<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended September 30, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ________________________
Commission File Number 0-12214
DALECO RESOURCES CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 23-2860739
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087
----------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number: (610)254-4199
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Shares Par Value $.01
Series A 10% Cumulative Preferred Stock Par Value $.01
------------------------------------------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or 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 _____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ ]
State issuer's revenues for its most recent fiscal year: $2,462,909
Aggregate market value of voting stock held by non-affiliates of registrant
based upon the closing NASDAQ sale price on December 1, 1997: $4,058,064.
Applicable only to Corporate Registrants
Number of shares outstanding of the issuer's common stock as of
December 1, 1997: 27,767,880
Number of shares outstanding of the issuer's preferred stock as of
December 1, 1997: 160,000
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into this report in Part III, is information to be
contained in Registrant's Proxy Statement at its Annual Meeting.
Transitional Small Business Disclosure Format: Yes __X__ No _____
<PAGE>
PART I
ITEM 1 BUSINESS
General:
Daleco Resources Corporation (hereinafter referred to as
"Daleco" and, together with its wholly owned subsidiaries Westlands Resources
Corporation ("Westlands"), Sustainable Forest Industries, Inc. ("Sustainable");
Deven Resources, Inc. ("Deven"); DRI Operating Company, Inc. (DRI); Haly
Corporation ("Haly"); Tri-Coastal Energy, Inc. ("Tri-Coastal) and Tri-Coastal
Energy, L.P. ("TCELP") hereinafter sometimes collectively referred to as the
"Company") is engaged in the exploration, development and production of oil and
gas properties, the harvesting of timber concessions and the holder of mineral
interests. Daleco, originally named United Westlands Resources, Inc., was
organized under the laws of the province of Ontario by amalgamation of two small
companies in 1981. In 1986, the Company changed its name to Daleco Resources
Corporation, and its province of organization to Ontario, Canada. Effective
October 1, 1996, the Company was re-domesticated into the State of Delaware. The
Company, through its wholly owned subsidiary, Westlands, a Nevada corporation,
has acquired a significant number of interests in its Texas properties from
entities owned or controlled by Messrs. Amir and Erlich. Other interests have
been acquired as a result of the failure of non-affiliated working interest
owners to maintain their interest in the properties by failing to pay their
share of costs associated with the properties. Daleco conducts no operations as
such and is essentially a holding company for its oil and gas operating
subsidiaries, its mineral interests in Mexico and the Yukon Territory and its
timber holdings in Guyana. Daleco does not refine any crude oil or market, at
retail, any oil or petroleum products. The Company does not own any drilling
rigs, and, generally, all of its drilling activities are performed by
independent drilling contractors on a contract basis. (See, "Managements
discussion and Analysis- Business and Properties".)
Effective September 30, 1997, the Company acquired all of
outstanding shares of Haly Corporation, a corporation presently held by Messes.
Amir and Erlich for common stock of the Company and $1,000 in cash. Haly has
working interest and overriding royalty interest in some of the Company's Texas
properties. (See, Business and Properties - Haly and Interests of Management in
certain transactions.)
Under the Company's agreement with Heller Financial, Inc., the
Company's Texas properties are fully pledged as security for the Heller Loan.
Likewise, certain Pennsylvania Properties of Deven are pledged to PNC Bank, N.A.
as collateral for a $300,000 loan. The pledging of these assets as collateral
for existing loans could hinder the ability of the Company to raise additional
capital through the pledging of assets. (See, Managements Discussion and
Analysis - Heller Transaction and PNC Loan.)
Deven serves as the managing general partner of two limited
partnerships, Developing Energy Partners I, L.P. ("Developing Energy") and
Deerlick Creek Partners I, L.P. ("Deerlick"). DRI, a wholly owned subsidiary of
Deven, manages 67 wells on behalf of Developing Energy in the State of West
Virginia and the Commonwealth of Pennsylvania.
The Company has interests in 204 wells in the States of Texas,
Alabama, West Virginia, New Mexico and the Commonwealth of Pennsylvania.
Definition of Terms:
As used herein, the term:
"Gross", as it applies to acreage or wells refers to the
number of acres or wells in which the Company has a working interest.
"Net", as it applies to acreage or wells refers to the sum of
the fractional ownership interests owned by the Company in gross acres or gross
wells.
"Working interest", means the share of costs borne by an owner
in the lease or well.
<PAGE>
"Net Revenue Interest", means the share of gross income from
such lease or well actually received by the owner.
"MMbtu", "Bbls", "Mcf" and "MMcf" mean million British thermal
units, barrels, a thousand cubic feet, and a million cubic feet, respectively.
"Proved reserves", are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known oil and gas reservoirs under existing economic and operating conditions.
"Proved developed reserves", are proved reserves which are
expected to be recoverable through existing wells with existing equipment and
operating methods.
"Proved undeveloped reserves", are proved reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where relatively major expenditures are required for drilling and
completion.
"Horizontal Well" means a well drilled vertically from its
surface to its objective depth and from that point drilled with special tools at
an angle approximating 90 degrees from the bottom of the vertical hole or
drilled from such point at an angle which approximates that at which the beds of
the objective formation lie, as opposed to a traditional vertical well, which is
drilled vertically from the surface to its objective.
Crude oil and condensate volumes are expressed in barrels
which are equivalent to 42 United States gallons. Gas volumes are expressed in
Mcf or MMcf as determined at 60 degrees Fahrenheit and the legal pressure base
that prevails in the state in which the reserves are located.
Exploration Practices and Policies:
Texas:
Historically the Company retained and/or acquired only a
fractional working interest in the wells in which it has participated, thereby
limiting its financial risk, operating expenses and the revenues it receives
from each well. The Company's practice, as operator of a well either being
drilled, or recompleted as a horizontal well from a vertical well, to conduct
such operations on a "Turnkey basis".
The Company has engaged RWA Corporation of Houston, Texas, an
unaffiliated company, to act as the contract operator of its oil and gas
properties pursuant to an oral agreement, thereby negating the necessity to
maintain a staff of operating personnel. The Company believes that, by engaging
a contract operator, it is able to effect cost savings and acquire localized
expertise. The Company expects to continue employing contract operators until
the size of its operations justifies hiring operating personnel. (See, "Business
- - Employees".)
Austin Chalk Trend
The Cretaceous carbonates in south Texas are of importance as
oil and gas producing horizons. The trend of these limestones include the Austin
Chalk, Buda, Georgetown and Edwards formations, extending for approximately 300
miles in length and 50 miles across, and encountered at depths of 5,500 to
18,000 feet. These reservoirs are generally of low permeability, and significant
oil and gas production is generally obtained only by intersecting vertical
fractures within the carbonate rocks. Historically, these formations were
considered to be economically marginal except in areas where the rocks were
highly fractured. In later years, stimulation by mechanical fracturing of the
rock resulted in increasing hydrocarbon recoveries and extensive development of
the trend. Recent developments using horizontal drilling techniques allow the
wellbore to intersect, if present, a series of vertical fracture systems instead
of a single one, thus resulting in higher rates of production and recoverable
reserves, at the cost of a more expensive drilling effort. (See, "Business -
Definition of Terms".) Whether an individual well will be economic, even if
horizontally drilled, depends largely upon intersecting fractured portions of
the formation, which cannot be predicted. Certain locales appear to contain more
fracturing than others, and the Company believes that it's Texas leases are
located in areas of better fracturing. It is not unusual for an individual well
to produce as much as forty percent (40%) of
<PAGE>
the primary recoverable reserves during the first two years of production and
the remainder over a period of ten to fifteen years. Prior to 1996, the Company
has drilled and successfully completed ten horizontal wells. (See, "Properties -
Texas Operations".) During 1996, the Company's operations included the fracture
stimulation of three wells and the drilling of a new horizontal lateral in
another well. As result of the Heller Financing (See, "Business - Heller
Transaction"), the Company has stimulated seven (7) existing vertical chalk
wells and plans to drill as many as twenty-five (25) new horizontal laterals on
its Austin Chalk acreage over the next two (2) years. Because maximum production
levels are currently regulated by government in the portion of Texas in which
the Company has its leases, wells which penetrate a highly fractured system may
be subject to production curtailments. (See "Government Regulation - Texas
Regulation".)
West Virginia and Pennsylvania:
Appalachian Basin:
The Company's production in the States of West Virginia and
the Commonwealth of Pennsylvania are from wells completed in methane coal seems
and in traditional producing zones such as the Oriskany and Medina formations of
the Appalachian Basin's Upper Devonian Section. Through its ownership in and
management of its Developing Energy Partners I, L.P., Partnership ("Developing
Energy"), the Company has an undivided interest in 27 producing coal bed methane
wells in the Blacklick Creek CBM Project located in Indiana County of Central
Pennsylvania. These wells produce from multiple coal seams ranging in depth from
600 feet to 1,200 feet. The 15,000 acre Blacklick Creek project was partially
developed at the time it was acquired and is now in the second year of a
multi-well, multi-year development program. Seven (7) wells were drilled as part
of the development program during fiscal year 1997 with an addition of eight (8)
wells scheduled during 1998. The Company, through its partnership, controls a
40% working interest in the project.
In addition, Developing Energy owns varying interest ranging
from 20% to 100% in forty (40) conventional Upper Devonian producing wells
ranging in depth from approximately 6,000 feet to 10,000 feet. Fourteen (14) of
these wells are located in Western and Central Pennsylvania and hold
approximately 18,983 gross acres. The remaining twenty-six (26) wells are
located in northern and central West Virginia and hold approximately 7,302
acres. The primary product produced from these Upper Devonian wells is natural
gas. The gas production is sold at market sensitive prices which have
historically benefited from the premiums paid for Appalachian gas supplies due
to their proximity to the end user market. These wells and their associated gas
gathering systems are operated by the Company's subsidiary, DRI. DRI is also
under contract to conduct "field operations" relating to the Blacklick Creek CBM
wells. All operations are controlled from the Company's Wayne, Pennsylvania
office. To assist in its operations, DRI Operating employs contract pumpers in
the vicinity of the specific wells to perform normal well tending and field
maintenance duties.
The Company, through its subsidiary, Deven, has an economic
interest in an additional thirty-eight (38) non-operated Upper Devonian wells
located in various counties of Western Pennsylvania.
The Company's acquisition and development philosophy in the
Appalachian Basis is to acquire producing properties with exploitation
potential, either individually or in conjunction with its managed partnerships.
In addition to increasing its reserves through direct property acquisitions, the
Company actively seeks out and evaluates the potential acquisition of other oil
and gas companies and partnerships.
Alabama:
Black Warrior Basin
The Company, through its interest in Deerlick Creek Partners,
L.P. (See Managements Discussion and Analysis-Partnerships) has a non-operating
50% working interest in 54 coal bed methane wells in Tuscaloosa County, Alabama.
The Deerlick Creek properties were partially developed at the time of their
acquisition . Since its acquisition, through its Partnership, the Company has
participated in the drilling of ten (10) additional wells and in numerous
workovers to enhance gas production from the field. Consideration is now being
given to the drilling of additional wells to more fully develop the field.
The Deerlick Creek project encompasses approximately 3,026
acres and produces multiple coal seams ranging in depth from 1,000 to 3,000
feet. Gas produced from the project is sold under a long term contract with
Southern
<PAGE>
Natural Gas. Under this contract the price received for the natural gas produced
is tied, on a heating value basis, to that of No. 2 fuel oil F.O.B. New York.
New Mexico:
San Juan Basin
The Company, through its interest in Developing Energy
Partners I, L.P. (See Management Discussion and Analysis - Partnership) has a
non-operated 10% Working interest in two (2) producing and two (2) pressure
observation wells located in San Juan Basin in Northwestern New Mexico. These
wells produce from the Mancos formation interval which occurs at depths ranging
from 6,000 to 7,000 feet. The existing Mancos production is considered marginal
but is being maintained to hold acreage while a deeper Entrada prospect is
developed for sale to third parties.
Operating Hazards and Uninsured Risks:
The Company's oil and gas operations are subject to all of the
risks normally incident to the exploration for and production of oil and gas,
including mechanical failures, blow-outs, cratering, pollution and fires, each
of which could result in damage to or destruction of oil and gas wells or
production facilities or damage to persons and property. While the Company
maintains a $4,000,000 all risks liability policy in amounts which it believes
are adequate, the insurance may not cover all potential operational risks. The
occurrence of a significant event not fully insured against could have a
material adverse effect the Company's financial position. (See, for example
"Properties -Operations" and "Litigation".)
Title to Oil and Gas Properties:
The Company's interests in producing and non-producing
acreage are in the form of direct or indirect interests in leases as well as
reversionary interests through its sponsored partnerships. Each of its
properties are subject to customary royalty interests in amounts prevailing in
the area in which the oil and gas lease is taken, overriding royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens and mineral encumbrances and restrictions. The Company believes
that none of these burdens materially interferes with the use of such
properties in the operation of the Company's business or the profitability of
the Company's investment therein.
As is customary in the oil and gas industry, only a
preliminary investigation of title is made at the time of acquisition of
undeveloped properties. Detailed investigations are generally made, including,
in most cases, receiving a title opinion of local counsel, prior to the
commencement of drilling operations. A thorough examination of title was
performed with respect to substantially all of the Company's producing
properties. Also, prior to the acquisition of properties, the Company will and
has received an opinion of title, satisfactory to counsel to the Company, on a
majority (in value) of the assets to be acquired. The Company believes that it
has defensible title to substantially all of its properties.
Mineral Interests:
Mining Claims
The Company owns 109 mining claims totaling approximately
5,500 acres in the Red Mountain area, located at the headwaters of the Klondike
River, Dawson and Mayo Mining districts of the Yukon Territory, Canada. Recent
surface surveys on the Company's acreage and positive geochemical and
geophysical work performed on the adjoining acreage block indicate the possible
presence of significant quantities of precious minerals, including gold, in the
area of the Company's holdings. The Company has fulfilled all governmental
requirement to maintain its claims, therefore, the Company believing that it
holds good title to its Yukon mining claims.
The Company also holds a 25% interest in a mining company,
Mineral La Yesca, in Mexico. Mineral La Yesca's main holding was a silver mine
in the mountains of the La Yesca in the southern State of Nayarit, Mexico. Due
to the long-term depression of silver prices, Mineral La Yesca abandoned its
mining operations and subsequently
<PAGE>
relinquished its interest in the mining claims. Mineral La Yesca is now acting
as a shell corporation which is investigating the economic viability of other
Mexican mining prospects.
Timber Interests:
Tropical Hardwood Concession
The Company, through its wholly-owned subsidiary, Sustainable
Forest Industries, Inc., a Delaware company, owns two (2) timber concessions in
Guyana, South America. These concessions encompass approximately 6,000 acres of
tropical hardwoods. Sustainable intends to harvest and market its wood through
strategic alliances with its partners in Guyana and the United States.
Sustainable has received its U.S. import certificate for tropical wood in July,
1997, and has applied for its marketing trademark, HeartDex. Due to the early
development stage of Sustainable, the Company provides accounting,
administrative and financial services to support its operations.
Sustainable has fulfilled all governmental requirements to
maintain its holdings and therefore, the Company believes that it has good title
to its two (2) hardwood timber concessions in Guyana.
Employees:
At September 30, 1997, the Company had six full-time
employees. The Company employs the services of consulting geologists and
engineers as well as those of a nonaffiliated operating company which conducts
the actual oil field operations for the Company in Texas. The Company manages
the operation of its wells in the State of West Virginia and the Commonwealth of
Pennsylvania from its Wayne, Pennsylvania, office utilizing contract pumpers to
perform actual field operations. The Company's non-operated wells are monitored
primarily out of the Company's Wayne, Pennsylvania, office. The Company's mining
claims are monitored by its Los Angeles, California office. The Company
considers its relations with its consultants to be satisfactory. (See, "Business
and Properties - Exploration Practices and Policies".)
Competition:
The Company encounters strong competition from other
independent operators and from major oil companies in acquiring properties
suitable for development, and in contracting for drilling equipment. Many of
these competitors have financial resources and staffs substantially larger than
those available to the Company. The availability of a ready market for oil and
gas discovered by the Company depends on numerous factors beyond its control,
including the extent of production and imports of oil and gas, the demand for
its products from the United States and Canada, the proximity and capacity of
natural gas pipelines and the effect of state and federal regulations. (See,
"Properties Marketing of Productions".)
Competition in the acquisition of oil and gas prospects and
properties in the area of the Company's operations in Texas, Alabama, West
Virginia, Pennsylvania and New Mexico varies according to the prices for oil and
gas. During periods of higher prices, competition for viable prospects and
properties. The Company's ability to discover and/or acquire reserves in the
future depends on various factors which involve its ability to select, acquire
and pay for prospects suitable for exploration and development.
The Company competes with other oil and gas concerns and other
investment companies, whether or not related to the petroleum industry in
raising capital. The Company's ability to access the capital markets is largely
dependent on the success of its oil and gas exploration activities and the
economic environment in which it operates.
Government Regulations:
In most, if not all, areas where the Company conducts
activities, there are statutory provisions regulating oil and gas operations.
These provisions allow administrative agencies to promulgate regulations in
connection with the development, production and sale of oil and gas, and to
establish allowable rates of production.
<PAGE>
The Company's activities also are subject to laws and
regulations relating to environmental quality and pollution control. Although
the cost of compliance with such legislation and regulations has not been
material to date, such laws and regulations may substantially increase the cost
of carrying on these activities and may prevent or delay the commencement or
continuance of a given operation. The Company believes that such legislation and
regulations have had no material adverse effect on its present method of
operations. In the future, federal, state and local environmental controls may
require the Company to make significant expenditures, but neither the
probability nor the magnitude of the expenditures, if any, can be predicted.
The discharge of oil, gas or the by-products of drilling,
reworking and producing oil and gas into the air, soil or water may give rise to
liabilities for the restoration of the environment and to third parties. A
variety of federal and state laws and regulations govern the environmental
aspects of the production, transportation and processing of hydrocarbons and
may, in addition to other laws and regulations, imposed liability in the event
of a discharge or seepage (whether or not accidental). Compliance with such laws
and regulations may increase the cost of the exploration, production and
development of oil and gas reserves although the Company does not currently
anticipate that compliance will have a material adverse effect on the ability of
the Company to continue in the exploration, development or production of its
existing reserves and the development and/or acquisition of new reserves.
The Company does not believe that the environmental risks are
materially different from those of comparable companies in the oil and gas
industry. The Company believes that it is in substantial compliance with all
existing rules and regulations. No assurance can be given, however, that
environmental laws will not, in the future, result in more onerous regulations
causing an market increase in the cost of production, development and
exploration or otherwise adversely affect the Company's operations or financial
ability to maintain its existing reserves. Although the Company maintains
insurance coverage for certain liabilities, to include insurance to cover
specific environmental risks, such as seepage or discharge, such environmental
risks are not fully insurable.
Transportation and Marketing:
The sale and transportation of natural gas in the interstate
market is regulated by the Federal Energy Regulatory Commission ("FERC") under
the Natural Gas Policy Act of 1983 ("NGPA") and the Natural Gas Act of 1938
("NGA"). The Natural Gas Wellhead Decontrol Act of 1989 eliminated all gas price
regulation effective January 1, 1993. FERC has recently proposed several rules
or "order" concerning transportation and marketing of natural gas. The impact of
these proposed rules and/orders cannot be predicted. Order 636, pertaining to
the restructuring of the interstate transportation of natural gas was finalized
in 1992. Pipelines are now required to provide producers service on a
non-discriminatory "open access" basis, although there are provisions which
allow certain categories of gas to gain preference over others. The Company
believes that as a result of Order 636, competition has increased in the
marketplace, resulting in a greater market volatility in the price and demand
for natural gas. Currently the majority of the Company's gas is sold to
interstate carriers. (Dependence on a Few Major Customers: See, "Properties -
Marketing of Production".)
Pipelines
In connection with the completion and production of its oil
and gas properties, the Company has either constructed or participated in the
construction of gas-gathering lines. These gathering lines carry natural gas
from the wellhead to gas transmission systems through which the Company's gas is
being transported to the purchaser. The Company is not a regulated interstate
carrier of natural gas and as such it is not a regulated pipeline under the NGPA
of 1983 or the NGA. For such gas gathering services the Company may receive an
allowance from the first purchaser of its gas.
Partnerships
Deven Resources, Inc. ("Deven") has sponsored two partnerships,
Deerlick Creek Partners I, L.P. formed on August 30, 1991 and Developing
Energy Partners I, L.P. formed on October 1, 1993. Deerlick Creek and
Developing Energy have conducted business as separate limited partnerships
with the Company's wholly owned subsidiary, Deven ("Deven"), acting as
managing general partner. As managing general partner. Deven is subject to
full liability for the obligations of the partnerships although it is entitled
to indemnification by each program to the extent of the assets of the that
partnership. Since "drilling programs" constitute a "security" under the
Securities Act of 1933, Deven is also subject to potential liability for
failure to compete with applicable federal and state securities laws and
regulations.
<PAGE>
Each of the drilling programs is structured on a "payout basis" with
Deven receiving a 1% interest in all profits and losses before payout and an
increased percentage of the profits and losses of the partnership after payout.
Deerlick Creek Partners I, L.P.
Deerlick's only asset is undivided interests in 54 coal bed methane
wells in Tuscaloosa County, Alabama. Before payout, as managing general partner
the Company's subsidiary, Deven is entitled to receive 1% of all profits and
losses of the partnership while the limited partners are entitled to receive
99%. After-payout, the managing general partner is entitled to receive 20% of
all profits and loses while the limited partners receive 80%. As a result of a
settlement between the founders of Deven in 1995, 40% of Deven's entitlement as
the managing general partner of Deerlick has been assigned to a third party. The
Company believes that "payout" will occur in fiscal year 1998.
Developing Energy Partners I, L.P.:
Developing Energy Partners I, L.P. owns interests in a variety of
properties located in the States of West Virginia, New Mexico and the
Commonwealth of Pennsylvania (See Business-Properties). Under the structure of
the Developing Energy partnership agreement, payout occurs in two tiers. Until
the first tier payout, Deven receives only 1% of the profits and losses of the
partnership. After the first tier payout, Deven is entitle to receive 20% of the
profits and loses of the partnership while the limited partners receive 80%.
After the second tier payout, Deven is entitled to receive 40% of the profits
and losses of the partnership while the limited partners receive 60%. Deven
receives a management fee of $200,000 per annum for its services as general
partner. Commencing the fifth anniversary of the partnership, the management fee
shall be the lesser of (I) 3% of the value of the assets held by the partnership
or (ii) $200,000.
<PAGE>
ITEM 2 PROPERTIES
Texas Operations
The Company holds approximately 7,225 gross (4,002 net) acres
in Burleson, Brazos, Austin, and Lee Counties, Texas. Of such amount,
approximately 5,808 gross (2,600 net) acres are classified as presently
developed, and 1,417 gross (1,402 net) acres are classified as proven
undeveloped. The Company owns interests varying from nine and six one-hundredths
percent (9.06%) to seventy-five percent (75.0%) net revenue interests in forty
wells which have been drilled on this acreage. Average gross production for
fiscal year 1997 was 225 barrels of oil and 3,260 Mcf per day.
The Company has identified a number of proposed drilling
locations on the leases identified above, of which nine such locations have been
classified as proven undeveloped by the Company's independent engineering
consultant. In addition, the Company owns seven (7) idle or marginal wells which
were completed in the Austin Chalk as vertical and which the Company believes
are suitable for redrilling as horizontal wells. Additionally, the Company
believes that some of its currently producing horizontal wells can be
re-completed in additional zones.
Except for ten (10) horizontal wells, all of the Company's
wells have been drilled and completed in a traditional vertical manner. During
Fiscal 1997, the Company participated in the drilling and completion of one
additional horizontal lateral in Burleson County. As a result of the closing of
the Heller Financing the Company has identified a total of twenty-five (25)
horizontal drilling prospects and seven (7) wells for rework operation to be
completed over the next two (2) years. The specific timing of these wells is
contingent on rig availability and the ongoing success of the project.
Prior to the Heller Financing (See, "Business - Heller
Financing"), the Company historically financed its exploration activities by
permitting third parties to pay 100% of the costs of drilling and completing a
well in exchange for 75% of the working interest. During the reworking of the
Company's Austin Chalk properties, the financing for these operations will be
provided from both the Company's own revenues and the Heller Financing (See
Managements Discussion and Analysis- Heller Financing), although the Company
does intend to continue its policy of conducting drilling operations on a
Turnkey basis or fixed costs basis for third party working interests in these
wells. If the well's costs of the operation is less than the fixed cost, the
Company profits, and if the operations costs exceeds the Turnkey cost the
Company suffers a loss. Generally, the Company has conducted its operations for
less than the Turnkey costs and has recorded a profit.
In August 1997, the Company commenced a two year
re-development program for its Austin Chalk properties, estimated to cost
approximately $15,000,000. (See, "Managements Discussion and Analysis - Heller
Financing").
The Company's planned Austin Chalk re-development program is
designed in two phases. The initial phase called for the restimulation of seven
(7) vertical chalk wells to enhance current production rates and ultimately
hydrocarbon recovery levels. The field work on these seven (7) wells has been
completed and the wells have now been put back on-line. Under the second phase
of the program, as many as twenty-five (25) horizontal laterals are scheduled to
be drilled over the next two (2) years. The drilling phase of the program is
further divided into three (3) segments based on the specific operations. One
segment calls for the drilling of a second lateral in eight (8) existing
horizonal wells. These drilling operations are designed to target potentially
recoverable reserves resulting from the vertical stratification recently
identified within the Austin Chalk. A second segment targets the conversion of
up to eight (8) existing vertical Chalk wells to horizontal wells. The third
portion of these planned drilling phase calls for the drilling of nine (9) new
"grass roots" horizontal wells on the Company's acreage block. The primary
objective of both the vertical well conversions and the new wells is to tap
incremental reserves by intersecting multiple natural fractured systems found
within the various Chalk intervals.
Appalachian Operations
The Company, either individually or through its sponsored
partnerships, holds 41,285 gross (21,689 net) acres in the counties of Harrison,
Logan, McDowell, Pleasant, Randolp, and Tucker, West Virginia and Armstrong,
Fayette, Clearfield, Somerset, Indiana, and Westmoreland, Pennsylvania. 11,687
acres (5,991 net) are classified as presently developed, and 29,598 acres
(15,697 net) are classified as undeveloped. The Company, either individually
<PAGE>
or through its sponsored partnerships, holds working interests varying from 20%
to 100% and net revenues interests of 15.8% to 87.4%. The Company also has a 10%
profits participation interest in 38 wells.
The current principal area for development within the
Appalachian area is in the Blacklick Creek coal bed methane project in which
Developing Energy Partners I, L.P. holds a 40% working interest. It is presently
planned that up to 20 wells will be drilled during the fiscal year 1998 with a
total of up to 40 wells to be drilled over the next 4 years. The Company owns
undivided interests in gathering systems in each of its producing areas for the
transportation of its gas to major transmission lines. All of the development of
the Blacklick Creek coal bed methane field will be done through the use of
partnership funds primarily generated from production from partnership
properties.
Alabama Operations
The Company, through Deelick Creek Partners I, L.P., holds
3,026 gross (1,513 net) acres in Tuscalosa County, Alabama. Approximately 1,936
acres (968 net) are classified as proved producing and 1,090 acres (545 net) are
classified as proved non-producing. Deerlick holds a 50% working interest and
net revenue interests of 36% in the project. The Deerlick Creek project produces
coal bed methane gas from multiple coal seams ranging in depth from 1,000 feet
to 3,000 feet.
The current development plan for the project calls for the
reworking of existing wells and the drilling of up to ten (10) new project wells
in fiscal year 1998. The Company is not the operator of this property and has
gone non-consent on the drilling of infield wells which the Company believes are
not prudent in light of surrounding production. All of the development of the
Deerlick coalbed methane field will be accomplished with partnership funds
primarily generated from production from the Deerlick Creek methane field.
New Mexico Operation
The Company, through Developing Energy Partners I, L.P., holds
37,793 gross acres (2,560 net) in the Jicarilla Prospect located in Rio Arriba
County, New Mexico. 3,779 acres (256 net) are classified as proved producing
while 35,233 acres (3,523 net) are classified as undeveloped. Developing Energy
has a 10% working interest and a 7.5% net revenue interest in the project.
The Company is not the operator of this prospect. At present
there is no future drilling planned.
Marketing of Production
The Company does not refine any petroleum products. All of its
production is sold to a variety of customers, which include pipelines, oil and
gas gathering firms and other purchasers, pursuant to written agreements.
Generally, sales of oil and gas are made at prevailing market prices. (See,
"Business - Effect of Failing Prices".) Typically, oil purchase agreements are
of short duration, and provide for market sensitive prices. The Company is a
party to two long term gas sales contracts, which may be terminated on short
notice if a price adjustment is unacceptable to the Company. (See, "Gas Sales"
below.) The Company is not obligated to provide a fixed and determinable
quantity of oil and gas in the future under existing contracts or agreements.
Under the terms of the Heller Financing, the Company is
required to purchase "hedges" to guarantee receipt of a specified price for the
gas sales from those properties developed with the Heller Financing.
The availability of a market for oil and gas produced from the
properties of the Company and prices received therefor are dependent upon
numerous factors, most of which are beyond the control of the Company. Such
factors include the level of domestic production, the availability of imported
oil and gas, actions taken by foreign producing nations, the availability of
distribution and transportation facilities and capacity thereon, the
availability and price of fuels competitive with oil and gas, demand for oil and
gas and refined products and governmental regulation and taxation. Such factors
make it impracticable to predict with any degree of certainty future demand for
or prices of oil or gas produced by the Company.
<PAGE>
Production of oil and gas is generally not considered to be of
a seasonal nature, although severe weather conditions temporarily can curtail or
preclude producing activities. Historically, the demand for natural gas
decreases during the summer months and increases during winter months.
The following table identifies customers of the Company which
purchased during the fiscal year ended September 30, 1997 in excess of ten
percent (10) of the oil or gas produced by the Company.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Percentage of
Production Area Name of Location Production Purchased
of Operation of Purchaser By State
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Texas Oil Production Pride Pipeline Company
Abilene, Texas 100.0
- -------------------------------------------------------------------------------------------------------------------------
Gas Production Aquila Southwest Pipeline Corp.*
San Antonio, Texas 43.1
- -------------------------------------------------------------------------------------------------------------------------
Austin Chalk Natural Gas Marketing Services**
Houston, Texas 44.0
- -------------------------------------------------------------------------------------------------------------------------
New Brenen Corp.
Houston, Texas 12.9
- -------------------------------------------------------------------------------------------------------------------------
Pennsylvania Gas Production *** Peoples Natural Gas (PNG)
Pittsburgh, Pennsylvania 14.7
- -------------------------------------------------------------------------------------------------------------------------
Consolidated Natural Gas (CNG)
Pittsburgh, Pennsylvania 49.7
- -------------------------------------------------------------------------------------------------------------------------
Petro Bank
Denver, Colorado 27.4
- -------------------------------------------------------------------------------------------------------------------------
West Virginia Gas Production *** Equitable Gas Company
Pittsburgh, Pennsylvania 47.2
- -------------------------------------------------------------------------------------------------------------------------
Columbia Gas System
51.5
- -------------------------------------------------------------------------------------------------------------------------
Alabama Gas Production Southern Natural Gas Co. ****
Birmingham, Alabama 100.0
- -------------------------------------------------------------------------------------------------------------------------
Oil PrGiantiRefining Co.
Scott, Arizona 100.0
- -------------------------------------------------------------------------------------------------------------------------
New Mexico Gas Production Wasatch Energy
Bountiful, Utah 100.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* A portion of the Company's production of gas from its wells in the
Giddings Field (presently 20 wells) is sold to Aquila Southwest
Pipeline Corporation ("Aquila"), pursuant to a long term contract
expiring January 31, 2010, which covers a number of the Company's Texas
leases. Subject to various conditions, Aquila has agreed to buy all of
the Company's gas produced from the Giddings Field. The Company
receives eighty percent (80%) of the weighted average monthly sales
price for liquid products extracted from gas delivered and eighty
percent (80%) of the resale prices for dry gas. Prices received by the
Company are subject to deductions for taxes, compression and similar
charges.
** Gas production from the remaining wells in the Giddings Field is sold
under a contract ending in April, 2000, at a base price of $2.00 per
Mmbtu on a month-to-month contract to Austin Chalk Natural Gas
Marketing Services. The effect of these contracts is that gas is sold
at a market base price, which may be adjusted by the purchaser;
<PAGE>
if the Company disagrees with a price adjustment, the sales contract
may be terminated by the Company or the purchaser.
*** Gas production from the Company's Appalachian Basin property are sold
under contracts which call for floating index based gas pricing.
Typically the general term. these contracts are set for periods of one
year and contain price "lock-in" options for the Company should local
gas market conditions warrant.
**** Gas production from the Company's Black Warrior Basin properties are
sold under a long term supply contract. The pricing mechanism under
this contract ties the price of gas to that on No. 2 fuel oil FOB New
York City through September 1999. After that, the price received for
the gas delivered will be renegotiated and most likely be tied to a
floating index.
The Company does not believe that the loss of any one of these
customers would have a material adverse effect upon the Company's revenues,
since there are numerous purchasers of oil and gas in the areas in which the
Company operates.
Production:
The following table summarizes the Company's net oil and gas
production for the periods indicated, shown in Bbls and Mcf, and the weighed
average sales prices for the periods indicated. Since Deven was acquired at the
beginning of this current fiscal year and was treated as having been an asset
acquisition, there are no historical comparison for those properties.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Texas
Oil (Bbls) 15,471 17,637 18,126
Gas (Mcf) 138,456 205,983 184,223
Average Bbls/day 42 48 50
Average Mcf/day 379 564 505
Alabama
Gas (Mcf) 279,172 (*) (*)
Average Mcf/day 765 (*) (*)
Pennsylvania:
Gas (Mcf) 230,387 (*) (*)
Average Mcf/day 631 (*) (*)
West Virginia:
Gas (Mcf) 91,327 (*) (*)
Average Mcf/day 250 (*) (*)
New Mexico:
Oil (Bbls) 777 (*) (*)
Gas (Mcf) 10,286 (*) (*)
Average Bbls/day 2 (*) (*)
Average Mcf/day 28 (*) (*)
TOTALS:
Oil (Bbls) 16,248 17,637 18,126
Gas (Mcfs) 749,628 205,983 184,223
Average Bbls/day 42 48 50
Average Mcf/day 2,004 564 505
</TABLE>
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
<PAGE>
The following table summarizes for the period indicated the
average price per Bbl and average price per Mcf of natural gas and the average
production (lifting) costs per barrel of oil and per Mcf of gas produced. In
determining the price received by the Company and costs incurred, all expenses
of operation have been attributed to the working interests but revenues
attributed are solely of the Company's net revenue interests.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
--------------------------------------------------
6 MCFE = 1 Bbl. 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Texas
Average Sale Price Per Bbl. $21.70 $19.41 $17.15
Average Sale Price Per Mcf 2.84 2.64 2.30
Average Production Cost per
Gas Equivalent (MCFE) 0.64 0.47 1.05
Alabama
Average Sale Price per Mcf 2.66 (*) (*)
Average Production cost per
Gas Equivalent 1.11 (*) (*)
Pennsylvania
Average Sale Price per Mcf 2.48 (*) (*)
Average Production Cost per
Gas Equivalent 1.20 (*) (*)
West Virginia
Average Sale Price per McF 2.76 (*) (*)
Average Production Cost per (*) (*)
Gas Equivalent (MCFE) 0.91
New Mexico
Average Sale Price Per Bbl 20.76 (*) (*)
Average Sale Price per Mcf 1.97 (*) (*)
Average Production Cost Per (*) (*)
Gas Equivalent (MCFE) 0.91
Combined Properties
Average Sale Price Per Bbl 21.60 19.41 17.15
Average Sale Price Per Mcf 2.68 2.64 2.30
Average Production Cost per
Gas Equivalent (MDFE) 0.85 0.47 1.05
</TABLE>
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
For the purpose of determining "Gas Equivalent," Oil has been converted to gas
at the rate of 1 Barrel per 6 Mcf.
<PAGE>
Wells and Acreage:
The following tables set forth certain information as of
September 30, 1997:
<TABLE>
<CAPTION>
Gross Wells Net Wells
--------------------------------------- -----------------------------------------
Well Count 1997 1996 1995 1997 1996 1995
---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Texas 40 41 41 16.99 16.56 16.56
Pennsylvania 41 34 34 18.58 13.68 13.68
West Virginia 26 26 26 9.94 9.94 9.94
Alabama 54 54 54 27.00 27.00 27.00
New Mexico 4 12 14 0.40 1.20 1.4
Total 165 167 169 72.91 68.38 67.60
Gross Acres Net Acres
--------------------------------------- -----------------------------------------
Developed Acreage 1997 1996 1995 1997 1996 1995
----------------- ---- ---- ---- ---- ---- ----
Texas 5,808 5,728 6,438 2,600 2,219 2,075
Pennsylvania 7,440 7,230 7,230 4,540 4,456 4,456
West Virginia 4,247 4,247 4,247 1,451 1,451 1,451
Alabama 1,936 1,936 1,577 968 968 788
New Mexico 2,560 7,680 8,960 256 768 896
Total 21,991 26,821 28,452 9,815 9,862 9,666
Gross Acres Net Acres
--------------------------------------- -----------------------------------------
Undeveloped Acreage 1997 1996 1995 1997 1996 1995
------------------- ---- ---- ---- ---- ---- ----
Texas 1,417 1,417 1,417 1,402 734 1,073
Pennsylvania 26,543 26,753 26,753 14,745 14,829 14,829
West Virginia 3,055 3,055 3,055 952 952 952
Alabama 1,090 1,090 1,449 545 545 724
New Mexico 22,433 27,553 28,833 2,243 2,955 2,883
Total 54,538 59,868 61,507 19,887 19,815 20,461
</TABLE>
<PAGE>
Drilling Activity:
The following table shows the number of wells drilled by or on
behalf of the Company and the results thereof for the period indicted. Such
information should not be considered indicative of future performance of
prospects of the Company. There is no necessary correlation between the number
of producing wells, whether developmental, or exploratory, completed during any
period and the aggregate reserves or future net income generated therefrom.
<TABLE>
<CAPTION>
===================================================================================================================================
EXPLORATORY WELLS
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR DRILLED PRODUCERS DRY HOLES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
1996 ----- ---- -----
- -----------------------------------------------------------------------------------------------------------------------------------
1995 ----- ----- -----
- -----------------------------------------------------------------------------------------------------------------------------------
DEVELOPMENT WELLS
- -----------------------------------------------------------------------------------------------------------------------------------
1997 7 0 7
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1 0 2
===================================================================================================================================
</TABLE>
As of September 30, 1997, the Company was actively involved
in the restimulation of seven (7) existing vertical Austin Chalk wells. The
Company also filed a permit application for the drilling of horizontal
laterals in three (3) existing horizontal chalk wells operated by the Company.
This work is part of the Company's redevelopment program on its chalk acreage
in Texas funded under the Company's financing agreement with Heller Financial,
Inc. In addition to the Texas development work, the Company, through its
Deerlick Creek Partners I, L.P. authorized re-work operations on five (5) coal
bed methane wells located in Alabama. In the Appalachian Basin operations, the
Company, through its Developing Energy Partners I, L.P., also authorized
participation in the drilling of eight (8) new wells to further develop its
leasehold portion in the Blacklick Creek coal bed methane project in central
Pennsylvania. ("Business" and "Properties - Operations".)
Proved Reserves:
The Company causes to be prepared an annual estimate of oil
and gas reserves. The Company has not filed reserves estimates with any United
States authority or agency, other than estimates previously filed with the
Commission.
The following table sets forth the proved reserves of the
Company as of September 30, 1997, September 30, 1996 and September 30, 1995.
Estimated quantities for Texas production for the year 1995 were prepared by
management of the Company using the following procedure. The Company adopted the
quantities for the Texas properties as of September 30, 1994 as accurate and
reduced such quantities of proved reserves for production during Fiscal 1995.
The Company then verified and adjusted its reserves for performance based on
decline curves for each well. The result was employed as an estimate of
quantities of proved reserves as of September 30, 1995. While there may be some
deficiencies in the procedure adopted by the Company, the Company believes that
the result obtained by the application of such procedure is consistent with that
which would have been obtained by employing an independent engineer to estimate
its reserves at year end. The Company adopted this method since production
levels and declines were consistent with prior periods and prices of oil and gas
were not materially different than in earlier periods.
The figures as of September 30, 1996, were taken from the
reserve report dated October 1, 1996, prepared by R. A. Lenser & Associates,
Inc., Independent Petroleum Engineers as of September 30, 1996. The figures as
of September 30, 1997 were taken from the reserve report dated October 1, 1997,
prepared by R. A. Lenser
<PAGE>
and Associates, independent petroleum engineers, as of September 30, 1997 for
the Texas properties, and from the reserve reports prepared by Huntley and
Huntley, Independent Petroleum Engineers, dated as of November 1996 for the
Alabama properties, September 30, 1996 for the Blacklick coal bed methane
property, and September 30, 1997 for the remaining Appalachian properties in
Pennsylvania and West Virginia. [ The Company extrapolated the values for the
properties by subtracting actual production from the reserve report through
September 30, 1997 and then adjusted its reserves for performance based on
decline curves for each well.]
<TABLE>
<CAPTION>
Year Ended Reserves
September 30, 1997
-------------------------------------------------------
Proved Developed Reserves 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
C X C (Bbls)
Texas 128,029 112,963 131,793
Pennsylvania ----- (*) (*)
West Virginia ----- (*) (*)
Alabama ----- (*) (*)
New Mexico 777 (*) (*)
Total 128,806 112,963 131,793
Gas (MCF)
Texas 463,000 750,537 1,633,612
Pennsylvania 1,500,499 (*) (*)
West Virginia 909,013 (*) (*)
Alabama 1,318,395 (*) (*)
New Mexico 10,286 (*) (*)
Total 4,201,193 750,537 1,633,612
</TABLE>
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
<PAGE>
<TABLE>
<CAPTION>
Year End Reserves
September 30, 1997
----------------------------------------------------------
Proved, Undeveloped Reserves 1997 1996 1995
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
C X C (Bbls)
Texas 1,276,028 850,605 693,420
Pennsylvania ----- (*) (*)
West Virginia ----- (*) (*)
Alabama 1,214,417 (*) (*)
New Mexico ---- (*) (*)
Total 1,276,028 850,605 693,420
Gas (Mcf)
Texas 11,482,000 7,989,223 6,403,034
Pennsylvania 1,517,536 (*) (*)
West Virginia ----- (*) (*)
Alabama 791,800 (*) (*)
New Mexico ----- (*) (*)
Totals 13,791,336 7,989,223 6,403,034
</TABLE>
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
All of the above stated reserves are located on-shore within
the United States.
Estimated Future Net Revenues and Present Worth:
Estimated future net revenues of the Company's net oil and gas
reserves at the date indicated and the present worth thereof employing a ten
percent (10%) discount factor is set forth in the following tabulation:
<TABLE>
<CAPTION>
Future Net Revenues
September 30 1997 1996 1995
------------ ---- ---- ----
<S> <C> <C> <C>
Proved Oil and Gas Reserves $35,857,908 $27,010,449 $18,512,310
Proved Developed Oil and Gas Reserves $ 5,616,679 $ 2,618,571 $ 1,545,735
Present Worth
September 30 1997 1996 1995
------------ ---- ---- ----
Proved Oil and Gas Reserves $22,479,971 $17,854,662 $13,402,604
Proved Developed Oil and Gas Reserves $ 3,678,884 $ 2,038,260 $ 1,324,567
</TABLE>
<PAGE>
The present value of estimated future net revenues set forth
above is computed using the estimated future net revenues and a discount factor
of ten percent (10%) over the projected life of each property. (See,
"Consolidated Financial Statements - Supplemental Financial Information".)
Future net revenues and present worth values for the Texas
properties as of September 30, 1995 and September 30, 1996 were computed using
crude oil prices of $17.00 and $21.00 per barrel unescalated respectively, while
the price of $20.17 per barrel unescalated was used in 1997 calculations. Gas
prices of $2.50 per Mcf unescalated was used as of September 30, 1995, $2.50 per
Mcf unescalated was used as of September 30, 1996, and $2.84 per Mcf u-escalated
was used as of September 30, 1997.
Future net revenues and present worth values for the Alabama
properties as of September 30, 1997 were computed using a gas price of $2.38 per
Mcf unescalated. Estimates of proved reserves and the present value of future
net revenues for Alabama and Pennsylvania at September 30, 1997 were prepared by
Huntley & Huntley, Independent Petroleum Engineers. Proved reserves and future
net revenues were computed applying prices of oil and gas in effect as of the
date of each estimate (with consideration of price changes only to the extent
provided by contractual arrangements or law) to estimated future production of
proved oil and gas reserves and then deducting estimated future expenditures
(based on current costs and excluding income taxes) to be incurred in producing
and developing the proved reserves. If the proved reserves and future net
revenues had been computed using oil and gas prices currently in effect, the
results obtained would have been materially different than those shown above.
Future prices to be received from such production and future production costs
may vary, perhaps significantly, from the prices and costs assumed for purposes
of these estimates. Present value of future net revenues were calculated by
discounting the future net revenues at the rate of ten percent (10%) per year
over the expected period of realization. The engineering estimates do not
include the cost of abandoning wells at the end of their productive lives, since
the Company believes that the salvage value of equipment will approximate the
cost of abandonment. The Company believes that the cost (net of estimated
salvage) of Company's wells should range from $2,000 to $10,000 per well for a
one hundred percent (100%) working interest depending upon depth and locale. The
Company can either bear the cost for the plug and abandonment of a well, the
cost of which can usually be covered in whole or material part from the salvage
from the equipment and tubing from the well or the Company can, as it has done
in the past, sell the well for salvage to a third party who then bears and
assumes all responsibility for the plug and abandonment of the well to include
compliance with all state and other regulatory obligations regarding a well
abandonment.
Petroleum engineering is not an exact science. Information
relating to the Company's oil and gas reserves is based upon engineering
estimates. Estimates of economically recoverable oil and gas reserves and of the
future net revenues therefrom are based upon a number of variable factors and
assumptions, such as historical production from the subject properties compared
with production from other producing properties, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, severance and excise taxes, development
costs, work-over and remedial costs, all of which may in fact vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable reserves of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company emphasizes that the actual production, revenues, severance and
excise taxes, development expenditures and operating expenditures with respect
to its reserves will likely vary from such estimates, and such variances may be
material.
The present values shown above should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements of the
Securities and Exchange Commission ("Commission"), the estimated discounted
future net revenues from proved reserves are based, generally, on prices and
costs as of the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net revenues also will be affected
by factors such as actual production, supply and demand for oil and gas,
curtailments or increases in consumption by gas purchasers, changes in
governmental regulations or taxation, the impact of inflation on costs, general
and administrative costs and interest expense. The timing of actual future net
revenues from proved reserves, and thus their actual present value, will be
affected by the timing of the incurrence of expenses in connection with
development of oil and gas properties. In addition, the ten percent (10%)
discount factor, which is required by the Commission to be used to calculate
discounted
<PAGE>
future net revenues for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the oil and gas industry. Discounted future net
revenues, no matter what discount rate is used are materially affected by
assumptions as to the timing of future production and future expenses which may
and often do prove to be inaccurate. (See "Business - Effect of Falling
Prices".)
Reserves Reported To Other Agencies:
There were no estimates or reserve reports of the Company's
proved domestic net oil or gas reserves filed with any governmental authority or
agency, other than the Commission, during the years ended September 30, 1995,
September 30, 1996 or September 30, 1997.
Delivery Commitment:
The Company is not obligated to provide a fixed and
determinable quantity of oil and gas in the future under existing contracts or
agreements.
Mineral Properties:
Minera La Yesca Ownership Interest:
The Company owns twenty-five percent (25%) of the issued
shares of Minera La Yesca ("Yesca"), a Mexican mining corporation which
presently has no assets. Yesca previously owned the Pinabete Silver Mine in the
State of Nayarit, Mexico. The Company has no plans to invest or loan further
funds to Yesca.
Yukon Gold Exploration:
In February 1995, the Company acquired from Messrs. Amir and
Erlich 109 mining claims totaling approximately 5500 acres in the Red Mountain
area, located at the headwaters of the Klondike River, Dawson and Mayo mining
districts of the Yukon Territory, Canada. The Company paid Messrs. Amir and
Erlich $15,487 which was their cost of acquiring the claims. The claims adjoin
properties owned by Regent Ventures Ltd., a small non-affiliated Canadian
company which has been conducting exploration work on its holdings for the last
two years. During the period, Regent conducted geochemical and geophysical
surveys as well as trenching and corehole drilling. Regent reported that during
the period, it had drilled 27 corehole and intersected significant gold vanes in
11 of such holes. Assays of core samples confirmed values ranging from a low of
0.020 oz/ton to a high of 0.810 oz/ton of gold, at depths of 110 to 600 feet.
During Fiscal 1997, the Company did not conduct any significant work on its
claims other than work required to maintain the claims in good standing.
Recent surface work on the Company's acreage showed the same
high values on silt soil samples as those obtained on the Regent acreage, which,
coupled with the geochemical and geophysical work done by Regent on the
adjoining acreage, indicate that the same high intensity structure extends into
and across the Company's acreage.
The Company has no present intention of mining its claims
independently and is currently seeking interest from third party partners.
Timber Rights:
Effective September 29, 1995, the Company acquired all of the
outstanding shares of Sustainable Forest Industries ("Sustainable"), a privately
held Delaware Company. Sustainable owns the rights to two (2) tropical hardwood
concessions in Guyana, South America. The rights to the initial concession,
which encompasses 1,800 acres was acquired in September, 1995. The concession
was inventoried and assessed by an independent consultant, CESO International
Services, ("CIS") a Canadian government affiliated entity which provides
advisory services to developing countries. Based on this assessment, the
commercial quantity of merchantable logs is 25,497 units or approximately
14,233,200 board feet equivalents. the market value of the wood in rough cut
form,"is estimated at roughly $5,692,000. Sustainable acquired the second
hardwood concession in November, 1995 encompassing an additional 4,200 acres.
Based on the inventory and assessment of CIS, the commercial quantity of
merchantable logs
<PAGE>
available on that concession is 65,546 units, yielding approximately 33,671,300
board feet equivalents. The market value of the wood is "rough cut form" is
estimated at $12,671,000. The combined estimated appraisal value of the
hardwoods available on the Company's two Guyana timber concessions is roughly
$18,363,000.
In consideration for all of the capital stock of Sustainable,
the Company issued 1,500,000 shares of its Common Stock, and warrants to
purchase 500,000 shares of Common Stock at a price of $0.25 per share. The
warrants will expire on September 30, 2000. Under the Agreement, the Company has
the option to acquire additional hardwood timber rights in Guyana.
ITEM 3 LEGAL PROCEEDINGS
In April 1997, the company commenced an Adversary Action
styled Daleco Resources Corporation v. Reserve Production Inc., Liquidating
Trust and Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No.97-6036. The case was
commenced to enforce the Company's rights under that certain Asset Purchase
Agreement dated December 20, 1996 ("Asset Purchase Agreement") as approved by
the Bankruptcy Court on February 13, 1997. In the Adversary Action, the Company
alleged that the defendants' had failed to meet their conditions to Closing
under the Asset Purchase Agreement and were thus required to refund the
Company's $100,000 Earnest Money Deposit and pay for the reworking of the Jody
Well. Subsequent to the commencement of the Company's adversary action, a case
was commenced in the United States District Court for the Eastern District of
Texas, Tyler Division, styled Reserve Production Liquidating Trust v. Daleco
Resources Corporation, Westlands Resources Corporation, David F. Lincoln, Gary
J. Novinskie and C. Warren Trainor, C.A. No: 6:97 CV 705 ("District court
Action"). The District Court Action was in essence a counter claim against the
Company and three of its directors asserting matters which should have been
addressed in an answer to the Adversary Action. The Company filed a motion to
dismiss the District Court Action; however, prior to ruling on the Company's
Motion, the Adversary Action was resolved through Court mandated mediation.
Under the terms of the settlement, the Company's Earnest Money Deposit was
returned and the Reserve Production Inc., Liquidating Trust, Reserve Production
Liquidating Partnership, and Leonard Pipkin, Trustee, were required to resolve
all outstanding claims for the reworking of the Jody Well.
Triad Pipe & Steel, Inc. v. Westlands Resources Corporation
and Daleco Resources, Inc., In The District Court of Harris County, Texas, Case
No. 97-44587. Triad Pipe & Steel, Inc. ("Triad") supplied 2-3/8th inch tubing
for the reworking of the Jody Well. Triad commenced its original suit on or
about August 25, 1997 ("Original Complaint") prior to the Settlement Agreement
and its amended complaint filed on or about November 18, 1997 ("Amended
Complaint"). Reserve Production, Inc., Liquidating Trust and Reserve Production
Liquidating Partnership (collectively the "Trust") have not yet satisfied the
obligations owed to Triad in the amount of $33,514.21. The Trust has requested
that the Company contribute funds towards the satisfaction of Triad's claim
which the Company has declined to do, as the obligation to settle all costs
attributable to the Jody Well is the responsibility of the Trust. The Company
has filed an answer to the Original Complaint and interrogatories filed by
Triad, noting that the sole and exclusive responsibility to pay Triad's claim
under the Asset Purchase Agreement belongs to the Trust.
Should the Trust fail to satisfy Triad's claim by the time the
answer to the Amended Complaint is due, the Company will name the Trust, each
partner of Reserve Production Liquidating Partnership as cross defendants.
Should the matter go to litigation, we believe that the Trust
will be liable for the obligation to Triad.
As a consequence of the problems encountered in drilling the
Tom Moore 3-H well on the Company's Texas Properties, the Company, in 1993,
commenced an action in the District Court of Harris County, Texas, styled
Westlands Resources Corporation v. Questor Drilling Corporation, et al. and
Westlands Resources Corporation v. System Pipe & Supply, Inc., et al. being
numbers 93-23884 and 93-038866, respectively, of said court.
<PAGE>
In December 1995, Daleco's subsidiary obtained favorable
settlements in the two lawsuits commenced by it a result of problems encountered
in the drilling of the Tom Moore 3-H well. These law suits resulted in a net
settlement of $769,780 to the Company, receipt of $630,000 in cash and the
elimination of accrued liabilities and claims amounting to $485,000
approximately. These funds were received in fiscal years 1995 and 1996.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the
fourth quarter of Fiscal year 1997.
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS
The Company's common stock trades on the NASDAQ. The symbol
for the Company's shares is DLOV. As of December 1, 1997 there were
approximately 1,247 record owners of the Company's common stock.
The range of the high and low bid prices, by quarters, for
fiscal years 1996 and 1997, commencing with the first quarter of the fiscal year
ended September 30, 1996 for the Company's common stock is as follows:
Fiscal Year End NASDAQ
September 30 (Bid Prices)
US $
High Low
1996 - 1st Qtr. 5/8 3/16
1996 - 2nd Qtr. 7/16 1/8
1996 - 3rd Qtr. 13/4 9/32
1996 - 4th Qtr. 1 1/2 5/8
1997 - 1st Qtr. 31/32 13/64
1997 - 2nd Qtr. 11/32 3/16
1997 - 3rd Qtr. 9/32 1/8
1997 - 4th Qtr. 15/32 3/16
These quotations represent prices between dealers, do not
include retail mark-ups, markdowns or commissions, and may not represent actual
transactions. The prices set forth above may not be representative of prices in
a more active market for the Company's common stock.
The Company has never paid any cash dividends. For the
foreseeable future, the Company intends to retain any earnings to finance the
growth of its business.
Sales Of Securities:
In Fiscal 1997, the Company conducted No sales of Securities.
During the third quarter of Fiscal year 1996, the Company
concluded a foreign placement of $1,000,000 of three (3) year 7% convertible
debentures. Under the terms of this offering dated May 31, 1996 the foregoing
investor was capable of converting up to fifty percent (50%) at any time from
and after the 40th day following May 31, 1996 and one hundred percent (100%) at
any time from and after the 60th day following May 31, 1996 into shares of
common stock of the Company at a conversion price per share equal to the lesser
of (I) the average closing bid price (as reported by NASDAQ) of the Company's
common stock for the five trading days immediately prior to the date of the
Debenture (which was $1.19 per share) (the "Closing Price") or, (ii) sixty-five
percent (65%) of the average closing bid price (as reported by NASDAQ) of the
Company's common stock for the five (5) trading days immediately prior to the
conversion date. The foreign investor also received a warrant for 100,000 shares
of common stock at an
<PAGE>
exercise price of $1.00 per share. The Warrant expires May 31, 2001, and
contains adjustments in the exercise price and the warrant shares upon the
occurrence of certain provisions.
As of September 30, 1996, $600,000 of the 7% convertible
debentures had been converted into 1,077,122 shares of common stock. As of March
31, 1997, all of the 7% convertible debentures had been converted into 1,982,918
shares of common stock.
The Company completed a second securities offering under
Regulation S on September 6-11, 1996. The second offering was for $1,310,000 of
8% convertible debentures due September 6, 1998. Under the terms of the
debentures, the debenture could be converted into common stock of the Company
commencing 45 days following the closing of the offering as to 50% of their
principal amount of the debenture plus accrued interest through the date of
conversion, and after the 65th day following the closing as to 100% of the
outstanding amount of the debenture plus accrued interest through the date of
conversion. The foreign investor is authorized to convert at a price equal to
75% of the average closing bid price of the Company's common stock for the five
(5) trading days immediately preceding the date of conversion. The foregoing
investor also received warrants for 50 of the face amount of the Debenture owned
by the foregoing investor on the date of exercise ("Exercise Amount"). The
Warrants are five (5) year warrants and permit the exercise of the warrants in
three tranches as follows: (I) Tranche one, equals to one-third of the Exercise
Amount on the closing date of the Regulation S offering ("Closing Date") (ii)
Tranche two, equals one-third of the Exercise Amount computed on the 75th day
after the Closing Date; and, (iii) Tranche three equals one-third of the
Exercise Amount on the 270th day after the Closing Date. The exercise price for
each Tranche is 115% of the average closing bid price of the Company's common
stock for the five (5) trading days immediately preceding the 45th, 75th and
270th day following the Closing Date. As of September 30, 1996, none of the
Debentures had been converted into shares of common stock. As of September 30,
1997, $1,250,000 of the Debentures had been converted into 7,650,150 shares of
common stock. No warrants have been exercised.
Warrants, under the same terms, amounts, and of like duration
were issued to the foreign investment advisor for each foreign investor
("Investor Advisor Warrants"). The Investor Advisor Warrants were tied to the
face amount of their foreign investor's debentures outstanding from time to
time. As of September 30, 1997 none of these warrants have been exercised.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General:
The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provides a safe harbor for forward-looking statements made by or
on behalf of the Company. All statements, other than statements of historical
facts, which address activities, event or developments that the Company expects
or anticipates will or may occur in the future, including such things as the
anticipated development of revenues, acquisition of additional properties or the
obtaining of capital, business strategy, development trends in the industry
segments in which the Company is active, expansion and growth of the Company's
business and operations and other such matters are forward-looking statements.
To take advantage of the safe harbor provisions provided by the Reform Act, the
Company is identifying certain factors that could cause actual results to differ
materially from those expressed in any forward-looking statements, whether oral
or written, made by or on behalf of the Company. Many of these factors have
previously been identified in filings or statements made by or on behalf of the
Company.
All phases of the Company's operations are subject to
influences outside of the Company's control. Any one, or a combination, of these
factors could materially affecting the results of the Company's operations.
These factors include: competitive pressures, inflation, trade restrictions,
interest rate fluctuations and other capital market conditions, weather, future
and options trading in, and the availability of natural resources and services
from other sources. Forward-looking statements are made by or on behalf of the
Company's knowledge of its business and the environment in which it operates,
but because of the factors listed above, as well as other environmental factors
over which the Company has no control, actual results may differ from those in
the forward-looking statements. Consequently, all of the forward-looking
statements made are qualified in their entirety by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized
<PAGE>
or, even if substantially realized, that they will have the expected effect on
the business and/or operations of the Company.
The fiscal year ended September 30, 1997, was marked by a
number of events which in the opinion of management will strengthen the Company
and ensure an aggressive continuous growth pattern.
The Company settled its two lawsuits arising out of the Asset
Purchase Agreement with Reserve Production, Inc., Liquidating Trust, Reserve
Production Liquidating Partnership and Leonard Pipkin, Trustee. Although the
Company did not acquire the assets of these entities as it had hoped, which
assets would have complemented its other Austin Chalk Properties in Texas, the
Company believed that the settlement was in the best interest of its
shareholders.
On May 23, 1997, the Company entered into a Loan Agreement
with Sonata Investment Company, Ltd. ("Sonata") pursuant to which Sonata made a
$250,000 loan ("Loan") to Sustainable Forest Industries, Inc. ("Sustainable")
for use in funding Sustainable's operations. The Loan is secured by
Sustainable's receivables and guaranteed by Daleco, Westlands and Deven
affiliates of Sustainable. Under the terms of the Loan Agreement, Sonata has the
right but not the obligation to make an additional $250,000 loan to Sustainable
upon Sustainable's request and assuming that Sustainable is in compliance with
the provisions of the Loan Agreement. Repayment of the Loan (and any subsequent
advance) is pursuant to a Profits Participation Agreement by which Sonata will
receive twenty-five percent (25%) of the Profits of Sustainable and after payout
of the Loan, twenty percent (20%) of the Profits. The funds obtained through the
Sonata loan have allowed Sustainable to commence harvesting and shipping test
samples of woods for the purpose of establishing a domestic market for South
American woods.
Sustainable has commenced negotiations with several processors
and distributors of both treated and untreated woods with the expectation that
orders will be placed to fill the need for spring construction, if not sooner.
In the Fourth Quarter, the Company entered into an arrangement
with Heller Financial, Inc. ("Heller") whereby Heller agreed to provide the
Company with up to $15,000,000 for use by the Company to rework its existing
horizontal wells in the Austin Chalk formation , recomplete its vertical wells
as horizontal wells and develop additional acreage held by the Company in the
immediate vicinity of its existing wells. Approximately $2,500,000 of the
$15,000,000 funding is set aside for potential future acquisitions. This funding
has and will provide the Company with the capital it needs to accelerate the
reworking, recompleting and development of its acreage in Texas more quickly and
more efficiently than would be the case if the Company was employing production
revenues. Under the terms of the Agreement with Heller, all of the properties of
Westlands Resources Corporation, which constituted all of the Company's Texas
properties located in the Austin Chalk trend, were transferred to a newly formed
Texas limited partnership, Tri-coastal Energy, LLP, the general partner of which
is a Delaware corporation, Tri-Coastal Energy, Inc. the sole shareholder of
which is Westlands Resources Corporation. Westlands Resources Corporation
continues to be the operator of the wells.
In the Fourth Quarter, the Company acquired a $300,000 loan
from PNC Bank, N.A. ("PNC Loan"). The PNC Loan was collateralized by the pledge
of the Company's net profits interest in 38 wells located in Armstrong and
Fayette Counties, Pennsylvania. The PNC Loan is a three year loan at an interest
rate of prime plus 3 1/2% per annum.
During Fiscal 1997, crude oil prices averaged $21.70 per
barrel for the Company's Texas crude production compared with an average of
$19.41 per barrel during the previous fiscal year. The average price the Company
received for its natural gas production increased to $2.84 per mcf compared with
$2.64 per mcf for the same period last year. The prices for the Company's
Alabama production averaged $2.66 per mcf, while the Pennsylvania production
averaged $2.48 per mcf. The average price for the West Virginia production was
$2.76 per mcf. With an average price of $1.97 per mcf and an average crude price
of $20.76 per barrel for the New Mexico production.
The Company intends to finance each acquisition made by it on
a transaction by transaction basis normally through customary financing sources,
such as banks or other lending institutions. The Company does not foresee
raising capital through the sale of equity capital during Fiscal 1998. The
Company would like to diversify its production base by moving into areas other
than the Austin Chalk of Texas and the Appalachian Basin of Pennsylvania.
<PAGE>
The Company does not record any significant deferred tax
provisions, since it has a substantial loss carry-forward. The Company considers
all of its operations to be fully integrated.
As indicated elsewhere in this report, the Company does not
include a provision for abandonment or restoration costs in its financial
statements, since historically the costs of abandonment of wells have been
offset by the salvage value of the related well. The Company believes that it
has not incurred any environmental remediation costs of a consequential nature
and makes no provisions therefore.
Fiscal 1997
As a result of the Company's agreement with Heller Financial,
Inc. the Company received, in the fourth quarter of Fiscal Year 1997, the
capital required to carry out its drilling and workover programs of its Texas
properties in order to maximize the potential of its properties. The results of
the initial reworking of the Company's horizontal wells has demonstrated
improved production. Since only a fraction of the workovers could be completed
prior to the end of the fiscal year, the true results of the workovers,
redrilling and development will not be realized until later in Fiscal Year 1998.
In spite of the capital constraints which existed for most of Fiscal Year 1997,
gross operating revenues amounted to $2,462,909 in Fiscal 1997 as compared with
$805,259 for Fiscal 1996, year while lease operating expense decreased by
$121,001.
The Sonata Loan has financed the initial cutting and delivery
of woods from Guyana. The Company is negotiating exclusive marketing, processing
and distribution rights with established regional and national wood treating and
wholesaling companies any one of which should allow Sustainable to become self
sufficient by the end of Fiscal Year 1998. Even without one of these contracts,
Sustainable believes that the demand for the Guyana woods compared with the
declining availability of domestic alternatives and the more costly alternatives
from Asia will provide a viable market for its products.
Administrative expenses amounted to $1,412,823 for Fiscal 1997
as compared to $810,495 for the prior Fiscal year.
In connection with the Company's timber operations in Guyana, the
Company incurred $249,499 in advances and accrued expenses. A majority of these
expenses, an increase of $57,358 over Fiscal 1997 were funded through the Sonata
Loan.
Liquidity and Capital Resources
Prior to the Heller Financing, the Company historically financed its
operations through cash flow from operating activities. Well drilling costs were
historically met by selling interests in a well to be drilled on a turnkey
or fixed costs basis to a few individuals having close ties to the Company and
its founders. Typically, the Company has recognized a profit in these turnkey
arrangements; since it has been able to contract for the drilling of the wells
on a costs basis less that the turnkey price. The Company has also been able to
secure a free or "carried interest" in these wells as part of the arrangement.
As a result of the Heller financing, the Company, while still conducting
drilling on a Turnkey Basis, has abandoned its former approach of funding
operations through internally generated cash flow, and accelerated the
reworking, recompleting and development of proved undeveloped reserves in an
effort to increase cash flow and increase the value of the Company's reserves.
While the Company still intends to use cash flow for operations where
appropriate, the Company believes that it was more prudent to accelerate
development to take advantage of the improved market for hydrocarbons and
realize the potential of the Company's reserves.
During the third quarter of Fiscal 1996, the Company sold $1,000,000 of
a 7% convertible debenture to foreign investors under a Registration "S"
Offshore Subscription Agreement. A second Registration "S" 8% convertible
debenture in the amount of $1,310,000 was successfully placed with foreign
investors during the fourth quarter. The net proceeds from both debentures were
used to re-drill a horizontal oil well and rework three other oil wells in the
Austin Chalk trend, as well as to retire trade accounts payable and meet other
corporate obligations. Funds when needed were made available to the Company by
its controlling shareholders, Messrs. Amir and Erlich in the form of unsecured
loans and deferral of payments for administration service charges. (See,
"Certain Relationships" and "Related Transactions".) At the end of Fiscal 1997,
the amount owed to such individuals was $349,590.
<PAGE>
An increase of $176,949 was recorded in depletion, depreciation and
amortization costs. The increase reflects the production increase in Fiscal
1997.
The Company believes that its relations with trade creditors are good
and foresees no immediate problems in deferring payments for a short time or
making other necessary arrangements to meet its obligations. The Company
continues to seek additional capital with which to continue the development of
its holdings as well as acquire producing oil and gas properties having a good
development potential. Management is considering both debt and equity additional
financing during Fiscal 1997, however there are no assurances that such efforts
will be successful.
Capital Expenditures
During Fiscal 1997, the Company either drilled or through its related
entities participated in the drilling of seven (7) new wells. The Company also
reworked seven (7) wells, the Company's share of which was $463,800.
Acquisitions:
On September 30, 1997, the Company acquired Haly Corporation ("Haly"),
a California corporation, for 3,000,000 shares of the Company's common stock. At
the time of its acquisition from Mr. Amir and Mr. Erlich, Haly's assets
consisted of 3,000,117 shares of the Company's common stock plus working
interests ranging from 1.75% to 33.3% in fourteen (14) wells. Thirteen (13) of
these wells are producing from the Austin Chalk formation of Texas while the
remaining well interest represents a small overriding royalty in a non-operated
well in California. This acquisition also eliminated amounts owed to Haly of
$364,931 less $100,000 in Haly bank debt assumed by the Company.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and schedules are included
herein.
Audited Financial Statements and Supplemental Financial Information
* Independent Auditors' Report or Audited Consolidated Financial
Statements
* Consolidated Balance Sheets
* Consolidated Statements of Loss
* Consolidated Statements of Deficit
* Consolidated Statements of Cash Flow
* Notes to Consolidated Financial Statements
* Auditors' Report on Supplemental Financial Information
* Schedule II - Amounts Receivable from Related Parties and Underwriters,
Promoters, and Employees Other Than Related Parties
* Schedule IV - Non-Current Indebtedness of and to Related Parties
* Schedule V - Property, Plant and Equipment
* Schedule VI - Accumulated Depreciation, Depletion and Amortization of
Property, Plant and Equipment
* Schedule IX - Short-Term Borrowings
* Schedule X - Supplementary Income Statement Information
<PAGE>
Other Supplemental Data
* Estimated Net Quantities of Proven Oil and Gas Reserves
* Standardized Measure of Discounted Future Net Cash Flow from Estimated
Production of Proved Oil and Gas Reserves
* Summary of Changes in Standardized Measure of Discounted Future Net
Cash Flows
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Daleco Resources Corporation
We have audited the accompanying consolidated balance sheet of Daleco Resources
Corporation and subsidiaries as of September 30, 1997, and the related
consolidated financial statements of loss, deficit, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated statements based on our audit. The consolidated balance sheet of
Daleco Resources Corporation as of September 30, 1996, and the related
consolidated statements of loss, deficit, and cash flows for the years ended
September 30, 1996 and 1995, were audited by other auditors whose report dated
December 4, 1996, expressed an unqualified opinion on those consolidated
statements in accordance with Canadian reporting standards, which do not permit
a reference to significant doubt about the Company's ability to continue as a
going concern when the matter is adequately disclosed in the financial
statements.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 financial position of Daleco Resources
Corporation and subsidiaries as of September 30, 1997, and the results of
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying 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,
which raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 1 to the
financial statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Miller and Co.
Certified Public Accountants
Santa Monica, California
December 24, 1997
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 526,760 $ 268,185
Accounts receivable 320,057 983,130
------------ ------------
Total Current Assets 846,817 1,251,315
Investment in and advances to mining joint venture (note 3) -- 100,000
Oil and gas properties and equipment (note 4) 5,590,533 3,765,127
Property and equipment 62,632 --
Timber rights (note 6) 1,028,342 1,028,342
Mineral properties (note 7) 23,973 15,673
Goodwill (note 19) 813,357 --
Debt Issue Costs 584,815 268,732
------------ ------------
Total Assets $ 8,950,469 $ 6,429,189
============ ============
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 1,198,896 $ 1,316,404
Current portion of long-term debt 200,000 --
Notes payable (note 8) -- 800,000
Drilling deposits 268,000 29,000
Due to related parties (note 9) 349,590 384,806
------------ ------------
Total Current Liabilities 2,016,486 2,530,310
Long-term debt (note 11) 1,589,815 --
Debentures (note 10) 60,000 1,710,000
------------ ------------
Total Liabilities 3,666,301 4,240,310
------------ ------------
Commitments and Contingencies (notes 14 and 17)
Shareholders' Equity
27,567,880 Common Shares, par value $0.01 per share (1996 - 13,154,854)
(note 12) 275,699 131,549
160,000 Preferred Shares, par value $0.01 per share (note 8) 1,600 --
Additional Paid in Capital 13,808,832 8,729,435
Accumulated deficit (8,801,963) (6,672,105)
------------ ------------
Total Shareholders' Equity 5,284,168 2,188,879
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,950,469 $ 6,429,189
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Gross Operating Revenue $2,462,909 $805,259 $799,397
Less: Lease operating expenses 472,148 593,149 473,422
Severance taxes 32,079 25,827 28,593
Loss on Development of Wells ----- ----- 46,449
Depletion, depreciation and amortization 497,951 321,002 262,238
Net profits interest and related expenses 1,274,427 ----- -----
------------ ---------- ------------
Net income (loss) from oil and gas 186,304 (134,719) (11,305)
operations ------------ ---------- ------------
Loss on disposal of Mississippi oil and gas rights ----- ----- 532,854
(note 5)
Net loss (gain) on sale of assets ----- 20,671 (17,037)
Administration expense 1,421,823 810,495 575,650
Amortization of debenture issue costs 42,865 12,305 -----
Financial advisory expenses 287,356 207,946 28,264
Timber operation costs (note 6) 249,499 192,141 -----
Interest expense 155,371 165,312 108,131
Amortization of goodwill 416,643 ----- -----
Write-down of advances to mining joint venture 100,000 200,000 -----
(Note 3)
------------ ---------- ------------
2,673,557 1,608,870 1,227,862
Other Income
Management and administrative fees 582,270 ----- -----
Gain (Loss) on litigation settlement (Notes 14 and 18) (224,875) 769,780 -----
------------ ---------- ------------
2,316,162 839,090 1,227,862
------------ ---------- ------------
Net Loss for the Year $(2,129,858) $(973,809) $(1,239,167)
============ ========== ============
Basic and Fully Diluted Net Loss per Common $(0.08) $(0.08) $(0.10)
====== ====== ======
Share (note 12(c))
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deficit - Beginning of Year $(6,672,105) $(5,698,296) $(4,459,129)
Net loss for the year (2,129,858) (973,809) (1,239,167)
----------- ----------- -----------
Deficit - End of Year $(8,801,963) $(6,672,105) $(5,698,296)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating Activities
Net loss for the year $(2,129,858) $ (973,809) $(1,239,167)
Items not affecting working capital
Depletion, depreciation, and amortization 497,951 321,002 262,238
Amortization of debenture issue costs 42,865 12,305 --
Write-down of advances to mining joint venture 100,000 200,000 --
Loss of development and resale of wells -- -- 46,449
Loss on disposal of Mississippi oil and gas rights -- -- 532,854
Loss (gain) on sale of oil and gas properties -- 21,057 (19,529)
Loss (gain) on litigation settlement 224,875 (769,780) --
Accrued interest on conversions of debt -- 8,017 --
----------- ----------- -----------
(1,264,167) (1,181,208) (417,155)
Decrease (increase) in accounts receivable 663,073 (82,251) (476,499)
(Decrease) increase in accounts payable (117,508) (390,756) 95,140
(Decrease) increase in advances received on well costs 239,000 (22,000) 51,000
Drilling and work over costs -- (818,139) (212,038)
Net proceeds from settlement of litigation -- 611,573 --
Proceeds of drilling program -- 525,500 --
----------- ----------- -----------
Cash used for operating activities (479,602) (1,357,281) (959,552)
Investing Activities
Drilling and lease acquisition costs incurred (381,307) (344,704) (29,822)
Mineral properties expenditures (8,300) (186) (15,487)
Timber rights acquisition -- -- (1,028,342)
Proceeds from sale of oil and gas properties -- 4,500 130,374
Increase in advances -- (150,000) --
Decrease in lease acquisition and well costs -- 158,864 699,308
----------- ----------- -----------
Cash used for investing activities (389,607) (331,526) (243,969)
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Financing Activities
(Decrease) increase in notes payable -- (300,000) 800,000
Increase (decrease) in amounts due to related parties (77,216) 255,176 83,237
Issuance of stock -- -- 1,024,881
Redemption of stock -- -- (699,358)
Issuance of convertible debentures -- 2,310,000 --
Proceeds from long-term debt 1,789,815 -- --
Debt issue costs (584,815) (388,196) --
----------- ----------- -----------
Cash provided from financing activities 1,127,784 1,876,980 1,208,760
----------- ----------- -----------
Increase in Cash and Cash Equivalents 258,575 188,173 5,239
Cash and Cash Equivalents - Beginning of Period 268,185 80,012 74,773
----------- ----------- -----------
Cash and Cash Equivalents - End of Period $ 526,760 $ 268,185 $ 80,012
=========== =========== ===========
</TABLE>
Non-cash transactions for the year ended September 30, 1997:
1. The Company issued 2.6 million shares of common stock in acquiring the
assets of Deven Resources, Inc.
2. The Company converted $800,000 in Notes Payable to 160,000 shares of
Preferred stock.
3. The Company issued 9,633,068 of Common shares upon the conversion of
$1,650,000 of debentures.
4. The Company issued 2,179,958 of Common shares in exchange for legal and
financial advisory services.
5. The Company assumed a $100,000 bank loan and $42,000 in amounts due to
related parties in acquiring Haly Corporation.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a
going concern, which contemplates that the Company will be
able to realize assets and discharge liabilities in the normal
course of business. Accordingly, they do not give effect to
adjustments that would be necessary should the Company be
required to liquidate it assets. As of September 30, 1997 the
Company has reported a loss of $2,129,858 and had net current
liabilities of $1,169,669. The ability of the Company to meet
these liabilities and to continue as a going concern is
dependent upon the availability of future funding, the
successful completion of its drilling projects (see Note 11),
and achieving profitable timber operations (see Note 6).
2. Summary of Significant Accounting
a. 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.
b. Basis of consolidation
The consolidated financial statements of
Daleco Resources Corporation (the "Company")
have been prepared in accordance with
generally accepted accounting principles and
include the accounts of the Company and its
wholly-owned subsidiaries Westlands
Resources Corporation ("Westlands"),
Sustainable Forest Industries Inc.
("Sustainable"), Deven Resources,
Inc.("Deven"), Tri-Coastal Energy, Inc., and
Haly Corp. The Company's investments in oil
and gas leases are accounted for using
proportionate consolidation whereby the
Company's prorata share of each of the
assets, liabilities, revenues and expenses
of the investments are aggregated with those
of the Company in its financial statements.
c. Oil and gas properties and equipment
The Company follows the successful efforts
method of accounting for the costs of
exploration and development activities.
Direct acquisition costs of developed and
undeveloped leases are capitalized. Costs of
undeveloped leases on which proved reserves
are found are transferred to proven oil and
gas properties. Each undeveloped lease with
significant acquisition cost is reviewed
periodically and a valuation allowance
provided for any estimated decline in value.
Capitalized costs of proved developed leases
are charged to income on the units of
production basis based upon total proved
reserves. The capitalized costs of these
proved developed leases are written down to
their projected net recoverable amount.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Costs of exploratory wells found to be dry
during the year or before the issuance of
these financial statements are charged
against earnings in that year. Costs of
successful exploration wells and development
wells are capitalized. All costs of
development wells and successful exploration
wells are charged to earnings on a
unit-of-production basis based upon proved
developed reserves. Where the costs of
developed wells and successful exploration
wells exceed projected net recoverable
amounts, such wells are written down to
their projected net recoverable amount. Net
recoverable amount is the aggregate of
estimated un-discounted future net revenues
from proven reserves less operating and
production expenses.
Effective in the first quarter of 1997, the
Company began assessing the impairment of
capitalized costs of proved oil and gas
properties and other long-lived assets in
accordance with Statement of Financial
Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of." Under this method, the Company
generally assesses its oil and gas
properties on a field-by-field basis
utilizing its current estimate of future
revenues and operating expenses. In the
event net undiscounted cash flow is less
than the carrying value, an impairment loss
is recorded based on estimated fair value,
which would consider discounted future net
cash flows. SFAS 121 did not have any impact
on the Company's change in method of
assessing impairment of oil and gas
properties and other long-lived assets.
d. Site restoration, dismantlement and abandonment costs
The salvage value of producing wells is
expected to exceed the cost of site
restoration and abandonment. As a result, no
such costs are accrued in these financial
statements.
e. Property and Equipment
Property and equipment are recorded at cost
and depreciated over the straight-line
method over a period of five years.
f. Mineral Properties
The Company has recorded the acquisition of
mineral claims at cost. These costs along
with any future exploration and development
costs relating to mineral properties are
deferred until the properties are brought
into production, at which time they are
amortized on a unit-of-production basis, or
until the properties are abandoned or sold
or management determines that the mineral
property is not economically viable, at
which time the deferred costs are written
off.
g. Timber Rights
The Company has recorded the acquisition of
timber rights at cost. These costs are
deferred until commercial production
commences. Where the costs exceed projected
net recoverable amounts, the timber rights
are written down to the projected net
recoverable amount. Net recoverable amount
is the aggregate of
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
estimated un-discounted future net revenues
from the sale of timber less operating and
production expenses.
h. Debt Issue Costs
Debt issue costs as of September 30, 1997,
represent those associated with the Heller
Financial, Inc. loan (see Note 11) and will
be amortized over a period of five years.
Costs as of September 30, 1996, were
associated with the debentures and were
written off upon conversion of the
debentures into common stock.
i. Cash and Cash Equivalents
Cash and cash equivalents include cash and
investments with original maturities of
three months or less.
j. Goodwill
Goodwill associated with the acquisition of
Deven Resources, Inc. will be amortized over
a period of three (3) years.
k. Fair Value of Financial Instruments
Cash and cash equivalents, receivables, and
all liabilities have fair values
approximating carrying amounts, except for
the Heller Financial, Inc., and Sonata
Investment Company, LTD., loans for which it
is not practicable to estimate fair values.
The loans are to be repaid out of net cash
flows. Additional interest or profit
participation is payable after the payment
of principal.
3. Investment In and Advances to Mining Joint Venture
The Company participated in an agreement dated March 12, 1980,
(revised October 18, 1980) to purchase 25% of the issued
shares of Minera La Yesca, a Mexican mining corporation. Funds
were advanced to Minera La Yesca to help finance the cost of
placing the Pinabete Silver Mine (the "mine") in Mexico into
production. The investment in and advances to Minera La Yesca
have been recorded at cost. Due to operating losses resulting
from the continuing low price of silver, the mine was taken
out of production during 1991.
The investment in the advances to Minera La Yesca, which were
recorded at cost, has been written off during fiscal 1997.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
4. Oil and Gas and Equipment
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Proven lease acreage costs $ 3,756,637 $ 2,428,092
Proven undeveloped lease acreage costs 1,906,220 1,906,220
Well costs 2,501,208 1,506,396
------------ -------------
$ 8,164,065 5,840,708
Accumulated depletion, depreciation and amortization 2,573,532 2,075,581
------------ -------------
$ 5,590,533 $ 3,765,127
=========== ============
</TABLE>
5. Mississippi Oil and Gas Rights
Pursuant to an agreement with CMW Oil Company, CMW
Chalk Company Inc, and CMW Energy Company ("Vendors")
dated May 26, 1992 (amended June 26, 1992 and July
22, 1992) the Company acquired in July 1992, through
its wholly-owned subsidiary Westlands, a number of
oil and gas rights in Mississippi.
Effective February 1, 1995, Westlands sold and
reassigned its oil and gas rights in the Mississippi
properties back to the Vendors. In consideration,
Daleco received 1,000,000 of the 1,280,000 common
shares originally issued for the purchase. As a
result of this transaction, the Company recorded a
loss on the resale of the oil and gas rights of
$532,854.
6. Timber Rights Acquisition
Effective September 29, 1995, the Company entered
into an agreement ("Acquisition Agreement") to
purchase 100% of the issued and outstanding shares of
the common stock of Sustainable Forest Industries
Inc. ("Sustainable"), a privately held Delaware
Company, in exchange for 1,500,000 shares of common
stock of the Company.
Prior to this, Sustainable entered into a Timber
Acquisition Agreement on September 27, 1995 with Oreu
Timber and Trading Co., Ltd. ("Oreu"), a Guyana
Corporation which is an affiliate of May Joy
Agricultural Cooperative Society Ltd. ("May Joy").
Under the terms of the agreement, Sustainable has
been assigned the exclusive harvesting and cutting
rights for the timber concession issue by Permit No.
1367. This permit was originally granted to May Joy
who subsequently assigned harvesting rights to Oreu
as per an agreement dated January 3, 1995.
In exchange for the timber rights, Oreu received a
10% ownership of Sustainable. This ownership was
subsequently converted to equivalent shares of the
Company as a result of the acquisition of
Sustainable.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The acquisition has been accounted for by the
purchase method. The purchase price of $962,500 was
determined based on the fair value of the 1,500,000
common shares of Daleco given up to acquire
Sustainable. The fair value of the net liabilities of
Sustainable acquired was $65,842 resulting in
consideration of approximately $1,028,500 which has
been recorded as timber rights.
During fiscal 1997, the Company obtained funds to
permit Sustainable to begin implementation of its
business plan (see Note 11).
7. Mineral Properties
In February 1995, the Company acquired 109 mining
claims from shareholders of the Company for $15,673
representing their cost to acquire the claims.
Additional costs of $8,300 were incurred during
fiscal 1997 to maintain these claims. The Company is
seeking interest from third parties for the
development of these claims.
8. Notes Payable
During the year ended September 30, 1995, the Company
received $1,100,000 in return for two notes payable,
with the producing wells of the Company used as
collateral. Interest of 10% per annum was due
monthly.
During fiscal 1996, the Company repaid $300,000 of
the outstanding balance. During fiscal 1997, the
remaining $800,000 was converted into 160,000 shares
of 10% cumulative preferred stock, at $5.00 per
share.
9. Due to (from) Related Parties
1997 1996
-------- -------
Net due to Haly Corporation
Bearing interest at prime +1% $ ----- $175,054
-------- -------
Net due (from) to Amir and Erlich
Bearing interest at prime +3% 91,062 90,209
Bearing interest at 7% 258,528 119,643
------- -------
349,590 209,852
------- -------
$349,590 $384,906
======= =======
The amounts due to Haly Corporation were eliminated through
the acquisition of Haly as of September 30, 1997 (see Note
19). Amir and Erlich are officers and shareholders of the
Company. These amounts have no fixed repayment terms.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
10. Debentures
1997 1996
------ ---------
7% Convertible Debentures $ ----- $ 400,000
8% Convertible Debentures 60,000 1,310,000
------- ----------
$60,000 $1,710,000
======= ==========
a. 7% Convertible Debentures
On May 31, 1996 the Company issued
$1,000,000 of 7% convertible debentures with
interest payable in cash or stock on a
semi-annual basis, and a term of three
years. The placement agent's fees were 10%
of the gross proceeds and 100,000 warrants
at $1.00, with an expiration date of May 30,
2001 (see Note 12). The debentures could be
converted after a holding period of: (a) as
to 50% of the principal amount, 40 days
(July 10, 1996), and (b) the remaining 50%,
60 days (July 30, 1996). The debentures are
convertible into the Company's common stock
at the lessor of (1) a 35% discount on the
previous five day average closing bid price
at conversion, or; (2) the previous day
average closing bid price at closing (May
31, 1996). As of September 30, 1996,
$600,000 of the 7% debentures had been
converted into 1,077,122 common shares. The
remaining balance was converted into 905,796
common shares during 1997.
b. 8% Convertible Debentures
On September 11, 1996, the Company issued
$1,310,000 worth of 8% convertible
debentures with interest payable in stock
only and accruing until conversion or
redemptions after the term of two years. The
placement agent's fees were 10% of the gross
proceeds and 122,111 warrants at $1.07
expiring November 16, 2001. The debentures
may be converted after a holding period of
45 days after closing at the lessor of: (1)
the fixed conversion price ($1.0171875), or
(2) 75% of the average closing bid price for
the five trading days immediately preceding
the date of conversion. As of September 30,
1997, $1,250,000 of the 8% debentures had
been converted into 7,650,150 common shares.
11. Long-Term Debt
Long-term debt of the Company consists of the
following:
a. Heller Financial, Inc.
During the forth quarter of fiscal
1997, the Company entered into an
arrangement with Heller Financial,
Inc. ("Heller") whereby Heller has
agreed to provide the Company with
up to $15,000,000 to rework existing
horizontal wells, recomplete its
vertical wells as horizontal wells,
and
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
develop additional acreage. Under
the terms of the agreement, all of
the properties of Westlands were
transferred to a newly formed
Limited Partnership, Tri-Coastal
Energy, L.P., the general partner of
which is Tri-Coastal Energy, Inc.,
("Tri-Coastal") and the sole limited
partner of which is Westlands.
Westlands is also the sole
shareholder of Tri-Coastal. The
amount outstanding under this
arrangement as of September 30,
1997, was $1,139,815. Interest on
the borrowings is at prime plus 2%.
Principal is paid out of 85% of the
net cash flow from the properties.
Additional interest is payable from
50% of the net cash flow from these
properties after the payment of
principal.
b. Sonata Investment Company, LTD.
During the third quarter of fiscal
1997, Sustainable entered into a
loan agreement with Sonata
Investment Company, LTD. for
$250,000, which remains outstanding
as of September 30, 1997.
Sustainable has the right to request
an additional $250,000 prior to
December 31, 1999. The Company and
Westlands are guarantors of the loan
with Westlands (now Tri-Coastal
Energy, L.P.) wells being pledged as
collateral, subordinated to the
Heller Financing. The loan is to be
repaid out of 25% of Sustainable's
net cash flow with any remaining
balance due by December 31, 1999.
Interest is at 12%. In addition,
Sonata will receive a profit's
participation of 25% of the net
profits of Sustainable while the
loan is outstanding and 20% after
the loan is repaid ("after payout").
Should Sustainable request the
additional $250,000 from Sonata and
should Sonata elect not to make said
advance, then the after payout rate
reduces from 20% to 15%.
c. PNC Bank Loan
During the fourth quarter of fiscal
1997, Deven Resources, Inc. obtained
a term loan of $300,000 with
interest at prime plus 1 1/2%.
Principal is due at $25,000 per
quarter. The loan is secured by
specific properties owned by Deven.
d. First Regional Bank
As of September 30, 1997, the
Company assumed a $100,000 loan with
First Regional Bank when it acquired
Haly Corporation (see Note 19).
Interest is at 6.9% and the loan
matures December 12, 1997. The loan
is secured by personal assets of an
officer of the Company.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
12. Capital Stock
<TABLE>
<CAPTION>
NUMBER OF COMMON NUMBER OF PREFERRED
SHARES, PAR VALUE SHARES PAR VALUE
$0.01 PER SHARE $0.01 PER SHARE AMOUNT
<S> <C> <C> <C>
Authorized 50,000,000 50,000,000
---------- ----------
Balance as at September 30, 1995 12,077,732 $8,360,126
Issued upon conversion of Debentures 1,077,122 500,858
--------- -------
Balance as at September 30, 1996 13,154,854 8,860,984
Issued upon conversion of Debentures 9,633,068 1,424,133
Issued for acquisition of Deven Resources, 2,600,000 2,392,000
Inc.
Issued for professional services rendered 2,179,958 651,014
Issued upon conversion of Notes Payable 160,000
---------- ------- -----------
Balance as at September 30, 1997 27,567,880 160,000 $14,086,131
========== ======= ===========
</TABLE>
Upon redomestication of the Company into the U.S. as of October 1, 1997, par
value was established at $0.01 per share for both common and preferred stock.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
a. Common Stock Options
In January 1995, the Company
granted fully vested common stock
purchase options expiring on
January 6, 2000 for 850,000 common
shares at $0.25 per share. On the
same date, the common stock
purchase options previously
outstanding, which expired on
September 5, 1995 for 356,704
common shares at $0.32 per share,
were gifted back to the Company
and canceled. The following
summary sets out the activity in
common stock purchase options:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Outstanding and Exercisable 700,000 850,000 356,704
at beginning of year
Canceled (350,000) (150,000) (356,704)
Granted -- -- 850,000
Exercised -- -- --Z
-------- -------- --------
Outstanding and Exercisable
at end of year 350,000 700,000 850,000
======== ======== ========
</TABLE>
Subsequent to September 30, 1997,
the Company issued 1.2 million
Common Stock options at 21.875(cent)
per share
In October 1995, the Financial
Accounting Standards Board issued
Statement of Financial Accounting
Standards No. 123, Accounting for
Stock-Based Compensation," (SFAS
123). SFAS 123 permits the Company's
continued use of the intrinsic value
based method prescribed by
Accounting Principles Board Opinion
No. 25 (APB 25). SFAS 123 requires
additional disclosures, including
proforma calculations of net
earnings and earnings per share, as
if the fair value method of
accounting prescribed by SFAS 123
had been applied. The fair value of
stock options and compensation cost
are measured at the date of grant.
The common stock purchase options
were issued for past services at an
exercise price of $0.25 per share
when the underlying stock was at
$0.2245 per share. Had compensation
cost been determined based on the
fair value of the common stock
purchase options using the
provisions of SFAS 123, the
Company's net loss and loss per
share in 1995 would have increased
by $161,500 and $0.01, respectively.
For the proforma calculation, the
fair value of each option on the
date of grant was estimated using
the Black-Scholes option pricing
model and the following
assumptions for awards in 1995:
zero dividend yield expected
volatility of 119.64%, risk -free
interest rate of 7.84%, and
expected life of 5 years. Using
these assumptions, the grant-date
fair value per share of the
options granted in 1995 was $0.19.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
b. Common Stock Warrants
Common stock warrants outstanding at
September 30, 1997, consist of the
following:
<TABLE>
<CAPTION>
Issuance Expiration Date Amount Price Per Share
-------- --------------- ------ ---------------
<S> <C> <C> <C>
Acquisition of Sustainable September 30, 2000 500,000 $0.35
Consulting Agreements May 8 2001 to
October 1, 2001 1,600,000 $0.35
Consulting Agreement 100,000 $1.00
8% Debenture Holders and September 11, 2001 to $0.4386 to
Placement Agents (I.) June 8, 2002 1,864,705 $1.081
</TABLE>
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8%
convertible debentures in September 1996; a
number of warrants were granted to the
holders of the debentures, the agents, and
subagents who placed the debentures.
With respect to the warrants granted to the
debenture holders and subagents, the
warrants were granted in three equal
installments of September 11, 1996; November
26, 1996; and June 8, 1997. These warrants
will expire five years from the date of each
installment: September 11, 2001; November
26, 2001; and June 8, 2002. The number of
shares of common stock into which the
warrants may be converted and the exercise
price of the warrants were determined by
(among other variables and future events)
the amount of debentures still outstanding
on each date of grant, and the average
closing bid price of the Company's common
stock for the five trading days immediately
preceding each date of grant.
On September 11, 1996, a total of 122,111
warrants expiring on September 11, 2001 were
granted to the agents. The warrants may be
exercised at any time before the expiration
date by either of the two methods as
follows: (1) each warrant may be exercised
for one common share with an exercise price
of $1.073, or (2) all or a portion of the
warrants may be exercised on a cashless
basis where a reduced number of shares of
common stock will be issued based upon the
difference between the average closing price
of the Company's common stock for the five
business days immediately preceding the date
of exercise and the exercise price, divided
by the average closing market price, times
the number of warrants being exercised.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
c. Net Income Per Share
Net income per share was calculated on the
basis of the weighted average number of
shares outstanding which amounted to
27,567,880 for the year ended September 30,
1997 (1996 - 12,223,541, 1995 - 12,030,140
shares). For the years ended September 30,
1997, 1996, and 1995 the exercise of the
options and warrants outstanding as at year
end did not have a dilutive effect on the
net income per share.
13. Income Taxes
The Company has no current and deferred taxes
payable. The Company and its subsidiary have
significant tax losses to be applied against future
income. The subsidiary Company's tax filings show net
operating losses to be applied against future taxable
income in the amount of approximately $25 million to
be utilized in various years through 2009. The tax
benefit of these losses is estimated to be
approximately $10 million. No potential benefit of
these losses has been recognized in the accounts.
14. Contingencies
Included in accounts payable at September 30, 1995
was $483,712 due to Questor Drilling Corporation
("Questor"). The Company's subsidiary, Westlands, was
seeking damages of $450,000 against Questor Drilling
Corporation and Cheyenne Services Inc., in connection
with the drilling of a well in 1993. Questor Drilling
Corporation filed a counter claim against Westlands
Resources Corporation for $485,000.
During December 1995, the Company's legal actions
were settled out of court on terms favorable to the
Company and its subsidiary, Westlands. In the action
involving Questor and Cheyenne Services, Inc.
("Cheyenne"), Questor has released Westlands of all
liabilities, and Cheyenne must pay a sum of $50,000
to Westlands. In the action involving System Pipe &
Supply Co. Westlands accepted a settlement offer of
$580,000. The settlement amounts of $630,000 plus
release liabilities of $483,712 less the capitalized
well costs, representing some of the cost overrun
from previous years, resulted in a one-time gain of
$769,780 during fiscal 1996.
15. Segmented Information
Substantially all of the Company's operating
activities are in oil and gas exploration and
development in the United States which is
considered to be the Company's domestic segment. In
addition, the Company has a 100% owned subsidiary
involved in the harvesting of timber Concessions in
Guyana. There were no revenues from timber
operations in 1997 and 1996.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The following table identifies customers of the
Company who purchased greater than ten percent of the
oil and gas produced by the Company:
<TABLE>
<CAPTION>
1997 PERCENTAGE 1996 PERCENTAGE
OF OF
TOTAL SALES (%) TOTAL SALES (%)
<S> <C> <C>
Oil Production
Pride Pipeline Company 100% 100%
Gas Production
Aquila Southwest Pipeline Corporation 11.8% 35.7%
Austin Chalk National Gas Marketing 59.1%
Services 12.3%
New Brenen Corporation 3.4% 5.2%
Southern Natural Gas 72.5% --%
</TABLE>
16. Additional Information on Petroleum and Natural Gas Activities
<TABLE>
<CAPTION>
DEPRECIATION,
PROPERTY (1) DEPLETION AND
ACQUISITION $ EXPLORATION $ DEVELOPMENT $ AMORTIZATION $
<S> <C> <C> <C> <C>
September 30, 1997 $2,323,357 -- $ 381,307 $ 497,951
September 30, 1996 -- -- 637,343 321,002
September 30, 1995 -- -- 195,411 262,238
</TABLE>
(1) Development costs include costs associated
with the developed leaseholds as well as
tangible and intangible well costs.
17. Employment Contracts and Commitments
In connection with the acquisition of Sustainable and
under Management Agreement dated April 17, 1995, the
Company agreed to engage two key officers for a
period of seven years ending April 17, 2002. The two
key officers are entitled to a base salary of $75,000
plus additional incentive payments each based upon a
percentage of net income of Sustainable. At the time
of termination for any reason, the key officers are
entitled to a severance payment equal to the total of
the annual base salary plus additional annual
incentive payments he is then receiving multiplied by
the remaining years, or portions thereof, of the
contract period. During fiscal 1997, the company
reached a settlement with one of the officers in the
total amount of $60,000 to be paid at $5,000 per
month through February 1998.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
In connection with the acquisition of Deven and under
the Stock Purchase Agreement dated October 1, 1996,
the Company agrees that should certain Deven officers
be involuntarily terminated, other than in response
to the Deven Officer's gross negligence, willful
misconduct, ineptitude or inability to perform the
duties of his position, ("Involuntary Personnel
Action") on or before September 30, 2001 ("Coverage
Period"), the said Deven Officer who was the object
of said Involuntary Personnel Action shall be
entitled to receive a sum equal to 150% of the
aggregate base salary plus the cash equivalent of all
benefits for the period of time between the date of
the Involuntary Personnel Action and the remaining
portion of the Coverage Period ("Settlement
Consideration").
However, the Settlement Consideration shall not be
less than two years severance even though the period
between the Involuntary Personnel Action and the
expiration of the Coverage Period be less than two
years.
The Company had two contracts with financial advisors
during fiscal 1997. The first expired in May 1997;
the second expired October 31, 1997. Neither contract
was renewed.
The Company had two office leases as of September 30,
1997. The first calls for rent of $3,864 per month
through June 30, 1998. The second lease calls for
rent of $3,354 per month through December 31, 1997.
18. Litigation Settlement
In April 1997, the Company commenced an Adversary
Action styled Daleco Resources Corporation v. Reserve
Production Inc., Liquidating Trust and Leonard
Pipkin, Trustee, in the United States Bankruptcy
Court for the Eastern District of Texas, Tyler
Division, Case No. 97-6036. The case was commenced to
enforce the Company's rights under that certain Asset
Purchase Agreement dated December 20, 1996 ("Asset
Purchase Agreement") as approved by the Bankruptcy
Court on February 13, 1997. In the Adversary Action,
the Company alleged that the defendants' had failed
to meet their conditions to Closing under the Asset
Purchase Agreement and were thus required to refund
the Company's $100,000 Earnest Money Deposit and pay
for the reworking of the Jody Well. Subsequent to the
commencement of the Company's adversary action, a
case was commenced in the United States District
Court for the Eastern District of Texas, Tyler
Division, styled Reserve Production Liquidating Trust
v. Daleco Resources Corporation, Westlands Resources
Corporation, David F. Lincoln, Gary J. Novinskie and
C. Warren Trainor, C.A. No.: 6:97 CV 705 ("District
Court Action"). The District Court Action was in
essence a counter claim against the Company and three
of is directors asserting matters which should have
been addressed in an answer to the Adversary Action.
The Company filed a motion to dismiss the District
Court Action; however, prior to ruling on the
Company's Motion, the Adversary Action was resolved
through Court mandated mediation. Under the terms of
the settlement, the Company's Earnest Money Deposit
was returned and the Reserve Production Inc.,
Liquidating Trust, Reserve Produciton Liquidating
partnership, and Leonard Pipkin, trustee, were
required to resolve all outstanding claims for the
reworking of the Jody Well.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The Company incurred $224,875 in costs to settle this
litigation.
19. Acquisitions
During fiscal 1997, the Company completed the
acquisitions of Deven Resources, Inc. and Haly
Corporation.
All of the outstanding stock of Deven was acquired on
October 1, 1996 in exchange for 2.6 million shares of
Daleco stock plus $150,000 in cash. The market value
of the stock was approximately $2.4 million. The
acquisition was accounted for as a purchase resulting
in oil and gas properties of $1.5 million, goodwill
of $1.25 million less liabilities assumed of
$200,000. Deven receives an annual management fee of
$200,000 from a partnership of which it has a 1%
general partner interest.
All of the outstanding stock of Haly, a related
party, was acquired on September 30, 1997. Daleco
issued 3 million shares of common stock to Messrs.
Amir and Erlich along with $1,000 cash. In exchange,
the Company received and retired 3 million shares of
common stock owned by Haly along with interests in
wells owned by Haly. The acquisition was accounted
for as a purchase. The amounts due Haly were written
off into common stock less the First Regional Bank
loan assumed by Daleco (see Note 11).
20. Pro-Forma Information
The following Pro-Forma information is presented for
the Fiscal Years ended September 30, 1996 and 1995,
as if the Deven and Haly acquisitions had been
accounted for as pooling of interests. Deven and Haly
amounts represented historical values without
acquisition adjustments as described in Note 19.
Haly activity for Fiscal 1997 is not material.
Amounts in Thousands
Fiscal Year Ended September 30, 1996:
<TABLE>
<CAPTION>
Balance Sheet Daleco Deven Haly Total
- ------------- ------ ----- ---- -----
<S> <C> <C> <C> <C>
Assets $ 6,429 $494 $12 $6,935
Liabilities 4,240 752 235 5,227
Stockholders Equity 2,189 (258) (223) 1,708
Statement of Loss
Revenues $ 805 $ 1,728 $ 49 $2,582
Expenses 1,778 2,010 97 3,885
----- ----- ----- -----
Net Loss $(973) $(282) $(48) $(1,303)
====== ====== ===== ========
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
Amounts in Thousands
Fiscal Year Ended September 30, 1995:
Balance Sheet Daleco Deven Haly Total
- ------------- ------ ----- ---- -----
<S> <C> <C> <C> <C>
Assets $6,133 $377 $17 $6,527
Liabilities 3,472 355 437 4,264
Stockholders Equity 2,661 22 (420) 2,263
Statement of Loss
Revenues $752 $2,003 $53 $2,808
Expenses 1,991 1,850 81 3,922
----- ----- -- -----
Net Loss $(1,239) $153 ($28) $(1,114)
======== ==== ===== ========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Daleco Resources Corporation
The audits referred to in our report to the Board of Directors and Stockholders
of Daleco Resources Corporation and subsidiaries dated December 24, 1997,
relating to the consolidated financial statements of Daleco Resources
Corporation and subsidiaries included the audit of Schedule V, VI, and IX, found
on pages 54, 55, and 56, respectively, for the year ended September 30, 1997.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules present fairly, in all
material respects, the information set forth therein.
The accompanying financial statements schedules for the years ended September
30, 1996 and 1995 were not audited by us, and accordingly, we do not express an
opinion on them.
Miller and Co.
Certified Public Accountants
Santa Monica, California
December 24, 1997
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE II - AMOUNTS RECEIVABLES FROM UNDERWRITERS, PROMOTERS, AND EMPLOYEES
OTHER THAN RELATED PARTIES YEARS ENDED SEPTEMBER 30, 1997, 1996
AND 1995
================================================================================
This schedule has been omitted as there are no receivables.
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE IV - NON-CURRENT INDEBTEDNESS OF AND TO RELATED PARTIES YEAR ENDED
SEPTEMBER 30, 1997
================================================================================
This schedule has been omitted as there are no non-current indebtedness of and
to related parties.
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT YEAR ENDED SEPTEMBER 30, 1997
(EXPRESSED IN THOUSANDS)
- --------------------------------------------------------------------------------
YEAR ENDED
SEPTEMBER 30
1997 1996 1995
-------- ------------ -------
COST
Proven Lease Acreage
Balance - Beginning of year $ 2,428 $ 2,364 $ 3,580
Additions 1,329 64 30
Disposal -- -- (1,246)
------- ------- -------
Balance - End Of Year 3,757 2,428 2,364
------- ------- -------
Proven Undeveloped Lease
Acreage
Balance - Beginning of Year 1,906 2,065 2,065
Additions -- -- --
Disposal -- (159) --
------- ------- -------
Balance - End of Year 1,906 1,906 2,065
------- ------- -------
Well Costs
Balance Beginning of Year 1,506 1,485 1,475
Additions 995 585 166
Disposal -- (569) (156)
------- ------- -------
Balance - End of Year 2,501 1,506 1,485
------- ------- -------
TOTAL COST $ 8,164 $ 5,840 $ 5,914
======= ======= =======
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY,
PLANT AND EQUIPMENT YEAR ENDED SEPTEMBER 30, 1997
(EXPRESSED IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
ACCUMULATED DEPRECIATION AND DEPLETION
Prove Lease Acreage
Balance - Beginning of Year $ 1,088 $ 891 $ 895
Charge for the Year 298 197 43
Disposal -- -- (47)
------- ------- -------
Balance - End of Year 1,386 1,088 891
------- ------- -------
Proven Undeveloped Lease Acreage
Balance Beginning of Year 362 362 362
Charge for Year -- -- --
Disposal -- -- --
------- ------- -------
Balance - End of Year 362 362 362
------- ------- -------
Well Costs
Balance - Beginning of Year 626 708 610
Charge for Year 200 124 219
Disposal -- (206) (121)
------- ------- -------
Balance - End of Year 826 626 708
------- ------- -------
TOTAL DEPRECIATION $ 2,574 $ 2,076 $ 1,961
======= ======= =======
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE IX - SHORT-TERM BORROWINGS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996
AND 1995
================================================================================
As of September 30, 1997, the Company had a $100,000 loan payable with First
Regional Bank. There were no other short-term borrowings for the years ended
September 30, 1996 and 1995.
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
================================================================================
This schedule has been omitted as the information is furnished in the income
statement included with the consolidated financial statements.
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED)
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
================================================================================
ESTIMATED NET QUANTITIES OF PROVEN OIL AND GAS RESERVES
Proved reserves are the estimated quantities which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operation conditions. Proved
developed reserves are the quantities expected to be recovered through existing
wells with existing equipment and operating methods. These reserve estimates
were prepared by independent engineers and are based on current technology and
economic conditions. The Company considers such estimates to be reasonable;
however, due to inherent uncertainties and the limited nature of reservoir data,
estimates of underground reserves are imprecise and subject to change over time
as additional information becomes available.
The following table shows the changes in the Company's proved oil and gas
reserves for the year.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- -------------------------- -----------------------------
CRUDE OIL NATURAL CRUDE OIL NATURAL CRUDE OIL NATURAL
AND GAS AND GAS AND GAS
CONDENSATE (MMCF) CONDENSATE (MMCF) CONDENSATE (MMCF)
(BARRELS) (BARRELS) (BARRELS)
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Proven
Developed and
Undeveloped
Reserves
Balance - 963,586 8,740 825,213 8,037 2,229,776 8,376
Beginning of
Year
Acquisition -- 2,107 -- -- -- --
of Reserves
Disposition of -- -- -- -- (1,211,250) --
Reserves
Revision of 421,802 3,368 155,992 909 (171,038) (155)
Previous
Estimates
Production for (15,471) (146) (17,637) (206) (22,275) (184)
Year ---------- ---------- ---------- ---------- ---------- ----------
Balance - End of 1,369,917 14,069 963,586 8,740 825,213 8,037
Year ========== ========== ========== ========== ========== ==========
Proved 125,013 2,311 112,963 751 131,793 1,634
Developed ========== ========== ========== ========== ========== ==========
Reserves as at
September 30
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED)
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
================================================================================
Measure of Discounted Future Net Cash Flow From Estimated Production Proved Oil
and Gas Reserves Standardized
The standardized measure of discounted future net cash flows from estimated
production of proven oil and gas reserves after income taxes is presented in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No. 69). In
computing this data assumptions other than those mandated by SFAS No. 69 could
produce substantially different results. The company cautions against viewing
this information as a forecast of future economic conditions or revenues.
The standardized measure of discounted future net cash flows is determined by
using estimated quantities of proved reserves and taking into account the future
periods in which they have been projected to be developed and produced.
Estimated future production is priced at the year-end price. The resulting
estimated future cash inflows are reduced by estimated future costs to develop
and produce the proved reserves. The future pretax net cash flows are then
reduced further by deducting future income tax expenses as applicable. The
resultant net cash flows are reduced to present value amounts by applying the
SFAS No. 69 mandated 10% discount factor.
STANDARDIZED MEASURE OF DISCOUNTED NET CASH INFLOWS AS AT SEPTEMBER 30, 1997,
1996, AND 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ 64,556,336 $ 42,084,331 $ 27,443,747
Future production costs (8,725,086) (8,488,124) (3,540,910)
Future development costs (19,973,342) (6,585,758) (5,390,527)
Future income tax expense* -- -- --
------------ ------------ ------------
35,857,908 27,010,449 18,512,310
Discount factor at 10% (13,377,937) (9,155,787) (5,109,706)
------------ ------------ ------------
Standardized Measure of Future Net Cash Flows $ 22,479,971 $ 17,854,662 $ 13,402,604
============ ============ ============
</TABLE>
* The Company presently has approximately $25 million of loss carry
forwards. Based on these carry forwards no future taxes payable have
been included in the determination of future new cash inflows. Future
head office general and administrative expenses have been excluded from
the cash flows.
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED)
AS AT SEPTEMBER 30, 1997, 1996 AND 1995
================================================================================
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance - Beginning of Year $17,854,662 $13,402,604 $23,269,213
Increase (decrease) in future
net cash flows:
Sales for the year net of
related costs (684,255) (577,911) (572,266)
Revisions to estimates of
proved reserves 3,723,618 5,207,897 (2,020,841)
Acquisition of Reserves 1,585,946
Extensions and discoveries
net of related costs:
Sales of reserves in place ----- (177,928) (7,273,502)
Balance - End of Year $22,479,971 $17,854,662 $13,402,604
</TABLE>
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 9 to 12
The information in these items are included in the Company's Proxy
Statement dated December 12, 1997, which is incorporated by reference.
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 10-KSB
a) The following exhibits are filed as part of this report:
Exhibit Number and description
3.1 Memorandum of Incorporation of United Westlands Resources,
Ltd. dated April 20, 1982 (incorporated by reference from
Registrant's Registration Statement pursuant to Section 12(b)
or (g) of the Securities Exchange Act of 1934 on Form 20-F
dated May 31, 1984).
3.2 Articles of United Westlands Resources, Ltd. (incorporated by
reference from Registrant's Registration Statement pursuant to
Section 12(b) or (g) of the Securities Exchange Act of 1934 on
Form 20-F dated May 31, 1984).
3.3 Certified Special Resolution and Altered Memorandum of Daleco
Resources Corporation filed May 2, 1986 (incorporated by
reference from Registrant's Annual Report Pursuant to Section
13 or 15 (d) of the Securities Exchange Act of 1934 for the
fiscal year ended September 30, 1991 on Form 10-K dated
December 28, 1991.
3.4 Articles of Continuance of Daleco Resources Corporation filed
July 15, 1986 (incorporated by reference from Registrant's
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
September 30, 1991 on Form 10-K dated December 28, 1991).
3.5 Registrant's domestication in the State of Delaware effective
September 30, 1996, incorporated by reference from
Registrant's Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the fiscal year ended
September 30, 1991 on Form 10-K dated January 15, 1997, and
Registrant's form 8-K dated October 7, 1996.)
10.1 Acquisition Agreement among Registrant and Joseph A. Nicolosi,
Jr. and John W. Ryan, the Shareholders of Sustainable Forest
Industries, Inc., dated April 17, 1995 (incorporated by
reference from Registrant's Current Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 on Form 8-K
dated October 17, 1995).
10.2 Acquisition Agreement among Registrant and Deven Resources,
Inc. effective October 1, 1996 (incorporated by reference from
Registrant's Current Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 on Form 8-K dated October
7, 1996).
10.3 Acquisition Agreement among Registrant and Haly Corporation
dated September 29, 1997.
16. Letter on Change in Certifying Accountant.
21. Subsidiaries of Issuer (incorporated by reference from
Registrant's Current Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 on Form 8-K dated October
7, 1996).
<PAGE>
21.1 Westlands Resources Corporation, a Nevada corporation, Deven
Resources, Inc., a Pennsylvania corporation and Sustainable
Forest Industries, Inc., Delaware (incorporated by reference
from Registrant's Current Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 on Form 8-K dated
October 7, 1996), Tri-Coastal Energy, Inc., a Delaware
corporation and Tri-Coastal Energy, L.P. a Texas limited
partnership.
b) The Company filed a Form 8-K on October 17, 1995, October 23, 1995,
November 15, 1995, and October 7, 1996. The Company did not file any
reports on Form 8-K during the fourth quarter of Fiscal Year 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DALECO RESOURCES CORPORATION
Dated: 12/24/97 By: /s/ Gary J. Novinskie
- --------------- ---------------------------
Gary J. Novinskie
President
In accordance with the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: 12/24/97 By: /s/ Gary J. Novinskie
- --------------- ---------------------------
Director, President, COO
Dated: 12/24/97 By: /s/ Edward J. Furman
- --------------- ---------------------------
Edward J. Furman
Chief Financial Officer
Dated: 12/24/97 By: /s/ Dov Amir
- --------------- ---------------------------
Dov Amir
Chairman of the Board of Directors
and Chief Executive Officer
Dated: 12/24/97 By: /s/ Louis Erlich
- --------------- ---------------------------
Louis Erlich
Vice Chairman of the Board of
Directors and Vice President
Dated: 12/24/97 By: /s/ David F. Lincoln
- --------------- ---------------------------
David F. Lincoln
Vice Chairman of the Board of
Directors and Vice President
Dated: 12/24/97 By: /s/ C. Warren Trainor
- --------------- ---------------------------
C. Warren Trainor, Esquire
Director
<PAGE>
EXHIBIT INDEX
Exhibit Number and description
3.1 Memorandum of Incorporation of United Westlands Resources,
Ltd. dated April 20, 1982 (incorporated by reference from
Registrant's Registration Statement pursuant to Section 12(b)
or (g) of the Securities Exchange Act of 1934 on Form 20-F
dated May 31, 1984).
3.2 Articles of United Westlands Resources, Ltd. (incorporated by
reference from Registrant's Registration Statement pursuant to
Section 12(b) or (g) of the Securities Exchange Act of 1934 on
Form 20-F dated May 31, 1984).
3.3 Certified Special Resolution and Altered Memorandum of Daleco
Resources Corporation filed May 2, 1986 (incorporated by
reference from Registrant's Annual Report Pursuant to Section
13 or 15 (d) of the Securities Exchange Act of 1934 for the
fiscal year ended September 30, 1991 on Form 10-K dated
December 28, 1991.
3.4 Articles of Continuance of Daleco Resources Corporation filed
July 15, 1986 (incorporated by reference from Registrant's
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
September 30, 1991 on Form 10-K dated December 28, 1991).
3.5 Registrant's domestication in the State of Delaware effective
September 30, 1996, incorporated by reference from
Registrant's Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the fiscal year ended
September 30, 1991 on Form 10-K dated January 15, 1997, and
Registrant's form 8-K dated October 7, 1996.)
10.1 Acquisition Agreement among Registrant and Joseph A. Nicolosi,
Jr. and John W. Ryan, the Shareholders of Sustainable Forest
Industries, Inc., dated April 17, 1995 (incorporated by
reference from Registrant's Current Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 on Form 8-K
dated October 17, 1995).
10.2 Acquisition Agreement among Registrant and Deven Resources,
Inc. effective October 1, 1996 (incorporated by reference from
Registrant's Current Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 on Form 8-K dated October
7, 1996).
10.3 Acquisition Agreement among Registrant and Haly Corporation
dated September 29, 1997.
16. Letter on Change in Certifying Accountant.
21. Subsidiaries of Issuer (incorporated by reference from
Registrant's Current Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 on Form 8-K dated October
7, 1996).
21.1 Westlands Resources Corporation, a Nevada corporation, Deven
Resources, Inc., a Pennsylvania corporation and Sustainable
Forest Industries, Inc., Delaware (incorporated by reference
from Registrant's Current Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 on Form 8-K dated
October 7, 1996), Tri-Coastal Energy, Inc., a Delaware
corporation and Tri-Coastal Energy, L.P. a Texas limited
partnership.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
CONSOLIDATION FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995,
AND 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000746967
<NAME> DALECO RESOURCES CORPORATION
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 526,760
<SECURITIES> 0
<RECEIVABLES> 320,057
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 846,817
<PP&E> 8,164,065
<DEPRECIATION> 2,573,532
<TOTAL-ASSETS> 8,950,469
<CURRENT-LIABILITIES> 2,016,486
<BONDS> 0
1,600
0
<COMMON> 275,699
<OTHER-SE> 13,808,832
<TOTAL-LIABILITY-AND-EQUITY> 8,950,469
<SALES> 2,462,909
<TOTAL-REVENUES> 2,462,909
<CGS> 2,276,605
<TOTAL-COSTS> 2,160,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,371
<INCOME-PRETAX> (2,129,858)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,129,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,129,858)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
