-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WVH2NhC4rGCBwa916XaUViOD2eBKFLupzdtZqBMMW8sb9hhzsSbClRCPzwI3KcDa 5LthPHZ8i/st3hP1L0W2FQ== 0000948830-97-000108.txt : 19970425 0000948830-97-000108.hdr.sgml : 19970425 ACCESSION NUMBER: 0000948830-97-000108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: METEOR INDUSTRIES INC CENTRAL INDEX KEY: 0000912875 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 841236619 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12401 FILM NUMBER: 97586792 BUSINESS ADDRESS: STREET 1: 216 16TH ST STE 730 CITY: DENVER STATE: CO ZIP: 80202 MAIL ADDRESS: STREET 1: 216 16TH ST STREET 2: STE 730 CITY: DENVER STATE: CO ZIP: 80202 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED For the Year ended December 31, 1996 Commission File Number: 0-27968 METEOR INDUSTRIES, INC. -------------------------------------------------- (Exact Name of Issuer as Specified in its Charter) COLORADO 84-1236619 - ------------------------------- --------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 216 SIXTEENTH STREET, SUITE 730, DENVER, COLORADO 80202 -------------------------------------------------------- (Address of Principal Executive Offices) Issuer's telephone number including area code: (303)572-1135 Securities registered under to Section 12(b) of the Exchange Act: None. Securities registered under to Section 12(g) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE Title of Class Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate by checkmark 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 [ ] At April 1, 1997, 3,440,138 shares of Common Stock (the Registrant's only class of voting stock) were outstanding. The aggregate market value of the Common Stock on that date held by non-affiliates was approximately $7,258,000. DOCUMENTS INCORPORATED BY REFERENCE: None. ITEM 1. BUSINESS. GENERAL Meteor Industries, Inc. ("Meteor" or the "Company") was incorporated in Colorado on December 22, 1992, to purchase all the outstanding common stock of Graves Oil & Butane Co., Inc. ("Graves"). The two companies and Graves' then sole shareholder ("Seller") entered into a Purchase Agreement in June, 1993 and finalized the purchase in September, 1993. The purchase price for the common stock was $4,100,000, which was paid $1,750,000 in the form of cash to Seller and the discharge of certain of his obligations at closing and $2,350,000 in the form of a promissory note payable over the following four years. The Seller also retained preferred stock in Graves with a redemption value of $3,543,500 plus accrued dividends to be redeemed subsequent to September 15, 2000, if not earlier converted into common stock. In January 1994, the Company completed an initial public offering of 200,000 shares of its Common Stock pursuant to Regulation A under the Securities Act of 1933. The net proceeds of this offering to the Company was approximately $800,000. On June 12, 1995, Meteor purchased all of the outstanding shares of Hillger Oil Company ("Hillger") headquartered in Las Cruces, New Mexico. This acquisition doubled Meteor's gasoline sales and improved cash flows. Hillger operates nine convenience stores and supplies 22 branded dealers in New Mexico. Graves operates seven retail sites and supplies 42 branded dealers. In connection with the acquisition of Hillger, Meteor sold 365,000 shares of its common stock for $730,000 in cash and borrowed $875,000 from Norwest Business Credit, Inc. In June 1995, the Company declared an 8% stock dividend to the shareholders of record as of June 30, 1995. In October 1995, the Company formed Pyramid Stores, Inc. ("Pyramid"), a Colorado corporation, as a wholly owned subsidiary to hold the stock of Graves and Hillger and operate those companies separately from the Company's other activities. In November 1995, the Company issued 1,745,000 shares of its Common Stock in exchange for all of the outstanding stock of Capco Resources, Inc. ("CRI"), a Delaware corporation. The shares of the Company's common stock issued in this transaction, which represent approximately 52.7% of the shares now outstanding, were issued to a U.S. subsidiary of Capco Resources Ltd. ("Capco"), an Alberta corporation, which is listed on the Alberta Stock Exchange. As a result of this transaction, there was a change in control of the Company and one of the Company's three directors was replaced by a Capco representative, Ilyas Chaudhary. Accordingly, the transaction has been considered a reverse acquisition for accounting purposes and the assets of Meteor, including the assets of Graves and Hillger have been revalued to their fair value at the date of the transaction. The major assets of CRI when acquired by Meteor included: (i) an interest in Saba Power Company Ltd., which is one of the developers of a power plant in Pakistan; (ii) all of the stock of Capco Analytical Services, Inc., a California environmental services firm; and (iii) a $1,516,000 promissory note receivable from Saba Petroleum Company and other miscellaneous assets. Since November 1995, CRI has focused most of its efforts on the financing of Saba Power Company Ltd. All of CRI's assets, other than the power project, have now been transferred out of CRI and into Meteor. The Company's headquarters are located at 216 Sixteenth Street, Suite 730, Denver, Colorado 80202, and its telephone number is (303) 572-1135. -2- PETROLEUM MARKETING BUSINESS AND OPERATIONS The Company operates its petroleum marketing and convenience store business primarily from its Farmington, Albuquerque and Las Cruces, New Mexico offices. The Company operates this business through Pyramid Stores, Inc. and its two New Mexico subsidiaries, Hillger Oil Company and Graves Oil & Butane Co., Inc. The commercial/wholesale operations are the largest part of the Company's business. This operation has fuel delivery agreements with customers that include truck stops, retail gasoline service stations, convenience stores, construction companies, commercial fleet distribution centers, the federal government, mining companies, and utilities. The wholesale operation has distributor agreements with Phillips Petroleum Company, Sun Oil Company, Conoco, Inc., Texaco, Inc., Diamond Shamrock Corp. and Fina Oil Company. These distributor agreements allow the Company to purchase petroleum products at wholesale prices directly from pipeline terminals and refineries controlled by these large oil producer/refiners. The Company is then authorized to resell those products to its customers. The distribution agreements have three-year terms and the Company has one to two years remaining on its agreements with its primary suppliers, Phillips 66 and Conoco, Inc. The distribution agreements do not provide for an exclusive territory and can be terminated by either party upon 30 days notice. There can be no assurance that these agreements will not have to be renegotiated or that they will be renewed. Although the Company, through its subsidiaries, is one of the larger and longer standing wholesale distributors of Conoco and Phillips products in New Mexico, it is possible the Company could lose such contracts. In such an event, the Company's operations may be adversely impacted. Management would attempt to persuade the retail outlets the Company supplies to switch to another oil company brand with which it has a contract. The Company could also buy and sell fuel as an unbranded independent, however, sales volumes and/or margins would likely decrease materially if the Company did not have access to branded products. Many of the Company's wholesale customers operate retail gasoline service stations under the banners of the various oil companies. The banner arrangements require that a retail operator purchase fuel exclusively from a distributor, such as the Company who is authorized to sell branded products. On occasion the Company has supplied new signage and other improvements to retailers so they would switch to a Company brand. The Company's suppliers may subsidize such improvements by providing discounts to the Company or by forgiving certain obligations based on the volume of product sold to such retailer. The Company also markets its products to commercial and governmental accounts. The marketing department consists of 11 people. The marketing department is primarily responsible for the direct selling efforts of the Company and for ensuring that customers accounts are properly serviced. The majority of wholesale revenues come from repeat telephone orders from existing customers. The Company also advertises in trade journals and attends industry trade shows in its market. The Company's wholesale distribution process is straightforward. The distri-bution channel begins with the loading of the Company's trucks at pipeline terminals or refineries. When delivered in transport quantities, the trucks deliver the inventory directly to the wholesale customer with no intermediate storage of fuel other than trucks en route to a customer. The distribution process for bulk fuel products, from pick-up to delivery to customers, is typically completed in two days or less. -3- Most of the Company's wholesale customers in the three major regional markets, Farmington, Albuquerque, and Las Cruces, have been with the Company for many years. No customer accounts for more than 10% of the Company's sales, however, the loss of one or more major wholesale customers could have a significant impact on the Company's revenues. The Company's retail operations consist of ownership or leasehold interests in 22 retail outlets which include service stations, convenience stores and lube pits. Sixteen outlets are operated by the Company and six are leased or subleased to third parties. The retail operation represents a potential growth area for the Company. The retail outlets sell gasoline, propane and other petroleum products directly to the general public. The services provided are those that would generally be expected to be provided at this type of facility. The retail outlets also sell food and tobacco products as a convenience to their customers. Other than at the convenience stores, non-petroleum products sales are not a material part of retail revenues. The Company's highest volume convenience stores are located in the Las Cruces and Albuquerque areas. The Company intends to expand its convenience store base by acquisition and new construction. The Company has four automated cardlock facilities. The cardlock systems provide 24-hour-per-day access to fuel dispensing facilities for commercial fleet customers and customers with automated debit cards. The cardlock systems do not require that a Company employee be present to process the fuel purchase. The cardlock facilities are primarily used by commercial fleet operators in order to take advantage of automated transaction process technology which allows a user to insert a "user card" activating the fuel dispenser and records the transaction. The Company's strategy contemplates increasing the number of cardlock facilities that the Company owns or controls. The Company also has retail and commercial propane operations. In November 1993, Graves reentered the residential propane markets in Farmington, New Mexico. Graves' management and employees have significant experience in the propane industry and the Company had a substantial amount of propane equipment that was underutilized. A significant percentage of the homes and commercial buildings in the rural areas around Farmington do not have access to natural gas lines and must rely on propane for heating. Management of the Company believes that the residential propane market provides a significant opportunity for growth. As of the date of this Annual Report, Graves has over 350 residential and over 200 commercial propane customers and continues to actively market this product and service. Recently, Graves became a 33% owner of a residential propane company in Albuquerque, New Mexico. Management of Graves is actively seeking other propane opportunities in Southern Colorado and New Mexico. SABA POWER COMPANY LTD. Saba Power Company Ltd. ("Saba Power") is a limited liability corporation in Pakistan which was established in early 1995 to pursue development of a power plant project in Pakistan. The Government of Pakistan recognized all of the owners of Saba Power when it accepted the financing documents to which the Company, through its subsidiary CRI, is a party. The Company has an interest in Saba Power, which has a power plant project 40 miles from Lahore, Pakistan. The Company has two unrelated joint venture partners, Cogen Technologies of Houston, Texas ("Cogen") and Coastal Saba Power Ltd. ("Coastal"). Estimated costs for the 125 megawatt plant are approximately $150,000,000. The project received a Letter of Support dated September 18, 1994, and an acknowledgment of financial closing on April 3, 1996, from the Ministry of Water & Power of the Government of Pakistan. All documentation relating to the project's permanent debt financing -4- was approved in May of 1996 and all documentation relating to the construction financing was finalized on or prior to March 4, 1997. Limited activities related to the construction of the project were commenced in late August of 1996 but were suspended in October. Construction activity is again underway and although there can be no assurances, the project is expected to be completed in approximately two years. At December 31, 1996, the Company, had invested $683,162 in Meteor Holdings LLC ("MHL") MHL owns an equity interest in Saba Power Company, Ltd. (the "Power Project") through its ownership of CRI. The investment in the Power Project is reported using the cost method. The Company also entered into an agreement with Saba Petroleum Company ("Saba") whereby Saba, a related party, participated in the Power Project. Saba invested $250,000 in MHL resulting in MHL's total investment of $933,162 in the Power Project. Saba owns a .5% interest in the Power Project through its ownership of 27% of MHL. The Company owns 1.5% of the Power Project through its ownership of 73% of MHL. Saba's .5% interest in the project is subject to the same terms and conditions as the Company's 1.5% interest. These percentages, however, could be reduced in the event that other shareholders of Saba Power are required to make additional contributions to equity. MHL has obtained the right to sell its interest in Saba Power to an affiliate of one of the other shareholders for approximately the amount of its contribution on October 26, 1997, for a period of 120 days. The Company's investment in the Power Project is not expected to provide any significant cash flow to the Company for at least three to four years. Further, if during the next 2-3 years certain enhancements to the Power Project contracts are not obtained from the Government of Pakistan, cash flow from the Power Project will not be earned by or distributed to the Company. During 1996, Saba Power Company Ltd. and the shareholders thereof, including the Company, completed the final negotiations with the project's construction lender and the engineering procurement and construction contractor was given a limited release to commence construction activities on the project, which was subsequently suspended. On March 4, 1997, all required equity capital was fully subscribed and paid by the partners in the form of cash or letters of credit; all documentation fees were paid to the Government of Pakistan; and the construction contractor was given a full release. All required consents were obtained from the Government of Pakistan, and all defaults were cured. Due to the changing political climate in Pakistan and the economic risks involved, the Company's management decided not to invest additional capital in the project. All debt and equity financing for the Power Project was completed on March 4, 1997, in the total amount of over $150,000,000. In connection with this transaction, the Company's co-developer Cogen Technologies agreed to pay a consulting fee for services provided in 1996, to the founding partners, of which MHL's share totals $400,000 with the possibility of receiving up to an additional $350,000 over a three year period if certain contract enhancements are obtained from the Government of Pakistan; however, there can be no assurance that such enhancements can or will be obtained. MHL incurred approximately $124,000 in expenses to outside sources in providing these consulting services. The Company's share of the $276,000 in net revenues totals $200,000 by virtue of its 73% ownership of in MHL. The Company is not required to invest any additional capital related to the Power Project. If costs of the project exceed budget and capital is required then the Company will have the choice of investing more capital or suffering ordinary dilution to its ownership interest without incurring any penalties. -5- ENVIRONMENTAL CONSULTING Capco Analytical Services Inc.("CAS") is an environmental consulting company and analytical laboratory located in California. CAS provides environmental consulting services to its customers throughout the Western United States including other subsidiaries of Meteor. In addition, CAS may expand the scope of its present activities to include the possible acquisition of properties in need of remediation and development. After purchasing a property, CAS would then arrange for remediation services to be performed. After remediation is complete, the property could be developed by CAS or sold to a developer. CAS intends to fund these projects at least partially with project capital raised through partnerships and/or other private investment vehicles. In August of 1996, the company acquired Innovative Solutions and Technologies, Inc. ("IST"), a small Colorado corporation, which provides environmental consulting services. IST was acquired for a nominal cash consideration. Through its president and sole employee, IST provides consulting services to outside clients as well as Meteor and its affiliates. INSURANCE The Company has a commercial liability policy and an umbrella policy, as well as other policies covering damage to its properties. These policies cover Company facilities, employees, equipment, inventories, and vehicles in all states of operation. While Management believes the Company's insurance coverage is adequate for most foreseeable problems, and is comparable with the coverage of other companies in the same business and of similar size, its coverage does not protect the Company for most liabilities relating to damage of the environment. Such environmental related coverage is generally unavailable or available only at a prohibitive cost. COMPETITION AND MARKETS The petroleum marketing business is highly competitive. The Company competes on the basis of price, service and corporate capabilities. In all phases of its operations, the Company encounters strong competition from a number of companies, including some very large companies. Many of these larger competitors possess and employ financial and personnel resources substantially in excess of those which are available to the Company. The Company's marketing division also competes with integrated oil companies which in some cases own or control a majority of their own marketing facilities. These major oil companies may offer their products to the Company's competitors on more favorable terms than those available to the Company from its suppliers. A significant number of companies, including integrated oil companies and petroleum products distribution companies, distribute petroleum products through a larger number of facilities than the Company. The wholesale and commercial distribution of petroleum products is a highly competitive industry. This competition generally comes from other privately held petroleum jobbers operating in the same geographic region as the Company. The competition is primarily focused on the government contract and commercial fleet segments of the business. The government contract business is awarded via a lowest sealed bid process and the Company competes heavily with several wholesale distributors. Competition also occurs for the gasoline service station customers. In competing for this segment of the business, a customer must be convinced to change the "brand" of the station (i.e., convert a station or store from Texaco to Phillips 66). A change of brands can be expensive and disruptive to the operations of the gasoline service station and therefore does not occur frequently. -6- Competition in the retail segment of the gasoline distribution industry is severe and highly decentralized. Competition comes from numerous gasoline service stations that have different brands and from many independent unbranded stations. The Company competes for retail customers based on brand loyalty and price. The Company attempts to develop brand loyalty as a result of the friendly service it provides to its customers. To the extent that the customer does not have brand loyalty, then the Company competes on price. The Company does not attempt to be a price leader, but instead changes prices to meet competitive prices. The convenience store industry is highly competitive, fragmented and regionalized. It is characterized by a few large companies, some medium-sized companies, and many small independent companies. Several competitors are substantially larger and have greater resources than the Company. The Company's largest competitors include Seven-Eleven, Diamond Shamrock, Thriftway, and Giant and other major oil companies that own and operate their own stores in the Company's market areas such as Texaco and Phillips 66. The Company also competes with other convenience stores, small supermarkets, grocery stores and major and independent gasoline distributors who have converted units to convenience stores. The Company also will encounter competition in attempting to acquire sites for new stores and existing groups of convenience stores. GOVERNMENTAL REGULATIONS ENVIRONMENTAL MATTERS Various federal and state statutes are designed to identify environmental damage, identify hazardous material and operations, regulate operations engaged in hazardous activities, and establish procedures for remedial action. The Company is inspected on a regular basis by both federal and state environmental authorities. The Environmental Protection Agency ("EPA") and the State of New Mexico have instituted environmental compliance regulations designed to prevent leakage and contamination from underground storage tanks. The Company continually expends capital when complying with changing environmental regulations and expects to spend about $60,000 a year on environmental compliance. The State of New Mexico has established the Ground Water Protection Act for the clean up of contaminated underground sites. Under most circumstances, the Company's exposure is limited to $10,000 per location, beyond which the state clean-up fund assumes responsibility. Assistance is not available to repair or replace underground tanks or equipment. The law specifies requirements which must have been met for an applicant to be eligible, includes a provision that payments will be made in accordance with regulations (which have not yet been issued) and states that payment from the corrective action fund are limited to amounts in that fund. There can be no assurance that the New Mexico fund will have sufficient capital, or will agree, to fund remediation of any particular problem. In addition, in connection with Company's purchase of the Graves' common stock, the Seller agreed to indemnify the Company for seven years against environmental related problems which may arise from activities conducted prior to the acquisition. The indemnification is not effective unless damages exceed a minimum of $25,000 per year and the maximum aggregate indemnification responsibility of Seller over the seven years is $8,000,000. ENVIRONMENTAL COMPLIANCE. The Company's Regulated Environmental Activities are subject to an extensive variety of evolving United States federal, state and local laws, rules and regulations governing the storage, transportation, -7- manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. A non-exclusive listing of the environmental laws which potentially impact the Company's Regulated Environmental Activities is set out below: RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, AS AMENDED IN 1984 ("RCRA"). The United States Congress enacted RCRA in 1976 and amended it in 1984. RCRA established a comprehensive regulatory framework for the management of hazardous wastes at active facilities. RCRA creates a "cradle to grave" system for managing hazardous wastes. Those who generate, transport, treat, store or dispose of waste above certain quantities are required to undertake certain performance, testing and record keeping. The 1984 amendments to RCRA known as "HSWA" increased the scope of RCRA to regulate small quantity hazardous waste generators and waste oil handlers and recyclers as well as require the identification and regulation of underground storage tanks in which liquid petroleum or hazardous substances were stored. HSWA and its implementing regulations require the notification to designated state agencies of the existence and condition of regulated underground storage tanks and impose design, construction and installation requirements; leak detection, presentation, reporting, and cleanup requirements; tank closure and removal requirements; and fiscal responsibility requirements. COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980 ("CERCLA" OR "SUPERFUND") AS AMENDED IN 1982. CERCLA established the Superfund program to clean up inactive sites at which hazardous substances had been released. Superfund has been interpreted to create strict, joint and several liability for the costs of removal and remediation, other necessary response costs and damages for injury to natural resources. Superfund liability extends to generators of hazardous substances, as well as to (i) the current owners and operators of a site at which hazardous substances were disposed; (ii) any prior owner or operator of the site at the date of disposal; and (iii) waste transporters who selected such facilities for treatment or disposal of hazardous substances. CERCLA allows the EPA to investigate and remediate contaminated sites and to recover the costs of such activities (response costs), as well as damages to natural resources, from parties specified as liable under the statute. CERCLA also authorizes private parties who incur response costs to seek recovery from statutorily liable parties. CERCLA was amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"). SARA provides a separate funding mechanism for the clean up of underground storage tanks. CERCLA excludes petroleum including crude oil or any fraction thereof, with certain limitations from the definition of "hazardous substances" for which liability for clean up of a contaminated site will attach. This exclusion also applies to those otherwise hazardous substances which are inherent in petroleum, but not to those added to or mixed with petroleum products. THE CLEAN WATER ACT OF 1972, AS AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes water pollutant discharge standards applicable to many basic types of manufacturing facilities and imposes standards on municipal sewage treatment plants. The Clean Water Act requires states to set water quality standards for significant bodies of water within their boundaries and to ensure attainment and/or maintenance of those standards. Many industrial and governmental facilities must apply for and obtain discharge permits, monitor pollutant discharges and under certain conditions reduce certain discharges. The Clean Water Act also requires pre-treatment of certain discharges prior to release into a publicly owned treatment works. FEDERAL OIL POLLUTION ACT OF 1990 ("OPA"). The OPA amends the Clean Water Act and expands the liability for the discharge of oil into navigable waters. Liability is triggered by discharge or substantial threat of a discharge of oil -8- into navigable waters. OPA defines three classes of parties subject to liability: (1) owners, operators, and persons chartering vessels; (2) lessees and permits of areas where off-shore facilities are located; and (3) owners and operators of on-shore facilities. THE CLEAN AIR ACT OF 1970, AS AMENDED (THE "CLEAN AIR ACT"). The Clean Air Act required the EPA to establish and ensure compliance with national ambient air quality standards ("NAAQS") for certain pollutants. The NAAQS generally are to be achieved by the individual states through state implementation plans ("SIPs"). SIPs typically attempt to meet the NAAQS by, among other things, regulating the quantity and quality of emissions from specific industrial sources. As required by the Clean Air Act, the EPA also has established regulations that limit emissions of specified hazardous air pollutants and has established other regulations that limit emissions from new industrial sources within certain source categories. The Clean Air Act was amended extensively in 1990, to, among other things, impose additional emissions standards that must be implemented by the EPA through regulations. THE TOXIC SUBSTANCES CONTROL ACT OF 1976 ("TSCA"). TSCA authorizes the EPA to gather information on the risks of chemicals, and to monitor and regulate the manufacture, distribution, processing, use and disposal of many chemicals. THE EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT ("EPCRA"). EPCRA was passed as a part of SARA. EPCRA resulted from several widely-publicized events which focused national attention on the dangers posed by toxic chemicals present at U.S. industrial facilities. EPCRA requires emergency planning notification, emergency release notification, and reports with respect to the storage and release of specified chemicals. Industry must provide information to communities regarding the presence of extremely hazardous substances at facilities within those communities. THE OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION ACT ("OSHA"). OSHA regulates exposure to toxic substances and other forms of workplace pollution. The Department of Labor administers OSHA. OSHA specifies maximum levels of toxic substance exposure. OSHA also sets out a "right-to-know" rule which requires that workers be informed of, and receive training relating to, the physical and health hazards posed by hazardous materials in the workplace. OTHER STATE AS WELL AS LOCAL GOVERNMENT REGULATION. Many states have been authorized by the EPA to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state as well as local authorities that regulate the environment, some of which impose more stringent environmental standards than Federal laws and regulations. The penalties for violations of state laws vary but typically include injunctive relief, recovery of damages for injury to air, water or property, and fines for non-compliance. REGULATORY STATUS AND POTENTIAL ENVIRONMENTAL LIABILITY. The operations and facilities of the Company are subject to numerous federal, state and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements. The Company regards compliance with applicable environmental regulations as a critical component of its overall operation and devotes significant attention to protecting the health and safety of its employees and to protecting the Company's facilities from environmental problems. Management believes that the Company has obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate its current business. In light of coverage of New Mexico's reimbursement fund and the indemnification of the Company by the Seller, Management does not believe that any pending or threatened environmental litigation or enforcement action(s) could materially and adversely affect the -9- Company's business. While the Company has implemented, where appropriate, operating procedures at each of its facilities designed to assure compliance with environmental laws and regulation, given the nature of its business, the Company always is subject to environmental risks and the possibility remains that the Company's ownership of its facilities and its operations and activities could result in civil or criminal enforcement and public as well as private action(s) against the Company, which may necessitate or generate mandatory clean up activities, revocation of required permits or licenses, denial of application for future permits, or significant fines, penalties or damages, any and all of which could have a material adverse effect on the Company. EMPLOYEES The Company employs approximately 160 people, none of whom is represented by any collective bargaining organizations. Management considers its employee relations to be satisfactory at the present time. ITEM 2. PROPERTIES The Company owns a 4,300 square foot office building in Farmington, New Mexico. This office building plus a 4,400 square foot truck repair shop, two warehouses totaling 15,800 square feet and an 1,855 square foot three bay service station are located on a 4.7 acre site. While the above-mentioned buildings are owned by the Company, they are located on property leased from an affiliated party. The Company pays rent of $550 per month on this land and the lease terminates on September 30, 2018, with two ten year options to extend. The Company also owns an additional 2.5 acres adjacent to this property where it stores moveable above ground fuel tanks. Also, in Farmington, New Mexico, the Company owns two additional gasoline stations, two fast lube pits, one car wash, and one cardlock location. The lube pits and car wash are leased to an unaffiliated third party, the Company operates three additional cardlock/retail locations on leased property. In Albuquerque, New Mexico, the Company owns one bulk petroleum storage facility which includes a 7,200 square foot warehouse on five acres with a rail spur. Also, the Company owns a 2,400 square foot convenience store, with a car wash and quick lube pit in a separate 6,300 square foot building and a propane distribution and cardlock facility. The carwash and quick lube pit are leased to an unaffiliated third party. This convenience store and related facilities are located on 1.6 acres of land. Also, in Albuquerque, the Company leases two warehouses and a service station and cardlock facility. Through joint ventures, the Company owns 50% of a 1,800 square foot convenience store and a one acre undeveloped convenience store site. In the Las Cruces area, the Company leases an office building, warehouse and bulk plant and seven retail outlets. The lease relating to such properties is a ten (10) year lease with three five (5) year options to renew. The Company owns one retail outlet in Truth or Consequences, New Mexico that it leases to an unaffiliated third party. The Company owns a 3,000 square foot convenience store located in Hatch, New Mexico. The Company leases a truck stop in Cortez, Colorado from an affiliated party and subleases the property to an unaffiliated truck stop operator. The Company's CAS subsidiary leases 8,000 square feet of space for its laboratory in Ventura, California. The Company owns a substantial amount of personal property, including above and below ground tanks located at its bulk plants, service stations and lube pits -10- described above. It also owns approximately 150 portable above ground commercial fuel tanks, over 750 propane tanks, various automobiles and small trucks, and a small fleet of tractors with trailers. ITEM 3. LEGAL PROCEEDINGS The Company is a party to certain litigation that has arisen in the normal course of its business and that of its subsidiaries. In the opinion of management, none to this litigation is likely to have a material effect on the Company's financial position or results of operations, except that as of the date of this Annual Report on Form 10-K the Company has agreed to an out of court settlement with one of its former insurers whereby such insurer has agreed to pay the Company approximately $500,000 after payment of the Company's costs and attorney's fees. The Company expects to receive such payment by May, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fiscal year covered by this Annual Report, no matter was submitted to a vote of the Company's shareholders through the solicitation of proxies or otherwise. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The principal market for trading Meteor's Common Stock has been the over-the-counter market. Prices for the Common Stock are quoted on the OTC Bulletin Board. The range of high and low bid quotations for Meteor's Common Stock since public trading began in January 1994 provided below were obtained from the National Quotation Bureau. Beginning in the second quarter of 1995, the information shown is for closing bid quotations. The stock is principally owned or controlled by Officers and Directors of Meteor, and the bid prices reported may not be indicative of the value of the Common Stock. The volume of trading in Meteor's Common Stock has been very limited. These over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions. Bid* Period High Low Quarter Ended February 28, 1994 . . . . $4.63 $4.17 Quarter Ended May 31, 1994. . . . . . . $4.17 $3.70 Quarter Ended August 31, 1994 . . . . . $4.17 $2.78 Quarter Ended November 30, 1994 . . . . $4.63 $2.78 Quarter Ended February 28, 1995 . . . . $4.63 $3.94 Quarter Ended May 31, 1995. . . . . . . $4.63 $3.47 Quarter Ended August 31, 1995 . . . . . $4.28 $2.50 Month Ended September 30, 1995. . . . $3.00 $2.50 Quarter Ended December 31, 1995 . . . . $3.25 $2.00 Quarter Ended March 31, 1996. . . . . . $3.75 $2.00 Quarter Ended June 30, 1996 . . . . . . $4.25 $1.75 Quarter Ended September 30, 1996. . . . $4.25 $2.87 Quarter Ended December 31, 1996 . . . . $5.87 $3.62 __________________ * As restated to give retroactive affect to a stock dividend of 8% which was paid to shareholders of record as of June 30, 1995. As of March 28, 1997, there were approximately 68 record holders of the Company's Common Stock. Based on securities position listings, the Company believes that there are approximately 265 beneficial holders of the Company's Common Stock. DIVIDENDS The Company has paid no cash dividends on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. In June 1995, the Company declared an 8% stock dividend on its outstanding Common Stock. It is the present policy of the Board of Directors to retain all earnings to provide for the growth of the Company. Payment of cash dividends in the future will depend, among other things, upon the Company's future earnings, requirements for capital improvements and financial condition. The Company's ability to pay any cash dividends on the Company's Common Stock in the future will be limited by the dividend requirements of the Preferred Stock of a Subsidiary. -12- PRIVATE SALES OF SECURITIES During the year ended December 31, 1996, and during the quarter ended March 31, 1997, the Company sold shares of its Common Stock which were not registered under the Securities Act of 1933, as amended, as follows: In May and June, 1996, the Company sold shares of the Company's Common Stock to 21 accredited investors and 3 unaccredited investors in a private offering. A total of 270,000 shares of Common Stock were sold in this offering for an aggregate of $704,700 in cash. The Company paid no commissions in connection with this offering. In February and March of 1997, the Company sold shares and warrants to purchase the Company's Common Stock to 16 accredited investors in a private offering. A total of 130,000 shares of Common Stock and 130,000 warrants were sold in this offering for an aggregate of $520,000 in cash. The Company paid no commissions in connection with this offering. Each warrant allows the holder to purchase one share of Common Stock at $5.00 per share from March 28, 1998 until March 27, 1999. With respect to these sales, the company relied on section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. Each investor was given a copy of a Private Placement Memorandum containing information concerning the Registrant, a Form D was filed with the SEC and the Company complied with the other applicable requirements of Rule 506. Each investor signed a subscription agreement in which he represented that he was purchasing the shares for investment only and not for the purpose of resale or distribution. The appropriate restrictive legends were placed on the certificates and stop transfer instructions were issued to the transfer agent. ITEM 6. SELECTED FINANCIAL DATA Effective November 2, 1995, Meteor Industries, Inc., acquired 100% of the issued and outstanding common stock of Capco Resources Inc. ("CRI") in exchange for 1,745,000 shares of Meteor common stock. The acquisition was treated as a reverse acquisition of Meteor by CRI. Accordingly, the results of operations of CRI are included in the following financial information since inception of CRI. The results of operations of Meteor for 1995 are included in the following financial information since November 2, 1995, the effective date of the acquisition. BALANCE SHEET DATA: (In Thousands) At December 31 1996 1995 1994 1993 1992 ------- ------- ------ ------- ------ Current Assets $ 8,488 $ 6,708 $ 126 $ -- $ -- Property and Equipment 8,277 8,568 250 -- -- Other Assets 3,669 3,273 164 -- -- Discontinued Operations -- -- 572 660 (28) Total Assets 20,434 18,549 1,112 660 (28) Current Liabilities 8,943 6,873 403 -- -- Long-term Debt 446 2,195 -0- -- -- Deferred Tax Liability 1,773 1,894 -0- -- -- Minority Interest 4,152 3,615 -0- -- -- Stockholders' Equity 5,120 3,924 709 660 (28) -13- STATEMENT OF OPERATIONS DATA: (In Thousands, Except Per Share Data) Inception To For the Years Ended December 31, December 31, 1996 1995 1994 1993 1992 --------- ------- --------- --------- ----------- Sales $ 59,984 $ 9,828 $ 473 $ -0- $ -0- Cost of sales 49,644 7,373 -0- -0- -0- Operating Expenses 9,119 2,395 602 2 -0- Other income (Expense) (79) (71) -0- -0- -0- Income (loss) From continu- ing operations 462 (74) (129) (2) -0- Income from dis- continued Operations -0- 1,871 179 690 765 Net income 462 1,796 49 688 765 Income (loss) from continuing opera- tions per common share .15 (.15) (1295.32) (22.82) -0- Net income per Common share $ 0.15 $ 3.67 $ 489.95 $6,883.42 $7,652.20 Weighted average Shares outstanding 3,184,397 489,035 100 100 100 Cash dividends $ -0- $ -0- $ -0- $ -0- $ -0- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Effective November 2, 1995, Meteor acquired CRI. The acquisition was treated as a reverse acquisition of Meteor by CRI. Accordingly, the historical accounts of CRI are reflected in the financial statements, so comparisons with prior year are not very meaningful. The consolidated statement of operations should be read in conjunction with the historical financial statements and notes thereto of Meteor, included elsewhere in this document. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities totaled $842,000 for the year ended December 31, 1996 compared to $2,101,000 for the year ended December 31, 1995. The decrease in cash provided is primarily related to the decrease in net income. As of December 31, 1996, the Company had a working capital deficit of $455,000 compared to a working capital deficit of $214,000 at December 31, 1995. The decrease in the working capital is due primarily to a long term debt becoming current. -14- Net cash used by investing activities totaled $923,000 for the year ended December 31, 1996, compared to cash used of $1,379,000 for the year ended December 31, 1995. The reduction is a result of the fact that the Company has loans to related parties of $1,516,000 in 1995 and only made loans to related parties of $68,000 in 1996. This was partialy offset by purchases of property and equipment and investment in CRI and in Coors Pyramid L.L.C. in 1996. Because of the Company's continued expansion and development efforts, the Company's liquidity requirements have increased and are expected to continue to increase as a result of the need to reduce the Company's existing debt related to prior acquisitions. Net cash provided by financing activities totaled $138,000 for the year ended December 31,1996 compared to a use of $629,000 for the year ended December 31, 1995. The decrease in cash used is primarily related to sale of stock of $734,000. The Company has two revolving bank credit facilities with Norwest Business Credit, Inc. - one for $3,000,000 and one for $1,500,000. The credit lines are subject to the borrowing base of the Company's subsidiaries, as defined and on December 31, 1996, $1,861,000 and $280,000 were borrowed against the facilities which are recorded as current liabilities. The Company has been in default on timely filing of information with the lender. The Company was also in default of the net worth requirements for one of the subsidiaries. The lender waived these defaults. The Company has a term loan with a New Mexico bank which is due in January, 1998 and a term loan with Norwest Business Credit, Inc. which is due in June, 1998. The balances at December 31, 1996, were $212,000 and $187,000, respectively. The loans are collateralized by real estate and buildings and equipment and require approximately $29,000 per month in payments. At December 31, 1996, the Company owned 50% of a limited liability company which in June, 1996, acquired a convenience store for $610,000 using financing from Phillips 66. The balance of the loan at December 31, 1996 was $505,000. The Company is a co-signer on this loan which has a term of 10 years. The Company records its investment using the equity method, which reflects only the Company's share of the net worth of the LLC. The Company owns 100% of a limited liability company which in December, 1996, acquired a convenience store for $415,000 using seller financing of $315,000. The loan has quarterly payments of $14,326 and a term of 7 years. A subsidiary of the Company has preferred stock outstanding which requires no periodic payments but accrues an 8% dividend and must be redeemed for $3,543,000 plus accrued dividends at the holder's request any time after September 15, 2000 unless earlier converted into common stock pursuant to its terms. This preferred stock is treated as a minority interest on the balance sheet and recorded at its discounted value. The Company owes the founder of one of its subsidiaries $1,759,139 payable in semi-annual installments of $200,000 which includes principal and interest calculated at 2 percentage points in excess of Citibank's prime rate. All previously unpaid principal and interest is due October 1, 1997. It is anticipated that $650,000 will be offset by payments on notes receivable from the founder also due October 1, 1997. The Company plans to pay this debt by either selling or refinancing one of its convenience stores. The Company is obligated to pay lease costs of approximately $66,000 monthly for land, building, facilities, and equipment. -15- In order to pay its obligations, the interest on such obligations and other expenses, the Company must generate cash flows from operations which exceeds that which has been achieved in the past. In addition, even if historical cash flow is exceeded throughout the terms of its obligations, the Company will probably be required to raise capital or refinance its existing debt in order to pay its obligations as they become due. The Company utilizes underground tanks at various locations to store petroleum products and is therefore subject to various federal and state statutes concerning environmental protection, as well as the New Mexico Ground Water Protection Act. The various federal and state statutes are designed to identify environmental damage, identify hazardous material and/or operations, regulate operations engaged in hazardous activities, and establish procedures for remedial action as necessary. The state of New Mexico has recognized the potential cleanup costs resulting from regulations, and the New Mexico Ground Water Protection Act has included the establishment of a corrective action fund. The purpose of the fund is to provide monetary assistance in both assessing site damage and correcting the damage where such costs are in excess of $10,000. Assistance is not available to repair or replace underground tanks or equipment. The law specifies requirements which must have been met for an applicant to be eligible, including a provision that payments will be made in accordance with regulations (which have not yet been issued), and states that payment from the corrective action fund are limited to amounts in that fund. The Company is responsible for any contamination of land it owns or leases; however, the Company's responsibilities may be limited as a result of possible claims for reimbursement from third parties. The Company maintains detailed inventory records and performs tank and line tightness tests on a regular basis on all underground storage tanks. Management has assessed the environmental contingencies and does not anticipate any potential liabilities that will have a material adverse effect on the consolidated financial position, results of operation, or liquidity of the Company. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1995 The Company is primarily engaged in the business of marketing and distributing refined petroleum and related products employing wholesale, convenience store operations and environmental services. The following discussion for comparisons is limited because the historical accounts for 1995 reflect only two months of revenue and expense for Meteor due to the reverse acquisition by CRI in November, 1995, while 1996 reflects a full year of operations for Meteor. The Company's sales for the year ended December 31, 1996, were $59,984,000 compared to $9,828,000 for the comparable period ending December 31, 1995. The increase in revenues is partially due to increases in gasoline volumes and prices at the retail level. Sales are expected to be relatively constant next year assuming no significant acquisitions are made. The Company's cost of sales for the year ended December 31, 1996, were $49,644,000 compared to $7,373,000 for the comparable period ended December 31, 1995. The increase in costs of sales is due to the increased level of sales discussed above. The increase in the percentage of sales is due to no cost of sales for CRI in either 1996 or 1995, however, due to the reverse acquisition, -16- a full year of CRI sales are included. Excluding CRI the cost of sales in 1995 would be 83.1%. The Company's gross profit for the year ended December 31, 1996, was $10,340,000 compared to $2,455,000 for the period ended December 31, 1995. The increase is partially related to higher sales and increased margins for gasoline at the retail level. Retail gasoline margins are dictated by competition in a given area and the Company has no control over such margins. The Company's selling, general and administrative expenses were $8,269,000 for the year ended December 31, 1996, compared to $2,244,000 for the period ended December 31, 1995. The increase in expenses is related to combining the operations of Hillger, Graves and CRI. As a percentage of sales general and administrative expenses declined from 23% to 14% reflecting benefits of combining the companies. The Company's depreciation for the year ended December 31, 1996, was $850,000 compared to $152,000 for the period ended December 31, 1995. The increase in depreciation expense is due primarily to acquisition of buildings and equipment. The Company's other expenses for the year ended December 31, 1996 was $79,000 compared to $71,000 for the period ended December 31, 1995. The reasons for the decrease are primarily related to an increase in interest income, a increase in interest expense, and sales of assets this year. The Company's provision for income taxes for the year ended December 31, 1996, was $395,000 compared to $(1,470)for the period ended December 31, 1995. This increase is due to more income. The expected tax provision based on statutory rates would have been $446,000. The variance from the effective rate is principally due to the benefit of the loss carryforward. The Company's income from continuing operations for the year ended December 31, 1996, was $462,000 compared to a loss from continuing operations of $74,000 in the prior year due to the above described items. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994 The Company's sales for the year ended December 31, 1995, were $9,828,000 compared to $473,000 for the comparable period ending December 31, 1994. The increase in revenue is due to an increase in sales due to acquisition of Meteor of $8,868,000 and an increase of $487,000 at CAS. The increase in revenues at CAS is due to additional lab analysis which trend is expected to continue. The Company's cost of sales for the year ended December 31, 1995, were $7,373,000 compared to $0 for the comparable period ended December 31, 1994. The increase in costs of sales is due to the acquisition of CRI by Meteor. The Company's gross profit for the year ended December 31, 1995, was $2,455,000 compared to $473,000 for the comparable period ended December 31, 1994. The increase is related to the inclusion of Meteor's gross profits for the two months ended December 31, 1995. The Company's selling, general and administrative expenses were $2,224,000 for the year ended December 31, 1995 compared to $602,000 for the year ended December 31, 1994. The increase in expenses of $1,388,000 is related to the acquisition of CRI by Meteor and an increase at CAS of $405,000 due to increased activity at the laboratory. -17- The Company's other expenses for the year ended December 31, 1995 were $71,000 compared to $0 for the comparable period December 31, 1994. The reasons for the increase is due to the acquisition of CRI by Meteor. The Company's loss from continuing operations for the year ended December 31, 1995, was $74,000 compared to a loss from continuing operations of $129,000 in the prior year due to the above described items. DISCONTINUED OPERATIONS CRI had been involved in the production of oil and gas prior to the transaction with the Company. Those operations were discontinued and will have no impact on future operations. CRI had these operations in subsidiaries. In 1995, CRI sold the shares of Saba de Colombia, Inc., a U.S. subsidiary engaged in the exploration and development of petroleum and natural gas in Colombia, to a third party. In 1995, CRI transferred to Capco Resources, Ltd. and CAPCO Acquisub, Inc., a wholly-owned subsidiary of CAPCO Resources Ltd., all of its holdings of Saba Petroleum Company and certain other assets and liabilities. The income from discontinued operations was $441,197 and the gain on disposition, net of taxes was $1,429,256 for the year ended December 31, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Included at F-1 through F-31. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -18- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Directors and Executive Officers of the Company are as follows: Name Age Positions and Offices Held --------------- --- ---------------------------------------------- Edward J. Names 45 President and Director Ilyas Chaudhary 49 Chairman, Chief Executive Officer and Director Dennis R. Staal 48 Secretary/Treasurer and Director Paul W. Greaves 44 President of Subsidiaries There is no family relationship between any Director or Executive Officer of the Company. Capco Acquisub, Inc. has the right to appoint two directors, however only one, Ilyas Chaudhary, is currently representing Capco Acquisub, Inc. The Company presently has no committees. Set forth below are the names of all Directors and Executive Officers of the Company and its major subsidiaries, all positions and offices with the Company held by each such person, the period during which he has served as such, and the principal occupations and employment of such persons during at least the last five years: EDWARD J. NAMES - President and Director. Mr. Names has been President and a Director of the Company since 1993. Mr. Names has extensive experience in mergers and asset acquisitions as well as small business matters such as business planning, financing, management and contract negotiation. Mr. Names was President of Alfa Resources, Inc. and its subsidiaries from 1983 to 1995. Mr. Names resigned as President of Alfa Resources, Inc. as of the closing of the CRI acquisition, but continues to serve as a director of that company. Alfa Resources, Inc. is an oil and gas company which files reports pursuant to the Securities and Exchange Act of 1934. In 1987, Mr. Names became Special Counsel to the law firm of Wills and Sawyer, P.C., Denver, Colorado, and maintained that relationship until December 1992. Mr. Names was associated with the firm of Nelson & Harding, Denver, Colorado, from 1980 to 1981, and the law firm of Schmidt, Elrod & Wills, Denver, Colorado, where he practiced corporate and securities law and became a Partner in October 1982. Mr. Names received a Bachelor of Arts Degree in Economics from the University of Colorado in 1973, and a Juris Doctorate from the University of Denver College of Law in 1980. He devotes his full time to the business of the Company and its subsidiaries. ILYAS CHAUDHARY - Chairman of the Board, Chief Executive Officer and Director. Mr. Chaudhary has been Chairman of the Board, Chief Executive Officer and a Director of the Company since November 1995. He has also been an officer and director of Capco Resources, Inc. ("CRI"), which is now a wholly-owned subsidiary of the Company, since October 1993. He has also been a director of Saba Petroleum Company, a publicly held oil and gas company listed on the American Stock Exchange, since 1985, and has served as its Chairman of the Board since 1993. He has been Saba Petroleum Company's Chief Executive Officer since 1993 and its President since 1994. Mr. Chaudhary is a director and controlling shareholder of Capco Resources Ltd., the Company's majority shareholder. Mr. Chaudhary has 24 years of experience in various capacities in the oil and gas industry, including eight years of employment with Schlumberger Well Services -19- from 1972 to 1979. Mr. Chaudhary received a Bachelor of Science degree in Electrical Engineering from the University of Alberta, Canada. DENNIS R. STAAL - Secretary and Treasurer and Director. Mr. Staal has been Secretary and Treasurer and a Director of the Company since July 1993. He also serves as an officer and director of several of the Company's wholly-owned subsidiaries. Mr. Staal is a graduate of the University of Nebraska, where he received a Bachelor of Science degree in Business Administration in 1970. From 1970 through 1973, he was a CPA with Arthur Andersen & Co. From 1973 through 1976, he was Controller for the Health Planning Council of Omaha. From 1977 through 1981, he served as a Director of Wulf Oil Corporation and as President of such company from 1979 to 1981. From 1979 through 1982, he served as a Director of Chadron Energy Corporation, and as Director of the First National Bank of Chadron. From 1982 through 1984, he was Chief Financial Officer of High Plains Genetics, Inc. From 1986 to 1991, Mr. Staal was Director and President of Saba Petroleum Company. Mr. Staal is currently Treasurer of Alfa Resources, Inc. and an officer and director of its subsidiaries. From June, 1992 to September, 1996, Mr. Staal was President and a Director of Mystique Developments, Inc., an oil and gas company which files reports pursuant to the Securities Exchange Act of 1934. He devotes approximately 80% of his time to the business of the Company and its subsidiaries. PAUL W. GREAVES - President and Chief Executive Officer of the subsidiaries. Mr. Greaves has been the President and Chief Executive Officer of the following subsidiaries: Pyramid Stores, Inc. and its subsidiaries, Graves Oil & Butane Co., Inc. and Hillger Oil Company since in April, 1996. Prior to working for the Company, Mr. Greaves held the position of Regional Manager, Rocky Mountain Region, for Propane Continental of Overland Park, Kansas, from April 1994 to April 1996. From 1989 until 1994, Mr. Greaves was Director of Business Development for the Wescourt Group of Denver, Colorado, a petroleum marketing and distribution holding company. Mr. Greaves devotes his full time to the business of the Company's subsidiaries described above. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely on a review of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year, and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year and certain representations, no persons who were either a director, officer, or beneficial owner of more than 10% of the Company's common stock, failed to file on a timely basis reports required by section 16(a) of the Exchange Act during the most recent fiscal year, except that Paul W. Greaves, Andres Chaudhary and Theron J. Graves each filed a Form 3 late. ITEM 11. EXECUTIVE COMPENSATION The following information regarding the executive compensation for the Company's Chief Executive Officer and President for the fiscal years ended December 31, 1996, 1995 and August 31, 1994. No other executive officer received compensation in excess of $100,000 during such periods. -20- SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts Securities Other Underlying All Annual Restrict- Options/ Other Name and Principal Compen- ed Stock SARs LTIP Compen- Position Year Salary Bonus sation Award(s) (Number) Payouts sation - ----------------- ---- -------- ----- ------ --------- ------- --------- - ------ Ilyas Chaudhary 1996 $ -0- -- -- -- -- -- - -- Chairman of 1995 $ -0- -- -- -- 100,000 -- - -- Board and Chief Executive Officer Edward J. Names 1996 $101,250 -- -- -- -- -- $5,040 President 1995 $ 78,000 - -- -- 100,000 -- $4,512* 1994 $ 62,769 -- -- -- -- -- $3,384*
___________________ * Represents premiums paid on health insurance policies for Mr. Names. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES Securities Underlying Value of Unexer- Shares Unexercised cised in-the Acquired Options SARs Money Options/ On At FY-end SARs AT FY-end Exercise Value Exercisable/ Exercisable/ Name (Number) Realized Unexercisable Unexercisable - ---------------- --------- -------- ------------- ---------------- Ilyas Chaudhary -0- -0- 33,333/66,667 $63,541/$127,084 Edward J. Names -0- -0- 33,333/66,667 $63,541/$127,084 EMPLOYMENT ARRANGEMENTS EDWARD J. NAMES, President of the Company, entered into a five-year employment agreement with the Company which became effective in January 1994, which provides that Mr. Names is required to devote substantially all his work time to the Company. The agreement was amended in November 1995 to provide for an annual salary of $105,000. Pursuant to his employment agreement, Mr. Names is allowed to devote up to 10 hours per month to other business operations including his duties as a director or officer in other companies including Alfa Resources, Inc., an oil and gas company of which he is currently a director. Absent notice to the contrary from the Company or Mr. Names, the five-year term of the employment agreement will renew automatically each year. The Company can terminate his employment, however, at any time without cause and be obligated only for one year's salary. The employment agreement includes a covenant not to compete which is effective for two years after termination of employment. ILYAS CHAUDHARY, Chairman of the Board and Chief Executive Officer of the Company, presently receives no salary. DENNIS R. STAAL, Secretary/Treasurer of the Company, presently receives an annual salary totaling $55,000 per year from the Company and a subsidiary. He devotes approximately 80% of his time to the business of the Company and its subsidiaries. -21- PAUL W. GREAVES entered into a three year employment agreement with the Company's subsidiary, Pyramid Stores, Inc. ("Pyramid") which became effective in April of 1996. Mr. Greaves is required to devote full time to the business of Pyramid and its subsidiaries; Graves Oil & Butane Co., Inc. and Hillger Oil Company. The agreement calls for a base salary of $80,000 per year plus an annual bonus of 5% of any increases in earnings before interest, taxes, depreciation and amortization of Pyramid and its subsidiaries from the prior year. The Company may terminate Mr. Greaves's employment at any time, without cause and be obligated for only six months base salary and accrued but unpaid bonuses. The employment agreement includes a covenant not to compete which is effective for two years after termination of employment. STOCK OPTION PLAN A stock option plan providing for the issuance of incentive stock options and non-qualified stock options to Meteor's employees was approved by Meteor's shareholders on April 15, 1993. Pursuant to the Plan, 500,000 shares of Meteor's $.001 par value Common Stock have been reserved for issuance. On October 1, 1993, incentive stock options were granted to employees. As of December 31, 1996, out of these options, options to purchase 41,000 shares were outstanding (after deducting options which expired as a result of termination of employment). These options are exercisable at $3.00 per share and vest in five equal installments each year following the date of grant. They expire ten years after the date of grant. On February 1, 1994, additional incentive stock options were granted to employees. As of December 31, 1996, out of these options, options to purchase 31,300 shares were outstanding (after deducting options which expired as a result of termination of employment). These options are exercisable at $5.25 per share and vest in three equal installments each year following the date of grant. They expire ten years after the date of grant. On August 4, 1995, incentive stock options to purchase 10,000 shares each of Common Stock were granted to Dennis R. Staal, Secretary/Treasurer of Meteor, and C. Thomas Houseman, a former Director of Meteor, and an incentive stock option to purchase 1,000 shares was granted to an employee. These options are exercisable at $3.00 per share and vest over three years on a pro rata annual basis following the date of grant. They expire five years after the date of grant. On November 30, 1995, the Board of Directors granted options to Edward J. Names, President of the Company, and Ilyas Chaudhary, Chairman and Chief Executive Officer, each to purchase 100,000 shares of Meteor's Common Stock, and Dennis R. Staal, Secretary/Treasurer of the Company, to purchase 15,000 shares of Common Stock. These options are exercisable at $3.50 per share and vest over a period of three years on a pro rata annual basis following the date of grant. In May of 1996, the Board of Directors granted options to Paul W. Greaves to purchase 50,000 shares of Meteor's Common Stock. These options are exercisable at $3.50 per share and vest on a pro rata annual basis over five years. These options expire five years after the date of grant. As of the date of this Report, of these options, only options to purchase 5,000 shares remain outstanding. In May of 1996, stock options were granted to two employees to purchase an aggregate of 55,000 shares of Meteor's Common Stock at $3.50 per share. The options vest in five equal installments each year following the date of grant. These options expire five years after the date of grant. -22- On January 2, 1997, Meteor granted options to four employees to purchase an aggregate of 20,000 shares of Common Stock at $5.07 per share. These options vest over five years and expire on January 2, 2002. On February 14, 1997, Meteor granted an option to Dennis R. Staal, Secretary and Treasurer of Meteor, to purchase 25,000 shares of Common Stock at $3.50. Also on February 14, 1997, Meteor granted an option to the president of IST, one of Meteor's subsidiaries, to purchase 5,000 shares of Common Stock at $3.50 per share. These options vest over three years on a annual basis and expire five years from the date of grant. CONSULTANTS' OPTIONS In November 1995, Meteor granted an option to a consultant to purchase a total of 100,000 shares of Meteor's Common Stock. This option was exercisable at $2.50 per share, but expired unexercised on January 31, 1997. On February 14, 1997, Meteor granted options to three consultants to purchase an aggregate of 130,000 shares of Meteor's Common Stock. These options are exercisable at $3.50 per share and expire on February 13, 1998. INCENTIVE EQUITY PLAN The Board of Directors adopted the 1997 Incentive Equity Plan of the Company (the "Incentive Plan") on January 2, 1997, subject to approval by the Stockholders of the Company at the next Annual Meeting. The purpose of the Incentive Plan is to enable the company to attract officers and other key employees and consultants and to provide them with appropriate incentives and rewards for superior performance. The Incentive Plan affords the Company the ability to respond to changes in the competitive and legal environments by providing the Company with greater flexibility in key employee and executive compensation than was available through the previously approved plan or individual stock option agreements. This plan is designed to be an omnibus plan allowing the Company to grant a wide range of compensatory awards including stock options, stock appreciation rights, restricted stock, deferred stock and performance shares or units. The Incentive Plan is intended to encourage stock ownership by recipients by providing for or increasing their proprietary interests in the Company, thereby encouraging them to remain in the Company's employment. The Incentive Plan has been prepared to comply with all applicable tax and securities laws, including Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and state and federal tax laws. Subject to adjustment as provided in the Incentive Plan, the number of shares of Common Stock that may be issued or transferred, plus the amount of shares of common Stock covered by outstanding awards granted under the Incentive Plan, shall not in the aggregate exceed 750,000. The number of Performance Units granted under the Incentive Plan shall not in the aggregate exceed 200,000. The number of shares of Common Stock granted under the Incentive Plan to any individual in any calendar year shall not in the aggregate exceed 100,000. To the date of this report, no options, awards or other benefits have been granted under the Incentive Plan. DIRECTOR COMPENSATION Directors of the Company do not receive any fees for their services in such capacity. However, each Director is reimbursed for all reasonable and necessary costs and expenses incurred as a result of being a Director of the Company. -23- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 25, 1997, the stock ownership of each person known by the Company to be the beneficial owner of five percent or more of the Company's Common Stock, all Directors individually and all Directors and Officers of the Company as a group. Except as noted, each person has sole voting and investment power with respect to the shares shown.
NAME AND ADDRESS AMOUNT OF BENEFICIAL PERCENTAGE OF BENEFICIAL OWNER OWNERSHIP OF CLASS Capco Resources Ltd. 1,745,000 50.7% #950, 444 - 5th Avenue, S.W. Calgary, Alberta Canada TOP 2T8 Edward J. Names 333,973 9.7% 216 - 16th Street, Suite 730 Denver, CO 80202 Ilyas Chaudhary 1,778,333 51.7% #950, 444 - 5th Avenue, SW Calgary, Alberta Canada TOP 2T8 Dennis R. Staal 92,765 2.7% 216 - 16th Street, Suite 730 Denver, CO 80202 Adres Chaudhary 378,000 11.0% 600 Hunter Trail, Suite #4 Glendora, CA 91740 Theron J. Graves 756,830 22.0% 761 South Miller Farmington, NM 87499 All Executive Officers and 2,220,371 64.3% Directors as a Group (4 Persons) __________________ Excludes 75,000 shares which have been pledged to Capco Resources Ltd. to secure certain guarantees made to it by NFF, Ltd. and PAMDEN, Ltd. Represents 33,240 shares held directly by Mr. Names, 265,000 shares held by NFF, Ltd., a limited partnership of which he served as general partner; 2,400 shares held by his wife of which he disclaims beneficial ownership, and 33,333 shares underlying stock options exercisable within 60 days by Mr. Names. Of the shares held by NFF, Ltd., 55,000 have been pledged to Capco Resources Ltd. to secure a guarantee made by NFF, Ltd. Includes 1,745,000 shares of the Company held by Capco Resources Ltd. of which Mr. Chaudhary is Chairman of the Board, Chief Executive Officer and beneficially owns over 50% of its outstanding stock and 33,333 shares underlying stock options exercisable within 60 days by Mr. Chaudhary. -24- Includes 5,400 shares held by Mr. Staal; 70,000 shares held by PAMDEN, Ltd., a limited partnership of which Mr. Staal is general partner; 8,432 shares held by Mystique Resources Company which is wholly owned by PAMDEN, Ltd.; 600 shares held by an IRA and 8,333 shares underlying stock options exercisable within 60 days by Mr. Staal. Of the shares held by PAMDEN, Ltd., 20,000 have been pledged to Capco Resources Ltd. to secure a guarantee made by PAMDEN, Ltd. Represents shares of the Company's Common Stock which Mr. Graves presently has the right to acquire upon the exchange of shares of Graves Preferred Stock held by him. Includes 5,300 shares held directly and 10,000 shares underlying stock options exercisable within 60 days held by Paul W. Greaves, who is President and Chief Executive Officer of certain of the Company's subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Board of Directors of the Company is of the opinion that the terms of each of these transactions were at least as favorable to the Company as could have been obtained from unaffiliated parties. All ongoing and future transactions with affiliates will be on terms no less favorable than those which could be obtained from unaffiliated parties. TRANSACTIONS INVOLVING THE COMPANY'S OFFICERS AND DIRECTORS During 1993, Edward J. Names, Dennis R. Staal, Daniel B. Matter and C. Thomas Houseman, the Company's founders, purchased a total of 475,500 shares of the Company's Common Stock for total consideration of $30,750 cash and $800 in interest expense and services rendered. In addition, these persons have advanced funds to the Company from time to time. Edward J. Names, President of Meteor, has personally guaranteed debt due to Norwest Business Credit, Inc., as described above, up to a maximum of $250,000 related to the Graves acquisition and $250,000 related to the Hillger acquisition. Mr. Names and Dennis R. Staal, who is Secretary and Treasurer of Meteor, each have agreed to personally guarantee the debts of Graves and Hillger to its major suppliers and a debt to a Farmington, New Mexico bank. Capco Resources Ltd. has agreed to indemnify Edward Names and Dennis Staal relating to such guarantees. In February, 1997, the Company agreed to sell a total of a 25% interest in the Hatch Pyramid LLC to Edward J. Names and Dennis R. Staal for a total for $38,000. Such investment would be made on the same terms and conditions as the Company offered and sold a 25% interest to an unaffiliated third party. Hatch Pyramid LLC was formed for the purpose of acquiring and operating a convenience store in Hatch, New Mexico. The Company retained a 50% interest in the entity. In the past the company has sold a 50% interest of two other limited liability companies to outside investors as part of its expansion plan. The Company intends to continue to buy and build convenience stores using money from outside investors including employees of the Company. TRANSACTIONS INVOLVING GRAVES On September 28, 1993, the Company acquired all of the issued and outstanding common stock of Graves Oil & Butane Co., Inc. from its sole shareholder, Theron J. Graves. As a result of the transaction, Theron J. Graves retired as the Company's chief executive officer but agreed to provide consulting services for -25- a period of seven years. Mr. Graves continues his investment by holding 1,000,000 shares of convertible cumulative preferred stock of Graves with a liquidation preference of $3,543,500, and a promissory note from the Company for $2,350,000, which, as of December 31, 1996, had an outstanding balance of $1,759,000. The structure of the acquisition is summarized below: Purchase Price for Common Stock: $4,100,000 Cash Paid at Closing: $1,750,000 Financing Provided by Seller: $2,350,000 note with interest at 2% over prime, payable $200,000 (includ- ing principal and interest) every six months and the balance on October 1, 1997 (the "Note"). This Note is se- cured by 50% of the Graves common stock purchased by the Company. Preferred Stock Retained by Seller: 1,000,000 shares of convertible preferred stock with a total liquidation preference of $3,543,500 and dividends accruing at a rate of 8% per annum until the date of redemption, which shall be no earlier than September 15, 2000 (the "Convertible Securities"). In the event of a default under the promissory note issued to purchase the Graves common stock, the holders of the Graves Series A Preferred have the ability to elect all the Graves directors. The Company's preferred stock obligations are secured by the unencumbered fixed assets of Graves. These securities are convertible into common stock of Graves or the Company at the bid price on the date of conversion or a maximum of 22.2% of the Company, whichever calculation yields fewer shares. The preferred stock, on conversion, also carries certain piggy-back registration rights. INDEMNIFICATIONS: Theron Graves has agreed to indemnify the Company until September 2000 against all losses and expenses exceeding $25,000 per year up to a cumulative total of $8,000,000 relating to environmental liabilities associated with the properties of the Company as of the closing date or any inaccuracies in the representations and warranties in the purchase agreement. Prior to the Company's acquisition, Mr. Graves owed approximately $650,000 to Graves. In connection with the acquisition, Mr. Graves executed two promissory notes payable on the date the Meteor note to Mr. Graves is due (October 1, 1997) plus interest at the same rate as the Company's note. One promissory note is for $100,000 representing the price of an airplane Mr. Graves purchased from the Company. The other promissory note for $550,000 represents funds advanced to or on behalf of Mr. Graves from time to time over several years. This note is collateralized by unimproved real estate Mr. Graves owns in the Albuquerque, New Mexico area ("Coors Road Property"). If such property is sold by Mr. Graves, the principal amount of the $550,000 note (up to the amount of the property's sales price) becomes immediately payable and is to be discharged by reducing the principal amount of the Company's $2,350,000 note to Mr. Graves, and the liquidation value of Mr. Graves' preferred stock retained in Graves Oil, each by one-half the amount accelerated under the $550,000 note. In addition, the Company has both (i) a right of first refusal on the entire Coors Road Property, and (ii) a right to purchase a portion of such property sufficient to build a retail gas station at fair market value, and all or a portion of the resulting consideration due can be paid by the Company by reducing the $550,000 note from Mr. Graves. -26- The Company leases real estate in Colorado from Mr. Theron Graves and subleases the property to a truck stop operator. Graves pays property taxes and insurance expense on the property. In addition, the Company leases land from Mr. Graves on which a yard, warehouses and offices are located. The parties have entered into an agreement which provides for regular payments of $500 per month beginning September 1, 1993. The rent escalates at 5% per annum, the lease term is 25 years, and the Company has two ten year options to extend such lease. TRANSACTIONS INVOLVING CAPCO RESOURCES LTD. In June 1995, Capco Resources, Inc. ("CRI") purchased 378,000 (as adjusted for the 8% stock dividend) shares of the Company's Common Stock for $700,000 in cash. As a result of this transaction, CRI's parent, Capco Resources Ltd. ("Capco"), became a principal shareholder of the Company. Immediately prior to the acquisition of CRI by the Company, CRI sold all 378,000 shares held by it to Adres Chaudhary (who is not related to Ilyas Chaudhary) for the forgiveness of debt in the amount of approximately $700,000. CRI offered Adres Chaudhary this asset to reduce its debt to him. In November 1995, the Company issued 1,745,000 shares of its Common Stock in exchange for all of the outstanding stock of CRI. The shares of the Company's Common Stock issued in this transaction, which represented approximately 53% of the shares now outstanding, were issued to a U.S. subsidiary of Capco. As a result of this transaction, there was a change in control of the Company and one of the Company's three directors was replaced by a Capco representative. The major assets of CRI included: (i) an interest in Saba Power Company Ltd., which is involved in the development of a power plant in Pakistan; (ii) all of the stock of Capco Analytical Services, Inc., a California environmental services firm; and (iii) a $1,516,000 promissory note from Saba Petroleum Company and other miscellaneous assets. Saba Petroleum Company is a publicly-held company of which Ilyas Chaudhary, the Company's Chief Executive Officer, is an officer, director and principal shareholder. The promissory note bears interest at 9% and is due in 2006. Subsequent to December 31, 1996, $500,000 has been paid. Capco has agreed to guarantee the prepayment of such note prior 2006 and has agreed to pay an additional 2% interest until the note is fully paid. Subsequent to November 1995, all of the assets of CRI, except its interest in Saba Power Company Ltd., have been transferred to the Company. In connection with the agreement with Capco, NFF, Ltd. and PAMDEN, Ltd., limited partnerships which are controlled by Edward J. Names and Dennis R. Staal, respectively, guaranteed on a limited recourse basis the representations and warranties of the Company in the agreement. To secure these guarantees, NFF, Ltd. and PAMDEN, Ltd. pledged 55,000 and 20,000 shares, respectively, to Capco. Also in connection with this agreement a subsidiary of Capco agreed to indemnify Edward J. Names and Dennis R. Staal against any liability they may incur as a result of the personal guarantees they have given in order to assist the Company and its subsidiaries. TRANSACTION WITH SABA PETROLEUM COMPANY On December 27, 1996, the Company entered into an agreement with Saba Petroleum Company concerning the ownership of Meteor Holdings LLC. The terms for this agreement are set forth in this report under "ITEM 1. DESCRIPTION OF BUSINESS -- SABA POWER COMPANY LTD." Ilyas Chaudhary is President, Chief Executive Officer and a Director of Saba Petroleum Company, which is listed on the American Stock Exchange. Mr. Chaudhary is also a principal shareholder of Capco Resources, Ltd., which owns a majority of the stock of Saba Petroleum Company and Meteor Industries, Inc. -27- CONFLICTS OF INTEREST All of the Company's Officers and Directors have been in the past and may continue to be active in other business with other companies and on their own behalf. These activities could give rise to potential conflicts with the interests of the Company. The Company's officers, directors, and other management personnel are subject to the doctrine of corporate opportunities only insofar as it applies to business opportunities in which the Company has indicated an interest, either through its proposed business plan or by way of an express statement of interest contained in the Company' minutes. Pursuant to a resolution of the Board of Directors of the Company, the Officers are required to make available to the Company any business opportunity relating to the wholesale and retail distribution of refined petroleum products which comes to the attention of any such Officer, and the Company shall have a right of first refusal with regard to such opportunity. A second resolution of the Board of Directors sets forth that if a business opportunity relating to the wholesale and retail distribution of refined petroleum comes to the attention of a Director and specifically is presented to the Director in his capacity as such, it must be disclosed to the Company and made available to it. No Officer or Director owes a fiduciary duty to another entity similar to the duty owed to the Company regarding business opportunities related to services and products provided by the Company. A majority of the disinterested Directors may reject a corporate opportunity for various reasons. If the Company rejects an opportunity, then any Director or Officer may avail himself or themselves of such opportunity. In addition, if an opportunity is presented to the Company, and one or more of the Company's Officers or Directors has an interest in the opportunity, the opportunity will be reviewed at a meeting of the Board of Directors and the interested Director(s) will not vote on issues relating to such opportunity. The Board of Directors has not yet adopted any resolutions related to other aspects of the Company's business. -28- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following statements are filed as part of this Report: Page(s) Report of Independent Accountants ................................ F-1 Consolidated Balance Sheets - December 31, 1996 and 1995 ......... F-2 Consolidated Statements of Operations - December 31, 1996 and 1995 F-4 Consolidated Statement of Shareholders' Equity - December 31, 1996 and 1995 .................................................... F-5 Consolidated Statements of Cash Flow - December 31, 1996 and 1995. F-6 Notes to Consolidated Financial Statements ....................... F-8 CAPCO RESOURCES, INC. FINANCIAL STATEMENTS Auditor's Report ................................................. F-22 Consolidated Balance Sheet - December 31, 1994 and 1993 .......... F-23 Consolidated Statement of Operations and Retained Earnings (Deficit) - year end December 31, 1994 and 1993.............. F-24 Consolidated Statement of Changes in Financial Position - year end December 31, 1994 and 1993 .................................. F-25 Notes to Consolidated Financial Statements ....................... F-26 (b) Exhibit Number Description Location - ------- -------------------------- ------------------------------------ 3.1 Articles of Incorporation, Incorporated by reference to Exhibit as amended 2.1 to Registrant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 3.2 Bylaws Incorporated by reference to Exhibit 2.2 to Registrant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.1 Stock Option Plan Incorporated by reference to Exhibit 6.1 to Registrant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.2 Stock Purchase Agreement Incorporated by reference to Exhibit among Registrant, Graves 6.2 to Registrant's Form 1-A Offer- Oil & Butane Co., Inc. and ing Statement (SEC File No. 24D-3802 Theron J. Graves dated June SML) 23,1993, Amendment dated August 23, 1993 and Closing Memorandum dated September 28, 1993 10.3 $2,350,000 Promissory Note Incorporated by reference to Exhibit payable to Theron J. Graves 6.3 to Registrant's Form 1-A Offering and Security Agreement Statement (SEC File No. 24D-3802 SML) 10.4 Notes Receivable ($550,000 Incorporated by reference to Exhibit and $100,000) from Theron 6.4 to Registrant's Form 1-A Offer- J. Graves ing Statement (SEC File No. 24D-3802 SML) 10.5 Registrantion Agreement Incorporated by reference to Exhibit regarding Subsidiary's 6.5 to Registrant's Form 1-A Offering Preferred Stock Statement (SEC File No. 24D-3802 SML) -29- 10.6 Security Agreement regard- Incorporated by reference to Exhibit ing Subsidiary's Preferred 6.6 to Registrant's Form 1-A Offering Stock Statement (SEC File No. 24D-3802 SML) 10.7 Consulting Agreement with Incorporated by reference to Exhibit Theron J. Graves 6.7 to Registrant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.8 Lease regarding corporate Incorporated by reference to Exhibit offices and storage yard 6.11 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.9 Lease regarding Albuquerque Incorporated by reference to Exhibit warehouse 6.12 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.10 Lease regarding East Main Incorporated by reference to Exhibit Properties 6.13 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.11 Norwest Credit and Security Incorporated by reference to Exhibit Agreement 6.14 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.12 $4,000,000 Note Payable to Incorporated by reference to Exhibit Norwest (partially drawn 6.15 to Registrant's Form 1-A Offer- upon) ing Statement (SEC File No. 24D-3802 SML) 10.13 Meteor Corporate Guarantee Incorporated by reference to Exhibit as regarding Norwest 6.16 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.14 Employment Agreement with Incorporated by reference to Exhibit Edward J. Names 6.17 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.15 Leases regarding Cortez Incorporated by reference to Exhibit truck stop 6.18 to Registrant's Form 1-A Offer- ing Statement (SEC File No. 24D-3802 SML) 10.16 Agreement between the Incorporated by reference to Exhibit Registrant and Hillger Oil 10.16 to Company's Registration Statement on form 10 (SEC File No. 0-27986) 10.17 Lease Agreement between Incorporated by reference to Exhibit Hillger Oil Co., Inc. and 10.17 to Company's Registration Hillco, Inc. Statement on Form 10 (SEC File No. 0-27968) -30- 10.18 Credit and Security Agree- Incorporated by reference to Exhibit ment between Hillger Oil 10.18 to Company's Registration Co., Inc. and Norwest Statement on Form 10 (SEC File No. Business Credit, Inc. 0-27968) 10.19 Project Development and Incorporated by reference to Exhibit Shareholders' Agreement 10.19 to Company's Registration for Pakistan Power Project Statement on Form 10 (SEC File No. 0-27968) 10.20 Amended and Restated Share Incorporated by reference to Exhibit Exchange and Reorganization 10.20 to Company's Registration Agreement Statement on Form 10 (SEC File No. 0-27968) 10.21 Amendment to Employment Incorporated by reference to Exhibit Agreement with Edward J. 10.21 to Company's Registration Names Statement on Form 10 (SEC File No. 0-27968) 10.22 Amended and Restated Incorporated by reference to Exhibit Promissory Note from Saba 10.22 to Company's Registration Petroleum Company to Capco Statement on Form 10 (SEC File No. Resources, Inc. 0-27968) 10.23 1997 Incentive Plan Filed herewith electronically 10.24 Second Amended and Restated Filed herewith electronically Agreement between Meteor Industries, Inc., Capco Resources, Inc. and Saba Petroleum Company 10.25 Shareholder's Agreement Filed herewith electronically among Cogen Technologies, Saba Capital Company, LLC, Capco Resources, Inc., et al 10.26 Letter Agreement with Filed herewith electronically Western Energy Resources Limited 10.27 Letter Agreement between Filed herewith electronically Meteor Industries, Inc. and Capco Resources, Ltd. dated April 23, 1996 11 Computation of per share Filed herewith electronically earnings of common stock 21 Subsidiaries of the Filed herewith electronically Registrant 27.1 Financial Data Schedule for Filed herewith electronically fiscal year ending December 31, 1996 -31- COOPERS Coopers & Lybrand L.L.P. &LYBRAND a professional services firm Report of Independent Accountants To the Board of Directors of Meteor Industries, Inc.: We have audited the consolidated financial statements of Meteor Industries, Inc. as of December 31, 1996 and 1995 and for the years then ended, as listed in Item 14(a) of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meteor Industries, Inc. as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 17, the accompanying 1995 financial statements have been restated. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Denver, Colorado April 24, 1997 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland. F-1 METEOR INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31 December 31 1996 1995 CURRENT ASSETS Cash and cash equivalents $ 151,992 $ 95,150 Restricted cash 928,355 541,964 Accounts receivable-trade, net of allowance 5,134,276 4,232,071 Accounts receivable, related party 109,149 48,000 Notes receivable, related party 736,045 156,962 Inventory 1,221,729 1,332,642 Deferred tax asset -- 149,824 Other current assets 206,401 151,103 Total current assets 8,487,947 6,707,716 Property, plant and equipment, net 8,277,368 8,568,392 Other assets Notes receivable, related party 1,598,430 2,202,210 Investments in closely held businesses 1,285,407 409,141 Other assets 784,579 661,737 Total other assets 3,668,416 3,273,088 TOTAL ASSETS $20,433,731 $18,549,196 Continued on next page F-2 METEOR INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY December 31 December 31 1996 1995 CURRENT LIABILITIES Accounts payable, trade $ 3,512,257 $ 2,870,045 Bank overdraft 170,308 71,657 Current portion, long-term debt 2,176,357 561,048 Accrued expenses 212,940 196,909 Taxes payable 730,034 946,102 Revolving credit facility 2,141,027 2,275,512 Total current liabilities 8,942,923 6,921,273 Long-term debt 445,774 2,194,773 Deferred tax liability 1,773,240 1,893,579 Minority interest in subsidiaries 4,151,903 3,615,398 Total liabilities 15,313,840 14,625,023 Commitments and contingencies (Notes 11, 12 and 13) SHAREHOLDERS' EQUITY Common stock, $.001 par value; authorized 10,000,000 shares, 3,310,138 and 3,024,903 shares issued and outstanding, respectively 3,310 3,025 Paid-in capital 2,660,973 1,927,338 Retained earnings 2,455,608 1,993,810 Total shareholders' equity 5,119,891 3,924,173 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,433,731 $18,549,196 The accompanying notes are an integral part of the financial statements. F-3 METEOR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31 1996 1995 Net sales $59,984,499 $ 9,828,092 Cost of sales 49,644,010 7,373,304 Gross profit 10,340,489 2,454,788 Selling, general and administrative expenses 8,269,292 2,243,612 Depreciation 849,607 151,709 Total expenses 9,118,899 2,395,321 Income from operations 1,221,590 59,467 Other income and (expenses) Interest income 361,271 28,047 Interest expense (474,136) (91,621) Gain (loss) on sale of assets 34,323 ( 7,460) Total other income and (expenses) (78,542) (71,034) Income (loss) from continuing operations before income taxes and minority interest 1,143,048 (11,567) Income tax (expense) benefit (394,745) 1,470 Income (loss) from continuing operations before minority interest 748,303 (10,097) Minority interest (286,505) (63,544) Income (loss) from continuing operations 461,798 (73,641) Discontinued operations: Income from discontinued operations (net of applicable income taxes of $452,620) -- 441,197 Gain on disposal of discontinued operations (net of applicable taxes of $100,000) -- 1,429,256 Net income $ 461,798 $ 1,796,812 Income (loss) per common share from continuing operations $ .15 $ (.15) Net income per common share $ .15 $ 3.67 The accompanying notes are an integral part of the financial statements. F-4 METEOR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1996 and 1995 Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Total --------- ------ ---------- ---------- ---------- Balance - January 1, 1995 100 $ 100 $ 511,920 $ 196,998 $ 709,018 Stock issued and restated for reverse acquisition 3,022,803 2,923 1,411,420 1,414,343 Stock issued during the year 2,000 2 3,998 4,000 Net income 1,796,812 1,796,812 Balance - December 31, 1995 3,024,903 3,025 1,927,338 1,993,810 3,924,173 Stock issued during the year 285,235 285 733,635 733,920 Net income 461,798 461,798 Balance - December 31, 1996 3,310,138 $3,310 $2,660,973 $2,455,608 $5,119,891 The accompanying notes are an integral part of the financial statements. F-5 METEOR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31 1996 1995 Cash flows from operating activities Net income $ 461,798 $1,796,812 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 849,607 159,416 (Gain)/loss on disposal of property & equipment (34,323) 7,460 Deferred income taxes 35,269 (1,470) Minority interest 286,505 63,544 Other (11,486) -- Changes in assets and liabilities, net of effects from reverse acquisitions (Increase)/decrease in accounts receivable (1,018,354) (127,762) (Increase)/decrease in inventories 110,913 (32,022) (Increase)/decrease in other current assets (55,298) 22,297 Increase in accounts payable 642,212 289,544 Increase/(decrease) in accrued liabilities 10,247 (113,889) Increase/(decrease) in taxes payable (216,068) 60,115 (Increase)/decrease in other assets (219,069) 8,207 Discontinued operations 0 (31,160) Net cash provided(used)by operating activities 841,953 2,101,092 Cash flows from investing activities Cash proceeds from sale of property 116,885 0 Purchases of property and equipment (253,202) (57,003) Loans to related parties (68,220) (1,516,000) Net cash from reverse acquisition 0 537,853 Investment in closely held business (876,266) (401,999) Note receivable payments 158,188 58,556 Net cash provided (used) by investing activities (922,615) (1,378,593) Cash flows from financing activities Borrowings on revolving credit facilities 56,203,123 7,734,473 Payments on revolving credit facilities (56,337,608) (7,922,104) Increase in bank overdraft 98,651 71,657 Borrowings on long-term debt 133,727 82,215 Sale of minority interests in subsidiary 250,000 - Payments on long-term debt (582,417) (56,903) Proceeds from common stock issued 733,920 4,000 Restricted cash (386,391) (541,964) Insurance Proceeds 24,499 -- Net cash provided (used)by financing activities 137,504 (628,626) Net increase (decrease) in cash and equivalents 56,842 93,873 Cash and equivalents, beginning of period 95,150 1,277 Cash and equivalents, end of period $ 151,992 $ 95,150 F-6 METEOR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Year Ended December 31 1996 1995 NON CASH INVESTING AND FINANCING ACTIVITIES Acquisition of CRI by issuance of stock accounted for as a reverse acquisition Property, plant and equipment $ -- $2,066,503 Deferred taxes $ -- $ (805,936) Stockholders' equity $ -- $1,260,567 Acquisition of property with debt $ 315,000 $ -- Accounts receivable replaced with note receivable $ 55,000 -- Other operating cash flow information: Cash paid for taxes $ 537,600 $ 34,152 Cash paid for interest $ 485,531 $ 53,005 The accompanying notes are an integral part of the financial statements. F-7 METEOR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Meteor Industries, Inc.("Meteor" or "Company") was incorporated on December 22, 1992, as a Colorado based holding company. Graves Oil & Butane Co., Inc. ("Graves"), which was acquired effective September 1, 1993, is a wholesale and retail distributor of petroleum products primarily in northern New Mexico, Colorado, Arizona and Utah. Graves also operates retail gasoline and convenience stores in northern New Mexico and Colorado. El Boracho, Inc., which was acquired September 1, 1993, holds a liquor license for use by an Albuquerque, New Mexico convenience store. Hillger Oil Company ("Hillger"), which was acquired effective April 1, 1995, is a wholesale and retail distributor of petroleum products primarily in southern New Mexico and Arizona. In addition, Hillger operates and owns through a subsidiary, Hatch Pyramid LLC, retail gasoline and convenience stores in southern New Mexico. Capco Resources, Inc. ("CRI"), is a holding Company involved in the development of a power project in Pakistan. The acquisition of CRI was accounted for as a reverse acquisition with CRI treated as the acquirer (See Note 15). The historical accounts of CRI are reflected in the 1995 financial statements for the full year. Information for Meteor is included since November 2, 1995, the date of acquisition. In 1996 the Company transferred its ownership of CRI to Meteor Holdings LLC ("MHL"). Innovative Solutions and Technologies, Inc. ("IST") is involved in providing environmental consulting. Capco Analytical Services, Inc. ("CAS") is involved in providing laboratory analysis. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION - The consolidated financial statements include the accounts of Meteor Industries, Inc., and its wholly owned subsidiaries, Graves, including its wholly owned subsidiary, El Boracho, Inc., Hillger including its wholly owned subsidiary Hatch Pyramid LLC, CAS and IST and Meteor's 73% owned subsidiary, Meteor Holdings LLC. All significant intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements. Actual results may differ from these estimates. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include certificates of deposit with original maturity dates of 3 months or less or cash in local banks. RESTRICTED CASH - The Company has revolving bank credit facilities which require the use of depository accounts from which collected funds are transferred to the lender. The lender then applies these collections to the revolving credit facilities. These accounts are controlled by the lender. INVENTORIES - Inventories are stated at the lower of cost or market. Inventories of petroleum products, greases and oils, and related products are stated at weighted average cost for Hillger and the last in first out (LIFO) basis for Graves. Sundries inventories are valued by the retail method and stated on the first in, first out (FIFO) basis which is lower than market. Approximately $324,000 of inventory is valued using the LIFO method. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost; major renewals and improvements are charged to the property and equipment accounts; while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets, are expensed currently. F-8 At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income. REVENUE RECOGNITION - Revenue from product sales is recognized when the product is delivered. Revenue from services is recognized when the services are performed and billable. DEPRECIATION - Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets. The estimated useful lives are as follows: DESCRIPTION LIVES Buildings and improvements 5 to 40 years Equipment 5 to 20 years COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER INTANGIBLES - The Company continually monitors its costs in excess of net assets acquired (goodwill) and its other intangibles to determine whether any impairment of these assets has occurred. In making such determination with respect to goodwill, the Company evaluates the performance using cash flows, on an undiscounted basis, of the underlying businesses which gave rise to such amount. With respect to other intangibles, which include the cost of license agreements, covenants not to compete and organization costs, the Company bases its determination on the performance using cash flows, on an undiscounted basis, of the related products. The Company's goodwill results from the acquisition of Hillger. The assets acquired in these transactions continue to contribute a significant portion of the Company's net revenues and earnings. Substantially all costs in excess of net assets (goodwill) of subsidiaries acquired are being amortized on the straight-line method over fifteen years. Other intangibles, which include the costs of license agreements, covenants not to compete and organization costs are being amortized over five years using the straight-line method. INCOME TAXES - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. ENVIRONMENTAL EXPENDITURES - Expenditures that relate to current operations are expended or capitalized as appropriate for each expenditure. Whenever an expenditure relates to an existing condition caused by past operations and does not contribute to future revenues, the expenditure is expensed currently. Liabilities are recorded when remedial efforts are probable and the cost can be reasonably estimated. EARNINGS PER SHARE - Earnings per common and common equivalent share are computed by dividing the net income by the weighted average number of common shares outstanding. The number of shares used in the earnings per share computation for 1996 is 3,184,397 and for 1995 is 489,035. The 1995 number of shares reflects CRI's equivalent share activity for ten months and Meteor share activity from the date of the reverse acquisition. F-9 NOTE 2 -- PROPERTY AND EQUIPMENT The major classifications of property and equipment are as follows: 1996 1995 DESCRIPTION AMOUNT AMOUNT Land $1,326,349 $ 1,334,374 Buildings and improvements 1,378,282 899,089 Equipment 6,512,753 6,511,294 9,217,384 8,744,757 Accumulated depreciation (940,016) ( 176,365) Net property and equipment $8,277,368 $ 8,568,392 NOTE 3 -- NOTES RECEIVABLE - RELATED PARTIES The Company has two outstanding notes receivable from its minority interest shareholder (100% preferred stockholder of Graves) in the amounts of $550,000 and $100,000. The $550,000 note is due October 1, 1997, and is collateralized by real estate. However, if the collateral is sold prior to satisfaction of this note, then one half of the lesser of the outstanding balance or the sale proceeds of the assets will be applied to reduce the liquidation preference of the preferred stock (discussed in Note 7), and the remaining one half will be applied to reduce the note payable to the minority interest shareholder. Interest is receivable semiannually and is determined at each anniversary based on Citibank of New York prime plus 2%. The interest rate at December 31, 1996 and 1995, was 10.25% and 10.50%, respectively. The $100,000 note is unsecured and is due October 1, 1997, with interest accrued from September 28, 1994. Interest is computed semiannually at Citibank of New York prime plus 2%, being 10.25% and 10.50% at December 31, 1996 and 1995, respectively. Accrued interest receivable at December 31, 1996 and 1995, totaled $45,793 and $36,210, respectively. The Company has a note receivable from another subsidiary of Capco Resources Ltd. (a 57% owner of the Company) in the amount of $1,516,000 due April 1, 2006. Interest is receivable semiannually at a rate of 9%. NOTE 4 -- INVESTMENTS IN CLOSELY HELD BUSINESSES The Company owns 50% of the Graves Rio Rancho No. 1 Ltd. Co. The investment was acquired in May 1994. The Company reports its investment in this limited liability company using the equity method. The carrying value was $133,263 at December 31, 1996. This investment is not publicly traded. The Company owns 50% of the Coors Pyramid L.L.C. The investment was acquired in June, 1996. The Company reports its investment in this limited liability company using the equity method. The carrying value was $153,680 at December 31, 1996. This investment is not publicly traded. The Company owns 33% of American L.P., Ltd. The investment was acquired in December 1995, for $100,014. The Company reports its investment in this limited liability Company using the equity method. This investment is not publicly traded. The carrying value was $65,302 at December 31, 1996. At December 31, 1996, the Company had invested $683,162 in Meteor Holdings LLC ("MHL") MHL owns an interest in Saba Power Company, Ltd. (the "Power Project"). The investment in the Power Project is reported using the cost method. The F-10 Company also entered into an agreement with Saba Petroleum Company ("Saba") whereby Saba, a related party, participated in the Power Project. Saba invested $250,000 in MHL resulting in MHL's total investment of $933,162 in the Power Project. Saba owns a .5% interest in the Power Project through its ownership of 27% of MHL. The Company owns 1.5% of the Power Project through its ownership of 73% of MHL. Saba's .5% interest in the project is subject to the same terms and conditions as the Company's 1.5% interest. These percentages, however, could be reduced in the event that other shareholders of Saba Power are required to make additional contributions to equity. MHL has obtained the right to sell its interest in Saba Power to an affiliate of one of the other shareholders for approximately the amount of its contribution on October 26, 1996, for a period of 120 days. The Company's investment in the Power Project is not expected to provide any significant cash flow to the Company for at least three to four years. Further, if during the next 2-3 years certain enhancements to the Power Project contracts are not obtained from the Government of Pakistan, then cash flow from the Power Project will not be earned by or distributed to the Company. During 1996, Saba Power Company Ltd. and the shareholders thereof, including the Company, completed the final negotiations with the project's construction lender and the engineering procurement and construction contractor was given a limited release to commence construction activities on the project, which was subsequently suspended. On March 4, 1997, all required equity capital was fully subscribed and paid by the shareholders in the form of cash or letters of credit; all documentation fees were paid to the Government of Pakistan; the construction contractor was given a full release. All required consents were obtained from the Government of Pakistan, and all defaults were cured. Due to the changing political climate in Pakistan and the economic risks involved, the Company's management decided not to invest additional capital in the project. All debt and equity financing for the Power Project was completed on March 4, 1997, in the total amount of over $150,000,000. In connection with this transaction, the Company's co-developer, Cogen Technologies, agreed to pay a consulting fee for services provided in 1996, to the founding partners, of which MHL's share totals $400,000 with the possibility of receiving up to an additional $350,000 over a three year period if certain contract enhancements are obtained from the Government of Pakistan; however, there can be no assurance that such enhancements can or will be obtained. MHL incurred approximately $124,000 in expenses to outside sources in providing these consulting services. The Company's share of the $276,000 in net revenues totals $200,000 by virtue of its 73% ownership of in MHL. The Company is not required to invest any additional capital related to the Power Project. If costs of the project exceed budget and capital is required then the Company will have the choice of investing more capital or suffering ordinary dilution to its ownership interest without incurring any penalties. NOTE 5 -- REVOLVING CREDIT FACILITY Revolving Credit Facility at December 31, consisted of the following: 1996 1995 $3,000,000 revolving bank credit facility, payable to Norwest Business Credit, Inc., bearing interest at Norwest Bank Minnesota, N.A., base rate plus 2.0% (10.25% and 11.25% at December 31, 1996 and 1995, respectively), due June 1999. Collateralized by trade accounts receivable and inventory of Graves $1,861,189 $2,039,944 F-11 $1,500,000 revolving bank credit facility, payable to Norwest Business Credit, Inc., bearing interest at Norwest Bank Minnesota, N.A., base rate plus 2% (10.25% and 10.75% at December 31, 1996 and 1995, respectively), due June 30, 1999. Collateralized by trade accounts receivable and inventory of Hillger $ 279,838 $ 235,568 The revolving bank credit facility agreements require the Company to maintain certain net worth and performance ratio levels and meet certain financial reporting requirements. As discussed in Note 1, payments on these loans are made through collateral cash accounts in the name of the lender. The unused borrowing base at December 31, 1996, was $938,606. Hillger was in default in its net worth requirement in December, 1996, Hillger received a waiver of this default. Graves and Hillger were in default of certain financial reporting requirements for which waivers were obtained. NOTE 6 -- LONG-TERM DEBT Long-term debt at December 31, consisted of the following: 1996 1995 Note payable to Theron Graves, semiannual payments of $200,000 including interest at prime plus 2% (10.25% and 10.75% at December 31, 1996 and 1995, respectively), collateralized by half of Graves common stock, matures October 1997. $1,759,139 $1,955,663 Note payable to First National Bank of Farmington, monthly payments of $19,000 including interest at prime plus 2% (10.25% and 10.75% at December 31, 1996 and 1995, respectively) collateralized by mortgage on buildings and land, matures January 1998. 211,872 388,048 Note payable to Norwest Business Credit, Inc., monthly payments of $10,417 plus interest at Norwest Bank of Minnesota, N.A. base rate plus 3.0% (11.25% and 11.75% at December 31, 1996 and 1995, respectively), collateralized by property and equipment, due June 1998. 187,494 312,498 Note payable to The Spot, quarterly payments of $14,326 plus interest at 7.00%, collateralized by mortgage on building and land, matures December, 2003. 315,000 -- Note payable to unaffiliated third party annual payout of $20,000 with no interest and no collateral, matures June, 2000. non-compete agreements 60,000 -- Note payable to Ford Motor Credit, monthly payments of $329 including interest at 11.9%, collateralized by equipment, matures December, 1999. 9,919 12,459 F-12 Note payable to GMAC, monthly payments of $257, including interest at 9.95%, collateralized by equipment, matures April, 2000. 8,533 -- Note payable to GMAC, monthly payments of $387, including interest at 9.95%, collateralized by equipment, matures April, 1999. 9,330 -- Note payable to GMAC, monthly payments of $604, including interest at 10.12%, collateralized by equipment, matures December, 1999. 18,681 23,754 Leases payable (Note 14) 42,163 63,399 Total 2,622,131 2,755,821 Current portion (2,176,357) (561,048) Long-term debt $ 445,774 $2,194,773 The following is a schedule by years of the repayment of long-term debt: PERIOD ENDING DECEMBER 31, AMOUNT 1997 $2,176,357 1998 161,973 1999 68,795 2000 58,453 2001 50,464 Remaining 106,089 Total $2,622,131 NOTE 7 -- MINORITY INTEREST IN SUBSIDIARIES The Series A Convertible Preferred Stock of Graves is limited voting stock and is entitled to cumulative annual dividends at a rate of 8% of the liquidation value. These securities are convertible into common stock of Graves or Meteor at the bid price on the date of conversion or 22.2% of Meteor based on whichever calculation yields fewer shares. The record holder has the right to vote on matters which affect the rights of the class and to elect two of the seven members of Graves' board of directors. In the event of default under the Meteor promissory note issued to purchase the Graves common stock, the holder of the Series A Convertible Preferred Stock has the ability to elect all of the Graves directors. The Company may at any time redeem all or any portion of the Series A Convertible Preferred Stock outstanding at an amount equal to the liquidation value plus all accrued and unpaid dividends. At any time after September 15, 2000, the record holder shall have the right to have the Company redeem all or any portion of the shares outstanding at the price stated above. No dividends have been declared by the board of directors. Dividends in arrears amount to $945,192 and $685,075 as of December 31, 1996 and 1995, respectively. The minority interest is recorded at its discounted value in the amount of $3,825,903. Dividends and accretion of the preferred stock discount are reflected in minority interest on the income statement. The Company owns 73% of MHL which owns 100% of Capco Resources, Inc. The minority interest of 27% is recorded at its cost basis of $326,000. F-13 NOTE 8 -- INCOME TAXES The provision for income taxes from continuing operations consists of the following components: 1996 1995 Current tax expense $359,476 $ 0 Deferred tax expense (benefit) 35,269 (1,470) Total provision (benefit) $394,745 $(1,470) The following reconciles the tax provision with the expected provision obtained by applying federal and state statutory rates to pretax income (loss) from continuing operations: 1996 1995 Expected tax provision $445,789 $ (3,933) Nondeductible expenses 4,407 2,425 Benefit of operating loss carryforwards (40,107) -- Other (15,344) 38 Total provision $394,745 $ (1,470) The deferred tax asset (liability) in the accompanying balance sheet includes the following components: 1996 1995 Current: Deferred tax asset(liability), federal $ (5,042) $ 130,616 Deferred tax asset(liability), state (742) 19,208 Net current deferred asset(liability) $ (5,784) $ 149,824 Noncurrent: Deferred tax liability, federal $(1,535,934) $(1,650,812) Deferred tax liability, state (237,306) (242,767) Net noncurrent deferred tax liability $(1,773,240) $(1,893,579) Net deferred tax liability (1,779,024) $(1,743,755) Components of deferred income taxes at December 31, were as follows: 1996 1995 Deferred tax asset: Accounts receivable $ 82,776 $ 80,272 Net operating loss carryforwards -- 40,170 Other 23,764 29,382 Total deferred tax liability 106,540 149,824 Deferred tax liability: Depreciation and amortization $(1,773,240) $(1,893,579) Other (112,324) -- Total deferred tax liability (1,885,564) (1,893,579) Net deferred tax liability (1,779,024) (1,743,755) NOTE 9 -- DEFINED CONTRIBUTION PLAN Graves adopted a 401(k) profit sharing plan effective January 1, 1994. Excluded from the plan are employees whose employment is governed by a collective bargaining agreement that includes retirement benefits. Contributions to the plan are voluntary through a salary reduction agreement up to a maximum of 15% F-14 of compensation. Matching contributions and other additional contributions may be made by the employer at the employer's discretion. No contributions were made for the year ended December 31, 1995 and contributions for the year ended December 31, 1996, were $17,014. Hillger adopted a 401(k) profit sharing plan effective April 1, 1994. No employees are excluded from the plan. Contributions to the plan are voluntary through a salary reduction agreement up to a maximum of 15% compensation. Matching contributions and other additional contributions may be made by the employer at the employer's discretion. For the years ended December 31, 1996 and 1995, Hillger's contribution was $13,056 and $4,346, respectively. NOTE 10 -- RELATED PARTY TRANSACTIONS The Company used space, telephone and secretarial services of a corporation controlled by officers of the Company. Expenses are paid by the Company as invoiced. At December 31, 1996 and 1995, amounts payable to related parties were $-0- and $21,256, respectively. These services were discontinued in 1996. The following are transactions that occurred with the minority interest (100% preferred stockholder) in Graves Oil & Butane Co., Inc.: The Company leases certain real estate from the preferred stockholder. For the years ended December 31, 1996 and 1995, rents paid were $54,643 and $9,102, respectively. The Company has land, buildings, and equipment in Springerville, Arizona, and equipment in St. Johns, Arizona, which were used by a relative of the preferred stockholder. The Company did not charge for the use of its properties but received revenue from the sale of its products. During the years ended December 31, 1996 and 1995, revenues reported amounted to $56,612 and $56,864, respectively. The properties are now closed and the Company is in the process of selling the land, buildings, and equipment. The Company sells its products to other entities controlled by the preferred stockholder. During the years ended December 31, 1996 and 1995, revenues reported amounted to $1,018,928 and $224,425, respectively. The preferred stockholder is indebted to the Company on two notes totaling $650,000 as described in Note 3. Interest receivable at December 31, 1996 and 1995, was $45,793 and $36,210, respectively. Interest earned during the years ended December 31, 1996 and 1995, was $66,790 and $11,677, respectively. The Company is indebted to the preferred stockholder for $1,759,139 as described in Note 6. Interest payable at December 31, 1996 and 1995, was $45,078 and $54,903, respectively. Interest expense during the years ended December 31, 1996 and 1995, for this note was $193,369 and $36,602, respectively. The Company has entered into a consulting agreement with the preferred stockholder which provides for payments of $1,500 per month and the use of a vehicle; fuel for such vehicle; a personal automobile; health, life, disability, and automobile insurance; and reimbursement of various expenses including club dues. During the years ended December 31, 1996 and 1995, the fees paid were $27,232 and $3,570, respectively. NOTE 11 -- ENVIRONMENTAL PROTECTION EXPENDITURES The Company utilizes underground tanks at various locations to store petroleum products and is therefore subject to various federal and state statutes F-15 concerning environmental protection, as well as the New Mexico Ground Water Protection Act. The various federal and state statutes are designed to identify environmental damage, identify hazardous material and/or operations, regulate operations engaged in hazardous activities, and establish procedures for remedial action as necessary. The state of New Mexico has recognized the potential cleanup costs resulting from regulations, and the New Mexico Ground Water Protection Act has included the establishment of a corrective action fund. The purpose of the fund is to provide monetary assistance in both assessing site damage and correcting the damage where such costs are in excess of $10,000. Assistance is not available to repair or replace underground tanks or equipment. The law specifies requirements which must have been met for an applicant to be eligible, including a provision that payments will be made in accordance with regulations (which have not yet been issued), and states that payment from the corrective action fund are limited to amounts in that fund. The Company is responsible for any contamination of land it owns or leases. However, the Company may have limitations on any potential contamination liabilities as well as claims for reimbursement from third parties. During the period ended December 31, 1996 and 1995, the Company expended $31,167 and $5,876, respectively, for site assessment and related cleanup costs. Included in other assets at December 31, 1996 and 1995, are unreimbursed costs from the State of New Mexico of $125,761 and $94,593, respectively. NOTE 12 -- COMMITMENTS AND CONTINGENCIES The Company is contingently liable for certain costs associated with leasehold improvements made by a supplier on property of customers of Graves. The liability for the costs is amortized over a five-year period with the Company becoming responsible for payment to the supplier if fuel purchases fail to meet certain volumes. At December 31, 1996 and 1995, the Company was contingently liable for $11,462 and $31,175, respectively, in unamortized costs. Future losses, if any, cannot be estimated at this time. The Company has in escrow 400,000 shares in a Canadian corporation and a $150,000 cash deposit related to the sale of a subsidiary in 1995. Both the deposit and the shares are subject to reduction depending on various factors related to the subsidiary sale. The Company has not recognized any gain or asset related to the escrow items. The Company is a co-signer on the Phillips Performance Fund, Inc. note for $504,982 for its 50% owned equity investment in Coors Pyramid LLC. NOTE 13 -- OPERATING LEASES The Company has entered into various noncancelable leases for land, buildings and equipment with terms ranging from 3 to 15 years. Under most leasing arrangements, the Company pays the property taxes, insurance, maintenance, and expenses related to the leased property. Total rent expense under operating leases for the years ended December 31, 1996 and 1995, was $771,716 and $123,723, respectively. Minimum future obligations on leases in effect at December 31, 1996, are: December 31, 1997 $ 759,000 December 31, 1998 $ 753,000 December 31, 1999 $ 705,000 December 31, 2000 $ 663,000 December 31, 2001 $ 665,000 Thereafter $ 2,145,000 F-16 Annual minimum future rental payments have not been reduced by $42,000 of sublease rentals to be received in the future under non-cancelable subleases. NOTE 14 -- CAPITAL LEASES As of December 31, leased property under capital leases by major classes was as follows: 1996 1995 Buildings and improvements $ 18,141 $ 18,141 Equipment 119,600 106,292 Accumulated amortization (69,492) (44,350) Net leased property $ 68,249 $ 80,083 The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1996: December 31, 1997 $ 32,785 December 31, 1998 5,670 December 31, 1999 3,832 December 31, 2000 3,832 December 31, 2001 2,875 Total minimum lease payments 48,994 Less: amount representing interest 6,831 Present value of minimum lease payments $ 42,163 NOTE 15 - BUSINESS COMBINATION Effective November 2, 1995, Meteor Industries, Inc. acquired 100% of the issued and outstanding common stock of Capco Resources Inc. ("CRI") in exchange for 1,745,000 shares of Meteor common stock. The shares were valued at $2.51 each for a total consideration of $4,379,950. The $2.51 value was determined using the market price of the Company's stock at the date of the transaction and averaging that with a recent private placement. The acquisition was treated as a reverse acquisition of Meteor by CRI. Accordingly, the results of operations of CRI are included in the accompanying financial statements since January 1, 1995. The results of operations of Meteor are included in the accompanying financial statements since the date of the acquisition. The total cost of the acquisition by CRI exceeded the book value of Meteor by $2,066,503. The excess was allocated to property and equipment based on appraised value and will be depreciated over the estimated remaining useful lives of the assets. The unaudited results of operations on a pro forma basis for the year ended December 31, 1995 are as follows: Revenues $57,721,328 Income (loss) from continuing operations $ (285,335) Income (loss) per share $ (.16) NOTE 16 -- STOCK OPTION AND INCENTIVE EQUITY PLANS The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Pro forma disclosures as if the Company adopted the expense recognition requirements under SFAS No. 123 in 1996 are presented below. F-17 A stock option plan providing for the issuance of incentive stock options and non-qualified stock options to the Company's key employees was approved by the Company's stockholders on April 15, 1994. Pursuant to the plan, 500,000 shares of the Company's $.001 par value common stock have been reserved for issuance. Options must be granted at prices not less than 100% of fair market value at the time the option is granted. Options issued to each employee vest in equal installments on the anniversary dates of the date the options were granted. No options have been exercised. The Company's common stock options were granted at exercise prices equal to, or in excess of, market prices on the grant dates, and therefore no compensation cost was recognized. The majority of the options outstanding at December 31, 1996 will vest by December 31, 1998. A summary of the status of the Company's stock option plans as of December 31, 1996 and 1995, is presented below: 1996 1995 ---------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- Outstanding at beginning of year 312,400 $ 3.60 108,000 $ 3.90 Granted 105,000 $ 3.50 236,000 $ 3.46 Exercised Forfeited (54,100) $ 3.63 (31,600) $ 3.54 Outstanding at end of year 363,300 $ 3.57 312,400 $ 3.60 Options exercisable at Year-End 123,934 $ 3.66 28,400 $ 3.95 Options Available for Future Grant 136,700 N/A 187,600 N/A NUMBER OF EXERCISE PRICE DATE OPTIONS GRANTED OPTIONS PER SHARE VESTING PERIOD - -------------------- --------- -------------- -------------- October 1, 1993 41,000 $ 3.00 5 years February 1, 1994 31,300 $ 5.25 3 years August 4, 1995 21,000 $ 3.00 3 years November 30, 1995 215,000 $ 3.50 3 years May 31, 1996 105,000 $ 3.50 5 years The following table summarizes information about stock options outstanding at December 31, 1996: OPTIONS WEIGHTED AVERAGE OPTIONS EXERCISABLE OUTSTANDING AT REMAINING CON- EXERCISABLE AT PRICE DECEMBER 31, 1996 TRACTUAL LIFE DECEMBER 31, 1996 - ----------- ----------------- ---------------- ----------------- 3.00 41,000 7 24,600 5.25 31,300 8 20,867 3.00 21,000 4 7,000 3.50 215,000 4 71,667 3.50 55,000 5 -0- F-18 Had compensation cost been determined based on the fair value at grant dates for stock option awards consistent with the SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 1996 and 1995, would have been reduced to the pro forma amounts indicated below: 1996 1995 Net Income: As reported $ 461,798 $1,215,337 Pro Forma $ 368,367 $1,138,931 Earnings per share: As reported $ .15 $ 2.49 Pro Forma $ .12 $ 2.33 The pro forma compensation expense based on the fair value of the options is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for grants: no dividends both years; an expected life of 5 years for both years, expected volatility of 95% and 57% for 1996 and 1995, respectively, and a risk free rate of return of 6.40 and 6.37 percent, respectively. The weighted average fair value of those purchase rights granted in 1996 and 1995 was $2.54 and $1.75 respectively. SFAS No. 123 does not apply to awards prior to 1995. In November 1995, Meteor granted an option to a consultant to purchase a total of 100,000 shares of Meteor's Common Stock. This option was exercisable at $2.50 per share, but expired unexercised on January 31, 1997. NOTE 17 -- DISCONTINUED OPERATIONS The 1995 financial statements have been restated to properly reflect income and the provision for income taxes related to discontinued operations. The net impact of these adjustments was as follows: As Previously As Reported Restated ------------- ---------- Income from discontinued operations $ 398,789 $ 441,197 Gain on disposal of discontinued operations 890,189 1,429,256 Net income 1,215,337 1,796,812 Net income per share $2.49 $3.67 a) On September 15, 1995, CRI sold the shares of Saba de Colombia, Inc., a U.S. subsidiary engaged in the exploration and development of petroleum and natural gas in Colombia, to a third party for consideration of $2,601,719, and realized a gain net of taxes on the sale of the shares of $1,429,256. The consideration received was in the form of: Cash $2,401,719 400,000 cumulative, convertible, redeemable first preferred shares of PetroSantander Inc. bearing dividends at 8.5% 200,000 $2,601,719 Cash of $150,000 and the preferred shares remain in escrow pending review by Colombian taxing authorities. F-19 b) In 1995, CRI transferred all of its holdings of Saba Petroleum Company and certain assets and liabilities to CRL and to CAPCO Acquisub, Inc., a wholly-owned subsidiary of CAPCO Resources Ltd. This transaction was recorded at book value. The net assets transferred had a book value of approximately $(400,114). The Company has been indemnified by Capco Resources Ltd. with respect to certain tax liabilities. The Company has recorded a receivable for $48,000 which was received prior to the issuance of the financial statements. The discontinued operations results for 1995 are as follows: YEAR ENDED DECEMBER 31, 1995 Income Oil and gas sales (net of royalties) $14,197,860 Other income 843,793 15,041,653 Expenses Production and operating 8,695 733 General and administrative 1,986,967 Interest and bank charges 1,065,011 Depreciation, depletion and amortization 2,413,743 14,161,454 Operating income 880,199 Income tax expense 452,620 Foreign exchange (gain) loss 51,237 Minority interest 114,655 Dilution gain (179,510) 439,002 Net Income $ 441,197 Gain on disposition, net of tax of $100,000 $ 1,429,256 NOTE 18 - NEW ACCOUNTING PRONOUNCEMENTS In February, 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 128, "Earning per Share" ("SFAS No.128"). The standard requires presentation of earnings per share on a "basic" (only actual shares outstanding) and "fully diluted" (actual shares outstanding plus the effect of other dilutive securities) basis. At this time, the Company does not expect the adoption of SFAS No.128 to have a material impact on the Company's earnings per share. NOTE 19 - SUBSEQUENT EVENTS In February and March of 1997, the Company sold shares and warrants to purchase the Company's Common Stock to 16 accredited investors in a private offering. A total of 130,000 shares of Common Stock and 130,000 warrants were sold in this offering for an aggregate of $520,000 in cash. The Company paid no commissions in connection with this offering. Each warrant allows the holder to purchase one share of Common Stock at $5.00 per share from March 28, 1998 until March 27, 1999. F-20 In March 1997 the Company entered into an out of court settlement with one of its former insurers. As a result, the Company will receive approximately $500,000 in cash after paying its related attorney's fees. Such funds are expected to be received by the end of April 1997. F-21 PRICE WATERHOUSE Chartered Accountants 1200, 425 - 1st Street S.W. Calgary, Alta. T2P 3V7 403/267-1200 Telecopier: 403/233-0883 May 17, 1995, except for Notes 3, 5, 10(b), 10(c) and 10(d) which are as of September 15, 1995 for Notes 3(a) and 10(c) December 1, 1995, for Notes 3(b) and 10(b) and December 29, 1995 for Notes 5 and 10(d) AUDITORS' REPORT To the Shareholder of CAPCO Resources Inc. We have audited the consolidated balance sheet of CAPCO Resources Inc. as at December 31, 1994 and 1993 and the consolidated statements of operations and retained earnings (deficit) and changes in financial position for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1994 and 1993 and the results of its operations and the changes in its financial position for the three years then ended in accordance with Canadian generally accepted accounting principles. /s/ Price Waterhouse Chartered Accountants COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING CONFLICT In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by significant uncertainties such as that referred to in the attached consolidated balance sheet of CAPCO Resources Inc. as at December 31, 1994 and 1993 and as described in Note 2 of the consolidated financial statements. Our report to the shareholders dated May 17, 1995, except for Notes 3, 5, 10(b), 10(c) and 10(d) which are as of September 15, 1995 for Notes 3(a) and 10(c), December 1, 1995, for Notes 3(b) and 10(b) and December 29, 1995 for Notes 5 and 10(d) is expressed in accordance with Canadian reporting standards which do not permit a reference to such an uncertainty in the auditors' report when the uncertainty is adequately disclosed in the financial statements. /s/ Price Waterhouse Chartered Accountants F-22 CAPCO RESOURCES INC. CONSOLIDATED BALANCE SHEET (in U.S. dollars) December 31 1994 1993 ASSETS Current assets Cash $ 1,277 $ - Accounts receivable 124,263 - 125,540 - Capital assets (Note 4) 250,344 - Other assets Investment in Saba Power Company Limited (Note 5) 150,865 - Deposits and other 12,776 - Net assets from discontinued operations (held primarily through shares of other companies) (Note 3) 572,036 660,023 $ 1,111,561 $ 660,023 LIABILITIES Current liabilities Accounts payable $ 287,814 $ - Accrued liabilities 114,729 - 402,543 - SHAREHOLDER'S EQUITY Share capital Authorized 10,000 of $.01 par value common voting shares Issued and outstanding 100 common voting shares 100 100 Contributed surplus 511,920 511,920 Retained earnings 196,998 148,003 709,018 660,023 $ 1,111,561 $ 660,023 Commitments and contingencies (Notes 5, 8 and 10) Approved by the Board ______________________ Director ______________________ Director F-23 CAPCO RESOURCES INC. CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) (in U.S. dollars) Year ended December 31 1994 1993 1992 Revenue Analytical services and other $ 472,148 $ - $ - Expenses General and administrative 577,024 2,282 - Depreciation and amortization 24,656 - - 601,680 2,282 - (Loss) for the year before discontinued operations (129,532) (2,282) - Income from discontinued operations (Note 3) 178,527 690,624 765,220 Net income for the year 48,995 688,342 765,220 Retained earnings (deficit), beginning of year 148,003 (540,339) (1,305,559) Retained earnings (deficit), end of year $ 196,998 $ 148,003 $ (540,339) (Loss) per share from continuing operations $(1,295.32) $ (22.82) $ - Earnings per share $ 489.95 $6,883.42 $ 7,652.20 F-24 CAPCO RESOURCES INC. CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (in U.S. dollars) Year ended December 31 1994 1993 1992 Cash provided by (used in) operating activities Loss for the year before discontinued operations $ (129,532) $ (2,282) $ - Items not affecting cash Depreciation and amortization 24,656 - - (104,876) (2,282) - Net change in non-cash working capital deficiency 278,280 - - Cash provided by (used in) discontinued operations 266,514 2,282 (511,920) 439,918 - (511,920) Cash used in investing activities Purchase of capital assets (275,000) - - Investment in Saba Power Company Limited (Note 5) (150,865) - - Deposits and other (12,776) - - (438,641) - - Cash provided by (used in) financing activities Issue of share capital - 100 - Contributed surplus - - 511,920 Increase in notes receivable, related party - (100) - - - 511,920 Net change in cash for the year 1,277 - - Cash, beginning of year - - - Cash, end of year $ 1,277 $ - $ - Supplemental disclosure of cash flow information Cash paid during year for Interest in discontinued operations $1,071,405 $790,960 $ 440,078 Income taxes in discontinued operations $1,315,480 $ 72,064 $ 112,873 F-25 CAPCO RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994 (U.S. dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada. Underlying these principles is the assumption that the Company will be able to realize its assets and pay its liabilities in the normal course of business (refer to Note 2). The more significant of the Company's accounting policies are: a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiary, CAPCO Analytical Services Inc. Oil and gas and other miscellaneous operations were treated as discontinued operations as a definitive merger agreement which contemplated the sale of these assets was signed January 20, 1995 (see Note 3). b) ANALYTICAL EQUIPMENT Analytical equipment is stated at cost less accumulated depreciation. Depreciation of equipment is provided principally on the straight-line method over the estimated useful life of the equipment, ranging from three to seven years. c) INVESTMENT IN SABA POWER COMPANY LIMITED The investment in Saba Power Company Limited is recorded using the equity method. All operations to date have been pre-operational project development costs and such costs have been capitalized. d) EARNINGS PER SHARE Earnings per share is calculated using the weighted monthly average number of shares outstanding. 2. CORPORATE ITEMS a) FINANCIAL ITEMS At December 31, 1994, the Company had a working capital deficiency of $277,003. The Company's ability to continue as a going concern and to realize its assets and to discharge its liabilities (see Notes 3 and 5) is dependent upon the Company obtaining profitable operations or receiving financial support from its controlling shareholder. b) CONTROL At December 31, 1994, the Company was indirectly controlled by an individual who indirectly held 85.29% of the issued common shares of the parent company, CAPCO Resources Ltd. (see Note 10(b)). F-26 c) CAPCO ANALYTICAL SERVICES INC. In April 1994, the Company formed CAPCO Analytical Services, Inc. ("CAS"). CAS acquired $275,000 in assets to be used in laboratory analyses. CAS assumed liabilities related to the assets of $230,000 and agreed to pay the remaining $45,000 by providing discount laboratory analysis to the seller. d) ACCOUNTING PRESENTATION The Company was incorporated in October 1993 and commenced operations when the U.S. assets of its parent company were transferred to it for corporate planning purposes. The historical comparative financial information has been presented as if the Company owned the assets from the time acquired by the parent company as the purchase transaction occurred between companies under common control. Subsequent to December 31, 1994, the majority of the assets transferred by its parent company to the Company were transferred to a related party or sold, and accounted for as discontinued operations. 3. DISCONTINUED OPERATIONS a) On September 15, 1995, the Company sold the shares of Saba de Colombia, Inc., a U.S. subsidiary engaged in the exploration and development of petroleum and natural gas in Colombia, to a third party for fair market value of $2,601,719, and realized a gain net of taxes on the sale of the shares of $1,426,395. The consideration received was in the form of: Cash $2,401,719 400,000 cumulative, convertible, redeemable first preferred shares of PetroSantander Inc. bearing dividends at 8.5% per annum 200,000 $2,601,719 $150,000 and the preferred shares remain in escrow pending review by Colombian taxing authorities. b) On December 1, 1995, the Company transferred to CAPCO Acquisub Inc., a wholly-owned subsidiary of CAPCO Resources Ltd., all of its holdings of Saba Petroleum Company and certain other assets and liabilities. This transaction was recorded at book value. The net assets transferred had a book value of approximately $1,220,000. The discontinued operations results for 1994, 1993, and 1992 are as follows: Year ended December 31 1994 1993 1992 Income ----------- ----------- ----------- Oil and gas sales (net of royalties) $16,561,431 $14,888,250 $10,736,986 Other income 996,658 729,234 516,759 17,558,089 15,617,484 11,253,745 Expenses Production and operating 10,807,058 8,392,673 6,070,781 General and administrative 2,530,929 2,998,152 1,775,247 Interest and bank charges 1,252,507 810,168 498,607 Depreciation, depletion and amortization 2,744,054 2,555,213 1,551,673 17,334,548 14,756,206 9,896,308 F-27 Income before the following 223,541 861,278 1,357,437 Income tax expense 540,043 486,947 675,471 Foreign exchange (gain) loss (373,787) (114,313) (224,115) Minority interest 249,665 (36,676) 140,861 Dilution gain (370,907) (165,304) - 45,014 170,654 592,217 Income for the year $ 178,527 $ 690,624 $ 765,220 The following summarizes the carrying value of major assets and liabilities of the discontinued operations transferred which has been reflected in the consolidated balance sheet as net assets from discontinued operation. The assets and liabilities were held primarily through investments in shares in other companies and were not directly owned: Year ended December 31 1994 1993 1992 ----------- ----------- ----------- Net working capital $(4,026,062) $(2,583,420) $(2,527,348) Capital assets 16,798,922 13,060,590 13,169,002 Other assets 652,415 680,222 378,768 Minority interest (3,080,083) (1,834,087) (1,548,533) Long-term debt (5,385,221) (4,875,000) (3,612,649) Deferred tax and other (664,617) (306,786) (37,000) Pension liability (1,844,360) (1,554,154) (1,765,644) Deferred foreign exchange gain (420,379) (450,270) - Due to affiliated companies (1,458,579) (1,476,872) (4,084,913) $ 572,036 $ 660,023 $ (28,317) 4. CAPITAL ASSETS December 31 --------------------------------- 1994 1993 Accumulated Net book Net book Cost amortization value value -------- ------------ -------- -------- Analytical equipment $275,000 $24,656 $250,344 $ - 5. INVESTMENT IN SABA POWER COMPANY LIMITED ("SABA POWER") During 1994, Saba Power and several partners received approval to develop, construct and operate a 109 Megawatt power generating plant in the Islamic Republic of Pakistan. The Company holds an indirect equity investment in Saba Power of 25.2%. At December 31, 1994, the Company's investment represents its share of project development costs incurred to that date. The recoverability of the investment is dependent upon successful completion of the project and commencement of commercial production. The Company and its partners provided a performance guarantee through a bank in Pakistan, in the amount of approximately $355,000 at December 31, 1994 (10,900,000 Rupees). The agreements between the partners and the Government of Pakistan have several conditions, the most significant being: -28- i) To maintain its 25.2% interest in the project, the Company must fund an initial equity investment of $6.75 million which includes earning a development fee from the project of $2.7 million, which must be reinvested as part of the Company's equity commitment. In a letter dated December 29, 1995, the Company agreed with the majority equity holder, Cogen Technologies Inc. ("Cogen"), that the Company would borrow all additional equity from Cogen, which is necessary to fund the amount in excess of $6.75 million, including interest at 15% per annum to be paid out of the cashflow of the project if not paid sooner by the Company. The Company also confirms that, at the financial closing (currently March 17, 1996) of the project, it will deposit 50% of the $4.05 million required, after receiving the development fee, and the amount borrowed from Cogen. The remaining 50% will be deposited with Cogen on the first anniversary of the financial closing. Should the Company not meet its required equity commitment, the majority equity partner will fund the difference and reduce the Company's interest proportionately. ii) Cogen agreed to fund all project development costs subsequent to September 30, 1994 and will carry on day to day operations of the project, including design, engineering, selecting equipment, obtaining financing and overseeing construction and operations. iii) The Company must reimburse its proportionate share of all project development costs, paid for by Cogen, including interest at 15% per annum. The Company will be responsible for its proportionate share of all remaining project costs as incurred. iv) On September 17, 1995 Saba Power entered into an agreement with the Government of Pakistan to increase the Performance Guarantee to $728,000 (23 million Rupees) valid up to January 18, 1996 and to move the date of Financial Close under the Letter of Support to December 17, 1995. The Company has not yet determined how it will obtain the necessary financing for its share of the initial equity commitment but is investigating options available to it. The Company has a commitment outstanding for $75,000 as a finders fee relating to the project and $60,750 as a letter of credit fee. 6. INCOME TAXES The provision for income taxes in the Statement of Operations varies from the amount that would be computed by applying the expected income tax rate of 37.5% (1993 and 1992 - 37.5%) to income from continuing operations. The principal reasons for the difference between such "expected" income tax expense and the amount actually recorded are as follows: Year ended December 31: 1994 1993 1992 - --------------------------------------- -------- ----- ----- Computed "expected" income tax recovery $(48,575) $(856) $ - Tax losses carried forward applied 48,575 856 - $ - $ - $ - 7. SEGMENTED INFORMATION During 1994 and 1993 the Company operated predominately in one industry segment - Laboratory Analysis in the United States and invested in a Power Project in Pakistan (see Note 5). F-29 United 1994 States Pakistan Other Total - ------------------------------- --------- --------- ---------- ---------- Revenue $ 472,148 $ - $ - $ 472,148 Segment operating profit (loss) $(129,532) $ - $ 178,527 $ 48,995 Identifiable assets $ 388,660 $ 150,865 $ 572,036 $1,111,561 Depreciation and amortization $ 24,656 $ - $2,744,054 $2,768,710 1993 Revenue $ - $ - $ - $ - Segment operating profit (loss) $ (2,282) $ - $ 690,624 $ 688,342 Identifiable assets $ - $ - $ 660,023 $ 660,023 Depreciation and amortization $ - $ - $2,555,213 $2,555,213 8. COMMITMENTS AND CONTINGENCIES The Company is subject to extensive Federal, State and local environmental laws and regulations. These laws, which are constantly changing, include regulations of the discharge of materials into the environment. The Company believes that it is in compliance with existing laws and regulations. LEASES The Company is committed under non-cancelable leases for office space, which expire in 1998. Future minimum payments are as follows: 1995 $80,400 1996 80,400 1997 80,400 1998 33,500 9. RELATED PARTY TRANSACTIONS Related party transactions are described as follows: The Company has in the past, advanced and received funds with related parties. All of these transactions have been included in discontinued operations (see Note 3), including the amount from net assets from discontinued operations. 10. SUBSEQUENT EVENTS a) On April 22, 1995, the Company signed a Project Development and Share-holders' Agreement relating to the power generating plant in Pakistan which converted the indirect equity holding into direct investment in Saba Power. b) On January 20, 1995, the Company's parent entered into a definitive merger agreement with Meteor Industries, Inc. (Meteor), a United States public company engaged in the wholesale and retail marketing of petroleum products with operations in Colorado and New Mexico. The Company's parent was to exchange shares of the parent for all the shares of Meteor. Although the number of shares was to be determined, the Company's parent would issue a maximum of 2,091,250 F-30 shares. This agreement was canceled and a new agreement between the Company, its parent, and Meteor was entered into and closed on December 1, 1995. The new agreement merged the Company with Meteor in a reverse takeover whereby all of the shares of the Company were exchanged for 1,745,000 shares of Meteor, representing 57.8% of the total outstanding shares of Meteor after the transaction. In connection with this agreement, the Company transferred its interest in Saba Petroleum Company and certain other assets and liabilities to another wholly-owned subsidiary of the Company's parent. This resulted in the discontinuation of operations in oil and gas production and in other assets, liabilities and revenues and expenses which are allocated to discontinued operation (see Note 3). The acquisition will be accounted for as a purchase of Meteor by the Company with income being recorded from the date of acquisition. The estimated purchase price allocation based upon the August 31, 1995 financial statements of Meteor is as follows: Current assets $ 6,682,503 Capital assets 7,677,652 Other assets 2,131,081 Current liabilities (6,950,574) Long-term liabilities (2,095,660) Deferred taxes (1,682,051) Minority interest (3,488,310) $ 2,274,641 c) On September 15, 1995, the Company sold its interest in Saba de Colombia, Inc. The proceeds of the sale were used to advance monies to Saba Petroleum Company and to pay some liabilities. The operations of Saba de Colombia, Inc. and the gain on sale are included in discontinued operations (see Note 3). d) Restructuring of the Saba Power commitment as disclosed in Note 5. 11. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") There are no material differences between Canadian and U.S. GAAP. F-31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. METEOR INDUSTRIES, INC. Dated: April 24, 1997 By: /s/ Edward J. Names Edward J. Names, President Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated. Dated: April 24, 1997 By: /s/ Ilyas Chaudhary Ilyas Chaudhary, Chief Executive Officer and Director Dated: April 24, 1997 By: /s/ Edward J. Names Edward J. Names, President and Director Dated: April 24, 1997 By: /s/ Dennis R. Staal Dennis R. Staal, Secretary/ Treasurer (Principal Financial and Accounting Officer) and Director F-32 EX-10.23 2 EXHIBIT 10.23 - 1997 INCENTIVE PLAN EXHIBIT 10.23 METEOR INDUSTRIES, INC. 1997 INCENTIVE EQUITY PLAN 1. PURPOSE. The purpose of this Plan is to attract and retain officers and other key employees of and consultants to Meteor Industries, Inc. (the "Corporation") and its Subsidiaries and to provide such persons with incentives and rewards for superior performance. 2. DEFINITIONS. As used in this Plan, "APPRECIATION RIGHT" means a right granted Pursuant to Section 5 of this Plan, including a Free-standing Appreciation Right and a Tandem Appreciation Right. "BASE PRICE" means the price to be used as the basis for determining the Spread upon the exercise of a Free-standing Appreciation Right. "BOARD" means the Board of Directors of the Corporation. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMON SHARES" means (i) shares of the Common Stock, $.001 par value, of the Corporation and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 10 of this Plan. "DATE OF GRANT" means the date specified by the Board of Directors on which a grant of Option Rights, Appreciation Rights, Performance Shares or Performance Units or a grant or sale of Restricted Shares or Deferred Shares shall become effective, which shall not be earlier than the date on which the Board of Directors takes action with respect thereto. "DEFERRAL PERIOD" means the period of time during which Deferred Shares are subject to deferral limitations under Section 7 of this Plan. "DEFERRED SHARES" means an award pursuant to Section 7 of this Plan of the right to receive Common Shares at the end of a specified Deferral Period. "EFFECTIVE DATE" shall have the meaning set forth in Section 17. "FREE-STANDING APPRECIATION RIGHT" means an Appreciation Right granted pursuant to Section 5 of this Plan that is not granted in tandem with an Option Right or similar right. "INCENTIVE STOCK OPTION" means an Option Right that is intended to qualify as an "incentive stock option" under Section 422 of the code or any successor provision thereto. "MANAGEMENT OBJECTIVES" means the achievement of performance objectives established pursuant to this Plan, which may be described in terms of Corporation-wide objectives or objectives that are related to the performance of the individual Participant, or the Subsidiary, division, department or function within the corporation or Subsidiary in which the Participant is employed or with respect to which the Participant provides consulting services. The Board of Directors may adjust Management Objectives and the related minimum acceptable level of achievement if, in the sole judgment of the Board of Directors, events or transactions have occurred after the Date of Grant that are unrelated to the performance of the Participant and result in distortion of the Management Objectives or the related minimum acceptable level of achievement. "MARKET VALUE PER SHARE" means the fair market value of the Common Shares as determined by the Board of Directors from time to time. "NONQUALIFIED OPTION" means an Option Right that is not intended to qualify as an Incentive Stock Option. "OPTIONEE" means the person so designed in an agreement evidencing an outstanding Option Right or the Successor of an Optionee, as the context so requires. "OPTION PRICE" means the purchase price payable upon the exercise of an Option Right. "PARTICIPANT" means a person who is selected by the Board of Directors to receive benefits under this Plan and (i) is at the time an officer, including without limitation an officer who may also be a member of the Board, or other key employee of or a consultant to the Corporation or any Subsidiary or (ii) has agreed to commence serving in any such capacity, or the Successor of a Participant, as the context requires. "PERFORMANCE PERIOD" means a bookkeeping entry that records the equivalent of one Common Share awarded pursuant to Section 8 of this Plan. "PERFORMANCE UNIT" means a bookkeeping entry that records a unit equivalent to $1.00 awarded pursuant to Section 8 of this Plan. "RELOAD OPTION RIGHTS" means additional Option Rights automatically granted to an Optionee upon the exercise of Option Rights pursuant to Section 4(f) of this Plan. "RESTRICTED SHARES" means Common Shares granted or sold pursuant to Section 6 of this Plan as to which neither the substantial risk of forfeiture nor the restrictions on transfer referred to in Section 6 hereof has expired. "RULE 16b-3" means Rule 16b-3, as promulgated and amended from time to time by the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended, or any successor rule to the same effect. "SPREAD" means, in the case of a Free-standing Appreciation Right, the amount by which the Market Value per share on the date when the Appreciation Right is exercised exceeds the Base price specified therein or, in the case of Tandem Appreciation Right, the amount by which the Market Value per share on the date when the Appreciation Right is exercised exceeds the Option Price specified in the related Option Right. "SUBSIDIARY" means any corporation in which the Corporation owns or controls directly or indirectly more than 50 percent of the total combined voting power represented by all classes of stock issued by such corporation at the time of the grant. "SUCCESSOR" of a Participant means the legal representative of the estate of a deceased Participant or the person or persons who shall acquire the right to exercise an award hereunder by bequest or inheritance or by reason of death of the Participant. "TANDEM APPRECIATION RIGHT" means an Appreciation Right granted pursuant to Section 5 of this Plan that is granted in tandem with an Option Right or any similar right granted under any other plan of the Corporation. 3. SHARES AND PERFORMANCE UNITS AVAILABLE UNDER THE PLAN. (a) Subject to adjustment as provided in Section 10 of this Plan, the number of Common Shares issued or transferred, plus the number of Common shares covered by outstanding awards granted under this Plan, shall not in the aggregate exceed 750,000 Common Shares, which may be Common Shares of original issuance of Common Shares held in treasury or a combination thereof. For the purposes of this Section 3(a): (i) Upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award shall again be available for issuance or transfer hereunder. (ii) Common Shares covered by any award granted under this Plan shall be deemed to have been issued or transferred, and shall cease to be available for future issuance or transfer in respect of any other award granted hereunder, at the earlier of the time when they are actual issued or transferred or the time when dividends or dividend equivalents are paid thereon; PROVIDED, HOWEVER, that Restricted Shares shall be deemed to have been issued or transferred at the earlier of the time when they cease to be subject to a substantial risk of forfeiture or the time when dividends are paid thereon. (b) The number of Performance Units that may be granted under this Plan shall not in the aggregate exceed 200,000. Performance Units that are granted under this Plan, but are paid in Common Shares or are not earned by the Participant at the end of the Performance Period, shall be available for future grants of Performance Units hereunder. 4. OPTION RIGHTS. The Board of Directors may from time to time authorize grants to Participants of options to purchase Common Shares upon such terms and conditions as the Board of Directors may determine in accordance with the following provisions: (a) Each grant shall specify the number of Common Shares to which it pertains; PROVIDED, HOWEVER, that no participant shall be granted Option Rights for more than 100,000 Common Shares in any one fiscal year of the Corporation, subject to adjustment as provided in Section 10 of this Plan. (b) Each grant shall specify an Option Price per Common Share, which may be less than, equal to or greater than the Market Value per Share on the Date of Grant; PROVIDED, HOWEVER, (i) the Option Price shall equal at east 75% of the Market Value per Share on the Date of Grant, or (ii) the Option Price with respect to each Incentive Stock Option shall not be less than 100% (or 110%, in the case of an individual described in Section 422(b)(6) of the Code (relating to certain 10% owners)) of the Market Value per Share on the Date of Grant. (c) Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalents acceptable to the Board of Directors, (ii) subject to Section 4(d), nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee and have a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Board of Directors may deem appropriate, including without limitation any form of consideration authorized under Section 4(d) below, on such basis as the Board of Directors may determine in accordance with this Plan and (iv) any combination of the foregoing. (d) On or after the Date of Grant of any Nonqualified Option, the Board of Directors may determine that payment of the Option Price may also be made in whole or in part in the form of Restricted Shares or other Common Shares that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Board of Directors on or after the Date of Grant, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 4(d), the Common Shares received by the Optionee upon the exercise of the Nonqualified Option shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; PROVIDED, HOWEVER, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of Common Shares received by the Optionee as applied to the forfeitable or restricted Common Shares surrendered by the Optionee. (e) Any grant may provide for deferred payment of the Option Price from the proceeds of sale through a broker on the date of exercise of some or all of the Common Shares to which the exercise relates. (f) On or after the Date of Grant of any Option Rights, the Board of Directors may provide the automatic grant to the Optionee of Reload Option Rights upon the exercise of Option Rights, including Reload Option Rights for Common Shares or any other noncash consideration authorized under Sections 4(c) and (d) above. (g) Successive grants may be made to the same Participant regardless of whether any Option Rights previously granted to the Participant remain unexercised. (h) Each grant shall specify the conditions, including as and to the extent determined by the Board of Directors, the period or periods of continuous employment, or continuous engagement of the consulting services, of the Optionee by the Corporation or any Subsidiary, or the achievement of Management Objectives, that are necessary before the Option Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Option Rights, including, without limitation, in the event of a change in control of the Corporation or other similar transaction or event. (i) Option Rights granted pursuant to this Section 4 may be Nonqualified Options or Incentive Stock Options or combinations thereof, as set forth in the award agreement. (j) On or after the Date of Grant of any Nonqualified Option, the Board of Directors may provide for the payment to the Optionee of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis, or the Board of Directors may provide that any dividend equivalents shall be credited against the Option Price. (k) No Option Right granted pursuant to this Section 4 may be exercised more than 10 years from the Date of Grant (except that, in the case of an individual described in Section 422(b)(6) of the Code (relating to certain 10% owners) who is granted an Incentive Stock Option, the term of such Option Right shall be no more than five years from the Date of Grant). (l) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by an officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Board of Directors may determine consistent with this Plan. (m) The aggregate Market Value per Share, determined as of the Date of Grant, of the Common Shares for which any Optionee may be awarded Incentive Stock Options which are first exercisable by the Optionee during any calendar year under this Plan (or any other stock option plan required to be taken into account under Section 422(b) of the Code) shall not exceed $100,000. (n) If and to the extent otherwise advisable herein or under the applicable option agreement, upon and after the death of an Optionee, such Optionee's Option Rights, to the extent exercisable after death may be exercised by the Successors of the Optionee. An Option Right may be exercised, and payment in full of the aggregate Option Price made, by the Successors of an Optionee only by written notice (in the form prescribed by the Board of Directors) to the Corporation specifying the number of Common Shares to be purchased. Such notice shall state that the aggregate Option Price will be paid in full, or that the Option Right will be exercised as otherwise provided hereunder, in the discretion of the Corporation or the Board of Directors, if and as applicable. 5. APPRECIATION RIGHTS. The Board of Directors may also authorize grants to Participants of Appreciation Rights. An Appreciation Right shall be a right of the Participant to receive from the Corporation an amount, which shall be determined by the Board of Directors and shall be expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of an Appreciation Right. Any grant of Appreciation Rights under this Plan shall be upon such terms and conditions as the Board of Directors may determine in accordance with the following provisions: (a) Any grant may specify that the amount payable upon the exercise of an Appreciation Right may be paid by the Corporation in cash, Common Shares or any combination thereof and may (i) either grant to the Participant or reserve to the Board of Directors the right to elect among those alternatives or (ii) preclude the right of the Participant to receive and the Corporation to issue Common Shares or other equity securities in lieu of cash; PROVIDE, HOWEVER, that no form of consideration or manner of payment that would cause Rule 16B-3 to cease to apply to this Plan shall be permitted. (b) Any grant may specify that the amount payable upon the exercise of an Appreciation Right shall not exceed a maximum specified by the Board of Directors on the Date of Grant. (c) Any grant may specify (i) a waiting period or periods before Appreciation Rights shall become exercisable and (ii) permissible dates or periods on or during which Appreciation Rights shall be exercisable. (d) Any grant may specify that an Appreciation Right may be exercised only in the event of a change in control of the Corporation or other similar transaction or event. (e) On or after the Date of Grant of any Appreciation Rights, the Board of Directors may provide for the payment to the Participant of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis. (f) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Optionee and shall contain such other terms and provisions as the Board of Directors may determine consistent with this Plan. (g) Regarding Tandem Appreciation Rights only: Each grant shall provide that a Tandem Appreciation Right may be exercised only (i) at a time when the related Option Right (or any similar right granted under any other plan of the Corporation) is also exercisable and the Spread is positive and (ii) by surrender of the related Option Right (or such other right) for cancellation. (h) Regarding Free-standing Appreciation Rights only: (i) Each grant shall specify in respect of each Free-standing Appreciation Right a Base Price per Common Share, which shall be equal to or greater than the Market Value per Share on the Date of Grant; (ii) Successive grants may be made to the same Participant regardless of whether any Free-standing Appreciation Rights previously granted to the Participant remain unexercisable; PROVIDED, HOWEVER, that no participant shall be granted more than 100,000 Free-standing Appreciation Rights in any one fiscal year of the Corporation, subject to adjustments as provided in Section 10 of this Plan; (iii) Each grant shall specify the conditions, including as and to the extent determined by the Board of Directors, the period or periods of continuous employment, or continuous engagement of the consulting services, of the Participant by the Corporation or any Subsidiary, or the achievement of Management Objectives, that are necessary before the Free-standing Appreciation Rights or installments thereof shall become exercisable, and any gant may provide for the earlier exercise of the Free-standing Appreciation Rights, including, without limitation, in the event of a change in control of the Corporation or other similar transaction or event; and (iv) No Free-standing Appreciation Right granted under this Plan may be exercised more than 10 years from the Date of Grant. 6. RESTRICTED SHARES. The Board of Directors may also authorize grants or sales to Participants of Restricted Shares upon such terms and conditions as the Board of Directors may determine in accordance with the following provisions: (a) Each grant or sale shall constitute an immediate transfer of the ownership of Common Shares to the Participant in consideration of the performance of services, or as and to the extent determined by the Board of Directors, the achievement of Management Objectives, entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Market Value per Share on the Date of Grant. (c) Each grant or sale shall provide that the Restricted Shares covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of section 83 of the Code for a period to be determined by the Board of Directors on the Date of Grant, and any grant or sale may provide for the earlier termination of such period, including without limitation, in the event of a change in control of the Corporation or other similar transaction or event. (d) Each grant or sale shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Board of Directors on the Date of Grant. Such restrictions may include, without limitation, rights of repurchase or first refusal in the Corporation or provisions subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. (e) Any grant or sale may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional Common Shares, which may be subject to the same restrictions as the underlying award or such other restrictions as the Board of Directors may determine. (f) Each grant or sale shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board of Directors may determine consistent with this Plan. Unless otherwise directed by the Board of Directors, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to the Restricted Shares, shall be held in custody by the Corporation until all restrictions thereon lapse. 7. DEFERRED SHARES. The Board of Directors may also authorize grants or sales of Deferred Shares to Participants upon such terms and conditions as the Board of Directors may determine in accordance with the following provisions: (a) Each grant or sale shall constitute the agreement by the Corporation to issue or transfer Common Shares to the Participant in the future in consideration of the performance of services rendered, subject to the fulfillment during the Deferral Period of such conditions as the Board of Directors may specify. (b) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Market value per Share on the Date of Grant. (c) Each grant or sale shall provide that the Deferred Shares covered thereby shall be subject to a Deferral Period, which shall be fixed by the Board of Directors on the Date of Grant, and any grant or sale may provide for the earlier termination of the Deferral Period, including without limitation, in the event of a change in control of the Corporation or other similar transaction or event. (d) During the Deferral Period, the Participant shall not have any right to transfer any rights under the subject award, shall not have any rights of ownership in the Deferred Shares and shall not have any right to vote the Deferred Shares, but the Board of Directors may on or after the Date of Grant authorize the payment of dividend equivalents on the Deferred Shares in cash or additional Common Shares on a current, deferred or contingent basis. (e) Each grant or sale shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board of Directors may determine consistent with this Plan. 8. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Board of Directors may also authorize grants of Performance Shares and Performance Units, which shall become payable to the Participant upon the achievement of specified Management Objectives, upon such terms and conditions as the Board of Directors may determine in accordance with the following provisions: (a) Each grant shall specify the number of Performance Shares or Performance Units to which it pertains, which may be subject to adjustment to reflect changes in compensation or other factors. (b) The Performance Period with respect to each Performance Share or Per-formance Unit shall be determined by the Board of Directors on the Date of Grant and may be subject to earlier termination, including, without limitation, in the event of a change in control of the Corporation or other similar transaction or event. (c) Each grant shall specify the Management Objectives that are to be achieved by the Participant. (d) Each grant shall specify in respect of the specified Management Objectives a minimum acceptable level of achievement below which no payment will be made and shall set forth a formula for determining the amount of any payment to ve made if performance is at or above the minimum acceptable level but falls short of full achievement of the specified Management Objectives. (e) Each grant shall specify the time and manner of payment of Performance Shares or Performance Units that shall have been earned, and any grant may specify that any such amount may be paid by the Corporation in cash, Common Shares or any combination thereof and may either grant to the Participant or reserve to the Board of Directors the right to elect among those alternative; PROVIDED, HOWEVER, that no form of consideration or manner of payment that would cause Rule 16b-3 to case to apply to this Plan shall be permitted. (f) Any grant of Performance Shares may specify that the amount payable with respect thereto may not exceed a maximum specified by the Board of Directors on the Date of Grant. Any grant of Performance of Units may specify that the amount payable, or the number of Common Shares issued, with respect thereto may not exceed maximums specified by the Board of Directors on the Date of Grant. (g) On or after the Date of Grant of Performance Shares, the Board of Directors may provide for the payment to the Participant of dividend equivalents thereon in cash or additional Common Shares on a current, deferred or contingent basis. (h) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board of Directors may determine consistent with this Plan. 9. TRANSFERABILITY. (a) No Option Right or other derivative security (as that term is used in Rule 16b-3) granted under this Plan may be transferred by a Participant except by will or the laws of descent and distribution. Option Rights and Appreciation Rights granted under this Plan may not be exercised during a Participant's lifetime except by the Participant or, in the event of the Participant's legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. (b) Any grant made under this Plan may provide that all of any part of the Common Shares that are to be issued or transferred by the Corporation upon the exercise of Deferred Shares or in payment of Performance Shares or Performance Units, or are no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 6 of this Plan, shall be subject to further restrictions upon transfer. 10. ADJUSTMENTS. The Board of Directors may make or provide for such adjustments in the number of Common Shares covered by outstanding awards granted hereunder, the Option Prices per Common Share or Base Prices per Common Share applicable to any such awards, and the kind of shares (including shares of another issuer) covered thereby, as the Board of Directors may in good faith determine to be equitably required in order to prevent dilution or expansion of the rights of Participants that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Corporation or (b) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of warrants or other rights to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Board of Directors may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Board of Directors may on or after the Date of Grant provide in the agreement evidencing any award under this Plan that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Board of Directors may provide that the holder will automatically be entitled to receive such an equivalent award. The Board of Directors may also make or provide for such adjustments in the maximum number of Common Shares specified in Section 3(a) of this Plan, the maximum number of Performance Units specified in Section 3(b), and the maximum number of Common Shares and Free-standing Appreciation Rights specified in Sections 4(a) and 5(h)(ii) of this Plan as the Board of Directors may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 10. 11. FRACTIONAL SHARES. The Corporation shall not be required to issue any fractional Common Shares pursuant to this Plan. The Board of Directors may provide for the elimination of fractions or for the settlement thereof in cash. 12. WITHHOLDING TAXES. To the extent that the Corporation is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Corporation for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. At the discretion of the Board of Directors and subject to the provision so Rules 16b-3, any such arrangements may include relinquishment of a portion of any such payment or benefit. The Corporation and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 13. CERTAIN TERMINATIONS OF EMPLOYMENT OR CONSULTING SERVICES, HARDSHIP AND APPROVED LEAVES OF ABSENCE. Notwithstanding any other provision of this Plan to the contrary, in the event of termination of employment or consulting services by reason of death, disability, normal retirement, early retirement, with the consent of the Corporation, termination of employment or consulting services to enter public service with the consent of the Corporation or leave of absence approved by the Corporation, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right or Appreciation Right that is not immediately and fully exercisable, any Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, any Deferred Shares as to which the Deferral Period is not complete, any Performance Shares or Performance Units that have not been fully earned, or any Common Shares that are subject to any transfer restriction pursuant to Section 9b) of this Plan, the Board of Directors may take any action that it deems to be equitable under the circumstances or in the best interests of the Corporation, including without limitation, waiving or modifying any limitation or requirement with respect to any award under this Plan. 14. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by a Board of Directors of the Board, which shall be composed of not less than two members of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3. (b) The interpretation and construction by the Board of Directors of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares or Performance Units, and any determination by the Board of Directors pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Board of Directors shall be liable for any such action taken or determination made in good faith. 15. AMENDMENTS AND OTHER MATTERS. (a) This plan may be amended from time to time by the Board of Directors; PROVIDED, HOWEVER, that except as expressly authorized by this Plan, no such amendment shall increase the number of Common Shares specified in Section 3(a) hereof, increase the number of Performance Units specified in Section 3(b) hereof, or otherwise cause this Plan to cease to satisfy any applicable condition of Rule 16b-3, without further approval of the stockholders of the Corporation. (b) With the concurrence of the affected Participant, the Board of Directors may cancel any agreement evidencing Option Rights or any other award granted under this Plan. In the event of any such cancellation, the Board of Directors may authorize the granting of new Option Rights or other awards hereunder, which may or may not cover the same number of Common Shares or Performance Units as had been covered by the canceled Option Rights or other award, at such Option Price, in such manner and subject to such other terms, conditions and discretion as would have been permitted under this Plan had the canceled Option Rights or other award not been granted. (c) The Board of Directors may grant under this Plan any award or combination of awards authorized under this Plan in exchange fro the cancellation of an award that was not granted under this Plan, including without limitation any award that was granted prior to the adoption of this Plan by the Board, any and such award or combination of wards so granted under this Plan may or may not cover the same number of Common Shares as had been covered by the canceled ward and shall be subject to such other terms, conditions and discretion as would have been permitted under this Plan and the canceled award not been granted. (d) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Corporation or any Subsidiary and shall not interfere in any way with any right that the Corporation or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time. (e) (i) To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as an Incentive Stock Option from so qualifying, any such provision shall be null and void with respect to any such Option Right; PROVIDED, HOWEVER, that any such provision shall remain in effect with respect to other Option Rights, and there shall be no further effect on any provision of this Plan. (ii) Any award that may be made pursuant to an amendment to this Plan that shall have been adopted without the approval of the stockholders of the Corporation shall be null and void if it is subsequently determined that such approval was required in order for this Plan to continue to satisfy the applicable conditions of Rule 16b-3. 16. TERMINATION OF THE PLAN. No further awards shall be granted under this Plan after the passage of 10 years from the date on which this Plan is first approved by the stockholders of the Corporation. 17. EFFECTIVE DATE. The effective date of this Plan (the "Effective Date") shall be January 2, 1997, provided, however, that this Plan and each award granted hereunder shall be void and of no force or effect until and unless this Plan shall have been approved by a vote of the holders of the majority of the Common Shares of the Corporation present, or represented, and entitled to vote at a meeting duly held in accordance with Colorado law. 18. NONTRANSFERABILITY. Each award granted under this Plan shall by its terms nontransferable by the Participant except by will or the laws of decent and distribution of the state wherein the Participant is domiciled at the time of his death; provided, however, that the Board of Directors may (but need not) permit other transfers, to the extent consistent with Rule 16b-3; where the Board of Directors concludes that such transferability does not result in accelerated taxation and is otherwise appropriate and desirable. EX-10.24 3 EXHIBIT 10.24 - SECOND AMENDED AND RESTATED AGREEMENT SECOND AMENDED AND RESTATED AGREEMENT BETWEEN METEOR INDUSTRIES, INC., CAPCO RESOURCES, INC. AND SABA PETROLEUM COMPANY This Agreement is made effective on the 27th day of December 1996, between Meteor Industries, Inc. ("Meteor"), a Colorado corporation, Capco Resources, Inc. ("Capco"), a Delaware corporation, and Saba Petroleum Company ("Saba"), a Colorado Corporation. Whereas Capco and Saba entered into a certain agreement on April 23, 1996 (the "Original Agreement" attached hereto as Exhibit A), relating to Saba's participation in the Saba Power Project (as defined below), and Whereas Capco and Saba amended and restated the Original Agreement on August 1, 1996, pursuant to the Amended and Restated Agreement (attached hereto as Exhibit B), and Whereas Meteor, Capco and Saba desire to amend and restate the agreements described above pursuant to this Second Amended and Restated Agreement, and Whereas Capco entered into a Project Development and Shareholders' Agreement dated June 2, 1995, a Letter Agreement with Cogen Technologies dated December 27, 1996; a Mutual Release and Termination Agreement dated December 27, 1996; a Capitalization Agreement dated November 26 ,1996; and a Shareholders' Agreement dated February 25, 1997, (collectively referred to as the "Shareholders' Agreements"), whereby Capco participated in the Saba Power Project, a proposed 115 Megawatt power plant to be located in Lahore, Pakistan (the "Project"), and Whereas Saba, through its counsel has reviewed the documentation relating to the Project; Whereas Meteor, Capco and Saba have negotiated terms pursuant to which Saba shall participate in the Saba Power Project; In consideration of the mutual covenants and agreements contained herein, it is hereby agreed among the parties as follows: 1) Saba has invested $250,000 in order to own a .5% (27% of 2%) interest in the Project. Saba owns this .5% interest by virtue of its ownership of 27% of Meteor Holdings LLC. 2) If required, Capco shall hold Saba's interest in trust pursuant to a written agreement until such time as it is determined that such interest can be directly assigned to Saba without any detrimental effect to the parties hereto or the Project as a whole. 3) Meteor, through Capco, has invested approximately $684,000 in order to own a 1.5% (73% of 2%) interest in the Project. Meteor owns this 1.5% interest by virtue Of its ownership of 73% of Meteor Holdings LLC. 4) In connection with the Project, Capco will be receiving from Cogen Technologies: 1) a consulting fee of $400,000 to be paid on or before June 1' 1997; and 2) a contingent fee of up to $350,000 should Cogen accomplish certain "Enhancement Events" as defined in the Shareholders' Agreements. 5) After receiving the $400,000 consulting fee, Capco shall pay Nauman Umar $86,500 and Interlink $37,500. The balance of the funds ($276,000) shall be divided between Meteor $200,000 (73%) and Saba $76,000 (27%). 6) If and when any funds are received by Capco pursuant to the $350,000 contingent fee, 27% of such funds will be paid to Saba and 73% of such funds will be paid to Meteor. 7) This Agreement shall be governed by the laws of the State of Colorado. 8) This Agreement may be signed in counterpart, each of which shall be deemed an original and together shall constitute one and the same instrument. 9) This Agreement contains the entire agreement and understanding among the parties hereto concerning the Project and supersedes all prior and contemporaneous, agreements, discussions, negotiations and understandings either written or oral. No amendment or modif~cation of any of the terms and conditions contained herein shall be made except by a duly authorized written agreement. SABA PETROLEUM COMPANY CAPCO RESOURCES, INC. By:/s/ Ilyas Chaudhary By: /s/ Edward J. Names Ilyas Chaudhary, President Edward J. Names, President METEOR INDUSTRIES, INC. By: /s/ Edward J. Names Edward J. Names, President -2- EX-10.25 4 EXHIBIT 10.25 - SHAREHOLDER'S AGREEMENT EXHIBIT 10.25 SHAREHOLDERS' AGREEMENT This Shareholders' Agreement (this "Agreement") is made and entered into as of this 25th day of February, 1997, by and among Cogen Technologies Saba Capital Company, L.L.C., a limited liability company duly formed and existing under the laws of Delaware ("Cogen"), Capco Resources, Inc., a corporation duly organized and existing under the laws of Delaware ("Capco"), and Coastal Saba Power Ltd., a company duly organized and existing under the laws of Mauritius ("Coastal SP") (Cogen, Capco and Coastal SP being hereinafter referred to as the "Parties", and each, a "Party"). W I T N E S S E T H : WHEREAS, a Cogen Affiliate and certain other entities entered into a Project Development and Shareholders' Agreement dated June 2, 1995 (the "Initial Agreement") as amended by an Amendment to Project Development and Shareholders' Agreement dated March 30, 1996 (the Initial Agreement, as so amended, being herein called the "Original Agreement"), relating to the development, financing, construction and operation of a power generating plant at or near Farouqabad, Pakistan (the "Project"), WHEREAS, the Cogen Affiliate has subsequently assigned its interest under the Original Agreement to Cogen, . WHEREAS, the Original Agreement has been terminated, and WHEREAS, Coastal SP, Cogen and Saba Power Company (Private) Limited, a private limited company duly organized and existing under the laws of the Islamic Republic of Pakistan (the "Company"), have entered into a Purchase and Sale Agreement dated as of November 26, 1996 (the "Purchase Agreement"), providing, inter alia, that Coastal SP will become a Shareholder of the Company, NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants and conditions contained herein the Parties agree as follows: ARTICLE I STRUCTURE AND OWNERSHIP 1.1 Status as a Partnership. (a) It is the intention of the Shareholders that the Company be treated as a partnership for tax purposes in the United States. The Company will file an election with the U.S. Internal Revenue Service to be treated as a partnership if a majority in interest of the Shareholders believes such an election is desirable (in which case each Shareholder will take whatever actions are required to make the election). (b) This Agreement and the Articles of Association of the Company should be read together as creating a single partnership and as constituting a single partnership agreement for tax purposes in the United States and for no other purposes. 1.2 Ownership and Equity Funding. (a) The Parties acknowledge that the Project capital cost is approximately $152 million based on current projections and that approximately $43 million of such cost is to be funded as base equity capital ("Base Equity") and approximately $109 million in third-party limited recourse debt. The Parties agree that Cogen shall contribute 7.25%, Capco shall contribute 2% and Coastal SP shall contribute 90.75% of the total Base Equity required for the Project. The Lenders have required, pursuant to the Shareholders' Direct Agreement, that the obligation to provide unfunded Base Equity be supported by letters of credit ("Base Equity L/C's"). The Lenders have also required, among other things, (i) equity support for cost overruns during the construction period in the form of irrevocable and unconditional letters of credit ("Cost Overrun L/C"), (ii) equity support during the operational period in the form of irrevocable and unconditional letters of credit ("Restoration Reserve L/C"), and (iii) equity support during the operational period in the form of debt service reserve letters of credit ("Debt Service Reserve L/C") (the Cost Overrun L/C, Restoration Reserve L/C, and the Debt Service Reserve L/C being collectively referred to as the "Equity Support L/C's"). After the Closing Date, Coastal SP shall provide 92.751 of Base Equity, Cogen shall provide 7.25% of Base Equity and each of Coastal SP and Cogen shall provide Base Equity L/C's in amounts equal to $26,004,898 (in the case of Coastal SP) and $2,032,728 (in the case of Cogen) pursuant to the Shareholders' Direct Agreement. In addition to providing its share of Base Equity and the Base Equity L/C, as described in the foregoing sentence and subject to Section 1.2(b), each of Coastal SP and Cogen shall be required to provide Equity Support L/C's through irrevocable and unconditional letters of credit acceptable to the Lenders in amounts equal to 90.75% (in the case of Coastal SP) and 9.25% (in the case of Cogen) of the aggregate amount of each Equity Support L/C that is required to be provided by the Shareholders pursuant to the Shareholders Direct Agreement except that Coastal SP shall provide 100% of the Cost Overrun L/C in an amount equal to $11,500,000. Capco has contributed 2% of the Base Equity through recognition of certain capitalized development costs and will not be required to provide any Base Equity L/C or any Equity Support L/Cs. Subject to Section 1.2(b), each Party shall be required to provide its equity at the times and in the form required by the Lenders, and as proposed herein. (b) Each of Coastal SP and Cogen shall utilize its total unfunded equity as and when funded to subscribe for shares of the Company, and a proportionate share of the Base Equity L/C and Equity Support L/C's shall be drawn and shares shall be issued to Coastal SP and Cogen, respectively, in proportion to the amount of such letters of credit provided by Coastal SP and Cogen, in accordance with this Section 1.2, except that, notwithstanding anything to the contrary in the Shareholders' Direct Agreement, Coastal SP shall also provide the Equity Support L/C's to the extent of the Special Shares (defined in Section 2.4(a)). (c) In recognition of Capco's not posting any Base Equity L/C or Equity Support L/C's, Capco expressly waives in favor of Cogen and Coastal SP any preemptive rights to acquire shares pursuant to draws thereunder or, in lieu of such draws, sums deposited (pursuant to the Amended and Restated Shareholders' Direct Agreement) in respect of the purposes for which such letters of credit were posted. In the event that the Lenders draw upon any letter of credit posted by Coastal SP or Cogen, Coastal SP's, Cogen's and Capco's equity ownership in the Company shall be affected as follows: the Party posting the letter of credit shall become the owner of the shares purchased with the proceeds of each draw thereunder, and all right, title and interest in such shares shall vest in such Party (free and clear of any encumbrance other than pursuant to the Security Documents and the Indemnity Agreement). Notwithstanding the provisions of Section 1.2(b), any shares issued against the proceeds of each draw under the Base Equity L/C posted by Coastal SP that would cause the proportion of shares of the Company owned by Coastal SP to exceed 90.75% shall be transferred and reissued without payment of further consideration by Cogen other than the transfer to Coastal SP of the right to receive the Capital Payment (as defined in the Equity-Put Agreement) pursuant to the Equity-Put Agreement. (d) (i) In the event that the Lenders draw upon any Equity Support L/C posted by Coastal SP for the account of Cogen or Capco and Cogen or Capco, as the case may be, fails to reimburse Coastal SP within ten (10) days of notice of that draw for its share of the draw attributable to the Special Shares, Coastal SP's, Cogen's and Capco's equity ownership in the Company shall be affected as follows: Coastal SP shall have the right to become the owner of the shares purchased with the proceeds of the draw for which Cogen or Capco, as the case may be, has failed to make timely reimbursement, and all right, title and interest in such shares shall, following the above 10-day period, immediately vest in Coastal SP (free and clear of any encumbrance other than pursuant to the Security Documents and the Indemnity Agreement). (ii) If the Lenders have drawn on the Debt Service Reserve L/C posted by Coastal SP for the account of Cogen or Capco, each of the Shareholders shall decide, within fifteen (15) days of notice of that draw, whether it will replenish a share of the Debt Service Reserve L/C in the proportions set forth in Section 1.2(b) hereof. If Cogen or Capco decides not to replenish its pro rata share of such Debt Service Reserve L/C, Coastal SP may replenish that unreplenished portion of the Debt Service Reserve L/C. If Coastal SP so replenishes such Debt Service Reserve L/C, Coastal SP shall be paid an amount equal to fifteen percent (15%) per annum of the amount not replenished by the non-replenishing Shareholder. That amount shall be paid out of the Company's distributions which, but for this clause (ii), would be payable to the non-replenishing Shareholder, excluding distributions made with respect to Special Shares, made through the Agent before any other distributions are made by the Agent to that Shareholder, and the Agent shall reduce the distributions to that Shareholder accordingly. The foregoing amount shall be paid to Coastal SP so long as such replenished Debt Service Reserve L/C remains in effect or is drawn upon and the excess amount is not replenished. 1.3 Shareholders' and Board of Directors' Actions. (a) On or before the Closing Date, the Corporate Law Authority of Pakistan shall have approved the transactions contemplated hereby and by the Purchase Agreement. On or before the Closing Date, the Shareholders shall adopt resolutions in the forms attached hereto as Schedules 1.3(a)(i) and 1.3(a)(ii), (i) adopting the amendments to the Memorandum and Articles of Association of the Company that are necessary to give effect to such transactions and (ii) approving the appointment of a board of directors of the Company as specified in the following paragraph, respectively. Each action contemplated by this Section 1.3(a) shall be taken in a manner consistent with the requirements set forth in the approval obtained by the Company from the PPIB and in accordance with all reporting requirements specified in such approval. (b) Each Shareholder shall be entitled to vote its share in the Company based upon one vote for each share it holds. It is agreed that the Company will have eight (8) directors and Coastal SP will be entitled to appoint or cause to be appointed seven (7) of such directors (or such larger number thereof as will approximate the combined direct and indirect percentage of shares held by Coastal SP of the Company, such number to be rounded to the closest whole number). As soon as possible after receipt of any necessary PPIB and Lenders' approval therefor Coastal SP will name its seven (7) directors to be elected as directors of the Company and Cogen will cause seven (7) of the existing directors of the Company to resign so that Coastal SP's nominees may be elected as directors on the Board of Directors of the Company effective as of the Closing Date. In the event of any subsequent casual vacancy on the Board of Directors, the Shareholder who had nominated the former director shall have the right to nominate the replacement director. It is further agreed that Coastal SP will select the Chairman of the Board of Directors of the Company. (c) Notwithstanding anything to the contrary contained herein or in the Articles of Association of the Company, the matters set forth on Part I of Annex A shall require approval by Shareholders or Directors, as the case may be, representing at least 85% of the issued and outstanding shares and the matters set forth on Part II of Annex A shall require the unanimous consent of the Shareholders. (d) In recognition of the Coastal SP Obligations (as defined in the Indemnity Agreement), Coastal SP agrees in favor of Cogen that during the existence of a failure of Coastal SP to pay any undisputed amount or any disputed amount finally determined to be due to Capital in accordance with the Capitalization Agreement, subject to the rights of the Finance Parties under the Finance Documents, Coastal SP will not vote its shares of the Company in favor of any action of the Company unless and until such action shall have received an affirmative vote by Cogen of its shares of the Company. (e) The Shareholders agree that to the extent necessary to give legal effect to the provisions of Section 1.3, the Shareholders will amend the Articles of Association accordingly. 1.4 Operation and Maintenance. Subject to receipt of any necessary Governmental Approvals and approvals of the Lenders, the Company shall exercise any rights it may have to terminate the O&M Agreement with SSOI without incurring liability for wrongful termination. Upon the lawful termination of the O&M Agreement with SSOI, Coastal SP shall cause Coastal Technology Pakistan (Private) Limited, a Coastal SP Affiliate, to enter into an O&M Agreement with the Company pursuant to which such Coastal SP Affiliate will operate the Project on a cost basis, plus an agreed upon fee, and otherwise on terms not less favorable in the aggregate to the Company than those set forth in the O&M Agreement. Coastal SP or the Coastal SP Affiliate shall provide Cogen with copies of monthly reports detailing the operation of the Project, and shall provide access to the books and records of the Company and to the Site to Cogen and its authorized representatives during normal business hours and upon receiving advance notice from Cogen. 1.5 Assistance. Cogen will assist Coastal SP in all Project matters and especially those dealing with site location and local approvals, assisting as liaison with governmental agencies, both political and regulatory. Cogen shall have primary responsibility for those matters that are the subject of the Enhancement Events during the periods set forth in Section 2.4(b), and Coastal SP shall support all reasonable efforts of Cogen to attain the Enhancement Events. 1.6 Pledge of Stock. It is recognized that in connection with raising borrowed funds for construction of the Project, the Parties will have to pledge their stock in the Company in favor of the Lenders, and the Parties may have to demonstrate their financial ability to perform their respective equity commitments set forth in the Shareholders' Direct Agreement. The Parties agree that they will pledge such stock and use all reasonable efforts to take such other actions as required by the Lenders. 1.7 Irrevocable Proxy. The Parties agree that each existing and future Shareholder will, as a condition to being a Shareholder, execute and deliver an irrevocable proxy in the form set forth in the Company's Articles of Association appointing the Chairman of the Board of Directors of the Company and, if the Chairman is not in attendance, each of the other Shareholders in sequence, to attend and vote for that Shareholder and on that Shareholder's behalf, at an Extraordinary General Meeting held after the date of the proxy, for the sole purpose of winding up the Company after the occurrence of an event described in Article 109.(1) of such Articles of Association, in favor of a resolution requiring the dissolution of the Company. 1.8 Regulatory Status. The Parties agree to make all filings and take all action as may be required to preserve the Company's status as a foreign utility company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), unless and until the Company shall have taken all action necessary to qualify and become an "Exempt Wholesale Generator" pursuant to PUHCA; and thereafter will maintain such status or any other future status so as to avoid regulation as a "public utility" or an "electric utility" as defined in the Federal Power Act of 1935, as amended, or a "public utility company," "electric utility company," or "holding company," each as defined in PUHCA , or as a "subsidiary" or an "affiliate," each as defined in PUHCA, of any of the foregoing. ARTICLE II EXPENSES, SPECIAL SHARES AND REIMBURSABLE EVENTS 2.1 Interim Expenses. Each of the Parties paying costs on behalf of the Company pursuant to Section 12.08 of the Purchase and Sale Agreement shall have the right to be reimbursed for such audited expenses, subject to the Finance Documents, out of the first funds available for such reimbursement of expenses. 2.2 [Intentionally Left Blank] 2.3 [Intentionally Left Blank] 2.4 Special Shares and Enhancement Events. (a) The Parties agree that they will jointly direct the Company to pay all distributions including dividends from their shares, returns of capital and any assets or cash distributed following the winding up of the Company to the Agent as specified in Section 4.1(a). Each of Cogen and Capco agrees that it will direct the Agent to distribute to Coastal SP the dividends received from shares owned by Capco representing two percent (2%) of the total shares issued by the Company and shares owned by Cogen representing seven and one-quarter percent (7.25%) of the total shares issued by the Company or, in the event of an Enhancement Event, such lesser number of shares as set forth in this Section 2.4 (such shares, measured as a percentage of the total shares issued by the Company, as reduced from time to time, the "Special Shares", and each Special Share being one percent of the total shares issued by the Company). (b) The Parties agree that an Enhancement Event shall occur (whether or not such occurrence is caused by Cogen or Coastal SP or otherwise) if, within 12 months after the Closing Date in the case of subsection (i) below, and within 37 months after the Closing Date in the case of subsections (ii) and (iii) below, an amendment to the Power Purchase Agreement is duly executed by the Company and WAPDA that: (i) extends the Required Commercial Operations Date (as such term is defined in the Power Purchase Agreement) by up to 3.5 months (an "Avoided LD Event"); or (ii) increases the Estimated Dependable Capacity (as such term is defined in the Power Purchase Agreement), such that 105% of the Estimated Dependable Capacity (the "Increased Capacity") is an amount greater than 114 MW but no more than 127.2 MW (an "Increased Capacity Event"); (iii) shifts the amount of the tariff, set forth in Table 1 of Schedule 6 to the Power Purchase Agreement, in the Non-Escalable Local Component to the Non-Escalable Foreign Component (as such terms are defined in the Power Purchase Agreement) (a "Revised Tariff Event"); provided, however, that such an amendment shall qualify as an Enhancement Event only if (A) such amendment contains no other change to the Power Purchase Agreement unless approved by Coastal SP; (B) the Lenders have approved such amendment, to the extent required under the Finance Documents; (C) Coastal SP has received an opinion from the Company's counsel reasonably satisfactory to Coastal SP with regard thereto; (D) after giving effect to such amendment, the GOP Guarantee applies undiminished to WAPDA's obligations under the Power Purchase Agreement as modified by such amendment; and (E) such amendment causes no default or event of default under any of the Project Documents or Finance Documents. Each amendment evidencing the achievement of an increment of increased value will cause an Enhancement Event to occur so long as such amendment occurs within the applicable period and subject to the proviso set forth in this Section 2.4(b). (c) (i) If an Avoided LD Event occurs within the time period set forth in Section 2.4(b), the Special Shares shall be reduced by an amount (the "Avoided LD Event Credit") equal to the product of (1) 1/280,108 times (2) the sum of (x) 314,640 per month of extension plus (y) the pro rated monthly portion (based on a 30-day month) of 314,640 for any period of extension which is less than a month. As provided in Section 2.4(c)(iv) of this Agreement, such reduction shall be made first by decreasing the Special Shares by the Avoided LD Event Credit (as if such credit was stated as a percentage; e.g., if the Avoided LD Event Credit is 2.25 when the percentage of Special Shares is 9.25%, then after giving effect to such Avoided LD Event Credit, the percentage of Special Shares will be 7.00%), and then, by allocating first to Capco the number of shares then released as Special Shares until Capco shall no longer have any Special Shares, with the balance allocated to Cogen. (ii) (A) If an Increased Capacity Event occurs on or before the Commercial Operations Date, the Special Shares shall be reduced by an amount (the "Capacity Credit") equal to the product of (1) 1/280,108 times (2) 657,424 per MW for each MW (prorated for any part thereof) of increase in Increased Capacity in excess of 114 MW but not greater than 122.2 MW. As provided in Section 2.4(c)(iv) of this Agreement, such credit shall be made first by decreasing the Special Shares by the Capacity Credit (as if such credit was stated as a percentage), and then, by allocating first to Capco the number of shares then released as Special Shares until Capco shall no longer have any Special Shares, with the balance allocated to Cogen. (B) If an Increased Capacity Event occurs after the Commercial Operations Date, but within the period set forth in Section 2.4(b), the Special Shares shall be reduced by an amount (the "Additional Capacity Credit") calculated in the same manner as is set forth in Section 2.4(c)(ii)(A) except that the value of 657,424 per MW shall be reduced to a value of 609,091 for the purposes of calculating the Additional Capacity Credit. As provided in Section 2.4(c)(iv) of this Agreement, such credit shall be made first by decreasing the Special Shares by the Additional Capacity Credit (as if such credit was stated as a percentage), and then, by allocating first to Capco the number of shares then released as Special Shares until Capco shall no longer have any Special Shares, with the balance allocated to Cogen. (C) If Cogen is able to obtain an increase in the Increased Capacity, within the period set forth for an Increased Capacity Event in Section 2.4(b), to a level above 127.2 MW, the Parties shall negotiate to effect an appropriate amendment to the Power Purchase Agreement and, based on the amendment, an appropriate reduction in Special Shares reflecting the incremental cost to the Company of the capacity increase and the incremental value to the Company of the additional sales and subject to the fulfillment of the proviso set forth in Section 2.4(b) above. (iii) If a Revised Tariff Event occurs within the period set forth in Section 2.4(b), the Special Shares shall be reduced by an amount (the "Revised Tariff Event Credit", and together with the Avoided LD Event Credit, Capacity Credit and Additional Capacity Credit, collectively the "Credits"; and individually a "Credit") equal to 7.0687. As provided in Section 2.4(c)(iv) of this Agreement, such credit shall be made first by decreasing the Special Shares by the Revised Tariff Event Credit (as if such credit was stated as a percentage), and then, by allocating first to Capco the number of shares then released as Special Shares until Capco shall no longer have any Special Shares, with the balance allocated to Cogen. (iv) Each Credit, and the corresponding reduction of Special Shares, shall, for all purposes of this Agreement, be deemed made, and received by Cogen or Capco, as the case may be, on the date of occurrence of the corresponding Enhancement Event. Without limiting the decrease in Special Shares upon the occurrence of each Credit, it is agreed that on and as of the date that the aggregate of all Credits equals or exceeds 9.25, then subject to Section 2.4(c)(v), the respective shares of Cogen and Capco in the Company then constituting Special Shares (if any), and all shares of the Company issued or received then or thereafter by Cogen and Capco attributable thereto or otherwise, shall forever cease to be Special Shares, and the provisions and references to Special Shares in this Agreement shall be deemed terminated and deleted mutatis mutandis throughout this Agreement. (v) Notwithstanding the foregoing, any decrease in ~he `.~-.~er of Special Shares shall not cause a reduction in the amount of the Cost Overrun L/C posted by Coastal SP. If there are any draws on such Cost Overrun L/C, Coastal SP shall have the right to become the owner of any shares purchased with the proceeds of such draw in accordance with Section 1.2(d)(i). Each of Cogen and Capco hereby waives any right it may have to reimburse any such draw and any preemptive rights to acquire shares pursuant to any such draw. 2.5 Limitation of Indemnity of Cogen Under the Purchase Agreement. Notwithstanding anything in this Agreement or in the Purchase Agreement to the contrary, Shareholder (in this Section 2.5 as defined in the Purchase Agreement) shall have liability to Buyer (in this Section 2.5 as defined in the Purchase Agreement) under Section 10.01(a) of the Purchase Agreement only to the extent described in Section 10.01(b) of the Purchase Agreement and further limited as follows: from and after the Closing Date the obligations of Shareholder to make any payment to Buyer in satisfaction of any such liability shall be limited to (a) making payments from Distributions (as defined in Section 4.4(c) of the Security Trust Deed) when and if payable to or received by Shareholder pursuant to Sections 4.4(c) and (d) of the Security Trust Deed (and if any such Distributions have yet to be paid, the appropriate parties shall be instructed by Shareholder that such Distributions be paid only to the extent due hereunder, directly to the appropriate indemnitees) and (b) from any Enhancement Amount that pursuant to Section 3.02 of the Capitalization Agreement is to be paid to Cogen Technologies Capital Company, L.P. after Buyer has made a claim for which Shareholder is so liable by Buyer's reducing any such amount yet to become due; provided, however, that any payments received by Buyer with respect to Special Shares during such time as they constitute Special Shares shall not be deemed as payments made by Shareholder in satisfaction of any liability of Shareholder under Section 10.01(a) of the Purchase Agreement. If Shareholder transfers any shares, the indemnity obligations in Section 10.01(a) of the Purchase Agreement (as limited by Section 10.01(b) thereof and this Section 2.5) shall be borne by the transferees of such shares in proportion to the number of transferred shares. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties. Each of the Parties represents and warrants to the others that as of the date of this Agreement: (i) it is duly formed or incorporated, as applicable, existing, in good standing and has complied fully with all requirements of applicable laws and regulations of the country in which it is incorporated; (ii) it has the power to enter into and to perform this Agreement; (iii) except for the approvals from PPIB and the Finance Parties of the transactions contemplated hereunder and under the Purchase Agreement, all necessary corporate and/or other consents and procedures necessary to authorize and give effect to the execution and performance of this Agreement have been duly obtained and followed and remain in force as of the date hereof; (iv) this Agreement is its legal, valid and binding obligation and is enforceable in accordance with its terms subject to bankruptcy, insolvency or similar laws affecting creditors rights and general principles of equity; (v) the effectiveness of this Agreement will not violate any obligation, whether by reason of any law or regulation or under any contract, by which it is bound; (vi) there are no proceedings pending, or to the best of its knowledge threatened, for its liquidation; (vii) it will, following the receipt of shares in the Company pursuant to this Agreement and subject to the Security Documents, be the full legal and beneficial owner of such shares; and (viii) it is aware that it is illegal under the United States Foreign Corrupt Practices Act (the "FCPA") to give, offer, promise or authorize the giving of anything of value to any government official or political party in an effort to win or retain business; for purposes of this Agreement, "government official" means not only a public official, but also a government employee (including employees of government-owned utilities and other state enterprises), director of a state enterprise, candidate for public office or party official; nothing was done in connection with the Project by any Shareholder, its Affiliates or any of their respective directors, officers, shareholders or, to Shareholder's knowledge, employees, or by the Company or any of its shareholders, directors, officers or employees that, if done by an American citizen, would have constituted a violation of the FCPA. ARTICLE IV DISTRIBUTIONS 4.1 Redistribution Through Agent. (a) On the Closing Date, each Shareholder shall join in appointing the Agent as agent for all the Shareholders, collectively, authorized to receive all distributions of dividends and any other amounts payable by the Company to the Shareholders, on behalf of such Shareholder, and each Shareholder shall join in instructing the Company to make any such payments directly to the Agent, by issuing the Agent Appointment Letter, in the form attached hereto as Schedule 4.1(a). All distributions by the Company (including dividends, returns of capital and any assets or cash distributed following the winding up of the Company) shall be paid to the Agent directly. Agent shall, at the direction of the Shareholders, redistribute all amounts received by it on behalf of the Shareholders to the Shareholders in accordance with the terms of this Agreement. Notwithstanding any provisions relating to the sharing of distributions set forth in the Articles of Association of the Company, no Shareholder shall be entitled to any amount, funds or property distributed by the Company except as provided in this Agreement and the Indemnity Agreement. (b) Except as provided in Sections 2.1, 4.2 or 4.3 and subject to Section 4.5, and any interest that Cogen may acquire pursuant to Sections 1.2(c) or (d), Section 2.4(c)(v) or Section 6.4, all distributions of cash or property to the Agent by the Company shall be redistributed by the Agent in the following percentages: Coastal SP 100% Cogen 0% Capco 0% 4.2 Exception Where Enhancement Event Has Occurred. When any Enhancement Event has occurred, the Agent shall redistribute a percentage of the cash and property to Coastal SP equal to the sum of 90.75% and the percentage of the Company's issued shares that remain as Special Shares plus any other shares owned by Coastal SP pursuant to Section 1.2(d), and the balance shall be redistributed by the Agent to Cogen and Capco in proportion to their respective percentage holding of shares other than Special Shares. 4.3 Exception for Distributions Following Winding-up of the Company. Liquidating distributions of cash or property to the Agent in connection with the winding up of the Company will be redistributed to Shareholders with positive Capital Account balances pro rata in the same ratio as the balances in their Capital Accounts. 4.4 No Restoration of Negative Capital Accounts. Except for any negative balance resulting from a distribution in contravention of this Agreement, at no time will a Shareholder with a negative balance in its Capital Account as defined in Section 5.1 have any obligation to restore the negative balance. 4.5 Adjustment of Distributions. Any and all distributions to be made by Agent shall be made to each Shareholder in accordance with the percentage of the Company's issued shares held by such Shareholder, taking into account any Special Shares or other shares held by such Shareholder in accordance with Section 1.2(d). ARTICLE V CAPITAL CONTRIBUTIONS 5.1 Capital Accounts. A separate capital account ("Capital Account") will be maintained for each Shareholder. Capital Accounts will be maintained in the manner required by Treas. Regs. Section 1.704-l(b). There will be added to the Capital Account of each Shareholder: (a) the amount of any cash and the fair market value of any property that the Shareholder contributed to the Company (net of liabilities securing the property that the Company is considered to assume or take subject to under Section 752 of the U.S. Internal Revenue Code), and (b) the Profits allocated to the Shareholder under Article VII. There will be subtracted from the Capital Account of each Shareholder: (c) the amount of any cash and the fair market value of any property distributed to the Shareholder (net of liabilities securing the property that the Shareholder is considered to assume or take under Section 752 of the U.S. Internal Revenue Code) but not counting any redirection of cash distributions to pay indemnities pursuant to Section 2.5(a) hereof or pursuant to Section 2.02(b) of the Indemnity Agreement, and (d) the Losses allocated to the Shareholder under Article VII. 5.2 Basis for Initial Balance. (a) For the reasons specified in the Capitalization Agreement, each Shareholder will have an initial Capital Account balance on the Closing Date of zero. (b) The stock of the Company had zero value prior to the infusion of approximately $28 million in new capital after the Closing Date. The early-stage development work on the Project in the amount of $15.372 million was funded by an Affiliate of Cogen and Capco and has been capitalized. The Company has zero net worth. An additional approximately $28 million in new equity is required by the Finance Parties, and Coastal SP has agreed to contribute 92. 75% of such equity in exchange for which the Company agreed to issue Coastal SP sufficient shares so that Coastal SP will own 90. 75% of the shares after giving effect to Section 1.2(C) (c) The Finance Documents require the Shareholders to contribute 24% or more of the total cost of the Project, or approximately $43 million in equity of which $15. 372 million is represented by capitalized early stage development work already funded. The Shareholders closed the shortfall of $15.732 million between the capital infusion required by the construction lender and the "equity" required by the Finance Documents by having the Company capitalize the $15.372 million of the Affiliated Payable (as such term is defined in the Capitalization Agreement). Such $15.372 million that was capitalized in exchange for shares of the Company was treated as equity for purposes of the Implementation Agreement and the Finance Documents and was not viewed by the Shareholders as creating positive value and its omission from the Capital Accounts reflects agreement that the approximately $28 million in new capital infusion after the Closing Date is the only true capital in the Company going forward. ARTICLE VI TRANSFER OF SHARES 6.1 Invalid Share Transfer. If any Party hereto shall transfer any shares of stock of the Company in violation of the terms of the loan documentation evidencing the construction and/or permanent financing for the Project or the Memorandum and Articles of Association or other organizational documents of the Company or under any other agreement relating to the Project, including, without limitation, the Project Documents, such transfer will be null and void and of no force and effect. Nothing in this Article shall be construed as authorizing any Party to transfer any stock in violation of such loan documentation or the Memorandum and Articles of Association or other organizational documents of the Company or any other agreement relating to the Project. 6.2 Transfer of Special Shares. If Cogen or Capco transfers any shares that are treated as Special Shares, such transfer shall be made subject to Coastal SP's rights and undertakings under this Agreement including the right to receive payments equal to the dividends from such shares and the undertaking to grant Credits with respect thereto and decrease Special Shares upon the occurrence of Enhancement Events, as though Cogen or Capco, or both, as applicable, remained the owners thereof. 6.3 New Parties and Transfers with Irrevocable Proxy. Each Shareholder agrees that it will not transfer shares in the Company unless any transferee of such shares agrees to become a party to this Agreement and executes and delivers the irrevocable proxy described in Section 1.7. The Shareholders shall cause the Company to place a legend on all share certificates stating that the issuance and transfer of shares and dividends associated with the shares are subject to the provisions of this Agreement. 6.4 Transfer of Cogen Shares. (a) If no Enhancement Event has occurred during the time period set forth in Section 2.4(b) of this Agreement for such events (the "Enhancement Period") or if Enhancement Events have occurred but Cogen continues to own Special Shares at the end of the Enhancement Period, Cogen shall, within 30 days after the last day on which such Enhancement Event could have occurred, transfer to Coastal SP all of the Special Shares owned by Cogen. Such transfer shall be evidenced in a manner reasonably acceptable to Coastal SP. (b) Upon the earlier of the end of the Enhancement Period and the date on which all Enhancement Events are achieved, Coastal SP shall have the right to purchase all shares of the Company owned by Cogen that are not Special Shares for a price to be determined pursuant to Annex C. Coastal SP's right to purchase such shares shall expire on the 90th day following the day on which Cogen gives notice to Coastal SP that either (a) the Enhancement Events have been achieved or (b) the Enhancement Period has ended. (c) Except as set forth in this Section 6.4 or otherwise with Coastal SP's consent, Cogen may not transfer any Special Shares and may not, before the end of the 90 day period described in Section 6.4(b), transfer any shares that are not Special Shares; provided, however, that Cogen may transfer 2% of the shares of the Company that are Special Shares to Western Resources Energy Limited ("Western") pursuant to a letter agreement by and among Cogen, Western and Capco dated February 28, 1997, subject to the consent of the Lenders. 6.5 Negative Covenant. Except as set forth in the Security Documents and the Indemnity Agreement, Cogen and Capco shall not suffer the encumbrance of any dividends available for satisfaction of the liabilities described in Section 2.5 hereof. ARTICLE VII U.S. TAXABLE INCOME 7.1 Filing Returns. The Company will file a return each year with the U.S. Internal Revenue Service, and furnish a copy to each Shareholder, as required by Section 6031 of the U.S. Internal Revenue Code for foreign partnerships in which there are U.S. persons as partners. 7.2 Losses. After giving effect to the special allocations in Section 7.7, Losses each year will be allocated as follows: (a) First, in any year when the Company is in a cumulative net loss position after taking into account Profits and Losses for all prior years, 90.75% to Coastal SP, 7.25% to Cogen and 2% to Capco, but only to the extent of the cumulative net loss of the Company, and (b) the balance, if any, 100% to Coastal SP, 0% to Cogen and 0% to Capco. 7.3 Profits. After giving effect to the special allocations in Section 7.7 and with the exception in Section 7.6 of certain gains from Disposition Events, Profits each year will be allocated as follows: (a) First, 90.75% to Coastal SP, 7.25% to Cogen and 2% to Capco in an amount equal to the excess, if any, of (i) the cumulative Losses allocated to such Shareholders in prior years under Section 7.2, over (ii) the cumulative Profits allocated to such Shareholders in prior years, and (b) the balance, if any, 100% to Coastal SP, 0% to Cogen and 0% to Capco. 7.4 Meanings of Profit and Loss. "Profits" and "Losses" mean the taxable income or loss of the Company computed under U.S. tax rules, but with any adjustments required by the capital account maintenance rules in Treas. Regs. Section 1.7041(b)(2)(iv), including the following: (a) any income that is exempted from U.S. income tax and would not be taken into account by a U.S. company for purposes of figuring taxable income will still be included in Profits or Losses for purposes of allocations, and (b) any expenditures by the Company that are described in Section 705(a)(2)(B) of the U.S. Internal Revenue Code or treated as Section 705(a)(2)(B) expenditures by the U.S. income tax regulations will be subtracted from taxable income or loss. 7.5 Effect of Enhancement Events. If there is an Enhancement Event that causes the percentages for making distributions under Section 4.1(b) to change, then those same percentages will be used for allocating residual Profits and Losses in Sections 7.2(b) and 7.3(b) hereof. 7.6 Gain from Disposition Events. Any gain from a Disposition Event will be allocated first to Shareholders in the amounts needed to bring their Capital Account balances into the ratio then in effect for making distributions under Section 4.1(b). Any remaining gain will be allocated in the same manner as other Profits. 7.7 Special Allocations. The following special allocations will be made before any general allocations of Profits and Losses in Sections 7.2 and 7.3 hereof: (a) No Shareholder will be allocated Losses in any calendar year to the extent the allocation would cause the Specially-Adjusted Capital Account of the Shareholder to go into deficit. The Specially-Adjusted Capital Account of a Shareholder is not considered in deficit to the extent the Shareholder is obligated to restore the capital account (including any deemed obligation to restore under U.S. income tax regulations) at liquidation. "Specially-Adjusted Capital Account" means the Capital Account of a Shareholder adjusted for certain expected events described in Treas. Regs. Section 1.704-l(b)(2)(ii)(d). (b) Minimum Gain Chargeback. If the Company has a net decrease in "partnership minimum gain" (within the meaning of Treas. Regs. Section 1.704-2(b) (2)) in a year, then each Shareholder will be allocated it~ms of gross income and gain that year, before any other allocation, equal to that Shareholder's share of the net decrease in partnership minimum gain. This provision is intended to comply with the requirements of Treas. Regs. Section 1.704-2(f). (c) Partner Minimum Gain Chargeback. If a Shareholder suffers a net decrease in "partner nonrecourse debt minimum gain" (within the meaning of Treas. Regs. Section 1.704-2(i)(4)) in a year, then that Shareholder will be allocated items of gross income and gain to comply with the requirements of Treas. Regs. Section 1.7042(i)(4). (d) Qualified Income Offset. If a Shareholder unexpectedly receives an adjustment, allocation or distribution described in Treas. Regs. Section 1.704-l(b)(ii)(d)(4), (5) or (6) and this causes the Specially-Adjusted Capital Account of the Shareholder to go into deficit, then the Shareholder will be allocated gross income in an amount and manner sufficient to eliminate the deficit as quickly as possible. However, the Capital Account of a Shareholder is not considered in deficit to the extent the Shareholder is obligated to restore the Capital Account (including any deemed obligation to restore under U.S. income tax regulations) at liquida- tion. This provision is intended to serve as a "qualified income offset" within the meaning of Treas. Regs. Section 1.704-2(b)(ii)(d). (e) Partner Nonrecourse Deductions. If there are any "partner nonrecourse deductions" (within the meaning of Treas. Regs. Section 1.704-2(i)(1), then these will be specially allocated to the Shareholder who bears the economic risk of loss for the "partner nonrecourse liability" (within the meaning of Treas. Regs. Section 1.704-2(b)(4)) to which the deductions are attributable. (f) Section 704(c) Adjustments. If any Shareholder contributes appreciated or depreciated property to the Company, allocations to Shareholders will be adjusted as required by Section 704(c) of the U.S. Internal Revenue Code to take into account the built-in gain or loss at the time of contribution. ARTICLE VIII CONFIDENTIALITY Each Party agrees not to disclose to any third party the contents of this Agreement, any other documentation or agreement in connection with this Agreement or the Project that is marked as confidential, and any and all written information marked as confidential relating to this Agreement or the Project without the prior written consent of the other Parties. The obligation of each Party under this Article VIII shall extend to such Party's officers, directors, affiliates, consultants, agents and employees and shall survive the expiration or termination of this Agreement for a period of five (5) years thereafter. For the purpose of this Agreement, confidential information shall not include: (i) any information that was rightfully in the possession of a Party prior to the date of disclosure of such information to the Party; (ii) any information that was in the public domain prior to the date of disclosure of such information to a Party; (iii) any information that becomes part of the public domain by publication or otherwise except by an unauthorized act or omission on the part of a Party; (iv) any information that is supplied to a Party by a third party which is under no obligation to the other Party to maintain such information in confidence; (v) any information required or reasonably requested by any of the Finance Parties in connection with financing the Project or by the GOP or any other governmental entity in connection with the implementation of the Project; and (vi) any information which a Party is required by law or regulatory process to disclose. If any Party or its representatives are requested or required (by oral question, interrogatories, requests for information or documents, subpoenas, governmental inquiry, or similar process) to disclose any documentation or information of a confidential nature relating to this Agreement, the Party receiving such request or demand will use reasonable efforts to provide the other Parties with prompt notice of such request or demand so that such other Parties have an opportunity to seek an appropriate protective order. In addition, each Party agrees to take all reasonable steps necessary to prevent disclosure of such confidential material, including seeking an appropriate protective order, or, if the information is required to be disclosed, confidential treatment. It is further agreed that, if, in the absence of a protective order, any Party or any of its representatives are legally required to disclose such confidential information concerning this Agreement or a Party to this Agreement, such Party or its representatives may disclose such information without liability hereunder, but no Party shall be relieved or any liability hereunder for any previous disclosure by such Party or any of its representatives which was not permitted by this Agreement. ARTICLE IX INDEMNIFICATION 9.1 Indemnification. Each of the Parties (each an "Indemnifying Party") shall indemnify and save the other Party harmless from, against, for and in respect of any and all direct damages, losses, settlement payments, obligations, liabilities, claims or actions suffered, sustained, incurred or required to be paid by the other Parties arising from or relating to (a) the negligence or willful misconduct of such Indemnifying Party with respect to the actions contemplated under this Agreement or (b) a breach by such Indemnifying Party of any of its obligations hereunder; provided, however, that no Party shall be liable for indirect or consequential damages including lost profits. 9.2 Indemnification for Payments under the Shareholders' Direct Agreement. In recognition of the joint and several liability of Cogen and Capco under the Shareholders' Direct Agreement, each of Cogen and Capco further agree, without limiting the indemnity set forth in the foregoing Section 9.1, that if either of Cogen or Capco fails to make any payment under the Shareholders' Direct Agreement and the other party is called upon to make a payment thereunder that is in excess of the payment it would otherwise have made taking into account such party's ownership percentage of the issued and outstanding shares of the Company, such party shall be entitled to reimbursement from the other party. ARTICLE X MISCELLANEOUS 10.1 Entire Agreement; Amendments. This Agreement, the Purchase Agreement, the Indemnity Agreement, the Capitalization Agreement, the Equity Put Agreement and the Finance Documents contain the entire agreement and understanding among the Parties hereto with respect to the subject matter contained herein and supersede all prior and contemporaneous agreements, negotiations, understandings, representations and statements, oral and written. No amendment, modification, limitation or release of any of the terms and conditions contained herein shall be made except by a written agreement executed by the duly authorized representatives of the Parties hereto and in full compliance with any applicable governmental requirement. 10.2 Assignment. No Party shall assign its rights or delegate its obligations hereunder without the prior written consent of the other Parties; provided that each Party consents to the other Party's assignment of this Agreement to the Security Trustee pursuant to the Pledge Agreements. Each such assignee shall agree to become a party to this Agreement. 10.3 Arbitration. If any dispute or claim between or among any of the Parties arising out of this Agreement or their rights and duties arising out of this Agreement (in this Section 10.3, a "claim") has not been resolved by mutual agreement on or before the thirtieth (30th) day following the first notice of the subject matter of the claim to or from one Party to the other, then any Party may refer the claim to binding arbitration under the following provisions: (a) To refer a claim to arbitration, a party must provide notice to the other party stating (i) a general description of the claim and (ii) that the claim is being referred to arbitration under this Section 10.3(a). (b) The Parties shall endeavor to agree promptly on a panel of three arbitrators. If on or before the fifteenth (15th) day following the notice described in Section 10.3(a) they have not so agreed, then each Party may designate one arbitrator. If no arbitrator or only one arbitrator is selected as just provided by the fifteenth (15th) day following the expiration of the fifteenth (15th)-day period referred to at the beginning of the immediately preceding sentence, any party may petition the United States District Court for the Southern District of New York to designate a number of arbitrators so that two in total have been designated. The two arbitrators designated as provided above in this Section 10.3(b) shall endeavor to designate promptly a third arbitrator. If the two arbitrators have not designated a third arbitrator by the fifteenth (15th) day following the designation of the second arbitrator, any party may petition the United States District Court for the Southern District of New York to appoint the third arbitrator. If the court named above has failed to designate an arbitrator, then on or after the fifteenth (15th) day following the request, any Party may request the International Court of Arbitration of the International Chamber of Commerce to designate the arbitrator. If any arbitrator resigns, becomes incapacitated, or otherwise refuses or fails to serve or to continue to serve as an arbitrator, the Party or other Person that designated that arbitrator shall designate a successor. (c) The arbitration shall be conducted in New York City or such other place as the Parties may agree. The arbitrators shall set the date, the time, and the place of the hearing, which must commence on or before the thirtieth (30th) day following the designation of the third arbitrator. The hearing may be adjourned to later times and dates as the arbitrators determine. The arbitration shall be conducted under the rules of the International Chamber of Commerce not inconsistent with the provisions of this Agreement or such other rules as the Parties may agree. The arbitrators shall endeavor to notify a Party not present of any adjournment to other dates or places; however, the proceedings may continue in the absence of either Party that has received appropriate notice of the date, the time, and the place of the initial session of the hearing. (d) The arbitrators shall endeavor to render their decision on or before the thirtieth (30th) day following the last session of the hearing. If the position of one Party prevails, then the other Party shall pay all fees and expenses of the arbitrators and the prevailing Party in the arbitration. If the positions of both Parties prevail, the arbitrators' decision must include an allocation of the fees and expenses of the arbitrators to the Parties based on the extent to which the Parties do not prevail on their positions. Each Party against which the decision assesses a monetary obligation shall pay that obligation on or before the thirtieth (30th) day following the decision or such other date as the decision may provide. (e) The decisions of the majority of the arbitrators are final and binding on both Parties and are not subject to appeal. Without limiting the provisions of Sections 10.3(g) and (h), the decisions of the arbitrators (including the granting of the remedies of specific performance and injunctive relief) may be enforced in any court of competent jurisdiction, and the Parties authorize any such court to enter judgment on the arbitrators' decisions. (f) The Parties agree that arbitration under this Section 10.3 is the exclusive method for resolving any claim and that it will not commence an action or proceeding based on a claim, except to enforce arbitrators' decisions as provided in this Section 10.3 or to compel the other party to participate in arbitration under this Section 10.3. (g) This paragraph 10.3(g) and the following paragraph 10.3(h) do not affect the limitations set forth in paragraphs 10.3(a) through (f) above on commencing judicial proceedings, but may be used to enforce arbitrators' decisions, to compel Persons to participate in arbitration, or to compel Persons that have brought judicial proceedings other than in compliance with this Section 10.3 to dismiss those proceedings. (h) The Parties agree that any arbitration award made may be enforced by each such Party against assets of each of the other Parties, wherever those assets are located or may be found, and judgment upon any arbitration award may be entered by any court of competent jurisdiction thereof. The Parties expressly submit to the jurisdiction of any such court. 10.4 Notices. All notices, communications, or other documents to be given or made by one Party to the other Parties pursuant to this Agreement shall be in writing, shall be addressed for the attention of the person indicated below, and shall either be delivered personally or sent by telegram, registered or certified mail, or facsimile. The addresses for service of the Parties and their respective facsimile numbers shall be: (a) For Cogen: Address: 1600 Smith Street, Suite 4300 Houston, Texas 77002 Attention: Mr. Nadeem Babar and Mr. Richard A. Lydecker Facsimile: 713-951-7747 (b) For Coastal SP: Address: Les Cascades Building Edith Cavell Street Port Louis, Mauritius Facsimile: 230-212-9833 with a copy to: Address: Coastal Power Company Nine Greenway Plaza Houston, Texas 77046-0995 Attention: President Facsimile: 713-297-1513 (c) For Capco: Address: 216 16th Street, Suite 730 Denver, Colorado 80202 Attention: Ed Names Facsimile: (303) 572-1803 or such other addresses and facsimile numbers as either Party may have notified to the other Party in accordance with this Section 10.4. 10.5 Notices Continued. All Notices shall be deemed delivered (a) when presented personally, (b) if received on a business day for the receiving Party, when transmitted by facsimile to the receiving Party's facsimile number specified above and, if received on a day that is not business day for the receiving Party, on the first business day following the date transmitted by facsimile to the receiving Party's facsimile number specified above, (c) one (1) day after being delivered to a courier for overnight delivery, addressed to the receiving Party, at the address indicated above (or such other address as such Party may have specified by Notice delivered to the delivering Party at its address or facsimile number specified above) or (d) upon receipt if deposited in a regularly maintained receptacle for the postal service in Pakistan or the United States, as applicable, postage prepaid, registered or certified, return receipt requested, addressed to the receiving Party, at the address indicated above (or such other address as the receiving Party may have specified by written Notice delivered to the delivering Party at its address or facsimile number specified above). Any Notice given by facsimile shall be confirmed in writing delivered personally or sent by registered or certified mail, but the failure to so confirm shall not void or invalidate the original Notice if it is in fact received by the Party to which it is addressed. 10.6 Definitions. The terms set forth in Annex B shall have the meanings set forth therein whenever used in this Agreement, whether in the singular or the plural, or in the present or in the past tense. Capitalized terms used herein but not otherwise defined in Annex B, shall have the meanings ascribed to such terms and be subject to the rules of interpretation in the Purchase Agreement (and such definitions and rules of interpretation are incorporated herein by reference). 10.7 U.S. Tax Matters Partner. Cogen will be the "tax matters partner" of the company within the meaning of Section 6231 of the U.S. Internal Revenue Code for purposes of any dealings with the U.S. tax authorities. However, Cogen will keep Coastal SP and Capco fully informed on a timely basis of any communications with the U.S. tax authorities about the Company and give the other Parties the opportunity to attend any meetings or participate in any telephone discussions with the U.S. tax authorities pertaining to the Company. Cogen will not take any positions or file any material in writing with the U.S. tax authorities in the capacity as tax matters partner without first obtaining agreement from Coastal SP. Cogen will be reimbursed for the reasonable expenses it incurs in performing its duties as tax matters partner. 10.8 Pakistan Taxes. The Company will deal directly with the tax authorities in Pakistan, but will keep the Shareholders informed on a timely basis of any issues that arise. 10.9 Elections. The Company will make an election under Section 754 of the U.S. Internal Revenue Code if any Shareholder so requests. It will make any other elections for tax purposes in the United States or Pakistan that a majority in interest of the Shareholders believes is desirable. 10.10 Governing Law. This Agreement and any arbitration arising from or relating to it shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York. 10.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10.12 Limitation on Liability. Notwithstanding any provision contained or referred to in this Agreement to the contrary, each Shareholder agrees with the other Shareholders that no representation, warranty, indemnity, assurance or other agreement made in, or in connection with, this Agreement has been made, or shall be deemed to have been made, by any Person other than such Shareholder who is a signatory hereto, and that neither any Shareholder, nor any Affiliate or subsidiary of any Shareholder, nor any shareholder, member, officer, director, employee, agent or general or limited partner of any Shareholder, nor any Person heretofore having served or maintained, or now or hereafter serving or maintaining ,the status of shareholder, member, officer, director, employee, agent or general or limited partner of any Shareholder or any subsidiary or Affiliate of any Shareholder, has relied on any statement made by (a) any shareholder, member, director, officer, employee, agent or general or limited partner, subsidiary or Affiliate of any other Shareholder, or (b) any shareholder, member, officer, director, employee, agent or general or limited partner of any such subsidiary or Affiliate or (c) any Person that, whether individually or in a representative capacity, at the time any such statement was made served or maintained the status of shareholder, member, officer, director, employee, agent or general or limited partner of any such other Shareholder or any subsidiary or Affiliate of any such other Shareholder, in conducting its due diligence review related to the transactions contemplated by this Agreement, or in deciding to initiate its participation in, or in proceeding on or prior to the Closing Date with, and consummating on or prior to the Closing Date, the transactions provided for in, this Agreement and the transaction contemplated hereby. Each Shareholder agrees with the other Shareholders that, subject to the additional limitations, as applicable, in Section 2.5 of this Agreement and Sections 10.01(b) and 10.02(b) of the Purchase Agreement, their respective liabilities hereunder are limited to claims against the assets of such Shareholder, and that no such claims shall be made against or upon, and no recourse shall be had to the assets of, any other Person including, without limitation, (i) any director, officer, employee, agent, general or limited partner, shareholder, member, subsidiary or Affiliate of any Shareholder, or (ii) any shareholder, member, officer, director, employee, agent or general or limited partner of any such subsidiary or Affiliate, or (iii) any other natural person, or (iv) any Person heretofore having served or maintained, or now or hereafter serving or maintaining ,the status of shareholder, member, officer, director, employee, agent or general or limited partner of any Shareholder or any subsidiary or Affiliate of any Shareholder, or (v) any successor, assign, heir, executor or legal representative of any of the foregoing Persons; provided, however, that nothing herein shall limit the liability of any Person for damages for fraud, knowing misrepresentation or willful misconduct. IN WITNESS WHEREOF, the Parties have caused their duly authorized representatives to execute this Agreement as of the date first above written. COGEN TECHNOLOGIES SABA Attestation of Witnesses: /s/ By: Cogen Technologies Saba Name: Power GP, Inc., Member Occupation: Address: By:/s/ Name: Title: Attestation of Witnesses: /s/ Name: Occupation: Address: Attestation of Witnesses: /s/ By: Cogen Technologies Saba Name: Power GP, Inc., Member Occupation: Address: By:/s/ Name: Title: Attestation of Witnesses: By: Cogen Technologies Saba Power GP, Inc., its General /s/ Partner Name: Occupation: Address: COASTAL SABA POWER LTD. Attestation of Witnesses: /s/ By:/s/ Name: Name: Occupation: Title: Address: Attestation of Witnesses: /s/ Name: Occupation: Address: CAPCO RESOURCES, INC. Attestation of Witnesses: /s/ Dennis R. Staal By: /s/ Edward J. Names Name: Dennis R. Staal Name: Edward J. Names Occupation: Treasurer Title: President Address: Littleton, CO Attestation of Witnesses: /s/ William D. Bennet Name: William D. Bennet Occupation: Accountant Address: Denver, Colorado ANNEX A Part I 1. The execution of any contract or contract amendment, whether or not on commercially reasonable terms, with respect to the provision of any goods or services to the Company pursuant to which Coastal SP or Cogen or an Affiliate of either is a party or in which it has an economic interest and the making of any payment (other than dividends or payments under any contract or contract amendment entered into in compliance with this Annex A) to any such party. 2. Any election to increase the capital of the Company rather than incurring indebtedness, if such indebtedness is available on commercially reasonable terms (without any credit support from the Shareholders), except as expressly set forth in Section 1.2 of the Shareholder's Agreement. 3. Any substantial expansion of the power generating capacity of the Project to more than 150 MW. Part II 1. Sale of all or substantially all of the Company's assets. 2. Any dissolution or winding up of the Company (other than dissolution or winding up caused by the bankruptcy or dissolution of any Shareholder). 3. Any substantial change in the nature of the business of the Company. 4. Any change in the Company's policy to declare dividends with respect to substantially all of the Company's net earnings subject to applicable laws and reasonable reserve requirements. ANNEX B "Agent" shall mean a bank or other financial institution designated by all of Coastal SP, Cogen and Capco acting jointly, to serve as agent for the receipt and distribution of dividends and other distributions to be made by the Company to the Shareholders as specified in Section 4.1(a). "Base Equity" shall have the meaning set forth in Section 1.2(a) hereof. "Base Equity L/C" shall have the meaning as set forth in Section 1.2(a). "cost Overrun L/C" shall have the meaning set forth in Section 1.2(a) hereof. "Debt Service Reserve L/C" shall have the meaning set forth in Section 1.2(a) hereof. "Disposition Event" means a sale, exchange or other disposition of Company assets, including the disposition of assets that occurs when the Company is wound up and its assets liquidated. "Enhancement Event" shall mean any of those events set forth in Section 2.4(b). "Equity Support L/C's" shall have the meaning set forth in Section 1.2(a). "Indemnifying Parties" shall have the meaning set forth in Section 9.1 hereof. "Notices" shall mean all notice, communications, or other documents given or to be given or made by on Party to the other Parties pursuant to this Agreement. "Restoration Reserve L/C" shall have the meaning as set forth in Section 1.2(a) hereof. "Shareholder or Shareholders" shall mean each of or all holders of shares of the Company. "Shareholders' Direct Agreement" shall mean the Amended and Restated Shareholders' Direct Agreement dated as of February 25, 1997. "Special Shares" shall have the meaning set forth in Section 2.4(a) hereof. "SSOI" shall mean Stewart & Stevenson Operations, Inc. Schedule 4.1(a) Form of Agent Appointment Letter [Closing Date] [Agent Bank] [Cayman Islands] Dear _____: Reference is made to the Shareholders' Agreement, dated as of February 25, 1997 (the "Shareholders' Agreement"), among Cogen Technologies Saba Capital Company, L.L.C. ("Cogen"), Capco Resources, Inc. ("Capco") and Coastal Saba Power Ltd. ("Coastal") (Cogen, Capco and Coastal hereinafter collectively, the "Shareholders"). The undersigned Shareholders, acting jointly, hereby appoint [Agent Bank] as their agent, to act as agent on their behalf to (i) receive all distributions by Saba Power Company (Private) Limited (the "Company") (including dividends, returns of capital and any assets or cash distributed following the winding up of the Company) in accordance with the provisions of the Shareholders' Agreement, and (ii) redistribute all such amounts in accordance with the provisions of-the Shareholders' Agreement, including, without limitation, Section 4.1 thereof. COGEN TECHNOLOGIES SABA CAPITAL COMPANY, L.L.C. By: Cogen Technologies Saba Power GP, Inc., Member By: Name Title and By: Cogen Technologies Saba Power, L.P., Member By: Cogen Technologies Saba Power GP, Inc., its General Partner By: Name Title COASTAL SABA POWER LTD. By: Name Title CAPCO RESOURCES, INC. By: Name Title EX-10.26 5 EXHIBIT 10.26 - LETTER AGREEMENT WITH WESTERN ENERGY RESOURCES EXHIBIT 10.26 WESTERN ENERGY RESOURCES LIMITED c/o Nadeem Babar 1600 Smith Street, Suite 4300 Houston, Texas 77002 February 28, 1997 Capco Resources, Inc. 216 16th Street, No. 730 Denver, Colorado 80202 Gentlemen: Western Energy Resources Limited ("Western") understands that Capco Resources, Inc. ("Capco") has been approved by the State Bank of Pakistan to have issued to Capco 2,675,426 shares of stock (the "Saba Shares") of Saba Power Company Limited ("Saba") against certain approved project development expenses in the amount of US$848,877. Saba is the owner of a power plant which is contemplated to be constructed near Mandi Farouqabad, Province of Punjab, Pakistan. Western is currently a limited partner in a partnership which owns and controls directly or indirectly one of the "Initial Shareholders" (as defined in the Amended and Restated Implementation Agreement between Saba and the Government of Pakistan dated March 31, 1996, as the same may be amended from time to time) in Saba. Saba is in the process of negotiating construction financing for its power plant under the loan documentation more generally described in the Amended and Restated Common Debt agreement dated as of June 15, 1996, by and among Saba Export-Import Bank of the United States, The Sanwa Bank, Limited, as Eurocurrency Facility Agent, ABN AMRO Bank N.V., Singapore Branch, as Inter-Creditor Agent, ABN AMRO Bank N.V., Chicago Branch, as Eximbank Facility Agent and the Financial Institutions who may become the parties Lender thereto, as amended from time to time (the "CDA"). All terms used herein but not otherwise defined herein shall have the meaning ascribed thereto in the CDA. For and in consideration of the mutual promises herein set forth and other good and valuable consideration, by notice given by Capco to Western between 240 and 360 days from and after the date hereof, Capco shall have the right to cause Western to acquire all of the Saba Shares, or if such shares have not been issued, to cause Western to acquire such future right to acquire shares (in either case herein called the "Capco Interest") for a purchase price (the "Purchase Price") equal to $848,877 plus an additional amount equal to interest upon such $848,877 at a rate equal to ten percent (10%) per annum accruing from and after the date hereof through and including the date of closing of such sale and purchase (the "Put Option"). Western shall have the right to direct Capco to sell the Capco Interest to a third party nominee. The closing of such sale and purchase shall be held at the offices of Fulbright & Jaworski L.L.P. in Houston, Texas, or at such other address as the parties may agree, at 10:00 a.m. local time on the date which is 30 days after such notice has been given by Capco to Western. Notice for purposes hereof must be in writing and sent to Western (to the attention of Nadeem Babar (fax no. (713) 651-7803) at the address set forth on this letterhead (or such other address as may be designated by Cogen to Capco) and shall be sent by telecopy (confirmed by overnight messenger delivery) or by messenger delivery, and will be effective upon receipt. At such closing, Western or its nominee, shall pay the Purchase Price to Capco in immediately available U.S. funds and Capco shall deliver to Western the Capco interest free and clear of any and all liens and encumbrances other than those under the loan documentation referred to in the first paragraph of this letter agreement). Capco's Put Option is subject to obtaining all requisite governmental approvals, Page Two including those of the Government of Pakistan, so as to avoid causing violation of laws or agreements binding upon Saba or Western, and to obtaining the approval by the Lenders. If at the time Capco should exercise its Put Option, the Saba Shares are still "Special Shares" (as defined in that certain Shareholders' Agreement dated as of ________, 1997 executed or contemplated to be executed by and among Cogen Technologies Saba Capital Company, L.L.C. ("Cogen"), Capco and Coastal Saba Power Ltd. (the "Sponsors' Shareholder Agreement"), Cogen agrees to transfer to Western an equal number of such Special Shares as were covered by the Put Option for no additional consideration. Cogen also agrees that so long as there are Special Shares still in existence that Western solely (as among Cogen, Capco and Western) shall be entitled to pursue the occurrence of "Enhancement Events" as defined in the Sponsor's Shareholders Agreement with full authority but cooperation from Cogen and Capco. This letter agreement and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. Any controversy, dispute or claim of any nature between or involving any party hereto, regardless of whether the controversy, dispute or claim is based upon an action or omission taken in an individual or representative capacity, and whether or not arising from, relating to or on account of, this Agreement, or any breach or cancellation or it or any default under it, shall be subject to and settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as amended from time to time, before a panel of three neutral arbitrators. Each party shall appoint one arbitrator within 30 days after demand for arbitration is made pursuant to the next succeeding paragraph hereof, and the two appointed arbitrators shall appoint the third arbitrator within 30 days of their appointment. The arbitration proceedings shall take place in Houston, Texas as soon as reasonably possible after the appointment of the third arbitrator and thereafter shall be conducted as expeditiously as reasonably possible. The award rendered by the arbitration shall be final and binding on the parties, and judgement may be entered upon it in accordance with Texas law in any court having jurisdiction of it. Demand for arbitration shall be filed in writing with the other party or parties to this Agreement. A demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on the claim, dispute or other matter in question would be barred by applicable statutes of limitations. Cogen joins in the execution hereof to evidence its agreement and the terms hereof. If the foregoing sets forth your agreement and understanding, please so indicate by executing a copy hereof in the appropriate place set forth below and returning an executed counterpart to the undersigned. This letter shall become effective upon the actual disbursement of loan proceeds out of the Distribution Account to Saba under the loan documentation referred to in the first paragraph of this letter agreement. Page Three Very truly yours, WESTERN ENERGY RESOURCES LIMITED By:/s/ Nadeem Babar Name: Nadeem Babar Title: Managing Director ACCEPTED AND AGREED TO: CAPCO RESOURCES, INC. By:/s/ Edward J. Names Name: Edward J. Names Title: President Date: February 28, 1997 COGEN TECHNOLOGIES SABA CAPITAL COMPANY, L.L.C. By: Cogen Technologies Saba Power GP, Inc., Member By:/s/ Nadeem Babar Name: Nadeem Babar Title: Vice President Date: February 28, 1997 and By: Cogen Technologies Saba Power, L.P., Member By: Cogen Technologies Saba Power GP, Inc., its General Partner By:/s/ Nadeem Babar Name: Nadeem Babar Title: Vice President Date: February 28, 1997 EX-10.27 6 EXHIBIT 10.27 - LETTER AGREEMENT BETWEEN METEOR AND CAPCO EXHIBIT 10.27 April 23, 1996 Mr. Ilyas Chaudhary, President Capco Resources, Ltd. 950 - 444 5th Avenue SW Calgary, Alberta, Canada T2P 2T8 Dear Ilyas: After further discussing my letters of March 7, 1996, with you, Meteor proposes to extend the time period for the prepayment by Capco Resources Ltd. of $1,016,000 of the $1,516,000 Saba Petroleum Company promissory note until February 28, 1997, or until such time as Saba closes any significant offering of its securities, whichever first occurs. This proposed extension is subject to the following terms and conditions: 1. Saba agrees to the Meteor proposal attached to this letter and dated April 23, 1996 (the "Saba Agreement"), and complies with the terms thereof. 2. Payment of $500,000 is made on the Saba promissory note by Capco Resources Ltd. when required for the Pakistan Power Project or June 30, 1996, whichever first occurs. 3. CRL agrees to pay an additional 2% annual simple interest on the balance owed by Saba relating to the promissory note described above. 4. If Saba does not comply with the terms of the Saba Agreement, Capco shall perform on its guarantee to Meteor and take whatever steps are necessary so that Meteor does not lose its opportunity tofully participate in the Pakistan Power Project. Very truly yours, Meteor Industries, Inc. /s/ Edward J. Names Edward J. Names, President Agreed and Accepted this 3rd day of April, 1996. Capco Resources Ltd. By: /s/Ilyas Chaudhary Ilyas Chaudhary, President EX-11 7 EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS COMMON STOCK EXHIBIT 11 METEOR INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS OF COMMON STOCK YEARS ENDED DECEMBER 31 1996 1995 1994 - ------------------------------- ---------- ----------- ------------ Income (loss) from continuing operations $ 461,798 $ (73,641) $ (129,532) Discontinued operations, net of income taxes -- 1,870,453 178,527 Net income 461,798 1,796,812 48,995 Primary earnings per share: Continuing operations $ .15 $ (.15) $ (1,295.32) Discontinued operations -- 3.82 1,785.27 Earnings per share $ .15 $ 3.67 $ 489.95 Weighted average number of common shares outstanding 3,184,397 489,035 100 Fully diluted earnings per share(1) Continuing operations $ .14 $ (.15) $ (1,295.32) Discontinued operations -- 3.82 1,785.27 Earnings per share $ .14 $ 3.67 $ 489.95 Weighted average number of common shares outstanding 3,184,397 489,035 100 Common equivalent shares 37,432 -- -- Average number of common shares outstanding & equivalents 3,221,829 489,035 100 Primary earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for each period. The calculation excludes the effect of common equivalent shares resulting from stock options using the treasury stock method as the effect would not be material. Fully diluted earnings per share are computed based on the weighted average number of common shares and common equivalent shares outstanding for each period. (1) Fully diluted earnings per share for 1995 are identical to primary earnings per share as the effect of common equivalent shares would be antidilutive. EX-21 8 EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT JURISDICTION OF OTHER NAMES UNDER INCORPORATION OR WHICH SUBSIDIARY NAME (AND % OWNED) ORGANIZATION DOES BUSINESS - ------------------------------------- ---------------- ----------------- Pyramid Stores, Inc. (100%) New Mexico None Graves Oil & Butane Co., Inc.(100% by New Mexico None Pyramid Stores, Inc.) El Boracho, Inc. (100% by Graves) New Mexico None Hillger Oil Company (100% by Pyramid) New Mexico None Hatch Pyramid LLC (75%) New Mexico None Capco Analytical Services, Inc.(100%) California None Innovative Solutions and Technologies, Inc. (100%) Colorado None Meteor Holdings LLC (73%) Colorado None Capco Resources, Inc. (100% by Meteor Delaware None Holdings LLC) Bloomfield Pyramid LLC (100%) New Mexico None Graves Rio Rancho LLC (50%) New Mexico None Coors Pyramid, LLC (50%) New Mexico None EX-27.1 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages F-2 through F-4 of the Company's Form 10-K for the year to date, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 DEC-31-1996 151,992 0 5,979,470 0 1,221,729 8,487,947 8,277,368 0 20,433,731 8,942,923 0 3,310 0 0 5,116,581 20,433,731 59,984,499 59,984,499 49,644,010 49,644,010 9,118,899 0 474,136 1,143,048 394,745 461,798 0 0 0 461,798 .15 .15
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