U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-18995
INTERLINE RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0461653
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
160 West Canyon Crest Drive, Alpine, UT 84004
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 756-3031
Securities registered pursuant to Section 12(b) of the Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange
Act: None
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
[X] No [ ].
Common stock outstanding at May 14, 1996 - 13,951,052 shares of
$.005 par value Common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
Part I Financial Information
Condensed consolidated balance sheet for March 31, 1996
(unaudited) and December 31, 1995
Condensed consolidated statement of operations for three
and six months ended March 31, 1996 and 1995 (unaudited)
Condensed consolidated statement of cash flow for six
months ended March 31, 1996 and 1995 (unaudited)
Notes to condensed consolidated financial statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other Information
Item 1 Legal Proceedings
Item 2 Changes in the Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6(a) Exhibits
Item 6(b) Reports on Form 8-K
Signatures
INTERLINE RESOURCES
CORPORATION
AND SUBSIDIARIES
PART I - ITEM 1
FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
The condensed financial statements included have been prepared by
the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. The Company presumes that the user of this
interim financial information has read or has access to the
audited financial statements for the preceding fiscal year----and
in that context, this disclosure is adequate for a fair
presentation of the Company's financial position.
In the opinion of the Company, all adjustments consisting of only
normal recurring adjustments as of March 31, 1996, have been
made. The results of operations for the interim period is not
necessarily indicative of the results to be expected for the
entire year.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, Dec. 31,
1996 1995
(unaudited)
Assets
Current assets:
Cash and cash equivalents $245,942 $1,705,219
Accounts receivable - trade $2,790,892 2,851,804
Income taxes receivable 80,000 80,000
Inventories 112,504 117,272
Note receivable - current portion 40,200 40,200
Other current assets 1,304,723 786,067
Total current assets 4,574,261 5,580,562
Property, plant and equipment 12,878,951 12,698,402
Accumulated depreciation and depletion (2,522,923) (2,237,216)
Net property, plant & equipment 10,356,028 10,461,186
Note receivable 176,415 188,238
Technology and marketing rights 1,929,696 1,953,598
Other assets 388,997 95,563
Total assets $17,425,397 $18,279,147
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet - Continued
March 31, Dec. 31,
1996 1995
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $4,073,180 $4,492,790
Accrued liabilities 393,223 737,201
Current portion of long-term debt 2,482,881 1,187,991
Other current liabilities 120,143 484,847
Total current liabilities 7,069,427 6,902,829
Long-term debt less current maturities 2,339,225 2,463,247
Deferred income 923,840 929,445
Total liabilities 10,332,492 10,295,521
Stockholders' equity:
Preferred stock - $.01 par value. 25,000,000
shares authorized; 1,000,000 series
A shares authorized; 0 series A shares
issued and o/s - -
Common stock - $.005 par value. 100,000,000
shares authorized; 13,951,052 shares and
13,951,052 shares issued and outstanding
at March 31, 1996 and December 31, 1995,
respectively 69,755 69,755
Additional paid-in capital 8,574,383 8,574,383
Retained earnings (1,551,233) (660,512)
Total stockholders' equity 7,092,905 7,983,626
Total liabilities & stockholders' equity $17,425,397 $18,279,147
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
Three months ended
March 31,
1996 1995
Revenue $5,001,054 $2,830,205
Direct costs 4,267,851 1,834,423
Gross margin 733,203 995,782
Selling, general and
administrative expenses 833,020 632,438
Research and development 332,230 107,635
Depreciation, depletion and amortization 285,707 179,873
Income (loss) from operations (717,754) 75,836
Other income (expense) net
Interest income (expense) (62,839) (59,916)
(Loss) in investment (110,128) -
Income (loss) before income tax benefit (890,721) 15,920
Income tax (benefit) provision
Current - 4,000
Deferred - -
Total tax (benefit) 0 4,000
Net income (loss) ($890,721) $11,920
Income (loss) per common share: ($0.06) $0.00
Weighted average shares o/s 13,951,052 13,336,474
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
Three months ended
March 31,
1996 1995
Cash flows from operating activities:
Net income (890,721) 11,920
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 285,707 179,873
(Gain) loss on disposal of asset - -
Common stock issued for services - -
(Increase) decrease in:
Accounts receivable 60,912 59,439
Other assets (518,656) (4,253)
Income tax receivable - 4,000
Prepaid expenses - -
Inventories 4,768 (54,460)
Increase (decrease) in:
Accounts payable (419,610) (793,879)
Accrued liabilities (343,978) (33,281)
Deferred income (5,605) (254,169)
Other current liabilities (364,704) 130,740
Net cash provided by operating
activities (2,191,887) (754,070)
Cash flows from investing activities:
(Increase) decrease in notes receivable 11,823 -
(Increase) decrease in general partnership (293,434) -
Purchase of technology and marketing rights 23,902 (42,815)
Purchase of property, plant and equipment (180,549) (939,934)
Net cash (used in) investing activities (438,258) (982,749)
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows - Continued
(Unaudited)
Three months ended
March 31,
1996 1995
Cash flows from financing activities:
Proceeds from line of credit - (35,618)
Proceeds from debt obligations 1,550,000 84,000
Proceeds from issuance of common stock - 498,780
Payment on long-term debt (379,132) (144,143)
Net cash provided by financing activities 1,170,868 403,019
Net (decrease) in cash (1,459,277) (1,333,800)
Cash, beginning of quarter 1,705,219 2,200,035
Cash, ending of quarter 245,942 866,235
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Oil and Gas Accounting
The Company uses the "successful efforts" method to account
for oil and gas operations. The use of this method results in the
capitalization of costs related to acquisition, exploration, and
development of revenue producing oil and gas properties. The
costs of unsuccessful exploration efforts are expensed in the
period in which they are determined unrecoverable by future
revenues. Provision for depreciation and depletion of oil and gas
properties is based on the units of production method, based on
proven oil and gas reserves.
Segment information concerning oil and gas reserves and
related disclosures are not presented since they are not
significant in relation to the financial statements taken as a
whole.
Construction Accounting
Construction revenues are recognized on the percentage-of-
completion method of accounting. Profits on contracts are
recorded on the basis of "cost-to-cost" determination of
percentage of completion on individual contracts, commencing when
progress reaches a point where cost and estimate analysis and
other evidence of trend are sufficient to estimate final results
with reasonable accuracy. That portion of the total contract
price which is allocable to contract expenditure incurred and
work performed is accrued as earned income. At the time a loss on
contract becomes known, the entire amount of the estimated
ultimate loss is accrued. Claims for additional revenue are
recognized when settled. The aggregate of cost incurred and
income recognized on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of
billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current liability.
Inventories
Inventories consisting of supplies and miscellaneous
material are recorded in the financial statements at their
aggregate lower or cost (first-in, first-out) or market.
Income per Common Share
Income per share of common stock is calculated based on the
weighted average number of common shares outstanding during the
period. The weighted average shares for the three months ended
March 31, 1996 and 1995 is 13,951,052 and 13,336,474,
respectively. Fully diluted income per share information is not
presented as the per share amounts are not different from
presented per share amounts.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property, Plant and Equipment
Property, plant and equipment are carried at cost.
Depreciation is computed using straight-line and accelerated
methods. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized as income
for the period. The cost of maintenance and repairs is charged to
income as incurred; significant renewals and betterments are
capitalized. Deductions are made for retirements resulting from
renewals or betterments. The estimated useful lives are as
follows:
Building and equipment 15-25 years
Equipment and vehicles 3-10 years
Amortization
The Company has amortized its marketing and technology
rights for the used oil refining process over seventeen years.
This period approximates the assets' useful lives.
Cash Equivalents
For purposes of the consolidated statement of cash flows,
cash includes all cash and investments with original maturities
to the Company of three months or less.
Convertible Debt
During 1994, the Company issued a $250,000 senior
convertible note payable to an individual. The note bears
interest at 10% and is due in lump sum on August 29, 1996. After
December 31, 1994, the note is convertible in full to 67,750
shares of the Company's restricted common stock at any time
before the due date, at the option of the note holder.
Senior Secured Note
On February 29, 1996 the Company obtained $1,500,000 in a 6%
senior secured note from a related individual. The obligation is
due August 29, 1996. In the event of a default on the note, the
principal can be converted to up to 468,750 shares of the
Company's common stock at the price of the lesser of $3.20 per
share or 80 percent of the average closing price for the
Company's shares for the five consecutive trading days preceding
the date of conversion. The note was secured by all of the issued
and outstanding stock of two subsidiaries, Interline Energy
Services and Gagon Mechanical Contractors.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Common Stock
During the year ended December 31, 1994 as a condition for a
private placement of the Company's restricted common stock, the
Company entered into an agreement which contains certain
restrictive convenants. The Company may not sell its restricted
common stock for a price less than $4.50 or issue options or
warrants of equal effect. The Company also may not repay any related party
debt during this period. These covenants may be waived upon
obtaining written consent of the other party in the agreement.
Profit Sharing Plan
During 1995, the Company commenced a defined contribution
retirement plan which qualifies under code section 401(k), for
all eligible employees. Employees who work at least 1,000 hours
during a year and are over age 21 are eligible to participate.
Employees may contribute up to fifteen percent of their annual
compensation subject to regulatory limitations. The Company also
contributes a discretionary amount on behalf of the participating
employees. The company made contributions of $2,059 for the
three months ended March 31, 1996 and $2,218 for the year ended
December 31, 1995.
Investments
Investments in less than majority owned entities are
accounted for using the equity method. Investments are included
in the financial statements under the caption of "Other Assets."
Reclassification
Certain amounts in the prior years financial statements have
been reclassified to conform to the 1996 presentation.
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interline Resources Corporation (the "Company"), a Utah
corporation, is engaged in four areas of business: oil and gas,
construction, manufacturing and used oil refining. During 1995,
the Company formed three subsidiaries to operate the four
different areas of business. Interline Hydrocarbon Inc., a
Wyoming corporation, is the subsidiary that owns the used oil
refining technology. Interline Energy Services, Inc., a Wyoming
corporation, manages the oil and gas operations in Utah and
Wyoming. Gagon Mechanical, a Utah corporation, participates in
commercial and industrial construction and manufactures
refineries for the Company used oil refining technology.
Interline Energy Services - Oil and Gas Operations. The
Company has been engaged in the oil and gas industry since 1990.
Its oil and gas operations primarily involve natural gas
gathering, natural gas processing, a crude oil pipeline
operation, propane retail sales and oil well production. The
Company's main oil and gas operations are located in east-central
Wyoming and eastern Utah. Wyoming operations, located near
Douglas, Wyoming, include the Well Draw Gas Plant, Interline
Crude Gathering Company, NRG Fuels, a 20.4% interest in the
Hatcreek Partnership and various producing oil and gas wells. The
Company's Utah operations are located near Roosevelt, Utah, and
include the Monument Butte Gathering System and Roseland Wells.
Gagon Mechanical - Industrial and Commercial Construction.
Gagon Mechanical Contractors, a wholly owned subsidiary of the
Company, provides expertise and resources necessary for
construction of used oil refineries. Gagon specializes in
mechanical system construction, such as heating, ventilation, air
conditioning, process piping and plumbing, including piping and
controls for hydrocarbon and chemical products. Gagon's work
includes certified pressure vessel design and construction under
regulated American Society of Mechanical Engineers (ASME) "U" and
"R" stamps. Boiler piping work is done under ASME "PP" stamp
regulations. Teams specialize in piping, structural steel,
pressure vessels, instrumentation and controls, insulation and
electrical work.
Gagon Mechanical - Manufacturing. Part of Gagon's
construction revenues include the manufacture of refineries for
Interline Hydrocarbon. Gagon has the ability to build each
refinery from design and engineering to start up and operation.
Gagon supervised the construction of the Dubai refinery, has
built and installed the Genesis refinery in Salt Lake City, and
has manufactured and shipped a refinery for Interline (UK).
Currently, Gagon is manufacturing a refinery for Dukeun
Industrial Company and installing the Interline (UK) refinery.
Interline Hydrocarbon - Used Oil and Low-Grade Hydrocarbon
Refining. In January 1993, the Company acquired the exclusive
license to a patented reprocessing technology with the right to
exclusively manufacture, market, use, license, sub-license and
fully commercialize the patented technology as it relates to all
areas and facets of the field of hydrocarbons. The Company
subsequently acquired the patent rights relating to the
technology. As of March 15, 1996, the Company has two plants in
production trial stage. On May 27, 1995, Gadgil Western
Corporation officially inaugurated the first oil refinery in the
world to use Interline's technology. The second plant was built
for the Genesis joint venture in Salt Lake City. Although
management continues to evaluate the best marketing strategy for
the refining process, the current approach is to build the
refineries through Gagon, and sell and install them at locations
throughout the world. The Company anticipates revenues to come
from exclusivity fees, engineering fees and ongoing royalties and
from profit generated through ownership in various refineries
throughout the world.
Results of Operations
The following analysis of the financial condition and
results of operations should be read in conjunction with the
Financial Statements and Notes thereto, included elsewhere in
this report.
Comparison of three months ending March 31, 1996 and 1995
Total Revenues
Revenues increased $2,170,849, or 76.7%, to $5,001,054 for
the three months ended March 31, 1996 as compared to $2,830,205
for the three months ended March 31, 1995. This revenue increase
included a $322,297 or 20.85%, increase in oil and gas revenues,
a $781,998, or 222.42%, increase in construction revenues, a
$304,472, or 120.58% increase in manufacturing revenues and a
$195,278, or 78.11%, decrease in used oil refining revenues. The
Company's total revenues, on a segment basis, for three months
ended March 31, 1996 and 1995 were as follows:
Three Month Revenues Ended March 31, 1996 and 1995
1996 % 1995 %
Oil and gas $1,867,995 37% $1,545,698 55%
Construction 2,521,355 51% 781,998 27%
Manufacturing 556,982 11% 252,509 9%
Used Oil 54,722 1% 250,000 9%
Refining
Total Revenue $5,001,054 100% $2,830,205 100%
Oil and Gas Revenues
Oil and gas revenues, contributed approximately 37.35% of
total revenues for the three months ended March 31, 1996, as
compared to approximately 54.61% for the three months ended March
31, 1995. Revenues increased $322,297 or 20.85% to $1,867,995 for
the three months ended March 31, 1996 as compared to $1,545,698
for three months ended March 31, 1995.
Wyoming operations revenue increased $141,668, or 11.56%, to
$1,367,167 for the three months ended March 31, 1996 as compared
$1,225,499 for the three months ended March 31, 1995. The
increase in revenues was mainly attributed to the Company's new
NGL liquids contracts to fractionate for others.
Utah operations revenue increase $178,976, or 55.89%, to
$499,178 for the three months ended March 31, 1996 as compared to
$320,202 for the three months ended March 31, 1995. This increase was
attributed to a residue volume (MMBtu) increase of 120,851, or 55.93%,
to 336,917 for the three months ended March 31, 1996 compared to 216,066
for the three months ended March 31, 1995. The increase was also
attributed to a increase in sales price (MMBtu) of $.12, or
10.17%, to $1.30 for the three months ended March 31, 1996
compared to $1.18 for the three months ended March 31, 1995. In
1995, the Company added 29 new wells to its gathering system,
compared to two new wells for 1994. With ten new wells already
added in 1996, the Company anticipates volumes to increase.
Construction Revenues
Construction revenues, contributed approximately 50.42% of
total revenues for the three months ended March 31, 1996 compared
to 27.63% for the three months ended March 31, 1995. This
resulted in an increase of $1,739,357, or 222.4%, to $2,521,355
for the three months ended March 31, 1996 compared to $781,998
for the three months ended March 31, 1995.
Revenues for the quarter ended March 31, 1996 were
$1,909,534 from commercial work, and $611,821 from industrial
work, compared to $582,523 from commercial work, and $202,331
from industrial work for the three months ended March 31, 1995.
The increase was due to the Company's focus on larger commercial
and industrial contracts. As of March 31, 1996, uncompleted work
related to commercial work was $1,159,992 and uncompleted work
related to industrial work was $215,216.
Manufacturing Revenues
Manufacturing revenues, contributed approximately 11.14% of
total revenues for the three months ended March 31, 1996 compared
to 8.92% for the three months ended March 31, 1995. This
resulted in an increase of $304,473, or 120.58%, to $556,982 for
the three months ended March 31, 1996 compared to $252,509 for
the three months ended March 31, 1995.
The $304,472 increase in manufacturing revenues was
attributed to the Company's contracts to build used oil
refineries for Genesis Petroleum (a Quaker State company), Dukeun
Industrial Company of South Korea and the Company's joint venture
partner Whelan Environmental Services of England. As of March
31, 1996, uncompleted work under contract related to used oil
refining was $852,331 compared to $1,214,554 for March 31, 1995.
Used Oil Refining Revenues
Used oil refining revenues, contributed 1.09% of total
revenues for the three month quarter ended March 31, 1996
compared to 8.83% for the three months ended March 31, 1995. This
was a resulted in a decrease of $195,278, or 78.11%, to $54,722
for the three months ended March 31, 1996 compared to $250,000
for the three months ended March 31, 1995.
The Company also received licensing fees from Genesis
Petroleum (formerly Quaker State Resources) in the amount of
$750,000 which is classified on the balance sheet under caption
"Deferred income." This revenue will be recognized if the
contracts proceed as agreed. The Company anticipates that future
revenues will come from the sale of used oil refineries, ongoing
royalties from sublicense agreements on a per gallon processed
basis and profits from joint venture ownership in used oil
refineries.
Direct Costs. Direct costs increased $2,433,428, or
132.65%, to $4,267,851 for the three months ended March 31, 1996
compared to $1,834,423 for the three months ended March 31, 1995.
The increase of $2,433,428 for the three months ended March 31,
1996 was mainly attributed to an increase in the Company's total
revenues. As a percent of revenues, direct costs increased to
85.34% for the three months ended March 31, 1996 compared to
64.82% for the three months ended March 31, 1995. This percent of
revenue increase is mainly attributed to the Company's contracts
to build refineries at cost for Genesis Petroleum and Interline
(UK). The Company's increase in direct cost, as a percent of
revenue, was also attributed to an increase in commercial
construction revenues which yield lower gross margins.
Selling, General and Administrative. Selling, general and
administrative expenses increased $200,582 or 31.72%, to $833,020
for three months ended March 31, 1996 compared to $632,438 for
three months ended March 31, 1995. As a percent of revenues, selling,
general and administrative expenses were 16.66% for the three months
ended March 31, 1996 compared to 22.35% for the three months ended
March 31, 1995. These expenses consisted principally of salaries and
benefits, travel expenses, legal, information technical services and
administrative personnel of the Company. Also included are outside legal
and accounting fees, and expenses associated with computer equipment
and software used in the administration of the business.
Research and Development. Research and development expenses
increased $224,595 or 208.7%, to $332,230 for three months ended
March 31, 1996 compared to $107,635 for the three months ended
March 31, 1995. As a percent of revenues, research and
development expenses increased to 6.64% for the three months
ended March 31, 1996 compared to 3.80% for the three months ended
March 31, 1995.
Research and development expenses as of March 31, 1996
included $313,153 which was attributable to development and
enhancement to the Genesis Petroleum-Salt Lake City LLC used oil
refining plant located in Utah. These expenses both in absolute
dollars and as a percentage of revenue, reflect additions to the
Company's engineering staff and related costs required to support
its continued emphasis on developing, testing and commercializing
its used oil refining technology. The Company believes that
continued investment in research and development is critical to
its future growth and profitability. The Company therefore
expects that research and development expenses will continue in
future periods.
Depreciation and Amortization. Depreciation and
amortization expenses increased $105,833 or 58.84%, to $285,706
for the three months ended March 31, 1996 compared to $179,873
for the three months ended March 31, 1995. As a percent of
revenues, depreciation and amortization expenses decreased to
5.71% for the three months ended March 31, 1996 compared to 6.36%
for the three months ended March 31, 1995. This increase in
depreciation and amortization, in absolute dollars, is attributed
to the Company's capital asset purchases made in 1995.
Liquidity and Capital Resources
The Company had $245,942 in cash and cash equivalents as of
March 31, 1996, compared to $1,705,219 as of December 31, 1995.
As of March 31, 1996, the Company reported cash used from
operating activities of $2,191,887 compared to $754,070 as of
December 31, 1995.
Sources of liquidity for the Company include revenues from
oil and gas operations, construction operations, manufacturing
operations and revenues from sale of hydrocarbon refining
technology and rights. Management believes that the Company's
cash from operating activities is not adequate to meet its
operating and capital expenditure needs for the foreseeable
future. In an effort to increase future cash from operating
activities and minimize expenses, the Company has undergone some
operations personnel changes and corporate restructuring. The
impact of these changes will be reflected in second and third
quarter reports, and thereafter.
On February 29, 1996 the Company obtained $1,500,000 in a 6%
senior secured note from a related individual. The obligation is
due August 29, 1996. In the event of a default on the note the principal
can be converted to up to 468,750 shares of the Company's common stock at
the price of the lesser of $3.20 per share or 80 percent of the average
closing price for the Company's shares for the five consecutive
trading days preceding the date of conversion. The note was
secured by all of the issued and outstanding stock of two
subsidiaries, Interline Energy Services and Gagon Mechanical Contractors.
Under the license agreement, Genesis Petroleum (formerly
Quaker State Resources) has 180 days from delivery (which
occurred on Feb. 20, 1996) to determine if the Interline process
is acceptable and whether or not Genesis Petroleum desires to
maintain its exclusive North American license. If it elects to
maintain its exclusive license, Genesis Petroleum is required to
purchase $600,000 worth of newly issued shares of the Company's
common stock within 90 days of delivery. Within 180 days from
delivery, Genesis Petroleum is required to pay an additional
$400,000, thereby obtaining permanent exclusive rights to Canada
and Mexico. If Genesis Petroleum determines the Interline
process is not acceptable, it may terminate its exclusive
license. In such event, the Company is required to repay one-half
of all exclusivity fees paid to the Company by Genesis Petroleum. At
Genesis Petroleum's option under the agreement, the Company may be required
to repurchase the refinery as previously disclosed in the
Company's Form 8-K filed in September 1994. As of May 14, 1996,
there is no assurance or indication that the Company will
received any future proceeds from this license agreement.
Presently, Management is seeking to raise approximately $5
to $10 million for future expansion through borrowing or an
equity placement of its common stock. These funds and existing
working capital are expected to be sufficient to fund current
operations during fiscal year 1996.
In the event management elects to participate in a joint
venture in owning and operating refining plants, the Company
would need to raise additional sums through borrowing or equity
financing. Additionally, it is Management's intent that when
potential purchasers of a refining plant place an order, the
payment terms will be tailored to provide construction funds to
build the plants. If the Company were to make any other major
acquisitions during the coming year, issuance of additional
stock, bank borrowing or other form of debt financing might be
considered.
Material Changes to the Balance Sheet
The following represents material changes affecting the
balance sheet as of March 31, 1996 as compared to the balance
sheet as of December 31, 1995.
Current Assets. Current assets decreased to $4,574,261 as
of March 31, 1996 from $5,580,562 as of December 31, 1995. The
$1,006,301 decrease in current assets was attributed to the following:
a decrease in cash and cash equivalents of $1,459,277 primarily from the
Company's current year loss, a decrease of $60,912 in accounts receivable, a
decrease of $4,768 in inventories and an increase of $518,656 in
other assets attributed to cost plus earning in excess of
billings on construction contracts.
Property, Plant and Equipment. Net property, plant and
equipment decreased to $10,356,028 as of March 31, 1996 from
$10,461,186 as of December 31,1995. The $105,158 decrease was
attributed to capital expenditures of $180,549 and a decrease due
to current year depreciation of $285,707. Capital expenditures
consisted of a generator overhaul and 10 new wells connected to
the Company's gas gathering system located in Utah.
Other Assets: Other assets increased to $2,495,108 as of
March 31, 1996 from $2,237,399 as of December 31, 1995. The
$257,709 increase was attributed to a decrease in note receivable
of $11,823, a decrease of $23,902 in technology and marketing
rights and an increase of $293,434 in other assets, which is
mainly attributed to the Company's investment in the Interline
(UK) joint venture.
Current Liabilities. Current liabilities increased to
$7,069,427 as of March 31, 1996 from $6,902,829 as of December
31, 1995. The $166,598 increase in current liabilities was
attributed to a decrease of $419,610 in accounts payable which
represents payments to vendors, a decrease of $343,678 in accrued
liabilities attributed to settlement payments made to Phillips
Petroleum, an increase of $1,294,890 due to the reclassification
of current portion of long-term debt and capital lease
obligations, a decrease of $364,704 in other current liabilities
attributed to billing in excess of cost, and earned profit on
construction contracts.
Non-Current Liabilities. Non-current liabilities decreased
to $3,263,065 as of March 31, 1996 from $3,392,692 as of December
31, 1995. The $129,627 decrease was attributed to a decrease in
deferred income of $5,605, a decrease of $1,294,890 from
reclassification of current portion of long term debt and capital
lease obligations, a decrease of $379,132 from principle
reduction of debt and capital lease obligations and an increase
in new debt obligations of $1,550,000.
Total Stockholders' Equity. Total stockholders' equity
decreased to $7,092,905 as of March 31,1996 from $7,983,626 as of
December 31, 1995. The $890,721 decrease in equity was attributed
to the current year net loss.
Inflation
The Company's business and operations have not been
materially affected by inflation during the past three years and
the current calendar quarter. The Company believes that inflation
will not materially nor adversely impact its business plans for
the future.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 29, 1994, the Company was served with a complaint
seeking unspecified damages against it in the Third Judicial
District Court, State of Wyoming, County of Sweetwater. The
Plaintiff in the action is Phillips Petroleum Company; defendants
are the Company, Tulsa Operating Group, Inc., and Roger Williams
(unrelated to any of the directors or officers of the Company).
The Complaint arises out of three wells purchased by the Company
from Phillips in September 7, 1988, which the Company had in turn
sold to the codefendants on February 1, 1989. The Company's
purchasers (codefendants) failed to put the wells into
production, and as a result, were ordered to plug and abandon
them by federal and state regulatory agencies. The Codefendants
failed to carry out the plugging and abandonment of the wells,
and Phillips was ordered and completed the plugging and
abandoning of the wells, spending, as of the date of the
Complaint, $466,300.
On December 11, 1995, the Court entered a summary judgment in
favor of Phillips, awarding Phillips the sum of $466,785.61
against the Company based on contractual indemnity. Phillips and
the Company have since agreed on a settlement agreement, in which
the Company will pay $300,000. As of May 14, 1996 the Company
paid $270,000 and the remaining $30,000 is due in monthly
installments of $10,000 per month. In a cross claim, the Company
is seeking indemnity for these costs from the codefendants.
Although the Company has contractual indemnity rights against
codefendants, it is unknown that should a judgment be entered
against codefendants that they would have assets to pay such
judgment. While management believes that some recovery could be
made, the Company would have difficulty in enforcing a full
recovery of its costs from the codefendants. According to the
settlement agreement, the Company must give 40 percent of the
recovery amount to Phillips. Because of the uncertainty of the
amount the Company could recover against codefendants under its
cross-claim, a reserve of $100,000 had been accrued in 1994 and a
reserve of $200,000 had been accrued in 1995.
On August 4, 1995, Basin Exploration, Inc. filed a lawsuit
against the Company in the U.S. District Court for the District
of Colorado in Denver relating to a gas purchase agreement
between the Company and Basin. The dispute revolves around
measurement and allocation of Basin's gas and sales proceeds
therefrom. An unspecified amount of damages is claimed by Basin.
The Company filed a motion to dismiss or transfer venue to the
U.S. District Court of Wyoming. On April 1, 1996, the Company
motion to transfer venue to the U.S. District Court of Wyoming
was successful. Although the outcome of this litigation cannot be
predicted, at this time the Company believes that it has adequate
answers and defenses to all the issues raised in the suit. The
Company's financials do not reflect any reserves for these
claims.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6(a) Exhibits
EX-27 FINANCIAL DATA SCHEDULE
Item 6(b) Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1996
INTERLINE RESOURCES CORPORATION
(Registrant)
By:/s/ Michael R. Williams
Michael R. Williams, President
and Chief Executive Officer
Principal Executive Officer
Director
By:/s/ Mark W. Holland
Mark W. Holland, Chief Financial Officer
Director