<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, 1999
--------------
( ) 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 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.
3,102,574 shares of common stock as of May 1, 1999
1
<PAGE>
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)...................................3
Consolidated Balance Sheets........................................3
Consolidated Statement Of Income...................................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...............................18
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K..................................19
SIGNATURES ................................................................20
2
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
=========================================================================================================
1999 1998
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 432,400 $ 277,796
Accounts receivable 342,581 453,861
Other 11,474 11,474
------------ ------------
Total Current Assets 786,455 743,131
Oil and gas properties and equipment (note 3) 8,789,931 9,776,006
Property and equipment 32,632 47,368
Timber rights (note 4) 828,342 1,028,342
Mineral properties (note 5) -- 23,973
Goodwill (note 15) 37,693 605,025
Debt Issue Costs 272,815 559,815
------------ ------------
Total Assets $ 10,747,868 $ 12,783,660
============ ============
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 2,670,118 $ 2,041,317
Current portion of long-term debt 200,000 200,000
Due to related parties (note 7) 445,839 356,256
------------ ------------
Total Current Liabilities $ 3,315,957 $ 2,597,573
Long-term debt (note 10) 6,285,054 5,554,783
Debentures (note 9) -- 60,000
------------ ------------
Total Liabilities 9,601,011 8,212,356
------------ ------------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
3,102,574 (1998--2,776,788) Common shares,
par value $0.01 per share 31,026 27,770
16,000 Preferred Shares, par value $0.01 per share (note 7) 160 160
Additional Paid in Capital 14,388,255 14,103,912
Accumulated deficit (13,272,584) (9,560,538)
------------ ------------
Total Shareholders' Equity 1,146,857 4,571,304
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,747,868 $ 12,783,660
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE PERIODS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
============================================================================================================================
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Oil and Gas Operating Revenue $ 379,916 $ 627,977 $ 816,735 $ 1,196,759
Less: Lease Operating Expenses 195,184 278,283 473,165 387,723
Severance taxes 6,425 11,731 12,550 20,370
Net Profits Interest and Related Expenses 167,043 236,470 402,249 521,361
Depletion, depreciation and amortization 55,000 85,000 120,000 160,000
----------- ----------- ----------- -----------
Net Income (Loss) from Oil and Gas Operations (43,736) 16,493 (191,229) 107,305
----------- ----------- ----------- -----------
Timber Revenues -- 22,032 22,032 26,573
Timber Operating Costs 21,867 100,548 54,981 185,981
----------- ----------- ----------- -----------
Net Loss From Timber Operations (21,867) (78,516) (27,408) (163,949)
----------- ----------- ----------- -----------
Management and Administrative Expense 153,844 111,080 276,289 197,209
Administration Expenses (222,969) (258,699) (403,787) (480,060)
Amortization of Debenture Issue Costs (50,000) (9,250) (100,000) (18,500)
Amortization of Goodwill (100,000) (104,166) (200,000) (208,332)
Interest expense (177,978) (91,224) (343,756) (152,248)
----------- ----------- ----------- -----------
TOTAL (397,103) (352,259) (771,254) (661,931)
----------- ----------- ----------- -----------
NET (LOSS) $ (462,706) $ (414,282) $ (989,891) $ (718,575)
=========== =========== =========== ===========
PRIMARY AND FULLY Diluted NET (LOSS)
PER COMMON SHARE $ (0.14) $ (0.15) $ (0.32) $ (0.26)
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE PERIODS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================
1999 1998
<S> <C> <C>
Deficit - Beginning of Period $(12,242,693) $(8,801,963)
Net loss for the period (989,891) (718,575)
Dividends on Preferred Stock (40,000) (40,000)
------------ -----------
Deficit - End of Year $(13,272,584) $(9,560,538)
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================================
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (Loss) $ (462,706) $ (414,282) $ (989,891) $ (718,575)
Items not affecting Working Capital Depletion,
Depreciation, and Amortization and Write-Downs 205,000 198,416 470,000 386,832
----------- ----------- ----------- -----------
(257,706) (215,866) (519,891) (331,743)
(Increase) Decrease in Other Assets -- -- -- --
(Increase) Decrease in Receivables (88,800) (191,972) (3,564) (145,278)
Increase (Decrease) in Accounts Payable 497,580 927,384 773,503 908,882
Cash provided (used) for Operations 151,074 519,546 250,048 431,861
----------- ----------- ----------- -----------
INVESTMENT ACTIVITIES
Leasing Acquisition and Well Costs Incurred -- (3,455,104) -- (4,612,459)
----------- ----------- ----------- -----------
Cash provided from/(used for) Investing Activities -- (3,455,104) -- (4,612,459)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Increase in amounts due to Related Parties 12,010 6,666 30,010 6,666
Dividends Paid (20,000) (20,000) (40,000) (40,000)
Proceeds From Long-Term Debt -- 2,666,137 -- 3,964,968
----------- ----------- ----------- -----------
Cash Provided From (used by) Financing Activities (7,990) 2,652,803 (9,990) 3,931,634
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 143,084 (282,755) 240,058 (248,964)
CASH - BEGINNING OF PERIOD 289,316 560,551 192,342 526,760
----------- ----------- ----------- -----------
CASH - END OF PERIOD $ 432,400 $ 277,796 $ 432,400 $ 277,796
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
1. CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a
going concern, which contemplates that the Company will be
able to realize assets and discharge liabilities in the
normal course of business. Accordingly, they do not give
effect to adjustments that would be necessary should the
Company be required to liquidate it assets. As of March 31,
1999 the Company has reported a loss of $989,891 and had
negative working capital of $2,529,502. The ability of the
Company to meet these liabilities and total liabilities of
$9.3 Million and to continue as a going concern is dependent
upon the availability of future funding, the successful
completion of its drilling projects (see Note 5), and
achieving profitable timber operations (see Note 4).
As of the date of this report, certain of the Company's
subsidiaries are in default relative to certain debt
obligations.
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.,
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.
7
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
Costs of exploratory wells found to be dry during the
year or before the issuance of these financial
statements are charged against earnings in that year.
Costs of successful exploration wells and development
wells are capitalized. All costs of development wells
and successful exploration wells are charged to
earnings on a unit-of-production basis based upon
proved developed reserves. Where the costs of
developed wells and successful exploration wells
exceed projected net recoverable amounts, such wells
are written down to their projected net recoverable
amount. Net recoverable amount is the aggregate of
estimated un-discounted future net revenues from
proven reserves less operating and production
expenses.
Effective in the first quarter of 1997, the Company
began assessing the impairment of capitalized costs
of proved oil and gas properties and other long-lived
assets in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Under this
method, the Company generally assesses its oil and
gas properties on a field-by-field basis utilizing
its current estimate of future revenues and operating
expenses. In the event net undiscounted cash flow is
less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would
consider discounted future net cash flows. SFAS 121
did not have any impact on the Company's change in
method of assessing impairment of oil and gas
properties and other long-lived assets.
d. Site restoration, dismantlement and abandonment costs
The salvage value of producing wells is expected to
exceed the cost of site restoration and abandonment.
As a result, no such costs are accrued in these
financial statements.
e. Property and Equipment
Property and equipment are recorded at cost and
depreciated over the straight-line method over a
period of five years.
f. 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.
g. Debt Issue Costs
Debt issue costs as of March 31, 1999 and 1998,
represent those associated with the Heller Financial,
Inc. loan (see Note 9) and will be amortized over a
period of five years.
8
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
h. Cash and Cash Equivalents
Cash and cash equivalents include cash and
investments with original maturities of three months
or less.
i. Goodwill
Goodwill associated with the acquisition of Deven
Resources, Inc. is being amortized over a three (3)
year period.
j. 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.
k. Reverse Stock Split
Effective February 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.
9
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
3. Oil and Gas and Equipment
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proven lease acreage costs $ 6,071,637 $ 6,359,400
Proven undeveloped lease acreage costs 1,906,220 1,906,220
Well costs 4,795,605 4,243,918
----------- -----------
$12,773,462 $12,509,538
Accumulated depletion, depreciation and amortization 3,983,531 2,733,532
----------- -----------
$ 8,789,931 $ 9,776,006
=========== ===========
</TABLE>
4. 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 150,000 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 3,1995,1
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.
5. 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 claims were not renewed and
written-off during Fiscal 1998.
10
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
6. 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.
During fiscal 1998, the Company borrowed $145,000 from four (4)
persons. The debt was evidenced by Notes which matured on November 21,
1998. The Notes earned interest at 2% over the prime rate charged by
the Huntingdon National Bank of Columbus, Ohio, through the maturity
date, and 18% thereafter. The Noteholders were also given warrants.
(See Note 10(b)--Warrants).
7. Due to (from) Related Parties
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net due (from) to Amir and Erlich
Bearing interest at prime +3% $91,062 91,062
Bearing interest at 7% 354,777 265,194
-------- --------
$445,839 $356,256
======== ========
</TABLE>
The amounts due to Haly Corporation were eliminated through the
acquisition of Haly as of September 30, 1997 (see Note 18). Amir and
Erlich are officers and shareholders of the Company. These amounts have
no fixed repayment terms.
8. Debentures
1999 1998
---- ----
8% Convertible $30,000 $60,000
Debentures ------- -------
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 12). The
debentures could be converted after a holding period
of: (a) as to 50% of the principal amount, 40 days
(July 10, 1996), and (b) the remaining 50%, 60 days
(July 30, 1996). The debentures are convertible into
the Company's common stock at the lessor of (1) a 35%
discount on the previous five day average closing bid
price at conversion, or; (2) the previous day average
closing bid price at closing (May 31, 1996). As of
September 30, 1996, $600,000 of the 7% debentures had
been converted into 107,712 common shares. The
remaining balance was converted into 80,579 common
shares during 1997.
11
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - 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 12,111 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 ($1 0.171875), or (2) 75%
of the average closing bid price for the five trading
days immediately preceding the date of conversion. As
of March 31, 1999, $1,280,000 of the 8% debentures
had been converted into 978,687 common shares.
9. Debt
Long-term debt of the Company consists of the following:
a. Heller Financial, Inc.
During the forth quarter of fiscal 1997, the Company
entered into an arrangement with Heller Financial,
Inc. ("Heller") whereby Heller has agreed to provide
the Company with up to $15,000,000 to rework existing
horizontal wells, re-complete its vertical wells as
horizontal wells, and develop additional acreage.
Under the terms of the agreement, all of the
properties of Westlands were transferred to a newly
formed Limited Partnership, Tri-Coastal Energy, L.P.,
the general partner of which is Tri-Coastal Energy,
Inc., (Tri-Coastal) and the sole limited partner of
which is Westlands. Westlands is also the sole
shareholder of Tri-Coastal. The amount outstanding
under this arrangement as of March 31, 1999, was
$5,835,054. Interest on the borrowings is at prime
plus 2%. Principal is paid out of 85% of the net cash
flow from the properties. Additional interest is
payable from 50% of the net cash flow from these
properties after the payment of principal.
b. Sonata Investment Company, LTD.
During the third quarter of fiscal 1997, Sustainable
entered into a loan agreement with Sonata Investment
Company, LTD. for $250,000, which remains outstanding
as of September 30, 1997. Sustainable has the right
to request an additional $250,000 prior to December
31, 1999. The Company and Westlands are guarantors of
the loan with Westlands (now Tri-Coastal Energy,
L.P.) wells being pledged as collateral, subordinated
to the Heller Financing. The loan is to be repaid out
of 25% of Sustainable's net cash flow with any
remaining balance due by December 31, 1999. Interest
is at 12%. In addition, Sonata will receive a profits
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%.
12
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
c. PNC Bank Loan
During the fourth quarter of fiscal 1998, Deven
Resources, Inc. obtained a term loan of $300,000 with
interest at prime plus 12%. Principal is due at
$25,000 per quarter. The loan is secured by specific
properties owned by Deven.
The Company is in default under these debt obligations currently.
d. First Regional Bank
As of December 31, 1997, the Company assumed a
$100,000 loan with First Regional Bank when it
acquired Haly Corporation. Interest is at 6.9% and
the loan matures in 1999. The loan is secured by
personal assets of an officer of the Company.
10. Capital Stock
<TABLE>
<CAPTION>
SHARES
----------------------------------------------------
NUMBER OF COMMON NUMBER OF PREFERRED
SHARES, PAR VALUE SHARES PAR VALUE DOLLAR
$0.01 PER SHARE $0.01 PER SHARE AMOUNT
<S> <C> <C>
Authorized 20,000,000 10,000,000
---------- ----------
Balance as at September 30, 1996 1,315,485 $8,860,984
Issued upon conversion of Debentures 963,307 1,424,133
Issued for acquisition of
Deven Resources, Inc. 260,000 2,392,000
Issued for professional services rendered 217,996 609,014
Issued upon conversion of Notes Payable 16,000 800,000
---------- ----------
Balance as at September 30,1997 2,756,788 16 000 14,086,131
Issued for Professional Services Rendered 194,900 -- 273,377
---------- -----------
Fractional shares (46) (5)
Balance as at September 30, 1998 2,951,642 16,000 $14,359,503
Issued upon conversion of notes payable 150,932 -- 59,938
---------- ---------- -----------
Balance as of March 31, 1999 3,102,574 16,000 14,419,441
========= ========== ==========
</TABLE>
Upon re-domestication 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.
13
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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:
1999 1998
- --------------------------------------------------------------------------------
Outstanding and Exercisable
at beginning of year 35,000 700,000
- --------------------------------------------------------------------------------
Canceled 15,000 (350,000)
- --------------------------------------------------------------------------------
Granted 120,000 --
- --------------------------------------------------------------------------------
Exercised -- --
------- --------
- --------------------------------------------------------------------------------
Outstanding and Exercisable
at end of year 140,000 35,000
======= =========
- --------------------------------------------------------------------------------
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123). SFAS 123 permits the
Company's continued use of the intrinsic value based
method prescribed by Accounting Principles Board
Opinion No. 25 (APB 25). SFAS 123 requires additional
disclosures, including proforma calculations of net
earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been
applied. The fair value of stock options and
compensation cost are measured at the date of grant.
The common stock purchase options were issued for
past services at an exercise price of $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 $1.80.
14
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
b. Common Stock Warrants
Common stock warrants outstanding at March 31, 1999,
consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Issuance Expiration Date Amount Price Per Share
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acquisition of Sustainable September 30, 2000 50,000 $3.50
- ------------------------------------------------------------------------------------------------------------------------------
Consulting Agreements May 8, 2001 to 160,000 $3.50
October 1, 2001
- ------------------------------------------------------------------------------------------------------------------------------
Consulting Agreement September 30, 2001 10,000 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
8% Debenture Holders and September 11, 2001 to 186,470 $4.386 to
Placement Agents (I.) June 8, 2002 $10.81
- ------------------------------------------------------------------------------------------------------------------------------
$145,000 Loan November 20, 2003 263,638 $.55
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8% convertible
debentures in September 1996; a number of warrants were
granted to the holders of the debentures, the agents, and
subagents who placed the debentures.
With respect to the warrants granted to the debenture holders
and subagents, the warrants were granted in three equal
installments of September 11, 1996; November 26, 1996; and
June 8,1997. These warrants will expire five years from the
date of each installment: September 11, 2001; November 26,
2001; and June 8, 2002. The number of shares of common stock
into which the warrants may be converted and the exercise
price of the warrants were determined by (among other
variables and future events) the amount of debentures still
outstanding on each date of grant, and the average closing bid
price of the Company's common stock for the five trading days
immediately preceding each date of grant.
On September 11, 1996, a total of 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 3,102,574 for the period ended
March 31, 1999. For the period ended December 31,
1998 the exercise of the options and warrants
outstanding as at year end did not have a dilutive
effect on the net income per share.
15
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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 $27 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. 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").
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.
14. 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.
16
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
The Company incurred $224,875 in costs to settle this litigation.
15. Acquisitions
During fiscal 1997, the Company completed the acquisitions of Deven
Resources, Inc. and Haly Corporation.
All of the outstanding stock of Deven was acquired on October 1, 1996
in exchange for 2.6 million shares of Daleco stock plus $150,000 in
cash. The market value of the stock was approximately $2.4 million. The
acquisition was accounted for as a purchase resulting in oil and gas
properties of $1.5 million, goodwill of $1.25 million less liabilities
assumed of $200,000. Deven receives an annual management fee of
$200,000 from a partnership of which it has a 1% general partner
interest.
All of the outstanding stock of Haly, a related party, was acquired on
September 30, 1997. Daleco issued 3 million shares of common stock to
Messrs. Amir and Erlich along with $1,000 cash. In exchange, the
Company received and retired 3 million shares of common stock owned by
Haly along with interests in wells owned by Haly. The acquisition was
accounted for as a purchase. The amounts due Haly were written off into
common stock less the First Regional Bank loan assumed by Daleco (see
Note 11).
Mid Continent:
On March 27, 1998, but affective as of November 1,
1997, Tri-Coastal Energy acquired in the States of Kansas and Oklahoma
consisting of 298 wells, 6,409 gross and 4,828 net acres. The purchase
price for the acquisition was $2,315,000. The purchase was funded by an
Amendment to the Heller Transaction, which increased the Heller
Transaction Loan Commitment to $19,000,000. An additional $2,294,397
was drawn down by Tri-Coastal at closing for development of the
Mid-Continent properties.
16. Subsequent event
On December 18, 1998, an unaffiliated company agreed to purchase
1,848,566 shares of common stock for $9 Million. The Company has not
yet received the proceeds on this sale.
17
<PAGE>
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 affect 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 Company's performance during its second fiscal Quarter
ended March 31, 1999, was influenced by a variety of factors:
-Oil prices remained depressed, which resulted in a
net loss from oil and gas operations. The Company,
like most domestic independents, is unable to
influence the price of oil. The announcements by
OPEC of its intent to reduce production and thus
increase the demand for oil on a worldwide basis
should, if it occurs, materially benefit the Company
through the resultant increase in oil pricing.
18
<PAGE>
-The Company's timber subsidiary, Sustainable Forest
Industries continues to attempt to market Guyana
woods domestically. To date, while there has been a
tremendous interest shown in the potential for
Guyana woods, especially in the railroad industry,
no substantial contracts have been obtained.
-On December 18, 1998, the Company entered into a
contract with Infinite Networks Corporation whereby
the Company agreed to sell 1,848,566 shares of
common stock for $9 Million. This agreement has yet
to be consummated. The closing of this transaction
will enable the Company to move forward with planned
development of its existing assets, acquire
additional assets, retire its preferred stock and
bring current all outstanding payables.
With the end of the fiscal quarter ending March 31, 1999,
several elements which will affect the Company's future
economic performance improved. For example, the crude oil
prices received throughout the Company's operating areas began
to firm in response to output restriction put in place by the
OPEC nations. Early indications of price gains appear to be on
the order of several net dollars per barrel produced. In
addition, as of the quarter's end, approximately 97% of the
originally booked goodwill has been amortized. The remaining
booked goodwill of $37,000 represent only about 25% of the
average quarterly charge taken during the current fiscal year.
PART II. OTHER INFORMATION
-----------------
ITEM 6 Exhibits and Reports on Form 8-K
None.
19
<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: June 1, 1999 /s/ Gary J. Novinskie
--------------------------
Gary J. Novinskie
President
Date: June 1, 1999 /s/ Edward J. Furman
--------------------------
Edward J. Furman
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
QUARTERLY FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
AND IS QUALIFIED IN ITS ENTIRETY BY ITS REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000746967
<NAME> DALECO RESOURCES CORPORATION
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 432,400
<SECURITIES> 0
<RECEIVABLES> 342,581
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 786,455
<PP&E> 12,773,462
<DEPRECIATION> 3,983,531
<TOTAL-ASSETS> 10,747,868
<CURRENT-LIABILITIES> 3,315,957
<BONDS> 0
160
0
<COMMON> 31,026
<OTHER-SE> 14,388,255
<TOTAL-LIABILITY-AND-EQUITY> 10,747,868
<SALES> 816,735
<TOTAL-REVENUES> 1,120,597
<CGS> 1,062,945
<TOTAL-COSTS> 1,062,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343,756
<INCOME-PRETAX> (989,891)
<INCOME-TAX> 0
<INCOME-CONTINUING> (989,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (989,891)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
