DALECO RESOURCES CORP (DLOV) - Description of business

Company Description
GENERAL Daleco Resources Corporation ("Daleco" or the "Company") is a natural resources holding company whose subsidiaries are engaged in the exploration, development and production of oil and gas, the development and sale of naturally occurring minerals, and the marketing of patented products utilizing the Company's minerals. The Company's wholly owned subsidiaries include Westlands Resources Corporation, Sustainable Forest Industries, Inc., Deven Resources, Inc., DRI Operating Company, Inc., Tri-Coastal Energy, Inc., Tri-Coastal Energy, L.P., Clean Age Minerals, Inc., CA Properties, Inc. and The Natural Resources Exchange, Inc. Deven Resources, Inc. is the managing general partner of Deerlick Royalty Partners, L.P. The Company's assets consist of two separate categories: oil and gas and minerals. The Company owns a patent related to its minerals. The Natural Resources Exchange, Inc., is a dormant company that conducted no business in the past two fiscal years. Sustainable Forest Industries, Inc., is a dormant company related to the Company's forest holdings that conducted no business in the past two years. The Company is a Nevada corporation whose Articles provide for authorized capital stock of 100,000,000 shares of common stock and 20,000,000 shares of preferred shares. Daleco, through its wholly owned subsidiaries, Westland Resources Corporation, DRI Operating Company, Deven Resources, Inc. and Tri-Coastal Energy, L.P. owns and operates oil and gas properties in the States of Texas, West Virginia and Oklahoma and the Commonwealth of Pennsylvania. Daleco does not refine any crude oil or market, at retail, any oil or petroleum products. Daleco does not own any drilling rigs. All of its drilling activities are performed by independent drilling contractors on a contract basis. Deven Resources, Inc. ("DRI") is the general partner of Deerlick Royalty Partners L.P., a Delaware limited partnership, owning overriding royalty interests in the Deerlick Coalbed Methane Field, Tuscaloosa Alabama. DRI is also the sole shareholder of DRI Operating Company, which operates nine (9) wells and has oil and gas interests in the State of West Virginia and in the Commonwealth of Pennsylvania. As of September 30, 2006, the Company had interests in 68 wells in the States of Texas, West Virginia and Oklahoma and the Commonwealth of Pennsylvania. The Company has experienced an average increase in the unit of production weighted average sales prices it received throughout the 12 month period beginning October 1, 2005, and ending September 30, 2006, of 31% for its oil and gas products as compared to the twelve (12) month period beginning October 1, 2004, and ending September 30, 2005. Sustainable Forest Industries, Inc., sold forest products under the HeartDex(TM) trademark. This entity has been inactive for the past two years. The Company has fully written off its costs associated with this subsidiary and its operations have been terminated. Clean Age Minerals, Inc., through its subsidiary, CA Properties, Inc., (collectively "CAMI") owns fee, leasehold interests, and federal mining claims containing non-metallic minerals in the States of Texas, New Mexico, and Utah. CAMI mines its minerals through the use of contract miners. CAMI also owns the CA Series patented process, utilizing many of the minerals owned or under lease to CAMI, for the cleansing, decontamination and remediation of air, water and soils. ASSETS: OIL AND GAS DEFINITIONS OF TERMS: As used herein, the term: "Gross", as it applies to acreage, mining claims or wells refers to the number of acres, mining claims or wells in which the Company has a direct working / operating interest. "Horizontal Well", means a well drilled vertically from its surface to its objective depth and from that point drilled with special tools at an angle approximating 90 degrees from the bottom of the vertical hole or drilled from such point at an angle which approximates that at which the beds of the objective formation lie, as opposed to a traditional vertical well, which is drilled vertically from the surface to its objective. "Net", as it applies to acreage, mining claims or wells refers to the sum of the fractional ownership interests owned by the Company in gross acres, mining claims or gross wells. "Operating interest", means the share of costs borne by an owner in the lease, claim or well. "MMBTU", "Bbls", "Mcf" and "MMcf", mean million British thermal units, barrels, a thousand cubic feet, and a million cubic feet, respectively. "Net Revenue Interest", means the share of gross income from such lease, claim or well actually received by the owner. "Proved developed reserves", are proved reserves which are expected to be recoverable through existing wells or mines with existing equipment and operating methods. "Proved reserves", are the estimated quantities of crude oil, natural gas, natural gas liquids and minerals which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known oil and gas reservoirs or from known mineral deposits and under existing economic and operating conditions. "Proved undeveloped reserves", are proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where relatively major expenditures are required for drilling and completion or from new mine operations. "Working interest", means the share of costs borne by an owner in the lease, claim or well. Crude oil and condensate volumes are expressed in barrels that are equivalent to 42 United States gallons. Gas volumes are expressed in Mcf or MMcf as determined at 60 degrees Fahrenheit and the legal pressure base that prevails in the state in which the reserves are located. PROPERTY ACQUISITION During Fiscal 2006, the Company did not acquire any new oil and gas properties or drilling prospects. During Fiscal 2006, the Company did acquire additional working interests from third parties in certain producing wells within the Company's existing holdings. Within the oil and gas sector, the Company faces competition from entities possessing substantially larger financial resources and staffs. The demand for domestically produced oil and gas remains high and should remain at these levels in the foreseeable future especially in light of the turmoil in the Middle East and high domestic and world demands for crude oil and natural gas. However, the domestic oil industry is subject to the fluctuations inherent in the global oil industry. Pricing for domestic natural gas is not as volatile as is the pricing for crude oil. Both natural gas and crude oil prices have fluctuated on the spot market and are a commodity traded on the mercantile exchanges. However, most of Daleco's products (natural gas and crude) are under contracts that provide Daleco with competitive pricing within its operating areas. During Fiscal 2007, the Company intends to focus on identifying niche acquisition and developmental opportunities within the oil and gas sector that can be economically exploited. MARKETING AND PRODUCTION OIL AND GAS Daleco does not refine any petroleum products. All of its production is sold to a variety of customers, which include pipelines, oil and gas gathering firms and other purchasers, pursuant to written agreements. Generally, sales of oil and gas are made at prevailing market prices or tied to a benchmark price under long term contracts. Typically, oil purchase agreements are of short duration, and provide for market sensitive pricing. Daleco is a party to two long-term gas sales contracts, which may be terminated on short notice if a price adjustment is unacceptable to Daleco. Daleco is not obligated to provide a fixed and determinable quantity of oil and gas under existing contracts or agreements. The availability of a market for oil and gas produced from the properties of Daleco and prices received are dependent upon numerous factors, substantially all of which are beyond the control of Daleco. Such factors include the level of domestic production, the availability of imported oil and gas, actions taken by foreign producing nations, the availability of distribution and transportation facilities and capacity thereon, the availability and price of fuels competitive with oil and gas, world and domestic demand for oil and gas and refined products, governmental regulation and taxation. Such factors make it impracticable to predict with any degree of certainty future demand for or prices of the oil or gas produced by the Company. Production of oil and gas is generally not considered to be of a seasonal nature, although severe weather conditions can temporarily curtail or preclude producing activities. Historically, the demand for natural gas decreases during the summer months and increases during winter months. However, in recent years this has not been the case with demand for natural gas being constant over the entire year as a result of the increased use of natural gas to fuel electric power generation. Daleco has never experienced any difficulties in selling any of its oil and gas. CUSTOMERS The following table identifies the Company's customers who purchased in excess of five percent (5%) of the Company's oil or gas during the fiscal year ended September 30, 2006. PRODUCTION AREA OF OPERATION NAME AND LOCATION OF PURCHASER PERCENTAGE ------------------------------------ ------------------------------------------------------------ ---------- TEXAS Oil Production Gulfmark Energy Houston, Texas 97% Gas Production ETC Pipeline (Aquila Southwest San Antonio, Texas 96% Pipeline Corp)(1) PENNSYLVANIA Gas Production Dominion (Peoples) Gas Corp. Pittsburgh, Pennsylvania 100% WEST VIRGINIA Gas Production(2) Volunteer Energy Services, Inc. Gahanna, Ohio 86% Gas Production Canaan Valley Gas Co. Davis, West Virginia 13% OKLAHOMA Oil Production Sand Point Oklahoma City, Oklahoma 12% Oil Production Tri-Power Resources Ardmore, Oklahoma 88% Gas Production Sand Point Oklahoma City, Oklahoma 9% Gas Production Tri-Power Resources Ardmore, Oklahoma 91% ---------- 1 Daleco's production of gas from its wells in the Giddings Field is sold to ETC Pipeline pursuant to a long term contract expiring January 31, 2010, which covers a number of Daleco's Texas leases. Subject to various conditions, ETC has agreed to buy all of Daleco's gas produced from the Giddings Field. Daleco receives eighty percent (80%) of the weighted average monthly sales price for liquid products extracted from gas delivered and eighty percent (80%) of the resale prices for dry gas. Prices received by Daleco are subject to deductions for taxes, compression and similar charges.2 Gas production from Daleco's Appalachian Basin properties is sold under contracts that are tied to a percentage of the sale price of the gas by the purchaser.Daleco does not believe that the loss of any one of these customers would have a material adverse effect upon Daleco's revenues, since there are numerous purchasers of oil and gas in the areas in which Daleco operates. PRODUCTION The following table summarizes the Company's net oil and gas production for the periods indicated, shown in barrels (Bbls) and thousand cubic feet (Mcf). FISCAL YEAR ENDED SEPTEMBER 30 ---------------------- 2006(1) 2005 ------- ------ TEXAS: Oil (Bbls) 10,864 11,460 Gas (Mcf) 75,167 53,147 Average Bbls/day 30 31 Average Mcf/day 206 146 PENNSYLVANIA: Gas (Mcf) 3,229 2,182 Average Mcf/day 9 6 WEST VIRGINIA: Gas (Mcf) 26,354 30,442 Average Mcf/day 72 83 OKLAHOMA: Oil (Bbls) 1,466 2,333 Gas (Mcf) 8,190 10,534 Average Bbls/day 4 6 Average Mcf/day 22 29 TOTALS: Oil (Bbls) 12,330 13,793 Gas (Mcf) 112,940 96,305 Average Bbls/day 34 38 Average Mcf/day 309 264---------- 1 During 2006, the Company satisfied its indebtedness to Sonata Investment Company, LTD. Consistent with the provisions of the Second Amended Loan, Sonata requested and was assigned sixty-six and two thirds percent (66 2/3%) of all of Tri-Coastal Energy, LP's oil and gas interests, and the figures for 2006 reflect such assignment. The following table summarizes for the periods indicated the average price per barrel (bbl) of oil, the average price per thousand cubic feet ("Mcf") of natural gas and the average production (lifting) costs per gas equivalent. In determining the price received by the Company and costs incurred, all expenses of operation have been attributed to Daleco's working interests and the revenues are attributed to Daleco's net revenue interests. For the purpose of determining MCF Equivalents ("MCFE"), one barrel of oil has been converted to gas at the rate of 1 barrel per 6 Mcf. FISCAL YEAR ENDED SEPTEMBER 30 ---------------- 2006 2005 ------ ------ TEXAS Average Sale Price Per Bbl $62.46 $41.13 Average Sale Price Per Mcf $8.79 $6.87 Average Production Cost Per Gas Equivalent (MCFE) $4.81 $4.30 PENNSYLVANIA Average Sale Price Per Mcf $9.12 $6.84 Average Production Cost Per Gas Equivalent (MCFE) $9.62 $18.09(1) WEST VIRGINIA Average Sale Price Per Mcf $9.48 $6.64 Average Production Cost Per Gas Equivalent (MCFE) $2.02 $1.71 OKLAHOMA Average Sale Price Per Bbl $64.30 $49.26 Average Sale Price Per Mcf $6.12 $4.99 Average Production Cost Per Gas Equivalent (MCFE) $4.33 $3.65 COMBINED PROPERTIES Average Sale Price Per Bbl $62.68 $48.13 Average Sale Price Per Mcf $9.43 $6.46 Average Production Cost per Gas Equivalent (MCFE) $4.46 $3.94---------- 1 This figure results from the Company's having incurred production costs during Fiscal Year 2005 but not receiving the production revenues for those periods until late in the first quarter of Fiscal 2006. WELLS AND ACREAGE The following tables set forth certain information as of September 30 (1): GROSS WELLS NET WELLS ------------------ --------------- WELL COUNT 2006 2005 2006 2005 -------------- ------ ------ ----- ----- Texas 29 30 9.64 17.65 Pennsylvania 2 2 2.00 2.00 West Virginia 7 7 2.41 2.41 Oklahoma 35 35 2.11 6.34 ------ ------ ----- ----- Total 73 74 16.16 28.4 ------ ------ ----- ----- GROSS ACRES NET ACRES ------------------ --------------- DEVELOPED ACREAGE 2006 2005 2006 2005 ----------------- ------ ------ ----- ----- Texas 4,357 4,456 771 1,415 Pennsylvania 1,280 1,280 1,280 1,280 West Virginia 2,480 2,480 693 693 Oklahoma 1,300 1,300 81 244 ------ ------ ----- ----- Total 9,417 9,516 2,825 3,632 ------ ------ ----- ----- GROSS ACRES NET ACRES ------------------ --------------- UNDEVELOPED ACREAGE 2006 2005 2006 2005 ------------------- ------ ------ ----- ----- Texas 1,519 1,357 554 1,264 Pennsylvania 4,818 4,818 4,818 4,818 West Virginia 2,997 2,997 920 920 Oklahoma 1,120 1,120 43 128 ------ ------ ----- ----- Total 10,454 10,292 6,335 7,130 ------ ------ ----- --------------- (1) During 2006, the Company satisfied its indebtedness to Sonata Investment Company, LTD. Consistent with the provisions of the Second Amended Loan, Sonata requested and was assigned sixty-six and two thirds percent (66 2/3%) of all of Tri-Coastal Energy, LP's oil and gas interests, and the figures for 2006 reflect such assignment. DRILLING ACTIVITY The following table shows the number of wells drilled by or on behalf of Daleco and the results for the period indicated. Such information should not be considered indicative of future performance of prospects of Daleco. There is no necessary correlation between the number of producing wells, whether developmental or exploratory, completed during any period and the aggregate reserves or future net income generated. EXPLORATORY WELLS ----------------------------- YEAR DRILLED PRODUCERS DRY HOLES TOTAL ------------ --------- --------- ----- 2006 0 0 0 2005 0 0 0 DEVELOPMENT WELLS ----------------------------- 2006 0 0 0 2005 0 0 0 Daleco did not participate in the drilling of any exploratory or development wells in Fiscal years 2006 or 2005. PROVED RESERVES Daleco causes to be prepared an annual estimate of its oil and gas reserves. Daleco has not filed reserves estimates with any United States authority or agency, other than estimates previously filed with the Securities and Exchange Commission. The following table sets forth the proved reserves of Daleco as of September 30, 2006, and September 30, 2005. The figures for the Company's Texas and Oklahoma properties were taken from a reserve report dated as of December 15, 2006, prepared by Netherland, Sewell & Associates, Inc., independent petroleum engineers, with the figures as of September 30, 2006, utilizing constant product prices in accordance with reporting requirements. Reserve estimates for Daleco's Pennsylvania and West Virginia properties were taken from a reserve report prepared by Hall Energy Inc. of Magnetic Springs, Ohio, dated November 24, 2006, with the figures as of September 30, 2006, utilizing constant product prices in accordance with reporting requirements. Hall Energy, Inc. is an independent petroleum engineering concern with an emphasis in the Appalachian and Ohio Basins. NET RESERVES YEAR ENDED RESERVES SEPTEMBER 30, ------------------ PROVED DEVELOPED RESERVES 2006(1) 2005 ------------------------- ------- ------ C X C (BBLS) Texas 19,826 31,380 Oklahoma 3,462 20,141 Pennsylvania 0 0 West Virginia 0 0 ------- ------- Total 23,288 51,521 ------- ------- GAS (Mcf) Texas 147,149 190,489 Oklahoma 20,327 79,199 Pennsylvania 10,861 2,434 West Virginia 301,796 310,762 ------- ------- Total 480,133 582,884 ------- ----------------- (1) During 2006, the Company satisfied its indebtedness to Sonata Investment Company, LTD. Consistent with the provisions of the Second Amended Loan, Sonata requested and was assigned sixty-six and two thirds percent (66 2/3%) of all of Tri-Coastal Energy, LP's oil and gas interests, and the figures for 2006 reflect such assignment. YEAR END RESERVES SEPTEMBER 30, -------------------- PROVED, UNDEVELOPED RESERVES 2006(1) 2005 ---------------------------- ------- --------- C X C (BBLS) Texas 77,066 202,626 Oklahoma 0 0 Pennsylvania 0 0 West Virginia 0 0 ------- --------- Total 77,066 202,626 ------- --------- GAS (Mcf) Texas 237,661 1,168,222 Oklahoma 0 0 Pennsylvania 0 0 West Virginia 0 0 ------- --------- Totals 237,661 1,168,222 ------- ------------------- (1) During 2006, the Company satisfied its indebtedness to Sonata Investment Company, LTD. Consistent with the provisions of the Second Amended Loan, Sonata requested and was assigned sixty-six and two thirds percent (66 2/3%) of all of Tri-Coastal Energy, LP's oil and gas interests, and the figures for 2006 reflect such assignment.All of the above stated reserves are located on-shore within the United States. ESTIMATED FUTURE NET REVENUES AND PRESENT WORTH Estimated future net revenues of Daleco's net oil and gas reserves at the date indicated and the present worth thereof employing a ten percent (10%) discount factor is set forth in the following tabulation: FUTURE NET REVENUES SEPTEMBER 30 2006(1) 2005 ------------------------------------- ---------- ----------- Proved Oil and Gas Reserves $4,780,208 $20,990,167 Proved Developed Oil and Gas Reserves $2,440,608 $5,571,767 PRESENT WORTH SEPTEMBER 30 2006(1) 2005 ------------------------------------- ---------- ----------- Proved Oil and Gas Reserves $2,918,062 $14,665,132 Proved Developed Oil and Gas Reserves $1,589,062 $3,753,532---------- (1) During 2006, the Company satisfied its indebtedness to Sonata Investment Company, LTD. Consistent with the provisions of the Second Amended Loan, Sonata requested and was assigned sixty-six and two thirds percent (66 2/3%) of all of Tri-Coastal Energy, LP's oil and gas interests, and the figures for 2006 reflect such assignment. The present value of estimated future net revenues set forth above is computed using the estimated future net revenues and a discount factor of ten percent (10%) over the projected life of each property. Petroleum engineering is not an exact science. Information relating to Daleco's oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of the future net revenues therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties compared with production from other producing properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices and future operating costs, severance and excise taxes, development costs, work-over and remedial costs, all of which may in fact vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable reserves of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary. Daleco emphasizes that the actual production, revenues, severance and excise taxes, development expenditures and operating expenditures with respect to its reserves will likely vary from such estimates, and such variances may be material. Persons should not assume that the estimates of Daleco's future reserves are a guaranteed figure. The present values shown above should not be construed as the current market value of the estimated oil and gas reserves attributable to Daleco's properties. In accordance with applicable requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from proved reserves are based, generally, on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on operating costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of the incurrence of expenses in connection with development of oil and gas properties. Inaddition, the ten percent (10%) discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Discounted future net revenues, no matter what discount rate is used, are materially affected by assumptions as to the timing of future production and future expenses which may and often do prove to be inaccurate. RESERVES REPORTED TO OTHER AGENCIES There were no estimates or reserve reports of Daleco's proved domestic net oil or gas reserves filed with any governmental authority or agency, other than the Securities and Exchange Commission, during the years ended September 30, 2005, or September 30, 2006. DELIVERY COMMITMENT Daleco is not obligated to provide a fixed and determinable quantity of oil and gas in the future under existing contracts or agreements. MINERAL INTERESTS DEFINITIONS: "Cu Yd", "Cu M", mean units of volume in terms of Cubic Yards and Cubic Meters, respectively. "Competent Person", is a person who is a member of a professional society for earth scientists or mineral engineers, or has other appropriate qualifications. "Development Stage", means a party engaged in the preparation of an established commercially mineable deposit for its extraction which is not in the production stage. "Exploration Stage", means a party engaged in the search for mineralization and/or mineral deposits to prove the existence of a material of having the reasonable prospects for eventual economic development. "Gross", means, as it applies to acreage or mining claims, the numbers of acres or mining claims in which the Company has a direct operating interest. "Inferred Mineral Resource", is that part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and /or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which is limited or of uncertain quality and/or reliability.(1) "Indicated Mineral Resource", is that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are too widely or inappropriately spaced to confirm geological continuity and/or grade continuity but are spaced closely enough for continuity to be assumed. (1)---------- (1) As defined in "A Guide for Reporting Exploration Information, Mineral Resources and Mineral Reserves" dated March 1, 1999, by The Society for Mining, Metallurgy and Exploration. "Measured Mineral Resource", is that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are spaced closely enough to confirm geological and/or grade continuity. (1) "Mineral Reserve", is the economically mineable part of a Measured or Indicated Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction is reasonable justified. Mineral Reserves are sub-divided in order of increasing confidence into Probable Mineral Reserves and Proved Mineral Reserves. "Mineral Resource", is a concentration or occurrence of material of intrinsic economic interest in or on the Earth's crust (a deposit) in such form and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources are subdivided in order of increasing geological confidence, into Inferred, Indicated and Measured categories. (1) "Mining Claims", are regulatory and/or legal descriptions of mineral property rights as defined by State and Federal Mineral Codes. "Net", as it applies to acreage mining claims refers to the sum of the fractional ownership interests owned by the Company in gross acres mining claims. "Production Stage", means a party engaged in the exploitation of a mineral deposit (reserve). "Probable (Indicated) Reserves", are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) recoverable minerals, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) recoverable minerals, is high enough to assume continuity between points of observation. "Proven (Measured) Reserves", are reserves for which (a) quantity is computed from dimensions revealed in outcroppings, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. "Reserve", is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. "Tons", mean a unit of weight equal to 2,000 pounds (lbs.), 906 kilograms.---------- (1) As defined in "A Guide for Reporting Exploration Information, Mineral Resources and Mineral Reserves" dated March 1, 1999, by The Society for Mining, Metallurgy and Exploration. GENERAL The mining and marketing of non-metallic industrial minerals is highly competitive; however, Daleco believes that the locations and quality of its mineral deposits will benefit its future development and sales efforts. Daleco's ability to develop these mineral deposits is dependent on its success in bringing in strategic partners with experience in or a demand for specific minerals and raising capital through third parties. In fiscal year 2005, the Company entered into two agreements with Tecumseh Professional Associates for the exploration, exploitation, development and marketing of its Sierra Kaolin(TM) and Calcium Carbonate. During fiscal year 2006, the Company and its joint venture partner, as appropriate, continued the evaluation of the Company's three minerals, kaolin, zeolite and calcium carbonate. The Company continues to market its zeolite based products such as its ReNuGen(TM) a product utilized in wastewater treatment applications. By letter dated May 4, 2006, TPA advised the Company of its intent not to continue as the operator of the Company's Calcium Carbonate lease as of August 4, 2006. As such, the Development and Operating Agreement (Calcium Carbonate) terminated, in its entirety. At September 30, 2006, the Company was and continues to be involved in discussions with a potential joint venture partner for the development and testing of additional zeolite based products and to provide capital for market introduction. MINERAL DEPOSITS As of September 30, 2006, the estimated resource quantities ("Mineral Resources") associated with the Company's kaolin claims in Sierra County, New Mexico, zeolite leases and fee acreage in Presidio County, Texas, zeolite claims in Beaver County, Utah, and calcium carbonate lease in Cibola County, New Mexico, were evaluated and estimated by James Harrison, an independent professional mining engineer and competent person, are outlined below: GROSS STATE MINERAL ACRES RESOURCE TONNAGE ---------- ----------------- ----- ---------------- Texas Zeolite 5,200 1,000,000,000 Utah Zeolite 220 500,000,000 New Mexico Calcium Carbonate 5,020 1,200,000,000 New Mexico Kaolin 800 200,000,000(1)---------- (1) In Fiscal year 2004, CA Properties, Inc., filed approximately 23 Federal mining claims covering 1,875+/- acres immediately adjacent to and surrounding its existing kaolin deposit in New Mexico. In addition, in Fiscal Year 2005, the Company filed 8 Lode claims covering approximately 160 acres covering a portion of its existing holdings. The Company has maintained all of its claims during Fiscal year 2006. The Company has not tested via coring or trenching operation the acreage associated with its additional mining claims. Therefore it has not assigned additional resource quantities of kaolin beyond those associated with its base claim holdings of 800 acres, but will do so as development of its kaolin deposit progresses. MINERAL MINING The Company's minerals are in a Development Stage and/or Exploration Stage and not in a Production Stage. All of the Company's mineral extraction, when required, is conducted by third party contractors engaged by CAMI or its joint venture partners. The Company does not conduct any direct mining/extraction activities of its own. As such, the Company is subject to "pass through" costs for the mining, extraction, crushing or preparation of its minerals as its minerals products are distributed for sale. Likewise, the third party operator is solely responsible for the type of equipment utilized on each mineral site, subject to the third party contractor's compliance with all Federal, state and local laws, regulations and ordinances for the conduct of operations, environmental protection and safety of operations. InFebruary and March 2005, the Company entered into two contracts with Tecumseh Professional Associates, Inc. ("TPA"), for the mining of the Company's Sierra Kaolin(TM) claims and Mesa de Oro calcium carbonate lease. By letter dated May 4, 2006, TPA gave the Company notice, consistent with the Agreement covering the Mesa de Oro calcium carbonate lease, that it would not be continuing to act as the operator of the Mesa de Oro calcium carbonate lease as of August 4, 2006. MARKETING OF MINERALS Through September 15, 2004, the marketing of the Company's minerals was covered by the Company's Marketing Agreement with Sumitomo Corporation of America. As a result of the Company's entering into the First Amendment to the Marketing and Distribution Agreement with Sumitomo on September 15, 2004, Sumitomo no longer has an exclusive marketing arrangement with the Company (see "Marketing Agreement below). On February 14, 2005, and March 11, 2005 (See Exhibit 10.39 and 10.40), the Company entered into two agreements with Tecumseh Professional Associates of Albuquerque, New Mexico ("TPA") to mine, develop and market the Company's calcium carbonate deposit minerals in Cibola County, New Mexico, and its Sierra Kaolin(TM) deposit minerals in Sierra County, New Mexico. By letter dated May 4, 2006, TPA gave the Company notice, consistent with the Agreement covering the calcium carbonate lease that it would not be continuing to act as the marketing agent for the Company's calcium carbonate as of August 4, 2006. KAOLIN. Through September 30, 2006, the Company did not produce commercial quantities of its Sierra Kaolin(TM). Sierra Kaolin(TM) was mined in sufficient quantities, in previous years, for testing by prospective customers. Under its Agreement with TPA, the pre-development evaluation program of the Company's Sierra Kaolin(TM) claims continued during fiscal year 2006. This program focused on evaluating in detail approximately 32 acres (+/-1%) of the Company's 2,720 acre mineral claim block which is most likely to be subjected to initial development. The initial phase of the program consisted of drilling 16 core holes (completed in fiscal year 2005) from which 1,442 feet of subsurface material was recovered. During fiscal year 2006, this subsurface material was broken down into over 600 samples which were subjected to detailed testing (second phase) at three different laboratories. The testing phase of the project included roughly 20,000 tests which now comprise an extensive Sierra Kaolin (TM) data base. This data base was then utilized by the consulting firm of Pincock, Allen & Holt to develop detailed geologic and resources models of the Sierra Kaolin(TM) deposit test area. Based on this work, it was determined that the core tested area contained approximately 1,400,000 tons of Indicated Mineral Resources and 2,000,000 tons of inferred mineral resource. The Company believes that these volumes are sufficient to proceed with next phase of the project which will include further work to quantify Measured mineral resources and Mineral Reserves, product identification, process flow sheet and detail design, as well as marketing and capital requirements which will continue in the 2007 fiscal year. LIMESTONE (CALCIUM CARBONATE "TRAVERTINE"). During the 12 month period ended September 30, 2006, 2,500 tons of calcium carbonate were sold from the Company's Limestone Lease block in Cibola County New Mexico for use as ground cover aggregate. During fiscal year 2006, Denali Enterprises coordinated the deliveries of the aggregate material local contractors from the Mesa Del Oro mine site. To facilitate the identification of additional markets, the Company contracted Hains Technology Associates (Hains) to perform a study of the opportunities for utilizing the calcium carbonate in the manufacturing of cement. The Hains study reviewed data available covering roughly 4,540 acres out of the 5,180 acres controlled by the Company and investigated potential market opportunities. Based on this work and after adjusting for the potential impact of ACEC (Areas of Critical Environmental Concern) designations in some sections of the held acreage, an estimated resource of approximately 477,600,000 tons of high quality calcium carbonate was identified. The material was also determined to be suitable for the manufacture of cement. The study indicated that the regional cement market could absorb additional capacity over the near and intermediate term time frame. The Company is continuing to investigate alternatives to address this and other high volume markets. ZEOLITE. Through September 30, 2006, the Company mined roughly 1,300 tons of material for the preparation of samples and test products. Roughly 60 tons have been sold or distributed as the Company's trademarked ReNuGen(TM) zeolite based wastewater treatment product. The Company has also provided material for various environmental testing and waste purification projects and currently has approximately 1,000 tons available for product processing. During Fiscal year 2006, the Company initiated a confirmation geologic field mapping project and commenced a resource/reserve definition program and a core hole drilling and sampling program to delineate Mineral Resources and Mineral Reserves in sufficient quantities to support large scale mining operations. These efforts targeted the roughly 500 acres (+/- 10%) of the 5,200 acres held by the Company which are most likely to be subjected to initial development. The analytical results of these efforts are expected during the first half of Fiscal year 2007. At September 30, 2006, the Company is also exploring alternatives for the development and marketing of additional zeolite based products for introduction into the industrial and environmental markets. SUSTAINABLE FOREST INDUSTRIES INTERESTS TIMBER INTERESTS Daleco has terminated this activity.MARKETING AGREEMENTS Effective November 16, 2001, Daleco entered into a Master Distribution and Marketing Agreement with Sumitomo Corporation of America. The marketing agreement covers Daleco's mineral interests, timber interests, and products covered by Clean Age Minerals, Inc.'s Patent. The marketing agreement establishes a "Territory" consisting of the United States, Canada, Mexico and Japan (Japan is not included in the Territory for Kaolin), in which Sumitomo Corporation of America had the exclusive rights to market and distribute the minerals, timber and Clean Age Minerals Inc.'s patented products. The marketing agreement had an initial term of ten (10) years with automatic successive renewal periods of twenty (20) years, unless the marketing agreement is otherwise terminated in accordance with its provisions. On September 15, 2004, the Company and Sumitomo Corporation of America entered into the First Amendment to the Master Distribution and Marketing Agreement ("First Amendment"). Under the First Amendment, Sumitomo continued to have the rights, but not exclusive rights, to market the Company's minerals and timber. Any sales of the minerals by Sumitomo will be on the same terms as any third party sales. The Company will no longer be required to share any profits with Sumitomo. Sumitomo relinquished all warrants issued under the Master Distribution and Marketing Agreement as well as certain buy-out provisions and other rights and obligations of Sumitomo. On or about December 2, 2004, the Company entered into a Memorandum of Understanding ("MOU") with Tecumseh Professional Associates ("TPA") for the management, development, exploration and marketing of the Company's Sierra Kaolin(TM) claims, located in Sierra County, New Mexico. (See Exhibit 10.37 attached to the Company's Form 10-KSB for the fiscal year ended September 30, 2004). Pursuant to the MOU, the Company and TPA entered into the Development and Operating Agreement (Calcium Carbonate) on or about February 14, 2005 (See Exhibit 10.38). On or about March 11, 2005, the Company entered into the Sierra Kaolin(TM) Operating License with TPA (See Exhibit 10.39). Under these agreements, TPA has assumed the duties to mine, test, exploit, and market the Company's Sierra Kaolin(TM) and calcium carbonate. By letter dated May 4, 2006, TPA advised the Company of its intent not to continue as the operator of the Company's calcium carbonate lease as of August 4, 2006. As such, the Development and Operating Agreement (Calcium Carbonate) has terminated. Management of the Company directs the development of the Company's zeolite and calcium carbonate minerals.GOVERNMENT REGULATIONS OIL AND GAS There are statutory and/or regulatory provisions regulating Daleco's oil and gas operations. These statutes allow administrative agencies to promulgate regulations in connection with the development, production and sale of oil and gas, and to establish allowable rates of production. Daleco's activities are subject to laws and regulations relating to environmental quality and pollution control. Although the cost of compliance with such legislation and regulations has not been material to date, such laws and regulations could substantially increase the cost of carrying on these activities and could prevent or delay the commencement or continuance of a given operation. Daleco believes that existing legislation and regulations have had no material adverse effect on its present method of operations. In the future, federal, state and local environmental controls may require Daleco to make significant expenditures, but neither the probability nor the magnitude of the expenditures, if any, can be predicted. The discharge of oil, gas or the by-products of drilling, reworking and producing oil and gas into the air, soil or water may give rise to liabilities for the restoration of the environment and to third parties. A variety of federal and state laws and regulations govern the environmental aspects of the production, transportation and processing of hydrocarbons and may, in addition to other laws and regulations, impose liability in the event of a discharge or seepage (whether or not accidental). Compliance with such laws and regulations could increase the cost of the exploration, production and development of oil and gas reserves although Daleco does not currently anticipate that compliance will have a material adverse effect on the ability of Daleco to continue in the exploration, development or production of its existing reserves and the development and/or acquisition of new reserves. Daleco does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry. Daleco believes that it is in substantial compliance with all existing rules and regulations. No assurance can be given, however, that environmental laws will not, in the future, result in more onerous regulations causing a market increase in the cost of production, development and exploration or otherwise adversely affect Daleco's operations or financial ability to maintain its existing reserves. Although Daleco maintains insurance coverage for certain liabilities, to include insurance to cover specific environmental risks, such as seepage or discharge, other environmental risks may not be fully insurable. MINERAL INTERESTS Daleco's activities are subject to Federal and state laws and regulations relating to environmental quality and pollution control as well as safety rules as prescribed by Occupational Safety and Health Association. At present, Daleco does not intend to engage in mining activities on its own. Daleco intends to retain, and has to date retained, the services of outside contractors to carry out such activities (See agreements with TPA attached hereto by reference as Exhibits 10.38 and 10.39). Daleco intends to enter into a new agreement with a yet unidentified party to develop the Mesa de Oro calcium carbonate lease. Daleco believes that such practices will result in substantial savings in the future. Daleco's contract miner for its calcium carbonate deposits in New Mexico and Zeolite deposits in Texas have obtained mining permits covering a portion of the property. Most of the Company's mineral interests in New Mexico (limestone and kaolin) and Utah (zeolite) are on either Federal land or lands administered by the Bureau of Indian Affairs ("BIA"). As such, the Company must also comply with the rules and regulations imposed for the development of Federal mining leases or BIA leases. The Marfa Properties (zeolite) in Texas areon fee and leased acreage and are subject to Federal and state laws and regulations governing open pit extraction.TRANSPORTATION OIL AND GAS The Federal Energy Regulatory Commission under the Natural Gas Policy Act of 1983 and the Natural Gas Act of 1938 regulates the sale and transportation of natural gas in the interstate market. The Natural Gas Wellhead Decontrol Act of 1989 eliminated all gas price regulation effective January 1, 1993. As a result of FERC Order 636, pertaining to the restructuring of the interstate transportation of natural gas pipelines, interstate pipelines are required to provide producers service on a non-discriminatory "open access" basis, although there are provisions which allow certain categories of gas to gain preference over others. Currently the majority of Daleco's gas is sold to interstate carriers. The Company moves its gas to the interstate carriers over a gathering system owned by the Company or joint venture partners in the Company's wells. The Company has experienced no difficulty in moving or selling its gas. The Company is not a regulated interstate carrier of natural gas and as such it is not a regulated pipeline under the National Gas Policy Act of 1983 or the National Gas Act of 1938. MINERAL INTERESTS All of the Company's mineral deposits are serviced by all weather paved or unpaved roads. The Marfa zeolite property in Texas is adjacent to a railroad line that can be utilized to transport minerals to market. The Mesa de Oro calcium carbonate deposit is in close proximity to a railroad siding junction but would require over-land transportation. The Utah zeolite and New Mexico Sierra Kaolin(TM) zeolite deposits also have access to rail lines but will require over-land transport prior to rail transport.PARTNERSHIPS Deven Resources, Inc. sponsored Deerlick Royalty Partners L.P. which was formed in April, 1993. As managing general partner, Deven Resources, Inc., is subject to full liability for the obligations of the partnership although it is entitled to indemnification to the extent of the assets of the partnership. Since "partnership programs" constitute a "security" under the Securities Act of 1933, Deven Resources, Inc., is also subject to potential liability for failure to comply with applicable federal and state securities laws and regulations. DEERLICK ROYALTY PARTNERS, L.P. Deerlick Royalty Partners owns overriding royalty interests covering 2,043 gross acres in the Deerlick Creek coalbed methane field, Tuscaloosa County, Alabama. Deerlick Royalty Partners is structured on a carried participation basis.ACQUISITIONS/MERGERS DALECO'S 16/6, INC. Effective September 3, 2004, Daleco merged its wholly owned subsidiary, 16/6, Inc., into the Company. As such, as of September 3, 2004, 16/6, Inc., ceased to exist as a separate entity with all of the 16/6, Inc., information technology passing to the Company. During Fiscal year 2005, the information technology assets of the Company were sold.STOCK PURCHASE AGREEMENTS: TERRA SILEX AGREEMENT On September 20, 2001, Daleco entered into a Stock Purchase Agreement with Terra Silex Holdings, LLC pursuant to which Daleco agreed to sell Terra Silex up to 1,800,000 shares of common stock at a price of $1.25 per share. At the time of the Terra Silex Agreement, the market price of Daleco's Common Stock was $1.05. The Terra Silex Agreement provided for the purchase of the common stock in three (3) tranches. At closing, Terra Silex acquired 400,000 shares. The second tranche was to have closed within sixty (60) days, subject to Terra Silex's satisfactory completion of its due diligence. However, Terra Silex requested an extension. The second tranche for 400,000 shares did close on November 20, 2001. The third tranche was to have closed within 60 days of the closing of the second tranche. On February 15, 2002, Terra Silex advised the Company that it would not fund the third tranche. As such, the warrant to which Terra Silex was entitled under its stock purchase agreement was capped at 250,000 shares. This warrant has an exercise price of $1.25 per share and expires on December 31, 2006. By action of the Board of Directors on December 14, 2006, the expiration dated for the Terra Silex Warrant was extended until September 16, 2007. Terra Silex has not exercised its warrant either in whole or in part. SUMITOMO CORPORATION OF AMERICA SECURITIES PURCHASE AGREEMENT Effective November 16, 2001, Daleco entered into a Stock Purchase Agreement with Sumitomo Corporation of America. The Sumitomo Corporation of America Securities Purchase Agreement provided for the purchase of 640,000 shares of Daleco's common stock at a price of $1.25 per share. The Sumitomo Corporation of America Securities Purchase Agreement also granted Sumitomo Corporation of America 1,700,000 warrants, 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 Sumitomo Corporation of America Securities Purchase Agreement provided for Sumitomo Corporation of America to nominate one person to serve as a director of Daleco and also to have an "observer" present at the meetings of the Board of Directors The Agreement also allowed Sumitomo to nominate a second director upon the acquisition of an additional 1,500,000 shares of Daleco Common Stock. On September 15, 2004, the warrants granted Sumitomo Corporation of America were cancelled in accordance with the provisions of the First Amendment to the Marketing and Distribution Agreement as was its right to nominate a director. (See Marketing Agreement below and Exhibit 10.36 to this Form 10-KSB.) Sumitomo's one director on the Board of Directors, Mr. Graustein, resigned from the Board of Directors on June 15, 2004.MARKETING AGREEMENT Also on November 16, 2001, Daleco entered into a Master Distribution and Marketing Agreement with Sumitomo Corporation of America ("MD&MA"). Under the Marketing Agreement, Sumitomo Corporation of America ("Sumitomo") received 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 per share for the next 162,000 shares and $3.00 per share for the remaining 270,000 shares. On September 15, 2004, the Company and Sumitomo entered into the First Amendment to the MD&MA. Under the First Amendment, the warrants for 540,000 shares of Daleco Common Stock granted Sumitomo under the MD&MA and the warrants for 1,700,000 shares of Daleco Common Stock granted Sumitomo under the Stock Purchase Agreement dated as of November 16, 2001 were cancelled. The Marketing Agreement was amended to delete Sumitomo's exclusive rights to market the Company's products. Sumitomo's right to nominate one or more directors to the Company's Board of Directors wasalso terminated under the First Amendment. Mr. Graustein, Sumitomo's nominee, resigned from the Board of Directors effective June 15, 2004 (See Exhibit 10.36 to this 10-KSB.) On or about December 2, 2004, the Company entered into a Memorandum of Understanding ("MOU") with Tecumseh Professional Associates ("TPA") for the management, development, exploration and marketing of the Company's calcium carbonate and kaolin minerals (See Exhibit 10.37 attached to the Company's Form 10-KSB for the fiscal year ended September 30, 2004). Pursuant to the MOU, the Company and the TPA entered into the Development and Operating Agreement ("Calcium Carbonate") on or about February 14, 2005) (See Exhibit 10.38). On or about March 11, 2005, the Company entered into the Sierra Kaolin(TM) Operating License with TPA (See Exhibit 10.39). Under the agreements between the Company and TPA, TPA assumed the duties to mine, test and market the Company's Sierra Kaolin(TM) and calcium carbonate. By letter dated May 4, 2006, TPA advised the Company that it was electing to terminate the February 14, 2005, agreement effective as of August 4, 2006. Under the Contract, TPA remained obligated to satisfy the annual obligations under the Company's lease covering the calcium carbonate property. Management of the Company continues to direct the development efforts pertaining to its zeolite mineral deposit.PATENTS C.A. SERIES Clean Age Minerals, Inc., is the owner of U.S. Patent No. 5,387,738, upon which an engineered product is based which utilizes all naturally occurring non-hazardous minerals for the remediation of sites contaminated with hazardous and/or toxic materials. Typically, the remediation of these sites is necessary in order to meet quality control regulation for air, land and water enforced by the Environmental Protection Agency and various other state and Federal environmental regulatory agencies. The patented engineered products are marketed by Clean Age Minerals, Inc., under the trademark of the CA Series. Each of these engineered environmental products is designed for specific project site requirements based on the nature of the on-site contaminant, the size of the project and specific treatment requirements. The CA Series have been proven effective, through the use of a catalytically enhanced chemical exchange process, in permanently changing many hazardous metals to a non-hazardous state and, through molecular sieve and/or absorption processes, in removing ("site remediation") many hazardous hydrocarbon and nitrate contaminants. The processing of contaminate materials using the patented CA Series technology is designed as an on-site operation. Internal studies have shown that because the CA Series of engineered products are designed to be used at the remediation project site, substantial cost savings can be generated as compared to other remediation methods requiring extraction, removal and incineration. The on-site use of CA engineered products can provide a complete and permanent environmental cleanup of the hazardous materials in that the "treated" materials are converted into non-hazardous permanently non-leachable substances that can remain in place. Through laboratory and field tests, the CA Series engineered products have been proved to be effective in the remediation of contamination caused by hydrocarbons and petroleum products, chemicals as well as toxic metallic compounds in rendering the toxic and hazardous materials to a permanently non-toxic and non-hazardous stage.TRADEMARKS The Company has applied for Trademarks governing the CA Series of Products CA-1 through CA-6. The Company has applied for the trademark for the Company's "RENUGEN(TM)", a product used to enhance the efficacy of conventional waste water treatment plants and has obtained the trademarkSIERRA KAOLIN(TM) to cover its New Mexico Kaolin. The Company has filed for a trademark for its "ORO GRANDE GOLD(TM)" covering one of its calcium carbonate products. The Company has also