10-KSB 12/31/03 Exhibit 10.5 Arete Industries, Inc.
JOINT VENTURE AGREEMENT
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24 Well Texas Re-Entry Project
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This Agreement is entered into by the Parties named below in their personal
and representative capacities, effective February 27, 2004 for the purpose of
setting forth the respective obligations and rights of the Parties in a joint
venture to re-enter and develop up to twenty four (24) oil and gas leases
located in Lavaca and XxXxxx Counties, Texas, brought forward by promoter and
operator, Clear Fork Energy, LLC. (hereinafter the "24 Well Project" and/or the
"Joint Venture".) This Agreement shall stand as the understanding and agreement
among the Parties to form and finance four (4) limited liability limited
partnerships (LLLP's) to pursue re-entry and development of 6 xxxxx each out of
the 24 xxxxx proposed for the 24 Well Project.
I. THE PARTIES
A. Arete Industries, Inc. (Arete) is a publicly held, Colorado corporation
involved in organization and capitalization of traditional and alternative
and renewable energy ventures, and has engaged with the other Parties to
this Agreement to provide general management, direction and capital
formation support for the Joint Venture through a wholly owned subsidiary
to be formed to perform as corporate general partner for each of the
contemplated limited liability limited partnerships in consideration for
the ownership interest, compensation and reimbursement of expenses
described herein.
B. Xxxxx Xxxxx (Black) of West Palm Beach, Fl., has organized the principal
Parties to this Agreement by introducing Parties that will contribute
contracts providing the Joint Venture with access to the Leases and to
capital through referrals to investors, investment bankers and professional
services including legal and accounting support for organization and
financing the Project, and desires to engage with the other Parties in the
24 Well Project directly or through a nominee corporate entity, entitled
Knight Group, Inc. to act as a Special Limited Partner in each of the
LLLC's formed pursuant to this Joint Venture.
C. Xxxxx Herrtage of London, England, has provided and will continue to
provide referrals of prospective investors, investment bankers, attorneys
and other support professionals to the Joint Venture, and desires to engage
with the other Parties in the 24 Well Project directly or through a nominee
corporate entity, the details of which will be submitted at a later date,
to act as a Special Limited Partner in each of the LLLC's formed pursuant
to this Joint Venture.
D. Xxx Xxx Xxxxxx, (Xxx Xxxxxx) of Plano, Texas, will provide access to the
Leases for the 24 Well Project through his contact and contract with the
Operator, Clear Fork Energy, LLC and its principals, J. O. Xxxxxx and Xxxxx
X. Xxxxx (hereafter, CFE, Xxxxxx and Xxxxx, respectively) and desires to
engage with the other Parties in the 24 Well Project directly or through a
nominee corporate entity, entitled North Energy Corporation, Inc. to act as
a Special Limited Partner in each of the LLLC's formed pursuant to this
Joint Venture.
E. Xxxxxx X. Xxxxx (Xxxxx) of Niwot, Colorado, has served as organizer of the
Project on behalf of the Parties, also serves as CEO of Arete Industries,
Inc., and has brought the 24 Well Project to Arete for its participation in
the Joint Venture as corporate General Partner for each of the four LLLP's
and will act individually to act as a Special Limited Partner in each of
the LLLC's formed pursuant to this Joint Venture and as Managing Director
of the proposed General Partner of each LLLC on behalf of the Joint
Venture.
F. Xxxxxx X. Xxxxxx, (Selden) of Beverly Hills, California, serves as a
consultant to Arete, and has introduced the other Parties to each other and
desires to act as a Special Limited Partner in each of the LLLC's formed
pursuant to this Joint Venture.
G. Arete Energy Development Group, Inc. (hereinafter referred to as "Arete
Energy" or the "General Partner") is to be incorporated upon execution of
this Agreement as a "C" Corporation, formed and initially capitalized and
wholly owned by Arete to serve as the corporate general partner of each of
the LLLC's formed under the terms hereof.
II. RECITATIONS, GENERAL TERMS AND AGREEMENTS OF THE PARTIES
A. NEC has an agreement with CFE which, in turn, controls leasing rights to
develop 24 oil and gas leases in Lavaca and XxXxxx Counties and has engaged
with Black and Herrtage for funding of the 24 Well Project. Selden has
introduced Xxxxx and Arete to Black and Herrtage and Xxxxx has set up the
structure for funding of the 24 Well Project through private placements
conducted by a corporate entity, serving as the corporate general partner
of four separate LLLP's of $5 Million USD each, to develop six of the 24
Leases in each LLLP. The Parties desire to jointly pursue development of
the 24 Well Project and to set forth the terms and conditions of the
funding, structure and operation of the 24 Well Project and each of the
four LLLP's that will be employed to finance the 24 Well Project.
Please sign below your name.
Xxxxxx X. Xxxxx Xxx Xxx Xxxxxx Xxxxxx Xxxxxx Xxxxx Xxxxx
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/s/ Xxxxxx X. Xxxxx /s/ Xxx Xxx Xxxxxx /s/ Xxxxxx Xxxxxx /s/ Xxxxx Xxxxx
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Xxxxx Herrtage
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/s/ Xxxxx Herrtage
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B. The Parties agree to act jointly through four individual LLLP's in which a
private offering will be conducted in the amount of $5 Million USD each,
and to act individually or corporately in their capacities of special
expertise as Special Limited Partner, and Arete Energy as the corporate
General Partner for each of the LLLP's, and as sponsor of each $5 Million
private placement of LLLP, Limited Liability Partner Interests.
C. The Parties have agreed to terms with CFE that CFE shall earn a 50% Working
Interest (WI) (of a 75% Net Revenue Interest (NRI)) in each well as
operator which begins as a 25% WI in each well until the specific LLLP is
paid $500,000 from its 75% WI in each well and thereafter CFE and the LLLP
will each earn a 50% WI. Depending on the percentage of WI paid to the
LLLP, that is either 75% or 50% as determined by the operator's payout
formula per the previous sentence, the LLLP's Working Interest will pay an
estimated Lease Operating Expense (XXX) of 2.25% (for 75%WI or 1.5% (for
50%WI) of Total Revenue from Production of each Well. The XXX will be
shared pro-rata among the entire Partnership Interests of each LLLP.
D. The Parties have agreed that the LLLP's 50% WI will be split equally
between the General Partner and the LLLP Limited Partner Interests on each
well after the LLLP Limited Partnership Interests have received 100% of
their total investment in that LLLP from Partnership Revenue. Prior to
payout to the LLLP Limited Partner Interests' original investment, the
Parties have agreed that the LLLP Limited Partner Interests will be paid a
50% WI, (of the 75% NRI) and the General Partner will retain any remainder
over and above the 50% WI. After payout of 100% of the initial investment
of the LLLP Limited Partner Interests, the General Partner "backs-in" to a
25% WI.
E. The Parties have agreed that of the General Partner Interest earned in each
of the LLLP's, net of the General Partner's direct expenses and overhead,
that Arete Energy will receive a carried interest equal to 10% of the net
revenue and the five other Special Limited Partners will divide the balance
equally between them, or a carried interest of 20% of the balance each. The
Parties have projected that the General Partner's overhead expenses on a
monthly basis for the entire 24 Well Project or all four LLLP's together is
$26,000 per month and that amount will be divided equally between each LLLP
that is formed, funded and commences production, and will be paid to the
General Partner out of first revenues from oil and gas production paid to
the General Partnership Interest of each such LLLP, before any
distributions of income to the General Partner and the Special Limited
Partners as described above. This provision has the effect that the $26,000
overhead charge will be charged and paid in full on a monthly basis
regardless of whether 1, 2, 3 or 4 LLLP's are formed and funded.
Additionally, during the first months in which re-working operations are
begun but before revenue to the particular LLLP has been established and/or
paid from sales of production, the pro-rata overhead charge owed the
General Partner will be paid out of the Reserve Proceeds, described in the
next paragraph, to ensure that the General Partner has operating capital
from the first date of operations after the funding has closed for each
LLLP.
F. The Parties have agreed that the 24 Well Program will be funded through
private placements of a total of $20 Million through four LLLP's to develop
six (6) xxxxx each, offering units of Limited Partnership Interests, of
$50,000 per Unit, $50,000 minimum investment per investor to qualified
investors that will be entitled to the Working Interest percentages set out
in the previous paragraph. Each $5 Million Limited Partnership Interest
offering will provide for escrow of gross offering proceeds until a
$2,500,000 minimum subscription has been achieved, at which time proceeds
in escrow will be released to the LLLP and the offering will continue
without an escrow until the first to occur of acceptance of a total of $5
Million USD in subscriptions from qualified investors, or 90 days from the
commencement date of the offering or the date of the offering document,
whichever is earlier, subject to extension, in the discretion of the
General Partner for an additional 90 days. In the event that an offering is
terminated prior to achievement of the $5 Million maximum offering, the
General Partner or any Party may purchase the balance of unsold Limited
Partner Interests, necessary to close the offering The Parties agree that
the target funding of $5 Million for each LLLP has taken into account a
maximum sales commission of 7% to licensed broker/dealers and/or investment
advisors; $100,000 in offering costs including legal and accounting per
LLLP, and a reserve of approximately 9% for contingencies that will
reserved out of net offering proceeds for each LLLP and be replaced out of
Limited Partner Revenues at the rate of $50,000 per month and, as so
replaced, will be retained by the General Partner as a management fee that
will be paid out to it and the Special Limited Partners according to the
carried interest sharing percentages set forth in the previous paragraph.
G. Black, Herrtage and to a lesser degree, Selden will undertake primary
responsibility to designate and refer to the General Partner professional
fund raisers and professional investors to fund the LLLP's in series to
match the approximate timing of well completion projected by Xxx Xxxxxx and
NEC in conjunction with its negotiations with the operator, CFE. Xxxxx will
support these efforts through his contacts as well, and the General
Partner, Arete Energy will formally negotiate with and engage these
professionals on behalf of the individual LLLP's. Neither Black, Herrtage,
Selden or Xxxxx are being paid commissions or referral fees for these
introductions, but in the event that Arete Energy and/or Xxxxx funds a
principal amount of any one or more of the LLLP's through their personal or
professional contacts, then the Parties agree that their share of
Partnership income from the particular LLLP so effected, may be adjusted in
some mutually agreeable proportion to reflect the value of providing such
funding.
H. Arete Energy will undertake primary responsibility to retain lawyers and
accountants to conduct due diligence and prepare offering documents;
provide bookkeeping services to track revenues; make distributions to the
General, Special Limited and Limited Partners; conduct the day to day
business of each LLLP including technical and financial evaluation for
selection of Leases proposed by the Operator and undertaking oversight of
the re-working operations and subsequent production (with the assistance
and support of NEC).
Please sign below your name.
Xxxxxx X. Xxxxx Xxx Xxx Xxxxxx Xxxxxx Xxxxxx Xxxxx Xxxxx
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/s/ Xxxxxx X. Xxxxx /s/ Xxx Xxx Xxxxxx /s/ Xxxxxx Xxxxxx /s/ Xxxxx Xxxxx
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Xxxxx Herrtage
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/s/ Xxxxx Herrtage
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I. All Parties will jointly participate in making major economic and policy
decisions of the General Partner regarding the approval of subscription
offers by potential investors, underwriting or sales agreements with
broker/dealers, selection or replacement of principal accounting firms and
law firms for the private placements and matters concerning substitution or
replacement of the General Partner, the Special Limited Partners, and/or
the Limited Partners; matters relating to the liquidation and dissolution,
recapitalization, reorganization, merger, acquisition, sale of all or
substantially all of the assets of, any LLLP, or any other material LLLP
action; and will have such authority set forth in the organizational
documents of each LLLP. Notwithstanding this provision, neither the General
Partner nor any Special Limited Partner may withdraw, resign or be replaced
or substituted without the unanimous approval, not unreasonably withheld,
of the other non-withdrawing or non-resigning Parties, or otherwise in such
a manner as would cause the termination or dissolution of such LLLP under
the terms of the LLLP Operating Agreement, statutory law or the common law.
III. SPECIAL PROVISIONS
A. The terms and conditions of this Agreement will be reflected in Articles of
Organization and/or the Limited Liability Limited Partnership Agreement to
be used in each LLLP designated in this Agreement and associated contracts
and agreements. Forms of such LLLP Agreements will be generated and
submitted for approval to the Parties within a reasonable time after
execution of this Agreement and the approved version attached to this
Agreement as an Exhibit and incorporated herein by reference.
B. This Agreement will be deemed a Pre-formation Agreement for the series of
LLLP's described in this Agreement. The Joint Venture will be consummated
on the formation, funding and commencement of operations of each LLLP, as
to that entity, and will close upon formation, funding and commencement of
operations of the final LLLP under the 24 Well Program. Notwithstanding
this provision, it is contemplated that the number of Leases available for
the 24 Well Program could conceivably be increased up to a total of 60
xxxxx, and in such event will remain in full force and effect and apply to
the formation of any additional LLLP's to pursue development of such
additional Leases. Increasing the number of Leases proposed to be developed
over the original 24 Leases, may be made via a written addendum to this
Agreement setting forth terms and conditions to develop the additional
Leases as are mutually agreed to by each Party in writing.
C. The Parties designated below will undertake the following specific duties
and obligations:
1. NEC will assign its agreement with CFE to the Joint Venture on
execution of this Agreement by all Parties. Leases acquired under such
agreement will be assigned to the particular LLLP funding the
development of such Lease. An operating agreement between CFE and the
applicable LLLP will also be generated and signed upon formation of
the LLLP and covering each Lease assigned to that LLLP. Choice of each
Lease to be attached to a particular LLLP will be made after
evaluation by NEC, Arete Energy and CFE.
2. Operation and Development of each Lease acquired under the 24 Well
Program will be conducted by CFE under the supervision of Arete Energy
pursuant to an A.A.P.L. standard form operating agreement, with the
assistance and guidance of NEC. The operator will perform all
drilling, development and production operations on the Leases accepted
by the Joint Venture in a prudent and workmanlike manner, in
accordance with accepted industry practices. NEC and CFE shall provide
Arete Energy with a development plan for the Leases prepared in
conjunction with such operator and with the advice of qualified and
experienced petroleum professionals, including geologists and
engineers. Arete Energy shall disburse all drilling and development
funds in accordance with such plans as are mutually approved, from an
escrow account formed for such purpose.
3. NEC will assure that Arete Energy receives timely reports from the
operator of status and results of drilling and development operations.
CFE will be required to prepare and transmit to Arete Energy, a joint
interest billing, together with any net revenues from the Leases,
segregated by LLLP, on a monthly basis. CFE will also be required to
prepare and transmit to Arete Energy an annual summary of pro-rata
share of leasehold, equipment, development and lease operating
expenses, and revenues, for tax purposes no later than March 15 of
each year. NEC will also provide or arrange that Arete Energy have
access to information, literature, status updates, field reports,
summaries and reports, or anything else which may be reasonably
requested by Arete Energy from time to time, upon reasonable notice.
This will include arranging field visits by Arete (or its investors)
upon reasonable notice for the purpose of visiting the Leases or
viewing operations.
4. Arete Energy will be delegated the responsibility of coordinating and
managing financing efforts including legal matters, due diligence,
hiring and retaining accountants, lawyers, engaging fundraisers,
managing offerings, escrowing offering proceeds, issuing instructions
to escrow agents, and providing financial projections and making
investment representations to prospective investors, as well as
qualifying, accepting and rejecting subscription offers. Each LLLP
will be the offeror of the Limited Partnership Interests under the
heading of the General Partner. All Parties will fully cooperate with
Arete Energy in the legal and accounting due diligence and disclosure
process to ensure minimization of risk to the Parties for securities
fraud liability. Financing the Joint Venture will be conducted on a
best efforts basis, with no Party guaranteeing a successful funding
for any or all of the proposed LLLP's.
Please sign below your name.
Xxxxxx X. Xxxxx Xxx Xxx Xxxxxx Xxxxxx Xxxxxx Xxxxx Xxxxx
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/s/ Xxxxxx X. Xxxxx /s/ Xxx Xxx Xxxxxx /s/ Xxxxxx Xxxxxx /s/ Xxxxx Xxxxx
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Xxxxx Herrtage
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/s/ Xxxxx Herrtage
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5. Arete Energy will be delegated responsibility to manage the day to day
operations of each LLLP. Each of the Parties taking Special Limited
Partnership Interests, are contributing their special expertise,
contacts and opportunities as stated herein, to each LLLP, and will
obtain to general partner liability only as to performance of those
duties, and contribution of those contacts, expertise and
opportunities.
D. Neither the execution and delivery of this Agreement nor the performance by
either party of any provision hereof shall constitute or be deemed or
construed to constitute either of the Parties hereto an owner, partner,
parent, subsidiary, division, or employee of the other. It is acknowledged
that each Party is in full control of their business and operations and
shall conduct such business and operations in accordance with their own
respective judgment and discretion, in accordance with applicable laws and
the provisions of this Agreement. Neither Party shall have the right to
bind or obligate each other to any debts, liabilities or obligations of the
other, including hiring of personnel. Each Party alone shall be responsible
for the payment of all costs, expenses and taxes in connection with their
business and operations. Each Party and their successors shall indemnify,
defend and hold the other harmless from and against any and all claims,
liability, costs, fees of legal counsel and any and all other expenses of
every kind and nature arising out of or in connection with the conduct by
each Party of its business and operations, including any act or omission of
its agents, whether arising from this Agreement, the offering contemplated
hereby, or otherwise.
E. The activities of the Joint Venture shall be accounted for according to
best practices of partnership accounting for oil and gas ventures.
Financial statements prepared for the Joint Venture shall be reviewed by an
accounting firm to be retained by the Joint Venture to be paid for out of
revenues of the Joint Venture or contributions by the Parties on an equal
basis. The Parties shall mutually agree whether to elect partnership tax
status, and how to allocate tax credits or benefits among the various
Parties and Limited Partner Interests.
F. The Joint Venture shall be treated as a legal entity pursuant to the laws
of the State of Colorado for such entities. Parties shall be deemed equal
partners in the Joint Venture subject to the rights, privileges and duties
of Joint Venture Partners according to the provisions of such laws and
further subject to the allocations set forth in the previous section
IV. TERMINATION, DEFAULT AND REMEDIES
A. Termination. This Agreement shall terminate on the first to occur of:
1. February 28, 2005, unless earlier terminated or extended by mutual
agreement of a majority of the Parties.
2. Achievement of formation, funding and commencing operations on each of
the four (4) LLLP's, which may be increased from time to time, unless
the Parties determine not to pursue development of additional Leases
over and above the original 24 Leases.
3. An event of Default, including:
a. The non-terminating Party shall commit a material breach of any
of its obligations hereunder and such breach shall not have been
remedied within thirty (30) days following receipt of written
notification of such breach, except when both Parties otherwise
agree in writing to modify the terms of the Agreement.
b. The other Party shall commit a corroborated act of fraud,
misrepresentation or concealment of material information
materially injurious to the other; or
c. The other Party shall be adjudicated bankrupt, shall file for
reorganization under any law relating to creditors rights, shall
have a receiver appointed for all or any material part of its
property, or shall commit any act of bankruptcy, whether
voluntary or involuntary.
4. The operating terms of this Agreement shall survive any termination
hereunder with regard to effective Leases conveyed to the Joint
Venture and funded under the terms hereof, and no termination shall
serve to sever or defeat any rights of the terminating or terminated
Party nor serve as an act of partition with respect thereto.
V. MISCELLANEOUS
A. Each of the Parties hereto shall execute and deliver such other and
further documents and instruments, and take such other and further
actions, as may be reasonably requested of them for the implementation
and consummation of this Agreement and the transactions herein
contemplated.
Please sign below your name.
Xxxxxx X. Xxxxx Xxx Xxx Xxxxxx Xxxxxx Xxxxxx Xxxxx Xxxxx
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/s/ Xxxxxx X. Xxxxx /s/ Xxx Xxx Xxxxxx /s/ Xxxxxx Xxxxxx /s/ Xxxxx Xxxxx
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Xxxxx Herrtage
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/s/ Xxxxx Herrtage
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B. Unless an assignment or transfer is made by or on behalf of a Party through
a court decree, decree of dissolution of marriage, or by a Party to a legal
entity over which it has at least majority ownership and control, this
Agreement may not be assigned in whole or in part by any Party without the
express written consent of the other Parties, which consent shall not be
unreasonably withheld.
C. This Agreement is made and shall be governed in all respects, including
validity, interpretation and effect, by the laws of the State of Colorado.
D. All notices, requests or demands and other communications hereunder must be
in writing and shall be deemed to have been duly made if personally
delivered or mailed, postage prepaid, or by facsimile, with original
confirmation delivered contemporaneously by mail or courier, to the Parties
at their addresses listed below with attendant proof of delivery, effective
on the date posted Any Party hereto may change its address by written
notice to the other Parties given in accordance with this Section.
E. This Agreement contains the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior agreements,
understandings and writings between the Parties with respect to the subject
matter hereof. Each Party hereto acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by
any Party, or anyone acting with authority on behalf of any Party, which
are not embodied herein or in an exhibit hereto, and that no other
agreement, statement or promise may be relied upon or shall be valid or
binding. Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated orally. This Agreement may be amended or any term
hereof may be changed, waived, discharged or terminated only by an
agreement in writing signed by all Parties.
F. In the event that any provision of this Agreement shall be unenforceable or
inoperative as a matter of law, the remaining provisions shall remain in
full force and effect.
G. No waiver of any breach or default of this Agreement by any Party hereto
shall be considered to be a waiver of any prior, concurrent or subsequent
breach or default of this Agreement.
H. All claims, disputes or deadlocks arising out of this Agreement, or the
breach thereof, shall be decided by binding arbitration in accordance with
the Rules of the American Arbitration Association then obtained, unless the
Parties shall mutually agree otherwise. Notice of demand for arbitration
shall be filed in writing by each Party with the American Arbitration
Association and shall be made within a reasonable time after a claim,
dispute or deadlock has arisen. Each Party shall bear their own legal fees
and expenses of an arbitration including a pro-rata portion of the
arbitrator's fees and costs. The decision of the arbitrator may include an
award for monetary and/or exemplary damages and shall be binding and
conclusive on the Parties. The exclusive venue for such arbitration, or for
any dispute arising out of this Agreement, shall be Boulder County,
Colorado.
I. This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which taken together shall constitute but one
and the same document.
J. The Parties shall periodically, but no less frequently than weekly, consult
with each other as to the manner of performance of the continuing
obligations contemplated hereby and shall fully cooperate with one another
in efforts to accomplish their common objectives.
IN WITNESS WHEREOF, the Parties have executed this Agreement effective as
of the date first above written.
ARETE INDUSTRIES, INC. NORTH ENERGY COMPANY
A Colorado corporation a Texas corporation
By: /s/ Xxxxxx X. Xxxxx By: /s/ Xxx Xxx Xxxxxx
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Xxxxxx X. Xxxxx, CEO Xxx Xxx Xxxxxx, President
(Phone: ) (Phone: )
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Address: Address:
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KNIGHT GROUP, INC ARETE ENERGY DEVELOPMENT GROUP, INC
A Florida corporation a corporation to be formed
By: /s/ Xxxxx Xxxxx By: /s/ Xxxxxx X. Xxxxx
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Xxxxx Xxxxx, President Xxxxxx X. Xxxxx, Organizer
(Phone: ) (Phone: )
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Address: Address:
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..INDIVIDUALLY:
By: /s/ Xxxxxx X. Xxxxxx Phone:
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Xxxxxx X. Xxxxxx Address
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By: /s/ Xxxxx Herrtage Phone:
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Xxxxx Herrtage Address:
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By: /s/ Xxxxxx X. Xxxxx Phone:
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Xxxxxx X. Xxxxx Address:
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