<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-12214
-------
DALECO RESOURCES CORPORATION
----------------------------------------------------------------------------
Name of small business issue as specified in Charter
Delaware 23-2860739
-------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
983 Old Eagle School Road, Suite 615
Wayne, Pennsylvania 19087 (610) 293-9400
----------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Issuer's telephone number)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution under a
plan confirmed by court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
3,102,574 shares of common stock as of July 1, 2000
<PAGE>
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)....................................3
Consolidated Balance Sheets.........................................3
Consolidated Statement Of Income....................................4
Consolidated Statement Of Cash Flow.................................5
Notes to Consolidated Financial Statements..........................6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................17
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K...................................18
SIGNATURES ..................................................................19
-2-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 and 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 322,511 $ 153,365
Accounts receivable 792,392 238,206
Other 11,470 11,474
------------ ------------
Total Current Assets 1,126,377 403,045
Oil and gas properties and equipment (note 3) 7,280,713 8,729,931
Property and equipment 27,633 32,632
Timber rights (note 4) 700,000 828,342
Mineral properties (note 5) -- --
Goodwill (note 15) -- --
Debt Issue Costs 172,815 222,815
------------ ------------
Total Assets $ 9,307,538 $ 10,216,765
============ ============
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 3,318,702 $ 2,547,516
Current portion of long-term debt 6,754,426 200,000
Notes payable other 452,092 --
Due to related parties (note 7) 586,984 463,039
------------ ------------
Total Current Liabilities 11,112,204 3,210,555
Current debt (note 6 and 9) -- 6,285,054
Debentures (note 8) -- --
Total Liabilities 11,112,204 9,495,609
------------ ------------
Commitments and Contingencies (notes 7)
Shareholders' Equity
3,102,574 (1998 - 2,926,788) Common Shares, 31,026 31,026
par value $0.01 per share (note 10)
16,000 Preferred Shares, par value $0.01 per share (note 6) 160 160
Additional Paid in Capital 14,430928 14,388,255
Accumulated deficit (16,266,780) (13,698,285)
------------ ------------
Total Shareholders' Equity (1,804,666) 721,156
------------ ------------
Total Liabilities and Shareholders' Equity 9,307,538 10,216,765
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE PERIODS
ENDED JUNE 30, 2000 and 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Gross Oil and Gas Operating Revenue
Oil and Gas Sales $ 699,136 $ 297,896 $1,885,835 $ 1,114,631
Less: Lease Operating Expenses 611,929 201,163 1,522,316 674,328
Severance taxes 42,196 6,201 115,081 18,751
Net Profits Interest and Related Expenses -- 102,401 (10,541) 504,650
Depletion, Depreciation and Amortization 25,725 60,000 82,148 180,000
--------- --------- ---------- -----------
Net Income (Loss) from Oil and Gas Operations 19,725 (71,867) 176,831 (263,098)
--------- --------- ---------- -----------
Timber Revenues -- 5,541 -- 27,573
Timber Operating Costs -- 10,217 -- 59,657
-- --------- -- -----------
Net Loss From Timber Operations -- (4,678) -- (32,084)
--------- -----------
Management and Administrative Fee Revenues 113,786 130,454 353,842 406,743
Income from sale of properties -- -- 878,685 --
Administration Expenses (175,228) (199,859) (703,964) (603,646)
Amortization of Debenture Issue Costs -- (50,000) -- (150,000)
Financial Advisors Expense -- -- -- --
Amortization of Goodwill -- (37,693) -- (237,693)
Interest expense 100,586 (172,058) 1,221,499 (515,814)
--------- --------- ---------- -----------
Net Income/(Loss) other activities (162,028) (329,156) (692,936) (1,100,410)
--------- --------- ---------- -----------
NET Income/(Loss) (142,742) $(405,703) (516,105) $(1,395,592)
========= ========= ========== ============
PRIMARY AND FULLY Diluted NET (LOSS)
PER COMMON SHARE $ (0.05) $ (0.13) $ (0.17) $ (0.45)
========= ========= ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS
ENDED JUNE 30, 2000 and 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Operating Activities
Net Income/(Loss) $(142,742) $(405,703) $(515,905) $(1,395,592)
Items not affecting Working Capital:
Depletion, Depreciation, and Amortization 25,725 147,693 79,772 617,693
and Write-Downs
Gain/Loss on Sales of Properties -- -- 878,685 --
Change in Other (140,004) -- (384,272) --
--------- --------- --------- -----------
(257,021) (258,010) (58,280) (777,899)
Items affecting Working Capital:
(Increase) Decrease in Other Assets (7,206) -- (11,470) --
(Increase) Decrease in Receivables (283,308) 104,375 (348,276) 100,811
Increase (Decrease) in Accounts Payable 379,312 (122,600) 147,395 668,901
--------- --------- --------- -----------
88,798 (18,225) (212,351) (568,090)
Cash provided (used) for Operations (168,223) (276,235) (154,071) (276,235)
--------- --------- --------- -----------
INVESTMENT ACTIVITIES
Leasing Acquisition and Well Costs Incurred -- -- -- --
--------- --------- --------- -----------
Cash provided from/(used for) Investing Activities -- -- -- --
--------- --------- --------- -----------
Financing Activities
Increase in amounts due to Related Parties 49,473 17,200 98,445 29,210
Increase/(Decrease) amounts due Other Notes 178,699 -- 232,092 --
Dividends Paid (20,000) (20,000) (60,000) (60,000)
Issuance of Common Stock -- -- -- --
Proceeds From Long-Term Debt -- -- -- --
--------- --------- --------- -----------
Cash Provided From (used by) Financing Activities 208,172 (2,800) 270,537 (30,790)
--------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH 39,949 (279,035) 116,466 (38,977)
Cash - Beginning of Period 282,562 432,400 206,045 192,342
--------- --------- --------- -----------
Cash - End of Period 322,511 $ 153,365 322,511 $ 153,365
========= ========= ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
1. CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a going concern,
which contemplates that the Company will be able to realize assets and
discharge liabilities in the normal course of business. Accordingly, they do
not give effect to adjustments that would be necessary should the Company be
required to liquidate it assets. As of June 30, 2000 the Company has reported
a loss of $142,742 for the quarter then ending and a loss of $516,105 for the
nine-month period. The ability of the Company to meet these liabilities and
total liabilities of $11.1 Million and to continue as a going concern is
dependent upon the availability of future funding, the continued successful
of its oil and gas operations (see Note 5), and achieving profitable timber
operations (see Note 4) and consummation of its acquisition of Clean Age
Minerals, Inc. (See Note 15)
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
-6-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
significant acquisition cost is reviewed periodically and a valuation
allowance provided for any estimated decline in value. Capitalized costs
of proved developed leases are charged to income on the units of
production basis based upon total proved reserves. The capitalized costs
of these proved developed leases are written down to their projected net
recoverable amount.
Costs of exploratory wells found to be dry during the year or before the
issuance of these financial statements are charged against earnings in
that year. Costs of successful exploration wells and development wells are
capitalized. All costs of development wells and successful exploration
wells are charged to earnings on a unit-of-production basis based upon
proved developed reserves. Where the costs of developed wells and
successful exploration wells exceed projected net recoverable amounts,
such wells are written down to their projected net recoverable amount. Net
recoverable amount is the aggregate of estimated un-discounted future net
revenues from proven reserves less operating and production expenses.
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
-7-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
net revenues from the sale of timber less operating and production
expenses.
g. Debt Issue Costs
Debt issue costs as of June 30, 2000 and 1999, represent those associated
with the Heller Financial, Inc. loan (see Note 9) and will be amortized
over a period of five years.
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.
-8-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
3. Oil and Gas and Equipment
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Proven lease acreage costs $5,4299,995 $ 6,071,637
Proven undeveloped lease acreage costs 1,745,810 1,906,220
Well costs 4,795,605 4,795,605
---------- -----------
$11,971,410 $12,773,462
Accumulated depletion, depreciation and amortization 4,690,697 4,043,531
$ 7,280,713 $ 8,729,931
=========== ===========
</TABLE>
4. Timber Rights Acquisition
Effective September 29, 1995, the Company entered into an agreement
("Acquisition Agreement") to purchase 100% of the issued and outstanding
shares of the common stock of Sustainable Forest Industries Inc.
("Sustainable"), a privately held Delaware Company, in exchange for 150,000
shares of common stock of the Company.
Prior to this, Sustainable entered into a Timber Acquisition Agreement on
September 27, 1995 with Oreu Timber and Trading Co., Ltd. ("Oreu"), a Guyana
Corporation which is an affiliate of May Joy Agricultural Cooperative Society
Ltd. ("May Joy"). Under the terms of the agreement, Sustainable has been
assigned the exclusive harvesting and cutting rights for the timber
concession issue by Permit No. 1367. This permit was originally granted to
May Joy who subsequently assigned harvesting rights to Oreu as per an
agreement dated January 3,1995,1
In exchange for the timber rights, Oreu received a 10% ownership of
Sustainable. This ownership was subsequently converted to equivalent shares
of the Company as a result of the acquisition of Sustainable.
The acquisition has been accounted for by the purchase method. The purchase
price of $962,500 was determined based on the fair value of the 150,000
common shares of Daleco given up to acquire Sustainable. The fair value of
the net liabilities of Sustainable acquired was $65,842 resulting in
consideration of approximately $1,028,500, which has been recorded as timber
rights.
5. Mineral Properties
In February 1995, the Company acquired 109 mining claims from shareholders of
the Company for $15,673 representing their cost to acquire the claims.
Additional costs of $8,300 were incurred during fiscal 1997 to maintain these
claims. The claims were not renewed and written-off during Fiscal 1998.
6. Notes Payable
During the year ended September 30, 1995, the Company received $1,100,000 in
return for two notes payable, with the producing wells of the Company used as
collateral. Interest of 10% per annum was due monthly.
-9-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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. The 160,000 shares
were to have been repurchased by the Company as of August 22, 1999. (See Note
16, Litigation).
During fiscal 1998, the Company borrowed $145,000 from four (4) persons. The
debt was evidenced by Notes that matured on November 21, 1998. The Notes
earned interest at 2% over the prime rate charged by the Huntingdon National
Bank of Columbus, Ohio, through the maturity date, and 18% thereafter. The
Noteholders were also given warrants. (See Note 10(b)--Warrants).
7. Due to (from) Related Parties
2000 1999
Net due (from) to Amir and Erlich
Bearing interest at prime +3% $ 91,062 $ 91,062
Bearing interest at 7% 470,922 371,977
-------- --------
$561,984 $463,039
======== ========
The amounts due to Haly Corporation were eliminated through the
acquisition of Haly as of September 30, 1997 (see Note 15). Amir and
Erlich are officers and shareholders of the Company. These amounts have
no fixed repayment terms.
8. Debentures
2000 1999
8% Convertible $30,000 $30,000
------- --------
Debentures
a. 7% Convertible Debentures
On May 31, 1996 the Company issued $1,000,000 of 7% convertible debentures
with interest payable in cash or stock on a semi-annual basis, and a term
of three years. The placement agent's fees were 10% of the gross proceeds
and 10,000 warrants at $10.00, with an expiration date of May 30, 2001
(see Note 12). The debentures could be converted after a holding period
of: (a) as to 50% of the principal amount, 40 days (July 10, 1996), and
(b) the remaining 50%, 60 days (July 30, 1996). The debentures are
convertible into the Company's common stock at the lessor of (1) a 35%
discount on the previous five day average closing bid price at conversion,
or; (2) the previous day average closing bid price at closing (May 31,
1996). As of September 30, 1996, $600,000 of the 7% debentures had been
converted into 107,712 common shares. The remaining balance was converted
into 80,579 common shares during 1997.
-10-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
b. 8% Convertible Debentures
On September 11, 1996, the Company issued $1,310,000 worth of 8%
convertible debentures with interest payable in stock only and accruing
until conversion or redemptions after the term of two years. The placement
agent's fees were 10% of the gross proceeds and 12,111 warrants at $10.07
expiring November 16, 2001. The debentures may be converted after a
holding period of 45 days after closing at the lessor of: (1) the fixed
conversion price ($1 0.171875), or (2) 75% of the average closing bid
price for the five trading days immediately preceding the date of
conversion. As of June 30, 1999, $1,280,000 of the 8% debentures had been
converted into 981,322 common shares.
9. Debt
The debt of the Company consists of the following:
a. Heller Financial, Inc.
During the forth quarter of fiscal 1997, the Company entered into an
arrangement with Heller Financial, Inc. ("Heller") whereby Heller has
agreed to provide the Company with up to $15,000,000 to rework existing
horizontal wells, re-complete its vertical wells as horizontal wells, and
develop additional acreage. Under the terms of the agreement, all of the
properties of Westlands were transferred to a newly formed Limited
Partnership, Tri-Coastal Energy, L.P., the general partner of which is
Tri-Coastal Energy, Inc., (Tri-Coastal) and the sole limited partner of
which is Westlands. Westlands is also the sole shareholder of Tri-Coastal.
The amount outstanding under this arrangement as of March 31, 1999, was
$5,835,054. Interest on the borrowings is at prime plus 2%. Principal is
paid out of 85% of the net cash flow from the properties. Additional
interest is payable from 50% of the net cash flow from these properties
after the payment of principal. In January 1999, Heller declared the Loan
to be in default, as a result of the pledged properties failure to
generate the required interest payments. This was solely due to the
decrease in the price for oil worldwide. As a result, the full amount of
the Heller loan has been reclassified as current debt.
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
-11-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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%. The full remaining balance of this loan has been reclassified
as current debt.
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. This loan was paid off on December 15, 1999 through the sale of
Deven's Net Profits interests in certain properties in Armstrong and
Fayette Counties, Pennsylvania.
d. First Regional Bank
As of December 31, 1997, the Company assumed a $100,000 loan with First
Regional Bank when it acquired Haly Corporation. Interest is at 6.9% and
the loan matures in 1999. The loan is secured by personal assets of an
officer of the Company.
10. Capital Stock
<TABLE>
<CAPTION>
SHARES
------------------------------------------
NUMBER OF COMMON NUMBER OF PREFERRED
SHARES, PAR VALUE SHARES PAR VALUE DOLLAR
$0.01 PER SHARE $0.01 PER SHARE AMOUNT
Authorized 20,000,000 10,000,000
---------- ----------
<S> <C> <C> <C>
Balance as at September 30,1997 2,756,788 16,000 14,086,131
========= ====== ===========
Issued for Professional Services Rendered 194,900 -- 273,377
Fractional shares (46)
---------
Balance as at September 30, 1998 2,951,642 16,000 $14,329,827
========= ====== ===========
Issued upon conversion of notes payable 150,932 -- 59,938
--------- ------ -----------
Balance as of September 30, 1999 3,102,574 16,000 14,338,258
========= ====== ===========
Balance as of June 30, 2000 3,102,574 16,000 14,338,258
========= ====== ===========
</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.
-12-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
a. Common Stock Options
In January 1995, the Company granted fully vested common stock purchase
options expiring on January 6, 2000 for 85,000 common shares at $2.50 per
share. On the same date, the common stock purchase options previously
outstanding, which expired on September 5,1995 for 35,670 common shares
at $3.20 per share, were gifted back to the Company and canceled. The
following summary sets out the activity in common stock purchase options:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Outstanding and Exercisable 140,000
at beginning of year 35,000
----------------------------------------------------------------------------------
Canceled 10,000 15,000
----------------------------------------------------------------------------------
Granted 120,000
----------------------------------------------------------------------------------
Exercised --
-------
----------------------------------------------------------------------------------
Outstanding and Exercisable 130,000 140,000
at end of year ======= =======
----------------------------------------------------------------------------------
</TABLE>
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.
b. Common Stock Warrants
Common stock warrants outstanding at June 30, 2000, 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 March 18, 2001 to 160,000 $3.50
October 1, 2001
------------------------------------------------------------------------------------------------------------------------------
Consulting Agreement September 30, 2001 10,000 $10.00
------------------------------------------------------------------------------------------------------------------------------
8% Debenture Holders and September 11, 2001 to 186,470 $4.386 to
Placement Agents (I.) June 8, 2002 $10.81
------------------------------------------------------------------------------------------------------------------------------
$145,000 Loan November 20, 2003 263,638 $.55
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8% convertible debentures in
September 1996; a number of warrants were granted to the holders of the
debentures, the agents, and subagents who placed the debentures.
With respect to the warrants granted to the debenture holders and
subagents, the warrants were granted in three equal installments of
September 11, 1996; November 26, 1996; and June 8,1997. These warrants
will expire five years from the date of each installment: September 11,
2001; November 26, 2001; and June 8, 2002. The number of shares of
common stock into which the warrants may be converted and the exercise
price of the warrants were determined by (among other variables and
future events) the amount of debentures still outstanding on each date
of grant, and the average closing bid price of the Company's common
stock for the five trading days immediately preceding each date of
grant.
On September 11, 1996, a total of 12,211 warrants expiring on September
11, 2001 were granted to the agents. The warrants may be exercised at
any time before the expiration date by either of the two methods as
follows: (1) each warrant may be exercised for one common share with an
exercise price of $10.73, or (2) all or a portion of the warrants may
be exercised on a cashless basis where a reduced number of shares of
common stock will be issued based upon the difference between the
average closing price of the Company's common stock for the five
business days immediately preceding the date of exercise and the
exercise price, divided by the average closing market price, times the
number of warrants being exercised.
c. Net Income Per Share
Net income per share was calculated on the basis of the weighted average
number of shares outstanding that amounted to 3,102,574 for the period
ended June 30, 2000. For the period ended June 30, 2000 and 1999 the
exercise of the options and warrants outstanding as at year end did not
have a dilutive effect on the net income per share.
11. 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.
12. 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
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DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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 is 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.
13. Litigation Settlement
In April 1997, the Company commenced an Adversary Action styled Daleco
Resources Corporation v. Reserve Production Inc., Liquidating Trust and
Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No. 97-6036. The case was
commenced to enforce the Company's rights under that certain Asset Purchase
Agreement dated December 20, 1996 (Asset Purchase Agreement) as approved by
the Bankruptcy Court on February 13, 1997. In the Adversary Action, the
Company alleged that the defendants' had failed to meet their conditions to
Closing under the Asset Purchase Agreement and were thus required to refund
the Company's $100,000 Earnest Money Deposit and pay for the reworking of
the Jody Well. Subsequent to the commencement of the Company's adversary
action, a case was commenced in the United States District Court for the
Eastern District of Texas, Tyler Division, styled Reserve Production
Liquidating Trust v. Daleco Resources Corporation, Westlands Resources
Corporation, David F. Lincoln, Gary J. Novinskie and C. Warren Trainor, C.A.
No.: 6:97 CV 705 ("District Court Action"). The District Court Action was in
essence a counter claim against the Company and three of is directors
asserting matters, which should have been addressed in an answer to the
Adversary Action. The Company filed a motion to dismiss the District Court
Action; however, prior to ruling on the Company's Motion, the Adversary
Action was resolved through Court mandated mediation. Under the terms of the
settlement, the Company's Earnest Money Deposit was returned and the Reserve
Production Inc., Liquidating Trust, Reserve Production Liquidating
partnership, and Leonard Pipkin, trustee, were required to resolve all
outstanding claims for the reworking of the Jody Well.
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<PAGE>
The Company incurred $224,875 in costs to settle this litigation.
14. 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 10).
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. In January 2000,
the majority of these properties were divested.
15. Subsequent Event
In December 1999, the Company entered into a letter of intent to
acquire 14,000,000 of the outstanding shares of Clean Age Minerals, Inc., a
Nevada corporation ("CAMI") for 1.4 million shares of Series B 8% Cumulative
Convertible Preferred Stock of the Company plus $600,000 for the remaining
6,000,000 shares of CAMI common stock. The acquisition, in the form of a
merger with a newly formed wholly owned subsidiary of the Company named
Strategic Minerals, Inc., is anticipated to close during August 2000.
16. Litigation
On January 14, 2000, Daniel Kane individually and his Trustee and Stanley B.
Kane individually and his Trustee commenced an action against Daleco
Resources Corporation, Dov Amir an individual and Louis W. Erlich an
individual to force the buyback provisions under the Loan Conversion
Agreement dated August 22, 1997. Specifically the Complaint alleged that
under the Loan Buyback Agreement, the Kanes conversion of $800,000 in debt
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DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
to equity (See Note 6, Notes Payable) was due on or about August 22, 1999.
Messrs. Amir and Erlich were sued in their capacity as individual guarantors
under the obligation, each of whom was liable for repayment of one-half of
the sum due and owing to the Plaintiffs by Daleco Resources Corporation. On
or about February 2000, Mr. Amir satisfied his obligation to the Plaintiff's
and was dismissed from the case. The case is currently active in the
Superior Court in the Central District of California. The Company has been
advised that the Plaintiffs and Mr. Erlich have agreed to resolve the
Complaint. As part of this resolution, the Company has agreed to grant the
Kane's warrants for 25,000 shares at an excise price of $2.50 per share,
which will expire in August 2002.
17. Contingencies
None.
18. 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.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a safe harbor for forward-looking statements made by or on
behalf of the Company. All statements, other than statements of
historical facts, which address activities, event or developments that
the Company expects or anticipates will or may occur in the future,
including such things as the anticipated development of revenues,
acquisition of additional properties or the obtaining of capital,
business strategy, development trends in the industry segments in which
the Company is active, expansion and growth of the Company's business
and operations and other such matters are forward-looking statements.
To take advantage of the safe harbor provisions provided by the Reform
Act, the Company is identifying certain factors that could cause actual
results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on
behalf of the Company. Many of these factors have previously been
identified in filings or statements made by or on behalf of the
Company.
All phases of the Company's operations are subject to influences
outside of the Company's control. Any one, or a combination, of these
factors could materially affect the results of the Company's
operations. These factors include: competitive pressures, inflation,
trade restrictions, interest rate fluctuations and other capital market
conditions, weather, future and options trading in, and the
availability of natural resources and services from other sources.
Forward-looking statements are made by or on behalf of the Company's
knowledge of its business and the environment in which it operates, but
because of the factors listed above, as well as other environmental
factors over which the Company has no control, actual results may
differ from those in the forward-looking statements. Consequently, all
of the forward-looking statements made are qualified in their entirety
by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the
expected effect on the business and/or operations of the Company.
The Company's performance during its third fiscal Quarter ended June
30, 2000, was influenced by a variety of factors:
-Oil prices remained high, but the increase in revenues was
consumed by payment of Heller debt. The Company, like most
domestic independents, is unable to influence the price of oil.
The announcements by OPEC of its intent to increase production and
thus lower the price of oil on a worldwide basis should, if it
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<PAGE>
occurs, would affect the Company through the resultant decrease in
oil pricing.
-The Company's timber subsidiary, Sustainable Forest Industries
continues to attempt to market Guyana woods domestically. To date,
while there has been a tremendous interest shown in the potential
for Guyana woods, especially in the railroad industry, no
substantial contracts have been obtained.
-In December 2000, the Company entered into a letter of intent
with Clean Age Minerals, Inc. ("CAMI") to acquire all of the
outstanding capital stock of CAMI through a tax free transaction.
CAMI, through its wholly owned subsidiaries, owns a patent on a
process for the remediation of waste products and water and leases
on deposits of zeolite, bentonite and calcium carbonate in the
States of Texas, New Mexico and Utah. The transaction will be
treated and recorded as an acquisition.
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DALECO RESOURCES CORPORATION
Date: August 15, 2000 /s/ Gary J. Novinskie
-------------------------------------
Gary J. Novinskie
President and Chief Financial Officer
