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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended September 30, 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
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DALECO RESOURCES CORPORATION
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(Name of small business issuer in its charter)
DELAWARE 23-2860739
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087
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(Address of Principal Executive Offices)
Issuer's telephone number: (610)254-4199
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Securities registered under Section 12 (b) of the Exchange Act: None
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Securities registered under Section 12 (g) of the Exchange Act:
Common Shares Par Value $.01
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Series A 10% Cumulative Preferred Stock Par Value $.01
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ ]
State issuer's revenues for its most recent fiscal year: $2,842,951
Aggregate market value of voting stock held by non-affiliates of registrant
based upon the closing NASDAQ sale price on January 27, 1999: $3,692,063
Applicable only to Corporate Registrants
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Number of shares outstanding of the issuer's common stock as of
January 27, 1999: 3,102,574
Number of shares outstanding of the issuer's preferred stock as of
January 27, 1999: 16,000
DOCUMENTS INCORPORATED BY REFERENCE
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Incorporated by reference into this report in Part III, is information to be
contained in Registrant's Proxy Statement at its Annual Meeting.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1 BUSINESS
General:
Daleco Resources Corporation (hereinafter referred to as
"Daleco" and, together with its wholly owned subsidiaries Westlands Resources
Corporation ("Westlands"), Sustainable Forest Industries, Inc. ("Sustainable");
Deven Resources, Inc. ("Deven"); DRI Operating Company, Inc. (DRI); Haly
Corporation ("Haly"); Tri-Coastal Energy, Inc. ("Tri-Coastal") and Tri-Coastal
Energy, L. P. ("TCELP") hereinafter sometimes collectively referred to as the
"Company") is engaged in the exploration, development and production of oil and
gas properties, the harvesting of timber concessions and the holder of mineral
interests. Daleco, originally named United Westlands Resources, Inc., was
organized under the laws of the province of Ontario by amalgamation of two small
companies in 1981. In 1986, the Company changed its name to Daleco Resources
Corporation, and its province of organization to Ontario, Canada. Effective
October 1, 1996, the Company was re-domesticated into the State of Delaware. The
Company, through its wholly owned subsidiary, Westlands, a Nevada corporation,
has acquired a significant number of interests in its Texas properties from
entities owned or controlled by Messrs. Amir and Erlich. Other interests have
been acquired as a result of the failure of non-affiliated working interest
owners to maintain their interest in the properties by failing to pay their
share of costs associated with the properties. Daleco conducts no operations as
such and is essentially a holding company for its oil and gas operating
subsidiaries and the Yukon Territory and its timber holdings in Guyana. Daleco
does not refine any crude oil or market, at retail, any oil on petroleum
products. The Company does not own any drilling rigs, and, generally, all of its
drilling activities are performed by independent drilling contractors on a
contract basis. (See, "Managements discussion and Analysis-Business and
Properties".)
In March 1998, the Company acquired various working interests
and operating right to 298 wells located in the Mid-Continent producing region
of the County for $2,381,000. This acquisition was incorporated into the
Company's project financing arrangement with Heller Financial.
Effective September 30, 1997, the Company acquired all of
outstanding shares of Haly Corporation, a corporation presently held by Messes.
Amir and Erlich for common stock of the Company and $1,000 in cash. Haly has
working interest and overriding royalty interest in some of the Company's Texas
properties. (See, Business and Properties - Haly and Interests of Management in
certain transactions.)
Under the Company's agreement with Heller Financial, Inc., the
Company's Texas and Mid-Continent properties are fully pledged as security for
the Heller Loan. Likewise, certain Pennsylvania Properties of Deven are pledged
to PNC Bank, N.A. as collateral for a $300,000 loan. The pledging of these
assets as collateral for existing loans could hinder the ability of the Company
to raise additional capital through the pledging of assets. (See, Managements
Discussion and Analysis - Heller Transaction and PNC Loan.)
Deven serves as the managing general partner of two limited
partnerships, Developing Energy Partners I, L.P. ("Developing Energy") and
Deerlick Creek Partners I, L.P. ("Deerlick"). DRI, a wholly owned subsidiary of
Deven, manages 67 wells on behalf of Developing Energy in the State of West
Virginia and the Commonwealth of Pennsylvania.
Definition of Terms:
As used herein, the term:
"Gross", as it applies to acreage on wells refers to the
number of acres on wells in which the Company has a working interest.
"Net", as it applies to acreage on wells refers to the sum of
the fractional ownership interests owned by the Company in gross acres on gross
wells.
"Working interest", means the share of costs borne by an owner
in the lease or well.
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"Net Revenue Interest", means the share of gross income from
such lease or well actually received by the owner.
"MMbtu", "Bbls", "Mcf" and "MMcf" mean million British thermal
units, barrels, a thousand cubic feet, and a million cubic feet, respectively.
"Proved reserves", are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known oil and gas reservoirs under existing economic and operating conditions.
"Proved developed reserves", are proved reserves which are
expected to be recoverable through existing wells with existing equipment and
operating methods.
"Proved undeveloped reserves", are proved reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where relatively major expenditures are required for drilling and
completion.
"Horizontal Well" means a well drilled vertically from its
surface to its objective depth and from that point drilled with special tools at
an angle approximating 90 degrees from the bottom of the vertical hole on
drilled from such point at an angle which approximates that at which the beds of
the objective formation lie, as opposed to a traditional vertical well, which is
drilled vertically from the surface to its objective.
Crude oil and condensate volumes are expressed in barrels
which are equivalent to 42 United States gallons. Gas volumes are expressed in
Mcf or MMcf as determined at 60 degrees Fahrenheit and the legal pressure base
that prevails in the state in which the reserves are located.
Exploration Practices and Policies
Texas:
Historically the Company retained and/or acquired only a
fractional working interest in the wells in which it has participated, thereby
limiting its financial risk, operating expenses and the revenues it receives
from each well. The Company's practice, as operator of a well either being
drilled, or re-completed as a horizontal well from a vertical well, to conduct
such operations on a "Turnkey basis".
The Company has engaged RWA Corporation of Houston, Texas, an
unaffiliated company, to act as the contract operator of its oil and gas
properties pursuant to an oral agreement, thereby negating the necessity to
maintain a staff of operating personnel. The Company believes that, by engaging
a contract operator, it is able to effect cost savings and acquire localized
expertise. The Company expects to continue employing contract operators until
the size of its operations justifies hiring operating personnel. (See, "Business
- - Employees".)
Austin Chalk Trend
The Cretaceous carbonates in south Texas are of importance as
oil and gas producing horizons. The trend of these limestones include the Austin
Chalk, Buda, Georgetown and Edwards formations, extending for approximately 300
miles in length and 50 miles across, and encountered at depths of 5,500 to
18,000 feet. These reservoirs are generally of low permeability, and significant
oil and gas production is generally obtained only by intersecting vertical
fractures within the carbonate rocks. Historically, these formations were
considered to be economically marginal except in areas where the rocks were
highly fractured. In later years, stimulation by mechanical fracturing of the
rock resulted in increasing hydrocarbon recoveries and extensive development of
the trend. Recent developments using horizontal drilling techniques allow the
wellbore to intersect, if present, a series of vertical fracture systems instead
of a single one, thus resulting in higher rates of production and recoverable
reserves, at the cost of a more expensive drilling effort. (See, "Business -
Definition of Terms".)
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Whether an individual well will be economic, even if horizontally drilled,
depends largely upon intersecting fractured portions of the formation, which
cannot be predicted. Certain locales appear to contain more fracturing than
others, and the Company believes that it's Texas leases are located in areas of
better fracturing. It is not unusual for an individual well to produce as much
as forty percent (40%) of the primary recoverable reserves during the first two
years of production and the remainder over a period of ten to fifteen years.
Prior to 1996, the Company has drilled and successfully completed ten horizontal
wells. (See, "Properties - Texas Operations".) During 1996, the Company's
operations included the fracture stimulation of three wells and the drilling of
a new horizontal lateral in another well. As a result of the Heller Financing
(See, "`Business - Heller Transaction"), the Company stimulated seven (7)
existing vertical chalk wells and drilled three (3) laterals in its existing
horizontal wells. The Company's plan to drill as many as twenty-two (22) new
horizontal laterals was delayed due to persistent depressed oil and gas prices.
Because maximum production levels are currently regulated by government in the
portion of Texas in which the Company has its leases, wells which penetrate a
highly fractured system may be subject to production curtailments. (See
"Government Regulation - Texas Regulation".)
Kansas and Oklahoma:
Mid-Continent Basin:
The Company's production in the State of Kansas and Oklahoma
is derived from a total 298 operating wells which produce from shallow oil
producing zones traditionally found throughout the basin. In Kansas, the Company
holds the operating rights to 199 wells and controls 6,489 gross acres located
in Butler, Greenwood, Pawnee and Woodson Counties. Production from these
properties is derived from shallow oil producing formation which exhibit long
producing lives including but not limited to the Cherokee, Kansas City, Viola
and Mississippi formations. In Oklahoma, the Company holds the rights to 99
wells and controls 4,443 acres located in Kay, Pontotoc, Noble and Seminole
Counties. These wells also produce from relatively shallow oil producing
formations such as the Hutton, Calvin, Senora, Layton and Wilcox zones among
others. In both areas, the Company conducts its operations by contracting for
field production services. In this way, the Company believes that it can take
advantage of technical expertise available in the local property areas.
West Virginia and Pennsylvania:
Appalachian Basin:
The Company's production in the States of West Virginia and
the Commonwealth of Pennsylvania are from wells completed in methane coal seems
and in traditional producing zones such as the Oriskany and Medina formations of
the Appalachian Basin's Upper Devonian Section. Through its ownership in and
management of its Developing Energy Partners I, L.P., Partnership (Developing
Energy), the Company has an undivided interest in 27 producing coal bed methane
wells in the Blacklick Creek CBM Project located in Indiana County of Central
Pennsylvania. These wells produce from multiple coal seams ranging in depth from
600 feet to 1,200 feet. The 15,000 acre Blacklick Creek project was partially
developed at the time it was acquired and is now in the second year of a
multi-well, multi-year development program. Seven (7) wells were drilled as part
of the development program during fiscal year 1997 with an additional fifteen
(15) wells drilled during 1998. The Company, through its partnership, controls a
40% working interest in the project.
In addition, Developing Energy owns varying interest ranging
from 20% to 100% in forty (40) conventional Upper Devonian producing wells
ranging in depth from approximately 6,000 feet to 10,000 feet. Fourteen (14) of
these wells are located in Western and Central Pennsylvania and hold
approximately 18,983 gross acres. The remaining twenty-six (26) wells are
located in northern and central West Virginia and hold approximately 7,302
acres. The primary product produced from these Upper Devonian wells is natural
gas. The gas production is sold at market sensitive prices which have
historically benefited from the premiums paid for Appalachian gas supplies due
to their proximity to the end user market. These wells and their associated gas
gathering systems are operated by the Company's subsidiary, DRI. DRI is also
under contract to conduct field operations relating to the Blacklick Creek CBM
wells. All operations are controlled from the Company's Wayne, Pennsylvania
office. To assist in its operations, DRI Operating employs contract pumpers in
the vicinity of the specific wells to perform normal well tending and field
maintenance duties.
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The Company, through its subsidiary, Deven, has an economic
interest in an additional thirty-eight (38) non-operated Upper Devonian wells
located in various counties of Western Pennsylvania.
The Company's acquisition and development philosophy in the
Appalachian Basis is to acquire producing properties with exploitation
potential, either individually or in conjunction with its managed partnerships.
In addition to increasing its reserves through direct property acquisitions, the
Company actively seeks out and evaluates the potential acquisition of other oil
and gas companies and partnerships.
Alabama:
Black Warrior Basin
The Company, through its interest in Deerlick Creek Partners,
L.P. (See Managements Discussion and Analysis-Partnerships) has a non-operating
50% working interest in 54 coal bed methane wells in Tuscaloosa County, Alabama.
The Deerlick Creek properties were partially developed at the time of their
acquisition . Since its acquisition, through its Partnership, the Company has
participated in the drilling of ten (10) additional wells and in numerous
workovers to enhance gas production from the field. Consideration is now being
given to the drilling of additional wells to more fully develop the field.
The Deerlick Creek project encompasses approximately 3,026
acres and produces multiple coal seams ranging in depth from 1,000 to 3,000
feet. Gas produced from the project is sold under a long term contract with
Southern Natural Gas. Under this contract the price received for the natural gas
produced is tied" on a heating value basis, to that of No. 2 fuel oil F.O.B. New
York.
Operating Hazards and Uninsured Risks:
The Company's oil and gas operations are subject to all of the
risks normally incident to the exploration for and production of oil and gas,
including mechanical failures, blow-outs, cratering, pollution and fires, each
of which could result in damage to or destruction of oil and gas wells or
production facilities or damage to persons and property. While the Company
maintains a $4,000,000 all risks liability policy in amounts which it believes
are adequate, the insurance may not cover all potential operational risks. The
occurrence of a significant event not fully insured against could have a
material adverse effect the Company's financial position. (See, for example
"Properties -Operations" and "Litigation".)
Title to Oil and Gas Properties:
The Company's interests in producing and non-producing acreage
are in the form of direct or indirect interests in leases as well as
reversionary interests through its sponsored partnerships. Each of its
properties are subject to customary royalty interests in amounts prevailing in
the area in which the oil and gas lease is taken, overriding royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens and mineral encumbrances and restrictions. The Company believes that
none of these burdens materially interferes with the use of such properties in
the operation of the Company's business or the profitability of the Company's
investment therein.
As is customary in the oil and gas industry, only a
preliminary investigation of title is made at the time of acquisition of
undeveloped properties. Detailed investigations are generally made, including,
in most cases, receiving a title opinion of local counsel, prior to the
commencement of drilling operations. A thorough examination of title was
performed with respect to substantially all of the Company's producing
properties. Also, prior to the acquisition of properties, the Company will and
has received an opinion of title, satisfactory to counsel to the Company, on a
majority (in value) of the assets to be acquired. The Company believes that it
has defensible title to substantially all of its properties.
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Mineral Interests:
Mining Claims:
The Company owned 109 mining claims totaling approximately
5,500 acres in the Red Mountain area, located at the headwaters of the Klondike
River, Dawson and Mayo Mining districts of the Yukon Territory, Canada. The
Company allowed these claims to expire during the year ended September 30, 1998.
The Company also holds a 25% interest in a mining company,
Minera La Yesca, in Mexico. Minera La Yesca's main holding was a silver mine in
the mountains of the La Yesca in the southern State of Nayarit, Mexico. Due to
the long-term depression of silver prices, Minera La Yesca abandoned its mining
operations and subsequently relinquished its interest in the mining claims.
Minera La Yesca is now acting as a shell corporation which is investigating the
economic viability of other Mexican mining prospects. Due to the lack of
activity, this investment was written-off during the year ended September 30,
1997.
Timber Interests:
Tropical Hardwood Concession:
The Company, through its wholly-owned subsidiary, Sustainable
Forest Industries, Inc., a Delaware company, owns two (2) timber concessions in
Guyana, South America. These concessions encompass approximately 6,000 acres of
tropical hardwoods. Sustainable intends to harvest and market its wood through
strategic alliances with its partners in Guyana and the United States.
Sustainable has received its U.S. import certificate for tropical wood in July,
1997, and has applied for its marketing trademark, HeartDex. Due to the early
development stage of Sustainable, the Company provides accounting,
administrative and financial services to support its operations.
Sustainable has fulfilled all governmental requirements to
maintain its holdings and therefore, the Company believes that it has good title
to its two (2) hardwood timber concessions in Guyana.
Employees:
At September 30, 1998, the Company had five full-time
employees. The Company employs the services of consulting geologists and
engineers as well as those of a non-affiliated operating company which conducts
the actual oil field operations for the Company in Texas. The Company manages
the operation of its wells in the State of West Virginia and the Commonwealth of
Pennsylvania from its Wayne, Pennsylvania, office utilizing contract pumpers to
perform actual field operations. The Company's non-operated wells are monitored
primarily out of the Company's Wayne, Pennsylvania, office. The Company's mining
claims are monitored by its Los Angeles, California office. The Company
considers its relations with its consultants to be satisfactory. (See, "Business
and Properties - Exploration Practices and Policies".)
Competition:
The Company encounters strong competition from other
independent operators and from major oil companies in acquiring properties
suitable for development, and in contracting for drilling equipment. Many of
these competitors have financial resources and staffs substantially larger than
those available to the Company. The availability of a ready market for oil and
gas discovered by the Company depends on numerous factors beyond its control,
including the extent of production and imports of oil and gas, the demand for
its products from the United States and Canada, the proximity and capacity of
natural gas pipelines and the effect of state and federal regulations. (See,
"Properties - Marketing of Productions".)
Competition in the acquisition of oil and gas prospects and
properties in the area of the Company's operations in Texas, Alabama, West
Virginia, Pennsylvania and New Mexico varies according to the prices for oil and
gas. During periods of higher prices, competition for viable prospects and
properties. The
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Company's ability to discover and/or acquire reserves in the future depends on
various factors which involve its ability to select, acquire and pay for
prospects suitable for exploration and development.
The Company competes with other oil and gas concerns and other
investment companies, whether on not related to the petroleum industry in
raising capital. The Company's ability to access the capital markets is largely
dependent on the success of its oil and gas exploration activities and the
economic environment in which it operates.
Government Regulations:
In most, if not all, areas where the Company conducts
activities, there are statutory provisions regulating oil and gas operations.
These provisions allow administrative agencies to promulgate regulations in
connection with the development, production and sale of oil and gas, and to
establish allowable rates of production.
The Company's activities also are subject to laws and
regulations relating to environmental quality and pollution control. Although
the cost of compliance with such legislation and regulations has not been
material to date, such laws and regulations may substantially increase the cost
of carrying on these activities and may prevent or delay the commencement or
continuance of a given operation. The Company believes that such legislation and
regulations have had no material adverse effect on its present method of
operations. In the future, federal, state and local environmental controls may
require the Company to make significant expenditures, but neither the
probability nor the magnitude of the expenditures, if any, can be predicted.
The discharge of oil, gas or the by-products of drilling,
reworking and producing oil and gas into the air, soil on water may give rise to
liabilities for the restoration of the environment and to third parties. A
variety of federal and state laws and regulations govern the environmental
aspects of the production, transportation and processing of hydrocarbons and
may, in addition to other laws and regulations, imposed liability in the event
of a discharge or seepage (whether or not accidental). Compliance with such laws
and regulations may increase the cost of the exploration, production and
development of oil and gas reserves although the Company does not currently
anticipate that compliance will have a material adverse effect on the ability of
the Company to continue in the exploration, development or production of its
existing reserves and the development and/or acquisition of new reserves.
The Company does not believe that the environmental risks are
materially different from those of comparable companies in the oil and gas
industry. The Company believes that it is in substantial compliance with all
existing rules and regulations. No assurance can be given, however, that
environmental laws will not, in the future, result in more onerous regulations
causing an market increase in the cost of production, development and
exploration or otherwise adversely affect the Company's operations or financial
ability to maintain its existing reserves. Although the Company maintains
insurance coverage for certain liabilities, to include insurance to coven
specific environmental risks, such as seepage or discharge, such environmental
risks are not fully insurable.
Transportation and Marketing:
The sale and transportation of natural gas in the interstate
market is regulated by the Federal Energy Regulatory Commission ("FERC") under
the Natural Gas Policy Act of 1983 (NGPA) and the Natural Gas Act of 1938
("NGA"). The Natural Gas Wellhead Decontrol Act of 1989 eliminated all gas price
regulation effective January 1, 1993. FERC has recently proposed several rules
or "order" concerning transportation and marketing of natural gas. The impact of
these proposed rules and/orders cannot be predicted. Order 636, pertaining to
the restructuring of the interstate transportation of natural gas was finalized
in 1992. Pipelines are now required to provide producers service on a
non-discriminatory "open access" basis, although there are provisions which
allow certain categories of gas to gain preference over others. The Company
believes that as a result of Order 636, competition has increased in the
marketplace, resulting in a greater market volatility in the price and demand
for natural gas. Currently the majority of the Company's gas is sold to
interstate carriers. (Dependence on a Few Major Customers: See, "Properties -
Marketing of Production".)
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Pipelines
In connection with the completion and production of its oil
and gas properties, the Company has either constructed or participated in the
construction of gas-gathering lines. These gathering lines carry natural gas
from the wellhead to gas transmission systems through which the Company's gas is
being transported to the purchaser. The Company is not a regulated interstate
carrier of natural gas and as such it is not a regulated pipeline under the NGPA
of 1983 or the NGA. For such gas gathering services the Company may receive an
allowance from the first purchaser of its gas.
Partnerships:
Deven Resources, Inc. (Deven) has sponsored two partnerships,
Deerlick Creek Partners I, L.P. formed on August 30, 1991 and Developing Energy
Partners I, L.P. formed on October 1,1993. Deerlick Creek and Developing Energy
have conducted business as separate limited partnerships with the Company's
wholly owned subsidiary, Deven ("Deven"), acting as managing general partner. As
managing general partner, Deven is subject to full liability for the obligations
of the partnerships although it is entitled to indemnification by each program
to the extent of the assets of the that partnership. Since "drilling programs"
constitute a "security" under the Securities Act of 1933, Deven is also subject
to potential liability for failure to comply with applicable federal and state
securities laws and regulations.
Each of the drilling programs is structured on a "payout
basis" with Deven receiving a 1% interest in all profits and losses before
payout and an increased percentage of the profits and losses of the partnership
after payout.
Deerlick Creek Partners I, L.P.:
Deerlick's only asset is undivided interests in 54 coal bed
methane wells in Tuscaloosa County, Alabama. Before payout, as managing general
partner the Company's subsidiary, Deven is entitled to receive 1% of all profits
and losses of the partnership while the limited partners are entitled to receive
99%. After-payout, the managing general partner is entitled to receive 20% of
all profits and loses while the limited partners receive 80%. As a result of a
settlement between the founders of Deven in 1995, 40% of Deven's entitlement as
the managing general partner of Deerlick has been assigned to a third party. The
Company believes that "payout" will occur in fiscal year 1999.
Developing Energy Partners I, L.P.:
Developing Energy Partners I, L.P. owns interests in a variety
of properties located in the State of West Virginia and the Commonwealth of
Pennsylvania (See Business-Properties). Under the structure of the Developing
Energy partnership agreement, payout occurs in two tiers. Until the first tier
payout, Deven receives only 1% of the profits and losses of the partnership.
After the first tier payout, Deven is entitle to receive 20% of the profits and
loses of the partnership while the limited partners receive 80%. After the
second tier payout, Deven is entitled to receive 40% of the profits and losses
of the partnership while the limited partners receive 60%. Deven receives a
management fee of $200,000 per annum for its services as general partner.
Commencing the fifth anniversary of the partnership, the management fee shall be
the lessen of (I) 3% of the value of the assets held by the partnership or (ii)
$200,000.
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ITEM 2 PROPERTIES
Texas Operations:
The Company holds approximately 7,904 gross (4,135 net) acres
in Burleson, Brazos, and Lee Counties, Texas. Of such amount, approximately
5,819 gross (2,064 net) acres are classified as presently developed, and 2,085
gross (2,071 net) acres are classified as proven undeveloped. The Company owns
interests varying from nine and six one-hundredths percent (9.06%) to
seventy-five percent (75.0%) net revenue interests in forty-one wells which have
been drilled on this acreage.
Prior to the Heller Financing (See, "Business - Heller
Financing"), the Company historically financed its exploration activities by
permitting third parties to pay 100% of the costs of drilling and completing a
well in exchange for 75% of the working interest. During the reworking of the
Company's Austin Chalk properties, the financing for these operations will be
provided from both the Company's own revenues and the Heller Financing (See
Managements Discussion and Analysis- Heller Financing), although the Company
does intend to continue its policy of conducting drilling operations on a
Turnkey basis or fixed costs basis for third party working interests in these
wells. If the well's costs of the operation is less than the fixed cost, the
Company profits, and if the operations costs exceeds the Turnkey cost the
Company suffers a loss. Generally, the Company has conducted its operations for
less than the Turnkey costs and has recorded a profit.
Mid-Continent Basin:
The Company's production in the States of Kansas and Oklahoma
is derived from a total 298 operating wells which produce from shallow oil
producing zones traditionally found throughout the basin. In Kansas, the Company
holds the operating rights to 199 wells and controls approximately 6,489 gross
(4,828 net) acres located in Butler, Greenwood, Pawnee and Woodson Counties.
Production from these properties is derived from shallow oil producing formation
which exhibit long producing lives including but not limited to the Cherokee,
Kansas City, Viola and Mississippi formations. In Oklahoma, the Company holds
the rights to 99 wells and controls roughly 4,443 gross (1,014 net) acres
located in Kay, Pontotoc, Noble and Seminole Counties. These wells also produce
from relatively shallow oil producing formations such as the Hutton, Calvin,
Senora, Layton and Wilcox zones among others. In both areas, the Company
conducts its operations by contracting for field production services. In this
way, the Company believes that it can take advantage of technical expertise
available in the local property areas.
Appalachian Operations:
The Company, either individually or through its sponsored
partnerships, holds 4,247 gross (1,451 net) acres which are classified as
presently developed and 3,055 gross (952 net) acres classified as undeveloped in
the counties of Harrison, Logan, McDowell, Pleasant, Randolph, and Tucker, West
Virginia. In the Pennsylvania counties of Armstrong, Fayette, Clearfield,
Somerset, Indiana, and Westmoreland the Company, either individually or through
its sponsored partnerships, holds 7,860 gross (4,708 net) acres are classified
as presently developed, and 26,123 gross (14,577 net) acres are classified as
undeveloped. The Company, either individually or through its sponsored
partnerships, holds working interests varying from 20% to 100% and net revenues
interests of 15.8% to 87.4%. The Company also has a 10% profits participation
interest in 38 wells.
The current principal area for development within the
Appalachian area is in the Blacklick Creek coal bed methane project in which
Developing Energy Partners I, L.P. holds a 40% working interest. In fiscal 1998,
fifteen (15) wells were drilled with a total of up to 40 wells to be drilled
oven the next 4 years. The Company owns undivided interests in gathering systems
in each of its producing areas for the transportation of its gas to major
transmission lines. All of the development of the Blacklick Creek coal bed
methane field will be done through the use of partnership funds primarily
generated from production from partnership properties.
Alabama Operations:
The Company, through Deerlick Creek Partners I, L.P., holds
2,043 gross (1,022 net) acres in Tuscaloosa County, Alabama. Approximately 2,043
acres (1,022 net) are classified as proved producing and 982
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acres (491 net) are classified as proved non-producing. Deerlick holds a 50%
working interest and net revenue interests of 36% in the project. The Deerlick
Creek project produces coal bed methane gas from multiple coal seams ranging in
depth from 1,000 feet to 3,000 feet.
The Company is not the operator of this property and has gone
non-consent on the drilling of infield wells which the Company believes are not
prudent in light of surrounding production. All of the development of the
Deerlick coal bed methane field will be accomplished with partnership funds
primarily generated from production from the Deerlick Creek methane field.
Marketing of Production:
The Company does not refine any petroleum products. All of its
production is sold to a variety of customers, which include pipelines, oil and
gas gathering firms and other purchasers, pursuant to written agreements.
Generally, sales of oil and gas are made at prevailing market prices. (See,
"Business - Effect of Failing Prices".) Typically, oil purchase agreements are
of short duration, and provide for market sensitive prices. The Company is a
party to two long term gas sales contracts, which may be terminated on short
notice if a price adjustment is unacceptable to the Company. (See, "Gas Sales"
below.) The Company is not obligated to provide a fixed and determinable
quantity of oil and gas in the future under existing contracts or agreements.
Under the terms of the Heller Financing, the Company is
required to purchase "hedges" to guarantee receipt of a specified price for the
gas sales from those properties developed with the Heller Financing.
The availability of a market for oil and gas produced from the
properties of the Company and prices received therefor are dependent upon
numerous factors, most of which are beyond the control of the Company. Such
factors include the level of domestic production, the availability of imported
oil and gas, actions taken by foreign producing nations, the availability of
distribution and transportation facilities and capacity thereon, the
availability and price of fuels competitive with oil and gas, demand for oil and
gas and refined products and governmental regulation and taxation. Such factors
make it impracticable to predict with any degree of certainty future demand for
or prices of oil or gas produced by the Company.
Production of oil and gas is generally not considered to be of
a seasonal nature, although severe weather conditions temporarily can curtail or
preclude producing activities. Historically, the demand for natural gas
decreases during the summer months and increases during winter months.
The following table identifies customers of the Company which
purchased during the fiscal year ended September 30, 1998 in excess often
percent (10) of the oil or gas produced by the Company.
-10-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________
Percentage of
Production Area Name and Location Production
of Operation of Purchaser Purchased
by State
________________________________________________________________________________________________________________
<S> <C> <C> <C>
Texas Oil Production Pride Pipeline Company 100.0%
Abilene, Texas
________________________________________________________________________________________________________________
Texas Gas Production Aquila Southwest Pipeline Corporation * 47.4
San Antonio, Texas
________________________________________________________________________________________________________________
Austin Chalk Natural Gas Marketing Services ** 52.6
Houston, Texas
________________________________________________________________________________________________________________
Pennsylvania Gas Production*** Peoples Natural Gas (PNG) 14.7
Pittsburgh, Pennsylvania
________________________________________________________________________________________________________________
Consolidated Natural Gas (CNG) 49.7
Pittsburgh, Pennsylvania
________________________________________________________________________________________________________________
Petro Bank 27.4
Denver, Colorado
________________________________________________________________________________________________________________
West Virginia Gas Production*** Equitable Gas Company 47.2
Pittsburgh, Pennsylvania
________________________________________________________________________________________________________________
Columbia Gas System 51.5
________________________________________________________________________________________________________________
Alabama Gas Production Southern Natural Gas Co.**** 100.0
Birmingham, Alabama
________________________________________________________________________________________________________________
Oil Production Giant Reining Co. 100.0
Scott, Arizona
________________________________________________________________________________________________________________
Kansas Oil Production Warren Corporation 5.0
Oklahoma City, Oklahoma
________________________________________________________________________________________________________________
Tri-Power Resources, Inc. 95.0
Ardmore, Oklahoma
________________________________________________________________________________________________________________
Oklahoma Oil Production Kelly MaClaskey Oilfield Services, Inc. 72.0
El Dorado, Kansas
________________________________________________________________________________________________________________
Farmland Industries, Inc. 28.0
Kansas City, Missouri
________________________________________________________________________________________________________________
</TABLE>
* A portion of the Company's production of gas from its wells in the
Giddings Field (presently 20 wells) is sold to Aquila Southwest
Pipeline Corporation ("Aquila"), pursuant to a long term contract
expiring January 31, 2010, which covers a number of the Company's Texas
leases. Subject to various conditions, Aquila has agreed to buy all of
the Company's gas produced from the Giddings Field. The Company
receives eighty percent (80%) of the weighted average monthly sales
price for liquid products extracted from gas delivered and eighty
percent (80%) of the resale prices for dry gas. Prices received by the
Company are subject to deductions for taxes, compression and similar
charges.
** Gas production from the remaining wells in the Giddings Field is sold
under a contract ending in April, 2000, at a base price of $2.00 per
Mmbtu on a month-to-month contract to Austin Chalk Natural Gas
Marketing Services. The effect of these contracts is that gas is sold
at a market base price, which may be adjusted by the purchaser; if the
Company disagrees with a price adjustment, the sales contract may be
terminated by the Company or the purchaser.
*** Gas production from the Company's Appalachian Basin property are sold
under contracts which call for floating index based gas pricing.
Typically the general term. These contracts are set for periods of one
year and contain price options for the Company should local gas market
conditions warrant.
**** Gas production from the Company's Black Warrior Basin properties are
sold under a long term supply contract. The pricing mechanism under
this contract ties the price of gas to that on No. 2 fuel oil FOB New
York City through September 1999. After that, the price received for
the gas delivered will be renegotiated and most likely be tied to a
floating index.
-11-
<PAGE>
The Company does not believe that the loss of any one of these
customers would have a material adverse effect upon the Company's revenues,
since there are numerous purchasers of oil and gas in the areas in which the
Company operates.
Production:
The following table summarizes the Company's net oil and gas
production for the periods indicated, shown in Bbls and Mcf, and the weighed
average sales prices for the periods indicated. Since Deven was acquired at the
beginning of this current fiscal year and was treated as having been an asset
acquisition, there are no historical comparison for those properties.
-12-
<PAGE>
________________________________________________________________________________
Fiscal Year Ended September 30
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Texas:
- --------------------------------------------------------------------------------
Oil (Bbls.) 34,968 15,471 17,637
- --------------------------------------------------------------------------------
Gas (Mcf) 128,286 138,456 205,983
- --------------------------------------------------------------------------------
Average Bbls/day 96 42 48
- --------------------------------------------------------------------------------
Average Mcf/day 351 379 564
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Alabama:
- --------------------------------------------------------------------------------
Gas (Mcf) 259,658 279,172 (*)
- --------------------------------------------------------------------------------
Average Mcf/day 711 765 (*)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pennsylvania:
- --------------------------------------------------------------------------------
Gas (Mcf) 252,723 230,387 (*)
- --------------------------------------------------------------------------------
Average Mcf/day 692 631 (*)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
West Virginia:
- --------------------------------------------------------------------------------
Gas (Mcf) 93,071 91,327 (*)
- --------------------------------------------------------------------------------
Average Mcf/day 255 250 (*)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
New Mexico:
- --------------------------------------------------------------------------------
Oil (Bbls) -0- 777 (*)
- --------------------------------------------------------------------------------
Gas (Mcf) -0- 10,286 (*)
- --------------------------------------------------------------------------------
Average Bbls/day -0- 2 (*)
- --------------------------------------------------------------------------------
Average Mcf/day -0- 28 (*)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Kansas:
- --------------------------------------------------------------------------------
Oil (Bbls) 23,416 -0- -0-
- --------------------------------------------------------------------------------
Gas (Mcf) -0- -0- -0-
- --------------------------------------------------------------------------------
Average Bbls/day 65 -0- -0-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma:
- --------------------------------------------------------------------------------
Oil (Bbls) 11,533 -0- -0-
- --------------------------------------------------------------------------------
Gas (Mcf) -0- -0- -0-
- --------------------------------------------------------------------------------
Average Bbls/day 32 -0- -0-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Totals:
- --------------------------------------------------------------------------------
Oil (Bbls) 69,917 16,248 17,637
- --------------------------------------------------------------------------------
Gas (Mcfs) 733,738 749,628 205,983
- --------------------------------------------------------------------------------
Average Bbls/day 192 42 48
- --------------------------------------------------------------------------------
Average Mcf/day 2,010 2,004 564
________________________________________________________________________________
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
-13-
<PAGE>
The following table summarizes for the period indicated the
average price per Bbl and average price per Mcf of natural gas and the average
production (lifting) costs per barrel of oil and per Mcf of gas produced. In
determining the price received by the Company and costs incurred, all expenses
of operation have been attributed to the working interests but revenues
attributed are solely of the Company's net revenue interests.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________
Fiscal Year Ended September 30
- -------------------------------------------------------------------------------------------------------------------
6MCFE = 1Bbl. 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Texas
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price per Barrel $13.43 $21.70 $19.41
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price per Mcf 2.54 2.84 2.64
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost per Gas Equivalent (MCFE) 1.51 0.64 0.47
- -------------------------------------------------------------------------------------------------------------------
Alabama
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf 2.71 2.66 (*)
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) 2.13 1.11 (*)
- -------------------------------------------------------------------------------------------------------------------
Pennsylvania
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf 2.48 2.48 (*)
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) 1.38 1.20 (*)
- -------------------------------------------------------------------------------------------------------------------
West Virginia
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf 2.31 2.76 (*)
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) 1.14 0.91 (*)
- -------------------------------------------------------------------------------------------------------------------
New Mexico
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Bbl -0- 20.76 (*)
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf -0- 1.97 (*)
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) -0- 0.91 (*)
- -------------------------------------------------------------------------------------------------------------------
Kansas
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Bbl 13.65 -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) 1.67 -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Oklahoma
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Bbl 13.65 -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Mcf -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost Per Gas Equivalent (MCFE) 1.67 -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Combined Properties
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price Per Bbl 13.54 21.60 19.41
- -------------------------------------------------------------------------------------------------------------------
Average Sale Price per Mcf 2.55 2.68 2.64
- -------------------------------------------------------------------------------------------------------------------
Average Production Cost per Gas Equivalent (MCFE) 1.55 0.85 0.47
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
For purpose of determining gas equivalent, Oil has been
converted to gas at the rate of 1 Barrel per 6 Mcf.
-14-
<PAGE>
Wells and Acreage:
The following tables set forth certain information as of
September 30, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Gross Wells Net Wells
- ---------------------------------------------------------------------------------------------------------------------------
Well Count 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Texas 41 40 41 25.78 16.99 16.56
- ---------------------------------------------------------------------------------------------------------------------------
Pennsylvania 55 41 34 24.18 18.58 13.68
- ---------------------------------------------------------------------------------------------------------------------------
West Virginia 26 26 26 9.94 9.94 9.94
- ---------------------------------------------------------------------------------------------------------------------------
Alabama 57 54 54 27.00 27.00 27.00
- ---------------------------------------------------------------------------------------------------------------------------
New Mexico -0- 4 12 -0- 0.40 1.20
- ---------------------------------------------------------------------------------------------------------------------------
Kansas 199 -0- -0- 167.12 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Oklahoma 99 -0- -0- 33.31 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Total 477 165 167 287.33 72.91 68.38
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Gross Acres Net Acres
- ---------------------------------------------------------------------------------------------------------------------------
Developed Acreage 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Texas 5,819 5,808 5,728 2,064 2,600 2,219
- ---------------------------------------------------------------------------------------------------------------------------
Pennsylvania 7,860 7,440 7,230 4,708 4,540 4,456
- ---------------------------------------------------------------------------------------------------------------------------
West Virginia 4,247 4,247 4,247 1,451 1,451 1,451
- ---------------------------------------------------------------------------------------------------------------------------
Alabama 2,043 1,936 1,936 1,022 968 968
- ---------------------------------------------------------------------------------------------------------------------------
New Mexico -0- 2,560 7,680 -0- 256 768
- ---------------------------------------------------------------------------------------------------------------------------
Kansas 4,317 -0- -0- 3,730 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Oklahoma 2,653 -0- -0- 822 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Total 26,939 21,991 26,812 13,797 9,815 9,862
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Gross Acres Net Acres
- ---------------------------------------------------------------------------------------------------------------------------
Undeveloped Acreage 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Texas 2,085 1,417 1,417 2,071 1,402 734
- ---------------------------------------------------------------------------------------------------------------------------
Pennsylvania 26,123 26,543 26,753 14,577 14,745 14,829
- ---------------------------------------------------------------------------------------------------------------------------
West Virginia 3,055 3,055 3,055 952 952 952
- ---------------------------------------------------------------------------------------------------------------------------
Alabama 982 1,090 1,090 491 545 545
- ---------------------------------------------------------------------------------------------------------------------------
New Mexico -0- 22,433 27,553 -0- 2,243 2,955
- ---------------------------------------------------------------------------------------------------------------------------
Kansas 2,172 -0- -0- 1,098 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Oklahoma 870 -0- -0- 103 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Total 35,287 54,538 59,868 19,292 19,887 19,815
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Drilling Activity:
The following table shows the number of wells drilled by or on
behalf of the Company and the results thereof for the period indicted. Such
information should not be considered indicative of future performance of
prospects of the Company. There is no necessary correlation between the number
of producing wells, whether developmental, or exploratory, completed during any
period and the aggregate reserves or future net income generated therefrom.
<TABLE>
<CAPTION>
================================================================================================================================
EXPLORATORY WELLS
- --------------------------------------------------------------------------------------------------------------------------------
YEAR DRILLED PRODUCERS DRY HOLES TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
1997 0 0 0---
- --------------------------------------------------------------------------------------------------------------------------------
1996 ---- ---- ----
- --------------------------------------------------------------------------------------------------------------------------------
DEVELOPMENT WELLS
- --------------------------------------------------------------------------------------------------------------------------------
1998 17 0 17
- --------------------------------------------------------------------------------------------------------------------------------
1997 7 0 7
- --------------------------------------------------------------------------------------------------------------------------------
1996 1 1 1
================================================================================================================================
</TABLE>
As of September 30, 1998, the Company was actively involved in
reworking its Austin Chalk wells. The Company also drilled horizontal laterals
in three (3) existing horizontal chalk wells operated by the Company. This work
was part of the Company redevelopment program on its chalk acreage in Texas
funded under the Company's financing agreement with Heller Financial, Inc. In
addition to the Texas development work, the Company, through its Deerlick Creek
Partners I, L.P. authorized re-work operations on five (5) coal bed methane
wells located in Alabama. Three other wells were drilled successfully on the
property in which the Company's Partnership wells have a reversionary interest.
In the Appalachian Basin operations, the Company, through its Developing Energy
Partners I, L.P., also authorized participation in the drilling of fifteen (15)
new wells to further develop its leasehold portion in the Blacklick Creek coal
bed methane project in central Pennsylvania. By year end, all wells were drilled
and are awaiting completion. In addition to the new wells, the field's gas
-16-
<PAGE>
gathering and sales facility were expanded to handle the increased volume to be
produced from the successful drilling programs. ("Business" and "Properties -
Operations".)
Proved Reserves:
The Company causes to be prepared an annual estimate of oil
and gas reserves. The Company has not filed reserves estimates with any United
States authority or agency, other than estimates previously filed with the
Commission.
The following table sets forth the proved reserves of the
Company as of September 30, 1998, September 30, 1997, and September 30, 1996.
The figures for the Texas and Mid-Continent Properties as of
September 30, 1998 and 1997, were taken from the reserve reports prepared by R.
A. Lenser & Associates, Inc., Independent Petroleum Engineers. The reserve
report for the Alabama properties was prepared by Huntley and Huntley,
Independent Protroleum Engineers as of September 30, 1998. The reserve estimates
for the Blacklick coal bed methane property was based on in-house projections
and on the analysis contained in the Huntley and Huntley report of September 30,
1996. The reserve estimates for the remaining Appalachian properties in
Pennsylvania, and West Virginia were extrapolated by subtracting actual
production from the Huntley and Huntley reserve report as of September 30, 1996
and supported by internal projections of future performance based on decline
curves for each well.
-17-
<PAGE>
- ----------------------------------------------------------------------------
Year Ended Reserves
September 30,
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Proved Developed Reserves
- ----------------------------------------------------------------------------
CXC (BBLS)
- ----------------------------------------------------------------------------
Texas 67,125 128,029 112,963
- ----------------------------------------------------------------------------
Pennsylvania -0- -0- (*)
- ----------------------------------------------------------------------------
West Virginia -0- -0- (*)
- ----------------------------------------------------------------------------
Alabama -0- -0- (*)
- ----------------------------------------------------------------------------
New Mexico -0- 777 (*)
- ----------------------------------------------------------------------------
Kansas 133,135 -0- -0-
- ----------------------------------------------------------------------------
Oklahoma 60,613 -0- -0-
- ----------------------------------------------------------------------------
TOTAL 260,973 128,806 112,963
- ----------------------------------------------------------------------------
Gas (Mcf)
- ----------------------------------------------------------------------------
Texas 438,000 463,000 750,537
- ----------------------------------------------------------------------------
Pennsylvania 1,917,417 1,500,499 (*)
- ----------------------------------------------------------------------------
West Virginia 815,942 909,013 (*)
- ----------------------------------------------------------------------------
Alabama 1,768,544 1,318,395 (*)
- ----------------------------------------------------------------------------
New Mexico -0- 10,286 (*)
- ----------------------------------------------------------------------------
Kansas -0- -0- -0-
- ----------------------------------------------------------------------------
Oklahoma -0- -0- -0-
- ----------------------------------------------------------------------------
TOTAL 4,939,903 4,201,193 750,537
- ----------------------------------------------------------------------------
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
-18-
<PAGE>
- ----------------------------------------------------------------------------
Year Ended Reserves
September 30,
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Proved, Undeveloped Reserves
- ----------------------------------------------------------------------------
CXC (BBLS)
- ----------------------------------------------------------------------------
Texas 1,186,187 1,276,028 850,605
- ----------------------------------------------------------------------------
Pennsylvania ----- ----- (*)
- ----------------------------------------------------------------------------
West Virginia ----- ----- (*)
- ----------------------------------------------------------------------------
Alabama ----- ----- (*)
- ----------------------------------------------------------------------------
New Mexico ----- 1,214,417 (*)
- ----------------------------------------------------------------------------
Kansas 182,896 ----- -----
- ----------------------------------------------------------------------------
Oklahoma ----- ----- -----
- ----------------------------------------------------------------------------
TOTAL 1,369,083 1,276,028 850,605
- ----------------------------------------------------------------------------
Gas (Mcf)
- ----------------------------------------------------------------------------
Texas 10,532,000 11,482,000 7,989,223
- ----------------------------------------------------------------------------
Pennsylvania 808,212 1,517,536 (*)
- ----------------------------------------------------------------------------
West Virginia ----- ----- (*)
- ----------------------------------------------------------------------------
Alabama 951,692 791,800 (*)
- ----------------------------------------------------------------------------
New Mexico ----- ----- (*)
- ----------------------------------------------------------------------------
Kansas ----- ----- -----
- ----------------------------------------------------------------------------
Oklahoma ----- ----- -----
- ----------------------------------------------------------------------------
TOTAL 12,291,904 13,791,336 7,989,223
- ----------------------------------------------------------------------------
(*) Deven's acquisition on October 2, 1996, was treated as a purchase of assets.
Therefore, historical numbers are not applicable.
All of the above stated reserves are located on-shore within
the United States.
Estimated Future Net Revenues and Present Worth:
Estimated future net revenues of the Company's net oil and gas
reserves at the date indicated and the present worth thereof employing a ten
percent (10%) discount factor is set forth in the following tabulation:
-19-
<PAGE>
<TABLE>
<CAPTION>
Future Net Revenues 1998 1997 1996
September 30
<S> <C> <C> <C>
Proved Oil and Gas Reserves $25,869,992 $35,857,908 $27,010,449
Proved Developed Oil and Gas Reserves $6,601,604 $5,616,679 $2,618,571
Present Worth
September 30
Proved Oil and Gas Reserves $13,017,977 $22,479,971 $17,854,662
Proved Developed Oil and Gas Reserves $3,398,305 $3,678,884 $2,038,260
</TABLE>
The present value of estimated future net revenues set forth
above is computed using the estimated future net revenues and a discount factor
of ten percent (10%) over the projected life of each property. (See,
"Consolidated Financial Statements - Supplemental Financial Information".)
Petroleum engineering is not an exact science. Information
relating to the Company's oil and gas reserves is based upon engineering
estimates. Estimates of economically recoverable oil and gas reserves and of the
future net revenues therefrom are based upon a number of variable factors and
assumptions, such as historical production from the subject properties compared
with production from other producing properties, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, severance and excise taxes, development
costs, work-over and remedial costs, all of which may in fact vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable reserves of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company emphasizes that the actual production, revenues, severance and
excise taxes, development expenditures and operating expenditures with respect
to its reserves will likely vary from such estimates, and such variances may be
material.
The present values shown above should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements of the
Securities and Exchange Commission ("Commission"), the estimated discounted
future net revenues from proved reserves are based, generally, on prices and
costs as of the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net revenues also will be affected
by factors such as actual production, supply and demand for oil and gas,
curtailments on increases in consumption by gas purchasers, changes in
governmental regulations or taxation, the impact of inflation on costs, general
and administrative costs and interest expense. The timing of actual future net
revenues from proved reserves, and thus their actual present value, will be
affected by the timing of the incurrence of expenses in connection with
development of oil and gas properties. In addition, the ten percent (10%)
discount factor, which is required by the Commission to be used to calculate
discounted future net revenues for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with the oil and gas industry. Discounted future net
revenues, no matter what discount rate is used are materially affected by
assumptions as to the timing of future production and future expenses which may
and often do prove to be inaccurate. (See "Business - Effect of Falling
Prices".)
Reserves Reported To Other Agencies:
There were no estimates on reserve reports of the Company's
proved domestic net oil on gas reserves filed with any governmental authority or
agency, other than the Commission, during the years ended September 30, 1996,
September 30, 1997 or September 30, 1998.
-20-
<PAGE>
Delivery Commitment:
The Company is not obligated to provide a fixed and
determinable quantity of oil and gas in the future under existing contracts or
agreements.
Timber Rights:
Effective September 29, 1995, the Company acquired all of the
outstanding shares of Sustainable Forest Industries ("Sustainable"), a privately
held Delaware Company. Sustainable owns the rights to two (2) tropical hardwood
concessions in Guyana, South America. The rights to the initial concession,
which encompasses 1,800 acres was acquired in September, 1995. The concession
was inventoried and assessed by an independent consultant, CESO International
Services, (CIS) a Canadian government affiliated entity which provides advisory
services to developing countries. Based on this assessment, the commercial
quantity of merchantable logs is 25,497 units or approximately 14,233,200 board
feet equivalents, the market value of the wood in rough cut form, is estimated
at roughly $5,692,000. Sustainable acquired the second hardwood concession in
November, 1995 encompassing an additional 4,200 acres. Based on the inventory
and assessment of CIS, the commercial quantity of merchantable logs available on
that concession is 65,546 units, yielding approximately 33,671,300 board feet
equivalents. The market value of the wood is Arough cut form is estimated at
$12,671,000. The combined estimated appraisal value of the hardwoods available
on the Company's two Guyana timber concessions is roughly $18,363,000.
In consideration for all of the capital stock of Sustainable,
the Company issued 150,000 shares of its Common Stock, and warrants to purchase
50,000 shares of Common Stock at a price of $2.50 per share. The warrants will
expire on September 30, 2000. Under the Agreement, the Company has the option to
acquire additional hardwood timber rights in Guyana.
-21-
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
In April 1997, the Company commenced an Adversary Action
styled Daleco Resources Corporation v. Reserve Production Inc., Liquidating
Trust and Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No. 97-6036. The case was
commenced to enforce the Company's rights under that certain Asset Purchase
Agreement dated December 20, 1996 ("Asset Purchase Agreement") as approved by
the Bankruptcy Court on February 13, 1997. In the Adversary Action, the Company
alleged that the defendants' had failed to meet their conditions to Closing
under the Asset Purchase Agreement and were thus required to refund the
Company's $100,000 Earnest Money Deposit and pay for the reworking of the Jody
Well. Subsequent to the commencement of the Company's adversary action, a case
was commenced in the United States District Court for the Eastern District of
Texas, Tyler Division, styled Reserve Production Liquidating Trust v. Daleco
Resources Corporation, Westlands Resources Corporation, David F. Lincoln, Gary
J. Novinskie and C. Warren Trainor, C.A. No: 6:97 CV 705 ("District court
Action"). The District Court Action was in essence a counter claim against the
Company and three of its directors asserting matters which should have been
addressed in an answer to the Adversary Action. The Company filed a motion to
dismiss the District Court Action; however, prior to ruling on the Company's
Motion, the Adversary Action was resolved through Court mandated mediation.
Under the terms of the settlement, the Company's Earnest Money Deposit was
returned and the Reserve Production Inc., Liquidating Trust, Reserve Production
Liquidating Partnership, and Leonard Pipkin, Trustee, were required to resolve
all outstanding claims for the reworking of the Jody Well.
Triad Pipe & Steel, Inc. v. Westlands Resources Corporation
and Daleco Resources, Inc., In The District Court of Harris County, Texas, Case
No. 97-44587. Triad Pipe & Steel, Inc. ("Triad") supplied 2-3/8th inch tubing
for the reworking of the Jody Well. Triad commenced its original suit on or
about August 25, 1997 ("Original Complaint") prior to the Settlement Agreement
and its amended complaint filed on or about November 18, 1997 ("Amended
Complaint"). Reserve Production, Inc., Liquidating Trust and Reserve Production
Liquidating Partnership (collectively the "Trust") have not yet satisfied the
obligations owed to Triad in the amount of $33,514.21. The Trust has requested
that the Company contribute funds towards the satisfaction of Triad's claim
which the Company has declined to do, as the obligation to settle all costs
attributable to the Jody Well is the responsibility of the Trust. The Company
filed an answer to the Original Complaint and interrogatories filed by Triad,
and cross claimed against the Trust. By Order dated May 4, 1998, the matter was
fully resolved and the case dismissed as a result of the Trust' payment, in
full, of Triad's claim.
On January 6, 1999, the Company authorized the Mediator to
release the various mutual settlement documents between Daleco Resources
Corporation, Reserve Production Inc., Liquidity Trust, Leonard Pipkin, Trustee,
Reserve Production Liquidity Partnership and its partners. The Advisory Action
and District Court Action have been dismissed and the matter fully resolved.
Southland Drilling Company, a Division of Triad Drilling
Company v. Westlands Resources Corporation, Daleco Resources Corporation and
Tri-Coastal Energy, L.P., Cause No. 98-34542, In the 270th Judicial District
Court of Harris County, Texas. On or about July 21, 1998, Southland Drilling
Company ("Southland") commenced a lawsuit against the Company and its
subsidiaries Westlands and Tri-Coastal. The lawsuit seeks to recover the amount
of $260,577.66 allegedly due and owing for work performed on the DRC GA #3 Well
and the DRC VI #1 Well, Burleson County, Texas. Daleco has made a special
appearance in this matter for the purpose of contesting jurisdiction. Each of
the Defendants have filed answers' asserting a general denial. Discovery is on
going in this matter. Westlands is the operator of these wells on behalf of
Tri-Coastal. Both Westlands and Tri-Coastal are evaluating potential counter
claims against Southland for the cost overruns resulting from the reworking of
these wells.
-22-
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the
fourth quarter of Fiscal Year 1998.
-23-
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS
The Company's common stock trades on the NASDAQ. The symbol
for the Company's shares is DLOV. As of December 1, 1998 there were
approximately 1,721 record owners of the Company's common stock.
The range of the high and low bid prices, by quarters, for
fiscal years 1998 and 1997, commencing with the first quarter of the fiscal year
ended September 30, 1997 for the Company's common stock is as follows:
FISCAL YEAR END NASDAQ BID PRICE U.S. $
SEPTEMBER 30
HIGH LOW
1997 - 1st Quarter 9 11/16 2 1/32
1997 - 2nd Quarter 3 7/16 1 7/8
1997 - 3rd Quarter 2 13/16 1 1/4
1997 - 4th Quarter 4 21/32 1 7/8
1998 - 1st Quarter 2 13/16 1 1/4
1998 - 2nd Quarter 2 13/16 1
1998 - 3rd Quarter 1 7/16 27/42
1998 - 4th Quarter 1 5/16
These quotations represent prices between dealers, do not
include retail mark-ups, markdowns on commissions, and may not represent actual
transactions. The prices set forth above may not be representative of prices in
a more active market for the Company's common stock. The above prices reflect
the effect of a reverse ten-for-one stock split on February 24,1998.
The Company has never paid any cash dividends. For the
foreseeable future, the Company intends to retain any earnings to finance the
growth of its business.
Sales Of Securities:
In Fiscal 1998 and 1997, the Company conducted no sales of
Securities.
During the third quarter of Fiscal year 1996, the Company
concluded a foreign placement of $1,000,000 of three (3) year 7% convertible
debentures. Under the terms of this offering dated May 31, 1996 the foregoing
investor was capable of converting up to fifty percent (50%) at any time from
and after the 40th day following May 31, 1996 and one hundred percent (100%) at
any time from and after the 60th day following May 31, 1996 into shares of
common stock of the Company at a conversion price per share equal to the lessen
of (I) the average closing bid price (as reported by NASDAQ) of the Company's
common stock for the five trading days immediately prior to the date of the
Debenture (which was $11.90 per share) (the "Closing Price") or, (ii) sixty-five
percent (65%) of the average closing bid price (as reported by NASDAQ) of the
Company's common stock for the five (5) trading days immediately prior to the
conversion date. The foreign investor also received a warrant for 10,000 shares
of common stock at an exercise price of $10.00 per share. The Warrant expires
May 31, 2001, and contains adjustments in the exercise price and the warrant
shares upon the occurrence of certain provisions.
As of March 31, 1997, all of the 7% convertible debentures had
been converted into 240,698 shares of common stock.
-24-
<PAGE>
The Company completed a second securities offering under
Regulation S on September 6, 1996. The second offering was for $1,310,000 of 8%
convertible debentures due September 6,1998. Under the terms of the debentures,
the debenture could be converted into common stock of the Company commencing 45
days following the closing of the offering as to 50% of their principal amount
of the debenture plus accrued interest through the date of conversion, and after
the 65th day following the closing as to 100% of the outstanding amount of the
debenture plus accrued interest through the date of conversion. The foreign
investor is authorized to convert at a price equal to 75% of the average closing
bid price of the Company's common stock for the five (5) trading days
immediately preceding the date of conversion. The foregoing investor also
received warrants for 50 of the face amount of the Debenture owned by the
foregoing investor on the date of exercise ("Exercise Amount"). The Warrants are
five (5) year warrants and permit the exercise of the warrants in three tranches
as follows: (I) Tranche one, equals to one-third of the Exercise Amount on the
closing date of the Regulation S offering ("Closing Date") (ii) Tranche two,
equals one-third of the Exercise Amount computed on the 75th day after the
Closing Date; and, (iii) Tranche three equals one-third of the Exercise Amount
on the 270th day after the Closing Date. The exercise price for each Tranche is
115% of the average closing bid price of the Company's common stock for the five
(5) trading days immediately preceding the 45th, 75th and 270th day following
the Closing Date. As of September 30, 1998, $1,250,000 of the Debentures had
been converted into 827,755 shares of common stock. No warrants have been
exercised.
Warrants, under the same terms, amounts, and of like duration
were issued to the foreign investment advisor for each foreign investor
("Investor Advisor Warrants"). The Investor Advisor Warrants were tied to the
face amount of their foreign investor's debentures outstanding from time to
time. As of September 30, 1998 none of these warrants have been exercised.
-25-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General:
The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provides a safe harbor for forward-looking statements made by or
on behalf of the Company. All statements, other than statements of historical
facts, which address activities, event or developments that the Company expects
or anticipates will on 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 on developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effect on the business and/on operations of the
Company.
Fiscal 1998:
On July 21, 1998, the Company borrowed a total of $145,000
from four (4) persons. These funds were borrowed so as to allow the Company to
meet its current obligations to Heller Financial. The funds were borrowed from
David F. Lincoln, a vice-president and director of the Company ($20,000), Sonata
Investment Company, Ltd., ($75,000) Dov Amir, Chairman of the Board of Directors
and Chief Executive Officer ($25,000) and Patricia M. Trainor, wife of C. Warren
Trainor, a director of the Company ($25,000) ("July Notes"). The July Notes were
to have matured on November 20, 1998, and earnest interest at the prime rate of
interest as established by the Huntingdon Bank, Columbus, Ohio, from time to
time plus (2) percent computed on the basis of a 360 day year. Since the July
Notes were not satisfied on November 20, 1998, they have been earning interest
at 18% per annum on the basis of a 360 day year.
Additionally, each note holder was given warrants exercisable
at any time prior to November 20, 2003 at an exercise price of $.55 per share.
The significant drop in oil prices and the lack of firm
purchase commitments for its timber concession resulted in significant losses
for fiscal 1998.
Despite the drilling activities of the Austin Chalk properties
and the acquisition of the Mid-Continent Properties, gross oil and gas revenues
decreased by $89,196 in fiscal 1998. In addition, due to the increased number of
wells from the Mid-Continent Acquisition and significant repairs to existing
wells, lease operating expenses increased by $483,569. This situation, in
conjunction with an $800,000 write down of the Mid-Continent properties due to
the year-end reserve values, resulted in a net loss of $726,148 from oil and gas
operations in fiscal 1998.
The Company's subsidiary, Sustainable Forrest Industries, Inc.
initiated timber sales in fiscal 1998 but has yet to obtain significant purchase
commitments. The internal marketing frame well is still being
-26-
<PAGE>
developed. As a result, the Company has continued to incur significant losses in
this segment ($454,752 loss in Fiscal 1998).
The Company reduced its administration expense by $140,898 in
fiscal 1998. However, due to the Heller Financing, the amortization of debt
issuer costs and interest expense increase significantly ($415,000) in fiscal
1998.
These events resulted in a loss of $3,360,735 in fiscal 1998.
Due to the continued depressed oil prices, subsequent to year-end, certain of
the Company's subsidiaries defaulted on certain of their debt obligations. On
December 18, 1998, the Company agreed to sell 1,848,566 shares of common stock
for $9 Million. The Company has not yet received the proceeds on this sale. The
Company's ability to continue as a going concern is dependent upon the
availability of future funding, the successful compensation of its drilling
properties and profitable timber operations.
Fiscal 1997:
The Company settled its two lawsuits arising out of the Asset
Purchase Agreement with Reserve Production, Inc., Liquidating Trust, Reserve
Production Liquidating Partnership and Leonard Pipkin, Trustee. Although the
Company did not acquire the assets of these entities as it had hoped, which
assets would have complemented its other Austin Chalk Properties in Texas, the
Company believed that the settlement was in the best interest of its
shareholders.
On May 23, 1997, the Company entered into a Loan Agreement
with Sonata Investment Company, Ltd. ("Sonata") pursuant to which Sonata made a
$250,000 loan ("Loan") to Sustainable Forest Industries, Inc. ("Sustainable")
for use in funding Sustainable's operations. The Loan is secured by
Sustainable's receivables and guaranteed by Daleco, Westlands and Deven
affiliates of Sustainable. Under the terms of the Loan Agreement, Sonata has the
night but not the obligation to make an additional $250,000 loan to Sustainable
upon Sustainable's request and assuming that Sustainable is in compliance with
the provisions of the Loan Agreement. Repayment of the Loan (and any subsequent
advance) is pursuant to a Profits Participation Agreement by which Sonata will
receive twenty-five percent (25%) of the Profits of Sustainable and after payout
of the Loan, twenty percent (20%) of the Profits. The funds obtained through the
Sonata loan have allowed Sustainable to commence harvesting and shipping test
samples of woods for the purpose of establishing a domestic market for South
American woods.
In the Fourth Quarter, the Company entered into an arrangement
with Heller Financial, Inc. ("Heller") whereby Heller agreed to provide the
Company with up to $15,000,000 for use by the Company to rework its existing
horizontal wells in the Austin Chalk formation , recomplete its vertical wells
as horizontal wells and develop additional acreage held by the Company in the
immediate vicinity of its existing wells. Approximately $2,500,000 of the
$15,000,000 funding is set aside for potential future acquisitions. This funding
has and will provide the Company with the capital it needs to accelerate the
reworking, recompleting and development of its acreage in Texas more quickly and
more efficiently than would be the case if the Company was employing production
revenues. Under the terms of the Agreement with Heller, all of the properties of
Westlands Resources Corporation, which constituted all of the Company's Texas
properties located in the Austin Chalk trend, were transferred to a newly formed
Texas limited partnership, Tri-coastal Energy, LLP, the general partner of which
is a Delaware corporation, Tri-Coastal Energy, Inc. the sole shareholder of
which is Westlands Resources Corporation. Westlands Resources Corporation
continues to be the operator of the wells.
In the Fourth Quarter, the Company acquired a $300,000 loan
from PNC Bank, N.A. ("PNC Loan"). The PNC Loan was collateralized by the pledge
of the Company's net profits interest in 38 wells located in Armstrong and
Fayette Counties, Pennsylvania. The PNC Loan is a three year loan at an interest
rate of prime plus 2% per annum.
The Company does not record any significant deferred tax
provisions, since it has a substantial loss carry-forward. The Company considers
all of its operations to be fully integrated.
-27-
<PAGE>
As indicated elsewhere in this report, the Company does not
include a provision for abandonment on restoration costs in its financial
statements, since historically the costs of abandonment of wells have been
offset by the salvage value of the related well. The Company believes that it
has not incurred any environmental remediation costs of a consequential nature
and makes no provisions therefore.
As a result of the Company's agreement with Heller Financial,
Inc. the Company received, in the fourth quarter of Fiscal Year 1997, the
capital required to carry out its drilling and workover programs of its Texas
properties in order to maximize the potential of its properties. The results of
the initial reworking of the Company's horizontal wells has demonstrated
improved production. Since only a fraction of the workovers could be completed
prior to the end of the fiscal year, the true results of the workovers,
redrilling and development will not be realized until later in Fiscal Year 1998.
In spite of the capital constraints which existed for most of Fiscal Year 1997,
gross operating revenues amounted to $2,462,909 in Fiscal 1997 as compared with
$805,259 for Fiscal 1996, year while lease operating expense decreased by
$121,001.
The Sonata Loan has financed the initial cutting and delivery
of woods from Guyana. The Company is negotiating exclusive marketing, processing
and distribution rights with established regional and national wood treating and
wholesaling companies any one of which should allow Sustainable to become self
sufficient by the end of Fiscal Year 1998. Even without one of these contracts,
Sustainable believes that the demand for the Guyana woods compared with the
declining availability of domestic alternatives and the more costly alternatives
from Asia will provide a viable market for its products.
Administrative expenses amounted to $1,421,823 for Fiscal 1997
as compared to $810,495 for the prior Fiscal year.
In connection with the Company's timber operations in Guyana,
the Company incurred $249,499 in advances and accrued expenses. A majority of
these expenses, an increase of $57,358 over Fiscal 1997 were funded through the
Sonata Loan.
Liquidity and Capital Resources:
Prior to the Heller Financing (which increased $4.7 million in
Fiscal 1998), the Company historically financed its operations through cash flow
from operating activities. Well drilling costs were historically been met by
selling interests in a well to be drilled on a turnkey or fixed costs basis to a
few individuals having close ties to the Company and its founders. Typically,
the Company has recognized a profit in these turnkey arrangements; since it has
been able to contract for the drilling of the wells on a costs basis less that
the turnkey price. The Company has also been able to secure a free or "carried
interest" in these wells as part of the arrangement. As a result of the Heller
financing, the Company, while still conducting drilling on a Turnkey Basis, has
abandoned its former approach of funding operations through internally generated
cash flow, and accelerated the reworking, re-completing and development of
proved undeveloped reserves in an effort to increase cash flow and increase the
value of the Company's reserves. While the Company still intends to use cash
flow for operations where appropriate, the Company believes that it was more
prudent to accelerate development to take advantage of the improved market for
hydrocarbons and realize the potential of the Company's reserves.
During the third quarter of Fiscal 1996, the Company sold
$1,000,000 of a 7% convertible debentures to foreign investors under a
Registration "S" Offshore Subscription Agreement. A second Registration "S" 8%
convertible debenture in the amount of $1,310,000 was successfully placed with
foreign investors during the fourth quarter. The net proceeds from both
debentures were used to re-drill a horizontal oil well and rework three other
oil wells in the Austin Chalk trend, as well as to retire trade accounts payable
and meet other corporate obligations. At the end of Fiscal 1998, the amount
remaining outstanding for the 8% debenture was $60,000. Funds when needed were
made available to the Company by its controlling shareholders, Messrs. Amir and
Erlich in the form of unsecured loans and deferral of payments for
administration service charges. (See, "Certain Relationships" and "Related
Transactions".) At the end of Fiscal 1998, the amount owed to such individuals
was $415,829.
-28-
<PAGE>
An increase of $647,049 was recorded in depletion,
depreciation and amortization costs for the fiscal year. The increase reflects
the production increase in Fiscal 1998 resulting from the Company's acquisition
and development efforts, as well as from the negative effects of the lower
average product prices received by the Company.
The Company believes that its relations with trade creditors
are good and foresees no immediate problems in deferring payments for a short
time on making other necessary arrangements to meet its obligations. The Company
continues to seek additional capital with which to continue the development of
its holdings as well as acquire producing oil and gas properties having a good
development potential. Management is considering both debt and equity additional
financing during Fiscal 1998, however there are no assurances that such efforts
will be successful.
Capital Expenditures:
During Fiscal 1998, the Company either drilled or through its
related entities participated in the drilling of seventeen (17) new wells. The
Company also reworked seven (7) wells, the Company's share of which was
$463,800.
Acquisitions:
Effective September 30, 1997, the Company acquired Haly
Corporation ("Haly"), a California corporation, for 3,000,000 shares of the
Company's common stock. At the time of its acquisition from Mr. Amir and Mr.
Erlich, Haly's assets consisted of 3,000,117 shares of the Company's common
stock plus working interests ranging from 1.75% to 33.3% in fourteen (14) wells.
Thirteen (13) of these wells are producing from the Austin Chalk formation of
Texas while the remaining well interest represents a small overriding royalty in
a non-operated well in California. This acquisition also eliminated amounts owed
to Haly of $364,931 less $100,000 in Haly bank debt assumed by the Company.
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.
Year 2000 Readiness:
The Company has developed a Year 2000 plan that includes
assessment, hardware and software remediation, and testing. The Company has
substantially completed the assessment phase, which included review of internal
computer applications and information systems, facilities and equipment, as well
as products and services provided by third parties. Substantially all computer
applications and systems are expected to be year 2000 compliant by September 30,
1999. Numerous third parties will be contacted to assess and monitor their
compliance and remediation efforts. The estimated costs of the Year 2000
compliance program are not material to the Company's operating results on
financial position.
The Company is supplementing existing emergency recovery plans
with Year 2000-specific procedures to mitigate the impact of any unsuccessful
remediation or third party failures. Management believes that the diversity of
the Company's operations and systems reduces overall exposure and expects that
the consequences of any unsuccessful remediation will not be significant.
However, there can be no assurance that the Company's efforts or those of other
entities will be successful, or that any potential failure would not have a
material adverse effect on the Company's operating results or financial
condition.
-29-
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and schedules are included
herein.
AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL INFORMATION
* Independent Auditors" Report on Audited Consolidated Financial
Statements
* Consolidated Balance Sheets
* Consolidated Statements of Loss
* Consolidated Statements of Deficit
* Consolidated Statements of Cash Flow
* Notes to Consolidated Financial Statements
* Auditors' Report on Supplemental Financial Information
* Schedule II - Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees Other Than Related Parties
* Schedule IV - Non-Current Indebtedness of and to Related Parties
* Schedule V - Property, Plant and Equipment
* Schedule VI - Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment
* Schedule IX - Short-Term Borrowings
* Schedule X - Supplementary Income Statement Information
OTHER SUPPLEMENTAL DATA
* Estimated Net Quantities of Proven Oil and Gas Reserves
* Standardized Measure of Discounted Future Net Cash Flow from
Estimated Production of Proved Oil and Gas Reserves
* Summary of Changes in Standardized Measure of Discounted Future
Net Cash Flows
-30-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Daleco Resources Corporation
We have audited the accompanying consolidated balance sheet of Daleco Resources
Corporation and subsidiaries as of September 30, 1998, and the related
consolidated statements of loss, deficit, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated statements based on our audit. The consolidated financial
statements as of September 30, 1997 and for the years ended September 30, 1997
and 1996, were audited by other auditors whose report dated December 24, 1997,
included a reference to the Company's ability to continue as a going concern to
that below.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Daleco Resources
Corporation and subsidiaries as of September 30, 1998, and the results of
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered significant recurring net losses,
negative operating cash flow, and has uncertainly relative to full
recoverability of assets and repayment of $8.9 million in obligations, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 1 to the
financial statements. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Jay J. Shapiro, C.P.A.
A Professional Corporation
Encino, California
April 16, 1999
-31-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
=================================================================================================================
1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $192,342 $526,760
Accounts receivable 339,017 320,057
----------- ----------
Total Current Assets 531,359 846,817
Oil and gas properties and equipment (note 4) 9,054,930 5,590,533
Property and equipment 37,632 62,632
Timber rights (note 5 ) 828,342 1,028,342
Mineral properties (note 6) ----- 23,973
Goodwill (note 18) 237,693 813,357
Debt Issue Costs 372,815 584,815
----------- ----------
Total Assets $11,062,771 $8,950,469
=========== ==========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $1,985,078 $1,198,896
Current portion of long-term debt 200,000 200,000
Drilling deposits ----- 268,000
Due to related parties (note 8) 415,829 349,590
----------- ----------
Total Current Liabilities 2,600,907 2,016,486
Long-term debt (note 10) 6,285,054 1,589,815
Debentures (note 9) 60,000 60,000
----------- ----------
Total Liabilities 8,945,961 3,666,301
----------- ----------
Commitments and Contingencies (notes 7, 10, 11, 13 and 16)
Shareholders' Equity
2,951,642 Common Shares, par value $0.01 per share (1997- 2,756,788) 29,516 27,570
(note 11)
16,000 Preferred Shares, par value $0.01 per share (note 8) 160 160
Additional Paid in Capital 14,329,827 14,058,401
Accumulated deficit (12,242,693) (8,801,963)
----------- ----------
Total Shareholders' Equity 2,116,810 5,284,168
----------- ----------
Total Liabilities and Shareholders' Equity $11,062,771 $8,950,469
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-32-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
==========================================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Gross Operating Revenue $ 2,374,223 $ 2,462,909 $ 805,259
Less: Lease operating expenses 955,717 472,148 593,149
Severance taxes 38,598 32,079 25,827
Depletion, depreciation and amortization 1,145,000 497,951 321,002
Net profits interest and related expenses 961,056 1,274,427 -----
------------ ------------ ----------
Net income (loss) from oil and gas operations (726,148) 186,304 (134,719)
------------ ------------ ----------
Timber Sales: 46,369 ----- -----
Timber Operating Costs 501,121 249,499 192,141
------------ ------------ ----------
Net Loss From timber Operations (454,752) (249,499) (192,141)
------------ ------------ ----------
Net loss (gain) on sale of assets ----- ----- 20,671
Administration expense 1,280,925 1,421,823 810,495
Amortization of debt issue costs 212,000 42,865 12,305
Financial advisory expenses ----- 287,356 207,946
Interest expense 533,626 155,371 165,312
Amortization of goodwill (Note 18) 575,643 416,643 -----
Write-down of advances to mining joint venture (Note 3) ----- 100,000 200,000
------------ ------------ ----------
2,602,194 2,673,557 1,608,870
Other Income (Expense)
Management and administrative fees 422,359 582,270 -----
Gain (Loss) on litigation settlement (Notes 13 and 17) ----- (224,875) 769,280
------------ ------------ ----------
422,359 2,316,162 839,090
------------ ------------ ----------
Net Loss for the Year $(3,360,735) $(2,129,858) $(973,809)
------------ ------------ ----------
Basic and Fully Diluted Net Loss per Common Share $(1.14) $(0.80) $(0.80)
====== ====== ======
(note 11(c))
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-33-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT
AS AT SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Deficit - Beginning of Year ($8,801,963) $(6,672, 105) $(5,698,296)
Net loss for the year (3,360,735) (2,129,858) (973,809)
Dividends on Preferred (80,000) ---- -----
------------ ------------ -----------
Deficit - End of Year $(12,242,698) $ (8,801,963) $(6,672,105)
------------ ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-34-
<PAGE>
RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
AS AT SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Operating Activities
Net loss for the year $(3,360,735) $(2,129,858) $(973,809)
Items not affecting working capital
Depletion, depreciation, and amortization 1,145,000 497,951 321,002
Amortization of debenture issue costs 212,000 42,865 12,305
Write-down of advances to mining joint venture ----- 100,000 200,000
Loss (gain) on litigation settlement ----- 224,875 (769,780)
Other ----- ----- 29,074
----------- ----------- -----------
(2,003,735) (1,264,167) (1,181,208)
Decrease (increase) in accounts receivable (18,960) 663,073 (82,251)
(Decrease) increase in accounts payable 788,182 (117,508) (390,756)
(Decrease) increase in advances received on well costs ----- 239,000 (22,000)
Drilling and work over costs (3,808,754) (381,307) (1,162,843)
Net proceeds from settlement of litigation ----- ----- 611,573
Proceeds of drilling program (268,000) ----- 525,500
----------- ----------- -----------
Cash used for operating activities (5,311,267) (860,909) (1,701,985)
Investing Activities:
Mineral properties expenditures/write-off 23,973 (8,300) 4,314
Increase in advances ----- ----- (150,000)
Decrease in lease acquisition and well costs ----- ----- 158,884
----------- ----------- -----------
Cash provided by (used for) investing activities 23,973 (8,300) (13,198)
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-35-
<PAGE>
RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
AS AT SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Financing Activities
(Decrease) increase in notes payable ----- ----- (300,000)
Increase (decrease) in amounts due to related parties 66,239 (77,216) 255,176
Issuance of convertible debentures ----- ----- 2,310,000
Dividends (80,000) ----- -----
Proceeds from long-term debt 4,966,637 1,789,815 -----
Debt issue costs ----- (584,815) (388,196)
---------- ---------- ----------
Cash provided from financing activities 4,952,876 1,127,784 1,876,980
---------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents (334,418) 258,575 188,173
Cash and Cash Equivalents - Beginning of Period 526,760 268,185 80,012
---------- ---------- ----------
Cash and Cash Equivalents - End of Period $ 192,342 $ 526,760 $ 268,185
========== ========== ==========
Supplemental Information:
Issuance of stock for debt $ 273,377 $ 609,014 -0-
========== ========== ==========
Income taxes paid -0- -0- -0-
========== ========== ==========
Interest paid $ 367,848 $ 155,371 $ 165,312
</TABLE>
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
1. CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a
going concern, which contemplates that the Company will be
able to realize assets and discharge liabilities in the
normal course of business. Accordingly, they do not give
effect to adjustments that would be necessary should the
Company be required to liquidate it assets. As of September
30, 1998 the Company has reported a loss of $3,360,735 and
had negative working capital of $2,600,907. The ability of
the Company to meet these liabilities and total liabilities
of $8.9 Million and to continue as a going concern is
dependent upon the availability of future, debt or equity,
funding, the profitable completion of its drilling projects
(see Note 4), and achieving profitable timber operations (see
Note 5).
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.
-37-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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 September 30, 1998 and 1997,
represent those associated with the Heller Financial,
Inc. loan (see Note 1) and will be amortized over a
period of five years. Costs as of September 30, 1996,
were associated with the debentures and were written
off upon conversion of the debentures into common
stock.
-38-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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.
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.
-39-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
4. Oil and Gas and Equipment
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Proven lease acreage costs $ 6,071,637 $ 3,756,637
Proven undeveloped lease acreage costs 1,906,220 1,906,220
Well costs 4,795,605 2,501,208
----------- -----------
$12,773,462 $ 8,164,065
Accumulated depletion, depreciation and amortization 3,718,532 2,573,532
----------- -----------
$ 9,054,930 $ 5,590,533
=========== ===========
</TABLE>
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 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.
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 claims were not renewed and
written-off during Fiscal 1998.
-40-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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.
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 11(b)--Warrants and Schedule IX--Short Term Borrowings).
8. Due to (from) Related Parties
<TABLE>
<CAPTION>
1998 1997
Net due (from) to Amir and Erlich
<S> <C> <C>
Bearing interest at prime +3% $91,062 91,062
Bearing interest at 7% 324,767 258,528
------- -------
$415,829 $349,590
======== ========
</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.
9. Debentures
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
8% Convertible
Debentures $60,000 $60,000
------- -------
</TABLE>
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.
-41-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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 September 30, 1998 and 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 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 September 30, 1998 and
1997, was $5,835,054 and $1,139,815, respectively.
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%.
-42-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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.
d. First Regional Bank
As of September 30, 1998, the Company assumed a
$100,000 loan with First Regional Bank when it
acquired Haly Corporation (see Note 19). Interest is
at 6.9% and the loan matures December 12, 1998. The
loan is secured by personal assets of an officer of
the Company.
11. 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
Authorized 20,000,000 10,000,000
---------- ----------
<S> <C> <C> <C>
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
Shares cancelled due to cancellation of
Fractional shares (46) (5)
--------- -----------
Balance as at September 30, 1998 2,951,642 16,000 $14,359,503
========= ====== ===========
</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.
-43-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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:
1998 1997 1996
- ----------------------------------------------------------------------------
Outstanding and Exercisable
at beginning of year 35,000 700,000 85,000
- ----------------------------------------------------------------------------
Canceled 15,000 (350,000) (150,000)
- ----------------------------------------------------------------------------
Granted 120,000 ----- -----
- ----------------------------------------------------------------------------
Exercised ----- ----- -----
----- ----- -----
- ----------------------------------------------------------------------------
Outstanding and Exercisable
at end of year 140,000 35,000 70,000
======= ====== ======
- ----------------------------------------------------------------------------
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 and 1998 was
$1.80.
The options issued in Fiscal 1998 were at $2.187 per
share, the same as the underlying stock. Therefore,
there would be virtually no impact on the Company's
net loss or net loss per share.
-44-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
b. Common Stock Warrants
Common stock warrants outstanding at September 30,
1998, 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 Note Warrants 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.
(2.) Warrants Attached to $145,000 Notes. See Schedule IX--Short
Term Borrowings.
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 2,951,688 (after reverse split--see
Note 2) for the year ended September 30, 1998 (1997 -
2,756,788; 1996 - 1,222,354). For the years ended
September 30, 1998, 1997, and 1996 the exercise of
the options and warrants outstanding as at year end
did not have a dilutive effect on the net income per
share.
-45-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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. Contingencies
Southland $263,000. This amount is reserved for the potential
obligations of Westlands arising out of the Southland Drilling Company
litigation. See Item 3, Legal Proceedings.
14. 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. In 1998 revenues from timber operations
were $46,369 and the net investment was $828,000.
The following table identifies customers or 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 (%)
Oil Production
<S> <C> <C>
Pride Pipeline Company 50.0% 100%
Kelly MacClaskey Oilfield Services, Inc. 11.9%
Tri-Power Resources, Inc. 31.8%
Gas Production
Aquila Southwest Pipeline Corp. 13.2% 11.8%
Austin Chalk National Gas Marketing 14.5% 12.3%
Southern Natural Gas 72.5%
</TABLE>
-46-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
15. Additional Information on Petroleum and Natural Gas Activities
<TABLE>
<CAPTION>
DEPRECIATION,
PROPERTY (1) DEPLETION AND
ACQUISITION $ EXPLORATION $ DEVELOPMENT $ AMORTIZATION $
<S> <C> <C> <C> <C>
September 30, $2,315,000 ----- $2,294,397 $1,145,000
1998
September 30, $2,323,357 ----- $381,307 $497,951
1997
September 30, ----- ----- 637,343 321,002
1996
</TABLE>
(1) Development costs include costs associated
with the developed leaseholds as well as
tangible and intangible well costs.
16. 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.
17. 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
-47-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
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.
18. 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.
19. 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 and no assurance is given to the
eventual consummation of this transaction.
-48-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Daleco Resources Corporation
The audit referred to in our report to the Board of Directors and Stockholders
of Daleco Resources Corporation and subsidiaries dated April 16, 1999, relating
to the consolidated financial statements of Daleco Resources Corporation and
subsidiaries included the audit of Schedule V, VI, and IX, found on pages 52,
53, and 54, respectively, for the year ended September 30, 1998. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the Fiscal 1998 information set forth therein.
The accompanying financial statements schedules for the year ended September 30,
1997 and prior were not audited by us, and accordingly, we do not express an
opinion on them.
Jay J. Shapiro, C.P.A.
A Professional Corporation
Encino, California
April 16, 1999
-49-
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT YEARS ENDED SEPTEMBER 30, 1998, 1997
and 1996 (EXPRESSED IN THOUSANDS)
================================================================================
YEAR ENDED
SEPTEMBER 30
1998 1997 1996
Acreage Cost
Proven Lease Acreage
Balance - Beginning of year $ 3,757 $ 2,428 $ 2,364
Additions 2,315 1,329 64
Disposal -- -- --
------- ------- -------
Balance - End Of Year 6,072 3,757 2,428
-------
Proven Undeveloped Lease Acreage
Balance - Beginning of Year 1,906 1,906 2,065
Additions -- -- --
Disposal -- -- (159)
------- ------- -------
Balance - End of Year 1,906 1,906 1,906
------- ------- -------
Well Costs
Balance Beginning of Year 2,501 1,506 1,485
Additions 2,294 995 585
Disposal -- -- (569)
------- ------- -------
Balance - End of Year 4,795 2,501 1,506
------- ------- -------
TOTAL COST $12,773 $ 8,164 $ 5,840
======= ======= =======
-50-
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY,
PLANT AND EQUIPMENT YEARS ENDED SEPTEMBER 30, 1998, 1997 and 1996
(EXPRESSED IN THOUSANDS)
================================================================================
YEAR ENDED SEPTEMBER 30
1998 1997 1996
ACCUMULATED DEPRECIATION AND DEPLETION
Prove Lease Acreage
Balance - Beginning of Year $ 1,386 $ 1,088 $ 891
Charge for the Year 844 298 197
Disposal -- -- --
------- ------- -------
Balance - End of Year 2,230 1,386 1,088
------- ------- -------
Proven Undeveloped Lease Acreage
Balance Beginning of Year 362 362 362
Charge for Year -- -- --
Disposal -- -- --
------- ------- -------
Balance - End of Year 362 362 362
------- ------- -------
Well Costs
Balance - Beginning of Year 826 626 708
Charge for Year 300 200 124
Disposal -- -- (206)
------- ------- -------
Balance - End of Year 1,126 826 626
------- ------- -------
TOTAL DEPRECIATION $ 3,718 $ 2,574 $2 076
======= ======= =======
-51-
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE IX - SHORT-TERM BORROWINGS FOR THE YEARS ENDED SEPTEMBER 30, 1998,
1997 AND 1996
================================================================================
As of September 30, 1998, the Company had a $100,000 loan payable with First
Regional Bank.
On July 21, 1998, the Company borrowed $145,000 from David F. Lincoln ($20,000),
Dov Amir ($25,000), Patricia M. Trainor ($25,000) and Sonata Investment Company,
Ltd. ($75,000). The loans were evidenced by Notes maturing on November 20, 1998
earning interest at the prime rate charged by the Huntingdon Bank, Columbus,
Ohio, plus two percent (2%) per annum, computed on the basis of a 360 day year.
After November 20, 1998, the notes earn interest at the rate of 18% per annum,
computed on the basis of a 360 day year.
In addition to the Notes, the lenders were also given warrants for Company
common stock, with an exercise price of $.55. Mr. Amir and Mrs. Trainor each
received warrants for 45,455 shares, Mr. Lincoln received warrants for 36,364
shares, and Sonata Investment Company, Ltd. received warrants for 136,364
shares. Messrs. Amir and Lincoln are officers and directors of the Company. Mrs.
Trainor is the wife of C. Warren Trainor, general counsel to the Company and a
director. Sonata Investment Company, Ltd. is a lender to Sustainable Forest
Industries (See Management's Discussion and Analysis).
There were no other short-term borrowings for the years ended September 30, 1997
and 1996.
-52-
<PAGE>
DALECO RESOURCES CORPORATION
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
================================================================================
This schedule has been omitted as the information is furnished in the income
statement included with the consolidated financial statements.
-53-
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED) FOR THE YEARS ENDED
SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
ESTIMATED NET QUANTITIES OF PROVEN OIL AND GAS RESERVES
Proved reserves are the estimated quantities which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operation conditions. Proved
developed reserves are the quantities expected to be recovered through existing
wells with existing equipment and operating methods. These reserve estimates
were prepared by independent engineers and are based on current technology and
economic conditions. The Company considers such estimates to be reasonable;
however, due to inherent uncertainties and the limited nature of reservoir data,
estimates of underground reserves are imprecise and subject to change over time
as additional information becomes available.
The following table shows the changes in the Company's net proved and proved
developed oil and gas reserves for the year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
CRUDE OIL NATURAL CRUDE OIL NATURAL CRUDE OIL NATURAL
AND GAS AND GAS AND GAS
CONDENSATE (MMCF) CONDENSATE (MMCF) CONDENSATE (MMCF)
(BARRELS) (BARRELS) (BARRELS)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proven
Developed and
Undeveloped
Reserves
- -------------------------------------------------------------------------------------------------------------------
Balance - 1,369,917 14,069 963,586 8,740 825,213 8,037
Beginning of Year
- -------------------------------------------------------------------------------------------------------------------
Acquisition of 411,694 ----- ----- 2,107 ----- -----
Reserves
- -------------------------------------------------------------------------------------------------------------------
Disposition of ----- ----- ----- ----- ----- -----
Reserves
- -------------------------------------------------------------------------------------------------------------------
Revision of (148,762) (192) 421,802 3,368 155,992 909
Previous
Estimates
- -------------------------------------------------------------------------------------------------------------------
Production for (69,918) (349) (15,471) (146) (17,637) (206)
Year
- -------------------------------------------------------------------------------------------------------------------
Balance - End of 1,562,931 13,912 1,369,917 14,069 963,586 8,740
========= ====== ========= ====== ======= =====
Year
- -------------------------------------------------------------------------------------------------------------------
Proved 260,973 2,963 125,013 2,311 112,963 751
======= ===== ======= ===== ======= ===
Developed
Reserves as at
September 30
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-54-
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED)
AS AT SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
Measure of Discounted Future Net Cash Flow From Estimated Production Proved Oil
and Gas Reserves Standardized
The standardized measure of discounted future net cash flows from estimated
production of proven oil and gas reserves after income taxes is presented in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No. 69). In
computing this data assumptions other than those mandated by SFAS No. 69 could
produce substantially different results. The company cautions against viewing
this information as a forecast of future economic conditions or revenues.
The standardized measure of discounted future net cash flows is determined by
using estimated quantities of proved reserves and taking into account the future
periods in which they have been projected to be developed and produced.
Estimated future production is priced at the year-end price. The resulting
estimated future cash inflows are reduced by estimated future costs to develop
and produce the proved reserves. The future pretax net cash flows are then
reduced further by deducting future income tax expenses as applicable. The
resultant net cash flows are reduced to present value amounts by applying the
SFAS No. 69 mandated 10% discount factor.
STANDARDIZED MEASURE OF DISCOUNTED NET CASH INFLOWS AS AT SEPTEMBER 30, 1998,
1997, AND 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $53,813,143 $64,556,336 $42,084,331
- -------------------------------------------------------------------------------------------------------
Future production costs (9,122,759) (8,725,086) (8,488,124)
- -------------------------------------------------------------------------------------------------------
Future development costs (18,820,392) (19,973,342) (6,585,758)
- -------------------------------------------------------------------------------------------------------
Future income tax expense* ----- ----- -----
----- ----- -----
- -------------------------------------------------------------------------------------------------------
25,869,992 35,857,908 27,010,,449
- -------------------------------------------------------------------------------------------------------
Discount factor at 10% (12,852,015) (13,377,937) (9,155,787)
- -------------------------------------------------------------------------------------------------------
Standardized Measure of Future Net Cash Flows $13,017,977 $22,479,971 $17,854,662
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------
</TABLE>
* The Company presently has approximately $27 million of loss carry
forwards. Based on these carry forwards no future taxes payable have
been included in the determination of future new cash inflows. Future
head office general and administrative expenses have been excluded from
the cash flows.
-55-
<PAGE>
DALECO RESOURCES CORPORATION
SUPPLEMENTAL INFORMATION (UNAUDITED)
AS AT SEPTEMBER 30, 1998, 1997 AND 1996
================================================================================
Summary in Changes in Standardized Measure of Discounted Future Net Cash Flows.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance - Beginning of Year $22,479,971 $17,854,662 $13,402,604
Increase (decrease) in future
net cash flows:
Sales for the year net of
related costs (418,852) (684,255) (577,911)
Revisions to estimates of
proved reserves (10,678,066) 3,723,618 5,207,897
Acquisition of Reserves 1,634,924 1,585,946
Extensions and discoveries
Net of related costs:
Sales of reserves in place ----- ----- (177,928)
----- ----- ---------
Balance - End of Year $13,017,977 $22,479,971 $17,854,662
=========== =========== ===========
</TABLE>
-56-
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-57-
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the shares of Common Stock of the
Company beneficially owned as of the Record Date by each officer and director of
the Company and by officers and directors as a group:
<TABLE>
<CAPTION>
========================================================================================================================
AMOUNT OF PERCENT
CLASS OF NAME, AGE AND POSITION BENEFICIAL OF CLASS
STOCK WITH THE COMPANY OWNERSHIP (%)
(SHARES)
========================================================================================================================
<S> <C> <C> <C>
Common Gary J. Novinskie (48) 107,724(1) 3.2%
Director, President and Chief Operating Officer
========================================================================================================================
Common Dov Amir (74) 300,109(2) 9.0%
Chairman of the Board of Directors and Chief Executive
Officer
========================================================================================================================
Common David F. Lincoln (42) 283,682(3) 8.5%
Vice Chairman of the Board of Directors and Vice
President
========================================================================================================================
Common C. Warren Trainor (53) 75,955(4) 2.3%
Director
========================================================================================================================
Common All Directors and Officers of the Company as a Group 768,970(5) 22.8%
========================================================================================================================
</TABLE>
(1) The stock ownership of Mr. Novinskie includes: warrants to purchase
20,000 shares of Daleco Common Stock on or before October 1, 2001 at
$3.50 per share; 80,000 options to purchase shares of Daleco Common
Stock on or before November 12, 2002 at $2.1875 per share; plus 7,724
shares owned directly.
(2) The stock ownership of Mr. Amir includes: 239,582 shares owned
directly; 73 shares owned by the Amir Family Trust, dated May 13, 1991;
15,000 shares which are subject to acquisition pursuant to an option to
purchase such shares on or before January 6, 2000 at $2.50 per share
and warrant for 45,455 shares at $.55 which expire November 20, 2003.
(3) The stock ownership of Mr. Lincoln consists of 190,500 shares and
warrants for 75,000 shares at $3.50 which expire October 1, 2001 and
warrants for 18,182 shares at $.55 which expire on November 20, 2003.
Mr. Lincoln is Vice Chairman of the Board of Directors and a Vice
President of the Company. Formerly, Mr. Lincoln was the Chairman of the
Board and Chief Executive Officer of Deven Resources, Inc. Mr. Lincoln
is also a managing director of EnerTech Capital Partners, a private
equity investment firm.
(4) Mr. Trainor's stock ownership consists of 500 shares owned by him
directly and 30,000 options to purchase shares of Daleco Common Stock
on or before November 12, 2002 at $2.1875 per share. The options are
held by FRW, LLC, a limited liability company of which Mr. Trainor is a
one-third member. Mr. Trainor's wife has warrants for 45,455 shares at
$.55 per share which expire on November 20, 2003. Mr. Trainor disclaims
beneficial ownership of both the options and warrants.
-58-
<PAGE>
(6) This group consists of four persons.
Section 16(a) Compliance
Based solely upon a review of Forms 3 and 4 during the fiscal year
ending September 30, 1998 and Form 5 forwarded to the Company with respect to
the fiscal year ended September 30, 1998, there were no late filing of reports
by any party required to have filed same.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
===================================================================================================
NAME AND AGE OFFICE HELD
===================================================================================================
<S> <C>
Dov Amir (74) Chairman of the Board and Chief Executive Officer (1)
===================================================================================================
Gary J. Novinskie (48) President and Chief Operating Officer and Director (1)
===================================================================================================
David F. Lincoln (42) Vice Chairman of the Board of Directors (1)
===================================================================================================
Edward J. Furman (44) Treasurer
===================================================================================================
Jody Spencer (54) Secretary
===================================================================================================
</TABLE>
(1) See "SECURITY OWNERSHIP OF MANAGEMENT" for positions held and experience.
EXECUTIVE COMPENSATION
----------------------
Item 10
For the period ending September 30, 1998 the Company had five (5)
full-time employees. The following table sets forth the compensation paid its
three (3) highest paid officers for the past three (3) years.
-59-
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------
Long Term Compensations
- ------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) 8 (d) (e) (f) (g) (h) (I)
- ------------------------------------------------------------------------------------------------------------------------
Name and Securities
Principal Other Annual Restricted Underlying LTIP All other
Position Year Salary Bonus Compensation Stock Options/SARs Payouts Compensation
($) ($) ($) Award(s) (#) ($) ($)
($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dov Amir 1996 96,000 0 14,100 0 0 0 0
President
- ------------------------------------------------------------------------------------------------------------------------
Dov Amir 1997 99,000 0 14,100 0 0 0 0
President
- ------------------------------------------------------------------------------------------------------------------------
Dov Amir 1998 99,000 0 14,100 0 0 0 0
President
- ------------------------------------------------------------------------------------------------------------------------
Louis Erlich 1996 96,000 0 14,100 0 0 0 0
Chairman of the
Board and Vice
President
- ------------------------------------------------------------------------------------------------------------------------
Louis Erlich 1997 99,000 0 14,100 0 0 0 0
Chairman of the
Board and Vice
President
- ------------------------------------------------------------------------------------------------------------------------
Gary J. 1997 100,000 0 0 0 800,000 0 0
Novinskie
President
- ------------------------------------------------------------------------------------------------------------------------
Gary J. 1998 100,000 0 0 0 0 0 0
Novinskie
President
========================================================================================================================
</TABLE>
1. As of March 1, 1997, the Company's management agreement with Haly
Corporation was terminated, with Messrs. Amir and Erlich becoming
employees of Daleco. All accounting and other functions of the Company
relating to its management were relocated to the Company's office in
Wayne, Pennsylvania from Haly's offices in California. Messrs. Amir and
Erlich's offices remain, however, in California. Mr. Amir and Erlich
are reported as if they had been employees of Daleco for the entirety
of Fiscal 1997.
2. Mr. Erlich resigned as an officer of the Company as of January 1, 1998.
-60-
ITEM 11
COMPENSATION OF DIRECTORS
-------------------------
On December 6, 1996, the Board of Directors unanimously voted to
abolish fees for Directors, but agreed to reimburse Directors for travel and
lodging, if any, actually incurred by a Director in conjunction with his
attendance at a meeting of the Board. In Fiscal 1997, the Company incurred
$833.74 of costs, reimbursable to Directors, in connection with Directors
attendance at Board Meetings.
ITEM 12 RELATED TRANSACTIONS
None
-61-
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 10-KSB
(A) The following exhibits are filed as part of this report:
EXHIBIT NUMBER AND DESCRIPTION
3.1 Memorandum of Incorporation of United Westlands Resources, Ltd. dated
April 20, 1982 (incorporated by reference from Registrant's
Registration Statement pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934 on Form 20-F dated May 31, 1984).
3.2 Articles of United Westlands Resources, Ltd. (incorporated by reference
from Registrant's Registration Statement pursuant to Section 12(b) or
(g) of the Securities Exchange Act of 1934 on Form 20-F dated May 31,
1984).
3.3 Certified Special Resolution and Altered Memorandum of Daleco Resources
Corporation filed May 2, 1986 (incorporated by reference from
Registrant's Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the fiscal year ended September 30,
1991 on Form 10-K dated December 28, 1991).
3.4 Articles of Continuance of Daleco Resources Corporation filed July 15,
1986 (incorporated by reference from Registrant's Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended September 30, 1991 on Form 10-K dated
December 28, 1991).
3.5 Registrant's domestication in the State of Delaware effective September
30, 1996, incorporated by reference from Registrant's Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended September 30, 1991 on Form 10-K dated January
15, 1997, and Registrant's form 8-K dated October 7, 1996.)
10.1 Acquisition Agreement among Registrant and Joseph A. Nicolosi, Jr. and
John W. Ryan, the Shareholders of Sustainable Forest Industries, Inc.,
dated April 17, 1995 (incorporated by reference from Registrant's
Current Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 17, 1995).
10.2 Acquisition Agreement among Registrant and Deven Resources, Inc.
effective October 1, 1996 (incorporated by reference from Registrant's
Current Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 7, 1996).
10.3 Acquisition Agreement among Registrant and Haly Corporation dated
September 29, 1997.
16. Letter on Change in Certifying Accountant.
(a) The Company filed a Form 8-K on March 18, 1999 and a First
Amendment on Form 8-K on May 5, 1999 relating to the change of
certifying accountants.
21. Subsidiaries of Issuer (incorporated by reference from Registrant's
Current Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 7, 1996).
21.1 Westlands Resources Corporation, a Nevada corporation, Deven Resources,
Inc., a Pennsylvania corporation and Sustainable Forest Industries,
Inc., Delaware (incorporated by reference from Registrant's Current
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 on Form 8-K dated October 7, 1996), Tri-Coastal Energy, Inc., a
Delaware corporation and Tri-Coastal Energy, L.P. a Texas limited
partnership.
(B) The Company filed a Form 8-K on October 17, 1995, October
23, 1995, November 15, 1995, and October 7, 1996. The Company did not file any
reports on Form 8-K during the fourth quarter of Fiscal Year 1997.
-62-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DALECO RESOURCES CORPORATION
Dated: May , 1999 By: /s/ Gary J. Novinskie
-------- -------------------------------------------
Gary J. Novinskie, President
In accordance with the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: May , 1999 By: /s/ Gary J. Novinskie
-------- -------------------------------------------
Gary J. Novinskie, Director, President, COO
Dated: May , 1999 By: /s/ Edward J. Furman
-------- -------------------------------------------
Edward J. Furman, Chief Financial Officer
Dated: May , 1999 By: /s/ Dov Amir
-------- -------------------------------------------
Dov Amir, Chairman of the Board of
Directors, and Chief Executive Officer
Dated: May , 1999 By: /s/ David F. Lincoln
-------- -------------------------------------------
David F. Lincoln, Vice Chairman of the
Board of Directors and Vice President
Dated: May , 1999 By: /s/ C. Warren Trainor, Esquire
-------- -------------------------------------------
C. Warren Trainor, Esquire, Director
-63-
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
3.1 Memorandum of Incorporation of United Westlands Resources, Ltd. dated
April 20, 1982 (incorporated by reference from Registrant's
Registration Statement pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934 on Form 20-F dated May 31, 1984).
3.2 Articles of United Westlands Resources, Ltd. (incorporated by reference
from Registrant's Registration Statement pursuant to Section 12(b) or
(g) of the Securities Exchange Act of 1934 on Form 20-F dated May 31,
1984).
3.3 Certified Special Resolution and Altered Memorandum of Daleco Resources
Corporation filed May 2, 1986 (incorporated by reference from
Registrant's Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the fiscal year ended September 30,
1991 on Form 10-K dated December 28, 1991.
3.4 Articles of Continuance of Daleco Resources Corporation filed July 15,
1986 (incorporated by reference from Registrant's Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended September 30, 1991 on Form 10-K dated
December 28, 1991).
3.5 Registrant's domestication in the State of Delaware effective September
30, 1996, incorporated by reference from Registrant's Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended September 30, 1991 on Form 10-K dated January
15, 1997, and Registrant's form 8-K dated October 7, 1996.)
10.1 Acquisition Agreement among Registrant and Joseph A. Nicolosi, Jr. and
John W. Ryan, the Shareholders of Sustainable Forest Industries, Inc.,
dated April 17, 1995 (incorporated by reference from Registrant's
Current Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 17, 1995).
10.2 Acquisition Agreement among Registrant and Deven Resources, Inc.
effective October 1, 1996 (incorporated by reference from Registrant's
Current Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 7, 1996).
10.3 Acquisition Agreement among Registrant and Haly Corporation dated
September 29, 1997.
16. Letter on Change in Certifying Accountant.
(a) The Company filed a Form 8-K on March 18, 1999 and a First
Amendment on Form 8-K on May 5, 1999 relating to the change of
certifying accountants.
21. Subsidiaries of Issuer (incorporated by reference from Registrant's
Current Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 8-K dated October 7, 1996).
21.1 Westlands Resources Corporation, a Nevada corporation, Deven Resources,
Inc., a Pennsylvania corporation and Sustainable Forest Industries,
Inc., Delaware (incorporated by reference from Registrant's Current
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 on Form 8-K dated October 7, 1996), Tri-Coastal Energy, Inc., a
Delaware corporation and Tri-Coastal Energy, L.P. a Texas limited
partnership.
-64-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DALECO RESOURCES CORPORATION
Dated: May 14 , 1999 By: /s/ Gary J. Novinskie
------------- -------------------------------------------
Gary J. Novinskie, President
In accordance with the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: May 14 , 1999 By: /s/ Gary J. Novinskie
------------- -------------------------------------------
Gary J. Novinskie, Director, President, COO
Dated: May 14 , 1999 By: /s/ Edward J. Furman
------------ -------------------------------------------
Edward J. Furman, Chief Financial Officer
Dated: May 14 , 1999 By: /s/ Dov Amir
------------ -------------------------------------------
Dov Amir, Chairman of the Board of
Directors, and Chief Executive Officer
Dated: May 14 , 1999 By: /s/ David F. Lincoln
------------ -------------------------------------------
David F. Lincoln, Vice Chairman of the
Board of Directors and Vice President
Dated: May 14 , 1999 By: /s/ C. Warren Trainor, Esquire
------------ -------------------------------------------
C. Warren Trainor, Esquire, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
ANNUAL FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 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> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 0.01
<CASH> 192,342
<SECURITIES> 0
<RECEIVABLES> 339,017
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 531,359
<PP&E> 12,773,462
<DEPRECIATION> 3,718,532
<TOTAL-ASSETS> 11,062,771
<CURRENT-LIABILITIES> 2,600,907
<BONDS> 0
160
0
<COMMON> 29,516
<OTHER-SE> 14,329,827
<TOTAL-LIABILITY-AND-EQUITY> 11,062,771
<SALES> 2,374,223
<TOTAL-REVENUES> 2,842,951
<CGS> 3,100,371
<TOTAL-COSTS> 3,100,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 533,626
<INCOME-PRETAX> (3,360,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,360,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,360,735)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
