CONFORMED
_________________________________________________________________
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 June 30, 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 Road, 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 August 12, 1996 _ 14,063,160 shares
of $.005 par value Common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
__________________________________________________________________
FORM 10-QSB
INTERLINE RESOURCES CORPORATION
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet at
June 30, 1996 and December 31, 1995
Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for
six months ended June 30, 1996 and 1995
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)
June 30, 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 June 30, 1996, have been made.
The results of operations for the interim period are not
necessarily indicative of the results to be expected for the
entire year.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, Dec 31,
1996 1995
(unaudited)
Assets
Current assets:
Cash and cash equivalents ($214,718) $1,705,219
Accounts receivable - trade $3,577,495 2,851,804
Income taxes receivable 80,000 80,000
Inventories 107,657 117,272
Note receivable - current portion 40,200 40,200
Other current assets 975,088 786,067
Total current assets 4,565,722 5,580,562
Property, plant and equipment 13,432,433 12,698,402
Accumulated depreciation and depletion (2,707,777) (2,237,216)
Net property, plant & equipment 10,724,656 10,461,186
Note receivable 164,381 188,238
Technology and marketing rights 1,891,845 1,953,598
Other assets 452,299 95,563
Total assets $17,798,903 $18,279,147
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, Dec 31,
1996 1995
(unaudited)
Liabilities and Stockholders'
Current liabilities:
Accounts payable $2,910,548 $4,492,790
Accrued liabilities 428,165 737,201
Current portion of long-term debt 2,463,122 1,187,991
Other current liabilities 86,500 484,847
Total current liabilities 5,888,335 6,902,829
Long-term debt less current maturities 4,697,133 2,463,247
Deferred income 989,852 929,445
Total liabilities 11,575,320 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 s - -
Common stock - $.005 par value.
100,000,000 shares authorized;
13,955,052 shares and 13,951,052
shares issued and outstanding at
June 30, 1996 and December 31,1995 69,775 69,755
Additional paid-in capital 8,578,363 8,574,383
Retained earnings (2,424,555) (660,512)
Total stockholders' equity 6,223,583 7,983,626
Total liabilities &
stockholders equity $17,798,903 $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 Six months ended
June 30, June 30,
1996 1995 1996 1995
Revenue $4,327,040 $3,917,171 $9,328,093 $6,747,376
Direct costs 3,979,925 3,276,236 8,247,776 5,110,660
Gross margin 347,115 640,935 1,080,317 1,636,716
Selling, general and
administrative expenses 751,091 651,566 1,584,112 1,284,004
Research and development 12,297 109,587 344,527 217,222
Depreciation, depletion
and amortization 307,550 142,139 593,256 322,012
(Loss) from operations (723,823) (262,357) (1,441,578) (186,522)
Other income (expense) net
Interest income (expense) (132,833) (74,768) (195,671) (134,681)
(Loss) from investment (47,511) - (157,639) -
Gain from sale of assets 30,845 - 30,845 -
(Loss) before
income tax benefit (873,322) (337,125) (1,764,043) (321,203)
Income tax (benefit) provision
Current - (4,000) - -
Deferred - - - -
Total tax (benefit) 0 (4,000) 0 0
Net (loss) ($873,322) ($333,125) ($1,764,043) ($321,203)
(Loss) per common share: ($0.06) ($0.02) ($0.13) ($0.02)
Weighted average
shares o/s 13,955,052 13,702,979 13,953,052 13,781,947
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
1996 1995
Cash flows from operating activities:
Net income (loss) ($1,764,043) ($321,203)
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 593,253 322,012
(Gain) loss on disposal of asset (30,845) -
Common stock issued for services 4,000 -
(Increase) decrease in:
Accounts receivable (725,691) (402,386)
Other assets (189,022) (189,785)
Prepaid expenses - -
Note receivable 23,857 -
Inventories 9,615 (29,933)
Increase (decrease) in:
Accounts payable (1,582,242) 383,741
Accrued liabilities (309,036) 54,089
Deferred income taxes - -
Deferred income 60,407 (259,169)
Other current liabilities (398,347) 589,705
Net cash provided (used) by
operating activities (4,308,094) 147,071
Cash flows from investing activities:
(Increase) decrease in general partnership (356,735) 6,071
Purchase of technology and marketing rights (net) 61,755 (45,573)
Purchase of property, plant and equipment (825,880) (1,699,484)
Net cash (used in) investing activities (1,120,860) (1,738,986)
The accompanying notes are an integral part of these consolidated
condensed financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
1996 1995
Cash flows from financing activities:
Proceeds from line of credit - 9,554
Proceeds from debt obligations 4,053,805 171,963
Proceeds from issuance of common stock - 1,298,780
Payment on long-term debt (544,788) (386,166)
Net cash provided by financing activities 3,509,017 1,094,131
Net (decrease) in cash (1,919,937) (497,784)
Cash, beginning of year 1,705,219 2,200,035
Cash, ending of quarter ($214,718) $1,702,251
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
June 30, 1996 and 1995 is 13,955,052 and 13,702,979,
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 September 1, 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 Notes
On February 29, 1996 the Company obtained $1,500,000 in a 6%
senior secured note from a related individual. The obligation is
due September 1, 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.
On May 15, 1996, the Company obtained $2,500,000 in a 9.25%
senior secured note from the same individual as the $1,500,000
note. The note is due January 15, 1998 and is secured by the
outstanding shares of Interline Energy Services and Gagon
Mechanical. The loan may be converted, between August 15 and
December 31, 1996, into shares of the Company's common stock at
the lesser of $3.12 per share of 80 percent of the average
closing price for shares of the Company's common stock for five
consecutive trading days preceding the date of conversion. As
additional consideration for the individual making the Loan to
the Company, the Company has issued a Warrant to purchase up to
250,000 shares of common stock at $3.90 per share.
On July 19, 1996, the Company obtained $1,000,000 in a 9.5%
senior secured note from the same individual. As of August 12,
1996, the Company has used $515,369 of the $1,000,000. The note
is due September 1, 1996. The note is secured by the outstanding
shares of Interline Energy Services, Gagon Mechanical and
Interline Hydrocarbon.
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 covenants. 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 $1,644 for the
three months ended June 30, 1996 and $2,218 for the three months
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's 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, 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.
In July 1996, the Company signed a letter of intent to sell the
Well Draw Gas Plant and gathering system, the 20.4% interest in
the Hatcreek Partnership and Interline Crude Gathering Company.
Gagon Mechanical - Industrial and Commercial Construction.
Gagon Mechanical Contractors, a wholly owned subsidiary of the
Company, 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 installed a refinery for Interline (UK).
Currently, Gagon is shipping and installing a refinery for Dukeun
Industrial Company.
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 August 1, 1996, the Company had two plants in
production trial stage: a refinery for Genesis Petroleum, located
in Salt Lake City and a refinery in Stoke-on-Trent, England. On
June 21, 1996, Interline announced it had reacquired the rights
to the United States, Canada and Mexico from Genesis Petroleum, a
subsidiary of Quaker State Inc. As a result, Interline will
purchase Genesis Petroleum's interest in the joint venture for
$2.8 million. Genesis Petroleum also has purchased 108,115 shares of
Interline common stock at $5.55 per share, according to the agreement.
Interline will now pursue contract possibilities in North America.
Already, Interline has signed letters of intent with Research Oil Company
of Ohio and Sani Mobile of Montreal, Canada.
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 six months ending June 30, 1996 and 1995
Total Revenues
Revenues increased $2,580,717 or 38.25, to $9,328,093 for
the six months ended June 30, 1996 as compared to $6,747,376 for
the six months ended June 30, 1995. This revenue increase
included a $1,273,536 or 44.24%, increase in oil and gas
revenues, a $1,418,480, or 72.38%, increase in construction
revenues, a $9,197, or .55%, decrease in manufacturing revenues
and a $102,102, or 40.84%, decrease in used oil refining
revenues. The Company's total revenues, on a segment basis, for
six months ended June 30, 1996 and 1995 were as follows:
Six Month Revenues Ended June 30, 1996 and 1995
1996 % 1995 %
Oil and Gas 4,152,530 44.52% $2,878,994 42.7%
Construction 3,378,148 36.21% 1,959,668 29.0%
Manufacturing 1,649,517 17.68% 1,658,714 24.6%
Used oil refining 147,898 1.59% 250,000 3.7%
Total Revenue 9,328,093 100% $6,747,376 100%
Comparison of three months ending June 30, 1996 and 1995
Total Revenues
Revenues increased $409,869, or 10.46%, to $4,327,040 for
the three months ended June 30, 1996 as compared to $3,917,171
for the three months ended June 30, 1995. This revenue increase
included a $951,240 or 71.34%, increase in oil and gas revenues,
a $85,135, or 7.23, decrease in construction revenues, a
$549,412, or 39.07% decrease in manufacturing revenues and a
$93,176 increase in used oil refining revenues. The Company's
total revenues, on a segment basis, for three months ended June
30, 1996 and 1995 were as follows:
Three Month Revenues Ended June 30, 1996 and 1995
1996 % 1995 %
Oil and gas 2,284,536 52.80% $1,333,296 34.04%
Construction 1,092,535 25.25% 1,177,670 30.06%
Manufacturing 856,793 19.80% 1,406,205 35.90%
Used Oil 93,176 2.15% 0 0%
Refining
Total Revenue 4,327,040 100% $3,917,171 100%
Oil and Gas Revenues
Oil and gas revenues, contributed approximately 52.80% of
total revenues for the three months ended June 30, 1996, as
compared to approximately 34.04% for the three months ended June
30, 1995. Revenues increased $951,240 or 71.34% to $2,284,536 for
the three months ended June 30, 1996 as compared to $1,333,296
for three months ended June 30, 1995.
Wyoming operations revenue increased $816,874, or 89.98%, to
$1,724,722 for the three months ended June 30, 1996 as compared
to $907,848 for the three months ended June 30, 1995. The
increase in revenues was mainly attributed to the several new NGL
liquids purchase contracts entered into during 1996.
Utah operations revenue increased $134,366, or 31.58%, to
$599,812 for the three months ended June 30, 1996 as compared to
$425,446 for the three months ended June 30, 1995. This increase
was attributed to a residue volume (MMBtu) increase of 136,268, or
49.87%, to 409,526 for the three months ended June 30, 1996 compared
to 273,258 for the three months ended June 30, 1995. The increase
in volume was offset by a decrease in sales price (MMBtu) of $.17,
or 12.64%, to $1.16 for the three months ended June 30, 1996
compared to $1.33 for the three months ended June 30, 1995.
During 1996 the Company has added 28 new wells to its gathering
system, compared to 29 wells in 1995 and 2 wells in 1994.
Construction Revenues
Construction revenues contributed approximately 25.25% of
total revenues for the three months ended June 30, 1996 compared
to 30.06% for the three months ended June 30, 1995. These
revenues decreased $85,135, or 7.23%, to $1,092,535 for the three
months ended June 30, 1996 compared to $1,177,670 for the three
months ended June 30, 1995.
Revenues for the quarter ended June 30, 1996 were
$1,092,535 from commercial and industrial work, compared to
$1,177,670 from commercial and industrial work for the three
months ended June 30, 1995. As of June 30, 1996, uncompleted
work related to commercial and industrial work was $1,237,746
compared to $6,100,900 as of June 30, 1995. The decrease in
uncompleted work related to commercial and industrial work is
attributed to the Company's focus to downsize the commercial and
industrial operations and put more emphasis on its manufacturing
operations.
Manufacturing Revenues
Manufacturing revenues contributed approximately 19.80% of
total revenues for the three months ended June 30, 1996 compared
to 35.90% for the three months ended June 30, 1995. These
revenues decreased $549,412, or 39.07%, to $856,793 for the three
months ended June 30, 1996 compared to $1,406,205 for the three
months ended June 30, 1995.
The $549,412 decrease in manufacturing revenues was
attributed to the Company's completion of two used oil refineries
for Genesis Petroleum (a Quaker State company) and the Company's
joint venture partner Whelan Environmental Services of England.
As of June 30, 1996, uncompleted work under contract was $537,353
for Dukeun Industrial Company of South Korea.
Used Oil Refining Revenues
Used oil refining revenues, contributed 2.15% of total
revenues for the three month quarter ended June 30, 1996 compared
to 0% for the three months ended June 30, 1995. These revenues
increased $93,176 to $93,176 for the three months ended June 30,
1996 compared to $0 for the three months ended June 30, 1995.
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 $703,689, or 21.48%,
to $3,979,925 for the three months ended June 30, 1996 compared
to $3,276,236 for the three months ended June 30, 1995. The
increase of $703,689 for the three months ended June 30, 1996 was
mainly attributed to an increase in the Company's total revenues.
As a percent of revenues, direct costs increased to 91.98% for
the three months ended June 30, 1996 compared to 83.64% for the
three months ended June 30, 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) and
the Company's new NGL liquids purchase contracts, which yield
lower gross margins.
Selling, General and Administrative. Selling, general and
administrative expenses increased $99,525 or 15.27%, to $751,091
for three months ended June 30, 1996 compared to $651,566 for
three months ended June 30, 1995. As a percent
of revenues, selling, general and administrative expenses were
17.36% for the three months ended June 30, 1996 compared to
16.63% for the three months ended June 30, 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
decreased $97,290 or 88.78%, to $12,297 for three months ended
June 30, 1996 compared to $109,587 for the three months ended
June 30, 1995. As a percent of revenues, research and development
expenses decreased to .28% for the three months ended June 30,
1996 compared to 2.80% for the three months ended June 30, 1995.
Research and development expenses for the six months ended
June 30, 1996 were $344,527. These expenses were mainly
attributable to development and enhancement of 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 $165,411 or 116.37%, to $307,550
for the three months ended June 30, 1996 compared to $142,139 for
the three months ended June 30, 1995. As a percent of revenues,
depreciation and amortization expenses increased to 7.11% for the
three months ended June 30, 1996 compared to 3.63% for the three
months ended June 30, 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
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 flow 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 future quarters.
The Company had a deficit of $214,718 in cash and cash
equivalents as of June 30, 1996, compared to $1,705,219 as of
December 31, 1995. As of June 30, 1996, the Company operations
used $4,308,094 of cash, compared to $754,070 as of December 31,
1995. During 1996 the Company experienced an increase of $725,691
in accounts receivables. In addition, accounts payable were
reduced by $1,582,242 and accrued liabilities by $309,036. In
order to fund the negative cash flows from operations, the
Company obtained the following three senior secured notes from a
related individual.
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.
On May 15, 1996, the Company obtained $2,500,000 in a 9.25%
senior secured note from the same individual as the $1,500,000
note. The note is due January 15, 1998 and is secured by the
outstanding shares of Interline Energy Services and Gagon
Mechanical. The loan may be converted, between August 15 and
December 31, 1996, into shares of the Company's common stock at
the lesser of $3.12 per share of 80 percent of the average
closing price for shares of the Company's common stock for five
consecutive trading days preceding the date of conversion. As
additional consideration for the individual making the Loan to
the Company, the Company has issued a Warrant to purchase up to
250,000 shares of common stock at $3.90 per share.
On July 19, 1996, the Company obtained $1,000,000 in a 9.5%
senior secured note from the same individual. As of August 12,
1996 the Company has used $515,369 of the $1,000,000. The note is
due September 1, 1996. The note is secured by the outstanding
shares of Interline Energy Services, Gagon Mechanical and
Interline Hydrocarbon.
In July, Interline signed a letter of intent to sell the
Well Draw Gas Plant and the crude oil pipeline to a major
operator of gas pipeline and processing facilities in the western
United States. The sale is subject to a due diligence review by
both companies. Transfer of the crude oil pipeline requires
approval by the Wyoming Public Service Commission. The associated
properties contributed about 21 percent of total revenues and
about 16 percent of gross margin during the year ended December.
31, 1995. A majority of the funds from the sale of the assets are
planned to be used to pay a portion of existing debt. The sale
will also reduce overhead expenses as part of the corporate
restructuring.
Genesis Petroleum, as part of the terms of an exclusive
license agreement, decided not to continue with its exclusive
North American rights. As part of that agreement, Interline is
purchasing Genesis Petroleum's interest in the Salt Lake City
refinery for $2.8 million. Genesis Petroleum has purchased
108,115 shares of Interline common stock for $5.55 per share,
according to the agreement. As a result, Interline has reacquired
the rights to North America and is pursuing potential contracts.
Interline has already signed two letters of intent to build a
refinery each in Cleveland and Montreal.
Presently, Management is seeking to raise additional funds
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 forms of debt financing might be
considered.
Material Changes to the Balance Sheet
The following represents material changes affecting the
balance sheet as of June 30, 1996 compared to the balance sheet
as of December 31, 1995.
Current Assets. Current assets decreased to $4,565,722 as
of June 30, 1996 from $5,580,562 as of December 31, 1995. The
$1,014,840 decrease in current assets was attributed to the
following: a decrease in cash and cash equivalents of $1,919,937
primarily from the Company's current year loss, an increase of
$725,691 in accounts receivable, a decrease of $9,615 in
inventories and an increase of $189,021 in other assets
attributed to cost plus earnings in excess of billings on
construction contracts.
Property, Plant and Equipment. Net property, plant and
equipment increased to $10,724,656 as of June 30, 1996 from
$10,461,186 as of December 31,1995. The $263,470 increase was
attributed to capital expenditures of $825,880 and a decrease due
to current year depreciation of $593,253. Capital expenditures
consisted of $538,402 for site improvements for the Salt Lake
City refinery and 29 new wells connected to the Company's gas
gathering system located in Utah.
Other Assets: Other assets increased to $2,508,525 as of
June 30, 1996 from $2,237,399 as of December 31, 1995. The
$271,126 increase was attributed to a decrease in note receivable
of $23,857, a decrease of $61,753 in technology and marketing
rights and an increase of $356,736 in other assets, which is
mainly attributed to the Company's investment in the Interline
(UK) joint venture.
Current Liabilities. Current liabilities decreased to
$5,888,335 as of June 30, 1996 from $6,902,829 as of December 31,
1995. The $1,014,494 decrease in current liabilities was
attributed to a decrease of $1,582,242 in accounts payable which
represents payments to vendors, a decrease of $309,036 in accrued
liabilities attributed to settlement payments made to Phillips
Petroleum, an increase of $1,275,131 due to the reclassification
of current portion of long-term debt and capital lease
obligations, a decrease of $398,347 in other current liabilities
attributed to billing in excess of cost, and earned profit on
construction contracts.
Non-Current Liabilities. Non-current liabilities increased
to $5,686,985 as of June 30, 1996 from $3,392,692 as of December
31, 1995. The $2,294,293 increase was attributed to an increase
in deferred income of $60,407, a decrease of $1,275,131 from
reclassification of current portion of long term debt and capital
lease obligations, a decrease of $544,788 from principle
reduction of debt and capital lease obligations and an increase
in new debt obligations of $4,053,805.
Total Stockholders' Equity. Total stockholders' equity
decreased to $6,223,583 as of June 30,1996 from $7,983,626 as of
December 31, 1995. The $1,760,043 decrease in equity was
attributed to the issuance of common stock for services of $4,000
and the current year net loss of $1,764,043.
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.
ITEM 3. LEGAL PROCEEDINGS
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. Basin filed an amendment to its claim, specifying
$654,000 in damages. 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. The suit is scheduled
for trial in November 1996. However, both parties are currently
trying to negotiate a settlement. Because it is unclear what
damages, if any, the Company may be required to pay, the
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
None
Item 6(b). Form 8-K
A Form 8-K was filed by the company concerning a $2.5
million senior secured note due January 15, 1998. The 8-K was
filed on June 27, 1996.
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: August 13, 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