FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the period ended: June 30, 1999
or
[ ] Transition Report Pursuance to Section 13 or 15(d) of the Securities
Exchange act of 1934. For the transition period from to
Commission File Number 33-16820-D
ARETE INDUSTRIES, INC.
(Exact name of registrant 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, CO 80302
(Address of principal executive offices) (Zip Code)
(303) 247-1313
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report.)
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.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
[ X ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 6, 1999, Registrant had 284,615,516 shares of common stock,
No par value, outstanding.
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INDEX
Page
Number
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Part I. Financial Information
Item I. Financial Statements
Balance Sheet as of June 30, 1999 2
Statements of Operations, Three Months
Ended June 30, 1999 and 1998 3
Statements of Operations, Six Months
Ended June 30, 1999 and 1998 4
Statements of Cash Flows, Three Months
Ended June 30, 1999 and 1998 5
Statements of Cash Flows, Six Months
Ended June 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 8
Part II. Other Information 9
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ARETE INDUSTRIES, INC.
BALANCE SHEET
June 30, 1999
(Unaudited)
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Current Assets
Cash $ 56,960
Accounts receivable, net of allowance for
doubtful accounts of $25,000 120,725
__________
Total Current Assets $ 177,685
Furniture and equipment, net of accumulated
depreciation (Note 2) 2,329
Prepaid Expenses 19,416
Other Investments 38,188
__________
Total Assets $ 237,618
Current Liabilities
Accounts payable 305,705
Notes Payable 41,000
Customer deposits (Note 1(e)) -
Other accrued expenses 239,015
_________
Total Current Liabilities $ 585,720
Total Liabilities $ 585,720
Stockholders' (Deficit) Equity:
Redeemable convertible preferred stock - no par
Series A, 3,000 shares issued and outstanding,
$30,000 face value 30,000
Common stock - No par value,
500,000,000 shares authorized;
283,115,516 shares issued and
outstanding as of 630/99 (Note 3) 7,211,457
Accumulated deficit (7,402,652)
Current Period Deficit (186,907)
Total Stockholders' Equity (Deficit) (348,102)
__________
Total Liabilities and Stockholders' (Deficit) $ 237,618
===========
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended June 31,
(Unaudited)
1999 1998
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Sales (1c) $ 171,618 $ 583,782
Cost of goods sold (exclusive of
depreciation shown separately
below) (1c) 126,618 463,578
____________ ____________
Gross Profit 45,000 120,204
Operating Expenses
Depreciation (1d) - 10,923
Bad debts - 5,000
Rent 13,600 21,500
Salaries 160,058 70,230
Other operating expenses 58,222 97,911
Total Operating Expenses 231,880 205,564
____________ _____________
Net Operating (Loss) $ (186,880) $ ( 85,360)
Other Income (Expenses)
Interest Income 107 -
Miscellaneous Income - -
Gain on sale of investment - 4,500
Interest (expense) (134) (1,238)
_____________ _____________
Total Other $ (27) $ 3,262
Net (Loss) $ (186,907) $ (82,098)
_____________ _____________
Net (Loss) per Share $ nil $ nil
Weighted Average Shares Outstanding 282,307,824 216,184,655
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30,
(Unaudited)
1999 1998
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Sales (1c) $ 429,102 $ 860,488
Cost of goods sold (exclusive of
depreciation shown separately
below) (1c) 352,769 679,526
__________ ____________
Gross Profit 76,331 180,962
Operating Expenses
Depreciation (1d) - 26,705
Bad debts - 79,065
Rent 37,365 43,000
Salaries 224,863 153,952
Other operating expenses 122,016 211,881
Total Operating Expenses 384,244 514,603
____________ ____________
Net Operating (Loss) $ (307,913) $ (333,641)
Other Income (Expenses)
Interest Income 420 -
Miscellaneous Income - -
Gain on sale of investment 40,061 4,500
Interest (expense) (1,781) (7,065)
Total Other $ 38,700 $ (2,565)
_____________ ___________
Net (Loss) $ (269,213) $ (336,206)
_____________ ___________
Net (Loss) per Share $ nil $ nil
Weighted Average Shares Outstanding 266,086,314 226,430,264
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30
(Unaudited)
1999 1998
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Cash Flows from Operating Activities:
Net (loss) $ (186,907) $ (82,098)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities
Depreciation - 10.923
Ammortization of Management Fees - 12,500
Stock Issued for Services 99,096 46,000
Increase (Decrease) in Customer
Deposits (Note 1e) (7,274) (6,539)
Increase (Decrease) in Accounts
Payable, Accrued Expenses and
Other 173,185 15,277
(Increase) Decrease in Accounts
Receivable (100,594) (8,261)
_____________ ___________
Net Cash Provided by Operating
Activities (22,494) (12,198)
_____________ ___________
Cash Flows from Investing Activities (23,188) -
Purchase of Equipment (2,329) -
(25,517)
____________ ___________
Cash Flows from Financing Activities:
Note Payable 41,000 -
Proceeds from Issuance of Common Stock 22,148 -
____________ ___________
Net Cash (Used by) Financing
Activities 63,148 -
____________ ___________
Increase (Decrease) in cash 15,137 (12,198)
Cash, beginning of period 41,823 12,198
============ ==========
Cash, end of period $ 56,960 $ -
============ ==========
Interest paid $ 134 $ 1,238
============ ==========
Income taxes paid $ - $ -
============ ==========
The accompanying notes are an integral part of the financial statements.
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ARETE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(Unaudited)
1999 1998
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Cash Flows from Operating Activities:
Net (loss) $ (269,214) $ (336,206)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities
Depreciation - 26,705
Increase (Decrease) in Prepaid Expenses (8,437) 9,737
Stock Issued for Services 153,223 318,335
Increase (Decrease) in Customer
Deposits (Note 1e) (10,791) 110,000
Increase (Decrease) in Accounts
Payable, Accrued Expenses and
Other 247,258 (78,242)
(Increase) Decrease in Accounts
Receivable (106,007) (48,865)
____________ ____________
Net Cash Provided by Operating
Activities 6,032 1,464
___________ ___________
Cash Flows from Investing Activities (23,188) -
___________ ___________
Purchase of Equipment 2,329 -
___________ ___________
Cash Flows from Financing Activities:
Repayment of Note Payable and Advances (48,800) -
Note Payable 41,000 -
Proceeds from Issuance of Common Stock 64,198 -
___________ ___________
Net Cash Added by (Used by) Financing
Activities 56,398 -
___________ ___________
Increase (Decrease) in cash 36,913 13,662
Cash, beginning of period 20,047 (1,464)
___________ ___________
Cash, end of period $ 56,960 $ 12,198
=========== ===========
Interest paid $ 1,781 $ 5,287
=========== ===========
Income taxes paid $ - $ -
=========== ===========
The accompanying notes are an integral part of the financial statements.
ARETE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
(1) Summary of Significant Accounting Policies
a) Condensed Financial Statements
The financial statements included herein have been prepared by Management of
Arete Industries, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted as allowed by such rules and regulations, and management believes
that the disclosures are adequate to make the information presented not
misleading.
The management of Arete Industries, Inc. believes that the accompanying
unaudited condensed financial statements contain all adjustments (including
normal recurring adjustments) necessary to present fairly the operations and
cash flows for the periods presented.
b) Change in Fiscal Year End.
Effective the period ended December 31, 1998, the Company changed its fiscal
year end to December 31, from March 31.
c) Revenue Recognition.
The Company recognizes revenue when goods are shipped and/or services
are provided and when expenses are incurred. Prior period financial
statements include a reclassification of postage expenses from cost
of goods sold to a reduction of sales to be consistent with the
presentation for the period ended June 30, 1999.
d) Furniture and Equipment.
All of the Company's operating equipment has been either liquidated or
relocated to Denver, Colorado during the current period. The Company's
operating equipment is being carried at a fully depreciated value, or zero at
this time, due to this equipment being held after the end of its depreciable
life. Office equipment, costing $2,329, was purchased in the current period.
e) Reclassification of Certain Liability.
Following the end of the second quarter of fye 12/31/98, the Company reclassified
certain Current Liabilities to Current Liabilities - Customer Deposits to account
for advance customer payments received for services which were held pending
completion of work as of the end of the reporting period.
f) 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, and is delinquent on certain
payroll taxes and on payment of creditor liabilities. 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.
2) Recent Sale of Assets.
The Company sold a substantial portion of its operating assets and office
furnishings as a part of the move of operations into facilities of SourceOne
Worldwide, LLC. for $40,061 recorded as a long term gain from sale of equipment.
The balance of operating assets are at the end of their depreciable lives, are
fully depreciated and are carried at $0 book value.
3) Common Stock Issued
During the three month period ended June 30, 1999, 7,500,000 shares of common
stock were issued as compensation payments and bonuses to officers and directors
pursuant to the Company's 1998 Omnibus Stock Option and Incentive Plan
(the "1998 Plan") including 4,500,000 common shares to the CEO and 1,500,000
common shares each to the two outside directors. In addition, 1,500,000
common shares were issued to the former general manager of the Company's
printing and direct mail subsidiary, on exercise of an option granted as
severance for the $15,000 in cash. Also, 1,000,000 common shares were
issued to the General Manger of Aggression Sports, Inc. as compensation
and booked as an advance to Aggression Sports.
4) Stock Options/Grants.
During the period ended June 30, 1999, the Company granted
incentive stock options to its directors and CEO to purchase
up to 16,500,000 shares at an exercise price of $0.011 per
share pursuant to the 1998 Plan including a 10,500,000 share
option to the Company's CEO and a 3,000,000 share option to
the two outside directors.
Also, pursuant to the Company's 1999 Omnibus Stock Option
and Incentive Plan (the "1999 Plan") which was adopted by
the shareholders at the June 11, 1999 annual meeting of
shareholders, the two outside directors, as administrators
of the 1999 Plan, were issued formula awards of contingent
bonuses of 1,250,000 common shares each, issuable in the
amount of one quarter (1/4) of the total amount on the
last day of each fiscal quarter beginning June 30, 1999
provided that such individual is a director or executive
officer of the Company on that date. As part of the same
award, each outside director was awarded an option to
purchase $25,000 in Class A Preferred Stock,
convertible into common shares at an initial
conversion price of $0.00975 per share for a
period of two years after the vesting date. The
options vest quarterly commencing October 1, 1999
as to 1/2 of such shares, and the balance in equal
amounts at the end of the next two fiscal quarters,
again provided that the individual is a director or executive
officer on such date.
5) Accrued Salary
The Company's Chairman and CEO has been accruing all salary
since January, 1999. Pursuant to his employment agreement,
he has the right to exchange accrued salary at any time into
shares of Class A Preferred Stock, Cash or Common Stock, at his
option. The rights, preferences and privileges of such Preferred
Stock has been previously disclosed in the Company's periodic
reports. As of the end of the current period ended June 30,
1999, the CEO had accrued salary of $37,500 plus reimbursable
expenses.
6) Extraordinary and Non-recurring Expenses
During the period ended June 30, 1999, the Company continued to experience
extraordinary and non-recurring expenses in connection with the
closure of its operations in Council Bluffs, Iowa and moving
its print and direct mail operations as well as its accounting
records and controls to Colorado. These expenses include severance payments
to former employees, order cancellations and credits issued to customers
and unresolved overcharges and billing errors from the Company's outsourcing
supplier. Also, during the current period, the Company paid certain non-cash
compensation to directors, executive officers, experts and consultants which
expenses are attributable to the ongoing turnaround and restructuring project.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Arete Industries, Inc. (the "Company") was organized as a Colorado corporation
on June 21, 1987 under the name Travis Investments, Inc. and filed and completed
its initial public offering as a blank check company in that year. The Company
acquired a cooperative coupon direct mail advertising business that year and
since then made several acquisitions of similar businesses. In, 1994 the Company
filed for Chapter 11 Bankruptcy protection and, in 1995, the United States
Bankruptcy Court approved the Company's Chapter 11 Plan of Reorganization.
The Company emerged from its Chapter 11 bankruptcy with its cooperative coupon
franchise business intact along with a small captive coupon printing and mailing
operation located in Council Bluffs, Iowa.
Beginning in May of 1998, with a complete change in management control to its
current management, the Company embarked on a turnaround and restructuring
plan in which it was converted into a holding company with two subsidiaries.
Effective September 1, 1998, all operations and assets of the franchised
cooperative coupon business were transferred into a new, wholly owned
subsidiary, Global Direct Marketing Services, Inc. Also, pursuant to the
change in control agreement, executed by present and former management,
the Company acquired a minority interest in Aggression Sports, Inc.,
which was formed to pursue business in the outdoor sports industry.
Beginning February 1999 and continuing through the current period, the
Company entered into the first phase of a joint venture agreement with
SourceOne Worldwide, LLC in which it outsourced all its printing and
mailing operations from SourceOne's Denver fulfillment facility.
Customer service, graphics and typesetting was temporarily provided by
employees of Global Direct in an executive suite leased from an
unaffiliated party in Council Bluffs, IA, in order to assure
continuity of the relationships with current customers until
the transition to Colorado was complete. In July, 1999, the
Company closed its Council Bluffs operation entirely and
transferred all functions to SourceOne. Bookkeeping and
accounting functions formerly handled by an independent firm
in Iowa were transferred to Colorado as well.
Since the end of the current period, the Company hired two
individuals to review the current business structure and
recommend and implement changes in pricing, franchise structure,
and operating procedures. These changes will be put in place
and implemented by approximately October 1, 1999. These
individuals also are being retained to design a new franchise
system incorporating these changes, prepare and file a new
Uniform Franchise Offering Circular and begin selling new
franchises across the country on behalf of the Company's subsidiary.
Results of Operations
The Company's financial performance has been adversely affected
by the transition from closing its Council Bluffs, Iowa printing and direct mail
facility and starting-up its outsouring relationship in Denver, Co. The Company
plans to reverse these effects by improving systems and controls and making
sweeping changes in its product and service offerings and pricing structure.
Due to late mailings and printing mistakes, customers cancelled orders, and were
given credits to ensure their continued business. Certain customers withdrew
from the Franchise system. The Company generated operating revenues of
approximately $171,618 with cost of goods sold of $126,151 (or 74% of sales)
during the quarter ended June 30, 1999. This is compared to operating revenues
of $583,782 and cost of goods sold of approximately $463,578 (or 80% of sales)
during the quarter ended June 30, 1998. The salary expenses of approximately
$160,058 (or 94% of sales) were incurred during the quarter ended June 30, 1999,
compared to $70,230 (or 12% of sales) in the quarter ended June 30, 1998. The
increase in compensation was due to payment in common stock to directors,
executives and consultants necessary to perform the ongoing turnaround of the
direct mail business and the ongoing restructuring of the Company. The Company
had a net loss of $186,880 (or 100.09% of sales) during the quarter ended
June 30, 1999.
Management was required to estimate its accounts receivable of $120,725 as of
June 30, 1999 due to an unanticipated loss of billing information during the
move to Denver and difficulty experienced by the Company coordinating with the
accounting systems of its oursourcing partner. The Company continues to work
on reconstructing its accounting and billing system and correcting errors.
Liquidity and Capital Resources
Management's efforts to date have been directed at eliminating historic operating
losses caused by fatal deficiencies in its operating systems and equipment
and problems associated with remote management. Management has since discovered
additional flaws in the pricing and product mix of its cooperative coupon
franchise business and is now acting to completely revise these elements. It
is anticipated that after the break-in period, installation of new accounting
and operating systems as well as the pending installation of new equipment at
its outsourcing facility, the Company will begin to experience
growth in sales without ongoing operating losses. The Company has negotiated
a pricing structure with SourceOne going forward which will assure a fixed gross
profit, and has hired two industry veteran franchise sales personnel to begin
to sell franchises nationwide. These moves will enhance cash flow as well as
allow the Company to accumulate working capital to fund growth of
its current business and expand into other more profitable lines of business.
The Company had liabilities in excess of assets at June 30, 1999
of $348,102.
At June 30, 1999, the Company had no material commitments
for capital expenditures.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
During the period ended June 30, 1999, there were no material legal
proceedings initiated by or against the Company or any of its officers,
directors or subsidiaries.
Item 2. Changes in Securities
(a) Changes in Instruments Defining Rights of Security Holders. Previously
reported.
(b) Not Applicable
(c) Item 701 Reg. SB. - There were no unregistered shares of common stock
sold by the registrant during the period covered by this report.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
a) The Company's annual meeting of the shareholders was held on June 11, 1999.
b) The following individuals were elected by the votes shown, as the entire
board of directors of the Company at the annual meeting.
Thomas P. Raabe For: 213,873,415 Withhold: 1,125,319
Thomas Y. Gorman For: 213,963,415 Withhold: 1,035,319
Keith A. Talbot For: 213,902,665 Withhold: 1,096,069
c) Other Business Conducted at the Meeting:
i) Adoption of the 1999 Omnibus Stock Option and Incentive Plan. The Plan
reserves for issuance up to 35,000,000 shares of common stock or common
stock equivalents, preferred stock or equivalents, SAR's, tandem rights
and other incentive awards to officers, directors, employees and consultants.
The two outside directors, Messrs. Talbot and Gorman, were appointed as
administrators under the Plan and a formula award to these individuals
was included in the plan and approved by the shareholders, preserving
the requirement of disinterested directors plan administrators.
(See - Note 4, Notes to Financial Statements and Registrant's
Definitive Proxy Statement, previously filed, as an amendment to
Form 10-KSB for the fiscal year ended Dec. 31, 1998).
Of the total 214,998,734 voting shares represented at the meeting,
the measure adopting this plan was adopted by a vote of 92, 465,174
in favor, 8,781,888 against, 1,489,182 abstentions and 112,262,490 broker
non-votes.
ii) Ratification of Appointment of Independent Auditors. The appointment of
Schumacher & Associates, CPA's as independent auditors of the Company for
the upcoming fiscal year ending December 31, 1999 was passed by a vote of
213,970,052 in favor, 234,000 withheld and 794,682 abstentions.
Item 5. Other Information.
Subsequent Material Event. On August 2, 1999, the U.S. Securities and
Exchange Commission filed a civil action in the U.S. District Court for
the District of Colorado instituting injunctive proceedings against the
Company, its current CEO and its former directors, under Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder pertaining to certain press
releases issued by the Company under former management in February of
1998; and further cited violations of Section 15(d) of the Exchange Act
for Late and Missing filings of periodic reports under the Exchange Act.
The first claim states that the Company issued two false or misleading
press releases in February of 1998 pertaining to an acquisition and
that the current CEO, being a principal of the target company,
participated in the preparation of the press releases. The second
claim states that the Company filed a number of its periodic reports
late including several that were never filed for periods ranging from
inception of the Company to the present. The Company and its current
CEO and former directors and executive officers state that undisputed
evidence obtained during the preceding SEC investigation in which they
voluntarily cooperated, belies any grounds for a fraud claim against
them and/or the Company. Secondly, the Company believes that former
management filed a number of its reports late pursuant to valid
extensions under Rule 12b-25 of the Exchange Act and was exempt
from filing reports during the Company's Chapter 11 Bankruptcy
proceedings for others. The Company further argues that it brought
certain delinquent reports current following the resignation of
its former management and there are therefore no grounds for
sanctions for late or missing filings against the Company or
current management.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are attached:
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Exhibit No. Page No.
10-1 1999 Omnibus Incentive Stock Compensation Plan
Adopted June 11, 1999 EX-10.1
27 Financial Data Schedule EX - 27
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There were no Reports on Form 8-K filed during the period covered by
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: August 23, 1999 By: /s/ Thomas P. Raabe, CEO
Principal Executive Officer,
Principal Financial and
Accounting Officer
ARETE INDUSTRIES, INC.
1999 OMNIBUS STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE.
The Plan is intended to provide incentive to key
employees and directors of, and key consultants,
vendors, customers, and others expected to provide
significant services to the Corporation, to
encourage proprietary interest in the Corporation,
to encourage such key employees to remain in the
employ of the Corporation and its Subsidiaries, to
attract new employees with outstanding
qualifications, and to afford additional incentive
to consultants, vendors, customers, and others to
increase their efforts in providing significant
beneficial services to the Corporation.
2. DEFINITIONS.
2.1 "Award" shall mean an Option which may be
designated an Incentive Stock Option or a Non-
statutory Stock Option, a Purchase Right, a Stock
Appreciation Right or a Stock Payment, in each case
as granted pursuant to the Plan.
2.2 "Award Agreement" shall mean a Stock Option
Agreement, Restricted Stock Agreement or a Purchase
Right Agreement.
2.3 "Beneficiary" shall mean the person, persons,
trust or trusts entitled by will or the laws of
descent and distribution to receive the benefits
specified under the Plan in the event of a
Participant's death.
2.4 "Board" shall mean the Board of Directors of the
Corporation.
2.5 "Code" shall mean the Internal Revenue Code of
1986, as amended.
2.6 "Committee" shall mean the committee, if any,
appointed by the Board in accordance with Section 4
of the Plan.
2.7 "Common Stock" shall mean the Common Stock of
the Corporation.
2.8 "Corporation" shall mean Arete Industries, Inc.
and its Subsidiaries.
2.9 "Disability" shall mean the condition of a
Participant who is unable to (i) perform his or her
substantial and material job duties due to injury or
sickness or such other condition as the Board or
Committee may determine in its sole discretion;
and/or (ii) engage in any substantial gainful
activity by reason of any medically determinable
physical or mental impairment which can be expected
to result in death or which has lasted or can be
expected to last for a continuous period of not less
than twelve (12) months.
2.10 "Discount" shall mean, with respect to the
Purchase Price of Purchase Rights, the discount from
the Fair Market Value of a Share as set forth in
Section 8.3.
2.11 "Dividend Equivalent" shall mean a right to
receive a number of Shares or a cash amount,
determined as provided in Article 12 hereof.
2.12 "Eligible Employee" shall mean an individual
who is employed (within the meaning of Code Section
3401 and the regulations thereunder) by the
Corporation.
2.13 "Event" shall mean any of the following:
(a) Any person or entity (or group of affiliated
persons or entities) who acquired in one or more
transactions, whether before or after the Effective
Date of the Plan, ownership of more than fifty
percent (50%) of the outstanding Shares of stock
entitled to vote in the election of directors of the
Corporation; or
(b) The dissolution or liquidation of the
Corporation or a reorganization, merger or
consolidation of the Corporation with one or more
entities, as a result of which the Corporation is
not the surviving entity, or a sale of all or
substantially all of the assets of the Corporation
as an entirety to another entity.
For purposes of this definition, ownership does not
include ownership: (i) by a person owning such
Shares merely of record (such as a member of a
securities exchange, a nominee or a securities
depository system), (ii) by a person who is a bona
fide pledgee of Shares prior to a default and
determination to exercise powers as an owner of the
Shares, (iii) by a person who is not required to
file a statement on Schedule 13D by virtue of Rule
13d-1(b) of the Securities and Exchange Commission
under the Exchange Act, or (iv) by a person who owns
or holds Shares as an underwriter acquired in
connection with an underwritten offering pending and
for purposes of resale.
2.14 "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended from time to time.
2.15 "Exercise Price" shall mean the price per
Share of Common Stock, determined by the Board or
the Committee, at which an Award may be exercised.
2.16 "Fair Market Value" shall mean the value of one
(1) Share of Common Stock, determined as follows:
(i) if the Shares are traded on an exchange, the
price at which Shares traded at the close of
business on the date of valuation; or
(ii) if the Shares are traded over-the-counter on
the NASDAQ System, the closing bid price if one is
available, or the mean between the bid and asked
prices on said system at the close of business on
the date of valuation; or
(iii) if neither (i) nor (ii) above applies, the
Fair Market Value as determined by the Board or the
Committee in good faith. Such determination shall be
conclusive and binding on all persons.
2.17 "Incentive Stock Option" shall mean an option
described in Section 422A(b) of the Code.
2.18 "Nonstatutory Stock Option" shall mean an
option not described in Section 422(b), 422A(b),
423(b) or 424(b) of the Code.
2.19 "Option" shall mean either an Incentive Stock
Option or a Nonstatutory Stock Option granted
pursuant to the Plan.
2.20 "Participant" shall mean an Eligible Employee
who has received an Award under the Plan.
2.21 "Performance Award" shall mean a cash bonus,
stock bonus or other performance or incentive award
that is paid in cash, stock or a combination of
both.
2.22 "Plan" shall mean the Ar^te Industries, Inc.
1999 Omnibus Stock Option and Incentive Plan, as it
may be amended from time to time.
2.23 "Purchase Price" shall mean the Exercise Price
times the number of Shares with respect to which an
Award is exercised.
2.24 "Purchase Right" shall mean the grant to an
Employee of the right to purchase Shares under the
Plan.
2.25 "Restricted Stock" shall mean those Shares
issued pursuant to a Restricted Stock Award that are
not free of the restrictions set forth in the
related Restricted Stock Agreement.
2.26 "Restricted Stock Award" shall mean an award of
a fixed number of shares subject to payment of such
consideration, if any, and such forfeiture
provisions, as are set forth in the related
Restricted Stock Agreement.
2.27 "Retirement" shall mean the voluntary
termination of employment by an Employee upon the
attainment of age sixty-five (65) and the completion
of not less than twenty (20) years of service with
the Corporation or a Subsidiary.
2.28 "Share" shall mean one (1) share of Common
Stock, adjusted in accordance with Section 15.3 of
the Plan (if applicable).
2.29 "Securities Act" shall mean the Securities Act
of 1933, as amended from time to time.
2.30 "Stock Appreciation Right" shall mean the right
to receive a number of Shares or a cash amount, or a
combination of Shares and cash, based upon the Fair
Market Value, book value or other measure determined
by the Board or the Committee, as the case may be,
pursuant to Section 9 of the Plan.
2.31 "Stock Payment" shall mean a payment in the
form of Shares, or a Purchase Right, as part of a
deferred compensation arrangement made in lieu of
all or any portion of the compensation, including
without limitation the salary, bonuses or
commissions, that would otherwise become payable in
cash to an Eligible Employee.
2.32 "Subsidiary" shall mean any corporation at
least fifty percent (50%) of the total combined
voting power of which is owned by the Corporation or
by another subsidiary.
2.33 "Tax Date" shall have the meaning set forth in
Section 15.3 hereof.
3. EFFECTIVE DATE.
The Plan was proposed by the Board of Directors on
April 1, 1999 and adopted by the Corporation's
shareholders on June 11, 1999. The Effective Date of
the Plan shall be April 1, 1999 (the "Effective
Date").
4. ADMINISTRATION.
The Plan shall be administered by the Board in
compliance with Rule 16b-3 of the Exchange Act
("Rule 16b-3"), or by a Committee appointed by the
Board, which Committee shall be constituted to
permit the Plan to comply with Rule 16b-3, and which
shall consist of not less than three (3) members.
The Board shall appoint one (1) of the members of
the Committee, if there be one, as Chairman of the
Committee. If a Committee has been appointed, the
Committee shall hold meetings at such times and
places as it may determine. Acts of a majority of
the Committee at which a quorum is present, or acts
reduced to or approved in writing by a majority of
the members of the Committee shall be valid acts of
the Committee. The Board, or the Committee, if there
be one, shall from time to time at its discretion
select the Eligible Employees and consultants who
are to be granted Awards, determine the number of
Shares or cash, or the combination thereof, to be
applicable to such Award, and designate any Options
as incentive Stock Options or Nonstatutory Stock
Options, except that no Incentive Stock Option may
be granted to a non-employee director or a non-
employee consultant. A member of the Board or
Committee member shall in no event participate in
any determination relating to Awards held by or to
be granted to such Board or Committee member;
however, a member of the Board or a Committee member
shall be entitled to receive Awards approved by the
shareholders in accordance with the provisions of
Rule 16b-3. The interpretation and construction by
the Board, or by the Committee, if there be one, of
any provision of the Plan or of any Award granted
thereunder shall be final. No member of the Board or
the Committee shall be liable for any action or
determination made in good faith with respect to the
Plan or any Award granted thereunder. In addition to
any right of indemnification provided by the
Articles of Incorporation or Bylaws of the
Corporation, such person shall be indemnified and
held harmless by the Corporation from any loss,
cost, liability or expense that may be imposed upon
or reasonably incurred by him in connection with any
claim, suit, action or proceeding to which he may be
a party by reason of any action or omission under
the Plan.
5. PARTICIPATION.
5.1 Eligibility. Subject to the terms and conditions
of Section 5.2 below, the Participants shall be such
persons as the shareholders may approve or as the
Committee may select from among the following
classes of persons: (i) Employees of the Corporation
or of a Subsidiary (who may be officers, whether or
not they are directors); and (ii) Consultants,
vendors, customers, and others expected to provide
significant services to the Corporation or a
Subsidiary.
For purposes of this Plan, a Participant who is a
director or a consultant, vendor, customer, or other
provider of significant services to the Corporation
or a Subsidiary shall be deemed to be an Eligible
Employee, and service as a director, consultant,
vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary shall be
deemed to be employment, except that no Incentive
Stock Option may be granted to a non-employee
director or non-employee consultant, vendor,
customer, or other provider of significant services
to the Corporation or a Subsidiary, and except that
no Nonstatutory Stock Option may be granted to a
non-employee director or non-employee consultant,
vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary other
than upon a vote of a majority of disinterested
directors finding that the value of the services
rendered or to be rendered to the Corporation or a
Subsidiary by such non-employee director or non-
employee consultant, vendor, customer, or other
provider of services is at least equal to the value
of the Awards granted.
5.2 Ten-Percent Shareholders. An Eligible Employee
who owns more than ten percent (10%) of the total
combined voting power of all classes of outstanding
stock of the Corporation, its parent or any of its
Subsidiaries shall not be eligible to receive an
Award for an Incentive Stock Option unless (i) the
Exercise Price of the Shares subject to such Award
is at least one hundred ten percent (110%) of the
Fair Market Value of such Shares on the date of
grant: and (ii) such Award by its terms is not
exercisable after the expiration of five (5) years
from the date of grant.
5.3 Stock Ownership. For purposes of Section 5.2
above, in determining stock ownership, an Eligible
Employee shall be considered as owning the stock
owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be
considered as being owned proportionately by or for
its shareholders, partners or beneficiaries. Stock
with respect to which such Eligible Employee holds
an Award shall not be counted.
5.4 Outstanding Stock. For purposes of Section 5.2
above, "Outstanding stock" shall include all stock
actually issued and outstanding immediately after
the grant of the Award to the Participant.
"Outstanding stock" shall not include shares
authorized for issue under outstanding Options or
Purchase Rights held by the Participant or by any
other person.
6. STOCK SUBJECT TO THE PLAN.
The stock subject to Awards granted under the Plan
shall be Shares of the Corporation's authorized but
unissued or reacquired Common Stock. The aggregate
number of Shares which may be issued as Awards or
upon exercise of Awards under the Plan shall not
exceed Thirty Five Million (35,000,000) common
shares. The number of Shares subject to unexercised
Options, Stock Appreciation Rights or Purchase
Rights (plus the number of Shares previously issued
under the Plan) shall not at any time exceed the
number of Shares available for issuance under the
Plan. In the event that any unexercised Option,
Stock Appreciation Right or Purchase Right, or any
portion thereof, for any reason expires or is
terminated, or if any Shares subject to a Restricted
Stock Award do not vest or are not delivered, the
unexercised or unvested Shares allocable to such
Option, Stock Appreciation Right, Purchase Right or
Restricted Stock Award may again be made subject to
any Award. Any Shares withheld by the Corporation
pursuant to Section 15.3 shall not be deemed to be
issued. The number of withheld Shares shall be
deducted from the applicable Award and shall not
entitle the Participant to receive additional
Shares. The limitations established by this Article
6 shall be subject to adjustment in the manner
provided in Section 14.5 hereof upon the occurrence
of an event specified therein.
7. OPTIONS.
7.1 Stock Option Agreements. Options shall be
evidenced by written stock option agreements in such
form as the Committee shall from time to time
determine. Such agreements shall comply with and be
subject to the terms and conditions set forth below.
7.2 Number of Shares. Each Option shall state the
number of Shares to which it pertains and shall
provide for the adjustment thereof in accordance
with the provisions of Section 14.5 hereof.
7.3 Exercise Price. Each Option shall state the
Exercise Price thereof. The Exercise Price in the
case of any Incentive Stock Option shall not be less
than the Fair Market Value on the date of grant and,
in the case of any Option granted to an Optionee
described in Section 5.2 hereof, shall not be less
than one hundred ten percent (110%) of the Fair
Market Value on the date of grant. The Exercise
Price in the case of any Nonstatutory Stock Option
shall not be less than eighty-five percent (85%) of
the Fair Market Value on the date of grant.
7.4 Medium and Time of Payment. The Purchase Price
shall be payable in full in United States dollars
upon the exercise of the Option; provided, however,
that if the applicable Stock Option Agreement so
provides the Purchase Price may the paid (i) by the
surrender of Shares in good form for transfer, owned
by the Participant and having a Fair Market Value on
the date of exercise equal to the Purchase Price, or
in any combination of cash and Shares, as long as
the sum of the cash so paid and the Fair Market
Value of the Shares so surrendered equals the
Purchase Price, (ii) by cancellation of indebtedness
owed by the Corporation to the Participant, (iii)
with a full recourse promissory note executed by the
Participant, or (iv) any combination of the
foregoing. The interest rate and other terms and
conditions of such note shall be determined by the
Committee. The Committee may require that the
Participant pledge his or her Shares to the
Corporation for the purpose of securing the payment
of such note. In no event shall the stock
certificate(s) representing such Shares be released
to the Participant until such note shall be paid in
full.
7.5 Term and Non-Transferability of Options. Each
option shall state the time or times which all or
part thereof becomes exercisable. No Option shall be
exercisable after the expiration of ten (10) years
from the date it was granted, and no Option granted
to a Participant described in Section 5.2 hereof
shall be exercisable after the expiration of five
(5) years from the date it was granted. During the
lifetime of the Participant, the Option shall be
exercisable only by the Participant and shall not be
assignable or transferable. In the event of the
Participant's death, the Option shall not be
transferable by the Participant other than by will
or the laws of descent and distribution.
7.6 Modification, Extension and Renewal of Option.
Within the limitations of the Plan, the Committee
may modify, extend or renew outstanding Options or
accept the cancellation of outstanding Options (to
the extent not previously exercised) for the
granting of new Options in substitution therefor.
The foregoing notwithstanding, no modifications of
an Option shall, without the consent of the
Participant, alter or impair any rights or
obligations under any Option previously granted.
7.7 Limitation on Grant of Incentive Stock Options.
In the case of Incentive Stock Options granted
hereunder, the aggregate Fair Market Value
(determined as of the date of the grant thereof) of
the Shares with respect to which Incentive Stock
Options become exercisable by any Participant for
the first time during any calendar year (under this
Plan and all other plans maintained by the
Corporation, its parent or it Subsidiaries) shall
not exceed One Hundred Thousand Dollars ($100,000).
The Board or Committee may, however, with the
Participant's consent authorize an amendment to the
incentive Stock Option which renders it a
Nonstatutory Stock Option.
7.8 Other Provisions. The Stock Option Agreements
authorized under the Plan may contain such other
provisions not inconsistent with the terms of the
Plan (including, without limitation, restrictions
upon the exercise of the Option) as the Committee
shall deem advisable.
7.9 Specific Awards Approved by the Shareholders.
Subject to the approval by the vote of the
shareholders at the Annual Meeting of the
Shareholders to be held on June 11, 1999, the
individuals whose names are set forth in Schedule
"A", a copy of which is attached hereto and
incorporated herein by this reference, shall be
deemed granted Awards in the amounts and
denominations specified thereon, in the amounts and
for the amount indicated opposite their respective
names, and in accordance with the vesting schedule
set forth herein, all in accordance with the
provisions set form in this Article 7 of the Plan,
effective as of the date granted or the Effective
Date, whichever is specified in resolutions of the
Board of Directors granting such awards. The
provisions of this Section 7.9 shall not be amended
more than once every six (6) months, other than to
comport with changes in the Internal Revenue Code,
the Employee Retirement Income Security Act, or the
rules thereunder, and/or intended to be construed in
accordance with the provisions pertaining to
"formula awards" under Paragraph (c)(2)(ii) of Rule
16b-3.
8. RESTRICTED STOCK PURCHASE RIGHTS
8.1 Stock Purchase Agreements. Purchase Rights shall
be evidenced by written Stock Purchase Agreements in
such form as the Committee shall from time to time
determine. Such agreements shall comply with and be
subject to the terms and conditions set forth below.
8.2 Number of Shares. Each Purchase Right shall
state the number of Shares to which it pertains and
shall provide for the adjustment thereof in
accordance with the provisions of Section 14.5
hereof.
8.3 Purchase Price. Each Stock Purchase Agreement
shall state the Purchase Price per Share at which
the Purchase Right may be exercised which, unless
the Board or Committee otherwise determines, shall
not be less than the Fair Market Value of a Share as
of the date on which the Purchase Right is granted,
less a discount (the "Discount") equal to not more
than seventy-five percent (75%) of such value.
8.4 Exercisability and Non -Transferability of
Purchase Rights. Purchase Rights granted to an
Eligible Employee pursuant to the Plan must be
exercised within sixty (60) days after the later to
occur of (i) Board approval of the grant of the
Purchase Right or (ii) delivery of notice of such
grant. Purchase Rights may not be sold, pledged
assigned, hypothecated, transferred or disposed of
in any manner and shall expire immediately upon the
death of the Participant or the termination of such
Participant a employment with the Corporation.
8.5 Medium and Time of Payment. The Purchase Price
shall be payable in full in United States dollars
upon exercise of the Purchase Right; provided
however that if the applicable Stock Purchase
Agreement so provides the Purchase Price may be paid
(i) by the surrender of Shares in good form for
transfer owned by the person exercising the Purchase
Right and having a Fair Market Value on the date of
exercise equal to the Purchase Price or in any
combination of cash and Shares as long as the sum of
the cash so paid and the Fair Market Value of the
Shares so surrendered equal the Purchase Price or
(iii) with a full recourse promissory note executed
by the Participant. The interest rate and other
terms and conditions of such note shall be
determined by the Committee. The Committee may
require that the Participant pledge his or her
Shares to the Corporation for the purpose of
securing the payment of such note. In no event shall
the stock certificate(s) representing such Shares be
released to Participant until such note shall be
paid in full. In the event the Corporation
determines that it is required to withhold state or
federal income tax as a result of the exercise of a
Purchase Right, as a condition to the exercise
thereof, a Participant may be required to make
arrangements satisfactory to the Corporation for it
to satisfy such withholding requirements. In
addition, the Participant shall agree to immediately
notify the Corporation if he or she files an
election pursuant to Section 83(b) of the Code with
respect to receipt of the Shares.
8.6 Consent of Spouse. Each Participant who is
married must cause his or her spouse to sign and
deliver the Stock Purchase Agreement to the
Corporation, in the place provided for such
signature on the Stock Purchase Agreement.
Modification, Extension and Renewal of Purchase
Rights. Within the limitations of the Plan, the
Board or the Committee may modify, extend or renew
outstanding Purchase Rights or accept the
cancellation of outstanding Purchase Rights (to the
extent not previously exercised) for the granting of
new Purchase Rights in substitution therefor. The
foregoing notwithstanding, no modification of a
Purchase Right shall, without the consent of the
Employee, alter or impair any rights or obligations
under any Purchase Right previously granted.
Repurchase Option as to Unvested Shares.
Termination of Employment. In the event of the
voluntary or involuntary termination or cessation of
employment or association of the Participant with
the Corporation or any Subsidiary for any reason
whatsoever, with or without cause (including death
or disability), the Corporation shall, upon the date
of such termination, have an irrevocable, exclusive
option to repurchase (the "Repurchase Option") all
or any portion of the Shares held by the Employee
that are subject to the Repurchase Option as of such
date at the original Purchase Price.
Vesting. Initially, all of the Shares shall be
subject to the Repurchase Option. Thereafter, the
Repurchase Option shall lapse and expire, or "vest",
as to a specified number of the Shares in accordance
with a schedule to be determined by the Board or the
Committee, as the case may be, which shall be
attached to the Stock Purchase Agreement to be
entered into between the Participant sad the
Corporation as provided in Section 8.1 above. All
Shares which continue to be subject to the
Repurchase Option are sometimes hereinafter referred
to as "Unvested Shares."
Notice. Within ninety (90) days following the date
of the Participant's termination of employment by
the Corporation, the Corporation shall notify the
Employee as to whether it wishes to repurchase the
Unvested Shares pursuant to the exercise of the
Repurchase Option. If the Corporation elects to
repurchase said Unvested Shares, it shall set a date
for the closing of the transaction at the Executive
Offices of the Corporation, not later than thirty
(30) days from the date of such notice.
Transfers. Except for transfers to Participant's
descendants and spouses, the Participant shall not
transfer by sale, assignment, hypothecation,
donation or otherwise any of the Shares or any
interest therein prior to the release of such Shares
from the Repurchase Option.
Assignment. The Corporation's Repurchase Option may
be assigned in whole or in part to any stockholder
or stockholders of the Corporation or other persons
or organizations.
Corporation's Right of First Refusal to Purchase
Vested Shares. Each Stock Purchase Agreement entered
into as provided herein shall provide for a right of
first refusal and option on the part of the
Corporation to purchase all or any part of any
Shares which are no longer subject to the Repurchase
Option which the Participant purposes to sell,
transfer or otherwise dispose of (except for
transfers to Participant's descendants and spouses)
on the following terms and conditions:
The Participant must notify the Corporation in
writing of any proposed sale, transfer or other
disposition of any of the Shares, specifying the
proposed transferee, the number of Shares proposed
to be transferred, and the price at which such
Shares are to be sold, transferred or otherwise
disposed.
The Corporation shall have a period of thirty (30)
days from receipt of such notice to notify the
Participant in writing as to whether or not the
Corporation elects to purchase all or a specified
portion of such Shares at the lower of: i) price per
share set forth in the notice given by the
Participant, or ii) the Fair Market Value for a
share of the Corporation's Common Stock, without
restrictions, on the date on which the notice is
given by Participant to the Corporation (determined
as provided in Section 2.13 above), less in either
case an amount equal to the Discount. If the
Corporation elects not to purchase all of the Shares
specified in the notice, the Participant may sell,
transfer or otherwise dispose of the remaining
Shares in strict accordance with the terms specified
in the notice within ninety (90) days following the
date of the notice. It is understood and agreed that
any transferee of any of such Shares (other than the
Corporation) will take and acquire all of such
Shares subject to the continuing right of first
refusal and option on the part of the Corporation to
purchase all or any portion of such Shares from the
transferee on all of the same terms and conditions
as are set forth in the Stock Purchase Agreement,
unless the Participant shall have paid to the
Corporation, out of the proceeds from the sale of
such Shares or otherwise, an amount equal to the
lesser of (i) the Discount, or (ii) the amount by
which the Fair Market Value for a share of the
Corporation's Common Stock, without restrictions, on
the date on which the notice is given by Participant
to the Corporation (determined as provided in
Section 2.13 above) exceeds the price per Share paid
by the Participant for such Shares.
8.10 Other Provisions. The Stock Purchase Agreements
authorized may contain such other provisions not
inconsistent with the terms of the Plan as the Board
or the Committee shall deem advisable.
9. STOCK APPRECIATION RIGHTS.
9.1 Grant. Stock Appreciation Rights related or
unrelated to Options or other Awards may be granted
to Eligible Employees: (i) at any time, if
unrelated to an Award, or if related to an Award
other than an Incentive Stock Option; or (ii) only
at the time of grant of an Option if related
thereto. A Stock Appreciation Right may extend to
all or a portion of the Shares covered by a related
Award.
9.2 Exercise of Stock Appreciation Rights. A Stock
Appreciation Right granted in connection with an
Award shall be exercisable only at such time or
times, and to the extent that a related Award is
exercisable. A Stock Appreciation Right granted in
connection with an Option may be exercisable only
when the Fair Market Value of the stock subject to
the Option exceeds the Exercise Price of the
Incentive Stock Option.
9.3 Payment.
(a) Upon the exercise of a Stock Appreciation Right,
and, if such Stock Appreciation Right is related to
an Award, surrender of an exercisable portion of a
related Award, the Participant shall be entitled to
receive payment of an amount determined by
multiplying: (i) the difference obtained by
subtracting the purchase price of a share of Common
Stock specified in the related Award, or if such
Stock Appreciation Right is unrelated to an Award,
from the Fair Market Value, book value or other
measure specified in the Award of such Stock
Appreciation Right of a share of Common Stock on the
date of exercise of such Stock Appreciation Right,
by (ii) the number of Shares as to which such Stock
Appreciation Right has been exercised.
(b) The Board or the Committee, as the case may be,
in its sole discretion, may require settlement of
the amount determined under paragraph (a) above
solely in cash, solely in Shares of Common Stock
(valued at Fair Market Value on the business day
next preceding the date of exercise of such Stock
Appreciation Right), or partly in such Shares and
partly in cash.
9.4 Maximum Stock Appreciation Right Term. Each
Stock Appreciation Right and all rights and
obligations thereunder shall expire on such date as
shall be determined by the Board or the Committed
but not later than ten (10) years after the date of
the Award thereof, and shall be subject to earlier
termination as provided in the related Award
Agreement and Sections 14.6, 14.7, 14.8, 14.9 and
15.1.
10. PERFORMANCE AWARDS.
One or more Performance Awards may be granted to any
Eligible Employee. The value of such Awards may be
linked to the market value, book value or other
measure of the value of the Common Stock or other
specific performance criteria determined appropriate
by the Board or the Committee, in each case on a
specified date or over any period determined by the
Board or the Committee, or may be based upon the
appreciation in the market value, book value or
other measure of the value of a specified number of
Shares of Common Stock over a fixed period
determined by the Board or the Committee. In making
such determinations, the Board or the Committee may
consider (among such other factors as it deems
relevant in light of the specific type of award) the
contributions, responsibilities and other
compensation of the Participant.
11. DIVIDEND EQUIVALENTS.
A Participant may also be granted "Dividend
Equivalents" based on the dividends declared on the
Common Stock, to be credited as of dividend payment
dates, during the period between the Award Date and
the date such Award is exercised, vests or expires
as determined by the Board or the Committee. Such
Dividend Equivalents shall be converted to cash or
additional Shares of Common Stock by such formula
and at such time and subject to such limitations as
may be determined by the Board or the Committee.
12. STOCK PAYMENTS.
The Board or the Committee may approve Stock
Payments to Eligible Employees who elect to receive
such payments in the manner determined from time to
time by the Board or the Committee. The number of
Shares shall 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 Award Date or on any date
thereafter.
13. LOANS.
The Corporation may, with the Board's or the
Committee's approval, extend one or more loans to
Participants in connection with the exercise or
receipt of outstanding Awards granted under the
Plan; provided any such loan shall be subject to the
following terms and conditions;
(i) The principal of the loan shall not exceed the
amount required to be paid to the Corporation upon
the exercise or receipt of one or more Awards under
the Plan less the aggregate Par Value of any Common
Stock deliverable on such event, and the loan
proceeds shall be paid directly to the Corporation
in consideration of such exercise or receipt.
(ii) The initial term of the loan shall be
determined by the Board or the Committee; provided
that the term of the loan, including extensions,
shall not exceed a period of ten (10) years.
(iii) The loan shall be with full recourse to the
Participant, shall be evidenced by the Participant's
promissory note and shall bear interest at a rate
determined by the Board or the Committee but not
less than the Corporation's average cost of funds as
of a date within thirty-one (31) days of the date of
such loan, as determined by the Board or Committee.
(iv) in the event a Participant terminates his or
her employment at the request of the Corporation,
the unpaid principal balance of the note shall
become due and payable on the tenth (10th) business
day after such termination; provided, however, that
if a sale of such Shares would cause such
Participant to incur liability under Section 16(b)
of the Exchange Act, the unpaid balance shall become
due and payable on the tenth (10th) business day
after the first day on which a sale of such Shares
could have been made without incurring such
liability assuming for these purposes that there are
no other transactions by the Participant subsequent
to such termination. In the event a Participant
terminates employment other than at the request of
the Corporation, the unpaid principal balance of the
note shall become due and payable six (6) months
after the date of such termination.
14. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND
BENEFICIARIES.
14.1 Employee Status. Status as an Eligible Employee
shall not be construed as a commitment that any
Award will be made under the Plan to an Eligible
Employee or to Eligible Employees generally.
14.2 No Employment Contract. Nothing contained in
the Plan (or in the Award Agreements or in any other
documents related to the Plan or to Awards) shall
confer upon any Eligible Employee or any Participant
any right to continue in the employ of the
Corporation or constitute any contract or agreement
of employment, or interfere in any way with the
right of the Corporation to reduce such person's
compensation or to terminate the employment of such
Eligible Employee or Participant, with or without
cause, but nothing contained in the Plan or any
document related thereto shall affect any other
contractual right of any Eligible employee or
Participant. Nothing contained in the Plan (or in
the Award Agreements or in any other documents
related to the Plan or the Awards) shall confer upon
any director of the Corporation any right to
continue as a director of the Corporation.
14.3 No Transferability. Awards may be exercised
only by, and amounts payable or Shares issued
pursuant to an Award shall be paid only to or
registered only in the name of, the Participant or,
in the event of the Participant's death, to the
Participant's Beneficiary or, in the event of the
Participant's Disability, to the participant's
Personal Representative or, if there is none, to the
Participant. Other than by will or the laws of
descent and distribution, no right or benefit under
the Plan or any Award, including, without
limitation, any Option or share of Restricted Stock
that has not vested, shall be subject in any manner
to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge and any
such attempted action shall be void and no such
right or benefit shall be, in any manner, liable
for, or subject to, debts, contract, liabilities,
engagements, or torts of any Eligible Employee,
Participant or Beneficiary, in any case except as
may otherwise by expressly required by applicable
law. The Board or the Committee shall disregard any
attempt at transfer, assignment or other alienation
prohibited by the preceding sentence and shall pay
or deliver such cash or Shares of Common Stock in
accordance with the provisions of the Plan.
Notwithstanding the foregoing, the Board or the
Committee may authorize exercise by or transfers or
payments to a third party in a specific case or more
generally; provided, however, with respect to any
option or similar right (including any Stock
Appreciation Right) such discretion may only be
exercised to the extent that applicable rules under
Section 16 of the Exchange Act would so permit
without disqualifying the Plan from certain benefits
thereunder.
14.4 Plan Not Funded. No Participant, Beneficiary or
other person shall have any right, title or
interest in any fund or in any specific asset
(including Shares of Common Stock) of the
Corporation by reason of any Award granted
hereunder. There shall be no funding of any benefits
which may become payable hereunder. Neither the
provision of the Plan (or of any documents related
hereto, nor the creation or adoption of the Plan,
nor any action taken pursuant to the provisions of
the Plan shall create, or be construed to create, a
trust of any kind or a fiduciary relationship
between the Corporation and any Participant or
Beneficiary. To the extent that a Participant, a
Beneficiary or other person acquires a right to
receive an Award hereunder, such right shall be no
greater than the right of any unsecured general
creditor of the Corporation. Awards payable under
the Plan shall be paid in Shares of Common Stock or
from the general assets of the Corporation, and no
special or separate fund or deposit shall be
established and no segregation of assets or Shares
shall be made to assure payment of such Awards.
14.5 Adjustment Upon Recapitalization and Corporate
Changes. If the outstanding Shares of Common Stock
are changed into or exchanged for cash or a
different number or kind of Shares or securities of
the Corporation, or if the outstanding Shares of the
Common Stock are increased, decreased, exchanged
for, or otherwise changes, or if additional Shares
or new or different shares or securities are
distributed with respect to the outstanding Shares
of the Common Stock, through a reorganization or
merger in which the Corporation is the surviving
entity or through a combination, consolidation,
recapitalization, reclassification, stock split,
stock dividend, reverse stock split, stock
consolidation or other capital change or adjustment,
an appropriate adjustment shall be made in the
number and kind of shares or other consideration
that is subject to or may be developed under the
Plan and pursuant to outstanding Awards. A
corresponding adjustment to the consideration
payable with respect to Awards granted prior to any
such change and to the price, if any, to be paid in
connection with Restricted Stock Awards shall also
be made as appropriate. Corresponding adjustments
shall be made with respect to Stock Appreciation
Rights related to Options to which they are related.
In addition, the Board or the Committee may grant
such additional rights in the foregoing
circumstances as the Board or the Committee deems to
be in the best interest of any Participant and the
Corporation in order to preserve for the participant
the benefits of an Award.
14.6 Termination of Employment Except by Death,
Disability or Retirement. If a Participant ceases to
be an Employee for any reason other than his or her
death, disability or retirement, such Participant
shall have the right, subject to the restrictions of
Section 14.3 above, to exercise any Award at any
time within three (3) months after termination of
employment, but only to the extent that, at the date
of termination of employment, the Participant's
right to exercise such Award had accrued pursuant to
the terms of the applicable agreement and had not
previously been exercised; provided, however, that
if the Participant was terminated for cause (as
defined in the applicable agreement) any Award not
exercised in full prior to such termination shall be
canceled. For this purpose, the employment
relationship shall be treated as continuing intact
while the Participant is on military leave, sick
leave or other bona fide leave of absence (to be
determined in the sole discretion of the Board or
the Committee). The foregoing notwithstanding, in
the case of an Incentive Stock Option, employment
shall not be deemed to continue beyond the ninetieth
(90th) day after the Participant's re-employment
rights are guaranteed by statute or by contract.
14.7 Death of Participant. If a Participant dies
while an Employee, or after ceasing to be an
Employee but during the period while he or she could
have exercised the Award under this Section 14.7,
and has not fully exercised the Award, then the
Award may be exercised in full at any time within
twelve (12) months after the Participant's death but
no later than the date of termination (fixed in the
applicable agreement), by the executors or
administrators of his or her estate or by any person
or persons who have acquired the Award directly from
the Participant by bequest or inheritance, but only
to the extent that, at the date of death, the
Participant's right to exercise such Award had
accrued and had not been forfeited pursuant to the
terms of the applicable agreement and had not
previously been exercised.
14.8 Disability of Participant. If a Participant
ceases to be an Employee by reason of Disability,
such Participant shall have the right to exercise
the Award at any time within twelve (12) months
after termination of employment (but not later than
the termination date fixed in the applicable
agreements) but only to the extent that at the date
of termination of employment, the Participant's
right to exercise such Award had accrued pursuant to
the terms of the applicable agreement and had not
previously been exercised.
14.9 Retirement of Participant. If a Participant
ceases to be an Employee by reason of Retirement,
such Participant shall have the right to exercise
the Award at any time within three (3) months after
termination of employment (but not later than the
termination date fixed in the applicable agreements)
but only to the extent that, at the date of
termination of employment, the Participant's right
to exercise such Award had accrued pursuant to the
terms of the applicable agreement and had not
previously been exercised.
14.10 Rights as a Stockholder. A Participant, or a
transferee of a Participant, shall have no rights as
a stockholder with respect to any Shares covered by
his or her Award until the date of the issuance of a
stock certificate for such Shares. No adjustment
shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other
property), distributions or other rights for which
the record date is prior to the date such stock
certificate is issued, except as provided in Section
14.5 hereof.
14.11 Deferral of Payments. The Board or the
Committee may approve the deferral of any payments
that may become due under the Plan. Such deferrals
shall be subject to any conditions, restrictions or
requirements as the Board or the Committee may
determine.
14.12 Acceleration of Awards. Immediately prior to
the occurrence of an Event, (i) each Option and
Stock Appreciation Right under the Plan shall become
exercisable in full; (ii) Restricted Stock delivered
under the Plan shall immediately vest free of
restriction; and (iii) each other Award outstanding
under the Plan shall be fully vested or exercisable
unless prior to the Event, the Board or the
Committee otherwise determines that there shall be
no such acceleration or vesting of an Award or
otherwise determines those Awards which shall be
accelerated or vested and to the extent to which
they shall be accelerated or vested, or that an
Award shall terminate, or unless in connection with
such Event the Board provides (a) for the assumption
of such Awards theretofore granted; or (b) for the
substitution for such Awards of new awards covering
securities or obligations (or any combination
thereof) of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as
to number and kind of shares and prices; or (c) for
the payment of the Fair Market Value of the then
outstanding Awards. In addition, the Board or the
Committee may grant such additional rights in the
foregoing circumstances as the Board or the
Committee deems to be in the best interest of the
Participant and the Corporation in order to preserve
for the Participant the benefits of an Award. For
purposes of this Section 14.12 only, Board shall
mean the Board of Directors of the Corporation as
constituted immediately prior to the Event. In
addition, the Board may in its sole discretion
accelerate the exercisability or vesting of any or
all Awards outstanding under the Plan in
circumstances under which the Board or the Committee
determines such acceleration appropriate.
15. MISCELLANEOUS
15.1 Termination, Suspension and Amendment. The
Board or the Committee may, at any time suspend,
amend, modify of terminate the Plan (or any part
thereof) and may, with the consent of a Participant,
authorize such modifications of the terms and
conditions of such Participant's Award as it shall
deem advisable; provided that, except as permitted
under the provision of Section 14.5 hereof, no
amendment or modification of the Plan may be adopted
without approval by a majority of the Shares of the
Common Stock (represented in person or by proxy) at
a meeting of stockholders at which a quorum is
present and entitled to vote thereat, if such
amendment or modification would:
(i) materially increase the benefits accruing to
Participants under the Plan within the meaning of
Rule 16b-3 under the Exchange Act or any successor
provision;
ii) materially increase the aggregate number of
Shares which may be delivered pursuant to Awards
granted under the Plan; or
iii) materially modify the requirements of
eligibility for either adoption of the Plan.
Neither adoption of the Plan nor the provisions
hereof shall limit the authority of the Board to
adopt other Plans or to authorize other payment of
compensation and benefits under applicable law. No
Awards under the Plan may be granted or amended
during any suspension of the Plan or after its
termination. The amendment, suspension or
termination of the Plan shall not, without the
consent of the Participant, alter or impair any
rights or obligations pertaining to any Awards
granted under the Plan prior to such amendment,
suspension or termination.
15.2 No Fractional Shares. No Award or installment
thereof shall be exercisable except in respect to
whole Shares, and fractional share interest shall be
disregarded.
15.3 Tax Withholding and Tax Bonuses. As required by
law, federal, state or local taxes that are subject
to the withholding of tax at the source shall be
withheld by the Corporation as necessary to satisfy
such requirement. The Corporation is entitled to
require deduction from other compensation payable to
such Participant or, in the alternative; i) the
Corporation may require the Participant to advance
such sums: or ii) if Participant elects, the
Corporation may withhold (or require the return of)
Shares having the Fair Market Value equal to the
sums required to be withheld. If the Participant
elects to advance such sums directly, written notice
of that election shall be delivered prior to such
exercise and, whether pursuant to such election or
pursuant to a requirement imposed by the
Corporation, payment in cash or by check of such
sums for taxes shall be delivered within ten (10)
days after the Exercise Date. If the Participant
elects to have the Corporation withhold Shares (or
be entitled to the return of Shares) having a Fair
Market Value equal to the sums required to be
withheld, the value of the Shares to be withheld (or
returned) will be equal to the Fair Market Value on
the day the amount of tax to be withheld (or subject
to return) is to be determined (the "Tax Date").
15.4 Restriction on Elections Made by Participants.
Elections by Participants to have Shares withheld
(or subject to return) for this purpose will be
subject to the following restrictions: i) the
election must be made prior to the Tax Date; ii) the
election must be irrevocable; iii) the election
will be subject to the Board's disapproval; and (iv)
if the Participant is an "officer" within the
meaning of Section 16 of the Exchange Act, the
election shall be subject to such additional
restrictions as the Board or the Committee may
impose in an effort to secure the benefits of any
regulations thereunder.
15.5 Limitations on the Corporation's Obligations.
The Corporation shall not be obligated to issue
Shares and/or distribute cash to the Participant
upon any Award exercise until such payment has been
received or Shares have been withheld, (unless
withholding for offset against a cash payment) as of
or prior to the Exercise Date, sufficient to cover
all such sums due or which may be due with respect
to such exercise. In addition, the Board or the
Committee may grant to a Participant a cash bonus in
any amount required by federal, state, or local tax
law to be withheld with respect to an Award.
15.6 Compliance with Laws. The Plan, the granting
of Awards under the Plan, the Stock Option
Agreements and Stock Purchase Agreements and the
delivery of Options, Shares and Awards (and/or the
payment of money or Common Stock) pursuant thereto
and the extension of any loans hereunder are subject
to such additional requirements as the Board or the
Committee may impose to assure or facilitate
compliance with all applicable federal and state
laws, rules and regulations (including, without
limitation, securities laws and margin requirements)
and to such approvals by any regulatory or
governmental agency which may be necessary or
advisable in connection therewith. In connection
with the administration of the Plan or the grant of
any Award, the Board or the Committee may impose
such further limitations or conditions as in its
opinion may be required or advisable to satisfy, or
secure the benefits of, applicable regulatory
requirements (including those rules promulgated
under Section 16 of the Exchange Act or those rules
that facilitate exemption from or compliance with
the Securities Act or the Exchange Act), the
requirements of any stock exchange upon which such
Shares or shares of the same class are then listed,
and any Blue Sky or other securities laws applicable
to such Shares.
15.7 Governing Laws. The Plan and all Awards granted
under the Plan and the documents evidencing Awards
shall be governed by, and construed in accordance
with, the laws of the State of Colorado.
15.8 Securities Law Requirements.
a) Legality of issuance. The issuance an any Shares
upon the exercise of any Option and the grant of any
Option shall be contingent upon the following:
i) the Corporation and the Participant shall have
taken all actions required to register the Shares
under the Securities Act, and to qualify the Option
and the Shares under any and all applicable state
securities or "Blue Sky" laws or regulations, or to
perfect an exemption from the respective
registration and qualification requirements thereof;
ii) any applicable listing requirement of any stock
exchange on which the Common Stock is listed shall
have been satisfied; and
iii) any other applicable provision of federal law
shall have been satisfied.
b) Restrictions on Transfer. Regardless of whether
the offering and sale of Shares under the Plan has
been registered under the Securities Act or has been
registered or qualified under the securities laws of
any state, the Corporation may impose restrictions
on the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on
stock certificates) if, in the judgment of the
Corporation and its counsel, such restrictions are
necessary or desirable in order to achieve
compliance with the provision of the Securities Act,
the securities laws of any state or any other law.
In the event that the sale of Shares under the Plan
is not registered under the Securities Act but an
exemption is available which required an investment
representation or other representation, each
Participant shall be required to represent that such
Shares are being acquired for investment, and not
with a view to the sale or distribution thereof, and
to make such other representations as are deemed
necessary or appropriate by the Corporation and its
counsel. Any determination by the Corporation and
its counsel in connection with any of the matter set
forth in this Section 15.8(b) shall be conclusive
and binding on all persons. Stock certificates
evidencing Shares acquired under the Plan pursuant
to an unregistered transaction shall bear the
following restrictive legend and such other
restrictive legends as are required or deemed
advisable under the provisions of any applicable
law:
THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "SECURITIES ACT"). ANY TRANSFER OF SUCH
SECURITIES WILL BE INVALID UNLESS A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT IS IN EFFECT AS
TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR
THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER
FOR SUCH TRANSFER TO COMPLY WITH THE SECURITIES ACT.
c) Registration or Qualification of Securities. The
Corporation may, but shall not be obligated to
register or qualify the issuance of Awards and/or
the sale of Shares under the Securities Act or any
other applicable law. The Corporation shall not be
obligated to take any affirmative action in order to
cause the issuance of Awards or the sale of Shares
under the Plan to comply with any law.
d) Exchange of Certificates. If, in the opinion of
the Corporation and its counsel, any legend placed
on a certificate representing Shares issued under
that Plan is no longer required, the holder of such
certificate shall be entitled to exchange such
certificate for a certificate representing the same
number of Shares but lacking such legend.
15.9 Execution. To record the adoption of the Plan
in the form set forth above by the Board effective
as of April 1, 1999, the Corporation has caused this
Plan to be executed in the name and on behalf of the
Corporation where provided below by an officer of
the Corporation thereunto duly authorized.
ARETE INDUSTRIES, INC.
By:___________________________
Chief Executive Officer
Attest:
________________________
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET OF ARETE INDUSTRIES, INC. AS OF JUNE 30, 1999 AND THE RELATED
STATEMENTS OF OPERATIONS, AND CASH FLOWS FOR THE PERIODS ENDED JUNE 30,
1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 56,960
<SECURITIES> 0
<RECEIVABLES> 145,725
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 177,685
<PP&E> 2,329
<DEPRECIATION> 0
<TOTAL-ASSETS> 237,618
<CURRENT-LIABILITIES> 585,720
<BONDS> 0
0
30,000
<COMMON> 7,211,457
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 237,618
<SALES> 171,618
<TOTAL-REVENUES> 171,618
<CGS> 126,618
<TOTAL-COSTS> 231,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> (186,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186,907)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
