FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the period ended: June 30, 2000
or
[ ] Transition Report Pursuance 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 84-1063149
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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 August 15, 2000, Registrant had 328,113,700 shares of common stock, No par
value, outstanding.
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
Consolidated Financial Statements:
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999
(unaudited) 2
Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Deficit for the Six Months
Ended June 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 6-7
Notes to Unaudited Consolidated Financial Statements at June 30,
2000 8-11
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 2000 and December 31, 1999
(Unaudited)
2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 99,920 $ 15,844
Restricted cash - 25,000
Accounts receivable, less allowance for
doubtful accounts of $0 12,639 519
Intercompany - -
Prepaid expenses - 1,200
---------- ----------
Total current assets 112,559 42,563
Notes receivable 25,400 -
Furniture and equipment, at cost net of accumulated
depreciation of $1,198 (2000) and $233 (1999) 19,870 2,096
Security deposit 5,664 -
Investment in and advances to Verbaltech Labs &
Banking 611 -
Investment in and advances to Aggression Sports
(Note 2) (4,330) 40,560
---------- ----------
$ 159,774 $ 85,219
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable (Note 3) $ 203,449 $ 204,318
Accrued expenses 87,263 34,409
Accrued payroll taxes (Note 3) 174,998 146,130
Notes payable 5,000 24,500
Convertible note payable - officer 81,021 81,021
Stock subscription payment received - 7,333
---------- ----------
Total current liabilities 551,731 497,711
Commitments and contingencies (Notes 1, 3 and 6)
Stockholders' deficit (Note 4):
Redeemable preferred stock; 100,000,000 shares
authorized:
Convertible Class A; $10 par value, 100,000
shares authorized, 3,000 shares issued and
outstanding (liquidation preference $32,475) - 30,000
Common stock, $.0001 par value; 500,000,000
shares authorized, 328,113,700 (2000) and
301,397,155 (1999) shares issued and
outstanding 7,862,710 7,414,758
Accumulated deficit (8,254,667) (7,857,250)
---------- ----------
Total stockholders' deficit (391,957) (412,492)
---------- ----------
$ 159,774 $ 85,219
========== ==========
See accompanying notes.
2
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Revenues:
Management fees $ 30,000 $ -
Operating expenses:
Depreciation 849 -
Rent 6,931 -
Salaries 112,231 -
Stock issued for services (Note 4) 47,500 -
Other operating expenses 114,203 -
----------- -----------
Total costs and expenses 281,714 -
----------- -----------
Total operating income (loss) (251,714) -
Other income (expense):
Equity in loss of Aggression Sports (Note 2) (75,005) -
Gain on sale of equipment - -
Interest expense (1,847) (134)
Interest and miscellaneous income 9,863 107
----------- -----------
Total other income (expenses) (66,989) (27)
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Net loss from continuing operations (Note 5) (318,703) (27)
Net loss from discontinued operations (Note 1) - (186,880)
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Net loss applicable to common shareholders $ (318,703) $ (186,907)
=========== ===========
Basic and diluted loss per share $ * $ *
=========== ===========
Weighted average common shares outstanding 265,404,922 282,307,824
=========== ===========
* - Less than $.01 per share
See accompanying notes.
3
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Revenues:
Management fees $ 30,000 $ -
Operating expenses:
Depreciation 849 -
Rent 6,931 -
Salaries 112,231 -
Stock issued for services (Note 4) 47,500 -
Other operating expenses 114,203 -
----------- -----------
Total costs and expenses 281,714 -
----------- -----------
Total operating income (loss) (251,714) -
Other income (expense):
Equity in loss of Aggression Sports (Note 2) (77,005) -
Gain on sale of equipment - 40,061
Interest expense (8,604) (1,781)
Interest and miscellaneous income 10,426 420
----------- -----------
Total other income (expenses) (75,183) 38,700
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Net loss from continuing operations (Note 5) (326,897) 38,700
Net loss from discontinued operations (Note 1) (70,520) (307,913)
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Net loss applicable to common shareholders $ (397,417) $ (269,213)
=========== ===========
Basic and diluted loss per share $ * $ *
=========== ===========
Weighted average common shares outstanding 265,404,922 266,086,314
=========== ===========
* - Less than $.01 per share
See accompanying notes.
4
<PAGE>
<TABLE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT STOCKHOLDERS' DEFICIT
For the Six Months Ended June 30, 2000 and 1999
(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) - - 7,127,885 93,910 -
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) - - - 183,557 -
Exercise of Class A Preferred options
and conversion to common stock 500,000 2,500
Net loss for the six months ended
June, 2000 - - - - (397,417)
----- ------ ----------- ---------- -----------
- $ 328,113,700 $7,862,710 $(8,254,667)
===== ====== =========== ========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net loss $(397,417) $ 38,700
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 965 -
Equity in loss of Aggression Sports 77,005 -
Stock issued for services 93,910 153,223
Changes in assets and liabilities:
Accounts receivable (12,120) (106,007)
Security deposit (5,664) -
Prepaid expenses 1,200 (8,437)
Accounts payable (869) 247,258
Accrued expenses 81,722 -
Customer deposits - (10,792)
-------- --------
Total adjustments 236,149 275,245
-------- --------
Net cash provided by (used in) operating
Activities (161,268) 313,945
Cash flows from investing activities:
Purchase of property and equipment - (25,517)
Investments in and advances to Aggression Sports 106,692 -
Proceeds from certificate of deposit 25,000 -
-------- --------
Net cash provided by investing activities 131,692 (25,517)
Cash flows from financing activities:
Proceeds from issuance of common stock 67,152 64,198
Proceeds from exercise of stock options 66,000 -
Proceeds from note payable - 41,000
Payments on long term debt (19,500) (48,800)
-------- --------
Net cash provided by financing activities 113,652 56,398
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Net increase in cash and cash equivalents 84,076 344,826
Cash and cash equivalents at beginning of period 15,844 20,047
-------- --------
Cash and cash equivalents at end of period $ 99,920 $364,873
======== ========
(Continued on following page)
See accompanying notes.
6
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Interest paid during the period $ 8,604 $ 1,781
======= =======
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
June 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 June 30, 2000, and the results of
operations and cash flows for the periods ended June 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 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 June 30, 2000,
the Company has a working capital deficit of $439,172 and a stockholders'
deficit of $391,957. 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 6). 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. During 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, and
generated cash of $417,000 through the sale of Arete's common stock.
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 the six months ended June 30, 2000,
Aggression Sports sold 26,490,000 shares of Arete for gross proceeds of
$417,175. Arete's 44% interest in the proceeds of $183,557 has been recorded
as additional paid-in capital.
8
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
2. Investment in and advances to Aggression Sports (continued)
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 six months ended June 30, 2000, the Company paid salaries of
$15,548 for services performed by certain individuals on Agression Sports
behalf. The investment in Aggression Sports has been reduced by the Company's
44% share of Aggression Sports' loss for the six months ended June 30, 2000
exclusive of the gain on the sale of Arete common stock.
3. Delinquent amounts payable
As of June 30, 2000, 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. Stockholders' equity
During the six months ended June 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 7,127,885 shares
of common stock for services valued at $93,910 ($0.013 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 guaranting 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. 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.
9
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
5. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $2,082,000
which expire in years through 2020.
As of June 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 $ 416,400 $ 352,000
Valuation allowance (416,400) (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 321,000
----------
$2,082,000
==========
6. Commitments and contingencies
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.
10
<PAGE>
ARETE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
6. 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.
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF
OPERATIONS Overview
Management is implementing a strategic plan to bring the Company to financial
viability. As reported at the Company's annual meeting held on June 2, 2000, the
Company has recast itself as a seed-stage business incubator. In March of 2000,
Management discontinued the Company's print and direct mail operations and
terminated the franchised cooperative coupon direct mail advertising business.
Management then directed the Company's resources toward launching its outdoor
adventure equipment company, Aggression Sports, Inc. dba Arete Outdoors. After
May 1, 2000 with the addition to the management team of Mr. Thomas Gorman
(finance), Mr. Lawrence Mortimer (marketing) and Mr. Michael Parsons
(operations), the Company could offer seasoned executive talent and facilities
to seed stage companies. Management believes this plan will serve the dual
purpose of spreading the overhead of its executive management and facilities
over several businesses and maximizing the finanicial benefit to the company
through the performance of the incubator partners.
The incubator concept provides four sources of income from its incubator
partners: (i) fees for sharing basic services (rent, accounting, information
technology and support services, among others) to its incubator partners, (ii)
fees for executive management services provided to its incubator partners, (iii)
fees and other non-cash or in-kind compensation for investment banking-type
services that help its incubator partners receive additional equity capital; and
(iv) liquidation of equity upon the graduation of its incubatees through a
liquidity event such as an initial public offering, or a spin-off or acquisition
transaction.
The Company's management team is focused locating businesses to work with whose
founding owners or entrepreneurs know their market and product, and whose
business service or product concepts have been developed to a prototype stage
with an acceptable indication of market acceptance. The vision of Management is
not to be driven by any particular industry or sector, but to find business
opportunities that stand out when the following questions are asked: Is there
someone willing to buy what the business will make? Can the business make what
someone is willing to buy? Can their potential cash flow attract investors? Can
the business be a market leader? And, what is the character of the founders?
At this time, the Company is engaged with three incubator partners: Arete
Outdoors, VerbalTech Labs and Cloudwalker, and is surveying additional
candidates.
Aggression Sports, Inc., dba Arete Outdoors was orginally formed in May of 1998
as Aggression Sports, Inc. by the Company and Boulder Sports, LLC. pursuant to
the change in contol agreement signed at that time in which former management of
the Company resigned and Tom Raabe, the current Chairman and CEO, and Mr. Fred
Boethling, former director, Company Secretary and CFO took over its management.
Upon inception, the Company owned 44% of Aggression Sports, Inc. and Boulder
Sports, LLC, wholly owned by Mr. Raabe, owned 56%. The purpose of the new
company was to pursue building a business in the `adrenaline' or `extreme'
sports industry. In early 1999, Aggression Sports, Inc. took a trade name of
Arete Outdoors (hereinafter referred to as either Aggression Sports, Inc. or
Arete Outdoors). Previously, in late 1998, the Company engaged the services of
Mr. Mike Lowe to manage Aggression Sports and to develop products for it.
Additionally, Mr. Lowe was paid by the Company to act as Chief Operating Officer
for the purpose of assisting in the Company's then ongoing turnaround efforts
with regard to its print and direct mail, cooperative coupon direct mail
business.
12
<PAGE>
In December of 1999, Arete Outdoors entered an agreement with Mike Lowe in which
his participation, and present and future product designs were exchanged for a
30% ownership position in Arete Outdoors with an option to purchase an
additional 6% that vests on certain performance milestones.
Mike Lowe has been a leader in mountaineering and alpine sports throughout his
life. Mike and his brother Greg were early leading designers and innovators in
the outdoor sports industry. He was in Army Special Forces and a director of
Outward Bound. In 1972, he founded Lowe Alpine Systems, which, with the
assistance of his Brother, Greg Lowe, grew to approximately $20 million in
sales. In 1987, the Lowe brothers sold Lowe Alpine Systems to an independent
group of investors. At that time, the company was a brand leader in the high-end
specialty outdoor products industry. The Lowe's did this by creating product
firsts and industry standards, including numerous climbing tools such as the
FootFang Crampon, and they pioneered the internal frame backpacks.
After a hiatus in which he started other outdoor product companies including his
own line of mountain bikes and accessories, Mike Lowe is reentering the
specialty outdoors sporting goods industry in partnership with Arete Outdoors.
Lowe has developed and is developing approximately thirty products that Arete
Outdoors has the right to patent and bring to market. These products cover a
number of categories in the outdoor sports market as well as the consumer
market. Arete Outdoors also has a design and development agreement with Greg
Lowe, brother of Mike Lowe, for a line of products, which will be called
`Lifestyle Tools.' Greg is an accomplished and well sought after outdoor product
designer in his own right. Since the beginning of 2000, Arete Outdoor has filed
for four patents, and is ready to bring two products to market: SnowFang
snowshoe, the Dirt Rush and the Powder Rush Downhillers to market this fall for
the winter outdoor sports season.
The SnowFangs snowshoe, the Dirt Rush and Powder Rush Downhillers are unique
products that fill unmet needs in the outdoor sports market. These products have
had strong early indications of market accptance. During the second quarter of
2000, the development process was nearly complete for the SnowFangs snowshoe.
Two versions of the SnowFangs snowshoe are scheduled to be released in the third
quarter of 2000. Arete Outdoors' next product, the summer and winter downhill
scooter, which have been branded the Dirt Rush and Powder Rush for the summer
and winter versions, will be commercially produced in the third quarter and are
scheduled to be released for sale in the fourth quarter of 2000.
Arete Outdoors plans to build market leadership by developing new outdoor
experiences with its new product designs and web-based user interaction, which
are intended to drive an ever growing loyal customer base. Arete Outdoors plans
to market its products through various distribution channels, including a
relational data-base driven, community-style outdoor adventure website. The
first version of the website has been published under the name
www.areteoutdoors.com. Not all products will be suited for resale over the World
Wide Web, and other venues and channels will be used depending on the nature of
the product and the most appropriate method to achieve the best return on
investment.
Arete Outdoors has an in house, R&D, product development and production team and
is receiveing management and investment banking support from the Company's
management team. Arete Outdoors recently leased its own facility in Berthoud,
Colorado to house R&D, Product Development and Production coordination.
Management believes that Arete Outdoors will be required to provide in-house
customer service, support and product fulfillment for wholesale, direct
marketing and internet sales on an immediate basis.
13
<PAGE>
During the period ended June 30, 2000, the Company engaged into a full service
incubator relationship with VerbalTech Labs, Inc. (formerly Applied Behavior
Systems, LLC). VTL has developed a breakthrough language learning software
program that incorporates voice recognition, neural network and intelligent
agent computer technologies. The software program adapts to the 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. Two issued patents protect
the teaching software and others are pending. The teaching method is especially
effective with people with learning disabilities, which is why VerbalTech has
chosen them as the focus of its first application.
There is an immediate and growing need for software to service this market
because of a lack of qualified speech and language professionals. In the US
alone, there are over 6.8 million children and adults with developmental and
language delays (includes Downs Syndrome, mental retardation, autism and other
learning disabilities) and only 100,000 speech and language professionals.
Over 90% of these children are in regular public school. One of the reasons is
that there are a series of federal laws (1975-Education for All Handicapped
Children Act, and 1990-Individuals with Disabilities Education Act), which
require the states to specifically provide free and appropriate public education
to this segment of the population. The legislation also encourages schools to
fund "assistive technology" (including software) that contributes to the
effectiveness of their education.
Management believes that the growth of the opportunity and acceptance of
teaching software in the US classroom creates a ready market for the
introduction of this product: In 1999, computers were in 78% of the US public
schools; and in the 1998-1999 school year, $500 million was spent by US public
schools on instructional software, which was a 70% increase over the prior
school year.
Management believes that VerbalTech Labs' language teaching software will
distinguish itself from existing 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 the parents and teachers will see tangible results by using
the program. Other companies who use a receptive teaching method will have to
undertake extensive tests to attempt to prove the same results that are obvious
with VerbalTech program. The software program is beta tested with pilot and
trial programs, and has shown consistent and impressive results. It is ready to
be prepared for commercial introduction.
To move VerbalTech into the next stage of its growth, the Company is assisting
it in an effort to raise $3 million in equity capital through a convertible
preferred stock offering to venture capitalists and other accredited investors.
The $3 million of additional equity capital will be used to prepare VerbalTech's
software for commercial introduction, to provide the marketing and sales effort
to demonstrate market acceptance, and to finance initial operations. The Company
has an agreement with VerbalTech that provides for a 14.3% ownership interest by
the Company, which after taking into account the proposed $3 million investment
in convertible preferred, will be diluted to approximately 10%. The Company's
agreement with VerbalTech provides that the Company receives a fee for raising
the money and provides for VerbalTech to pay Arete a monthly fee for basic
services (rent, accounting, IT, etc) and management services.
Also during the period ended June 30, 2000, the Company provides the most basic
incubator services to Cloudwalker LLC., a Colorado limited liability company
that is principally owned and managed by Jeff Lowe, Mike Lowe's brother.
Cloudwalker is also a seed-stage business venture, which has recently launched
its products to the high-end technical specialty retail market. Cloudwalker
manufactures and distributes innovative climbing and mountaineering clothing and
hardware. At present, Arete Industries is providing Cloudwalker basic services
and does not own any interest in the company. Arete Outdoors and Cloudwalker are
exploring new areas they can work together, beginning with Cloudwalker acting as
Arete Outdoors sales representative to market the SnowFangs snowshoes to its
customer base in North America and Europe through their in-house sales team.
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Through the implementation of its seed-stage incubator strategy with these three
relationships and with other groups in the future, management is currently
focused on developing profitable operations and then recapitalizing the business
when it has a demonstrable cash flow model to show to potential investors.
Management believes that it is improving its ability to attract capital from
professionally managed funds on terms which will be favorable to its current
shareholders. 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.
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 June 30, 2000, of $439,172. 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 June 30, 2000, the Company issued 4,750,000
shares of common stock for services.
Results of Operations
---------------------
The Company's financial performance has been adversely affected by the
termination of its co-op coupon business, and the execution of the seed-stage
incubator strategy has not yet developed into significant financial results.
The Company generated operating revenues of approximately $8,035 with $7,515 (or
94% of sales) of cost of goods sold, during the first three months, ending March
31, 2000. As of March 1, 2000, the co-op coupon business was discontinued and is
reflected in the financial statements as a loss of discontinued operations.
For the quarter, the Company incurred $281,714 in operating expenses. The
Company's future expectation is that these expenses will remain relatively
stable, but may increase over time as the fees and revenues from its management
services increase.
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 liabilities in excess of assets at June 30, 2000 of $391,957.
This is compared to liabilities in excess of assets at December 31, 1999 of
$412,492. The reduction in the liabilities in excess of assets was due to cash
provided by Aggression Sports.
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Management believes that with a successful track record of its seed-stage
incubator 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 June 30, 2000, the Company had no material commitments for capital
expenditures.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the period ended June 30, 2000, there were no material legal proceedings
initiated by or against the Company or any of its officers, directors or
subsidiaries.
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.
o 1,288,660 shares sold to Gary McMullen for $7,333, as part of a
private placement
o 500,000 shares issued in exchange for the exercise of Class A
convertible preferred stock that was exercised then converted by Eric
Popkoff for $2,500
o 4,750,000 shares issued for salaries and services to Lawrence Mortimer
(1,500,000 shares), Michael Lowe (1,500,000 shares), Michael Parsons
(1,500,000 shares) and Greg Lowe (250,000 shares).
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders. During the period
ended June 30, 2000, the Company held its regular annual meeting of
shareholders. Matters submitted were the election of directors, approval of the
Omnibus Stock Bonus and Compensation Plan and ratification of appointment of
independent auditors, all of such resolutions were voted on as follows:
Election of Thomas P. Raabe as director,
For: 252,430,492 Withhold Authority 347,000 and Not Voted
----------- -------- --------------
Election of Thomas Y. Gorman as director,
For: 252,430,492 Withhold Authority 347,000 and Not Voted .
----------- -------- --------------
Ratification of Appointment of Causey Demgen & Moore as independent auditors of
the Company;
For: 251,815,291 Against 662,700 Abstain 299,501 Not Voted 1,392,101
------------ ------- --------- ----------
Approval of 2000 Omnibus Stock Bonus and Compensation Plan.
For: 75,601,411; Against 3,318,850; Abstain: 520,901; Not Voted 174,728,431
---------- ---------- -------- -----------
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: August 14, 2000 By: /s/ Thomas Y. Gorman, CFO
-------------------------------
Thomas Y. Gorman, CFO
Principal Financial and Accounting Officer
