<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 December 31, 1999
-----------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-12214
-------
DALECO RESOURCES CORPORATION
-----------------------------------------------------
Name of small business issue as specified in Charter
Delaware 23-2860739
--------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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 February 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 Deficit........................ 5
Consolidated Statement Of Cash Flow...................... 6
Notes to Consolidated Financial Statements............... 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
-2-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 -- PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,536 $289,316
Accounts receivable 490,468 253,781
Other 11,474 11,474
---------- -----------
Total Current Assets 503,478 554,571
Oil and gas properties and equipment (note 3) 7,335,638 8,989,930
Property and equipment 27,633 32,632
Timber rights (note 4) 700,000 828,342
Mineral properties (note 5) ----- -----------
Goodwill ----- 137,693
Debt Issue Costs 172,815 322,815
---------- -----------
Total Assets $8,739,564 $10,865,983
========== ===========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $3,057,141 $2,316,035
Current portion of long-term debt 6,675,727 200,000
Drilling deposits ----- -----
Notes payables (note 6) 451,092 -----
Due to related parties (note 7) 499,539 433,829
---------- -----------
Total Current Liabilities $10,683,499 $2,949,864
Long-term debt (note 9) ----- 6,285,054
Debentures (note 8) 30,000 60,000
Total Liabilities 10,713,499 9,294,918
---------- -----------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
3,102,574 Common shares,
(3,078,548,-1998) par value $0.01 per share 31,027 30,785
160,000 Preferred Shares, par value $0.01 per share (note 6) 160 160
Additional Paid in Capital 14,369,258 14,329,998
Accumulated deficit (16,374,380) (12,789,878)
---------- -----------
Total Shareholders' Equity (1,973,935) 1,571,065
Total Liabilities and Shareholders' Equity $8,739,564 $10,865,983
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 -- PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Gross Operating Revenue $ 569,929 $436,819
Less: Lease operating expenses 526,680 277,981
Severance taxes 46,061 6,125
Depletion, depreciation and amortization 27,223 65,000
Net profits interest (gain) loss (10,541) 235,206
---------- -----------
Net income (loss) from oil and gas operations (19,494) (147,493)
Timber sales ----- 27,573
Timber operating costs ----- 33,114
----- ------
Net loss from timber operations ----- (5,541)
----- -----------
Administrative expense 365,685 180,818
Amortization of debenture issue costs ----- 50,000
Interest expense 901,361 165,778
Amortization of goodwill ----- 100,000
----- -----------
1,267,046 496,596
Other Income
Management and administrative fees 132,916 122,445
Income from sale of property 469,920 -----
Net Loss for the Period $(683,504) $(527,185)
========== ===========
Basic and Fully Diluted Net Loss per Common Share $(0.22) $(0.18)
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
1999 1998
Deficit - Beginning of Period $(15,670,876) $(12,242,693)
Net loss for the period (683,504) (527,185)
Dividends on Preferred Stock (20,000) (20,000)
----------- ------------
Deficit - End of Period $(16,374,380) $(12,789,878)
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Operating Activities
Net loss for the period $(683,504) $(527,185)
Items not affecting working capital
Depletion, depreciation, and amortization 27,223 165,000
Amortization of debt issue costs ----- 100,000
---------- ----------
(656,281) (262,185)
Decrease in accounts receivable (46,281) 85,236
(Decrease) increase in accounts payable (114,166) 275,923
Increase in advances received on well costs ----- -----
---------- ----------
Cash provided (used) for operating activities $ (816,798) $ 98,974
---------- ----------
Investing Activities
Drilling and lease acquisition costs incurred ----- -----
---------- ----------
Cash used for investing activities ----- -----
---------- ----------
Financing Activities
Increase in amounts due to related parties $ 11,000 $ 18,000
Dividends Paid (20,000) (20,000)
Proceeds from long-term debt ----- -----
---------- ----------
Cash provided (used) for financing activities $ (9,000) $ (2,000)
---------- ----------
Increase in Cash and Cash Equivalents $ (204,509) $ 96,974
Cash and Cash Equivalents - Beginning of Period 206,045 192,342
---------- ----------
Cash and Cash Equivalents - End of Period $1,536 $ 289,316
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
1. CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a
going concern, which contemplates that the Company will be
able to realize assets and discharge liabilities in the
normal course of business. Accordingly, they do not give
effect to adjustments that would be necessary should the
Company be required to liquidate it assets. As of December
31, 1999 the Company has reported a loss of $683,504. The
ability of the Company to meet its total liabilities of $10.7
Million and to continue as a going concern is dependent upon
the availability of future funding, the successful completion
of its drilling projects (see Note 5), and achieving
profitable timber operations (see Note 4).
As of the date of this report, certain of the Company's
subsidiaries are in default relative to certain debt
obligations.
2. Summary of Significant Accounting Policies
a. Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
b. Basis of consolidation
The consolidated financial statements of Daleco
Resources Corporation (the "Company") have been
prepared in accordance with generally accepted
accounting principles and include the accounts of the
Company and its wholly-owned subsidiaries Westlands
Resources Corporation ("Westlands", Sustainable
Forest Industries Inc. ("Sustainable"), Deven
Resources, Inc. ("Deven"), Tri-Coastal Energy, Inc.,
and Haly Corp. The Company's investments in oil and
gas leases are accounted for using proportionate
consolidation whereby the Company's prorata share of
each of the assets, liabilities, revenues and
expenses of the investments are aggregated with those
of the Company in its financial statements.
c. Oil and gas properties and equipment
The Company follows the successful efforts method of
accounting for the costs of exploration and
development activities. Direct acquisition costs of
developed and undeveloped leases are capitalized.
Costs of undeveloped leases on which proved reserves
are found are transferred to proven oil and gas
properties. Each undeveloped lease with significant
acquisition cost is reviewed periodically and a
valuation allowance provided for any estimated
-7-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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
-8-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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 December 31, 1999 and 1998,
represent those associated with the Heller Financial,
Inc. loan (see Note 9) are being 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.
-9-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
3. Oil and Gas Properties and Equipment
1999 1998
---- ----
Proven lease acreage costs $ 5,429,995 $ 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(1) 4,635,772 3,783,532
----------- -----------
$ 7,335,638 $ 8,989,930
============ ===========
(1) The DD&A associated with the sale of the Deerlick Creek field was recorded
as an extraordinary deduction as of September 1, 1999 and the sale of the
Company's net profits interest in 39 Pennsylvania wells as of October 1, 1999 in
the Company's 10-KSB for the period ending September 30, 1999.
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.
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 $1,028,342 which
has been recorded as timber rights.
5. Mineral Properties
In February 1995, the Company acquired 109 mining claims from
shareholders of the Company for $15,673 representing their cost to
acquire the claims. Additional costs of $8,300 were incurred during
fiscal 1997 to maintain these claims. The claims were not renewed and
written-off during Fiscal 1998.
-10-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
6. Notes Payable
During the year ended September 30, 1995, the Company received
$1,100,000 in return for two notes payable, with the producing wells of
the Company used as collateral. Interest of 10% per annum was due
monthly.
During fiscal 1996, the Company repaid $300,000 of the outstanding
balance. During fiscal 1997, the remaining $800,000 was converted into
16,000 shares of 10% cumulative preferred stock, at $50.00 per share.
The 16,000 shares were to have been repurchased by the Company as of
August 22, 1999. (See Note: 17 Litigation.)
During fiscal 1998, the Company borrowed $145,000 from four (4)
persons. The debt was evidenced by Notes which matured on November 21,
1998. The Notes earned interest at 2% over the prime rate charged by
the Huntingdon National Bank of Columbus, Ohio, through the maturity
date, and 18% thereafter. The Noteholders were also given warrants.
(See Note 10(b)--Warrants).
7. Due to (from) Related Parties
1999 1998
Net due (from) to Amir and Erlich
Bearing interest at prime +3% $ 91,062 91,062
Bearing interest at 7% 408,477 342,767
-------- --------
$499,539 $433,829
======== ========
The amounts due to Haly Corporation were eliminated through the
acquisition of Haly as of September 30, 1997 (see Note 18). Amir and
Erlich are officers and shareholders of the Company. These amounts have
no fixed repayment terms.
8. Debentures
1999 1998
---- ----
8% Convertible $30,000 $60,000
Debentures
a. 7% Convertible Debentures
On May 31, 1996 the Company issued $1,000,000 of 7%
convertible debentures with interest payable in cash
or stock on a semi-annual basis, and a term of three
years. The placement agent's fees were 10% of the
gross proceeds and 10,000 warrants at $10.00, with an
expiration date of May 30, 2001 (see Note 12). The
debentures could be converted after a holding period
of: (a) as to 50% of the principal amount, 40 days
(July 10, 1996), and (b) the remaining 50%, 60 days
-11-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
(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.
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 December 31, 1999, $1,280,000 of the 8% debentures
had been converted into 981,322 common shares.
9. Debt
Long-term debt of the Company consists of the following:
a. Heller Financial, Inc.
During the forth quarter of fiscal 1997, the Company
entered into an arrangement with Heller Financial,
Inc. ("Heller") whereby Heller has agreed to provide
the Company with up to $15,000,000 to rework existing
horizontal wells, re-complete its vertical wells as
horizontal wells, and develop additional acreage.
Under the terms of the agreement, all of the
properties of Westlands were transferred to a newly
formed Limited Partnership, Tri-Coastal Energy, L.P.,
the general partner of which is Tri-Coastal Energy,
Inc., (Tri-Coastal) and the sole limited partner of
which is Westlands. Westlands is also the sole
shareholder of Tri-Coastal. The amount outstanding
under this arrangement as of December 31, 1999, was
$6,675,727 . 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 world wide. As a
result, the full amount of the Heller loan has been
reclassified as current debt.
-12-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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, of which $232,092 remains
outstanding as of December 31, 1999. Sustainable had
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%. 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, 1998, 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.
-13-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
10. Capital Stock
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
NUMBER OF COMMON SHARES, SHARES PAR VALUE
PAR VALUE $0.01 PER SHARE
$0.01 PER SHARE AMOUNT
<S> <C> <C> <C>
Authorized 20,000,000 10,000,000
---------- ----------
Balance as at September 30, 1997 2,756,988 $14,086,131
Issued for Professional services rendered 194,900 273,377
16,000 800,000
------ -----------
Shares cancelled due to cancellation of (46)
Fractional Shares ========
Balance as at September 30, 1998 2,951,642 16,000 $14,329,827
------ ===========
Issued for Professional services rendered 150,932
=========
Balance as at September 30, 1999 3,102,574 16,000 14,388,258
========= ====== ===========
Balance as of December 31, 1999 3,102,574 16,000 14,388,258
========= ====== ===========
</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.
a. Common Stock Options
In January 1995, the Company granted fully vested
common stock purchase options expiring on January 6,
2000 for 85,000 common shares at $2.50 per share. On
the same date, the common stock purchase options
previously outstanding, which expired on September
5,1995 for 35,670 common shares at $3.20 per share,
were gifted back to the Company and canceled. The
following summary sets out the activity in common
stock purchase options:
1999 1998 1997
- -------------------------------------- ----------- ------------ ----------------
Outstanding and Exercisable 155,000 35,000 700,000
at beginning of year
- -------------------------------------- ----------- ------------ ----------------
Canceled ----- ----- (350,000)
- -------------------------------------- ----------- ------------ ----------------
Granted ----- 120,000 -------
- -------------------------------------- ----------- ------------ ----------------
Exercised ----- ----- -------
------- ------- -------
- -------------------------------------- ----------- ------------ ----------------
Outstanding and Exercisable
at end of year 155,000 155,000 35,000
======= ======= ======
- -------------------------------------- ----------- ------------ ----------------
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123). SFAS 123 permits the
Company's continued use of the intrinsic value based
method prescribed by Accounting Principles Board
Opinion No. 25 (APB 25). SFAS 123 requires additional
disclosures, including proforma calculations of net
earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been
applied. The fair value of stock options and
compensation cost are measured at the date of grant.
-14-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
The common stock purchase options were issued for
past services at an exercise price of $2.50 per share
when the underlying stock was at $2.245 per share.
Had compensation cost been determined based on the
fair value of the common stock purchase options using
the provisions of SFAS 123, the Company's net loss
and loss per share in 1995 would have increased by
$161,500 and $0.10, respectively.
For the proforma calculation, the fair value of each
option on the date of grant was estimated using the
Black-Scholes option pricing model and the following
assumptions for awards in 1995: zero dividend yield
expected volatility of 119.64%, risk -free interest
rate of 7.84%, and expected life of 5 years. Using
these assumptions, the grant-date fair value per
share of the options granted in 1995 was $1.80.
b. Common Stock Warrants
Common stock warrants outstanding at December 31,
1999, consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
Issuance Expiration Date Amount Price Per Share
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
Acquisition of Sustainable September 30, 2000 50,000 $3.50
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
Consulting Agreements May 8, 2001 to 160,000 $3.50
October 1, 2001
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
Consulting Agreement September 30, 2001 10,000 $10.00
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
8% Debenture Holders and September 11, 2001 to 186,470 $4.386 to
Placement Agents (I.) June 8, 2002 $10.81
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
$145,000 Loan November 20, 2003 263,638 $.55
- ------------------------------------- -------------------------------- ------------------------ ------------------------------
</TABLE>
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8% convertible
debentures in September 1996; a number of warrants were
granted to the holders of the debentures, the agents, and
subagents who placed the debentures.
With respect to the warrants granted to the debenture holders
and subagents, the warrants were granted in three equal
installments of September 11, 1996; November 26, 1996; and
June 8,1997. These warrants will expire five years from the
date of each installment: September 11, 2001; November 26,
2001; and June 8, 2002. The number of shares of common stock
into which the warrants may be converted and the exercise
price of the warrants were determined by (among other
variables and future events) the amount of debentures still
outstanding on each date of grant, and the average closing bid
price of the Company's common stock for the five trading days
immediately preceding each date of grant.
On September 11, 1996, a total of 12,211 warrants expiring on
September 11, 2001 were granted to the agents. The warrants
may be exercised at any time before the expiration date by
either of the two methods as follows: (1) each warrant may be
exercised for one common share with an exercise price of
-15-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
$10.73, or (2) all or a portion of the warrants may be
exercised on a cashless basis where a reduced number of shares
of common stock will be issued based upon the difference
between the average closing price of the Company's common
stock for the five business days immediately preceding the
date of exercise and the exercise price, divided by the
average closing market price, times the number of warrants
being exercised.
c. Net Income Per Share
Net income per share was calculated on the basis of
the weighted average number of shares outstanding
which amounted to 3,102,574 for the period ended
December 31, 1999 (for 1998 - 3,078,548). For the
periods ended December 31, 1999 and 1998 the exercise
of the options and warrants outstanding as at year
end did not have a dilutive effect on the net income
per share.
12. Income Taxes
The Company has no current and deferred taxes payable. The Company and
its subsidiary have significant tax losses to be applied against future
income. The subsidiary Company's tax filings show net operating losses
to be applied against future taxable income in the amount of
approximately $27 million to be utilized in various years through 2009.
The tax benefit of these losses is estimated to be approximately $10
million. No potential benefit of these losses has been recognized in
the accounts.
13. Employment Contracts and Commitments
In connection with the acquisition of Sustainable and under Management
Agreement dated April 17, 1995, the Company agreed to engage two key
officers for a period of seven years ending April 17, 2002. The two key
officers are entitled to a base salary of $75,000 plus additional
incentive payments each based upon a percentage of net income of
Sustainable. At the time of termination for any reason, the key
officers are entitled to a severance payment equal to the total of the
annual base salary plus additional annual incentive payments he is then
receiving multiplied by the remaining years, or portions thereof, of
the contract period. During fiscal 1997, the Company reached a
settlement with one of the officers in the total amount of $60,000 to
be paid at $5,000 per month through February 1998.
In connection with the acquisition of Deven and under the Stock
Purchase Agreement dated October 1,1996, the Company agrees that should
certain Deven officers be involuntarily terminated, other than in
response to the Deven Officer's gross negligence, willful misconduct,
ineptitude or inability to perform the duties of his position,
("Involuntary Personnel Action") on or before September 30, 2001
("Coverage Period"), the said Deven Officer who was the object of said
Involuntary Personnel Action shall be entitled to receive a sum equal
to 150% of the aggregate base salary plus the cash equivalent of all
benefits for the period of time between the date of the Involuntary
Personnel Action and the remaining portion of the Coverage Period
("Settlement Consideration").
-16-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
However, the Settlement Consideration shall not be less than two years
severance even though the period between the Involuntary Personnel
Action and the expiration of the Coverage Period be less than two
years.
The Company had two contracts with financial advisors during fiscal
1997. The first expired in May 1997; the second expired October 31,
1997. Neither contract was renewed.
14. Litigation Settlement
In April 1997, the Company commenced an Adversary Action styled Daleco
Resources Corporation v. Reserve Production Inc., Liquidating Trust and
Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No. 97-6036. The case
was commenced to enforce the Company's rights under that certain Asset
Purchase Agreement dated December 20, 1996 (Asset Purchase Agreement)
as approved by the Bankruptcy Court on February 13, 1997. In the
Adversary Action, the Company alleged that the defendants' had failed
to meet their conditions to Closing under the Asset Purchase Agreement
and were thus required to refund the Company's $100,000 Earnest Money
Deposit and pay for the reworking of the Jody Well. Subsequent to the
commencement of the Company's adversary action, a case was commenced in
the United States District Court for the Eastern District of Texas,
Tyler Division, styled Reserve Production Liquidating Trust v. Daleco
Resources Corporation, Westlands Resources Corporation, David F.
Lincoln, Gary J. Novinskie and C. Warren Trainor, C.A. No.: 6:97 CV 705
("District Court Action"). The District Court Action was in essence a
counter claim against the Company and three of is directors asserting
matters, which should have been addressed in an answer to the Adversary
Action. The Company filed a motion to dismiss the District Court
Action; however, prior to ruling on the Company's Motion, the Adversary
Action was resolved through Court mandated mediation. Under the terms
of the settlement, the Company's Earnest Money Deposit was returned and
the Reserve Production Inc., Liquidating Trust, Reserve Production
Liquidating partnership, and Leonard Pipkin, trustee, were required to
resolve all outstanding claims for the reworking of the Jody Well.
The Company incurred $224,875 in costs to settle this litigation.
15. Acquisitions
During fiscal 1997, the Company completed the acquisitions of Deven
Resources, Inc. and Haly Corporation.
All of the outstanding stock of Deven was acquired on October 1, 1996
in exchange for 2.6 million shares of Daleco stock plus $150,000 in
cash. The market value of the stock was approximately $2.4 million. The
acquisition was accounted for as a purchase resulting in oil and gas
properties of $1.5 million, goodwill of $1.25 million less liabilities
assumed of $200,000. Deven receives an annual management fee of
$200,000 from a partnership of which it has a 1% general partner
interest.
All of the outstanding stock of Haly, a related party, was acquired on
September 30, 1997. Daleco issued 3 million shares of common stock to
-17-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
Messrs. Amir and Erlich along with $1,000 cash. In exchange, the
Company received and retired 3 million shares of common stock owned by
Haly along with interests in wells owned by Haly. The acquisition was
accounted for as a purchase. The amounts due Haly were written off into
common stock less the First Regional Bank loan assumed by Daleco (see
Note 11).
Mid Continent:
--------------
On March 27, 1998, but affective as of November 1, 1997, Tri-Coastal
Energy acquired in the States of Kansas and Oklahoma consisting of
298 wells, 6,409 gross and 4,828 net acres. The purchase price for the
acquisition was $2,315,000. The purchase was funded by an Amendment to
the Heller Transaction, which increased the Heller Transaction Loan
Commitment to $19,000,000. An additional $2,294,397 was drawn down by
Tri-Coastal at closing for development of the Mid-Continent properties.
16. Subsequent event
On December 18, 1998, an unaffiliated company agreed to purchase
1,848,566 shares of common stock for $9 Million. The Company has not
yet received the proceeds on this sale and no stock has been issued.
The Company is pursuing its options to seek performance under the terms
of the stock purchase agreement, to include filing a complaint in
Arbitration before the American Arbitration Association in
Philadelphia, Pennsylvania under the contracts dispute resolution
provisions.
17. 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 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 doing 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.
-18-
<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 first fiscal Quarter
ended December 31, 1999, was influenced by a variety of
factors:
-Oil prices remained depressed, which resulted in a
net loss from oil and gas operations. The Company,
like most domestic independents, is unable to
influence the price of oil. The announcements by
OPEC of its intent to reduce production and tighten
the available supplies while the demand for oil on a
worldwide basis has been increasing should benefit
the Company subsequent quarters.
-19-
<PAGE>
-. In the second quarter of Fiscal 1998, the Company
acquired properties in Oklahoma and Kansas adding a
total of 298 new wells. This addition resulted in an
increase in operating expenses over the comparable
period in Fiscal 1998. The low energy prices
experienced during the fiscal year ending September
30, 1999 and in quarter ending December 1999, had a
negative impact on the operations and economic
performance of these properties.
-The Company's timber subsidiary, Sustainable Forest
Industries continues to attempt to market Guyana
woods domestically. To date, while there has been a
tremendous interest shown in the potential for
Guyana woods, especially in the railroad industry,
no substantial contracts have been obtained.
-On December 18, 1998, the Company entered into a
contract with Infinite Networks Corporation whereby
the Company agreed to sell 1, 848,566 shares of
common stock for $9 Million. This agreement has yet
to be consummated. The closing of this transaction
and/or an alternative funding transaction will
enable the Company to move forward with planned
development of its existing assets, acquire
additional assets, retire its preferred stock and
bring current all outstanding payables. In March
1999, the Company placed demand on Infinite Networks
Corp. for specific performance under the agreement
and is filing a complaint in arbitration against
Infinite Networks Corporation for breach of
contract.
PART II. OTHER INFORMATION
-----------------
ITEM 6 Exhibits and Reports on Form 8-K
None.
-20-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DALECO RESOURCES CORPORATION
Date: May 15, 2000 /s/ Gary J. Novinskie
------------------------
Gary J. Novinskie
President
Date: May 15, 2000 /s/ Dov Amir
---------------
Dov Amir
Chief Executive Officer
-21-
