<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 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
<TABLE>
<CAPTION>
<S> <C>
Delaware 23-2860739
-------------------------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
983 Old Eagle School Road, Suite 615
Wayne, Pennsylvania 19087 (610) 293-9400
---------------------------------------------------------- ---------------------------------------
(Address of Principal Executive Offices) (Issuer's telephone number)
</TABLE>
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution under a
plan confirmed by court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
3,102,574 shares of common stock as of May 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................................18
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K...................................19
SIGNATURES.................................................................20
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $282,562 $432,400
Accounts receivable 509,084 342,581
Other 4,264 11,474
----------- -----------
Total Current Assets $795,910 $786,455
Oil and gas properties and equipment (note 3) 7,306,438 8,789,931
Property and equipment 27,633 32,632
Timber rights (note 4) 700,000 828,342
Mineral Properties (note 5) -- --
Goodwill (note 15) -- 37,693
Debt Issue Costs 172,815 272,815
----------- -----------
Total Assets $ 9,002,796 $10,747,868
=========== ===========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 2,939,390 $2,670,118
Current portion of long-term debt 6,675,727 200,000
Note Payables (note ) 452,092 --
Due to related parties (note 7) 537,511 445,839
----------- -----------
Total Current Liabilities $10,604,720 $3,315,957
Long-term debt (note 10) -- 6,285,054
Debentures (note 9) -- --
----------- -----------
Total Liabilities $10,604,720 $9,601,011
----------- -----------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
3,102,574 (1998--2,776,788) Common shares,
par value $0.01 per share $31,027 $31,026
16,000 Preferred Shares, par value $0.01 per share (note 7) 160 160
Additional Paid in Capital 14,430,928 14,388,255
Accumulated deficit (16,064,039) (13,272,584)
----------- -----------
Total Shareholders' Equity (1,641,924) 1,146,857
----------- -----------
Total Liabilities and Shareholders' Equity $ 9,002,796 $10,747,868
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE PERIODS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Gross Oil and Gas Operating Revenue $616,770 $379,916 $1,186,699 $816,735
Less: Lease Operating Expenses 383,707 195,184 910,387 473,165
Severance taxes 26,824 6,425 72,885 12,550
Net Profits Interest and Related Expenses -- 167,043 (10,541) 402,249
Depletion, depreciation and amortization 29,200 55,000 56,423 120,000
-------- --------- --------- ---------
Net Income (Loss) from Oil and Gas Operations 177,039 (43,736) 157,545 (191,229)
-------- --------- --------- ---------
Timber Revenues -- -- -- 22,032
Timber Operating Costs -- 21,867 -- 54,981
-------- --------- --------- ---------
Net Loss From Timber Operations -- (21,867) -- (27,408)
-------- --------- --------- ---------
Other Activities
Management and Administrative Fees 107,140 153,844 240,056 276,289
Income from sale of Properties 408,765 -- 878,685 --
Administration Expenses (163,051) (222,969) (528,736) (403,787)
Amortization of Debenture Issue Costs -- (50,000) -- (100,000)
Amortization of Goodwill -- (100,000) -- (200,000)
Interest expense (219,552) (177,978) (1,120,913) (343,756)
-------- --------- --------- ---------
Net income (Loss) Other Activities 133,302 (397,103) (530,908) (771,254)
-------- --------- --------- ---------
Net income (Loss) for Period $310,341 $(462,706) $(373,363) $(989,891)
======== ========= ========= =========
PRIMARY AND FULLY Diluted NET (LOSS)
PER COMMON SHARE $0.10 $(0.14) $(0.12) $(0.32)
===== ====== ====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS
ENDED March 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deficit - Beginning of Period $(16,374,380) $(12,242,693)
Net Income (loss) for the period 310,341 (989,891)
Dividends on Preferred Stock (80,000) (40,000)
------------ ------------
Deficit - End of Year $(16,144,039) $(13,272,584)
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C.
Operating Activities
Net Income (Loss) $310,341 $(462,706) $(373,163) $(989,891)
Items not affecting Working Capital Depletion:
Depreciation, and Amortization and Write-Downs 29,200 205,000 56,423 470,000
-------- -------- ------- --------
339,541 (257,706) (316,740) (519,891)
Item affecting Working Capital Depletion:
(Increase) Decrease in Other Assets -- -- -- --
(Increase) Decrease in Receivables (18,616) (88,800) (64,967) (3,564)
Increase (Decrease) in Accounts Payable (132,871) 497,580 (247,037) 773,503
-------- -------- ------- --------
Cash provided (used) for Operations 188,054 151,074 (628,744) 250,048
-------- -------- ------- --------
INVESTMENT ACTIVITIES
Leasing Acquisition and Well Costs Incurred -- -- -- --
-------- -------- ------- --------
Cash provided from/(used for) Investing Activities -- -- -- --
-------- -------- ------- --------
Financing Activities
Increase in amounts due to Related Parties 37,972 12,010 48,972 30,010
Dividends Paid (20,000) (20,000) (40,000) (40,000)
Proceeds From Long-Term Debt -- -- -- --
-------- -------- ------- --------
Cash Provided From (used by) Financing Activities (17,972) (7,990) 8,972 (9,990)
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH 206,026 143,084 1,517 240,058
Cash - Beginning of Period 1,536 289,316 206,045 192,342
-------- -------- ------- --------
Cash - End of Period $207,562 $432,400 207,562 $432,400
======== ======== ======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 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 March 31, 2000 the
Company has reported a gain of $133,302 of the three month period then
ending and a loss of $528,736 for the six month period ending March
31,2000. The ability of the Company to meet these liabilities and total
liabilities of $ 10.6 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), achieving profitable
timber operations (see Note 4) and consummation of its acquisition of Clean
Age Minerals.
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 proven reserves are found are
transferred to proven oil and gas properties. Each undeveloped lease
-7-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
with significant acquisition cost is reviewed periodically and a
valuation allowance provided for any estimated decline in value.
Capitalized costs of proven developed leases are charged to income on
the units of production basis based upon total proved reserves. The
capitalized costs of these proven 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 proven 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.
-8-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
g. Debt Issue Costs
Debt issue costs as of March 31, 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.
-9-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
3. Oil and Gas and Equipment
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Proven lease acreage costs 5,429,995 $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 4,664,972 3,983,531
----------- -----------
$ 7,306,438 $ 8,789,931
=========== ===========
</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.
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 that has been recorded as timber
rights.
During Fiscal 1997, the Company obtained funds to permit Sustainable to
begin implementation of its business plan. (See Note 9).
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.
-10-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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.
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 17, 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% 446,449 354,777
-------- --------
$537,511 $445,839
======== ========
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
2000 1999
---- ----
8% Convertible Debentures $30,000 $30,000
------- -------
a. 7% Convertible Debentures
On May 31, 1996 the Company issued $1,000,000 of 7% convertible
debentures with interest payable in cash or stock on a semi-annual
basis, and a term of three years. The placement agent's fees were 10%
of the gross proceeds and 10,000 warrants at $10.00, with an
expiration date of May 30, 2001 (see Note 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 MARCH 31, 2000 AND 1999 - 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 March 31, 2000, $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 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 MARCH 31, 2000 AND 1999 - 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,
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%. 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>
NUMBER OF COMMON SHARES, NUMBER OF PREFERRED
PAR VALUE SHARES 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>
-13-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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
--------------------------------------------------------------------------------
Outstanding and Exercisable
at beginning of year 35,000 700,000
--------------------------------------------------------------------------------
Canceled 15,000 (350,000)
--------------------------------------------------------------------------------
Granted 120,000 --
--------------------------------------------------------------------------------
Exercised -- --
------ ------
--------------------------------------------------------------------------------
Outstanding and Exercisable
at end of year 140,000 35,000
======= ======
--------------------------------------------------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123). SFAS 123 permits the Company's
continued use of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25 (APB 25). SFAS 123 requires
additional disclosures, including proforma calculations of net
earnings and earnings per share, as if the fair value method of
accounting prescribed by SFAS 123 had been applied. The fair value of
stock options and compensation cost are measured at the date of grant.
The common stock purchase options were issued for past services at an
exercise price of $2.50 per share when the underlying stock was at
$2.245 per share. Had compensation cost been determined based on the
fair value of the common stock purchase options using the provisions
of SFAS 123, the Company's net loss and loss per share in 1995 would
have increased by $161,500 and $0.10, respectively.
For the proforma calculation, the fair value of each option on the
date of grant was estimated using the Black-Scholes option pricing
model and the following assumptions for awards in 1995: zero dividend
yield expected volatility of 119.64%, risk -free interest rate of
7.84%, and expected life of 5 years. Using these assumptions, the
grant-date fair value per share of the options granted in 1995 was
$1.80.
-14-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
b. Common Stock Warrants
Common stock warrants outstanding at March 31, 1999, consist of the
following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Issuance Expiration Date Amount Price Per Share
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acquisition of Sustainable September 30, 2000 50,000 $3.50
----------------------------------------------------------------------------------------------------------------------------------
Consulting Agreements May 8, 2001 to 160,000 $3.50
October 1, 2001
----------------------------------------------------------------------------------------------------------------------------------
Consulting Agreement September 30, 2001 10,000 $10.00
----------------------------------------------------------------------------------------------------------------------------------
8% Debenture Holders and September 11, 2001 to 186,470 $4.386 to
Placement Agents (I.) June 8, 2002 $10.81
----------------------------------------------------------------------------------------------------------------------------------
$145,000 Loan November 20, 2003 263,638 $.55
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1.) Common Stock Warrants Attached to Debenture
In connection with the issuance of the 8% convertible debentures in
September 1996; a number of warrants were granted to the holders of
the debentures, the agents, and subagents who placed the debentures.
With respect to the warrants granted to the debenture holders and
subagents, the warrants were granted in three equal installments of
September 11, 1996; November 26, 1996; and June 8,1997. These warrants
will expire five years from the date of each installment: September
11, 2001; November 26, 2001; and June 8, 2002. The number of shares of
common stock into which the warrants may be converted and the exercise
price of the warrants were determined by (among other variables and
future events) the amount of debentures still outstanding on each date
of grant, and the average closing bid price of the Company's common
stock for the five trading days immediately preceding each date of
grant.
On September 11, 1996, a total of 12,211 warrants expiring on
September 11, 2001 were granted to the agents. The warrants may be
exercised at any time before the expiration date by either of the two
methods as follows: (1) each warrant may be exercised for one common
share with an exercise price of $10.73, or (2) all or a portion of the
warrants may be exercised on a cashless basis where a reduced number
of shares of common stock will be issued based upon the difference
between the average closing price of the Company's common stock for
the five business days immediately preceding the date of exercise and
the exercise price, divided by the average closing market price, times
the number of warrants being exercised.
c. Net Income Per Share
Net income per share was calculated on the basis of the weighted
average number of shares outstanding, which amounted to 3,102,574 for,
the period ended March 31, 2000. For the period ended March 31, 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.
-15-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
12. Income Taxes
The Company has no current and deferred taxes payable. The Company and its
subsidiary have significant tax losses to be applied against future income.
The subsidiary Company's tax filings show net operating losses to be
applied against future taxable income in the amount of approximately $27
million to be utilized in various years through 2009. The tax benefit of
these losses is estimated to be approximately $10 million. No potential
benefit of these losses has been recognized in the accounts.
13. Employment Contracts and Commitments
In connection with the acquisition of Sustainable and under Management
Agreement dated April 17, 1995, the Company agreed to engage two key
officers for a period of seven years ending April 17, 2002. The two key
officers are entitled to a base salary of $75,000 plus additional incentive
payments each based upon a percentage of net income of Sustainable. At the
time of termination for any reason, the key officers are entitled to a
severance payment equal to the total of the annual base salary plus
additional annual incentive payments he is then receiving multiplied by the
remaining years, or portions thereof, of the contract period. During fiscal
1997, the Company reached a settlement with one of the officers in the
total amount of $60,000 to be paid at $5,000 per month through February
1998.
In connection with the acquisition of Deven and under the Stock Purchase
Agreement dated October 1,1996, the Company agrees that should certain
Deven officers be involuntarily terminated, other than in response to the
Deven Officer's gross negligence, willful misconduct, ineptitude or
inability to perform the duties of his position, ("Involuntary Personnel
Action") on or before September 30, 2001 ("Coverage Period"), the said
Deven Officer who was the object of said Involuntary Personnel Action shall
be entitled to receive a sum equal to 150% of the aggregate base salary
plus the cash equivalent of all benefits for the period of time between the
date of the Involuntary Personnel Action and the remaining portion of the
Coverage Period ("Settlement Consideration").
However, the Settlement Consideration shall not be less than two years
severance even though the period between the Involuntary Personnel Action
and the expiration of the Coverage Period be less than two years.
The Company had two contracts with financial advisors during fiscal 1997.
The first expired in May 1997; the second expired October 31, 1997. Neither
contract was renewed.
14. Litigation Settlement
In April 1997, the Company commenced an Adversary Action styled Daleco
Resources Corporation v. Reserve Production Inc., Liquidating Trust and
Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
Eastern District of Texas, Tyler Division, Case No. 97-6036. The case was
commenced to enforce the Company's rights under that certain Asset Purchase
Agreement dated December 20, 1996 (Asset Purchase Agreement) as approved by
the Bankruptcy Court on February 13, 1997. In the Adversary Action, the
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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
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. In January 2000,
the majority of these properties were divested.
-17-
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 1999 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
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 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.
-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 second fiscal Quarter ended March 31,
2000, was influenced by a variety of factors:
-Oil prices improved during the quarter, which resulted in a net gain
from oil and gas operations. The Company, like most domestic
independents, is unable to influence the price of oil. The
announcements by OPEC of its intent to reduce production and thus
increase the demand for oil on a worldwide basis should, if it occurs,
materially benefit the Company through the resultant increase in oil
pricing.
-19-
<PAGE>
-The Company's timber subsidiary, Sustainable Forest Industries
continues to attempt to market Guyana woods domestically. To date,
while there has been a tremendous interest shown in the potential for
Guyana woods, especially in the railroad industry, no substantial
contracts have been obtained.
-On December 18, 1998, the Company entered into a contract with
Infinite Networks Corporation whereby the Company agreed to sell 1,
848,566 shares of common stock for $9 Million. This agreement has yet
to be consummated. The Company is pursuing its options to seek
performance under the terms of the stock purchase agreement.
-The Company is investigating alternative funding sources to near term
acquisition capital needs.
With the end of the fiscal quarter ending March 31, 2000, several elements
which will affect the Company's future economic performance improved. For
example, the crude oil prices received throughout the Company's operating
areas began to firm in response to output restriction put in place by the
OPEC nations. Early indications are that the crude price gains experienced
during the quarter will hold throughout the fiscal year. In addition,
natural gas prices have risen significantly in response to market demand.
These two price factors should stabilize the Company's overall cash flow
and operating performance.
PART II. OTHER INFORMATION
-----------------
ITEM 6 Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DALECO RESOURCES CORPORATION
Date: June 12, 2000 /s/ Gary J. Novinskie
-----------------------
Gary J. Novinskie
President
Date: June 12, 2000 /s/ Edward J. Furman
-----------------------
Edward J. Furman
Chief Financial Officer
-21-
