FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the period ended: September 30, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange act of 1934.
For the transition period from ___________________ to _______________________
Commission File Number 33-16820-D
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ARETE INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1508638
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2955 Valmont Road, Suite 310, Boulder, CO 80301
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(Address of principal executive offices) (Zip Code)
(303) 247-1313
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ X ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 29, 2000, Registrant had 341,120,748 shares of common stock, No
par value, outstanding.
<PAGE>
TABLE OF CONTENTS
Page No.
Consolidated Financial Statements:
Consolidated Balance Sheet at September 30, 2000 and December 31, 1999
(unaudited) 2
Consolidated Statements of Operations for the Three Months Ended
September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Deficit for the Nine Months
Ended September 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 6-7
Notes to Unaudited Consolidated Financial Statements at September 30,
2000 8-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Financial Condition 17
Signatures 19
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2000 and December 31, 1999
(Unaudited)
ASSETS
2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 4,843 $ 15,844
Restricted cash 50,919 25,000
Accounts receivable, less allowance for
doubtful accounts of $0 70,194 519
Prepaid expenses 2,393 1,200
---------- ----------
Total current assets 128,349 42,563
Notes receivable Verbaltech Labs & Banking 82,200 -
Furniture and equipment, at cost net of accumulated
depreciation of $3,170 (2000) and $233 (1999) 21,830 2,096
Security deposit 5,664 -
Investment in and advances to Verbaltech Labs &
Banking 1,469 -
Investment in and advances to Aggression Sports
(Note 2) 39,286 40,560
---------- ----------
$ 278,798 $ 85,219
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable (Note 3) $ 209,644 $ 204,318
Accrued expenses 146,162 34,409
Accrued payroll taxes (Note 3) 184,976 146,130
Advances from Aggression Sports (Note 2) 113,294 -
Notes payable 51,000 24,500
Convertible note payable - officer 104,251 81,021
Stock subscription payment received - 7,333
---------- ----------
Total current liabilities 809,327 497,711
Commitments and contingencies (Notes 1, 3 and 6)
Stockholders' deficit (Note 4):
Redeemable preferred stock; 100,000,000 shares
authorized:
Convertible Class A; $10 face value, 100,000
shares authorized, 3,000 shares issued and
outstanding (liquidation preference $32,475) - 30,000
Common stock, no par value; 500,000,000 shares
authorized, 341,120,748 (2000) and 301,397,155
(1999) shares issued and outstanding 8,010,783 7,414,758
Accumulated deficit (8,541,312) (7,857,250)
---------- ----------
Total stockholders' deficit (530,529) (412,492)
---------- ----------
$ 278,798 $ 85,219
========== ==========
See accompanying notes.
2
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ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Management fees $ 108,000 $ -
Operating expenses:
Depreciation 1,972 -
Rent 19,947 -
Salaries 162,023 -
Stock issued for services (Note 4) 127,500 -
Other operating expenses 34,701 -
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Total costs and expenses 346,143 -
--------- ---------
Total operating income (loss) (238,143) -
Other income (expense):
Equity in loss of Aggression Sports (Note 2) (49,228) -
Gain on sale of equipment 10,000 -
Interest expense (1,034) (1,016)
Interest and miscellaneous income (8,240) 201
--------- ---------
Total other income (expense) (48,502) (815)
--------- ---------
Net loss from continuing operations (286,645) (815)
Net loss from discontinued operations (Note 1) - (256,481)
--------- ----------
Net loss (Note 5) $ (286,645) $ (257,296)
========== ==========
Basic and diluted loss per share $ * $ *
========== ==========
Weighted average common shares outstanding 332,752,000 285,663,342
=========== ===========
* - Less than $.01 per share
See accompanying notes.
3
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Management fees $ 138,000 $ -
Operating expenses:
Depreciation 2,821 -
Rent 26,878 -
Salaries 274,254 -
Stock issued for services (Note 4) 175,000 -
Other operating expenses 148,904 -
--------- ----------
Total costs and expenses 627,857 -
--------- ----------
Total operating income (loss) (489,857) -
Other income (expense):
Equity in loss of Aggression Sports (Note 2) (126,233) -
Gain on sale of equipment 10,000 40,061
Interest expense (9,638) (2,797)
Interest income 2,186 621
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Total other income (expense) (123,685) 37,885
--------- ----------
Net loss from continuing operations (613,542) 37,885
Net loss from discontinued operations (Note 1) (70,520) (564,395)
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Net loss (Note 5) $ (684,062) $ (526,510)
========== ===========
Basic and diluted loss per share $ * $ *
========== ==========
Weighted average common shares outstanding 323,610,000 272,707,956
=========== ===========
* - Less than $.01 per share
See accompanying notes.
4
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<TABLE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2000
(Unaudited)
<CAPTION>
Class A preferred stock Common stock Accumulated
Shares Amount Shares Amount deficit
------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 3,000 $30,000 301,397,155 $7,414,758 $(7,857,250)
Conversion of Series A preferred
stock to common (Note 4) (3,000) (30,000) 2,600,000 30,000 -
Issuance of common stock for
services (Note 4) - - 20,134,933 225,863 -
Issuance of common stock for
transfer of certificate of deposit
and accrued interest (Note 4) - - 8,750,000 33,152 -
Sale of common stock - - 1,738,660 38,833 -
Common stock issued upon exercise
of options (Note 4) - - 6,000,000 66,000 -
Interest in sale of Arete common
stock be equity-method investee
(Note 2) - - - 199,677 -
Exercise of Class A Preferred
options and conversion to common
stock - - 500,000 2,500 -
Net loss for the nine months ended
September 30, 2000 - - - - (684,062)
------ ------- ----------- ---------- ---------
Balance, September 30, 2000 - $ - 341,120,748 $8,010,783 $(8,541,312)
====== ======= =========== ========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net loss $(684,062) $(526,510)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,937 -
Equity in loss of Aggression Sports 126,233 -
Stock issued for services 225,863 197,561
Changes in assets and liabilities:
Accounts receivable (69,675) (26,680)
Security deposit (5,664) -
Prepaid expenses (1,193) 10,979
Accounts payable 5,326 -
Accrued expenses 150,599 362,036
Customer deposits - (10,791)
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Total adjustments 434,426 533,105
--------- ---------
Net cash provided by (used in) operating
activities (249,636) 6,595
Cash flows from investing activities:
Purchase of property and equipment (3,932) (68,227)
Investments in and advances to Aggression Sports 106,334 -
Purchase of certificate of deposit (25,919) -
-------- ---------
Net cash provided by (used in) investing
activities 76,483 (68,227)
Cash flows from financing activities:
Proceeds from issuance of common stock 67,152 86,298
Proceeds from exercise of stock options 68,500 -
Proceeds from note payable - 85,250
Payments on long term debt 26,500 (48,800)
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Net cash provided by financing activities 162,152 122,748
-------- ---------
Net increase in cash and cash equivalents (11,001) 61,116
Cash and cash equivalents at beginning of period 15,844 20,047
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Cash and cash equivalents at end of period $ 4,843 $ 81,163
======== =========
(Continued on following page)
See accompanying notes.
6
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(Continued from previous page)
Supplemental disclosure of cash flow information:
Interest paid during the period $ 9,638 $ 2,797
======= =======
Income taxes paid during the period $ - $ -
======= =======
Supplemental disclosure of non-cash investing and financing activities:
During the quarter ended March 31, 2000, the Company issued common stock
valued at $15,548 to employees of Aggression Sports and treated such issuance
as an advance.
See accompanying notes.
7
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Summary of significant accounting policies
Basis of presentation:
The accompanying financial statements have been prepared by the Company,
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of December 31, 1999 and September 30, 2000, and the results of
operations and cash flows for the periods ended September 30, 1999 and 2000.
Discontinued operations:
During March 2000, the Company abandoned the direct mail and coupon business
and shifted its focus toward Aggression Sports, Inc. (Aggression Sports) (see
Note 2). The direct mail coupon business continued until March 2000 and is
not expected to generate a loss during 2000. The Company has become engaged
in development of new business ventures including a development stage company
which creates, designs, develops, produces and markets highly innovative
outdoor adventure sports products and adventure travel services; and a
software development company engaged in development of a patented
neural-networking, intelligent agent software engine and its unique
applications for language learning, voice recognition, speech interpretation,
vision recognition, and intelligent robotics.
Basis of presentation:
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and liquidation of liabilities in the
ordinary course of business. As shown in the accompanying financial
statements, the Company has incurred significant losses and at September 30,
2000, the Company has a working capital deficit of $680,978 and a
stockholders' deficit of $530,529. In addition, the Company is delinquent on
payment of certain payroll taxes and has certain liabilities remaining from
its confirmed Chapter 11 Plan of Reorganization approved by the Court in
October of 1996. Also, the Company is a named defendant in a Federal civil
enforcement action brought by the SEC in the summer of 1998 for certain
alleged violations of the Federal Securities laws (See Note 6). As a result,
substantial doubt exists about the Company's ability to continue to fund
future operations using its existing resources.
Under its initiative to provide new venture management services, the Company
plans to assist, Aggression Sports, Inc., dba Arete Outdoors in developing
its management team and to develop, create, produce and sell its line of
specialty outdoor sporting goods, equipment and adventure travel services.
During 2000, Arete Outdoors entered into an employment agreement with its
President and principal designer to issue up to 38% of its outstanding common
stock in exchange for the assignment of his interest in approximately 30
proprietary designs including all license and patent rights in such products
and any new products designed during the term of his employment agreement.
During 2000 Arete Outdoors generated cash of $644,000 through the sale of
Arete's common stock in open market transactions.
8
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Summary of significant accounting policies (continued)
Also, the Company plans to provide new venture management services to assist
in the formation of a new company, funding, and product development process
concerning several unique applications of a patented neural-networking,
intelligent agent software engine in conjunction with Applied Behavior
Systems, LLC, an unaffiliated company. The Company has an agreement to
provide basic business services, plus management services in exchange for
fees and an equity interest in this proposed new application development
company. Through the current quarter, the Company has advanced $82,200 as a
bridge loan to finance operations and has accrued $58,000 in management
and service fees.
2. Investment in and advances to Aggression Sports
During 1998, the Company acquired a 44% ownership interest in Aggression
Sports in exchange for 30,000,000 shares of the Company's common stock valued
at $150,000. Due to the uncertainty related to the ultimate realization of
this carrying value, the $150,000 was written off during the nine months
ended December 31, 1998.
In January 2000, Aggression Sports entered into an agreement to issue 30% of
its outstanding common stock in exchange for the right, title and interest in
approximately 30 products in various stages of development and various stages
of the patenting process. As a result of this agreement, the Company's
interest in Aggression Sports was reduced to 31%.
During the nine months ended September 30, 2000, the Company paid salaries of
$15,548 for services performed by certain individuals on Aggression Sports
behalf. The investment in Aggression Sports has been reduced by the Company's
31% share of Aggression Sports' loss for the nine months ended September 30,
2000 exclusive of the gain on the sale of Arete common stock.
During the nine months ended September 30, 2000, Aggression Sports sold
17,456,500 shares of Arete for gross proceeds of $644,120. Arete's 31%
interest in the proceeds of $199,677 has been recorded as additional paid-in
capital.
3. Delinquent amounts payable
As of September 30, 2000, the Company is delinquent on payments of various
amounts to creditors including payroll taxes and $62,316 to creditors
remaining from its confirmed Chapter 11 Plan of Reorganization approved by
the Court in October of 1996. 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.
9
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
4. Stockholders' equity
During the nine months ended September 30, 2000, (1) an officer and a former
officer of the Company converted their Class A preferred stock into 2,600,000
shares of the Company's common stock, (2) the Company issued 20,134,933
shares of common stock for services valued at $225,863 ($0.011 per share),
(3) the Company issued 8,750,000 shares of common stock in exchange for a
$25,000 certificate of deposit, accrued interest and for guarantying a note
payable of the Company and (4) the Company issued 6,000,000 shares of common
stock upon the exercise of stock options at $.011 per share.
In January 2000, the board of directors adopted, subject to shareholder
approval, the 2000 Omnibus Stock Option and Incentive Plan which designates
and reserves 50,000,000 shares of common stock to be issued under the Plan.
In January 2000, the board of directors authorized the issuance of options to
purchase 65,000 shares of Class A preferred stock for $10 per share to five
individuals. The options are first exercisable between May and July 2000 and
are exercisable for a period of one year from those dates. The Class A
preferred stock is convertible into the Company's common stock at $.025 per
share.
5. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $2,170,000
which expire in years through 2020.
As of September 30, 2000 and December 31, 1999, total deferred tax assets,
liabilities and valuation allowances are as follows:
2000 1999
---- ----
Deferred tax asset resulting from loss
carryforward $ 434,000 $ 352,000
Valuation allowance (434,000) (352,000)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonable assured.
The Company's net operating losses are restricted as to the amount which may
be utilized in any one year. The Company's net operating loss carryforwards
expire as follows:
December 31, 2015 $ 458,000
2016 224,000
2017 304,000
2018 614,000
2019 161,000
2020 409,000
----------
$2,170,000
==========
10
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
6. Commitments and contingencies
Securities and Exchange Commission civil enforcement action:
In August 1999, the Securities and exchange Commission instituted a civil
enforcement action in the Federal District Court for the District of Colorado
against the Company, its former officers and directors and the current CEO.
The complaint alleges press releases issued in February of 1998 concerning a
status of a business relationship between the Company and an unrelated third
party company were misleading in violation of Section 17(a) of the Securities
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5. Additionally, the suit includes the Company's alleged failure to
timely file the required periodic reports with the Commission under Section
15(d) of the Exchange Act and Rules 15b-1 and 15b-13. The action further
alleges that two former officers of the Company aided and abetted the
Company's violation of Section 15(d) of the Exchange Act and Rules 15d-1 and
15d-13. The SEC is seeking an injunction against the defendants. Company's
counsel has determined it to be impractical to render an opinion as to the
outcome of the pending action against the Company and the individuals
involved.
As authorized by the Company's corporate charter, the board of directors has
agreed to indemnify, and advance fees and expenses to Mr. Raabe for his costs
of defending the action. The case progress is at a stage wherein it is too
early to predict the actual costs of the defense.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General Summary
In the First Quarter of this year, we discontinued our print and direct mail
operations and embarked on a completely new direction for the Company. During
the Second Quarter, we acquired a professional senior management team and recast
Arete Industries, Inc. as a New Venture Management Services. In the current
Quarter, with the immediate focus of establishing the financial viability of the
company, we are implementing our new strategic development plan for New Venture
Management Services.
New Core Philosophy: New Venture Management Services In the long run, business
firms derive competitive advantages from their unique bundles of assets such as
location, brand names, distribution channels, patents and corporate cultures
that contribute to their ability to create, produce, sell and deliver their
goods and services to consumers. Firms will have a competitive advantage if
their resources are distinctive or superior compared to other firms with whom
they compete. The decisions that are made early in the life of a firm that weigh
the relative value and development of these assets substantially determine that
firm's chances of success or failure. The essence of Arete Industries' New
Venture Management Services is that it has unique management and capital
resources that it can offer to young, aspiring firms that other competitive
firms in their position do not possess and cannot acquire. Our new financial
opportunity lies in matching our management and capital resources to
high-growth, leading-edge opportunities where the resources are economically
relevant.
Our New Venture Management Services initiative has taken us into two new areas:
1) Outdoor sporting goods equipment design, development and sales; and
2) Patented intelligent agent software that has unique applications for
language learning, voice recognition, vision recognition and intelligent
robotics.
We offer the following detailed information showing what we have accomplished
thus far and the current status and processes implemented to achieve financial
viability for Arete Industries, Inc.
I. Outdoor Sporting Goods Equipment
The Business Opportunity of Arete Outdoors(TM). We believe there is a strong
specialty outdoor and adventure sports market segment in the US, Canada and
Europe with largely un-met or at best poorly-met needs. Our belief is
demonstrated by a large and growing number of people who enjoy backcountry
running, cross-country skiing, road biking, mountain cycling, camping, skiing,
snowboarding, snowshoeing, trekking and hiking. The largest segment of this
population, the now-aging Baby-Boomers, is always seeking better gear, tools,
toys and apparel in order to continue to enjoy aggressive outdoor sports. They
are also known to be open to new ways of enjoying their outdoor leisure time.
The snowboard is probably one of the clearest examples of a buying population's
willingness and desire to seek and use new equipment technologies to enjoy the
great outdoors. Snowboarding, the last real revolution in the ski industry, was
introduced about ten years ago, and has developed into the equipment of choice
by people under 30 years old, and is now seen on virtually every ski resort
slope in the US, Canada and Europe.
12
<PAGE>
Arete Outdoors began patent protection and product development in January of
2000 and is now ready to launch the first two offerings in its innovative
leading-edge line of outdoor products. These products reflect the objective of
the company to offer users a truly exciting and unique outdoor experience. Both
product groups represent major innovations in design and usability, and in the
case of our RUSH(TM) Downhiller, we have literally created an entirely new
outdoor sport.
SnowFangs(TM) We believe that SnowFangs (patent pending) are the first real
innovation in snowshoe design in 10,000 years. SnowFangs innovation is a dual
platform, which puts the shoe several inches below the snowshoe deck. This dual
profile increases the ability to traverse steep slopes, high angle step kicking,
and unparalleled secure terrain travel ranging from snow, to rock, to ice. The
SnowFangsO is lightweight, inviting the winter outdoor enthusiast to use both
traditional and non-traditional resort areas for use and fun.
PowderRUSH(TM) and DirtRUSH(TM). The RUSH is a downhill or gravity powered
scooter built on a custom mountain-bike frame which has two articulated custom
snowboards on it's PowderRUSH(TM) version and mountain bike wheels and knobby
tires and a front suspension with front-end caliper or disk-type brakes. They
are specially designed for easy on and off loading on chair lifts and have
rugged suspensions to handle the most ardent enthusiasts while safely smoothing
the ride over mogul or bump. Downhilling is an entirely new sport designed to
attract new and old patrons back to the ski slopes.
Marketing and Sales The initial marketing opportunity we see with the RUSH is to
sell to ski resorts for their winter and summer rental pools and then develop
retail sales to the resort's patrons. The RUSH provides ski resorts a unique
year-round revenue opportunity with its easy and inexpensive convertibility from
one version to the other on the same frame configuration. Ski resorts across
North America and Europe are experiencing a growth plateau in patronage for a
number of reasons including the aging of the baby boom population and the
growing costs and physical stress of alpine skiing. Resorts are seeking to
increase and/or stabilize their revenues by attracting baby-boomer age families
and new patrons as well as increasing their summer slope use. In order to sell
the PowderRUSH to resorts in North America, it is first necessary to gain
approval from ski area management. Beginning in early August of this year, we
started contacting ski resorts across the US, Canada and Europe. We were very
fortunate to gain initial acceptance with our first order of PowderRUSH's from
Copper Mountain Resort. Copper Mountain, is owned by Intrawest Corp., one of the
elite owners of destination ski and outdoor recreation resorts on an
international scale and which owns Mammoth Mountain in California,
Whistler/Blackcombe outside Vancouver, British Columbia and a number of other
destination resorts. Located in the heart of the Colorado Rockies, our back
yard, Copper Mountain has expressed a keen interest in our PowderRush as well as
our other products and ideas that will attract new business to the resort. The
first delivery of the PowderRush to Copper Mountain is scheduled for November,
2000.
13
<PAGE>
In addition to selling to the ski resorts, Arete Outdoors has sought exposure
for its new products in several internationally attended trade shows. In August
of this year, representatives of the Company attended the nationally recognized
Outdoor Retailer Trade show in Salt Lake City, Utah. We also introduced the
DirtRUSH at the Interbike Expo, held in Las Vegas, Nevada this past September.
The Interbike Expo is the principal North American venue for cycling
enthusiasts' new product introduction. It was attended by over 3,000 retailer
and rental shop owners, many of whom came by our booth and took literature and
indicated their interest. At the Interbike Show, we introduced the DirtRUSH to
bicycle retailers and rental shops that rent and sell mountain bicycles because
the DirtRUSH is a superior substitute for mountain bikes on the trails and
designated ski slopes during the summer. The low center of gravity on the
DirtRUSH makes it safer compared to traditional bicycles while providing an
enjoyable ride to the most ardent enthusiast.
Additionally, Arete Outdoor attended the Outdoor Sports Show in
Friederichshafen, Germany. This European trade show attracts buyers from the
European ski resorts, mountain shops and mass retailers. Arete Outdoors set up a
sales and distribution center in Garmisch, Germany to be managed by Martin Bader
of Bergsport International. Mr. Bader has been in the ski product sales industry
for over five years and has been hired to develop and manage a team of European
sales representatives. Europe is a much larger market than North America, which
we believe will prove to be much more receptive to our current and future
products. We were very fortunate to be able to execute a first year product
launch in Europe at the same time we are launching in North America.
Manufacturing and Fulfillment. The SnowFangs are manufactured in the US and
assembled by Arete Outdoors. The DirtRush and PowderRush are manufactured in
Taiwan and shipped to the US for distribution by Arete Outdoors. The Taiwan
manufacturer has been making bicycles for more than thirty years. Arete
Outdoors, will ship and fill orders at its Berthoud, Colorado headquarters.
Future New Products from Arete Outdoors The PowerPole(TM) (patent pending) is
the third new product developed for production by AreteOutdoors' design team.
This breakthrough cross-country ski pole utilizes a spring lever arm to
dramatically increase effective pole length and provide faster cross-country
speeds compared to traditional poles. In July of this year, we filed for patent
protection for our fourth new product, the Snap Organic Mountain Bike Pedal and
Snap Road Bike Pedal. This device keeps the foot in place on the bicycle pedal
using almost any type shoe and will not damage the shoe. Working similar to the
conventional dot snap, the pedals are a major improvement in safety and
usability by permitting easier attachment and quick release of the shoe from the
pedal in a 360 degree arc when necessary.
Website Development. Part of our overall marketing strategy for current and
future products and services is the use of a strong interactive web site. During
the current quarter the AreteOutdoors.com interactive, community web site was
created and put into operation. Consumers can visit the site and learn about our
products, where and how to buy, read articles on people who have used our
products, see other non-competitive products, and learn about adventure travel
opportunities, etc. People can also put up articles and pictures on the
community section of the web site. Arete Outdoors will endeavor to improve and
upgrade the website as its resources allow, however, we are focusing our
resources on direct corporate sales and developing a team of professional sales
representatives to market through more traditional channels.
14
<PAGE>
Adventure Travel Services Seeking to expand into related outdoor sports markets,
we also stepped into the high-end adventure expedition niche of the travel
market. In August, we retained the services of Marion Emmons. Ms. Emmons
specializes in arranging and marketing adventure travel. Also known as
"Adventure Girl", Ms Emmons has signed up as a booking agent arranging trips for
approximately 15 different professional guiding services offering trips ranging
from pack trips into the Sangre de Cristo Mountains in Colorado, Copper Canyon,
Mexico, or lost Inca villages in Peru, to white water rafting and snowshoe trips
across the globe exclusively for Arete Outdoors. This move is a natural
expansion of services for Arete Outdoors to new outdoor experiences created from
its new products.
Financial Progress of the Outdoor Equipment and Services. Arete Outdoors has
developed, designed, manufactured and is now in the marketing phase of
generating sales with the introduction of its first group of new products. At
this time, we have taken our first sales order for the PowderRush product. This
first sale is the Colorado ski resort of Copper Mountain. We have also made our
first entree at several national and international outdoor enthusiast product
trade shows to start exposing our products, the DirtRush, PowderRush and
SnowFangs to the specialty outdoor retail, rental and ski resort industry. While
we are encouraged by the response in interest to these new products, we are only
now commencing to generate sales. In the meantime, we have incurred research and
development, production and other costs associated with the four products, plus
website development expenses, which for the time being (2000-2001 ski season)
will exceed the sales revenues generated from our marketing and sales efforts.
It is our goal in the 2001-2002-ski season to have a dramatic increase in sales
when we will have in place many more ski resorts and equipment rental and retail
stores selling and renting products to the outdoor sports consumers.
Ownership In the Third Quarter of 2000, there has been no change in the
ownership of Arete Outdoors. Arete Outdoors was originally formed in May of 1998
as Aggression Sport, Inc. by the Company and Boulder Sport, Inc., which is owned
by Tom Raabe, Chairman and CEO of Arete Industries. Since inception, Arete
Industries has owned 44% of Aggression. In 1999, it began operating under the
dba of Arete Outdoors. In December of 1999, Arete Outdoors exchanged with Mike
Lowe his participation, and present and future product designs for 30% ownership
with an option to purchase an additional 6%, which vests on certain performance
milestones, which Arete Outdoors has not met to date.
The current financial statements contained herein treat subsidiary Aggression
Sports, Inc. (d/b/a Arete Outdoors) on a non-consolidated basis, i.e. as an
investment.
II. Patented Intelligent Agent Software
June 2, 2000 Engagement Agreement. In line with the prior quarter reports
announcing the new strategic direction of Arete Industries, Inc., an agreement
was entered into with Applied Behavioral Systems, LLC to form Verbal TechLabs,
Inc. ("VTL"), on June 2, 2000. In that agreement, the parties agreed to pay
Arete. $16,000 per month to provide its New Venture Management Services, which
include accounting and management services and include office facilities with
common computer and telephone network services. In addition, we would receive a
14.3% equity ownership interest, which after taking into account the proposed
first round of $3 million investment, will be diluted to approximately 10%.
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Language Learning Software VTL has developed a software program that enhances
the education and language training skills of children with developmental
learning disabilities. (Downs Syndrome, mental retardation, autism and other
learning disabilities.) VTL's software is unique in that it adapts to the
particular language learning skills of the student. It works by measuring the
accuracy of the student's verbal expressions against the intended response and
automatically cues the student according to his or her progress. It also
distinguishes itself from other competitive software programs because it is the
only program that teaches people how to speak (expressive language) rather than
just listen (receptive language). The increase in the participating children's
vocabulary and in their ability to express themselves will translate into market
leadership because parents and teachers will see tangible results by using the
program. Two issued patents protect the teaching software and others are
pending.
Interactive Teacher Demo In mid-September, VTL completed a working prototype of
its "interactive teacher" software program. The working prototype successfully
demonstrated the ability to integrate the intelligent agent and the voice
recognition software into an effective method of teaching language.
Potential New Development Direction The speed with which it was created by the
VTL design team and quality of the voice recognition features of the interactive
teacher prompted us to explore other applications beyond education and language.
As a result, we discovered it is highly likely that entirely new realms of
industries like speech interpretation and intelligent robotics applications
could be suitable for this software. We will remain focused on continuing to
complete program function for language and education. However, if the early
research is correct, development of these applications could potentially
significantly expand our ability to create significant value for our
shareholders. For example, our ability to identify the words spoken from an
independent speaker without training the device is as good or better than the
technology that launched two recent IPOs, Nuance Communications, Inc. (NUAN) and
SpeechWorks International (SPWX) that are trading approximately 100 times
estimated 2000 sales. As a result, Arete Industries is working closely with the
principals of the company to determine the best direction of the company given
this new information.
III. Other Opportunities
We believe that there is no shortage of business opportunities that would
benefit from our management and capital resources and would be willing to engage
Arete to accelerate them through their development stages of making and selling
a product, building their capital structure and developing a management team. We
will focus on companies with exciting leading-edge products or services, a
proven market and the ability to make a product that the market is willing to
accept. We emphasize the integrity and experience of a new company's management
team or the human element because we believe that relationships are 90 % of the
formula for success. Finally, we focus on whether the prospective company can be
grown significantly with our help to a point where we can have an exit strategy
in which we realize a significant capital gain. In this way, we believe that
Arete Industries, Inc. can become an investment vehicle in which investors can
participate in opportunities with potentials that are customarily only available
to angel investors and venture capitalists.
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The current financial statements contained herein treat subsidiary Agression
Sports, Inc. (d/b/a Arete Outdoors) on a non-consolidated basis, i.e. as an
investment.
Financial Condition
-------------------
The Company had a working capital deficit as of September 30, 2000, of $680,978.
This compares to a working capital deficit of $455,148 at December 31, 1999.
Losses were partially funded with accrued salaries and shares issued for
services. During the 3-month period ended September 30, 2000, the Company issued
13,007,048 shares of common stock for services.
Results of Operations
---------------------
The Company's financial performance has been stabilized by the termination of
its co-op coupon business, and the execution of the New Venture Management
Services strategy has not yet developed into significant financial results.
The Company's operating revenues of $108,000 was management fees charged for its
New Venture Management Services for the three months ended. The nine month total
is $138,000 for New Venture Management Services.
For the quarter ended September 30, 2000, the Company incurred $346,143 in
operating expenses. For the nine month period of this year total operating
expenses are $627,857. The Company's future expectation is that these expenses
will remain relatively stable, but may increase over time relative to growth in
revenues from its management services.
Liquidity and Capital Resources
-------------------------------
Arete Outdoors will need significant additional capital in the coming months as
additional products come on stream and prior to the generation of sufficient
revenue to cover these costs. The Company anticipates that these requirements
will be covered by liquidation of shares of the Company's common stock held by
Arete Outdoors, or otherwise with proceeds of private placements of the
Company's securities advanced by the Company in the form of loans or further
equity infusions. There are no assurances that Arete Outdoors will be successful
in liquidating such shares at a favorable price or that the Company will be
successful in raising such funds in the short term.
The Company had stockholder's deficit in excess of assets at September 30, 2000
of $530,529. This is compared to stockholder's deficit in excess of assets at
December 31, 1999 of $412,492. The stockholder's deficit increased due to the
Company's operating at a loss.
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Management believes that with a successful track record of its New Venture
Management Services strategy, it will become an attractive investment for new
equity investors, but the Company has yet to qualify for conventional bank or
venture capital financing. Additional debt and/or infusions of equity capital
are necessary to finance working capital for the Company's new business
incubation initiatives and to build its banking and operational infrastructure.
Management is resolved to continue to support the Company and its incubator
partners as long as it is able to generate positive cash flow to finance growth
and retire debt within the near term, of which there is no assurance. Due to the
current financial condition of the Company and the volatility in the market for
the Company's common stock, no assurance can be made that the Company will be
successful in raising any substantial amount of capital through the sale of
equity securities, or with bank debt on favorable terms in the near future.
Never-the-less, due to such conditions, the Company may be required to issue
further common 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 or medium term.
At September 30, 2000, the Company had no material commitments for capital
expenditures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the Period ended September 30, 2000, there were no material legal
proceedings initiated by or against the Company or any ofitsw officers,
directors or subisdiates.
Item 2. Changes in Securities
(a) Changes in Instruments Defining Rights of Security Holders. Previously
reported.
(b) Not Applicable
(c) Item 701 Reg. SB. - The following were the unregistered shares of common
stock sold by the registrant during the period covered by this report.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are attached:
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
There were no Reports on Form 8-K filed during the period covered by this
report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: September 30, 2000 By: /s/ Thomas Y. Gorman, CFO
-------------------------------
Thomas Y. Gorman, CFO
Principal Financial and Accounting Officer
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