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U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
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 organizatio 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:
Common Stock $.005 Par Value
---------------------------------
Title of Class
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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____.
Check if there is no disclosure of deliquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Issuer's knowledge, in difinitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
As of May 15, 1999, 14,066,052 shares of the Issuer's common stock were
issued and outstanding, 9,169,826 of which were held by non-affiliates. As of
May 15, 1999, the aggregate market value of shares held by non-affiliates (based
upon the closing price) was approximately $550,190. The Issuer's revenues for
the three months ending March 31, 1999 were $816,934.
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____.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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FORM 10-QSB
INTERLINE RESOURCES CORPORATION
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheet at
March 31, 1999 5
Condensed Consolidated Statement of Operations for the
three ended March 31, 1999 and 1998 7
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in the Securities 24
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6(a) Exhibits 25
Item 6(b) Reports on Form 8-K 25
Signatures 26
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 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)
March 31, 1999
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, 1999, 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)
March 31,
1999
--------------
Assets
Current assets:
Cash and cash equivalents $413,266
Accounts receivable - trade 400,338
Inventories 45,391
Note receivable - current portion 20,000
Other current assets 33,536
--------------
Total current assets 912,531
Property, plant and equipment 6,294,695
Accumulated depreciation and depletion (2,373,106)
--------------
Net property, plant & equipment 3,921,589
Note receivable 85,746
Technology and marketing rights 821,430
--------------
Total assets $5,741,296
==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
March 31,
1999
---------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $257,967
Accrued liabilities 164,471
Note payable, related party 750,000
Current portion of long-term debt 163,597
----------------
Total current liabilities 1,336,035
----------------
Long-term debt less current maturities 666,959
Note payable, related party 2,850,000
Deferred income 50,166
----------------
Total liabilities 4,903,160
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; 14,066,052 shares
outstanding at March 31, 1999 70,330
Additional paid-in capital 9,209,058
Retained earnings (8,441,252)
---------------
Total stockholders' equity 838,136
---------------
Total liabilities & stockholders' equity $5,741,296
===============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
Three months ended
March 31,
------------------------------------
1999 1998
------------------------------------
Revenue $816,934 $897,570
Direct costs 534,212 670,878
------------------------------------
Gross margin 282,722 226,692
Selling, general and
administrative expenses 240,416 316,448
Research and development 19,678 23,446
Depreciation, depletion and amortization 168,712 170,321
------------------------------------
(Loss) from operations (146,084) (283,523)
Other income (expense) net
Interest income (expense) (14,226) (10,086)
Interest expense, related party (63,000) (88,475)
Gain from sale of assets 18,908 -
------------------------------------
(Loss) before discontinued operations (204,402) (382,084)
Income (loss) from discontinued operations - -
------------------------------------
Net (loss) ($204,402) ($382,084)
====================================
Earning per share
Loss from continuing operations ($0.01) ($0.03)
Income (loss) from discontinued $0.00 $0.00
operations
------------------------------------
(Loss) per common share: ($0.01) ($0.03)
====================================
Weighted average shares o/s 14,066,052 14,066,052
====================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three months ended
March 31,
------------------------------------
1999 1998
------------------------------------
Cash flows from operating activities:
Net income (loss) (204,402) (382,084)
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortization 132,998 170,321
Gain on disposal of asset (18,908) -
Common Stock issued for services - 24,000
(Increase) decrease in:
Accounts receivable (130,618) (5,554)
Inventories 9,834 (1,170)
Other current assets (13,041) 3,896
Note receivable 3,975 -
Increase (decrease) in:
Accounts payable (109,200) 50,250
Accrued liabilities (25,504) (780,972)
Other current liabilities - 88,474
Deferred income (1,888) -
------------------------------------
Net cash (used) by operating activities (356,754) (832,839)
Cash flows from investing activities:
Proceeds from sale of equipment 3,000 -
Proceeds from sale of joint venture - -
Purchase of intangible assets - -
Net assets of discontinued operations - 74,799
Purchase of property, plant & equipment (46,410) (21,948)
------------------------------------
Net cash provided (used in) investing activities (43,410) 52,851
The accompanying notes are an integral part of these consolidated condensed
financial statements.
8
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three months ended
March 31,
------------------------------------
1999 1998
------------------------------------
Cash flows from financing activities:
Proceeds from debt obligations 76,280 -
Payment on long-term debt (25,309) (27,555)
------------------------------------
Net cash provided (used) by financing 50,971 (27,555)
activities ------------------------------------
Net increase (decrease) in cash (349,193) (807,543)
Cash, beginning of year 762,459 1,153,199
------------------------------------
Cash, end of quarter 413,266 345,656
====================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
9
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 a 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.
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.
Inventories
Inventories consisting of supplies and miscellaneous material are recorded
in the financial statements at their aggregate lower of cost (first-in,
first-out) or market.
10
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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."
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.
Contingencies
During 1996, the Company entered into an agreement to sell certain assets
of the Company. As part of this agreement, the Company also agreed to guarantee
a note payable between the purchaser and a third party. At March 31, 1999, the
remaining liability on the note was approximately $83,465.
The Company has executed license agreements with licensees to utilize
Interlines used oil technology which includes technology received from Petroleum
System, Inc. ("PSI") through an assignment agreement of certain patent rights
(PSI technology). Under the assignment agreement the Company is obligated to pay
royalties to PSI for those Interline plants using PSI technology.
The Company has now developed a new technology which does not utilize PSI
technology. As a result, on September 10, 1998 the Company reassigned all of the
intellectual rights it obtained from PSI under the assignment agreement, back to
PSI. The only plants that utilize the PSI technology are the Dubai Plant which
has been shut down and essentially abandoned, the Genesis Plant which has been
shut down and no longer operates, and the England Plant which currently
operates. Under the terms of the assignment agreement, the Company is obligated
to assign all royalties payable from plants utilizing PSI technology back to
PSI. The Company did so on September 10, 1998.
11
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
PSI has made other claims against the Company which are described in Part
II, Item 1. Legal Proceeding.
In April of 1997, the Company sold its 40% interest in the England Plant
joint venture to John Wheland for $500,000. John Wheland has only paid $200,000
of the purchase price and while the Company has demanded payment of the
remaining purchase price the payment remains in dispute. Additionally, in
connection with the sale of the Company" interest in the joint venture, the
joint venture was to pay the Company $100,000 for certain construction charges
and services it performed on the England Plant. The joint venture has not made
this payment, and its payment is in dispute. While the Company believes that a
settlement of the disputed payments is likely, there can be no assurance that an
agreement will be reached. In such an event the Company will seek a legal
remedy. The Company's financial statements reflect a doubtful allowance reserve
to cover this money due.
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 $463 and $316 for the three months ended March 31, 1999 and
1998, respectively.
Reclassification
Certain amounts in the prior years financial statements have been
reclassified to conform to the September 30, 1998 presentation.
Going Concern
The Company has sustained significant operating losses in 1998 and 1997,
and it has taken longer than projected to bring the re-refining technology to
economic viability. This has caused the Company to incur more research and
development costs than originally projected. In addition, the Company filed on
September 26, 1997, a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code. On September 10, 1998, the bankruptcy court approved the
Company's plan. Under terms of the confirmed plan, certain obligations were
restructured. It is not known if the Company will be able to meet its
obligations under the confirmed plan. These factors create an uncertainty about
the Company's ability to continue as a going concern.
The Company has made continuous efforts to negotiate settlements to
satisfy claims, obligations and to obtain profitable operations. The ability of
the Company to continue as a going concern is dependent on the Company
generating cash from the sale of technology, and attaining future profitable
operations. The consolidated financial statements do not include any adjustment
that might be necessary if the Company is unable to continue as a going concern.
12
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a Utah corporation with its principal and executive offices
located at 160 West Canyon Crest Road, Utah 84004 (801) 756-3031. Interline
Resources Corporation (the "Company"), a Utah corporation, is engaged in two
areas of business, each operating as separate subsidiaries: Interline
Hydrocarbon Inc., a Wyoming corporation, which commercializes the Company's used
oil refining technology; and Interline Energy Services, Inc., a Wyoming
corporation, which manages the Company's oil and gas operations located in
Wyoming.
The Company has invested substantial resources commercializing a used oil
refining technology and has signed license agreements with companies in England,
South Korea, Dubia, Australia and Spain. The Company's first used oil refinery
was constructed in Salt Lake City, Utah in 1996. The Company's oil and gas
operations consist of natural gas gathering, natural gas processing,
transportation and oil well production all located in Wyoming.
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 Proceeding.
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 authorized by the United
States Bankruptcy Court for the District of Utah, Central Division.
On September 10, 1998, the plan of reorganization under Chapter 11 of
Interline Resources Corporation 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 have been 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.
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 and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
13
Interline Energy Service - 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, and oil well production. The
Company's main oil and gas operations are located in east-central Wyoming.
Wyoming operations, located near Douglas, include the Well Draw Gas Plant ("Well
Draw"), a crude gathering pipeline, a 20.4% interest in the Hatcreek
Partnership, NGL trucking and four producing oil and gas wells.
Well Draw Gas Plant
Well Draw, located near Douglas, Wyoming, is a natural gas liquids (NGLs)
processing plant which has the capacity to process approximately 150,000 gallon
of NGLs each day. 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.
Additionally, the Company enters into agreements for fractionation of liquids
from others on a fee basis. Most of the liquids originate from liquids that are
trucked into the plant from outside sources. The liquids are then processed and
fractionated into commercial propane, butane, and natural gasoline, and
re-marketed into the local market. As part of the plant system, the Company owns
a gathering pipeline system. The gathering system is connected to the Well Draw
Gas Plant and supplies a small percentage of liquids for the plant. The plant
processed and fractionated a total of 100,007 gallons a day of NGLs for the
three months ended March 31, 1999 compared to 78,100 gallons a day for the three
months ended March 31, 1998. Of the total gallons fractionated and processed,
9,228 gallons per day was for the Company and 90,779 gallons per day for others,
as compared to 9,039 and 69,061 gallons per day respectively in 1998.
Amoco Contract
During 1994, the Company entered into a six year contract with Amoco
Production Company to process NGLs. The agreement expires June 1, 2000. The
Amoco agreement is the largest liquids contract the Company has entered into
since it purchased the Plant in 1990. To fulfill the contract, the Company made
modifications to the Well Draw Gas Plant to increase its processing capacity
from about 90,000 to approximately 150,000 gallons per day. The Company also
constructed an amine treating unit to reduce sulfur concentrations of the NGLs
at Amoco's Bairoil, Wyoming plant where the NGLs are collected. During the three
months ended March 31, 1999, the Company processed an average of 50,182 gallons
per day of NGLs under the Amoco contract compared to 47,198 for the three months
ended March 31, 1998. The Amoco agreement accounted for 50.17% of the total NGLs
processed by the Plant for the three months ended March 31, 1999 compared to
60.43% for the three months ended March 31, 1998.
Most of the revenue earned at the Well Draw Gas Plant is derived from the
Amoco agreement. The Amoco agreement expires June 1, 2000 and if this agreement
is not renewed it will have a substantial impact on the ability of the Company
to continue operations.
14
KN Gas Gathering Agreement
During the first quarter of 1998, the Company entered into a agreement
with KN Gas Gathering, Inc. ("KNGG") to process NGLs on a month to month basis.
During the three months ended March 31, 1999 the Company processed an average of
40,599 gallons per day of NGLs under this agreement compared to 20,000 gallons a
day for the three months ended March 31, 1998. The KNGG agreement accounted for
40.6% of the total NGLs processed by the plant for the three months ended March
31, 1999 compared to 25.61% for the three months ended March 31, 1998. In the
past, the local market for NGLs has weakened during the warm months and liquid
prices decline. In April 1999, due to lower NGLs prices in the local market,
KNGG reduce the amount of NGLs delivered to the plant to approximately 10,000
gallons a day.
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 45,041 barrels of
crude during the three months ended March 31, 1999 compared to 67,045 during the
three months ended March 31, 1998.
Hat Creek Partnership
The Hat Creek Partnership, of which Interline Energy owns a 20.4%
interest, owns working interests in two oil and gas wells and a 13 mile
gathering line interconnected to the Well Draw Gas Plant. The Company receives
revenues from the sale of oil and gas from the oil wells.
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 March 31, 1999 the wells produced approximately1,358 barrels
of oil and 3,016 Mcf of natural gas compared to approximately 2,125 barrels of
oil and 4,031 Mcf of natural gas for the three months ended March 31, 1998.
NGL Transportation Operation
The Company's NGL transportation operation transported approximately 9
million gallons of raw and finished products during the three months ended March
31, 1999. The Company operates five tractor-trailer-pup combination units to
move unprocessed natural gas liquids to Well Draw for fractionation, and then to
take propane, butane, and natural gasoline from Well Draw to various refiners,
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.
Management is unaware of any significant future capital expenditures
except for the addition to the office and control room at the Well Draw Gas
Plant The total cost of this addition will be approximately $60,000. However,
the very nature of equipment operation, including the wear and
15
tear and replacement in this type of operation, can be significant. Further, it
is noted that most of the revenues earned by the Well Draw Plant are derived
from the Amoco contract which will expire in June 1, 2000. If this contract is
not renewed, it will have a substantial impact on the ability of the Well Draw
plant to continue operations. Management continues to seek other liquids and gas
connections to expand and diversify its operations in Wyoming, however, its
operations are in a limited and well defined area and expansion is difficult.
Interline Hydrocarbon - Used Oil Refining
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 territories to licensee, 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) rather than build
plants, sell the construction plans and provide consultation and expertise so
the customer can then build the Plant.
Based on the experiences with the five Plants that have been built by the
Company, management's current feelings are to not be in the construction
business. Further, until the Company gets in better financial condition, it is
not in a position to take interests in operating Plants. Management believes
that 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.
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. The plant will be located in Madrid, Spain. Under the agreement,
Ecolube will construct and operate the plant and produce lubricant base oil.
Interline will receive a $534,000 engineering and licensing payment and receive
a running royalty of $0.0175 on each gallon produced and sold for 10 years. As
of March 31, 1999, the Company has recorded revenues of $350,000 of the $534,000
based on meeting certain criteria in the contract. Ecolube has the right to
build additional plants in the Iberian Peninsula (Spain and Portugal) for a four
year period commencing from the date of plant start up.
It has also become evident to management that demanding royalties based on
production in many situations and countries is difficult. Unless and until the
rerefined oil produced in a Plant can be sold at higher values based on pricing
similar to base lubricating oils, on-going royalties based on production is
difficult to obtain. The most viable opportunities management has discovered are
in countries that have governmental concessions resulting in economic incentives
for collecting and processing used oil. 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 not payable
until profitable.
16
Management still believes that there exists economic justification and
interest in the technology. The Company continues to improve the technology, and
on May 28, 1998 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. While management continues to receive inquiries about the
technology, the Company is selective as to potential purchasers. From
experience, management is aware of the complicated nature between the balance of
supply and demand. Management has become much more selective in its
consideration of selling the technology to prospective purchasers and unless
favorable conditions exist the Company discourages the purchaser. Management has
become much more active in helping potential customers evaluate their end
product sales markets.
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
Revenues decreased $80,636 or 8.98%, to $816,934 for the three months
ended March 31, 1999 as compared to $897,570 for the three months ended March
31, 1998. The revenue decrease included a $31,949 or 4.07%, increase in oil and
gas revenues; a $103,885, or 100% decrease in used oil refining revenues and an
$8,700 decrease in other revenues. The Company's total revenues, on a segment
basis, for the three months ended March 31, 1999 and 1998 were as follows:
Revenues For Three Months Ended March 31, 1999 and 1998
1999 % 1998 %
- ------------------------------------------------------------------------------
Oil and Gas $816,934 100% $784,985 87.46%
Used Oil refining 0 0% 103,885 11.57%
Other 0 0% 8,700 .97%
- ------------------------------------------------------------------------------
Total Revenue $816,934 100% $897,570 100%
Oil and Gas Revenues
Oil and gas revenues contributed 100% of total revenues for the three
months ended March 31, 1999, as compared to approximately 87.46% for the three
months ended March 31, 1998. Revenues increased $31,949 or 11.57% to $816,934
for the three months ended March 31, 1999 as compared to $784,985 for the three
months ended March 31, 1998.
During the three months ended March 31, 1999 revenues increased $31,949,
or 4.07%. This revenue increase was mainly attributed to a $82,267, or 37.42%
increase in fractionation fees, a $45,989, or 13.58% increase in transportation
fees, offset by a $58,634, or 28.34% decrease in
17
liquids (NGLs) sold to the local market under the account of the Company.
Because of low oil prices during the three months ending March 31, 1999, crude
oil tariffs fees decreased by $15,276 and crude oil sold decreased by $20,154.
The increase in fractionation and transportation fees was mainly
attributed to the Company's agreement with KNGG to process NGLs at Well Draw.
During the three months ended March 31, 1999 the Company processed an average of
40,599 gallons per day of NGLs under this agreement compared to 20,000 gallons a
day for the three months ended March 31, 1998. In the past, the local market for
NGLs has weakened during the warm months and liquid prices decline. In April
1999, due to lower NGLs prices in the local market, KNGG reduce the amount of
NGLs delivered to the plant to approximately 10,000 gallons a day.
The Company's Oil & Gas Operations revenue for the three months ended
March 31, 1999 and 1998 were as follows:
Oil & Gas Operations Revenue For Three Months Ended March 31, 1999 and 1998
1999 % 1998 %
- ------------------------------------------------------------------------------
Liquids (NGL) Sold $199,853 24.46% $258,487 32.93%
Fractionation Fees 219,824 26.91% 137,557 17.52%
Transportation Fees 338,752 41.47% 292,763 37.30%
Crude Tariff Fees 33,556 4.11% 48,832 6.22%
Crude Oil Sold 9,925 1.21% 30,079 3.83%
Residue Gas Sold 9,571 1.17% 7,764 .98%
Other 5,453 .67% 9,503 1.22%
- ------------------------------------------------------------------------------
Total Revenue $816,934 100% $784,985 100%
==============================================================================
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% of total revenues for the three
months ended March 31, 1999 compared to 11.57% for the three months ended March
31, 1998. The revenues decreased $103,885, or 100%, to $-0- for the three months
ended March 31, 1999 compared to $103,885 for the three months ended March 31,
1998. The $103,885 revenue for three months ended March 31, 1998 was mainly
derived from the Australian refinery contract. For the three months
18
ended March 31, 1999, the Company received no revenues relating to the
engineering and licensing agreement with Ecolube, S.A., a subsidiary of Sener
Engineering of Madrid, Spain. Under the Ecolube agreement, the Company will
receive a total engineering and licensing payment of $534,000. As of March 31,
1999, the Company has received $350,000 from Ecolube which was all reported in
1998. During the three months ended March 31, 1999 and 1998, the Company
received no revenues for royalties for it used oil technology.
Direct Costs
Direct costs decreased $136,666 or 20.37%, to $534,212 for the three
months ended March 31, 1999 compared to $670,878 for the three months ended
March 31, 1998. As a percent of revenues, direct costs decreased to 65.39% for
the three months ended March 31, 1999 compared to 74.74% for the three months
ended March 31, 1998. The decrease of $136,666 for the three months ended March
31, 1999 was mainly attributed to the Company's focus to increase cash flows by
increasing margins as it relates to its liquid purchase contracts, reducing
operational personnel and reducing operational expenses.
Selling, General and Administrative
Selling, general and administrative expenses decreased $76,032, or 24.03%,
to $240,416 for the three months ended March 31, 1999 compared to $316,448 for
the three months March 31, 1998. As a percent of revenues, selling, general and
administrative expenses were 29.43% for the three months ended March 31, 1999
compared to 35.26% for the three months ended March 31, 1998. During 1998, the
Company's management developed a plan to increase cash flow and reduce expenses.
Part of the plan included a reduction of personnel, including both management
and operations personnel. During the three months ended March 31, 1999 the
Company decrease wages by $26,089, or 26.87% to $71,014 compared to $97,103 for
three months ended March 31, 1998. The Company also decreased legal, accounting
and outside contract services by $42,133, or 49.66% to $42,712 for the three
months ended March 31, 1999 compared to $84,845 for the three months ended March
31, 1998. These services were mainly attributed to the Company's legal
proceedings, patent protection, auditing fees and bankruptcy filing.
Depreciation and Amortization
Depreciation and amortization expenses decreased $1,609 or .94% to
$168,712 for the three months ended March 31, 1999 compared to $170,321 for the
three months ended March 31, 1998. As a percent of revenues, depreciation and
amortization expenses increased to 20.65% for the three months ended March 31,
1999 compared to 18.98% for the three months ended March 31, 1998.
Research and Development
Research and development expenses decreased $3,768, or 16.07%, to $19,678
for the three months ended March 31, 1999 compared to $23,446 for the three
months ended March 31, 1998. As a percent of revenues, research and development
expenses increased to 2.41% for the three months ended March 31, 1999 compared
to 2.61% for the three months ended March 31, 1998.
Research and development expenses were mainly attributable to the
development and enhancement of the Company's used oil refining technology. The
Company will continue to incur research and development expenses as it continues
to develop its used oil refining technology.
19
(Loss) from operations
Loss from operations decreased $137,439, or 48.48%, to $146,084 for the
three months ended March 31, 1999 compared to a $283,523 loss for the three
months ended March 31, 1998. The $137,439 decrease in loss from operations was
mainly attributed to an increase in gross margin of $140,796 from the Company's
focus on increasing margins as it relates to liquid contracts. Also the
Company's selling, general and administrative expenses decreased by $76,032, or
24.03%, which was mainly attributed to decrease in wages, legal, accounting and
outside contract services
Other income (expenses)
Net interest income (expense) increased $4,140, or 41.05%, to $14,226 for
the three months ended March 31, 1999 compared to $10,086 for the three month
ended March 31, 1998. The net increase was mainly attributed to a decrease in
interest earned on the Company's money market and interest bearing accounts.
Interest expense to a related party decreased $25,475 or 28.79%, to
$63,000 for the three months ended March 31, 1999 compared to $88,475 for the
three months ended March 31, 1998. This $25,475 decrease in interest expense to
a related party was attributed to the Company's new note agreement. As part of
the plan of reorganization under Chapter 11 the Company executed a new note
agreement for $3,600,000. The new note agreement bears interest at 7% per annum
compared to the old note agreements of 16%.
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 only from the Australia Plant, and the Spanish
Plant, when constructed and operational. While the Company continues to work
with potential purchasers of its technology, such sales and expected revenues
are uncertain and unpredictable.
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 an 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 will make quarterly payments of all accrued interest
beginning on December 22, 1998 and continuing until September 22, 2002. The
Company will also 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 protected with Trust Deeds which include 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. As obligated
in the previous agreements, the Company executed a new Pledge Agreement with
this major creditor pledging stock of the Company and stock of all subsidiaries
of the Company.
20
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 and would also provide enough cash
to meet debt obligations. 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 not receive any cash from the marketing of it
refining technology.
As of May 15, 1999, the Company is current on all interest payments due to
its major creditor under the new trust agreement. On June 22, 1999, the Company
is obligated to make the next quarterly interest payment of $62,000. Under the
new trust deed note (see new terms of trust deed above), on September 22, 1999,
the Company is obligated to pay this major creditor $812,000 which consists of
$750,000 of principal and $62,000 of interest. Based on the Company's current
cash position and anticipated future cash flow, the Company could be forced to
cease operations and liquidate the assets of the Company. This could occur if
the Company is unable to receive cash from the marketing of it refining
technology or raise additional funding through equity or the sale of assets. A
merger could also be a viable option.
Management has put strict restraints on all capital expenditures. There
are necessary disbursements to maintain current operations. 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 by operations was $356,754 for the three
months ended March 31, 1999 compared to net cash used by operations of $832,839
for the three months ended March 31, 1998. Of the $832,839 cash used in
operations for the three months ended March 31, 1998, $750,000 was attributed to
an one time payment to Genesis Petroleum, Inc. to settle all claims (See Item 1
- - Legal Proceeding). Without the one time payment to Genesis Petroleum, Inc.,
cash used in continuing operations for the three months ended March 31, 1998 was
$82,839. The $273,915 increase in cash used in 1999 by operations (exclusive of
the $750,000 payment to Genesis Petroleum, Inc.) was mainly attributed to an
increase of $130,618 in accounts receivable and a $109,200 decrease in accounts
payable.
Year 2000 Compliance
The Year 2000 (Y2K) issue is the result of computer programs being written
using two digits rather than four to define the applicable year. This could
result in a system failure or miscalculations causing disruptions of operations,
including, but not limited to, a temporary inability to process transactions,
including invoices or other similar normal business activities.
The Company is in the process of assessing its computer equipment,
accounting software, telephone systems, scanning equipment and other
miscellaneous systems. The Company's compliance plan provides for the conversion
of noncompliant systems in the second and third quarter of 1999. The Company
estimates that the cost to complete these efforts will not exceed $30,000.
21
The Company has begun discussion with its significant vendors and
customers on the need to be 2000 compliant. The Company plans to mail
questionnaires to its significant vendors, customers and service providers to
assist in an assessment of whether they will be Year 2000 compliant. If they are
not, such failure could affect the Company's ability sell its oil and gas
products and receive payments, to receive natural gas liquid products from its
customers to generate revenues and the ability to get vendors and service
providers to provide products and services in support of the Company's
operations. The Company expects to complete this assessment by June 30, 1999.
Although the Company has no reason to believe that its vendors and customers
will not be compliant by the year 2000, the Company is unable to determine the
extent to which Year 2000 issues will effect its vendors and customers.
The Company has not yet begun a comprehensive analysis of the operational
problems and costs that would be reasonable likely to result from failure by the
Company and significant third parties to complete efforts necessary to achieve
Year 2000 compliance on a timely basis. A contingency plan has not been
developed for dealing with most reasonably likely worst case scenario, and such
scenario has not been clearly identified. The Company plans to complete such
analysis and contingency planning by June 30, 1999.
The Company presently does not plan to incur significant problems due to
the Year 2000 issue. However, if all Year 2000 issues are not properly and
timely identified, assessed, remediated and tested, there can be no assurance
that the Year 2000 issue will not materially impact the Company's results of
operations or adversely affect its relationship with customers, vendors, or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material impact on the Company's results of
operations.
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.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bankruptcy Proceedings
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 Proceeding.
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 authorized by the United
States Bankruptcy Court for the District of Utah, Central Division.
On September 10, 1998, the plan of reorganization under Chapter 11 of
Interline Resources Corporation 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 have been removed. Interline reached
agreement with its major creditor during the Chapter 11 case and the terms of
the agreement were incorporated in the plan. All other creditors will be paid in
full under the plan.
Petroleum Systems Inc.
The Company has executed license agreements with licensees to utilize
Interlines used oil technology which includes technology received from Petroleum
System, Inc. ("PSI") through an assignment agreement of certain patent rights
(PSI technology). Under the assignment agreement the Company is obligated to pay
royalties to PSI for those Interline plants using PSI technology.
The Company and PSI have been involved in a dispute as to what payments
the Company owes PSI under the assignment agreement. The Company and PSI were
first involved in an arbitration proceeding to determine the issues between
them, but PSI discontinued resolution through arbitration and on July 29, 1997
filed a lawsuit against the Company and its wholly owned subsidiary Interline
Hydrocarbons in the Third Judicial District Court of the State of Utah ("State
Court Action") alleging that the Company was in breach of the Assignment
agreement and that PSI should be allowed to re-acquire all of the technology
rights assigned to the Company through the assignment agreement. PSI filed its
complaint and the Company answered, but as a result of the bankruptcy
proceeding, and its procedural rules the State Court Action was stayed until the
bankruptcy proceedings were resolved.
On March 26, 1998, PSI filed claim against the Company in the bankruptcy
proceeding seeking royalties of $420,000, asserting breaches of the assignment
agreement and requesting the return of a prototype production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel, the court entered an
23
order denying PSI's claim for $420,000, ordering that the Company return Baby M
to PSI and denying all other claims brought by PSI. The Company has returned
Baby M to PSI.
On May 29, 1998, PSI filed a motion for relief from the automatic stay in
the bankruptcy court seeking the right to proceed with its State Court Action
against the Company and the Company's subsidiary Interline Hydrocarbons. After
argument and hearing, the bankruptcy court requested counsel for PSI to prepare
an order granting relief from the automatic stay. The Company objected to the
proposed order granting relief from the automatic stay and a hearing was set
before the court on August 13, 1998. After argument, the Court entered its order
granting relief from the automatic stay, but limited PSI cause of action against
the Company by prohibiting any money damage to be assessed against the Company.
On September 10, 1998, on its own initiative, the Third District Court
scheduled an Order to Show Cause for on October 15, 1998. Its purpose was to
advise the court as to the progress of the action. The hearing was held on
October 15, 1998 and the court entered an order that the case be certified ready
for trail within 90 days - January 13, 1999. PSI was to amend or otherwise file
a new complaint against the Company. PSI took no steps to proceed on its
complaint against the Company and on January 9, 1999 the Company filed a motion
to dismiss the PSI claim. On January 27, 1999 the court granted the motion, and
extend its order dismissing the lawsuit
Interline U.K.
In April of 1997, the Company sold its 40% interest in the England Plant
joint Venture to John Wheland for $500,000. John Wheland has only paid $200,000
of the purchase price and while the Company demanded payment of the remaining
purchase price the payment remains in dispute. Additionally, in connection with
the sale of the Company's interest in the joint venture, the joint venture was
to pay the Company $100,000 for certain construction charges and services it
performed on the plant. The joint venture has not made this payment, and its
payment is in dispute. As a result, on November 19, 1998 the Company instituted
a legal proceeding against John Whelan in the High Court of Justice, Queen's
Bench Division, Bristol District Registry, Bristol Mercantile Court. This action
is currently pending.
Item 2. Changes in Securities:
None
24
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
The Company announced on August 13, 1997 that the American Stock Exchange
(AMEX) made a final determination to delist the Company from the AMEX's Emerging
Company marketplace.
As of May 15, 1999, a market is being made of the Company's common stock
on the NASD Bulletin Board under symbol "IRCE".
Item 6(a). Exhibits:
None
Item 6(b) Form 8-K:
None
25
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: May 15, 1999 INTERLINE RESOURCES CORPORATION
By /s/ Michael R. Williams
-------------------------------------
Michael R. Williams
CEO/President
Principal Executive Officer
Director
By /s/ Mark W. Holland
-------------------------------------
Mark W. Holland
Chief Financial Officer / Director
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
May 15, 1999 CEO/President /s/ Michael R. Williams
and Director Michael R. Williams
May 15, 1999 Director/ /s/ Laurie Evans
Secretary Laurie Evans
26