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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 Periods Ended June 30, 2001
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:
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock $.005 Par Value
Title of Class
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____.
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING PRECEDING
FIVE YEARS Indicate by check whether the Registrant has filed all documents
and reports required to be file by Section 12,13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No____.
Common stock outstanding at June 30, 2001 - 14,066,052 shares of $.005 par value
Common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
FORM 10-QSB
INTERLINE RESOURCES CORPORATION
1
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheet at June 2\30, 2001 5
Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 2001 and 2000 7
Condensed Consolidated Statements of Cash Flows for
six months ended June 30, 2001 and 2000 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Notes to Consolidate Financial Statements
Subsequent Event 19
PART II. - OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in the Securities 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Hold22s
Item 5 Other Information 22
Item 6(a) Exhibits 22
Item 6(b) Reports on Form 8-K 22
Signatures 23
2
FORWARD LOOKING INFORMATION AND RISK FACTORS
Interline Resources Corporation (the "Company") or its representatives may
make forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operation, press release and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from operations, planned
capital expenditures (including the amount and nature thereof), the effects of
the Company's prior Bankruptcy proceeding, the Company's projected financial
position, results of operations, business strategy and other plans and
objectives for future operations. These statements are forward- looking
statements, within the meaning of Section 27A of the Securities Act of 1993 and
Section 21E of the Securities Exchange Act, which reflect Management's current
views with respect to future events and financial performance.
Although the Company believes that the expectations reflected in these
forward looking statements are reasonable, there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected effects on its
business or results of operations. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include but are not limited to the
outcome of the Company's current Bankruptcy Proceeding, the timing and extent of
changes in commodity prices, unforeseen engineering and mechanical or
technological difficulties in connection with the Company's business operations
and other risks.
These forward-looking statements are subject to certain risks and
uncertainties including, but not limited to, future financial performance and
future events, competitive pricing for services, costs of obtaining capital as
well as national, regional and local economic conditions. Actual results could
differ materially from those addressed in the forward-looking statements. Due to
such uncertainties and risks, readers are cautioned not to place undue reliance
on such forward-looking statements, which speak only as of the date whereof.
All subsequent oral and written forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
3
INTERLINE RESOURCES
CORPORATION
AND SUBSIDIARIES
PART I - ITEM 1
FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2001
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, 2000, 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, 2001, 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.
4
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
June 30
2001
Assets
Current Assets:
- ----------------------------------------------------------------- -------------
Cash & cash equivalents $ 57,997
Accounts receivable - trade 853,004
Inventories 66,203
Other current assets 50,884
Total current assets 1,028,088
- ----------------------------------------------------------------- -------------
Property, plant & equipment 6,723,917
Accumulated depreciation & (3,683,103)
depletion
Net property, plant & 3,040,814
equipment
Technology and marketing rights 355,000
Total assets $ 4,423,902
- ---------------------------------------------------------------- ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
June 30
2001
Liabilities & Stockholders' Equity
Current Liabilities:
- ----------------------------------------------------------------- ------------
Accounts payable $ 536,056
Accrued liabilities 423,312
Notes payable - related party 3,595,920
Current portion of long-term debt 251,604
Total current liabilities 4,806,892
Long-term debt less current
portion 414,191
Total liabilities 5,221,083
- ---------------------------------------------------------------- -------------
Stockholder's Equity
- ---------------------------------------------------------------- -------------
Preferred stock - $0.01 par value.
25,000,000 shares authorized;
1,000,000 series A shares
authorized; No "A" shares issued
or outstanding.
6
Common stock - $0.005 par
value,
100,000,000 shares
authorized. 70,330
14,066,052 shares issued &
outstanding
Additional paid-in capital 9,209,058
Retained earnings (10,076,569)
Total stockholders' equity (797,181)
Total liabilities and
stockholder's equity $ 4,423,902
- ---------------------------------------------------------------- -------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
- ---------------------------- ------------------------- -------------------------
2001 2000 2001 2000
- ---------------------------- ------------ ------------ ------------ ------------
Revenue $ 1,268,224 $ 1,433,693 $ 2,539,754 $ 2,750,496
Direct costs 920,571 1,214,318 1,741,407 2,039,462
Gross Margin 347,653 219,375 798,347 711,034
- ---------------------------- ------------ ------------ ------------ ------------
Selling, general &
administrative expenses 300,289 225,231 556,551 483,740
Research & development - 6,391 1,730 13,519
Depreciation, depletion
& amortization 179,859 177,258 391,918 361,875
Loss from operations (132,495) (189,505) (151,852) (148,100)
- ---------------------------- ------------ ------------ ------------ ------------
Other income
Interest income (expense) (17,005) (13,860) (30,981) (30,942)
Interest (expense) -
related party (93,544) (75,488) (188,208) (152,107)
Gain from sale of assets - 1,500 - 1,500
- ---------------------------- ------------ ------------ ------------ ------------
Net loss before income taxes (243,054) (277,353) (371,041) (329,649)
- ---------------------------- ------------ ------------ ------------ ------------
Income taxes
Current - - - -
Deferred - - - -
- ---------------------------- ------------ ------------ ------------ ------------
Net loss (243,054) (277,353) (371,041) (329,649)
============================ ============ ============ ============ ============
Loss per common share -
basic & diluted (0.02) (0.02) (0.03) (0.02)
============================ ============ ============ ============ ============
Weighted average shares -
basic & diluted 14,066,052 14,066,052 14,066,052 14,066,052
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
8
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Fows
(Unaudited)
Six months ended
June 30,
- --------------------------------------------------------- ----------------------
Cash flows from operating activities: 2001 2000
- --------------------------------------------------------- ----------- ----------
Net loss (371,041) (329,649)
Adjustment to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation, depletion & amortization 391,918 361,875
Gain on disposal of assets - (1,500)
(Increase) decrease in :
Accounts receivable (310,207) (577,455)
Inventories 7,407 9,527
Other current assets (33,361) (7,018)
Note receivable - 77,500
- --------------------------------------------------------- ----------- ----------
Increase (decrease) in:
Accounts payable 3,265 639,771
Accrued liabilities 194,746 (390)
Net cash provided (used) by operating activites (117,273) 172,661
- --------------------------------------------------------- ----------- ----------
Cash flows from investing activities:
Proceed from sale of equipment - 1,500
Purchase of property, plant & equipment (1,600) (141,261)
Net cash used by investing activities (1,600) (139,761)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
9
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Fows
(Unaudited)
Six months ended
June 30,
- -------------------------------------------------------- -----------------------
2001 2000
Cash flows from financing activities:
- ------------------------------------------------------- ----------- ------------
Payment on long-term debt (86,159) (73,920)
Net cash used by financing activities (86,159) (73,920)
- ------------------------------------------------------- ----------- ------------
Net (decrease) increase in cash (205,032) (41,020)
- ------------------------------------------------------- ----------- ------------
Cash, beginning of period 263,029 255,735
- ------------------------------------------------------- ----------- ------------
Cash, end of period 57,997 214,715
- ------------------------------------------------------- ----------- ------------
Cash paid during the period for:
Interest 36,228 40,912
Income taxes - -
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
10
PART 1 - ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Interline Resources Corporation (the Company), is a Utah corporation with
its principal and executive offices located at 160 West Canyon Crest Road,
Alpine, Utah 84004, telephone (801) 756- 3031. The Company's current operating
subsidiaries are (1) Interline Energy Services, Inc. ("Interline Energy") a
Wyoming corporation which manages the Company's oil and gas operations located
in Wyoming which consist of natural gas gathering, natural gas processing, over
the road NGL truck transportation and oil well production. and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the Petition) of the United States Bankruptcy Code. The
Company continued its operations as a debtor-in-possession under the Bankruptcy
Code. The Company's subsidiaries did not join the Company in the Petition and
were not directly involved in the Bankruptcy Reorganization Proceedings.
On June 18, 1998, the Company filed a Plan of Reorganization and Disclosure
Statement to the Plan of Reorganization with the United States Bankruptcy Court
for the District of Utah, Central Division. On July 14, 1998, the Company's Plan
of Reorganization and Disclosure Statement to the Plan of Reorganization was
approved and circulation thereof was authorized by the United States Bankruptcy
Court for the District of Utah, Central Division.
On September 10, 1998, the Plan of Reorganization was confirmed by the
United States Bankruptcy Court for the District of Utah. As a result, restraints
on the activities of Interline imposed by the Bankruptcy code were removed.
Interline reached agreement with its major creditor during the Chapter 11 case
and the terms of the agreement (See Part 1 - Item 2 - Liquidity and Capital
Resources) were incorporated in the plan. All other creditors were paid in full
under the plan.
Interline Energy Services - Oil and Gas Operations.
The Company has been engaged in the oil and gas industry since 1990, and
currently operates in east-central Wyoming near Douglas. The Company's oil and
gas operations include the Well Draw Gas Plant, a crude gathering pipeline, a
20.4% interest in the Hat Creek Partnership, NGL trucking and four producing oil
and gas wells.
Well Draw Gas Plant
The Well Draw Gas Plant (the "Plant"), is a natural gas liquids (NGLs)
processing plant with a 150,000 gallons per day capacity. The Plant processes
NGL's into propane, butane and natural gasoline. As part of the Plant system,
the Company owns a natural gas gathering pipeline system. The gathering system
is connected to the Well Draw Gas Plant and supplies a small percentage of
liquids for the Plant. Most of the NGL's originate from liquids that are trucked
into the Plant from outside sources.
11
At the Well Draw Gas Plant ("Well Draw") the Company buys mixed liquids
from several different plants, transports them to Well Draw, fractionates the
liquids into commercial propane, butane, and natural gasoline, and re-markets
these products for its own account. The Company also enters into agreements for
fractionation of liquids for others on a fee basis. The plant processed and
fractionated a total of 75,617 gallons a day of natural gas liquids for the
three months ended June 30, 2001, compared to 101,067 gallons a day for the
three months ended June 30, 2000. Of the total gallons fractionated and
processed, 6,763 gallons per day was for the Company and 68,854 gallons per day
for others during 2001, as compared to 11,531 and 89,536 gallons per day
respectively for the three months ended June 30, 2000.
Merit (formerly Amoco) Agreement
During 1994, the Company entered into a six year contract with Amoco
Production Company ("Amoco") to process NGLs located at its Baroil Plant located
in Wyoming. On December 1, 1999, Amoco Production Company sold its Baroil Plant
assets to Merit Energy Company ("Merit"). Merit is the largest product supplier
for the Company's Well Draw Gas Plant. Effective June 1, 2001, the Company
entered into a new service agreement to transport, sweeten and fractionate
natural gas liquids for Merit through March 31, 2002. The commitment of Merit's
product under the new contract is expected to permit stable and efficient
operation of the Plant through the term of the contract. During the three months
ended June 30, 2001, the Company processed an average of 55,274 gallons per day
of Merit liquids compared to 51,961 gallons per day for the three months ended
June 30, 2000. The Merit contract accounted for 73.09% of the total NGLs
processed for the 2001 period compared with 47.03% for 2000
Kinder Morgan (formerly KN Gas Gathering) Agreement
During 1998, the Company entered into an agreement with KN Gas Gathering,
Inc. ("KNGG") to process NGLs on a month to month basis. On October 7, 1999, all
assets of KNGG was purchase by Kinder Morgan ("KM"). During the three months
ended June 30, 2001, the Company processed an average of 13,580 gallons per day
of NGLs under the KM contract compared to 37,574 gallons per day for the same
period in 2000. The KM contract accounted for 17.95% of the total NGLs processed
by the plant for the three months ended June 30, 2001, compared to 37.18% of the
total NGLs process for the three months ended June 30, 2000.
Conoco Pipeline
The Conoco Pipeline, purchased by the Company from Conoco Pipeline Company
in January of 1995 is a 180 mile crude gathering and trunk pipeline with
associated pumping stations and storage tanks. The pipeline transports oil from
oil producing fields in Converse County, Wyoming to Conoco's Lance Creek Station
where it connects with an interstate crude oil pipeline system. The Company
receives revenues from operation of the Conoco Pipeline by charging a
transportation fee. The pipeline gathered and transported approximately 52,460
barrels of oil during the three months ended June 30,2001, compared to 58,239
for the three months ended June 30,2000.
Hat Creek Partnership
The Hat Creek Partnership, of which Interline Energy owns a 20.4% interest,
owned working interests in two oil and gas wells -- the Hat Creek #2, and CH
Federal wells -- and a 13 mile gathering line interconnected to the Well Draw
Gas Plant. Effective July 1, 1999, the Company sold its interests in the Hat
Creek #2 well for the sum of $4,080 to Dakota Oil LLC. Dakota Oil LLC is a
company formed and owned in part by Company insiders, to attempt a recompletion
of the Dakota producing zone in the Hat Creek #2 well, which if successful,
would have provided additional natural gas reserves to the Company's Well Draw
Gas Plant. Unfortunately, the recompletion was unsuccessful.
12
Oil Well Production
The Company owns working interests in four wells located in Converse
County, Wyoming. The Company is also the operator of these wells. During the
three months ended June 30, 2001, the wells produced approximately 1,254 barrels
of oil and 1,797 Mcf of natural gas compared to approximately 1,333 barrels of
oil and 3,101 Mcf of natural gas for the three months ended June 30, 2000.
NGL Trucking Operations
The Company's NGLs transportation operation consists of seven
tractor-trailer-pup combination units. These units move unprocessed natural gas
liquids to Well Draw for fractionation, and takes propane, butane and natural
gasoline from Well Draw to various refiner, chemical plants, and end-users. When
time permits, these trucks also move liquids on a common carrier basis for third
parties. The Company intends to continue to emphasize this profitable business
segment, and believes that our reputation for flexibility and customer service
will allow us to maximize opportunities.
During the three months ended June 30, 2001, the Company's trucks traveled
a combined total of 247,380 miles and carried approximately 10 million gallons
of raw and finished product compared to 229,849 miles and 14 million gallons of
raw and finish product for the quarter ended June 30, 2000.
Interline Hydrocarbon - Used Oil Refining.
In January 1993, the Company acquired certain patent rights to a used oil
reprocessing technology from Petroleum Systems Inc., ("PSI"). However, as a
result of substantial independent research and development of used oil
technologies and processes since 1993, the Company has been able to develop a
new process which does not utilize the PSI technology. On May 28, 1998, the
Company filed a patent application in the United States Patent Office for a new
and alternative method from the PSI technology for processing used oil. This new
technology has been implemented in the Korean, Australian and Spanish Plants. As
a result, on September 10, 1998 the Company reassigned to PSI all of the
intellectual rights it obtained from it under the assignment agreement. In
making that re-assignment, the Company assigned all rights it had to receive
royalties from any plants constructed by the Company which utilized PSI
technology.
To date, the Company has constructed or licensed six used oil plants. For
full disclosure on each plant, refer to the Company's December 31, 2000, 10-KSB
filing.
Revenues to the Company, from its used oil refining technology can come
from five sources: 1) profits made from constructing used oil plants, 2)
granting exclusive franchise territories to licensees, 3) receiving royalties
based on either production or a flat yearly licensing fee, 4) taking partnership
interests in operating plants by either contributing the technology and/or
making cash contributions for partnership interests and, 5) supplying technology
and construction plans along with process consultation services and star-up
assistance to customers wishing to construct their own plant (as opposed to the
Company supplying a "turn-key" facility).
13
Based on the experiences with the six plants that have been constructed or
licensed by theCompany, management's current preference is not to perform plant
construction services. Further, until the Company improves its financial
condition, it is not in a position to take interests in operating plants.
Management believes the best way for it to capitalize on the technology is to
sell the construction plans for a plant and provide consultation services to the
purchaser.
It has also become evident to management that demanding royalties based on
production is, in many situations and countries, difficult. Unless and until the
re-refined oil produced in a plant can be sold at prices comparable to base
lubricating oils, collecting royalties based on production will be difficult to
achieve. This reality has been seen in both Korea, where the royalty was
terminated for the first plant, and England where, as described in previous
filings, the royalties were reduced and deferred until the plant becomes
profitable. The most viable opportunities the Company has identified to employ
its technology are in countries where governmental concessions provide economic
incentives for collecting and processing used oils.
Management still believes that there exists economic support for and interest in
the used oil refining technology. The Company continues to receive inquiries
about its patented process but has become more selective as to potential
purchasers. Because of the substantial knowledge Management obtained about the
complicated used oil supply and demand picture the Company has become much more
active in helping potential customers evaluate the markets in which they would
compete.
Transpacific Industries - Australia
In September 1996, the Company signed an exclusive purchase agreement with
Transpacific Group of Companies granting them exclusive rights to the Technology
for all of Australia. Under the terms of the agreement, Transpacific purchased
from the Company a 24,000 gallon per day plant for $3.4 million. On July 16,
1997, Transpacific announced that it had formed a new Australian national used
oil collection, recycling and refining company called Nationwide Oil Pty. Ltd.
with Shell Australia Ltd., and Mobil Oil Australia Ltd. to own and operate the
plant.
The Company completed construction of the Nationwide plant in Sydney in August
of 1998 and the plant has been operating since that time. Per the purchase
agreement, upon completion of the plant the Company is entitled to retention
monies in the amount of $186,509 and ongoing royalties of 6 cents per gallon.
Since the inception of the startup of the Australian plant, the Company has
tried on many occasions to receive these outstanding sums and to resolve the
royalty issues with Transpacific. These negotiations have not been successful.
In February of 2000, the Company hired legal counsel in Australia to pursue
money due under the purchase agreement. On July 19, 2000, the Company filed a
claim with the Queensland Supreme Court seeking payment of the royalties due
under the License Agreement. The action is currently in the discovery stage.
Ecolube, S.A. - Madrid, Spain
On June 10, 1998 the Company signed an engineering and marketing agreement with
Ecolube, S.A., a subsidiary of Sener Engineering of Madrid, Spain. Under the
agreement, the Company provided Ecolube with engineering specifications and
construction drawings for the building of a 24,000 gallon per day waste oil
re-refinery in Madrid. Under the agreement, Interline receives a $534,000
engineering and licensing payment and running royalties of $0.0175 on each
gallon produced and sold for 10 years. Ecolube has the right to build additional
plants in the Iberian Peninsula (Spain and Portugal) for a four year period
14
commencing from the date of plant start up. The Ecolube Plant has now been
constructed and has been operating at approximately 75% of design capacity. Full
commissioning and acceptance is expected to be completed early in the third
quarter of 2001.
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.
Total Revenues For Three- and Six- Months Ended June 30, 2001 and 2000
- -----------------------------------------------------------------------
Revenues decreased $165,469, or 11.5%, to $1,268.224 for the three months ended
June 30,2001, as compared to $1,433,693 for the three months ended June 30,
2000. The revenue decrease included a $134,983 or 9.6%, decrease in oil and gas
revenues and a decrease of $30,486 or 100% in used oil refining revenues. The
Company's total revenues, on a segment basis, for the three months ended June
30, 2001, and 2000 were as follows:
Revenues For Three- and Six- Months Ended June 30, 2001, and 2000
-----------------------------------------------------------------
3 Months Ended June 30 6 Months Ended June 30
- ----------------- ------------------------------ -------------------------------
2001 % 2000 % 2001 % 2000 %
- ----------------- ---------- --- ---------- ---- ---------- --- ---------- -----
Oil and Gas $1,268,224 100 $1,403,207 97.9 $2,539,754 100 $2,650,662 96.4
Used Oil Refining - - $30,486 2.1 - - $99,834 3.6
Total Revenue $1,268,224 100 $1,433,693 100 $2,539,754 100 $2,750,496 100
- ----------------- ---------- --- ---------- ---- ---------- --- ---------- -----
Oil and Gas Revenues
Oil and gas revenues contributed 100% of total revenues for the three- and six-
months ended June 30, 2001, as compared to a 97.9% for the three months and
96.4% for the six months ended June 30, 2000. Revenues decreased $134,983 or
9.6% for the Quarter ended June 30 and $210,742 or 7.7% for the six months ended
on that date.
The decrease in oil and gas revenues for the quarter resulted from a 25%
decrease in processing volumes during 2001 when compared to 2000 period. This
decrease was partially offset by a 6%, increase in the quantity of liquids
processed for Merit and a 96% increase in the unit rate paid by Merit for
processing. For the half-year the decrease in oil and gas revenues is
attributable to the substantial elimination of the purchase of liquids for
resale by the Company, which action was offset by a significant increase in the
rate collected for fractionation at the Plant.
The Company attributes the decrease in first half and second quarter throughput
in 2001 compared to the prior year period to comparative "softness" in the price
of NGL's relative to natural gas during January through April and to weakness in
the local markets for NGL's compared to those at Conway, Kansas and Borger,
Texas during May and June. In addition to these factors, during the 2001 periods
the Company materially reduced the quantity of NGL's purchased and sold by the
company. This reduction was prompted by reduction in the quantity of liquids
available for purchase during the period and substantially lower margins which
could be derived from such activity.
15
The Company's Oil & Gas Operations revenue for the three months ended June 30,
2001 and 2000 were as follows:
16
Oil & Gas Operations Revenue For Three- and Six- Months Ended June 30, 2001
and 2000
- --------------------------------------------------------------------------------
3 Months Ended June 30 - Months Ended June 30
- ------------------ -------------------------------- ----------------------------
2001 % 2000 % 2001 % 2000 %
---- ---- ---- ----
Liquids (NGL) Sold $381,268 30.1 $668,118 47.6 $658,150 $1,099,067
Fractionation Fees $452,649 35.7 $298,760 21.3 $1,028,274 $566,110
Transportation Fees $351,238 27.7 $335,399 23.9 $669,110 $752,520
Crude Tariff Fees $39,049 3.1 $43,097 3.1 $78,410 $88,213
Crude Oil Sold $33,932 2.7 $42,530 30.3 $66,017 $96,563
Residue Gas Sold $6,043 0.5 $15,303 1.1 $31,000 $37,890
Other $4,045 0.3 $0 0.0 $8,789 $10,299
-------- -------- --------- ----------
Total Revenue $1,268,224 100 $1,403,207 100 $2,539,754 100 $2,650,662 100
========== ========== ========== ==========
Used Oil Refining Revenues
Since it commenced operations in the used oil refining business, the Company has
primarily derived revenues attributed to fees for engineering, plant design,
license, exclusively or other services associated with the Company's used oil
refining technology. The revenue attributed to the used oil refining business
varies significantly from quarter to quarter reflecting the status of the
Company's fees and plant design services.
Used oil refining revenues contributed $0 total revenues for the three- and six-
month periods ended June 30, 2001, compared to $30,486 for the three month and
$99,834 for the six month period in 2000.
Direct Costs
Direct costs decreased $193,227, or 24.2%, to $920,571 for the three months
ended June 30, 2001, compared to $1,214,318 for the three months ended June 30,
2000. As a percent of revenues, direct costs decreased to 72.6% for the three
months ended June 30, 2001 compared to 84.7% for the three months ended June 30,
2000. For the six months ending June 30 of 2001 and 2000 direct costs decreased
$298,055 to $1,741,407 in 2001 compared to $2,039,462 for 2000. The 2001 figure
represents 68.6% of total revenues for the half year compared to 74.1% for the
same period in 2000.
The decrease in direct costs resulted from the reduction in the purchase of
natural gas liquids for processing at the Company's Well Draw Plant.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of salaries and
benefits, travel expenses, insurance, legal and accounting, outside contract
services, information technical services and administrative personnel of the
Company.
Selling, general and administrative expenses increased $75,058, or 33.3% for the
quarter ended June 30, 2001, and $72,811, or 15% for the six months then ended
compared to the year earlier periods. As a percent of revenues, selling, general
and administrative expenses increased to 23.7% for the three months and 21.9%
for the six months ended June 30, 2001, compared to 15.7% for the three months
and 17.6% for the six months ended one year earlier.
17
The increase in selling, general and administrative expenses was mainly
attributed to increases in insurance, utilities, business development and labor
costs.
Depreciation and Amortization
Depreciation and amortization expenses increased $2,601 or 1.5% for the three
months ended June 30, 2001, and $30,043, or 8.3% for the half-year then ended.
As a percent of revenues, depreciation and amortization expenses increased to
16.7% and 15.4% for the 2001 three- and six- month periods compared to 14.0% and
13.2% for the comparable 2000 periods.
Research and Development
Research and development expenses are mainly attributable to the development and
enhancement of the Company's used oil refining technology. The Company will
incur research and development expenses over time as it continues to develop its
used oil refining technology.
Research and development expenses decreased 100%, to $0, for the three months
ended June 30, 2001, compared to $6,391 for the three months ended June 30, 2000
and 87.2% to $1,730 from $13,519 for the six months then ended. As a percent of
revenues, research and development expenses decreased to 0.0% and 0/1% for the
three and six month periods ended June 30, 2001, compared to 0.4% and 0.5% for
the year earlier periods.
Income (Loss) from operations
Loss from operations decreased $57,010, or 30.1%,for the three months ended June
30, 2001, but increased $3,752 for the half year then ended when compared to the
year earlier periods.
Other income (expenses)
Net interest expense increased $21,201 or 23.7% for the three months ended June
30, 2001, and $36,101 (also 23.7%) for the six months ended June 30, 2000. The
increases were mainly attributed to higher interest payments to the Company's
major creditor during the 2000 period.
The company's major creditor is a related party with whom the Company signed a
secured note in the amount of $3,595,920. On September 22, of 1999 and 2000, the
Company did not pay this major creditor the first and second installments
($750,000 and $1,000,000) due under the note. As a result, the Company is
currently in default under the note. Pursuant to the terms of the note, In the
event of default any installments not paid when due shall bear an increase in
interest from seven percent (7%) to fourteen percent (14%).
Liquidity and Capital Resources
Sources of liquidity for the Company are revenues from oil and gas operations
and revenues from the sale of its hydrocarbon refining technology. Currently,
the only consistent ongoing revenue sources to the Company are from its oil and
gas operations in Wyoming. The Company receives revenues from its used oil
refining technology when a sale or license is executed. On-going royalty fees
will be received from the Australia Plant (see Part II - Item 1 - Legal
Proceeding), and the Spanish Plant when commissioning and acceptance is
completed. While the Company continues to work with potential purchasers of its
technology, such sales and expected revenues are uncertain and unpredictable.
18
On September 9, 1998, the plan of reorganization under Chapter 11 was confirmed
by the United States Bankruptcy Court for the District of Utah. The Company
reached agreement with its major creditor during the Chapter 11 case and the
terms of the agreement were incorporated in the plan. The terms of the agreement
included a new trust deed note dated September 22, 1998 for $3,600,000, together
with interest at the rate of 7% per annum on the unpaid principal. The Company
is obligated to make quarterly payments of all accrued interest beginning on
December 22, 1998 and continuing until September 22, 2002. The Company is also
obligated to make principal payments of $750,000 on September 22, 1999;
$1,000,000 on September 22, 2000; $1,000,000 on September 22, 2001 and $850,000
on September 22, 2002. The note is secured by Trust Deeds securing an interest
in the Company's Alpine Office located in Alpine, Utah and a security interest
in all assets of Interline Energy Service, Inc. The Company executed a new
Pledge Agreement with this major creditor pledging stock of all subsidiaries of
the Company.
In August of 1999, the Company received $4,080 for its interest in the Hat Creek
#2 well. Under the pledge agreement with this major creditor, all proceeds from
the sale of Company assets will go to pay down the principal portion of the
note. After applying the proceeds from this sale the note was reduced to
$3,595,920.
At the time the plan was confirmed, management believed the Company's cash from
the oil and gas operating activities, cash received from the sale of its
hydrocarbon refining technology and cash retained under the reorganization plan
would be adequate to meet its operating needs in the near term and would provide
a plan to meet debt obligations. Certain assumptions where made in the plan of
reorganization that the Company would receive cash from the marketing of its
hydrocarbon refining technology. Since September 10, 1998 when the Bankruptcy
Plan was confirmed, the Company has received $179,006 cash from the marketing of
its refining technology.
The Company has not paid the first two principal payments due under the
September 22, 1998, trust note. The Company also did not pay interest
installments ($93,554) due December 22, 2000, March 22, 2001 and June 22, 2001.
As a result, the note for $3,595,920 due to this major creditor is currently in
default. Under the trust deed note if default occurs in the payment of
installments of principal or interest, the holder thereof, at its option and
without notice or demand, may declare the entire principle balance and accrued
interest due and payable. Also if default occurs any installments not paid when
due shall bear interest thereafter at the rate of fourteen percent (14%) per
annum until paid. The note is secured by Trust Deeds securing a security
interest in the Company's Alpine Office located in Alpine, Utah and a security
interest in all assets of Interline Energy Service, Inc. The Company executed a
pledge agreement with this major creditor pledging stock of all subsidiaries of
the Company. Per the trust deed note and pledge agreement, upon default, the
major creditor can exercise his rights and sell or demand the Company to sell
the collateral or any part of the collateral to cure the installments in default
($750,000 and $1,000,000) or the total ($3,595,920) due under the note.
In an effort to cure the default status with its major creditor, the Company is
seeking to sell its Alpine Office Building located in Utah. Also the Company is
trying to raise cash from the marketing of it refining technology or raise
additional financing through the sale of equity, sale of debt or assets. If the
Company is unable to raise additional cash it may be forced to cease operations
and liquidate the assets of the Company.
Management has put strict restraints on all capital expenditures with the
exception of any necessary expenditures to maintain current operations. For the
quarter ended June 30, 2001, the Company spent $1,600 to purchase improved
software for its chromatograph at the Well Draw Plant. Management is unaware of
any significant future capital expenditures. However the very nature of
19
equipment operation, wear and tear and replacement in this type of operation can
be significant. The Company will continue to incur research and development
costs as it continues to develop its refining technology. At present these
activities are being performed by current Company employees and part time
contract consultants.
The Company's net cash used in the Company's operations was $117,273 for the six
months ended June 30, 2001 compared to net cash provided by operations of
$172,661 for the period ended June 30, 2000. The net decrease of $289,934 in
cash provided by operations for the half-year ended June 30, 2001 was mainly
attributed to a $41,392 increase in the Company's net loss, and material
differences in the collection of accounts receivable and disbursement of
accounts payable between the period ended June 30, 2001 and that ended a year
earlier.
PART 1 - ITEM 3.
Notes to The Consolidated Financial Statements
Subsequent Event: The Company has entered into a non-binding Memorandum of
Understanding to form a joint venture with a foreign entity. The Company would
be required to use its best efforts to raise substantial debt and/or equity
financing in exchange for convertible preferred class shares, which shall be
convertible into 51% of the joint venture's common shares and would exercise
significant control over the joint venture.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
LEGAL PROCEEDINGS
Interline U.K.
In February 1995, the Company formed Interline (UK) Limited, a joint venture
with Whelan Environmental Services, Ltd. of Birmingham, England, to construct a
refinery in Stoke, England. As part of the transaction, the Company executed a
licensing agreement with the joint venture giving it the right to own, operate
and practice the Interline used oil technology. The terms of the joint venture
provided the Company a 40% ownership interest, and under the license agreement,
the right to receive a 6 cent gross royalty per gallon of oil processed. The
refinery was completed in early 1996 and officially opened in July 1996. The
refinery, with a capacity to process 24,000 gallons of used oil per day, is in
current production. In April of 1997 the Company sold its 40% interest in the
joint venture to John Whelan for $500,000. Whelan is now the sole owner of the
used oil refinery in Stoke-on-Trent, and is authorized to use the Interline
technology under the original licensing agreement. As a result of the realities
of the pricing structure in England for used oil products, and the higher than
expected operating costs to operate the England plant, the 6 cent royalty called
for in the license agreement was reduced to 3 cents and is not payable until the
refinery is profitable. To date, the Company has not received any royalty
revenue from the English plant. Further, John Whelan had only paid $200,000 of
the purchase price. After attempted settlement negotiations broke down, on
November 19, 1998 the Company instituted a legal proceeding against him in the
High Court of Justice, Queens Bench Division, Bristol District Registry, Bristol
Mercantile Court.
In January of 2000, the Company was required to deposit approximately $80,000
security bond with Bristol Mercantile Court. The Company was also faced with
spending $50,000 to litigate the case. Due to the Company's cash restraints and
in the best interest of the Shareholders, the Company elected not to proceed
with the case and the action against John Whelan was dismissed. The Company has
the option to re-file this claim against John Whelan for five years.
Transpacific Industries - Australia
In September 1996, the Company signed an exclusive purchase agreement with
Transpacific Group of Companies granting them exclusive rights to the Technology
for all of Australia. Under the terms of the agreement, Transpacific purchased
from the Company a 24,000 gallon per day plant for $3.4 million.
The plant was completed and has been operating since August of 1998. Per the
purchase agreement, upon completion of the plant the Company is entitled to
retention monies in the amount of $186,509 and ongoing royalties of 6 cents per
gallon. Since the inception of the startup of the Australian plant, the Company
has tried on many occasions to receive these outstanding sums and to resolve the
royalty issues with Transpacific. These negotiations have not been successful.
In February of 2000, the Company hired legal counsel in Australia to pursue
money due under the purchase agreement. On July 19, 2000, the Company filed a
claim in the Queensland Supreme Court seeking payment of the royalties due under
the License Agreement. The action is currently in the discovery stage.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
On September 9, 1998, the plan of reorganization under Chapter 11 was confirmed
by the United States Bankruptcy Court for the District of Utah. The Company
21
reached agreement with itsmajor creditor during the Chapter 11 case and the
terms of the agreement were incorporated in the plan. The terms of the agreement
included a new trust deed note dated September 22, 199,8 for $3,600,000,
together with interest at the rate of 7% per annum on the unpaid principal. The
Company is obligated to make quarterly payments of all accrued interest
beginning on December 22, 1998 and continuing until September 22, 2002. The
Company is also obligated to make principal payments of $750,000 on September
22, 1999 (the Company did not make this installment - see below); $1,000,000 on
September 22, 2000 (the Company did not make this installment - see below);
$1,000,000 on September 22, 2001 and $850,000 on September 22, 2002. The note is
secured by Trust Deeds securing a security interest in the Company's Alpine
Office located in Alpine, Utah and a security interest in all assets of
Interline Energy Service, Inc. The Company executed a new Pledge Agreement with
this major creditor pledging stock of all subsidiaries of the Company.
In August of 1999, the Company received $4,080 for its interest in the Hat Creek
#2 well. Under the pledge agreement with this major creditor, all proceeds from
the sell of Company assets will go to pay down the principal portion of the
note. After applying the proceeds from this sell the note was reduced to
$3,595,920.
Under the new trust deed note, (see new terms of trust deed above) the Company
is obligated to pay this major creditor $750,000 by September 22, 1999 and
$1,000,000 by September 22, 2000. As of May 15, 2001, the Company has not paid
the first two principal payments due under the trust note. As a result, the note
for $3,595,920 due to this major creditor is currently in default. Under the
trust deed note if default occurs in the payment of installments of principal or
interest, the holder thereof, at its option and without notice or demand, may
declare the entire principle balance and accrued interest due and payable. Also
if default occurs any installments not paid when due shall bear interest
thereafter at the rate of fourteen percent (14%) per annum until paid. The note
is secured by Trust Deeds securing a security interest in the Company's Alpine
Office located in Alpine, Utah and a security interest in all assets of
Interline Energy Service, Inc. The Company executed a pledge agreement with this
major creditor pledging stock of all subsidiaries of the Company. Per the trust
deed note and pledge agreement, upon default, the major creditor can exercise
his rights and sell or demand the Company to sell the collateral or any part of
the collateral to cure the installments in default ($750,000 and $1,000,000) or
the total ($3,595,920) due under the note. As of May 15, 2001, the Company also
has not made the required interest payments.
In an effort to cure the default status with its major creditor, the Company is
seeking to sell its Alpine Office Building located in Utah. Also the Company is
trying to raise cash from the marketing of it refining technology or raise
additional financing through the sale of equity, sale of debt or assets. If the
Company is unable to raise additional cash it may be forced to cease operations
and liquidate the assets.
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:
None
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 13, 2001 INTERLINE RESOURCES CORPORATION
By /s/ Michael R. Williams
Michael R. Williams
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date Title Signature
August 13, 2001 Chairman /s/ Michael R. Williams
& CEO ------------------------
Michael R. Williams
August 13, 2001 Director/ /s/ B. E. Bergquist
President & COO -------------------------
B. E. Bergquist
23