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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 Quarter Ended June 30, 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 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 July 29, 1999 - 14,066,052 shares of $.005 par
value Common stock.
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 June 30, 1999 5
Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 1999 and 1998 7
Condensed Consolidated Statements of Cash Flows for
six months ended June 30, 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 25
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.
Theses 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, 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 June 30, 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.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
June 30,
1999
--------
Assets
Current assets:
Cash and cash equivalents $223,328
Accounts receivable - trade 412,672
Inventories 26,089
Note receivable - current portion 20,000
Other current assets 21,493
-----------
Total current assets 703,582
Property, plant and equipment 6,343,753
Accumulated depreciation and depletion (2,529,868)
-----------
Net property, plant & equipment 3,813,885
Note receivable 80,700
Technology and marketing rights 788,319
------------
Total assets $5,386,486
============
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,
1999
--------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $162,611
Accrued liabilities 163,425
Note payable, related party 750,000
Current portion of long-term debt 163,597
-----------
Total current liabilities 1,239,633
-----------
Long-term debt less current maturities 602,034
Note payable, related party 2,850,000
Deferred income 47,771
-----------
Total liabilities 4,739,438
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 June 30, 1999 70,371
Additional paid-in capital 9,209,017
Retained earnings (8,632,340)
-----------
Total stockholders' equity 647,048
-----------
Total liabilities & stockholders' equity $5,386,486
===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
1999 1998 1999 1998
-----------------------------------------------
Revenue $923,750 788,063 $1,740,684 $1,685,633
Direct costs 588,547 559,802 1,122,759 1,230,680
-----------------------------------------------
Gross margin 335,203 228,261 617,925 454,953
Selling, general and
administrative expenses 235,016 221,415 475,432 513,809
Research and development 20,841 25,640 40,519 49,086
Depreciation, depletion and
amortization 192,478 169,729 361,190 340,050
-----------------------------------------------
(Loss) from operations (113,132) (188,523) (259,216) (447,992)
Other income (expense) net
Interest income (expense) (14,954) (11,023) (29,180) (21,109)
Interest expense, related
party (63,000) (89,456) (126,000) (177,931)
Gain from sale of assets - 1,334 18,908 1,334
-----------------------------------------------
(Loss) before discontinued
operations (191,086) (287,668) (395,488) (645,698)
Discontinued operations
(Loss) from discontinued
operations - (29,814) - (53,868)
Gain on disposal of
discontinued operations - 18,885 - 18,885
-----------------------------------------------
Total discontinued operations 0 (10,929) 0 (34,983)
Net (loss) ($191,086) ($298,597) ($395,488) ($680,681)
===============================================
Earning per share
(Loss) from continuing
operations ($0.01) ($0.02) ($0.03) ($0.05)
(Loss) from discontinued
operations $0.00 ($0.00) $0.00 ($0.00)
-----------------------------------------------
(Loss) per common share: ($0.01) ($0.02) ($0.03) ($0.05)
===============================================
Weighted average shares o/s 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.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
1999 1998
------------------
Cash flows from operating activities:
Net (loss) ($395,488) ($680,681)
Adjustment to reconcile net (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortization 361,190 340,050
Gain on disposal of asset 18,908 1,334
Common Stock issued for services - 24,000
(Increase) decrease in:
Accounts receivable 142,952) (86,283)
Inventories 29,136 4,603
Other current assets (998) 1,213
Note receivable 9,021 (45,677)
Increase (decrease) in:
Accounts payable (204,556) 60,344
Accrued liabilities (26,550) (741,252)
Accrued interest, related party - 177,930
Other current liabilities - 20,127
Deferred income (4,281) 145,220
------------------------
Net cash (used) by operating activities (356,570) (779,072)
Cash flows from investing activities:
Proceeds from sale of equipment 54,763 4,700
Purchase of intangible assets - -
Net assets of discontinued operations - 683,853
Purchase of property, plant & equipment (147,090) (23,115)
------------------------
Net cash provided (used in) investing activities (92,327) 665,438
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
1999 1998
-------------------------
Cash flows from financing activities:
Proceeds from debt obligations 76,280 -
Payment on long-term debt (90,234) (58,107)
-------------------------
Net cash provided (used) by financing activities (90,234) (58,107)
-------------------------
Net increase (decrease) in cash (539,131) (171,741)
Cash, beginning of year 762,459 1,153,199
-------------------------
Cash, end of quarter $223,328 $981,458
=========================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Oil and Gas Accounting
The Company uses the "successful efforts" method to account for oil and gas
operations. The use of this method results in the capitalization of costs
related to acquisition, exploration and development of revenue producing oil and
gas properties. The costs of unsuccessful exploration efforts are expensed in
the period in which they are determined unrecoverable by future revenues.
Provision for depreciation and depletion of oil and gas properties is based on
the units of production method, based on proven oil and gas reserves.
Segment information concerning oil and gas reserves and related disclosures
are not presented since they are not significant in relation to the financial
statements taken as a whole.
Construction Accounting
Construction revenues are recognized on the percentage-of-completion method
of accounting. Profits on contracts are recorded on the basis of "cost-to-cost"
determination of percentage of completion on individual contracts, commencing
when progress reaches a point where cost and estimate analysis and other
evidence of trend are sufficient to estimate final results with reasonable
accuracy. That portion of the total contract price which is allocable to
contract expenditure incurred and work performed is accrued as earned income. At
the time a loss on 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.
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."
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed
using straight-line and accelerated methods. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized as income for
the period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized. Deductions are
made for retirements resulting from renewals or betterments. The estimated
useful lives are as follows:
Building and equipment 15-25 years
Equipment and vehicles 3-10 years
Amortization
The Company has amortized its marketing and technology rights for the used
oil refining process over seventeen years. This period approximates the assets'
useful lives.
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 June 30, 1999, the
remaining liability on the note was approximately $79,445.
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 its 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. PSI has made other claims against
the Company which are described in Part II, Item 1. Legal Proceedings.
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 with a trial date set for March 27, 2000.
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $476 and $1,095 for the three months ended June 30, 1999 and
1998, respectively.
Reclassification
Certain amounts in the prior years financial statements have been
reclassified to conform to the June 30, 1999 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 cost 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 cencern.
The Company has made continuous efforts to negotiate settlement 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 its re-refining 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.
Inflation
The Company's business and operations have not been materially affected by
inflation during the past three years and the current calendar quarter. The
Company believes that inflation will not materially nor adversely impact its
business plans for the future.
PART 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.
In 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.
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 72,826 gallons a day of NGLs for the three
months ended June 30, 1999 compared to 62,221 gallons a day for the three months
ended June 30, 1998. Of the total gallons fractionated and processed, 11,451
gallons per day was for the Company and 61,375 gallons per day for others, as
compared to 9,847 and 52,374 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 June 30, 1999, the Company processed an average of 53,065 gallons
per day of NGLs under the Amoco contract compared to 44,565 for the three months
ended June 30, 1998. The Amoco agreement accounted for 72.86% of the total NGLs
processed by the Plant for the three months ended June 30, 1999 compared to
71.62% for the three months ended June 30, 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.
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 June 30, 1999 the Company processed an average of
8,310 gallons per day of NGLs under this agreement compared to 7,809 gallons a
day for the three months ended June 30, 1998. The KNGG agreement accounted for
11.41% of the total NGLs processed by the plant for the three months ended June
30, 1999 compared to 12.55% for the three months ended June 30, 1998. Local
markets for NGLs weaken during the warm months and liquid prices decline. During
the three months ended June 30, 1999, due to lower NGL prices in the local
market, KNGG reduced the amount of NGLs delivered to the plant to 8,310 gallons
a day compared to 40,599 gallons a day delivered during the three months ended
March 31, 1999.
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 68,380 barrels of
crude during the three months ended June 30, 1999 compared to 67,830 during the
three months ended June 30, 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 June 30, 1999 the wells produced approximately 1,245 barrels
of oil and 3,168 Mcf of natural gas compared to approximately 2,138 barrels of
oil and 4,024 Mcf of natural gas for the three months ended June 30, 1998.
NGL Transportation Operation
The Company's NGL transportation operation transported approximately 10.4
million gallons of raw and finished products during the three months ended June
30, 1999. The Company operates five tractor-trailer-pup combination units to
move unprocessed natural gas liquids to Well Draw for fractionation, and then
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 $72,000. As of June
30, 1999 , the Company has spent $42,000 with approximately $30,000 remaining.
However, the very nature of equipment operation, including the wear and 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 belief is to stay out of the construction
business. Further, until the Company becomes more financially stable, 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.
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 June 30, 1999, the Company has recorded revenues of $409,500 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.
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 increased $135,687 or 17.22%, to $923,750 for the three months
ended June 30, 1999 as compared to $788,063 for the three months ended June 30,
1998. The revenue increase included a $126,087 or 17.28%, increase in oil and
gas revenues; a $18,000, or 36% decrease in used oil refining revenues and an
$8,400 decrease in other revenues. The Company's total revenues, on a segment
basis, for the three months ended June 30, 1999 and 1998 were as follows:
Revenues For Three Months Ended June 30, 1999 and 1998
1999 % 1998 %
-----------------------------------------------
Oil and Gas $855,750 92.64% $729,663 92.59%
Used Oil refining 68,000 7.36% 50,000 6.34%
Other 0 0% 8,400 1.07%
-----------------------------------------------
Total Revenue $923,750 100% $788,063 100%
===============================================
Oil and Gas Revenues
Oil and gas revenues contributed 92.64% of total revenues for the three
months ended June 30, 1999, as compared to approximately 92.59% for the three
months ended June 30, 1998. Revenues increased $126,087 or 17.28% to $855,750
for the three months ended June 30, 1999 as compared to $729,663 for the three
months ended June 30, 1998.
During the three months ended June 30, 1999 revenues increased $126,087,
or 17.28%. This revenue increase was mainly attributed to a $41,838, or 25.37%
increase in fractionation fees, a $66,568, or 27.76% increase in transportation
fees, and a $10,480, or 4.41% increase in liquids (NGLs) sold to the local
market under the account of the Company. Revenues from the sale of crude oil
decreased $3,966 during the three months ending June 30, 1999 compared to the
three months ending June 30, 1998.
The increase in fractionation and transportation fees was mainly
attributed to the Company's agreement with Amoco to process NGLs at Well Draw.
During the three months ended June 30, 1999 the Company processed an average of
53,065 gallons per day of NGLs under this agreement compared to 44,565 gallons a
day for the three months ended June 30, 1998.
The Company's Oil & Gas Operations revenue for the three months ended June
30, 1999 and 1998 were as follows:
Oil & Gas Operations Revenue For Three Months Ended June 30, 1999 and 1998
--------------------------------------------------------------------------
1999 % 1998 %
- ------------------------------------------------------------------------------
Liquids (NGL) Sold $247,860 28.96% $237,380 32.53%
Fractionation Fees 206,771 24.16% 164,933 22.60%
Transportation Fees 306,335 35.80% 239,767 32.86%
Crude Tariff Fees 50,601 5.91% 50,194 6.88%
Crude Oil Sold 23,894 2.79% 27,860 3.82%
Residue Gas Sold 6,549 .76% 6,500 .89%
Other 13,740 1.62% 3,029 .42%
- ------------------------------------------------------------------------------
Total Revenue $855,750 100% $729,663 100%
==============================================================================
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 68,000, or 7.36% of total revenues
for the three months ended June 30, 1999 compared to 50,000, or 6.34% for the
three months ended June 30, 1998. The revenues increased of $18,000 or 36%, to
$68,000 for the three months ended June 30, 1999 compared to $50,000 for the
three months ended June 30, 1998. The $68,000 received for the three month
ending June 30, 1999 and the $50,000 received for the three months ended June
30, 1998 were 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 June 30, 1999, the Company has recorded revenues of
$409,500 attributed to the Ecolube agreement. During the three months ended June
30, 1999 and 1998, the Company received no revenues for royalties for it used
oil technology.
Direct Costs
Direct costs increased $28,745 or 5.13%, to $588,547 for the three months
ended June 30, 1999 compared to $559,802 for the three months ended June 30,
1998. As a percent of revenues, direct costs decreased to 63.71% for the three
months ended June 30, 1999 compared to 71.04% for the three months ended June
30, 1998. The increase of $28,745 for the three months ended June 30, 1999 was
mainly attributed to the Company's increase in revenues. The 7.33% decrease in
direct costs as it relates to revenues was mainly attributed to the Company's
focus to increase cash flows by increasing margins as it relates to its liquid
purchase contracts and reducing operational expenses.
Selling, General and Administrative
Selling, general and administrative expenses increased $13,601, or 6.14%,
to $235,016 for the three months ended June 30, 1999 compared to $221,415 for
the three months June 30, 1998. As a percent of revenues, selling, general and
administrative expenses were 25.44% for the three months ended June 30, 1999
compared to 28.10% for the three months ended June 30, 1998. These expenses
consisted principally of salaries and benefits, travel expenses, insurance,
legal, information technical services and administrative personnel of the
Company. Also included are outside legal and accounting fees, and expenses
associated with computer equipment and software used in the administration of
the business.
Depreciation and Amortization
Depreciation and amortization expenses increased $22,749 or 13.40% to
$192,478 for the three months ended June 30, 1999 compared to $169,729 for the
three months ended June 30, 1998. As a percent of revenues, depreciation and
amortization expenses increased to 20.84% for the three months ended June 30,
1999 compared to 21.54% for the three months ended June 30, 1998.
Research and Development
Research and development expenses decreased $4,799, or 18.72%, to $20,841
for the three months ended June 30, 1999 compared to $25,640 for the three
months ended June 30, 1998. As a percent of revenues, research and development
expenses decreased to 2.26% for the three months ended June 30, 1999 compared to
3.25% for the three months ended June 30, 1998. Research and development
expenses are 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.
(Loss) from operations
Loss from operations decreased $75,391, or 39.99%, to $113,132 for the
three months ended June 30, 1999 compared to a $188,523 loss for the three
months ended June 30, 1998. The $75,391 decrease in loss from operations 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.
Other income (expenses)
Net interest income (expense) increased $3,931, or 35.665%, to $14,954 for
the three months ended June 30, 1999 compared to $11,023 for the three month
ended June 30, 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 $26,456 or 29.57%, to $63,000
for the three months ended June 30, 1999 compared to $89,456 for the three
months ended June 30, 1998. This $26,456 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 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 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. 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.
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 not receive any cash from the marketing of
it refining technology.
As of July 29, 1999, the Company is current on all interest payments due
to its major creditor under the new trust agreement. On September 22, 1999, the
Company is obligated to pay this major creditor $812,000 which consists of
principal of $750,000 and interest of $62,000 under the new trust deed note (see
new terms of trust deed above) due to its major creditor. As of July 29, 1999,
the Company is not in a position to pay this major creditor $812,000 due
September 22, 1999. If the Company is unable to receive cash from the marketing
of it refining technology or raise additional financing through the sale of
equity, sale of debt or assets, then the Company could 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 the building at Well Draw Gas Plant and any necessary expenditures
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 $356,570 for the six months
ended June 30, 1999 compared to net cash used by operations of $779,072 for the
six months ended June 30, 1998. Of the $779,072 cash used in operations for the
six months ended June 30, 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 six months ended June 30, 1998 was $29,072.
The $327,498 increase in cash used by operations (exclusive of the $750,000
payment to Genesis Petroleum, Inc.) was mainly attributed to an increase of
$142,952 in accounts receivable and a $204,556 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 third quarter of 1999. The Company estimates that
the cost to complete these efforts will not exceed $15,000.
The Company has begun discussion with its significant vendors and customers
on the need to be 2000 compliant. The Company has mailed 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 August 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 is in the process of assembling 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 fully 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 September 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.
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. Iterline 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 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 with a trial date set for March 27, 2000.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
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 August 13, 1998, 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
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: July 29, 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
July 29, 1999 CEO/President /s/ Michael R. Williams
and Director ----------------------------------
Michael R. Williams
July 29, 1999 Director/Secretary /s/Laurie Evans
----------------------------------
Secretary Laurie Evans