholder. The Fund, which owns 30% of the Ridgewood UK, is managed by RPC and Power VI, its managing shareholder.
As of December 31, 2003, CLP owned twenty one landfill methane gas-fired electric generating projects in the United Kingdom with an installed capacity of 32.3 MWs. Sixteen of the projects representing 25.3 MW sell electricity under 15 year contracts to the Non Fossil Purchasing Agency (“NFPA”), a non-profit organization that purchases electricity generated by renewable sources on behalf of all British utilities. The remaining five projects representing 7 MW are subject to leases and sell this output under one year contracts. As of December 31, 2005, CLP owned thirty one landfill methane gas-fired electric generating projects in the United Kingdom with an installed capacity of 48.7 MWs.
In the fourth quarter of 2002, CLP decided not to continue the development of two projects it received as part of the 2001 UK Merger and recorded a writedown of $854,367 to adjust the carrying value of the projects to zero.
As part of the UK Merger, Ridgewood UK also acquired a 50% ownership in CLP Organogas SL (“Organogas”), a 2 MW plant located in Seville, Spain, as well as a 50% interest in CLP Envirogas, SL, (“Envirogas”), a management and development service company also located in Seville, Spain (collectively, the “Spanish Landfill Projects”). Under the terms of an agreement with one of its minority shareholders, effective January 1, 2003 Ridgewood UK transferred its 50% interest in the Spanish Landfill Projects in return for a portion of the minority shareholder’s interest in CLP. As a result of the transaction, Ridgewood UK increased its ownership in CLP from 76% to 88%.
F-13
Beginning in 2002, Ridgewood UK began to identify and develop sites in order to take advantage of the United Kingdom’s Renewable Obligation incentive program (“RO”). The RO program requires electricity suppliers serving electric users in the U.K. to obtain renewable obligation certificates (“ROC”) to demonstrate that a portion of their electricity supply portfolio was produced by qualified producers. Registered producers generate electricity from qualified renewable sources. Accordingly, Ridgewood UK began to borrow funds from Ridgewood Renewable PowerBank LLC, an affiliated entity, to finance Ridgewood UK’s expansion in 2002. In 2003 and 2004, Ridgewood UK borrowed funds from Ridgewood Renewable PowerBank II LLC, Ridgewood Renewable PowerBank III LLC and Ridgewood Renewable PowerBank IV LLC, all affiliates of Ridgewood UK (as they have a common managing shareholder), to further finance expansion. As of December 31, 2003, Ridgewood UK received advances totaling $41,806,478 from three of the respective PowerBank Funds with the expectation to develop twenty six projects with an operating capacity of 31.6 MWs. As of December 31, 2005, Ridgewood UK had commissioned sixteen projects with a capacity of 21.3 MWs.
The Fund’s 30% investment in Ridgewood UK is accounted for under the equity method of accounting as the Fund has the ability to exercise significant influence over the operating and financial policies of Ridgewood UK. The Fund’s equity in the earnings of Ridgewood UK has been included in the consolidated statements of operations since acquisition.
Summarized financial information for the United Kingdom Landfill Gas Projects is as follows:
Balance Sheet Information
December 31, 2003 | December 31, 2002 | |||
| Current assets | $ 39,129,585 | $ 6,892,113 | ||
| Non-current assets | 53,899,002 | 41,553,839 | ||
| Total assets | $ 93,028,587 | $ 48,445,952 | ||
| Current liabilities | $ 12,307,232 | $ 4,238,985 | ||
Long-term debt Construction advances Capital lease obligations | 21,193,090 34,178,955 10,198,319 | 20,528,446 -- -- | ||
| Deferred income taxes | 753,979 | 918,249 | ||
| Other liabilities | -- | 77,699 | ||
| Minority interest | 2,030,568 | 5,400,035 | ||
| Members’ equity | 12,366,444 | 17,282,538 | ||
| Liabilities and members’ equity | $ 93,028,587 | $ 48,445,952 |
Statements of Operations
For the Year Ended December 31, | |||||
2003 | 2002 | 2001 | |||
| Revenue | $ 13,713,905 | $ 9,120,088 | $ 6,233,030 | ||
| Cost of sales | 13,633,056 | 9,991,516 | 5,594,142 | ||
| Other expenses | 2,170,997 | 1,945,724 | 1,187,718 | ||
| Total expenses | 15,840,053 | 11,937,240 | 6,781,860 | ||
| Net loss | $ (2,090,148) | $ (2,817,152) | $ (548,830) | ||
ZAP
In March 1999, the Fund, through a wholly owned subsidiary, purchased 678,808 shares of common stock of ZAP (“ZAP”, formerly ZAP World.com,) for $2,050,000. ZAP, headquartered in Sebastopol, California, designs, assembles, manufactures and distributes electric power bicycle kits, electric bicycles and tricycles and electric scooters. As part of the $2,050,000 share purchase, the Fund also received a warrant to purchase additional shares of ZAP’s common stock at a price between $3.50 and $4.50 per share. In June 1999, the Fund exercised the warrant and purchased 571,249 additional shares for approximately $2,000,000, or $3.50 per share. The Fund then owned approximately 21% of the outstanding common stock of ZAP. In December 1999, the Fund received a warrant to purchase an additional 100,000 shares of ZAP, at a price of $6.25 per share which expired in December 2002. The Fund’s investment in ZAP, through the third quarter of 2001, was accounted for using the equity method of accounting. Accordingly, the accompanying 2001 consolidated statement of operations includes the Fund’s equity interest in ZAP.
In the third quarter of 2001, the Fund entered into an agreement with ZAP which resulted in the Fund selling all of its ZAP shares to ZAP and certain of its shareholders. In exchange for the returned shares, the Fund received a $1,500,000 interest bearing promissory note (“note”). The note provided for installment payments to be made to the Fund until its maturity in 2003. However, no payments on the note were received and, effective the fourth quarter of 2001, the Fund wrote down $1,282,241 to reduce the note to zero based upon the quick deterioration of ZAP’s financial status. The write-down of investment in ZAP was included in the 2001 consolidated statement of operations.
On March 1, 2002, ZAP filed a voluntary petition for reorganization under Chapter 11 of the U. S. Bankruptcy Code with the U.S. Bankruptcy Court in Santa Rosa, California. On or about July 1, 2003, the Second Amended Plan for Reorganization became effective and the Fund’s note was converted into 994,500 shares of common stock in the reorganized ZAP. The new shares are publicly traded but the shares issued to the Fund, as well as all other unsecured creditors who opted for an equity interest in the reorganized ZAP, are subject to certain restrictions (lapsing over specified periods of time), which limited the ability to transfer or sell such shares and impaired its value given ZAP’s history. Accordingly, the Fund’s policy was to maintain the carrying value of the ZAP securities at zero until the restrictions on the respective shares lapsed. In September 2003, the Fund, with permission from ZAP, sold approximately 118,000 shares of ZAP to a private individual for $1.00 per share, which represented a 10% discount off the then current market price of unrestricted ZAP shares, and recognized the full proceeds as a realized gain.
During the second and third quarters of 2004, as 772,500 ZAP shares became unrestricted, the Fund and ZAP entered into an agreement in which ZAP would transfer the unrestricted shares into the names of the Fund’s investor shareholders. Except for 104,000 shares that became unrestricted in July 2005, the transfers were made and the Fund distributed the share certificates to its investor shareholders. Accordingly, the Fund recorded the transfer of the 772,500 shares of ZAP common stock as distributions to its investor shareholders at the market value (as defined) of $2,078,959 for financial accounting purposes in the second and third quarter of 2004 and recorded a corresponding realized gain.
As part of the reorganization, the Fund also received a warrant granting it the right to purchase another 994,500 ZAP shares at an exercise price of $1.07 per share. In May 2004, the Fund exercised its rights under the warrant and purchased 994,500 unrestricted shares at $1.07 per share. During 2004, the Fund sold all of the shares it purchased from the exercise of the first warrant for a gain of $340,322. As an incentive to exercise the warrant it received in the reorganization, the Fund received a second warrant, which was exercised in December 2004, with the purchase of 538,462 shares at a $3.25 per share. As of December 31, 2004, the Fund did not sell any of the shares it purchased from the exercise of the second warrant and recorded an investment of $1,750,000 to reflect the shares held at market value. From January 1, 2005 through December 31, 2005, the value of the ZAP shares has declined to $0.26 per share. During this period, the Fund has sold 537,000 shares and realized and recognized losses in the net amount of approximately $940,000.
F-14
| 4. | Long-Term Debt |
Following is a summary of long-term debt at December 31, 2003:
| Sinai | Ridgewood Egypt of Infrastructure | US Hydro | Total | ||||||
| Total long-term debt | $ 2,313,803 | $ 1,642,583 | $ 5,650,000 | $ 9,606,386 | |||||
| Less - Current maturity | (65,850) | (505,410) | (4,312,723) | (4,883,983) | |||||
| Long-term portion | $ 2,247,953 | $ 1,137,173 | $ 1,337,277 | $ 4,722,403 | |||||
Sinai has an outstanding loan and interest payable of 14,292,806 Egyptian pounds (approximately US $2,314,000). The loan bears interest at 11.0% per annum and is non-recourse to the Fund. A provision of the loan restricts Sinai from paying dividends to its shareholders or obtaining credit from other banks. The loan was in default prior to the acquisition of Sinai by Ridgewood Near East and has remained in default through the second quarter of 2005. In the second quarter of 2005, the bank and Sinai resolved all issues and an extension and revised payment schedule was formalized. The bank adjusted its claims and Sinai, as of December 31, 2005, is in compliance with the terms of the modified loan and is no longer in default. The revised terms provide for progressive monthly payments over six years ranging from 171,545 Egyptian pounds to 356,727 Egyptian pounds (or US $29,451 to US $61,243 at loan inception exchange rates), including interest, maturing on May 1, 2011.
During the third quarter of 2002, REFI executed a term loan agreement with its principal bank. The bank provided a loan of 12,500,000 Egyptian pounds (approximately US $2,022,000), which matures on March 31, 2007. The loan is being repaid in quarterly principal installments of 781,250 Egyptian pounds (approximately US $126,000) starting June 2003. Outstanding borrowings bear interest at the bank’s medium term loan rate plus 0.5% (12.5% at December 31, 2003 and 2002).
Five of the US Hydro Projects’ hydro-electric power plants are financed by a term loan (“term loan”). The Fund has a choice of variable or fixed interest rates on the term loan. Variable rates are LIBOR ( 1.16375% and 1.450% at December 31, 2003 and 2002, respectively) plus 1¾% or the Lenders Corporate Base Rate (as defined). At the Fund’s option, a fixed interest rate can be selected, payable on any portion of the debt in excess of $1,000,000, for any period of time from two to seven years. Such fixed rate shall be based on the U.S. Treasury note rate at the date of election plus 2¾%. The variable rate of 2.91375% and 3.20% were the effective interest rates at December 31, 2003 and 2002, respectively. This credit facility is collateralized by five hydroelectric plants and notes receivable owned by the US Hydro Projects (See Note 6). Although the Fund is current in its interest and principal payments, it is technically in default under the covenants of the term loan as a result of not providing its lender a copy of its current audited financial statements. As per the terms of the term loan agreement, the default does not allow the lender to accelerate or call the loan.
During the fourth quarter of 2003, discussions were entered into with the Truckee-Carson Irrigation District (“TCID”) to sell the US Hydro Projects notes receivable (see Note 6) and cash flow rights from one of its projects (the Lahontan project) to TCID. In the first quarter of 2004, TCID’s Board of Directors approved the purchase. In return for its notes receivable and cash flow rights, the US Hydro Projects received $4,000,000. Pursuant to the term loan agreement, the US Hydro Projects submitted the proceeds it received from the sale of the notes receivable directly to its lender on March 31, 2004. As a result of the sale and remittance of the proceeds, the balance of the term loan was reduced to $1,650,000. Of the proceeds received, $3,958,386 was applied to the principal balance and the remaining $41,614 was applied to current interest due. The parties mutually agreed to amend the term loan agreement, providing for a revised amortization of principal for the $4,000,000 received.
As additional compensation to the lender of the U.S. Hydro Projects, the Fund is required to pay an additional amount equal to 10% of the cash flow, as defined, of the financed projects plus 10% of any net proceeds, as defined, from the sale or refinancing of any of the financed projects. No additional payments were required for the years ended December 31, 2003 and 2002.
Scheduled principal repayments of the Fund’s long-term debt, as revised for the Sinai loan modification, are as follows:
| Year Ended | |
| December 31, | Payment |
| 2004 | $ 4,883,983 |
| 2005 | 1,172,070 |
| 2006 | 1,169,935 |
| 2007 | 791,139 |
| 2008 | 321,625 |
| Thereafter | 1,267,934 |
| Total | $ 9,606,386 |
5. Lease Commitments
Two of the US Hydro Projects hydroelectric plants have leased the site at its facility under a long term lease which terminates in 2024. Rent expense for the year ended December 31, 2003 and the period November 23, 2002 to December 31, 2002 was $794,720 and $12,083, respectively.
Minimum lease payments are as follows:
| 2004 | $670,000 |
| 2005 | 685,000 |
| 2006 | 695,000 |
| 2007 | 700,000 |
| 2008 | 710,000 |
| Thereafter | 6,216,477 |
| Total Minimum Lease Payments | $ 9,676,477 |
The Fund has certain other leases that require payments based upon a percentage of annual gross revenue of the hydroelectric plant less any taxes or other fees paid to the lessors. There are no minimum rents required and these commitments are not included in the amounts presented above. Rent expense for these hydroelectric plants for the year ended December 31, 2003 and the period November 23, 2002 to December 31, 2002 was $6,982 and $451, respectively.
One of the US Hydro electric plants is subject to a second mortgage lien in the amount of $2,017,000, in the event the plant defaults on its electric power sales contract with a utility.
6. Notes Receivable
The following is a summary of the Fund’s notes receivable:
| December 31, | |||
| 2003 | 2002 | ||
| TCID | $ 3,800,000 | $ 6,749,822 | |
| Other | 469,020 | -- | |
| Total notes receivable | 4,269,020 | 6,749,822 | |
| Less current portion | 4,269,020 | 200,000 | |
| Notes receivable - long-term portion | $ -- | $ 6,549,822 | |
F-15
TCID
During 1989, Synergics (Note 3) constructed a hydroelectric facility (“HF”) for TCID. The construction and term funding for this plant was provided by (i) a portion of the secured term loan credit facility (see Note 4), the proceeds of which were originally paid to a certain US Hydro Project and then advanced to Synergics, (ii) funds from Synergics and (iii) TCID. The HF, after completion, was sold by Synergics to TCID. The sales price of the HF was paid by assignment of future excess cash flows, as defined, to Synergics in the form of a long term note receivable, which consists of two separate notes. As of December 31, 2003 the long term note receivable has been pledged as additional collateral for the secured term loan credit facility. The amounts initially due from TCID:
| Portion payable over 15 years at variable interest | $ 4,000,000 |
| Portion payable over 15 years at 15% fixed rate | 2,137,000 |
| Total due | $ 6,137,000 |
Upon the Fund’s acquisition of US Hydro in 2002, the then outstanding balances of the notes receivable, which accreted to approximately $6,700,000, were adjusted by approximately $2,900,000, through purchase accounting to approximately $3,800,000 as of December 31, 2003. In March 2004, $4,000,000 of the notes receivable were paid by TCID, the proceeds of which were applied directly towards a reduction of the term loan (Note 4) and a gain, net of professional fees, of $175,000 was recognized accordingly.
| 7. | Consulting Agreements |
The Fund’s Egypt Projects have an arrangement with a consultant that provides marketing, construction and management services in Egypt. The consultant receives, in total, a development fee of 3% of the capital cost of the completed projects, an annual management fee of greater of 0.3% of the capital cost of completed projects and $180,000 and reimbursement of out-of-pocket costs incurred in performing its duties under the agreement. The agreement has a term of one year and is automatically renewed annually. The agreement may be terminated by either party upon written notice.
In February 2003, a complaint was filed against Ridgewood Near East by a corporation claiming breach of consulting contract. In November 2003, the parties reached an agreement whereby Ridgewood Near East paid the corporation a one-time payment of $280,750, representing commissions and penalties, and have agreed to continue making required commission payments as per the original agreement of $900,000 payable in monthly installments of $7,500. The Fund recorded the liability by discounting the future payments at the rate of 10% resulting in total expense of $567,534.
Schedule of future discounted principal payments are as follows:
| Year Ended | |
| December 31, | Payment |
| 2004 | $ 36,591 |
| 2005 | 40,422 |
| 2006 | 44,655 |
| 2007 | 49,331 |
| 2008 | 54,497 |
| Thereafter | 325,064 |
| Total | $ 550,560 |
8. Commitments
In the first quarter of 2005, Ridgewood Near East entered into an agreement with a former consultant, who previously operated under an arrangement similar to terms defined in Note 7. The new agreement provides for a fixed annual fee of $120,000.
In accordance with Egyptian company law, the Egypt Projects transfer 5% of annual net profits to a statutory reserve. Transfers will cease when the reserve reaches 50% of issued capital. The statutory reserve is not eligible for distribution to members. The statutory reserve amounted to $50,943 and $50,396 as of December 31, 2003 and 2002, respectively.
9. Fair Value of Financial Instruments
At December 31, 2003 and 2002, the carrying value of the Fund’s cash and cash equivalents, accounts receivable, notes receivable, accounts payable and, accrued expenses approximates their fair value. The fair value of the long-term debt, calculated using current rates for loans with similar maturities, does not differ materially from its carrying value.
| 10. | Transactions with Managing Shareholder and Affiliates |
The Fund which closed on April 30, 2000, operates pursuant to a management agreement with RPC, a Managing Shareholder, under which RPC renders certain management, administrative and advisory services and provides office space and other facilities to the Fund. As compensation to RPC for such services, the Fund was initially obligated for an annual management fee of $1,645,266, or 2.5% of the total capital contributions to the Fund payable monthly upon the closing of the Fund. For the years ended December 31, 2003 and 2002, the managing shareholder contemporaneously waived 50% of the management fee due (or $822,633 annually). Accordingly, management fees of $822,633, $822,633, and $1,645,267 were charged to the Fund for the years ended December 31, 2003, 2002 and 2001, respectively. For 2003 the Fund paid $150,000 of the 2003 management fee to the managing shareholder and the remaining $672,633 was accrued. For 2002, $377,105 of the 2002 management fee was paid to managing shareholder and $445,528 was accrued. For 2001, the Fund paid all management fees pertaining to 2001 to the managing shareholder and, therefore, $0 was accrued. During 2005, the management fee amounts accrued for 2004, 2003 and 2002, aggregating $1,623,690 was forgiven by the managing shareholder. The aggregate management fee forgiven was recorded as a capital contribution by the managing shareholder in the fourth quarter of 2005, who also anticipates assigning said contribution for the benefit of the investor shareholders.
The Fund reimburses the Managing Shareholder and affiliates for expenses and fees of unaffiliated persons engaged by the Managing Shareholder for fund business. The Managing Shareholder or affiliates originally paid all project due diligence costs, accounting and legal fees and other expenses shown in the statements of operations and were reimbursed by the Fund.
Under the Declaration of Trust, RPC is entitled to receive each year 1% of all distributions made by the Fund (other than those derived from the disposition of Fund property) until the shareholders have been distributed each year an amount equal to 12% of their equity contribution. Thereafter, RPC is entitled to receive 25% of the distributions for the remainder of the year. RPC is entitled to receive 1% of the proceeds from dispositions of Fund properties until the shareholders have received cumulative distributions equal to their original investment ("Payout"). After Payout, RPC is entitled to receive 25% of all remaining distributions of the Fund.
Income is allocated to the Managing Shareholder until the profits equal distributions to the Managing Shareholder. Then, income is allocated to the investors, first among holders of Preferred Participation Rights until such allocations equal distributions from those Preferred Participation Rights, and then among Investors in proportion to their ownership of investor shares. If the Fund has net losses for a fiscal period, the losses are allocated 99% to the Investors and 1% to the Managing Shareholder, except that if an allocation of a loss would cause an Investor to have a negative amount in the Investor’s capital account, the loss will be allocated to the Managing Shareholder instead in the amount necessary to prevent the creation of a negative balance in the Investor’s capital account. Revenues from dispositions of Fund Property are allocated in the same manner as distributions from such dispositions. Amounts allocated to the Investors are apportioned among them in proportion to their capital contributions.
Where permitted, in the event the Managing Shareholder or an affiliate performs brokering services in respect of an investment acquisition or disposition opportunity for the Fund, the Managing Shareholder or such affiliate may charge the Fund a brokerage fee. Such fee may not exceed 2% of the gross proceeds of any such acquisition or disposition. No such fees have been paid through December 31, 2003.
RPC purchased one investor share of the Fund for $83,000 in 1998. The Fund granted the Managing Shareholder a single Management Share representing the Managing Shareholder’s management rights and rights to distributions of cash flow.
On June 26, 2003, the Managing Shareholder of the Fund, entered into a $5,000,000 Revolving Credit and Security Agreement with Wachovia Bank, National Association. The agreement allows the Managing Shareholder to obtain loans and letters of credit for the benefit of the trusts and funds that it manages. As part of the agreement, the Fund agreed to limitations on its ability to incur indebtedness, liens and provide guarantees. On February 20, 2004, the Managing Shareholder and Wachovia Bank amended the agreement increasing the amount to $6,000,000. As described in Note 14, the agreement has subsequently been extended.
F-16
From time to time, the Fund records short-term payables and receivables from other affiliates in the ordinary course of business. The amounts payable and receivable with the other affiliates do not bear interest. At December 31, 2003 and 2002, the Fund had outstanding payables and receivables, with the following affiliates:
As of December 31, | ||||||
Due From | Due To | |||||
2003 | 2002 | 2003 | 2002 | |||
| Ridgewood Power Management | $ 1,851 | $ --- | $ --- | $ 179,402 | ||
| Ridgewood Renewable Power | --- | --- | 1,058,204 | --- | ||
| Trust V | 1,280,936 | 1,490,549 | --- | --- | ||
| Ridgewood Electric Power Trust IV | --- | --- | 71,000 | --- | ||
| Egypt Fund | --- | --- | 351,239 | 378,852 | ||
| United Kingdom Landfill Gas Projects | 595,837 | 218,809 | --- | --- | ||
| Ridgewood Dubai (paid January 2005) | 612,517 | --- | --- | --- | ||
| Other affiliates | --- | 17,077 | 407,951 | --- | ||
| Total | $2,491,141 | $1,726,435 | $1,888,394 | $558,254 | ||
| 11. | Key Employees Incentive Agreement |
The Key Employees Incentive Plan (the “Plan”) was adopted by the Fund in February 1998 and permits the Managing Shareholder to designate key executives and employees of the Fund and its operating companies to receive Incentive Shares. Currently, the Fund does not have any employees.
The Managing Shareholder and persons granted Incentive Shares under the Plan are entitled to receive a portion of the Fund's cash flow as follows:
| Prior to Payout* | After Payout* | |
| Net Operating Cash Flow after Investors obtain 12% | Managing Shareholder | Managing Shareholder |
cumulative return | Up to 20% | 20% |
| Plan Participants | Plan Participants | |
| Up to 5% | 5% | |
| Net Cash Flow from Dispositions | Managing Shareholder | Managing Shareholder |
| 1% | 20% | |
| Plan Participants | Plan Participants | |
| Zero | 5% |
* - Payout is considered to be cumulative distributions to the shareholders equal to the original investment.
The Managing Shareholder and Plan participants will be entitled to cash flow on a proportionate basis, meaning that if the cash flow allocable to them is less than the maximum percentages stated in the table, that cash flow will be distributed pro rata between the Managing Shareholder and Plan participants.
No Incentive Shares have been issued by the Managing Shareholder. Until Incentive Shares are actually issued, the cash flow, if any, distributable to those Shares will be distributed to the Managing Shareholder after the payout threshold is reached.
Each issued and outstanding Incentive Share will have voting rights equal to one Investor Share.
When approved by Near East, Near East’s subsidiaries pay 10% of its cash dividends as profit sharing to its employees.
12. Financial Information by Business Segment
In 2003 and 2002, revenues were recorded from customers of the US Hydro Projects and Egypt Projects. In 2001, all revenues were recorded from customers of the Egypt Projects. The financial statements of the UK Projects and ZAP are not consolidated with those of the Fund and, accordingly, their revenues are not considered to be operating revenues. As of and for the years ended December 31, 2003, 2002 and 2001, financial information by geographic location was as follows:
| 2003 | 2002 | 2001 | |||||||
| US | Egypt | US | Egypt | US | Egypt | ||||
| Revenue | $ 5,844,921 | $ 4,399,763 | $ 371,345 | $ 5,459,011 | $ - | $ 4,237,676 | |||
| Property, plant | |||||||||
| and equiptment, net | 1,734,015 | 20,867,386 | 1,777,647 | 31,214,014 | - | 25,961,010 | |||
The Fund has two customers which accounted for approximately 80% of US sourced revenue in 2003 and three customers which accounted for approximately 83% of US sourced revenue in 2002. The Fund has two customers which accounted for approximately 19%, 33% and, 46% of Egypt sourced revenue in 2003, 2002 and 2001, respectively.
The Fund’s business segments were determined based on similarities in economic characteristics and customer base. The Fund’s principal business segments consist of power generation and water desalinization.
Common services shared by the business segments are allocated on the basis of identifiable direct costs, time records or in proportion to amount invested in projects managed by Ridgewood Management.
F-17
The financial data for business segments are as follows:
Water | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Revenue | $ | 3,618,874 | $ | 4,088,172 | $ | 2,797,834 | ||||
| Depreciation and amortization | 1,285,564 | 1,395,198 | 609,671 | |||||||
| Gross profit | 922,384 | 738,695 | 1,191,175 | |||||||
| Impairment of intangibles | --- | --- | --- | |||||||
| Interest expense | 325,800 | 574,480 | --- | |||||||
| Plant and equipment and office equipment, net | 13,656,329 | 19,009,864 | 10,628,640 | |||||||
| Capital expenditures | 344,679 | 856,648 | 6,776,541 | |||||||
| Goodwill | --- | --- | --- | |||||||
Power | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Revenue | $ | 6,625,810 | $ | 1,742,184 | $ | 1,439,842 | ||||
| Depreciation and amortization | 2,044,067 | 419,345 | 208,164 | |||||||
| Gross profit (loss) | 2,478,556 | (49,539 | ) | (2,269 | ) | |||||
| Impairment of Intangibles | 2,457,834 | --- | --- | |||||||
| Interest expense | 204,173 | 22,320 | --- | |||||||
| Plant and equipment and office equipment, net | 7,637,620 | 11,514,945 | 10,107,668 | |||||||
| Capital expenditures | 5,954 | 1,143 | 2,477,933 | |||||||
| Goodwill | 5,153,145 | --- | --- | |||||||
Corporate | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Revenue | $ | --- | $ | --- | $ | --- | ||||
| Depreciation and amortization | 298,607 | 262,396 | 207,785 | |||||||
| Gross loss | (298,607 | ) | (262,396 | ) | (207,785 | ) | ||||
| Impairment of intangibles | --- | --- | --- | |||||||
| Interest expense | 330,686 | 390,802 | 29,698 | |||||||
| Plant and equipment and office equipment, net | 708,572 | 922,941 | 697,607 | |||||||
| Capital expenditures | 9,377 | 209,599 | 1,099,827 | |||||||
| Goodwill | --- | --- | --- | |||||||
Total | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Revenue | $ | 10,244,684 | $ | 5,830,356 | $ | 4,237,676 | ||||
| Depreciation and amortization | 3,628,238 | 2,076,939 | 1,025,620 | |||||||
| Gross profit | 3,102,333 | 426,760 | 981,121 | |||||||
| Impairment of intangibles | 2,457,834 | --- | --- | |||||||
| Interest expense | 860,659 | 987,602 | 29,698 | |||||||
| Plant and equipment and office equipment, net | 22,002,521 | 31,447,750 | 21,433,915 | |||||||
| Capital expenditures | 360,010 | 1,067,390 | 10,354,301 | |||||||
| Goodwill | 5,153,145 | --- | --- | |||||||
13. Income Taxes
The income tax expense (benefit) consists of:
2003 | 2002 | ||||||
| Current | |||||||
| Federal | $ | --- | $ | --- | |||
| State | 263,934 | 12,622 | |||||
| 263,934 | 12,622 | ||||||
Deferred Federal State | ($ 1,209,098 (108,580 | ) ) | --- --- | ||||
| ($ 1,317,678 | ) | --- | |||||
| ($ 1,053,744 | ) | $ 12,622 | |||||
The Fund incurred state income taxes of $263,934 and $12,622 for the years ended December 31, 2003 and 2002, respectively, on behalf of certain of the US Hydro Projects. For the year ended December 31, 2003 the Fund recorded a deferred federal and state income tax benefit of $1,209,098 and $108,580, respectively, which reflects the change in the net tax effects of temporary differences between the carrying amounts of assets and liabilities of the US Hydro Projects for financial reporting purposes and the amounts used for income tax purposes.
F-18
Components of the Fund’s deferred income tax assets and liabilities are as follows:
2003 | 2002 (Note 3) | |
| Deferred tax asset: | ||
| Carrying value of notes receivable | $ 1,435,129 | $ -- |
| Deferred tax liabilities: | ||
| Depreciation and amortization | $ (5,826,098) | $ -- |
14. Subsequent Events
In the fourth quarter of 2004, US Hydro Projects’ Blackstone entity and New England Power (“NEP”) agreed to terminate their 1989 power purchase agreement. As per the terms of Termination and Release Agreement, Blackstone now has the right to sell its production of electricity to any party it chooses. In addition, beginning January 2005 NEP will pay Blackstone $16,000 per month through February 2010 and a lump sum payment of $1,000,000 on February 15, 2010 to compensate Blackstone for the cancellation of the fifteen years remaining on the original agreement.
As a result of the new agreement, the Fund recorded a net gain of $564,713 in the consolidated statement of operations in 2004, reflecting an impairment to electric power sales contracts of $1,077,296 to write-down the carrying value of the pre-existing power purchase agreement to zero less $1,642,009 to recognize the present value of payments to be received.
Effective January 1, 2005, the Managing Shareholder, acting on the recommendation of tax counsel for the Fund, amended the Declaration of Trust in order to clear up potential ambiguity and to maintain the tax status of the Fund. The Declaration authorizes the Managing Shareholder to make such amendments to the Declaration without notice to or approval of the Investors in a variety of circumstances, including, without limitation, amendments to maintain the tax status of the Fund.
Under the terms of the amendment, if an Investor’s Adjusted Capital Account would become negative using General Allocations, losses and expenses will be allocated to the Managing Shareholder. Should the Managing Shareholder’s Adjusted Capital Account become negative and items of income or gain occur, then such items of income or gain will be allocated entirely to the Managing Shareholder until such time as the Managing Shareholder’s Adjusted Capital Account becomes positive. This mechanism will not affect the allocation of cash which was not affected by the amendment.
The Managing Shareholder has reviewed the amendments to the Declaration recommended by tax counsel for the Fund, and has concluded that the amendment of the Declaration will not materially and adversely affect the interests of the Investors in the Fund.
During 2005, the management fee to Managing Shareholder accrued for 2004, 2003, and 2002, aggregating $1,623,690 was forgiven by the managing shareholder. The aggregate management fee forgiven was recorded as a capital contribution by the Managing Shareholder in the fourth quarter of 2005, who also anticipates assigning said contribution for the benefit of the investor shareholders.
During 2005, Wachovia Bank agreed to further extend the Managing Shareholder’s Line of credit, as described in Note 10, through September 30, 2006.
B. Supplementary Financial Information
Selected Quarterly Financial Data for the years ended December 31, 2003 and 2002 (Unaudited).
| 2003 | ||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Revenue | $2,701,000 | $2,987,000 | $2,336,000 | $ 2,221,000 |
| Gross profit (loss) | 1,286,000 | 1,508,000 | 838,000 | (530,000) |
| Income (loss) from operations | 184,000 | 718,000 | 145,000 | (5,657,000) |
| Net loss | (292,000) | (326,000) | (164,000) | (3,008,000) |
| 2002 | ||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Revenue | $896,000 | $1,398,000 | $2,058,000 | $1,478,000 |
| Gross profit (loss) | 232,000 | 288,000 | (6,000) | (87,000) |
| Loss from operations | (538,000) | (571,000) | (513,000) | (1,239,000) |
| Net loss | (762,000) | (690,000) | (498,000) | (1,381,000) |
See Item 7. ‘Management’s Discussion and Analysis of Financial Condition and Results Operation’ for discussion regarding interim periods.
F-19
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements.
See the Index to Financial Statements in Item 8 of this report.
(b) Exhibits.
Exhibits required by Section 601 of Regulation S-K.
Exhibit No. | Description | ||
3 | (i)(A) | † | Certificate of Trust of the Registrant. |
3 | (i)(B) | † | Amendment No. 1 to Certificate of Trust. |
3 | (i)(C) | † | Declaration of Trust of the Registrant. |
3 | (i)(D) | Amendment No. 1 to the Declaration of Trust (incorporated by reference to the Registrant’s definitive proxy statement filed with the SEC on November 5, 2001). | |
10A | † | Stock and Warrant Purchase Agreement for ZAP Power Systems, Inc., dated March 29, 1999. | |
10B | † | Warrant for Purchase of Common Stock of ZAP Power Systems, Inc., dated March 29, 1999. | |
10C | † | Investors' Rights Agreement with ZAP Power Systems, Inc., dated March 29, 1999. | |
10D | † | Milestone letter agreement with ZAP Power Systems, Inc., dated March 29, 1999. | |
10E | † | Letter agreement re board representation with ZAP Power Systems, Inc., dated March 29, 1999. | |
10F | †# | Management Agreement between the Fund and Managing Shareholders, dated March 29, 1999. | |
10G | †# | Key Employees' Incentive Plan | |
10H | † | Agreement of Merger between Ridgewood Power Corporation and Ridgewood Power LLC. | |
10I | Operating Agreement of Ridgewood Near East Holding LLC., dated September 30, 1999 (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003, filed with the SEC on March 1, 2006). | ||
10J | Form of contracts and agreements between CLPE Holdings, Inc and each of (i) Ridgewood Renewable PowerBank II, LLC, (ii) Ridgewood Renewable PowerBank I, LLC, (iii) Ridgewood Renewable PowerBank III, LLC and (iv) Ridgewood Renewable PowerBank IV, LLC (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003, filed with the SEC on March 1, 2006). | ||
14 | Code of Ethics, adopted on March 1, 2004 (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003, filed with the SEC on March 1, 2006). | ||
31.1 | * | Certification of Randall D. Holmes, Chief Executive Officer of the Registrant, pursuant to Securities Exchange Act Rule 13a-14(a). | |
31.2 | * | Certification of Douglas R. Wilson, Chief Financial Officer of the Registrant, pursuant to Securities Exchange Act Rule 13a-14(a). | |
32 | * | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Randall D. Holmes, Chief Executive Officer of the Registrant, and Douglas R. Wilson, Chief Financial Officer of the Registrant. | |
99.2 | * | Ridgewood UK, LLC Consolidated Financial Statements | |
_____________________
| * | Filed herewith. |
| † | Incorporated by reference to the Registrant's Registration Statement on Form 10 filed with the SEC on April 30, 1999. |
| # | A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. |
(c) Financial Statement Schedules
See Financial Statements and accompanying notes included in this report.
F-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE RIDGEWOOD POWER GROWTH FUND (Registrant) | |
Date: March 3, 2006 | By: /s/ Randall D. Holmes Randall D. Holmes Chief Executive Officer (Principal Executive Officer) |
F-22
Exhibit 31.1
CERTIFICATION
I, Randall D. Holmes, certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of The Ridgewood Power Growth Fund (the “Registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
| 5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: March 3, 2006
/s/ Randall D. Holmes___
Name: Randall D. Holmes
Title: Chief Executive Officer
F-23
Exhibit 31.2
CERTIFICATION
I, Douglas R. Wilson, certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of The Ridgewood Power Growth Fund (the “Registrant”); |
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: March 3, 2006
/s/ Douglas R. Wilson__
Name: Douglas R. Wilson
Title: Senior Vice President and
Chief Financial Officer
F-24
Exhibit 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report on Form 10-K/A of The Ridgewood Power Growth Fund (the "Fund") for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof, (the "Report"), each of the undersigned officers of the Fund hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge except with respect to the timeliness of the filing of the Report:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. |
/s/ Randall D. Holmes |
Name: Randall D. Holmes |
Title: Chief Executive Officer |
Date: March 3, 2006 |
/s/ Douglas R. Wilson |
Name: Douglas R. Wilson |
Title: Senior Vice President and Chief Financial Officer |
Date: March 3, 2006 |
This certification is being furnished to the SEC with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Fund for purposes of Section 18 of the Securities Exchange Act of 1934.
F-25