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 ------------------------------------------------------- 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 ---------------------------------------------- --------------------------- (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) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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). 15 DALECO RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED) -------------------------------------------------------------------------------- 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. 16 DALECO RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001 - PREPARED BY MANAGEMENT (UNAUDITED) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 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. 18 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