SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2004
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Commission file No. 33-16820-D
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OR
[] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
ARETE INDUSTRIES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Colorado 84-1508638
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
7102 La Vista Place, Suite 100, Niwot, Colorado, 80503
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(Address of Principal Executive Offices) (Zip Code)
(303) 652-3113
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports(s), and, 2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB [ X ].
State Issuer's revenues for the most recent fiscal year: $ 0
On April 14, 2005, the Registrant had 149,236,582 shares of common voting stock
held by non-affiliates. The aggregate market value of shares of voting and
non-voting common equity held by non-affiliates was $395,477 on this date. This
valuation is based upon the average of the best bid and ask price for shares of
common voting and non-voting equity of the Registrant on the "Electronic
Bulletin Board" of the National Associational of Securities Dealers, Inc.,
("NASD") on April 13, 2005.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
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Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
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On April 14, 2005, the issuer had 216,209,867 shares of no par value common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g. Part I, Part II, etc) into which
the document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).
None
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
PART I
Item 1- Description of Business
Forward Looking Statements
This Annual Report on Form 10-KSB includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact,
including statements regarding industry prospects and future results of
operations of financial position, made in this Annual Report on Form 10-KSB are
forward looking. We use words such as "anticipates," "believes," "expects,"
"future" and "intends" and similar expressions to identify forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. The Company's actual results may differ
significantly from management's expectations. The following discussion includes
forward-looking statements regarding expectations of future profitability of our
business and the businesses we choose to invest in, gross margin, improvement in
operating loss and sales, all of which are inherently difficult to predict.
Actual results could differ significantly for a variety of reasons, including
the accessibility and cost of new investment capital, the ability of the Company
to attract viable business ventures and the ability of those ventures to achieve
their stated objectives, economic and political uncertainty, and the timing of
the Company's investments, customer spending patterns, the mix of products sold
to customers, the mix of revenues derived from product sales as compared to
services, and risks of fulfillment throughout and productivity. These risks and
uncertainties, as well as other risks and uncertainties, could cause the
Company's actual results to differ significantly from management's expectations.
General Development of the Business
Arete Industries, Inc., (the "Company") was organized under the laws of the
State of Colorado on July 21, 1987, under the name "Travis Investments, Inc." In
late 1987 the company completed a blank check public offering and merged with a
company named Vallarta, Inc., and its subsidiary Le Mail, Inc., where after the
name was changed to Travis Industries, Inc. On September 1, 1998, the
shareholders approved the name change of the Company to Arete Industries, Inc.
Since then, the Company has been in an evolutionary process of becoming a seed
and growth stage business development company originating several in-house
business initiatives as well as business initiatives for outside clients.
From inception in 1987 until early March 2000, the Company was in the business
of cooperative direct mail coupon advertising. This business included a
nationally franchised sales force and an in-house printing and mailing facility
assembled from several business acquisitions made by the Company from inception
through 1994, when the Company underwent a reorganization and change in control.
From 1995 until May 1, 1998, the Company's former management sought the
acquisition of an entirely new business while maintaining the coupon printing
business for possible sale or liquidation.
In May 1998, a second change in control was implemented and its then officers
and directors resigned and were replaced by the current Chairman and CEO. At
that time the Company became a holding company by the formation of a new
minority-owned subsidiary corporation, Aggression Sports, Inc. to develop
business opportunities in the outdoor sports industry brought in by the new CEO.
The Company also transferred all print and direct mail operations in Council
Arete Industries, Inc. Page 1 Form 10-KSB 12/31/2004
Bluffs, Iowa, including certain operating assets and liabilities into a second,
wholly owned subsidiary, Global Direct Marketing Services, Inc. Following the
end of the fiscal year ended December 31, 2004, the Company resolved to dissolve
its two subsidiaries and has initiated procedures to close out all inter-company
accounts and consolidating accounts related to these subsidiaries.
From May 1998 until March 2000, new management undertook to turn the printing
and direct mail operations around by moving operations to Denver and joining
facilities with an independent logistics and fulfillment operation. In the
spring of 2000, the business was deemed incapable of rehabilitation and was
liquidated and permanently discontinued.
Beginning in 2000, the Company launched its first entirely new business
initiative to cultivate start-ups as a new business incubator. In May of 2000,
the Company's CEO brought in a new management team to provide financial,
management, technical and marketing services along with on-site operating
facilities and administrative staff to young companies to help them raise
outside capital and execute their business plans in exchange for equity
participations and management fees. The Company took in three incubation
projects, the Arete Outdoors' outdoor sports products venture; the Applied
Behavior Systems ("ABS") commercialization of a computer automated artificial
intelligence-based speech learning system for the learning disabled; and several
new spin-off applications of the ABS artificial intelligence technology through
a new company, Seventh Generation Technologies, Inc. ("7GT"). While the Company
achieved tangible success in bringing these new business entities forward with
its own limited resources, including significant financial resources contributed
by principals of the Company, due largely to the adverse economic conditions
surrounding the `dot-com' crash, these entities were unable to generate further
investment capital and/or strategic financial and industry partners to sustain
their development. The Company attempted to reconfigure and redirect these
ventures to more viable business models suitable to the then current business
environment, but was forced to terminate its financial and management support of
these business ventures, and to turn its focus toward ensuring its own survival.
By the middle of 2001 and continuing through mid-2002, the Company was downsized
to two employees, office equipment was liquidated and overhead was reduced to a
minimum. During this time, the Company looked for opportunities to assist more
mature emerging and high growth-stage businesses with financial and board level
managerial support with a view of taking such companies public through a
registered rights offering or dividend spin-off distribution to the Company's
shareholders. To assist these efforts, the Company launched an initiative with
an independent corporate and commercial bond financing originator to develop a
captive source of investment capital for its venture development activities.
While a number of projects were originated and in progress, the events of
September 11, 2001 essentially neutralized these efforts. In December 2001, the
Company began a private placement of up to $200,000 in Series 2 Convertible
Preferred Stock. This subscription was completed in March 2003 with the
investment by affiliates of the Company's then two directors and certain
non-affiliated investors of $100,000 in cash and by the conversion of $100,000
in notes payable to unrelated parties into 20,000 shares of Series 2 Convertible
Preferred stock, convertible into 20,000,000 shares of Common Stock of the
Company. At the end of 2002, once most of the equipment and inventory from our
discontinued operations had been disposed of, we closed our offices in Boulder
and moved to an executive suite in Niwot, Colorado to reduce overhead. We still
maintain a storage facility for our files, furniture and the Arete Outdoors
inventory which is currently held for sale or disposal.
Arete Industries, Inc. Page 2 Form 10-KSB 12/31/2004
In July 2002, the shareholders approved a 20 to 1 reverse stock split of our
common stock without reducing authorized capital. From mid-2002 through the
second quarter of 2003, we pursued a number of business development projects as
acquisition or dividend spin-off candidates and corporate finance clients. Our
efforts were impaired by the lack of availability of outside investment capital
and because our internal bond funding venture failed to produce results. By June
2003, we terminated our efforts to develop acquisition capital through bond and
other equity fund instruments, and embarked on an entirely new business model
pursuing traditional and alternative energy investments.
In September of 2003, we added three independent directors to help the Company
upgrade our corporate governance and to support our CEO in executing this new
business model. These new independent directors form the Company's Audit,
Compensation and Nominating Committees of the board of directors. During the
fall of 2003, we retained several independent business and financial consultants
to assist in focusing our business plan, developing investment banking
relationships, perform business development, public and financial relations and
to help recruit advisory board members to add expertise in traditional and
alternative energy.
To more appropriately reflect our current business activities and operations, in
August of 2003 we recast the Company as in its development stage, and bifurcated
our financial statements to reflect discontinued operations separately from
continuing operations. Since that time, our continuing operations have consisted
of development of business opportunities in traditional oil and gas by direct
acquisition and funding of drilling and/or development partnerships and joint
ventures. We also have continued our efforts to improve our corporate
governance, our securities law compliance, and liquidating or disposing
non-productive and unused operating assets and eliminating debt barred by the
statute of limitations. Without revenue, we have operated in reliance on
contributions from affiliates throughout 2003 and 2004, on accrual and deferral
of executive compensation, and payment for advisory and consulting services with
common stock and stock options.
Our efforts in these areas reflect our intent to attract new investors and give
the Company additional transactional options including a possible acquisition
through a reverse merger. We also are in the process of identifying and
qualifying several ventures for placement into new subsidiaries and possibly
spinning them out to our shareholder base in a stock dividend and/or rights
offering in the near-term.
Current Business of the Company
In 2003 and continuing through the present, we continue to recast and refocus
our business development activities in the Energy Industry. This includes
attempts to acquire participating interests in traditional oil and gas
development projects, primarily of overlooked and by-passed reserves of oil
and/or natural gas in the Western Hemisphere. Additionally, we are looking to
purchase non-operating positions in producing fields with the possibility of
additional in-field development. Both these approaches allow us access to both
debt and equity capital and an opportunity to earn-in equity positions or a
"promote" for organizing and managing the project. This approach serves our
entry-level objective of establishing revenue and an asset base for further
expansion. We have sought to pursue projects with high-profit potential, low
entry-cost and low exploration risk to take advantage of rising domestic energy
prices and relatively inexpensive capital becoming available for low risk
projects. In this way we seek to avoid the high cost of capital associated with
more speculative `wildcat' projects where investors require well capitalized
participants with substantial track records. We are currently working with an
expanding base of oil and gas prospect generators, independent energy developers
and private and institutional investors. We are also looking for an opportunity
to acquire one or more established oil and gas companies whose owners either
require liquidity for expansion or an exit strategy.
Arete Industries, Inc. Page 3 Form 10-KSB 12/31/2004
Our longer term vision is to leverage future traditional oil and gas investments
into alternative and renewable energy development projects including bio-mass,
co-generation, solar, wind, municipal and organic waste conversion into
bio-fuels and alternative electrical energy feed stocks. In this connection, our
longer term vision is to expand financial services capabilities into development
of energy investment funds and traditional and alternative energy trading,
including barter. This will require that we develop significant infrastructure
and working capital, which at this stage, cannot be assured with any level of
certainty. Additionally, while the Company contemplates focusing its energy and
resources on this plan for the indefinite future, it has not entirely abandoned
its vision of assisting promising emerging and high growth-stage businesses with
financial and board level managerial support with a view of taking such
companies public through a registered rights offering or dividend distribution
to the Company's shareholders.
We have been moving aggressively to achieve all of our objectives despite a
number of challenges not the least of which are our minimal financial and human
resources. And while these circumstances have made our business development
efforts problematic, throughout 2004, we were tenacious in pursuing several
attractive oil and gas development prospects. Beginning at the end of 2003, we
engaged in two specific projects aided by several business and financial
consultants. In the second quarter of 2004, we established a formal relationship
with an investment banking consulting firm specializing in oil and gas
financing, which provides valuable advice and support in our ongoing evaluation
of new prospects. This group provides us with access to numerous professional
equity funding sources that specialize in financing oil and gas development
projects.
The two prospects we undertook to acquire and fund during 2004 utilized
significant company resources and after considerable due diligence and review by
our investment banking consultant, were ultimately rejected. The typical project
we have been looking at has required from $15 to $25 Million in acquisition and
drilling capital. Although we have been able to develop a considerable number of
new candidates, we have very recently determined to pursue a less challenging
path for the near-term to acquire producing properties with in-field development
potential, and of considerably smaller size that will provide cash flow for
operations and create free assets for a borrowing base to achieve sustainable
near-term growth. Several new prospects of this nature were introduced to the
Company during the fourth quarter of 2004 by one of our outside directors, and
we are currently moving forward to secure debt and equity funding to purchase a
non-operating interest in this project.
In the fourth quarter of 2004, the Company formed a new subsidiary to pursue an
acquisition of one of the mentioned prospects with a number of producing wells
and several potential new in-field or offset wells in Northeastern Colorado. The
subsidiary was initially capitalized by small cash contributions made personally
by three of the Company's outside directors including the introducing director
for an aggregate of 15% of the new subsidiary's common stock with the
understanding that the Company would receive the other 85% of the founders'
stock. It is contemplated that this prospect would, if possible, be financed
through a portion of short-term bank financing plus private equity through third
parties which will in all likelihood dilute the Company's equity position by an
as yet undetermined amount. At this time, the subsidiary is negotiating terms of
an acquisition agreement subject to financing and completion of due diligence,
which is targeted to be completed during the second quarter of fiscal year 2005.
In the event that this transaction does close, it is the intent of the Company
and the three outside directors, to pursue a dividend spin-off of this
subsidiary to the Company's shareholders during fiscal year 2005, of which there
Arete Industries, Inc. Page 4 Form 10-KSB 12/31/2004
can be no assurance that a purchase agreement will be executed or that proposed
debt and equity financing will be completed in any agreed upon time frame, if
ever. Additionally, the three outside directors who are acting as the board and
executive officers of the new subsidiary will directly benefit from their equity
and management positions in the new subsidiary and as such, their dealings will
not be considered at arm's length with the Company or the subsidiary. (See:
Certain Relationships and Related Transactions, Transactions with Management and
Others.)
Current Capitalization of the Company.
Effective July 15, 2002, the shareholders of the Company approved a 20 for 1
reverse stock split. All common share references herein have been revised to
reflect the reverse split. The Company has 500,000,000 shares of Capital Stock
authorized of which 1,000,000 shares have been designated $10 face value Class A
Preferred Stock pursuant to an Amended Certificate of Class A Preferred adopted
by the board of directors on February 26, 2001. As of April 14, 2005 there are
216,209,867 shares of common stock, no par value, issued and outstanding, and no
shares of Class A Preferred Stock outstanding as of December 31, 2004.
As of December 31, 2003, there were 19,200 shares of Series 2 Class A Preferred
outstanding that were convertible into 19,200,000 shares of common stock. On
March 25, 2004, 4,050 of such shares were converted into 4,050,000 common shares
and distributed to unaffiliated parties. Additionally, on October 27, 2004, the
remaining 15,150 shares of such Series 2 Preferred were distributed to an
affiliate of the CEO and converted into 15,150,000 common shares, and the Series
2 Convertible Preferred Shares was retired. (See: Security Ownership of Certain
Beneficial Owners and Management, Certain Relationships and Related
Transactions.)
Intellectual Property
There is no intellectual property of Arete Industries for its current business
focus other than the intellectual property and trademarks developed in its
subsidiaries and investments. The Company owns certain US registered trademarks
associated primarily with its subsidiary, Aggression Sports, Inc., and certain
trademarks associated with its discontinued print and direct mail operations,
which, pending other decisions, it intends to maintain in full force and effect.
Seasonality of Business
There is little to no seasonality for Arete Industries in its current business
focus. The primary external economic factor is the business cycle, which is not
seasonal.
Market and Competition
The Company will compete as a financial intermediary with substantially more
mature and well funded financial institutions, investment banks and venture
capital organizations for acquisition and capital funding opportunities in
traditional and alternative energy projects. We will also compete with
well-funded major oil and gas exploration companies, as well as large corporate
energy technology firms that are sponsoring alternative and renewable energy
projects, especially in co-generation and waste to energy projects. We believe
that economic conditions in the United States and elsewhere are exceptionally
harsh to young growth-stage companies in terms of obtaining funding and senior
management support, but that there also is an abundance of promising investment
opportunities that fall below the radar screens of these larger concerns. We
perceive a significant opportunity for the Company to lie in the traditional oil
and gas and the alternative and renewable energy sectors. We especially see a
Arete Industries, Inc. Page 5 Form 10-KSB 12/31/2004
successful entry strategy involving re-development of capped and shut-in natural
gas fields where re-entry and re-working projects in large, known producing
fields can yield significant returns without the attendant risks of wildcat
exploration projects. There is an abundance of overlooked and by-passed reserves
of natural gas and a number of experienced independent oil and gas development
companies looking for development capital. Redevelopment of existing natural gas
fields that were abandoned during times of significantly lower prices and lack
of transportation facilities is a trend that has just begun to gain popularity
with professional investors and traditional private energy investors. Again, to
meet these competitive conditions, the Company must be able to demonstrate that
it can execute on its ability to source equity or debt capital for its potential
portfolio companies, as well as execute its dividend spin-off program
effectively. To meet this challenge, the Company needs to build a track record
and demonstrate that it has access to capital, of which there can be no
assurance.
Cost of Compliance with Environmental Laws
As a financial intermediary for energy development that will represent investors
in these ventures, there is no direct liability or operating cost to the Company
associated with significant waste by-products which are discharged into the
environment or which require special handling or the incurring of additional
costs for disposal. While, as a technical matter these costs are associated with
traditional oil and gas as well as alternative and renewable energy projects,
they represent investment risks to the Company and its prospective client
investors. Accordingly, costs of compliance with environmental laws, rules and
regulations have not been segregated and are believed to be nominal. The Company
is unaware of any pending or proposed environmental laws, rules or regulations,
the effect of which would be adverse to its contemplated operations.
Employees
Arete Industries' CEO is currently employed as an independent contractor and has
been compensated during the current fiscal year in common stock and has accrued
a significant amount of his salary, which has recently been converted into a
convertible promissory note. He devotes such time to the Company as is necessary
to pursue its business plan and perform legal and administrative tasks required
by the federal and state securities laws and regulations. He is not constrained
from pursuing other ventures outside of the Company including oil and gas
ventures, provided he notifies the board of directors upon recognition of an oil
and gas opportunity and first offering such opportunity to the Company through
its independent board members. We employ one administrative assistant who is
also an independent contractor under a monthly stipend. The other directors and
an executive officer are being compensated for their input and consultation on a
project by project basis as well as for the risk associated with holding a
position as an officer and director of a public company without Errors and
Omissions Insurance.
Item 2-Description of Property
Arete Industries Inc. currently leases approximately 200 square feet of office
space in an executive suite located in Niwot, Colorado, seven miles North of
Boulder, Colorado. The Company also rents an off-site storage facility. It is
anticipated this location is sufficient for Arete's business development
operations for the foreseeable future.
Item 3-Legal Proceedings
As of the date of this Report, there were no material pending or contemplated
legal proceedings against the Company or any of its subsidiaries, other than
routine matters incidental to the business.
Arete Industries, Inc. Page 6 Form 10-KSB 12/31/2004
Item 4-Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2004.
PART II
Item 5-Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is listed on the Over the Counter "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.,
("NASD") under the symbol "OTCBB:ARET".
The following table shows the range of quarterly high and low bid quotations for
the Company's common stock for the past two fiscal years, as reported by
NASDAQ's OTC Bulletin Board. Prices reflect inter-dealer prices and do not
necessarily reflect actual transactions, retail mark-up, mark-down or
commission, and are adjusted retroactively to reflect a 20 to 1 Reverse Stock
Split, which was effected July 15, 2002.
STOCK QUOTATIONS
Fye 12/31/03 BID
Quarter Ending High Low
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3/31/03 0.03 0.01
6/30/03 0.029 0.01
9/30/03 0.019 0.01
12/31/03 0.069 0.01
Fye 12/31/04
Quarter Ending High Low
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3/31/04 0.038 0.016
6/30/04 0.03 0.0102
9/30/04 0.011 0.005
12/31/04 0.022 0.005
As of April 14, 2005 the number of record holders of the Company's common stock
was 423. This number does not include the indeterminate number of stockholders
whose shares are held by brokers as "nominees" or in street name.
Dividends
The Company has not paid any dividends with respect to its common stock and it
is not anticipated that the company will pay dividends in the foreseeable
future. There are no accrued dividends outstanding on any class of Preferred
Stock of the Company.
Arete Industries, Inc. Page 7 Form 10-KSB 12/31/2004
Item 6-Management's Discussion and Analysis
Critical accounting policies:
The Company has identified the accounting policies described below as critical
to its business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout this section where such
policies affect the Company's reported and expected financial results. The
preparation of this Annual Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities of the
Company, revenues and expenses of the Company during the reporting period and
contingent assets and liabilities as of the date of the Company's financial
statements. There can be no assurance that the actual results will not differ
from those estimates.
Stock issuances:
The Company has relied upon the issuance of shares of its common and preferred
stock, and options to purchase its common stock and preferred stock as well as
accrual of salary of its senior executive officer to fund much of the Company's
operations. The following describes the methods used to record various stock
related transactions.
Stock issued for services is valued at the market price of the Company's stock
at the date of grant.
Compensation related to the issuance of stock options to employees and directors
is recorded at the intrinsic value of the options, which is the market price of
the Company's common stock less the exercise price of the option at the
measurement date. The Company's common stock options issued to consultants are
recorded at the fair value of the Company's options computed using the
Black-Scholes Model.
Overview.
Effective July 15, 2002, the Company enacted a recapitalization of its
outstanding common shares by effecting a 20 to 1 reverse stock split, done
without changing the total amount of authorized common shares. All references
herein to common stock have been restated to reflect the effect of this reverse
split.
During the third quarter of 2003, the Company was reclassified as being in its
development stage with the cessation of operations of its Aggression Sports,
Inc. subsidiary; having discontinued operations as a business development
company focusing on developing certain bond and other funding vehicles for
growth stage companies; and having embarked on an entirely new business of
developing opportunities in the traditional and alternative and renewable energy
sectors, which contemplates the formation of capital and management resources to
pursue development of new business opportunities in these areas. This
reclassification of the Company as in its development stage is intended to more
correctly and accurately reflect the current status of the Company and to
properly record results of operations and changes in financial conditional as it
pursues its new business plan. This Report and the accompanying audited
financial statements have been revised to reflect this reclassification and
divergence from its past business endeavors including losses from the write down
of assets and valuation of assets held for disposal from discontinued
operations. (See: Notes to Financial Statements - Note 1 Summary of Significant
Accounting Policies.)
Arete Industries, Inc. Page 8 Form 10-KSB 12/31/2004
Since the beginning of 2002, we terminated our business incubation business;
discontinued operations of its Aggression Sports, Inc. subsidiary; downsized
operations to a single executive suite and a single administrative assistant to
the CEO. From the third quarter of 2002 forward through the third quarter of
2003, the CEO deferred his salary and continued as CEO in an independent
contractor status to allow him the opportunity to supplement his income from
legal and consulting fees from outside clients and to pursue outside
opportunities that are neither in conflict with, nor in competition with the
current business interests of the Company. The CEO resumed accruing consulting
fees in November of 2004, and beginning in the second quarter of 2005, has
discontinued his employment agreement to negotiate his compensation with the
board on a quarterly basis. The Company believes that the overhead consisting of
staff, outside consultants and facilities, coupled with the deferral of salary
and/or payment of professional business consulting services in common stock are
at their absolute minimum to ensure the Company remains viable and current in
its reporting under the federal securities laws, as a public company, which
Management believes is its primary advantage and sole means of developing future
value for its shareholders.
The Company changed its course in mid 2003 to focus its primary efforts on
generating new projects in the traditional and alternative and renewable energy
sectors of the Energy Industry. During the first quarter of 2004, the Company
originated a series of two ventures to develop certain domestic oil and gas
prospects in known oil and gas fields in Texas and Oklahoma. These prospects
required raising equity capital through professional equity investors for each
in excess of $20 Million and took considerable time and resources of the Company
to investigate and validate. For a variety of economic and technical factors the
first project was terminated in April of 2004 and the second project was
terminated in the first quarter of 2005. At the instance of certain of the
outside board members, a new project was initiated in the first quarter of 2005
to acquire a project with a number of proven producing wells with in-field
drilling capabilities into a majority owned subsidiary of the Company. This
project is in its very early stages of documentation, validation and preparation
for funding, and there are no assurances that this project will ultimately be
realized. In recognition of the Company's limited resources, the board of
directors has shifted the company's immediate focus toward pursuing
significantly smaller projects that will spin out cash flow, that will sustain
our operations and provide a base for growth from producing and proven
undeveloped properties.
We continue our efforts to compromise or resolve outstanding obligations
including accrued employee compensation, withholding and other taxes, operating
and trade payables of the Company and its former subsidiary operations. To date
these efforts have been funded by cash advances from related parties, by the
issuance of common stock for services and from proceeds from exercise of stock
options. The Company will be required to rely upon ongoing financial support
from these parties for the foreseeable future.
Financial Condition
During fiscal year ended December 31, 2004, we have principally written down
assets held for disposal from discontinued operations either entirely or by a
percentage that we have estimated would reasonably be recovered from liquidation
or by selling the entire business opportunity outright to a third party. As of
December 31, 2004, the Company had $7,090 in total assets after a write-off of
$50,890 in accrued interest receivable and $25,243 of inventory and molds held
for disposal relative to discontinued operations. This compares to total assets
of $89,438 as of December 31, 2003. Total liabilities were $941,977 as of
December 31, 2004 compared to $1,193,123 as of December 31, 2003. Accounts
payable and accrued expenses at December 31, 2004 were $919,890 as compared to
$1,162,900 at December 31, 2003. During the fiscal year ended December 31, 2004,
Arete Industries, Inc. Page 9 Form 10-KSB 12/31/2004
liabilities were reduced by $251,146 including $54,054 from extinguishment of
debt and $232,250 in payment of accrued wages to the CEO with common stock. The
operating losses from continuing operations of $977,037 and extinguishment of
debt of $54,054 resulted in a net loss of $922,983 contributing to the
accumulated deficit as of December 31, 2004 of $12,523,565, as compared to an
accumulated deficit as of December 31, 2003 of $11,600,582. (See: Note 1 to
Financial Statements.)
The Company's subsidiary, Global Direct Marketing Services, Inc., which is now
inactive, had, as of December 31, 2003, left an obligation of trade payables of
$54,055 and $58,230 in unpaid payroll taxes, and as of December 31, 2004, all
$54,055 of the trade payables were reclassified as extinguished. During 2003,
the Company abandoned the development of the Aggression Sports, Inc. subsidiary.
At December 31, 2004, the remaining liabilities of this subsidiary were $91,077
in trade payables and $79,351 in unpaid payroll taxes. As of December 31, 2004,
the consolidated entity owes $289,363 in unpaid payroll taxes of which $151,782
applies specifically to the parent company for periods through the fourth
quarter of 2001. (See: Notes 1 and 2 to Financial Statements.)
During the fiscal year ended December 31, 2004, the Company continued to rely
upon infusions of cash from exercise of stock options, loans and cash advances
by officers, directors and affiliates of the Company. During the fiscal year
ended December 31, 2004, the Company paid prior period accrued salary and
converted a previous settlement agreement with the CEO valued at $405,000 into
25,000,000 shares unregistered common stock; paid $223,750 in compensation to
officers and directors with 20,140,947 shares of common stock and $344,673 to
consultants and professionals with 21,861,495 shares of common stock; received
$60,000 in cash from an unrelated party in exercise of stock options, received
$19,000 in cash on exercise of stock options by officers and directors; and
booked an expense of $20,858 (net of $5,562 credited on cancellation of
1,000,000 share option) in value of stock options granted to consultants using
the Black-Sholes option pricing model. As of December 31, 2004, executive
salaries and bonuses of $286,624 were accrued and unpaid, and the Company had
$218,820 in notes receivable for stock sales from former management members
together with a note receivable for exercise of a stock option of $4,000 from a
third party for a total of $ 222,830.
Results of operations
As stated above, at the beginning of the third quarter of fiscal 2003, the
Company discontinued former operations and set about pursuing a new business
plan in the energy industry as a development stage entity and reported results
of continuing operations and of discontinued operations separately for the
current fiscal year and for fiscal 2003. (See: Note 1 to Financial Statements.)
The Company had no revenues from operations for the fiscal year ended December
31, 2004 nor for fiscal year ended December 31, 2003. Net loss from continuing
operations for the fiscal year ended December 31, 2004 was $977,037 as compared
to a net loss from continuing operations of $463,041 for the fiscal year ended
December 31, 2003. The net loss from discontinued operations for the fiscal year
ended December 31, 2003 was $383,374. The extinguishment of debt of $123,141
offset other losses in fiscal year ended December 31, 2003. This resulted in an
aggregate net loss for the fiscal year ended December 31, 2003 of $723,274. The
increase in net loss during the fiscal year ended December 31, 2004 over the
prior year of $199,709 is largely due to compensation to officers, directors,
professionals and consultants.
Arete Industries, Inc. Page 10 Form 10-KSB 12/31/2004
In January 2003, the Company moved to an executive suite on a month to month
basis reducing its rent to $1,000 per month. The Company continues to rent
storage space for file storage, furniture and excess equipment as well as its
Arete Outdoors inventory for approximately $125 per month.
As stated above, we will continue to operate the Company on an austere program
of minimum overhead, while obtaining access to expertise in the areas we are
pursuing with the use of our common stock and common stock options as incentives
during the development stage of our new business model. Further as opportunities
for participation in profitable revenue producing projects come forward, we
intend that consultants and advisors will be offered compensation from revenues
or interests, direct participations, royalties or other incentives from the
specific projects to which they contribute. While reducing the amount of
variable costs, there is almost no way to reduce or offset our fixed expenses
related to office expense, legal, accounting, transfer agent fees, Securities
Act reporting, corporate governance, and shareholder communications. Our future
expectation is that monthly operating expenses will remain as low as possible
until new opportunities are initiated, of which there can be no assurance, in
which event, the operating costs of the Company may increase relative to the
need for administrative and executive staff and overhead to provide support for
these new business activities.
Liquidity and Capital Resources
The Company had a working capital deficit as of December 31, 2004 of $938,856.
This compares to a working capital deficit of $1,104,774 in the fiscal year
ended December 31, 2003. During the 12-month period ended December 31, 2004 an
aggregate of 100,453,142 shares of common stock were issued for aggregate
consideration of $1,406,937, (avg. $0.014 per share) and recorded $20,858 in
value of stock options granted to consultants. This compares to the 12-month
period ended December 31, 2003 in which an aggregate of 48,193,045 shares of
common stock were issued for aggregate consideration of $759,469 (avg. $0.0158
per share), recorded $31,647 in value of stock options granted to consultants,
and the Company issued 1,458 shares of Series 2 Convertible Preferred Stock at
face value of $14,575.
The Company had a stockholder's deficit at December 31, 2004 of $934,887. This
is compared to stockholder's deficit at December 31, 2003 of $1,103,685. The
stockholder's deficit decreased due to the Company's net operating loss offset
by the exercise of stock options for cash and an increase in payments for
services with common stock.
At December 31, 2004, the Company had no material commitments for capital
expenditures.
Due to its recent liquidity issues, the Company has defaulted on several short
term obligations including for its operating overhead, trade payables, and state
and federal employment taxes, resulting in tax liens being imposed on the
Company's assets, which will have to be resolved with an infusion of new
capital, of which no assurances can be made.
Management believes that the Company will experience significant difficulty
raising significant additional equity capital or attracting viable acquisition
candidates until these matters have been resolved and the Company has eliminated
a substantial amount of its outstanding debt.
During the second quarter of 2002, the Company reduced the number of outstanding
common shares (through a 1 for 20 reverse stock split) to allow it to raise new
equity capital and to effect conversion and exercise of outstanding common stock
options and conversion rights of preferred stock which had been reserved for
issuance to insiders in exchange for their accrued cash advances, and for
issuance in a private placement of $200,000 in Series 2 Convertible Preferred
stock, which the Company completed on August 14, 2003. As of December 31, 2004,
all outstanding shares of Convertible Preferred Stock had been converted into
common stock.
Arete Industries, Inc. Page 11 Form 10-KSB 12/31/2004
The Company relies on infusions of cash for operations from officers and
directors, from deferral of salary, from services rendered for stock
compensation, and from proceeds of exercise of stock options. The Company's
success depends upon its ability to generate revenue from oil and gas projects
in the form of management fees and equity participation in revenue streams from
projects it is currently pursuing and future projects developed from its
business development activities introduced by its officers, directors and
consultants.
(See: Executive Compensation Tables and Notes thereto.)
The Company may continue to be required to issue further stock to pay
executives, consultants and other employees, which may have a continuing
dilutive effect on other shareholders of the Company. Failure of the Company to
acquire additional capital in the form of either debt or equity capital will
most likely impair the ability of the Company to meet its obligations in the
near-term.
Item 7-Financial Statements
The financial statements listed in the accompanying index to financial
statements are set forth under Part IV, Item 13 to this report and incorporated
herein by reference.
Item 8-Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
On May 5, 2004, Causey Demgen & Moore, Inc. ("CDM") notified our audit committee
that it was declining to stand for re-election as the Company's independent
registered public accounting firm as of May 5, 2004. On that date the audit
committee made the decision to engage Ronald R. Chadwick, PC ("Chadwick") for
the fiscal year ending December 31, 2004 as our new independent registered
public accounting firm, as of that date.
The change in accountants was mandated by the limitations on terms for
independent registered pubic accounting firms imposed under the Federal
Securities Laws, including the Sarbanes-Oxley Act. The reports of CDM on our
financial statements for the years ended December 31, 2002 and 2003 did not
contain an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope, or accounting principle. However, CDM's reports for
the years ended December 31, 2002 and 2003 included an explanatory paragraph
noting our recurring losses from operations and our requirement for additional
funding, which raised doubt about our ability to continue as a going concern.
In connection with its audits of our financial statements for the years ended
December 31, 2002 and 2003, there were no disagreements with CDM on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of CDM, would have caused it to make reference thereto in its
reports.
During our two most recent fiscal years and the period from the end of the most
recent fiscal year to the date of appointment of Chadwick, neither we nor anyone
acting on our behalf consulted with Chadwick with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
or any other matters or event set forth in Items 304(a)(2)(i) and (ii) of
Regulation SB.
Arete Industries, Inc. Page 12 Form 10-KSB 12/31/2004
PART III
Item 9 - Directors, Executive Officers, Promoters and Control persons:
Compliance with Section 16(a) of the Exchange Act.
(a) Officers and Directors
--------------------------
Thomas P. Raabe (51) Chairman and CEO
---------------
Mr. Raabe has served as Chief Executive Officer and a Director of the Company
since May 1, 1998. Mr. Raabe formerly served as special securities and business
counsel on specific projects from time to time for the Company since
approximately 1994. Mr. Raabe has 18 years experience as an entrepreneurial
attorney and business consultant, practicing law in Colorado and representing
corporate clients in complex situations across the nation. As a solo
practitioner, Mr. Raabe has specialized in securities transactions and
compliance, entity formation and governance, business reorganizations, mergers
and acquisitions, and technology protection and exploitation. Mr. Raabe has been
a founder, director and/or counsel for a number of start-up and development
stage companies including robotics, high technology, durable medical equipment,
advanced composites, optics, engineering, film entertainment and most recently,
outdoor and extreme sports ventures. Mr. Raabe has been involved as special
counsel for a number of public and private companies with the responsibility to
design and execute corporate finance transactions, turn-arounds and capital
restructuring projects and corporate securities compliance for several
Securities Exchange Act reporting companies. Prior to joining the Company as CEO
in May of 1998, Mr. Raabe entered into a letter of intent with the Company to
acquire an entity he controlled to pursue acquisitions of outdoor sports
businesses through his contacts. In February 1998, a press release was issued
concerning this transaction and a potential acquisition candidate, which was
later made subject of an enforcement action against the Company by the
Commission. This action has been settled as of October 2001 in which Mr. Raabe
and the Company agreed to consent to imposition of an administrative order
against them, without Mr. Raabe or the Company admitting or denying the findings
of fact contained therein, and without the imposition of any financial or other
sanctions against them, to cease and desist from committing or causing any
violations and any future violations of Sections 10(b), 15d-1 and 15d-3 of the
Exchange Act and Rules 10b-5, 15d-1 and 15d-13, thereunder. Mr. Raabe received
his undergraduate degree in political science from the University of Denver and
his Juris Doctorate from the University of Denver, College of Law, in 1981. In
addition, Mr. Raabe pursued a graduate degree in Mineral Economics jointly with
his law degree and completed three semesters graduate course work and
comprehensive examinations toward a doctorate degree from the Colorado School of
Mines.
William W. Stewart (43) Director.
------------------
Mr. Stewart joined the board of directors on December 19, 2001 at the time the
Company entered into a Letter of Intent with Mr. Stewart to form a subsidiary
corporation to pursue acquisition and management of minor league sports
franchises. From December, 2001 until August, 2002, Mr. Stewart ran the
operations and directed the business plan of Eagle Capital Funding Corp. (Eagle
Capital) to pursue capital funding projects, In addition to serving as an
outside director, Mr. Stewart provides consulting services to the Company
relating to corporate finance, mergers and acquisitions. (See - Certain
Transactions with Management and Others). From 1986 to 1994, Mr. Stewart worked
Arete Industries, Inc. Page 13 Form 10-KSB 12/31/2004
in the brokerage industry as an NASD licensed registered representative. He
started his career with Boettcher and Company of Denver, Colorado and left the
Principal Financial Group of Denver, Colorado in 1994 to open his own small-cap
investment firm, S.W. Gordon Capital, Inc., where he has been its president
since 1994 to the present. He has consulted with many small companies, both
public and private, on capital formation and mergers and acquisitions. Mr.
Stewart formerly served as CEO and is an owner of Larimer County Sports, LLC, a
Colorado Limited Liability Company, which owns the Colorado Eagles Hockey Club a
minor league professional hockey franchise in northern Colorado. Mr. Stewart was
born in The Pas, Manitoba, Canada. Mr. Stewart attended the University of Denver
on a full athletic scholarship where he played hockey from 1979 to 1983 as right
wing and served as assistant captain during his senior year. Mr. Stewart
graduated with a BS, Business Administration from the University of Denver in
1983, with honors as a Student Athlete.
Donald W. Prosser (54) Director.
-----------------
Mr. Prosser joined the Company's Board of Directors in September of 2003,
serving as Director and member of the Company's Compensation, Audit, Policy, and
Compensation Committees. He has been designated as the Company's Financial
Expert under the Sarbanes-Oxley Act. Mr. Prosser is a professional CPA,
specializing in tax and securities accounting, and has represented a number of
private and public companies serving in the capacity of CPA, member of boards of
directors, and as Chief Financial Officer. Mr. Prosser brings to the Company his
great depth of expertise in tax and securities compliance and accounting,
corporate finance transactions and turn-arounds.
From 1997 to 1999, Mr. Prosser served as CFO and Director for Chartwell
International, Inc, a public company publishing high school athletic information
and providing athletic recruiting services. From 1999 to 2000, he served as CFO
and Director for Anything Internet, Inc. and from 2000 to 2001, served as CFO
and Director for its successor, Inform Worldwide Holdings, Inc., which is a
publicly traded company. From 2001 to the present, Mr. Prosser serves as CFO and
Director for Net Commerce, Inc, a public company selling internet services.
Since November 2002 through the present, Mr. Prosser serves as a director and
CFO of VCG Holding Corp., a public company engaged in the business of acquiring,
owning and operating nightclubs, which provide premium quality entertainment,
restaurant and beverage services in an up-scale environment to affluent patrons.
His accounting firm performs accounting service for VCG Holding Corp.
Mr. Prosser has been a Certified Public Accountant since 1975, and is licensed
in the state of Colorado. Mr. Prosser attended the University of Colorado from
1970 to 1971 and Western State College of Colorado from 1972 to 1975, where he
earned a Bachelor's degree in both accounting and history (1973) and a Masters
degree in accounting - income taxation (1975).
Charles L. Gamber (54) Director.
-----------------
Mr. Gamber joined the Company's Board of Directors in September of 2003, serving
as an independent Director, and as a member of the Company's Compensation,
Audit, Policy, and Compensation Committees.
Mr. Gamber is currently the President and CEO of 86 Phoenix, LLC, a real estate
and property development corporation doing business in Colorado. Mr. Gamber has
also served as a Director of Net Commerce, Inc., a public company from 2001 to
the present. He has served as a consultant for Donald W. Prosser, PC and VCG
Holding Corp., a publicly held company with an emphasis in areas of
organizational needs, financial projects, and business development.
Arete Industries, Inc. Page 14 Form 10-KSB 12/31/2004
Mr. Gamber has 14 years of sales and service experience in the restaurant
industry. He has owned and operated All America Auto Transport of Colorado for 6
years, and was with Toyota Motor Distributors for 5 years, leaving them as a
District Sales Manager to pursue his own interests.
Mr. Gamber received a bachelors degree in Business Administration from Western
State College in 1973. John R. Herzog (61) Director.
Mr. Herzog joined the Company's Board of Directors in September of 2003, serving
as independent Director, and as a member of the Company's Audit, Policy,
Nomination and Compensation Committees. He brings a depth of concrete practical
and entrepreneurial experience in business start-ups, turn-arounds, technology
oriented business and technology development projects.
From 1998 to 2000, Mr. Herzog served as Director of Billing Services for Eglobe,
Inc., where he managed daily operations, conversion of the billing system, and
generated an additional $1 million per year of revenue for this company.
From 2000 to 2001, he served as director of IT for Anything Internet, Inc., a
public company.
Since 2001, Mr. Herzog has been President of Business Information Systems, Inc.,
developing applications, consulting on software development, business systems,
and programming.
Mr. Herzog has also served as a Director of Net Commerce, Inc., a public company
from 2001 to the present.
Mr. Herzog graduated from Drexel University in 1967 with a degree in Electrical
Engineering, and in 1970 with a Master's degree in Biomedical Engineering. He
received a Doctorate in Pathology from Temple University in 1976.
Compliance With Section 16(a) of the Exchange Act. The Company files reports
under Section l5 (d) of the Securities Exchange Act of 1934; accordingly,
directors, executive officers and 10% stockholders are not required to make
filings under Section 16 of the Securities Exchange Act of 1934.
Arete Industries, Inc. Page 15 Form 10-KSB 12/31/2004
Item 10 - Executive Compensation
Summary Compensation Table
--------------------------
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the last three completed fiscal years, and
have been adjusted to reflect a reverse stock split of 20 to 1 effective July
15, 2002:
=======================================================================================================================
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------
Long Term Compensation
-------------- ------------ -------------- ---------- --------------- ------------------------------------ ------------
Annual Compensation Awards Payouts
-------------- ------------ ----------------------------------------- ------------------------- ---------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------
Name and Year or Other Restricted All Other
Principal Period $ $ Annual Stock Option/ LTIP Compensation
Position Ended Salary Bonus Compensation Awards SAR's Payouts ($)
($) (#) ($)
-------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------
Thomas P. 12/31/04 $180,000 $172,500(2) 500,000(1)
Raabe, CEO, 12/31/03 $79,000 (1) 7,000,000(1)
Chairman 12/31/02 $86,000 (1)
-------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------
=======================================================================================================================
(1) During 2002, Mr. Raabe forgave $75,000 in accrued salary for previous
periods, accrued $60,000 in salary for the first two quarters of 2002 and was
paid $26,000 in the form of 2,000,000 shares of common stock. After accruing the
first two period's salary in 2002, Mr. Raabe discontinued accrual of his salary
until the third quarter of 2003. During 2003, Mr. Raabe's employment arrangement
was converted to an independent contractor agreement and was awarded an annual
consulting fee of $180,000. He was paid $79,000 of this consulting fee in common
stock plus was granted stock options to purchase 1,000.000 common shares for
$16,500, 1,000,000 common shares for $15,500 and 5,000,000 common shares for
$50,000, of which 2,000,000 shares were purchased during the Fourth Quarter of
2003 for $20,000 in cash and 2,000,000 stock options expired at the end of the
first quarter of 2005. Mr. Raabe received $150,000 in registered common stock
and accrued $30,000 in salary for 2004. He was granted stock options for 500,000
common shares during 2004. (See: Certain Transactions with Management and
Others).
(2) In March of 2004, Mr. Raabe received additional compensation of $172,500 in
the form of restricted common shares in a settlement with the Company resolving
accrued salary of $232,250 for previous periods and a preferential claim to
future stock dividends for stock valued at $75,000 for a total of 25,000,000
restricted shares valued at $0.0192 per share. (See Certain Transactions with
Management and Others.)
Option/SAR Grants Table
-----------------------
Option/SAR Grants in Last Fiscal Year
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securites Options/SAR's
Underlying Granted to
Name Options/SAR's Employees in Fiscal Exercise or Base
Granted (#) Year Price ($/Sh) Expiration Date
=========================== =================== ===================== ================== =================
Thomas P. Raabe (1) 500,000 100% (1) $0.006 9/22/06
--------------------------- ------------------- --------------------- ------------------ -----------------
(1) At the time of grant the exercise price exceeded the market price
for the underlying common shares by 10%. The four outside
directors received stock options during fiscal 2004 as part of
their regular compensation, but have not been included in this
calculation. See: Compensation of Directors, below.
Arete Industries, Inc. Page 16 Form 10-KSB 12/31/2004
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
---------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
==================== ================= ====================== ========================== ==========================
(a) (b) (c) (d) (e)
Number of
Securities
Value of
Unexercised
Underlying Unexercised In-the-Money
Options/SAR's at Options/SAR's at FY-End
Shares Acquired FY-End (#) ($)(1)
on Exercise (#) Exercisable/ Exercisable/
Name Value Realized ($) Unexercisable Unexercisable
==================== ================= ====================== ========================== ==========================
Thomas P. Raabe 0 $ - 3,300,000 $1,860
==================== ================= ====================== ========================== =========================
(1) Value determined at closing trade on 12/31/04 of $0.0062/share for 300,000
options exercisable at $0.006 per share. The 3,000,000 stock options were
out of the money as of 12/31/04.
Compensation of Directors. Until the three outside directors were appointed
immediately prior to the close of the third quarter of 2003, there have been no
standard arrangements relating to compensation of directors for services
provided as directors. From the third quarter of 2003 through the second quarter
of 2004 the Company enacted a policy to pay the outside directors 125,000
registered common shares per fiscal quarter coupled with stock options to
purchase 250,000 at the current trading price on the date of grant, which is
typically done in the last two weeks of the current quarter for compensation
grants in the following quarter. During the third quarter of 2004 this
compensation was increased to 250,000 common shares and 500,000 common stock
options per quarter per outside director. During the first quarter of 2005, the
board passed a resolution to pay a director an additional 250,000 common shares
per quarter commencing the first quarter of the 2004 fiscal year for services as
Audit Committee Chairman and Financial Expert. The directors are compensated for
consulting services and may be reimbursed for their expenses in attending formal
meetings of the board of directors. (See: Certain Transactions with Management
and Others).
Termination of Employment and Change of Control Arrangement. Other than as set
forth below, there are no compensatory plans or arrangements, including payments
to be received from the Company, with respect to any person named in the Cash
Compensation Tables set out above which would in any way result in payments to
any such person because of his resignation, retirement or other termination of
such person's employment with the Company or its subsidiaries, or any change in
control of the Company, or a change in the person's responsibilities following a
change in control of the Company. Also, the employment agreement between the
Company and Mr. Raabe, provides for severance pay and vesting of benefits under
circumstances of termination without cause.
Employment Contracts of Executives with Company. Mr. Raabe has an employment
contract with the Company, executed in November of 1998 and renewed as amended
by board minutes dated October 15, 2003 which provides that the agreement is
amended to read an independent contractor agreement, with a base annual gross
consulting fee of $180,000 per year, plus standard employee benefits,
reimbursement of business expenses including providing office, phone,
secretarial assistance and other operating support. The term of the agreement is
two years from this date or any renewal date. The agreement automatically renews
for a successive two-year period on each anniversary date. The agreement
provides that accrued and unpaid salary or incentive pay can be taken in the
form of any available Series of Class A Preferred Stock, common stock and/or
notes convertible into Preferred or common stock. The agreement further provides
Arete Industries, Inc. Page 17 Form 10-KSB 12/31/2004
for incentive and performance based compensation subject to good faith
negotiation with the board of directors. The agreement incorporates certain
terms of a change in control agreement signed by the Company in 1998, which
provides that Mr. Raabe will be paid success fees for closing transactions which
either provide assets, revenue or relationships of substantial value to the
Company, based on a modified Lehman's formula, or some other mutually agreeable
formula. Termination without cause prior to the termination of the agreement,
results in vesting of all contingent benefits, stock options and mandates
severance pay in the amount of unpaid, unaccrued salary/consulting fees
remaining under the full unexpired term of the agreement. As of April 2, 2005,
this agreement has been terminated and Mr. Raabe's consulting arrangement with
the Company will be negotiated on a quarter by quarter basis with the outside
board members.
Contractual Arrangements Regarding Changes in Control. There are no arrangements
known to management, including any pledge by any person of securities of the
Company, the operation of which may at a subsequent date result in a change in
the control of the Company. Pursuant to terms of the Class A Preferred, under
certain conditions of default, holders of a Series of the Class A Preferred
entitled by virtue of the Company's default of such provision, may call a
special shareholders' meeting and remove the board of directors, appoint a new
board of directors, a receiver or a trustee until such time as such defaults are
cured or remedied. No shares of the Class A Preferred Stock are currently
outstanding.
Arete Industries, Inc. Page 18 Form 10-KSB 12/31/2004
Item 11 - Security Ownership of Certain Beneficial Owners and Management.
Stock Ownership of Certain Beneficial Owners
The following table sets forth the shareholdings of the Company's directors and
executive officers and those persons who own more than 5% of the Company's
common stock as of April 14, 2005.
Certain Beneficial Owners of More than 5%
----------------------- -------------------------------- ------------------------- ----------------------------
(1) (2) (3) (4)
----------------------- -------------------------------- ------------------------- ----------------------------
Title of Class Name and Address of Beneficial Amount and Nature of Percent of Class
Owner Beneficial Ownership
----------------------- -------------------------------- ------------------------- ----------------------------
None(1)
----------------------- -------------------------------- ------------------------- ----------------------------
(1) During 2004, two affiliated companies converted all of their shares of
Series 2 Convertible Preferred Stock into Common Stock of the Company
and made liquidating distributions of the converted shares to their
respective members. With the exception of the CEO and certain
affiliates of the CEO, none of the recipients of such shares
constitutes a group, nor otherwise controls 5% or more of the
outstanding common stock of the Company.
Security Ownership of Management
----------------------- ------------------------------- --------------------------- ---------------------------
(1) (2) (3) (4)
----------------------- ------------------------------- --------------------------- ---------------------------
Title of Class Name and Address of Amount and Nature of Percent of Class(1)
Beneficial Owner Beneficial Ownership(1)
----------------------- ------------------------------- --------------------------- ---------------------------
Directors and Executive
Officers
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock Thomas P. Raabe Direct:
Director/CEO 41,644,235
c/o 7102 La Vista Place, Indirect: 20.6% (1)
Suite 100, Niwot, Colorado 3,748,224
80503 Total:
45,392,459(1)
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock William W. Stewart Direct: 3.8% (2)
Director/Secretary 8,291,666 (2)
c/o 7102 La Vista Place,
Suite 100 Niwot, Colorado
80503
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock Donald W Prosser Direct: 5.8% (3)
Director 12,548,000 (3)
c/o 7102 La Vista Place,
Suite 100 Niwot, Colorado
80503
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock Charles L. Gamber Direct: 2.7% (4)
Director 5,900,000 (4)
c/o 7102 La Vista Place,
Suite 100, Niwot, Colorado
80503
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock John R. Herzog Direct 2.1% (5)
Director 4,591,160 (5)
c/o 7102 La Vista Place,
Suite 100, Niwot, Colorado
80503
----------------------- ------------------------------- --------------------------- ---------------------------
Common Stock Directors and Executive Total: 33.97% (6)
Officers as a Group 76,723,285 (6)
----------------------- ------------------------------- --------------------------- ---------------------------
(1) Includes Directly Owned 37,344,235 common shares, plus 3,748,224
indirectly owned, 4,300,000 common shares issuable on exercise of
common stock options, which the Beneficial Owner has the right to
acquire within 60 days. Percentage calculated based on 220,509,867
total common shares including 216,209,867 common shares
outstanding plus 4,300,000 common shares issuable on exercise of
stock options which the Beneficial Owner has the right to acquire
within 60 days.
Arete Industries, Inc. Page 19 Form 10-KSB 12/31/2004
(2) Includes Directly Owned of 7,041,666 shares plus 1,250,000 common
shares issuable on exercise of common stock options, which the
Beneficial Owner has the right to acquire within 60 days.
Percentage based on 217,459,867 total shares including 216,209,867
currently outstanding plus 1,250,000 common shares issuable on
exercise of stock options, which the Beneficial Owner has the
right to acquire within 60 days.
(3) Includes Directly Owned of 11,173,000 shares plus 1,375,000 common
shares issuable on exercise of common stock options which the
Beneficial Owner has the right to acquire within 60 days.
Percentage based on 217,584,867 total shares including 216,209,867
currently outstanding plus 1,375,000 common shares issuable on
exercise of stock options, which the Beneficial Owner has the
right to acquire within 60 days.
(4) Includes Directly Owned of 4,525,000 shares plus 1,375,000 common
shares issuable on exercise of common stock options which the
Beneficial Owner has the right to acquire within 60 days.
Percentage based on 217,584,867 total shares including 216,209,867
currently outstanding plus 1,375,000 common shares issuable on
exercise of stock options, which the Beneficial Owner has the
right to acquire within 60 days.
(5) Includes Directly Owned of 3,091,160 common shares, plus 1,500,000
common shares issuable on exercise of common stock options, which
the Beneficial Owner has the right to acquire within 60 days;
Percentage calculated based on 217,709,867 total shares including
216,209,867 common shares outstanding plus 1,500,000 common shares
issuable on exercise of stock options which the Beneficial Owner
has the right to acquire within 60 days.
(6) Includes Directly Owned of 66,923,285 common shares, plus
9,800,000 common shares issuance on exercise of stock options,
which the Beneficial Owner has the right to acquire within 60
days. Percentage calculated based on 226,009,867 total shares
including 216,209,867 common shares outstanding plus 9,800,000
common shares issuable on exercise of stock options which the
Beneficial Owner has the right to acquire within 60 days
Item 12 - Certain Relationships and Related Transactions.
Transactions with Management and Others
During the fiscal years ended December 31, 2003 and December 31, 2004,
transactions occurred with directors and executive officers relating to cash and
non-cash compensation which are disclosed in the discussion and footnotes to
Item 10 of this Report, Executive Compensation, and Item 11, Security Ownership
of Certain Beneficial Owners and Management which are incorporated herein by
reference. (See also: Note 5, Notes to Audited Financial Statements.)
As of December 31, 2002, the CEO was owed $27,532 in Accrued cash advances
$15,000 of which was applied to the exercise price of an outstanding common
stock option in 2003. During 2003, the CEO advanced an additional $3,227 in cash
and advances to the Company, of which $4,186 was repaid during 2003 leaving
$11,573 as of December 31, 2003 unpaid. During 2004, the CEO was repaid $8,136
leaving a balance of $3,437.
During the third quarter of 2003 one of the Company's then three directors
resigned and 4,000,000 options to purchase common stock granted to him during
2002 and 2003 were cancelled. At the same time, 3,000,000 options granted to
another director during 2002 and 2003 were also cancelled.
Also, during the third quarter of 2003, and 2004, the Company adopted its 2003
and its 2004 Omnibus Stock Option and Incentive Stock Compensation Plans,
respectively. These plans contained open and designated grants for members of
the board, officers, and consultants. These Plans, including such designated
grants have been previously filed as exhibits to the Company's periodic reports
and are incorporated herein by reference. Grants under these Plans, exercises of
stock options and grants of and purchases under the compensatory stock purchase
plans in such Plans, are listed in the Notes to Financial Statements, and
incorporated herein by reference.
(See: Note 5, Notes to Financial Statements.)
Arete Industries, Inc. Page 20 Form 10-KSB 12/31/2004
Upon engagement of three new outside directors in September of 2003, the Company
adopted a special compensation plan under the Company's 2003 Omnibus Plan for
the outside directors, providing for quarterly compensation of 125,000
registered shares of common stock and 250,000 common stock options priced at the
then market value for the Company's common stock on a quarterly basis for each
quarter in which they served as directors of the Company. Compensatory Stock
payments and Stock Options under this program have been granted at the beginning
of each fiscal quarter, priced at the closing bid for the common stock the last
trading date before the date of grant. At the end of the Second Quarter of 2004,
this plan was amended to pay 250,000 registered shares of common stock and
500,000 common stock options per quarter. Subsequent to the end of the fiscal
year ended December 31, 2004, the Company paid a director an additional 250,000
common shares per quarter for the entire 2004 fiscal year for the first quarter
of fiscal year 2005 for services as chairman of the audit committee.
Additionally, subsequent to the end of the Fiscal Year ended December 31, 2004,
the board adopted a policy to price the compensation shares at 110% the closing
price on the last trading date before grant, and the exercise price of Stock
Options at 100% of the closing price on such date. (See: Note 5, Notes to
Financial Statements.)
The 2003 and 2004 Omnibus Plans are scheduled for shareholder approval at the
Company's next regular or a special shareholders meeting to be scheduled.
In April 2002, two officers of the Company cancelled $344,000 in accrued wages
owed by the Company in exchange for the right to receive in the aggregate 12% of
the total future stock dividend distribution by the Company from the first four
companies that it spins off to its shareholders in a registered stock dividend
and/or a registered rights offering. During the first quarter of 2004, the CEO
agreed to settle $232,500 in accrued salary and bonus outstanding for the 2000,
2001 and 2002 fiscal years, and cancel a special 3% dividend preference which he
acquired in a prior period for cancellation of $75,000 in salary accrued in
2002, for issuance of 25,000,000 restricted common shares valued at $480,000
based on the closing bid for the shares on the date of issuance.
On May 31, 2002, $160,014 of Notes Payable to an entity owned by the CEO were
converted into 16,001 shares of Series 1 Convertible Preferred Stock, and during
the first quarter of 2004, such Series 1 Convertible Preferred Shares were
converted into 8,000,700 shares of common stock, of which 5,000,000 shares were
distributed to adult family members of the CEO for which the CEO disclaims
beneficial ownership.
During the Third quarter of 2003, a subscription for
Series 2 Preferred Stock in a private placement conducted in prior years, was
completed by a related company in the amount of $100,000. During the fourth
quarter of fiscal year 2003, 1,000 shares of Series 2 Preferred were transferred
to two affiliates of the Company and 800 of those shares were used to purchase
3,000,000 shares of common stock on exercise of certain of their incentive stock
options. During the first quarter of 2004, the affiliate of the related company
converted 4,050 shares of the Series 2 Preferred to 4,050,000 shares of common
stock and distributed them to certain owners of such affiliate of the related
company. During the Fourth Quarter of 2004, the related company converted the
remaining 15,150 Series 2 Preferred Shares into 15,150,000 common shares, and
distributed all its assets including these shares to its remaining owners
including the CEO and a director. In this distribution, all 15,150,000 common
shares were distributed to an affiliate of the CEO, which distributed certain
shares to several adult family members of the CEO of which the CEO disclaims
beneficial ownership and certain of these shares were transferred into an
affiliate of the CEO; and 3,000,000 common shares were distributed to the other
director.
Arete Industries, Inc. Page 21 Form 10-KSB 12/31/2004
During the Fourth Quarter of 2004, and officer and director was granted and
exercised a compensatory stock option for 1,000,000 shares for $0.005 per share,
or $5,000. Also during the Fourth Quarter, the CEO agreed to accrue his monthly
consulting fees for six months from November, 2004 through April, 2005.
Subsequent to the fiscal year ended December 31, 2004, the CEO accepted a
promissory note from the Company for 4 months accrued consulting fees in the
amount of $60,000 with simple interest at 8% per annum, due on or after July 1,
2005 plus a grant of 10,000,000 common shares for specified consulting services
from March, 2005 through June 30, 2005. The CEO has the right to convert the
promissory note plus interest into registered common stock at $0.01 per share,
in the event that the Company does not pay the note in cash after the due date.
In the fourth quarter of the fiscal year ended December 31, 2004, the Company
formed a wholly owned subsidiary named Colorado Oil and Gas, Inc., a Colorado
corporation for the purpose of acquiring domestic oil and gas properties, in
particular producing properties with the potential for drilling additional
wells. The Company contemplated that this new subsidiary would be operated by
three of the Company's current outside directors, who would act as officers and
directors, and would be charged with the daily operations, development of
business opportunities, and would upon successfully identifying and contracting
with a suitable acquisition candidate, obtain an equity position in such
subsidiary, with a view of gaining the Company's assistance in becoming a
publicly traded company through a rights offering or dividend spin-off of
securities to the Company's shareholders. As of the end of the current fiscal
year, certain nominal funds had been advanced by these directors to the
subsidiary, several prospects were evaluated and oil and gas engineering
consulting services obtained. Subsequent to the end of the current fiscal year,
a specific prospect has been identified and negotiations pursued to the point
that the parties are engaging in final due diligence and the drafting of formal
legal documents. It is anticipated that formal capitalization and other
post-incorporation actions will be taken in the very near future in which these
directors will purchase equity in the subsidiary, and begin the process of
formation and funding of the proposed venture, of which there can be no
assurance. The value or the extent of ownership granted to these directors has
not been determined at the date of this Report.
Arete Industries, Inc. Page 22 Form 10-KSB 12/31/2004
Item 13 - Exhibits
Exhibit No. Description Ref. No.
--------------------------------------------------------------------------------
EX-3.1 Restated Articles of Incorporation with Amendments
adopted by shareholders on September 1, 1998. 1
EX-3.2 Bylaws adopted by the Board of Directors on
October 1, 1998. 1
EX-4.1 Designation of Class A Preferred Stock dated
February 26, 2001 1
EX-4.2 Designation of Series 1 Convertible Preferred
Adopted November 19, 2001 1
EX-4.3 Designation of Series 2 Convertible Preferred
Adopted December 19, 2001. 1
EX-10.1 2003 Omnibus Incentive Stock Compensation Plan
Adopted, August 21, 2003 2
EX-10.2 2004 Omnibus Incentive Stock Compensation Plan
Adopted, August 4, 2004 3
EX-21 Subsidiaries of the Registrant 4
EX-23 Consents of Experts and Counsel
EX-23.1 Consent of Causey Demgen & Moore, Inc. 4
EX-23.2 Consent of Ronald R. Chadwick, PC 4
EX-31 Certification of CEO and CFO Pursuant to
18 U.S.C, Section 7241, as adopted
and Section 302 of the Sarbanes-Oxley Act of 2002. 4
EX-32 Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 4
Arete Industries, Inc. Page 23 Form 10-KSB 12/31/2004
Notes to Exhibits:
1. These documents and related exhibits have been previously filed with the
Securities and Exchange Commission, and by this reference are incorporated
herein.
2. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-KSB
filed on September 4, 2003.
3. These documents and related exhibits have been previously filed under the
Company's periodic reports for periods ended during the fiscal year
12/31/04 and are incorporated herein by reference.
4. Attached to this report on Form 10-KSB as Exhibits and incorporated herein
by reference.
Arete Industries, Inc. Page 24 Form 10-KSB 12/31/2004
Item 14. - Principal Accountant Fees and Services.
The following relate to aggregate fees billed for the last two fiscal years by
the Company's principal accountants concerning the Company's: (1) audit; (2) for
assurance and services reasonably related to the audit; (3) for tax compliance,
advice, and planning; and (4) for other fees provided by the principal
accountant for the
1. Audit Fees. $22,194
2. Audit-Related Fees. $-0- 3. Tax Fees. $-0- 4. All Other Fees. $2,910
Reading of the Form S-8, subsequent events procedures and form 8-K.
5. (i) The Company's Audit Committee's pre-approval policies and procedures
(described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X), are:
Audit Committee Pre-Approval Policies and Procedures
As set forth in its charter, our Audit Committee has the sole authority to
pre-approve all audit and non-audit services provided by our independent
auditor. All services performed by Causey Demgen & Moore, Inc. in 2003 and
Ronald R. Chadwick in 2004 were pre-approved by our Audit Committee. Having
considered whether the provision of the auditors' services other than for the
annual audit and quarterly reviews is compatible with its independence, the
Audit Committee has concluded that it is.
The Audit Committee on an annual basis reviews audit and non-audit services
performed by the independent auditors. All audit and non-audit services are
pre-approved by the Audit Committee, which considers, among other things, the
possible effect of the performance of such services on the auditors'
independence. All requests for services to be provided by the independent
auditor, which must include a description of the services to be rendered and the
amount of corresponding fees, are submitted to the Chief Financial Officer. The
Chief Financial Officer authorizes services that have been pre-approved by the
Audit Committee. If there is any question as to whether a proposed service fits
within a pre-approved service, the Audit Committee chair is consulted for a
determination. The Chief Financial Officer submits requests or applications to
provide services that have not been pre-approved by the Audit Committee, which
must include an affirmation by the Chief Financial Officer and the independent
auditor that the request or application is consistent with the SEC's rules on
auditor independence, to the Audit Committee (or its chair or any of its other
members pursuant to delegated authority) for approval.
(ii) 100 per cent of the fees billed by the principal accountant were
approved by the Audit Committee (described in paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X).
6. The percentage (if over 50%) of hours expended on the principal accountant's
engagement to audit the Company's financial statements for the most recent
fiscal year done by persons other than the principal accountant's full-time,
permanent employees, was: Not applicable
Arete Industries, Inc. Page 25 Form 10-KSB 12/31/2004
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this first amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: April 14, 2004 By: /s/ THOMAS P. RAABE
-------------------------------------
Thomas P. Raabe,
President, Chief Executive Officer,
acting Chief Financial and Accounting
Officer, and Chairman of the Board
of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
ARETE INDUSTRIES, INC.
Date: April 14, 2004 By: /s/ THOMAS P. RAABE
------------------------------------
Thomas P. Raabe Board Member
Date: April 14, 2004 By: /s/ WILLIAM W. STEWART
------------------------------------
William W. Stewart Board Member
Date: April 14, 2004 By: /s/ DONALD W. PROSSER
------------------------------------
Donald W. Prosser Board Member
Date: April 14, 2004 By: /s/ CHARLES L. GAMBER
------------------------------------
Charles L. Gamber Board Member
Date: April 14, 2004 By: /s/ JOHN R. HERZOG
------------------------------------
John R. Herzog Board Member
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS, WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT
For information forwarded to shareholders of the Company during the period
covered by this Report, see the Exhibit Index of this Report. As of the date of
this report no annual report for the fiscal year ended December 31, 2004 or
proxy material for the 2005 annual shareholders meeting has been sent to
security holders. Registrant intends to send proxy information to its security
holders for its regular Annual Meeting to be scheduled shortly, but does not
intend to send an annual report with such materials. Registrant undertakes to
forward any annual report or proxy material delivered to securities holders to
the Securities and Exchange Commission on the date such information is forwarded
to stockholders.
Arete Industries, Inc. Page 26 Form 10-KSB 12/31/2004
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2004
WITH
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
INDEX
Page No.
--------
Reports of Independent Registered Public Accounting Firms F-1
Consolidated Financial Statements:
Consolidated Balance Sheet - December 31, 2003 and 2004 F-3
Consolidated Statement of Operations - For the years ended
December 31, 2003 and 2004 and from inception (August
1, 2003) to December 31, 2004 F-4
Consolidated Statement of Stockholders' Deficit - For
the years ended December 31, 2003 and 2004 F-5
Consolidated Statement of Cash Flows - For the years
ended December 31, 2003 and 2004 and from inception
(August 1, 2003) to December 31, 2004 F-7
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Arete Industries, Inc.
Boulder, Colorado
I have audited the accompanying consolidated balance sheet of Arete
Industries, Inc. and Subsidiaries (a development stage entity) as of
December 31, 2004, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the year then ended and for the
period from inception of the development stage (August 1, 2003) through
December 31, 2004. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit. The Company's financial statements
as of and for the year ended December 31, 2003, and for the period from
inception of the development stage (August 1, 2003) through December 31,
2003 were audited by other auditors whose report, dated April 1, 2004,
included an explanatory paragraph describing going concern issues as
discussed in Note 1 to the financial statements. The financial statements
for the period from inception of the development stage (August 1, 2003)
through December 31, 2003 reflect a net loss applicable to common
stockholders of $463,041 of the related total. The other auditors' report
has been furnished to me, and in my opinion, insofar as it relates to the
amounts for such prior period, is based solely on the report of such other
auditors.
I conducted my audit in accordance with the audit standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that I plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Arete Industries, Inc. and Subsidiaries at December 31, 2004,
and the consolidated results of their operations and their cash flows for
the year then ended and for the period from inception of the development
stage (August 1, 2003) through December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring
losses from operations, has a working capital deficit and a stockholders'
deficit, and is delinquent on the payment of creditor liabilities including
payroll taxes. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
April 11, 2005 /s/ Ronald R. Chadwick, P.C.
Aurora, Colorado ------------------------------
RONALD R. CHADWICK, P.C.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Arete Industries, Inc.
Boulder, Colorado
We have audited the consolidated balance sheet of Arete Industries, Inc.
and Subsidiaries (a development stage entity) as of December 31, 2003, and
the related consolidated statements of operations, stockholders' deficit,
and cash flows for the year then ended and for the period from inception of
the development stage (August 1, 2003) through December 31, 2003. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the audit standards of the Public
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Arete Industries, Inc. and Subsidiaries at December 31, 2003,
and the consolidated results of their operations and their cash flows for
the year then ended and for the period from inception of the development
stage (August 1, 2003) through December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring
losses from operations, has a working capital deficit and a stockholders'
deficit, and is delinquent on the payment of creditor liabilities including
payroll taxes. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ CAUSEY DEMGEN & MOORE INC.
Denver, Colorado -------------------------------
April 1, 2004 CAUSEY DEMGEN & MOORE INC.
F-2
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEET
December 31, 2003 and 2004
ASSETS
2003 2004
------------ ------------
Current assets:
Cash and cash equivalents $ 25,345 $ 121
Accrued interest receivable 37,761 --
Inventory and molds held for disposal (Note 1) 25,243 --
Prepaid expenses -- 3,000
------------ ------------
Total current assets 88,349 3,121
Furniture and equipment, at cost net of accumulated
depreciation of $13,511(2003) and $19,672 (2004) 1,089 3,969
$ 89,438 $ 7,090
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable (Note 2) $ 288,059 $ 262,019
Accrued expenses 585,478 368,508
Accrued payroll taxes (Note 2) 289,363 289,363
Settlement due 18,650 18,650
Notes payable - related parties (Note 3) 11,573 3,437
------------ ------------
Total current liabilities 1,193,123 941,977
Commitments and contingencies (Notes 1, 2,3,7 and 8)
Stockholders' deficit (Notes 4 and 5):
Convertible Class A preferred stock; $10 face value,
1,000,000 shares authorized:
Series 1, 30,000 shares authorized, 16,001 (2003)
and 0 (2004)shares issued and outstanding 160,014 --
Series 2, 25,000 shares authorized,19,200 (2003)
and 0 (2004) shares issued and outstanding 192,000 --
Common stock, no par value; 499,000,000 shares
authorized, 82,592,626 (2003) and 183,045,768 (2004)
shares issued and outstanding 10,383,703 11,811,498
Accumulated deficit (including $1,309,891 accumulated
during the development stage) (11,600,582) (12,523,565)
Notes receivable from sale of stock (238,820) (222,820)
------------ ------------
Total stockholders' deficit (1,103,685) (934,887)
------------ ------------
$ 89,438 $ 7,090
============ ============
See accompanying notes
F-3
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF OPERATIONS
For the years ended December 31, 2003 and 2004
and from inception (August 1, 2003) to December 31, 2004
Inception to
2003 2004 December 31, 2004
------------- ------------- -------------
Operating expenses:
Depreciation $ 384 $ 2,192 $ 2,576
Rent 9,203 13,375 22,578
Other operating expenses 448,094 933,046 1,381,140
------------- ------------- -------------
Total operating expenses 457,681 948,613 1,406,294
------------- ------------- -------------
Total operating loss (457,681) (948,613) (1,406,294)
Other income (expense):
Loss on Sale of Investments - (10,502 (10,502)
Interest expense (18,489) (17,922) (36,411)
Interest and miscellaneous income 13,129 -- 13,129
------------- ------------- -------------
Total other income (expense) (5,360) (17,922) (33,784)
------------- ------------- -------------
Net loss from continuing operations (463,041) (977,037) (1,440,078)
Net loss from discontinued operations (including loss on disposal
of $108,673 in 2003) (Note 1) (383,374) -- --
Extingusihment of Debt (Note 2) 123,141 54,054 54,054
------------- ------------- -------------
Net loss (Note 6) $ (723,274) $ (922,983) $ (1,386,024)
============= ============= =============
Basic and diluted loss per share from continuing operations $ (0.01) $ (0.01) $ (0.01)
============= ============= =============
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01)
============= ============= =============
Weighted average common shares outstanding 52,600,000 144,760,000 130,000,000
============= ============= =============
See accompanying notes.
F-4
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the years ended December 31, 2003 and 2004
Series 1 Series 2
preferred stock preferred stock Common stock Accumulated
Shares Amount Shares Amount Shares Amount deficit
------ -------- ------ --------- ---------- ------------ -------------
Balance, December 31, 2002 16,001 $160,014 18,542 $185,425 34,399,581 $ 9,592,587 $(10,877,308)
Issuance of Series 2 preferred stock
to reimburse advances made to the -- -- 1,458 14,575 -- -- --
Company ( Note 3)
Exercise of stock options upon
conversion of Series 2 preferred stock
(Note 4) -- -- (800) (8,000) 3,000,000 8,000 --
Exercise of stock options (Note 5) -- -- -- -- 6,750,000 103,750 --
Issuance of common stock to employees
and consultants for services (Note 5) -- -- -- -- 37,443,045 637,719 --
Purchase of stock by directors in connection
with granted purchase rigts -- -- -- -- 1,000,000 10,000 --
Value of stock options granted to consultants
(Note 5) -- -- -- -- -- 31,647 --
Net loss for the year ended
December 31, 2003 -- -- -- -- -- -- (723,274)
------ -------- ------ --------- ---------- ------------ -------------
Balance, December 31, 2003 16,001 $160,014 19,200 $192,000 82,592,626 $ 10,383,703 $(11,600,582)
====== ======== ====== ========= ========== ============ =============
See accompanying notes
F-5
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the years ended December 31, 2003 and 2004
(Continued from preceding page)
***(SPLIT TABLE - SEE BELOW)***
Series 1 Series 2
preferred stock preferred stock
Shares Amount Shares Amount
--------- ---------- -------- ---------
Balance, December 31, 2003 16,001 $ 160,014 19,200 $ 192,000
Exercise of stock options upon
conversion of Series 1 preferred stock --
( Note 3) (16,001) (160,014) -- --
Exercise of stock options upon
conversion of Series 2 preferred stock
(Note 4) -- -- (19,200) (192,000)
Issuance of common stock to repurchase
a portion of a future interest in stock
distributions, payment of accrued wages
and for services (NOTE 5) -- -- -- --
Exercise of stock options (NOTE 5) -- -- -- --
Issuance of common stock to employees
and consultants for services (Note 5) -- -- -- --
Purchase of stock by directors in connection
with granted purchase rigts -- -- -- --
Value of stock options granted to consultants
(Note 5) -- -- -- --
Net loss for the year ended
December 31, 2004 -- -- -- --
--------- ---------- -------- ---------
Balance, December 31, 2004 -- $ -- -- $ --
========= ========== ======== =========
*** SPLIT TABLE - SEE ABOVE) ***
Common stock Accumulated
Shares Amount deficit
------------ ------------ -------------
Balance, December 31, 2003 82,592,626 $ 10,383,703 $(11,600,582)
Exercise of stock options upon
conversion of Series 1 preferred stock
( Note 3) 8,000,700 160,014
Exercise of stock options upon
conversion of Series 2 preferred stock
(Note 4) 19,200,000 192,000 --
Issuance of common stock to repurchase
a portion of a future interest in stock
distributions, payment of accrued wages
and for services (NOTE 5) 25,000,000 405,000 --
Exercise of stock options (NOTE 5) 6,000,000 79,000 --
Issuance of common stock to employees
and consultants for services (Note 5) 42,002,442 568,423 --
Purchase of stock by directors in connection
with granted purchase rigts 250,000 2,500 --
Value of stock options granted to consultants
(Note 5) -- 20,858 --
Net loss for the year ended
December 31, 2004 -- -- (922,983)
------------ ------------ -------------
Balance, December 31, 2004 183,045,768 $ 11,811,498 $(12,523,565)
============ ============ =============
See accompanying notes
F-6
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 2003 and 2004
and from inception (August 1, 2003) to December 31, 2004
Inception to
2003 2004 December 31, 2004
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (723,274) $ (922,983) $(1,386,024)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 19,509 2,192 2,576
Stock and options issued for services and
interest on notes 669,366 762,031 1,202,092
Write down of assets included in loss from
discontinued operations 108,673 -- --
Changes in assets and liabilities:
Interest receivable (13,129) 37,761 44,325
Inventory (4,941) 25,243 25,243
Prepaid expenses 2,285 (3,000) (3,000)
Accounts payable (134,638) (26,040) (53,251)
Accrued expenses 8,747 (216,970) (208,390)
----------- ----------- -----------
Total adjustments 655,872 581,217 1,009,595
----------- ----------- -----------
Net cash used in operating activities (67,402) (341,766) (376,429)
Cash flows from investing activities:
Purchase of property and equipment -- (5,072) (5,072)
----------- ----------- -----------
Net cash used in investing activities -- (5,072) (5,072)
Cash flows from financing activities:
Proceeds from issuance of preferred stock 14,575 -- 6,713
Proceeds from issuance of common stock 10,000 -- 10,000
Proceeds from exercise of stock options 83,750 81,500 125,250
Note Receivable from sale of stock -- 16,000 16,000
Payment of accrued wages -- 232,250 232,250
Payment of note payable - related parties (15,959) (8,136) (8,709)
----------- ----------- -----------
Net cash provided by financing activities 92,366 321,614 381,504
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 24,964 (25,224) 3
Cash and cash equivalents at beginning of period 381 25,345 118
----------- ----------- -----------
Cash and cash equivalents at end of period $ 25,345 $ 121 $ 121
=========== =========== ===========
See accompanying notes
(Continued on following page)
F-7
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 2003 and 2004
and from inception (August 1, 2003) to December 31, 2004
(Continued from preceding page)
Inception
to
December 31,
Supplemental disclosure of cash flow information: 2003 2004 2004
------- ------- -----------
Interest paid during the period $ - $ - $ -
------- ------- -----------
Income taxes paid during the period $ - $ - $ -
Supplemental disclosure of non-cash investing and financing activities
During the year ended December 31, 2003, 800 shares of Series 2 preferred stock
were used to exercise common stock options for the purchase of 3,000,000 common
shares. In addition wages to officers and directors and fees to consultants of
$637,719 were paid by the issuance of common stock and the value assigned to
stock options issued was $31,647.
During the year ended December 31, 2003, a consultant exercised common stock
options for a note receivable of $20,000.
During the year ended December 31, 2004, 15,150 shares of Series 2 preferred
stock were converted into 15,150,000 common shares and 16,001 shares were
converted into 8,000,700 common shares.
In addition wages to officers and directors and fees to consultants of
$562,861 were paid by the issuance of common stock and the value
assigned to stock options issued was $26,420.
See accompanying notes
F-8
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
1. Summary of significant accounting policies
-----------------------------------------------
Nature of business:
Arete Industries, Inc. (Arete), formerly Travis Industries, Inc., a
Colorado corporation was incorporated on July 21, 1987. One of Arete's
subsidiaries, Global Direct Marketing, Inc. (Global) was in the business of
printing advertising materials and coupons and mailing them for its
customers. The other Arete subsidiary, Aggression Sports, Inc. (Aggression
Sports) was an outdoors sports products company which became a consolidated
subsidiary through Arete's increased investment, effective October 1, 2001.
The Company is currently considered to be in the development stage as more
fully defined in Financial Accounting Standards Board Statement No. 7. The
Company has not generated any revenues from its activities in the oil and
gas business.
The Company formed Global in October 1998. Certain assets and liabilities
of Arete were contributed to Global. The consolidated financial statements
of the Company include the accounts of Arete for the entire period, the
accounts of Global since inception, and Aggression Sports since October 1,
2001. All intercompany accounts have been eliminated in the consolidation.
All operations prior to August 1, 2003 have been reclassified as
discontinued.
On August 1, 2003, the Company discontinued operations as a business
development company focused on certain bond and other funding vehicles for
growth stage companies. The Company has embarked on an entirely new
business focusing on acquiring interests in traditional oil and gas
ventures as well as development of alternative and renewable energy
projects. In the oil and gas field, the Company is looking for conservation
oriented projects that offer high profit, low risk projects including
overlooked and by-passed reserves of natural gas, which will include
shut-in and in-field development, stripper wells, re-completion and
re-working projects. The Company is interested in combining traditional oil
and gas investments with projects that advance and exploit the use of
alternative and renewable energy including bio-mass, co-generation, solar,
wind, municipal and organic waste conversion to bio-fuels, and alternative
electrical energy feed stocks. The Company will seek to make investments
for direct participations in the revenue streams from such projects on a
project finance basis, as well as through acquisition of management,
capital, and assets by one or more acquisitions of going concerns. Also
under consideration is creation and operation of one or more investment
funds to engage in energy related and socially responsible investments.
Discontinued operations:
During March 2000, the Company abandoned the direct mail and coupon
business. At December 31, 2004, the remaining liabilities of this division
were $58,230 in unpaid payroll taxes. For the years ended December 31, 2003
and December 31, 2004, $123,141 and $54,054, respectively, of debt were
reclassified as extinguished. During 2003, the Company abandoned the
development of Aggression Sports Inc., a subsidiary. At December 31, 2004,
the remaining liabilities of this division were $91,077 in trade payables
and $79,351 in unpaid payroll taxes.
F-9
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
1. Summary of significant accounting policies (continued)
The Company's decision to pursue projects and investments in traditional
oil and gas as well as the `New' alternative and renewable Energy business
is an entirely new business direction that requires that it take the
decisive step to formally discontinue its former operations. This decision
is reflected by a change in the presentation of the Company's financial
statements to segregate discontinued operating results in previous periods
from continuing operations going forward. The effect in 2003 of this
recasting and reclassification is a loss of $383,374 from discontinued
operations including a write down of inventory and fixed assets held for
disposal from discontinued operations of $108,673. Following the end of the
fiscal year ended December 31, 2004, the company resolved to dissolve its
two subsidiaries and has initiated procedures to close out all
inter-company accounts and consolidating accounts related to these
subsidiaries.
Basis of presentation:
The financial statements have been prepared on the basis of the Company
being a development stage entity, having discontinued several unsuccessful
ventures including cessation of operations of its subsidiary, Aggression
Sports, Inc., having discontinued operations as a business development
company focused on developing certain bond and other funding vehicles for
growth stage companies, and having embarked on an entirely new business of
developing opportunities in the traditional and alternative and renewable
energy sectors, and which contemplates the formation of capital and
management resources to pursue development of new business opportunities.
The recast of the Company as development stage is intended to more
correctly and accurately reflect the current status of the Company and to
properly record results of operations and changes in financial condition as
it pursues its new business plan. As shown in the accompanying financial
statements, the Company has recast its financial statements to reflect this
divergence from its past business endeavors including losses from write
down of assets and valuation of assets held for disposal from discontinued
operations. The Company has incurred significant losses and at December 31,
2004, the Company has a working capital deficit of $938,856 and a
stockholders' deficit of $934,887. In addition, the Company is delinquent
on payment of payroll taxes and creditor liabilities. As a result,
substantial doubt exists about the Company's ability to continue to fund
future operations using its existing resources.
As a development stage company, the Company continues to rely on infusions
of debt and equity capital to fund operations. The Company relies
principally on cash infusions from its directors and affiliates, deferred
compensation and expenses from the executive officers, and paid a
significant amount of personal services, salaries and incentives in the
form of common stock and common stock options.
F-10
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
1. Summary of significant accounting policies (continued)
Recent accounting pronouncements:
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 requires that a liability be recorded for
thefair value of the obligation in the guarantor's balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires certain disclosures
about each of the entity's guarantees. The disclosure provisions of FIN 45
are effective for annual and interim periods that end after December 15,
2002. The recognition provisions of FIN45 are applicable prospectively to
guarantees entered after December 31, 2002. The adoption of FIN 45
effective January 1, 2003 did not have a material effect on the Company's
results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting standards
No. 150. "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity" (SFAS N. 150). This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for the first interim period
beginning after June 15, 2003, with certain excerptions. The adoption of
SFAS No. 150, effective July1, 2003, did not have a material effect on the
Company's results of operations or financial position.
In September 2003, the FASB approved SFAS No. 150, Accounting For Certain
Financial Instruments With Characteristics Of Both Liabilities And Equity
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
September 15, 2003. The effect on the Company's financial position include
the fact that beginning on July 1, 2003, redeemable warrants will be
classified as liabilities and not shown in the mezzanine equity section of
the balance sheet.
In December 2004, the FASB revised SFAS No. 123, Share-Based Payment ("SFAS
No. 123R"). SFAS No. 123R is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R
requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period in which
an employee is required to provide service in exchange for the award. SFAS
No. 123R requires a public entity to initially measure the cost of employee
services rendered in exchange for an award of liability instruments at its
current fair value. The fair value of that award is to be remeasured
subsequently at each reporting date through the settlement date. Changes in
the fair value during the required service period are to be recognized as
an increase or decrease in the amount of compensation cost recognized
during the period. We are
F-11
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
1. Summary of significant accounting policies (continued)
currently in the process of evaluating different option pricing models and
the impact of SFAS No. 123R on our consolidated financial statements. We
will adopt SFAS No. 123R on July 1, 2005.
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP
109-1"), Application of FASB Statement No. 109, "Accounting for Income
Taxes" ("SFAS No. 109") to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, which
provides guidance on the recently enacted American Jobs Creation Act of
2004 (the "Act"). The Act provides a tax deduction for income from
qualified domestic production activities. FSP 109-1 provides for the
treatment of the deduction as a special deduction as described in SFAS No.
109. As such, the deduction will have no effect on existing deferred tax
assets and liabilities. The impact of the deduction is to be reported in
the period in which the deduction is claimed on our U.S. tax return. We do
not expect that this deduction will have a material impact on our effective
tax rate in future years. FSP 109-1 is effective prospectively as of
January 1, 2005.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Depreciation:
Furniture and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful life of three to five
years using the straight-line and accelerated methods.
Advertising costs:
The Company expenses the costs of advertising as incurred. Advertising
costs amount to $0 and $0 for the years ended December 31, 2003 and 2004
respectively.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist primarily of parts for snowshoes and the
downhill gravity scooter. During 2003, the Company wrote off all fixed
assets and revalued inventory at fair market value listed as inventory and
molds held for disposal. This revalued inventory was written off as of
December 31, 2004.
F-12
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
1. Summary of significant accounting policies (continued)
Intangible assets:
Intellectual property will be amortized over their estimated lives of 15
years. All Intellectual property has been written off in 2003 with the
discontinuation of the business.
Income taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("FASB No. 109"). Temporary differences are
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. The Company's temporary differences
consist primarily of tax operating loss carry forwards and start-up costs
capitalized for tax purposes.
Fair value of financial instruments:
Cash, accounts payable, accrued liabilities and notes payable are carried
in the financial statements in amounts which approximate fair value because
of the short-term maturity of these instruments.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers cash and
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash. The Company
places its cash with high quality financial institutions.
Net loss per share:
Basic net loss per common share is based on the weighted average number of
shares outstanding during each period presented. Options to purchase stock
are included as common stock equivalents when dilutive.
2. Delinquent amounts payable
As of December 31, 2003 and 2004, the Company is delinquent on payments of
various amounts to creditors including payroll taxes. Failure to pay these
liabilities could result in liens being filed on the Company's assets and
may result in assets being attached by creditors resulting in the Company's
inability to continue operations.
F-13
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
3. Notes payable
Notes payable - individuals:
On May 31, 2002, the Board of Directors approved two assignment agreements
between third party creditors of the Company holding secured promissory
notes in the aggregate amount of $100,000 and a company owned by a
director. The agreements provided for the purchase of the referenced notes
and collateral consisting of 500,000 common shares and a security interest
in certain inventory of the Company's subsidiary, Aggression Sports, Inc.
and the subsequent surrender for cancellation of such notes by the related
company with the Company for 10,000 shares of Series 2 Convertible
Preferred Stock of the Company (convertible into 500,000 shares of common
stock). The assignments were finalized upon the closing of a private
placement by the related company during September 2002 and were credited
toward the related company's $200,000 subscription for Series 2 Preferred
in the amount of $100,000. The related company completed the other $100,000
of its subscription to purchase the Series 2 Preferred Stock in several
payments made between the first quarter of 2002 through August of 2003.
During the fourth quarter of fiscal year 2003, 1,000 shares of Series 2
Preferred were transferred to two officers of the Company and 800 of those
shares were used by the two officers to pay the exercise price for
3,000,000 incentive stock options.
Notes payable - related parties:
As of January 1, 2003, the CEO was owed $27,532 in accrued cash advances,
$15,000 of which was applied to the exercise price of an outstanding common
stock option in 2003. During 2003, the CEO advanced an additional $3,227 in
cash and advances to the Company, of which $4,186 was repaid during 2003
leaving $11,573 unpaid as of December 31, 2003. During 2004, the CEO was
repaid $8,136 leaving a balance of $3,437.
4. Preferred stock
The Company has designated Class A Convertible Preferred Stock and
1,000,000 shares authorized for issuance. The Class A preferred stock has a
cumulative dividend at prime rate and is redeemable for cash at the rate of
$10 per share plus accrued but unpaid dividends at the option of the
Company. Each of the Class A preferred shares is convertible at any time
after thirty days from issuance at face value and convertible into an equal
amount of common stock at 100% of the average weekly closing bid price of
the common stock. The Class A shares have certain voting rights and other
rights and preferences as specified in the amended articles of
incorporation of the Company. The Company intends to use Class A preferred
stock for special funding situations and possibly as consideration for
unpaid officers' compensation.
On November 19, 2001, the board of directors designated a new series of
Class A Preferred Stock as the Series 1 Convertible Preferred Stock. The
Series 1 Convertible Preferred Stock is limited to 30,000 shares with a
face value of $10 per share. The redemption price and liquidation
preference for each share is $10 per share. As of December 31, 2004, all
previously issued shares of this Series 1 have been converted to Common
Stock and retired. The Company has no present intention to re-issue any
shares of this Series 1 Preferred Stock.
F-14
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
On December 19, 2001, the board of directors designated a new series of
Class A Preferred Stock as the Series 2 Convertible Preferred Stock. The
Series 2 Convertible Preferred Stock is limited to 25,000 shares with a
face value of $10 per share. The redemption price and liquidation
preference for each share is $10 per share. As of December 31, 2004, all
previously issued shares of this Series 2 have been converted to Common
Stock and retired. The Company has no present intention to re-issue any
shares of this Series 2 Preferred Stock.
On January 10, 2004, an affiliate of the CEO, converted 16,001 shares of
Series 1 Class A Preferred Stock into 8,000,700 shares of common stock.
As of December 31, 2003, the Company received total proceeds of $200,000
for the purchase of 20,000 shares of Series 2 Convertible Preferred Stock.
10,000 of these preferred shares were issued in connection with a note
conversion. In November of 2003, 800 of these Series 2 Preferred shares
were used by two related parties as the purchase price for the exercise of
stock options for 3,000,000 shares of common stock. In the first quarter of
2004, 4,050 of these Preferred Shares were converted into 4,050,000 shares
of common stock and distributed by an affiliated entity to unrelated
parties. During the fourth quarter of 2004, 15,150 of these Preferred
Shares were converted by this affiliated entity into 15,150,000 shares of
common stock and distributed to certain parties and family members related
to the CEO.
5. Common stock
Stock issuances:
During the years ended December 31, 2003 and 2004, 37,443,045 and
67,002,442 shares of the Company's common stock, respectively, were issued
to officers, directors and consultants for services. Of the total common
shares issued in fiscal years ended December 31, 2003 and December 31,
2004, 18,750,000 and 12,250,000 shares of common stock were issued to
consultants in connection with developing the Company's new business in the
traditional, alternative, and renewable energy sector; 7,700,000 and
700,000 shares of common stock were issued to consultants for corporate
communications support, 9,625,000 and 26,141,947 shares of common stock
were issued to officers, directors and consultants for compensation and on
exercise of stock options, including 25,000,000 shares as settlement of
accrued wages; and 1,368,045 and 8,910,495 shares of common stock were
issued for professional services, respectively.
By a settlement agreement approved by the board of directors on March 17,
2004, the CEO converted $232,250 in accrued wages, cancelled his right to
receive 3% of total future stock dividends for $75,000, and received
compensation of $172,750 for the above mentioned 25,000,000 shares of
unregistered common stock valued at $405,000.
F-15
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
5. Common stock (continued)
Stock options:
Stock Option Plans
The Company has established the Omnibus Stock Option and Compensation Plans
for employees, directors and consultants or other advisors for 2003 and
2004. The Company has reserved a maximum of 40,000,000 and 50,000,000
common shares under the 2003 and 2004 Plans, respectively, including
10,000,000 special incentive common stock purchase rights to officers,
directors, employees and consultants. Additionally, the 2004 Plan replaced
a total of 8,500,000 stock options granted under the Company's 2002 and
2003 Plans into the 2004 Plan. The purchase price of each share of stock
under the stock option plan will be determined by the Board of Directors or
the Compensation Committee based on the fair market value as of the date of
grant, determined by the closing sales price on the OTC Bulletin board on
the last trading date before the date of grant. The stock option plans
exercise terms do not exceed ten years. As of December 31, 2004, no shares
were available under the 2003 Plan and all 50,000,000 shares were available
under the 2004 Plan for issuance, with 12,500,000 outstanding stock
options, leaving 37,500,000 shares unallocated.
During the second quarter of 2004, the Company established a Special Stock
Compensation Plan with 25,000,000 shares designated under such plan for
issuance to employees, consultants, advisors, professionals, officers and
directors. As of December 31, 2004, with 18,309,252 shares issued during
2004 and with 2,000,000 outstanding stock options against this plan,
4,690,748 shares were available under this Plan for issuance.
During the year ended December 31, 2003, the board of directors granted
stock options to officers and directors for: (i) 3,000,000 shares of common
stock, exercisable at $.0165 per share for two years of which 2,000,000
were cancelled during 2003 and 1,000,000 expired in the first quarter of
2005; (ii) 3,000,000 shares of common stock, exercisable at $.0155 for 2
years of which 1,000,000 were cancelled during 2003, 1,000,000 was
exercised in 2004 and 1,000,000 expired in the first quarter of 2005; (iii)
7,000,000 shares of common stock, exercisable at $.01 per share for two
years of which 2,000,000 were cancelled during 2003; (iv) 750,000 shares of
common stock exercisable at $.011 per share for one year; and (v) 1,000,000
shares of common stock exercisable at $.022 for six months which vested in
2004.
During the year ended December 31, 2003, the board of directors granted a
stock option for the purchase of 4,000,000 shares of common stock to a
consultant. The option was exercisable at $.015 per share for two years and
was valued at $31,627 and was exercised during the first quarter of 2004
for $60,000.
During the year ended December 31,2003, stock options for the purchase of
2,000,000 shares issued to a director in the year 2001 were cancelled, and
2,000,000 options granted in 2001 and 53,075 options granted in 1999
expired. A total of 9,750.000 stock options were exercised during 2003 for
proceeds of $111,750.
F-16
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
5. Common stock (continued)
During the current fiscal year ended December 31, 2004, the board of
directors granted stock options to officers and directors to purchase
7,500,000 common shares for an aggregate exercise price of $84,000, of
which 2,500,000 stock options were exercised resulting in proceeds to the
Company of $22,000. Additionally, during the fourth quarter 250,000 special
compensation shares were purchased by a director for consideration to the
Company of $2,500.
Also, during the first quarter of 2004, the Company granted four unrelated
individuals incentive stock options to purchase 3,000,000 shares each at an
aggregate purchase price of $320,000 and the Company recorded $22,248 in
compensation expense. During the second quarter of 2004, 3,000,000 of these
stock options were cancelled resulting in an adjustment to compensation of
($5,542) and during the period ended September 30, 2004, 9,000,000 of these
stock options expired.
The following is a summary of stock option activity, all of which are
currently exercisable:
Weighted
Option price Average Number of
per share exercise price shares
---------------- -------- -----------
Balance, December 31, 2002 $.02 to $.22 $.031 10,578,075
Granted $.01 to .022 $.0137 18,750,000
Expired $.02 to .20 $.0025 (2,053,075)
Cancelled $.0155 to $.02 $.0183 (7,000,000)
Exercised $.01 to $.02 $ .011 (9,750,000)
------------ ------ -----------
Balance, December 31, 2003 $.01 to $.22 $.014 10,525,000
Granted $.006 to $.03 $0.0194 20,500,000
Expired $.02 to $.03 $0.0267 (9,000,000)
Cancelled $.02 to $.03 $0.0267 (3,000,000)
Exercised $.022 to $.005 $0.0150 (6,000,000)
---------------- -------- -----------
Balance, December 31, 2004 $.006 to $.22 $ 0.023 13,025,000
F-17
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
5. Common stock (continued)
The following is additional information with respect to those options
outstanding at December 31, 2004:
Weighted
average Weighted
contractual life average exercise Number of
Option price per share in years price shares
---------------------- -------- ----- --------
$0.0155 to $0.0165 0.25 $0.0160 2,000,000
$0.075 to $0.01 0.67 $0.0150 5,000,000
$0.0220 1 $0.0220 500,000
$0.0200 1.25 $0.0200 1,000,000
$0.0110 1.5 $0.0110 2,000,000
$0.0060 1.75 $0.0060 2,000,000
$0.2200 5 $0.2200 525,000
As of December 31, 2004, 123,622 options to purchase common stock
outstanding under the 2002 stock option plan and 525,000 stock options that
expire in 2009, were outstanding under previous plans.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation costs for the Company's stock option
plans been determined based on the fair value at the grant date for awards
during the periods ended December 31, 2003 and 2004 in accordance with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
2003 2004
---- ----
Net loss - as reported $ (723,274) $ (922,983)
Net loss - pro forma (817,548) (1,048,460)
Loss per share - as reported (0.01) (0.01)
Loss per share - pro forma (0.02) (0.01)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2004, dividend yield of 0%;
expected volatility of 100%, risk-free interest rate of 1.23% and 1.05%;
and expected life of 1 and 2 years. The weighted average grant date fair
value of options was $.013 for 2003 and $0.023 for 2004.
F-18
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
6. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carry forwards of $5,767,000
which expire in years through 2024.
As of December 31, 2003 and 2004, total deferred tax assets; liabilities
and valuation allowances are as follows:
2003 2004
----------- -----------
Deferred tax asset resulting from loss carryforward $1,851,000 $2,139,000
Deferred tax asset resulting from future deductions 192,000 192,000
Valuation allowance (2,043,000) (2,331,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ==========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carry forwards and realization of other
deferred tax assets cannot be reasonably assured.
The Company's net operating losses are restricted as to the amount, which
may be utilized in any one year. The Company's net operating loss carry
forwards expire as follows:
December 31, 2015 $ 458,000
2016 224,000
2017 304,000
2018 835,000
2019 161,000
2020 1,055,000
2021 880,000
2022 353,000
2023 692,000
2024 805,000
-----------
$5,767,000
7. Commitments and contingencies
Lease commitments:
The Company entered into a month-to-month building lease for office space
in Niwot, Colorado. Rent expense for the years ended December 31, 2003 and
December 31, 2004 amounted to $16,546 and $13,375 respectively.
F-19
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2004
8. Subsequent events
Following the end of the fiscal year ended December 31, 2004, as of April
11, 2005, the Company issued a total of 24,899,864 common shares for
compensation of officers, directors and consultants, valued at an aggregate
of $ 116,692, and issued 10,264,236 shares on exercise of compensatory
stock options and compensatory stock purchase rights for proceeds to the
Company of $ 45,927. The Company made new grants of stock options of
10,000,000 common shares to certain officers and directors exercisable for
up to $ 50,000 of which 7,000,000 were exercised in the same period.
Also, during the first quarter of 2005, 2,000,000 stock options granted to
the CEO in prior periods expired, and 2,000,000 stock options granted to a
consultant also expired.
On March, 16, 2005, the Company and the CEO agreed to settle all consulting
services accrued through March 30, 2005 with a Convertible Promissory Note
for $60,000 with 8% interest from March 30, 2005 due on demand after July
1, 2005. The Promissory Note converts into registered common shares at
$0.006 per common share. In addition, in consideration for the payment of
10,000,000 registered common shares, representing compensation through July
1, 2005, the CEO agreed to terminate his consulting agreement and negotiate
quarterly compensation with the compensation committee of the board each
quarter commencing July 1, 2005.
Also, in the first quarter of 2005, the Company terminated its pending
agreements with an oil and gas developer to acquire and fund development of
certain prospects in Texas and Oklahoma after its investment banking
consulting firm withdrew its interest in funding the prospects. Immediately
thereafter, the Company was introduced to an opportunity to acquire a small
number of producing wells in Colorado that had several new wells and
re-working opportunities in the same field. The Company has authorized
three of its directors to pursue negotiations and perform due diligence
with the intent that the prospect, if it provides viable, will be acquired
into the Company's subsidiary, Colorado Oil and Gas, Inc. Should this
project prove viable after full investigation, it is the Company's intent
to complete capitalization of the Subsidiary including selling an equity
interest in the Subsidiary to the three directors, who will manage the
subsidiary and oversee funding and execution of the prospect, after which
time, the Company intends to dividend a portion of its equity ownership in
the subsidiary to the Company's shareholders. In April, 2005, the Company
granted two of these directors stock compensation in the amount of
2,500,000 common shares each as well as stock options to purchase 2,500,000
shares of common stock for $0.004 per share for their services in bringing
this prospect into the Company and completing the deal. As of the date of
this report, the Company has not signed an agreement to purchase the
prospect although the basic terms and form of purchase agreement have been
negotiated. The subsidiary company must successfully raise an amount of
debt and equity capital to acquire the prospect, which is subject to a
fairly rigorous time line, and there remains other details of the total
agreement yet to be worked out. Therefore, this prospect and opportunity at
this time, has not been fully evaluated, and there are no firm commitments
from bankers or investors to fund the purchase of the property as well as
the drilling and development costs.
On April 2, 2005, the CEO purchased 594,235 special compensation shares
with cancellation of a note payable for $2,377.
F-20