<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 issue as specified in Charter
Delaware 23-2860739
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087 (610) 254-4199
- ------------------------------- ----------------------------------------
(Address of Principal Executive (Issuer's telephone number)
Offices)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution under a
plan confirmed by court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
26,863,880 shares of common stock as of August 1, 1997
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)...................................... 1
Consolidated Balance Sheets........................................... 1
Consolidated Statement Of Income...................................... 2
Consolidated Statement Of Deficit..................................... 3
Consolidated Statement Of Cash Flow................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................... 5
1. Reference To Audited Financial Statements......................... 5
2. Summary of Significant Accounting Policies........................ 5
3. Investment In And Advances To Mining Joint Venture................ 7
4. Oil and Gas Properties and Equipment.............................. 7
5. Timber Rights Acquisition......................................... 8
6. Mineral Properties................................................ 8
7. Note Payable...................................................... 8
8. Due to (from) Related Parties..................................... 9
9. Related Party Transactions........................................ 9
10. Debentures........................................................ 10
11. Capital Stock..................................................... 11
12. Income Taxes...................................................... 13
13. Segmented Information............................................. 13
14. Acquisition of Deven Resources Corporation........................ 14
15. Commitment........................................................ 14
16. Acquisition of Oil and Gas Properties from Reserve Production Inc.
Liquidating Trust............................................... 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 16
A. Completion of the acquisition of Deven Resources, Inc............. 16
B. Acquisition of Oil and Gas Properties from Reserve Production Inc.
Liquidating Trust............................................... 17
1. Timber Rights.............................................. 17
2. Settlements................................................ 18
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS................ 18
ITEM 5 OTHER INFORMATION................................................. 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.................................. 18
SIGNATURES...................................................................... 19
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS AS
OF JUNE 30, 1997 AND 1996
Prepared by Management (Unaudited)
<TABLE>
<CAPTION>
Unaudited Unaudited
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
ASSET
CURRENT ASSETS
Cash $ 212,457 $ 553,530
Receivables 108,577 772,176
Costs Associated With Acquisition of Oil and Gas Properties 612,915
From Reserve Production, Inc., Liquidating Trust (Note 16)
Other Current Assets 87,248 --
------------ ------------
1,021,197 1,325,706
Investments in and Advances to Mining Joint Venture (Note 3) 25,000 300,000
Oil and Gas Properties and Equipment (Note 4) 5,079,670 3,771,562
Property and Equipment 77,633 --
Timber Rights (Note 5) 1,028,342 1,028,342
Mineral Properties (Note 6) 15,673 15,487
Goodwill (Note 14) 917,518 --
Debenture Issue costs (Note 10) -- 100,000
------------ ------------
TOTAL ASSETS $ 8,165,033 $ 6,541,097
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities 1,989,058 $ 1,298,833
Notes Payable (Note 7) 800,000 1,100,000
Drilling Deposits 29,000 29,000
------------ ------------
2,818,058 2,427,833
Amounts Due to Related Parties (Note 8) 571,211 423,992
Long-Term Debt (Note 5) 250,000 --
Debentures (Note 10) 90,000 1,000,000
------------ ------------
3,729,269 3,851,825
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued common shares (Note 11) 12,855,225 8,360,126
Accumulated Deficit (8,307,461) (5,670,854)
------------ ------------
Total Shareholders' Equity 4,547,764 2,689,272
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,165,033 $ 6,541,097
============ ============
</TABLE>
See Accompanying Notes.
1
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED INCOME STATEMENTS FOR THE
PERIODS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
GROSS OPERATING REVENUE 1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Oil and Gas Sales $ 602,181 $ 110,248 $ 1,852,100 $ 608,655
Less: Operating Expenses (Note 4) 101,093 126,581 383,477 295,852
Net Profits Interest and Associated Expenses 321,022 -- 985,619 --
Severance Taxes 3,218 7,444 22,070 19,018
Depletion, Depreciation and Amortization 148,317 44,651 342,951 172,745
----------- ----------- ----------- -----------
NET OPERATING REVENUE 28,531 (68,428) 117,983 121,040
Management and Administrative Fee
Revenues 172,836 -- 422,302 --
Gain on Litigation Settlement -- -- -- 768,463
Administration Expense (316,946) (412,793) (1,129,416) (757,588)
Amortization of Debenture Issue Costs (10,632) -- (42,865) --
Financial Advisors Expenses (56,000) -- (284,829) --
Timber Operating Costs (38,369) -- (220,889) --
Amortization of Goodwill (104,150) -- (312,482) --
Write-Down of Advances to Mining Joint
Venture (25,000) -- (75,000) --
Interest Expense (18,810) (37,942) (110,160) (104,473)
----------- ----------- ----------- -----------
TOTAL (397,071) (450,735) (1,753,339) (93,598)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (368,540) $ (519,163) $(1,634,856) $ 27,442
=========== =========== =========== ===========
PRIMARY AND FULLY DILUTED NET
INCOME (LOSS) PER COMMON SHARE $ (0.02) $ (0.04) $ (0.09) $ 0.01
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes.
2
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF DEFICIT FOR THE
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
Prepared by Management (Unaudited)
Unaudited Unaudited
June 30, 1997 June 30, 1996
------------- -------------
BALANCE - BEGINNING OF PERIOD $(6,672,105) (5,698,296)
NET INCOME (LOSS) FOR THE PERIOD (1,635,356) 27,442
----------- -----------
BALANCE - END OF PERIOD $(8,307,461) $(5,670,854)
=========== ===========
See Accompanying Notes.
3
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
Prepared by Management (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
OPERATING ACTIVITIES 1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (368,540) $ (519,163) $(1,635,356) $ 27,442
Items not affecting Working Capital -
Depreciation, Depletion and Amortization and 288,099 44,651 440,599 172,745
Write-Downs
Loss on Development and Resale of Wells -- 71,468 -- --
Loss/(Gain) on Sale of Oil & Gas Properties -- -- -- --
----------- ----------- ----------- -----------
(80,441) (403,044) (1,194,757) 200,187
(Increase) Decrease in Other Assets 21,866 12,191 (608,577) --
(Increase) Decrease in Receivables (34,772) -- 762,553 (43,297)
Increase (Decrease) in Accounts Payable (29,298) 249,997 679,210 (892,039)
Drilling and Workover Costs -- (251,993) -- (271,838)
Proceeds of Drilling Program -- -- -- 525,500
----------- ----------- ----------- -----------
Cash provided from/(used for) Operations (122,645) (392,849) (361,571) (481,487)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Leasing Acquisition and Well Costs incurred -- (52,255) (124,406) (59,006)
-----------
Lease Acquisition and Well costs surrendered -- (70,770) -- (180,251)
----------- ----------- ----------- -----------
Cash provided from/(used for) Investing Activities -- 123,025 (124,406) (239,257)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Increase (Decrease) in Notes Payable 250,000 -- 250,000 --
Issuance of Debentures -- 1,000,000 -- 1,000,000
Debentures Costs -- (100,000) -- (100,000)
Increase (Decrease) in amounts due to Related 4,618 112,331 180,249 294,262
----------- ----------- ----------- -----------
Parties
Cash provided from/(used for) Financing Activities 254,618 1,012,331 430,249 1,194,262
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 131,973 (496,457) (55,728) 473,518
CASH - BEGINNING OF PERIOD 80,484 57,073 268,185 80,012
----------- ----------- ----------- -----------
CASH - END OF PERIOD $ 212,457 $ 553,530 $ 212,457 $ 553,530
=========== =========== ----------- ===========
</TABLE>
See Accompanying Notes.
4
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
1. Reference To Audited Financial Statements. These Financial Statements should
be read in conjunction with the Notes to the Company's Audited Financial
Statements as of September 30, 1996.
2. Summary of Significant Accounting Policies.
a. Use of Estimates.
The preparation of financial statements in conformity with general
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.
These 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), and Deven Resources,
Inc.("Deven"). 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. Cost of undeveloped
leases on which proved reserves are found are transferred to proven oil
and gas properties. Each undeveloped lease with significant acquisition
costs 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.
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 undiscounted future net
revenues from proven reserves less operating and production expenses.
5
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
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. Investment in Minera La Yesca.
The investment in Minera La Yesca (the "Venture") is recorded at costs
less certain impairment provisions. At each balance sheet date the
estimated net recoverable value of the investment is calculated based upon
the underlying assets of the Venture.
f. Mineral Properties.
The Company has recorded the acquisition of mineral claims at cost. These
costs along with any future exploration and developments 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 estimated undiscounted future net revenues from sale of
timber less operating and production expenses.
h. Cash and Cash Equivalent.
Cash and cash equivalent includes cash and investments with original
maturities of three months or less.
i. Goodwill.
Goodwill related to the acquisition of the assets of Deven will be
amortized over a period of three years.
j. Property and Equipment.
Property and Equipment are recorded at cost and will be depreciated over a
period of five years.
6
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
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 costs 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 1990.
The investment in the advances to Minera La Yesca, which were recorded at
cost, have been written down to approximate their net recoverable value
based on the value of equipment owned by Minera La Yesca.
4. Oil and Gas Properties and Equipment.
1997 1996
---- ----
Proven lease acreage cost $3,756,637 $2,423,093
Proven undeveloped lease acreage
cost 1,906,220 2,065,084
Well costs 1,636,803 1,261,034
---------- ----------
7,299,660 5,749,211
Accumulated depletion,
depreciation and amortization 2,225,444 1,938,103
---------- ----------
5,074,216 3,766,108
---------- ----------
Other equipment 6,060 6,060
Accumulated depreciation 606 606
---------- ----------
5,454 5,454
---------- ----------
$5,079,670 $3,771,562
========== ==========
Westlands has carried interests in producing oil wells which have been
acquired at no cost and are not included on the balance sheet.
During the years ended September 30, 1996 and 1995, Westlands farmed out a
portion of its undeveloped gas acreage in Brazos County, Texas, to a
non-affiliated entity. The farmee has drilled two successful horizontal
wells on such acreage in which the Company was carried for a free 5% Working
Interest. The farmee has the right to drill another 794 acre tract for a
consideration of $158,864. The undeveloped lease costs were reduced by this
amount.
Operating expenses include the lease operating expenses for and the net
profits interests paid to a partnership sponsored by Deven Resources, Inc.
This amounted to $985,619 for the nine months ended June 30, 1997.
7
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
5. Timber Rights Acquisition.
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 issued 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.
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 is $65,842 resulting in
consideration of approximately $1,028,500 which has been recorded as timber
rights.
Under the terms of the Company's acquisition of Sustainable, the Company was
obligated to contribute up to $750,000 to support the operation of
Sustainable. As of June 30, 1997, this condition has been partially met. The
Company has entered into new agreements with Oreu for the funding of the
harvesting of the timber concessions. Due to excess sawmill capacity in
Guyana, the Company has decided not to build a sawmill at this time and will
use such excess capacity in its operations.
During the quarter ended June 30, 1997 the Company completed negotiations
with an external funder to provide financing for Sustainable's Guyana
operations. Under the terms of agreement, an initial tranche of $250,000 was
provided in the form of a participatory loan bearing interest at 12% and
payable out of the net operating cash flow of Sustainable.
6. Mineral Properties.
In February, 1995, the Company acquired 109 mining claims from shareholders
of the Company for $15,487 representing their cost to acquire the claims.
These claims adjoin properties owned by Regent Ventures, Ltd. ("Regent").
Effective February 28, 1995, the Company entered into an option joint
venture agreement with Regent to acquire up to an undivided 50% interest in
Regent's holdings by spending up to $2,500,000 on the property. The Company
did not make the investment and the option expired on December 31, 1995. The
Company is awaiting the results of tests on adjoining claims prior to the
formulation of a plan of exploration which may or may not include third
parties.
7. Note Payable.
During the year ended September 30, 1995, the Company received $1,100,000 in
return for a note payable, with the producing wells of the Company used as
collateral. Interest of 10% per annum is due monthly. The balance
outstanding on this loan as of June 30, 1997 was $800,000.
8
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
8. Due to (from) Related Parties.
June 30, June 30,
1997 1996
-------- --------
Net due to Haly Corporation -
Bearing interest at prime +1% $312,952 141,570
Bearing interest at TCD +1.5% -- --
-------- -------
312,952 141,570
-------- -------
Net due (From) to Amir and Erlich
Bearing interest at prime +3% 91,062 159,552
Bearing interest at 7% 167,197 --
Non-interest bearing -- 122,870
-------- -------
258,259 282,422
-------- -------
$571,211 423,992
======== =======
There are no fixed repayment terms for these amounts.
9. Related Party Transactions.
Remuneration of directors for the periods ended June 30, 1997 and June 30,
1996 was $0 and $2,748, respectively. Remuneration for the years September
30, 1992 through 1996 in the amount of $54,761 have yet to be paid to the
directors.
Haly Corporation (whose shareholders are shareholders and directors of the
Company) has charged, after amounts recovered from third parties, for the
periods ended June 30, 1997 and June 30, 1996 the sum of $302,926 and
$404,500, respectively for administrative services including remuneration of
Dov Amir and Louis Erlich who both were officers and directors of the
Company.
In February, 1995 the Company acquired 109 mining claims from Messrs. Amir
and Erlich, directors and shareholders of the Company at their original cost
of acquisition of $15,487.
9
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
10. Debentures.
As Of As Of
June 30, June 30,
1997 1996
-------- --------
7% Convertible Debentures -- --
8% Convertible Debentures $90,000 --
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 ere 10% of the gross proceeds,
and 100,000 warrants at U.S. $1.00 and a five year term (see note 12(b)).
The debentures may 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 five day average closing bid price at closing (May 31, 1996). As
of December 31, 1996 the 7% debentures have been converted into 2,406,285
common shares.
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 redemption after the term of two. The placement
agent's fees were 10% of the goss proceeds, and 122,111 warrants discussed
in not 12(c). the debentures may be converted after a holding period of:
(a) as to 50% of the principal amount, 45 days after closing (October 2,
1996), and (b) as to the remaining 50%, 65 days after closing (November
16, 1996). The debentures and accrued interest are convertible into the
Company's common stock at the less 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 June 30,
1997, $1,220,000 of the 8% debentures have been converted into 5,573,338
shares of common stock.
The fair value of the debentures is not materially different from the
carrying amount on the balance sheet.
10
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
11. Capital Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
COMMON SHARES PREFERRED SHARES
PAR VALUE $.01 PAR VALUE $.01
AUTHORIZED Ref. AMOUNT
<S> <C> <C> <C> <C>
50,000,000 50,000,000
Balance as at September 30, 1996 13,154,854 -0- $ 8,860,984
Issued upon conversion of Debentures (1) 8,722,525 -0- 1,427,241
Issued upon Acquisition of Deven Resources, (2) 2,600,000 -0- 2,500,000
Inc.
Issued For Services (3) 702,666 -0- 67,000
Exercise of Warrants (4) 400,000 -0- --
----------
Balance as at June 30, 1997 25,580,045 -0- $12,855,225
========== ===========
</TABLE>
(1) During the period ended June 30, 1997, $790,000 of the 8% convertible
Debentures were converted into 5,246,966 shares of common stock.
(2) Effective October 1, 1996, the Company acquired all of the issued and
outstanding stock of Deven Resources, Inc. ("Deven") for 2,600,000 shares
of the Company's common stock. Mr. David F. Lincoln was the principal
shareholder of Deven and received 1,820,000 of the 2,600,000 shares of
Daleco common stock. (See Note 16)
(3) In November, 1996, the Company issued 265,000 shares to consultants, those
included: 25,000 shares to Rodney C. Hill, Esquire, former general counsel
to the Company; 200,000 to Joel Brownstein, a financial consultant; and,
40,000 shares to Financial Futures Corporation, a financial consulting
firm.
By Agreement dated March 12, 1997, Avonwood agreed to accept 187,666
shares of the Company's common stock, par value $.01, in exchange for the
amounts due Avonwood under its Financial Consulting Services Agreement for
the months of January, February, and March, 1997.
By Agreement dated October 31, 1996, by and among Wall Street Equities,
Inc. and the Company. Wall Street Equity was entitled to receive 250,000
shares of the Company's stock, par value $.01 in exchange for financial
consulting services.
(4) The Company entered into a Financial Consulting Services Agreement with
Avonwood Capital Corporation ("Avonwood") which provided as part of the
compensation to Avonwood warrants for 800,000 shares at $.35 per share
expiring May 8, 2001. On October 18, 1996, Avonwood conveyed its warrants
equally to two of its principles, Thomas R. Smith and James Porter, Jr. On
November 24, 1996, Mr. Smith exercised his warrants for 400,000 shares of
common stock by issuing a Note Payable to the Company.
11
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
(a) Common Stock Options
In January, 1995, the Company granted common stock purchase options
expiring on January 6, 2000 for 850,000 common shares at $.25 per share.
On the same date, the common stock purchase options previously
outstanding, which expire on September 5, 1995 for 356,704 common shares
at $.38 per share, were gifted back to the Company and cancelled. The
following summary sets out the activity in common stock purchase options:
1997 1996
---- ----
Outstanding at beginning of year 850,000 850,000
Cancelled (150,000) (150,000)
-------- --------
Outstanding at end of period 700,000 700,000
======== ========
(b) Effective September 29, 1995, the Company granted 500,000 common stock
purchase warrants expiring on September 30, 2000. Each warrant may be
exercised for one common share at $.25 per share. The Company entered
into various consulting agreements dated March 27, 1996, with financial
advisors. As part of these agreements, effective May 8, 1996, the Company
granted 2,400,000 common stock purchase warrants expiring on May 8, 2001.
Each warrant may be exercised for one common share; 2,300,000 warrants
have an exercise price of $.35 each and 100,000 warrants have an exercise
price of $1.00 each. The exercise price of the warrants exceeded the
March market value of the Company's common stock. The following summary
details the activity of the common stock warrants:
1997 1996
--------- ---------
Outstanding at beginning of year 500,000 500,000
Granted 2,400,000 2,400,000
Exercised 400,000 400,000
--------- ---------
Outstanding at end of period 2,500,000 2,500,000
========= =========
(c) Common Stock Warrants Attached to Debentures
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. As of
June 30, 1997, the number of warrants outstanding is indeterminable due
to the exercise formula which is based upon a number of variables and
future transactions.
12
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
With respect to the warrants granted to the debentures holders and
subagents, the warrants are granted in three equal installments on
September 11, 1996; November 26, 1996; and June 8, 1997. These warrants
will expire five years from the date of each instalment; 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 will be 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 a portion of the warrants may 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.
(d) Net Income Per Share
Net income per share was calculated on the basis of the weighted average
number of shares outstanding which amounted to 19,465,358 of the period
ended June 30, 1997 (12,077,732 shares for the period ended June 30,
1996). For the periods ended June 30, 1997 and June 30, 1996 the exercise
of the options and warrants outstanding as at year end did not have a
dilative effect on the net income per share.
12. 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 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.
13. 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.
13
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
The following table identifies customers of the Company who purchased
greater than ten percent (10%) of the oil and gas produced by the Company:
<TABLE>
<CAPTION>
1997 1996
Percentage Percentage
Of Total Of Total
Sales Sales
<S> <C> <C>
Oil Production
Pride Pipeline Company 100% 100%
Gas Production
Aquila Southwest Pipeline Corporation 57% 50%
Austin Chalk National Gas Marketing Services 34% 50%
SONAT 9%
</TABLE>
14. Acquisition of Deven Resources Corporation.
Under the Stock Purchase Agreement effective October 1, 1996, the Company
acquired 100% of the issued and outstanding capital stock of Deven
Resources, Inc. in exchange for 2.6 million shares of common stock with a
market value of approximately $2.5 million and cash of $150,000. The Company
accounted for the acquisition under the purchase method of accounting with
significant categories recorded as follows:
(In Millions)
Oil and Gas Properties $1.50
Goodwill 1.25
Less -Net Liabilities Assumed ( .10)
-----
$2.65
=====
15. Commitment.
The Company was committed under an agreement with a financial advisor for
services at the rate of $20,000 per month through May, 1997. In October,
1996, the Company entered into a one year agreement, expiring September,
1997, with a financial public relations firm, at the rate of $16,000 per
month.
16. Acquisition of Oil and Gas Properties from Reserve Production Inc.
Liquidating Trust.
Effective November 27, 1996, a binding letter of intent was signed with
Reserve Production Inc. Liquidating Trust ("Trust") to acquire oil and gas
properties with approximately 3 million barrels of oil equivalent and a
projected annual operating cash flow of $1.5 million. At the time of
signing, the Company made a deposit of $100,000 ("Earnest Money Deposit").
On December 20, 1996, the Company entered into a definitive agreement
("Definitive Agreement") for the acquisition of these properties, subject to
Bankruptcy Court approval and the Seller's meeting certain conditions to
14
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
closing, at a purchase price of $5 Million. Although Bankruptcy Court
approval was obtained on February 13, 1997, the Trust was unable to meet its
conditions to closing and the transaction has terminated. The Company has
made demand for return of the Earnest Money Deposit and other costs expended
by the Company all in accordance with the Definitive Agreement. The Trust
has refused to return the Earnest Money Deposit and to reimburse the Company
for certain costs in accordance with the Definitive Agreement. On April 24,
1997, the Company commenced a law suit against the Trust to recover the
Earnest Money Deposit, other reimbursable costs and other unspecified
damages. On July 23, 1997, Reserve Production Liquidating Partnership, an
affiliate of the Trust, filed a complaint in the United States District
Court for the Eastern District of Texas, Tyler Division, against the
Company, Westlands Resources Corporation and three of its officers and/or
directors Messrs: Lincoln, Novinskie and Trainor. The suit is essentially a
counter claim to the Company's cause of Action filed in the Bankruptcy court
and seeks unspecified damages. The Company is moving to have the complaint
joined with its complaint, have it treated as a counter claim and filing
appropriate motions in respect thereto. The complaint is without merit and
the Company is taking appropriate actions to defend same. The Company,
consistent with the provisions of its By-Laws, is paying for the defense of
Messrs: Lincoln, Novinskie, and Trainor in this matter.
15
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 or, even if substantially realized, that
they will have the expected effect on the business and/or operations of
the Company.
The Quarter ended June 30, 1997 was marked by a number of events which,
in the long run, will strengthen the Company and enable it to sustain
future growth. These events include:
A. Completion of the acquisition of Deven Resources, Inc.
Effective October 1, 1996, the Company acquired all the outstanding capital
stock of Deven Resources, Inc. ("Deven") in exchange for 2.6 million shares
of the Company's common stock plus $150,000 in cash advances. Deven
contributed $407,302 in management and overhead fees for first nine months of
the current fiscal year and $1,088,289 in oil and gas sales during the period
ended June 30, 1997. In addition, Deven's interests in oil and gas properties
will provide positive cash flow in future years. Consolidation of the
Company's administrative and accounting functions into Deven's operations has
been completed during the second quarter of Daleco's fiscal year ending
September 30, 1997.
16
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
B. Acquisition of Oil and Gas Properties from Reserve Production Inc.
Liquidating Trust.
On April 24, 1997, the Company commenced an Adversary Action against Reserve
Production, Inc. Liquidating Trust ("Trust") in the United States Bankruptcy
Court for the Eastern District of Texas, Tyler Division, Case No.: 97-6036A
(Suit) to recover costs, damages and return of the Company's Earnest Money
Deposit.
On November 27, 1996, the Company entered into a Letter of Intent to acquire
the Trust's interests in oil and gas properties with approximately 3 million
barrels of oil equivalent. On December 20, 1996, the Company entered into a
Definitive Agreement ("Definitive Agreement") for the acquisition of these
properties the purchase was conditional upon Bankruptcy Court approval, which
was obtained on February 13, 1997, and the Trust meeting certain conditions
to closing, which the Trust was unable to do.
Under the terms of the Definitive Agreement, the Company was required to
conduct a workover of the Jody No. 2 Well, Fayette County, Texas, which the
Company did. The Definitive Agreement provided that should the Company not
acquire the Jody No. 2 Well, for any reason, then the Trust would reimburse
the Company for the cost of the Jody No. 2 Well workover.
Since the Trust was unable to meet its conditions to closing as set forth in
the Definitive Agreement, closing on the transaction did not occur and the
Company was entitled to repayment of its Earnest Money Deposit made at the
time of the signing of the Letter of Intent and the cost of the Jody No. 2
Well workover. After the Trust's refusal to abide by the terms of the
Definitive Agreement, the Company commenced the Suit. The Company has also
alleged that the inability of the Trust to meet its Conditions to Closing was
the result of the intentional acts of the Trustee for which it is seeking
damages of an unspecified amount.
On or about July 23, 1997, Reserve Production, Inc., Liquidating Partnership,
a partnership comprised of Reserve Production, Inc., Liquidating Trust and CT
Energy, LLC, a Texas limited liability company, filed an action in the United
States District Court for the Eastern District of Texas, Tyler Division,
seeking unspecified damages from the Company and there of its officers and
directors. The District Court Suit, which should have been filed as a counter
claim to the Company's suit, is believed by the Company and its counsel to be
without merit. The Company, under the provision of its By-Laws, is
undertaking the defense of its officers and director in this matter.
1. Timber Rights.
During the period ended June 30, 1997, the Company's subsidiary,
Sustainable Forest Industries ("Sustainable"), completed the development
of a business plan to utilize its tropical hardwood forest concession in
Guyana, South America. This plan calls for commercial quantities of timber
sales by the quarter ending June 30, 1997. Sustainable closed its first
sale of timber during the quarter. Although small in size, 425 utility
poles, the sale represents the beginning of sales in the Caribbean basin
area. The Company has also completed its on-site inventory of marketable
17
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
timber on its Phase II 4,200 acre concession in the Waurauboo area of
Guyana. With the addition of this block, the company's holdings in Guyana
now stand at over 6,000 acres and have a gross appraised value in excess
of $15,000,000. During the quarter the Company entered into discussion to
provide project financing for Sustainable. It is anticipated that this
financing will be in place during the third fiscal quarter. With the funds
from the project financing, Sustainable will have the necessary working
capita to take the next step in the harvesting of timber necessary to meet
larger orders for wood. At present, Sustainable is in negotiations with
several US and foreign purchasers of raw and rough cut wood that if
consummated would return a substantial profit to the Company.
2. Settlements.
During the period ended March 31, 1997, the Company entered into an
agreement with Avonwood Capital Corporation to satisfy the Company's
monthly obligation of $15,000 for stock. The exchange covered the months
of January, February and March, 1997, for which Avonwood was issued
187,666 shares of common stock.
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
On March 20, 1997, the Annual Meeting of Shareholders was held. At this
meeting there were two matter to be acted upon by the Shareholders: (i)
election of directors; and, (ii) ratification of accounts.
Seven persons were nominated to serve as directors for the coming year
and until their successors are elected and qualified. The nominees and
votes for, against or withheld are as follows:
ITEM 5 OTHER INFORMATION.
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
None.
18
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
===============================================================================
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DALECO RESOURCES CORPORATION
Date: August 11, 1997 GARY J. NOVINSKIE
-------------------------
Gary J. Novinskie
President
Date: August 11, 1997 EDWARD J. FURMAN
-------------------------
Edward J. Furman
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
QUARTERLY FINANCIAL STATEMENTS FOR THE QUARTERS ENDED DECEMBER 31, 1996 AND 1995
AND IS QUALIFIED IN ITS ENTIRETY BY ITS REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000746967
<NAME> DALECO RESOURCES CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 212,457
<SECURITIES> 0
<RECEIVABLES> 108,577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,021,197
<PP&E> 7,305,720
<DEPRECIATION> 2,225,444
<TOTAL-ASSETS> 8,165,033
<CURRENT-LIABILITIES> 3,729,269
<BONDS> 0
0
0
<COMMON> 12,855,225
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,165,033
<SALES> 602,181
<TOTAL-REVENUES> 775,017
<CGS> 573,650
<TOTAL-COSTS> 573,650
<OTHER-EXPENSES> 551,097
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,810
<INCOME-PRETAX> (368,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (368,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (368,540)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
