SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998 Commission file No. 33-16820-D
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
ARETE INDUSTRIES, INC.
(Exact name of small business issuer as specified in its Charter)
Colorado 84- 1063149
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2305 Canyon Blvd. Suite 103, Boulder, Colorado 80302
(Address of principal executive offices) (Zip Code)
(303) 247-1313
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference of Part 111 of this Form 10-K, or any amendment to this Form 10-K. [ X ]
State Issuer's revenues for its most recent fiscal year: $888,371
On April 13, 1999, the Registrant had 235,413,310 shares of common voting stock held by non-affiliates. The Aggregate market value of shares of common stock held by non-affiliates was $1,647,893 on this date. This valuation is based upon the average low bid price for shares of common voting stock of the Registrant on the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD").
Documents Incorporated By Reference: Part III, Items 9-12 of this Form are incorporated by reference from Registrants Proxy Statement for its upcoming meeting of stockholders scheduled for approximately June 10, 1999, which will be filed with the Commission by amendment to this Form 10-KSB on or before the earlier of the date of mailing to stockholders or 120 days from December 31, 1998 per general instruction E(3) of Form 10-KSB.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On April 13, 1999, the issuer had 273,155,516 shares of its no par value common stock outstanding.
Transitional Small Business Disclosure Format: Yes_ No X .
PART I
Item 1 - Business
General Development of the Business
Arete Industries, Inc. (the "Company") was organized under the laws of the State of Colorado on July 21, 1987, under the name "Travis Investments, Inc." On September 1, 1998, the shareholders approved a name change of the Company to Arete Industries, Inc. In June of 1988 the Company completed an initial public offering as a Blank Check public company and in October of that year, made its first acquisition of a coop coupon direct mail advertising business, Vallarta, Inc. of San Diego, CA and its wholly owned subsidiary LeMail, Inc. a Colorado company. The Company then merged with Donis Corp., Inc. of Omaha, Nebraska which was involved in retail office supplies, printing, business forms. In 1993, the Company acquired the assets of American Advertisng Distributors, Inc. of Mesa, Arizona out of bankruptcy for stock, which operated a nationally franchised coop coupon direct mail business.
The Donis acquisition was unwound in October, 1994 when the Company, then directed by the management and former owners of Donis, filed the Company filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code, under Case No. BK. 94-81544 in the U.S. Bankruptcy Court for the District of Nebraska (the "Bankruptcy Case"). The Company filed a Plan of Reorganization which was approved and confirmed by the Bankruptcy Court on September 25, 1995 with an effective date of November 6, 1995 which fundamentally spun off all Donis assets and liabilities back to the original owners. During the Bankruptcy Case, Liberty Capital Corporation, a Colorado corporation ("Liberty Capital"), the principals of whom had been previously involved with the Company and its former management as stock brokers and then outside promoters, entered into a settlement agreement with Donis principals to spin off Donis assets to the former owners and recover the remaining business assets and franchise network of the Company. During the Case, management control was transferred to principals of Liberty Capital, Steve Cayou and Jeff Skinner, and they arranged and completed several private placements to infuse cash into the Company to facilitate settlements and cover operating losses of the Company.
Upon emerging from the Bankruptcy case, a number of improvements had been made including restructuring certain debt and equity including a 1 for 5 reverse stock split and cancellations of substantial amounts of common and Class A Preferred stock and settlement or acquisition by Liberty of certain leases and encumbrances on the Company's operating equipment. As of December 31, 1998, the Company had paid off its perfected secured and certain priority claims but remained in arrears on certain payments to certain allowed unsecured creditors as provided under its Plan of Reorganization (See Notes l (a) and 3 to Financial Statements).
The Company currently has authorized 500,000,000 shares of no par value common stock. As of April 13, 1999, the Company had 13,125,000 shares of Class B Preferred, face value $328,125. These shares are scheduled to be converted into an equal number of shares of common stock pursuant to an agreement with the shareholder which currently expires on May 30, 1999. The Series B Preferred is voting, noncumulative, redeemable and, pursuant to an agreement with the holder thereof, is convertible at the option of the Company into shares of common stock for $.025 per share at face value plus accrued dividends through April 30, 1999, subject to extension. The Class B Preferred, commencing January 1, 1994, accrues dividends at the rate of prime plus 4%, when and if declared by the Company. As of December 31, 1998 cumulative dividends of $383,400 are in arrears. (See: Note 4 to Financial Statements - Preferred Stock).
Upon emerging from Chapter 11 in September 1995, the Company engaged in a strategy to complete a substantial acquisition in another business, and resolved to simply maintain the coop coupon business in a survival state until this objective was accomplished. Funds were infused into the Company by Liberty Capital to cover operating losses and continue to resolve post- bankruptcy debts, but no resources were devoted to developing management and financial systems and controls, marketing or maintenance of the franchise system, and the equipment was allowed to deteriorate without substantial maintenance or rebuilding.
Messrs Cayou and Skinner were unsuccessful in completing an acquisition and, during 1997, encountered pressure from certain shareholders to complete a transaction. For this reason and under pressure from certain independent shareholders to remove Messrs Cayou and Skinner from the Board of Directors, on April 30, 1998, Messrs. Cayou and Skinner resigned as officers and directors of the Company and transferred management and board control of the Company to its special securities counsel and business consultant, Thomas P. Raabe and Fred C. Boethling, who is a business associate of Mr. Raabe.
Despite being immediately faced with defending a hostile shareholders suit and a court-ordered shareholders meeting, Messrs Raabe and Boethling began a turnaround and restructuring program designed to fix the current business, clean up the capital structure and generate profitability and positive cash flow in order to make the Company an attractive investment opportunity and acquisition vehicle. Since taking over control in April of 1998, new management has restructured the Company into a holding company; transferred the direct mail business into into Global Direct Marketing Services, Inc., a wholly owned subsidiary of the Company ("Global Direct"); shut down and liquidated the Company's Council Bluffs printing and mailing facility; and began outsourcing the requirements of its coop coupon and direct mail business. New management plans to grow the Company internally and by acquisition of additional and complimentary capabilities through merger, asset purchase, stock exchange, strategic alliances and joint ventures.
In February of 1999, management engaged in a joint venture with SourceOne Worldwide, LLC, a privately owned Colorado based direct mail and fulfillment company ("SourceOne") to take advantage of the synergies between the two businesses and to avoid the costs and ongoing risks and inefficiencies of rebuilding and operating the Council Bluffs print and mail facilities. The purpose of its joint venture with SourceOne, is to create and operate a full scale commercial printing operation within a new subsidiary to be formed, which will service all of the printing business of the Company, SourceOne and new business from around the Denver regional market. Once it is funded with working capital and has purchased approximately $3.5 million in printing and pre-preproduction equipment, of which there is no assurance, this new entity will begin servicing approximately $2 million annually in existing printing business, and will service new business generated from over $22 million in potential printing work which SourceOne currently mails, but presently cannot print. Additionally, the new company will have an internal sales department to sell commercial print work to the local and regional Denver market. As presently planned, the new printing company will have the capacity to generate in excess of $30 million in printing revenues and the partners hope to fill that capacity within 12 to 24 months of start-up. Narrative Description of Business of the Company
Since commencement of operations, the Company's primary business has been graphics, printing, advertising and fulfillment of direct mail advertising programs, particularly in the national and neighborhood coop coupon mailer niche. The Company has sold its services under a variety of direct marketing mechanisms including a network of licensed dealers, franchisees, and Franchise Area Developers (bulk franchises packaged for resale through dealers or "FAD's") and recently through direct customer service agreements. The Company's coop coupon mailer advertising business is full service providing marketing materials, graphics support, printing, compiling, and assembling of inserts, stuffing envelopes, mailing list acquisition and generation, and direct mailing of the advertising material on behalf of its customers. Most orders are prepaid upon approval of the production order. The direct mail business is currently operated under a variety of tradenames and formats, all which, in the opinion of new management need substantial updating. In addition to traditional methods, the Company has been moderately successful in marketing coupon mailing programs through small market radio and television stations.
On October 1, 1998, the Company formed a wholly owned subsidiary, Global Direct Marketing Services, Inc. ("Global Direct") to act as a dedicated marketing company. Global Direct will operate the current coop coupon advertising business and will manage the franchise network as an independent division. Global intends to market and sell printing, direct mail and other print and electronic marketing products and services such as self-mailers, catalogue and directories, data base management and marketing, target marketing, lead acquisition and tracking, and web site design, development, administrating, hosting and webmastering.
The coop coupon direct mail business has become extremely competitive with the customer base becoming more sophisticated and purchasing printing and fulfillment based on price and quality. The rapid growth of electronic commerce demands that the Company completely rethink and restructure its business to take the opportunity available through SourceOne to blend print/mail marketing services with electronic commerce marketing services. The thin margins of direct mail coupons must be augmented with value added services which can be provided as a package to the customers of the franchisees. The franchisees must be given new and more effective marketing tools as well as a package of effective products and services which better serve the customer base. The Company believes that with an entirely new vision based on combining electronic commerce, information technology and direct mail reinforcement of web based marketing systems, the Company, in partnership with SourceOne, is positioned to capture a significant market share in the direct marketing market.
Global Direct is dedicated to modernizing and making its franchise business more profitable and desirable as a business opportunity for the existing network of franchisees as well as experienced and established coop coupon franchisees from other systems who are looking for a top of the line reliable support and fulfillment system where they can make good money with as little intrusion into their business lives as possible. To this end Global Direct has undertaken to revitalize and restructure its franchise business by hiring a franchise manager, preparing a new Uniform Franchise Offering Circular which will enable the Company to sell new franchises, providing enhanced services to franchisees and prospects such as direct and remote training and support, modern communications and networking capabilities, new product and service offerings and developing new approaches to the business including offering premium printed products and value added marketing services over the internet. Global Direct currently has two full-time employees who provide customer service, job tracking and assembly and graphics. The remaining operational services have been assumed and undertaken by SourceOne. Global and SourceOne have begun co-developing capabilities of using advanced information technology and market research techniques, electronic commerce and web based marketing systems to refocus its business on offering value added marketing services to a broader population of customers including independent home based businesses in addition to retail merchants. The Company intends to exploit the extensive electronic commerce, telemarketing, printing, fulfillment and other capabilities of SourceOne Worldwide in expanding its revenues and increasing its margins by offering higher profit and value added services to its customer base.
Trademarks and Tradenames
The Company owns certain US registered trademarks, "American Advertising Distributors" Reg. No. 1,156,603 filed June 1, 1981; "Radiomail" Reg. No. 1,534,595 filed April 11, 1989; "Bonus Express" Reg. No. 1,310,363 filed December 18, 1984; "Supermail" Reg. No. 1,464,806 filed November 10, 1987 and "LeMail", Reg. No. 1,536,701, filed April 25, 1989.
Seasonality of Business
The direct mail advertising business of the Company is seasonal to the extent that there is a greater volume of advertising and services provided during the last three months of the year, due to the holidays, and the general increases due to retailing activities associated with the holiday season. The Company also experiences spikes in activity as a result of back to school, other holidays and otherwise experiences drop offs at the end of these seasons.
Competition
The direct mail business is highly competitive and the Company has a number of competitors across the United States. Sizes of competitors range from small 'mom and pop' local businesses to large, well capitalized corporations, with substantial operating histories. The Company sells and therefore must compete, nationwide, but due to its recent financial distress, has not been able to afford substantial marketing efforts necessary to increase market share.
The principal competitors of the Company are franchisers and independent mailers including Money Mailer, Inc., which has been in business since 1979, and has an estimated 400 Franchised Units; Super Coups, which has been in business since 1983, and has an estimated 70 Franchised Units in 13 states; Trimark, Inc., which has been in business since 1978, and has an estimated 40 Franchised Units in 26 states and has two company-owned Units; United Coupon Corporation, which has been in business since 1989, and has an estimated 88 Franchised Units in 24 states and has two company-owned Units; and Val Pac. which is owned by Cox Communications, and is believed to be the largest in the country, with a combination of licensees and franchisees. The Company also competes with several independent mailing companies, Mail West of Tuscon which is approximately the same size as the Company and Storing, Inc. of Columbus, Ohio which is approximately two and 1/2 times the size of the Company.
The Company, through LeMail, Radiomail and AAD, has approximately 50 active franchises/licensees covering almost every state. Certain of the Franchise Area Dealers are active, mail to only a portion of their territories, but are actively trying to expand into their remaining areas.
Costs of Compliance with Environmental Laws
The business operations of the Company may involve the use of chemical supplies and inks related to its printing services; however, all of these products are used in the Company's business operations, and there are no significant waste by-products which are discharged into the environment or which require special handling or the incurring of additional costs for disposal. Accordingly, costs of compliance with environmental laws, rules and regulations have not been segregated and are believed to be nominal.
The Company is unaware of any pending or proposed environmental laws, rules or regulations, the effect of which would be adverse to its contemplated operations.
Employees
The present number of employees of the Company has been reduced from the number employed during fiscal year ended December 31, 1998. Global Direct had approximately 18 employees, including 16 production and office employees in Iowa during 1998 which have now been reduced to 2. The parent company has two executive officers in corporate headquarters located in Boulder, Colorado. The CEO and CFO are currently on employment agreements and the Company employs part-time professional business, accounting and financial consultants on an as needed basis.
Item 2 - Properties
During fiscal year ended December 31, 1998, Global Direct leased approximately 27,000 square feet of space at 3415 W. Broadway, Council Bluffs, Iowa, telephone number (712) 328-3040. These facilities housed the principal operating facilities of the Company. The Company leased these facilities from a non-affiliated party pursuant to a month to month lease. The rent was approximately $7,166.66 per month triple net, and the total cost of the facility including utilities and maintenance is approximately $10,000 per month. Commencing May 1, 1999 Global Direct will lease an 1,100 foot office suite from a non-affiliate to house its graphics and customer service operations for the franchise network. The rent will be $1,100 per month gross on a one year lease. Arete sub-leases a portion of a 800 square foot suite of offices in Boulder, Colorado from its director and CFO for approximately $550 per month plus utilities and supplies.
Item 3 - Legal Proceedings
To the knowledge of management, during the fiscal year ended December 31, 1998, and to the date hereof, other than as disclosed herein, the Company is not nor was a party to any material legal proceedings, and no such proceedings are known to be contemplated. Similarly, to the knowledge of management, and for the periods indicated, other than as disclosed herein, no director or executive officer of the Company is or was party to any material legal proceeding wherein any such person had an interest adverse to the Company. The Company, its current and former officers and directors were named in a certain proceedings filed in the District Court of Jefferson County, Colorado on May 1, 1998 by certain shareholders of the Company demanding a shareholder meeting and requesting certain extraordinary relief by the Court alleging misdeeds of management without specifying any such act in particular. This matter was resolved on September 1, 1998 with the holding of the last annual meeting of shareholders and the mentioned law suit has been dismissed with prejudice. The Securities and Exchange Commission has notified the Company, its former and current officers, that the SEC enforcement staff intends to recommend enforcement proceedings pertaining to the issuance of a press release by the Company in February, 1998 concerning a possible acquisition and the untimeliness of previous quarterly and annual reports. To date, the Company has not been made aware of any such proceedings being initiated, and if initiated is determined to vigorously defend such action. The Company has agreed to indemnify the former and current officers for their legal expenses incurred in connection with these threatened actions. The Company believes that neither it nor its former or current directors and officers is guilty of any wrongdoing, whether intentional, reckless or negligent.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the past quarter. The Company has tentatively scheduled its annual meeting for June 10, 1998 in Boulder, Colorado.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company is listed on the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD") under the symbol "AREE."
The following table shows the range of high and low bid quotations for the Company's common stock for the past two fiscal years, as reported by the National Quotation Bureau monthly reports or "Pink Sheets". Prices reflect inter-dealer prices, and do not necessarily reflect actual transactions, retail mark-up, mark-down or commission.
STOCK QUOTATIONS
BID
Quarter Ending: High Low
Fye 3/31/98
6/30/97 $ 0.025 $ 0.02
9/30/97 0.0275 0.02
12/31/97 0.0325 0.02
3/31/98 0.20 0.022
Fye 12/31/98
6/30/98 0.0525 0.016
9/30/98 0.02 0.005
12/31/98 0.015 0.006
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As of April 13, 1999, the number of record holders of the Company's common stock was 329. These numbers do not include an indeterminate number of stockholders whose shares are held by brokers as "nominees" or in street name.
Dividends
The Company has not paid any dividends with respect to its common stock, and it is not anticipated that the Company will pay dividends in the foreseeable future. While no dividends have been declared or have therefore accrued, cumulative dividends in the amount of $ 383,400 are in arrears as of December 31, 1998, on the Company's Series B Preferred Stock. (See: Note 4 to Financial Statements).
Recent Sales of Unregistered Securities
During the period of March 31, 1998 through December 31, 1998, the Company sold the following unregistered securities:
Common Stock no par value
Date Amount Sold Purchaser Consideration
April 30, 1998 30 Million Aggression Sports 44% equity, booked
at $3,000 Exmpt.
Rule 4(2)
4/30/98 20 Million Boethling\Raabe Compensation
booked at $2,000
Exempt Sec. 4(2)
4/30/99 10 Million Peter N. Hobbs Incentive to stay
vests if employee stays
with co. booked
at $10,000 5 million
shares were cancelled
Exempt Sec. 4(2)
8/10/98 5 million Thomas Raabe Trust Interest/Pledge
2,500,000 is held as
collateral, 2,500,000
paid for doing deal
Exempt Sec. 4(2)
10/10/98 - 17 million Gary McMullen $100,000 Rule 504/Reg. D
4/14/99 total, $35,400 (subscription
Accredited Inv.
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Item 6. - Management's Discussion and Analysis
Overview
Management reports that effective March 31, 1999, the entire financial structure of the Company, relative to the coop coupon advertising business, has changed. The Company is currently outsourcing all of its print and direct mail fulfillment business, which has the effect of drastically reducing fixed costs and making most of the cost of the coupon advertising business variable. The key to making the business profitable will be whether the efficiencies gained by the outsourcing arrangement disclosed elsewhere herein with SourceOne Worldwide will be offset or enhanced by the existing franchisee pricing structure and revenue levels from the companys customers. While the Joint Venture with SourceOne described elsewhere herein, drastically simplified the company's business and enabled management to focus on the key problems with the business, it remains to be seen whether the coop coupon business can be made profitable. This will depend on the Company's ability to renegotiate its pricing structure with its franchisees, licensees and customers as to its current products and services, and whether or not the Company can develop new profit centers for its customers.
The current financial statements reflect a change in fiscal year to December 31 from March 31 and therefore reports financial results for the shortened 9 month period and the two prior two fiscal years. It also provides consolidated financial statements reflecting the creation of two subsidiary corporations during the 9 month period following the change in control on April 30, 1998. On October 1, 1998, the company transferred all print and direct mail operations to a new wholly owned subsidiary, Global Direct Marketing Services, Inc. Excluded from the transfer and retained in the parent Company, Arete Industries, Inc. were certain assets, obligations and accounts which either could not be transferred (prior periods employee tax obligations, etc.) or which pertained to the parent company only. Arete is a participant in a venture with Boulder Sports, LLC, an affiliate of its CEO and CFO in ownership of subsidiary, Aggression Sports, Inc. Currently, the Company holds a minority equity interest in this Company, with the option to acquire additional equity for infusions of cash. Aggression has not assets or operations and is in the development stage. The financial results only reflect the effect of issuance of common shares of the Company to Aggression Sports, Inc. in exchange for the Companys current equity position in Aggression.
Since April 30, 1998, the Company has been in a turnaround and restructuring mode. Current management signed on to develop and implement a strategic plan to restore the company to financial viability. Prior to coming on board, management believes that there were substantially no accounting or fiscal controls, no cost accounting system or other reliable management information systems in place in order to assist management in evaluating the financial situation. Therefore, while management is confident that its current financial information reported herein fairly and accurately reflects the results of operations, management's efforts in implementing new systems and controls have not progressed to the point of enabling them to thoroughly interpret this information as to the underlying forces behind the Company's financial performance.
Fortunately, the Company encountered and seized the opportunity to engage in its joint venture relationship with SourceOne Worldwide, described elsewhere, which has eliminated the need to devote further time and resources to fixing the Council Bluffs operations. This situation has highlighted new problems including the low profitability levels of the current franchise business due to its pricing and operating structure. Fundamentally, the Company's pricing structure does not reflect the costs of providing the product and service to the franchisees. Since the Company currently outsources its printing and direct mail work in total, it no longer has the luxury of controlling its costs in the manner it has done in the past. While the Company believes that the SourceOne Joint Venture will benefit the Company with the highest stability and efficiency which translates into the most competitive cost structure available, the benefit will be lost if the Company is contemporaneously locked into a losing pricing structure with its customers. As of the time of this report, management cannot address this issue with any precision, nor can it predict whether it will be successful in renegotiating prices with its customers if and when necessary.
The Company is in need of substantial amount of equity capital and funding for equipment acquisitions in order to achieve certain economies of scale and to begin to offer expanded services and products to its customers. The restructuring the Company is currently carrying out is designed to reduce cash losses, cut fixed overhead and eliminate direct labor and certain variable costs while the business is being re-engineered.
Management believes that a major capital and corporate restructuring will be required in order to attract investment capital as well as qualified operating management and acquisition opportunities. Management wants to take advantage of the publicly held nature of the Company's stock to pursue strategic acquisitions in a number of industries. Other than a subscription from a non- affiliated individal to purchase up to $100,000 in common stock, there are currently no acquisition or capital funding transactions pending and no assurances that such opportunities will become available in the near future, nor that Management will be able to keep present operations viable.
The Company remained burdened with trade debt obligations and a continuning lack of working capital to expand marketing, enhance customer service and provide fulfilment services. Through the end of the fiscal year, the printing operations continued to operate at or under a break-even revenue level although significant improvements in cash management systems and operating efficiencies had been achieved. In August, 1998 the Company's CEO invested cash and pledged a personal certificate to collateralize a $50,000 working capital line of credit. This line afforded the Company the opportunity to install a cash management system ending ongoing bank service and overdraft charges.
Finally, the Company is in the process of transitioning its operations to SourceOne and is experiencing problems one would expect from this type of situation. Certain of the franchisees have been effected more than others and are threatening to leave the system. Notwithstanding this, the reality is that these problems were to be expected and are the necessary symptom of merging two different operating systems. Management is very pleased to have access to the professional staff of SourceOne assist the Company's employees and through them, have the Company's customers learn to adapt to a bona fide printing business environment. Despite these conditions, the Company otherwise maintains a steady flow of work from its long standing customers.
Financial Condition
The Company had $61,523 in total assets and approximately $362,006 in total liabilities at fye 12/31/98, as compared to $135,024 and $ 427,894 at the end of fiscal 3/31/98, respectively. The Company had $ 25,544 in net accounts receivable at the end of fye 12/31/98, as compared to $65,621 at the end of fiscal year ended 3/31/1998. Accounts payable and accrued expenses in fiscal year 12/31/98 were $297,462 as compared to $311,355 in fye 3/31/98. During fye 12/31/98, the Company signed a promissory note for $50,000 as a line of credit. The balance of that note on December 31, 1998 was $48,800. The note is secured by two separate certificates of deposit in the amount of $25,000 each, one of which was pledged by the Company's CEO, the other was purchased with proceeds of a stock purchase of 5,000,000 shares for $25,000 by the Company's CEO. During fiscal year ended 3/31/98, the Company paid off $129,764 in notes payable to insiders and bank debt incurred from the previous fiscal year, but experienced an additional $116,539 in customer deposits. The Company remains in arrears on certain payments due under its Chapter 11 Plan of Reorganization. (See - Note 3 to Financial Statements).
During the period ended December 31, 1998, the Company continued to rely upon infusions of capital from stock sales from affiliates and from a pending subscription from an unaffiliated party. These proceeds were expended on purchasing the Certificate of Deposit referred to above, funding ongoing operating losses and reducing operating and trade debt obligations. During this period, the Company decreased accounts payable by $54,967, decreased accounts receivable by 65,621 and decreased customer deposits by 105,748 over the prior period ended March 31, 1998. During fiscal year ended March 31, 1998, the Company paid off its secured note to Firstar Bank and paid off pre-petition payroll tax liabilities, but owes approximately $65,000 in additional payroll taxes for calendar years 1995 through 1997, which is currently being paid pursuant to an installment agreement of $3,000 per month. Also, during fiscal year ended March 31, 1998, the Company repaid $258,796 in debt consisting of $23,200 in past due lease payments on equipment and $235,596 in cash advances and loans from a related party, and purchased equipment valued at $42,800 from a related party for a total of 20,346,380 shares of common stock of the Company. The equipment lease pertaining to the equipment which was cancelled in this transaction provided for monthly lease payments of approximately $1,400.
Results of Operations
The Company's revenues from operations for the year ended December 31, 1998, were $888,371. Revenues from operations for the previous year ended March 31, 1998 were $2,192,755 which reflected postage deposits from customers. The Company no longer includes postage deposits from its customers in its revenue and books these funds as liabilities or expense advances from the customer.
Gross profits from operations for the 9 month period ended December 31, 1998, were $258,228, or 29% of sales, compared to $ 393,414 or 17.9% of sales for the year ended March 31, 1998. Cost of sales at $630,143 or 71% of sales were down as a percentage of sales from fye 3/31/98 at $1,799,341 or 82.1% of sales which is attributable to better trade credit terms and supplier prices and more efficient usage of direct labor.
Operating expenses increased as a percentage of sales from 58% of sales in fye 3/31/98 to 72.9% of sales in the 9 month period ended 12/31/98. The increase was attributable to expense of $240,000 for stock issued for services and a $60,000 write off of bad debt.
The net loss for the 9 month period ended 12/31/98 was $ 575,515 or 64.8% of sales as compared to a loss of $307,676 or 14% of sales for the fye 3/31/98. The substantial increase in the loss as a percentage of sales is attributable in part to $186,415 in other expenses including the writedown of $150,000 for the Company's investment in Aggression Sports, Inc. $60,021 bad debt expense, and $240,000 expense for stock issued for services without which the loss would have been $125,494 or 14.1 % of sales. Gross Margins of 29.1% decreased from 32.9 percent of sales between fye 3/31/98 to the short year ended 12/31/98 serves as the largest single indicia of the extent of operational and management problems encountered in Council Bluffs and served as the primary indicator compelling management to determine to shut the operation down rather than spend cash the Company did not have.
Liquidity and Capital Resources
The Company had a working capital deficit as of December 31, 1998, of $300,483. This compares to a working capital deficit of $343,095 in fye 3/31/98, an insignificant difference. Losses were again partially funded with issuance of common stock, new bank debt, increases in Accounts Payable and cash advances from related parties. During the nine month period ended 12/31/98 an aggregate of 84,047,772 shares of common stock were issued for aggregate consideration of $567,902. (See - Notes to Financial Statements - Note 5 - Common Stock).
During fiscal year ended March 31, 1998, the Company issued 1,500,000 shares of its common stock valued at $37,500 for exercise of an employee stock option and 200,000 shares valued at $0.025 in lieu of salary. During this period, the Company repaid a total of $258,797 in amounts owing to related parties and purchased certain leased equipment valued at $42,800 with a total of 20,346,380 shares of its common stock valued at $0.015 by the board of directors.
The Company lacks sufficient capital or revenue to pay for additional marketing and customer support personnel to increase revenue. Management decided to close the Company's Council Bluffs operations partly because continuing losses were absorbing capital resources and neutralizing management's fund raising efforts. The Company, as it is currently structured has made progress in becoming an attractive investment for new equity investors players, but the Company has a long way to go to qualify for conventional bank or venture capital financing. Additional equity capital is necessary to finance working capital for the new printing operation and for development of Global Direct's marketing services capabilities. Management is resolved to continue to bootstrap the Company as long as it is able to generate positive cash flow to finance growth and retire debt. Management has prepared investment summaries and has approached leasing companies to assist it in purchasing new printing equipment which efforts, management believes, may be feasible in the short term. Due to the current financial condition of the Company and the relative lack of liquidity in the market for the Company's common stock, no assurance can be made that the Company will be successful in raising any substantial amount of capital through the sale of equity securities, or with additional bank debt on favorable terms in the near future. Never the less, due to such conditions, the Company may be required to issue further common stock to pay executives, consultants and other employees which may have a continuing dilutive effect on other shareholders of the Company. Failure of the Company to acquire additional capital in the form of either debt or equity capital will most likely impair the ability of the Company to meet its obligations in the near or medium term. (See - Note 7 to Financial Statements).
Year 2000 Disclosure
The Company has not completed an assessment as to whether it has material issues concerning the Y2K problem. Assuming the presence of the Y2K problem in general, in its current configuration, the Company either does not own software or equipment with Y2K issues or that equipment and/or software it does own is not material to the business of the Company.
The Company has not undertaken an independent investigation nor has it contracted with any third party to investigate for it whether any business partner has Y2K issues. The Company has not contacted its vendors, banks, customers or utility providers for instruction on their Y2K preparedness. The Company has not determined whether it has any options or actions which would constitute a contingency plan in the event of any material Y2K event.
The Company has made a determination that if Y2K occurs, the impact that event will have specifically on what the Company does directly in its business will be minor. On the other hand, the Company has a material relationship with one or more third parties which have substantial Y2K issues and has informed the Company has not completed its Y2K compliance to date. If this entity incurs work stoppage or significant damage as a result of a Y2K event, the Company would experience a delay in completion of work being processed for its customers, which would delay if not impair the Company's revenue stream, and potentially impact the Company's ability to continue in busines. However, the products and services which the Company purchases from this entity are easily replaced and slightly higher prices and with less reliable service.
The company will not lose material software, computer systems, equipment or other assets in the event of a Y2K event.
Item 7. Financial Statements.
The financial statements listed in the accompanying index to financial statements are set forth under Part IV, Item 13 to this Report, and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
To the best knowledge of current management, there were no disagreements with the Company's current auditor.
PART III
The Company will file with the Securities and Exchange Commission within 120 days of its year end its definitive proxy statement for the annual meeting of stockholders to be held on September 1, 1998. The information required by this Part III, Items 9 through 12 are incorporated herein by reference from such proxy statement.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange Act.
Item 10. - Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. - Certain Relationships and Related Transactions.
PART IV
Item 13. - Exhibits and Reports on Form 8-K.
Reports on Form 8-K.
There were no Reports on Form 8-K of the Securities and Exchange Commission filed during the period ended December 31, 1998.
Exhibit No. Description
Ref. No.
EX-2.1* Plan of Reorganization and First Addendum to Plan of Reorganization
Chapter 11 Case No. BK94-81544, US Bankruptcy Court District of
Nebraska, confirmed on September 25, 1995, effective November 6,
1995. Incorporated by reference from exhibits to Form 10-KSB
for fiscal year ended March 31, 1996. Previously filed
EX-2.2* Disclosure Statement and First Addendum to Disclosure Statement
in above Bankruptcy Matter. Incorporated by reference from
exhibits to Form 10-KSB for fiscal year ended March 31, 1996.
Previously filed
EX-3.1 Restated and Amended Articles of Incorporation
EX-3.2 Amended Bylaws adopted October 1, 1998
EX-4.1 Designation of Class B Preferred Stock, incorporated
by reference to Exhibits filed under Form 10-K for
fiscal year ended March 31, 1991, Commission file No. 33-16820-D.
EX - 4.2 Designation of Class A Preferred Stock.
EX - 10.1 Raabe Employment Agreement
EX - 10.2 Boethling Employment Agreement
EX - 10.3 Conversion and Investment Agreement
EX-27 Financial Data Schedule
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* These documents and related exhibits have been previously filed with the Securities and Exchange Commission, and by this reference are incorporated herein.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1998, March 31, 1998 and March 31, 1997
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
December 31, 1998, March 31, 1998 and March 31, 1997
Table of Contents
Page
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in
Stockholders' (Deficit) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Arete Industries, Inc.
We have audited the consolidated balance sheet of Arete Industries, Inc. and Consolidated Subsidiary as of December 31, 1998 and the related consolidated statements of operations, changes in stockholders' (deficit) and cash flows for the nine month period ended December 31, 1998 and two years ended March 31, 1998 and March 31, 1997. 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 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 Arete Industries, Inc. and Consolidated Subsidiary as of December 31, 1998 and the consolidated results of its operations, its changes in stockholders' (deficit) and its cash flows for the nine month period ended December 31, 1998 and the two years ended March 31, 1998 and March 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, is delinquent on payment of creditor liabilities including payroll taxes and creditor liabilities pursuant to the Company's plan of reorganization, and is being investigated by the Securities and Exchange Commission for alleged securities law violations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
April 14, 1999
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Current Assets
Restricted cash (Note 7) $ 25,000
Accounts receivable, net of allowance for
doubtful accounts of $167,578 25,544
Prepaid expenses 10,979
________
Total Current Assets 61,523
Furniture and equipment, net of accumulated
depreciation of $125,054 (Notes 1,2 and 9) -
________
Total Assets $ 61,523
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Outstanding checks in excess of amounts reported
by bond $ 4,953
Customer deposits 10,791
Note payable (Note 9) 48,800
Accounts payable and accrued expenses (Note 3) 297,462
___________
Total Current Liabilities 362,006
___________
Total Liabilities 362,006
Commitments and contingencies
(Notes 1,3,4,5,6,7,8,9,10,11 and 12) -
Stockholders' (Deficit)(Notes 4,6,8,10,11 and 12):
Redeemable preferred stock - $.0001 par
value 100,000,000 shares authorized:
Series A, none issued and outstanding -
Series B, 21,136,842 shares issued and
outstanding, (liquidation amount of
$528,421) 528,421
Common stock - $.0001 par value,
500,000,000 shares authorized;
240,966,174 shares issued and
outstanding 24,097
Additional paid-in capital 6,467,345
Accumulated deficit
(7,320,346)
___________
Total Stockholders' (Deficit) (300,483)
___________
Total Liabilities and Stockholders' (Deficit) $ 61,523
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
Ended
December 31, For the Years Ended
1998 1998 1997
Sales $ 888,371 $ 1,194,963 $ 1,738,942
Cost of goods sold (exclusive
of depreciation shown
separately below) 630,143 801,549 1,228,050
Gross Profit 258,228 393,414 510,892
Operating Expenses
Depreciation 41,709 37,448 28,888
Bad debts 60,021 78,505 42,387
Rent 64,770 86,000 109,148
Salaries 111,984 227,863 216,632
Stock issued for services 240,000 5,000 162,500
Other operating expenses 128,844 258,659 238,381
Total Operating Expenses 647,328 693,475 797,936
________ ________ _________
Net Operating (Loss) (389,100) (300,061) (287,044)
Other Income (Expenses)
Write-down of investment in
Aggression Sports, Inc. (150,000) - -
Interest and miscellaneous
income 5,087 2,419 4,103
Interest (expense) (41,502) (10,034) (21,446)
Total Other (186,415) (7,615) (17,343)
___________ ___________ __________
Net (Loss) $ (575,515) $ (307,676) $
(304,387)
Net (Loss) per Share $ nil $ nil $ nil
Weighted Average Shares
Outstanding 195,310,709 138,732,054 122,933,864
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The accompanying notes are an integral part of the financial statements.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
From March 31, 1996 through December 31, 1998
Additional
Preferred Stock - B Common Stock Paid-in Accumulated
No./Shares Amount No./Shares Amount Capital (Deficit) Total
Balance at March 31, 1996 28,400,000 $ 710,000 121,308,864 $ 12,131 $ 5,228,335 $ (6,132,768) $ (182,302)
Common stock issued - - 6,500,000 650 161,850 - 162,500
Net (loss) for the year - - - - - (304,387) (304,387)
ended March 31, 1997
__________ __________ __________ ________ _________ ___________ __________
Balance at March 31,1997 28,400,000 710,000 127,808,864 12,781 5,390,185 (6,437,155) (324,189)
Common stock issued - - 21,846,380 2,184 336,811 - 338,995
Net (loss) for the year - - - - - (307,676) (307,676)
ended March 31, 1998
__________ __________ __________ ________ _________ ___________ ___________
Balance at March 31, 1998 28,400,000 $ 710,000 149,655,244 14,965 5,726,996 (6,744,831) (292,870)
Common stock issued - - 84,047,772 8,406 559,496 - 567,902
Conversion of preferred to (7,263,158) (181,579) 7,263,158 726 180,853 - -
common
Net (loss) for the nine - - - - - (575,515) (575,515)
months ended December
31, 1998 __________ __________ __________ ________ _________ ___________ ___________
Balance at December 21,136,842 $ 528,421 240,966,174 $ 24,097 $6,467,345 $ (7,320,346) $ (300,483)
31, 1998
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended
December 31, For the Years Ended
1998 1998 1997
Cash Flows from Operating
Activities:
Net (loss) $ (575,515) $ (307,676) $ (304,387)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities
Depreciation 41,709 37,448 28,888
Write-down of investment 150,000 - -
Stock issued for services 240,000 5,000 162,500
Increase (decrease) in
customer deposits (105,748) 116,539 -
Increase (decrease) in accounts
payable, accrued expenses and
other (54,967 27,242 634
(Increase) decrease in accounts
receivable 65,621 (33,579) 72,030
Net Cash (Used in) Operating ___________ _____________ __________
Activities (238,900) (155,026) (40,335)
Cash Flows from Investing Activities
(Acquisition of) furniture and
equipment - (42,007) -
Net Cash (Used in) Investing ___________ _____________ __________
Activities - (42,007) -
___________ _____________ __________
Cash Flows from Financing Activities:
Proceeds from note payable 48,800 - -
Repayment of notes payable - (75,114) (14,315)
Advances from related parties - - 54,650
(Repayment of) advances from related
parties - (54,650) -
Proceeds from the issuance of
common stock 177,902 338,995 -
Net Cash Provided by Financing
Activities 226,702 209,231 40,335
Increase (decrease) in cash (12,198) 12,198 -
Cash, beginning of year 12,198 - -
Cash, end of year $ - $ 12,198 $ -
Interest paid $ 41,502 $ 10,034 $ 21,446
Income taxes paid $ - $ - $ -
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The accompanying notes are an integral part of the financial statements.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, March 31, 1998 and March 31, 1997
(1) Summary of Significant accounting Policies
(a) General
Arete Industries, Inc. (Arete), formerly Travis Industries, Inc., a Colorado corporation was incorporated on July 21, 1987. Arete's subsidiary Global Direct Marketing, Inc. (Global) is in the business of printing advertising materials and coupons and mailing them for its customers. During 1995, the Company filed a plan of reorganization under Chapter XI of the United States Bankruptcy Code, which was approved by the Court. Under the plan of reorganization approximately $270,000 of debt was forgiven. The Company has changed its year end from March 31 to December 31.
During October, 1998 the Company formed a wholly-owned subsidiary named Global Direct Marketing, Inc. for the purpose of performing the business services of printing coupons and advertising materials and mailing them, formerly done by Arete, formerly Travis Industries, Inc. Certain assets and liabilities of Arete were contributed to Global. The consolidated financial statements of the Company include the accounts of Arete for the entire period and the accounts of Global since inception. All intercompany accounts have been eliminated in the consolidation.
(b) Revenue and Expense Recognition
The Company recognizes revenue when the goods are shipped and expenses when incurred. Prior year financial statements include the reclassification of postage expenses from cost of goods sold to a reduction of sales to be consistent with the presentation for the nine month period ended December 31, 1998.
(c) Furniture and Equipment
Furniture and equipment is carried at cost less accumulated depreciation. The Company expenses maintenance costs and capitalizes significant betterments. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. The estimated useful lives of assets range between 3 and 5 years. During the nine period ended December 31, 1998 the Company estimated the $200,000 of fully depreciated equipment was no longer being used and wrote down both the asset and accumulated depreciation by $200,000.
(d) Per Share Information
The per share information is presented based upon the weighted average number of shares outstanding.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(1) Summary of Significant accounting Policies, Continued
(e) Non-Monetary Transactions
The Company has exchanged services for non-monetary assets on a limited basis. The Company has also issued stock for services. Assets received in non-monetary transactions have been recorded at their fair value as of the date of the acquisition.
(f) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(g) Geographic Area of Operations
The Company prints advertising materials principally in the United States of America. The potential for severe financial impact can result from negative effects of economic conditions within the market or geographic area. Since the Company's business is principally in one area, this concentration of operations results in an associated risk and uncertainty.
(h) Income Taxes
The Company has approximately $1,600,000 of net operating loss carryovers which expire in years through 2018. A change in ownership of more than 50% of the Company may result in the inability of the Company to utilize the carryovers. As of December 31, 1998 the Company had deferred tax assets of approximately $320,000 related to net operating loss carryovers. A valuation allowance has been provided for the total amount since the amounts, if any, of future revenues necessary to be able to utilize the carryovers are uncertain.
(I) Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company grants credit to various customers in the United States. The Company does not require collateral for its accounts receivable. As of December 31, 1998, the Company had no significant concentrations of credit risk.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(2) Furniture and Equipment
Furniture and equipment consists principally of office and printing production equipment.
(3) Delinquent Amounts Payable
As of December 31, 1998 the Company is delinquent on payments of various amounts to creditors including the Internal Revenue Service and creditors required to be paid under the terms of its plan of reorganization. Failure to pay these liabilities could result in liens being filed on the Company's assets and may result in assets being attached by creditors resulting in the Company's inability to continue operations.
(4) Preferred Stock
The Company prepared Articles of Amendment to the Articles of Incorporation of the Company dated October 30, 1998 whereby a new class of preferred stock was designated as "Class A Cumulative Convertible Preferred Stock" of which 100,000 shares may be issued. The Class A preferred stock shall have a cumulative dividend at prime rate. Each of the Class A preferred shares shall be convertible at any time after thirty days from issuance at face value and convertible into an equal amount of common stock at 110% of the average weekly closing bid price of the common stock. The Class A shares shall have certain voting rights and other rights and preferences as specified in the amended articles. The Company intends to use this Class A preferred stock as consideration for unpaid officers' compensation. No Class A preferred stock was outstanding at December 31, 1998.
On December 31, 1991, 28,400,000 shares of Series B voting, noncumulative, redeemable preferred stock was issued to three major shareholders in exchange for $710,000 of outstanding loans. There was no gain or loss on extinguishment of debt. Beginning January 1, 1994 dividends are payable at the rate of prime rate plus 4% times $710,000 when and if declared by the Board of Directors.
Prior to the changes noted below, cumulative dividends in the amount of $383,400 were in arrears on the Series B preferred stock. The Series B stock was convertible into common stock only at the option of the Company at $.125 per share. The Series B stock is stated at its redemption price which is cost and was redeemable at the discretion of the Company upon 30 days written notice to the holder. The preference on liquidation was equal to $.125 per share for the total of $710,000. See Note 6 for a description of the changes to the conversion terms and other matters related to the Class B preferred stock.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(5) Common Stock
During the year ended March 31, 1997 the Company issued 6,500,000 shares of its common stock for services valued at $162,500. Of these shares, 1,800,000 were issued to three individuals for public relations, promotion and marketing efforts. For legal services, the Company issued 3,000,000 shares. As a bonus to an employee, 1,500,000 shares were issued. In addition, this employee also was granted an option to purchase an additional 1,500,000 shares at $.025 per share during the six month period which commenced in February 1998. During March 1998 this option was exercised. An additional 200,000 shares were issued to an individual in lieu of salary. All of the shares were valued by the Company's Board of Directors at $.025 per share.
During the year ended March 31, 1998, 21,846,380 shares of common stock of the Company were issued for aggregate consideration of $338,995. Of this amount $37,500 was cash consideration related to the exercise of the option for 1,500,000 shares of $.025 per share as disclosed above. The remainder of the shares were issued to officers of the Company in consideration for debt forgiveness of approximately $258,695 plus acquisition of certain printing equipment for $42,800.
During the nine month period ended December 31, 1998 an aggregate of 84,047,772 shares of the Company's common stock were issued for an aggregate consideration of $567,902. Of this amount 3,000,000 shares were issued for $75,000 of accrued expenses and compensation payable to two officers recorded as a liability as of March 31, 1998. Of this amount, 30,000,000 of the shares were issued for the acquisition of Aggression Sports, Inc. recorded at $150,000, as described in Note 8. Included in the amount also were 1,176,479 shares issued to two former officers as severance compensation valued at $30,000. Also included were 2,352,941 shares issued as management fees to two current officers of the Company valued at $60,000. Also included were 20,000,000 shares issued to the two current officers of the Company for services valued at $150,000, more fully described in Note 8. Also included were 2,500,000 shares issued as consideration for providing collateral for a loan for the company as described in Note 9. Also included were 2,500,000 shares issued as additional collateral for repayment of the loan and eventual release of the certificate of deposit collateral also described in Note 9. Included also were 5,000,000 shares issued to the Company's CEO by the CEO exercising an option for $25,000. Also included were 500,000 shares issued to an individual engaged by ASI for services performed for ASI as described in Note 10. Also included were 6,018,361 shares issued in a private placement as part of the Series B conversion transaction as described in Note 6. Also included were 10,000,000 shares issued to a former officer of the Company for services valued at $50,000. Also included were 1,000,000 shares issued for consulting services valued at $10,000. In addition, 7,263,158 shares of Series B preferred were converted to 7,263,158 shares of common as described in Note 6.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(6) Related Party Transactions
The Company paid or accrued $1,400 per month for certain printing equipment owned by Liberty and used by Travis until acquired by Travis during the year ended March 31, 1998 as described in Note 5 above.
As of March 31, 1997 the Company owed $54,650 to related parties for advances received and for accrued equipment rental expenses. During the year ended March 31, 1998, the Company received additional advances from related parties totaling approximately $202,746. The advances had no written repayment terms and did not bear interest. During the year ended March 31, 1998 the Company issued shares of common stock as repayment of the total advances payable to the related party as described in Note 5 above. The shares were valued by the Company's Board of Directors at $.015 per share. In addition, during the year ended March 31, 1998 the related party transferred the equipment it had been leasing to the Company and forgave the back payments due on the lease totaling $23,200 in exchange for shares of the Company's common stock. The shares were valued by the Company's Board of Directors at $.015 per share. The equipment was valued at $42,800.
During the nine month period ended December 31, 1998 the Company amended the conversion terms of the Series B preferred stock. The Series B preferred stock was originally convertible into 5,680,000 shares of common stock. The amended agreement entitled the holder to convert to 28,400,000 free trading shares of common. The converted common were considered to be free trading based on the holding period of the originally issued preferred stock. As a part of the amended conversion agreement, the Company agreed to issue 17,000,000 shares of restricted common stock for $100,000 cash. The Company's CEO located buyers and arranged the sale of the former preferred shareholder's converted common stock to eight entities and individuals. As of December 31, 1998, 7,263,158 shares of preferred stock were exchanged for 7,263,158 shares of free trading common stock. The amount received by the former preferred shareholder from the sale of the free trading converted common totaling $35,400 at December 31, 1998 was used to acquire 6,018,361 new shares of restricted common stock. Subsequent to December 31, 1998, $50,200 of additional proceeds from the sale of the converted common were used to acquire approximately 8,534,000 additional shares of restricted common stock. After the ultimate sale of all of the converted free trading common stock, the former preferred shareholder will have received $110,000 of which $100,000 will have been used to acquire the 17,000,000 shares of restricted common stock.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(7) Basis of Presentation - Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained recurring operating losses, has a net capital deficiency, is delinquent on payment of payroll taxes and creditor liabilities pursuant to the plan of reorganization, and is being investigated by the Securities and Exchange Commission for alleged securities law violations. See Note 10. Management is attempting to raise additional capital and attempting to complete a business combination.
In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, raise additional capital, and the success of its future operations. Management believes that actions planned and presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern.
(8) Change of Control
On April 30, 1998 the Company entered into an agreement whereby control of the Company was transferred. The Company's Board of Directors has been changed and various stock issuances were approved.
During April, 1998 the Company issued 1,500,000 shares of its common stock for payment of legal fees which were included as accrued expenses as of March 31, 1998. Also during April, 1998 the Company issued 1,500,000 shares of its common stock for accrued compensation of $37,500 to an employee.
Also during April, 1998 an additional 1,764,706 shares were issued for future legal fees valued at $45,000. In addition, 588,235 shares each were issued to two officers of the Company as consideration for severance, valued at $15,000 each. Also 588,235 shares were issued to an individual for future consulting fees valued at $15,000. In addition, funding of the acquisition and entity from certain related parties was approved. With respect to the acquisition of this entity from a related party 30,000,000 shares of the Company were issued for 44% of this newly formed corporation. The 30,000,000 shares were recorded at $.005 per share totaling $150,000 for the investment in this newly formed entity. Due to the uncertainty related to ultimate realization of this carrying value, the total $150,000 was written off during the nine month period ended December 31, 1998. In addition, 20,000,000 shares of the Company were issued to an affiliated entity as nominee of two individuals for their undertaking to assume control and management of the Company. Also the issuance of 10,000,000 shares of the Company's stock to an employee of the Company for past performance and future commitment to the business, and remaining an employee with the Company for certain future time periods. As a part of the change in control, a voting trust agreement was also formed.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(9) Note Payable
During September, 1998 the Company signed a promissory note in the amount of $50,000, bearing interest at a floating rate but initially at 10.75% per annum. As of December 31, 1998, $48,800 was payable on this note. The note matures on August 18, 1999. The note is collateralized by a $25,000 certificate of deposit owned by the Company and a $25,000 certificate of deposit owned by an affiliate of the Company's CEO. The $25,000 certificate of deposit owned by the Company was purchased by the exercise of a compensatory stock option for 5,000,000 shares of the Company's common stock for $25,000. As compensation for allowing the Company to use the affiliate of the CEO's certificate of deposit as collateral, the Company issued 2,500,000 shares of the Company's common stock to the CEO's affiliate. The Company also issued an additional 2,500,000 shares as collateral to ensure repayment of the $25,000 within twelve months of the date of pledge. The Company recorded $25,000 as interest expense related to these stock issuances. The note payable is also collateralized by principally all of the assets of the Company.
(10) Commitments and Contingencies
The Company received a letter from the Securities and Exchange Commission dated
March 30, 1998 indicating that the staff of Securities and Exchange Commission
pursuant to a formal order of private investigation was conducting an
investigation of certain matters. On October 23, 1998, the Securities and
Exchange Commission sent another letter to the Company indicating that the
staff of the Central Regional office of the Securities and Exchange Commission
intends to recommend to the Commission that an enforcement action be instituted
against the Company and two former officers of the Company. The staff proposed
to allege that based on facts developed in their investigation that misleading
press releases regarding the acquisition of a private company, that company's
business relationships, and sales projections were released. The proposed
action would allege that these press releases included material misstatements
and/or omitted to disclose material facts in connection with the offer,
purchase and sale of Company common stock, in violation of Section 17(a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934
(Exchange Act) and Rule 10b-5 thereunder. Additionally, the staff's proposed
action would be based on facts developed in their investigation that, between
January 1988 to the present, the Company failed to file, or filed on an
untimely basis, required periodic reports with the Commission, in violation of
Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. The
proposed action would further allege the two former officer's of the Company
aided and abetted the Company's violation of Section 15(d) of the Exchange Act
and Rules 15d-1 and 15d-13 thereunder. The Company's legal counsel has
indicated that at this state of the investigation, it is impracticable to
render an opinion about whether the likelihood of an unfavorable outcome is
either "probable" or "remote". A contingency exists with respect to this
matter, the ultimate resolution of which cannot presently be determined.
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998, March 31, 1998 and March 31, 1997
(10) Commitments and Contingencies, Continued
Effective November 1, 1998, the Company entered into employment agreements with its CEO and CFO for two year periods. The compensation for the CEO, based on full time employment, is $90,000 per year. The compensation for the CFO based on one third time employment is $30,000. Termination without cause would result in substantial penalties to the Company. Compensation not paid on a monthly basis may be converted to a Class A preferred stock to be designated for such purposes. The preferred stock will be convertible to S-8 registered common stock. In addition to base compensation the officers may be eligible for additional compensation, fringe benefits and use of office facilities.
Pursuant to a Change of Control Agreement effective in April, 1998, the Company issued 30,000,000 shares of its common stock for approximately 44% ownership of Aggression Sports, Inc. (ASI), a newly formed Colorado corporation. This entity was formed to pursue developing an outdoor sporting goods company specializing in the high end specialty store and high mainstream markets for extreme and outdoor sports products. ASI has engaged the services of an individual for $5,000 per month for an initial six month period, that would be extended depending upon certain events occurring. ASI also engaged the services of a design firm. ASI has committed to pay costs to design initial proprietary products including but not limited to a monthly design fee of $2,000. The agreement to engage the design firm includes commitments for use of name fees and royalties to the design firm. The Company has committed to fund certain yet to be determined expenses of ASI. The Company's Board of Directors has approved the funding of a subscription for $500,000 of ASI stock. The Company has been issuing Form S-8 registered stock to the consultant that was engaged by ASI to cover its commitment to fund certain expenses of ASI.
(11) Form S-8 Registration
On December 31, 1998, the Company filed an S-8 Registration statement related to the future issuance of 50,000,000 shares of common stock for compensation for services, which will be issued to related parties, including officers.
(12) Subsequent Events
Subsequent to December 31, 1998, the Company closed down its operations in Iowa and moved the operations to Colorado. Subsequent to December 31, 1998, the Company issued 4,625,000 shares to the Company's CEO and 937,500 shares to the Company's CFO in consideration of the declining value of the Company's common stock. Through April 14, 1999 the Company's outstanding shares have increased to approximately 273,115,516 shares through various issuances of stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: April 15, 1999 By: /s/ THOMAS P. RAABE
Thomas P. Raabe,
President, Chief Executive Officer,
and Chairman of the Board of
Directors
Date: April 15, 1999 By: /s/ FRED C. BOETHLING
Fred C. Boethling,
Chief Financial Officer,
Treasurer, Secretary and Director
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
ARETE INDUSTRIES, INC.
Date: April 15, 1999 By: /s/ THOMAS P. RAABE
Thomas P. Raabe
Board Member
Date: April 15, 1999 By: /s/ FRED C. BOETHLING
Fred C. Boethling
Board Member
Date: April 15, 1999 By: /s/ THOMAS Y. GORMAN
Thomas Y. Gorman
Board Member
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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT
For information forwarded to securities holders of the Company during the period covered by this Report, see the Exhibit Index of this Report. Any other proxy or information statements forwarded to stockholders will be forwarded to the Securities and Exchange Commission on the date such information is forwarded to stockholders.
EMPLOYMENT AGREEMENT
ARETE INDUSTRIES, INC. AND FRED BOETHLING
The following shall constitute an employment agreement between Arete Industries, Inc., a Colorado corporation ("Employer") and Fred Boethling ("Executive") effective November 1, 1998:
1. Term: The Term of the Employment Agreement shall be a two-year period from the date hereof and a like period from each successive Renewal Date (defined below). The Employment Agreement shall automatically renew one calendar year from the date hereof and each successive anniversary date thereafter, unless terminated per this Agreement.
2. Scope of Employment. Executive is hereby retained to act as a senior executive officer of Employer in the capacity of Chief Financial Officer and may also serve at the pleasure of the board of directors in such corporate officer capacities as are designated by the board of directors from time to time. Executive may also be appointed as an executive officer and/or director of subsidiaries or affiliates of Employer and Employer may allocate all or any portion of Executives compensation to such entities. Notwithstanding such allocation, Employer remains primarily obligated to Executive for his compensation. Executive shall devote such of his time to his duties hereunder as is negotiated with the Employer from time to time, but it is understood and agreed that Executive has other employment as consultant, officer and director of other unaffiliated corporate entities.
3. Compensation.
a) Salary. Annual base salary shall be $90,000 per year based on devotion of full time as an employee. Executives salary shall be adjusted to reflect current allocation of 1/3 of his time to business of Employer or $30,000 per year. The base salary will be adjusted from time to time as needed and/or requested by either party and agreed to in writing by the other. Salary shall accrue if not paid on a monthly basis. Notwithstanding the foregoing, Executive shall be paid a minimum draw against annual salary of $ 2,500 per month plus expenses, benefits and incentive pay as provided herein or otherwise agreed to by Employer and Executive. Compensation herein set forth shall be in addition to any compensation provided in the referenced Change in Control Agreement unless specifically superceded by this Agreement.
b) Expenses. Executive shall be reimbursed all expenses advanced on behalf of the Company if supported by proper evidence of their amount and business purpose with adequate documentation, on a monthly basis in cash.
c) Conversion of Accrued Salary to Class A Preferred Stock ("Preferred") and/or Common Stock. Any salary, incentive pay and benefits which remain unpaid at the end of each monthly pay period shall be paid in the form of cash, notes, common stock or Preferred which has been designated by the Company to be issued for such purpose. Notes shall provide for conversion at the option of the holder into shares of common or Preferred. Common Stock issued on conversion of the Preferred and/or issued directly to pay bonuses, accrued salary and/or unreimbursed expenses shall be in registered form under Form S-8 if applicable to the Employer at the time, or in the alternative shall carry demand and piggy back registration rights. The Employer can redeem the Preferred at face value plus accrued dividends at any time, or the Executive will have the option to convert the Preferred into shares of Common Stock of Employer on the terms specified in the Certificate of Designation of the Preferred on file with the Employer and incorporated herein by reference.
d) Participation in Benefits. Executive will at all times from the effective date hereof be entitled to participate in any such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans (collectively, the "Benefits").
4. Incentive Compensation. In addition to any other compensation provided for herein or in any other agreements to which the Executive is a party with Employer or any subsidiary or affiliate of Employer, Employer agrees to negotiate bonus and/or incentive compensation in good faith upon the occurrence of events which substantially further the initiatives of Employer to return its existing businesses to profitability, expand such businesses, fulfill business plans adopted by Employer, its subsidiaries, affiliates or joint venture partners, or upon events which Employee brings or introduces major business opportunities to the Employer or its subsidiaries or affiliates, which compensation shall fairly and adequately reflect the value to the Employer and/or its shareholders. In addition, the provisions contained in the Change in Control Agreement pertaining to success fees to Executive/Boulder Sports, LLC. are expressly continued in full force and effect and are incorporated herein by reference.
5. Office Facilities, Equipment and Administrative Support. Executive shall be provided with an office, utilities, telephone (local long distance service and equipment), and such services including part-time or full time secretarial as is economically feasible in Boulder, Colorado. The cost of employees' office, telephone, long distance, utilities and supplies will be born by Executive to the extent that Executive devotes less than full time to his duties as an Executive. If not advanced by Employer, such expenses will be reimbursed to Executive on a monthly basis. Any unpaid and accrued offices expenses may be included, at the option of Executive in the issuance of notes, shares of Common or Preferred Stock in lieu of salary per Paragraph 3(c), above. Employer will also provide office contents and liability insurance on the offices so provided.
6. Vacation, Holidays and Sick Pay. Executive will be entitled to take four weeks paid vacation each fiscal year assuming full time employment and the pro-rata portion of same based on time committed to the business of the Employer, and based on the vacation policies of the Employer in effect for its executive officers from time to time. Vacation must be taken by the Executive at such time or times as are approved by the highest ranked corporate officer. The Executive will also be entitled to the paid holidays (and other paid leave) set forth in Employer's policies. Unused vacation days in any fiscal year may not be carried over in any subsequent fiscal year. Executive will be given such sick pay or sick leave as is set forth in the employment policies of the Employer as established from time to time.
7. Errors and Omissions Insurance. Employer will immediately upon securing the necessary funding acquire E&O or Directors and Officers Liability Insurance of sufficient amount to cover ordinary risks commonly associated with companies similarly situated.
8. Termination
a) Termination without cause by the Employer on or before April 30,
1999 will give rise to payment of (r) of the break-up fee set forth in
the Change in Control Agreement.
b) Termination without cause thereafter will entitle the Executive to recover all salary remaining under the unexpired term of this Agreement (the "Severance Period"), plus all outstanding accrued and unpaid salary, expenses, advances and will further entitle Executive to the vesting of all stock options, bonuses and incentive compensation in effect or pending at the time of such termination. On an event of such termination, Employer will have a maximum of 6 months from the effective date of termination to pay all accruals under this and the previous paragraph 8(a) or to make mutually acceptable provisions for such payment. Any obligations of the Employer hereunder will be deemed subject to the security interest granted to Executive to cover the potential break-up fee and unpaid expenses and advances pursuant to Sections 5(a) and (c) of the Change in Control Agreement, which provisions are incorporated herein by reference.
c) The phrase "for cause" means: (a) the Executives material breach of this Agreement; (b) the Executives failure to adhere to any written Employer policy if the Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the ten-day period preceding termination of this Agreement); (c) the appropriation (or attempted appropriation) of a material business opportunity of the Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Employer; (d) the misappropriation (or attempted misappropriation) of any of the Employer's funds or property; or (e) the conviction of, the indictment for (or its procedural equivalent), or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment.
d) The Term, the Compensation and Incentive Compensation, and any and all other rights of the Executive under this Agreement or otherwise as an employee of the Employer will terminate (except as otherwise provided in this Paragraph ):
i) upon the death of the Executive;
ii) upon the disability of the Executive immediately upon notice from either party to the other;
iii) for cause immediately upon notice from the Employer to the Executive, or at such later time as such notice may specify; or
iv) upon resignation of the Executive unless such resignation is made by reason of a good faith dispute between Employer and Executive over policies, actions and/or conditions in which Executive has a good faith belief that he cannot continue without compromising his reputation, without violating a statute, rule, regulation or order of court, or which would in all likelihood not stand the test of the business judgment rule. In such event, Employer will remain obligated to pay separation pay as provided in sub paragraphs 8(a) and (b), above, occurs for good reason (as defined in Section 8(d)) upon not less than thirty days' prior notice from the Executive to the Employer.
e) Definition of Disability. For purposes of Section 8(d)(ii), the Executive will be deemed to have a "disability" if, for physical or mental reasons, the Executive is unable to perform the essential functions of the Executive's duties under this Agreement for 120 consecutive days, or 180 days during any twelve month period, as determined in accordance with this Section 8(e). In the event of a bona-fide dispute between Employer and Employee, the disability of the Executive will be determined by a medical doctor selected by written agreement of the Employer and the Executive upon the request of either party by notice to the other. f) In the event of a termination by disability, Executive will retain all accrued benefits and incentive compensation through the end of the calendar month following such disability. Salary will continue through the earlier of the Severance Period, defined above or the date disability insurance payments commence under provisions of insurance purchased by Employer on behalf of Executive.
g) Termination upon Death. If this Agreement is terminated because of the Executive's death, the Executive will be entitled to receive his Salary through the end of the calendar month in which his death occurs, and that part of the Executive's Incentive Compensation, if any, for the Fiscal Year during which his death occurs, prorated through the end of the calendar month during which his death occurs.
h) For purposes of this Section 8, the Executive's designated beneficiary will be such individual beneficiary or trust, located at such address as the Executive may designate by notice to the Employer from time to time or, if the Executive fails to give notice to the Employer of such a beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Executive, to determine whether any beneficiary designated by the Executive is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust, to determine whether any person or entity purporting to act as the Executive's personal representative (or the trustee of a trust established by the Executive) is duly authorized to act in that capacity, or to locate or attempt to locate any beneficiary, personal representative, or trustee.
i) Benefits. The Executive's accrual of, or participation in plans
providing for, employee benefits as specified herein will cease at
the effective date of the termination of this Agreement, and the
Executive will be entitled to accrued benefits pursuant to such
plans only as provided in such plans. Except under circumstances of
termination without cause, or termination by Executive by reason of
a bona fide dispute per sub-paragraph 8(d)(iv), above, the Executive
will not receive, as part of his termination pay pursuant to this
Section 8, any payment or other compensation for any vacation,
holiday, sick leave, or other leave unused on the date the notice of
termination is given under this Agreement.
9. Protection of Proprietary Property, Confidentiality Agreement. The Executive agrees to protect and preserve the confidentiality of all business opportunities, trade secrets and proprietary information of Employer, its affiliates and subsidiaries, throughout the term of this Agreement and will not disclose the same to others without the express written permission of Employer. Any inventions, ideas or concepts which are developed by Executive while and employee of Employer will, in the absence of a written agreement to the contrary, become the sole and exclusive property of Employer.
10. Miscellaneous.
a) Binding Effect. This agreement is binding on and will inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Executive under this Agreement, being personal, may not be delegated.
b) Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the last known addresses and/or facsimile numbers of the respective party.
c) Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof, except any documents and/or agreements specifically incorporated herein by reference. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto.
d) Governing Law. This Agreement will be governed by the laws of the State of Colorado without regard to conflicts of laws principles.
e) Jurisdiction. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Colorado, County of Boulder, or, if it has or can acquire jurisdiction, in the United States District Court for the District of Colorado, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on either party anywhere in the world.
f) Headings. The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms.
g) Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.
h) Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above.
EMPLOYER: EXECUTIVE:
By:___________________
EMPLOYMENT AGREEMENT
ARETE INDUSTRIES, INC. AND THOMAS P. RAABE
The following shall constitute an employment agreement between Arete Industries, Inc., a Colorado corporation ("Employer") and Thomas P. Raabe ("Executive") effective November 1, 1998:
1. Term: The Term of the Employment Agreement shall be a two-year period from the date hereof and a like period from each successive Renewal Date (defined below). The Employment Agreement shall automatically renew one calendar year from the date hereof and each successive anniversary date thereafter, unless terminated per this Agreement.
2. Scope of Employment. Executive is hereby retained to act as a senior executive officer of Employer in the capacity of Chief Executive Officer and may also serve at the pleasure of the board of directors in such corporate officer capacities as are designated by the board of directors from time to time. Executive may also be appointed as an executive officer and/or director of subsidiaries or affiliates of Employer and Employer may allocate all or any portion of Executives compensation to such entities. Notwithstanding such allocation, Employer remains primarily obligated to Executive for his compensation. Executive shall devote his full time to his duties hereunder, but it is understood and agreed that Executive has other occasional employment as an attorney, and an officer and director of affiliated corporate entities.
3. Compensation.
a) Salary. Annual base salary shall be $90,000 per year based on devotion of full time as an employee. The base salary may be increased from time to time as Employer's financial performance allows. Salary shall accrue if not paid on a monthly basis. Executive shall be paid a minimum draw against annual salary of $ 7,500 per month plus expenses, benefits and incentive pay as provided herein or otherwise agreed to by Employer and Executive. Compensation herein set forth shall be in addition to any compensation provided in the referenced Change in Control Agreement unless specifically superceded by this Agreement.
b) Expenses. Executive shall be reimbursed all expenses advanced on behalf of the Company if supported by proper evidence of their amount and business purpose with adequate documentation, on a monthly basis in cash. c) Conversion of Accrued Salary to Class A Preferred Stock ("Preferred") and/or Common Stock. Any salary, incentive pay and benefits which remain unpaid at the end of each monthly pay period shall be paid in the form of cash, notes, common stock or Preferred which has been designated by the Company to be issued for such purpose. Notes shall provide for conversion at the option of the holder into shares of common or Preferred. Common Stock issued on conversion of the Preferred and/or issued directly to pay bonuses, accrued salary and/or unreimbursed expenses shall be in registered form under Form S-8 if applicable to the Employer at the time, or in the alternative shall carry demand and piggy back registration rights. The Employer can redeem the Preferred at face value plus accrued dividends at any time, or the Executive will have the option to convert the Preferred into shares of Common Stock of Employer on the terms specified in the Certificate of Designation of the Preferred on file with the Employer and incorporated herein by reference.
d) Participation in Benefits. Executive will at all times from the effective date hereof be entitled to participate in any such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans (collectively, the "Benefits").
4. Incentive Compensation. In addition to any other compensation provided for herein or in any other agreements to which the Executive is a party with Employer or any subsidiary or affiliate of Employer, Employer agrees to negotiate bonus and/or incentive compensation in good faith upon the occurrence of events which substantially further the initiatives of Employer to return its existing businesses to profitability, expand such businesses, fulfill business plans adopted by Employer, its subsidiaries, affiliates or joint venture partners, or upon events which Employee brings or introduces major business opportunities to the Employer or its subsidiaries or affiliates, which compensation shall fairly and adequately reflect the value to the Employer and/or its shareholders. In addition, the provisions contained in the Change in Control Agreement pertaining to success fees to Executive/Boulder Sports, LLC. are expressly continued in full force and effect and are incorporated herein by reference.
5. Office Facilities, Equipment and Administrative Support. Executive
shall be provided with an office, utilities, telephone (local long
distance service and equipment), and such services including part-time
or full time secretarial as is economically feasible in Boulder,
Colorado. The cost of employees' office, telephone, long distance,
utilities and supplies will be born by Executive to the extent that
Executive devotes less than full time to his duties as an Executive.
If not advanced by Employer, such expenses will be reimbursed to
Executive on a monthly basis. Any unpaid and accrued offices expenses
may be included, at the option of Executive in the issuance of notes,
shares of Common or Preferred Stock in lieu of salary per Paragraph
3(c), above. Employer will also provide office contents and liability
insurance on the offices so provided.
6. Vacation, Holidays and Sick Pay. Executive will be entitled to take four weeks paid vacation each fiscal year assuming full time employment and the pro-rata portion of same based on time committed to the business of the Employer, and based on the vacation policies of the Employer in effect for its executive officers from time to time. Vacation must be taken by the Executive at such time or times as are approved by the highest ranked corporate officer. The Executive will also be entitled to the paid holidays (and other paid leave) set forth in Employer's policies. Unused vacation days in any fiscal year may not be carried over in any subsequent fiscal year. Executive will be given such sick pay or sick leave as is set forth in the employment policies of the Employer as established from time to time.
7. Errors and Omissions Insurance. Employer will immediately upon securing the necessary funding acquire E&O or Directors and Officers Liability Insurance of sufficient amount to cover ordinary risks commonly associated with companies similarly situated.
8. Termination
a) Termination without cause by the Employer on or before April 30, 1999 will give rise to payment of (r) of the break-up fee set forth in the Change in Control Agreement.
b) Termination without cause thereafter will entitle the Executive to recover all salary remaining under the unexpired term of this Agreement (the "Severance Period"), plus all outstanding accrued and unpaid salary, expenses, advances and will further entitle Executive to the vesting of all stock options, bonuses and incentive compensation in effect or pending at the time of such termination. On an event of such termination, Employer will have a maximum of 6 months from the effective date of termination to pay all accruals under this and the previous paragraph 8(a) or to make mutually acceptable provisions for such payment. Any obligations of the Employer hereunder will be deemed subject to the security interest granted to Executive to cover the potential break-up fee and unpaid expenses and advances pursuant to Sections 5(a) and (c) of the Change in Control Agreement, which provisions are incorporated herein by reference. c) The phrase "for cause" means: (a) the Executives material breach of this Agreement; (b) the Executives failure to adhere to any written Employer policy if the Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the ten-day period preceding termination of this Agreement); (c) the appropriation (or attempted appropriation) of a material business opportunity of the Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Employer; (d) the misappropriation (or attempted misappropriation) of any of the Employer's funds or property; or (e) the conviction of, the indictment for (or its procedural equivalent), or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment.
d) The Term, the Compensation and Incentive Compensation, and any and all other rights of the Executive under this Agreement or otherwise as an employee of the Employer will terminate (except as otherwise provided in this Paragraph ):
i) upon the death of the Executive;
ii) upon the disability of the Executive immediately upon notice from either party to the other;
iii) for cause immediately upon notice from the Employer to the Executive, or at such later time as such notice may specify; or
iv) upon resignation of the Executive unless such resignation is made by reason of a good faith dispute between Employer and Executive over policies, actions and/or conditions in which Executive has a good faith belief that he cannot continue without compromising his reputation, without violating a statute, rule, regulation or order of court, or which would in all likelihood not stand the test of the business judgment rule. In such event, Employer will remain obligated to pay separation pay as provided in sub paragraphs 8(a) and (b), above, occurs for good reason (as defined in Section 8(d)) upon not less than thirty days' prior notice from the Executive to the Employer.
e) Definition of Disability. For purposes of Section 8(d)(ii), the Executive will be deemed to have a "disability" if, for physical or mental reasons, the Executive is unable to perform the essential functions of the Executive's duties under this Agreement for 120 consecutive days, or 180 days during any twelve month period, as determined in accordance with this Section 8(e). In the event of a bona-fide dispute between Employer and Employee, the disability of the Executive will be determined by a medical doctor selected by written agreement of the Employer and the Executive upon the request of either party by notice to the other.
f) In the event of a termination by disability, Executive will retain all accrued benefits and incentive compensation through the end of the calendar month following such disability. Salary will continue through the earlier of the Severance Period, defined above or the date disability insurance payments commence under provisions of insurance purchased by Employer on behalf of Executive.
g) Termination upon Death. If this Agreement is terminated because of the Executive's death, the Executive will be entitled to receive his Salary through the end of the calendar month in which his death occurs, and that part of the Executive's Incentive Compensation, if any, for the Fiscal Year during which his death occurs, prorated through the end of the calendar month during which his death occurs.
h) For purposes of this Section 8, the Executive's designated beneficiary will be such individual beneficiary or trust, located at such address as the Executive may designate by notice to the Employer from time to time or, if the Executive fails to give notice to the Employer of such a beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Executive, to determine whether any beneficiary designated by the Executive is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust, to determine whether any person or entity purporting to act as the Executive's personal representative (or the trustee of a trust established by the Executive) is duly authorized to act in that capacity, or to locate or attempt to locate any beneficiary, personal representative, or trustee.
i) Benefits. The Executive's accrual of, or participation in plans providing for, employee benefits as specified herein will cease at the effective date of the termination of this Agreement, and the Executive will be entitled to accrued benefits pursuant to such plans only as provided in such plans. Except under circumstances of termination without cause, or termination by Executive by reason of a bona fide dispute per sub-paragraph 8(d)(iv), above, the Executive will not receive, as part of his termination pay pursuant to this Section 8, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the date the notice of termination is given under this Agreement.
9. Protection of Proprietary Property, Confidentiality Agreement. The Executive agrees to protect and preserve the confidentiality of all business opportunities, trade secrets and proprietary information of Employer, its affiliates and subsidiaries, throughout the term of this Agreement and will not disclose the same to others without the express written permission of Employer. Any inventions, ideas or concepts which are developed by Executive while and employee of Employer will, in the absence of a written agreement to the contrary, become the sole and exclusive property of Employer.
10. Miscellaneous.
a) Binding Effect. This agreement is binding on and will inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Executive under this Agreement, being personal, may not be delegated.
b) Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the last known addresses and/or facsimile numbers of the respective party.
c) Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof, except any documents and/or agreements specifically incorporated herein by reference. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto.
d) Governing Law. This Agreement will be governed by the laws of the State of Colorado without regard to conflicts of laws principles.
e) Jurisdiction. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Colorado, County of Boulder, or, if it has or can acquire jurisdiction, in the United States District Court for the District of Colorado, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on either party anywhere in the world.
f) Headings. The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms.
g) Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.
h) Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above.
EMPLOYER: EXECUTIVE:
By:___________________
CONVERSION AND INVESTMENT AGREEMENT
This Agreement is between Gary McMullen of La Jolla, California, (hereinafter, "Investor") and Travis Industries, Inc., a Colorado corporation (hereinafter, the "Company") and pertains to the mutual agreement of the Parties to modify certain terms and conditions of Twenty Eight Million Four Hundred Thousand (28,400,000) shares of Class B Preferred Stock of the Company held by Investor (hereinafter the "B Preferred") and an offer by Investor to purchase Seventeen Million (17,000,000) shares of the Common Stock, $0.0001 par value ("Investment Shares") for $ 0.005886 per share or an aggregate of up to $100,000 (the "Purchase Price").
RECITALS
I. Investor holds Twenty Eight Million Four Hundred Thousand (28,400,000) shares of B Preferred face value of $710,000 which constitutes all of the issued and outstanding Preferred Stock of the Company. The B Preferred carries certain rights including conversion rights into shares of common stock at the rate of $0.125 per share at the sole option of the Company.
II. The present trading price for shares of the Company's common stock on the OTC bulletin board of less than $0.01 per share, far less than the conversion price per share.
III. The Company desires to retire the B Preferred in its present efforts to recapitalize the Company and at the same time desires to raise much needed capital to complete a turn-around of its existing operations.
IV. Investor desires to obtain liquidity for his investment and a chance to participate in the future growth of the Company, as well as desires to assist the Company, at a time when there is little chance for the Company obtaining outside capital to finance the turn-around.
IV. The parties therefore have a mutual interest in renegotiating the terms of the B Preferred and desire to set forth herein their mutual agreement relating thereto.
AGREEMENT
1. In consideration for the mutual agreements, undertakings and obligations set forth therein, the Parties hereby agree to modify the terms of the "B Preferred" as follows:
a. Subject to, and in consideration for, the agreement of Investor
to invest (and further subject to payment of the Purchase Price as
provided below) up to $100,000 into the Company as provided below,
the Company grants the holder of the B Preferred the right to
convert such shares of B Preferred at a conversion price of $0.025
per share, or one share of B Preferred into one Common share (the "Conversion
Shares"). The Company will honor conversion of only so many of the
total number of B Preferred currently outstanding as equal the
percentage of the total Purchase Price for the Investment Shares
that has been paid as of the time of conversion.
b. All other terms and conditions of the B Preferred will be
suspended, except voting rights and rights upon liquidation will be
suspended until completion of Conversion. The Conversion must be
completed by November 30, 1998 at which time the original terms and
conditions of the B Preferred will be reinstated, including without
limitation, the original conversion price of $0.125 per share.
2. In consideration for the re-structuring of the terms of the B- Preferred, Investor agrees and does hereby subscribe to purchase 17 Million shares common stock of the Company for an aggregate purchase price of $100,000, or $0.005882 per share. The Purchase Price must be paid in cash or certified funds and be fully funded on or before November 30, 1998, or the subscription will expire as to any unpurchased shares. Investor agrees to fill in and execute a proper Subscription Agreement and Investor Representation Letter in substantially the form attached hereto as Exhibit A, and incorporated herein by reference.
3. Investor understands and agrees that while the Company is issuing the Investment Shares and the Conversion Shares in reliance upon certain exemptions from registration under the Federal and State Securities Laws, resale of such securities may be subject to further restrictions imposed by such laws, and no assurances have been made in advance that exemptions from registration or from certain resale restrictions of such laws will be available at the time that Investor wishes to liquidate his/her investment. It is also understood that the Company cannot guarantee that there will be a viable trading market for the securities at the time that Investor desires to liquidate the securities and is undertaking no duties to provide for such market at such time.
4. As a condition to the agreement to modify the terms of the B Preferred, Investor has agreed to imposition of contractual restrictions on resale of the Investment Shares for a period of one year from the date of final closing of the Investment or from November 30, 1998, whichever is sooner (the "Lock-up Period"). The Company reserves the right to release this restriction as to any Investment Shares in its sole discretion at any time. Secondly, Investor irrevokably grants Boulder Sports, LLC., his Proxy to vote any Investment Shares or Conversion Shares not otherwise previously sold by Investor into the public market in open market transactions or in private transactions to bona fide third parties through the duration of the referenced Lock-up Period.
5. The Company represents and warrants that it has taken all necessary measures to obtain the authority to issue the Investment Shares, modify the terms of the B Preferred as set forth herein, and to issue the Conversion Shares and that upon such issuance, the shares so issued shall be fully paid and non-assessable. Further, subject to information contained in periodic and annual reports issued by the Company, the Company is not insolvent, nor currently plans to effect the filing of a petition in bankruptcy or file an application for the appointment of a receiver with any court, has not sold or liquidated nor agreed to sell or liquidate all or substantially all of the assets of the Company, nor is there in existence nor presently contemplated any material agreement for the purchase or sale of the Company, nor a merger, consolidation or other reorganization in which the Company is not the surviving entity. Furthermore, except as disclosed to Investor in writing, the Company represents and warrants that it has not signed any material underwriting agreement nor declared any stock split or dividend which would materially alter the current tangible book value per share of the Common Stock of the Company.
6. Investor represents and warrants: (i) that he owns all 28,400,000 shares of B Preferred directly or through affiliates that he controls; (ii) that he has in his possession certificates for all such shares of B Preferred; and (iii) to the best of his knowledge, there are no liens or encumbrances, and there are no legal, contractual or other restriction on alienation or conversion of same. Investor represents that he/she is familiar with and has read all current annual and period reports of the Company including the recently issued proxy statement pertaining to the Annual Meeting held on September 1, 1998, understands the relative risks and merits of an investment in the Investment Shares and the Conversion Shares and can afford to bear the risks of an investment in the same. Finally, Investor represents and warrants that the information contained in the Exhibit A Subscription Agreement and Investor Representation Letter are true and correct as of the date executed and that there are no material misstatements nor material omissions therefrom.
7. Both parties agree to keep the terms and conditions of this agreement confidential to the extent possible acknowledging that certain aspects of this agreement must or should be disclosed in regulatory filings made by the Company from time to time.
8. This Agreement together with the Exhibit A Subscription Agreement and Investor Representation Letter which is incorporated herein by reference constitute the entire agreement of the Parties hereto and may not be modified except in writing signed by both parties. Individuals executing this Agreement on behalf of a corporate entity or partnership represent and warrant by their signature hereon that they have been duly authorized to do so under applicable law and their respective corporate charter or partnership agreement. This Agreement has been made and executed in the state of Colorado and will be enforceable in accordance with its laws and venue and jurisdiction for any matter pertaining to this Agreement will be proper if filed in the appropriate county or district court for the County of Boulder, State of Colorado. All provisions herein are severable and any provision of this agreement being held unenforceable by any court will not invalidate any other provision. The Parties agree to provide anything by way of further assurances including representation letters, legal opinions, estoppel certificates, affidavits or certificates of authenticity reasonably requested by either party.
Dated this ____ day of _____, 1998.
TRAVIS INDUSTRIES, INC. Investor:
By:
RESTATED ARTICLES OF INCORPORATION
WITH AMENDMENTS
OF
ARETE INDUSTRIES, INC.
Pursuant to the provisions of the Colorado Business Corporation Act, the undersigned corporation adopts the following amended and restated Articles of Incorporation. These articles correctly set forth the provisions of the Articles of Incorporation, as amended, and supersede the original Articles of Incorporation and all amendments thereto.
ARTICLE I
Name
The name of the Corporation shall be:
Arete Industries, Inc.
ARTICLE II
Purposes and Powers
The purpose for which this corporation is organized is to transact any lawful business or businesses for which corporations may be incorporated pursuant to the Colorado Business Corporation Act, 1973 Colorado Revised Statutes, 7-101-101 et. seq. including, but not limited to, such business or businesses as shall be specified in writing by the board of directors in the bylaws.
ARTICLE III
Capital
The aggregate number of capital shares which the corporation shall have authority to issue is Five Hundred Million (500,000,000). Except for any class or series of common or preferred shares that may be subsequently established from time to time by resolution of the board of directors pursuant to this Article III, each capital share of this corporation shall be a voting Common Share without par value, shall have unlimited voting rights, and shall be entitled to receive the net assets of the corporation upon dissolution. Issuance of fractional shares is expressly authorized in the discretion of the board of directors or as provided for in the bylaws.
The board of directors of this corporation shall have the authority to establish by resolution different classes or series of common or preferred shares and, within the limitations provided by the Colorado Business Corporation Act, 7-106-102, or any similar provision as may later be adopted, to fix by resolution the voting powers, designations, preferences, and relative participating, optional, or other special rights, and the qualifications, limitations, or restrictions of the shares of any such class or series so established.
The shares of the corporation may be issued for consideration as may be fixed from time to time by the board of directors of the corporation, which consideration may consist of any tangible or intangible property or benefit to the corporation including cash, promissory notes, services performed and any other securities of the corporation. The judgment of the board of directors as to the value of any property or services received shall, in the absence of fraud or bad faith, be conclusive upon all persons for adequacy of consideration received with respect to whether such shares are validly issued, fully paid and nonassessable. Upon receipt of the consideration for which the board of directors has authorized the issuance of shares, the shares so issued therefore shall be deemed fully paid and nonassessable.
Except as otherwise provided in the bylaws, the board of
directors may authorize the issuance by the corporation of some or
all of the shares of any or all of its classes or series without
certificates. Within a reasonable time after the issuance or
transfer of shares without certificates, the corporation shall send
to the shareholder a written statement of the information required
on certificates pursuant to the provisions of subsections (2) and
(4) of 7-106-206 and 7-106-208 of the Colorado Business
Corporation Act, or any similar provision as may later be adopted.
ARTICLE IV
Period of Duration
This corporation shall exist perpetually unless dissolved according to law.
ARTICLE V
No Cumulative Voting
At the election of directors of the corporation, directors shall be elected by a majority vote of the shareholders, and the cumulative system of voting of shares of stock shall not be allowed.
ARTICLE VI
Restriction on Transfer of Shares
Transfer or registration of transfer of all, or any part of the shares of the corporation may be restricted by these Articles or any amendment hereto, the bylaws, an agreement among shareholders, or an agreement among shareholders and the corporation. The corporation is authorized to become party to agreements entered into by any of its shareholders including holders of rights convertible into, or carrying a right to subscribe for, or acquire shares. The board of directors is hereby authorized on behalf of the corporation to exercise the corporation's right to so impose such restrictions.
ARTICLE VII
Board of Directors
The number of directors shall be fixed in accordance with the bylaws. The number of directors may be increased or decreased at any time by the adoption of or amendment to the bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. In the absence of any provision in the bylaws fixing the number of directors, the number shall be the same as provided in these Articles of Incorporation. The number of directors shall be not less than three, except there need be only as many directors as there are shareholders in the event that the outstanding shares are held by fewer than three shareholders.
A director shall be a natural person who is eighteen years of age or older and need not be a resident of the state of Colorado or a shareholder unless the bylaws so prescribe.
The board of directors may at any time appoint an advisory board consisting of directors, non-directors, shareholders and/or non-shareholders for the purpose of advising and counseling the board of directors, and may compensate such advisory board members in the manner provided in the bylaws or as determined by the board of directors in their sole discretion in the absence of a bylaw provision. Such advisory board shall serve in an advisory capacity only and membership per se shall not carry or impute the status of a director, officer, fiduciary, employee or agent of the corporation. Members of any such advisory board shall not, solely by virtue of holding such position, have any express or implied authority to act on behalf of the corporation, nor shall be deemed to hold any of the duties and responsibilities of a director, officer, fiduciary, employee or agent of the corporation to any member thereof. The corporation shall indemnify any advisory board member and shall advance reasonable legal costs and expenses to the fullest extent permitted by law and/or as set forth in these Articles or in the bylaws, whichever provision is the most liberal. ARTICLE VIII Indemnification/Limitation of Liability of Directors
The corporation shall, to the fullest extent permitted by the provisions of the Colorado Business Corporation Act, 7-109-101 to 7-109-107, inclusive, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by said sections, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of the heirs, executors and administrators of such person.
Pursuant to the Colorado Business Corporation Act, 7-108-402, directors of the corporation shall not be liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director of the corporation except that this provisions shall not eliminate or limit the liability of a director to the corporation or its shareholders for: (i) monetary damages for any breach of such director's duty of loyalty to the corporation or to its shareholders; (ii) for any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for any acts specified in the Colorado Business Corporation Act, 7-108-403, or (iv) for any transaction from which the director derived an improper personal benefit.
In accordance with the Colorado Business Corporation Act 7- 109-108, as may be amended or supplemented, the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the corporation or who, while a director, officer, employee, fiduciary or agent of the corporation is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under provisions of this Article X.
Notwithstanding the foregoing, the corporation grants to its officers, directors, fiduciaries and agents any more expansive indemnification rights now or in the future created by case law or granted by statute in the State of Colorado.
ARTICLE IX
Transactions with Interested Directors
No contract or other transaction between the corporation and one (1) or more of its directors or officers or any other corporation, firm, association, or entity in which one (1) or more of its directors or officers are directors or officers or are financially interested shall be either void or voidable or be enjoined, set aside, or give rise to an award of damages or other sanctions solely because of such relationship or interest, or solely because such directors or officers are present at the meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction, or solely because their votes are counted for such purpose if:
(i) The material facts as to such relationship or interest and as to the subject transaction are disclosed or are known to the board of directors or committee, and the board of directors or committee in good faith authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or
(ii) The material facts as to such relationship or interest and as to the subject transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is authorized, approved, or ratified in good faith by vote or written consent of the shareholders; or
(iii) The contract or transaction was fair and reasonable to the corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof or the shareholders.
Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction.
ARTICLE X
Dividend Restrictions
This corporation may pay dividends in cash, property, or its
own shares, and may redeem its shares at their fair market value or
their face value except: (i) when the corporation is insolvent; or
(ii) if after such dividend or distribution the corporation's total
assets would be less than the sum of its total liabilities plus
(unless these Articles of Incorporation or any subsequent amendment
hereto, provide otherwise) the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the
distribution; and (iii) subject to the provisions of the Colorado
Business Corporation Act, 7-106-401, as amended, or any subsequent
amendment thereof.
ARTICLE XI
Quorum and Action of Shareholders
One Third (1/3) of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, and the affirmative vote of fifty-one percent (51%) of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders. Such action of the shareholders may be taken at a meeting called for such purpose or in such manner as provided for in the bylaws.
ARTICLE XII
Voting of Shareholders
The shareholders, by vote or concurrence of a majority of the outstanding shares of the corporation, or any class or series thereof, entitled to vote on the subject matter, may take any action which, except for this Article, would require a two-thirds vote under the Colorado Business Corporation Act, as amended.
ARTICLE XIII
Regulation of Internal Affairs
The internal affairs of the corporation shall be regulated as provided for in the bylaws. The initial bylaws may be adopted by the initial incorporation(s) or by the initial board of directors. The power to alter, amend, or repeal the bylaws or to adopt new bylaws shall be vested in the board of directors. The bylaws may contain any provision for the regulation and management of the affairs of the corporation not inconsistent with the Colorado Business Corporation Act, as the same may be amended or supplemented or by these Articles of Incorporation.
All corporate powers shall be exercised by or under the authority of the board of directors. The business and affairs of the corporation shall be managed under the direction of the board of directors, or as provided for in the bylaws, any committee of directors under such delegation of authority by the full board of directors as is permitted under the Colorado Business Corporation Act, 7-108-206, as amended or supplemented.
ARTICLE XIV
Restriction on Purchase of Shares
This corporation shall have the right to purchase, take, receive, redeem or otherwise acquire, hold, own, pledge, transfer or otherwise dispose of its own shares in accordance with the Colorado Business Corporation Act, Section 7-103-102, as amended, or any subsequent amendment thereof.
VERIFICATION
The undersigned being the Secretary of the within corporation certifies that the foregoing Restated Articles of Incorporation with Amendments were adopted by shareholder vote at a meeting of shareholders held on September 1, 1998, in which the number of votes cast for the amendment by the shareholders as a whole including each voting group entitled to vote separately on the amendment was sufficient for approval by such shareholders and/or that voting group.
IN WITNESS WHEREOF, the above-named Secretary hereby verifies that the foregoing are true and correct copy of the Restated Articles of Incorporation with Amendments duly approved by shareholders of the corporation at a meeting held on September 1, 1998.
Date:
Fred C. Boethling, Secretary
BY-LAWS
OF
ARETE INDUSTRIES, INC.
ARTICLE I
Offices
Section 1. The principal office of the corporation shall be designated from time to time by the corporation and may be within or outside of Colorado.
Section 2. The corporation may also have offices at such other places both within and without the State of Colorado as the board of directors may from time to time determine or the business of the corporation may require.
Section 3. The registered office of the corporation required by the Colorado Business Corporation Act (the "Act") to be maintained in Colorado may be, but need not be, identical with the principal office, and the address of the registered office may be changed from time to time by the board of directors.
ARTICLE II
Meetings of Stockholders
Section 1. The board of directors may designate any place, either within or outside of Colorado, as the place for any annual meeting of the stockholders for the election of directors and for the transaction of such other business as may come before the meeting, or for any special meeting of stockholders called by the board of directors, at such place as stated in the notice of the meeting or in a duly executed waiver of notice thereof. A waiver in writing signed by the stockholder entitled to such notice, whether before, at, or after the time stated therein, shall be deemed equivalent to the giving of such notice.
Section 2. Annual meetings of stockholders, commencing after completion of the first fiscal year of the corporation, shall be held in no event later than seven (7) months after the close of the corporation's most recently ended fiscal year on a date and at a time fixed by the board of directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting. If the election of directors is not held on the day fixed as provided herein for any annual meeting of the stockholders, or any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as it may conveniently be held.
Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder of record entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting, unless the business to be transacted at the meeting includes increasing the total number of authorized shares, in which case, the minimum notice period shall be thirty (30) days; or unless otherwise mandated by the Colorado Business Corporation Act.
Section 4. The officer who has charge of the stock ledger of the corporation or the corporation's transfer agent, shall prepare and make, at the earliest practicable date but no later than ten (10) days before such meeting a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The original stock transfer records of the corporation, broker/dealer or intermediary agency electronic searches, and/or omnibus proxies obtained in the ordinary course of meeting preparation through customary channels, agents and intermediaries and regulated by stock exchanges, Self-Regulatory Organizations or the National Association of Securities Dealers (NASD) and/or the Securities and Exchange Commission (SEC), shall be prima facie evidence as to who are the stockholders entitled to examine the record or transfer books or to vote at any meeting of stockholders.
Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the articles of incorporation, may be called by the Chairman of the Board (if other than the Chief Executive Officer), by the Chief Executive Officer, or the board of directors and shall be called by the Chairman and/or the Chief Executive Officer at the demand of a majority of the board of directors, or if the corporation receives one or more written demands for the meeting, signed and dated and stating the purposes for which it is to be held, of stockholders holding shares representing at least one-tenth in amount of all the votes entitled to be cast on any issue proposed to be considered at the meeting.
Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Unless required by either the Act, or by applicable federal or state securities laws, notice of an annual meeting need not include a description of the purpose or purposes for which the meeting is called. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice or in a duly executed waiver of notice of the meeting.
Section 8. The holders of one-third (1/3) of the Shares of the corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the articles of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than one hundred twenty (120) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting as of the new record date. The stockholders present in person or by proxy at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting.
Section 9. Fifty (50%) percent of the votes entitled to be cast on a matter by a voting group represented in person or by proxy, shall constitute a quorum of that voting group for action on the matter. If less than such quorum is present at a duly organized meeting, a majority of the votes so represented may adjourn the meeting from time to time, without notice other than announcement at the meeting, for a period not exceeding one hundred twenty (120) days. If a quorum exists, action on a matter other than the election of directors by a voting group is approved as to that voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by provision of any contract to which the corporation is subject, any law or the articles of incorporation.
Section 10. When a quorum is present at any meeting, the vote of the holders of a plurality of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of a contract to which the corporation shall be a party or unless by the provisions of the Act or of the articles of incorporation, a different vote is required in which case such express provisions shall govern and control the decision of such question.
Section 11. At all meetings of stockholders, a stockholder entitled to vote may vote in person or by proxy appointed in writing by the stockholder or by his duly authorized attorney-in-fact. The proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Unless otherwise provided in the proxy, a proxy may be revoked at anytime before it is voted, either by written notice filed with the Secretary or the acting Secretary of the meeting, or by oral notice given by the stockholder to the presiding officer during the meeting. The presence of a stockholder who has filed his proxy shall not of itself constitute a revocation. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. The Board of Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiency of proxies. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Until the Corporation becomes formally subject to the proxy disclosure, filing and solicitation rules under Schedule 14A promulgated by the SEC, the Corporation shall make every effort to comply with the spirit and intent of such rules and regulations with respect to disclosure, timing and manner of notice, determination of the record date and voting rights of shareholders.
Section 12. At all elections of directors of the corporation each stockholder having voting power shall not be entitled to exercise the right of cumulative voting, unless so provided in the articles of incorporation.
Section 13. Unless otherwise provided in the articles of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing (or counterparts thereof), setting forth the action so taken, is signed by the all the holders of outstanding stock entitled to vote with respect to the subject matter and received by the corporation. Action taken under this Section 13 is effective as of the date the last writing necessary to effect the action is received by the corporation, unless all of the writings specify a different effective date, in which case such specified date shall be the effective date for such action. The record date for determining shareholders entitled to take action without a meeting is the date the corporation first receives a writing upon which the action is taken. No such action shall be effective if any shareholder entitled to vote on the action proposed in the consent revokes their consent by delivering written notice of revocation of his consent to the corporation prior to the effective date thereof.
Section 14. Any or all of the stockholders may participate in an annual or special meeting of stockholders by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A stockholder participating in a meeting by this means is deemed to be present in person at the meeting.
ARTICLE III
Board of Directors
Number, Tenure, Qualification and Authority of Directors
Section 1. The number of directors which shall constitute the whole board of directors shall be fixed from time to time by resolution of the board of directors, but shall not be less than three, unless there be less than three stockholders, in which case there may be as many directors as stockholders. The number of directors may be limited by agreement between the corporation and stockholders or third parties, in which case the provisions of such agreement shall govern. The first board shall consist of three (3) directors. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the board of directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders or residents of the State of Colorado.
Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the stockholders at a special meeting called for such purpose or by the board of directors. If such vacancies or newly created directorships on the board are filled by the board of directors, such vacancies or newly created directorships may be filled by the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by the Colorado Business Corporation Act.
Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are authorized by statute or by the articles of incorporation or by these by-laws directed or required to be exercised or done by the stockholders.
Meetings of the Board of Directors
Section 4. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Colorado.
Section 5. The first meeting of each newly elected board of directors shall be held immediately after and at such place as the annual meeting of stockholders and no notice of such meeting shall be necessary other than this By-law to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at the time and place so fixed hereby, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all the directors, which meeting, in no event shall be held no more than twenty (20) days from the annual meeting of stockholders.
Section 6. Additional regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the board of directors.
Section 7. Special meetings of the board of directors may be called by or at the request of the Chairman of the Board (if different than the Chief Executive Officer) the Chief Executive Officer or any two directors on three (3) days' notice to each director, either personally or by mail, tested telex, facsimile transmission, telegram or by third party courier with facilities to record date, time of receipt and to whom delivered (unless the board of directors consists of only one director; in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director). The person or persons entitled to call the meeting shall specify the time, date and place of the meeting, which shall be held in Colorado unless a majority of the board of directors otherwise authorizes.
A director may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such director. Such waiver shall be delivered to the secretary for filing with the corporate records, but such delivery and filing shall not be conditions to the effectiveness of the waiver. Further, a director's attendance at or participation in a meeting waives any required notice to him of the meeting unless at the beginning of the meeting, or promptly upon his later arrival, the director objects to the holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting.
Section 8. At all meetings of the board of directors, a majority of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the articles of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the articles of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the articles of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. To the extent feasible, all formal meetings of the board and/or committees shall be tape recorded.
Committees of Directors
Section 11. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the articles of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 7-108-206(4)(h) of the Colorado Business Corporation Act, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class of classes or any other series of the same or any other class or classes of stock of the corporation) adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the articles of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors.
Section 12. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Unless the board of directors otherwise provides, each committee designated by the board of directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business pursuant to the rules set forth for the conduct of meetings of the board of directors in this Article III of these by-laws.
Compensation of Directors
Section 13. Unless otherwise restricted by the articles of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.
Removal of Directors
Section 14. Unless otherwise restricted by the articles of incorporation or any by-law, and subject to the provisions of any stockholder agreement to which the corporation is a party with respect to the appointment of nominees of such parties to the board of directors of the corporation, any director or the entire board of directors may be removed, with or without cause, in the manner provided in the Colorado Business Corporation Act, and any subsequent amendment thereto.
ARTICLE IV
Notices
Section 1. Except as otherwise provided herein, whenever, under the provisions of the statutes or of the articles of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, first-class mail, and such notice shall be deemed to be given five (5) days from the time deposited in the United States mail. Notice to directors may also be given either personally or by mail, tested telex, facsimile transmission, telegram or by third party courier with facilities to record date, time of receipt and to whom delivered or if mailed by registered or certified mail return receipt requested, provided that the return receipt is signed by the director to whom the notice is addressed.
Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the articles of incorporation or these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
Officers
Appointment. Compensation, and Term of Officers
Section 1. The officers of the corporation shall be appointed by the board of directors and shall consist of, at a minimum, a chief executive officer who shall also act as president, a vice-president, a secretary and a treasurer. The chief executive officer shall be the chairman of the board and the board of directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Except that the Chief Executive Officer may not act as company secretary, any number of offices may be held by the same person, unless the articles of incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a chairman of the board and chief executive officer, one or more vice-presidents, a secretary, a treasurer.
Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such power and perform such duties as shall be determined from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation shall be fixed from time to time by resolution of the board of directors.
Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any required office of the corporation shall be filled by the board of directors.
Chairman of the Board
Section 6. The chairman of the board, if one shall have been appointed and be serving, shall preside at all meetings of the board of directors and of the stockholders and shall perform such other duties as from time to time may be assigned to him or her by the board of directors. Unless the chairman of the board is also director, he/she shall have no vote at a meeting of the board of directors, unless to break a tie vote of the other directors on any matter being considered at a duly called meeting of board of directors.
Chief Executive Officer
Section 7. The chief executive officer shall, in the absence of an independent chairman of the board, be the chairman of the board and preside at all meetings of the stockholders and the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. The designation of either president or chief executive officer shall have the same meaning and represent the same office of the corporation. In the absence of an amendment to these by-laws, the president and chief executive officer shall be one and the same person.
Section 8. The chief executive officer shall execute certificates for shares of the corporation with the secretary or any other proper officer of the corporation hereunto authorized by the board of directors, and bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation.
Vice-President
Section 9. In the absence of the chief executive officer or in the event of the inability or refusal to act of the chief executive officer, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the chief executive officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the chief executive officer. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
Secretary and Assistant Secretary
Section 10. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary (if so authorized by resolution of the board of directors or directive of the secretary), shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Secretary shall also: (a) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (b) sign with the chairman or vice chairman of the board of directors, or the chief executive officer, or a vice president, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the board of directors; (c) have general charge of the stock transfer books of the corporation; and (d) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the chief executive officer or by the board of directors.
Section 11. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
Treasurer and Assistant Treasurers
Section 12. The treasurer shall have the custody of the corporate funds and securities of the corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors.
Section 13. The Treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation.
Section 14. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.
Section 15. The assistant treasurer, if any, of if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination' then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
ARTICLE VI
Stock and Stockholders
Certificates for Shares
Section 1. The board of directors may make such rules and regulations as it may deem appropriate concerning the issuance, transfer and registration of certificates for shares of the corporation, including the appointment of transfer agents and registrars.
Section 2. The shares of the corporation shall be represented by a certificate or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the chairman or vice- chairman of the board of directors, or the chief executive officer or a vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation.
Section 3. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration paid therefor. Upon the face or back of each stock certificate issued to represent any partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated.
Section 4. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 7-106-206 of the Colorado Business Corporation Act, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
Section 5. Within a reasonable time after the issuance or transfer
of uncertificated stock, the corporation shall send to the
registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to
Section 7-106-206, subsections (2) and (4) thereof and Section 7-
106-208 of the Colorado Business Corporation Act, or a statement
that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 6. Any of or all the signatures on a certificate may be by facsimile if the certificate is countersigned by a transfer agent, or registered by a registrar other than the corporation itself or its employee. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
Lost Certificates
Section 7. The board of directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
Transfer of Stock
Section 8. Subject to the terms of any shareholder agreement relating to the transfer of shares or other transfer restrictions contained in the certificate of incorporation or authorized therein, upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereat, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation.
Record Date for Determination of Stockholders
Section 9. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than seventy nor less than ten days before the date of such meeting, nor more than seventy days prior to any other action. If no record date is fixed by the board of directors, the record date shall be the day before the notice of the meeting is given to stockholders, or the date on which the resolution of the board of directors providing for a distribution or other action is adopted, as the case may be. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders under this Section shall apply to any adjournment of the meeting: provided, however, that the board of directors may fix a new record date for the adjourned meeting and shall do so if the meeting is to be held more than one hundred twenty (120) days after the date fixed for the original meeting. Unless otherwise specified when the record date is fixed, the time of day for such determination shall be as of the corporations of business on the record date.
Registered Stockholders - Representative Voting of Shares
Section 10. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Colorado.
Section 11. The following shall apply when shares are to be voted by a representative:
11.01 Shares standing in the name of another corporation, whether domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of the other corporation may prescribe, or, in the absence of any such provision, as the board of directors of the other corporation may determine.
11.02 Shares held by an administrator, executor, personal representative, guardian or conservator may be voted by the fiduciary, either in person or by proxy, without a transfer of such shares into the fiduciary's name.
11.03 Shares standing in the name of a trustee may be voted by the trustee either in person or by proxy, but no trustee shall be entitled to vote the shares without a transfer of the shares into the trustee's name.
11.04 Shares held by a minor or incompetent may be voted by the minor or incompetent in person or by proxy and no such vote shall be subject to disaffirmance or avoidance, unless prior to the vote the secretary of the corporation has actual knowledge that the stockholder is a minor, or that the stockholder has been adjudicated an incompetent or that judicial proceedings have been started for the appointment of a guardian.
11.05 Shares held in the names of joint tenants may be voted in person or by proxy by any one of the joint tenants, if no other individual joint tenant is present and claims the right to vote the shares, or if prior to the vote he/she has filed with the secretary of the corporation a contrary proxy or a written denial of the authority of the person present to vote the shares.
11.06 Shares standing in the name of a receiver may be voted by the receiver, and shares held by or under the control of a receiver may be voted by the receiver without the transfer thereof into the receiver's name if authority is contained in an appropriate order of the court which appointed the receiver.
11.07 A stockholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledges, and thereafter, the pledges shall be entitled to vote the shares so transferred.
11.08 Neither treasury shares of its own stock held by the corporation, nor shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
ARTICLE VII
Contracts, Loans, and Checks
Contracts
Section 1. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.
Loans
Section 2. No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances.
Checks and Drafts
Section 3. All checks, drafts, or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors.
ARTICLE VIII
General Provisions
Dividends
Section 1. Dividends upon the capital stock of the corporation, may be declared by the board of directors in the manner and upon the terms and conditions provided by law and by the articles of incorporation. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the articles of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property or the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
Section 3. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.
Annual statement
Section 4. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.
Fiscal Year
Section 5. The fiscal year of the corporation shall be fixed by resolution of the board of directors.
Seal
Section 6. The use of a corporate seal by the corporation is optional. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Colorado''. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Indemnification
Section 6.1 The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended any person who was or is made or is threatened to be to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The corporation shall be required to indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the board of directors of the corporation.
Section 6.2 The corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Section or otherwise.
Section 6.3 If a claim for indemnification or payment of expenses under this Section is not paid in full within sixty days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.
Section 6.4 The rights conferred on any person by this Section 6 shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the articles of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise.
Section 6.5 The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.
Section 6.6 Any repeal or modification of the foregoing provisions of this Section 6 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
Interested Directors, Quorum
Section 7. No contract or transaction between the corporation and one or more of its directors or officers or any other corporation, firm, association, or entity in which one or more of its directors or officers are directors or officers or are financially interested shall be either void or voidable solely because of such relationship or interest, or solely because such directors or officers are present at the meeting of the board of directors or a committee thereof which authorized, approves, or ratifies such contract or transaction, or solely because their votes are counted for such purpose if:
Section 7.1 The fact of such relationship or interest is disclosed or known to the board of directors or committee which authorizes, approves, or ratifies the contract or transaction by a vote or consent insufficient for the purpose without counting the votes or consents of such interested directors;
Section 7.2 The fact of such relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve, or ratify such contract or transaction by vote or written consent; or
Section 7.3 The contract or transaction was fair and reasonable to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the stockholders.
Section 8. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction.
Authorization of Comprehensive Benefits
Section 9. The board of directors shall have authority to provide for or to delegate authority to an appropriate committee to provide for reasonable pensions, health and accident insurance, paid vacations, disability or death benefits, and other benefits or payments, to directors, officers, and employees and to their estates, families, dependents, or beneficiaries on account of prior services rendered by such directors, officers, and employees to the corporation.
Liability Insurance
Section 10. The board of directors is authorized to purchase and maintain insurance for and on behalf of any person who is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him or incurred by him in any such capacity arising out of his status as such.
ARTICLE IX
Amendments
Section 1. Subject to any restriction contained in the Colorado Business Corporation Act, these by-laws or the articles of incorporation, or by any voting agreement to which the corporation shall become a party, these by-laws may be altered, amended or repealed or new by-laws may be adopted at any time by the board of directors, when such power is conferred upon the board of directors by the articles of incorporation at any regular meeting or at any special meeting if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. Subject to the above limitations, if the power to adopt, amend or repeal by-laws is conferred upon the board of directors by the articles of incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws at any annual or special meeting of stockholders called for such purpose.
Section 2. If authorized by the articles of incorporation, the shareholders may amend the bylaws to fix a greater quorum or voting requirement for stockholders, or voting groups of stockholders, than is required in the Colorado Business Corporation Act. An amendment to the bylaws to add, change, or delete a greater quorum or voting requirement for stockholders shall meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever are greater.
Section 3. A bylaw that fixes a greater quorum or voting requirement for stockholders under Section 2, above shall not be amended by the board of directors.
Section 4. A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended: a) If adopted by stockholders, only by the stockholders; or b) If adopted by the board of directors, either by the stockholders or by the board of directors.
Section 5. A bylaw adopted or amended by the stockholders that fixes a greater quorum or voting requirement for the board of directors may provide that it may be amended only by a specified vote of either the stockholders or the board of directors.
Section 6. Action by the board of directors under sub-section 4(b) above to adopt a bylaw that changes the quorum or voting requirement for the board of directors shall meet the same quorum requirement and be adopted by the same vote required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater.
CERTIFICATE
I, ___________________________ secretary of the corporation certify
that the foregoing
By-laws constitute the official by-laws of the corporation as
adopted by resolution of the board of directors of the corporation
on ___________________, 199_.
(SEAL)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is Arete Industries, Inc.
SECOND: The following amendment to the Articles of Incorporation was adopted on October 30, 1998, as prescribed by the Colorado Business Corporation Act, by the board of directors where shares have been issued and shareholder action was not required.
RESOLVED, that a new series of Preferred Stock is hereby designated consisting of the following rights, preferences and designations:
a. The new class is designated "Class A Cumulative Convertible Preferred Stock (the "Class A Preferred") the number of which may be issued is hereby fixed at 100,000 shares.
b. The redemption price and liquidation preference for each share of such Class A Preferred shall be $10.00 plus accrued and unpaid dividends and shall be redeemable for cash at any time at the option of the Company. The redemption price stated above shall be subject to adjustment in the manner provided for adjustment of the Conversion Price, below.
c. The Class A Preferred shall have a liquidation preference over shares of Common Stock and any series of preferred stock subsequently designated as to the unencumbered assets of the Company.
d. The quarterly cumulative dividend rate for the Class A Preferred is specified as the prime rate posted in the Wall Street Journal on the last day of the previous fiscal quarter. Alternatively, if no prime rate is posted in the Wall Street Journal on such date, the rate shall be that rate published by Chase Manhattan Bank, NA., as of the most recent date preceding the date such dividend rate is to be determined. Dividends will accrue on a quarterly basis commencing the date of issuance and will accumulate if not paid within 15 days from the end of the quarter in which they become due. Dividends may be paid in cash, notes, common or Class A Preferred stock, as agreed to by the holder and the Company.
e. Each share of Class A Preferred plus accrued dividends, shall be convertible at any time after thirty days from the date of issuance at the option of the holder into shares of Common Stock of the Company on the basis of the face value of each such share of Class A Preferred divided by an amount equal to 110% of the average weekly closing bid price for a common share on the OTC Bulletin Board (or the NASDAQ Small Cap Bulletin Board if applicable) on the date of issuance or on the date of conversion (or the date of determination of voting rights provided below), whichever is less.
f. Class A Preferred will be entitled to vote as a class for all matters brought at shareholders meetings potentially adversely affecting the rights, preferences and privileges of the Class A Preferred Stock according to applicable provisions of the Articles, By-laws and/or the Colorado Business Corporation Act. Holders of Class A Preferred shall also be entitled to vote such number of votes at any meeting of shareholders, equal to their cumulative face value divided by their applicable conversion price specified above. In the event that dividends duly declared and accrued on the Class A Preferred have not been paid for four consecutive fiscal quarters following their issuance and/or in the event that the Class A Preferred has not been redeemed for face value plus accrued dividends for cash by the Company within four calendar quarters from the date of their issuance, then the Holders of outstanding Class A Preferred holding 80% of the face amount of Class A Preferred which is qualified to so act, may elect a majority of the board of directors of the Company at any special meeting of shareholders called for such purpose.
g. Holders of Class A Preferred will be entitled to demand and piggy-back registration rights as to shares of common stock issuable on conversion of the Class A Preferred: (i) on demand one time only by the holders of at least 80% of the outstanding Class A Preferred in which case the Company shall prepare and file a registration statement with the Securities and Exchange Commission (SEC) duly registering the conversion shares along with appropriate state blue sky qualification of such conversion of same at the sole cost and expense of the Company; and (ii) such piggy-back rights, if exercised as to the entire number of shares of Class A Preferred held by any holder at the time any registration statement becomes effective provided that such holder provides the Company with 90 days advance notice prior to the date the Company first files its registration statement for review by the SEC.
h. The number of shares of Common Stock of the Company into
which shares of Class A Preferred shall be adjusted to reflect
changes in the aggregate capitalization of the Company, whether
voluntary or involuntary, including, without limitation, the
following:
1. A reverse stock split or forward split of the outstanding Common Stock
of the Company regardless of whether or not the par value or total authorized
shares is effected by such reverse;
2. A stock dividend, or share reclassification of shares issued by the Company;
3. A distribution of assets except cash distributions, distributions made out of current retained earnings or surplus or stock dividends of subsidiary corporations; and
4. Issuance without consideration or for per share consideration less than the effective per share conversion price of the Class A Preferred, of Common Stock of the Company or warrants, options or rights to purchase Common Stock of the Company.
Such adjustments shall be made at the time of each such event, distribution, or issuance and retroactively to the date any shares of Class A Preferred were converted between the record date of either of such events and the date such options, warrants or rights were exercised or the date such consideration was received, as the case may be. Further, such adjustments will be made to eliminate effective per share dilution to the holders of Class A Preferred caused by such event, distribution or issuance as to the shares of Common Stock into which such Class A Preferred shares are convertible.
No adjustment shall be made in the conversion rate of the Class A Preferred in the following cases:
i. Grant, issuance or exercise of qualified or non- qualified stock options, SAR's or other compensation pursuant to any incentive stock compensation plan adopted by the shareholders of the Company;
ii. Shares of Common Stock issued on conversion of Class A Preferred Stock or any other class of Preferred Stock outstanding prior to designation of the Class A Preferred Stock;
iii. Shares of Common Stock in connection with the acquisition of 80% or more of the voting shares or assets of any other corporation by the Company or any subsidiary of the Company or in connection with a merger between a third party corporation and the Company or any subsidiary of the Company in which the Company or its subsidiary is the surviving entity, including any shares, options or rights granted and/or exercised pursuant to such transactions.
The Treasurer of the Company shall prepare a certificate for all holders of Class A Preferred on issuance and subsequent to any of the events contemplated above setting forth the effective conversion price and the effect of any adjustment thereto caused by any of the above events. Adjustments shall be rounded up to the next whole share of common stock into which shares of Class A Preferred would convert.
i. The terms of Class A Preferred may not be modified or amended in any material way without the express unanimous written consent or the affirmative vote of the holders of, two thirds in face value amount of all outstanding Class A Preferred. Nothing in this certificate shall be deemed to limit the right of the Board of Directors to declare additional series or classes of Preferred or Common Stock nor to declare the rights, preferences or privileges thereon which do not conflict with, supercede or impair the rights, preferences or privileges of the Class A Preferred. The provisions of this Certificate shall be in addition to provisions affecting Preferred Stock generally as set forth in the Articles of Incorporation of the Company.
j. All notices required or permitted to be given by the Company with regard to the Class A Preferred Stock shall be in writing, and if delivered by first class US Mail, postage prepaid, to the holders of the Class A Preferred at their last addresses as set forth in the records of the Company, shall be conclusively presumed to have been duly given, whether or not the stockholder actually receives such notice; provided however, that failure to duly give such notice by mail, or any defect in such notice, to the holders of any stock designated for redemption, shall not affect the validity of the proceedings for the redemption of any other shares of Class A Preferred.
k. Pursuant to the Colorado Business Corporation Act, as amended, shares of Class A Preferred need not be certificated. Notwithstanding this, any holder of Class A Preferred may request and be issued a certificate or certificates reflecting the number of shares such holder owns of the Class A Preferred referring to the terms and conditions contained herein.
Arete Industries, Inc.
Signature:
Title Chief Executive Officer, Chairman of
the Board of Directors
|
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED BALANCE SHEET OF ARETE INDUSTRIES, INC. AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENTS OF OPERATIONS, CHANGES IN STOCKHOLDERS' (DEFICIT) AND CASH FLOWS FOR THE TWO YEARS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD END | DEC 31 1998 |
| CASH | 25,000 |
| SECURITIES | 0 |
| RECEIVABLES | 193,122 |
| ALLOWANCES | 167,578 |
| INVENTORY | 0 |
| CURRENT ASSETS | 61,523 |
| PP&E | 0 |
| DEPRECIATION | 0 |
| TOTAL ASSETS | 61,523 |
| CURRENT LIABILITIES | 362,006 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 528,421 |
| COMMON | 24,097 |
| OTHER SE | (853,001) |
| TOTAL LIABILITY AND EQUITY | 61,523 |
| SALES | 888,371 |
| TOTAL REVENUES | 888,371 |
| CGS | 630,143 |
| TOTAL COSTS | 630,143 |
| OTHER EXPENSES | 0 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 41,502 |
| INCOME PRETAX | (575,515) |
| INCOME TAX | 0 |
| INCOME CONTINUING | 0 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (575,515) |
| EPS PRIMARY | 0 |
| EPS DILUTED | 0 |