CONFORMED
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1997
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 identification No.)
incorporation or organization)
160 West Canyon Crest Road, Alpine, UT 84004
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 756-3031
Securities registered pursuant to Section 12(b) of the Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange
Act: None
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____.
Common stock outstanding at May 7, 1997 - 14,074,167 shares of
$.005 par value Common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
FORM 10-QSB
INTERLINE RESOURCES CORPORATION
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 1997 and December 31, 1996
Condensed Consolidated Statement of Operations for
the three months ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for
three months ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. - OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in the Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6(a) Exhibits
Item 6(b) Reports on Form 8-K
Signatures
<PAGE>
INTERLINE RESOURCES
CORPORATION
AND SUBSIDIARIES
PART I - ITEM 1
FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1997
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.
The Company has recorded a liability for the repurchase of a
used oil refinery from the original purchaser. This
liability is a result of the purchaser exercising the
option, provided in the sales agreement, to require the
Company to repurchase the refinery. Prior to the option
being executed, the Company was a 26% owner of the joint
venture which operated the used oil refinery and accounted
for its investment on the equity method through June 19,
1996. The original purchaser owned the remaining 74% of the
joint venture and operated the plant. The Company has
consolidated the operations of the refinery and joint
venture for the period June 19,1996 (date the option was
executed) through March 31, 1997.
In the opinion of the Company, all adjustments consisting of
only normal recurring adjustments as of March 31, 1997, 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.
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
<CAPTION>
<S> <C> <C>
March 31, Dec 31,
1997 1996
(unaudited)
Assets
Current assets:
Cash and cash equivalents $422,549 $1,090,810
Trade accounts receivable, net 2,828,307 2,183,461
Income taxes receivable 80,000 80,000
Inventories 91,693 55,748
Note receivables - current portion 55,200 55,200
Other current assets 232,754 219,802
Total current assets 3,710,503 3,685,021
Property, plant and equipment 14,323,004 14,618,162
Accumulated depreciation and depletion (3,433,220) (3,268,578)
Net property, plant & equipment 10,889,784 11,349,584
Note receivable 111,805 122,590
Intangible assets, net 1,850,355 1,875,484
Other assets 80,000 80,000
Total assets $16,642,447 $17,112,679
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
<CAPTION>
<S> <C> <C>
March 31, Dec 31,
1997 1996
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $1,898,201 $2,193,488
Accrued liabilities 675,233 564,408
Accrued interest, related party 436,501 405,314
Notes payable, related party 5,030,089 5,030,089
Notes payable, used oil refinery 2,027,911 2,027,911
Current portion of long-term debt 528,109 624,451
Other current liabilities 451,871 455,174
Total current liabilities 11,047,915 11,300,835
Long-term debt less current maturities 1,320,931 1,652,161
Deferred income 112,022 177,139
Total liabilities 12,480,868 13,130,135
Contingencies - -
Stockholders' equity:
Preferred stock - $.01 par value. 25,000,000
shares authorized; 1,000,000 series A shares
authorized; no series A shares issued and o/s - -
Common stock - $.005 par value. 100,000,000
shares authorized; 14,074,167 shares and
14,074,167 shares issued and outstanding at
March 31, 1997 and Dec 31, 1996, respectively 70,371 70,371
Additional paid-in capital 9,185,017 9,185,017
Retained deficit (5,093,809) (5,272,844)
Total stockholders' equity 4,161,579 3,982,544
Total liabilities & stockholders' equity $16,642,447 $17,112,679
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
<CAPTION>
<S> <C> <C>
Three months ended
March 31,
1997 1996
Revenue $3,337,554 $5,001,054
Direct costs 2,515,283 4,267,851
Gross margin 822,271 733,203
Selling, general and
administrative expenses 658,420 833,020
Research and development 97,759 332,230
Depreciation, depletion and amortization 369,035 285,707
(Loss) from operations (302,943) (717,754)
Other income (expense) net
Interest expense, net (110,653) (62,839)
Interest expense, related party (181,187) -
(Loss) from investment - (110,128)
Gain from sale of assets 773,818 -
Income (loss) before income tax 179,035 (890,721)
Income tax provision
Current - -
Deferred - -
Total tax (benefit) 0 0
Net income (loss) $179,035 ($890,721)
Income (loss) per common share: $0.01 ($0.06)
Weighted average shares o/s 14,074,167 13,951,052
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
<S> <C> <C>
Three months ended
March 31,
1997 1996
Cash flows from operating activities:
Net income (loss) $179,035 ($890,721)
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortization 369,035 285,707
Gain on disposal of asset (773,818) -
(Increase) decrease in:
Accounts receivable (644,846) 60,912
Inventories (35,945) 4,768
Other current assets (12,952) -
Note receivable 10,785 -
Other assets 25,129 (518,656)
Increase (decrease) in:
Accounts payable (295,287) (419,610)
Accrued liabilities 110,825 (343,978)
Accrued interest, related party 31,187 -
Deferred income taxes - -
Deferred income (65,117) (5,605)
Other current liabilities (3,303) (364,704)
Net cash provided (used) by operating activities (1,105,272) (2,191,887)
Cash flows from investing activities:
Proceeds from sale of equipment 524,768 -
Proceeds from sale of joint venture 500,000 -
(Increase) decrease in note receivable - 11,823
(Increase) decrease in general partnership - (293,434)
Purchase of intangible assets (9,316) 23,902
Purchase of property, plant & equipment (150,869) (180,549)
Net cash (used in) investing activities 864,583 (438,258)
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
<S> <C> <C>
Three months ended
March 31,
1997 1996
Cash flows from financing activities:
Proceeds from debt obligations - 1,550,000
Payment on long-term debt (427,572) (379,132)
Net cash provided by financing activities (427,572) 1,170,868
Net (decrease) in cash (668,261) (1,459,277)
Cash, beginning of year 1,090,810 1,705,219
Cash, end of quarter $422,549 $245,942
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Oil and Gas Accounting
The Company uses the "successful efforts" method to account
for oil and gas operations. The use of this method results
in the capitalization of costs related to acquisition,
exploration and development of revenue producing oil and gas
properties. The costs of unsuccessful exploration efforts
are expensed in the period in which they are determined
unrecoverable by future revenues. Provision for depreciation
and depletion of oil and gas properties is based on the
units of production method, based on proven oil and gas
reserves.
Segment information concerning oil and gas reserves and
related disclosures are not presented since they are not
significant in relation to the financial statements taken as
a whole.
Construction Accounting
Construction revenues are recognized on the percentage-of-
completion method of accounting. Profits on contracts are
recorded on the basis of "cost-to-cost" determination of
percentage of completion on individual contracts, commencing
when progress reaches a point where cost and estimate
analysis and other evidence of trend are sufficient to
estimate final results with reasonable accuracy. That
portion of the total contract price which is allocable to
contract expenditure incurred and work performed is accrued
as earned income. At the time a loss on contract becomes
known, the entire amount of the estimated ultimate loss is
accrued. Claims for additional revenue are recognized when
settled. The aggregate of cost incurred and income
recognized on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of
billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current
liability.
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 or cost (first-in, first-out) or market.
Investments
Investments in less than majority owned entities are
accounted for using the equity method. Investment are
included in the financial statements under the caption of
"Other Assets."
<PAGE>
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.
Income (Loss) per Common Share
Income (loss) per share of common stock is calculated based
on the weighted average number of common shares outstanding
during the period. The weighted average shares for the
three months ended March 31, 1997 and 1996 is 14,074,167 and
13,951,052, respectively. Fully diluted income per share
information is not presented as the per share amounts are
not different from presented per share amounts.
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, 1997, the
remaining liability on the note was approximately $125,000.
The Company is involved in litigation arising during the
normal course of business. Management is vigorously
defending its position and believes that it has meritorious
defenses. The financial statements reflect any amounts that
management believes would be payable should the litigation
rule in favor of the plaintiff.
The Company was a partner in several joint ventures. The
joint ventures have incurred debt related to the development
of the project. The Company is contingently liable for the
debt. The debt totals approximately $1,400,000 at March 31,
1997.
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes Payable Related Party
Notes payable to a related party at March 31, 1997 are
comprised of the following:
Note payable to a related party of the Company for
$2,500,000 with interest at a rate of 16%, due January
1, 1998, secured by common stock of Gagon Mechanical
and Interline Energy Services and convertible to common
stock at the lesser of $3.12 per share or 80% of the
average closing price for shares of the Company's
common stock for five consecutive trading day preceding
the date of conversion.
Note payable to a related party of the Company for
$1,500,000 with interest at a rate of 12%, due
September 1, 1996, secured by common stock of Gagon
Mechanical and Interline Energy Services and
convertible to common stock at the lesser of $3.20 per
share or 80% of the average closing price for shares of
the Company's stock for five consecutive trading days
preceding the date of conversion.
Note payable to a related party of the Company for
$780,089 with interest at a rate of 16%, due September
1, 1996, secured by common stock of Gagon Mechanical,
Interline Energy Services and Interline Hydrocarbon.
Unsecured note payable to a related party of the
Company for $250,000 with interest at a rate of 12%,
due September 1, 1996, convertible in full to 67,750
shares of the Company's common stock.
These notes payable to the related party of the Company are
in default. The note agreements provide that upon default of
any of these notes payable, each other note also enters
default status. The notes also provide that upon default,
certain default interest rates become effective immediately.
Such interest rates are reflected above. Under terms of the
notes, the Company cannot declare, authorize, or commit to
pay any dividends or other distributions on equity
securities until the notes are satisfied in full.
Note Payable, Used Oil Refinery
The Company has recorded a liability for the repurchase of
an used oil refinery from the original purchaser. This
liability is a result of the purchaser exercising the
option, provided in the sales agreement, to require the
Company to repurchase the refinery. Prior to the option
being executed, the Company was a 26% owner of the joint
venture which operated the used oil refinery. The original
purchaser owned the remaining 74% of the joint venture and
operated the plant. At the date of the option being
exercised (June 19, 1996), the Company has consolidated the
operations of the joint venture with the Company's
operations. At March 31, 1997, the Company was in default on
its repurchase obligation to the purchaser.
Common Stock
During the year ended December 31, 1994, as a condition for
a private placement of the Company's restricted common
stock, the Company entered into an agreement which contains
certain restrictive covenants. The Company may not sell its
restricted common stock for a price less than $4.50 or issue
options or warrants of equal effect. The Company also may
not repay any related party debt during this period. These
covenants may be waived upon obtaining written consent of
the other party in the agreement.
Profit Sharing Plan
During 1995, the Company commenced a defined contribution
retirement plan, which qualifies under code section 401(k),
for all eligible employees. Employees who work at least
1,000 hours during a year and are over age 21 are eligible
to participate. Employees may contribute up to fifteen
percent of their annual compensation subject to regulatory
limitations. The Company also contributes a discretionary
amount on behalf of the participating employees. The
Company made contributions of $1,292 and $2,059 for the
three months ended March 31, 1997 and 1996, respectively.
Reclassification
Certain amounts in the prior years financial statements have
been reclassified to conform to the 1997 presentation.
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interline Resources Corporation (the "Company"), a Utah
corporation, is engaged in three areas of business, each
operating as separate subsidiaries: Interline Hydrocarbon
Inc., a Wyoming corporation, which commercializes the
Company's patented used oil refining technology; Interline
Energy Services, Inc., a Wyoming corporation, which manages
the Company's oil and gas operations located in Utah and
Wyoming; and Gagon Mechanical, a Utah corporation, which
engages in industrial mechanical systems construction and
the manufacture, installation and start up of the Company's
used oil refining facilities.
Interline Energy Services - Oil and Gas Operations. The
Company has been engaged in the oil and gas industry since
1990. Its oil and gas operations primarily involve natural
gas gathering, natural gas processing, a crude oil pipeline
operation and oil well production. The Company's main oil
and gas operations are located in east-central Wyoming and
eastern Utah. Wyoming operations, located near Douglas,
Wyoming, include the Well Draw Gas Plant, Interline Crude
Gathering Company, a 20.4% interest in the Hatcreek
Partnership and various producing oil and gas wells. The
Company's Utah operations are located near Roosevelt, Utah,
and include the Monument Butte Gathering System and Roseland
Wells. On May 1, 1997, Interline sold its Utah operations to
Questar Gas Management Company, a subsidiary of Questar
Corporation, for $4 million.
Gagon Mechanical - Industrial and Commercial
Construction. Gagon Mechanical Contractors, a wholly owned
subsidiary of the Company, provides expertise and resources
necessary for the construction of used oil refineries.
Gagon specializes in mechanical system construction, such as
heating, ventilation, air conditioning, process piping and
plumbing, including piping and controls for hydrocarbon and
chemical products. Gagon's work includes certified pressure
vessel design and construction under regulated American
Society of Mechanical Engineers (ASME) "U" and "R" stamps.
Boiler piping work is done under ASME "PP" stamp
regulations. Teams specialize in piping, structural steel,
pressure vessels, instrumentation and controls, insulation
and electrical work. The commercial construction division of
Gagon Mechanical has been discontinued.
Gagon Mechanical - Manufacturing. Part of Gagon's
construction revenues include the manufacture of refineries
for Interline Hydrocarbon. Gagon has the ability to build
each refinery from design and engineering to start up and
operation. Gagon has built and installed refineries in Salt
Lake City, in Stoke-on-Trent, England, and in Seoul, South
Korea. Gagon is preparing to start operation on a refinery
for Dukeun Industrial Company in South Korea and is
constructing a refinery for Transpacific Industries for
location in Australia.
Interline Hydrocarbon - Used Oil Refining. In January
1993, the Company acquired the exclusive license to a
patented reprocessing technology with the right to
exclusively manufacture, market, use, license, sub-license
and fully commercialize the patented technology as it
relates to all areas and facets of the field of
hydrocarbons. The Company subsequently acquired the patent
rights relating to the technology. As of May 12, 1997, the
Company had two plants in production trial stage: a refinery
located in Salt Lake City and a refinery in Stoke-on-Trent,
England. On June 21, 1996, Interline announced it had
reacquired the rights to the United States, Canada and
Mexico from Genesis Petroleum, a subsidiary of Quaker State
Corporation. As a result, Interline will purchase Genesis
Petroleum's interest in the joint venture for $2,027,977.
The Company also issued Genesis 108,115 shares of its common
stock valued for $600,000 as part of the agreement.
According to the agreement announced on June 21,1997,
Interline was required to pay the $2.2 million by October
17, 1996. As of May 12, 1997, the Company has not made the
payment and is currently negotiating with Genesis Petroleum
for a resolution to the matter; however, there can be no
assurance the Company will be successful in these
negotiations. Interline is now pursuing contract
possibilities in North America. Already, Interline has
signed letters of intent with Research Oil Company of Ohio
and Sani Mobile of Montreal, Canada.
Although management continues to evaluate the best
marketing strategy for the refining process, the current
approach is to build the refineries through Gagon, and sell
and install them at locations throughout the world. The
Company anticipates revenues to come from exclusivity fees,
engineering fees and ongoing royalties and from profit
generated through ownership in various refineries throughout
the world.
Results of Operations
The following analysis of the financial
condition and results of operations should be read in
conjunction with the Financial Statements and Notes thereto,
included elsewhere in this report. The Company has recorded
a liability for the repurchase of a used oil refinery from
the original purchaser. This liability is a result of the
purchaser exercising the option, provided in the sales
agreement, to require the Company to repurchase the
refinery. Prior to the option being executed, the Company
was a 26% owner of the joint venture which operated the used
oil refinery and accounted for its investment on the equity
method through June 19, 1996. The original purchaser owned
the remaining 74% of the joint venture and operated the
plant. The Company has consolidated the operations of the
refinery and joint venture for the period June 19,1996 (date
the option was executed) through March 31, 1997.
Comparison of three months ending March 31, 1997 and 1996
Total Revenues
Revenues decreased $1,663,500, or 33.26%, to $3,337,554
for the three months ended March 31, 1997 as compared to
$5,001,054 for the three months ended March 31, 1996. This
revenue decrease included a $27,541 or 1.47%, increase in
oil and gas revenues, a $2,521,355, or 100%, decrease in
construction revenues, a $129,593, or 23.27% decrease in
manufacturing revenues and a $959,907, or 1,754%, increase
in used oil refining revenues. The Company's total revenues,
on a segment basis, for three months ended March 31, 1997
and 1996 were as follows:
Three Month Revenues Ended March 31, 1997 and 1996
1997 % 1996 %
Oil and gas $1,895,536 57% $1,867,995 37%
Construction 0 0% 2,521,355 51%
Manufacturing 427,389 13% 556,982 11%
Used Oil 1,014,629 30% 54,722 1%
Refining
Total Revenue $3,337,554 100% $5,001,054 100%
Oil and Gas Revenues
Oil and gas revenues contributed approximately 56.79%
of total revenues for the three months ended March 31, 1997,
as compared to approximately 37.35% for the three months
ended March 31, 1996. Revenues increased $27,541 or 1.47% to
$1,895,536 for the three months ended March 31, 1997 as
compared to $1,867,995 for three months ended March 31, 1996.
Wyoming operations revenue increased $97,529, or 7.13%,
to $1,466,346 for the three months ended March 31, 1997 as
compared to $1,368,817 for the three months ended March 31,
1996. The increase in revenue was mainly attributed to
several new NGL liquids purchase contracts entered into
during 1996.
Utah operations revenue decreased $69,988, or 14.02%,
to $429,190 for the three months ended March 31, 1997 as
compared to $499,178 for the three months ended March 31,
1996. This decrease was attributed to a residue volume
(MMBtu) decrease of 27,797, or 8.25%, to 309,120 for the
three months ended March 31, 1997 compared to 336,917 for
the three months ended March 31, 1996. The decrease was
also attributed to a decrease in sales price (MMBtu) of
$.13, or 10.00%, to $1.17 for the three months ended March
31, 1997 compared to $1.30 for the three months ended March
31, 1996.
On May 1, 1997 the Company sold its Utah operations to
Questar Gas Management Company, a subsidiary of Questar
Corporation, for $4 million. Total revenues attributed to
the assets sold were $429,190, or 12.86%, of the Company's
total revenues for the three months ended March 31, 1997.
Construction Revenues
Construction revenues contributed approximately 0% of
total revenues for the three months ended March 31, 1997
compared to 50.42% for the three months ended March 31,
1996. This resulted in a decrease of $2,521,355, or 100%, to
$0 for the three months ended March 31, 1997 compared to
$2,521,355 for the three months ended March 31, 1996.
The decrease in revenue was attributed to management's
decision to discontinue its commercial construction
division. Because of the low margins associated with
commercial construction, the Company has discontinued its
commercial construction division to focus on its used oil
refining technology.
Manufacturing Revenues
Manufacturing revenues contributed approximately 12.81%
of total revenues for the three months ended March 31, 1997
compared to 11.14% for the three months ended March 31,
1996. These revenues decreased $129,593, or 23.27%, to
$427,389 for the three months ended March 31, 1997 compared
to $556,982 for the three months ended March 31, 1996. The
$129,593 decrease in manufacturing revenues was attributed
to the Company having one used oil refinery under
construction for 1997 compared to two used oil refineries
under construction for 1996. During 1996, the Company
started construction on a 24,000 gallon per day plant for
Transpacific Group of Companies of Australia. As of May 12,
1997 this plant is approximately 50% completed and is
scheduled to be shipped during the third quarter 1997.
Used Oil Refining Revenues
Used oil refining revenues contributed 30.4% of total
revenues for the three month quarter ended March 31, 1997
compared to 1.09% for the three months ended March 31, 1996.
This resulted in an increase of $959,907, or 1,754%, to
$1,014,629 for the three months ended March 31, 1997
compared to $54,722 for the three months ended March 31,
1996.
The increase of $959,907 in used oil refining revenues
was attributed to an increase of $552,886 from the Salt Lake
City used oil refinery and an increase of $400,000
attributed to the marketing agreement with Dukeun Industrial
Company of South Korea. The Company signed a marketing
agreement with Dukeun Industrial Company, allowing Dukeun to
be the only company besides Interline to market Interline's
patented technology in South Korea, Japan and China.
Direct Costs. Direct costs decreased $1,752,568, or
41.06%, to $2,515,283 for the three months ended March 31,
1997 compared to $4,267,851 for the three months ended March
31, 1996. The decrease of $1,752,568 for the three months
ended March 31, 1997 was mainly attributed to a decrease in
the Company's total revenues. As a percent of revenues,
direct costs decreased to 75.36% for the three months ended
March 31, 1997 compared to 85.33% for the three months ended
March 31, 1996. This percent of revenue decrease is mainly
attributed to the agreement signed with Dukeun Industrial
Company for marketing rights to Interline's patented
technology for $400.000.
Selling, General and Administrative. Selling, general
and administrative expenses decreased $174,600, or 20.96%,
to $658,420 for three months ended March 31, 1997 compared
to $833,020 for three months ended March 31, 1996. As a
percent of revenues, selling, general and administrative
expenses were 19.73% for the three months ended March 31,
1997 compared to 16.66% for the three months ended March 31,
1996. These expenses consisted principally of salaries and
benefits, travel expenses, legal, information technical
services and administrative personnel of the Company. Also
included are outside legal and accounting fees, and expenses
associated with computer equipment and software used in the
administration of the business.
Research and Development. Research and development
expenses decreased $234,471, or 70.58%, to $97,759 for three
months ended March 31, 1997 compared to $332,230 for the
three months ended March 31, 1996. As a percent of revenues,
research and development expenses decreased to 2.93% for the
three months ended March 31, 1997 compared to 6.64% for the
three months ended March 31, 1996.
Research and development expenses were primarily
attributable to development and enhancement of its new
hydrocarbon refining technology. The Company believes that
continued investment in research and development is critical
to its future growth and profitability. The Company,
therefore, expects that research and development expenses
will continue in future periods.
Depreciation and Amortization. Depreciation and
amortization expenses increased $83,328 or 29.17%, to
$369,035 for the three months ended March 31, 1997 compared
to $285,706 for the three months ended March 31, 1996. As a
percent of revenues, depreciation and amortization expenses
increased to 11.06% for the three months ended March 31,
1997 compared to 5.71% for the three months ended March 31,
1996. This increase of $83,328 was attributed to the
amortization of its refining technology and marketing rights
and depreciation attributed to the Salt Lake City used oil
refinery.
Operating Income (Loss). Operating loss decrease
$414,811, or 57.79% to $302,943 for the three months ended
March 31, 1997 compared to $717,754 for the three months
ended March 31, 1996. The decrease in operating losses was
mainly attributed to a reduction in selling general and
administrative expenses and the reduction of research and
development expenses.
Gain on Sale of Assets. Gain on sale of assets
increased $773,818 or 100%, to $773,818 for the three months
ended March 31, 1997 compared to $0 for the three months
ended March 31, 1996. The increase of 773,818 was
attributed to the Company selling its 40% interest in the
Interline (UK) joint venture, which resulted in a gain of
$500,000, and the sale of two compressors and other
equipment located in Wyoming, which resulted in a gain of
approximately $273,818.
Liquidity and Capital Resources
Sources of liquidity for the Company include revenues
from oil and gas operations, manufacturing operations and
revenues from sale of hydrocarbon refining technology and
rights. Management believes that the Company's cash from
operating activities is adequate to meet its operating needs
but not adequate to meet capital and current debt obligation
needs for the foreseeable future. In an effort to increase
future cash flow from operating activities and minimize
expenses, the Company has undergone some operations
personnel changes and corporate restructuring. Some of
these changes have been reflected in the current report. The
full impact of these changes will be reflected in future
reporting periods. Also, the Company signed an agreement
with Transpacific Industries of Australia in September 1996,
and has been constructing a $3.4 million used oil refinery.
The refinery is scheduled to begin shipping to the site in
Australia in 1997.
On May 1, 1997, the Company sold its Monument Butte gas
pipeline system to Questar Gas Management Company, a
subsidiary of Questar Corporation, for $4 million. Of the $4
million proceeds from the sale of the Monument Butte assets,
approximately $800,000 was used to pay off secured debt
directly related to the assets sold, $1 million was put in a
restricted escrow account and $2.2 million was paid toward
notes payable to a related party.
The gas system consists of 28 miles of main trunk line
and 40 miles of lateral lines connecting 146 wells, as well
as five compressors. These lines collect natural gas from
the Monument Butte area in the Uintah Basin in eastern Utah.
The sale also included 12 producing oil wells that Interline
owned in the same area. The effective date of the sale is
May 1, 1997. The associated properties contributed about
14% of total revenues and 60% of gross margin for the year
ended December 31, 1996. For the first quarter ended March
31, 1997, these properties contributed approximately 12.9%
of revenues and 26.9% of gross margin.
On May 1, 1997, the Company paid $2,200,000 toward the
following four notes due to a related party of the Company
totaling $5,030,089. Three of the following Senior Secured
notes to a shareholder totaled $2,530,089. This amount and
the associated interest was due September 1, 1996. As a
result of non payment by the Company, the notes are
currently in default. (An event of default under another
$2.5 million note (see IV) has occurred, which permits
acceleration of the Company's obligation to repay the
principal and interest.) The lender has indicated to the
Company that he does not currently intend to take remedial
action against the Company.
I. During 1994, the Company issued a $250,000 senior
convertible note payable to a related party. The note
bears interest at 10% and was due on September 1, 1996.
After December 31, 1994, the note is convertible in
full to 67,750 shares of the Company's restricted
common stock at the option of the note holder. As a
result of the default, the interest rate has changed to 12%.
II. On February 29, 1996 the Company obtained $1,500,000 in
a 6% senior secured note from the same related party.
The obligation was due September 1, 1996. In the event
of a default on the note the principal can be converted
to shares of the Company's common stock at the price of
the lesser of $3.20 per share or 80 percent of the
average closing price for the Company's shares for the
five consecutive trading days preceding the date of
conversion. The note was secured by all of the issued
and outstanding stock of two subsidiaries, Interline
Energy Services and Gagon Mechanical Contractors. As a
result of the default, the interest rate has changed to 12%.
III. On July 19, 1996, the Company obtained $780,089 in a
9.5% senior secured note from the same related party.
The obligation was due September 1, 1996. The note is
secured by the outstanding shares of Interline Energy
Services, Gagon Mechanical and Interline Hydrocarbon.
As a result of the default, the interest rate has
changed to 16%.
IV. On May 15, 1996, the Company obtained $2,500,000 in a
9.25% senior secured note from the same related party
as above. The note is due January 15, 1998 and is
secured by the outstanding shares of Interline Energy
Services and Gagon Mechanical. Upon default, the loan
may be converted into shares of the Company's common
stock at the lesser of $3.12 per share or 80 percent of
the average closing price for shares of the Company's
common stock for five consecutive trading days
preceding the date of conversion. As additional
consideration for the shareholder making the Loan to
the Company, the Company has issued a Warrant to
purchase up to 250,000 shares of common stock at $3.90
per share. As a result of the default, the interest
rate has changed to 16%.
In an effort to cure the default status on the four
notes due to a related party, the Company is seeking to
restructure the note obligations with the lender, or raise
additional sums through equity financing. There can be no
assurance that this will be accomplished.
In June 1996, Genesis Petroleum, Inc. ("GPI"), as part
of the terms of an exclusive license agreement, decided not
to continue with its exclusive North American rights. As a
result, the Company is purchasing GPI's interest in the
joint venture for $2.0 million. As a result, the Company has
reacquired the rights to North America and is pursuing
potential contracts.
As of May 12, 1997 the Company was unable to pay the
approximately $2.0 million required to be paid to GPI. on
October 17, 1996, as required by a June 19, 1996 agreement
between the companies. Under this agreement, the Company was
to make this payment in exchange for GPI's interest in the
Genesis refinery. The Company is engaged in discussions with
GPI regarding a possible resolution of the situation;
however, there can be no assurance that any agreement will
be reached.
If the Company is unable to restructure its past due
obligations or sell sufficient assets or raise additional
financing, then there can be no assurance that the Company
will be able to continue its current operations, and the
Company may be compelled to consider filing under Chapter 11
of the federal bankruptcy laws. In any event, the Company
may also need to raise additional financing in order to fund
its current operations, depending upon its operating
results, and notes that it has required financing for such
purposes in the past.
In the event management elects to participate in a
joint venture in owning and operating refining plants, the
Company would need to raise additional sums through
borrowing or equity financing. Additionally, it is
Management's intent that when potential purchasers of a
refining plant place an order, the payment terms will be
tailored to provide construction funds to build the plants.
Material Changes to the Balance Sheet
The following represents material changes affecting the
balance sheet as of March 31, 1997 compared to the balance
sheet as of December 31, 1996.
Current Assets. Current assets increased to $3,710,503
as of March 31, 1997 from $3,685,021 as of December 31,
1996. The $25,482 increase in current assets was attributed
to the following: a decrease in cash and cash equivalents of
$668,261 primarily attributed to payment to vendors, an
increase of $644,846 in accounts receivable attributed to
the sale of Interline's 40% interest in the Interline (UK)
joint venture for $500,000 and the agreement signed with
Dukeun Industrial Company for marketing rights for $400,000,
an increase of $35,945 in inventories and an increase of
$12,952 in other assets attributed to cost plus earning in
excess of billings on construction contracts.
Property, Plant and Equipment. Net property, plant and
equipment decreased to $10,889,784 as of March 31, 1997
from $11,349,584 as of December 31, 1996. The $459,800
decrease was mainly attributed to a decrease of $369,035
from current year depreciation, an increase of $150,869
attributed to asset purchases and a decrease of $241,634
attributed to the sale of two compressors.
Intangible Assets. Net intangible assets decreased to
$1,850,355 as of March 31, 1997 from $1,875,484 as of
December 31, 1996. The $25,129 decrease was attributed to
the amortization of assets related to the Company's used oil
refining technology.
Current Liabilities. Current liabilities decreased to
$11,047,915 as of March 31, 1997 from $11,300,835 as of
December 31, 1996. The $252,920 decrease in current
liabilities was attributed to a decrease of $295,287 in
accounts payable which represents payments to vendors, an
increase of $110,825 in accrued liabilities which was mainly
attributed to an increase in accrued interest, a decrease of
$96,342 due to the reclassification of current portion of
long-term debt and capital lease obligations, a decrease of
$3,303 in other current liabilities attributed to billing in
excess of cost, and earned profit on construction contracts.
Non-Current Liabilities. Non-current liabilities
decreased to $1,432,953 as of March 31, 1997 from $1,829,300
as of December 31, 1996. The $396,347 decrease was
attributed to a decrease in deferred income of $65,117, an
increase of $96,342 from reclassification of current portion
of long-term debt and capital lease obligations, a decrease
of $427,572 from principle reduction of debt and capital
lease obligations. The decrease of $427,572 in principle
reduction was mainly attributed to the Company's payoff of
approximately $250,000 in secured debt related to the sale
of two compressors.
Total Stockholders' Equity. Total stockholders' equity
increased to $4,161,579 as of March 31, 1997 from $3,982,544
as of December 31, 1996. The $179,035 increase in equity was
attributed to the current year net income.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
GPI has filed a lawsuit against the Company in the
Third Judicial District Court of Salt Lake County, State of
Utah, for a breach of contract by the Company. The Company
agreed to pay about $2.0 million for GPI's interest in a
used oil refinery in Salt Lake City by October 17, 1996. The
Company has not made the payment and has engaged in
discussions with Genesis regarding a possible resolution of
the situation. However, there can be no assurance that any
agreement will be reached. The litigation is on-going, and
the Company is vigorously defending its position.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
As of May 14, 1997, the Company has not paid the
following three Senior Secured notes due to a related party
totaling $2,530,089 and the associated interest due
September 1, 1996. As a result, loans from this person are
currently in default. (An event of default under another
$2.5 million note (see IV) has occurred, which permits
acceleration of the Company's obligation to repay the
principal and interest.) The lender has indicated to the
Company that he does not currently intend to take remedial
action against the Company.
I. During 1994, the Company issued a $250,000 senior
convertible note payable to a related party. The note
bears interest at 10% and was due on September 1, 1996.
After December 31, 1994, the note is convertible in
full to 67,750 shares of the Company's restricted
common stock at the option of the note holder. As a
result of the default, the interest rate has changed to 12%.
II. On February 29, 1996 the Company obtained $1,500,000 in
a 6% senior secured note from the same related party.
The obligation is due September 1, 1996. In the event
of a default on the note the principal can be converted
to shares of the Company's common stock at the price of
the lesser of $3.20 per share or 80 percent of the
average closing price for the Company's shares for the
five consecutive trading days preceding the date of
conversion. The note was secured by all of the issued
and outstanding stock of two subsidiaries, Interline
Energy Services and Gagon Mechanical Contractors. As a
result of the default, the interest rate has changed to 12%.
III. On July 19, 1996, the Company obtained $780,089 in a
9.5% senior secured note from the same related party.
The note is secured by the outstanding shares of
Interline Energy Services, Gagon Mechanical and
Interline Hydrocarbon. As a result of the default, the
interest rate has changed to 16%.
IV. On May 15, 1996, the Company obtained $2,500,000 in a
9.25% senior secured note from the same related party
as above. The note is due January 15, 1998 and is
secured by the outstanding shares of Interline Energy
Services and Gagon Mechanical. Upon default, the loan
may be converted into shares of the Company's common
stock at the lesser of $3.12 per share or 80 percent of
the average closing price for shares of the Company's
common stock for five consecutive trading days
preceding the date of conversion. As additional
consideration for the shareholder making the Loan to
the Company, the Company has issued a Warrant to
purchase up to 250,000 shares of common stock at $3.90
per share. As a result of the default, the interest
rate has changed to 16%.
On May 1, 1997, the Company sold its Monument Butte gas
pipeline system to Questar Gas Management Company, a
subsidiary of Questar Corporation, for $4 million. Of the $4
million proceeds from the sale of the Monument Butte assets,
approximately $800,000 was used to pay off secured debt
directly related to the assets sold, $1 million was put in a
restricted escrow account and $2.2 million was paid toward
the notes payable to the related party.
In June 1996, GPI, as part of the terms of an exclusive
license agreement, decided not to continue with its
exclusive North American rights. As a result, the Company is
purchasing GPI's interest in the joint venture for $2.0
million. As a result, the Company has reacquired the rights
to North America and is pursuing potential contracts.
As of May 14, 1997 the Company was unable to pay the
approximately $2.0 million required to be paid to Genesis
Petroleum, Inc. on October 17, 1996, as required by a June
19, 1996 agreement between the companies. Under this
agreement, the Company was to make this payment in exchange
for GPI's interest in the Genesis refinery. The Company is
engaged in discussions with GPI regarding a possible
resolution of the situation; however, there can be no
assurance that any agreement will be reached.
Item 4. Submission of Matters to a Vote of Security
Holders: None
Item 5. Other Information:
Interline has been notified by the American Stock
Exchange that the Exchange is reviewing Interline's
continued listing eligibility, since it has fallen below the
guidelines for continued listing on the Emerging Company
Marketplace of the Exchange. Interline is working with the
American Stock Exchange for a resolution of this matter;
however, there is no assurance that Interline will continue
to be listed on the Exchange.
Item 6(a). Exhibits
Ex. 27 Financial Data Schedule
Item 6(b). Form 8-K
A Form 8-K was filed by the Company concerning the sale
of its Utah oil and gas operations to Questar Gas Management
Company for $4 million. The 8-K was filed on May 14, 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange
Act, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 1997
INTERLINE RESOURCES CORPORATION
(Registrant)
By:/s/ Michael R. Williams
Michael R. Williams, President
and Chief Executive Officer
Principal Executive Officer
Director
By:/s/ Mark W. Holland
Mark W. Holland, Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 422,549
<SECURITIES> 0
<RECEIVABLES> 2,963,507
<ALLOWANCES> 0
<INVENTORY> 91,693
<CURRENT-ASSETS> 3,710,503
<PP&E> 14,323,004
<DEPRECIATION> 3,433,220
<TOTAL-ASSETS> 16,642,447
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<COMMON> 70,371
<OTHER-SE> 4,091,208
<TOTAL-LIABILITY-AND-EQUITY> 16,642,447
<SALES> 3,337,554
<TOTAL-REVENUES> 3,337,554
<CGS> 2,515,283
<TOTAL-COSTS> 3,640,497
<OTHER-EXPENSES> (773,818)
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<INTEREST-EXPENSE> 291,840
<INCOME-PRETAX> 179,035
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