-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K02Q3ygzzA/PCZzyytCABX4jpGzUd7KPJNz9qUJFwuVCRa1a7VvMS0h/S0i4qAq1 +4a0L5eOZN/HnFK9Uhhx8g== 0001079974-03-000315.txt : 20030520 0001079974-03-000315.hdr.sgml : 20030520 20030520161924 ACCESSION NUMBER: 0001079974-03-000315 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARETE INDUSTRIES INC CENTRAL INDEX KEY: 0000820901 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 841063149 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-16820-D FILM NUMBER: 03712723 BUSINESS ADDRESS: STREET 1: 7102 LA VISTA PLACE STREET 2: STE 100 CITY: NIWOT STATE: CO ZIP: 80503 BUSINESS PHONE: 3036523113 MAIL ADDRESS: STREET 1: 7102 LA VISTA PLACE STREET 2: SUITE 100 CITY: NIWOT STATE: CO ZIP: 80503 FORMER COMPANY: FORMER CONFORMED NAME: TRAVIS INDUSTRIES INC DATE OF NAME CHANGE: 19930614 FORMER COMPANY: FORMER CONFORMED NAME: TRAVIS INVESTMENTS INC DATE OF NAME CHANGE: 19890427 10QSB 1 arete10qsb_5192003.txt QUARTERLY REPORT FOR PERIOD ENDED 3-31-2003 FORM 10-QSB - Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the period ended: March 31, 2003 or [] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ___________________ to _______________________ Commission File Number 33-16820-D ---------- ARETE INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Colorado 84-1508638 - ------------------------------ ------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 7102 La Vista Place, Suite 100, Niwot, CO 80503 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (303) 652-3113 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicated by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 15, 2003, Registrant had 47,599,581 shares of common stock, No par value, outstanding. ARETE INDUSTRIES, INC. AND SUBSIDIARIES INDEX ----- Page No. -------- Consolidated Financial Statements: Index to Consolidated Financial Statements 1 Consolidated Balance Sheet at March 31, 2003 and December 31, 2002 (unaudited) 2 Consolidated Statements of Operations for the Three Months Ended March 31 2003 and 2002 (unaudited) 3 Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (unaudited) 5-6 Notes to Unaudited Consolidated Financial Statements at March 31, 2003 7-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Part II - Other Information 14 Signatures 15 1 ARETE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2002 and March 31, 2003 (Unaudited)
ASSETS ------ 2002 2003 ------------ ------------ Current assets: Cash and cash equivalents $ 381 $ 32 Accrued interest receivable 24,632 27,914 Inventory 20,302 20,302 Prepaid expenses 2,285 345 ------------ ------------ Total current assets 47,600 48,593 Furniture and equipment, at cost net of accumulated depreciation of $74,309 (2002) and $81,823 (2003) 97,056 89,542 Intellectual property 32,215 31,640 ------------ ------------ $ 176,871 $ 169,775 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable (Note 2) $ 422,697 428,052 Accrued expenses 576,333 573,163 Accrued payroll taxes (Note 2) 289,761 289,761 Settlement due 18,650 18,650 Notes payable - related parties 27,532 27,827 ------------ ------------ Total current liabilities 1,334,973 1,337,453 Commitments and contingencies (Notes 1 and 2) 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 shares issued and outstanding 160,014 160,014 Series 2, 25,000 shares authorized, 18,542 (2002) and 18,897 (2003) shares issued and outstanding 185,425 188,970 Common stock, no par value; 499,000,000 shares authorized, 34,399,581 (2002) and 42,099,581 (2003) shares issued and outstanding 9,592,587 9,729,082 Accumulated deficit (10,877,308) (11,026,924) Notes receivable from sale of stock (218,820) (218,820) ------------ ------------ Total stockholders' deficit (1,158,102) (1,167,678) ------------ ------------ $ 176,871 $ 169,775 ============ ============
See accompanying notes 2 ARETE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended March 31, 2002 and 2003 (Unaudited) 2002 2003 ------------ ------------ Revenues: Sales $ 379 $ -- ------------ ------------ Total revenues 379 -- Operating expenses: Depreciation 8,102 7,515 Rent 9,804 2,084 Other operating expenses 34,247 138,309 ------------ ------------ Total operating expenses 52,153 147,908 ------------ ------------ Total operating loss (51,774) (147,908) Other income (expense): Minority interest in Aggression Sports loss 2,522 -- Interest expense (4,296) (4,990) Interest and miscellaneous income 3,228 3,282 ------------ ------------ Total other income (expense) 1,454 (1,708) ------------ ------------ Net loss (Note 3) $ (50,320) $ (149,616) ============ ============ Basic and diluted loss per share $ * $ * ============ ============ Weighted average common shares outstanding 24,416,300 38,852,900 ============ ============ *-Less than $.01 per share See accompanying notes. 3 ARETE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT For the three months ended March 31, 2003 (Unaudited)
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 Company (Note 4) -- -- 355 3,545 -- -- -- Issuance of common stock to employees and consultants for services (Note 4) -- -- -- -- 7,700,000 119,758 -- Value of stock options granted to consultants (Note 4) -- -- -- -- -- 16,737 -- Net loss for the year ended March 31, 2003 -- -- -- -- -- -- (149,616) ------ ---------- ------ -------- ---------- ---------- ------------ Balance, March 31, 2003 16,001 $ 60,014 18,897 $188,970 42,099,581 $9,729,082 $(11,026,924) ====== ========== ====== ======== ========== ========== ============
See accompanying notes. 4 ARETE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ended March 31, 2002 and 2003 (Unaudited) 2002 2003 --------- --------- Cash flows from operating activities: Net loss $ (50,320) $(149,616) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,102 8,089 Stock issued and options granted for services -- 136,495 Changes in assets and liabilities: Interest receivable (3,227) (3,282) Prepaid expenses 1,342 1,940 Accounts payable (2,507) 5,355 Accrued expenses 31,495 (3,170) --------- --------- Total adjustments 35,205 145,427 --------- --------- Net cash used in operating activities (15,115) (4,189) Cash flows from investing activities: Investments in and advances to Aggression Sports (1,521) -- --------- --------- Net cash used in investing activities (1,521) -- Cash flows from financing activities: Proceeds from issuance of preferred stock -- 3,545 Proceeds from note payable - related parties 16,989 295 --------- --------- Net cash provided by financing activities 16,989 3,840 --------- --------- Net increase (decrease) in cash and cash equivalents 353 (349) Cash and cash equivalents at beginning of period 110 381 --------- --------- Cash and cash equivalents at end of period $ 463 $ 32 ========= ========= See accompanying notes 5 ARETE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ended March 31, 2002 and 2003 (Unaudited) (Continued from preceding page) 2002 2003 --------- --------- Supplemental disclosure of cash flow information: Interest paid during the period $ -- $ -- ========= ========= Income taxes paid during the period $ -- $ -- ========= ========= Supplemental disclosure of non-cash investing and financing activities: During the quarter ended March 31, 2003, an account payable to a related party with an outstanding balance of $3,545 was converted into preferred stock. See accompanying notes. 6 ARETE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 1. Summary of significant accounting policies Basis of presentation: The accompanying financial statements have been prepared by the Company, without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial position as of December 31, 2002 and March 31, 2003, and the results of operations and cash flows for the periods ended March 31, 2002 and 2003. The financial statements have been prepared on a going concern basis which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. As shown in the accompanying financial statements, the Company has incurred significant losses and at March 31, 2003, the Company has a working capital deficit of $1,288,860 and a stockholders' deficit of $1,167,678. In addition, the Company is delinquent on payment of payroll taxes and creditor liabilities pursuant to the plan of reorganization. As a result, substantial doubt exists about the Company's ability to continue to fund future operations using its existing resources. On December 19, 2001, by board resolution pursuant to a subscription agreement, the board of directors designated 25,000 of Class A Preferred Stock as Series 2 Convertible Preferred Stock, in a proposed placement of up to $200,000 of such preferred stock at $10 per share face value. As of March 31, 2003, the Company received proceeds of $188,970 for the purchase of 18,897 shares of Series 2 Convertible Preferred Stock. 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 three directors, 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. The Company's business plan is to provide promising emerging and high growth-stage companies with financial and board level managerial support. The Company plans to develop its own in-house projects as well as seek to make acquisitions of going businesses through merger, acquisition, share exchange, or through financial service agreements to earn-in an equity participation as well as managerial fees from client companies. The Company believes that it can provide its client companies access to private and public debt and/or equity capital by offering these companies the opportunity to go public through a registered rights offering or dividend distribution to the Company's shareholders. 2. Delinquent amounts payable As of March 31, 2003, the Company is delinquent on payments of various amounts to creditors including payroll taxes and $62,316 to creditors required to be paid under the terms of its plan of reorganization. Failure to pay these liabilities could result in liens being filed on the Company's assets and may result in assets being attached by creditors resulting in the Company's inability to continue operations. 7 3. Income taxes The book to tax temporary differences resulting in deferred tax assets and liabilities are primarily net operating loss carryforwards of $4,328,000 which expire in years through 2023. A 100% valuation allowance has been established against the deferred tax assets, as utilization of the loss carryforwards 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. 4. Stock transactions On December 19, 2001, by board resolution pursuant to a subscription agreement, the board of directors designated 25,000 of Class A Preferred Stock as Series 2 Convertible Preferred Stock, in a proposed placement of up to $200,000 of such preferred stock at $10 per share face value. As of March 31, 2003, the Company received proceeds of $188,970 for the purchase of 18,897 shares of Series 2 Convertible Preferred Stock. These preferred shares are convertible into 18,896,976 shares of common stock. Effective July 15, 2002, the shareholders of the Company approved a 20 for 1 reverse stock split. All common share references in these financial statements have been revised to reflect the reverse split. On January 29, 2003, the Company issued 5,000,000 shares of common stock valued at $75,000, and granted stock options to purchase 3,000,000 shares at $0.0165 per share to its officers and directors for compensation for the first quarter. The options are exercisable beginning 79 days from the date of issuance and for a period of two years thereafter. Additionally 1,000,000 shares of common stock were issued to one consultant for services performed valued at $15,000. By agreement dated March 6, 2003, the Company engaged a consultant to provide corporate communications support for a period of six months from such date for compensation of 3,000,000 common shares and stock options to purchase up to 4,000,000 common shares for $0.015 per share for a period expiring 6 months from such date (valued at $16,737). As of March 31, 2003 1,500,000 of these shares have been issued valued at $22,500. On March 7, 2003, the Company issued 200,000 shares of common stock valued at $7,258 in final settlement of a wage claim. 8 4. Stock transactions (continued) Following the end of the first quarter, the Company inadvertently issued shares and/or granted stock options which exceeded the number of common shares allocated to its 2002 Incentive Stock Option Plan by 683,333 shares. Certain of these include shares reserved for issuance on exercise of outstanding stock options. The Company will not allow exercise of the most recently granted stock options unless other outstanding options expire, other shares pending issuance are cancelled or shares that were issued under the plan can be reassigned outside of the 2002 Plan or included in the anticipated 2003 Omnibus Stock Compensation and Incentive Plan in sufficient number to allow their exercise. 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 period ended March 31, 2003 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 ---- Net loss - as reported $(149,616) Net loss - pro forma (175,794) Loss per share - as reported * Loss per share - pro forma * * - Less than .01 per share 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, dividend yield of 0%; expected volatility of 100%, risk-free interest rate of 1.45% to 1.75%; and expected life of .5 to 2 years. 5. Subsequent Events On April 1, 2003 the company issued 1,000,000 shares to its CEO and stock options to purchase an aggregate of 3,000,000 shares of common stock at $0.0155 per share as compensation to the three directors for the second quarter of 2003. The options are exercisable beginning 90 days from the date of issuance, expiring 24 months from the original grant date. Additionally, 2,000,000 common stock options were exercised by the CEO and a consultant for consideration of $25,000 in cash and in payment of $15,000 of note payable to the CEO. On April 30, 2003, 2,500,000 shares of common stock were issued to two consultants for services performed. 9 Item 2 - 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 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 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 issued to consultants is recorded at the market price of the Company's common stock at the measurement date. The measurement date is generally the date the options are fully vested. Revenue recognition: The Company has provided management services to companies in the process of developing new products with no operations. These management fees have not been recorded as revenue when such services were performed since collectibility was not reasonably assured. 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. The conversion privilege of the designated Series 1 and Series 2 Convertible Preferred Stock has been adjusted to reflect the effect of the referenced reverse stock split. 10 By the beginning of fiscal 2001, the Company had initiated downsizing operations of its incubation services and facilities. By the end of the second quarter of fiscal 2001, the Company had reduced corporate overhead by eliminating all but two executive officers who were accruing salaries and had terminated all operations of its incubator client companies, its Arete Outdoors subsidiary and the ABS and 7GT projects. By the end of fiscal 2001, the Company had moved into the smaller of its two office suites and terminated its lease on the remaining space. During the first half of fiscal 2002, the Company continued resolving outstanding debts including salaries and accounts and notes payable to non-affiliates and affiliates; and focused on completing a recapitalization and restructuring of its capital structure, which required incurring the expense of holding a shareholders meeting that was held on July 2, 2002. During the third quarter of fiscal 2002, we dismantled operations, preserved our assets and resources, and maintained our current reporting status as a public company in order to preserve our continuity and our ability to launch our new corporate vision. In December 2002, the Company moved its corporate offices into an executive suite, reducing its overhead to an absolute minimum. Concurrently, having obtained shareholder approval to restructure the Company's capital structure, the CEO with the two other board members engaged aggressively in the development of new sources of capital and new acquisition prospects conforming to our business development objectives. Presently, 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, infusions from related parties, and by the issuance of common stock for services. The Company will be required to rely upon ongoing financial support from these parties for the foreseeable future. Financial Condition As of March 31, 2003, the Company had $169,775 in total assets and $1,337,453 in total liabilities, as compared to $176,871 and $1,334,973 at the end of fiscal year ended December 31, 2002, respectively. Accounts payable and accrued expenses at March 31, 2003 were $1,290,976 as compared to $1,288,791 at December 31, 2002. During the period ended March 31, 2003, the Company paid $75,000 in wages, resolved a wage claim for $7,258 and paid $ 54,237 in consulting fees with issuance of common stock and stock options. During April of 2003, the Chief Executive Officer exercised 1,000,000 in stock options with $5,000 in cash and payment of $15,000 of note payable; and a consultant exercised 1,000,000 in stock options with $20,000 in cash. The Company's subsidiary, Global Direct Marketing Services, Inc., which is now inactive, has left an obligation of trade payables of $87,625 and unpaid 1999 payroll taxes of $58,230 remaining from its printing and direct mail advertising business. The Company owes approximately $97,352 in unpaid Federal payroll taxes for calendar years 1995 through 1997 including penalties and interest. The Company owes approximately $110,842 in 2000 and $22,138 in 2001, respectively, in accrued payroll taxes, including penalties and interest. (See: Note 2 to Financial Statements.) 11 During the period ended March 31, 2003, the Company continued to rely upon infusions of cash from loans and cash advances by officers, directors and affiliates of the Company. As stated above, $3,545 was also received in partial payment of a subscription agreement for purchase of Series 2 Preferred Stock. The proceeds were used for overhead, payment of corporate obligations, legal fees and accounting expenses for corporate reporting. As of March 31, 2003, executive salaries and bonuses of $518,873 were accrued and unpaid, and the Company had $218,820 in notes receivable for stock sales from former management members. Results of operations The Company's operations during the first quarter of 2003 have been confined to business development activities of its officers, directors and consultants, and administrative bookkeeping tasks related to creditor and investor relations and securities act compliance. The Company is not providing new venture management or advisory activities and therefore not generating revenue from executive and management services. The Company's revenues from operations for the quarter ended March 31, 2003 were $0. Operating expenses for the quarter ended March 31, 2003 were $147,908 resulting in an operating loss of $147,908. This included officer and director salaries of $75,000, and other operating expenses of $72,908, including accounting fees, consulting, bookkeeping, transfer agent fees, and storage fees. 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 $550 per month. We envision operating the Company as a holding company in the future for other going concerns and revenue generating businesses, which will require minimal staff for accounting and administrative matters. 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 entities. Liquidity and Capital Resources The Company had a working capital deficit as of March 31, 2003 of $1,288,860. This compares to a working capital deficit of $1,287,373 as of December 31, 2002. During the quarter ended March 31, 2003 an aggregate of 7,700,000 shares of common stock were issued for aggregate consideration of $119,758 (avg. $0.016 per share) and the Company issued 355 shares of Series 2 Convertible Preferred Stock valued at face value of $3,545. Subsequent to March 31, 2003, 2,000,000 stock options were exercised at $0.02 per share for $25,000 in cash and payment of debt to an affiliate of the CEO in the amount of $15,000. The Company had a stockholder's deficit at March 31, 2003 of $1,167,678. This is compared to stockholder's deficit at December 31, 2002 of $1,158,102. The stockholder's deficit increased due to the Company operating at a loss, offset by the issuance of preferred stock for cash and the conversion of certain notes payable. 12 At March 31, 2003, 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. The Company has recently reduced the number of outstanding common shares to allow it to raise equity capital and to effect conversion and exercise of outstanding common stock options and conversion rights of preferred stock which has been reserved for issuance to insiders in exchange for their accrued cash advances, and for issuance in a private placement of up to $200,000 in Series 2 Convertible Preferred stock, which the Company is currently conducting to an affiliated entity. As of March 31, 2003, the Company had raised $188,970 in gross proceeds of this private placement and had 18,897 outstanding shares of Series 2 Convertible Preferred. 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. Subsidiaries/Employees: Arete Industries, Inc. has one full time employee, and two part-time corporate officers, and two part-time consultants presently engaged in developing and executing a marketing plan for its business development and capital funding businesses, as well as the automation and upgrading of the Company's shareholder and investor communication systems. The Company's subsidiary, Aggression Sports, Inc. presently has no employees other than its acting president, the Company's current CEO. The CEO operates and manages both entities and remains on a deferred salary basis for the first two quarters of 2003. He has accepted a 1,000,000 share stock grant valued at $15,000 and an Incentive stock option to purchase 1,000,000 shares of common stock at $0.0165 per share as compensation for services rendered during the first quarter of 2003, and the two outside directors each received a 2,000,000 stock grant valued at $30,000 each and an Incentive Stock Option to purchase 1,000,000 shares of common stock each at $0.0165 per share for compensation for the same period. Following the end of the first quarter of 2003, the company issued 1,000,000 shares of common stock to its CEO valued at $14,000 as compensation for services during the second quarter of 2003, and issued 1,000,000 common stock Incentive Options exercisable at $0.015 per share to each of its directors, as compensation for the same period. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. During the Period ended March 31, 2003, there were no material legal proceedings initiated by or against the Company or any of its officers, directors or subsidiaries. During the third quarter of 2001, the Company concluded its defense of an SEC enforcement action brought in the Federal District Court for the District of Colorado, for violations under Section 15d of the '33 Act and Section 10b including Rule 10b-5 of the '34 Act against the Company, one of its current officers and two former officers and directors through settlement of the action by consenting to the entry of an administrative Cease and Desist Order without admitting or denying the findings and conclusions made by the SEC. No financial sanctions or professional bars were imposed on the Company or the current officer in the settlement. The SEC previously settled this matter with the former officers and directors through the imposition of financial sanctions and an injunction from future violations of the anti-fraud provisions of the federal securities laws. Item 2. Changes in Securities (a) Changes in Instruments Defining Rights of Security Holders. Previously Reported. (b) Not Applicable (c) Item 701 Reg. SB. - The following were the unregistered shares of common stock sold by the registrant during the period covered by this report. None Item 3. Defaults Upon Senior Securities. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K Exhibit 99.1 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. There were no Reports on Form 8-K filed during the period covered by this report. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARETE INDUSTRIES, INC. Date: May 20, 2003 By: /s/ Thomas P. Raabe, CEO/ Interim CFO - --------------------------------------------------- Thomas P. Raabe, CEO/ Interim CFO Interim Principal Financial and Accounting Officer 15 CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15 SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I , Thomas P. Raabe, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Arete Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 20, 2003 By: /s/ Thomas P. Raabe -------------------------------------------------- Thomas P. Raabe, CEO/ Interim CFO Interim Principal Financial and Accounting Officer 16 EX-99.1 3 arete10qsbex991_5192003.txt CERTIFICATION CEO/CFO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Arete Industries, Inc. (the "Company") on Form 10-QSB for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas P. Raabe, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: May 20, 2003 By: /s/ Thomas P. Raabe -------------------------------------------------- Thomas P. Raabe, CEO/ Interim CFO Interim Principal Financial and Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----