-----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, FFeD7bk4y+RP5ebIgUpf2MTwZIxTXSQSCoEee1jENgCyl9oUNUnpn6Qnizbnj0nf 6NzzLNmQUG+BqGrhUli2cQ== 0001079974-06-000234.txt : 20060615 0001079974-06-000234.hdr.sgml : 20060615 20060615141650 ACCESSION NUMBER: 0001079974-06-000234 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060615 DATE AS OF CHANGE: 20060615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARETE INDUSTRIES INC CENTRAL INDEX KEY: 0000820901 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841063149 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-16820-D FILM NUMBER: 06906978 BUSINESS ADDRESS: STREET 1: 7260 OSCEOLA STREET CITY: WESTMINSTER STATE: CO ZIP: 80030 BUSINESS PHONE: 303-652-3113 MAIL ADDRESS: STREET 1: 7260 OSCEOLA STREET CITY: WESTMINSTER STATE: CO ZIP: 80030 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 10KSB/A 1 arete10ksba1_6142006.txt AMENDMENT #1 FOR YEAR ENDED 12/31/2005 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB/A Amendment #1 |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 ----------------- || TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-16820-D ---------- ARETE INDUSTRIES, INC. ---------------------------------------------- (Name of small business issuer in its charter) Colorado 84-1508638 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) .. P.O. Box 141 Westminster, CO 80032 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (303) 652-3113 --------------------------- (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.0001 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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. [] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [X] No [] Issuer's revenues for fiscal year ended December 31, 2005 were $92,354. The aggregate market value of the voting stock held by non-affiliates as of May 10, 2006 was $1,175,692 The number of shares outstanding of the issuer's common stock as of May 10, 2006 was 279,655,754 Documents incorporated by reference: None. The following is Amendment No. 1 to the Annual Report on Form 10-KSB for the period ended December 31, 2005 (the "Form 10-KSB") of ARETE INDUSTRIES, INC. This Amendment No. 1 is being filed to reflect certain typing errors and missing exhibits (21 and 23.1) of the Company's 10-K's exhibits, the auditor's opinion (the date was omitted), and to revise presentations in other parts of the Form 10-KSB to be consistent. All other statements and provisions in the Form 10-KSB have not been updated and remain unchanged. Cautionary Note Regarding Forward-Looking Statements This report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management's exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words "may", "will", "anticipate", "believe", "estimate", "expect", "intend", and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Item 1. Description of Business ----------------------- Company Overview 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. 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 a new Chairman and CEO. Beginning in May 1998 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. The Company also transferred all print and direct mail operations in Council Bluffs, Iowa, including certain operating assets and liabilities into a second, wholly owned subsidiary, Global Direct Marketing Services, Inc. and at the end of the fiscal year ended December 31, 2004, the Company resolved to dissolve two of its subsidiaries and has initiated procedures to close out all inter-company accounts and consolidating accounts related to these subsidiaries. The Company has 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 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 2 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 the CEO in executing the 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 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 2005, 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. In the fourth quarter of 2004, the Company formed a new subsidiary (Colorado Oil & Gas, Inc.) 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. Since inception of our new subsidiary, we have reviewed numerous prospects and pursued funding and acquisition efforts for two specific deals through an oil and gas investment banking consultant which we contracted in June of 2004. Ultimately, the first deal was terminated without cause by the seller of that project in April of 2004, and after significant evaluation and due diligence on our part, the second group of prospects initiated in May of 2004 did not qualify for financing, and in the first quarter of 2005, we terminated our negotiations with the seller group for this prospect. During the first nine month period 2005, we decided to pursue a much smaller and ostensibly easier prospect to acquire and fund which included a number of producing shallow wells in Colorado with several potential re-entry and in-field development wells for total cost of under $3 Million. That deal was terminated in mid December 2005. The subsidiary was spun-off during the shareholders of the Company in September 2005 on a pro rata basis of 1 for 250 to shareholders of record on September 9, 2005. The subsidiary will continue to pursue the oil and gas business on its own and file to register its stock during the first half of 2006. Arete Energy Development Group LTD was originally formed as a Colorado corporation on April 29, 2004 as a subsidiary of Arete Industries, Inc. for the purpose of pursuing a joint venture in oil and gas. The joint venture opportunity for Arete Energy Development Group LTD was abandoned with no further activity occurring in Arete Energy Development Group. The name was changed to Avatar Energy Development Group, LTD. in September 2004 in anticipation of developing an alternative energy business. The corporation remained dormant until late 2005. The board decided to change the direction of Avatar Energy Development Group, LTD to pursue a technology related business which was consistent with the expertise of one of the current directors. The board 3 approved a name change to Avatar Technology Group, Inc. The main business focus for Avatar Technology Group is the delivery of technology solutions for small to medium size businesses as well as public entities. These solutions include business services, custom software development and web design, network security services and IT solutions. Avatar has secured reseller/affiliate agreements with major partners in each area to deliver these services primarily through a website model. Avatar Technology Group maintains a website at www.avtekgroup.com. Avatar plans to market these services to specific vertical markets using advertising in print media and targeted opt in email campaigns. Most of the services are based on a recurring revenue model. All of the technology solution offerings were selected to be complimentary to each other. The Company is pursuing a merger candidate for the parent company Arete Industries, Inc. as soon as possible. The board of directors are in negotiations with two candidates and expect a letter of intent and deposit for the right to begin due diligence by the middle of May 2006. 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. Available Information Our principal executive offices are located at Arete Industries, Inc., 7260 Osceola Street, Westminster, Colorado 80030; out telephone number is (303)652-3113. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), which requires that we file reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). The SEC maintains a website on the Internet at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Arete Industries, Inc., which file electronically with the SEC. In addition, our Exchange Act filings may be inspected and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Risk Factors o We have had limited operations which makes our future operating results difficult to predict. We were incorporated as a Colorado corporation in 1998 and we have no current operating business. Although we are developing a business in one of our subsidiary company's, we have spun -off our operating subsidiary, and we are seeking a merger we are unable to predict the future ability to continue to operate. We have a limited operating history. We face the risks and uncertainties of other early-stage companies. As a result of our limited operating history, we may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls. Our budgeted expense levels are based in part on our expectations concerning future revenues. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, a significant shortfall in demand for our services would decrease our revenues and could have an immediate and material adverse effect on our business, results of operations and financial condition. To the extent that expenses precede or are not rapidly followed by increased revenue, our business, results of operations and financial condition may be materially adversely affected. 4 o We may need additional financing our business expansion plans may be significantly limited. We have no or little cash generated from our operations and what cash we generate are insufficient to satisfy our working capital and capital expenditure requirements, we will need to raise additional funds through the public or private sale of our equity or debt securities. The timing and amount of our capital requirements will depend on a number of factors, including any cash flow generated by our subsidiary company. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our then-existing shareholders will be reduced. There is no assurance that additional financing will be available on terms favorable to us, if at all. Any future equity financing, if available, may result in substantial dilution to existing shareholders, and debt financing, if available, may include restrictive covenants or may require us to grant a lender a security interest in our assets. Any failure by us to procure timely additional financing or investment adequate to fund our ongoing operations will have material adverse consequences on our business operations and as a result, on our consolidated financial condition, results of operations and cash flows. If we are unable to raise sufficient additional financing, we will not be able to continue our operations. o Our business is dependent upon management and employees for continuing operations and expansion. Our success will depend, to a significant extent, on the efforts and abilities of management and board of directors. Our current management team is understaffed and has very limited experience managing a public company subject to the SEC's periodic reporting obligations. Hiring qualified management will be difficult due to the limited number of qualified professionals in the work force in general and the costs of these qualified professionals. We have in the past experienced difficulty in recruiting qualified personnel and there can be no assurance that we will be successful in attracting and retaining additional members of management if the business begins to grow. Failure to attract and retain personnel, particularly management personnel would materially harm our business, financial condition and results of operations. o We must continue to meet the OTCBB continued listing requirements or we risk delisting. Our securities are currently listed for trading on the Over the Counter Bulletin Board (OTCBB). We must continue to satisfy OTCBB's continued listing requirements or risk delisting of our securities which would have an adverse effect on our business. If our securities are de-listed from the OTCBB, it may trade on the pink or gray sheet market, which may be a less liquid market. In such case, our shareholders' ability to trade, or obtain quotations of the market value of, shares of our common stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. o Our business plan and proposed strategy has not been independently evaluated. We have not obtained any independent evaluation of our business plan and proposed business strategy. There can be no assurance that our proposed strategy will generate sufficient revenues and capital to continue in business. o We could use the issuance of additional shares of our authorized stock to deter a change in control. As of May 10, 2006, we have 279,655,754 shares of common stock outstanding, out of a total of 500,000,000 shares of common stock authorized for future issuance under our Articles of Incorporation. This does not include 1,000,000 shares of common stock reserved for issuance under our Stock Option and Appreciation Rights Plan. 5 In addition, our Board is authorized to issue "blank check" preferred stock, with designations, rights and preferences as they may determine. Accordingly, our Board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock. This type of preferred stock could also be issued to discourage, delay or prevent a change in our control. The ability to issue "blank check" preferred stock is a traditional anti-takeover measure. These provisions in our charter documents make it difficult for a majority stockholder to gain control of the Board of Directors and of our company. The issuance of additional shares would make it more difficult for a third party to acquire us, even if its doing so would be beneficial to our shareholders. o We do not anticipate paying dividends on common shares in the foreseeable future. Since our inception we have not paid any dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future. We expect that if we have future earnings applicable to the common shareholders they will be used for working capital and to finance growth. o Future sales of our common stock may depress our stock price. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or as a result of the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. As of May 10, 2006, we have authorized shares of which 279,655,754 shares of common stock are issued and outstanding. o There is a limited public trading market for our common stock. Our stock is currently traded on the OTCBB under the trading symbol of "ARET". There is a limited public trading market for our common stock. Without an active trading market, there can be no assurance of any liquidity or resale value of our common stock, and stockholders may be required to hold shares of our common stock for an indefinite period of time. o Our stock price has been volatile and may fluctuate in the future. The trading price of our securities may fluctuate significantly. This price may be influenced by many factors, including: o our performance and prospects; o the depth and liquidity of the market for our securities; o sales by selling shareholders of shares issued in connection with the private placement; o investor perception of us; o changes in buy/sell recommendations by analysts; o general financial and other market conditions; and o domestic and international economic conditions. Public stock markets have experienced, and are currently experiencing, substantial price and trading volume volatility. These broad market fluctuations may adversely affect the market price of our securities. In addition, fluctuations in our stock price may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis. 6 o Provisions in our bylaws provide for indemnification of officers and directors, which could require us to direct funds away from our business. Our bylaws provide for the indemnification of our officers and directors. We may be required to advance costs incurred by an officer or director and to pay judgments, fines and expenses incurred by an officer or director, including reasonable attorneys' fees, as a result of actions or proceedings in which our officers and directors are involved by reason of being or having been an officer or director of our company. Funds paid in satisfaction of judgments, fines and expenses may be funds we need for the operation of our business, thereby affecting our ability to attain profitability. o As a public company, our business is subject to numerous reporting requirements that are currently evolving and could substantially increase our operating expenses and divert management's attention from the operation of our business. The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the SEC and the American Stock Exchange have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue. In addition, the requirements have taxed a significant amount of management's and the Board's time and resources. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers. 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 energy projects. We will also compete with well-funded major oil and gas exploration companies. 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 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. Employees - --------- Arete Industries' executive officers are currently employed as an independent contractors and has been compensated during the current fiscal year in common stock. The other directors 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. 7 Item 2-Description of Property Arete Industries Inc. currently leases approximately 200 square feet of office space that it shares with Colorado Oil & Gas, Inc. located in Westminster, 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. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2005. Part II Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities Market Information 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. STOCK QUOTATIONS FYE December 31, 2004 BID Quarter Ending High Low 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 FYE December 31, 2005 Quarter Ending High Low 3/31/05 0.008 0.0032 6/30/05 0.0085 0.0022 9/30/05 0.0249 0.0037 12/31/05 0.0085 0.0024 As of May 10, 2006 the number of record holders of the Company's common stock was 489. This number does not include the indeterminate number of stockholders whose shares are held by brokers as "nominees" or in street name. 8 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. Recent Sales of Unregistered Securities - --------------------------------------- We had no sales of unregistered securities during the twelve month period ended December 31, 2005 Repurchases of Equity Securities of the Issuer - ---------------------------------------------- None. Item 6. Management's Discussion and Analysis Forward-looking information - --------------------------- This report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management's exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words "may", "will", "anticipate", "believe", "estimate", "expect", "intend", and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-KSB. This Annual Report on Form 10-KSB, including the following discussion, contains trend analysis and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Annual Report on Form 10-KSB that are not statements of historical facts are forward-looking statements. These forward looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include without limitation: o our dependence on key management personnel o the presence of competitors with greater financial resources o the ability of management to execute acquisition and expansion plans and motivate personnel in the execution of those plans o interruptions or cancellation of existing contracts o adverse publicity related to the company o an inability to arrange additional debt or equity financing o the adoption of new, or changes in, accounting principles o the costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002 Actual results may differ materially from those set forth in such forward-looking statements as a result of factors set forth elsewhere in this Annual Report on Form 10-KSB, including under "Risk Factors." More information about factors that potentially could affect the Company's financial results is included in our filings with the Securities and Exchange Commission. The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. 9 General - ------- This management's discussion and analysis of financial conditions and results of operations is intended to provide investors with an understanding of the past performance, its financial condition and its prospects in the future. We will discuss and provide our analysis of the following: o Overview of the business o Critical accounting policies o Results of operations o Liquidity and capital resources o New accounting pronouncements Overview - -------- 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.) 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 10 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. Critical Accounting Policies - ---------------------------- The following discussion and analysis of the results of operations and financial condition are based on the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the Untied States of America. Our significant accounting policies are more fully described in Note 2 of Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of the our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. As a result, they are subject to uncertainty. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Actual results may differ from these estimates. All historical numbers are presented on a consolidated basis that includes all acquisitions and eliminates inter-company transactions. 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. Use of Estimates in the Preparation of Financial Statements Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expense during the reporting periods. Accordingly, actual results could differ from those estimates. 11 Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Costs of property maintenance and repairs are charged against operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the individual assets, as follows: Equipment, and furniture 5-7 years Results of Operations The nature of our operations, and the locations in which we operate create certain challenges and risks to us. These challenges and risks are discussed in Item I of this Annual Report. However certain of these factors are especially important to this discussion and to understanding our results of operations, financial condition and cash flows, and the reasons why historical financial results may not be indicative of our future operating performance. Key selected financial and operating data for the years ended December 31, 2005 and 2004 are as follows. All references to the earnings per share are on a diluted basis. The following consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements. The Company had $11,114 revenues for nor for fiscal year ended December 31, 2005 and no revenues from operations for the fiscal year ended December 31, 2004. Net loss from continuing operations for the fiscal year ended December 31, 2005 was $684,024 as compared to a net loss from continuing operations of $977,037 for the fiscal year ended December 31, 2004. The extinguishment of debt of $81,200 offset other losses in the fiscal year ended December 31, 2005 and the extinguishment of debt of $54,054 offset other losses in fiscal year ended December 31, 2004. This resulted in an aggregate net losses for the fiscal year ended December 31, 2005 of $602,824 and $922,983 for the fiscal year ended December 31, 2004. The decreased the overhead expenses during the fiscal year ended December 31, 2005 by $586,146 over the prior year but has included the loss attributed to the operations of Colorado Oil & Gas for the first nine months of fiscal year ended December 31, 2005 of $282,296. 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. 12 Liquidity and Capital Resources - ------------------------------- The Company had a working capital deficit as of December 31, 2005 of $888,159. This compares to a working capital deficit of $938,856 in the fiscal year ended December 31, 2004. 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, 2005 in which an aggregate of 79,109,986 shares of common stock were issued for aggregate consideration of $369,181 (avg. $0.0047 per share), recorded $7,727 in value of stock options granted to consultants. The Company had a stockholder's deficit at December 31, 2005 of $886,234. This is compared to stockholder's deficit at December 31, 2004 of $934,887. 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, 2005, 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 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. 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. 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. 13 Contractual Obligations and Commercial Commitments - -------------------------------------------------- We do not currently have any contractual obligations and commercial commitments, except the notes payable to related parties. Off Balance Sheet Arrangements - ------------------------------ We do not currently have any off balance sheet arrangements falling within the definition of Item 303(c) of Regulation S-B. Inflation - --------- To date inflation has not had a material impact on our operations. New Accounting Pronouncements - ----------------------------- In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4,"Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary Transactions". Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact on the Company's financial statements. In May, 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 will apply to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS No. 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial condition). 14 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 None. Item 8A. Controls and Procedures As of the end of the period covered by this Annual Report, our Chief Executive Officer and Chief Financial Officer (the "Certifying Officers") conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 Act, as amended (the "Exchange Act") the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers originally concluded that our disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder. Further, there were no changes in our internal control over financial reporting during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Charles L. Gamber (55) Director and President. - ----------------------------------------------- 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. 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. 15 John R. Herzog (62) Director and Acting Chief Financial Officer. - ----------------------------------------------------------------- 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. William W. Stewart (45) 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 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 (55) 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. 16 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 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). The Board of Directors - ---------------------- Our Board of Directors oversees the business affairs of the Company and monitors the performance of our management. The Board held ten meetings during the fiscal year ended December 31, 2005. During the 2005 fiscal year, all Board members attended 100% or more of the Board meetings. The Board of Directors has designated three standing committees: the Audit Committee, the Compensation Committee and the Nominating Committee. Board Committees - ---------------- Audit Committee. The Audit Committee's primary responsibilities are to monitor our financial reporting process and internal control system, to monitor the audit processes of our independent auditors, and internal financial management; and to provide an open avenue of communication among our independent auditors, financial and senior management and the Board. The Audit Committee reviews its charter annually and updates it as appropriate. The Committee met four times during the fiscal year 2005. The Audit Committee consists of the following independent directors: Donald W Prosser and William Stewart. Audit Committee Financial Expert. The Board has determined that Mr. Prosser is an audit committee financial expert as defined by Item 401(h) of Regulation S-B under the Securities Act and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Compensation Committee. The Compensation Committee was established in 2003. It administers our incentive plans, sets policies that govern executives' annual compensation and long-term incentives, and reviews management performance, compensation, development and succession. The Compensation Committee met two times during the fiscal year 2005 to review, among other things, compensation for the officers, the directors. Nominating Committee. The Nominating Committee was also established in 2003. It identifies candidates for future Board membership and proposes criteria for Board candidates and candidates to fill Board vacancies, as well as a slate of directors for election by the shareholders at each annual meeting. The Committee annually assesses and reports to the Board on Board and Board Committee performance and effectiveness; reviews and makes recommendations to the Board concerning the composition, size and structure of the Board and its committees; and annually reviews and reports to the Board on director compensation and benefits matters. The Nominating Committee met one time during the fiscal year 2005. The Company has one Board of Director seat open. 17 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. Code of Ethics - -------------- We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B of the Securities Act of 1933, as amended. The Code applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Upon written request, we will mail you a free copy of our Code. Please mail your request to the following address: Arete Industries Inc., P.O. Box 300, Westminmster, Colorado 80033. 18 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: 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 Compensa-tion Awards SAR's Payouts ($) ($) (#) ($) -------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------ Thomas P. 12/31/05 $ 85,000(1) Raabe, 12/31/04 $ 180,000(1) $172,500(2) 500,000(1) Former 12/31/03 $ 79,000(1) 7,000,000 Chairman & (1) CEO -------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------ Charles 12/31/05 $ 18,000 Gamber, 12/31/04 $ 0 President, 12/31/03 $ 0 Director -------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------ John Herzog, 12/31/05 $ 42,000 Acting CFO, 12/31/04 $ 0 Director 12/31/03 $ 0 -------------- ------------ -------------- ------------ ------------- ----------- ------------- ---------- ------------
- ------------------- (1) Mr. Raabe resigned in July 2005. 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. (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 $0.0192 per share. 19 Option/SAR Grants Table Option/SAR Grants in Last Fiscal Year Individual Grants There were no grants of options or stock to officers in the fiscal year ended December 31, 2005. (1) At the time of grant the exercise price exceeded the market price for the underlying common shares by 10%. The four outside directors received stock options during fiscal 2005 as part of their regular compensation, but have not been included in this calculation. See: Compensation of Directors, below. Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table. Aggregated Option/SAR Exercises in Last Fiscal Year And FY-End Option/SAR Values
==================== ================= ====================== ========================== ========================== (a) (b) (c) (d) (e) Number of Value of Securities Unexercised Underlying Unexercised In-the-Money Options/SAR's at Options/SAR's at FY-End FY-End (#) ($)(1) Shares Acquired on Exercise (#) Exercisable/ Exercisable/ Value Realized ($) Unexercisable Unexercisable Name ==================== ================= ====================== ========================== ========================== Thomas P. Raabe 0 $ - 1,000,000 $620 -------------------- ----------------- ---------------------- -------------------------- -------------------------
- -------------- (1) Value determined at closing trade on 12/31/05 of $0.0042/share for 500,000 options exercisable at $0.0042 per share. The 500,000 stock options were out of the money as of 12/31/05. Compensation of Directors. The directors are compensated for consulting services and may be reimbursed for their expenses in attending formal meetings of the board of directors. The following is the directors compensation for the fiscal year ended December 31, 2005 Charles Gamber $ 8,250 William Stewart $ 8,250 John Herzog $ 8,250 Donald W Prosser $ 20,350(1) - ---------------- (1) includes work related to the audit committee. 20 Item 11 - Security Ownership of Certain Beneficial Owners and Management. Security Ownership of Management
- ----------------------- ------------------------------- --------------------------- --------------------------- Title of Class Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership - ----------------------- ------------------------------- --------------------------- --------------------------- Directors and Executive Officers - ----------------------- ------------------------------- --------------------------- --------------------------- Common Stock William W. Stewart Direct: 3,750,000 1.4% (1) Director/Secretary c/o P.O. 300 Westminster, Colorado 80033 - ----------------------- ------------------------------- --------------------------- --------------------------- Common Stock Donald W Prosser Direct: 16,878,000 6.4% (2) Director c/o P.O. 300 Westminster, Colorado 80033 - ----------------------- ------------------------------- --------------------------- --------------------------- Common Stock Charles L. Gamber Direct: 9,650,000 3.7% (3) Director & President c/o P.O. 300 Westminster, Colorado 80033 - ----------------------- ------------------------------- --------------------------- --------------------------- Common Stock John R. Herzog Direct 3,750,000 1.4% (4) Director & Acting CFO c/o P.O. 300 Westminster, Colorado 80033 - ----------------------- ------------------------------- --------------------------- --------------------------- Common Stock Directors and Executive Total: 34,028,000 12.93% (5) Officers as a Group - ----------------------- ------------------------------- --------------------------- ---------------------------
- --------------- (1) Includes Directly Owned of 3,500,000 shares plus 250,000 common shares issuable on exercise of common stock options, which the Beneficial Owner has the right to acquire within 60 days. (2) Includes Directly Owned of 16,628,000 shares plus 250,000 common shares issuable on exercise of common stock options which the Beneficial Owner has the right to acquire within 60 days. (3) Includes Directly Owned of 9,400,000 shares plus 1250,000 common shares issuable on exercise of common stock options which the Beneficial Owner has the right to acquire within 60 days. (4) Includes Directly Owned of 3,500,160 common shares, plus 250,000 common shares issuable on exercise of common stock options, which the Beneficial Owner has the right to acquire within 60 days; (5) Includes Directly Owned of 33,028,000 common shares, plus 1,000,000 common shares issuance on exercise of stock options, which the Beneficial Owner has the right to acquire within 60 days. Percentage calculated based on 263,155,754 total shares including 262,155,754 common shares outstanding plus 1,000,000 common shares issuable on exercise of stock options which the Beneficial Owner has the right to acquire within 60 days 21 Item 12 - Certain Relationships and Related Transactions. Transactions with Management and Others - --------------------------------------- During the fiscal years ended December 31, 2004 and December 31, 2005, 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.) During the third quarter of 2004, the Company adopted its 2004 Omnibus Stock Option and Incentive Stock Compensation Plans. This plan contained open and designated grants for members of the board, officers, and consultants. This 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.) 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. During 2005 the Company paid 250,000 shares per quarter for its directors out of the 2004 plan and additional 250,000 shares to the audit committee. The Company issued options of 6,000,000 and 10,000,000 shares to its directors for other services preformed. 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. 22 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. 23 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-23.1 Consent of Ronald R. Chadwick, PC 4 EX-31.1 Certification of CEO Pursuant to 18 U.S.C, Section 7241, as adopted and Section 302 of the Sarbanes-Oxley Act of 2002. 4 EX-31.2 Certification of CFO Pursuant to 18 U.S.C, Section 7241, as adopted and Section 302 of the Sarbanes-Oxley Act of 2002. 4 EX-32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 4 EX-32.2 Certification CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 4 24 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. 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. $9,000 2. Audit-Related Fees. $-0- 3. Tax Fees. $-0- 4. All Other Fees. $1,000 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 Ronald R. Chadwick PC CPA in 2004 and 2005 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 25 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: June 15, 2006 By: /s/ CHARLES L GAMBER ---------------------- Charles L Gamber, President, Chief Executive Officer, and Director Date: June 15, 2006 By: /s/ JOHN R HERZOG ------------------- John R Herzog, Acting Chief Financial Officer and Director 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: June 15, 2006 By: /s/ WILLIAM W. STEWART -------------------------- William W. Stewart Board Member Date: June 15, 2006 By: /s/ DONALD W. PROSSER ------------------------- Donald W. Prosser Board Member Date: June 15, 2006 By: /s/ CHARLES L. GAMBER ------------------------- Charles L. Gamber Board Member Date: June 15, 2006 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, 2005 or proxy material for the 2006 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. 26 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2005 WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) INDEX Page No. Report of Independent Registered Public Accounting Firm F-1 Consolidated Financial Statements: Consolidated Balance Sheet - December 31, 2004 and 2005 F-2 Consolidated Statement of Operations - For the years ended December 31, 2004 and 2005 F-3 Consolidated Statement of Stockholders' Deficit - For the years ended December 31, 2004 and 2005 F-4 Consolidated Statement of Cash Flows - For the years ended December 31, 2004 and 2005 F-6 Notes to Consolidated Financial Statements F-8 RONALD R. CHADWICK, P.C. Certified Public Accountant 2851 South Parker Road, Suite 720 Aurora, Colorado 80014 Telephone (303)306-1967 Fax (303)306-1944 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Arete Industries, Inc. Boulder, Colorado I have audited the accompanying consolidated balance sheets of Arete Industries, Inc. and Subsidiaries (a development stage entity) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended and for the period from inception of the development stage (August 1, 2003) through December 31, 2005. 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. 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for the years then ended and for the period from inception of the development stage (August 1, 2003) through December 31, 2005 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. May 5, 2006 /s/ Ronald R. Chadwick, P.C. Aurora, Colorado ---------------------------- RONALD R. CHADWICK, P.C. F-1 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED BALANCE SHEET December 31, 2004 and 2005 ASSETS
2004 2005 ------------ ------------ Current assets: Cash and cash equivalents $ 121 $ 224 Prepaid expenses 3,000 3,000 ------------ ------------ Total current assets 3,121 3,224 Furniture and equipment, at cost net of accumulated depreciation of $19,672(2004) and $17,747(2005) 3,969 1,925 ------------ ------------ Security deposit -- -- Intellectual property -- -- ------------ ------------ Investment in and advances to Applied Behavior Systems, -- LLC (Note 2) -- -- Investment in Colorado Oil & Gas, Inc. 0 -- ------------ ------------ $ 7,090 $ 5,149 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable (Note 2) $ 262,019 $ 185,202 Accrued expenses 368,508 366,464 Accrued payroll taxes (Note 2) 289,363 289,363 Settlement due 18,650 18,650 Notes payable - related parties (Note 3) 3,437 31,704 ------------ ------------ Total current liabilities 941,977 891,383 Commitments and contingencies (Notes 1, 2,3,7 and 8) Stockholders' deficit (Notes 4 and 5): Common stock, no par value; 499,000,000 shares authorized, 183,045,768 (2004) and 262,155,754 (2005) shares issued and outstanding 11,811,498 12,462,975 Accumulated deficit (including $1,682,069 accumulated during the development stage) (12,523,565) (13,126,389) Notes receivable from sale of stock (222,820) (222,820) ------------ ------------ Total stockholders' deficit (934,887) (886,234) ------------ ------------ $ 7,090 $ 5,149 ============ ============
See accompanying notes. F-2 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF OPERATIONS For the years ended December 31, 2004 and 2005 and from inception (August 1, 2003) to December 31, 2005
Inception to 2004 2005 December 31, 2005 ------------- ------------- ------------- Revenues: Sales $ -- $ -- Other income -- 789 $ 789 ------------- ------------- ------------- Total revenues -- 789 789 ------------- ------------- ------------- Operating expenses: Depreciation 2,192 3,294 5,870 Rent 13,375 10,835 33,413 Other operating expenses 933,046 677,018 2,058,158 ------------- ------------- ------------- Total operating expenses 948,613 691,147 2,097,441 ------------- ------------- ------------- Total operating loss (948,613) (690,358) (2,096,652) Other income (expense): Loss on Sale of Investments (10,502) -- (10,502) Interest expense (17,922) (4,031) (40,442) Interest and miscellaneous income - 10,365 23,494 ------------- ------------- ------------- Total other income (expense) (28,424) 6,334 (27,450) ------------- ------------- ------------- Net loss from continuing operations (977,037) (684,024) (2,124,102) Extinguishment of Debt (Note 2) 54,054 81,200 135,254 ------------- ------------- ------------- Net loss (Note 6) $ (922,983) $ (602,824) $ (1,988,848) ============= ============= ============= Basic and diluted loss per share from continuing operations $ (0.01) $ * $ (0.01) ============= ============= ============= Basic and diluted loss per share $ (0.01) $ * $ (0.01) ============= ============= ============= Weighted average common shares outstanding 144,760,000 228,227,000 173,600,000 ============= ============= =============
* Less than $.01 per share See accompanying notes. F-3 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT For the years ended December 31, 2004 and 2005
Series 1 Series 2 preferred stock preferred stock Common stock -------------------- -------------------- -------------------------- Accumulated Shares Amount Shares Amount Shares Amount deficit ------- --------- ------- --------- ----------- ------------ ------------ Balance, December 31, 2003 16,001 $ 160,014 19,200 $ 192,000 82,592,626 $ 10,383,703 $(11,600,582) Exercise of stock options upon conversion of Series 1 preferred stock ( Note 3) (16,001) (160,014) -- -- 8,000,700 160,014 -- Exercise of stock options upon conversion of Series 2 preferred stock (Note 4) -- -- (19,200) (192,000) 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 rights -- -- -- -- 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-4 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT For the years ended December 31, 2004 and 2005 (Continued from preceeding page)
Common stock --------------------------- Accumulated Shares Amount deficit ------------ ------------ ------------ Balance, December 31, 2004 183,045,768 $ 11,811,498 $(12,523,565) Exercise of stock options (Note 5) 20,000,000 121,500 -- Issuance of common stock to employees and consultants for services (Note 5) 57,545,751 239,954 -- Purchase of stock by directors in connection with granted purchase rights 1,564,235 7,727 -- Value of investment in Colorado Oil & Gas, Inc. -- 282,296 ------------ ------------ ------------ Net loss for the year ended December 31, 2005 -- -- (602,824) ------------ ------------ ------------ Balance, December 31, 2005 262,155,754 $ 12,462,975 $(13,126,389) ============ ============ ============
See accompanying notes. F-5 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31, 2004 and 2005 and from inception (August 1, 2003) to December 31, 2005
Inception to 2004 2005 December 31, 2005 ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (922,983) $ (602,824) $(1,988,848) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,192 2,044 4,620 Loss related to subsidiary spun-off -- 282,296 284,872 Stock and options issued for services and interest on notes 762,031 239,954 1,442,046 Changes in assets and liabilities: Interest receivable 37,761 -- 44,325 Inventory 25,243 -- 25,243 Prepaid expenses (3,000) -- (3,000) Accounts payable (26,040) (76,817) (130,068) Accrued expenses (216,970) (2,044) (210,434) ----------- ----------- ----------- Total adjustments 581,217 445,433 1,457,604 ----------- ----------- ----------- Net cash used in operating activities (341,766) (157,391) (531,244) 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 -- -- 6,713 Proceeds from issuance of common stock -- 7,727 17,727 Proceeds from exercise of stock options 81,500 121,500 246,750 Note Receivable from sale of stock 16,000 -- 16,000 Payment of accrued wages 232,250 -- 232,250 Payment of note payable - related parties (8,136) 28,267 19,558 ----------- ----------- ----------- Net cash provided by financing activities 321,614 157,494 538,998 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (25,224) 103 2,682 Cash and cash equivalents at beginning of period 25,345 121 118 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 121 $ 224 $ 2,800 =========== =========== ===========
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, 2004 and 2005 and from inception (August 1, 2003) to December 31, 2005 (Continued from preceding page)
Supplemental disclosure of cash flow information: Inception to 2004 2005 December 31, 2005 ----------- ----------- ----------- 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, 2004, 4,050 shares of Series 2 preferred stock were used to exercise common stock options for the purchase of 4,050,000 common shares and 16,001 shares of Series 1 preferred stock were used to exercise common stock options for the purchase of 8,000,700 common shares. In addition wages to officers and directors and fees to consultants of $496,562 were paid by the issuance of common stock and the value assigned to stock options issued was $22,248. During the quarter ended March 31, 2004, 25,000,000 shares were issued to a director as payment of accrued wages for $232,250, repurchase of a future interest in stock distributions for $75,000, and payment for services for $172,750. During the quarter ended March 31, 2005 wages to officers and directors and fees to consultants of $81,592 were paid by the issuance of common stock. During the quarter ended June 30, 2005 wages to oficers and directors and fees to consultants of $65,595 were paid by the issuance of common stock. During the quarter ended September 30, 2005 wages to officers and directors and fees to consultants of $41,267 were paid by the issuance of common stock. During the quarter ended December 31, 2005 wages to officers and directors of $47,500 were paid by the issuance of common stock. See accompanying notes. F-7 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 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. F-8 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 1. Summary of significant accounting policies (continued) ------------------------------------------------------ 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 $1,104,774 and a stockholders' deficit of $1,103,685. 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-9 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 1. Summary of significant accounting policies (continued) ------------------------------------------------------ In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4,"Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary Transactions". Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact on the Company's financial statements. In May, 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 will apply to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS No. 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial condition). F-10 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 1. Summary of significant accounting policies (continued) ------------------------------------------------------ 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. Revenue recognition: The Company recognizes revenue when the goods are shipped. Advertising costs: The Company expenses the costs of advertising as incurred. Advertising costs amount to $0 and $0 for the years ended December 31, 2004 and 2005 respectively. 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. 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. F-11 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 1. Summary of significant accounting policies (continued) ------------------------------------------------------ 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. 2. Delinquent amounts payable -------------------------- As of December 31, 2004 and 2005, 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. 3. Notes Payable ------------- Notes payable - related parties: As of December 31, 2005, the Company owned the former CEO $26,507 that includes accrued interest and off-set of $5,000 for stock a option that was not paid for. In addition, the Company owes several directors $5,200 for advances given to the Company to pay expenses. 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-12 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 4. Preferred stock (continued) -------------------------- 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 entity and distributed to certain parties and family members related to the CEO. 5. Common stock ------------ Stock issuances: During the years ended December 31, 2004 and 2005, 67,002,442 and 59,109,986 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 year ended December 31, 2004, 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; 700,000 shares of common stock were issued to consultants for corporate communications support, 45,141,947 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 8,910,495 shares of common stock were issued for professional services. 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 $480,000. F-13 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 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 2004 and 2005. 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, 2005, no shares were available under the 2003 Plan and all 50,000,000 shares were available under the 2004 Plan for issuance, with 46,500,000 outstanding stock options, leaving 3,500,000 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, 2005, with 18,309,252 shares issued during 2004 and with 6,690,748 shares issued during 2005 against this plan, 0 shares were available under this Plan for issuance. 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 former CEO in prior periods expired, and 2,000,000 stock options granted to a consultant also expired. On April 2, 2005, the former CEO purchased 594,235 special compensation shares with cancellation of a note payable for $2,377. F-14 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 The following is a summary of stock option activity, all of which are currently exercisable: Weighted Average Option price exercise Number of per share price shares ---------------- ----------- ----------- 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 $ .023 13,025,000 =========== Granted $.0025 to $.008 $0.0044 13,000,000 Expired $.0075 to $.0165 $0.0118 (4,000,000) Exercised $.0025 to $.011 $0.0055 (20,000,000) ----------- ----------- Balance, December 31, 2005 $.0025 to $.011 $ .0225 2,025,000 =========== The following is additional information with respect to those options outstanding at December 31, 2005: Weighted average Weighted contractual life average exercise Number of Option price per share in years price shares ---------------------- -------- ----- ------ $0.0220 1 $0.0220 500,000 $0.0200 1.25 $0.0200 1,000,000 $0.2200 5 $0.2200 525,000 As of December 31, 2005, 0 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, 2004 and 2005 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: F-15 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 5. Common stock (continued) ------------------------ 2004 2005 ------------ ----------- Net loss - as reported $ (922,983) $ (602,824) Net loss - pro forma (1,048,460) (629,321) Loss per share - as reported (0.01) (0.00) Loss per share - pro forma (0.01) (0.00) 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 2004 and 2005, dividend yield of 0%; expected volatility of 100%, risk-free interest rate of 3.20% and 1.23%; and expected life of 2 and 1 years. The weighted average grant date fair value of options was $.01 for 2004 and $0.0 for 2005. 6. Income taxes ------------ The book to tax temporary differences resulting in deferred tax assets and liabilities are primarily net operating loss carry forwards of $6,063,000 which expire in years through 2025. As of December 31, 2004 and 2005, total deferred tax assets; liabilities and valuation allowances are as follows: 2004 2005 ----------- ----------- Deferred tax asset resulting from loss carryforward $ 2,139,000 $ 2,435,045 Deferred tax asset resulting from future deductions 192,000 192,000 Valuation allowance (2,331,000) (2,627,045) ----------- ----------- 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. F-16 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2005 6. Income taxes (continued) ------------------------ 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 2025 296,000 ---------- $6,063,000 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, 2004 and December 31, 2005 amounted to $13,375 and $ 10,835 respectively. 8. Dividend of Colorado Oil & Gas, Inc. Common Stock to Shareholders ----------------------------------------------------------------- In September of 2005 the Company paid a dividend of 90% of its Colorado Oil & Gas, Inc. common stock to the shareholders of record at September 23, 2005. For purposes of determining the number of outstanding shares of common stock entitled to receive shares of COG of the dividend the Company had issued and outstanding Common Stock was 246,279,389. Based on these shares the Company distributed on September 23, 2005 the 985,115 shares to its shareholders on the record date on a pro rata basis of 250 to 1. The Company reflected the operations of Colorado Oil & Gas, Inc. for the nine months ended September 30, 2005 in the financial statements for the fiscal year ended December 31, 2005. The loss included in the operations for this period was $282,296. F-17 EX-21 2 arete10ksbaex21_6142006.txt EXHIBIT 21 TO ANNUAL REPORT ON FORM 10-KSB/A FISCAL YEAR ENDED DECEMBER 31, 2005 Subsidiaries of the Registrant ------------------------------ Aggression Sports, Inc. Colorado Corporation org. 1998 (Inactive) Avatar Technology Group, Inc. Colorado Corporation org. 2004 EX-23.1 3 arete10ksbaex231_6142006.txt AUDITOR CONSENT Exhibit 23.1 RONALD R. CHADWICK, P.C. Certified Public Accountant 2851 South Parker Road, Suite 720 Aurora, Colorado 80014 Telephone (303)306-1967 Fax (303)306-1944 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Arete Industries, Inc. Westminster, Colorado I have audited the accompanying consolidated balance sheets of Arete Industries, Inc. and Subsidiaries (a development stage entity) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended and for the period from inception of the development stage (August 1, 2003) through December 31, 2005. 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. 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for the years then ended and for the period from inception of the development stage (August 1, 2003) through December 31, 2005 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. May 5, 2006 /s/ Ronald R. Chadwick, P.C. - ---------------------------- Aurora, Colorado RONALD R. CHADWICK, P.C. EX-31.1 4 arete10ksbaex311_6142006.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles Gamber, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 10-KS/A of Arete Industries, Inc. 2. Based on my knowledge, this Amendment No. 1 to the annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this Amendment No. 1 to the annual 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 annual report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: June 15, 2006 By: /s/ Charles Gamber --------------------------------------- Charles Gamber, Chief Executive Officer and Director EX-31.2 5 arete10ksbaex312_6142006.txt Exhibit 31.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Herzog, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 10-KS/A of Arete Industries, Inc. 2. Based on my knowledge, this Amendment No. 1 to the annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this Amendment No. 1 to the annual 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 annual report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: June 15, 2006 By: /s/ John Herzog ------------------------------ John Herzog, Interim Chief Financial Officer and Director EX-32.1 6 arete10ksbaex321_6142006.txt EXHIBIT 32.1 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 Amendment No. 1 to the Annual Report of Arete Industries, Inc. (the "Company") on Form 10-KSB/A for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles Gamber, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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: June 15, 2006 By: /s/ Charles Gamber --------------------------------------- Charles Gamber, Chief Executive Officer and Director EX-32.2 7 arete10ksbaex322_6142006.txt Exhibit 32.2 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 Amendment No. 1 to the Annual Report of Arete Industries, Inc. (the "Company") on Form 10-KSB/A for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Herzog, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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: June 15, 2006 By: /s/ John Herzog ------------------------------- John Herzog, Interim Chief Financial Officer and Director -----END PRIVACY-ENHANCED MESSAGE-----