SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A-1
[ 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
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 11, 1999, filed as
Exhibit 20 to this Report 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 11,
1999 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.
<TABLE>
<CAPTION>
STOCK QUOTATIONS
BID
Quarter Ending: High Low
<S> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
Date Amount Sold Purchaser Consideration
<S> <C> <C> <C>
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
12/31/98 total, $35,400 (subscription -
Accredited Inv.
See- Subsequent Events)
</TABLE>
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
Company's 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 continuing
lack of working capital to expand marketing, enhance customer service and
provide fulfillment 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 information required by this Part III, Items 9 through 12 are
incorporated herein by reference to registrant's proxy statement
to be delivered to shareholders for the upcoming annual meeting
to be held June 11, 1999 and filed as Exhibit 20 to this Report.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the Exchange Act.
Incorporated by reference from pages 3 through 4 and 8 through
9 of Proxy Statement, filed herein as Exhibit 20.
Item 10. - Executive Compensation.
Incorporated by reference from pages 8 and 10 through 11
of Proxy Statement, filed herein as Exhibit 20.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Incorporated by reference from pages 12 through 14
of Proxy Statement, filed herein as Exhibit 20.
Item 12. - Certain Relationships and Related Transactions.
Incorporated by reference from pages 14 through 16
of Proxy Statement, filed herein as Exhibit 20.
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.
<TABLE>
<CAPTION>
Exhibit No. Description
Ref. No.
<S> <C>
<C>
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-20 Proxy Statement and exhibit for annual meeting to be
held September 1, 1998 filed by Amendment to this report
per General Instruction E-3&4 of Form 10-KSB and incorporated
by reference into Part III of this Amendment to this Report.
EX-27* Financial Data Schedule
</TABLE>
* 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
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998
<S> <C>
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 bank $ 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.
</TABLE>
<TABLE>
<CAPTION>
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
Ended
December 31, For the Years
Ended
1998 1998 1997
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
<C> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
ARETE INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended
December 31, For the Years Ended
1998 1998
1997
<S> <C> <C> <C>
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 $ - $ - $
- -
</TABLE>
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 amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: April 30, 1999 By: /s/ THOMAS P. RAABE
Thomas P. Raabe,
President, Chief Executive Officer,
Chief Financial Officer
Chairman of the Board of
Directors
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 30, 1999 By: /s/ THOMAS P. RAABE
Thomas P. Raabe
Board Member
Date: April 30, 1999 By: /s/ THOMAS Y. GORMAN
Thomas Y. Gorman
Board Member
Date: April 30, 1999 By: /s/ KEITH TALBOT
KEITH TALBOT
Board Member
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.
ARETE INDUSTRIES, INC.
2305 CANYON BOULEVARD, SUITE 103
BOULDER, COLORADO 80302
Tel: (303) 247-1313 Fax: (303) 247-1315
April 30, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders of
Arete Industries, Inc. Friday, June 11, 1999 at 3:00 p.m. (MDT) at the offices
of the corporation located at 2305 Canyon Blvd., Suite 103, Boulder, Colorado.
Since we have very limited space at our offices, please notify us in advance of
your intention to attend in person, so we may make appropriate accommodations.
We look forward to this opportunity to update you on developments at Arete .
All stockholders are cordially invited to attend the Annual Meeting in person.
However, whether or not you expect to attend the Annual Meeting in person, you
are urged to mark, date, sign and return the enclosed proxy card as promptly as
possible in the postage-prepaid envelope provided to ensure your representation
and the presence of a quorum at the Annual Meeting. If you send in your proxy
card and then decide to attend the Annual Meeting to vote your shares in person,
you may still do so. Your proxy is revocable in accordance with the procedures
set forth in the Proxy Statement.
Also, regardless of whether you plan to attend, in order to keep you better
informed of developments within the Company and to help us update our records,
please fill in the additional reply card included in your materials and return
this postage prepaid card at your earliest convenience.
Sincerely,
Thomas P. Raabe
Chairman
ARETE INDUSTRIES, INC.
2305 CANYON BOULEVARD, SUITE 103
BOULDER, COLORADO 80302
Tel: (303) 247-1313 Fax: (303) 247-1315
______________________________________________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 11, 1999
______________________________________________________
To the Stockholders of Arete Industries, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Arete Industries, Inc. (the "Company") will be held at the offices of
the corporation, located at 2305 Canyon Blvd., Suite 103, Boulder,
Colorado, at 3:00 P.m., mountain daylight time, on Friday, June 11,
1999, for the following purposes:
1. To elect three directors to serve until the next annual meeting of
Shareholders of the Company and until their successors have been duly
elected and qualified.
2. To consider and adopt the proposed 1999 Omnibus Stock Option and
Incentive Plan.
3. To ratify the continuation of Schumacher & Associates, Inc.,
Englewood, Colorado as independent public accountants to audit the
financial statements of the Company for the fiscal year ending March
31, 1999.
4. To consider and act upon such other business as may properly come
before the meeting or any adjournment thereof.
Only Stockholders of record at the close of business on April 27,
1999, are entitled to notice of and to vote at the meeting, or any
adjournment thereof.
Stockholders unable to attend the Annual Meeting in person are
requested to read the enclosed Proxy Statement and then complete and
deposit the enclosed Proxy Card together with any power of attorney
or other authority, if any, under which it was signed, or a notarized
certified copy thereof, with the Company's transfer agent, American
Securities Transfer & Trust, Inc. 938 Quail Street, Operations Center,
Suite 101, Lakewood, Colorado 80215-5513, at least 48 hours (excluding
Saturdays, Sundays and statutory holidays) before the time of the
Annual Meeting or adjournment thereof or with the chairman of the
Annual Meeting prior to the commencement thereof.
Unregistered Stockholders who received the Proxy through an
intermediary must deliver the Proxy in accordance with the
instructions given by such intermediary.
BY ORDER OF THE BOARD OF DIRECTORS
_________________________________
Thomas P. Raabe, Chairman
IMPORTANT
THE PROXY STATEMENT WHICH ACCOMPANIES THIS NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS CONTAINS MATERIAL INFORMATION CONCERNING THE MATTERS TO
BE CONSIDERED AT THE MEETING, AND SHOULD BE READ IN CONJUNCTION WITH
THIS NOTICE.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN
THE ENCLOSED PROXY CARD AND SHAREHOLDER UPDATE CARD AS PROMPTLY AS
POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. IF A QUORUM IS NOT
REACHED, THE COMPANY WILL HAVE THE ADDED EXPENSE OF RE-ISSUING THESE
PROXY MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON.
THANK YOU FOR ACTING PROMPTLY
Arete Industries, Inc.
2305 CANYON BOULEVARD, SUITE 103
BOULDER, COLORADO 80302
Tel: (303) 247-1313 - Fax: (303) 247-1315
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
June 11, 1999
Boulder, Colorado
This Proxy Statement is being furnished to stockholders of Arete
Industries, Inc. (the "Stockholders") in connection with the
solicitation of proxies by the Board of Directors of Arete Industries,
Inc. (the "Company") for use at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held at the corporate offices of the
Company located at 2305 Canyon Blvd., Suite 103, Boulder, Colorado, at
3:00 p.m., mountain daylight time, on Friday, June 11, 1998, and at
any adjournments thereof for the purpose of considering and voting
upon the matters set forth in the accompanying Notice of Annual
Meeting of Stockholders (the "Notice"). This Proxy Statement and the
accompanying form of proxy are first being mailed to Stockholders on
or about April 30, 1999. All costs of soliciting proxies will be
borne by the Company.
The close of business on April 27, 1999, has been fixed as the record
date for the determination of Stockholders entitled to notice of and
to vote at the Annual Meeting and any adjournment thereof. As of the
record date, there were 273,155,516 shares of the Company's Common
Stock, no par value (the "Common Stock"), issued and outstanding;
6,000 shares of the Company's Series A Convertible Preferred Stock
("Series 'A" Preferred Stock") that are entitled to vote the
equivalent of 6,896,104 shares of Common Stock (the "Series A Common
Stock Equivalents") and 13,125,000 shares of the Company's Series B
Convertible Preferred Stock ("Series 'B' Preferred Stock") issued and
outstanding that are entitled to vote the equivalent of 2,625,000
shares of Common Stock (the "Series B Common Stock Equivalents").
The presence, in person or by proxy, of one third of the outstanding
shares of Common Stock and the Series A and B Common Stock Equivalents
on the Record Date is necessary to constitute a quorum at the Annual
Meeting. Abstentions and broker non-votes will be counted towards a
quorum. If a quorum is not present or represented by proxy at the
Annual Meeting, the Stockholders present or represented by proxy at
the Annual Meeting have the power to adjourn the Annual Meeting from
time to time, without notice other than an announcement at the Annual
Meeting, until a quorum is present or represented by proxy. At any
such adjourned Annual Meeting at which a quorum is present or
represented by proxy, any business may be transacted that might have
been transacted at the original Annual Meeting.
With respect to the election of directors, votes may be cast in favor
or withheld. Directors are elected by a plurality of the votes cast at
the Annual Meeting, and votes that are withheld will be excluded
entirely from the vote and will have no effect. Stockholders may not
cumulate their votes in the election of directors. The affirmative
vote of a majority of the shares of Common Stock and the Common Stock
Equivalents present or represented by proxy and entitled to vote at
the Annual Meeting is required for approval of all of the proposals
recommended by the board of directors. Abstentions will have the same
effect as a vote against a proposal.
All shares represented by properly executed proxies, unless such
proxies have been previously revoked, will be voted at the Annual
Meeting in accordance with the directions set forth on such proxies.
If no direction is indicated on proxies, the shares represented by
such proxies will be voted (i) FOR the election of the nominees named
herein, (ii) FOR the proposed 1999 Omnibus Stock Option and Incentive
Plan; (iii) FOR continuation of the Company's independent public
accountants as its auditors for the current fiscal year, and (iv) to
transact such other business as may properly come before the meeting.
The enclosed proxy, even though executed and returned, may be
revoked at any time prior to the voting of the proxy by one of the
following methods: (a) the execution and submission of a revised
proxy, (b) written notice to the Secretary of the Company, or (c)
voting in person at the Annual Meeting.
ANNUAL REPORT
A copy of the Company's Annual Report for the 9 month period ended
December 31, 1998 on Form 10-KSB is being mailed with this Proxy
Statement. The Annual Report does not form any part of the material
for solicitation of proxies. Part III including Items 9 through 12 of
Form 10-KSB have been incorporated by reference to information
provided in this Proxy Statement, to which the reader's attention is
directed. (See - Additional Information).
The Company will provide, without charge, a copy of its Annual Report
on Form 10-KSB, including financial statements and exhibits thereto,
upon written request to Fred Boethling, Secretary of the Company, at
2305 Canyon Boulevard, Suite 103, Boulder, Colorado 80302. The
Company"s telephone number is (303) 247-1313 and its fax number is
(303) 247-1315.
MANAGEMENT PROPOSALS
ITEM 1
ELECTION OF DIRECTORS
Term of Office. The directors hold office until the next annual
meeting of stockholders and/or serve until their resignation or their
successors are duly elected and qualified. The Bylaws of the Company
provide that the number of directors will be determined by the Board
of Directors, but shall not be less than three (3) unless there are
less than three shareholders, in which case there shall be as many
directors as shareholders. Although the Board of Directors of the
Company does not contemplate that any of the nominees will be unable
to serve, if such a situation arises prior to the Annual Meeting, the
persons named in the enclosed Proxy will vote for the election of such
person(s) as may be nominated by the Board of Directors. The Board of
Directors has designated that for an indeterminate period the number
of members will be reduced from five (5) to three (3) directors, and
have proposed the following slate of nominees:
DIRECTOR NOMINEES
Thomas P. Raabe (45) Mr. Raabe has served as Chief Executive Officer
and Director of the Company since May 1, 1998. Mr. Raabe formerly
served as special securities and business counsel on specific projects
from time to time for the Company since approximately 1994. Mr. Raabe
has 17 years experience as an entrepreneurial attorney and business
consultant, practicing law in Colorado and representing corporate
clients in complex situations across the nation. As a solo
practitioner, Mr. Raabe has specialized in securities transactions and
compliance, entity formation and governance, business reorganizations,
mergers and acquisitions, and technology protection and exploitation.
Mr. Raabe has been a founder, director and/or counsel for a number of
start-up and development stage companies including robotics, high-
technology, durable medical equipment, advanced composites, optics,
engineering, film entertainment and most recently, outdoor and extreme
sports ventures. Mr. Raabe has been involved as special counsel for a
number of public and private companies with the responsibility to
design and execute corporate finance transactions, capital
restructuring projects and corporate securities compliance for several
Securities Exchange Act reporting companies. During 1995 and 1996,
Mr. Raabe served as Chairman of the Board and Chief Executive Officer
of Quality Products, Inc., a $35 million formerly AMEX listed company
("Quality") as a member of a team installed by a dissident shareholder
group to remove management and turn around three operating
subsidiaries. Mr. Raabe served as CEO and director of the parent as
well as senior executive officer and director of the subsidiaries for
a period of 12 months during which two of the three subsidiaries were
determined not capable of rehabilitation and liquidated to pay down
the secured creditor. The remaining subsidiary company, a manufacturer
of hydraulic presses in Columbus, Ohio was Quality's only profitable
operation and was preserved. One of this company's subsidiaries, a
sports-related consumer products manufacturer filed and completed a
Liquidating Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code during Mr. Raabe's tenure there. Mr. Raabe completed
the legal and transactional steps necessary and, in February, 1997,
left the company on its way back to profitability. Mr. Raabe then
formed Boulder Sports, LLC to pursue acquisition and capital funding
transactions, with principal focus on extreme and outdoor adventure
sports related technologies and businesses. Mr. Raabe received his
undergraduate degree in political science from the University of
Denver and his Juris Doctorate from the University of Denver College
of Law, in 1981. In addition, Mr. Raabe pursued a graduate degree in
Mineral Economics jointly with his law degree and completed three
semesters graduate course work and comprehensive examinations toward a
doctorate degree from the Colorado School of Mines.
Thomas Y. Gorman (41) Mr. Gorman is currently employed in Aurora,
Colorado as Chief Financial Officer of In-Store Media Systems, Inc.
In Store Media Systems, Inc. is in the business of distributing and
redeeming packaged goods manufacturers' coupons. In-Store is a
publicly traded company. From 1993 to 1998, Mr. Gorman was Director
of Business Development for PAC Enterprises, Inc. which is involved in
the building of beverage can manufacturing plants around the world.
While at PAC Enterprises he coordinated the financing of turn-key and
joint venture aluminum can manufacturing plants in Asia, Africa, South
America, Eastern Europe and Russia. As an outside director Mr. Gorman
will bring his extensive financial, business analysis and marketing
expertise and contacts to help the Company's search for and evaluation
of new business opportunities. Mr. Gorman earned his BA in Economics
from DePauw University and his MBA from the University of Colorado.
Keith A. Talbot (40) Mr. Talbot is Managing Member and Chief
Executive Officer of SourceOne Worldwide, LLC, a Colorado Limited
Liability Company and is principally owned by Mr. Talbot.. Mr. Talbot
is trained as an Industrial Engineer and prior to purchasing SourceOne
from his former employer, was principally engaged as a turn-around
expert. Mr. Talbot's company is engaged in printing, direct-mail,
customer service, fulfillment, telemarketing and a broad range of
marketing support services. Mr. Talbot's experience and present
employment will be highly beneficial to the Company's current turn-
around efforts. From 1996 to 1997, Mr. Talbot served as General
Manager of AGI, a commercial printing company serving the
entertainment, multi-media and cosmetics industry. From 1994 to 1996
Mr. Talbot was General Manager of Neodata a direct marketing services
company in the publishing, consumer products and service industries.
From 1991 to 1994 he was a Plant Manager for Avery Dennison a multi-
billion dollar industrial products company where he was responsible
for managing a $35 million operating budget and implementing a
turnaround plan. Since 1980 he has served in similar capacities with
Frito-Lay and Deere & Company. Mr. Talbot earned his BS degree in
Industrial Engineering from the University of Michigan and his MBA
from the University of Northern Iowa.
THE BOARD OF DIRECTORS HAS NOMINATED THE ABOVE-REFERENCED DIRECTORS
FOR ELECTION BY THE STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR
THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE. THE ELECTION OF
THESE DIRECTORS REQUIRES A PLURALITY OF THE VOTES CAST BY THE HOLDERS
OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS PRESENT OR
REPRESENTED BY PROXY AT THE ANNUAL MEETING AND ENTITLED TO VOTE IN THE
ELECTION OF DIRECTORS.
ITEM 2
ADOPTION OF THE 1999 OMNIBUS STOCK OPTION AND INCENTIVE PLAN
The 1999 Omnibus Stock Option and Incentive Plan (the "Plan") was
adopted by the Board of Directors effective April 1, 1999, subject to
approval of the Stockholders. If approved by the Stockholders, the
Plan will allow both qualified and non-qualified stock option grants
and stock appreciation rights, restricted stock purchase rights,
bonuses and performance awards, stock compensation in lieu of salary
and dividend equivalents as determined by the Board of Directors,
("Board") or a committee, ("Committee") appointed by the Board of
Directors to administer the Plan. A summary of the Plan is set forth
below, and the full text of the Plan will be provided at the meeting
or to shareholders making a request for a copy prior to the date of
the meeting. The Company has designated approximately 30 Million
shares to the Plan which will be reserved directors, management and
for future grants to key employees, directors and
consultants/advisors.
Under SEC and IRS rules governing eligibility and administration, the
plan will be administered by a committee of two disinterested
directors, Mr. Gorman and Mr. Talbot, with Mr. Raabe serving as an
alternate. In order to compensate the two committee members with
eligible compensation, their compensation must be designated within
the plan and approved by the shareholders at the meeting. The Board
has designated that Mr. Gorman and Mr. Talbot each receive: (1) a
qualified stock option to purchase $25,000 face value (or 2,500 shares
at $ 10.00 liquidation and redemption price per share) of Class A
Preferred Stock with an initial conversion rate into shares of Common
Stock at $0.0088 per share commencing six months from the date of
grant and expiring 2 years from each vesting date. The options will
vest as to 1/2 of the total shares granted at the end of first six
month's period and 1/4 of such shares for each fiscal quarter
thereafter, if the director is still serving on the board of directors
at the time of vesting; plus (2) common stock bonuses of 2,500,000
shares of the no par value common stock of the Company valued at
$0.0077 per common share but to be issued upon approval of the plan by
the shareholders, 1/4 of the total shares to be delivered at the end
of each fiscal quarter provided such director is still serving on the
board of directors at such time.
Eligibility. The Plan is open to key employees (including officers and
directors), consultants of the Company and its affiliates ("Eligible
Persons").
Transferability. Awards under the Plan are not transferable.
Changes in the Company"s Capital Structure. The Plan will not effect
the right of the Company to authorize adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure.
In the event of an adjustment, recapitalization or reorganization the
award shall be adjusted accordingly. In the event of a merger,
consolidation, or liquidation, the Eligible Person will be eligible to
receive a like number of shares of stock in the new entity he would
have been entitled to if immediately prior to the merger he had
exercised his option. The Board or the Committee may waive any
limitations imposed under the Plan so that all options are immediately
exercisable.
Options and Sars. The Company may grant qualified and nonqualified
incentive stock options and stock appreciation rights (SARS).
Option price. Incentive options shall be not less than the greater of
(i)100% of fair market value on the date of grant, or (ii) the
aggregate par value of the shares of stock on the date of grant. The
Board or the Committee, at its option, may provide for a price greater
than 100% of fair market value. The price for 10% or more Stockholders
shall be not less than 110% of fair market value.
Duration. No option or SAR may be exercisable after the period of 10
years. In the case of a 10% or more Stockholder no incentive option
may be exercisable after the expiration of five years.
Amount exercisable-incentive options. No option may be exercisable
within six months from its date of grant. In the event an Eligible
Person exercises incentive options during the calendar year whose
aggregate fair market value exceeds $100,000, the exercise of options
over $100,000 will be considered non-qualified stock options.
Exercise of Options. Options may be exercised by written notice to the
Board or the Committee with:
(i) cash, certified check, bank draft, or postal or express money
order payable to the order of the Company for an amount equal to the
option price of the shares;
(ii) by surrender of stock owned by the Eligible Person at its fair
market value on the date of exercise;
(iii) by cancellation of indebtedness owed by the Company
to the Eligible Person;
(iv) with a full recourse promissory note executed by the Eligible
Person;
(v) any combination of the foregoing.
Sars. SARs may, at the discretion of the Board or the Committee, be
granted under the Plan to permit the Eligible Person to receive a
number of shares or a cash amount or a combination of cash and Shares
based upon the Fair Market Value, book value or other measure
determined by the Board or the Committee.
Restricted Stock Awards. The Board or the Committee may issue shares
of stock to an Eligible Person subject to the terms of a restricted
stock agreement. The restricted stock may be issued for no payment by
the Eligible Person or for a payment below the fair market value on
the date of grant. Restricted stock shall be subject to restrictions
as to sale, transfer, alienation, pledge or other encumbrance and
generally will be subject to vesting over a period of time specified
in the restricted stock agreement. The Board or the Committee shall
determine the period of vesting, the number of shares, the price, if
any, of stock included in a restricted stock award, and the other
terms and provisions which are included in a restricted stock
agreement.
Award of Stock Payments. The Board or the Committee may award shares
of stock to Eligible Persons who elect to receive such payments . The
number of Shares will be determined by the Board or the Committee and
may be based upon the fair market value, book value or other measure
of the value of such shares on the date of the Award.
Amendment or Termination of the Plan. The Board or the Committee may
amend, terminate or suspend the Plan at any time, in its sole and
absolute discretion; provided, however, that to the extent required to
qualify the Plan under Rule 16b-3 promulgated under Section 16 of the
Exchange Act, no amendment that would (a) materially increase the
number of shares of stock that may be issued under the Plan, (b)
materially modify the requirements as to eligibility for participation
in the Plan, or (c) otherwise materially increase the benefits
accruing to participants under the Plan, shall be made without the
approval of the Company"s Stockholders.
THE BOARD OF DIRECTORS HAS APPROVED THE ADOPTION OF THE PLAN AND
UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSED PLAN. SUCH ADOPTION
REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF SHARES
OF COMMON STOCK AND COMMON STOCK EQUIVALENTS PRESENT OR REPRESENTED BY
PROXY AND ENTITLED TO VOTE AT THE ANNUAL MEETING.
ITEM 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Schumacher & Associates, Inc., Englewood, Colorado has served as the
Company's independent auditors since fiscal year ended March 31, 1995
and has been appointed by the Board to continue as the Company's
independent auditors for the fiscal year ending December 31, 1999. In
the event that ratification of this selection of auditors is not
approved by a majority of the shares of Common Stock voting at the
Annual Meeting in person or by proxy, the Board will reconsider its
selection of auditors.
A representative of Schumacher & Associates, Inc. is expected to be
present at the Annual Meeting. This representative will have an
opportunity to make a statement and will be available to respond to
appropriate questions.
THE BOARD OF DIRECTORS HAS APPOINTED AND UNANIMOUSLY RECOMMENDS A VOTE
FOR THE RATIFICATION OF SCHUMACHER & ASSOCIATES, INC. AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
RATIFICATION OF THE APPOINTMENT REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF SHARES OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS PRESENT OR REPRESENTED BY PROXY AND ENTITLED TO VOTE AT
THE ANNUAL MEETING.
ADDITIONAL INFORMATION
Identification of Directors and Executive Officers
The following table sets forth the names, ages, nature of all
positions and offices held by all directors and executive officers of
the Company as of the latest practicable date, and the period or
periods during which each such director or executive officer served in
their respective positions.
<TABLE>
<CAPTION>
Date of
Date of Election Termination or
Name Age Positions Held or Designation Resignation
<S> <C> <C> <C> <C>
Thomas P. Raabe (1) 45 Chairman; CEO, Pres. 5/1/98 N/A
Thomas Y. Gorman (1) 38 Director 9/1/98 N/A
Keith A. Talbot (1) 40 Director 9/1/98 N/A
Steven E. Reichert 50 Director 9/1/98 4/21/99 (2)
Fred C. Boethling 52 Director 5/1/98 4/21/99 (2)
CFO, Secy & Treas.
</TABLE>
(1) Biographical information furnished in Item 1.
(2) Effective Date of Resignations.
Directorships and Family Relationships. None of the directors hold
directorships in any other public companies. None of the directors
(nominees) are related by way of family relationship to any of the
other directors or officers of the Company.
Board of Directors, Committees and Meetings. The board currently has
no specialized committees, although the Company's by-laws provide for
the creation of such committees. The full board will operate as
compensation and audit committee until the board is able to expand.
The compensation committee will review all officer compensation and
will manage employee benefit plans including the proposed 1999 Omnibus
Stock Option and Incentive Plan. The auditing committee will be
charged with monitoring and setting all accounting principals,
reporting systems, internal accounting and bookkeeping procedures for
the company and will oversee the activities of the company's outside
independent auditors.
During the last fiscal year, there was one organizational meeting of
the board of directors who acted otherwise by unanimous written
consent.
Directors' Fees. Board Members who are also employees currently
receive no fees or other compensation for their services as directors.
Outside directors will receive a small fee for attending meetings and
will be reimbursed their reasonable out of pocket expenses incurred in
attending board and committee meetings. Each director will be
eligible to receive options and other incentives from the 1999 Omnibus
Stock and Incentive Plan more particularly described in disclosure set
forth for Item No. 2 hereof. All directors are entitled to
reimbursement for reasonable expenses incurred in attending such
meetings.
Compliance with Section 16(a) of the Exchange Act. The Company
files its periodic and annual reports pursuant to Section 15(d) of the
Securities Exchange Act of 1934, accordingly, directors, executive
officers and 10% stockholders are not required under Section 16 of the
Securities Exchange Act of 1934 to file reports of ownership and
changes of ownership with the Securities and Exchange Commission.
Biographical Information for Resigning Officers and Directors.
The following information is provided as to two individuals who are
resigning effective April 21, 1999.
Fred C. Boethling (52) Mr. Boethling has served as Chief Financial
Officer, Secretary/Treasurer and Director of the Company since May 1,
1998. Mr. Boethling is Co-Managing Partner of Capstone Partners. Mr.
Boethling's career is characterized by entrepreneurial initiative and
employment of strict and fundamental business principals to the
development of business enterprises. From 1989 to 1993, Mr. Boethling
was President, CEO and Chairman of the Board of Directors of KLH
Engineering Group, Inc, a NASDAQ-listed engineering services holding
company. During this period, Mr. Boethling developed the in-house
management systems and procedures, developed and managed the company's
acquisition program, evaluated over 400 acquisition candidates and
completed 17 acquisitions. From 1983 to 1988, Mr. Boethling was
Chairman of Sandstone Capital Corp., a private management consulting
and investment firm specializing in start-ups. From 1979 to 1982, he
was a co-founder, President and Director of Hart Exploration &
Production Co., a NASDAQ-listed independent oil and gas firm. Prior
to that, for a period of eleven years, Mr. Boethling was employed by
Cities Service Oil Co., a Tulsa, Oklahoma-based, NYSE-listed major oil
company, first as an Engineer in Midland, Texas and then as
Exploration Manager for Canada-Cities Service, Ltd., the Canadian
subsidiary of Cities Service. Mr. Boethling graduated 1968 from the
University of Minnesota with a Bachelor"s degree in engineering. Mr.
Boethling is resigning to return to full time business and financial
consulting for existing clients.
Steven E. Reichert (50) Mr. Reichert presently serves as a director
and will not be standing for re-election due to substantial time
commitments elsewhere. Mr. Reichert is Co-Managing Partner of
Capstone Partners with Mr. Boethling. From 1991 to 1994, Mr. Reichert
was associated with the international law firm of Popham, Haik,
Schnobrich & Kaufman, Ltd. where he practiced in the area of
securities and complex commercial litigation. Prior to that, Mr.
Reichert was a founder and Senior Vice President and Director
responsible for strategic planning, acquisitions and capital
development for Sequal Corporation, a NASDAQ-listed, Denver-based
telecommunications company. From 1979 to 1982, Mr. Reichert was a co-
founder, Senior Vice President and Director of Hart Exploration &
Production Co., a NASDAQ-listed independent oil and gas firm. From
1966 to 1979, Mr. Reichert was Vice President in charge of the
Underwriting Department at Dain Bosworth, Inc. a regional investment
banking firm. He is a member of the Board of Arbitrators for the
National Association of Securities Dealers. Mr. Reichert earned his
Juris Doctor degree (Cum Laude) from Hamline University School of Law
and a BA in economics from the University of Minnesota.
Executive Compensation
Cash Compensation Table
The following table sets forth the aggregate compensation paid
by the Company for services rendered during the periods indicated:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year or Other Restricted All Other
Principal Period $ $ Annual Stock Option/ LTIP Compensation
Position Ended Salary Bonus Comp. Awards SAR's Payouts ($)
($) (#) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas P. 12/31/98 $60,000(1) $5,000(1) $75,000(2)
Raabe, CEO,
Chairman
Fred. C. 12/31/98 $20,000 (3) $75,000(2)
Boethling,
CFO, Dir.
Stephen E. 12/31/98 $15,000 N/A
Cayou 3/31/98 $30,000 $1,200(4)
Chairman, 3/31/97 $30,000 $16,050(4)
President(3)
</TABLE>
(1) Annual Salary of $90,000 or $7,500 per month has been paid
exclusively in the form of common stock. Option granted for 5 million
shares was below market by approximately 20% due to volume and price
limitations as well as resale limitations. That option was granted
and immediately exercised and is not disclosed elsewhere.
(2) Attributed at 1/3 of an earn-in incentive bonus of 20,000,000
restricted shares vested in October, 1998 valued at $0.0075, for
assuming control to turn the company around.
(3) Annual Salary of $90,000 reduced to 1/3 or $30,000 via commitment
of that amount of time, was paid exclusively with common stock.
(4) Mr. Cayou resigned May 1, 1998 and was paid severance pay in fye
12/31/98 of $15,000 in common stock. Attributed as one-half of the
amount of a management fee of $32,100 paid to Liberty Capital by the
Company during the pendency of the Bankruptcy Case, during fiscal year
ended March 31, 1996, and one-half of the amount of a management fee
of $2,400 paid to Liberty during fiscal year ended March 31, 1997.
Termination of Employment and Change of Control Arrangement.
Other than as set forth below, there are no compensatory plans or
arrangements, including payments to be received from the Company, with
respect to any person named in the Cash Compensation Tables set out
above which would in any way result in payments to any such person
because of his resignation, retirement or other termination of such
person's employment with the Company or its subsidiaries, or any
change in control of the Company, or a change in the person's
responsibilities following a change in control of the Company.
Notwithstanding the foregoing, Messrs. Cayou and Skinner each received
588,235 shares of common stock as severance pay on their resignation
effective May 1, 1998. Secondly, provisions are contained in the
referenced Change in Control Agreement providing that through May 1,
1999, one year from the effective date of such agreement, in the event
that Liberty Capital, Cayou, Skinner or any shareholders of the
Company act to remove Messrs. Raabe and/or Boethling as management of
the Company, the Company shall pay Raabe and Boethling a $500,000
break-up fee in cash or stock of the Company. In addition, should
such an event happen during that year, the stock purchase agreement in
which the Company has acquired its interest in Aggression Sports, Inc.
can be unwound. The break-up fee would be adjusted by the fair market
value of any securities issued to Boethling and Raabe. (See - Certain
Relationships and Related Transactions, Subsequent Event). Also,
pursuant to the employment agreements between the Company and Messrs
Raabe and Boethling, provide for severance pay and vesting of benefits
under circumstances of termination without cause.
Employment Contracts of Executives with Company. Messrs.
Raabe and Boethling have employment contracts with the Company,
executed in November of 1998 which provide for base annual salaries of
$90,000 per year, plus vacation pay, standard employee benefits,
reimbursement of business expenses including providing office, phone,
secretarial assistance and other operating support. The term of the
agreement is two years from the original date or any renewal date.
The agreements automatically renew for a successive two year period on
each anniversary date of the agreement. The employment provides that
accrued and unpaid salary or incentive pay can be taken in the form of
Series A Preferred Stock and/or common stock. The employment
agreements further provide for incentive and performance based
compensation subject to good faith negotiation with the board of
directors. The employment agreement incorporates certain terms of the
referenced change in control agreement which provides that the
employees will be paid success fees for closing transactions which
either provide assets, revenue or relationships of substantial value
to the Company, based on a modified Lehman's formula. Termination
without cause prior to the termination of the agreement, results in
vesting of all contingent benefits, stock options and mandates
severance pay in the amount of unpaid, unaccrued salary remaining
under the full term of the employment agreement. The executives have
been granted a security interest in certain assets of the Company to
secure this obligation.
Security Ownership of Certain Beneficial Owners and Management.
The following tables set forth the shareholdings of the
Company's directors and executive officers and those persons who own
more than 5% of the Company's common stock as of April 20, 1999.
(a) Stock Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership
<S> <C> <C> <C>
Common Stock Liberty Capital Corp. 17,866,714 Shares-
490 Orchard St., Golden, Direct
Co. 80401 55,000,000 Shares -
Indirect (1)
Tot. 72,866,714 26.7%
Common Stock Boulder Sports, LLC c/o 20,000,000 Shares -
2305 Canyon Blvd., Direct
Suite 103, Boulder, 87,385,075 Shares
Colorado 80302 Indirect (1)(2)
Tot. 107,385,075 39.3%
Common Stock of 1,250,000 Shares
Aggression Sports, Inc. Direct (3) 56%
Common Stock Voting Trust (1) 72,866,714 Shares - 26.7%
Direct
Common Stock Aggression Sports, Inc. 30,000,000 Shares
Direct (3)
42,866,714
Indirect(1)
Tot. 72,866,714 26.7%
Common Stock Gary McMullen 14,518,361 Shares
8050 Ronson Rd Direct
Suite 200 15,606,639 Options (4)
San Diego, CA 92111 Tot. 30,125,000 11% Common
Class B Preferred 13,125,000 Sh. Dir. 100% of B
</TABLE>
(1) Voting Trust including shares issued to Aggression Sports,
Boulder Sports, LLC., Liberty Capital, Corp., Peter N. Hobbs, expires
May 1, 1999, pursuant to the Change in Control Agreement of April 30,
1998, Thomas Y. Gorman, Voting Trustee c/o 2305 Canyon Blvd., Suite
103, Boulder, Co. 80302. Voting Trustee will vote these shares
according to the wishes of the respective beneficial owners.
(2) Per agreement with the Company, Boulder Sports, LLC is given
voting power over common shares issued on conversion of Class B
Preferred and common stock issued to McMullen on payment of $100,000
investment subscription.
(3) Aggression Sports, Inc. is owned 44% by the Company and 56% by
Boulder Sports, LLC until the Company infuses $100,000 cash into
Aggression at which time it will control 54.5%. Mike Lowe has a
contingent option to acquire 20% of Aggression under certain
circumstances. At this time Boulder Sports, LLC is attributed
beneficial ownership of the 30,000,000 shares of the Company that
Aggression owns. These shares are also part of the voting trust.
(4) McMullen has the right to convert balance of outstanding Series B
Preferred into 13,125,000 and has a pending subscription to purchase
2,481,639 shares of Common Stock. These shares are issued, are in
escrow pending payment in full of subscription amounts.
(b) Stock Ownership of Management
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership
<S> <C> <C> <C>
Common Stock Thomas P. Raabe 5,460,941 Shares Direct
c/o 2305 Canyon Blvd.,
Suite 103, Boulder, 92,385,075 Shares
Colorado 80302 Indirect(1)(3)
Tot. 103,018,094 (2a) 37%
Ser. A Preferred. $45,000 face value
Common Stock Fred Boethling 937,500 Direct*
c/o 2305 Canyon Blvd., 87,385,075 Shares
Suite 103, Boulder, Co Indirect(l)
80302 Tot. 90,046,601 (2b) 32.8%
Ser. A Preferred $15,000 face value
Common Stock Steven E. Reichert 250,000 direct
c/o 2305 Canyon Blvd., 87,385,075 Shares
Suite 103, Boulder, Indirect(l) 32.1%
Colorado 80302 Tot. 87,635,075
Common Stock Thomas Y. Gorman 250,000 direct(4)
c/o 2305 Canyon Blvd., Total 250,000 Nil
Suite 103, Boulder, Co.
80302
Common Stock Keith Talbot 250,000 direct(4)
c/o 2305 Canyon Blvd., Total 250,000 Nil
Suite 103, Boulder,
Colorado 80302
Common Stock All Officers and Directors
as a Group(3) 106,429,620 38.9 %
</TABLE>
(1) Aggregated with shares in voting trust and shares of McMullen
proxied to Boulder Sports, LLC. Messrs. Raabe, Boethling and Reichert
are co-owners of Boulder Sports, LLC. which is a participant in the
Voting Trust, and share voting and investment power over the
referenced securities of the Company held beneficially, directly and
indirectly, by Boulder Sports, LLC (and shared with other parties to
the Voting Trust) and are therefore shown as beneficial owners of the
same securities. They are also therefore beneficial owners of the
shares of Aggression Sports, Inc.
(2) Series A Preferred converts at the option of holder into common
stock at 110% of the fair market value at the time of issuance or at
the time of conversion, whichever is less. (a) Raabe: converts to
5,172,078; (b) Boethling 1,724,026.
(3) 5,000,000 shares attributable to Mr. Raabe from a Trust.
(4) Messrs. Gorman and Talbot each have been granted options to
purchase 250,000 shares of common stock at $0.009 per share under the
1998 Omnibus Stock Option and Incentive Plan.
Contractual Arrangements Regarding Changes in Control. There
are no arrangements known to management, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in the control of the Company.
Pursuant to terms of the Series A Preferred, in the event that either,
dividends are not paid or the stock is not redeemed within 12 months
from the date issued, holders of Series A Preferred entitled by virtue
of the Company's default of such provision, may call a special
shareholders' meeting and elect a majority of the board of directors
until such dividends are brought current or the shares are redeemed in
full, plus accrued dividends.
Compliance With Section 16(a) of the Exchange Act. The Company
files reports under Section l5(d) of the Securities Exchange Act of
1934; accordingly, directors, executive officers and 10% stockholders
are not required to make filings under Section 16 of the Securities
Exchange Act of 1934.
Certain Relationships and Related Transactions.
Transactions with Management and Others.
Liberty Capital and the Company were parties to an equipment
lease of certain equipment acquired by Liberty Capital from a secured
creditor of the Company. The terms of the agreement provided for 24
monthly payments of $1,400 commencing May 1, 1995. Effective April 1,
1997, the Company purchased the equipment subject to this lease for
$42,800 and repaid back lease payments of $23,200 in exchange for
4,640,000 shares of the Company's common stock valued by the Board of
Directors at $0.015 per share.
During the year ended March 31, 1998, the Company repaid cash
advances made by Liberty in the amount of $235,596 with a total of
15,706,380 shares of the Company's common stock. Such stock was
valued by the Board of Directors at $0.015 per share.
During the nine month period ended December 31, 1998, the
Company issued 30 million shares valued at $150,000 to a new company
formed pursuant to the Change in Control Agreement, Aggression Sports,
Inc. ("Aggression") for a 44% equity interest (1,000,000 shares) and
agreed to purchase $100,000 in additional common stock (500,000
shares) of Aggression to acquire a controlling interest. The majority
of shares of Aggression are owned by Boulder Sports, LLC., an entity
controlled by the Company's CEO and CFO. Additionally, on May 1, 1998
the Company issued 20,000,000 to Boulder Sports, LLC as nominee for
the two executive officers as contingent compensation for meeting
certain benchmarks set forth in the referenced Change in Control
Agreement. Those shares vested by act of the board of directors on
October 30, 1998. Also, per the Change in Control Agreement, the
Company issued 10 million common shares to the general manager
contingent on his remaining in the employ of the Company. This
individual resigned prior to vesting of 5 million of these shares and
they were returned and cancelled.
During the nine month period ended December 31, 1998, the
Company entered into an agreement with the holder of the Class B
Preferred Stock to convert the shares into common stock. The Company
agreed to modify the conversion price from $0.125 per share to $0.025
per share and to convert the B Preferred as and in the same proportion
as, the holder paid a subscription to purchase 17 million restricted
common shares for $100,000 cash. This agreement is being completed
with the assistance of the CEO to locate non-affiliated buyers for the
shares issuable on conversion of the Preferred on behalf of the
holder. To date, the Company has received $85,400 in proceeds from
the Preferred holder, and has issued 14,518,361 shares to the holder
and issued 15,275,000 shares of common on conversion of the B
Preferred. (See - Note 6 to Financial Statements).
In August of 1998, the CEO was issued and exercised an option to
purchase 5 million shares of common stock for $25,000, the proceeds of
which funded a certificate of deposit which was pledged as collateral
to a working capital line of credit issued to the Company.
Additionally, an affiliate of the CEO pledged a $25,000 Certificate of
Deposit against $25,000 additional credit on the referenced working
capital line of credit, for the Company. The Company issued 5 million
shares to the affiliate, 2.5 million shares as collateral for return
of the $25,000 CD, and the balance as prepaid interest on the loan.
(See Note 9 to Financial Statements).
Pursuant to the Change in Control Agreement, Messrs. Raabe and
Boethling are entitled to be paid transactional fees for completing
successful transactions on behalf of the Company including capital
funding transactions, acquisitions including mergers, asset purchases
and acquisitions by reverse merger or share for share exchange. The
fees are a Lehman's formula based on the aggregate gross value of the
transaction payable in cash and/or securities at the option of the
Company. Also, Messrs. Raabe and Boethling were paid a management fee
of $60,000 in the form of registered common stock for six months
ending November 1, 1998. On November 1, 1998 employment agreements
were executed between the Company and Messrs. Raabe and Boethling.
The Company pays a monthly office stipend of $1,500 to Messrs.
Boethling and Raabe for their offices in Boulder, which they share
partially with the Company.
Pursuant to the Change in Control Agreement, Messrs. Raabe and
Boethling are entitled to a break-up fee of $500,000 in the event that
either former management or shareholders remove them from office or
otherwise impair their ability to execute the turn-around for a period
of 1 year from the date of the agreement. The Company granted Messrs.
Raabe and Boethling a senior secured position in all assets and
equipment of the Company to cover this contingency. Additionally,
after 1 year from the inception date of the agreement, in the event
that Messrs. Raabe and Boethling are removed from office or as
directors of the Company, they will have the right to acquire the
shares of Aggression held by the Company or to put their Aggression
shares to the Company at their fair market value.
Subsequent Events.
Subsequent to December 31, 1998, the Company closed down its
operations in Iowa and moved the operations to Colorado. Also,
subsequent to December 31, 1998, the Company issued 4,625,000
registered common 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. Also, during the period ended December 31,
1998, as required in the employment agreements of Messrs. Raabe and
Boethling, the board of directors authorized a Series A Preferred
Stock to be reserved for issuance to employees and consultants for
compensation. Subsequent to December 31, 1998, the Company issued
$45,000 in face value of the Series A Preferred to the Company's CEO
and $15,000 in face value to the Company's CFO, in lieu of salary for
the 6 month period from, November 1, 1998 through April 30, 1999.
Also, subsequent to December 31, 1998, the Company entered into a
Joint Venture agreement with an unaffiliated third party to outsource
its current print and direct mailing requirements during an interim
period of approximately 6 months. During this interim period, the
Company has undertaken to raise funds to purchase commercial pre-press
and printing and finishing equipment to outfit a full scale commercial
printing operation to handle the Company's needs along with those of
the Joint Venture Partner and new business generated internally by the
new printing company. Upon funding and acquisition of equipment, the
Company will own the new printing company and the joint venture
partner will have a 20% earn-in right provided it meets certain
required levels of usage.
Also, subsequent to December 31, 1998, the compensation committee
granted stock options to purchase 16 million shares of common stock at
$0.009 per share and 7,500,000 share common stock bonuses to the
Company's CEO and two outside directors for a total of 23,500,000
shares. The options to the outside directors vest 1/2 after six
months from the date of grant and 1/4 of such shares at the end of
each calendar quarter thereafter.
COST OF SOLICITATION
The Company will bear the cost of the solicitation of proxies from its
stockholders. In addition to the use of mail, proxies may be solicited
by directors, officers and regular employees of the Company in person
or by telephone or other means of communication. The directors,
officers and employees of the Company will not be compensated
additionally for the solicitation, but may be reimbursed for out-of-
pocket expenses in connection with this solicitation. Arrangements are
also being made with brokerage houses and any other custodians,
nominees and fiduciaries for the forwarding of solicitation material
to the beneficial owners of the Company"s Common Stock, and the
Company will reimburse such brokers, custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses.
OTHER MATTERS
Management is not aware of any other matters to be presented for
action at the Annual Meeting. However, if any other matter is properly
presented, it is the intention of the persons named in the enclosed
proxy to vote in accordance with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
By: Thomas P. Raabe
Chief Executive Officer
April 30, 1999
