UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FIRST AMENDMENT
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, 2002
-----------------
( ) 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
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Name of small business issue as specified in Charter
Nevada 23-2860734
-------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
120 North Church Street
West Chester, Pennsylvania 19380 (610) 429-1258
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(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.
Number of shares outstanding of the issuer's common stock as of December 31,
2002: 21,101,630
Number of shares outstanding of the issuer's Series A preferred stock as of
December 31, 2002: 8,000
Number of shares outstanding of the issuer's Series B preferred stock as of
December 31, 2002: 375,000
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)......................................................... 3
Consolidated Balance Sheets.............................................................. 3
Consolidated Statement Of Loss........................................................... 5
Consolidated Statement Of Deficit........................................................ 6
Consolidated Statement Of Cash Flow...................................................... 7
Notes to Consolidated Financial Statements............................................... 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................... 28
ITEM 3 CONTROLS AND PROCEDURES.................................................................. 29
PART II OTHER INFORMATION........................................................................ 30
ITEM 2 CHANGE IN SECURITIES..................................................................... 30
ITEM 3 HELLER DEBT.............................................................................. 31
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 32
ITEM 6 Exhibits and Reports on Form 8-K......................................................... 32
SIGNATURES ......................................................................................... 33
2
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002--PREPARED BY MANAGEMENT
(UNAUDITED) AND SEPTEMBER 30, 2002 (AUDITED)
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December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited) (audited)
ASSETS
Current Assets
Cash Accounts $ 422,220 $ 492,939
C/Ds 132,743 132,743
Account receivables 610,884 848,487
Jib Receivables -- --
Prepaid Mineral Royalties (note 5c) 240,150 240,150
Other Current Assets 5,369 5,369
------------ ------------
Total Current Assets $ 1,411,366 $ 1,719,688
------------ ------------
Other Assets
Investment in Mining Joint Venture $ 232,197 $ 232,197
Goodwill 813,357 813,357
Accumulated Amortization Goodwill (813,357) (813,357)
Net Goodwill -- --
Debt Placement Costs 584,815 584,815
Accumulated Amortization (584,815) (584,815
Net Debt Placement Costs -- --
Equity Placement Costs -- --
Accumulated Amortization Equity Costs -- --
Net Equity Placement -- --
Other Assets -- --
Total Other Assets $ 232,197 $ 232,197
============ ============
Fixed Assets
Oil and Gas Properties (note 3) $ 12,607,950 $ 12,607,950
Accumulated DD&A (6,432,950) (6,307,950)
Net Oil and Gas Property 6,175,000 6,300,000
Mineral Properties (note 5) 12,609,100 12,609,100
Accumulated DD&A -- --
Net Mineral Property 12,609,100 12,609,100
Timber Properties (note 4) 1,028,342 1,028,342
Accumulated DD&A (1,028,342) (1,028,342)
Net Timber Property -- --
Technology/Patent Rights (note 6) 7,767,000 7,767,000
Accumulated DD&A (1,591,338) (1,399,743)
Net Tech./Patent Rights 6,175,662 6,367,257
Property, Equipment, Furniture & Fixtures 514,749 514,749
Accum. Depr (P, E, P & P) (481,427) (476,766)
Net (P, E, P & P) 33,322 37,983
Leasehold Improvements -- --
Accu. Amort. (Lease Improvements) -- --
Net Lease Improvements -- --
------------ ------------
a) Total Fixed Assets $ 24,993,084 $ 25,314,340
============ ============
b) Total Assets $ 26,636,647 $ 27,266,225
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002--PREPARED BY MANAGEMENT
(UNAUDITED) AND SEPTEMBER 30, 2002 (AUDITED)
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December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited) (audited)
LIABILITIES
Current Liabilities
Trade A/P $ 571,884 $ 784,520
Notes Payable (note 7) 142,543 142,543
Note Due related Pty (note 8) 698,196 698,196
HFI Financing (note 10a) 5,154,783 5,154,783
Loans--1st Regional (note 10d) 100,000 100,000
CAMI Notes 514,881 514,881
Sonata and Standard Energy Financing (notes 7b and 10b) -- --
Accrued Interest Expense (notes 10a and 10b) 1,971,407 9,974,261
Accrued Dividend Expense (notes 11d and 16) 1,835,106 1,750,106
Accrued Expense Reimbursements 64,286 55,938
Accrued Salary Expense 223,724 170,595
------------ ------------
Total Current Liabilities $ 11,276,810 $ 11,345,823
------------ ------------
Long Term Debt 225,000 $ 300,000
Total Long Term Debt $ 225,000 $ 300,000
------------ ------------
Total Liabilities $ 11,501,810 $ 11,645,823
------------ ------------
EQUITY
Beginning Retained Earnings $(22,421,362) $(18,185,097)
Current Period Income/(loss) (580,564 (3,511,493)
Dividends Paid (Cash & Stock) -- (724,772)
Add. Paid in Capital 37,921,917 37,836,061
Preferred Stock (note 11) 3,830 3,830
Common Stock (note 11) 211,016 201,873
Total Equity $ 15,134,837 $ 15,620,402
------------ ------------
Total Liabilities and Equity $ 26,636,647 $ 27,266,225
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 -- PREPARED BY MANAGEMENT (UNAUDITED)
2002 2001
--------- ---------
Revenue
O&G Sales $ 344,457 $ 243,695
N P I Receipts -- --
Royalty Receipts 5,308 4,079
Timber Sales -- --
Mineral Sales -- --
Total Operating Income $ 349,765 $ 247,775
--------- ---------
Interest Income -- --
Well Management 17,111 17,111
Ptr. Management -- --
Other Income -- --
Total Other Income $ 17,111 $ 17,111
--------- ---------
Total Income $ 366,876 $ 264,886
========= =========
Expenses
LOE - Oil and Gas 158,223 196,392
LOE--Timber 5,500 0
LOE--Minerals 35,000 0
N P I Exp -- --
Prod Tax 27,538 19,066
DD&A (Fixed Assets) 321,256 283,945
Third Party Distributions 4,029 32,241
Total Operational Expense $ 551,546 $ 531,645
--------- ---------
Interest Expense 180,350 184,157
General and Administrative Expenses 120,021 132,512
Legal and Professional Fees 120,021 90,224
Financial Advisor Fees -- 30,000
Shareholder Information 1,841 5,512
Amortization of Debt Costs -- --
Amortization of Goodwill $ -- $ --
Total Expenses $ 947,440 $ 974,209
--------- ---------
Net Income (Loss) $(580,564 $(709,324)
========= =========
Basic and Fully Diluted Net Loss per Common Share $ (.03) $ (.04)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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2002 2001
------------- --------------
Deficit - Beginning of Period $(22,421,362) ($18, 185,097)
Net loss for the period (580,564) (709, 325)
Dividends on Preferred Stock (--) (328,060)
Deficit - End of Period $(23,086,926 ($19,222,482)
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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2002 2001
----------- -----------
Operating Activities
Net Income/( loss) for the period $ (580,564) $ (709,32)
Items not affecting working capital
Change in DD & A for period $ 321,256 $ (257,246)
Debt Amortization - 0 --
Amortization of Good Will 0 --
Sub Total $ 321,256 (257, 246)
----------- -----------
Items affecting Working Capital:
(Increase) Decrease in other assets $ 0 $ (300,000)
(Increase) Decrease in Pre-paid Royalties 0 --
(Increase) Decrease in accounts receivable 237,603 72,447
Increase (Decrease) in Trade payables (212,637) (2,420,824)
Increase (Decrease) in other Accrued Expenses 61,477 (30,207)
Gain/(loss) on Sale of Properties 0 --
Sub Total $ 86,443 $(2,420,824)
----------- -----------
Cash provided (used) for operating activities $ (172,865) $(1,968,745)
----------- -----------
Investing Activities
(Increase)/decrease in Investment in Subsidiaries $ 0 $ --
Leasing, Acquisition and Well Costs Incurred 00 --
Cash Provided from/(used for) Investing Activities $ 0 $ --
Financing Activities
Increase/(decrease) Notes due Related Parties $ 0 $ 6,000
Increase/(decrease) Other Notes due 0 (349,092)
Increase/(decrease) Accrued Interest (2,854) (45,835)
Increase/(decrease) Accrued Dividends 85,000 (89,689)
Dividends Paid 0 --
Proceeds of Equity Issuance 95,000 1,300,000
Proceeds of L/ Debt -- (75,000)
-----------
Cash provided from/(used for) financing activities $ 102,146 $ 821,375
----------- -----------
Net Increase/(decrease) in cash for period $ (70,719) $(1,147,370)
Cash and Cash Equivalents - Beginning of Period $ 625,682 $ 2,501,040
----------- -----------
Cash and Cash Equivalents - End of Period $ 554,963 $ 1,353,670
=========== ===========
Change in Cash FY 1st Qtr $ (70,719) $(1,147,370)
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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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 its assets. For the quarter ending December 31, 2002, the
Company reported a loss of $580,564. he ability of the Company to meet its total
liabilities of $11, 645,823, of which $5,154,783 is nonrecourse to the Company
(See Note 10a) and to continue as a going concern is dependent upon the
availability of future funding, achieving profitable timber operations and
successful development of newly acquired mineral assets. On July 24, 2002
("Closing Date"), the Company entered into a $10,000,000 Equity Line of Credit
Agreement with Cornell Capital Partners, L.P. ("CCP"). As part of the
transaction, the Company issued to CCP a two year convertible debenture in a
face amount of $300,000. The debenture is convertible into common stock at a
price equal to the lesser of 120% of the final bid price on the Closing Date or
80% of the average lowest three closing bid prices as reported by Bloomberg of
the Company's common stock for the five trading days immediately preceding the
date of the conversion. The equity line provides for the Company to draw down
$75,000 per week over a three year period. In accordance with the provisions of
the Equity Line of Credit, the Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission which became effect on November
7, 2002.
The Company will continue to seek and evaluate "project specific"
funding commitments and other capital funding alternatives if and as they become
available.
As of December 31, 2002, the Company and certain of it subsidiaries
were in default of certain debt obligations (See Notes 7, 8 and 10(a) below).
The holders of these instruments are working with the Company to achieve the
ultimate extinguishment of the 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.
8
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
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, Sustainable Forest
Industries Inc., Deven Resources, Inc., Tri-Coastal Energy, Inc., Clean Age
Minerals Incorporated, CA Properties, Inc. and 16/6, Inc. 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. The Companies investments in
minerals are accounted for using purchasing accounting methods.
c. Oil and gas properties and equipment
The Company follows the successful efforts method of accounting for the
costs of exploration and development activities. Direct acquisition costs of
developed and undeveloped leases are capitalized. Costs of undeveloped leases on
which proved reserves are found are transferred to proven oil and gas
properties. Each undeveloped lease with significant acquisition cost is reviewed
periodically and a valuation allowance provided for any estimated decline in
value. Capitalized costs of proved developed leases are charged to income on the
units of production basis based upon total proved reserves. The capitalized
costs of these proved developed leases are written down to their projected net
recoverable amount.
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
un-discounted 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 including $20,000,000 in mineral properties.
9
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
d. Site restoration, dismantlement and abandonment costs
The salvage value of producing wells or mining deposits is expected to
exceed the cost of site restoration and abandonment. As a result, no such costs
are accrued in these financial statements. The Company has not accrued any costs
associated with the potential abandonment and restoration of mineral extraction
mine sites to date. Any required site specific restoration cost accruals will be
made once mineral extraction is initiated.
e. Property and Equipment
Property and equipment are recorded at cost and depreciated over the
straight-line method over a period of five years. The carrying value of property
and equipment is impaired from time to time in addition to typical depreciation
charges based on independent appraisals of the operational condition of the
specific unit of property and/or equipment.
f. Timber Rights
The Company has recorded the acquisition of timber rights at cost.
These costs are deferred until commercial production commences. Where the costs
exceed projected net recoverable amounts, the timber rights are written down to
the projected net recoverable amount. Net recoverable amount is the aggregate of
estimated un-discounted future net revenues from the sale of timber less
operating and production expenses.
g. Mineral Acquisition
The Company has recorded the acquisition of Clean Age Minerals
Incorporated and associated mineral rights at cost.
h. Debt Issue Costs
Debt issue costs, represent those associated with the Heller Financial,
Inc. loan (see Note 10) and were being amortized over a period of five years The
debt issuance costs had been fully amortized as of March 31, 2002.
i. Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with
original maturities of three months or less.
10
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
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.
loan 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. The fair value of all debt is based on
discounted cash flow analysis.
3. Oil and Gas and Equipment
2002 2001
----------- -----------
Proven lease acreage costs $ 5,429,996 $ 5,429,996
Proven undeveloped lease acreage costs $ 1,745,810 $ 1,745,810
Well costs $ 5,432,145 $ 5,432,145
----------- -----------
$12,607,950 $12,607,950
Accumulated depletion, depreciation and amortization 6,432,950 5,577,950
----------- -----------
$ 6,175,000 $ 6,730,000
=========== ===========
(a) Sale of Oil and Gas Properties
On September 28, 2001, effective January 1, 2001, the Company's
sponsored partnership, Developing Energy Partners I, L.P. sold all of its wells
in Pennsylvania and West Virginia for $3,250,000, of which $2,234,722 was
received at closing and $1,015,278 was attributed to production revenues
collected between January 1, 2001 and September 28, 2001.
Since the Company, as managing general partner, was responsible for the
receipt and distribution of all funds from the sales of these assets, 100% of
the proceeds were tabulated as part of the gross revenues of the Company on its
financial statements for the relevant periods. As indicated on those statements,
net funds attributable to the limited partners of Developing Energy Partners I,
L.P. were shown as both a line item, "Third Party Distributions", and within the
appropriate notes to those financial statements.
On or about July 31, 2002 but effective as of July 1, 2002, the Company
sold all of its oil and gas properties in Pontotoc County, Oklahoma, consisting
of 11 gross wells and 1.08 net wells, to the operator. These properties were
marginal properties and wells with the revenues from production being just
slightly above lease operating costs. Since these properties were part of the
collateral for the Heller Loan (See Note 10(a)), all the proceeds from the sale
went to Heller.
11
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
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 the Company given 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. To reflect
adjustments to the carry value of these assets, the Company has taken charges
accumulating $1,028,500 as of December 31, 2002.
The Company has maintained its concession rights since the inception of
timber operations in 1997.
5. Mineral Properties
a. Clean Age Minerals Incorporated. In September 2000, the Company
acquired Clean Age Minerals Incorporated ("CAMI") by way of merger with
the Company's wholly owned subsidiary, Strategic Minerals, Inc. CAMI
has three (3) subsidiaries, CA Properties, Inc., Matrix-Loc, Inc. and
Lone Star Minerals, Inc. (collectively "CAP").
CAP owns or has under long-term lease: (a) 5,200 acres(+/-) in Marfa,
Presidio County, Texas, containing high grade zeolite; (b) 5,020
acres(+/-) of calcium carbonate deposits located in the Oro Grande
area, Cibola County, New Mexico; (c) five (5) mining claims located in
Sierra County, New Mexico covering 800 acres(+/-) of kaolin; (d)
seventeen (17) mining claims covering 1360 acres (+/-) in Grant County,
New Mexico containing perlite (note: The perlite property title rights
associated with the perlite claims are being disputed and may have an
adverse impact on the Company's ability to the extraction of these
minerals); and (e) eleven (11) zeolite mining claims covering
approximately 220 acres(+/-) located in Beaver County, Utah.
12
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
b. Minerals and Equipment
2002 2001
Proven undeveloped lease costs $12,609,100 $12,609,100
Mine development costs -- --
Accumulated depletion and -- --
Depreciation
$12,609,100 $12,609,100
----------- -----------
c. Prepaid Royalties.
The Company receives a credit in the nature of "prepaid royalties" for
rents paid on the Marfa Zeolite Lease, Presidio County, Texas, and a
portion of the New Mexico Oro Grande Limestone Lease in Cibola County,
New Mexico. During Fiscal year 2002 the Company did preliminary mining
activities on its properties for the purpose of testing the minerals
and producing samples for sales. The Company anticipates the
commencement of the commercial production of its calcium carbonate,
Kaolin and zeolite properties in the second and third quarters of
Fiscal Year 2003. The Company did make sales of its CA Series products
in December 2002. Testing of the Company's Kaolin was commenced in
December 2002 to confirm its properties for bidding on contracts
currently anticipated to occur towards the end of the Company's second
quarter. A portion of the Prepaid royalties ($232,197) attributable to
the Calcium Carbonate deposits are not anticipated to be fully
recovered in Fiscal Year 2003 and are carried as Long Term Assets. The
remainder of the prepaid royalties($240,150) are anticipated to be
fully used in Fiscal Year 2003 and are listed as Current Assets.
6. Patents & Technology
As part of the acquisition of Clean Age Minerals Incorporated (See Note
6(a) above), the Company also acquired U.S. Patent No: 5387738. This
patent, owned by Clean Age Minerals Incorporated (previously owned by
Matrix-Loc, Inc. which was acquired by Clean Age Minerals Incorporated
as a result of Matrix-Loc's merger with Clean Age Minerals as of March
18, 2002), deals with a reagent and process for the remediation of
water and contaminated soils. The Company's subsidiary 16/6, Inc. has
applied for a patent on its I(2) Technology. (Patent Pending
#09/659641) This patent application covers the ability to extract
certain text documentation from existing published documents.
13
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
7. Notes Payable
a. 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. In fiscal 1996, the Company repaid $300,000 of the outstanding
balance. In fiscal 1997, the remaining $800,000 was converted into
16,000 shares of 10% cumulative preferred stock, at $50.00 per share
("Series A Preferred Stock"). The Series A Preferred Stock was subject
to a put on August 20, 1999. The holders of the Series A Preferred
Stock filed a lawsuit in the Los Angeles Superior Court, California
against the Company, as well as Mr. Amir and Mr. Erlich as guarantors.
Mr. Amir satisfied his obligation under his guarantee and purchased
one-half, or 8,000 shares of the Series A Preferred Stock, of the
16,000 shares of the Series A Preferred Stock owned by the Kanes. The
Company and Mr. Erlich entered into a Stipulation for the Entry of
Judgment granting the Company until August 1, 2001 in which to satisfy
the put for the remaining 8,000 shares of Series A Preferred Stock plus
accumulated interest. (See Litigation Note 14). Mr. Amir converted his
Series A Preferred shares into 408,163 shares of Company common stock.
A portion of the dividends ($32,212..97) due Mr. Amir on the Series A
Preferred Stock was paid to Mr. Amir in the third quarter of fiscal
2002. (See Note 8(a)).
b. 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 Note holders were also given warrants.
(See Note 11(b)-- Warrants) $75,000 in principal amount plus accrued
interest due to Sonata Investment Company, Ltd. ("Sonata") was paid to
Sonata on November 30, 2001. On June 7, 2002, Mr. Lincoln converted his
Note in the amount of $20,000, plus accrued and unpaid interest of
$13,528.17, into 49,818 shares of common stock. The debt was converted
at a price of $.673 per share which represented the average of the bid
and closing prices for the five day period prior to the conversion.
Presently, only two of the 4 Notes comprising $50,000, in the
aggregate, of the original $145,000 remain outstanding. On August 1,
2001, the Company borrowed $42,000 from Standard Energy Company. This
loan earned interest at 2% per annum. The Standard Energy Company loan
was satisfied on November 30, 2001. As of June 30, 2002, only two of
the original four (4) notes, each in the face amount of $25,000, remain
outstanding.
c. Pursuant to Paragraph 5.1 of the Agreement and Plan of Merger by and
among Clean Age Minerals Incorporated ("CAMI") and Strategic Minerals,
Inc. ("SMI") and the Company dated September 19, 2000, obligations of
CAMI to certain officers, directors and third parties were to have been
satisfied by SMI or the Company within one (1) year of the merger. The
indebtedness totaled (including the Martin Debt as defined in Note 8(b)
below) $514,881 and was evidenced by Notes dated September 19, 2000.
The Notes were due and payable on or before September 18, 2001 and
provide for interest at the rate of 8% per annum. These Notes remain
outstanding. As of December 31, 2002, the total amount payable on these
notes is $607,575 representing principal of $514,881 and accrued but
unpaid interest of $92,694.
14
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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8. Due to (from) Related Parties
(a) Due to (from) Amir
Mr. Amir has entered into four (4) Notes with the Company as follows:
(1) Note dated October 1, 1995, bearing interest at the rate of prime
plus 3 percent in the principal amount of $91,062.00. This amount
remains outstanding as of December 31, 2002.
(2) Note dated October 1, 1995 bearing interest at the rate of 7% as a
result of various advances as to the Company in the principal amount of
$445,134 as of December 31, 2002.
(3) Note dated July 20, 1998 in the face amount of $25,000 (See Note
7(b)) bearing interest at the rate of 2% over the prime rate charged by
the Huntingdon National Bank of Columbus, Ohio, through the maturity
date, November 21, 1998 and 18% thereafter.
(4) Note dated June 17, 2002 bearing interest at the rate of 7% in the
principal amount of $137,000.
As of December 31, 2002, the outstanding principal and accrued but
unpaid interest on the obligations listed under numbers 1 through 4 to
Mr. Amir amounted to $700,752.
Mr. Amir was also entitled to a cash payment of $25,000 under his Key
Man Contract on June 30, 2002. This bonus has not been paid (See Note
13(b)).
Prior to conversion of his Series A Preferred Stock into common stock,
Mr. Amir was entitled to have received dividends in the amount of
$91,550.72 of which $59,337.72 remains outstanding (See Note 7(a)).
As of December 31, 2002, the Company owed Mr. Amir $18,846 in
unreimbursed business expenses and $33,335 in accrued but unpaid
salary.
During 2002, the Company paid Mr. Amir $170,000 in partial payment of
the accrued and unpaid interest on his notes, unreimbursed expenses and
dividends attributable to the Class A Preferred Stock. These payments
have been reflected in the current and prior quarterly statements. Mr.
Amir subsequently advanced the Company an additional $137,000 (see
8(a)(4) above).
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ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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Mr. Amir converted $10,000 of indebtedness into 71,942 shares of Common
Stock as of December 3, 2002. The conversion was at the average of the
closing bid and asking price for the Common Stock for the five trading
days prior to the date of conversion.
As of December 31, 2002, the Company was indebted to Mr. Amir in the
aggregate amount of $862,269.
(b) By virtue of the merger of Clean Age Minerals Incorporated ("CAMI")
with Strategic Minerals, Inc. on September 19, 2000, Strategic
Minerals, Inc. assumed the obligation of CAMI to Mr. Robert E. Martin
in the amount of $134,811 ("Martin Debt"). The Martin Debt was to have
been satisfied on or before September 18, 2001 but was not and remains
outstanding. As of December 31, 2002, the Martin Debt amounts to
$165,645 representing $134,811 in principal and $30,834 in accrued but
unpaid interest. The Martin Debt is evidenced by a Note providing for
an annual rate of interest of 8%. These amounts are included in the
amounts shown for the Company's obligation to the former officers and
directors of Clean Age Minerals Incorporated. (See Note 7(c)).
(c) Novinskie Debt. Under the terms of Mr. Novinskie's employment agreement
(See Note 13(b)), Mr. Novinskie was to have received a cash bonus of
$25,000 as of September 30, 2002. This bonus was not paid. As of
December 31, 2002, the Company owed Mr. Novinskie $36,146 in
unreimbursed expenses and $33,338 in accrued but unpaid salary and
$25,000 in accrued and unpaid bonuses (as discussed previously).
` Mr. Novinskie converted $10,000 of indebtedness into 71,942 shares of
Common Stock as of December 3, 2002. The conversion was at the average
of the closing bid and asking price for the Common Stock for the five
trading days prior to the date of conversion. As of December 31, 2002,
the Company was indebted to Mr. Novinskie in the aggregate amount of
$94,484.
9. Debentures
2002 2001
---- ----
8% Convertible Debentures $30,000 $30,000
------- -------
a. 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 ($10.171875), or (2) 75% of the
average closing bid price for the five trading days immediately
preceding the date of conversion. As of December 31, 2002, $1,280,000
of the 8% debentures had been converted into 981,322 common shares.
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DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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10. Long-Term Debt
Long-term debt of the Company consists of the following:
a. Heller Financial, Inc.
In August 1997, the Company entered into an arrangement with Heller
Financial, Inc. ("Heller") whereby Heller 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 Energy, Inc. The
amount outstanding (principal and accrued interest) under this
arrangement as of December 31, 2002 and 2001, was $6,942,138 and
$7,017,390, respectively. Interest on the borrowings is at prime plus
2%. Principal is paid out of 85% of the net cash flow from the
properties. Additional interest is payable from 50% of the net cash
flow from these properties after the payment of principal. 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 attributable to the decrease in the low worldwide
prices for oil. As a result, the full amount of the Heller Loan has
been reclassified as current debt. With the recovery of oil prices, the
Heller Loan has come back into compliance, however, Heller has not
rescinded its default notice. The obligations to Heller are
non-recourse to the Company and payable solely out of the oil and
properties pledged to Heller as collateral.
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
remained outstanding as of December 31, 2000. Sustainable had the right
to request an additional $250,000 prior to December 31, 1999, which was
not exercised. The Company and Westlands were guarantors of the loan
with Westland's (now Tri-Coastal Energy, L.P.) wells being pledged as
collateral, subordinated to the Heller Financing. The loan was to have
been 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 received a profits participation of 25% of the net
profits of Sustainable while the loan was outstanding and 20% after the
loan is repaid (after payout). While the obligations were outstanding,
Sonata sought and the Company agreed to grant Sonata additional
collateral to secure its loan in the nature of a security interest in
the Patent then owned by Matrix-Loc and the mineral leases owned by
subsidiaries of CAMI. The totality of the Sonata debt, plus all accrued
and unpaid interest was satisfied on November 30, 2001, and all
collateral for the loan was released.
7 17
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
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c. First Regional Bank
In September 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 December 12, 2003. The loan is secured by personal
assets of Dov Amir an officer and Director of the Company.
11. Capital Stock
NUMBER OF
SERIES B
NUMBER OF SERIES PREFERRED
NUMBER OF COMMON A PREFERRED SHARES PAR
SHARES, PAR VALUE SHARES PAR VALUE VALUE $0.01
$0.01 PER SHARE $0.01 PER SHARE (1) PER SHARE (1)
--------- ----- ------------------- --- --------
Balance as of December 31, 2001 16,337,614 8,000 713,000
Issuance on the conversion of 2,549,793 (338,000)
Series B Preferred
Issued to Holders of Series B Preferred
Stock as payment for accrued interest
through the date of conversion (See Note 11(d)) 148,531
Issuance on conversion of the Note held
by David Lincoln (See Note 7(b)) 49,818
Issuance to Cornell Capital Partners, L.P.
and Westrock Advisors(2)(5) 1,640,073
Issued to Mr. Novinskie and Mr. Amir(3)(4) 229,500
Issued to Gary E. Ellison, P.C.
for legal services(6) 146,301
Ending Balance as of December 31, 2002 21,101,630 8,000 375,000
---------- ----- -------
(1) On February 28, 2002, the Shareholders approved an amendment to the
Articles of Incorporation of the Company, providing for an increase in the
authorized common stock of the Company from 20,000,000 shares to 50,000,000
shares of Common Stock. The Shareholders also approved the change of the
Company's state of incorporation from Delaware to Nevada. This was effected
through the merger of Daleco Resources Corporation, a Delaware corporation
("Old Daleco") with and into Daleco Resources Corporation of Nevada, a
Nevada corporation ("New Daleco"). The merger was consummated as of March
26, 2002. The Articles of Incorporation of New Daleco provide for
authorized capital stock of 50,000,000 shares of common stock, par value
$0.01 and 20,000,000 shares of preferred stock, par value $0.01.
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DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
(2) On July 23, 2002, the Company entered into an Equity Line of Credit
Agreement with Cornell Capital Partners, L.P. As part of the transaction,
the Company retained the firm of Westrock Advisors, Inc., an unaffiliated
registered broker dealer as its placement agent in connection with the
Equity Line of Credit. Under the terms of the transaction, Cornell Capital
received 847,826 shares as a commitment fee and Westrock Advisors, Inc.
received 21,739 as a placement agent fee.
(3) On October 31, 2002, the Company issued a total of 85,616 shares to Mr. Dov
Amir (42,808) and Mr. Gary Novinskie (42,808) in accordance with their Key
Man Employment Agreements. The stock was issued as of July 1, 2002 (See
Note 13(b)). Mr. Martin was issued 50,000 shares in payment of his $50,000
bonus under his Key Man Employment Agreement at $1.00 per share. (See Notes
12 (a) and 13(b))
(4) On December 3, 2002, each of Mr. Amir and Mr. Novinskie converted $10,000
of debt owed to them by the Company into 71,942 shares of common stock for
(143,884 in the aggregate) (See Notes 8(a) and 8(c)).
(5) On November 27, 2002, Cornell Capital Partners ("CCP") converted $10,000 of
the $300,000 debenture issued as part of its Equity Line of Credit
transaction ("Debenture") into 85,470 shares, on December 9, 2002, CCP
converted $40,000 of the Debenture into 366,972 shares and on December 30,
2002 CCP converted $25,000 of the Debenture into 318,066 shares, for a
total of 770,508 shares. On July 24, 2002, the Company entered into a
$10,000,000 equity line of credit with CCP. As part of the transaction, the
Company issued a $300,000 Debenture to CCP. The Debenture issued interest
at six percent (6%) per annum and matured in two years. CCP had the right
to convert the Debenture into Common Stock of the Company at a price equal
to the lessor of either (a) an amount equal to one hundred twenty percent
(120%) of the closing bid price of the Common Stock on July 24, 2002, or
(b) an amount equal to eighty percent (80%) of the average of the three (3)
lowest Closing Bid Prices of the Common Stock for the five (5) trading days
immediately preceding the date of CCP's conversion of the debenture into
Common Stock.
(6) On June 25, 2002, the Company satisfied $98,460.77 of indebtedness to Gary
E. Ellison, P.C. special counsel to the Company by issuing Mr. Ellison
146,301 shares of Common Stock. This was accomplished through the filing on
Form S-8 with the Securities and Exchange Commission on June 24, 2002.
19
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
a. Common Stock Options
December 31, December 31
2002 2001
------------ -----------
Outstanding and Exercisable (3)
at beginning of period 6,110,000 3,610,000
Canceled (524,384) (--)
Granted ----- 2,500,000
Reclassified (85,616) --
Exercised (--) (50,000)
Outstanding and Exercisable (2)
at end of period 5,500,000 6,110,000
--------- ---------
(1) These shares were reclassified as a grant under the Key Man
Contracts with Mr. Amir and Mr. Novinskie. Previously they were
included as options. The exact amount of the grant was not determinable
until June 30, 2002 when the exercise price of the $25,000 portion of
the $50,000 Key Man Contract bonus was to be paid to Mr. Novinskie and
Mr. Amir in common stock.
(2) Of the 5,500,000 options outstanding, 5,050,000 are held by current
officers, directors and employees of the Company. The exercise price
for the options held by insiders range from $0.25 per share to $1.08
per share. On November 12, 2002, 110,000 options awarded under the
Company's Non-Qualified Stock Plan expired. These options had an
exercise price of $2.19 per share.
On November 16, 2001, the Company entered into Key Man Employment
Contracts with Mr. Dov Amir, Chairman of the Board of Directors and
Chief Executive Officer of the Company, Mr. Gary J. Novinskie,
President and Chief Operating Officer of the Company, and Mr. Robert E.
Martin, a Director of the Company and President of Clean Age Minerals
Incorporated (previously Strategic Minerals, Inc., see merger
discussion). Under the employment agreements (see Note 13 below),
Messrs. Amir and Novinskie were granted options for 500,000 shares of
common stock and Mr. Martin was granted options for 1,000,000 shares of
common stock. All these options expire on the third anniversary of the
vesting of the options or two years after the key man ceases to be an
employee of the Company. The exercise price for Mr. Martin's options
are priced at $1.08 per share, 90% of the average closing price for the
common stock for the five business days prior to October 1, 2001. The
exercise price for Messrs. Amir's and Novinskie's options is 90% of the
average closing price for the common stock at the close of business for
the five trading days immediately preceding June 30, 2002. The exercise
price was determined to be $0.526 per share Mr. Amir and Mr. Novinskie
received a signing bonus under the Key Man Contracts of $50,000,
$25,000 of which is to be paid in common stock on or before June 30,
2002, at a price equal to the average closing price for the common
stock for the five business days preceding the date of issuance. Mr.
Amir and Mr. Novinskie were each awarded 42,808 shares under this
grant.
20
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
On September 11, 2000 the Board of Directors of the Company granted
options for 3,500,000 shares of common stock to three directors, one
officer and an employee of the Company. Messrs. Amir and Novinskie
officers and directors of the Company, were each awarded options for
1,000,000 shares. Ms. Spencer, the Secretary of the Company, was
granted an option for 250,000 shares and an employee, Mr. Payne, the
Controller, was awarded an option for 250,000. Mr. Trainor, a director,
was awarded options for 1,000,000. Mr. Trainor's options were
transferred to his law firm in accordance with his firms policies.
Subsequently, Mr. Trainor's law firm assigned to him options for
500,000 of the 1,000,000 originally granted. The 3,500,000 options are
exercisable at a price of $.25 per share which was above the fair
market value of the Company's stock at the time of issue. The options
were granted for service and dedication to the Company to the
recipients who while not being currently paid or paid at a wage scale
substantially below market continued to work for the benefit of the
Company and the shareholders. These options vested upon their grant.
(3) The Company accounts for all stock-based compensation (options) in
accordance with the Financial Accounting Standard Boards Statement of
Financial Accounting Standards No. 123 (SFAS 123). SFAS 123 permits the
Company's use of the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25. Under SFAS 123, the fair value of
stock options and compensation costs are measured as of the grant date.
21
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
b. Common Stock Warrants
Common Stock warrants outstanding at December 31, 2002, consist of the
following(1):
Price Per
Issuance Expiration Date Amount (1) Share
-------- --------------- ---------- -----
Financing Sources (2) August 1, 2003 to $0.55 to
November 20, 2005 699,579 $1.05
Terra Silex Warrant (3) December 31, 2006 250,000 $1.25
SCOA Warrants(4) November 15, 2006 2,240,000 $2.00 to $3.00
(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.
On June 8, 2002, warrants for 65,500 shares with an exercise price of
$10.81 per share expired. Those warrants were issued as part of the
Company's issuance of 8% convertible debentures in 1996. With the
expiration of these warrants, no warrants remain outstanding from the
issuance of the 8% convertible debentures.
(2) Financing Sources
On July 21, 1998, a total of 263,638 warrants expiring on November 20,
2005 were granted to four persons who loaned the Company a total of
$145,000 in July 1998. (See Note 7b). The warrants may be exercised at
any time before the expiration date at an exercise price of $0.55. On
August 9, 2001, the expiration date for a total of 25,000 warrants was
extend to August 10, 2002 for warrants previously granted (August
26,1997) to Kane interests as consideration for extending the time
period on the redemption of their remaining Class "A" Preferred Shares.
The exercise price of the "Kane Warrants" at any time before the
expiration date is $2.50.
On November 28, 2001, a total of 435,941 warrants to purchase common
stock were granted to Sonata Investment Ltd. (warrants for 395, 273
shares of common stock ("Sonata Warrant")) and Standard Energy
(warrants for 40, 668 shares of common stock ("Standard Warrant")) as
consideration for entering into the Loan Conversion Agreement dated
August 1, 2001. The Loan Conversion Agreement extended the date by
which the Company had to satisfy its obligations to both Sonata
Investment Company, Ltd. ("Sonata") (See Note 10(b)) and Standard
Energy Company ("Standard") and granted both Sonata and Standard the
right to convert the debt into common stock of the Company at such time
as the Company advised Sonata and Standard of its intent to satisfy the
Company's obligations to one or both entities. Sonata and Standard are
affiliated entities. The exercise price was fixed at $1.05. The Sonata
and Standard Warrants were to have expired August 1, 2002. However, the
Company agreed to extend the termination date of the Sonata and
Standard Warrants until July 31, 2004 in exchange for Sonata's
relinquishing its twenty percent (20%) interest in the net profits of
the Company's subsidiary Sustainable Forest Industries, Inc. (See Note
10(b))
22
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
On August 10, 2002, warrants for 25,000 shares issued to the Kanes in
consideration for forbearance on the redemption of the Series A
Preferred Stock expired.
(3) Terra Silex Warrant
Under a Stock Purchase Agreement dated September 11, 2001 by and among
the Company and Terra Silex Holding, LLC, Terra Silex was granted a
warrant for 250,000 shares ("Terra Silex Warrant") at an exercise price
of $1.25 The Terra Silex Warrant expires on December 31, 2006.
(4) Sumitomo Warrants
Under a Stock Purchase Agreement by and among Sumitomo Corporation of
America ("SCOA") and the Company dated as of November 16, 2001, SCOA
was granted warrants for 1,700,000 shares of common stock with a five
(5) year term at exercise prices ranging from $2.00 per share for the
first 850,000 shares, $2.50 per share for the next 510,000 shares and
$3.00 per share for the remaining 340,000 shares. The Company and SCOA
also entered into a Master Distribution and Marketing Agreement dated
as of November 16, 2001 under which SCOA was granted warrants for
540,000 shares. These warrants have a five (5) year term and have an
exercise price of $2.00 per share for the first 108,000 shares, $2.50
pen share for the next 162,000 shares and $3.00 per share for the
remaining 270,000 shares.
c. Net Income Per Share
Net income per share (primary basis) was calculated on the primary
basis of the weighted average number of common shares outstanding which
amounted to 20,101,630 for the period ended December 31, 2002 (2001 --
$16,337,614). For the periods ending December 31, 2002 and 2001, the
exercise of the options and warrants outstanding as at year end did not
have a dilutive effect on the net income per share.
23
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
d. Payment of Accrued Dividends
$603,024 of accrued dividends attributable to the 8% Cumulative
Convertible Preferred Stock issued in the acquisition of CAMI ("CAMI
Preferred") was paid in 480,998 shares of Common Stock upon conversion
of 1,626,800 shares of the CAMI Preferred Stock to Common Stock
commencing October, 2001 through December 31, 2002. See also Note
14(b), regarding payment of accrued dividends on the Series A Preferred
Stock held by the Kanes through December 31, 2002.
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
a. In connection with the acquisition of Sustainable and under a
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. The one remaining
SFI employment contract expired in accordance with its terms on April
17, 2002 and was not renewed. The Company retains the services of the
employee. As of June 30, 2002, Mr. Novinskie and Mr. Amir's employment
contracts provided for bonuses of $50,000 each to be paid one-half in
common stock and one-half in cash. The price of the stock to be issued
was determined by taking the closing average of the bid and asked price
for the Company's stock for the five (5) trading days preceding June
30, 2002. (See Note 13(b) below).
b. On November 16, 2001, the Company entered into a Stock Purchase
Agreement with SCOA ("SCOA SPA"). As a condition to the closing of the
SCOA SPA, SCOA required that the Company enter into Key Man Employment
Contracts ("Key Man Contracts") with Messrs. Robert E. Martin, Gary J.
Novinskie and Dov Amir. The Key Man Contracts are for an initial three
(3) year term. The Key Man Contracts provide for acceleration of the
24
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
vesting of incentive options should the Key Man be terminated prior to
the expiration of the term of the Key Man Contracts. Each of Messrs.
Novinskie and Amir are granted options for 500,000 shares of Company
Common Stock while Mr. Martin was granted options for 1,000,000 shares
of Common Stock. There are like provisions for the acceleration of the
salary due each employee over the life of the Contract. (See Note 11a.)
The Key Man Contract also provided for a bonus to Messrs. Novinskie and
Amir of $50,000 to be paid one-half in cash and one-half in stock. (See
Note 13(a) above). Mr. Novinskie's cash bonus has not been paid. Mr.
Amir's bonus was debted against an advance given to Mr. Amir in the
third quarter. (See Note 8.) Under Mr. Martin's Key Man Contract, he
was granted a salary of $50,000 for the six month period April 1, 2002
through September 30, 2002 ($8,333.34 per month), and $100,000 per year
for the remaining two (2)years of his Key Man Contract. In accordance
with his contract, the Company commenced paying Mr. Martin's salary as
of April 1, 2002.
14. Litigation Settlement and Pending Litigation
a. Southland Drilling Company, a Division of Triad Drilling Company v.
Westlands Resources Corporation. Daleco Resources Corporation and
Tri-Coastal Energy. L.P., Cause No. 98-34542, In the 270th Judicial
District Court of Harris County, Texas. On or about July 21, 1998,
Southland Drilling Company ("Southland") commenced a lawsuit against
the Company and its subsidiaries Westlands and Tri-Coastal. The lawsuit
sought to recover the amount of $260,577.66 allegedly due and owing for
work performed on the DRC GA #3 Well and the DRC VI #1 Well, Burleson
County, Texas. The Company settled this matter by the filing of a Joint
Motion for Entry of Agreed Judgment on December 1, 2000. Under the
terms of the agreement, the Company is obligated to pay Southland
$300,000 ("Settlement Amount") and has given a judgment note in that
amount to Southland. The Company had 90 days from settlement in which
to pay the note during which period Southland will forbear from taking
any action. The Company failed to pay the Settlement Amount within the
allotted 90 day period. As part of the Terra Silex Agreement, Terra
Silex acquired the Southland Judgment from Southland and filed a
release and satisfaction of the Southland Judgment.
b. Kane v. Daleco Resources Corp., et. al. On or about January 14, 2000,
Stanley B. Kane, et. al. commenced an action in the Superior Court, Los
Angeles, California to enforce their right to have the Company
repurchase 16,000 shares (stated value $50,000 purchase) of Series A,
10% Cumulative Preferred Stock. The Plaintiffs had the right to put the
stock to the Company on August 20, 1999, which they did. Although the
Company continued to pay quarterly dividends on the Series A Preferred
Stock, it did not redeem the shares due to its lack of liquidity. Also
named in the suit were Messrs. Dov Amir (a current officer and director
of the Company) and Mr. Louis Erlich (who was an officer and director
of the Company at the time of the issuance of the Series A Preferred
Stock) who had given personal guaranties to the Plaintiffs.
25
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
Mr. Amir satisfied his obligation under his guaranty to purchase
one-half on 8,000 shares from the Plaintiffs. The Company entered into
Stipulation for the Entry of Final Judgment and Judgment thereon as to
Daleco Resources Corporation, pursuant to which the Company shall have
until August 1, 2001 in which to redeem the remaining 8,000 shares for
$400,000 plus accrued dividends through the date of settlement at a
rate of ten percent (10%) per annum. The Kanes have been granting the
Company an extension of the August 1, 2001 date on a month to month
basis. On December 7, 2001, the Company paid the Kanes $90,000
representing all accrued and unpaid dividends on the Series A Preferred
Stock through December 31, 2001. The Company has paid all dividends due
and payable to the Kanes for periods through the fiscal quarter ending
March 31, 2002. Payments for the last two quarters ending September 30,
2002, in the amount of $20,000, are still outstanding.
Mr. Erlich has filed a Cross Complaint against the Company for payment
of his obligation under his guarantee.
c. Elizabeth McFadden v. BBC/DRI Blacklick Joint Venture, Belden & Blake
Corporation and Deven Resources, Inc., Civil Action--Equity, No. 50640
CD 2001, Court of Common Pleas, Indiana County, Pennsylvania.
This action was commenced by Plaintiff to prevent Belden & Blake
Corporation from laying a pipeline and utilization of an easement
across Plaintiffs property. Plaintiff's action had been dismissed once,
and Plaintiff had refiled the complaint allegedly addressing new issues
and adding Deven Resources, Inc. as a new defendant.
Developing Energy Partners I, L.P. ("DEP"), for which Deven Resources,
Inc. ("DRI") was the general partner, owned a 40% interest in BBC/DRI
Blacklick Joint Venture ("Joint Venture"). Belden & Blake Corporation
("BBC") owned the remaining 60% of the Joint Venture prior to September
28, 2001 at which time it acquired the 40% interest held by DEP. The
pipeline and utilization of the easement by BBC which are the subject
of this action are attributable to wells drilled on acreage under lease
to the Joint Venture ("BBC Wells"). DEP went non-consent on the BBC
Wells. Under the Joint Venture agreement, since DEP went non-consent on
the BBC Wells, DEP had no responsibility or liability for any costs
associated with the BBC Wells. Since the pipeline and easement usage
across the lands of the Plaintiff was exclusively related to the BBC
Wells, DEP had no liability for the costs associated with this lawsuit.
The relief sought by the lawsuit is to enjoin BBC from laying its lines
across the Plaintiffs property and for damages to the surface of
Plaintiffs property resulting from BBC's actions.
26
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------
Under the terms of the agreement covering the sale of DEP's 40%
interest in the Joint Venture, BBC agreed to indemnify and hold DEP and
its general partner, DRI, harmless from and against any and all damages
and costs, if any, arising out of the McFadden litigation.
15. Acquisitions
Clean Age Minerals Incorporated
CAMI, a Nevada corporation, was acquired by the Company through a
merger with the Company's newly formed subsidiary, Strategic Minerals, Inc., a
Nevada corporation, on September 19, 2000 Strategic Minerals, Inc. was the
surviving corporation which subsequently changed its name to Clean Age Minerals
Incorporated. The Shareholders of CAMI received 2,001,800 shares of Daleco
Resources Corporation Series B, 8% Cumulative Convertible Preferred Stock,
stated value $10.00, par value $.01, in exchange for 20,018,000 shares of CAMI
Common Stock constituting all of the capital stock of CAMI. CAMI, through its
subsidiaries CAP and Lone Star owns in fee and leasehold interests in
non-metallic minerals in the States of Texas, New Mexico and Utah. The Company
does not presently mine its minerals. Additionally, the Company acquired, as
part of the merger, a patented process utilizing many of the minerals owned or
under lease to the Company, for the cleansing and decontamination of water and
soils.
Daleco's 16/6, Inc.
Effective July 7, 2001, Daleco acquired 16/6, Inc., a software
development firm 16/6 has applied for a patent on its I(2) technology (Patent
Pending No. 09/659641). The I(2) technology covers the ability to extract
certain text documentation from existing published documents from the Internet
and micro-payments thereof.
Daleco acquired all of the outstanding capital stock of 16/6, Inc. in
exchange for 1,000,000 shares of common stock of Daleco.
27
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, events 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, 2002, was influenced by a variety of
factors which were beyond the control of management, such as
the variability of the demand for and the pricing of crude oil
and natural gas with the Company's operating areas and the
demand and pricing, both domestically or internationally, for
the Company's timber and industrial minerals impacted on the
Company's results. The prior certification of the Company's
timber and Patented Process by independent parties also
hindered the Company's ability to enter into immediate
contracts for the sale of these products.
28
For the three month period ending December 31, 2002, total revenues
increased by $101,991 (38.5%) while operating expenses decreased by
$38,169 (16.1%) as compared with the same quarter last year. For the
period the Company recorded a net loss of $580,564 as compared to
$749,823 last year.
During the period, the Company commenced mining and processing of
calcium carbonate on its Oro Grande, New Mexico deposit. At the same
time, samples of kaolin are being processed in preparation of
introduction to domestic and international markets. The Company's
patented engineered CA Series products were successfully tested by
independent environmental engineers, in remediating hazardous waste
from industrial plants, while efforts are underway to introduce our
products to the agricultural sector.
While the Company has yet to commence commercial marketing of its
minerals, timber and CA Series remediation products, we believe that
the recent work and continuous efforts will result in a profitable
future.
Item 3. Controls and Procedures
Sarbanes-Oxley Act
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 ("SOA"). The SOA is the first major revision to the securities
laws since the enactment of the Securities Act of 1933 and the
Securities and Exchange Act of 1934. The SAO, promulgated in large part
in response to the collapse of Enron/Worldcom demise, covers a variety
of measures all of which will not be covered here.
The SOA is applicable to all publicly traded reporting companies no
matter how small or large. The SOA provides for additional controls
such as the chief executive officer's certificate regarding the
accuracy of the Company's financial statements and providing for a
criminal penalty for making a false statement to the certification by
an executive officer that the financial statements do not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements, in light of the circumstances under
which the statement were made, not misleading with respect to the
period covered by the annual report. The certification also requires
that the executive officer of the company certify that the financial
statements and other materials presented in the annual report fairly
present all material respects the financial condition, results of
operations and cash flows of the Company as of and for the periods
covered by the annual report. This requirement exceeds the previous
requirement that the financial statements merely be presented in
accordance with generally accepted accounting principles.
The Company believes that it has historically provided its financials
in this fashion, having separately reported and presented each segment
of the Company's business for the past few years.
29
The SOA also suggests but does not presently require that a "Disclosure
Committee" be established. This committee would consider the
materiality of information and determine disclosure obligations on a
timely basis. This committee would, in essence, become the Company's
"watchman" for public disclosures. The Company has not, as of the date
of this annual report, established such a committee. The Company has
only six employees, and three independent directors. All parties are
intricately involved in the decision making processes at the Company
and no disclosure or decision not to disclose information is made
without the input of inside management, counsel and at least one, if
not more, independent directors. At such time as the Company changes
its method of operation and/or increases the number of employees, it
will reconsider the creation of a "Disclosure Committee."
Because the drafting and approval of all the Company's reports is a
collective process, the suggestions of the SOA to establish Disclosure
Committees, a Disclosure Controls Monitor, conduct internal drafting
sessions, distribution of draft reports and dealing with internal
trading policies are presently either not applicable or are already
implemented, have been and are part of the Company's operating
procedures.
The SOA also provides for certain controls on auditors and the
accounting industry. The Company only utilizes its auditors for
auditing purposes. As such, the Company feels that it is and will be in
full compliance with the final regulations promulgated by the
Securities and Exchange Commission ("SEC") under the SOA.
The SEC has acknowledged that a "one-size fits all" approach to
establishing effective disclosure controls and procedures and has not
prescribed any specific disclosure controls and procedures. Rather, the
SEC expects "each company to develop a process that is consistent with
its business and internal management and supervisory practice." The
Company believes that it has fully complied with the intent of the SOA
and Regulations promulgated by the SEC.
PART II. OTHER INFORMATION
-----------------
Item 1. None
Item 2. Change in Securities.
There were no sales of securities by the registrant during the quarter
ending December 31, 2002. The Company did convert $10,000 of
indebtedness owed to Mr. Novinskie, President and Chief Operating
Officer, and $10,000 of indebtedness owed to Mr. Amir, Chairman of the
Board of Directors and Chief Executive Officer into 143, 884 shares
(71, 942 to each of Mr. Novinskie and Mr. Amir) as of December 3, 2002.
Additionally, the Company issued a aggregate of 85, 616 shares of
common stock to Mr. Novinskie (42, 808) and Mr. Amir (42, 808)
consistent with their Key Man Agreements dated November 16, 2002.
30
On November 27, 2002, Cornell Capital Partners ("CCP") converted
$10,000 of the $300,000 debenture issued as part of its Equity Line of
Credit transaction ("Debenture") into 85,470 shares, on December 9,
2002, CCP converted $40,000 of the Debenture into 366,972 shares and on
December 30, 2002 CCP converted $25,000 of the Debenture into 318,066
shares, for a total of 770,508 shares. On July 24, 2002, the Company
entered into a $10,000,000 equity line of credit with CCP. As part of
the transaction, the Company issued a $300,000 Debenture to CCP. The
Debenture issued interest at six percent (6%) per annum and matured in
two years. CCP had the right to convert the Debenture into Common Stock
of the Company at a price equal to the lessor of either (a) an amount
equal to one hundred twenty percent (120%) of the closing bid price of
the Common Stock on July 24, 2002, or (b) an amount equal to eighty
percent (80%) of the average of the three (3) lowest Closing Bid Prices
of the Common Stock for the five (5) trading days immediately preceding
the date of CCP's conversion of the debenture into Common Stock. All
common stock issued to CCP was covered by the Company's registration
statement on Form SB-2 effective November 7, 2002.
Item 3 Heller Debt.
In August 1997, the Company entered into an arrangement with
Heller Financial, Inc. ("Heller") whereby Heller 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 Energy, Inc. The amount outstanding (principal and accrued
interest) under this arrangement as of December 31, 2002 and 2001, was
$6,942,138 and $7,017,390, respectively. Interest on the borrowings is
at prime plus 2%. Principal is paid out of 85% of the net cash flow
from the properties. Additional interest is payable from 50% of the net
cash flow from these properties after the payment of principal. 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 attributable to the decrease in the low
worldwide prices for oil. As a result, the full amount of the Heller
Loan has been reclassified as current debt. With the recovery of oil
prices, the Heller Loan has come back into compliance, however, Heller
has not rescinded its default notice. The obligations to Heller are
non-recourse to the Company and payable solely out of the oil and
properties pledged to Heller as collateral.
31
Item 4 Submission of Matters to a Vote of Security Holders.
None
Item 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
None.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DALECO RESOURCES CORPORATION
Dated: February 14, 2003 By: /s/ Gary J. Novinskie
--------------------------------------
Gary J. Novinskie, President
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: February 14, 2003 /s/ Gary J. Novinskie
--------------------------------------
Gary J. Novinskie
President and Director
Date: February 14, 2003 /s/ Dov Amir
--------------------------------------
Dov Amir
Chief Executive Officer and Chairman
of the Board of Directors
33
CERTIFICATION
I, Gary J. Novinskie, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Daleco
Resources Corporation.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Gary J. Novinskie
--------------------------------------
Gary J. Novinskie
President and Chief Financial Officer
34
In connection with the Quarterly Report of Daleco Resources Corporation (the
"Company") on Form 10-QSB for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Dov
Amir, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ Dov Amir
--------------------------------------
Dov Amir
Chief Executive Officer
February 14, 2003
35