<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 March 31, 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 (IRS Employer Identification Number)
of incorporation or organization)
435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087 (610) 254-4189
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Issuer's telephone number)
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.
26,490,588 shares of common stock as of May 1, 1997
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <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............................................................................ 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................................. 19
SIGNATURES............................................................................................. 19
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS
OF MARCH 31, 1997 AND 1996
Prepared by Management (Unaudited)
<TABLE>
<CAPTION>
Unaudited Unaudited
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
ASSET
CURRENT ASSETS
Cash $ 80,484 $ 57,073
Receivables 73,805 784,367
Costs Associated With Acquisition of Oil and Gas Properties 547,759
From Reserve Production, Inc., Liquidating Trust (Note 16)
Other Current Assets 87,248 --
------------ ------------
789,296 841,440
Investments in and Advances to Mining Joint Venture (Note 3) 50,000 300,000
Oil and Gas Properties and Equipment (Note 4) 5,230,227 3,512,663
Property and Equipment 75,415 --
Timber Rights (Note 5) 1,028,342 1,028,342
Mineral Properties (Note 6) 15,673 15,487
Goodwill (Note 14) 1,041,668 --
Debenture Issue costs (Note 10) 10,632 --
------------ ------------
TOTAL ASSETS $ 8,241,253 $ 5,697,932
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 2,018,356 $ 1,048,836
Notes Payable (Note 7) 688,000 1,100,000
Drilling Deposits 29,000 29,000
------------ ------------
2,735,356 2,177,836
Amounts Due to Related Parties (Note 8) 566,593 311,661
Debentures (Note 10) 90,000 --
------------ ------------
3,291,949 2,489,497
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued common shares (Note 11) 12,788,225 8,360,126
Accumulated Deficit (7,938,921) (5,151,691)
------------ ------------
Total Shareholders' Equity 4,849,304 3,208,435
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,241,253 $ 5,697,932
============ ============
</TABLE>
See Accompanying Notes.
1
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED INCOME STATEMENTS FOR THE
PERIODS ENDING MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
GROSS OPERATING REVENUE 1997 1996 1997 1996
--------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
Oil and Gas Sales $ 722,462 $ 305,751 $ 1,249,919 $ 498,407
Less: Operating Expenses (Note 4) 529,259 80,691 946,981 169,271
Severance Taxes 5,962 7,967 18,852 11,574
Depletion, Depreciation and Amortization 102,500 58,199 194,634 128,094
----------- ----------- ----------- -----------
NET OPERATING REVENUE 84,741 158,894 89,452 189,468
Management and Administrative Fee 127,555 -- 249,466 --
Revenues
Gain on Litigation Settlement -- (7,656) -- 769,162
Administration Expense (294,619) (222,479) (812,470) (345,327)
Amortization of Debenture Issue Costs (15,000) -- (32,233) --
Financial Advisors Expenses (135,178) -- (228,829) --
Timber Operating Costs (93,175) -- (182,520) --
Amortization of Goodwill (104,166) -- (208,332) --
Write-Down of Advances to Mining Joint (50,000) -- (50,000) --
Venture
Interest Expense (47,081) (32,083) (91,350) (66,698)
TOTAL (611,664) (246,906) (1,356,268) 357,137
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (526,923) $ (103,324) $(1,266,816) $ 546,605
----------- ----------- ----------- ===========
PRIMARY AND FULLY DILUTED NET $ (0.02) $ (0.01) $ (0.06) $ 0.04
INCOME (LOSS) PER COMMON SHARE =========== =========== =========== ===========
</TABLE>
See Accompanying Notes.
2
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF DEFICIT FOR THE
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
Prepared by Management (Unaudited)
<TABLE>
<CAPTION>
Unaudited Unaudited
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
BALANCE - BEGINNING OF $(6,672,105) (5,698,296)
PERIOD
NET INCOME (LOSS) FOR THE (1,266,816) 546,605
----------- -----------
PERIOD
BALANCE - END OF PERIOD $(7,938,921) $(5,151,691)
=========== ===========
</TABLE>
See Accompanying Notes.
3
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
Prepared by Management (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
OPERATING ACTIVITIES 1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (526,923) $ (103,324) $(1,266,816) $ 546,605
Items not affecting Working Capital -
Depreciation, Depletion and Amortization and Write- 60,066 58,199 152,500 128,094
Downs
Resale of Wells -- (71,468) -- (71,468)
----------- ----------- ----------- -----------
(466,857) (116,593) (1,114,316) 603,231
(Increase) Decrease in Other Assets (291,719) -- (629,943) --
(Increase) Decrease in Receivables 885,310 (655,956) 797,325 (33,488)
Increase (Decrease) in Accounts Payable (185,641) (52,946) 708,508 (1,164,036)
Drilling and Workover Costs -- (8,456) -- (19,845)
Proceeds of Drilling Program -- -- 525,500
----------- ----------- ----------- -----------
Cash provided from/(used for) Operations (58,907) (833,951) (238,426) (88,638)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Leasing Acquisition and Well Costs incurred -- (3,826) (124,406) (6,751)
Lease Acquisition and Well costs surrendered -- 79,125 -- (109,481)
----------- ----------- ----------- -----------
Cash provided from/(used for) Investing Activities -- 75,299 (124,406) (116,232)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Increase (Decrease) in amounts due to Related Parties 61,500 87,696 175,131 181,931
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 2,593 (670,956) (187,701) (22,939)
CASH - BEGINNING OF PERIOD 77,891 728,029 268,185 80,012
----------- ----------- ----------- -----------
CASH - END OF PERIOD $ 80,484 $ 57,073 $ 80,484 $ 57,073
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes.
4
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 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 SIX MONTHS ENDED MARCH 31, 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 SIX MONTHS ENDED MARCH 31, 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 $2,370,838
Proven undeveloped lease acreage
cost 1,906,220 2,065,084
Well costs 1,636,803 1,009,739
---------- ----------
7,299,660 5,445,661
Accumulated depletion,
depreciation and amortization 2,074,887 1,938,452
---------- ----------
5,224,773 3,507,209
---------- ----------
Other equipment 6,060 6,060
Accumulated depreciation 606 606
---------- ----------
5,454 5,454
---------- ----------
$5,230,227 $3,512,663
========== ==========
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 $664,597 for the six months ended March 31, 1997.
7
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 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 contributed up to $750,000 to support the operation of
Sustainable. As of December 31, 1996, 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 March 31, 1997 the Company entered into
negotiations with an external funder to provide financing for
Sustainable's Guyana operations. Under the terms of the terms of the
proposed agreement, an initial tranche of $250,000 will be provided in the
form of a participatory loan bearing interest at 12% and payable out of
the net operating cash flow of Sustainable. It is anticipated that the
funding will be in place during the company's third fiscal quarter.
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 March 31, 1997 was $688,000.
8
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
===============================================================================
8. Due to (from) Related Parties.
March 31, March 31,
1997 1996
--------- ----------
Net due to Haly Corporation -
Bearing interest at prime +1% $308,334 52,472
Bearing interest at TCD +1.5% -- 5,319
--------- ----------
$308,334 57,791
--------- ----------
Net due (From) to Amir and Erlich
Bearing interest at prime +3% 91,062 151,000
Bearing interest at 7% 167,197 --
Non-interest bearing
-- 102,870
--------- ----------
258,259 253,870
--------- ----------
$566,593 311,661
========= ==========
There are no fixed repayment terms for these amounts.
9. Related Party Transactions.
Remuneration of directors for the periods ended March 31, 1997 and March
31, 1996 was $0.00 and $2,739, 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 March 31, 1997 and March 31, 1996 the sum of $138,426 and
$135,000, 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.
Haly Corporation charged interest in the amount of $5,930, for the quarter
ended March 31, 1996 and $6,415 in the quarter ended March 31, 1997.
Amir and Erlich charged interest in the amounts of $0.00 and $5,692 for
the periods ended March 31, 1997 and March 31, 1996 respectively.
9
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
===============================================================================
10. Debentures.
As Of As Of
March 31, March 31,
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 March 31, 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 SIX MONTHS ENDED MARCH 31, 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- --
Exercise of Warrants (4) 400,000 -0- --
Balance as at March 31, 1997 $25,580,045 -0- $12,788,225
=========== ===========
</TABLE>
(1) During the period ended March 31, 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 SIX MONTHS ENDED MARCH 31, 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 year 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 as of March 31 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 March 31, 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 SIX MONTHS ENDED MARCH 31, 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 March 31, 1997 (12,077,732 shares for the period ended
March 31, 1996). For the periods ended March 31, 1997 and March 31,
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 SIX MONTHS ENDED MARCH 31, 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 17.3 16.6
Austin Chalk National Gas Marketing Services 27.0 27.4
SONAT 55.7 56.0
</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 is 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").
14
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
===============================================================================
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 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.
15
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 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 March 31, 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 $249,466 in management and overhead fees for
first six months of the current fiscal year and $695,988 in oil and gas
sales during the period ended March 31, 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 SIX MONTHS ENDED MARCH 31, 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.
1. Timber Rights.
During the period ended March 31, 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
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.
17
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
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:
NOMINEES FOR AGAINST ABSTAIN
-------- ---------- ------- -------
Dov Amir 17,723,608 0 147,707
Louis Erlich 17,723,608 0 147,707
David F. Lincoln 17,723,608 0 147,707
Gary J. Novinskie 17,723,608 0 147,707
Eberhard Mueller 17,723,608 0 147,707
C. Warren Trainor 17,723,608 0 147,707
Mark J. DeNino 17,723,608 0 147,707
The Shareholder ratified the selection of Coopers & Lybrand or such
other accounting firm selected by the Board of Directors as the
Company's certified public accountants as follows:
FOR AGAINST ABSTAIN
---------- ------- -------
17,667,525 82,740 121,050
18
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
===============================================================================
ITEM 5 OTHER INFORMATION.
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
None.
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: May 14, 1997 Gary J. Novinskie
-----------------
Gary J. Novinskie
President
Date: May 14, 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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 80,484
<SECURITIES> 0
<RECEIVABLES> 73,805
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 789,296
<PP&E> 7,305,720
<DEPRECIATION> 2,074,887
<TOTAL-ASSETS> 8,241,253
<CURRENT-LIABILITIES> 3,391,949
<BONDS> 0
0
0
<COMMON> 12,788,225
<OTHER-SE> (7,938,921)
<TOTAL-LIABILITY-AND-EQUITY> 8,241,253
<SALES> 722,462
<TOTAL-REVENUES> 850,017
<CGS> 637,721
<TOTAL-COSTS> 511,664
<OTHER-EXPENSES> 692,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,081
<INCOME-PRETAX> (526,923)
<INCOME-TAX> 0
<INCOME-CONTINUING> (526,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (526,923)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
