<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, 1998
( ) 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
<TABLE>
<CAPTION>
<S> <C>
Delaware 23-2860739
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
435 Devon Park Drive, Suite 410
Wayne, PA 19087 (610) 254-4199
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Issuer's telephone number)
</TABLE>
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.
2,776,788 shares of common stock as of April 1, 1998
<PAGE>
INDEX
PART I FINANCIAL INFORMATION Page
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statement of Loss 4
Consolidated Statement of Deficit 5
Consolidated Statement of Cash Flow 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 277,796 $ 80,484
Accounts receivable 453,861 73,805
Costs Associated with Potential acquisition of oil and gas properties
from Reserve Production, Inc. (Note 15) -- 547,759
Other 11,474 87,248
------------ ------------
Total Current Assets 743,131 789,296
Investment in and advances to mining joint venture (note 3) -- 50,000
Oil and gas properties and equipment (note 4) 9,776,006 5,230,227
Property and equipment 47,368 75,415
Timber rights (note 5) 1,028,342 1,028,342
Mineral properties (note 6) 23,973 15,673
Goodwill (note 16) 605,025 1,041,668
Debt Issue Costs 559,815 10,632
------------ ------------
Total Assets $ 12,783,660 $ 8,241,253
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 2,041,317 $ 2,018,356
Current portion of long-term debt 200,000 --
Notes payable (note 7) -- 688,000
Drilling deposits -- 29,000
Due to related parties (note 8) 356,256 566,593
------------ ------------
Total Current Liabilities 2,597,573 3,301,949
Long-term debt (note 10) 5,554,783 --
Debentures (note 9) 60,000 90,000
------------ ------------
Total Liabilities 8,212,356 3,391,949
------------ ------------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
2,776,788 Common shares, par value $0.01 per share (note 1) 27,770 27,570
16,000 Preferred Shares, par value $0.01 per share (note 7) 160 --
Additional Paid in Capital 14,103,912 12,760,655
Accumulated deficit (9,560,538) (7,938,921)
------------ ------------
Total Shareholders' Equity 4,571,304 4,849,304
------------ ------------
Total Liabilities and Shareholders' Equity $ 12,783,660 $ 8,241,253
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gross Oil and Gas Operating Revenue $ 627,977 $ 722,462 $ 1,196,759 $ 1,249,919
Less: Lease Operating Expenses 278,283 146,070 387,723 274,881
Severance taxes 11,731 5,962 20,370 18,852
Net Profits Interest and Related Expenses 236,470 383,189 521,361 672,100
Depletion, depreciation and amortization 85,000 102,500 160,000 194,634
----------- ----------- ----------- -----------
Net Income from Oil and Gas Operations 16,493 84,741 107,305 89,452
----------- ----------- ----------- -----------
Timber Revenues 22,032 -- 22,032 --
Timber Operating Costs 100,548 93,175 185,981 182,520
----------- ----------- ----------- -----------
Net Loss From Timber Operations (78,516) (93,175) (163,949) (182,520)
----------- ----------- ----------- -----------
Management and Administrative Fee Revenues 111,080 127,555 197,209 249,466
Administration Expense (258,699) (294,619) (480,060) (812,470)
Amortization of Debenture Issue Costs (9,250) (15,000) (18,500) (32,233)
Financial Advisors Expense -- (135,178) -- (228,829)
Amortization of Goodwill (104,166) (104,166) (208,332) (208,332)
Write-Down of Advances to Mining Joint Venture -- (50,000) -- (50,000)
Interest expense (91,224) (47,081) (152,248) (91,350)
----------- ----------- ----------- -----------
TOTAL (352,259) (518,489) (661,931) (1,173,748)
----------- ----------- ----------- -----------
NET (LOSS) $ (414,282) $ (526,923) $ (718,575) $(1,266,816)
=========== =========== =========== ===========
PRIMARY AND FULLY DILUTED NET (LOSS)
PER COMMON SHARE $ (0.15) $ (0.20) $ (0.26) $ (0.60)
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
1998 1997
------------ ------------
Deficit - Beginning of Period ($8,801,963) $(6,672,105)
Net loss for the period (718,575) (1,266,816)
Dividends on Preferred Stock (40,000) --
------------ ------------
Deficit - End of Year ($9,560,538) $(7,938,921)
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net (Loss) $ (414,282) $ (526,923) $ (718,575) $(1,266,816)
Items not affecting Working Capital
Depletion, Depreciation, and Amortization and Write-Downs 198,416 60,066 386,832 152,500
----------- ----------- ----------- -----------
(215,866) (466,857) (331,743) (1,114,316)
(Increase) Decrease in Other Assets -- (291,719) -- (629,943)
(Increase) Decrease in Receivables (191,972) 885,310 (145,278) 797,325
Increase (Decrease) in Accounts Payable 927,384 (185,641) 908,882 708,508
----------- ----------- ----------- -----------
Cash provided (used) for Operations 519,546 (58,907) 431,861 (238,426)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Leasing Acquisition and Well Costs incurred (3,455,104) -- (4,612,459) (124,406)
----------- ----------- ----------- -----------
Cash provided from/(used for) Investing Activities (3,455,104) -- (4,612,459) (124,406)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Increase in amounts due to Related Parties 6,666 61,500 6,666 175,131
Dividends Paid (20,000) -- (40,000) --
Proceeds From Long-term debt 2,666,137 -- 3,964,968 --
----------- ----------- ----------- -----------
Cash Provided From (used by) Financing Activities 2,652,803 61,500 3,931,634 175,131
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (282,755) 2,593 (248,964) (187,701)
CASH - BEGINNING OF PERIOD 560,551 77,891 526,760 268,185
----------- ----------- ----------- -----------
CASH - END OF PERIOD $ 277,796 $ 80,484 $ 277,796 $ 80,484
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
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, 1997.
2. Summary of Significant Accounting Policies
a. Use of estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
b. Basis of consolidation
The consolidated financial statements of Daleco
Resources Corporation (the "Company") have been
prepared in accordance with generally accepted
accounting principles and include the accounts of
the Company and its wholly-owned subsidiaries
Westlands Resources Corporation ("Westlands"),
Sustainable Forest Industries Inc. ("Sustainable"),
Deven Resources, Inc. ("Deven"), Tri-Coastal
Energy, Inc., ("TCE"), Tri-Coastal Energy, L.P.
("TCELP"), and Haly Corp. The Company's investments
in oil and gas leases are accounted for using
proportionate consolidation whereby the Company's
prorata share of each of the assets, liabilities,
revenues and expenses of the investments are
aggregated with those of the Company in its
financial statements.
c. Oil and gas properties and equipment
The Company follows the successful efforts method
of accounting for the costs of exploration and
development activities. Direct acquisition costs of
developed and undeveloped leases are capitalized.
Costs of undeveloped leases on which proved
reserves are found are transferred to proven oil
and gas properties. Each undeveloped lease with
significant acquisition cost is reviewed
periodically and a valuation allowance provided for
any estimated decline in value. Capitalized costs
of proved developed leases are charged to income on
the units of production basis based upon total
proved reserves. The capitalized costs of these
proved developed leases are written down to their
projected net recoverable amount.
Costs of exploratory wells found to be dry during
the year or before the issuance of these financial
statements are charged against earnings in that
year. Costs of successful exploration wells and
development wells are capitalized. All costs of
development wells and successful exploration wells
are charged to earnings on a unit-of-production
basis based upon proved developed reserves. Where
the costs of developed wells and successful
exploration wells exceed projected net recoverable
amounts, such wells are written down to their
projected net recoverable amount. Net recoverable
amount is the aggregate of estimated un-discounted
future net revenues from proven reserves less
operating and production expenses.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
Effective in the first quarter of 1997, the Company
began assessing the impairment of capitalized costs
of proved oil and gas properties and other
long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." Under
this method, the Company generally assesses its oil
and gas properties on a field-by-field basis
utilizing its current estimate of future revenues
and operating expenses. In the event net
undiscounted cash flow is less than the carrying
value, an impairment loss is recorded based on
estimated fair value, which would consider
discounted future net cash flows. SFAS 121 did not
have any impact on the Company's change in method
of assessing impairment of oil and gas properties
and other long-lived assets.
d. Site restoration, dismantlement and abandonment costs
The salvage value of producing wells is expected to
exceed the cost of site restoration and
abandonment. As a result, no such costs are accrued
in these financial statements.
e. Property and Equipment
Property and equipment are recorded at cost and
depreciated over the straight-line method over a
period of five years.
f. Mineral Properties
The Company has recorded the acquisition of mineral
claims at cost. These costs along with any future
exploration and development costs relating to
mineral properties are deferred until the
properties are brought into production, at which
time they are amortized on a unit-of-production
basis, or until the properties are abandoned or
sold or management determines that the mineral
property is not economically viable, at which time
the deferred costs are written off.
g. Timber Rights
The Company has recorded the acquisition of timber
rights at cost. These costs are deferred until
commercial production commences. Where the costs
exceed projected net recoverable amounts, the
timber rights are written down to the projected net
recoverable amount. Net recoverable amount is the
aggregate of estimated un-discounted future net
revenues from the sale of timber less operating and
production expenses.
h. Debt Issue Costs
Debt issue costs as of March 31, 1998, represent
those associated with the Heller Financial, Inc.
loan (see Note 10) and will be amortized over a
period of five years. Costs as of March 31, 1997
were associated with the Company's two offerings of
debentures in Fiscal 1996 (see note 9) and were
written off upon conversion of the debentures into
common stock.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
I. Cash and Cash Equivalents
Cash and cash equivalents include cash and
investments with original maturities of three
months or less.
j. Goodwill
Goodwill associated with the acquisition of Deven
Resources, Inc. is being amortized over a period of
three (3) years.
k. Fair Value of Financial Instruments
Cash and cash equivalents, receivables, and all
liabilities have fair values approximating carrying
amounts, except for the Heller Financial, Inc., and
Sonata Investment Company, LTD., loans for which it
is not practicable to estimate fair values. The
loans are to be repaid out of net cash flows.
Additional interest or profit participation is
payable after the payment of principal.
l. Reverse Stock Split
Effective Febraury 24, 1998, the majority of
stockholders of the Company approved a reverse
ten-for-one stock split. The effect of the reverse
stock split has been retroactively reflected in
these financial statements. All reference to the
number of common and preferred shares, stock
options, warrants, and per share amounts elsewhere
in these financial statements and related footnotes
have been restated as appropriate to reflect the
effect of the reverse split for all periods
presented.
3. Investment In and Advances to Mining Joint Venture
The Company participated in an agreement dated March 12,
1980, (revised October 18, 1980) to purchase 25% of the
issued shares of Minera La Yesca, a Mexican mining
corporation. Funds were advanced to Minera La Yesca to help
finance the cost of placing the Pinabete Silver Mine (the
"mine") in Mexico into production. The investment in and
advances to Minera La Yesca have been recorded at cost. Due
to operating losses resulting from the continuing low price
of silver, the mine was taken out of production during 1991.
The investment in the advances to Minera La Yesca, which
were recorded at cost, has been written off during fiscal
1997.
4. Oil and Gas and Equipment
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Proven lease acreage costs $ 6,359,400 $3,762,091
Proven undeveloped lease acreage costs 1,906,220 1,906,220
Well costs 4,243,918 1,636,803
------------ ----------
12,509,538 7,305,114
Accumulated depletion, depreciation, and amortization 2,733,532 2,074,887
------------ ----------
$ 9,776,006 $5,230,227
============ ==========
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
5. Timber Rights Acquisition
Effective September 29, 1995, the Company entered into an
agreement ("Acquisition Agreement") to purchase 100% of the
issued and outstanding shares of the common stock of
Sustainable Forest Industries Inc. ("Sustainable"), a
privately held Delaware Company, in exchange for 1,500,000
shares of common stock of the Company.
Prior to this, Sustainable entered into a Timber Acquisition
Agreement on September 27, 1995 with Oreu Timber and Trading
Co., Ltd. ("Oreu"), a Guyana Corporation which is an
affiliate of May Joy Agricultural Cooperative Society Ltd.
("May Joy"). Under the terms of the agreement, Sustainable
has been assigned the exclusive harvesting and cutting
rights for the timber concession issue by Permit No. 1367.
This permit was originally granted to May Joy who
subsequently assigned harvesting rights to Oreu as per an
agreement dated January 3, 1995. In April 1997, Sustainable
was assigned the timber concession rights under Permit
#4975.
In exchange for the timber rights, Oreu received a 10%
ownership of Sustainable. This ownership was subsequently
converted to equivalent shares of the Company as a result of
the acquisition of Sustainable.
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 150,000 common shares of Daleco
given up to acquire Sustainable. The fair value of the net
liabilities of Sustainable acquired was $65,842 resulting in
consideration of approximately $1,028,500 which has been
recorded as timber rights.
During fiscal 1997, the Company obtained funds to permit
Sustainable to begin implementation of its business plan
(see Note 10).
6. Mineral Properties
In February 1995, the Company acquired 109 mining claims
from shareholders of the Company for $15,673 representing
their cost to acquire the claims. Additional costs of $8,300
were incurred during fiscal 1997 to maintain these claims.
The Company is seeking interest from third parties for the
development of these claims.
7. Notes Payable
During the year ended September 30, 1995, the Company
received $1,100,000 in return for two notes payable, with
the producing wells of the Company used as collateral.
Interest of 10% per annum was due monthly.
During fiscal 1996, the Company repaid $300,000 of the
outstanding balance. During fiscal 1997, the remaining
$800,000 was converted into 16,000 shares of 10% cumulative
preferred stock, at $50.00 per share.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
8. Due to (from) Related Parties
1998 1997
-------- --------
Net due to Haly Corporation
Bearing interest at prime +1% $ -- $308,334
-------- --------
Net due (from) to Amir and Erlich
Bearing interest at prime +3% 91,062 91,062
Bearing interest at 7% 265,194 167,197
-------- --------
356,256 258,259
-------- --------
$356,256 $566,593
======== ========
The amounts due to Haly Corporation were eliminated through
the acquisition of Haly as of September 30, 1997 (see Note
17). Amir and Erlich are officers and shareholders of the
Company. These amounts have no fixed repayment terms.
9. Debentures
1998 1997
---- ----
8% Convertible Debentures $ 60,000 $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 were 10% of
the gross proceeds and 10,000 warrants at $10.00,
with an expiration date of May 30, 2001 (see Note
11). The debentures could be converted after a
holding period of: (a) as to 50% of the principal
amount, 40 days (July 10, 1996), and (b) the
remaining 50%, 60 days (July 30, 1996). The
debentures are convertible into the Company's
common stock at the lessor of (1) a 35% discount on
the previous five day average closing bid price at
conversion, or; (2) the previous day average
closing bid price at closing (May 31, 1996). As of
September 30, 1996, $600,000 of the 7% debentures
had been converted into 107,712 common shares. The
remaining balance was converted into 90,580 common
shares during 1997.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED March 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
b. 8% Convertible Debentures
On September 11, 1996, the Company issued
$1,310,000 worth of 8% convertible debentures with
interest payable in stock only and accruing until
conversion or redemptions after the term of two
years. The placement agent's fees were 10% of the
gross proceeds and 12,211 warrants at $10.07
expiring November 16, 2001. The debentures may be
converted after a holding period of 45 days after
closing at the lessor of: (1) the fixed conversion
price ($10.171875), or (2) 75% of the average
closing bid price for the five trading days
immediately preceding the date of conversion. As of
September 30, 1997, $1,250,000 of the 8% debentures
had been converted into 765,015 common shares.
10. Long-Term Debt
Long-term debt of the Company consists of the following:
a. Heller Financial, Inc.
During the fourth quarter of fiscal 1997, the
Company entered into an arrangement with Heller
Financial, Inc. ("Heller") whereby Heller has
agreed to provide the Company with up to
$15,000,000 to rework existing horizontal wells,
recomplete its vertical wells as horizontal wells,
and develop additional acreage. This facility was
increased to $19 million in March 1998 to
accomodate the purchae of additional properties
(see note 16). Under the terms of the agreement,
all of the properties of Westlands were transferred
to a newly formed Limited Partnership, Tri-Coastal
Energy, L.P., the general partner of which is
Tri-Coastal Energy, Inc., ("Tri-Coastal") and the
sole limited partner of which is Westlands.
Westlands is also the sole shareholder of
Tri-Coastal. The amount outstanding under this
arrangement as of March 31, 1998 was $5,154,783.
Interest on the borrowings is at prime plus 2%.
Principal is paid out of 85% of the net cash flow
from the properties. Additional interest is payable
from 50% of the net cash flow from these properties
after the payment of principal.
b. Sonata Investment Company, LTD.
During the third quarter of fiscal 1997,
Sustainable entered into a loan agreement with
Sonata Investment Company, LTD. for $250,000, which
remains outstanding as of March 31, 1998.
Sustainable has the right to request an additional
$250,000 prior to December 31, 1999. The Company
and Westlands are guarantors of the loan with
Westlands (now Tri-Coastal Energy, L.P.) wells
being pledged as collateral, subordinated to the
Heller Financing. The loan is to be repaid out of
25% of Sustainable's net cash flow with any
remaining balance due by December 31, 1999.
Interest is at 12%. In addition, Sonata will
receive a profit's participation of 25% of the net
profits of Sustainable while the loan is
outstanding and 20% after the loan is repaid
("after payout"). Should Sustainable request the
additional $250,000 from Sonata and should Sonata
elect not to make said advance, then the after
payout rate reduces from 20% to 15%.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
c. PNC Bank Loan
During the fourth quarter of fiscal 1997, Deven
Resources, Inc. obtained a term loan of $300,000
with interest at prime plus 1 1/2%. Principal is
due at $25,000 per quarter. The loan is secured by
specific properties owned by Deven.
d. First Regional Bank
As of September 30, 1997, the Company assumed a
$100,000 loan with First Regional Bank when it
acquired Haly Corporation (see Note 17). Interest
is at 6.9% and the loan matures December 12, 1998.
The loan is secured by personal assets of an
officer of the Company.
11. Capital Stock
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
NUMBER OF COMMON SHARES PAR VALUE
SHARES, PAR VALUE $0.01 PER SHARE
$0.01 PER SHARE
<S> <C> <C>
<S> <C> <C>
Authorized 20,000,000 10,000,000
---------- ----------
Balance as at September 30, 1997 2,756,788 16,000
Issued for Professional Services Rendered 20,000 ---
---------- ----------
Balance as at March 31, 1998 2,776,788 16,000
========== ==========
</TABLE>
Upon redomestication of the Company into the U.S. as of
October 1, 1997, par value was established at $0.01 per
share for both common and preferred stock.
a. Common Stock Options
In January 1995, the Company granted fully vested
common stock purchase options expiring on January
6, 2000 for 85,000 common shares at $2.50 per
share. On the same date, the common stock purchase
options previously outstanding, which expired on
September 5, 1995 for 35,670 common shares at $3.20
per share, were gifted back to the Company and
canceled. The following summary sets out the
activity in common stock purchase options:
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
Fiscal
1998 1997
------ ------
Outstanding and Exercisable 35,000 85,000
at beginning of year
- -------------------------------------------------------------------------
Canceled -- (15,000)
- -------------------------------------------------------------------------
Granted 120,000 --
------- -------
- -------------------------------------------------------------------------
Outstanding and Exercisable
at end of period 155,000 70,000
- -------------------------------------------------------------------------
In the first quarter of fiscal 1998, the Company
issued 120,000 Common Stock options at $2.1875 per
share.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation," (SFAS 123). SFAS
123 permits the Company's continued use of the intrinsic
value based method prescribed by Accounting Principles Board
Opinion No. 25 (APB 25). FAS 123 requires additional
disclosures, including proforma calculations of net earnings
and earnings per share, as if the fair value method of
accounting prescribed by SFAS 123 had been applied. The fair
value of stock options and compensation cost are measured at
the date of grant.
The common stock purchase options were issued for past
services at an exercise price of $2.50 per share when the
underlying stock was at $2.245 per share. Had compensation
cost been determined based on the fair value of the common
stock purchase options using the provisions of SFAS 123, the
Company's net loss and loss per share in 1995 would have
increased by $161,500 and $0.10, respectively.
For the proforma calculation, the fair value of each option
on the date of grant was estimated using the Black-Scholes
option pricing model and the following assumptions for
awards in 1995: zero dividend yield expected volatility of
119.64%, risk-free interest rate of 7.84%, and expected
life of 5 years. Using these assumptions, the grant-date
fair value per share of the options granted in 1995 was
$1.90.
b. Common Stock Warrants
Common stock warrants outstanding at March 31,
1998, consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance Expiration Date Amount Price Per Share
- ---------------------------------------------------------------------------------------------------------------
Acquisition of Sustainable September 30, 2000 50,000 $3.50
- ---------------------------------------------------------------------------------------------------------------
Consulting Agreements May 8 2001 to
October 1, 2001 160,000 $3.50
- ---------------------------------------------------------------------------------------------------------------
Consulting Agreement September 30, 2001 10,000 $10.00
- ---------------------------------------------------------------------------------------------------------------
8% Debenture Holders and September 11, 2001 to $4.386 to
Placement Agents (I.) June 8, 2002 186,471 $10.81
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8%
convertible debentures in September 1996;
a number of warrants were granted to the
holders of the debentures, the agents, and
subagents who placed the debentures.
With respect to the warrants granted to
the debenture holders and subagents, the
warrants were granted in three equal
installments of September 11, 1996;
November 26, 1996; and June 8, 1997. These
warrants will expire five years from the
date of each installment: September 11,
2001; November 26, 2001; and June 8, 2002.
The number of shares of common stock into
which the warrants may be converted and
the exercise price of the warrants were
determined by (among other variables and
future events) the amount of debentures
still outstanding on each date of grant,
and the average closing bid price of the
Company's common stock for the five
trading days immediately preceding each
date of grant.
On September 11, 1996, a total of 12,211
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 $10.73, or (2) all or a
portion of the warrants may be exercised
on a cashless basis where a reduced number
of shares of common stock will be issued
based upon the difference between the
average closing price of the Company's
common stock for the five business days
immediately preceding the date of exercise
and the exercise price, divided by the
average closing market price, times the
number of warrants being exercised.
c. Net Income Per Share
Net income per share was calculated on the basis of
the weighted average number of shares outstanding
which amounted to 2,776,788 for the period ended
March 31, 1998.
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 subsidiary Company's tax
filings show net operating losses to be applied against
future taxable income in the amount of approximately $25
million to be utilized in various years through 2009. The
tax benefit of these losses is estimated to be approximately
$10 million. No potential benefit of these losses has been
recognized in the accounts.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
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. There were no revenues from timber operations in
1997 and 1996.
The following table identifies customers of the Company who
purchased greater than ten percent of the oil and gas
produced by the Company:
<TABLE>
<CAPTION>
1998 PERCENTAGE OF 1997 PERCENTAGE OF
TOTAL SALES (%) TOTAL SALES (%)
<S> <C> <C>
Oil Production
Pride Pipeline Company 100% 100%
Gas Production
Aquila Southwest Pipeline Corporation 11.5% 17.3%
Austin Chalk National Gas Marketing Services 31.3% 27.0%
New Brenen Corporation .7% --%
Southern Natural Gas 56.5% 55.7%
</TABLE>
14. Employment Contracts and Commitments
In connection with the acquisition of Sustainable and under
Management Agreement dated April 17, 1995, the Company
agreed to engage two key officers for a period of seven
years ending April 17, 2002. The two key officers are
entitled to a base salary of $75,000 plus additional
incentive payments each based upon a percentage of net
income of Sustainable. At the time of termination for any
reason, the key officers are entitled to a severance payment
equal to the total of the annual base salary plus additional
annual incentive payments he is then receiving multiplied by
the remaining years, or portions thereof, of the contract
period. During fiscal 1997, the Company reached a settlement
with one of the officers in the total amount of $60,000 to
be paid at $5,000 per month through February 1998.
In connection with the acquisition of Deven and under the
Stock Purchase Agreement dated October 1, 1996, the Company
agrees that should certain Deven officers be involuntarily
terminated, other than in response to the Deven Officer's
gross negligence, willful misconduct, ineptitude or
inability to perform the duties of his position,
("Involuntary Personnel Action") on or before September 30,
2001 ("Coverage Period"), the said Deven Officer who was the
object of said Involuntary Personnel Action shall be
entitled to receive a sum equal to 150% of the aggregate
base salary plus the cash equivalent of all benefits for the
period of time between the date of the Involuntary Personnel
Action and the remaining portion of the Coverage Period
("Settlement Consideration").
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
However, the Settlement Consideration shall not be less than
two years severance even though the period between the
Involuntary Personnel Action and the expiration of the
Coverage Period be less than two years.
The Company had two contracts with financial advisors during
fiscal 1997. The first expired in May 1997; the second
expired October 31, 1997. Neither contract was renewed.
The Company had two office leases as of March 31, 1998. The
first calls for rent of $3,864 per month through June 30,
1998. The second lease calls for rent of $3,354 per month
through December 31, 1999.
15. Litigation Settlement
In April 1997, the Company commenced an Adversary Action
styled Daleco Resources Corporation v. Reserve Production
Inc., Liquidating Trust and Leonard Pipkin, Trustee, in the
United States Bankruptcy Court for the Eastern District of
Texas, Tyler Division, Case No. 97-6036. The case was
commenced to enforce the Company's rights under that certain
Asset Purchase Agreement dated December 20, 1996 ("Asset
Purchase Agreement") as approved by the Bankruptcy Court on
February 13, 1997. In the Adversary Action, the Company
alleged that the defendants' had failed to meet their
conditions to Closing under the Asset Purchase Agreement and
were thus required to refund the Company's $100,000 Earnest
Money Deposit and pay for the reworking of the Jody Well.
Subsequent to the commencement of the Company's adversary
action, a case was commenced in the United States District
Court for the Eastern District of Texas, Tyler Division,
styled Reserve Production Liquidating Trust v. Daleco
Resources Corporation, Westlands Resources Corporation,
David F. Lincoln, Gary J. Novinskie and C. Warren Trainor,
C.A. No.: 6:97 CV 705 ("District Court Action"). The
District Court Action was in essence a counter claim against
the Company and three of is directors asserting matters
which should have been addressed in an answer to the
Adversary Action. The Company filed a motion to dismiss the
District Court Action; however, prior to ruling on the
Company's Motion, the Adversary Action was resolved through
Court mandated mediation. Under the terms of the settlement,
the Company's Earnest Money Deposit was returned and the
Reserve Production Inc., Liquidating Trust, Reserve
Production Liquidating partnership, and Leonard Pipkin,
trustee, were required to resolve all outstanding claims for
the reworking of the Jody Well.
The Company incurred $224,875 in costs to settle this
litigation in Fiscal 1997.
16. Acquisitions
During fiscal 1997, the Company completed the acquisitions of
Deven Resources, Inc. and Haly Corporation.
All of the outstanding stock of Deven was acquired on
October 1, 1996 in exchange for 2.6 million shares of Daleco
stock plus $150,000 in cash. The market value of the stock
was approximately $2.4 million. The acquisition was
accounted for as a purchase resulting in oil and gas
properties of $1.5 million, goodwill of $1.25 million less
liabilities assumed of $200,000. Deven receives an annual
management fee of $200,000 from a partnership of which it
has a 1% general partner interest.
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS
ENDED MARCH 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
All of the outstanding stock of Haly, a related party, was
acquired on September 30, 1997. Daleco issued 3 million
shares of common stock to Messrs. Amir and Erlich along with
$1,000 cash. In exchange, the Company received and retired 3
million shares of common stock owned by Haly along with
interests in wells owned by Haly. The acquisition was
accounted for as a purchase. The amounts due Haly were
written off into common stock less the First Regional Bank
loan assumed by Daleco (see Note 11).
On March 27, 1998, the Company acquired oil and gas
properties located in Kansas and Oklahoma for approximately
$2.4 million.
<PAGE>
DALECO RESOURCES CORPORATION
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 then 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, 1998, was marked by a number of
significant events. These events include: the successful
completion of the drilling operations in the initial three
(3) wells (Phase I) of the planned twenty-five (25) well
drilling program on the Company's subsidiary's 7,300 acre
lease block along the Upper Texas Coast Austin Chalk Trend.
In addition, the Company took steps to expand its oil and
gas holdings by acquiring various producing and development
properties located in Kansas and Oklahoma. However, the
Company was impacted by falling oil and gas prices and
workover expenses incurred on existing wells and the
properties acquired in Oklahoma and Kansas.
The Company's Sustainable Forest Industries subsidiary also
was able to advance its sales and marketing program
specifically in its marine industrial and outdoor
residential construction product lines. Commercial sales
were recorded in the quarter ended March 31, 1998.
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
None.
<PAGE>
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 12, 1998 Gary J. Novinskie
------------------------------
Gary J. Novinskie
President
Date: May 12, 1998 Edward J. Furman
------------------------------
Edward J. Furman
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Registrants's
Consolidated six months ended March 31, 1998 and 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000746967
<NAME> DALECO RESOURCES CORPORATION
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 277,796
<SECURITIES> 0
<RECEIVABLES> 453,861
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 743,131
<PP&E> 12,509,538
<DEPRECIATION> 2,733,532
<TOTAL-ASSETS> 12,783,660
<CURRENT-LIABILITIES> 2,597,573
<BONDS> 0
160
0
<COMMON> 27,770
<OTHER-SE> 14,103,912
<TOTAL-LIABILITY-AND-EQUITY> 12,783,660
<SALES> 1,196,759
<TOTAL-REVENUES> 1,416,000
<CGS> 1,089,454
<TOTAL-COSTS> 1,982,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,248
<INCOME-PRETAX> (718,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (718,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (718,575)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
