-----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, Cp8AT70sE7G55jOc+Nm5XSpA51GM/OCpRRUZp4iTk4vf5wfxzQYkZYc4nhzNdIWe p2u/haYJkrXZadwMYBgRdQ== 0000948830-97-000119.txt : 19970508 0000948830-97-000119.hdr.sgml : 19970508 ACCESSION NUMBER: 0000948830-97-000119 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970507 SROS: NASD 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12557 FILM NUMBER: 97597169 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 S-1/A 1 As filed with the Securities and Exchange Commission on May 7, 1997 SEC Registration No. 333-12557 U.S. SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 METEOR INDUSTRIES, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Colorado 5541 84-1236619 - ---------------------- ---------------------------- ------------------- (State or Other Juris- (Primary Standard Industrial (IRS Employer Iden- diction of Incorpora- Classification Code Number) tification Number) tion) 216 Sixteenth Street, Suite 730, Denver, Colorado 80202 (303) 572-1135 ------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Edward J. Names, President 216 Sixteenth Street, Suite 730, Denver, Colorado 80202 (303) 572-1135 --------------------------------------------------------- (Name, Address and Telephone Number of Agent for Service) Copies to: Jon D. Sawyer, Esq. William M. Prifti, Esq. Krys Boyle Freedman Scott & Sawyer, P.C. Lynnfield Woods Office Park 600 Seventeenth Street, Suite 2700 220 Broadway, Suite 204 South Tower Lynnfield, Massachusetts 01940 Denver, Colorado 80202 (617) 593-4525 (303) 893-2300 _____________________________________________________________________________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. _X_ _____________________________________________________________________________ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED TITLE OF EACH MAXIMUM MAXIMUM CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF SECURITIES TO TO BE PRICE PER OFFERING REGISTRA- BE REGISTERED REGISTERED UNIT PRICE TION FEE Common Stock, 690,000 $4.625 $3,191,250 $1,100.43 $.001 Par Value Shares Per Share Redeemable 690,000 $0.10 $ 69,000 $ 23.79 Warrants Warrants Per Warrant Common Stock, 690,000 $6.0125 $4,148,625 $1,430.56 $.001 Par Value Shares Per Share Underwriter's -- -- $ 100 $ 0.03 Warrants Common Stock 60,000 $5.78125 $ 346,875 $ 119.61 $.001 Par Value Shares Per Share Underwriter's 60,000 $0.125 $ 7,500 $ 2.59 Redeemable Warrants Per Warrant Warrants Common Stock 60,000 $6.0125 $ 365,500 $ 126.03 $.001 Par Value Shares Per Share Total $8,128,850 $2,803.04 - ----------------------------------------------------------------------------- Estimated solely for the purpose of calculating the registration fee. Includes 90,000 Shares that may be purchased by Westport Resources Investment Services, Inc. (the "Underwriter"), in whole or in part, to cover overallotments, if any. Estimated based on the average of the closing bid and ask quotations on the OTC Bulletin Board on September 19, 1996. Includes 90,000 Warrants that may be purchased by the Underwriter, in whole or in part, to cover overallotments. Issuable upon exercise of the Redeemable Warrants. To be issued to the Underwriter. Issuable upon exercise of the Underwriter's Warrants. Issuable upon exercise of Underwriter's Redeemable Warrants. $2,949.78 was paid at the time of the initial filing. The total fee shown is reduced as a result of the elimination of the registration of 92,000 shares of Common Stock which was to have been sold by selling shareholders.
Pursuant to Rule 416, there are also being registered such additional shares of Common Stock, $.001 par value, as may become issuable in accordance with the anti-dilution provisions of the Underwriter's Warrants. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. METEOR INDUSTRIES, INC. Cross-Reference Sheet pursuant to Item 501(b) of Regulation S-K between Registration Statement (Form S-1) and Form of Prospectus. Item Number and Caption Heading in Prospectus 1. Forepart of the Registration Outside Front Cover Page; Statement and Outside Front Inside Front Cover Page Cover Page of Prospectus 2. Inside Front and Outside Back Inside Front Cover Page; Cover Pages of Prospectus Outside Back Cover Page 3. Summary Information, Risk Prospectus Summary; Risk Factors and Ratio of Earnings Factors; The Company to Fixed Charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Description of Securities; Underwriting 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Outside Front Cover Page; Underwriting 9. Description of the Securities to Description of Securities be Registered 10. Interest of Named Experts and Legal Matters Counsel 11. Information With Respect to the Registrant: (a) Description of Business The Company; Business (b) Description of Properties Business -- Facilities (c) Legal Proceedings Business - Legal Proceedings (d) Market Price; Dividends and Price Range of Common Stock; Related Stockholder Matters Dividend Policy; Risk Factors; Description of Securities (e) Financial Statements Financial Statements (f) Selected Financial Information Selected Financial Information (g) Supplementary Financial Not Applicable Information (h) Management's Discussion and Management's Discussion and Analysis of Financial Condi- Analysis of Financial Condi- tion and Results of Opera- tion and Results of Operations tions (i) Disagreements with Accountants Not Applicable (j) Directors and Officers Management (k) Executive Compensation Management (l) Security Ownership Security Ownership of Management and Principal Shareholders (m) Certain Relationships and Management; Certain Transactions Related Transactions 12. Disclosure of Commission Posi- Not Applicable tion on Indemnification for Securities Act Liabilities SUBJECT TO COMPLETION; DATED MAY 7, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. METEOR INDUSTRIES, INC. 600,000 Shares of Common Stock and 600,000 Redeemable Warrants Meteor Industries, Inc., a Colorado corporation (the "Company"), hereby offers 600,000 shares of common stock, par value $.001 per share (the "Common Stock"), and 600,000 redeemable common stock purchase warrants (the "Redeemable Warrants"). The Common Stock and the Redeemable Warrants offered hereby (sometimes hereinafter collectively referred to as the "Securities") may be purchased in this offering only together on the basis of one share of Common Stock and one Redeemable Warrant. Each Redeemable Warrant is separately transferable immediately upon issuance. Each Redeemable Warrant entitles the holder to purchase one share of Common Stock at a price of $___ per share (130% of the Common Stock Offering Price) commencing on the date of this Prospectus until _______, 1999. The Redeemable Warrants are redeemable by the Company at a redemption price of $.10 per Redeemable Warrant at any time commencing 90 days from the date of this Prospectus on 30 days' prior written notice, provided that the market price of the Common Stock equals or exceeds $____ per share (150% of the Common Stock Offering Price) for 10 consecutive trading days ending within 20 days prior to the notice of redemption. (See "DESCRIPTION OF SECURITIES.") The Company's Common Stock currently trades on the OTC Bulletin Board under the symbol "METE", and on May 6, 1997, the closing bid and ask prices of the Common Stock were $4.50 and $5.25, respectively. (See "PRICE RANGE OF COMMON STOCK.") The Common Stock and Redeemable Warrants have been approved for listing on the American Stock Exchange ("AMEX") under the proposed symbols "MTE" and "MTEW", respectively. It is currently anticipated that the offering price per share will be between $5.00 and $6.00. The final offering price of the Shares will be determined by negotiations between the Company and Westport Resources Investment Services, Inc. (the "Representative") based upon the then current market price for the Common Stock, the Company's financial condition, estimates of its business potential, liquidity for the Common Stock, and general market conditions immediately preceding the date of this Prospectus. (See "PRICE RANGE OF COMMON STOCK" and "UNDERWRITING.") __________________ THESE ARE SPECULATIVE SECURITIES. AN INVESTMENT IN THE SECURITIES OFFERED HEREIN INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS." ___________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ___________________
Price to Underwriting Proceeds to Public Discount Company Per Share . . . . . . . . . . . $ $ $ Per Warrant . . . . . . . . . . $0.10 $0.01 $0.09 Total. . . . . . . . . . . $ $ $ Does not include (i) a non-accountable expense allowance of 3% of the gross proceeds from this offering amounting to $_______ ($_____ if the Over-allotment Option is exercised in full) to the Representative, of which $20,000 has been paid as of the date of this Prospectus, and (ii) the sale to the Representative by the Company of a warrant (the "Representative's Warrants") to purchase 60,000 shares of Common Stock at $____ per share and 60,000 Redeemable Warrants to purchase 60,000 shares of Common Stock at an exercise price of $______ at any time after twelve months from the date hereof and for a period of four years thereafter. The Company has also agreed to indemnify the Representative against certain liabilities, including liabilities arising under the Securities Act of 1933. (See "UNDERWRITING.") Before deducting expenses payable by the Company estimated at $239,000, including the non-accountable expense allowance referred to in footnote 1. The Company has granted to the Representative a 45-day option to purchase up to 90,000 additional Shares and/or 90,000 additional Redeemable Warrants on the same terms and conditions as set forth above solely to cover over-allotments, if any. If the over-allotment option is exercised in full, the total Price to the Public, Underwriting Discount and Proceeds to the Company will be $_______, $________ and $________, respectively. Westport Resources Investment Services, Inc. 315 Post Road West Westport, Connecticut 06880 The date of this Prospectus is _________, 1997. 2 (INSIDE FRONT COVER) (Picture of convenience store) (METEOR INDUSTRIES, INC. LOGO) (Picture of convenience store) Convenience Stores, Las Cruces, NM 3 IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Securities are being offered on a "firm commitment" basis subject to receipt and acceptance by the Underwriters, the approval of certain legal matters by its counsel and prior sale. The Underwriters reserve the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of the certificates representing the Securities will be made on or about three business days from the date of this Prospectus, at the office of Westport Resources Investment Services, Inc., in Westport, Connecticut. ADDITIONAL INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the securities offered hereby has been filed by the Company with the Securities and Exchange Commission, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the securities offered hereby, reference is made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. However, all material elements of such contracts and documents are disclosed in this Prospectus. A copy of the Registration Statement may be inspected without charge at the Commission's principal offices in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. The Company is subject to the reporting requirements of Section 13(a) and to the proxy requirements of Section 14 of the Securities Exchange Act of 1934, as amended, and in accordance therewith files periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information concerning the Company may be inspected or copied at the public reference facilities at the Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices in New York, 7 World Trade Center, New York, New York 10048, and in Chicago, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents can be obtained at the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Electronic filings made through the Electronic Data Gathering, Analysis and Retrieval system are publicly available through the Commission's web site (http.//www.sec.gov). 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY 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 engaged in the marketing and distribution of refined petroleum and related products primarily in northern New Mexico, Colorado, Arizona and Utah. Graves operates seven retail sites in northern New Mexico. Hillger Oil Company ("Hillger"), which was acquired effective April 1, 1995, is engaged in the marketing and distribution of refined petroleum and related products primarily in southern New Mexico and Arizona. Hillger operates nine convenience stores in southern New Mexico. The Company sells fuel branded Phillips 66, Conoco, Texaco, Diamond Shamrock and FINA. In November 1995, the Company acquired all of the outstanding stock of Capco Resources, Inc. ("CRI"), in exchange for shares of the Company's Common Stock which represent approximately 53% of the shares now outstanding. 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. Capco Analytical Services, Inc. ("CAS"), a wholly-owned subsidiary of CRI, is involved in providing environmental consulting and laboratory analysis and was also acquired in the transaction with CRI. Approximately 98% of the Company's gross revenues are presently derived from the Graves and Hillger subsidiaries. The proceeds of this offering will be used to reduce accounts payable, purchase equipment and inventory, the repayment of debt, and the acquisition of petroleum marketing businesses. THE OFFERING
Securities offered 600,000 Shares of Common Stock 600,000 Redeemable Warrants Shares of Common Stock Outstanding: Prior to the offering 3,440,138 Shares After the offering 4,040,138 Shares Trading Symbol - OTC Bulletin Board METE Proposed AMEX Trading Symbols: Common Stock MTE Redeemable Warrants MTEW __________________ Does not include (i) 7,000 shares of Common Stock issuable upon the exercise of outstanding warrants to purchase Common Stock; (ii) up to 896,911 shares of 5 Common Stock of the Company issuable upon the exchange of Preferred Stock of a subsidiary; (iii) 1,250,000 shares of Common Stock reserved for issuance pursuant to stock options which may be granted under the Company's Incentive Stock Option Plan and its 1997 Incentive Equity Plan of which options to purchase 413,300 shares of Common Stock are currently outstanding; or (iv) 130,000 shares of Common Stock issuable upon the exercise of an option held by consultants. (See "MANAGEMENT" and "DESCRIPTION OF SECURITIES.") Does not give effect to an aggregate of 900,000 shares of Common Stock issuable upon exercise of: (i) the Redeemable Warrants; (ii) the over-allotment option; (iii) the Representative's Warrants; and (iv) the Redeemable Warrants subject to the over-allotment option. (See "UNDERWRITING.")
RISK FACTORS: The purchase of these securities involves a high degree of risk. Prospective investors should review carefully and consider the factors described under "RISK FACTORS." USE OF PROCEEDS: The proceeds from the offering will be used to reduce accounts payable, the repayment of debt, to purchase equipment and inventory, and the acquisition of petroleum marketing businesses. (See "USE OF PROCEEDS.") SUMMARY 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 are included in the following financial information since November 2, 1995, the effective date of the acquisition. The following table sets forth certain selected financial data with respect to the Company and is qualified in its entirety by reference to the financial statements and notes thereto included in this Prospectus. 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 6,921 403 -- -- 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) 6 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 continuing operations 462 (74) (129) (2) -0- Income from discon- tinued operations -0- 1,871 179 690 765 Net income 462 1,796 49 688 765 Net income(loss) from continuing opera- tions per common share .15 (.15) (1,295.32) (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- RISK FACTORS The securities offered hereby represent a speculative investment and involve a high degree of risk of a loss of part or all of the investment. Therefore, prospective investors should read this entire Prospectus and carefully consider the following risk factors in addition to the other information set forth elsewhere in this Prospectus prior to making an investment. 1. SUBSTANTIAL DEBT SERVICE. The structure of Meteor's acquisitions of Graves and Hillger have resulted in substantial debt service obligations to be funded by operations. Because of the nature of these leveraged buyouts and because of the Company's continued expansion and development plans, 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 and to finance capital expenditures and increased inventory requirements. In order to pay its debt obligations, the interest on such obligations and other expenses, the Company must generate cash flows from operations which exceed that which were achieved in the past. In addition, even if previous cash flows are exceeded throughout the terms of its obligations, the Company most likely will be required to raise capital, refinance its existing debt or sell assets in order to pay its obligations as they become due. 2. RELIANCE ON KEY EMPLOYEES. The Company is wholly dependent on the personal efforts and abilities of its Officers and key employees. The loss of or unavailability to the Company of the services of one or more of its key employees would have a materially adverse effect on the Company's business prospects and/or potential earning capacity. In particular, the Company's President, Edward J. 7 Names, who has an employment contract, is instrumental for the overall planning and management of the Company, its financing and its growth. There can be no assurance, if the services of any of these individuals were unavailable to the Company, that the Company would be able to employ a qualified replacement person or persons on terms suitable to the Company. The Company presently does not maintain key person life insurance on any of its key employees but has agreed to obtain a policy on the life of Edward J. Names in the amount of $1,500,000 upon completion of this offering. 3. FRANCHISE AGREEMENTS. The Company's petroleum marketing is dependent on franchise agreements with major producers of petroleum products. The Company's existing contracts with Phillips Petroleum Company, Conoco, Inc., Diamond Shamrock, Texaco, Inc., Fina Oil Company and Sun Oil Company have been in place for many years, but each of these contracts is terminable at the supplier's discretion on short notice. The loss of the Phillips 66 and Conoco contracts in particular could have a material adverse effect on the Company's revenues and profits. 4. COMPETITION. The Company's convenience store and gasoline distribution businesses are highly competitive. The Company competes with businesses similar in size to itself, with major oil companies with far greater resources than it possesses, and also with weaker firms who cut prices and engage in other efforts to remain in business. This competition, from time to time, adversely impacts operations and earnings. The Company operates 15 convenience stores or retail outlets without convenience stores in connection with its retail gasoline operations and leases one store to an independent operator. The convenience store business has been extremely competitive resulting in bankruptcies and reorganizations for a number of companies in the industry. 5. NARROW MARGINS FOR REFINED PETROLEUM PRODUCTS AND MARKET SHARE CONFLICTS. The distribution of refined petroleum products by the Company is extremely competitive, with narrow margins, requiring constant, careful attention, supervision and controls. Management has limited control over the competitive pricing of petroleum products. Foreign producers and refiners of petroleum products from time to time may affect materially the available supply of petroleum products, which could affect pricing and margins. Also, major oil companies, concerned with maintaining or increasing their respective market shares, sometimes depress prices and margins to attain or sustain product volume. These practices from time to time impact the earnings and operations of independent distributors such as the Company. 6. POTENTIAL ACCIDENTS. The Company owns and operates gasoline storage tanks, a fleet of 34 tank trucks, and wholesale and retail outlets for refined petroleum products. The presence of flammable and combustible products at these facilities provides the potential for fires and explosions which could destroy both property and human life. These products, almost all liquids, also have the potential to impose environmental damage if released. The Company has general liability coverage and a commercial umbrella liability policy with total coverage limits of $5 million as well as other insurance covering damage to its properties. 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 necessarily protect the Company for ultimate liability for any damage to the environment, especially if such environmental damage is caused by leaking lines or tanks. Such environmental related coverage generally is unavailable or available a prohibitive cost. See the heading "Environmental Risks" below. 8 7. PAKISTAN POWER PROJECT. Due to general political and economic instability in Pakistan, the Company's investment of approximately $685,000 in Saba Power Company Ltd. may not yield any return to the Company. (See "Business - Saba Power Company Ltd.) 8. CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS. Management and principal shareholders will beneficially own 75.8% of the outstanding common stock after this offering. Effective control of the Company will remain in the hands of such persons. 9. LIMITED DIRECTOR LIABILITY. The liability of a Director to the Company or any Shareholder for monetary damages for breach of his fiduciary duties as a Director is limited by the Company's Articles of Incorporation with certain exceptions. In addition, the Company will provide Officers and Directors the maximum indemnification allowable from time to time under Colorado law. These provisions limit the Company's and its Shareholders' ability to obtain damages or other relief from its Officers and Directors in the event of claimed wrongdoing. 10. GENERIC PREFERRED STOCK AUTHORIZED. The Company's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Preferred Stock, the terms, preferences, rights and restrictions of which may be established by its Board of Directors. Other companies on occasion have issued series of such preferred stock with terms, rights, preferences and restrictions that could be considered to discourage other persons from attempting to acquire control of such companies and thereby insulate incumbent management. It is possible the Company could issue shares of its Preferred Stock for such a purpose. In certain circumstances, the existence of corporate devices which would inhibit or discourage takeover attempts could have a depressive effect on the market value of the stock of a company. The Board of Directors has no current plans to issue any shares of Preferred Stock. 11. NO DIVIDENDS. The Company has paid no dividends on its Common Stock since incorporation. The Company does not anticipate paying dividends on its Common Stock in the foreseeable future and intends to devote any earnings to the development of the Company's business or the repayment of debt. 12. CONFLICTS OF INTEREST. Certain conflicts of interest may exist between the Company and its officers and directors. Each of such individuals has other business interests to which they devote their attention, and they are expected to continue to do so. As a result, conflicts of interest may arise that can be resolved only through their exercise of such judgment as is consistent with their fiduciary duties to the Company. No officer or director owes a fiduciary duty to another entity regarding business opportunities related to lines of business similar to that of the Company. 13. ENVIRONMENTAL ISSUES. The Company's operations, which include distribution and jobbing of refined petroleum products (collectively the above operations are referred to as "Regulated Environmental Activities") are subject to a variety of federal, state and local laws, rules and regulations governing the storage, translation, manufacture, use, discharge, release and disposal of products and contaminants into the environment or otherwise relating to the protection of the environment. The Company's Regulated Environmental Activities, by their very nature, give rise to the potential for substantial environmental risks including: RISK OF RELEASE OF PETROLEUM AND RELATED PRODUCTS AND WASTES. The accidental or unintended release or discharge of petroleum and related products 9 and wastes which result from normal activities at tank farms and service stations and during the transportation or manufacture of such products and wastes, or the release or discharge of such products or waste in excess of permitted levels, may occur despite the operational controls and procedures established by the Company. Releases or discharge of such petroleum and related products and associated wastes, could contaminate the environment. Such releases or discharges may give rise to potential liability under the environmental laws, rules and regulations of the United States, individual states, and local jurisdictions relating to contamination or threat of contamination of air, soil, groundwater and surface waters. Such liability could expose the Company to fines or other penalties, both civil and criminal, and could result in the Company being required to institute extensive cleanup and remediation activities. RISK OF VIOLATION OF ENVIRONMENTAL REGULATIONS. The Company is subject to numerous environmental laws, rules and regulations covering its Regulated Environmental Activities. The Company's failure to comply with any applicable environmental regulation, whether or not intentional, can give rise to fines, penalties and sanctions, including criminal charges against employees and management, and may under certain circumstances require the closure of such non-complying facilities. RISK OF FUTURE ENVIRONMENTAL REGULATIONS. The environmental laws, rules and regulations which cover the Company's Regulated Environmental Activities continue to evolve. Stricter environmental regulations and controls or modified environmental regulations and controls could impose added costs on the operation of the Company, or cause the manufacture, storage, transportation or sale of some of the Company's products to become either unprofitable or illegal. RISK OF ENVIRONMENTAL HEALTH AND SAFETY OF PERSONS. Exposure of the Company's employees or the public to certain petroleum and related products or waste could result in damage to human health and safety, and give rise to liability to the Company, thereby impacting the economic value of the Company. RISK OF ENVIRONMENTAL REIMBURSEMENT PROCEDURES. Certain of the Company's Regulated Environmental Activities, such as leaking petroleum storage tank remediation, give rise to a potential for reimbursement of all or a portion of the amounts expended from applicable governmental reimbursement programs. Such reimbursement programs are subject to changes in applicable statutes or the interpretation of the law, which could alter the timing or availability of reimbursement funds to the Company and its customers. 14. OUTSTANDING OPTIONS AND WARRANTS. Currently, the Company has outstanding options and warrants to purchase up to 550,300 shares of Common Stock at prices ranging from $1.00 to $5.25 per share, and has the ability to grant options to purchase 836,700 additional shares under its Incentive Stock Option Plan and its 1997 Incentive Equity Plan. Additionally, the Company has agreed to sell to the Representative and its designees Representative's Warrants to purchase up to 60,000 shares of Common Stock and 60,000 Redeemable Warrants exercisable during the four year period commencing one year from the date of this Prospectus at $_____ per share of Common Stock and $____ per Redeemable Warrant, subject to adjustment. The Representative will have certain registration rights with respect to the Representative's Warrants and the shares of Common Stock underlying such warrants. For the term of such options and warrants, the holders thereof will have an opportunity to profit from the rise in the market price of the Company's Common Stock without assuming the risks of ownership. This may have an adverse effect on the terms upon which the Company could obtain additional capital. 10 Furthermore, it might be expected that the holders of such options and warrants would exercise them at a time when the Company would be able to obtain equity capital on terms more favorable than those provided for by the options and warrants. (See "MANAGEMENT," "DESCRIPTION OF SECURITIES" and "UNDERWRITING.") 15. POTENTIAL SECURITIES LAW LIABILITIES FOR PRIVATE OFFERING. During February and March 1997, the Company sold 130,000 shares of its Common Stock and warrants to purchase 130,000 shares of Common Stock to 16 accredited investors for a total of $520,000 in a private offering. Because such sales were made at a time when the Registration Statement relating to this public offering was on file with the SEC, the private sales might be considered to e "integrated," or part of the same offering as this public offering. The Company does not believe that the two offerings would be integrated for several reasons, one of which is that the proceeds of the offerings are to be used for different purposes. However, if it was determined that the two offerings were to be integrated, the sales to the private investors should have been registered under the Securities Act of 1933, as amended, because they were part of a "public offering." As a result, if the persons who purchased the shares in February and March 1997 were to bring a legal action against the Company alleging violation of the securities laws and were to be successful, then the Company could be held liable to those persons for up to the full amount of the purchase price ($520,000) plus interest. No legal actions have been threatened or are pending with respect to this matter. If any such legal actions should be brought against the Company, the Company intends to vigorously maintain a defense against such actions. 16. PREFERRED STOCK OF SUBSIDIARY. Graves Oil & Butane Co., Inc., a subsidiary of the Company has outstanding shares of preferred stock. held by Theron J. Graves, which currently may be exchanged for shares of the Company's Common Stock at the current bid price or up to 22.2% of the shares of the Company's Common Stock outstanding after such exchange, whichever yields fewer shares. As a result, after this offering Mr. Graves will have the right to acquire a maximum of 896,911 shares of the Company's Common Stock assuming that no options or warrants are exercised. Mr. Graves would have certain piggy-back registration rights with respect to any shares which he receives upon exchange. As a result, Mr. Graves has the right to acquire a substantial number of shares of the Company's Common Stock in the future, and the resale of such shares could adversely affect the market for the Company's Common Stock. (See "SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS" and "DESCRIPTION OF SECURITIES.") 17. COMMON STOCK ELIGIBLE FOR RESALE. Of the 3,440,138 shares of Common Stock outstanding as of the date of this Prospectus, approximately 2,967,000 shares are "restricted securities" and under certain circumstances may be sold in compliance with Rule 144 adopted under the Securities Act of 1933, as amended. Of such shares, approximately 2,837,000 shares are presently eligible for resale under Rule 144 and the remaining 130,000 shares will be eligible for sale in February and March of 1998. The Company has obtained the agreement of its Officers, Directors and record shareholders who own 5% or more of the Company's outstanding common stock to not sell, publicly transfer or assign more than 25,000 of the 2,598,371 shares of Common Stock currently owned by them (including shares underlying their stock options which are currently exercisable or exercisable within 60 days), for a period of one year from the date of this Prospectus without the prior written consent of the Representative. The Company has agreed to use reasonable efforts to register 640,000 shares of restricted Common Stock for resale by the holders thereof, and the Company may file such registration statement within three to nine months after the date of this Prospectus. The Company also intends to file an S-8 registration statement which would register the shares of Common Stock issuable on the exercise of stock options granted under the 11 Company's stock option plans, which would allow the resale of such shares. (See "DESCRIPTION OF SECURITIES -- Shares Eligible for Future Sale.") Future sales of such shares will in all likelihood depress the market price of the Company's Common Stock. 18. POSSIBLE VOLATILITY OF PRICE OF SHARES. The price of shares of publicly-traded corporations tend to fluctuate over a wide range. It can be expected, therefore, that there may be wide fluctuations in the market price for the Common Stock. There is no assurance that an active market will develop in the Common Stock. The lack of a current market for the Common Stock and fluctuations in trading interest and changes in the Company's operating results, financial condition and prospects could have a significant impact on the market price for the Common Stock. 19. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations, including plans and objectives relating to (i) petroleum marketing and (ii) acquisitions and financing. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Although the Company expects to operate its petroleum marketing business, and make acquisitions with financing from major oil companies, there can be no assurance that competitive conditions within the industry will not change materially or adversely, and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Prospectus will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company of any other person that the objectives and plans of the Company will be achieved. THE COMPANY 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. 12 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. 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. 13 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. DIVIDEND POLICY 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. SELECTED FINANCIAL INFORMATION 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. 14 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 6,921 403 -- -- 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) 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 con- tinuing operations 462 (74) (129) (2) -0- Income from discon- tinued operations -0- 1,871 179 690 765 Net income 462 1,796 49 688 765 Income(loss) from con- tinuing operations per common share .15 (.15) (1,295.32) (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- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR METEOR INDUSTRIES, INC. This Prospectus 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. 15 The selected financial information 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 a long term debt becoming current. 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 partially 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. 16 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. 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. 17 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 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 an increase in sales as discussed above. The Company's gross profit for the year ended December 31, 1996, was $10,340,000 compared to $2,455,000 for the comparable 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 comparable 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 comparable 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 comparable 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 comparable 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 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. 18 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. 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. USE OF PROCEEDS The estimated net proceeds from the sale of the 600,000 Shares of Common Stock and 600,000 Redeemable Warrants offered hereby will be approximately $2,515,000 after deducting underwriting discounts and expenses of the offering based on an assumed offering price of $5.00 per Share and $.10 per Warrant. Such proceeds will be applied substantially as follows:
19 APPROXIMATE APPLICATION OF PROCEEDS DOLLAR AMOUNT Payment of Accounts Payable $ 200,000 Repayment of Debt 500,000 Purchase of Equipment and Inventory 300,000 Acquisition of Petroleum Marketing Businesses 1,515,000 ---------- Total $2,515,000 __________________ Such amounts will be used to either pay down amounts outstanding under one of the Company's lines of credit from Norwest Business Credit, Inc., or a promissory note held by Theron J. Graves. The line of credit bears interest at the prime rate plus 2.0%, is collateralized by trade accounts receivable and inventory of the Company's Graves subsidiary, and is due in June 1998. As of December 31, 1996, $1,861,189 was outstanding under this line of credit. The promissory note to Mr. Graves bears interest at 2% over the prime rate and is secured by 50% of the Graves common stock held by the Company. The Company is required to make payments of $200,000 every six months until October 1, 1997, when it is due in full. As of December 31, 1996, $1,759,139 was outstanding under this promissory note. In the event that the Company does not use all of the amounts allocated for the acquisition of petroleum marketing businesses within 12 months of the date of this Prospectus, the Company intends to use such unused funds to enhance its current business through capital expenditures (See "BUSINESS -- Petroleum Marketing")
It is expected that the net proceeds from this offering will satisfy the cash requirements of the Company for a period of approximately 12 months, and that during that period it will not be necessary for the Company to raise additional funds, except for further expansion and business opportunities not yet defined. Any additional proceeds received upon the exercise of the Over-allotment Option, the Redeemable Warrants and the Underwriter's Warrants to be sold to the Underwriter will be used for general corporate purposes. Pending utilization of the proceeds of this offering, the Company may invest such net proceeds in short-term government securities in a nondiscretional account of the Company. BUSINESS GENERAL Meteor Industries, Inc. ("Meteor" or the "Company"), through its wholly- owned subsidiaries, is engaged in the marketing and distribution of refined petroleum and related products and provides environmental services. In addition, through its Meteor Holdings LLC and Capco Resources, Inc. ("CRI") subsidiaries, the Company has an interest in Saba Power Company Ltd., which is in the process of building a power project in Pakistan. 20 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 distribution 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. 21 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 Prospectus, 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 22 Pakistan. All documentation relating to the project's permanent debt financing 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 possi- bility 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 23 then the Company will have the choice of investing more capital or suffering ordinary dilution to its ownership interest without incurring any penalties. 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 24 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. 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. Meteor Industries, Inc. ("Meteor" or the "Company"), through its wholly-owned subsidiaries, is engaged in the marketing and distribution of refined petroleum and related products and provides environmental services. In addition, through its Capco Resources, Inc. ("CRI") subsidiary, the Company has an interest in Saba Power Company Ltd., which is in the process of co-developing a power project in Pakistan, and owns Capco Analytical Services, Inc., which provides environmental consulting and laboratory analysis services. ENVIRONMENTAL ISSUES 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. 25 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, 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 26 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 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. 27 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 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. EMPLOYEE RELATIONS 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. FACILITIES 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. 28 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 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. 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 of 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 Prospectus, 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 $550,000 after payment of the Company's costs and attorney's fees. The Company expects to receive such payment during May 1997. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS 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 29 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 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 sub- sidiaries. 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 30 distribution holding company. Mr. Greaves devotes his full time to the business of the Company's subsidiaries described above. 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. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts Securities Other Re- Underlying All Annual stricted Options/ Other Name and Principal Compen- 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. 31 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. 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 32 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. 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. As of the date of this prospectus only 5,000 of such options remain outstanding. 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. 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. 33 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. 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 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.
PERCENTAGE OF CLASS NAME AND ADDRESS AMOUNT OF BENEFICIAL PRIOR TO AFTER OF BENEFICIAL OWNER OWNERSHIP OFFERING OFFERING - --------------------------- -------------------- -------------------- Capco Resources Ltd. 1,745,000 50.7% 43.2% #950, 444 - 5th Avenue, S.W. Calgary, Alberta CANADA T0P 2T8 Edward J. Names 333,973 9.7% 8.2% 216 - 16th Street, Suite 730 Denver, CO 80202 Ilyas Chaudhary 1,778,333 51.7% 43.7% #950, 444 - 5th Avenue, SW Calgary, Alberta CANADA TOP 2T8 Dennis R. Staal 92,765 2.7% 2.3% 216 - 16th Street, Suite 730 Denver, CO 80202 Adres Chaudhary 378,000 11.0% 9.4% 600 Hunter Trail, Suite #4 Glendora, CA 91740 Theron J. Graves 767,711 22.2% 22.2% 761 South Miller Farmington, NM 87499 All Executive Officers and 2,220,371 64.3% 53.8% Directors as a Group (4 Persons) __________________ 34 Includes 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. 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. Following the completion of this offering, the maximum number of shares of Common Stock which Mr. Graves could receive upon exchange will increase to 896,911. (See "DESCRIPTION OF SECURITIES.") 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.
CERTAIN 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 trans- actions 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. 35 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 out- standing common stock of Graves Oil & Butane Co., Inc. from its sole share- holder, 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 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 (including principal and interest) every six months and the balance on October 1, 1997 (the "Note"). This Note is secured 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 36 (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. 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 to 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 37 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. 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. DESCRIPTION OF SECURITIES COMMON STOCK The Company's Articles of Incorporation authorize the issuance of 10,000,000 shares of Common Stock, $.001 par value. Each record holder of Common Stock is 38 entitled to one vote for each share held on all matters promptly submitted to the stockholders for their vote. Cumulative voting for the election of directors is not permitted by the Articles of Incorporation. Holders of outstanding shares of Common Stock are entitled to such dividends as may be declared from time to time by the Board of Directors out of legally available funds; and, in the event of liquidation, dissolution or winding up of the affairs of the Company, holders are entitled to receive, ratably, the net assets of the Company available to stockholders after distribution is made to the preferred stockholders, if any, who are given preferred rights upon liquidation. Holders of outstanding shares of Common Stock are, and all unissued shares when offered and sold will be, duly authorized, validly issued, fully paid, and nonassessable. To the extent that additional shares of the Company's Common Stock are issued, the relative interests of the existing stockholders may be diluted. REDEEMABLE WARRANTS The following discussion of certain terms and provisions of the Redeemable Warrants is qualified in its entirety by reference to the Warrant Agreement (as hereinafter defined) and also the detailed provisions of the form of Warrant attached to the Warrant Agreement between the Company and American Stock Transfer & Trust, Inc. (the "Warrant Agent"). Each Redeemable Warrant entitles the holder to purchase, at a price of $____ subject to adjustment, one share of Common Stock at any time commencing on the date of this Prospectus until ________, 1999 (two years from the date of this Prospectus). The Company may redeem the Redeemable Warrants at $.10 per Warrant upon 30 days' prior written notice in the event that the Common Stock has traded above 150% of the exercise price of the Redeemable Warrants for 10 consecutive trading days ending not more than ten days prior to the mailing of the notice of redemption. For purposes of determining the daily trading price of the Company's Common Stock, if the Common Stock is listed on a national securities exchange, is admitted to unlisted trading privileges on a national securities exchange, or is on NASDAQ, then the last reported sale price of the Common Stock on such exchange or NASDAQ each day shall be used. If the Common Stock is not so listed on such exchange or system or admitted to unlisted trading privileges then the average of the last reported bid prices reported by the OTC Bulletin Board each day shall be used to determine such daily trading price. The Redeemable Warrants may only be redeemed if a current registration statement is in effect. Any Warrant holder who does not exercise prior to the redemption date, as set forth in the Company's notice of redemption, will forfeit the right to purchase the shares of Common Stock underlying the Redeemable Warrants and, after the redemption date, any outstanding Redeemable Warrants will become void and be of no further force or effect. If the Company does not redeem the Redeemable Warrants, such Warrants will expire, become void and be of no further force or effect on conclusion of the exercise period. All of the Redeemable Warrants must be redeemed if any are to be redeemed. The Redeemable Warrants have been issued pursuant to a Warrant Agreement between the Company and the Warrant Agent. The Company has authorized and reserved for issuance the shares of Common Stock issuable upon exercise of the Redeemable Warrants. When delivered, all shares of Common Stock issued upon exercise of the Redeemable Warrants will be duly and validly authorized and issued, fully paid and nonassessable, and no preemptive rights or rights of first refusal will exist with respect thereto. 39 Redeemable Warrants may be exercised upon surrender of the Warrant certificate on or prior to its expiration date (or earlier redemption date) at the offices of American Securities Transfer & Trust, Inc., the Warrant Agent, with the form of "Election to Purchase" on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price (by certified check or bank check payable to the order of the Company) for the number of shares with respect to which such Warrant is being exercised. The exercise price of the Redeemable Warrants and the number of shares to be obtained upon exercise of such Warrant are subject to adjustment in certain circumstances including a stock split of, or stock dividend on, or a subdivision, combination, or recapitalization of the Common Stock. In the event of liquidation, dissolution or winding up of the Company, holders of the Redeemable Warrants, unless exercised, will not be entitled to participate in the assets of the Company. Holders of the Redeemable Warrants will have no voting, preemptive, liquidation or other rights of a shareholder, and no dividends will be declared on the Redeemable Warrants. PREFERRED STOCK The Company's Articles of Incorporation authorize the issuance of 10,000,000 shares of Preferred Stock, $1.00 par value. The Board of Directors of the Company is authorized to issue the Preferred Stock from time to time in series and is further authorized to establish such series, to fix and determine the variations in the relative rights and preferences as between series, to fix voting rights, if any, for each series, and to allow for the conversion of Preferred Stock into Common Stock. At present, no Preferred Stock is issued or outstanding or contemplated to be issued. SECURITIES OF SUBSIDIARY The Company's Graves subsidiary has authorized 1,000,000 shares of $.01 par value common stock, all of which is issued, outstanding and owned by the Company. Graves also has authorized 1,000,000 shares of Series A Preferred Stock, all of which are issued, outstanding and held by Theron J. Graves, the former 100% shareholder of Graves. (See "CERTAIN TRANSACTIONS --Transactions Involving Graves.") The Graves Series A Preferred Stock has a liquidation value of $3.5435 per share, accrues a dividend of 8% per year, and is redeemable at liquidation value plus accrued dividends by the holder any time after September 15, 2000. The Graves Series A Preferred Stock is convertible into either the common stock of Meteor or the common stock of Graves at the option of the holder. The conversion rate is based on the bid price of the common stock, if a trading market exists, but the total common shares issued on conversion of all preferred stock cannot exceed 22.2% of the issuing company's outstanding common stock. The obligations of Graves under the Series A Preferred Stock is secured by the fixed assets of Graves. In the event of a default under the Meteor promissory note issued to purchase the Graves common stock, the holders of the Graves Series Preferred have the ability to elect all the Graves Directors. The holder of the common stock received on conversion is entitled to certain rights to have such common stock registered for sale. PRIOR UNDERWRITER'S WARRANTS In connection with the Company's initial public offering, the Company issued to the managing underwriter warrants to purchase shares of Common Stock (the "Prior Underwriter's Warrants"). These warrants were exercisable to purchase approximately 30,250 shares of Common Stock at a price of approximately $3.40 per 40 share through January 13, 1999. The exercise price of the Prior Underwriter's Warrants and the number of shares of Common Stock underlying such warrants was subject to adjustment under certain circumstances to prevent dilution to the holders in the event of stock dividends, stock splits, stock combinations or upon a sale of assets, merger or consolidation. Holders of the shares of Common Stock underlying the Prior Underwriter's Warrants had the right to join in any registration statement or offering filed by the Company under the Securities Act of 1933 to register the Prior Underwriter's Warrants and underlying securities for a period of seven years from January 14, 1994. In addition, for a period of five years from January 14, 1994, the Company agreed, upon request of the holders of not less than fifty percent of the Prior Underwriter's Warrants or underlying securities, to file, not more than once, a registration statement or offering statement under Regulation A registering or qualifying the underlying shares at the Company's expense. All expenses of such registration or qualification (except for underwriting commissions and expense) are the responsibility of the Company. In March 1996, the Company and the holders of the Prior Underwriter's Warrants agreed to reduce the number of shares issuable upon exercise of such warrants to 17,000 and reduce the exercise price on those warrants to $1.00 per share. The holders of the Prior Underwriter's Warrants also agreed to eliminate the demand registration rights and the anti-dilution provisions of the warrants. As of the date of this Prospectus, 10,000 warrants have been exercised and 7,000 remain outstanding. PRIVATE PLACEMENT WARRANTS In February and March 1997, the Company sold warrants to purchase up to 130,000 shares of Common Stock as part of a private placement. These warrants are exercisable at $5.00 during the period from March 28, 1998 until March 27, 1999. REPORTS TO INVESTORS The Company intends to provide holders of its securities with annual reports containing financial statements. The Company also will issue quarterly or other interim reports to its stockholders as it deems appropriate. TRANSFER AGENT American Securities Transfer & Trust, Inc., 938 Quail Street, No. 101, Lakewood, Colorado 80215, serves as the transfer and warrant agent for the Common Stock and Redeemable Warrants of the Company. SHARES ELIGIBLE FOR FUTURE SALE Of the 3,440,138 shares of Common Stock presently outstanding, approx- imately 473,000 may be traded without registration or further registration under most circumstances. The remaining approximately 2,967,000 shares are "restricted securities" as defined by Rule 144 under the Securities Act of 1933, as amended, and may in the future be resold by existing shareholders under that rule. In general, Rule 144 provides that a person (or persons whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding Common Stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, 41 without any limitation, by a person who is not an affiliate of the Company and who has satisfied a three-year holding period. Of the approximately 2,967,000 restricted shares of Common Stock outstanding, all but 510,000 shares are presently eligible for resale under Rule 144. Of those 510,000 shares 270,000 will become eligible in June of 1997 and 140,000 will become eligible in the first quarter of 1998. The Company has agreed to register 640,000 shares of restricted Common Stock some of which are not yet eligible for resale under Rule 144, and intends to file a registration statement for this purpose within three to nine months of the completion of this offering. In addition to the above, the Company's Graves subsidiary has outstanding shares of preferred stock which may be exchanged for shares of the Company's Common Stock. Such preferred stock may presently be exchanged for up to 756,830 shares of the Company's Common Stock and following this offering may be exchanged for up to 896,911 shares of the Company's Common Stock. Upon the exchange of any of this preferred stock, Theron J. Graves, who owns all of the preferred stock, would have piggy-back registration rights with respect to such shares. Officers, Directors and record shareholders who own 5% or more of the Company's outstanding Common Stock have agreed not to sell, publicly transfer or assign more than 5,000 shares each, and 25,000 shares in the aggregate, of the approximately 2,508,000 shares of Common Stock beneficially owned by them for a period of one year from the date of this Prospectus without the prior written consent of the Underwriter. UNDERWRITING The Underwriters listed below (the "Underwriters") have agreed, subject to the terms and conditions set forth in the Underwriting Agreement between the Company and Westport Resources Investment Services, Inc., as Representative of the Underwriters, to purchase from the Company the number of shares of Common Stock and Redeemable Warrants set forth opposite their names as follows: NAME OF UNDERWRITER NUMBER OF SHARES NUMBER OF REDEEMABLE WARRANTS - ---------------------------- ---------------- ----------------------------- Westport Resources Investment Services, Inc. TOTAL 600,000 600,000 The Underwriters propose to offer the Common Stock and Redeemable Warrants to the public at the initial public offering prices set forth on the cover page of this Prospectus and to selected dealers at that price less a concession of not more than $______ per share of Common Stock and $___ per Redeemable Warrant. After the commencement of this Offering, the offering price and other selling terms may be changed. The Underwriters have informed the Company that they do not intend to confirm sales to any accounts for which they exercise discretionary authority. The Common Stock and Redeemable Warrants will be offered by the Underwriters when, as, and if delivered to and accepted by the Underwriters and subject to their right to reject orders or cancel sales in whole or in part and 42 subject to approval of certain legal matters by legal counsel and to various other conditions. The Company has granted to the Representative an option, exercisable not later than 45 days after the date of this Prospectus, to purchase up to 90,000 additional shares of Common Stock and/or 90,000 Redeemable Warrants at the same offering prices less underwriting discounts and the nonaccountable expense allowance described below. The Representative may exercise this option only for the purpose of covering overallotments that it makes in the sale of the securities. If purchased, the Underwriters will sell the additional shares of Common Stock and Redeemable Warrants on the same terms as those on which the 600,000 shares of Common Stock and 600,000 Redeemable Warrants are offered. The Company has agreed to pay the Representative a nonaccountable expense allowance of 3% of the gross proceeds of this Offering, including any additional proceeds derived from the exercise of the overallotment option, and has made advance payments totaling $20,000 against this obligation. The Company and the Representative have agreed to indemnify each other and related persons against certain liabilities, including liabilities under the federal securities laws, and, if such indemnifications are unavailable or are insufficient, the Company and the Representative have agreed to damage contribution arrangements between them based upon the relative benefits received from the Offering and the relative fault resulting in such damages. Such relative benefits and relative fault would be determined in legal actions among the parties. Under such contribution arrangements, the maximum amount payable by the Representative would be the public offering price of the securities underwritten and distributed by the Representative. Commencing one year from the date of this Prospectus, the Company will pay the Representative a fee of 3% of the aggregate price of Redeemable Warrants solicited by it, if (i) the market price of the Company Common Shares on the date the Redeemable Warrant is exercised is greater than the then exercise price of the Redeemable Warrants; (ii) the exercise of the Redeemable Warrant was solicited by a member of the NASD who is so designated in writing by the holder exercising the Redeemable Warrant; (iii) the Redeemable Warrant is not held in a discretionary account; (iv) disclosure of compensation arrangements was made both at the time of the offering and at the time of the exercise of the Redeemable Warrant; and (v) the solicitation of the exercise of the Redeemable Warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act. The Company has agreed not to sell any additional securities for one year after the date of this Prospectus without the Representative's prior written consent, and not to sell or issue any Common Stock, warrants or options to Officers, Directors or record shareholders who own 5% or more of the Company's outstanding stock for a period of one year from the date of this Prospectus without the consent of the Underwriter. In addition, each of the Officers, Directors, and record shareholders who own 5% or more of the Company's outstanding stock have agreed not to sell, without the Representative's prior written consent, more than 5,000 of the shares of Common Stock owned by them as of the date of this Prospectus, for a period of one year from the date of this Prospectus. Such sales shall not aggregate more than 25,000 shares. The Company has agreed, upon completion of this Offering, to issue to the Representative, for $100.00, Representative's Warrants to purchase 60,000 shares of Common Stock and 60,000 Redeemable Warrants. The exercise price for the Representative's Warrants will be 125% of the offering price per share of the Common Stock sold in this Offering and $.125 per Redeemable Warrant, and the Representative's Warrants will be exercisable at any time during the four year 43 period commencing one year after the date of this Prospectus. The Redeemable Warrants will be exercisable to purchase one share of Common Stock at the same exercise price as the Redeemable Warrants sold to the public until two years after the date of this Prospectus. The Representative's Warrants contain certain demand registration rights. The demand registration rights contained in the Representative's Warrants are for a term of four years beginning one year after the effective date of this Prospectus. Following the exercise of the demand registration rights, the Representative's Warrants provide for piggyback registration rights for any unsold securities, until five years after the effective date of this Prospectus. LEGAL MATTERS The legality of the securities of the Company offered will be passed on for the Company by Krys Boyle Freedman Scott & Sawyer, P.C., 600 Seventeenth Street, Suite 2700, South Tower, Denver, Colorado 80202. Jon D. Sawyer, a principal in such firm, beneficially owns 5,400 shares of the Company's Common Stock. The law firm of William M. Prifti, Esq, Lynnfield Woods Office Park, 220 Broadway, Suite 204, Lynnfield, Massachusetts 01940, has acted as legal counsel to the Representative in connection with certain legal matters relating to this offering. EXPERTS The consolidated financial statements of Meteor Industries, Inc. as of December 31, 1996 and 1995 and for the years then ended, included in this Prospectus and in the Registration Statement have been included herein in reliance upon the report of Coopers & Lybrand, L.L.P., independent accountants, given upon the authority of that firm as experts in accounting and auditing. The financial statements of the Company for the years ended August 31, 1995 and 1994, included in this Prospectus and in the Registration Statement, have been audited by Squire & Woodward, P.C., Certified Public Accountants, and are included herein in reliance on the authority of such firm as experts in accounting and auditing. The financial statements of Capco Resources, Inc. included in this Prospectus and in the Registration Statement, to the extent and for the periods set forth in their report appearing elsewhere herein, have been audited by Price Waterhouse, Chartered Accountants and are included herein in reliance on the authority of such firm as experts in accounting and auditing. 44 INDEX TO FINANCIAL STATEMENTS Page(s) METEOR INDUSTRIES, INC. FINANCIAL STATEMENTS Report of Independent Accountants . . . . . . . . . . . . . . . . . . . F-1 Consolidated Balance Sheets - December 31, 1996 and 1995. . . . . . . . F-2 Consolidated Statements of Operations - For the Years Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statement of Shareholders' Equity - For the Years Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flow - For the Years Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . F-8 Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . F-22 Consolidated Balance Sheets - August 31, 1995 and 1994. . . . . . . . . F-23 Consolidated Statements of Income - August 31, 1995 and 1994. . . . . . F-25 Consolidated Statements of Stockholders' Equity - August 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-26 Consolidated Statements of Cash Flow - August 31, 1995 and 1994 . . . . F-27 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . F-29 CAPCO RESOURCES, INC. FINANCIAL STATEMENTS Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-41 Consolidated Balance Sheet - December 31, 1994 and 1993 . . . . . . . . F-42 Consolidated Statement of Operations and Retained Earnings (Deficit) - - year end December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . F-43 Consolidated Statement of Changes in Financial Position - year end December 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . F-44 Notes to Consolidated Financial statements. . . . . . . . . . . . . . . F-45 Report of Independent Accountants To the Board of Directors of Meteor Industries, Inc.: We have audited the consolidated balance sheets of Meteor Industries, Inc., as of December 31, 1996 and 1995 the related consolidated statements of operations, shareholders' equity and cash flows for the 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 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 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 536,505 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 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 interest 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. F-8 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. 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. F-9 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. 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. F-10 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 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 contri- bution 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 Tech- nologies, 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 pro-viding 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. F-11 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 $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), collateral- ized 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 F-12 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 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 F-13 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. 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: F-14 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) Inventory (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% 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. F-15 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 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. F-16 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 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 F-17 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 PLAN 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. 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: F-18 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 OUT- WEIGHTED AVERAGE OPTIONS EXER- EXERCISABLE STANDING AT REMAINING CON- CISABLE 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- 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 F-19 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) In September, 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. 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 liabilities 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. F-20 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 shares outstanding) actual 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. 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 SQUIRE & WOODWARD, P.C. Certified Public Accountants - Consultants 2730 San Pedro NE, Suite D Albuquerque, New Mexico 87110 505/881-3408 FAX 505/881-6597 To the Board of Directors and Stockholders of Meteor Industries, Inc. Denver, Colorado INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Meteor Industries, Inc. and subsidiaries, as of August 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Meteor Industries, Inc. and subsidiaries, as of August 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Squire & Woodward SQUIRE & WOODWARD, P.C. November 22, 1995 F-22 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of August 31, 1995 and 1994 ASSETS 1995 1994 Current assets Cash $ 244,206 $ 292,121 Cash - restricted 476,007 230,508 Accounts receivable, net of an allowance for doubtful accounts of $195,500 for 1995 and $165,000 for 1994 4,041,591 4,784,370 Inventory, pledged 1,426,901 853,671 Notes receivable 14,969 21,588 Deferred tax asset 257,893 135,409 Prepaid expenses 184,956 217,931 Other current assets 35,980 20,664 Total current assets 6,682,503 6,556,262 Property and equipment, at cost, partially pledged net of accumulated depreciation of $5,601,000 for 1995 and $5,533,417 for 1994 5,767,704 4,561,713 Other assets Notes receivable 271,438 40,833 Notes receivable - related parties 732,625 698,919 Intangibles, net of accumulated amortization of $70,031 for 1995 and $54,136 for 1994 104,448 120,343 Investment in closely held business 110,000 110,000 Goodwill, net of accumulated amortization of $3,784 818,121 Other assets 94,449 167,504 Total other assets 2,131,081 1,137,599 TOTAL ASSETS $14,581,288 $12,255,574 See accompanying notes to consolidated financial statements. F-23 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of August 31, 1995 and 1994 LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 Current liabilities Accounts payable $ 2,746,718 $ 1,711,450 Notes payable 2,002,085 2,700,165 Bank overdraft 124,166 Current portion of long-term debt 822,112 407,736 Due to related parties 91,077 2,827 Taxes payable 837,042 601,529 Accrued expenses 327,374 182,384 Total current liabilities 6,950,574 5,606,091 Long-term debt, net of current portion Notes payable 2,095,660 2,603,626 Deferred taxes 1,032,670 456,669 Minority interest in subsidiary 3,488,310 3,107,048 Commitments and contingencies (Notes 15, 16, 17 and 18) Stockholders' equity Common stock, $.001 par value, 10,000,000 shares authorized; 1,272,903 shares issued and outstanding in 1995; 835,500 shares issued and outstanding in 1994 1,273 835 Additional paid-in capital 1,715,290 954,865 Retained deficit (702,489) (473,560) Total stockholders' equity 1,014,074 482,140 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,581,288 $12,255,574 See accompanying notes to consolidated financial statements. F-24 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Income As of August 31, 1995 and 1994 1995 1994 Sales $44,970,956 $38,763,225 Cost of sales 38,518,916 33,475,541 Gross profit 6,452,040 5,287,684 Operating expenses Selling, general, and administrative 5,537,753 4,786,779 Depreciation and amortization 592,773 456,996 Bad debts expense 236,138 14,931 Total operating expenses 6,366,664 5,258,706 Income from operations 85,376 28,978 Other income and expense Interest income 234,096 235,593 Dividend income 5,452 3,398 Gain on sale of assets 41,110 32,599 Other income 121,314 125,017 Interest expense (526,665) (434,778) Total other income (124,693) (38,171) Loss before income taxes and minority interest (39,317) (9,193) Provision for income taxes (191,650) (28,562) Net income before minority interest 152,333 19,369 Minority interest (381,262) (492,929) Net loss $ (228,929) $ (473,560) Income per common share (weighted average common shares outstanding 1,056,191 for 1995 and 691,300 for 1994) $ (.22) $ (.69) See accompanying notes to consolidated financial statements. F-25 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity As of August 31, 1995 and 1994 Preferred Stock Common Stock Additional Number Number Paid-in Retained of Shares Amount of Shares Amount Capital Earnings Balance - September 1, 1993 $ 475,000 $ 475 $ 30,575 $ Stock issued 160,000 160,000 200,500 200 764,350 Stock warrants issued 100 Conversion of preferred stock (160,000) (160,000) 160,000 160 159,840 Net loss (473,560) Balance - August 31, 1994 0 0 835,500 835 954,865 (473,560) Stock issued 372,373 373 760,490 Stock dividend 65,030 65 (65) Net income (228,929) Balance - August 31, 1995 0 $ 0 1,272,903 $1,273 $1,715,290 $(702,489) See accompanying notes to consolidated financial statements. F-26 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows As of August 31, 1995 and 1994 1995 1994 Cash flows from operating activities Net income $ 152,333 $ 19,369 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 592,773 456,994 Gain on disposal of property and equipment (41,072) (32,599) Gain on disposal of investments (38) Other income from basis adjustment to property and equipment (65,000) Deferred income taxes (252,475) (28,769) Changes in assets and liabilities, net of effects from purchase of subsidiaries: Decrease (increase) in accounts receivable 1,223,429 (1,056,469) Decrease (increase) in inventories (35,852) 189,761 Decrease (increase) in other current assets 193,406 (193,178) Decrease (increase) in other assets 73,635 (164,537) Increase in bank overdraft 124,166 Increase in accounts payable 148,184 205,043 Decrease in accrued liabilities (1,407) (32,890) Net cash provided (used) by operating activities 2,177,082 (702,275) Cash flows from investing activities Cash paid for the purchase of subsidiaries, net of cash acquired (546,657) (1,832,635) Cash paid for purchase of investment securities (365) (110,000) Cash paid for purchases of property and equipment (377,210) (442,016) Cash proceeds from sale of investment securities 657 243,595 Cash proceeds from sale of property 117,199 80,472 Cash paid on notes receivable (205,972) 30,357 Cash paid on related party receivables (24,706) 134,916 Net cash used by investing activities (1,037,056) (1,895,311) Cash flows from financing activities Proceeds from short-term borrowings 42,695,070 42,760,933 Principal payments on short-term debt (43,452,946) (40,260,768) Proceeds from borrowing on long-term debt 536,000 Principal payments on long-term debt (1,569,679) (295,883) Proceeds from stock and stock warrants issued 760,863 924,650 Net borrowings on related party payables 88,250 (8,923) Net cash provided (used) by financing activities (942,442) 3,120,009 Net increase in cash and equivalents 197,584 522,423 Cash and equivalents, beginning of year 522,629 206 Cash and equivalents, end of year $ 720,213 $ 522,629 See accompanying notes to consolidated financial statements. F-27 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows As of August 31, 1995 and 1994 SUPPLEMENTAL INFORMATION 1995 1994 Cash paid (refunds received) for income taxes $(97,845) $ 155,107 Cash paid for interest $515,806 $ 320,651 NONCASH INVESTING AND FINANCING ACTIVITIES 1995 1994 The minority interest in subsidiary was adjusted to record the dividend in arrears and the accretion of preferred stock of Graves Oil & Butane Co., Inc. $381,262 $ 492,929 A stock dividend was issued for holders of record at June 30, 1995, at 8% $ 65 Long-term debt incurred in the acquisition of subsidiary $2,350,000 Acquisition of land from minority interest through recapitalization of subsidiary $ 83,853 Reduction of stockholder note receivable in exchange for reduction of stockholder note payable $ 100,000 Capital lease obligations incurred in the acquisition of property and equipment $ 124,433 As a result of the purchase of the subsidiary, the purchase premium increased additional paid-in capital and was allocated as follows: Marketable securities $ 47,824 Inventory 299,593 Property and equipment 759,190 Investment in closely held business 55,500 Deferred taxes payable (453,222) Increase in additional paid-in capital $ 708,885 See accompanying notes to consolidated financial statements. F-28 METEOR INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of August 31, 1995 and 1994 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Meteor Industries, Inc. (the company) and Subsidiaries is presented to assist in the understanding of the company's financial statements. The financial statements and notes are based upon representations of the company's management, who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. PRINCIPALS OF CONSOLIDATION AND ORGANIZATION - The consolidated financial statements include the accounts of Meteor Industries, Inc. and its wholly owned subsidiaries, Graves Oil & Butane Co., Inc., including its wholly owned subsidiary, El Boracho, Inc., and Hillger Oil Company. All significant intercompany transactions and balances have been eliminated in consolidation. Meteor Industries, Inc., was incorporated on December 22, 1992, as a Colorado based holding company. Graves Oil & Butane Co., Inc., 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. The company 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, 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, the company operates retail gasoline and convenience stores in southern New Mexico. ACCOUNTS RECEIVABLE - Accounts receivable are stated at net realizable value, using the allowance method of accounting for bad debts. INVENTORIES - Inventories of petroleum products, greases and oils, and related products for Hillger Oil Company are stated at weighted average cost, which is not in excess of market. Inventories of petroleum products, greases and oils, and related products for Graves Oil & Butane Co., Inc., are valued at Last In, First Out (LIFO) cost, which is not in excess of market. Graves Oil & Butane Co., Inc., determines its LIFO reserve using the link chain dollar value method. At August 31, 1995 and 1994, inventories valued using the LIFO method were $789,788 and $868,068, respectively. The LIFO reserves were $315,163 and $307,473, respectively. Sundries inventories are valued by the retail method and stated on the First In, First Out (FIFO) basis which is lower than market. 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 expended currently. 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. 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: F-29 Description Lives Buildings and improvements 5 to 40 years Office equipment 5 to 7 years Operating equipment 5 to 16 years General and administrative 5 to 20 years Marketing equipment 5 to 10 years Delivery equipment 5 to 10 years AMORTIZATION OF COVENANTS - Covenants not to compete are valued at cost and are amortized over a 60-month period. Goodwill represents the excess of the cost of Hillger Oil Company over the fair value of its net assets at the effective date of acquisition and is being amortized using the straight line method over 15 years. 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. Deferred taxes are also recognized for operating losses that are available to offset future income taxes. 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, and if dilutive, common stock equivalent shares (options and warrants) outstanding during the respective period. Fully diluted earnings per share is not materially different than primary earnings per share and has not been presented. The number of shares used in the earnings per share computation is 1,056,191 for 1995 and 691,300 for 1994. COMPENSATED ABSENCES - Employees of the company are entitled to paid vacation and paid sick days off, depending on length of service and other factors. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include certificates of deposit or cash in local banks. See Note 2. RECLASSIFICATIONS - Certain 1994 amounts have been reclassified to conform with the 1995 presentation. USE OF ESTIMATES - The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. F-30 NOTE 2 -- CASH - RESTRICTED The company has revolving bank credit facilities (See Note 7) which require the use of depository accounts called collateral 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. NOTE 3 -- PROPERTY AND EQUIPMENT The major classifications of property and equipment are as follows: Description 1995 1994 --------------------------- ----------- ----------- Land $ 1,037,170 $ 1,032,514 Buildings and improvements 4,113,280 3,980,515 Delivery equipment 2,446,471 2,495,329 Operating equipment 3,264,448 2,079,841 General and administrative 331,205 330,801 Office equipment 96,315 96,315 Marketing equipment 79,815 79,815 11,368,704 10,095,130 Accumulated depreciation (5,601,000) (5,533,417) Net property and equipment $ 5,767,704 $ 4,561,713 For the years ended August 31, 1995 and 1994, the company deducted depreciation of $587,388 and $441,098, respectively. NOTE 4 -- 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 secured by real estate. However, if the underlying security is sold prior to satisfaction of this note, then one half of the lesser of the outstanding balance or the sale proceeds of the security will be applied to reduce the liquidation preference of the preferred stock, and the remaining one half will be applied to reduce the note payable to Theron Graves. Interest is receivable semiannually and is determined at each anniversary based on Citibank of New York prime plus 2%. The interest rate at August 31, 1995 and 1994, was 11% and 8.25%, respectively. The $100,000 note is unsecured and is due October 1, 1997, with interest accrued from September 28. Interest is computed semiannually at Citibank of New York prime plus 2%, being 11% and 8.25% at August 31, 1995 and 1994, respectively. Accrued interest receivable at August 31, 1995 and 1994, totaled $73,625 and $48,919, respectively. NOTE 5 -- INTANGIBLES Intangible assets consist of organization costs of $3,000, net of accumulated amortization of $1,200 and $600 for the years ended August 31, 1995 and 1994,respectively, and a five-year covenant not to compete agreement resulting from the acquisition of Southwest Petroleum on September 1, 1990, of $76,479 at August 31, 1995 and 1994, net of accumulated amortization of $68,831 and $53,536, respectively, and a liquor license acquired in 1991 at a cost of $95,000. F-31 NOTE 6 -- INVESTMENTS IN CLOSELY HELD BUSINESS The company owns 50% of the Graves Rio Rancho No. 1 Ltd Co. The investment was acquired in May 1994 for $110,000. The company reports the investment in the limited liability company using the equity method. This investment is not publicly traded. The members of Graves Rio Rancho No. 1 Ltd. Co. set a fair market value of their company at $220,000. NOTE 7 -- NOTES PAYABLE Notes payable at August 31, 1995 and 1994, consisted of the following: 1995 1994 Revolving bank credit facility, payable to Norwest Business Credit, Inc., bearing interest at Norwest Bank Minnesota, N.A., base rate plus 2.5%, being 11.25% for 1995 and 9.75% for 1994. Due June 1998. Collateralized by trade accounts receivable and inventory of Graves Oil & Butane Co., Inc. Unused credit at August 31, 1995, was $1,061,474. $1,938,526 $2,700,165 Revolving bank credit facility payable to Norwest Business Credit, Inc., bearing interest at Norwest Bank Minnesota, N.A., base rate plus 2%, being 10.75%. Due June 30, 1998. Collateralized by trade accounts receivable and inventory of Hillger Oil Company. Unused credit at August 31, 1995, was $1,499,364. 63,559 Total notes payable $2,002,085 $2,700,165 The agreements require the company to maintain certain net worth and performance ratio levels. As discussed in Note 2, payments on these loans are made through collateral cash accounts in the name of the lender. NOTE 8 -- LONG-TERM DEBT Long-term debt at August 31, 1995 and 1994, consisted of the following: 1995 1994 Note payable, Theron Graves, semiannual payments of $200,000, including interest at prime plus 2% per annum. Collateralized by half of Graves common stock. Matures October 1997. $2,040,921 $2,244,200 Note payable, First National Bank of Farmington, monthly payments of $19,000 including interest at prime plus 2% per annum. Collateralized by mortgage on buildings and land. Matures January 1996. 448,709 620,108 Note payable, Federal Land Bank of Durango, payments of $350 monthly including interest at 8.25% per annum F-32 (variable rate), collateralized by mortgage on house and land in Pagosa Springs, Colorado. Matures in June 2011. 43,364 Note payable, Norwest Business Credit, Inc., monthly payments of $10,417 plus interest at Norwest Bank of Minnesota, N.A. base rate plus 3.0%, being 11.75% per annum, collateralized by property and equipment. Due June 30, 1998. 354,166 Lease payable, Norwest Equipment Finance, Inc., monthly payments of $2,276.68 including interest at 8.04% per annum, collateralized by equipment. Matures December 1997. 54,159 76,156 Lease payable, Norwest Equipment Finance, Inc., monthly payments of $306.23 including interest at 10.00% per annum, collateralized by equipment. Matures July 1998. 9,034 11,661 Lease payable, Dericks Leasing & Financial Company, monthly payments of $627.68 including interest at 17.93% per annum, collateralized by equipment. Matures June 1997. 10,783 15,873 Total 2,917,772 3,011,362 Current portion (822,112) (407,736) Long-term debt, net $2,095,660 $2,603,626 The following is a schedule by years of the repayment of long-term debt: Year ending August 31, Amount ----------- ---------- 1996 $ 822,112 1997 364,761 1998 1,730,899 $2,917,772 NOTE 9 -- MINORITY INTEREST IN SUBSIDIARY The Series A Convertible Preferred Stock of Graves Oil & Butane Co., Inc., is limited voting stock and is entitled to cumulative annual dividends at a rate of 8% of the liquidation value per annum. These securities are convertible into common stock of Graves or Meteor at the bid price on the date of conversion or 22.2% of the company 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 the 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 any accrued and unpaid dividends. At any time after September 15, 2000, the record holder shall have the right to have the F-33 company redeem all or any portion of the shares outstanding at the price stated above. No dividends were declared by the board of directors. Dividends in arrears amount to $.56696 and $.28348 per share or $566,960 and $283,480 as of August 31, 1995 and 1994, respectively. Included in the minority interest component of the statement of income for the year ended August 31, 1995, are dividends in arrears of $283,480, and $97,782 which represent the accretion of the preferred stock discount. The minority interest component for the year ended August 31, 1994, included dividends in arrears of $283,480, a deemed dividend of $121,881, which represents the minority interest's share of the difference between the purchase price and the book value of Graves at the time of acquisition and $87,568, which represents the accretion of preferred stock discount. NOTE 10 -- STOCKHOLDERS' EQUITY During the year ended August 31, 1995, the company issued 372,373 shares of the company's common stock for a total of $760,863. On July 9, 1995, the company distributed 65,030 shares of common stock in connection with an 8% stock dividend. As a result of the stock dividend, common stock was increased by $65, and additional paid-in capital was decreased by $65. On August 31, 1995, the company issued 100,000 stock options to outside consultants in connection with the various completed and pending acquisitions. The options issued have an exercise price of $2.50 and expire June 30, 1996. NOTE 11 -- PREFERRED STOCK During the year ended August 31, 1994, the company sold 160,000 shares of preferred stock, which was designated as Series A, for $160,000. The shares had a liquidation preference of $1.00 each, paid no dividends, had limited voting rights, and were convertible into the company's common stock on a one-for-one basis. The shares were required to be redeemed by the company on August 31, 1998, at $1.25 per share if they were not converted earlier. The shares were converted into the company's common stock on January 24, 1994, when an offering circular covering the issuance of such common stock was closed. NOTE 12 -- INCOME TAXES The provision for income taxes from continuing operations consists of the following components: 1995 1994 ---------- --------- Current tax expense $ $ 207 Deferred tax expense (benefit) (191,650) (28,769) Total provision $ (191,650) $ (28,562) The following reconciles the tax provision with the expected provision obtained by applying statutory rates to pre-tax income: F-34 1995 1994 ---------- --------- Expected tax provision $ (13,368) $ (3,126) Nondeductible expenses 2,157 1,159 Benefit of NOL carryover (1,872) (50,060) Change in temporary differences (176,820) 25,048 Income tax benefits of other tax jurisdictions (1,747) (1,583) Total provision $ (191,650) $(28,562) A consolidated tax return will be filed with the subsidiaries of Meteor Industries, Inc. The provision for income taxes was calculated by using a method that allocates current and deferred taxes to members of the group by applying the Financial Accounting Standards Board Statement 109 to the members as if they were separate taxpayers. The deferred tax asset (liability) in the accompanying balance sheet includes the following components: 1995 1994 Current: Deferred tax asset, federal $ 224,927 $ 124,896 Deferred tax asset, state 32,966 10,513 Net current deferred asset $ 257,893 $ 135,409 Noncurrent: Deferred tax liability, federal $ (957,120) $ (401,825) Deferred tax liability, state (75,550) (54,844) Net noncurrent deferred tax liability $(1,032,670) $ (456,669) The following temporary differences gave rise to the deferred tax asset and deferred tax liability at August 31, 1995 and 1994: 1995 1994 Excess of tax amortization and depreciation over financial accounting amortization and depreciation $ 2,933,026 $1,181,842 Accrued expenses deducted for financial accounting purposes, not deductible for tax purposes until paid $ (269,403) $ Net operating loss and contribution carryovers $ (370,076) $ (364,572) The deferred tax asset and deferred tax liability comprised the following at August 31, 1995 and 1994: Deferred tax asset: 1995 1994 Net operating loss and contribution carryovers $ 148,030 $ 135,409 Inventory and accounts receivable 88,410 Employee benefits 21,453 $ 257,893 $ 135,409 Deferred tax liability: Depreciation and amortization $ 1,032,670 $ 456,669 The company has available at August 31, 1995, $364,064 of unused operating loss carryforwards that may be applied against future taxable income and that expire as follows: F-35 August 31, 2007 $105,877 August 31, 2009 180,757 August 31, 2010 77,430 NOTE 13 -- RETIREMENT PLANS Graves Oil & Butane Company, Inc., adopted a 401(k) profit sharing plan effective January 1, 1994. In order to be eligible to participate in the plan, the employee must have completed 12 months of employment and be credited with a year of service, and must have attained age 21. 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% of compensation. Matching contributions and other additional contributions may be made by the employer at the employer's discretion. For the year ended August 31, 1995, the amount of pension expense was $26,779. For the year ended August 31, 1994, no matching contributions had been made. Hillger Oil Company adopted a 401(k) profit sharing plan effective April 1, 1994. In order to be eligible to participate in the plan, the employee must have completed 12 months of employment and be credited with a year of service, and must have attained age 21. No employees were excluded from the plan. Contributions to the plan are voluntary through a salary reduction agreement up to a maximum of 15% of compensation. Matching contributions and other additional contributions may be made by the employer at the employer's discretion. For the five months ended August 31, 1995, the amount of pension expense was $9,421. Prior to acquisition, Hillger Oil Company had adopted a defined benefit plan. Participation in the plan required an employee to complete one year of service and be at least 21 years old. Participants were vested in their accounts over a period of six years. The employer had a fixed obligation to contribute each plan year to the trust fund the amount the plan's actuary determined was necessary to fund retirement benefits under the plan. Plan assets consist primarily of investments in corporate debt and equity securities. The plan was terminated effective March 31, 1995, prior to the acquisition by Meteor Industries, Inc. The plan assets have not yet been settled. NOTE 14 -- RELATED PARTY TRANSACTIONS The company uses space, telephone and secretarial services of a company controlled by officers of Meteor Industries, Inc. Rent is currently $1,000 per month and secretarial services are currently $2,000 per month. Other expenses are reimbursed to the company as invoiced. For the years ended August 31, 1995 and 1994, the total amount paid to the company was $32,272 and $18,946, respectively. At August 31, 1995 and 1994, amounts payable to related parties were $1,500 and $2,827, respectively. During the year ended August 31, 1994, the company repaid advances made by various officers for acquisition costs incurred in the prior year. The total amount repaid was $11,750. During the year ended August 31, 1994, Almo Industries loaned $10,000 to the company. The loan, including interest at 5% per annum and 500 shares of common stock, was repaid from the proceeds of the company's public offering. During the year ended August 31, 1994, the company received $10,000 from a stockholder of Meteor Industries, Inc. The note was repaid with interest of $141. F-36 During the year ended August 31, 1995, the company controlled by officers of Meteor Industries, Inc., loaned the company $95,000. This amount was repaid with interest in the amount of $1,876. The company also reimbursed officers for out-of-pocket expenses and some consulting services. For the year ended August 31, 1995, total amounts paid to officers was $37,356. Also during the year, an officer loaned the company $46,000 which is included in the balance sheet as due to related parties. Included in the amount of stock issued during the year ended August 31, 1995, as discussed in Note 10, were 5,373 shares issued to the subsidiaries retirement plan as an employer matching contribution in the amount of $26,779. 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 August 31, 1995 and 1994, rents paid were $57,286 and $53,000, respectively. The company has land, buildings, and equipment in Springerville, Arizona, and equipment in St. Johns, Arizona, which are used by a relative of its preferred stockholder. The company does not charge for the use of its properties but receives revenue from the sale of its products. During the years ended August 31, 1995 and 1994, revenues reported amounted to $413,987 and $567,995, respectively. The company sells its products to other entities controlled by the preferred stockholder. During the years ended August 31, 1995 and 1994, revenues reported amounted to $1,152,825 and $558,939, respectively. The preferred stockholder is indebted to the company on two notes totaling $650,000 as described in Note 4. Interest receivable at August 31, 1995 and 1994, was $73,625 and $48,919, respectively. Interest received during the years ended August 31, 1995 and 1994, was $41,393 and $29,360, respectively. The company has entered into a consulting agreement with its 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 August 31, 1995 and 1994, the fees paid were $30,021 and $24,606, respectively. As discussed in Note 19, the company has entered into a purchase agreement with Mr. Graves in which a note payable in the amount of $2,350,000 was established. See Note 8. For the years ended August 31, 1995 and 1994, interest paid on the note was $196,722 and $94,200, respectively. As of August 31, 1995 and 1994, accrued interest was $94,106 and $90,000, respectively. Pursuant to the purchase agreement, additional land in the amount of $83,853 was contributed to the company. Other transactions: Hillger Oil Company leases various real property and equipment from a company in which an employee is a stockholder. Included in rent expense is $208,950 paid to the related party for the five months ended August 31, 1995. F-37 NOTE 15 -- ENVIRONMENTAL PROTECTION EXPENDITURES The company utilizes underground tanks at various locations to store petroleum products and is therefore subject to the various federal and state statutes oncerning environmental protection, as well as the New Mexico Ground Water rotection Act. The various federal and state statutes are designed to ientify 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 such 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 years ended August 31, 1995 and 1994, the company expended $47,013 and $69,702, respectively, for site assessment and related cleanup costs. Reimbursement from the state of New Mexico for the year ended August 31, 1995, amounted to $23,485. Included in other assets at August 31, 1995, are unreimbursed costs of $86,982. NOTE 16 -- PURCHASE COMMITMENTS The company is contingently liable for certain costs associated with leasehold improvements made by a supplier on property of customers of Graves Oil & Butane Co., Inc. 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. Originally, the company was contingently liable on $84,576 in unamortized costs. At August 31, 1995 and 1994, the company was contingently liable on $31,175 and $52,116, respectively, in unamortized costs. For the years ending August 31, 1995 and 1994, the company made payments to the supplier totaling $8,480 and $4,228, respectively, for periods when purchase commitments were not met. Future losses, if any, cannot be estimated at this time. NOTE 17 -- OPERATING LEASES The company has entered into various noncancelable leases for land, building, 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 August 31, 1995 and 1994, was $466,106 and $164,069, respectively. Minimal future obligations on leases in effect at August 31, 1995, are: August 31, 1996 $ 731,532 August 31, 1997 730,537 August 31, 1998 745,138 August 31, 1999 733,031 Thereafter 3,456,615 F-38 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 18 -- CAPITAL LEASES As of August 31, 1995 and 1994, leased property under capital leases by major classes was as follows: 1995 1994 Buildings and improvements $ 18,141 $ 18,141 Operating equipment 94,117 94,117 General and administrative 12,175 12,175 Accumulated amortization (36,286) (12,096) Net leased property $ 88,147 $112,337 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 August 31, 1995: August 31, 1996 $ 38,527 August 31, 1997 36,016 August 31, 1998 7,616 Total minimum lease payments 82,159 Less: amount representing interest (8,183) Present value of minimum lease payments $ 73,976 NOTE 19 -- BUSINESS COMBINATION On June 12, 1995, Meteor Industries, Inc. acquired 100% of the issued and outstanding common stock (2,500 shares, $100 par value) of Hillger Oil Company for cash. The acquisition was effective as of April 1, 1995. As part of the purchase agreement, all of the long-term debt of Hillger Oil Company was reorganized. At closing, Hillger Oil Company obtained a new revolving credit line and a term note, the terms of which are discussed in Notes 7 and 8. A total of $875,000 was borrowed at closing to payoff existing debt and consummate the transaction. The results of operations of Hillger Oil Company are included in the accompanying financial statements since the effective date of the acquisition. The acquisition was accounted for as a purchase and "push down accounting" was applied, with the result that purchase accounting adjustments were reflected in the accounting of the company. The total cost of acquisition exceeded the net assets of Hillger Oil Company by $1,123,144. Part of the excess was allocated to property and equipment based on appraised values and will be depreciated over the estimated remaining useful lives of the assets. The remaining excess was recorded as goodwill and is being amortized on the straight line method over 15 years. Effective September 1, 1993, Meteor Industries, Inc., purchased 100% of the common stock of Graves Oil & Butane Co., Inc., for cash and notes amounting to $4,100,000. Additional costs of $281,750 were incurred in the acquisition. Graves Oil & Butane Co., Inc., sells petroleum products at the wholesale and retail level. The business combination was accounted for under the purchase method. Results of operations of Graves for the years ended August 31, 1995 and 1994, are included in the income statements of Meteor Industries, Inc. As part of the acquisition, a note payable to the preferred stockholder of Graves in the amount of $2,350,000 was incurred. The note payable was included in long-term debt, which is detailed in Note 8. F-39 NOTE 20 -- SUBSEQUENT EVENTS In October 1995 the company formed Pyramid Stores, Inc., a Colorado corporation, as a wholly owned subsidiary to hold all of the stock of Graves Oil & Butane Co., Inc., and Hillger Oil Company 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 the outstanding stock of Capco Resources, Inc., (CRI) a Delaware corporation, which is a U.S. subsidiary of Capco Resources, Ltd. The shares of the company's common stock issued represent approximately 58% of the shares now outstanding. The shares were issued to 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 two of the company's three directors were replaced by Capco representatives. The major assets of CRI include: (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. NOTE 21 -- STOCK OPTION PLAN A stock option plan providing for the issuance of incentive stock options and nonqualified stock options to the company's key employees was approved by the company's stockholders on April 15, 1993. Pursuant to the plan, 500,000 shares of the company's $.001 par value common stock have been reserved for issuance. Such shares will be issued upon the exercise of options at prices not less than 100% of fair market value at the time the option is granted. The options so granted do not vest and are not exercisable by the holder except on the continued employment of the recipient. Options issued to each employee vest in equal installments on the anniversary dates of the date the options were granted. Options have been granted as follows: Number of Exercise Price Vesting Date options granted Options Per share Period October 1, 1993 64,000 $3.00 5 years February 1, 1994 49,600 $5.25 3 years F-40 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. 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. Chartered Accountants F-41 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-42 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-43 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-44 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-45 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 $1,429,256. 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% 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, subsequently restated to ($400,114). The discontinued operations results for 1994, 1993, and 1992 are as follows: F-46 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 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 $ - F-47 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: 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 F-48 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). 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 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: F-49 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 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-50 (INSIDE BACK COVER) (picture of hot air balloon (Picture of hot air balloon) with "Graves Oil & Butane" logo) (Picture of Graves Oil & (Picture of tank trucks) Butane tank truck) No person is authorized to give any information or to make any representation other than those contained in this Pros- pectus, and if given or made 600,000 Shares of Common Stock such information or represen- 600,000 Redeemable Warrants tation must not be relied upon as having been authorized. This Prospectus does not con- stitute an offer to sell or a METEOR INDUSTRIES, INC. solicitation of an offer to buy any securities other than the securities offered by this Pros- pectus or an offer to sell or a solicitation of an offer to buy the securities in any jurisdic- tion to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. TABLE OF CONTENTS Page Prospectus Summary.............. Risk Factors.................... The Company..................... Price Range of Common Stock..... __________________ Dividend Policy................. Selected Financial Information.. PROSPECTUS Pro Forma Consolidated State- __________________ ment of Operations............. Management's Discussion and Analysis of Financial Condi- tion and Results of Operations. Use of Proceeds................. Business........................ Management...................... Westport Resources Security Ownership of Manage- Investment Services, Inc. ment and Principal Shareholders Certain Transactions............ Description of Securities....... Underwriting.................... ________, 1997 Selling Shareholders............ Legal Matters................... Experts......................... Index to Financial Statements... PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses of the offering, all of which are to be borne by the Registrant, are as follows: SEC Filing Fee . . . . . . . . . . . . . . . . . . . . . $ 2,950 AMEX Initial Listing Fees. . . . . . . . . . . . . . . . 32,500 NASD Filing Fee. . . . . . . . . . . . . . . . . . . . . 1,355 Underwriter's Non-Accountable Expense Allowance. . . . . 91,800 Printing Expenses. . . . . . . . . . . . . . . . . . . . 25,000 Accounting Fees and Expenses . . . . . . . . . . . . . . 40,000 Legal Fees and Expenses. . . . . . . . . . . . . . . . . 40,000 Blue Sky Fees and Expenses . . . . . . . . . . . . . . . 10,000 Registrar and Transfer Agent Fees. . . . . . . . . . . . 1,000 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 4,395 Total . . . . . . . . . . . . . . . . . . . . . . . $239,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The only statute, charter provision, bylaw, contract, or other arrangement under which any controlling person, Director or Officer of the Registrant is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows: As permitted by Colorado law, the Company's Articles of Incorporation provide that the Company will indemnify its directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil or criminal action brought against them on account of their being or having been Company directors or officers unless, in any such action, they are adjudged to have acted with gross negligence or willful misconduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. Pursuant to the provisions of the Colorado Business Corporation Act, the Company's Articles of Incorporation exclude personal liability for its directors for monetary damages based upon any violation of their fiduciary duties as directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts in violation of Section 7-108-403 of the Colorado Business Corporation Act, or any transactions from which a director receives an improper personal benefit. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. During its past three fiscal years, the Company issued securities which were not registered under the Securities Act of 1933, as amended (the "Act"), as follows. The numbers of shares of Common Stock stated give retroactive effect to an 8% stock dividend which was effected in June 1995. During the period from April 15, 1993 through August 16, 1993, the Company issued 635,000 shares of its Common Stock to 27 persons who were officers, directors and sophisticated investors (includes the conversion of Series A Preferred Stock into Common Stock) as follows:
Amount and Type Name Number of Shares of Consideration Edward J. Names 325,000 $12,500 Cash $ 300 Services Dennis R. Staal 105,000 $17,000 Cash $ 300 Services Almo Industries 50,000 $ 6,250 Cash $ 300 Services John D. Bellino 2,000 $ 2,000 Cash John E. Bradley 2,000 $ 2,000 Cash Richard B. Cutforth 5,000 $ 5,000 Cash Michael J. Derrick 2,500 $ 2,500 Cash Donald A. French 5,000 $ 5,000 Cash Geraldine Gibson 3,000 $ 3,000 Cash John A. Gould 5,000 $ 5,000 Cash Gerald M. Greenberg 10,000 $10,000 Cash H. Wayne Hoover 2,500 $ 2,500 Cash Kim E. Hensley 30,000 $30,000 Cash C. Thomas Houseman 5,000 $ 5,000 Cash Lear 171 Inc. 10,000 $10,000 Cash James L. Lewis 2,500 $ 2,500 Cash Phil & Barbara Minnis 10,000 $10,000 Cash C.L. Nordstrom 5,000 $ 5,000 Cash Sandra L. Schlueter 3,000 $ 3,000 Cash Michael Skurich 5,000 $ 5,000 Cash ENS Family Partnership 10,000 $10,000 Cash John & Dinah Sullivan, TTEE 10,000 $10,000 Cash TBT Family Partners, Ltd. 5,000 $ 5,000 Cash Gary R. Tice 5,000 $ 5,000 Cash Daniel J. Vogl 5,000 $ 5,000 Cash Pamela J. Wilkinson 2,500 $ 2,500 Cash ITEN 10,000 $10,000 Cash Includes shares issued to Mr. Names' wife. II-2 Includes shares issued to a corporation controlled by Mr. Staal.
In connection with these issuances, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The shares were offered for investment only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by the Company. During January 1994, the Company sold 200,000 shares of Common Stock for an aggregate of $1,000,000 in cash. The Company paid a commission of $100,000 to VTR Capital, Inc. for its services as underwriter, and issued it Underwriter's Warrants to purchase 30,250 shares of the Company's Common Stock. In March 1996, the Company renegotiated the terms of the Underwriter's Warrants to reduce the exercise price and reduce the number of shares issuable to 17,000. With respect to these sales, the Company relied on Section 3(b) of the Securities Act of 1933, as amended, and Regulation A promulgated thereunder. Each investor was given a copy of an Offering Circular containing complete information concerning the Company, an Offering Statement on Form 1-A was filed with the SEC and the Company complied with the other applicable requirements of Regulation A. In June 1995, the Company sold 396,360 shares of its Common Stock to four sophisticated investors for an aggregate of $734,000 in cash as follows: Amount and Type Name Number of Shares of Consideration Capco Resources, Inc.* 378,000 $700,000 in cash C. Thomas Houseman 2,160 $ 4,000 in cash Charles R. Gwirtsman 10,800 $ 20,000 in cash Sawyer Family Partners 5,400 $ 10,000 in cash __________________ * The shares sold to Capco Resources, Inc. were subsequently resold to Adres Chaudhary. Also in June 1995, the Company issued 5,803 shares of its Common Stock to employees of its Graves subsidiary under Graves' 401(k) plan. The shares issued were valued at $4.63 per share. In October 1995, the Company sold 7,000 shares of its Common Stock to two sophisticated investors for the consideration set forth as follows: Amount and Type Name Number of Shares of Consideration C. Thomas Houseman 2,000 $4,000 in cash Paul Greaves 5,000 $6,000 in cash and $4,000 in services In connection with the issuances made in June and October 1995, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The shares were II-3 offered for investment only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by the Company. 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., a Delaware corporation. The shares of the Company's Common Stock issued in this transaction were issued to a U.S. subsidiary of Capco Resources Ltd., an Alberta corporation, which is listed on the Alberta Stock Exchange. In connection with this issuance, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The shares were offered for investment only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by the Company. 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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following Exhibits are filed as part of this Registration Statement pursuant to Item 601 of Regulation S-K: Exhibit Sequential No. Description Location 1.1 Form of Underwriting Agreement Filed herewith electronically 1.2 Form of Selected Dealers Agree- Filed herewith electronically ment 1.3 Form of Agreement Among Under- Filed herewith electronically writers II-4 3.1 Articles of Incorporation, Incorporated by reference as amended to Exhibit 2.1 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 3.2 Bylaws Incorporated by reference to Exhibit 2.2 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 4.1 Form of Warrant Agreement with Included in initial filing American Securities Transfer & Trust, Inc. 4.2 Form of Representative's Warrant Filed herewith electronically 5 Opinion of Krys Boyle Freedman Filed herewith electronically Scott & Sawyer, P.C. 10.1 Stock Option Plan Incorporated by reference to Exhibit 6.1 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.2 Stock Purchase Agreement Incorporated by reference among Registrant, Graves to Exhibit 6.2 to Regis- Oil & Butane Co., Inc. and trant's Form 1-A Offering Theron J. Graves dated Statement (SEC File No. June 23, 1993, Amendment 24D-3802 SML) dated August 23, 1993, and Closing Memorandum dated September 28, 1993 10.3 $2,350,000 Promissory Note Incorporated by reference Payable to Theron J. Graves to Exhibit 6.3 to Regis- and Security Agreement trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.4 Notes Receivable ($550,000 Incorporated by reference and $100,000) from Theron J. to Exhibit 6.4 to Regis- Graves trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.5 Registration Agreement re- Incorporated by reference garding Subsidiary's Pre- to Exhibit 6.5 to Regis- ferred Stock trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) II-5 10.6 Security Agreement regarding Incorporated by reference Subsidiary's Preferred Stock to Exhibit 6.6 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.7 Consulting Agreement with Incorporated by reference Theron J. Graves to Exhibit 6.7 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.8 Lease regarding corporate Incorporated by reference Offices and storage yard to Exhibit 6.11 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.9 Lease regarding Albuquerque Incorporated by reference warehouse to Exhibit 6.12 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.10 Lease regarding East Main Incorporated by reference Properties to Exhibit 6.13 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.11 Norwest Credit and Security Incorporated by reference Agreement to Exhibit 6.14 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.12 $4,000,000 Note Payable to Incorporated by reference Norwest (partially drawn upon) to Exhibit 6.15 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.13 Meteor Corporate Guarantee Incorporated by reference as regarding Norwest to Exhibit 6.16 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.14 Employment Agreement with Incorporated by reference Edward J. Names to Exhibit 6.17 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) II-6 10.15 Leases regarding Cortez Incorporated by reference truck stop to Exhibit 6.18 to Regis- trant's Form 1-A Offering Statement (SEC File No. 24D-3802 SML) 10.16 Agreement between the Incorporated by reference Registrant and Hillger Oil to Exhibit 10.16 to Regis- Co., Inc. trant's Registration State- ment on Form 10 (SEC File No. 0-27968) 10.17 Lease Agreement between Incorporated by reference Hillger Oil Co., Inc. and to Exhibit 10.17 to Regis- Hillco, Inc. trant's Registration State- ment on Form 10 (SEC File No. 0-27968) 10.18 Credit and Security Agree- Incorporated by reference ment between Hillger Oil to Exhibit 10.18 to Regis- Co., Inc. and Norwest trant's Registration State- Business Credit, Inc. ment on Form 10 (SEC File No. 0-27968) 10.19 Project Development and Incorporated by reference Shareholders' Agreement to Exhibit 10.19 to Regis- for Pakistan Power Project trant's Registration State- ment on Form 10 (SEC File No. 0-27968) 10.20 Amended and Restated Share Incorporated by reference Exchange and Reorganization to Exhibit 10.20 to Regis- Agreement trant's Registration State- ment on Form 10 (SEC File No. 0-27968) 10.21 Amendment to Employment Incorporated by reference Agreement with Edward J. to Exhibit 10.21 to Regis- Names trant's Registration State- ment on Form 10 (SEC File No. 0-27968) 10.22 Amended and Restated Incorporated by reference Promissory Note from Saba to Exhibit 10.22 to Regis- Petroleum Company to Capco trant's Registration State- Resources, Inc. ment on Form 10 (SEC File No. 0-27968) 10.23 Amendment to Project Incorporated by reference Development and Shareholders' to Exhibit 10.23 to Regis- Agreement for Pakistan Power trant's Registration State- Project ment on Form 10 (SEC file No. 0-27968) 10.24 Agreement between Capco Incorporated by reference Resources, Inc. and Saba to Exhibit 10.24 to Regis- Petroleum Company dated trant's Registration State- April 24, 1996 ment on Form 10 (SEC File No. 0-27968) II-7 10.25 Amended and Restated Agree- Included in initial filing ment between Capco Resources, Inc. and Saba Petroleum Company dated August 1, 1996 10.26 Employment Agreement between Included with Amendment No. 1 Pyramid Stores, Inc. and Paul W. Greaves 10.27 1997 Incentive Plan Incorporated by reference to Exhibit 10.23 to Registrant's Form 10-K for the year ended December 31, 1996 (SEC File No. 0-27968) 10.28 Second Amended and Restated Incorporated by reference to Agreement between Meteor Exhibit 10.24 to Registrant's Industries, Inc., Capco Form 10-K for the year ended Resources, Inc. and Saba December 31, 1996(SEC File No. Petroleum Company 0-27968) 10.29 Shareholder's Agreement among Incorporated by reference to Cogen Technologies Saba Capital Exhibit 10.25 to Registrant's Company, LLC, Capco Resources, Form 10-K for the year ended Inc., et al December 31, 1996(SEC File No. 0-27968) 10.30 Letter Agreement with Western Incorporated by reference to Energy Resources Limited Exhibit 10.26 to Registrant's Form 10-K for the year ended December 31, 1996(SEC File No. 0-27968) 10.31 Letter Agreement between Meteor Incorporated by reference to Industries, Inc. and Capco Exhibit 10.27 to Registrant's Resources, Ltd. dated April Form 10-K for the year ended 23, 1996 December 31, 1996(SEC File No. 0-27968) 11 Computation of per Share Incorporated by reference to earnings of Common Stock Exhibit 11 to Registrant's Form 10-K for the year ended December 31, 1996(SEC File No. 0-27968) 21 Subsidiaries of the Incorporated by reference to Registrant Exhibit 21 to Registrant's Form 10-K for the year ended December 31, 1996(SEC File No. 0-27968) 23.1 Consent of Krys Boyle Included in Exhibit 5 Freedman Scott & Sawyer, PC 23.2 Consent of Cooper & Lybrand Filed herewith electronically L.L.P. II-8 23.3 Consent of Squire & Woodward Filed herewith electronically P.C. 23.4 Consent of Price Waterhouse Filed herewith electronically All financial statement schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, Officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, Officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) For purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the Registration Statement. II-9 (4) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Denver, State of Colorado, on the 30th day of April, 1997. METEOR INDUSTRIES, INC. By /s/ Ilyas Chaudhary Ilyas Chaudhary, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Ilyas Chaudhary Chairman, Chief April 30, 1997 Ilyas Chaudhary Executive Officer and Director /s/ Edward J. Names President and April 30, 1997 Edward J. Names Director /s/ Dennis R. Staal Secretary, Treasurer April 30, 1997 Dennis R. Staal (Principal Financial and Accounting Officer) and Director II-11 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT METEOR INDUSTRIES, INC. 600,000 Shares of Common Stock and 600,000 Redeemable Warrants UNDERWRITING AGREEMENT Westport Resources Investment Services, Inc. 315 Post Road West Westport, Connecticut 06880 , 1997 DEAR SIRS: Meteor Industries, Inc. a Colorado corporation (the "Company"), pro- poses to issue and sell to the several Underwriters named in Schedule I here- to (the "Underwriters"), up to 600,000 shares of common stock of the Company and up to 600,000 redeemable warrants (the "Securities"). The Company hereby confirms the agreement made by it with respect to the purchase of the Securities by the Underwriter, which Securities are more fully described in the Registration Statement referred to below. Westport Resources Investment Services, Inc. is referred to herein as the "Underwriter" or the "Represen- tative." You have advised the Company that the Underwriters desire to act on a firm commitment basis to publicly offer and sell the Securities for the Company and that you are authorized to execute this Agreement. The Company confirms the agreement made by it with respect to the relationship with the Underwriters as follows: 1. FILING OF REGISTRATION STATEMENT WITH S.E.C. AND DEFINITIONS. A Registration Statement and Prospectus on Form S-1 (File No.333- ) with respect to the Securities has been carefully and accurately prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the published rules and regulations (the "Rules and Regulations") thereunder or under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has been filed with the Securities and Exchange Commission (the "Commission") and such other states that the Underwriter deems necessary in its discretion to so file to permit a public offering and trading thereunder. Such registration statement, including the prospectus, Part II, and all financial schedules and exhibits thereto, as amended at the time when it shall become effective, is herein referred to as the "Registration Statement," and the prospectus included as part of the Registration Statement on file with the Commission that discloses all the information that was omitted from the prospectus on the effective date pursuant to Rule 430 A of the Rules and Regulations with any changes contained in any prospectus filed with the commission by the Company with the Underwriters consent after the effective date of the Registration Statement, is herein referred to as the "Final Prospectus." The prospectus included as part of the Registration Statement of the Company and in any amendments thereto prior to the effective date of the Registration Statement is referred to herein as a "Preliminary Prospectus." 2. DISCOUNT, DELIVERY, AND SALE OF THE SECURITIES (a) Subject to the terms and conditions of this Agreement, and on the basis of the representations, warranties, and agreements herein contained, the Company agrees to sell to, and the Underwriters agree to buy from the Company at a purchase price of $ per share and $0.10 per Redeemable Warrant before any underwriter expense allowances, up to 600,000 shares of Common Stock, and up to 600,000 Redeemable Warrants on a firm commitment basis the "Initial Securities". It is understood that the Underwriters propose to offer the Securities to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. (b) Delivery of the Securities against payment of the purchase price therefor by certified or official bank check or checks or wire transfer in next-day funds, payable to the order of the Company shall take place at the offices of the clearing broker for the Underwriter at New York City, within three (3) business days after the Securities are first traded (or such other place as may be designated by agreement between you and the Company) at 11:00 A.M., New York time or such time and date as you and the Company may agree upon in writing, such time and date of payment and delivery for the Securities being herein called the "Initial Closing Date." The Company will make the certificates for the shares of Common Stock and Redeemable Warrants to be purchased by the Underwriters hereunder available to the Underwriter for inspection and packaging at least two (2) full business days prior to the Initial Closing Date. The certificates shall be in such names and denominations as the Underwriter may request to the Company in writing at least two (2) full business days prior to any Closing Date. (c) In addition, subject to the terms and conditions of this Agreement and on the basis of the representations, warranties and agreements herein contained, the Company grants an option to the Underwriters to purchase up to an additional 90,000 shares of Common Stock and/or up to 90,000 additional Warrants as the case may be ("Option Securities") at the same terms as the Underwriters shall pay for the Initial Securities being sold by the Company pursuant to the provisions of Section 2(a) hereof. This option may be exercised from time to time, for the purpose of covering overallotments, within forty-five (45) days after (i) the effective date of the Registration Statement if the Company has elected not to rely on Rule 430A under the Rules and Regulations or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, upon written notice by the Underwriter setting forth the number of Option Securities as to which the Underwriter is exercising the option and the time and date at which such certificates are to be delivered. Such time and date shall be determined by the Underwriter but shall not be earlier than four (4) nor later than ten (10) full business days after the date of the exercise of said option. Nothing herein shall obligate the Underwriter to make any overallotment. (d) Definitive certificates in negotiable form for the Securities to be purchased by the Underwriter hereunder will be delivered at the closing by the Company to the Underwriters against payment of the purchase price by the Underwriters by certified or bank cashier's checks or wire transfer in next day funds payable to the order of the Company. (e) The information set forth under "Underwriting" in any preliminary prospectus and Prospectus relating to the Securities and the information set forth in the last paragraph on the front cover page, under the last paragraph on page 2 concerning stabilization and over-allotment by the Underwriters, and (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriter to the Company for inclusion therein, and you represent and warrant to the Company that the statements made therein are correct. -2- (f) On the Initial Closing Date, the Company shall issue and sell to the Representative, warrants (the "Representative's Warrants") at a purchase price of $.001 per Representative's Warrant, which shall entitle the holders thereof to purchase up to 60,000 shares of Common Stock and up to 60,000 Redeemable Warrants. The shares of common stock and redeemable warrants issuable upon the exercise of the Representative's Warrants are hereafter referred to as the "Representative's Securities" or "Representative's Warrants." The shares of common stock issuable upon exercise of the redeemable warrants are hereinafter referred to collectively as the "Warrant Shares". The Representative's Warrants shall be exercisable for a period of four (4) years commencing one (1) year from the effective date of the Registration Statement at a price equaling one hundred twenty-five percent (125%) of the initial public offering price of the Securities. The form of Representative's Warrant Certificate shall be substantially in the form filed as an Exhibit to the Registration Statement. Payment for the Representative's Warrants shall be made on the Initial Closing Date. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company represents and warrants to you as follows: (i) The Company has prepared and filed with the Commission a registration statement, and an amendment or amendments thereto, on Form S-1 (No.333- ), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities, the Representative s Warrant and the Warrant Shares (sometimes referred to herein collectively as the "Registered Securities"), under the Act, which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the Rules and Regulations. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Underwriter and will not file any other amendment thereto to which the Underwriter shall have objected verbally or in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, any schedules, exhibits and all other documents filed as a part thereof or that may be incorporated therein (including, but not limited to those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Rules and Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, is hereinafter called the "Prospectus." (ii) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Prospectus or the Registration Statement and no proceeding for an order suspending the effectiveness of the Registration Statement or any of the Company's securities has been instituted or is pending or threatened. Each such Prospectus and/or any supplement thereto has conformed in all material respects with the requirements of the Act and the Rules and Regulations and on its date did not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which they were made; and when the Prospectus becomes legally effective and for twenty-five (25) days subsequent thereto (i) the Prospectus and/or any supplement thereto will contain all statements which are required to be stated therein by the Act and Rules and Regulations, and (ii) the Prospectus and/or any supplement thereto will not include any untrue statement of a material fact or -3- omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances under which they were made; provided, however, that no representations, warranties or agreements are made hereunder as to information contained in or omitted from the Prospectus in reliance upon, and in conformity with, the written information furnished to the Company by you as set forth in Section 2(e) above. (iii) The Company has been duly incorporated and is val- idly existing as a corporation in good standing under the laws of the state of its incorporation, with full power and authority (corporate and other) to own its properties and conduct its businesses as described in the Prospectus and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which the nature of its business or the charac- ter or location of its properties requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties or operations of the Company and the subsidiaries as a whole. (iv) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, the Option Securities and the Representative's Securities and to enter into this Agreement, the Representative's Warrant dated as of the initial closing date to be exercised and delivered by the Company to the Representative (the "Representative's Warrant Agreement"), and to consummate the transactions provided for in such agreements, and each of such agreements has been duly and properly authorized, and on the Initial Closing Date will be duly and properly executed and delivered by the Company. This Agreement constitutes and on the Initial Closing Date the Representative's Warrant Agreement will then constitute a valid and binding agreement, enforceable in accordance with its respective terms (except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by general equitable principles and except as the enforcement of indemnification provisions may be limited by federal or state securities laws). (v) Except as disclosed in the Prospectus, the Company is not in violation of its respective certificate or articles of incorporation or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party or by which it may be bound or is not in material violation of any law, order, rule, regulation, writ, injunction or decree of any governmental instrumentality or court, domestic or foreign; and the execution and delivery of this Agreement, the Representative's Warrant Agreement, and the consummation of the transactions contemplated therein and in the Prospectus and compliance with the terms of each such agreement will not conflict with, or result in a material breach of any of the terms, conditions or provisions of, or constitute a material default under, or result in the imposition of any material lien, charge or encumbrance upon any of the property or assets of the Company pursuant to, any material bond, debenture, note or other evidence of indebtedness or any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party nor will such action result in the material violation by the Company of any of the provisions of its respective certificate or articles of incorporation or bylaws or any law, order, rule, regulation, writ, injunction, decree of any government, governmental instrumentality or court, domestic or foreign, except where such violation will not have a material adverse effect on the financial condition of the Company. -4- (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus and the Company will have the adjusted capitalization set forth therein on the Initial Closing Date; all of the shares of issued and outstanding capital stock of the Company set forth therein have been duly authorized, validly issued and are fully paid and nonassessable; the holders thereof do not have any rights of rescission with respect therefor and are not subject to personal liability for any obligations of the Company by reason of being stockholders under the laws of the State in which the Company is incorporated; none of such outstanding capital stock is subject to or was issued in violation of any preemptive or similar rights of any stockholder of the Company; and such capital stock (including the Securities, the Option Securities and the Representative's Securities) conforms in all material respects to all statements relating thereto contained in the Prospectus. (vii) The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement or as described in the Prospectus. The Securities, the Option Securities and the Representative's Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform to the respective descriptions thereof contained in the Prospectus; except for payment of the applicable purchase price paid upon exercise of the options or warrants, as the case may be the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities, the Option Securities and the Representative's Securities has been duly and validly taken; and the certificates representing the Securities, the Option Securities and the Representative's Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities, the Option Securities and the Representative's Securities to be sold by the Company hereunder, the Underwriter will acquire good and marketable title to such Securities, Option Securities and Representative's Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever other than restrictions as may be imposed under the securities laws. (viii)The Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described or referred to in the Prospectus or which are not materially significant or important in relation to its business or which have been incurred in the ordinary course of business; except as described in the Prospectus all of the leases and subleases under which the Company holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and the Company is not in material default in respect of any of the terms or provisions of any of such leases or subleases, and no claim has been asserted by anyone adverse to the Company's rights as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above or affecting or questioning the Company's right to the continued possession of the leased or subleased premises or assets under any such lease or sublease; and the Company owns or leases all such properties as are necessary to its operations as now conducted and as contemplated to be conducted, except as otherwise stated in the Prospectus. (ix) The financial statements, together with related notes, set forth in the Prospectus fairly present the financial position and results of operations of the Company at the respective dates and for the respective periods to which they apply. Said statements and related notes have been prepared in -5- accordance with generally accepted accounting principles applied on a basis which is consistent in all material respects during the periods involved but any stub period has not been audited by an independent accounting firm. There has been no material adverse change or material development involving a prospective change in the condition, financial or otherwise, or in the prospects, value, operation, properties, business or results of operations of the Company whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus. (x) Subsequent to the respective dates as of which information is given in the Prospectus as it may be amended or supplemented, and except as described in the Prospectus, the Company has not, directly or indirectly, incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business or entered into any transactions not in the ordinary course of business, which are material to the business of the Company as a whole and there has not been any change in the capital stock of, or any incurrence of long term debts by, the Company or any issuance of options, warrants or rights to purchase the capital stock of the Company or declaration or payment of any dividend on the capital stock of the Company or any material adverse change in the condition (financial or other), net worth or results of operations of the Company as a whole and the Company has not become a party to, any material litigation whether or not in the ordinary course of business. (xi) To the knowledge of the Company, there is no pending or threatened, action, suit or proceeding to which the Company is a party before or by any court or governmental agency or body, which might result in any material adverse change in the condition (financial or other), business or prospects of the Company as a whole or might materially and adversely affect the properties or assets of the Company as a whole nor are there any actions, suits or proceedings against the Company related to environmental matters or related to discrimination on the basis of age, sex, religion or race which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole; and no labor disturbance by the employees of the Company individually exists or is, to the knowledge of the Company, imminent which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole. (xii) Except as may be disclosed in the Prospectus, the Company has properly prepared and filed all necessary federal, state, local and foreign income and franchise tax returns, has paid all taxes shown as due thereon, has established adequate reserves for such taxes which are not yet due and payable, and does not have any tax deficiency or claims outstanding, proposed or assessed against it. (xiii)The Company has sufficient licenses, permits, right to use trade or service marks and other governmental authorizations currently required for the conduct of its business as now being conducted and as contemplated to be conducted and the Company is in all material respects complying therewith. Except as set forth in the Prospectus, the expiration of any such licenses, permits, or other governmental authorizations would not materially affect the Company's operations. To its knowledge, none of the activities or businesses of the Company are in material violation of, or cause the Company to materially violate any law, rule, regulations, or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality. -6- (xiv) The Company has not at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any such contribution, or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasipublic duties, other than payments required or allowed by applicable law. (xv) Except as set forth in the Prospectus the Company knows of no outstanding claims for services either in the nature of a finder's fee, brokerage fee or otherwise with respect to this financing for which the Company or the Underwriters may be responsible, or which may affect the Underwriter's compensation as determined by the National Association of Securities Dealers, Inc. ("NASD") except as otherwise disclosed in the Prospectus or known by the Underwriters. (xvi) The Company has its property adequately insured against loss or damage by fire and maintains such other insurance as is customarily maintained by companies in the same or similar business. The Representative's Warrants herein described are duly and validly authorized and upon delivery to the Representative in accordance herewith will be duly issued and legal, valid and binding obligations of the Company, except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by equitable principles, and except as the enforcement of indemnification provisions may be limited by federal or state securities laws. (xvii)The Representative's Securities issuable upon exercise of any of the Representative's Warrants have been duly authorized, and when issued upon payment of the exercise price therefor, will be validly issued, fully paid and nonassessable. (xviii)Except as set forth in the Prospectus, no default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (xix) To the best of the Company s knowledge it has generally enjoyed a satisfactory employer-employee relationship with its employees and, to the best of its knowledge, is in substantial compliance in all material respects with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. To the best of the Company s knowledge, there are no pending investigations involving the Company, by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. To the best of the Company s knowledge, there is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or to its knowledge involving the Company, or any predecessor entity, and none has ever occurred. To the best of the Company s knowledge, no representation question is pending respecting the employees of the Company, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. To the -7- best of the Company s knowledge, no grievance or arbitration proceeding is pending or to its knowledge threatened under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company is pending, or, to its knowledge is imminent; and the Company is not aware of any pending or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which may result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, position, prospects, value, operation, properties, business or results of operations of the Company. (xx) Except as may be set forth in the Registration Statement, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code (the "Code"), which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401 (a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." (xxi) None of the Company, or any of its employees, directors, stockholders, or affiliates (within the meaning of the Rules and Regulations) has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, Option Securities, Representative's Securities or otherwise. (xxii)None of the patents, patent applications, trademarks, service marks, trade names, copyrights, and licenses and rights to the foregoing presently owned or held by the Company, are in dispute or, to the best knowledge of the Company's management are in any conflict with the right of any other person or entity. The Company (i) except as disclosed in the Prospectus owns or has the right to use, all patents, trademarks, service marks, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing, and except as set forth in the Prospectus or otherwise disclosed to the Underwriter in writing, to the best knowledge of the Company's management is not obligated or under any liability whatsoever to make any material payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. (xxiii)Except as disclosed in the Prospectus the Company owns and has adequate right to use to the best knowledge of the Company's management all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary -8- or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") required for or incident to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company. The Company is not aware of any such development of similar or identical trade secrets or technical information by others. The Company has valid and binding confidentiality agreements with all of its officers, covering its intellectual property (subject to the equitable powers of any court), which agreements have remaining terms of at least two years from the effective date of the Registration Statement except where the failure to have such agreements would not materially and adversely effect the Company's business taken as a whole. The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. (xxiv)Cooper & Lybrand, whose reports are filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. (xxv) The Company has agreed to execute and has also caused to be duly executed agreements pursuant to which each of the Company's officers and directors and shareholders and any person or entity deemed to be an affiliate of the Company pursuant to the Rules and Regulations, except for Theron J. Graves, has agreed not to, directly or indirectly, sell, assign, transfer, or otherwise dispose of more than 5000 shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) for a period of not less than eighteen (18) months following such effective date without the prior written consent of the Underwriter. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. (xxvi)The Registered Securities have been approved for listing on NASDAQ or an Exchange. (xxvii)Except as set forth in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no officer or director of the Company, holder of 5% or more of securities of the Company or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions" or disclosed in writing to the Underwriter (which writing specifically refers to this Section) there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, principal stockholder of the Company, or any partner, affiliate or associate of any of the foregoing persons or entities. -9- (xxviii)Any certificate signed by any officer of the Company, and delivered to the Underwriter or to the Underwriter's counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (xxix)Each of the minute books of the Company has been made available to the Underwriter and contains a complete summary of all meetings and actions of the directors and stockholders of the Company, since the time of its incorporation and reflect all transactions referred to in such minutes accurately in all respects. (xxx)Intentionally left blank. (xxxi)Except and only to the extent described in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. Except as disclosed in the Prospectus, all rights so described or disclosed have been waived or have not been triggered with respect to the transactions contemplated by this Agreement and the Representative's Warrant Agreement (including the warrants issuable thereunder). (xxxii)The Company has not entered into any employment agreements with its executive officers, except as disclosed in the Prospectus. (xxxiii)No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Registered Securities pursuant to the Prospectus and the Registration Statement, the issuance of the Underwriter's Warrants, the performance of this Agreement, the Representative's Warrant Agreement and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Securities, the Option Securities and the Underwriter's Securities, except such as have been or may be obtained under the Act, otherwise or may be required under state securities or blue sky laws in connection with the Underwriter's purchase and distribution of the Securities, the Option Securities, the Representative's Securities and the Underwriter's Warrants to be sold by the Company hereunder or may be required by the Rules of the National Association of Securities Dealer, Inc. ("NASD"). (xxxiv)All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company, enforceable against the Company, in accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate and fairly present the information required to be shown with respect thereto by Form S-1, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. -10- (xxxv)Within the past five (5) years, none of the Company's independent public accountants has brought to the attention of the Company's management any "material weakness" as defined in the Statement of Auditing Standard No. 60 in any of the Company's internal controls. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with you that: (a) It will cooperate in all respects in making the Prospectus effective and will not at any time, whether before or after the effective date, file any amendment to or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you or your counsel shall have reasonably objected or which is not in material compliance with the Act and the Rules and Regulations or applicable state law. As soon as the Company is advised thereof, the Company will advise you, and confirm the advice in writing, of the receipt of any comments of the Commission or any state securities department, when the Registration Statement becomes effective if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A, of the effectiveness of any posteffective amendment to the Registration Statement or Prospectus, or the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission or any state securities department for amendment of the Prospectus or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance of any stop order suspending the effectiveness of the Prospectus or any order preventing or suspending the use of any Prospectus or any order suspending trading in the Common Stock of the Company, or of the suspension of the qualification of the Securities, the Option Securities or the Representatives Securities for offering in any jurisdiction, or of the institution of any proceedings for any such purposes, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain as soon as possible the lifting or dismissal thereof. The Company has caused to be delivered to you copies of such Pros- pectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by law. The Company authorizes you and the dealers to use the Prospectus and such copies of the Prospectus in connection with the sale of the Securities, the Option Securities and the Representative's Securities for such period as in the opinion of your counsel and our counsel the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. The Company will prepare and file with the states, promptly upon your request, any such amendments or supplements to the Prospectus, and take any other action, as, in the opinion of your counsel, may be necessary or advisable in connection with the initial sale of the Securities, the Option Securities and the Underwriter's Securities and will use its best efforts to cause the same to become effective as promptly as possible. The Company shall file the Prospectus (in form and substance satisfactory to the Underwriter) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to Rule 424(b)(3) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement, and (ii) the fifth business day after the effective date of the Registration Statement. In case of the happening, at any time within such period as a Pros- pectus is required under the Act to be delivered in connection with the initial sale of the Securities, the Option Securities and the Representative's Securities of any -11- event of which the Company has knowledge and which materially affects the Company, or the securities thereof, and which should be set forth in an amendment of or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required under the Act to be delivered, or in case it shall be necessary to amend or supplement the Prospectus to comply with the Act, the Rules and Regulations or any other law, the Company will forthwith prepare and furnish to you copies of such amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they are made. The preparation and furnishing of any such amendment or supplement to the Prospectus or supplement to be attached to the Prospectus shall be without expense to you. The Company will to the best of its ability comply with the Act, the Exchange Act and applicable state securities laws so as to permit the initial offer and sales of the Securities, the Option Securities and the Representatives Securities under the Act, the Rules and Regulations, and applicable state securities laws. (b) It will cooperate to qualify the Securities and the Option Securities and the Representative's Securities for initial sale under the securities laws of such jurisdictions as you may designate and will make such applications and furnish such information as may be required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long as the Underwriter may reasonably request. (c) So long as any of the Securities, the Option Securities or the Representative's Securities remain outstanding in the hands of the public, the Company, at its expense, will annually furnish to its shareholders a report of its operations to include financial statements audited by independent public accountants, and will furnish to the Underwriter as soon as practicable after the end of each fiscal year, a balance sheet of the Company as at the end of such fiscal year, together with statements of operations, shareholders' equity, and changes in cash flow of the Company for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent public accountants. (d) It will deliver to you at or before the Initial Closing Date two signed copies of the Registration Statement including all financial statements and exhibits filed therewith, whether or not incorporated by reference. The Company will deliver to you, from time to time until the effective date of the Prospectus, as many copies of the Prospectus as you may reasonably request. The Company will deliver to you on the effective date of the Prospectus and thereafter for so long as a Prospectus is required to be delivered under the Act and the Rules and Regulations as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as you may from time to time reasonably request. (e) The Company will apply the net proceeds from the sale of the Securities and the Option Securities substantially in the manner set forth under "Use of Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly or indirectly, to acquire any securities issued by the Company, without the prior written consent of the Underwriter. -12- (f) As soon as it is practicable, but in any event not later than the first (lst) day of the fifteenth (15th) full calendar month following the effective date of the Registration Statement, the Company will make available to its security holders and the Underwriter an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the effective date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations. g. COSTS AND EXPENSES. The Company shall pay to the Underwriter at each closing date, and to be deducted from the purchase price for the Securities and the Option Securities, an amount equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Securities and the Option Securities at such closing date less in the case of the Initial Closing Date, the sum of $15,000 previously paid by the Company. If the sale of the Securities by the Underwriter is not consummated for any reason not attributable to the Underwriter, or if (i) the Company withdraws the Registration Statement from the Commission or does not proceed with the public offering, or (ii) the representations in Section 3 hereof are not correct or the covenants cannot be complied with, or (iii) there has been a materially adverse change in the condition, prospects or obligations of the Company or a materially adverse change in stock market conditions from current conditions, all as determined by the Underwriter, then the Company shall reimburse the Underwriter for its out of pocket expenses including without limitation, its legal fees and disbursements all on an accountable basis but not to exceed $25,000 (less the $15,000 previously paid by the Company), and if any excess remains from the advance previously paid, such excess will be returned to the Company. Subject to the provisions above the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including, but not limited to, the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement and Prospectus (including the fee of the Commission, any securities exchange and the NASD in connection with the filing required by the NASD relating to the offering of the Securities contemplated hereby); all expenses, including fees of counsel, which shall be due and payable on the Closing Date in connection with the qualification of the Securities under the state securities or blue sky laws; the cost of furnishing to you copies of the Prospectus, this Agreement, the cost of printing the certificates representing the Securities and of preparing and photocopying the Underwriting Agreement and related Underwriting documents, the cost of two underwriter's bound volumes, any advertising costs and expenses, including but not limited to the Company s expenses on "road show" information meetings and presentations, prospectus memorabilia, issue and transfer taxes, if any. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus of or any supplement to be attached to the Prospectus. (h) The Company shall not, without the Underwriter's prior written consent which shall not be unreasonably withheld, issue, sell or otherwise dispose of any of its equity or long-term debt securities for twelve (12) months from the effective date including other equity securities or warrants or options to purchase any shares of Common Stock (except for Common Stock issuable upon existing conversion rights, options or warrants or in connection with acquisitions) or any warrants, options or other rights to purchase Common Stock without the Underwriter s prior written consent to any officer, director, or holder of 5% or more of the Company s Common Stock or to any affiliate or associate thereof, except pursuant to an employee benefit plan approved by the Underwriter or subsequent options issued to employees of the Company's -13- subsidiaries pursuant to incentive stock option plans. The Company will obtain prior to the effective date, from each officer and director, each person related to an officer or director, and each person (except Theron Graves) or entity who owns 5% or more of the Company s Common Stock or any right to acquire 5% or more of the Company s Common Stock, a written agreement with the Underwriter that such person will not sell in open market transactions more than 5000 shares of the Company s Common Stock owned directly or indirectly by him or beneficially by him ( as defined by the 1934 Act and rules promulgated thereunder) on the effective date of the Registration Statement, for a period of twelve (12) months from such date without the Underwriter s prior written consent and will cause the transfer agent for the Company to note such restriction on the certificates representing his shares of Common Stock and on the transfer books and records of the Company, provided that the aggregate number of shares sold in such open market transactions shall not exceed 25,000. It is also understood that later in 1997, the Company intends to register restricted shares of shareholders who own less than 5% of the Company, so that such shares may be sold into the marketplace. The Underwriter has no objection to the filing of such registration statement. (i) During a date five years after the date hereof, the Company will make available to its shareholders, as soon as practicable, and deliver to the Underwriter: (1) as soon as they are available, copies of all reports (financial or other) mailed to shareholders; (2) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (3) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was prepared and released by or on behalf of the Company; and (4) any additional information of a public nature concerning the Company (and any future subsidiaries) or its businesses which the Underwriter may request. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (j) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (k) The Company will furnish to the Underwriter or on the Underwriter's order, without charge, at such place as the Underwriter may designate, copies of each Preliminary Prospectus, the Final Prospectus the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriter may request. -14- (1) Neither the Company nor any of its officers, directors, stockholders or any of its affiliates will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any of the Company's securities. (m) The Company shall timely file all such reports, forms or other documents as may be required, from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. (n) The Company shall cause the Securities to be listed on the American Stock Exchange for a period of five (5) years from the date hereof, use its best efforts to maintain the listing of the Securities to the extent they are outstanding. (o) As soon as practicable, (i) before the effective date of the Registration Statement, file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and/or Moody's OTC Manual and to continue such inclusion for a period of not less than five years if the securities are not listed on the AMEX. (p) Until the completion of the distribution of the Securities, the Company shall not without the prior written consent of the Underwriter and its counsel which consent shall not be unreasonably withheld or delayed, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in 'the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (q) Until the earlier of (i) five (5) years from the date hereof or (ii) the sale to the public of the Warrant Shares, the Company will not take any action or actions which may prevent or disqualify the Company s use of Form S-1 (or other appropriate form) for the registration under the Act of the Warrant Shares. (r) Commencing one year from the effective date of the Registration Statement, the Company agrees to pay the Underwriter a 3% solicitation fee for the exercise of the publicly-held warrants solicited by the Underwriter such solicitation being subject to applicable SEC and NASD rules. 5. CONDITIONS OF THE UNDERWRITER S OBLIGATIONS. The obligation of the Underwriters to offer and sell the Securities and the Option Securities is subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company to the performance by it of its agreement and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective as and when cleared by the Commission, and you shall have received notice thereof, on or prior to any closing date no stop order suspending the effectiveness of the Prospectus shall have been issued and no proceedings for that or similar purpose shall have been instituted or shall be pending, or, to your knowledge or to the -15- knowledge of the Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriter; and qualification, under the securities laws of such states as you may designate, of the issue and sale of the Securities upon the terms and conditions herein set forth or contemplated and containing no provision unacceptable to you shall have been secured, and no stop order shall be in effect denying or suspending effectiveness of such qualification nor shall any stop order proceedings with respect thereto be instituted or pending or threatened under such law. (b) On any closing date and, with respect to the letter re- ferred to in subparagraph (iii), as of the date hereof, you shall have received: (i) the opinion, together with such number of signed or photostatic copies of such opinion as you may reasonably request, addressed to you by Krys, Boyle, Freedman, Scott & Sawyer, PC counsel for the Company, in form and substance reasonably satisfactory to the Underwriter and William M. Prifti, Esq., counsel to the Underwriter, dated each such closing date, to the effect that: (A) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the jurisdiction in which it is incorporated and has all necessary corporate power and authority to carry on its business as described in the Prospectus. (B) The Company is qualified to do business in each jurisdiction in which conducting its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company's business or assets. (C) The Company has the full corporate power and authority to enter into this Agreement, and the Representative's Warrant Agreement and to consummate the transactions provided for therein and each such Agreement has been duly and validly authorized, executed and delivered by the Company. Each of this Agreement, and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency or similar laws governing the rights of creditors and to general equitable principles, and provided that no opinion need be given as to the enforceability of any indemnification or contribution provisions, and none of the Company's execution or delivery of this Agreement, the or the Representative's Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any material breach or violation of any of the terms or provisions of, or constitutes or will constitute a material default under, or result in the creation or imposition of any material lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the articles of incorporation or by-laws of the Company, (B) to the knowledge of such counsel, any material license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound, or (C) to the knowledge of such counsel, any statute, judgment, decree, order, rule or regulation applicable to the Company, whether domestic or foreign. -16- (D) The Company had authorized and outstanding capital stock as set forth in the Prospectus as of the date set forth therein, and all of such issued and outstanding shares of capital stock have been duly and validly authorized and issued, and to the knowledge of such counsel are fully paid and nonassessable, and to the knowledge of such counsel no stockholder of the Company is entitled to any preemptive rights to subscribe for, or purchase shares of the capital stock and to the knowledge of such counsel none of such securities were issued in violation of the preemptive rights of any holders of any securities of the Company. (E) To the knowledge of such counsel, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement, and except as described in the Prospectus. The Units, the Common Stock, the Warrants and the Representative s Warrants each conforms in all material respects to the respective descriptions thereof contained in the Prospectus. The outstanding shares of Common Stock and the Warrants, the Warrant Stock and the Representative s Warrant Stock, upon issuance and delivery and payment therefore in the manner described herein, the Warrant Agreement and the Representative Agreement, as the case may be, will be, duly authorized, validly issued, fully paid and nonassessable. There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company s articles of incorporation, by-laws, other governing documents or any agreement or other instrument known to such counsel to which the Company is a party or by which it is bound. (F) The certificates representing the Securities are in due and proper form and each of the Warrant Stock and the Representative's Warrant Stock has been duly authorized and reserved for issuance and when issued and delivered in accordance with the respective terms of the Warrant Agreement and Representative s Warrant Agreement, respectively, will duly and validly issued, fully paid and nonassessable. (G) To the knowledge of such counsel, there are no claims, suits or other legal proceedings pending or threatened against the Company in any court or before or by any governmental body which might materially affect the business of the Company or the financial condition of the Company as a whole, except as set forth in or contemplated by the Prospectus. (H) Based on oral and/or written advice from the staff of the Commission, the Registration Statement has become effective and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Prospectus is in effect and no proceedings for that purpose are pending before, or threatened by, federal or by a state securities administrator. (I) To the knowledge of such counsel, there are no legal or governmental proceedings, actions, arbitrations, investigations, inquiries or the like pending or threatened against the Company of a character required to be disclosed in the Prospectus which have not been so disclosed, questions the validity of the capital stock of the Company or this Agreement or the Representative's Warrant Agreement or might adversely affect the condition, financial or otherwise, or the prospects of the Company or which could adversely affect the Company's ability to perform any of its obligations under this Agreement or the Representative's Warrant Agreement. (J) To such counsel's knowledge, there are no material agreements, contracts or other documents known to such counsel required by the -17- Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto, and to such counsel's knowledge (A) the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound, including any document to which the Company is a party or by which it is bound incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form S-1. (K) No consent, approval, order or authorization from any regulatory board, agency or instrumentality having jurisdiction over the Company, or its properties (other than registration under the Act or qualification under state or foreign securities law or approval by the NASD) is required for the valid authorization, issuance, sale and delivery of the Securities, the Option Securities or the Representative s Warrant. (L) The statements in the Prospectus under "Risk Factors-Control by Existing Stockholders," "Management-Limitation of Liability" "Description of the Securities," and "Shares Eligible For Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not certified the accuracy or com- pleteness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration State- ment and any amendment or supplement, when such documents became effective or were filed with the Commission (other than the financial statements including the notes thereto and supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus and any amendment or supplement thereto (other than the financial statements including the notes thereto and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall also cover such other matters incident to the transactions contemplated hereby and the offering Prospectus as you or counsel to the Underwriter shall reasonably request. In rendering such opinion, to the extent deemed reasonable by them, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact of which the maker of such certificate has knowledge. -18- (ii) a certificate, signed by the Chief Executive Officer and the Principal Financial or Accounting Officer of the Company dated the Closing Date, to the effect that with regard to the Company, each of the conditions set forth in Section 5(d) have been satisfied. (iii) a letter, addressed to the Underwriter and in form and substance satisfactory to the Underwriter in all respects (including the nonmaterial nature of the changes or decreases, if any, referred to in clause (D) below), from Coopers & Lybrand, dated, respectively, as of the effective date of the Registration Statement and as of the Closing Date, as the case may be: (A) Confirming that they are independent public accountants with respect to the Company and its consolidated subsidiaries, if any, within the meaning of the Act and the applicable published Rules and Regulations. (B) Stating that, in their opinion, the financial statements, related notes and schedules of the Company and its consolidated subsidiaries, if any, included in the Registration Statement examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the published Rules and Regulations thereunder. (C) Stating that, with respect to the period from December 31, 1996, to a specified date (the "specified date") not earlier than five (5) business days prior to the date of such letter, they have read the minutes of meetings of the stockholders and board of directors (and various committees thereof) of the Company and its consolidated subsidiaries, if any, for the period from December 31, 1996 through the specified date, and made inquiries of officers of the Company and its consolidated subsidiaries, if any, responsible for financial and accounting matters and, especially as to whether there was any decrease in sales, income before extraordinary items or net income as compared with the corresponding period in the preceding year; or any change in the capital stock of the Company or any change in the longterm debt or any increase in the short-term bank borrowings or any decrease in net current assets or net assets of the Company or of any of its consolidated subsidiaries, if any, and further stating that while such procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards, nothing came to their attention which caused them to believe that during the period from December 31, 1996, through the specified date there were any decreases as compared with the corresponding period in the preceding year in sales, income before extraordinary items or net income; or any change in the capital stock of the Company or consolidated subsidiary, if any, or any change in the longterm debt or any increase in the short-term bank borrowings (other than any increase in short-term bank borrowings in the ordinary course of business) of the Company or any consolidated subsidiary, if any, or any decrease in the net current assets or net assets of the Company or any consolidated subsidiary, if any; and (D) Stating that they have carried out certain specified procedures (specifically set forth in such letter or letters) as specified by the Underwriter (after consultations with Coopers & Lybrand, relating to such procedures), not constituting an audit, with respect to certain tables, statistics and other financial data in the Prospectus specified by the Underwriter and such financial data not included in the Prospectus but from which information in the Prospectus is derived, and which have been obtained from the general accounting records of the Company or consolidated subsidiaries, if any, or from such accounting records by analysis or computation, and having compared such financial data with the accounting records of the Company or the consolidated subsidiaries, if any, stating that they have found such financial data to agree with the accounting records of the Company. -19- (c) All corporate proceedings and other legal matters relating to this Agreement, the Prospectus and other related matters shall be satisfactory to or approved by counsel to the Underwriter and you shall have received from Krys, Boyle, Freedman, Scott & Sawyer, PC, a signed opinion dated as of each closing date, with respect to the incorporation of the Company, the validity of the Securities, the form of the Prospectus, (other than the financial statements together with related notes and other financial and statistical data contained in the Prospectus or omitted therefrom, as to which such counsel need express no opinion), the execution of this Agreement and other related matters as you may reasonably require. (d) At each closing date, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects with the same effect as if made on and as of such closing date; (ii) the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations and in all material respects conform to the requirements thereof, and neither the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary, in light of the circumstances under which they were made, in order to make the statements therein not misleading; (iii) there shall have been since the respective dates as of which information is given no material adverse change in the business, properties or condition (financial or otherwise), results of operations, capital stock, longterm debt or general affairs of the Company from that set forth in the Prospectus, except changes which the Prospectus indicates might occur after the effective date of the Prospectus, and the Company shall not have incurred any material liabilities or material obligations, direct or contingent, or entered into any material transaction, contract or agreement not in the ordinary course of business other than as referred to in the Prospectus and which would be required to be set forth in the Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or proceeding at law or in equity shall be pending or threatened against the Company which would be required to be set forth in the Prospectus, and no proceedings shall be pending or threatened against the Company or any subsidiary before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company. (e) On the Initial Closing Date, the Company shall have executed and delivered to the Underwriter, (i) the Representatives' Warrant Agreement substantially in the form filed as an Exhibit to the Registration Statement in final form and substance satisfactory to the Underwriter, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. (f) On or before the Initial Closing Date, the Securities shall have been duly approved for listing on the American Stock Exchange, any other Exchange or on NASDAQ. (g) On or before the Initial Closing Date, there shall have been delivered to the Underwriter all of the Lock-up Agreements required to be delivered pursuant to Section 3(a)(xxv) and 4(h), in form and substance satisfactory to the Underwriter and Underwriter's counsel. If any condition to the Underwriter's obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case -20- may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if the Underwriter so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS. The obligation of the Company to sell and deliver the Securities is subject to the following: (a) The provisions regarding the effective date, as described in Section 10. (b) At the Initial Closing Date, no stop order suspending the effectiveness of the Prospectus shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission or by any state securities department. (c) Tender of payment by the Underwriter in accord with Section 2 hereof. 7. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and its employees and each person, if any, who controls you within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several (which shall, for any purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which each Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission made in the Prospectus, or such amendment or supplement to state a material fact required to be stated therein or necessary to make the statements therein not misleading, which is in reliance upon and in conformity with written information furnished by the Company to you specifically for use in the preparation thereof, and provided further that the indemnity agreement contained in this subsection (a) shall not inure to the benefit of you with respect to any person asserting any such loss, claim, damage or liability who has purchased the Securities which are the subject thereof if you or any participants failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Securities to such person and except that, with respect to any untrue statement or omission or any alleged untrue statement or omission, made in any Pre-Effective Prospectus, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Underwriter ( or to any person controlling any such underwriter) from whom the person asserting any such loss, claim, damage or liability purchased the securities concerned to the extent that such untrue statement or omission, or alleged untrue statement or omission, has been corrected in a later Pre-Effective Prospectus or in the Final Prospectus unless the Underwriter circulated a later Pre-Effective Prospectus or the Final Prospectus to such person (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such -21- losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission was made in the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you specifically for use in the preparation thereof. This indemnity will be in addition to any liability which any Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that, if the indemnified party is you or a person who controls you, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both you or such controlling person and the indemnifying party and you or such controlling person shall have been advised by such counsel that there is a conflict of interest which would prevent counsel for the indemnifying party from representing the indemnifying party and you or such controlling person (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of you or such controlling person, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction or which are consolidated into the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for you and all such controlling persons, which firm shall be designated in writing by you). No settlement of any action against an indemnified party shall be made without the consent of the indemnified party, which shall not be unreasonably withheld in light of all factors of importance to such indemnified party. 8. CONTRIBUTION. In order to provide for just and equitable contribution under the Act in any case in which (i) the indemnifying party makes a claim for indemnification pursuant to Section 7 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent -22- jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of the Underwriters, then the Company and the Underwriters in the aggregate shall contribute to the aggregate losses, claims, damages, or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) in either such case (after contribution from others) in such proportions that the Underwriters are responsible in the aggregate for that portion of such losses, claims, damages or liabilities determined by multiplying the total amount of such losses, claims, damages or liabilities times the difference between the public offering price and the commission to the Underwriter and dividing the product thereof by the public offering price, and the Company, if applicable, shall be responsible for that portion of such losses, claims, damages or liabilities times the commission to the Underwriters and dividing the product thereof by the public offering price; provided, however, that the Underwriters shall not be required to so contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder if such allocation is not permitted by applicable law, then the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. No person guilty of a fraudulent misrepresentation (within the meaning of Section 12(2) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any person having liability under Section 12 of the Act other than the Company and the Underwriter. As used in this paragraph, the term "Underwriters" includes any person who controls the Underwriters within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then any Underwriter and each person who controls any Underwriter shall be entitled to contribution from the Company, to the full extent permitted by law. 9. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m. New York time on the next full business day following the effective date of the Registration Statement, or at such other time after the effective date of the Prospectus as you in your discretion shall first commence the public offering of any of the Securities covered thereby, provided, however, that at all times the provisions of Sections 7, 8, 9 and 11 shall be effective. 10. TERMINATION. (a) This Agreement, may be terminated at any time prior to the Closing Date by you if in your judgment it is impracticable to offer for sale or to enforce contracts made by you for the sale of the Securities agreed to be sold hereunder by reason of (i) the Company as a whole having sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree, (ii) trading in securities of the Company having been suspended by a state securities administrator or by the Commission, (iii) material governmental restrictions having been imposed on trading in securities generally (not in force and effect on the date hereof) or trading on the New York Stock Exchange, American Stock Exchange, or in the over-the- counter market shall have been suspended, (iv) a banking moratorium having been declared by federal or New York State authorities, (v) an outbreak or escalation of hostilities or other national or international calamity having occurred, (vi) the passage by the Congress of the United States or by any state legislative body, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any -23- authoritative accounting institute or board, or any governmental executive, which is believed likely by you to have a material impact on the business, financial condition or financial statements of the Company; or (vii) any material adverse change having occurred, since the respective dates as of which information is given in the Prospectus, in the condition, financial or otherwise, of the Company as a whole, whether or not arising in the ordinary course of business, (viii) Edward Names ceases to be employed by the Company in his present capacity; (ix) the Securities are not listed the American Stock Exchange or on NASDAQ. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11 or in Section 10, the Company shall be promptly notified by you, by telephone or telegram, confirmed by letter. 11. REPRESENTATIONS, WARRANTS AND AGREEMENTS TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company (or its officers) and the Underwriter set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriter, the Company, or any of their officers or directors and will survive delivery of and payment for the Securities. 12. NOTICES. All communications hereunder will be in writing and, except as otherwise expressly provided herein, if sent to you, will be mailed, delivered or telephoned and confirmed to you at 315 Post Road West, Westport, CT 06880, Attention: John Lane, Senior Vice President; to the Company at 216 Sixteenth Street, Suite 730, Denver, CO 80202, Attention: Edward J. Names, President. 13. PARTIES IN INTEREST. This Agreement is made solely for the benefit of the Underwriter(s), and the Company, and their respective controlling persons, directors and officers, and their respective successors, assigns, executors and administrators. No other person shall acquire or have any right under or by virtue of this Agreement. 14. HEADINGS. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 15. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to conflict of law principles. 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same instrument. If the foregoing correctly sets forth the understanding between the Company and you, as Representative of the several underwriters, please so indicate in the space provided below for such purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, METEOR INDUSTRIES, INC. By:______________________________________ (Authorized Officer) Edward J. Names, President -24- Accepted as of the date first above written: Westport Resources Investment Services, Inc. As Representative of the several Underwriters By:_______________________________________ (Authorized Officer) John Lane, Senior Vice President -25- EXHIBIT A SCHEDULE I UNDERWRITERS 600,000 shares of 600,000 Underwriter Common Stock Redeemable Warrants - ----------------------------- ----------------- ------------------- Westport Resources Investment Services, Inc. TOTAL EX-1.2 3 FORM OF SELECTED DEALERS AGREEMENT EXHIBIT B A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. YOUR EXECUTION HEREOF WELL INVOLVE NO OBLIGATION OR COMMITMENT OF ANY KIND UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. METEOR INDUSTRIES, INC. SELECTED DEALERS AGREEMENT , 1997 Dear Sirs: 1. Westport Resources Investment Services, Inc. named as the Underwriter ("Underwriter") in the enclosed preliminary Prospectus, proposes to offer on a firm commitment basis, subject to the terms and conditions and execution of the Underwriting Agreement, up to 600,000 shares of common stock and up to 600,000 redeemable warrants at $ per share and Redeemable Warrants at $.10 per Warrant ("Securities") of the above Company. The Securities are more particularly described in the enclosed preliminary Prospectus, additional copies of which will be supplied in reasonable quantities upon request. Copies of the definitive Prospectus will be supplied after the effective date of the Registration Statement. 2. The Underwriter is soliciting offers to buy, upon the terms and conditions hereof, a part of the Securities from Selected Dealers, including you who are to act as principal and who are (i) registered with the Securities and Exchange Commission ("Commission") as broker-dealers under the Securities Exchange Act of 1934, as amended ("1934 Act"), and members in good standing with the National Association of Securities Dealers, Inc. ("NASD"), or (ii) dealers or institutions with their principal place of business located outside the United States, its territories and possessions who are not eligible for membership in the NASD and who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's Interpretation with Respect to FreeRiding and Withholding and with Sections 2730, 2740, 2420 to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. The Securities are to be offered at a public price of $ per share and $ per Redeemable Warrant. Selected Dealers will be allowed a concession of not less than $ per share and $ per Redeemable Warrant. You will be notified of the precise amount of such concession prior to the effective date of the Registration Statement. You may reallow not in excess of $ per share and $ per Redeemable Warrant to dealers who meet the requirements set forth in this Section 2. This offer is solicited subject to the issuance and delivery of the Securities and their acceptance by the Underwriter, to the approval of legal matters by counsel and to the terms and conditions as herein set forth. 3. Your offer to purchase may be revoked in whole or in part without obligation or commitment of any kind by you and any time prior to acceptance and no offer may be accepted by us and no sale can be made until after the registration statement covering the Securities has become effective with the Commission. Subject to the foregoing, upon execution by you of the Offer to Purchase below and the return of same to us, you shall be deemed to have offered to purchase the number of Securities set forth in your offer on the basis set forth in paragraph 2 above. Any oral notice by us of acceptance of your offer shall be immediately followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealers Agreement shall be applicable. We may also make available to you an allotment to purchase Securities, but such allotment shall be subject to modification or termination upon notice from us any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Securities assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing.. 4. You agree that in reoffering said Securities, if your offer is accepted after the effective date, you will make a bona fide public distribution of same. You will advise us upon request of Securities purchased by you remaining unsold and we shall have the right to repurchase such Securities upon demand at the public offering price without paying the concession with respect to any Securities so repurchased. Any of the Securities purchased by you pursuant to this Agreement are to be subject to the terms hereof. Securities shall not be offered or sold by you below the public offering price before the termination of this Agreement. 5. Payment for Securities which you purchase hereunder shall be made by you on or before five (5) business days after the date of each confirmation by certified or bank cashier's check payable to the Underwriter. Certificates for the Securities shall be delivered as soon as practicable after delivery instructions are received by the Underwriter. 6. A registration statement covering the offering has been filed with the Securities and Exchange Commission in respect to the Securities. You will be promptly advised when the registration statement becomes effective. Each Selected Dealer in selling Securities pursuant hereto agrees (which agreement shall also be for the benefit of the Company) that it will comply with the applicable requirements of the Securities Act of 1933 and of the Securities Exchange Act of 1934 and any applicable rules and regulations issued under said Acts. No person is authorized by the Company or by the Underwriter to give any information or to make any representations other than those contained in the Prospectus in connection with the sale of the Securities. Nothing contained herein shall render the Selected Dealers a member of the Underwriting Group or partners with the Underwriter or with one another. 7. You will be informed by us as to the states in which we have been advised by counsel the Securities have been qualified for sale or are exempt under the respective securities or blue sky laws of such states, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell Securities in any state. You agree not to sell Securities in any other state or jurisdiction and to not sell Securities in any state or jurisdiction unless you are qualified or licensed to sell securities in such state or jurisdiction. 8. The Underwriter shall have full authority to take such action as it may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Underwriter shall not be under any liability to you, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by us in this Agreement, and no obligation on our part shall be implied or inferred herefrom. 9. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate when the offering is completed. Nothing herein contained shall be deemed a commitment on -2- our part to sell you any Securities; such contractual commitment can only be made in accordance with the provisions of paragraph 3 hereof. 10. You represent that you are a member in good standing of the NASD and registered as a broker-dealer with the Commission, or that you are a foreign broker-dealer not eligible for membership under Section 1 of the Bylaws of the NASD who agrees to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretation with Respect to FreeRiding and Withholding and with Sections 2730, 2740, 2420, and 2750 of the Rules of Fair Practice. Your attention is called to and you agree to comply with the following: (a) Article III, Section 2110 of the Rules of Fair Practice of the NASD and the interpretations of said Section promulgated by the Board of Governors of the NASD including Section 2740 and the interpretation with respect to "Free-Riding and Withholding;" (b) Section 10(b) of the 1934 Act and Regulation M and Rule 10b-10 of the general rules and regulations promulgated under the 1934 Act; and (c) Rule 15c2-8 of the general rules and regulations promulgated under the 1934 Act requiring the distribution of a preliminary Prospectus to all persons reasonably expected to be purchasers of the Securities from you at least 48 hours prior to the time you expect to mail confirmations. You, as a member of the NASD, by signing this Agreement, acknowledge that you are familiar with the cited laws and rules and agree that you will not directly and/or indirectly violate any provisions of applicable law in connection with your participation in the distribution of the Securities. 11. In addition to compliance with the provisions of paragraph 10 hereof, you will not, until advised by us in writing or by wire that the entire offering has been distributed and closed, bid for or purchase Securities in the open market or otherwise make a market in the Securities or otherwise attempt to induce others to purchase the Securities in the open market. Nothing contained in this paragraph 11 shall, however, preclude you from acting as agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 12. You understand that the Underwriter may in connection with the offering engage in stabilizing transactions. If the Underwriter contracts for or purchases in the open market in connection with such stabilization any Securities sold to you hereunder and not effectively placed by you, the Underwriter may charge you the Selected Dealer's concession originally allowed you on the Securities so purchased and you agree to pay such amount to us on demand. 13. By submitting an Offer to Purchase you confirm that you may, in accordance with Rule 15 (c )(3 )(1) adopted under the 1934 Act, agree to purchase the number of Securities you may become obligated to purchase under the provisions of this Agreement. 14. All communications from you should be directed to us at 315 Post Road West, Westport, CT 06880 (203-227-3211) and (fax 203-222-8487). All communications from us to you shall be directed to the address to which this letter is mailed. Very truly yours, Westport Resources Investment Services, Inc. By__________________________________ (Authorized Officer) -3- OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke as set forth in paragraph 3) _____________________________ * Securities in accordance with the terms and conditions set forth above. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to such Securities. We further state that in purchasing such Securities we have relied upon such Prospectus and upon no other statement whatsoever, written or oral. By__________________________________ (Authorized Officer) *If a number appears here which does not correspond with what you wish to offer to purchase, you may change the number by crossing out the number, inserting a different number and initializing the change. EX-1.3 4 FORM OF AGREEMENT AMONG UNDERWRITERS METEOR INDUSTRIES, INC. 600,000 Shares of Common Stock and 600,000 Redeemable Warrants AGREEMENT AMONG UNDERWRITERS Westport Resources Investment Services, Inc. April , 1997 315 Post Road West Westport, Connecticut 06880 As Representative GENTLEMEN: We wish to confirm as follows the agreement among you, the undersigned and the other members of the Underwriting Group named in Schedule I to the Underwriting Agreement, as it is to be executed (all such parties being herein called the "Underwriters"), with respect to the purchase by the Underwriters severally from Meteor Industries, Inc. ("Company") of up to 600,000 shares of Common Stock and up to 600,000 Redeemable Warrants ("Securities") set forth in Schedule I to the Underwriting Agreement. The number of Securities to be purchased by each Underwriter from the Company shall be determined in accordance with Section 2 of the Underwriting Agreement. It is understood that changes may be made in those who are to be Underwriters and in the respective numbers of Securities to be purchased by them, but that the Underwriting Agreement will not be changed without our consent, except as provided herein, and in the Underwriting Agreement. The obligations of the Underwriters to purchase the number of Securities set opposite their respective names in Schedule I to the Underwriting Agreement, are herein called their "underwriting obligations." The number of Securities set opposite our name in said Schedule I, are herein called "our Securities." For purposes of this Agreement the following definitions shall be applicable: (a) "Manager's Concession" shall be the compensation to you for acting as Manager as provided in Paragraph 1 of not less than percent ( %) of the underwriting discount. The Manager's Concession shall include the right to a portion of the warrants to be issued pursuant to the Underwriting Agreement and, the right to the nonaccountable expenses to be paid pursuant to the Underwriting Agreement. (b) "Underwriting Group Concession" shall mean compensation to members of the Underwriting Group for assuming the underwriting risk and shall be not less than percent ( %) of the underwriting discount. (c) "Dealer's Concession" shall mean compensation to Dealers, who are members of the Selling Group and shall, as to Dealers who have executed an agreement with you, be not less than percent ( %) of the underwriting discount. (d) "Dealer's Reallowance Concession" shall mean the compensation allowed Dealers by Underwriters other than you and shall be one-half (1/2) of the Dealer's Concession. (e) It is contemplated that the underwriting discount will be ten percent (10%) of the offering price. You, in your absolute discretion, shall determine, within the foregoing limitations, the precise allocation of the underwriting discount and shall notify us of same at least twenty-four (24) hours prior to the execution of the Underwriting Agreement. 1. AUTHORITY AND COMPENSATION OF REPRESENTATIVE. We hereby authorize you, as our Representative and on our behalf, (a) to enter into an agreement with the Company substantially in the form attached hereto as Exhibit A ("Underwriting Agreement"), but with such changes therein as in your judgment are not materially adverse to the Underwriters, (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement, and (c) to take all such action as you, in your discretion, may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and this Agreement and the sale and distribution of the Securities, provided, however, that the time within which the Registration Statement is required to become effective pursuant to the Underwriting Agreement will not be extended more than forty-eight (48) hours without the approval of a majority in interest of the Underwriters (including you). We authorize you, in executing the Underwriting Agreement on our behalf, to set forth in Schedule I of the Underwriting Agreement as our commitment to purchase the number of Securities (which shall not be substantially in excess of the number of Securities included in your invitation to participate unless we have agreed otherwise) included in a wire, telex, or similar means of communication transmitted by you to us at least twenty-four (24) hours prior to the commencement of the offering as our finalized underwriting participation. As our share of the compensation for your services hereunder, we will pay you, and we authorize you to charge to our account, a sum equal to the Manager's Concession. 2. PUBLIC OFFERING. A public offering of the Securities is to be made, as herein provided, as soon after the Registration Statement relating thereto shall become effective as in your judgment is advisable. The Securities shall be initially offered to the public at the public offering price of $ per share and $0.10 per Redeemable Warrant. You will advise us by telegraph or telephone when the Securities shall be released for offering. We authorize you as Representative of the Underwriters, after the initial public offering, to vary the public offering price, in your sole discretion, by reason of changes in general market conditions or otherwise. The public offering price of the Securities at any time in effect is herein called the "Offering Price." We hereby agree to deliver all preliminary and final Prospectuses as required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934 and Section 5(b) of the Securities Act of 1933. You have heretofore delivered to us such preliminary Prospectuses as have been requested by us, receipt of which is hereby acknowledged, and will deliver such final Prospectuses as will be requested by us. 3. OFFERING TO DEALERS AND GROUP SALES. We authorize you to reserve for offering and sale, and on our behalf to sell, to institutions or other retail purchasers (such sales being herein called "Group Sales") and to dealers selected by you (such dealers being herein called the "Dealers") all or any part of our Securities as you may determine. Such sales of Securities, if any, shall be made (i) in the case of Group Sales, at the Offering Price, and (ii) in the case of sales to Dealers, at the Offering Price less the Dealer's Concession. Any Group Sales shall be as nearly as practicable in proportion to the underwriting obligations of the respective Underwriters. Any sales to Dealers made for our account shall be as nearly as practicable in the ratio that the Securities reserved for our account for offering to Dealers bears to the aggregate of all Securities of all Underwriters, including you, so reserved. On any Group Sales or sales to Dealers made by you on our behalf, we shall be entitled to receive only the Underwriter's Concession. -2- You agree to notify us not less than twenty-four (24) hours prior to the commencement of the public offering as to the number of Securities, if any, which we may retain for direct sale. Prior to the termination of this Agreement, you may reserve for offering and sale, as herein before provided, any Securities remaining unsold theretofore retained by us and we may, with your consent, retain any Securities remaining unsold theretofore reserved by you. Sales to Dealers shall be made under a Selected Dealers Agreement, attached hereto as Exhibit B and by this reference incorporated herein. We authorize you to determine the form and manner of any communications with Dealers, and to make such changes in the Selected Dealers Agreement, as you may deem appropriate. In the event that there shall be any such agreements with Dealers, you are authorized to act as managers thereunder, and we agree, in such event, to be governed by the terms and conditions of such agreements. Each Underwriter agrees that it will not offer any of the Securities for sale at a price below the Offering Price or allow any concession therefrom, except as herein otherwise provided. We, as to our Securities, may enter into agreements with Dealers, but any Dealer's Reallowance Concession shall not exceed half of the Dealer's Concession. It is understood that any person to whom an offer may be made, as hereinbefore provided, shall be a member of the National Association of Securities Dealers, Inc. ("NASD") or dealers or institutions with their principal place of business located outside of the United States, its territories or possessions, and who are not eligible for membership under Section 1 of the Bylaws of the NASD who agree to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof, or residents therein, and, in making sales, to comply with the NASD's Rules of Fair Practice. We authorize you to determine the form and manner of any public advertisement of the Securities. Nothing in this Agreement contained shall be deemed to restrict our right, subject to the provisions of this Section 3, to offer our Securities prior to the effective date of the Registration Statement, provided, however, that any such offer shall be made in compliance with any applicable requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder and of any applicable state securities laws. 4. REPURCHASES IN THE OPEN MARKET. Any Securities sold by us (otherwise than through you) which, prior to the termination of this Agreement, or such earlier date as you may determine, shall be contracted for or purchased in the open market by you on behalf of any Underwriter or Underwriters, shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes, if any, on redelivery. Any Securities delivered on such repurchase need not be the identical Securities originally sold by us. In lieu of delivery of such Securities to us, you may (i) sell such Securities in any manner for our account and charge us with the amount of any loss or expense, or credit us with the amount of any profit, less any expense, resulting from such sale, or (ii) charge our account . t with an amount not in excess of the concession to Dealers on such Securities. 5. DELIVERY AND PAYMENT. We agree to deliver to you, at or before 9:00 A.M., New York, New York Time, on the Closing Date referred to in the Underwriting Agreement, at your office, a certified or bank cashier's check payable to your order for the offering price of the Securities less Dealer's Concession of the Securities which we retained for direct sale by us, the proceeds of which check shall be delivered to you, in the manner provided in the Underwriting Agreement, to or for the account of the Company against delivery of -3- certificates for such Securities to you for our account. You are authorized to accept such delivery and to give receipts therefor. You may advance funds for Securities which have been sold or reserved for sale to retail purchasers or Dealers for our account. If we fail (whether or not such failure shall constitute a default hereunder) to deliver to you, or you fail to receive, our check and/or payment for sales made by you for our account for the Securities which we have agreed to purchase, you, individually and not as Representative of the Underwriters, are authorized (but shall not be obligated) to make payment, in the manner provided in the Underwriting Agreement, to or for the account of the Company for such Securities for our account, but any such payment by you shall not relieve us of any of our obligations under the Underwriting Agreement or under this Agreement and we agree to repay you on demand the amount so advanced for our account. We also agree on demand to take up and pay for or to deliver to you funds sufficient to pay for at cost any Securities of the Company purchased by you for our account pursuant to the provisions of Section 9 hereof, and to deliver to you on demand any Securities sold by you for our account, pursuant to any provision of this Agreement. We authorize you to deliver our Securities, and any other Securities purchased by you for our account pursuant to the provisions of Section 9 hereof, against sales made by you for our account pursuant to any provision of this Agreement. Upon receipt by you of payment for the Securities sold by us and/or through you for our account, you will remit to us promptly an amount equal to the Underwriter's Concession on such Securities. You agree to cause to be delivered to us, as soon as practicable after the Closing Date referred to in the Underwriting Agreement, such part of our Securities purchased on such Closing Date as shall not have been sold or reserved for sale by your for our account. In case any Securities reserved for sale in Group Sales or to Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree to accept delivery when tendered by you of any Securities so reserved for our account and not so purchased and pay you the offering price less the Dealer's and Underwriter's Concessions. 6. AUTHORITY TO BORROW. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments, and to hold, or pledge as security therefor, all or any part of our Securities of the Company purchased hereunder for our account. Any lending bank is hereby authorized to accept your instructions as Representative in all matters relating to such loans. Any part of our Securities held by you, may be delivered to us for carrying purposes, and if so delivered, will be redelivered to you upon demand. 7. ALLOCATION OF EXPENSE AND LIABILITY. We authorize you to charge our account with, and we agree to pay (a) all transfer taxes on sales made by you for our account, except as herein otherwise provided, and (b) our proportionate share (based on our underwriting obligations) of all expenses in excess of those reimbursed by the Company incurred by you in connection with the purchase, carrying and distribution, or proposed purchase and distribution, of the Securities and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. Funds for our account at any time in your hands as our Representative may be held in your general funds -4- without accountability for interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account, after proper charge and credit for all interim payments and receipts, shall be paid to or paid by us, provided, however, that you, in your discretion, may reserve from distribution an amount to cover possible additional expenses chargeable to the several Underwriters. 8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you, as Representative of the Underwriters, of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Securities shall constitute any representation by you as to the existence or nonexistence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement, or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our underwriting obligations) of all expenses and liabilities which may be incurred by, or for the accounts of the Underwriters, including any liability which may be incurred by the Underwriters or any of them, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 9. STABILIZATION. We authorize you, until the termination of this Agreement, (a) to make purchases and sales of the Securities, in the open market or otherwise, for long or short account, and on such terms, and at such prices as you in your discretion may deem desirable, (b) in arranging for sales of Securities, to overallot, and (c) either before or after the termination of this Agreement, to cover any short position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934. All such purchases, sales and overallotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations; provided, however, that our net position resulting from such purchases and sales and overallotments shall not at any time exceed, either for long or short account, fifteen percent (15%) of the number of Securities agreed to be purchased by us. If you engage in any stabilizing transactions as representative of the underwriters, you shall promptly notify us of that fact and in like manner you agree to promptly notify and file with us any stabilizing transaction in accordance with the requirements of Rule 17a-2(d) under the Securities Exchange Act of 1934. We agree to advise you from time to time, upon request, until the settlement of accounts hereunder, of the number of Securities at the time retained by us unsold, and we will upon request sell to you, for the accounts of one or more of the several Underwriters, such number of our unsold Securities as you may designate, at the Offering Price less such amount, not in excess of the concession to Dealers, as you may determine. 10. OPEN MARKET TRANSACTIONS. We agree that, except with your consent and except as herein provided upon advice from you, we will not make purchases or sales on the open market or otherwise, or attempt to induce others to make purchases or sales, either before or after the purchase of the Securities, and prior to the completion (as defined in Regulation M of the Securities Exchange Act of 1934) of our participation in the distribution, we will otherwise comply with Regulation M. Nothing in this Section 10 contained shall prohibit us from acting as broker or agent in the execution of unsolicited orders of customers for the purchase or sale of any securities of the Company. -5- 11. BLUE SKY. Prior to the initial offering by the Underwriters, you will inform us as to the states under the respective securities or Blue Sky laws of which it is believed that the Securities have been qualified or are exempt for sale, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or Dealer to sell the Securities in any jurisdiction. We will not sell any Securities in any other state or jurisdiction and we will not sell Securities in any state or jurisdiction unless we are qualified or licensed to sell securities in such state or jurisdiction. We authorize you, if you deem it unadvisable in arranging sales of Securities for our account hereunder, to sell any of our Securities to any particular Dealer, or other buyer, because of the securities or Blue Sky laws of any jurisdiction, to sell our Securities to one or more other Underwriters at the Offering Price less, in the case of a sale to any Dealer, such amount, not in excess of the concession to Dealers thereon, as you may determine. The transfer tax on any such sales among Underwriters shall be treated as an expense and charged to the respective accounts of the several Underwriters, in proportion to their respective underwriting obligations. 12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters, in respect to their obligations under the Underwriting Agreement shall not release us from any of our obligations. In case of such default by one or more Underwriters, you are authorized to increase, pro rata, with the other nondefaulting Underwriters, the number of defaulted Securities which we shall be obligated to purchase from the Company, provided, however, that the aggregate amount of all such increases for all Underwriters shall not exceed ten percent (10%) of such Securities, and, if the aggregate number of the Securities not taken up by such defaulting Underwriters exceeds such ten percent (10%), you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include yourselves, of all or a portion of the Securities not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective numbers of Securities to be purchased by the nondefaulting Underwriters and by any such other person or persons shall be taken as the basis for the underwriting obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriters to the other Underwriters for damages resulting from such default. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any Securities purchased by your for their respective accounts, pursuant to Section 9 hereof, or to deliver any such Securities sold or overallotted by you for their respective accounts pursuant to any provisions of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each nondefaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such Underwriter of its liability therefor. 13. TERMINATION OF AGREEMENT. Unless earlier terminated by you, the provisions of Sections 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise provided therein, terminate thirty (30) full business days after the effective date of the Registration Statement herein referred to, but may be extended by you for an additional period or periods not exceeding thirty (30) full business days in the aggregate. You may, however, terminate this Agreement, or any provisions hereof, at any time by written or telegraphic notice to us. 14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority as Representative of the several Underwriters shall include the taking -6- of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Securities, including the right to make any modifications which you consider necessary or desirable in the arrangements with Dealers or others. You shall be under no liability for or in respect of the value of the Securities or the validity or the form thereof, the Registration Statement, the Prospectus, the Underwriting Agreement, or other instruments executed by the Company or others of any agreement on its or their part; nor shall you, as such Representative or otherwise, be liable under any of the provisions hereof, or for any matters connected herewith, except for want of good faith, and except for any liability arising under the Securities Act of 1933; and no obligation not expressly assumed by you as such Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as the representative of each of them respectively. Nothing herein contained shall constitute the several Underwriters partners with you or with each other, or render any Underwriter liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective underwriting obligations and are not joint. 15. ACKNOWLEDGMENT OF REGISTRATION STATEMENT, ETC. We hereby confirm that we have examined the Registration Statement (including all amendments thereto) relating to the Securities as heretofore filed with the Securities and Exchange Commission, that we are familiar with the amendment(s) to the Registration Statement and the final form of Prospectus proposed to be filed, that we are willing to accept the responsibilities of an underwriter thereunder, and that we are willing to proceed as therein contemplated. We further confirm that the statements made under the heading "Underwriting" in such proposed final form of Prospectus are correct and we authorize you so to advise the Company on our behalf. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any amendment or amendments to the Registration Statement and of any amended Prospectus promptly, if and when received by you, but the making of such changes and amendments shall not release us or affect our obligations hereunder or under the Underwriting Agreement. 16. INDEMNIFICATION. Each Underwriter, including you, agrees to indemnify and hold harmless each other Underwriter and each person who controls any other Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, to the extent of their several commitments under the Underwriting Agreement and upon the terms that such Underwriter agrees to indemnify and hold harmless the Company as set forth in Section 7 of the Underwriting Agreement. The Agreement contained in this Section 16 shall survive any termination of this Agreement Among Underwriters. 17. CAPITAL REQUIREMENTS. We confirm that our ratio of aggregate indebtedness to net capital is such that we may, in accordance with and pursuant to Rule 15c3-1, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, agree to purchase the number of Securities we may be obligated to purchase under any provision of the Underwriting Agreement or this Agreement. 18. MISCELLANEOUS. We have transmitted herewith a completed Underwriters' Questionnaire on the form thereof supplied by you. Any notice hereunder from you to us or from us to you shall be deemed to have been duly give if sent by registered mail, telegram, teletype, telex, telecopier, graphic scan, or other written form of telecommunication to us at our address as set forth in the Underwriting Agreement, or to you at the address set forth on the first page of this Agreement. -7- You hereby confirm that you are registered as a broker-dealer with the United States Securities and Exchange Commission and that you are a member of the NASD and we confirm that we are either a member of the NASD or a foreign broker-dealer not eligible for membership under Section I of the Bylaws of the NASD, who agrees to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof or residents therein, and, in making sales, to comply with the requirements of the NASD's Interpretation with Respect to Free Riding and Withholding, and with Sections 2730, 2740 and 2420 to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. We will comply with all applicable federal laws, the laws of the states or other jurisdictions concerned and the Rules and Regulations of the NASD, including, but not limited to, Section 2740 of the Rules of Fair Practice. This instrument may be signed by the Underwriters in various counterparts which together shall constitute one and the same agreement among all the Underwriters and shall become effective as between us at such time as you shall have confirmed same by returning an executed copy to us, and thereafter, as to us and the other Underwriters, upon execution by them of counterparts which are confirmed by you. In no event, however, shall we have any liability under this Agreement if the Underwriting Agreement is not executed. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, _________________________________________ Attorney-in-Fact for the several Underwriters named in Schedule I to the Underwriting Agreement Confirmed as of the date first above written. Westport Resources Investment Services, Inc.. As Representative By_______________________________ Senior Vice President EX-4.2 5 FORM OF REPRESENTATIVE'S WARRANT THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH. Void After 3:30 P.M., Eastern Time, on , 2002. Representative's Warrant to Purchase Common Stock and Redeemable Warrants METEOR INDUSTRIES, INC. This is to Certify That, FOR VALUE RECEIVED, Westport Resources Investment Services, Inc. (the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from Meteor Industries, Inc. ("Company"), a Colorado corporation, at any time on or after , 1998, and not later than 3:30 p.m., Eastern Time, on , 2002, at $ per share of Common Stock and $ per Redeemable Warrants of the Company ("Securities") exercisable at a purchase price for the Securities which is 125% of the public offering price of the Securities; the shares of Common Stock are at $ per share and, in the case of the Redeemable Warrants, at $ per Redeemable Warrant. The number of Securities to be received upon the exercise of this Warrant and the price to be paid for the Securities may be adjusted from time to time as hereinafter set forth. The purchase price of a Security in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Warrant is or may be one of a series of Warrants identical in form issued by the Company to purchase an aggregate of 60,000 Shares of Common Stock and 60,000 Redeemable Warrants. The Securities, as adjusted from time to time, underlying the Warrants are hereinafter sometimes referred to as "Warrant Securities". The Securities issuable upon the exercise hereof are in all respects identical to the securities being purchased by the Underwriter for resale to the public pursuant to the terms and conditions of the Underwriting Agreement entered into on this date between the Company and Holder, except that the Exercise Price per share of Common Stock to be acquired upon the exercise of the Redeemable Warrants issuable to Holder pursuant hereto shall be $ per share. (A) EXERCISE OF WARRANT. Subject to the provisions of Section (g) hereof, this Warrant may be exercised in whole or in part at anytime or from time to time on or after , 1998, but not later than 3:30 p.m., Eastern Time on , 2002, or if , 2002, is a day on which banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of shares of Common Stock or Redeemable Warrants, as the case may be as specified in such Form, together with all federal and state taxes applicable upon such exercise. The Company agrees to provide notice to the Holder that any tender offer is being made for the Securities no later than the day the Company becomes aware that any tender offer is being made for the Securities. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the shares purchasable hereunder along with any additional Redeemable Warrants not exercised. Upon receipt by the Company of this Warrant at the office of the Company or at the office of the Company's stock transfer agent, in proper form for exercise and accompanied by the total Exercise Price, the Holder shall be deemed to be the holder of record of the Securities issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Securities shall not then be actually delivered to the Holder. (B) RESERVATION OF SECURITIES. The Company hereby agrees that at all times there shall be reserved for issuance and/or delivery upon exercise of this Warrant such number of shares of Securities as shall be required for issuance or delivery upon exercise of this Warrant. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Securities and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all Securities issuable upon the exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on NASDAQ. (C) FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (1) If the Securities are listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (2) If the Securities are not so listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Automated Quotation System (or, if not so quoted on NASDAQ or by the National Quotation Bureau, Inc.) on the last business day prior to the date of the exercise of this Warrant; or (3) If the Securities are not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount, not less than book value, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company, such determination to be final and binding on the Holder. (D) EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder thereof to purchase (under the same terms and conditions as provided by this Warrant) in the aggregate the same number of Securities purchasable hereunder. This Warrant may not be sold, transferred, assigned, or hypothecated until after one year from the effective date of the registration statement except that it may be (i) assigned in whole or in part to the officers of the "Underwriter(s)", and (ii)transferred to any successor to the business of the "Underwriter(s)." Any -2- such assignment shall be made by surrender of this Warrant to the Company, or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and with funds sufficient to pay any transfer tax; whereupon the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in-such instrument of assignment, and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants issued in substitution for or replacement of this Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not the Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (E) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. (F) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding and unexercised (i) if the Company shall pay any dividend exclusive of a cash dividend, or make any distribution upon the Common Stock, or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any class or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then, in any such case, the Company shall cause to be delivered to the Holder, at least ten (10) days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any, is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for equivalent securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (G) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK DELIVERABLE. (A)(i) Except as hereinafter provided, in the event the Company shall, at any time or from time to time after the date hereof, issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision or combination being herein call a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Exercise Price of the Common Stock issuable upon the exercise of the Warrant and -3- the Redeemable Warrant in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent to the nearest cent) determined by dividing (i) the sum of (a) the total number of shares of Common Stock outstanding immediately prior to such Change of Shares, multiplied by the Exercise Price in effect immediately prior to such Change of Shares, and (b) the consideration, if any, received by the Company upon such issuance, subdivision or combination by (ii) the total number of shares of Common Stock outstanding immediately after such Change of Shares; provided, however, that in no event shall the Exercise Price be adjusted pursuant to this computation to an amount in excess of the Exercise Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock. For the purposes of any adjustment to be made in accordance with this Section (g) the following provisions shall be applicable: (I) Shares of Common Stock issuable by way of dividend or other distribution on any capital stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (II) The number of shares of Common Stock at any one time outstanding shall not be deemed to include the number of shares issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights or warrants and upon the conversion or exchange of convertible or exchangeable securities. (ii) Upon each adjustment of the Exercise Price pursuant to this Section (g), the number of shares of Common Stock and Redeemable Warrants purchasable upon the exercise of each Warrant shall be the number derived by multiplying the number of shares of Common Stock and Redeemable Warrants purchasable immediately prior to such adjustment by the Exercise Price in effect prior to such adjustment and dividing the product so obtained by the applicable adjusted Exercise Price. (B) In case of any reclassification or change of outstanding Securities issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation other than a merger with a "Subsidiary" (which shall mean any corporation or corporations, as the case may be, of which capital stock having ordinary power to elect a majority of the Board of Directors of such corporation (regardless of whether or not at the time capital stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries) or by the Company and one or more Subsidiaries in which merger the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of subdivision or combination) or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company, or such successor or purchasing corporation, as the case may be, shall make lawful and adequate provision whereby the Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and -4- property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and shall forthwith file at the principal office of the Company a statement signed by its President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing such provision. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section (g)(A). The above provisions of this Section (g)(B) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (C) Irrespective of any adjustments or changes in the Exercise Price or the number of Securities purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant hereto, continue to express the Exercise Price per share and the number of shares purchasable thereunder as the Exercise Price per share and the number of shares purchasable thereunder as expressed in the Warrant Certificates when the same were originally issued. (D) After each adjustment of the Exercise Price pursuant to this Section (g), the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so adjusted, (ii) the number of Securities purchasable upon exercise of each Warrant, after such adjustment, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate in the Company's minute books and cause a brief summary thereof to be sent by ordinary first class mail to each Holder at his last address as it shall appear on the registry books of the Company. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (E) No adjustment of the Exercise Price shall be made as a result of or in connection with the issuance or sale of Securities if the amount of said adjustment shall be less than $.10, provided, however, that in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment that shall amount, together with any adjustment so carried forward, to at least $.10. In addition, Holders shall not be entitled to cash dividends paid by the Company prior to the exercise of any Warrant or Warrants held by them. (F) In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend consisting solely of shares of Common Stock or otherwise distribute to its stockholders any assets, property, rights, evidences of indebtedness, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the Securities or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same property, assets, rights, evidences of indebtedness, that they would have been entitled to receive at the time of such dividend or distribution as if the Warrants had been exercised immediately prior to such -5- dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section (g). (H) PIGGYBACK REGISTRATION. In the event that the demand registration rights provided for in Section( i) below have been exercised and fully complied with by the Company, and at the end of the twelve (12) month registration period provided for in Section (i) below the Holders shall not have sold all of their Warrants and/or Warrant Securities, then, if, at any time commencing one year from the effective date of the registration statement and expiring four (4) years thereafter, the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Act") (other than in connection with a merger or pursuant to Form S-8, S-4 or other comparable registration statement) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Holders and to all other Holders of the Warrants and/or the Warrant Securities of its intention to do so. If the Holder or other Holders of the Warrants and/or Warrant Securities notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford each of the Underwriter and such Holders of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement. Notwithstanding the provisions of this Section, the Company shall have the right at any time after it shall have given written notice pursuant to this Section (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. (I) DEMAND REGISTRATION. (1) At any time commencing one year from the effective date of the registration statement and expiring four (4) years thereafter, the Holders of the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Warrants) shall have the right (which right is in addition to the registration rights under Section (i) hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Underwriter and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant Securities for twelve (12) consecutive months by such Holders and any other holders of the Warrants and/or Warrant Securities who notify the Company within ten (10) days after receiving notice from the Company of such request. a. The Company covenants and agrees to give written notice of any registration request under this Section (i) by any Holder or Holders to all other registered Holders of the Warrants and the Warrant Securities within ten (10) days from the date of the receipt of any such registration request. (j) Covenants of the Company With Respect to Registration. In connection with any registration under Section (h) or (i) hereof, the Company covenants and agrees as follows: (i) The Company shall use its best efforts to file a registration statement within sixty (60) days of receipt of any demand therefor, shall use its -6- best efforts to have any registration statement declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (ii) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections (h), (i) and (j) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. If the Company shall fail to comply with the provisions of Section (j)(i), the Company shall, in addition to any other equitable or other relief available to the Holder(s), extend the Exercise Period by such number of days as shall equal the delay caused by the Company's failure. (iii) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (iv) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from and against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 7 of the Underwriting Agreement relating to the offering. (v) The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company. (vi) The Holder(s) may exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (vii) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in any registra- tion statement filed pursuant to Section (i) hereof, or permit any other reg- istration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section (i) hereof, other than a secondary offering of equity securities of the Company, without the prior written consent of the Holders of the Warrants and Warrant Securities representing a Majority of such securities (assuming an exercise of all the Warrants underlying the Warrants). -7- (viii)The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (x) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (y) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (ix) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (x) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriters, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD") or an Exchange. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (xi) The Company shall enter into an underwriting agreement with the managing underwriters, which may be the Underwriter. Such agreement shall be satisfactory in form and substance to the Company, and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter; provided however, that no Holder shall be required to make any representations, warranties or covenants or grant any indemnity to which it shall object in any such underwriting agreement. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (xii) For purposes of this Agreement, the term " Majority" in reference to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty (50%) of the then outstanding Warrants and Warrant Securities that (i) are not -7- held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith or (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. (k) Conditions of Company s Obligations. The Company's obligation under Section j hereof shall be conditioned as to each such public offering, upon a timely receipt by the Company in writing of: (A) Information as to the terms of such public offering furnished by or on behalf of the Holders making a public distribution of their Warrant Securities; and (B) Such other information as the Company may reasonably require from such Holder, or any underwriter for any of them, for inclusion in such registration statement or offering statement or post-effective amendment. (c) An agreement by the Holder to sell his Warrants and Warrant Securities on the basis provided in the Underwriting Agreement. (1) Continuing Effect of Agreement. The Company's agreements with respect to the Warrant Securities in this Warrant will continue in effect regardless of the exercise or surrender of this Warrant. (m) Notices. Any notices or certificates by the Company to the Holder and by the Holder to the Company shall be deemed delivered if in writing and delivered personally or sent by certified mail, to the Holder, addressed to him or sent to, Westport Resources Investment Services, Inc., 315 Post Road West, Westport, CT 06880, or, if the Holder has designated, by notice in writing to the Company, any other address, to such other address, and, if to the Company, addressed to it at 216 Sixteenth Street, Denver, CO 80202. The Company may change its address by written notice to Westport Resources Investment Services, Inc. (n) Limited Transferability. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the effective date of the Registration Statement except to underwriters of the Offering referred to in the Underwriting Agreement or to individuals who are either partners or officers of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrant holder, into a certificate or certificates evidencing the same aggregate number of Warrants. The Warrant may not be offered, sold, transferred, pledged or hypothecated in the absence of any effective registration statement as to such Warrant filed under the Act, or an exemption from the requirement of such registration, and compliance with the applicable federal and state securities laws. The Company may require an opinion of counsel satisfactory to the Company that such registration is not required and that such laws are complied with. The Company may treat the registered holder of this Warrant as he or it appears on the Company's book at any time as the Holder for all purposes. The Company shall permit the Holder or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (o) Transfer to Comply With the Securities Act of 1933. The Company may cause the following legend, or one similar thereto, to be set forth on the Warrants and on each certificate representing Warrant Securities, or any other -9- security issued or issuable upon exercise of this Warrant not theretofore distributed to the public or sold to underwriters for distribution to the public pursuant to Sections (h) or (i) hereof; unless counsel satisfactory to the Company is of the opinion as to any such certificate that such legend, or one similar thereto, is unnecessary: "The warrants represented by this certificate are restricted securities and may not be offered for sale, sold or otherwise transferred unless an opinion of counsel satisfactory to the Company is obtained stating that such offer, sale or transfer is in compliance wrath state and federal securities law. (p) Applicable Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of Colorado, without giving effect to conflict of law principles. (q) Assignability. This Warrant may not be amended except in a writing signed by each Holder and the Company. (r) Survival of Indemnification Provisions. The indemnification provisions of this Warrant shall survive until _____________, 2004. Meteor Industries, Inc. a Colorado corporation By_______________________________________ Edward J. Names, President Date:__________________________ Attest: _______________________________ ____________________, Secretary _______________________________ -10- PURCHASE FORM Dated__________, 19___ The undersigned hereby irrevocably elects to exercise the Warrant to the extent of purchasing _______ shares of Common Stock and ________ Redeemable Warrants and hereby makes payment of $_________ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name________________________________________ (please typewrite or print in block letters) Address_____________________________________ Signature___________________________________ ASSIGNMENT FORM FOR VALUE RECEIVED,_______________________________ hereby sells, assigns and transfers unto Name_____________________________________________ (please typewrite or print in block letters) Address__________________________________________ the right to purchase _____ shares of Common Stock and _____ Redeemable Warrants as represented by this Warrant to the extent of_____ shares of Common Stock and _____ Redeemable Warrants as to which such right is exercisable and does hereby irrevocably constitute and appoint , ________________________________________ attorney, to transfer the same on the books of the Company with full power of substitution in the premises. _________________________________________________ Signature Dated:_______________, 19_____ EX-5 6 KRYS BOYLE FREEDMAN SCOTT & SAWYER, P.C. 600 17th Street, Suite 2700 South Tower Denver, Colorado 80202 (303) 893-2300 FAX (303) 893-2882 April 30, 1997 Meteor Industries, Inc. 216 Sixteenth Street, Suite 730 Denver, Colorado 80202 RE: SEC Registration Statement on Form S-1 Ladies and Gentlemen: We are counsel for Meteor Industries, Inc., a Colorado corporation (the "Company") in connection with its proposed public offering under the Securities Act of 1933, as amended, of 600,000 shares of Common Stock (690,000 shares if the over-allotment option is exercised in full) and 600,000 Redeemable Warrants (690,000 Redeemable Warrants if the over-allotment option is exercised in full) through a Registration Statement on Form S-1 as to which this opinion is a part, to be filed with the Securities and Exchange Commission (the "Commission"). In connection with rendering our opinion as set forth below, we have reviewed and examined originals or copies identified to our satisfaction of the following: (1) Articles of Incorporation of the Company as filed with the Secretary of State of the State of Colorado, as amended. (2) Minute book containing the written deliberations and resolutions of the Board of Directors and Shareholders of the Company. (3) The Registration Statement and the Preliminary Prospectus contained within the Registration Statement. (4) The other exhibits to the Registration Statement to be filed with the Commission. We have examined such other documents and records, instruments and certificates of public officials, officers and representatives of the Company, and have made such other investigations as we have deemed necessary or appropriate under the circumstances. Based upon the foregoing and in reliance thereon, it is our opinion that: (I) 690,000 shares of Common Stock, $.001 par value, (ii) the 690,000 Redeemable Warrants; (iii) the 690,000 shares of Common Stock, $.001 par value, issuable upon exercise of the Redeemable Warrants; (iv) the Underwriter's Warrants to purchase 60,000 shares of Common Stock and 60,000 Redeemable Warrants; (v) the Underwriter's Redeemable Warrants to purchase up to 60,000 shares of Common Stock; and (vi) the 120,000 shares of Common Stock, $.001 par value, issuable upon the exercise of the Underwriter's Warrants and the Underwriter's Redeemable Warrants, will upon the purchase, receipt of full payment, issuance and delivery in accordance with the terms of the offering described in such Registration Statement, be duly and validly authorized, legally issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus constituting a part thereof. Very truly yours, KRYS BOYLE FREEDMAN SCOTT & SAWYER, P.C. By /s/ Jon D. Sawyer Jon D. Sawyer EX-23.2 7 EXHIBIT 23.2 COOPERS & LYBRAND Coopers & Lybrand L.L.P. 370 17th Street, Suite 3300 Denver, Colorado 80202-5633 telephone 303/573-2800 facsimile 303/573-2902 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion of this registration statement on Form S-1 (File No. 333-12557) of our report dated April 24, 1997, on our audits of the consolidated financial statements of Meteor Industries, Inc. as of December 31, 1996 and 1995 and for the years then ended. We also consent to the reference to our firm under the caption "Experts." /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Denver, Colorado April 29, 1997 EX-23.3 8 EXHIBIT 23.3 SQUIRE & WOODWARD, P.C. Bruce W. Squire, C.P.A. Marc A. Woodward, C.P.A. 2730 San Pedro NE., Suite D Albuquerque, New Mexico 98110 Tel: (505) 881-3408 fax: (505) 881-6507 - ------------------------------ American Institute of Certified Public Accountants CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-12557) of our report dated November 22, 1995, on our audits of the consolidated financial statements of Meteor Industries, Inc. as August 31, 1995 and 1994 and for the years then ended. We also consent to the reference to our firm under the caption "Experts." /s/ Squire & Woodward, P.C. SQUIRE & WOODWARD, P.C. Albuquerque, New Mexico April 29, 1997 EX-23.4 9 EXHIBIT 23.4 PRICE WATERHOUSE Chartered Accountants 1200 425 - 1st Street, S.W. Calgary, Alberta T2P 3V7 403/267-100 telecopier: 403/233-0883 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Amendment No. 2 to the Registration Statement on Form S-1 of our report 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) relating to the financial statements of CAPCO Resources Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse Chartered Accountants April 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----