SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999 Commission file No. 33-16820-D
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
ARETE INDUSTRIES, INC.
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(Exact name of small business issuer as specified in its Charter)
Colorado 84-1063149
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2305 Canyon Blvd. Suite 103, Boulder, Colorado 80302
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference of Part 111 of this Form 10-K, or any amendment to
this Form 10-K. [ X ]
State Issuer's revenues for its most recent fiscal year: $817,917
On April 11, 2000, the Registrant had 307,363,700 shares of common voting stock
held by non-affiliates. The Aggregate market value of shares of common stock
held by non-affiliates was $22,130,186 on this date. This valuation is based
upon the average low bid price for shares of common voting stock of the
Registrant on the "Electronic Bulletin Board" of the National Association of
Securities Dealers, Inc. ("NASD").
Documents Incorporated By Reference: Part III, Items 9-12 of this Form are
incorporated by reference from Registrants Proxy Statement for its upcoming
meeting of stockholders scheduled for June 2, 2000, which will be filed with the
Commission by amendment to this Form 10-KSB on or before the earlier of the date
of mailing to the stockholders or 120 days from 12/31/99 per general instruction
E(3) of Form 10-KSB.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
-------------------------------------------
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
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On April 11, 2000, the issuer had 322,863,700 shares of its no par value common
stock outstanding.
Transitional Small Business Disclosure Format: Yes ; No X .
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PART I
Item 1 - Business
=================
General Development of the Business
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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. whereafter the
name was changed to Travis Industries, Inc. On September 1, 1998, the
shareholders approved a name change of the Company to Arete Industries, Inc.
From 1987 through approximately March of 2000, the company was engaged in
cooperative direct mail coupon advertising including a nationally franchised
sales force and an in-house printing and mailing facility. In 1994, the Company
filed a voluntary petition under Chapter 11 of the US Bankruptcy Code and
successfully consummated its Chapter 11 Plan of Reorganization in September of
1995. Since then until approximately May 1, 1998, former management pursued a
strategy of keeping the coupon business operational while looking for an
acquisition of an entirely new business. In May, 1998 the company underwent a
change in control in which its former management and board resigned and put two
new individuals in place to engage in the high end specialty outdoor sporting
goods business. At that time a new subsidiary company, Aggression Sports, Inc.
was formed to seek acquisitions in this industry, which was majority owned by
its current CEO and former CFO. Later in 1998, the company formed a wholly owned
subsidiary, Global Direct Marketing Services, Inc. into which all its printing
and direct mail assets and the franchise network were transferred in order to
execute a financial turnaround of this business while pursuing its outdoor
sports business and other planned initiatives in separate entities.
In February of 1999, management engaged in a joint venture with SourceOne
Worldwide, LLC, a privately owned Colorado based direct mail and fulfillment
company ("SourceOne") to take advantage of the synergies between the two
businesses and to avoid the costs and ongoing risks and inefficiencies of
rebuilding and operating the Company's Council Bluffs print and mail facilities.
The purpose of its joint venture with SourceOne, was to create and operate a
full scale commercial printing operation within a new subsidiary to be formed,
which was to service all of the printing business of the Company, SourceOne and
new business from around the Denver regional market. In June of 1999, the
Company engaged franchise development specialists to stem attrition in its
franchise network and to direct the fulfillment side of the business.
Historically, the Company's primary business has been graphics, printing,
advertising and fulfillment of direct mail advertising programs, particularly in
the national and neighborhood coop coupon mailer niche through a franchised
network of coupon advertising dealers. However, over the years, the coop coupon
direct mail business has become extremely competitive with the customer base
becoming more sophisticated and purchasing printing and fulfillment based on
price and quality. The rapid growth of electronic commerce gave the Company an
opportunity to completely rethink and restructure its business away from
commodity-type products. The Company tried to augment the thin margins of direct
mail coupons with value added services, which were provided as a package to the
customers of the franchisees. The Company tried to develop an entirely new
vision based on combining electronic commerce, information technology and direct
mail reinforcement of web based marketing systems. The Company, in partnership
with SourceOne, tried to position itself capture a significant market share in
the direct marketing market.
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In the final quarter of 1999, the company's franchise network collapsed under
these pressures and in the beginning of the first quarter of 2000, management
ceased its coop coupon turnaround efforts. It determined that the likelihood of
the growth in sales to a level sufficient to support operations and provide a
return to the shareholders did not justify the cost of creating, developing and
maintaining the capacity to provide the value added services to the franchisees.
Since taking over control in May of 1998, the financial structure of the Company
required the new management to devote its time in a turnaround and restructuring
program of the coop coupon program, which was designed to fix the existing
business, clean up the capital structure and generate profitability and positive
cash flow. Beginning in the first quarter of 2000, that focus has changed.
The new vision of Arete Industries is to cultivate business start-ups. The
Company's strategy is to build a management team and core logistical function
that can be shared by various business development initiatives. The core
logistical function will be centered on a flexible internet marketing and
back-end fulfillment capability that can be leveraged to develop new and unique
profitable business opportunities. The plan is to begin with a couple of
projects that match-up well with the capablities of the management team and the
internet and fullfilment capabilities. The Company has formed its core mangement
team consisting of Thomas P. Raabe (corporate and legal), Thomas Y. Gorman
(finance), Lawrence P. Mortimer (sales and marketing) and Michael H. Parsons
(operations and engineering).
The first company Arete Industries is working with is Agression Sports, Inc.
(d/b/a Arete Outdoors). On April 30, 1998, the Company executed a share
exchange, where the Company exchanged 30 million shares of common stock for a
44% equity interest in Arete Outdoor. Arete Outdoors' is built around the unique
and patentable designs of Michael Lowe. Michael Lowe has approximately 30 unique
concepts in experiential outdoor sports and adventure products that he is
contributing to the Company for development. The first of the products to come
to market is a snowshoe (patent pending). The product development process for
the snow shoe was completed in the first quarter of 2000. Out-sourcing
manufacturing arrangements for the snowshoe are to be set-up in second quarter
of 2000, and the first sales are scheduled to be in early third quarter of 2000.
The next product is the Alpine Scooter (patent pending). The Alpine Scooter is a
totally unique winter and summer alpine product. It provides the Company an
opportunity to introduce a product for young and old to have a new experience
primary on ski slopes. The product development process and out-sourcing
manufacturing arrangements for the Alpine Scooter are on scheulde to be
completed in second quarter of 2000 with the first sales expected to occur in
late third quarter of 2000. The next two products, scheduled to be introduced in
2000 are the Power Pole and Suspension Ski which will complete the first full
winter product line. Both of these products are in the product development
process and are not expected to be available for sale until the fourth quarter
of 2000.
The second focus of the Company is building e-commerce capabilities and
Internet-based products and services. The Company is developing this in two
parts. The first part is a focus on a new outdoor adventure community website
for Arete Outdoors, and development of its content and the fulfillment logistics
that will support consumer-to-Company direct order placements over the website.
Thes will be the core elements of the e-commerce capabilties that can be shared
throughout the Arete Industries related group of companies. The second part is
an initiative to explore and develop unique ways of combining the internet with
the traditional media business model. The Company sees a potentially long-term
opportunity in marrying the internet and traditional media opportunities that is
contrary to current trends. The Company believes there are several profitable
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products and services that can be focused on the consumer, the retailer and
traditional media, e.g., newspapers.
The Company currently has authorized 500,000,000 shares of no par value common
stock. During fiscal year 1999, all outstanding shares of Class B Preferred had
been converted into common stock and the class was retired. By board resolution
dated October of 1998 and pursuant to an amendment to the Articles of
Incorporation filed with the Colorado Secretary of State on April 22, 1999, a
new Class of Preferred Stock, entitled Class A Cumulative Convertible Preferred
Stock (the "Class A Preferred) was designated. Under this designation, the
Company currently has 100,000 shares authorized and as of April 12, 2000, none
outstanding. Each share of Class A Preferred carries a redemption price and a
liquidation preference of $10 and pays cumulative dividends on a quarterly basis
at the prime rate posted in the Wall Street Journal on the last day of any
fiscal quarter in question. Also, the Class A Preferred is convertible into
shares of common stock based on face value divided by an amount equal to 110% of
the average weekly closing bid price for a common share on the OTC Bulletin
Board (or the NASDAQ Small Cap Bulletin Board, if applicable) on the date of
issuance or on the date of conversion, whichever is less. In January of 1999,
the company issued 3,000 shares of Class A Preferred, valued at $30,000 with an
up-front conversion price of $0.01 per share and in January and February of
2000, these shares were converted into common stock at the election of the
shareholders. In November of 1999, the board granted certain officers options to
purchase up to $100,000 in face value of Class A Preferred convertible into
Common Stock at $0.01 per share. Also, on January 5, 2000, the board granted
certain officers and employees the option to purchase an aggregate of $650,000
in face value of Class A Preferred convertible into common stock at $0.025 per
share. (See: Note 10 to Financial Statements -Subsequent Events).
Narrative Description of Business of the Company
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The vision of Arete Industries, Inc. is to cultivate unique and profitable
business opportunities and build a portfolio of successful companies under a
holding company format. Management intends to accomplish this task by providing
senior management and critical operations infrastructure (bricks and mortar) on
a `shared overhead' basis to leverage growth and therefore the potential for
success of each business initiative it pursues.
The first business opportunity which the Company is cultivating is in the summer
and winter alpine sport segment of the specialty outdoor adventure sporting
goods industry. This segment is one of the fastest growing areas of the sporting
goods industry with product categories such as snowboards, snowshoes and
mountain biking. In recent years, these products have created entire new
industry niches. The Company is entering this segment with innovative patentable
products that can be at the leading edge of entirely new categories. Each of the
approximately thirty products currently under development or proposed in the
near term, is directed at creating a new and unique experience for the weekend
explorer, the expert and recreational user. The ability to create this unique
experience is illustrated by the Company's first two products: the snowshoe and
the alpine scooter.
The snowshoe is a breakthrough design addressing a broad range of needs of users
from weekend warriors seeking a winter alternative to jogging, to the technical
needs of adventurists and alpine climbers. The snowshoe is extremely lightweight
and durable. It can fit any boot with or without crampons. Because the level of
the foot is below the float, they also have great floatation and work better
than any other snowshoe on steep or technical terrain.
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The alpine scooter is designed for summer and winter down hilling fun at ski
areas. This full suspension scooter is easier and safer to ride than a mountain
bike, and it is much faster to learn than skiing or snowboarding. This product
creates a unique experience for a broad range of users and management believes
that it will revitalize the winter alpine sport industry with a potential market
impact beyond that of the snowboard.
The Company is developing a marketing and sales plan for the scooters that takes
full advantage of the products' unique features of low impact, exciting, fun and
something that users of all skills and ages can enjoy. The Company believes that
its initial products are strategically placed at the right time and place in the
market because the ski slopes have had a string of bad years and there is a
popularity with x-game type events, into which the Company's products can
hopefully expand. The Company's key demographic focus is the old people who want
to be young and young people who want to be bold. The Company's products allow
people who love adrenalin-oriented athletic events to partiicpate without the
potential for ice packs on the knees afterwards.
In addition to cultivating the product and marketing initiatives of Arete
Outdoors, Arete Industries has committed to begin using advanced information
technology and market research techniques, including electronic commerce,
targeting and data-base and permission marketing systems with a view to
providing value added marketing services to its portfolio businesses as well as
a broader population of individuals, merchants and business enterprises. The
Company intends to exploit these capabilities to expand the revenues and
increase the margins of businesses it is cultivating.
Arete Industries has undertaken to build a high level core management team that
will serve as the cornerstone of its future. This core group will serve as a
shared overhead amongst the Arete Industries group of companies. Providing
high-level expertise and advanced infrastructure capabilities to the individual
companies, keeping the individual business unit's overhead cost to a minimum is
the financial essence of the Company's business cultivation process.
Arete Industries currently has two full-time employees, Thomas Raabe (Chairman
and CEO of Arete Industries) and Michael Lowe (COO of Arete Industries and
President of Arete Outdoors), who provide general management services for Arete
Industries and Arete Outdoors. In addition, Arete Industries has three part-time
employees, Thomas Gorman (board member, CFO and director of finance), Lawrence
Mortimer (Sales and Marketing) and Michael Parsons (Operations and Engineering).
By approximately May 1, 2000, Michael Lowe will begin to focus all of his time
and efforts on product development and development of website content at Arete
Outdoors. At this time, the company anticipates that Mr. Lowe will be managing
two full-time employees, an operations manager and a designer. Arete Industries
plans to hire a controller in the immediate future to oversee the financial
controls of the extended operations. In addition, Arete Industries plans to add
one or more information technology ("IT") personnel to manage and maintain the
company's websites, operate the marketing database and up-date the websites'
content.
Intellectual Property
- ---------------------
The Company, through its partly owned subsidiary, Aggression Sports, Inc. (dba
Arete Outdoors) has two US patents pending on its snowshoe design and alpine
scooter designs. Other patents are scheduled to be filed for a number of
products which the Company plans to release. Arete Outdoors has an exclusive
license agreement implicit in Michael Lowe's employment agreement of both his
name and his trade name "Lowe Brothers Design". Mike Lowe's agreement also
provides a provisional assignment to Arete Outdoors of patent rights to at least
30 proprietary product designs in Mr. Lowes current portfolio. Arete Outdoors
and the Company have a consulting agreement with Mr. Greg Lowe, Mike Lowe's
brother, to provide design services in connection
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with a new line of products which includes a royalty to Mr. Lowe and an
assignment of patent rights to the Company on all designs provided by him
pursuant to this agreement. The Company owns certain US registered trademarks
associated primarily with its discontinued print and direct mail operations,
which, pending other decisions, it intends to maintain in full force and effect.
The Company's franchise network remains in place although the company believes
all outstanding franchises are inactive, therefore the agreements can be
terminated at any time by the Company.
The Company has subsidized research and development activities for Arete
Outdoors since November of 1998. In this connection, Mr. Lowe devoted full time
since that date until approximately May 12, 1999 and part-time thereafter
through the end of fiscal year 1999. Mr. Lowe has undertaken full time
responsibilities as product development director at Arete Outdoors beginning
January 1, 2000 and will be executing the plan to patent approximately 2
products designs per month until selected concept in his portfolio of patentable
ideas is exhausted. Thereafter, both he and Greg Lowe will continue to provide
design services and new product development for the Company on an ongoing basis.
Seasonality of Business
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The outdoor sports business is a two season business, summer and winter.
Products can address two or four seasons on a case by case basis. The
traditional product cycles in this industry require two distinct marketing and
manufacturing efforts per year. The Company intends to market products which
cover all seasons. Because the Company will be marketing its products primarily
over the internet, these traditional cycles will not carry the same effect as if
it depended on wholesale distribution to merchants and dealers.
Competition
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The outdoor sports business is highly competitive and Arete Outdoors will have a
number of competitors across the United States. Sizes of competitors range from
small privately held businesses to large, well capitalized corporations, with
substantial operating histories. Arete outdoors will address the competition by
being one of few companies to launch its products and sell primarily over the
internet. In this way, it will not have to invest substantial sums of money
developing a wholesale distribution network in order to break through entry
barriers. This will require a substantial investment in publishing and
advertising its new website. Arete Outdoors will operate a community website
which is designed as a destination site for outdoor adventurists and
enthusiasts. There are several outdoor websites already in existence which have
substantial traffic and are well funded with private and public venture capital.
Although the company's website design is unique in the industry, the Arete
Outdoor website will compete with the existing sites for this traffic.
Costs of Compliance with Environmental Laws
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In the business operations of the Company there are no significant waste
by-products which are discharged into the environment or which require special
handling or the incurring of additional costs for disposal. Accordingly, costs
of compliance with environmental laws, rules and regulations have not been
segregated and are believed to be nominal.
The Company is unaware of any pending or proposed environmental laws, rules or
regulations, the effect of which would be adverse to its contemplated
operations.
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Employees
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The parent company, Arete Industries, has one full time and three part time
employees located in corporate headquarters in Boulder, Colorado. The
subsidiary, Global Direct Marketing Services, Inc. has no operations or
employees. Arete Outdoors, partially owned subsidiary has one full time employee
and two individuals who will become full time May 1, 2000. Arete Outdoors shares
facilities with the parent, but efforts are underway to acquire a production and
fulfillment facility in the near future. The CEO of the Company and the
President of Arete Outdoors are currently on employment agreements, and the
Company employs part-time professional business, accounting and financial
consultants on an as needed basis.
Item 2 - Properties
===================
Arete Industries currently sub-leases a portion of an 1100 square foot suite of
offices in Boulder, Colorado for approximately $550 per month plus supplies.
Beginning May 1, 2000, it has leased approximately 4,000 square feet for $4,779
per month. This site will house the executive offices and the website. It should
be sufficient space for Arete Industries for the foreseeable future. Arete
Outdoors is looking for an independent facility, where it can develop its
light-assembly, fulfillment and database management capabilities.
Item 3 - Legal Proceedings
==========================
To the knowledge of management, during the fiscal year ended December 31, 1999,
and to the date hereof, other than as disclosed herein, the Company is not nor
was a party to any material legal proceedings, and no such proceedings are known
to be contemplated. Similarly, to the knowledge of management, and for the
periods indicated, other than as disclosed herein, no director or executive
officer of the Company is or was party to any material legal proceeding wherein
any such person had an interest adverse to the Company. As disclosed under Part
II, Subsequent Events in the Company's quarterly report, for the period ending
June 30, 1999, on August 2, 1999, the U.S. Securities and Exchange Commission
filed a civil action in the U.S. District Court for the District of Colorado
instituting injunctive proceedings against the Company, its current CEO and its
former directors, under Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and further citing violations of Section 15(d) of the Exchange Act
for late and missing filings of periodic reports under the Exchange Act.
Item 4 - Submission of Matters to a Vote of Security Holders
============================================================
No matters were submitted to a vote of security holders during the past quarter.
The Company has scheduled its annual meeting for June 2, 2000 in Boulder,
Colorado.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters.
===============================================================================
The common stock of the Company is listed on the "Electronic Bulletin Board" of
the National Association of Securities Dealers, Inc. ("NASD") under the symbol
"AREE."
The following table shows the range of 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.
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STOCK QUOTATIONS
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BID
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Quarter Ending: High Low
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Fye 12/31/98
3/31/98 $ 0.20 $ 0.022
6/30/98 0.0525 0.016
9/30/98 0.02 0.005
12/31/98 0.015 0.006
Fye 12/31/99
3/31/99 0.015 0.005
6/30/99 0.015 0.005
9/30/99 0.029 0.009
12/31/99 0.022 0.007
As of April 11, 2000, the number of record holders of the Company's common stock
was 318. These numbers do not include an indeterminate number of stockholders
whose shares are held by brokers as "nominees" or in street name.
Dividends
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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
- ---------------------------------------
During the period of January 1, 1999 through December 31, 1999, the Company sold
the following unregistered securities:
Common Stock no par value
Date Amount Sold Purchaser Consideration
- ----------- ------------ --------------- ---------------------------
11/11/98 to 28.4 Million Gary McMullen - Conversion of 28.4 Million
3/31/99 Printnet, Inc. shares Class B Preferred
Item 6. - Management's Discussion and Analysis
==============================================
Overview
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Management reports that effective March 31, 2000, the entire financial structure
of the Company, relative to the coop coupon advertising business, has changed.
The Company has completely discontinued the coop advertising business which has
historically averaged total revenues in the $1 to $1.5 Million range and
contemporaneously incurred annual cash losses of approximately $300,000 or more.
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To stem operating losses, on March 15, 1999, the company terminated all in-house
print and direct mail operations of its wholly owned subsidiary, Global Direct
Marketing Services, Inc. and transferred these responsibilities to SourceOne
Worldwide of Denver, Colorado. Effective October 1, 1999, the company terminated
its outsourcing and joint venture agreement with SourceOne due to the inability
of SourceOne to adapt to the time and quality requirements of the Company's
franchise network. Because the coop coupon mail business is essentially a
commodity-product business, the Company's ability to renegotiate its pricing
structure with its franchisees, licensees and customers was extremely limited.
Subsequent to October 1, 1999, the franchise network and all demand for
production from existing customers essentially evaporated. The Company initiated
a working relationship with a specialized direct mail coupon printing and
fulfillment facility located in Mesa, Az. and hired two franchise and coupon
advertising specialists to design and propose a program to execute a franchise
marketing plan to open a new franchise network to sell coupons nationwide.
Unfortunately, the personal situation of these two individuals changed and the
initiative to pursue this business was put on hold indefinately.
Since April 30, 1998, the Company has been in a turnaround and restructuring
mode. With the discontinuance of its print and direct mail operations and of the
franchised cooperative coupon direct mail advertising business, the company
resolved to put its resources behind launching the outdoor adventure equipment
business, Arete Outdoors, which management believes has a much greater potential
for revenues and profits. As such, the company is not longer in a turn-around
mode, but has become essentially a development stage company.
Current management signed on to develop and implement a strategic plan to
restore the company to financial viability. The first phase of that plan has
come to fruition with the elimination of unprofitable, cash and resource
draining business operations, and that task was accomplished without forcing the
entire Company out of business. The next phase will be to add management
expertise and develop operational capabilities to cultivate new business ideas,
and generate immediate revenue with Arete Outdoors.
Throughout 1999, the Company remained burdened with trade debt obligations and a
continuing lack of working capital. Management is currently focused on
developing profitable operations and then recapitalizing the business when it
has a demonstratable cash flow model to show to potential investors. Management
believes that it cannot currently attract capital from professionally managed
funds on terms which will be favorable to its current shareholders and must
raise capital internally, through small private offerings and through project
financing. Management believes that they can take advantage of the publicly held
nature of the Company's stock to pursue capital raising transactions and
strategic acquisitions in a number of industries. Other than outstanding stock
options, there are currently no acquisition or capital funding transactions
pending and no assurances that such opportunities will become available in the
near future, nor that Management will be able to keep present operations viable.
The current financial statements provide consolidated financial statements
reflecting its wholly owned subsidiary corporation, Global Direct Marketing
Services, Inc. The financials treat its partly owned subsidiary Agression
Sports, Inc. (d/b/a Arete Outdoors) on a non-consolidated basis, as an
investment. The company's investment was written down to zero in fiscal year
ended 12/31/98.
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Financial Condition
- -------------------
The Company had $85,219 in total assets and approximately $497,711 in total
liabilities at fiscal year ended 12/31/99, as compared to $61,523 and $362,006
at the end of fiscal year ended 12/31/98, respectively. The Company had $519 in
net accounts receivable at the end of fiscal year ended 12/31/99, as compared to
$25,544 at the end of fiscal year ended 12/31/98. Accounts payable and accrued
expenses in fiscal year 12/31/99 were $384,857 as compared to $297,462 in fiscal
year ended 12/31/98. During the fiscal year ended 12/31/98, the Company signed a
promissory note for $50,000 as a line of credit. The balance of that note on
December 31, 1999 was $19,500. The note was secured by two separate certificates
of deposit in the amount of $25,000 each, one of which was pledged by the
Company's CEO, the other was purchased with proceeds of a stock purchase of
5,000,000 shares for $25,000 by the Company's CEO. Subsequently, the CEO
contributed his CD to the company in exchange for shares of common stock. At the
end of the third quarter, 1999 the Company recorded an account payable to
SourceOne Worldwide for printing and direct mail services in the amount of
$220,406. This payable was forgiven in a settlement agreement surrounding the
termination of the SourceOne Joint Venture Agreement effective October 1, 1999
and is treated as a reduction of cost of goods sold.
Despite its discontinued operations, the Global Direct Marketing Services, Inc.
subsidiary remains obligated for trade payables of $101,050 and for unpaid 1999
payroll taxes of approximately $ 46,897 . Also, during fiscal year ended
12/31/99 the company negotiated termination of a lease covering insertion
equipment and engaged in an agreement to purchase that equipment on a note
payable in monthly payments of $1,500 per month, which was substantially less
than the $2,500 per month lease payments, and the lease did not have a payoff
amount. With the termination of the SourceOne relationship shortly thereafter,
the Company no longer needed the equipment and the purchase agreement was
terminated and the equipment was surrendered to the seller in exchange for a
$5,000 promissory note payable $500 per month commencing February 2000. During
fiscal year ended December 31, 1998, the Company paid off pre-petition payroll
tax liabilities, but owes approximately $65,000 in additional payroll taxes for
calendar years 1995 through 1997. The parent company remains obligated for
certain claims of unsecured creditors due under its Chapter 11 Plan of
Reorganization in the approximate amount of $62,316. (See - Note 3 to Financial
Statements).
During the period ended December 31, 1999, the Company continued to rely upon
infusions of capital from stock sales from affiliates and from proceeds of a
private placement of common stock to an unaffiliated party. These proceeds were
used to defer corporate overhead and pay corporate obligations required to
operate as a public company. In the first quarter, funds from liquidation of
operating assets were used to pay extraordinary expenses including the shutdown
costs, employee incentives and operating expenses for the coupon business.
Results of Operations
- ---------------------
The Company's revenues from operations for the year ended December 31, 1999,
were $ 817,917. Revenues from operations for the previous year ended December
31, 1998 were $ 888,371. Gross profits from operations for the 12-month period
ended December 31, 1999, were $161,841, or 19.8% of sales, compared to $ 258,228
or 29.1% of sales for the fiscal year ended December 31, 1998. Cost of sales at
$ 656,076 or 80.2% of sales were up as a percentage of sales from fiscal year
ended 12/31/98 at $ 630,143 or 70.9% of sales which is attributable to
outsourcing of the printing and insertion services.
Page 9
<PAGE>
Operating expenses increased as a percentage of sales from 72.9% of sales in
fiscal year ended 12/31/98 to 85.8% of sales in the fiscal year ended 12/31/99.
The increase was attributable to an additional expense of $ 30,000 for stock
issued for services and $90,000 for professional fees including accounting,
legal, financial services, franchise consulting in connection with operations of
the Global Direct subsidiary, financial public relations and website
development, hosting and graphics.
The net loss for the fiscal year ended 12/31/99 was $ 536,904 or 65.6% of sales
as compared to a loss of $ 575,515 or 64.8% of sales for the fiscal year ended
12/31/98. The increase in the loss as a percentage of sales is attributable in
part to a $ 128,000 increase in Other Expenses, a decrease of $ 96,000 in the
Gross Margin, an increase of $30,000 in Stock Issued for Services, less a
$60,000 decrease in Bad Debts, a $ 41,000 decrease in Depreciation and the 1998
write-off of Investment. Gross Margins decreased from 29.1% percent of sales in
fiscal year ended 12/31/98 to 19.8% for the fiscal year ended 12/31/99. This
factor serves as the largest single indicia of the extent of operational and
management problems encountered in Council Bluffs and served as the primary
indicator compelling management to determine to shut the operation down rather
than spend cash the Company did not have.
Liquidity and Capital Resources
- -------------------------------
The Company had a working capital deficit as of December 31, 1999, of $ 455,148.
This compares to a working capital deficit of $ 300,483 in fiscal year ended
12/31/98. Losses were again partially funded with issuance of common stock, new
bank debt and increases in Accounts Payable. During the 12-month period ended
12/31/99 an aggregate of 45,369,139 shares of common stock were issued for
aggregate consideration of $ 394,895 excluding the conversion of Series B
Preferred Stock into Common Stock. (See - Notes to Financial Statements - Note 5
- - Common Stock).
During fiscal year ended 12/31/99, the Company issued 1,500,000 shares of its
common stock valued at $ 15,000 for exercise of an employee stock option and an
aggregate of 20,712,500 shares valued at $ 240,577 in lieu of salary and
expenses. The Company also issued 21,136,842 shares of common stock upon
conversion of a like number of Class B Preferred Shares face value of $ 528,421
which entire class was then retired and all accrued dividends and other rights
cancelled.
During the fiscal year ended December 31, 1999 and thereafter, the Arete Outdoor
subsidiary was able to liquidate a number of its Arete common stock to finance
its start-up activities. As of 4/13/2000, the Arete Outdoors generated cash of
$417,000 in net proceeds from sales of Arete's common stock which was sufficient
to begin the process of preparing and filing patent applications and initiating
the product development process on a number of products, plus development of its
e-commerce website. (See - Notes to Financial Statements - Note 1 - Basis of
Presentation). 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, as it is currently structured has made progress in becoming an
attractive investment for new equity investors, but the Company has a long way
to go to qualify for conventional bank or venture capital financing. Additional
equity capital is necessary to finance working capital for the Company's new
business cultivation initiatives and to build merchant banking and operational
infrastructure capabilities. Management is resolved to continue to bootstrap the
Company as long as it is able to generate positive cash flow to finance growth
and retire debt. 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 additional 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.
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 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
================================================================================
Subsequent to fiscal year ended 12/31/1999, the Company retained a new
accounting firm as it auditors for the fiscal year. A current report on Form 8-K
was filed with the Securities and Exchange Commission on March 16, 2000 and is
incorporated herein by reference. To the best knowledge of management, there
were no disagreements with the Company's current or former auditors.
PART III
The Company will file with the Securities and Exchange Commission within 120
days of its fiscal year end its definitive proxy statement for the annual
meeting of stockholders to be held on June 2, 2000. The information required by
this Part III, Items 9 through 12 are incorporated by reference to registrant's
proxy statement to be delivered to shareholders for the upcoming annual meeting
to be held June 2, 2000.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.
================================================================================
Item 10. - Executive Compensation.
====================================
Item 11. Security Ownership of Certain Beneficial Owners and Management.
========================================================================
Item 12. - Certain Relationships and Related Transactions.
==========================================================
Page 11
<PAGE>
PART IV
Item 13. - Exhibits and Reports on Form 8-K.
============================================
Reports on Form 8-K.
- --------------------
There were no Reports on Form 8-K of the Securities and Exchange Commission
filed during the quarter ended December 31, 1999.
Exhibit No. Description Ref. No.
- ----------- ------------------------------------------------------ --------
EX-2.1 Plan of Reorganization and First Addendum to *
Plan of Reorganization, Chapter 11 Case No. BK94-81544,
US Bankruptcy Court District of Nebraska, confirmed on
September 25, 1995, effective November 6, 1995.
Incorporated by reference from exhibits to Form 10-KSB
for fiscal year ended March 31, 1996.
- --------------------------------------------------------------------------------
EX-2.2 Disclosure Statement and First Addendum to *
Disclosure Statement in above Bankruptcy Matter.
Incorporated by reference from exhibits to Form
10-KSB for fiscal year ended March 31, 1996.
- --------------------------------------------------------------------------------
EX-3.1 Restated Articles of Incorporation with Amendments **
adopted by shareholders on September 1, 1998
- --------------------------------------------------------------------------------
EX-3.2 Bylaws adopted by the Board of Directors on October 1, **
1998
- --------------------------------------------------------------------------------
EX-4.1 Designation of Class B Preferred Stock, incorporated *
by reference to Exhibits filed under Form 10-K for
fiscal year ended March 31, 1991, Commission file
No. 33-16820-D.
- --------------------------------------------------------------------------------
EX - 4.2 Designation of Class A Preferred Stock. **
- --------------------------------------------------------------------------------
EX - 10.1 1999 Omnibus Incentive Stock Compensation Plan Adopted ***
June 11, 1999
- --------------------------------------------------------------------------------
EX-27 Financial Data Schedule
- --------------------------------------------------------------------------------
* These documents and related exhibits have been previously filed with
the Securities and Exchange Commission, and by this reference are
incorporated herein.
** These documents and related exhibits have been previously filed under
the Company's Form 10-KSB for the fiscal year ended 12/31/98 and by
this reference are incorporated herein.
*** These documents and related exhibits have been previously filed under
the Company's quarterly reports for periods ended during fiscal year
ended 12/31/99 and by this reference are incorporated herein.
Page 12
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
WITH
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
Reports of Independent Certified Public Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheet F-5
Consolidate Statements of Operations F-6
Consolidate Statement of Changes in Stockholders' (Deficit) F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Arete Industries, Inc.
Boulder, Colorado
We have audited the consolidated balance sheet of Arete Industries, Inc. and
Subsidiary as of December 31, 1999, and the related consolidated statements
of operations stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arete Industries, Inc. and Subsidiary at December 31, 1999, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
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,
is delinquent on the payment of creditor liabilities including payroll taxes
and liabilities pursuant to the Company's plan of reorganization, and is
being investigated by the Securities and Exchange Commission for alleged
securities law violations. 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.
Denver, Colorado
March 30, 2000 CAUSEY DEMGEN & MOORE INC.
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Arete Industries, Inc.
We have audited the consolidated statements of operations, changes in
stockholders' (deficit) and cash flows of Arete Industries, Inc. and
Consolidated Subsidiary as of December 31, 1998 for the nine month period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations,
changes in stockholders' (deficit) and cash flows of Arete Industries, Inc. and
Consolidated Subsidiary for the nine month period ended December 31, 1998 in
conformity with generally accepted accounting principles.
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 deficiency, is delinquent on payment of creditor
liabilities including payroll taxes and creditor liabilities pursuant to the
Company's plan of reorganization, and is being investigated by the Securities
and Exchange Commission for alleged securities law violations. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
April 14, 1999
F-4
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 15,844
Restricted cash (Note 4) 25,000
Accounts receivable, less allowance for
doubtful accounts of $0 519
Prepaid expenses 1,200
--------
Total current assets 42,563
Furniture and equipment, at cost net of accumulated
depreciation of $233 2,096
Investment in and advances to Aggression Sports
(Note 2) 40,560
--------
$ 85,219
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable (Note 3) $ 204,318
Accrued expenses 34,409
Accrued payroll taxes (Note 3) 146,130
Notes payable (Note 4) 24,500
Convertible note payable - officer (Note 4) 81,021
Stock subscription payment received 7,333
----------
Total current liabilities 497,711
Commitments and contingencies (Notes 1, 3, 4 and 9)
Stockholders' deficit (Notes 5 and 6):
Redeemable preferred stock; 100,000,000 shares
authorized:
Convertible Class A; $10 par 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, 301,397,155 shares issued and
outstanding 7,414,758
Accumulated deficit (7,857,250)
----------
Total stockholders' deficit (412,492)
----------
$ 85,219
==========
See accompanying notes.
F-5
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF OPERATIONS
For the year ended December 31, 1999 and the nine months ended December 31, 1998
1999 1998
---- ----
Sales $ 817,917 $ 888,371
Cost of goods sold 656,076 630,143
--------- -------
Gross profit 161,841 258,228
Operating expenses:
Depreciation 233 41,709
Bad debts - 60,021
Rent 46,445 64,770
Salaries 127,051 111,984
Stock issued for services (Note 5 and 6) 270,577 240,000
Other operating expenses 257,336 128,844
--------- -------
Total costs and expenses 701,642 647,328
--------- -------
Net loss from discontinued operations (Note 1) (539,801) (389,100)
Other income (expense):
Equity in loss of Aggression Sports (Note 2) (34,158) -
Write down of investment in Aggression Sports (Note 2) - (150,000)
Gain on sale of equipment 40,061 -
Interest expense (3,839) (41,502)
Interest and miscellaneous income 833 5,087
--------- --------
Total other income (expenses) 2,897 (186,415)
--------- ---------
Net loss (Note 8) (536,904) (575,515)
Accrued dividends applicable to Class A preferred
Stock (Note 5) (2,475) -
--------- --------
Net loss applicable to common shareholders $(539,379) $(575,515)
========= =========
Basic and diluted loss per share $ * $ *
========= =========
Weighted average common shares outstanding 265,404,922 195,310,709
=========== ===========
* - Less than $.01 per share
See accompanying notes.
F-6
<PAGE>
<TABLE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1999 and the nine months ended December 31, 1998
<CAPTION>
Class A Series B
preferred stock preferred stock Common stock Accumulated
Shares Amount Shares Amount Shares Amount deficit
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 - $ - 28,400,000 $ 710,000 149,655,244 $5,741,961 $(6,744,831)
Common stock issued (Note 6) - - - - 84,047,772 567,902 -
Conversion of Series B preferred
stock to common (Note 7) - - (7,263,158) (181,579) 7,263,158 181,579 -
Net loss for the nine months
ended December 31, 1998 - - - - - - (575,515)
----- ------- ---------- -------- ---------- --------- -----------
Balance, December 31, 1998 - - 21,136,842 528,421 240,966,174 6,491,442 (7,320,346)
Issuance of Series A preferred
stock for services (Note 5) 3,000 30,000 - - - - -
Conversion of Series B preferred
stock to common (Note 7) - - (21,136,842) (528,421) 21,136,842 528,421 -
Issuance of common stock for
services (Note 6) - - - - 27,462,500 256,077 -
Issuance of common stock for
services performed for Aggression
Sports (Note 2) - - - - 6,100,000 74,718 -
Sale of common stock (Note 7) - - - - 10,981,639 64,600 -
Common stock issued upon exercise
of options (Note 6) - - - - 1,500,000 15,000 -
Cancellation of common shares
subject to forfeiture (Note 6) - - - - (6,750,000) (15,500) -
Net loss for the year ended
December 31, 1999 - - - - - - (536,904)
----- ------- ---------- --------- ----------- ---------- -----------
Balance, December 31, 1999 3,000 $30,000 - $ - 301,397,155 $7,414,758 $(7,857,250)
===== ======= ========== ========= =========== ========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
For the year ended December 31, 1999 and the nine months ended December 31, 1998
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (536,904) $ (575,515)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 233 41,709
Write down of investment - 150,000
Equity in loss of Aggression Sports 34,158 -
Gain on sale of equipment (40,061) -
Stock issued for services 270,577 240,000
Note issued for services 81,021 -
Changes in assets and liabilities:
Accounts receivable 25,025 65,621
Prepaid expenses 9,779 -
Accounts payable (93,144) (54,967)
Accrued expenses 180,539 -
Customer deposits (10,791) (105,748)
--------- ---------
Total adjustments 457,336 336,615
--------- ---------
Net cash used in operating activities (79,568) (238,900)
Cash flows from investing activities:
Purchase of property and equipment (2,329) -
Proceeds from sale of equipment 40,061 -
Outstanding checks in excess of bank balance (4,953) -
---------- ---------
Net cash provided by investing activities 32,779 -
Cash flows from financing activities:
Proceeds from issuance of common stock 79,600 177,902
Stock subscription payment received 7,333 -
Proceeds from note payable 5,000 48,800
Payments on long term debt (29,300) -
---------- ---------
Net cash provided by financing activities 62,633 226,702
---------- ---------
Net increase (decrease) in cash and cash equivalents 15,844 (12,198)
Cash and cash equivalents at beginning of period - 12,198
---------- ---------
Cash and cash equivalents at end of period $ 15,844 $ -
========== =========
(Continued on following page)
See accompanying notes.
F-8
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
For the year ended December 31, 1999 and the nine months ended December 31, 1998
(Continued from previous page)
Supplemental disclosure of cash flow information:
Interest paid during the period $ 3,839 $ 41,502
======= ========
Income taxes paid during the period $ - $ -
======= ========
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 1999, the Company issued common stock
valued at $74,718 to employees of Aggression Sports and treated such issuance
as an advance.
See accompanying notes.
F-9
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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. Arete's subsidiary, Global
Direct Marketing, Inc. (Global) is in the business of printing advertising
materials and coupons and mailing them for its customers. During 1995, the
Company filed a plan of reorganization under Chapter XI of the United States
Bankruptcy Code, which was approved by the Court. Under the plan of
reorganization, approximately $270,000 of debt was forgiven. The Company has
changed its year end from March 31 to December 31 during 1998.
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 and the
accounts of Global since inception. All intercompany accounts have been
eliminated in the consolidation.
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 provided executive
support to help Aggression Sports get prepared to start its own operations.
Aggression Sports is in the process of developing a web site to market its
proprietary outdoor products.
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 December 31,
1999, the Company has a working capital deficit of $455,148 and a
stockholders' deficit of $412,492. In addition, the Company is delinquent on
payment of payroll taxes and creditor liabilities pursuant to the plan of
reorganization, and is being investigated by the Securities and Exchange
Commission for alleged securities law violations (see Note 9). As a result,
substantial doubt exists about the Company's ability to continue to fund
future operations using its existing resources.
The Company plans to assist Aggressions Sports set up its web site to market
a line of specialty sporting goods. Subsequent to year end, 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,
and generated cash of $417,000 through the sale of Arete's common stock.
F-10
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Summary of significant accounting policies (continued)
Use of estimates:
The preparation of 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 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.
Investment in affiliates:
Investments in which the Company's ownership is equal to or greater than 20%
but less than 51% are accounted for using the equity method.
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.
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 carryforwards 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.
F-11
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Summary of significant accounting policies (continued)
Cash flows:
For purposes of the statement of cash flows, the Company considers cash and
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company places its cash with
high quality financial institutions.
Net loss per share:
Basic net loss per common share is based on the weighted average number of
shares outstanding during each period presented. Options to purchase stock
are included as common stock equivalents when dilutive.
Reclassifications:
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
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.
During 1999, the Company issued 6,100,000 shares of its common stock for
services performed by certain individuals on Aggression Sports' behalf. The
shares of stock were valued at $74,718 and have been charged to investment in
and advances to Aggression Sports. The investment has subsequently been
reduced by the Company's 44% share of Aggression Sports net loss for 1999.
F-12
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
2. Investment in and advances to Aggression Sports (continued)
Summarized unaudited financial information of Aggression Sports is as
follows:
Cash $ 5,037
Common stock of Arete Industries, Inc. 142,050
---------
Total assets $ 147,087
=========
Accounts payable - Arete Industries, Inc. $ 74,718
Stockholders' equity 72,369
---------
$ 147,087
=========
Interest income $ 12
Loss on sale of Arete Industries, Inc. stock (2,925)
General and administrative expenses (74,718)
---------
Net loss $ (77,631)
=========
3. Delinquent amounts payable
As of December 31, 1999, the Company is delinquent on payments of various
amounts to creditors including payroll taxes and $62,316 to creditors
required to be paid under the terms of its plan of reorganization. Failure to
pay these liabilities could result in liens being filed on the Company's
assets and may result in assets being attached by creditors resulting in the
Company's inability to continue operations.
4. Notes payable
Note payable - bank
During September 1998, the Company signed a promissory note as subsequently
amended, in the amount of $50,000, bearing interest 7.49% per annum at
December 31, 1999. At December 31, 1999 and 1998, $19,500 and $48,800,
respectively, was payable on this note. The note matures on October 1, 2000.
The note is collateralized by a $25,000 certificate of deposit owned by the
Company and a $25,000 certificate of deposit owned by an affiliate of the
Company's CEO. The $25,000 certificate of deposit owned by the Company was
purchased by the exercise of a compensatory stock option for 5,000,000 shares
of the Company's common stock for $25,000. As compensation for allowing the
Company to use the affiliate of the CEO's certificate of deposit as
collateral, the Company issued 2,500,000 shares of the Company's common stock
to the CEO's affiliate. The Company also issued an additional 2,500,000
shares as collateral to ensure repayment of the $25,000 within twelve months
of the date of pledge. The Company recorded $25,000 as interest expense
during 1998, related to these stock issuances. The note payable is also
guaranteed by the Company's CEO.
F-13
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
4. Notes payable (continued)
Convertible note payable - officer:
On December 21, 1999, the Company entered into a convertible note payable
with an officer of the Company for the payment of $81,021 of unpaid wages.
The note is payable on December 21, 2000, including simple interest at 10%
per annum. The note and accrued interest are convertible into shares of
common stock or Class A preferred stock at the option of the holder. The
number of shares of common stock that shall be issuable upon conversion of
the note (or upon the conversion of the Class A preferred stock into common
stock) shall equal the product of a fraction, the numerator of which is the
total principal and interest due under the note at the time of conversion and
the denominator of which is 85% of the average weekly closing bid price for
the shares of the Company.
5. Preferred stock
The Company prepared Articles of Amendment to the Articles of Incorporation
dated October 30, 1998 whereby a new class of preferred stock was designated
as "Class A Cumulative Convertible Preferred Stock" of which 100,000 shares
may be issued. 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 85% 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. The Company intends to use this Class A preferred stock
as consideration for unpaid officers' compensation. During 1999, 3,000 shares
of Class A preferred stock was issued to two officers of the Company in
payment for past services valued at $30,000.
On December 31, 1991, 28,400,000 shares of Series B voting, noncumulative,
redeemable preferred stock was issued to three major shareholders in exchange
for $710,000 of outstanding loans. The Series B stock was convertible into
common stock only at the option of the Company at $.125 per share. The Series
B stock was stated at its redemption price which is cost and was redeemable
at the discretion of the Company upon 30 days written notice to the holder.
See Note 7 for a description of the changes to the conversion terms and other
matters related to the Series B preferred stock. Stock issuances:
6. Stockholders' equity
During the nine month period ended December 31, 1998, an aggregate of
84,047,772 shares of the Company's common stock were issued for an aggregate
consideration of $567,902. Of this amount 3,000,000 shares were issued for
$75,000 of accrued expenses and compensation payable to two officers recorded
as a liability as of March 31, 1998. Of this amount, 30,000,000 of the shares
were issued for the acquisition of Aggression Sports, recorded at $150,000,
as described in Note 2.
F-14
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
6. Stockholders' equity (continued)
Included in the amount also were 1,176,479 shares issued to two former
officers as severance compensation valued at $30,000. Also included were
2,352,941 shares issued as management fees to two current officers of the
Company valued at $60,000. Also included were 20,000,000 shares issued to an
affiliated entity as nominee for current officers of the Company for their
undertaking to assume control and management of the Company, valued at
$150,000.
Also included were 2,500,000 shares issued as consideration for providing
collateral for a loan for the Company as described in Note 4. Also included
were 2,500,000 shares issued as additional collateral for repayment of the
loan and eventual release of the certificate of deposit collateral also
described in Note 4. Included also were 5,000,000 shares issued to the
Company's CEO by the CEO exercising an option for $25,000. Also included were
500,000 shares issued to an individual engaged by Aggression Sports for
services performed for Agression Sports. Also included were 6,018,361 shares
issued in a private placement as part of the Series B conversion transaction
as described in Note 7. Also included were 10,000,000 shares issued to a
former officer of the Company for services valued at $50,000 which were
contingent on continued employment. During 1999, 5,000,000 of these shares
were forfeited. Also included were 1,000,000 shares issued for consulting
services valued at $10,000. In addition, 7,263,158 shares of Series B
preferred were converted to 7,263,158 shares of common stock as described in
Note 7.
During the year ended December 31, 1999, an aggregate of 27,462,500 shares of
common stock were issued for services valued at $256,077 (an average of $.009
per share). As some of the shares issued in 1998 and 1999 were subject to
vesting, 6,750,000 of these shares were returned during 1999 upon forfeiture
and were valued at the original amount the shares were issued at of $15,500.
The Company also issued 6,100,000 shares of its common stock for services
performed for Aggression Sports valued at $74,718 as described in Note 2, and
sold 10,981,639 shares for $64,600 in a transaction described in Note 7 and
received proceeds of $15,000 upon exercise of options to purchase 1,500,000
shares of common stock by a former officer of the Company.
Stock options:
Incentive Stock Option Plans ("ISO")
The Company has established the 1998 and 1999 ISO plans for employees,
directors and consultants or other advisors. The Company has reserved a
maximum of 59,000,000 common shares to be issued upon the exercise of options
granted under the ISO plan. The purchase price of each share of stock under
the ISO will be determined by the Board of Directors or the Compensation
Committee. The ISO exercise term will not exceed ten years.
F-15
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
6. Stockholders' equity (continued)
The following is a summary of stock option activity, all of which are
currently exercisable:
Weighted
Option price Average Number of
per share exercised price shares
------------ --------------- ---------
Balance, March 31, 1998 $.015 to $.025 $0.015 34,800,000
Granted $.005 $.005 5,000,000
Expired $.015 $.015 (33,300,000)
Exercised $.005 to $.025 $.01 (6,500,000)
-------------- ----------
Balance, December 31, 1998 - - -
Granted $.01 to $.011 $.011 18,000,000
Exercised $.01 $.01 (1,500,000)
---- ----- ----------
Balance, December 31, 1999 $.011 $.011 16,500,000
==========
The following is additional information with respect to those options
outstanding at December 31, 1999:
Weighted
average Weighted
contractual life average exercise Number of
Option price per share in years price Shares
---------------------- ---------------- ---------------- ---------
$0.011 10 $0.011 16,500,000
==========
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, 1999 and 1998 in accordance with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:
1999 1998
---- ----
Net loss - as reported $ (536,904) $ (575,515)
Net loss - pro forma (726,904) (585,515)
Loss per share - as reported - -
Loss per share - pro forma - -
F-16
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
6. Stockholders' equity (continued)
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 1998 and 1999, dividend yield of 0%; expected
volatility of 100%, risk-free interest rate of 5.86%; and expected life of 4
years.
7. Related party transactions
During the nine month period ended December 31, 1998, the Company amended the
conversion terms of the Series B preferred stock. The Series B preferred
stock was originally convertible into 5,680,000 shares of common stock. The
amended agreement entitled the holder to convert to 28,400,000 free trading
shares of common stock at the rate of $.025 per share. The converted common
shares were considered to be free trading based on the holding period of the
originally issued preferred stock. As a part of the amended conversion
agreement, the Company agreed to issue 17,000,000 shares of restricted common
stock for $100,000 cash. The Company's CEO located buyers and arranged the
sale of the former preferred shareholder's converted common stock to eight
entities and individuals. During the year ended December 31, 1999 and the
nine months ended December 31, 1998, 21,136,842 and 7,263,158 shares,
respectively, of preferred stock were exchanged for an equal number of shares
of free trading common stock. The amount received by the former preferred
shareholder from the sale of the free trading converted common totaling
$35,400 at December 31, 1998 was used to acquire 6,018,361 new shares of
restricted common stock. During 1999, $64,600 of proceeds from the sale of
the converted common were used by the individual to acquire 10,981,639
additional shares of restricted common stock.
During 1999, the Company entered into an agreement with Source One Worldwide,
LLC to service the printing business of the Company. Source One is a company
owned by a former director of the Company. The printing charges during 1999
amounted to $480,737, of which $260,331 was paid in cash and $220,406 was
disputed and subsequently adjusted pursuant to a settlement agreement.
8. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $1,761,000
which expire in years through 2019.
As of December 31, 1999 and 1998, total deferred tax assets, liabilities and
valuation allowances are as follows:
1999 1998
---- ----
Deferred tax asset resulting from loss carryforward $ 352,000 $ 320,000
Valuation allowance (352,000) (320,000)
--------- ---------
Net deferred tax asset $ - $ -
========= ===== ===
F-17
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
8. Income taxes (continued)
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
----------
$1,761,000
==========
9. Commitments and contingencies
Lease commitments:
On March 22, 2000, the Company entered into a building lease for office space
in Boulder, Colorado. Minimum monthly rent is between $4,779 and $5,169 for
the three-year lease term. The total commitment under this lease amounts to
$179,016.
Rent expense for the year ended December 31, 1999 and the nine months ended
December 31, 1998 amounted to $46,445 and $64,770, respectively.
Securities and Exchange Commission investigation:
The Company received a letter from the Securities and Exchange Commission
dated March 30, 1998 indicating that the staff of Securities and Exchange
Commission pursuant to a formal order of private investigation was conducting
an investigation of certain matters. On October 23, 1998, the Securities and
Exchange Commission sent another letter to the Company indicating that the
staff of the Central Regional Office of the Securities and Exchange
Commission intends to recommend to the Commission that an enforcement action
be instituted against the Company and two former officers of the Company. The
staff proposed to allege that based on facts developed in their investigation
that misleading press releases regarding the acquisition of a private
company, that company's business relationships, and sales projections were
released. The proposed action would allege that these press releases included
material misstatements and/or omitted to disclose material facts in
connection with the offer, purchase and sale of Company common stock, in
violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
F-18
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
9. Commitments and contingencies (continued)
Additionally, the staff's proposed action would be based on facts developed
in their investigation that, between January 1988 to the present, the Company
failed to file, or filed on an untimely basis, required periodic reports with
the Commission, in violation of Section 15(d) of the Exchange Act and Rules
15d-1 and 15d-13 thereunder. The proposed action would further allege the two
former officer's 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 thereunder. The
Company's legal counsel has indicated that at this state of the
investigation, it is impracticable to render an opinion about whether the
likelihood of an unfavorable outcome is either "probable" or "remote". A
contingency exists with respect to this matter, the ultimate resolution of
which cannot presently be determined.
Employment agreements:
Effective November 1, 1998, the Company entered into employment agreements
with its CEO and CFO for two year periods. Termination without cause would
result in substantial penalties to the Company. Compensation not paid on a
monthly basis may be converted to a Class A preferred stock to be designated
for such purposes. The preferred stock will be convertible to S-8 registered
common stock. In addition to base compensation, the officers may be eligible
for additional compensation, fringe benefits and use of office facilities.
During 1999, the CFO resigned and his employment agreement was cancelled.
Change in Control Agreement:
Pursuant to a Change of Control Agreement effective in April 1998, the
Company issued 30,000,000 shares of its common stock for approximately 44%
ownership of Aggression Sports, a newly formed Colorado corporation. This
entity was formed to pursue developing an outdoor sporting goods company
specializing in the high end specialty store and high mainstream markets for
extreme and outdoor sports products. Aggression Sports has engaged the
services of an individual for $5,000 per month for an initial six month
period, that would be extended depending upon certain events occurring. The
Company has committed to fund certain yet to be determined expenses of
Aggression Sports. The Company has been issuing Form S-8 registered stock to
the consultant that was engaged by Aggression Sports to cover its commitment
to fund certain expenses of Aggression Sports.
The Company has the option to purchase additional shares in Aggression Sports
for $100,000 that would raise its equity interest to 55%, assuming no other
shares of Aggression Sports are issued. In connection with the change in
control agreement, Arete's board of directors has approved a subscription
from an affiliated company for the purchase of $500,000 of Arete's common
stock for a two year period at a price 25% below the prevailing market price
at the time of purchase. At the time the transaction was consummated, the
affiliated company was owned by two officers and directors of the company.
F-19
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
9. Commitments and contingencies (continued)
The agreement also provides that upon the removal of two named officers and
directors of Arete, the affiliated company, at its option, shall be entitled
to purchase all of the shares of Aggression Sports held by Arete or sell all
of their shares of Aggression Sports to Arete at their fair market value.
10.Subsequent events
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. The board also approved compensatory common stock grants of 7,750,000
shares in the aggregate to six individuals for services to be performed
valued at $77,500. During the first quarter of 2000, 1,500,000 of these
shares were issued.
During the first quarter of 2000, the Company issued 8,750,000 shares of
stock for the transfer to the Company of a $25,000 certificate of deposit
owned by an affiliate of the CEO, sold 450,000 shares of common stock in a
private placement for proceeds of $31,500, issued 2,377,885 shares of common
stock for services valued at $46,410, and issued 2,600,000 shares of common
stock upon conversion of $30,000 of Class A preferred stock.
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, 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%.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report on Form 10K-SB
to be signed on its behalf by the undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: April 13, 2000 By: /s/ THOMAS P. RAABE
-------------- --------------------------------------
Thomas P. Raabe,
President, Chief Executive Officer
and Chairman of the Board of
Directors
Date: April 13, 2000 By: /s/ THOMAS Y. GORMAN, JR.
-------------- ---------------------
Thomas Y. Gorman, Jr.
Secretary, Treasurer, Principal
Financial and Accounting Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this amended report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
ARETE INDUSTRIES, INC.
Date: April 13, 2000 By: /s/ THOMAS P. RAABE
-------------- ---------------------
Thomas P. Raabe
Board Member
Date: April 13, 2000 By: /s/ THOMAS Y. GORMAN, JR.
-------------- ---------------------
Thomas Y. Gorman, Jr.
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 securities holders of the Company during the period
covered by this Report, see the Exhibit Index of this Report. Any other proxy or
information statements forwarded to stockholders will be forwarded to the
Securities and Exchange Commission on the date such information is forwarded to
stockholders.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 40,844
<SECURITIES> 0
<RECEIVABLES> 519
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,563
<PP&E> 2,329
<DEPRECIATION> (233)
<TOTAL-ASSETS> 85,219
<CURRENT-LIABILITIES> 497,711
<BONDS> 0
0
30,000
<COMMON> 7,414,758
<OTHER-SE> (7,857,250)
<TOTAL-LIABILITY-AND-EQUITY> 85,219
<SALES> 817,917
<TOTAL-REVENUES> 817,917
<CGS> 656,076
<TOTAL-COSTS> 656,076
<OTHER-EXPENSES> 701,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,839
<INCOME-PRETAX> (536,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,897
<DISCONTINUED> (539,801)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (536,904)
<EPS-BASIC> 0
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</TABLE>