U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-18995
INTERLINE RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0461653
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
160 West Canyon Crest Road, Alpine, UT 84004
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 756-3031
Securities registered pursuant to Section 12(b) of the Exchange Act:
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____.
Check if there is no disclosure of deliquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Issuer's knowledge, in difinitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. X
The Issuer's revenues for the fiscal year ending December 31, 1996
were $17,011,792.
As of March 14, 1997, 14,074,160 shares of the Issuer's common stock
were issued and outstanding, 8,958,789 of which were held by non-
affiliates. As of March 14, 1997, the aggregate market value of shares
held by non-affiliates (based upon the closing price) was
approximately $7,279,016.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
General
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.
Company total revenues, total assets and total stockholders'
equity:
Year Total Revenues Total Assets Stockholders'
Equity
1996 $ 17,011,792 $ 17,112,679 $ 3,982,544
1995 20,405,802 18,279,147 7,983,626
1994 11,091,172 13,931,218 7,115,740
1993 9,740,815 9,404,667 4,597,094
1992 8,489,768 4,603,980 2,424,653
Interline Hydrocarbon Inc.
In 1993, the Company acquired a license to a patented used
oil reprocessing technology (the "Technology") from Petroleum
Systems Inc. (PSI) for 1.5 million shares of the Company's common
stock and the obligation to pay 20 percent of its royalty revenue
to PSI. The Technology removes physical and chemical
contaminants from used oil and returns a clean, reusable oil
suitable for base oil reformulations or for use as a high-value
industrial fuel.
The contaminants removed from the used oil in the refining
process are chemically bound in a "residuum" that can be used in
asphalt products. The other by-product, water, is disposed of
through minimal treatment. The Interline Technology is
significant when compared to the current industry practice of
filtering and dewatering used oil products just enough to be
utilized as a low-grade industrial burner fuel. When such fuel is
burned, many of the harmful metals not removed by processing are
released into the air. Because the Interline process removes
these metals along with other physical contaminants the Company's
re-refined oil is high quality, and if burned, eliminates the
release of these objectionable pollutants.
During the last four years of development, the Company has
greatly improved the Technology and has gained experience in both
the technical and marketing aspects of the used oil refining
process. These developments are best described and explained in
context of reviewing the following projects the Company has
entered into.
1. Genesis Petroleum
The Company entered into various agreements with Q Lube,
Inc., a wholly owned subsidiary of Quaker State Corporation, and
these agreements were subsequently assigned to Genesis Petroleum,
Inc. ("GPI"), also a subsidiary of Quaker State. As a result of
these agreements, the first full-scale used oil refinery was
constructed and installed north of Salt Lake City, Utah, through
the formation of joint venture between Interline Hydrocarbon and
GPI, called Genesis Petroleum - Salt Lake City L.L.C.
("Genesis"). Used oil processing at this 24,000 gallon per day
refinery commenced in February 1996. The finished products are
sold as cat cracker feed, a No. 2 fuel and residuum used in
asphalt products.
Technical modifications and start up continued during much
of 1996 and into early 1997. Critical process information was
collected to verify design parameters, such as yields, energy
consumption, process flow, equipment sizing, propane performance,
operating costs and product quality. The information gathered
about the complex reactions of used oil chemistry and the effects
on equipment were vital to corrections in future plants. Because
such a refinery had never been built before, the changes and
difficulties encountered were expected and normal in such an
undertaking. While operation of the plant was intermittent during
1996, a total of 3,669,880 gallons of finished products was
produced. This total represents 46 percent of design capacity.
Since September 1996, the operation of the unit was limited by
the availability of used oil feedstocks.
As previously reported, in June 1996, GPI elected not to
continue with its exclusive license to the Technology, and, under
the terms of the agreements between the Company and GPI, the
Company must purchase Genesis Petroleum's 74 percent interest in
the plant. To enforce the Company's obligation to re purchase
GPI's interest, GPI has instituted suit against the Company (see
Item 3: Legal Proceedings). The Company is currently seeking to
raise the approximate $2 million purchase price.
As a result of GPI's decision not to continue with exclusive
rights, the Company signed a termination agreement on June 19,
1996. The agreement states that all profits and losses incurred
from June 19, 1996 forward will accrue to the Company even though
the day to day operations, which include the buying and selling
of used oil and marketing of finished products, were managed by
GPI.
In February 1997, GPI agreed to give the Company the right
to acquire used oil and sell finished products on behalf of
Genesis beginning in March 1997. As a result of the Company's
efforts to acquire sufficient used oil to operate the refinery,
the plant has operated at 95 percent of capacity (more than
600,000 gallons of oil) during March 1997.
2. Interline U.K., Stoke-on-Trent, England
In February 1995, the Company formed Interline (UK) Limited,
a joint venture with Whelan Environmental Services, Ltd. of
Birmingham, England, to construct a plant in Stoke, England. The
terms of the joint venture provides the Company a 40 percent
ownership interest, and the right to receive a 6 cent gross
royalty per gallon of oil processed. As part of the financial
arrangements, in October 1995, the joint venture entity was
approved for 1.8 million British pounds (about $2.7 million) in
financing for the construction and installation of the refinery.
The loan is secured by assets owned by Whelan as well as the
Company's signatory guarantee for 1.2 million pounds of the loan.
The plant was completed in early 1996 and officially opened
in July 1996. The refinery, with a capacity to process 24,000
gallons of used oil per day, is still in a testing mode. As of
March 1996, the joint venture was selling the processed used oil
as a lubricating base oil. The finished products could also be
sold as industrial fuels. The Company is not receiving royalties
from the Interline (UK) joint venture and does not anticipate
receiving royalties until the refinery achieves a profitable
status.
To pay down debt, the Company is negotiating with Whelan to
sell the 40 percent interest in the Interline UK joint venture.
3. Dukeun Industrial Company - South Korea
In April 1995, the Company signed an agreement with Dukeun
Industrial Company, Ltd. of Seoul, South Korea, to build a 24,000
gallon used oil refinery in Seoul. The refinery was constructed
in 1996 by Gagon Mechanical. Dukeun is in final preparations to
start up the refinery. The Company expects the plant will be in
full production by the middle of 1997.
4. Transpacific Industries - Australia
In September 1996, the Company signed an exclusive purchase
agreement with Transpacific Group of Companies granting them
exclusive rights to the Technology for all of Australia. Under
the terms of the agreement, Transpacific purchased from the
Company a 24,000 gallon per day plant for $3.4 million. This
plant is currently under construction by Gagon Mechanical with an
anticipated shipment date to Australia during the third quarter
of 1997.
The Company will receive a 6 cent per gallon gross royalty
for each gallon of finished product processed. To maintain its
exclusivity for Australia, Transpacific must order at least one
more 24,000-gallon-per-day refinery within two years. The
purchase agreement also gives Transpacific the right to construct
additional plants, depending on market conditions.
Transpacific is an Australian company that, together with
associated companies, is the largest used oil collector in
Australia. The company, through its affiliates, is the preferred
used oil collector in Australia for Mobil, Shell, British
Petroleum, Castrol and Valvoline. Its affiliates include the
following: Tri-State Oil of Sydney, a joint venture company,
owned 50 percent by Transpacific and 50 percent by Shell Oil
Company Australia; True Blue Oil Recycling, the largest used oil
collector in Brisbane; Muir Oil in Perth; and North Queensland
Resource Recovery of Townsville.
Transpacific and its associates have operations in
Australia, the United States, Canada, Hong Kong, Philippines, the
United Kingdom and Thailand. The main thrust of its operations
are to create high-value products from low-value products,
including upgrading used oil to its highest end use recycled
base oil. The Transpacific Group also has operations in liquid
waste collection, bus manufacturing through Orion Bus and truck
construction through Western Star Truck manufacturing. In 1996,
Western Star bought ERF Trucks, the largest private truck
building operation in the United Kingdom.
5. Gadgil Western Corporation- 12 Middle Eastern and Far
Eastern Countries
In December 1993, the Company signed an agreement with
Gadgil Western Corporation of New Delhi, India, for exclusive
rights to the Technology in 10 Middle Eastern and Far Eastern
countries. These countries include India, Saudi Arabia, United
Arab Emirates, Oman, Kuwait, Iran, Thailand, Vietnam, Malaysia
and Qatar. In 1995, Gadgil Western also purchased the exclusive
rights to Bahrain and Singapore. Gadgil Western intended to use
the Company's Technology to extract gasoline and diesel from low-
grade hydrocarbons.
The first refinery under the Gadgil Western's exclusive
agreement and the first refinery in the world to used the
Company's Technology was completed in June 1995. The facility is
located in Dubai, United Arab Emirates (at the Persian Gulf), and
was designed to process 45,000 gallons per day of low-grade
hydrocarbons into diesel and other burner fuels. Gadgil Western
used the Dubai refinery as a demonstration and evaluation
refinery for the possibility of building other refineries in
Bahrain, Singapore and India. The Dubai plant did not achieve the
economic results desired by Gadgil Western, due to the very slim
margins between the low-grade hydrocarbon - burner fuels spread.
As a result, Gadgil Western proposed retrofitting the facility to
process used oil. The Company, to its best knowledge, believes
that these modifications have not been accomplished and that the
refinery is shutdown.
Because Gadgil Western has not fulfilled the terms of its
exclusive license (as reported in the 1995 and 1994 FORM 10-KSB)
the Company intends to rescind the exclusive rights of Gadgil
Western to the Technology. The Company has not received any
royalties from Gadgil Western.
Interline Energy Services
The Company has facilities for natural gas gathering and
processing, and crude oil gathering and production in eastern
Utah and east-central Wyoming, as well as truck transportation of
natural gas liquids in Wyoming.
1. Well Draw Gas Plant
The Well Draw Gas Plant (the "Plant"), located near Douglas,
Wyoming, is a natural gas liquids (NGLs) processing plant which
has the capacity to process approximately 150,000 gallons of NGLs
a day. Currently, the Plant processes the liquids into propane,
butane and natural gasoline. 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. Most of the liquids
originate from liquids that are trucked into the Plant from
outside sources.
Amoco Contract
During 1994, the Company entered into a contract with Amoco
Production Company to process about 25 million gallons of NGLs
per year, ending the year 2000 (based on an average of 70,000
gallons processed per day). The Amoco agreement is the largest
liquids contract the Company has entered into since it purchased
the Plant and the connected pipeline 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. In 1996, the Company processed an
average of 50,000 gallons per day of NGLs because of the Amoco
contract, which totals 60 percent of the total NGLs processed by
the Plant. The Well Draw Gas Plant processed an average of 83,000
per day of NGLs for 1996, including outside sources and liquids
from the pipeline.
Conoco Pipeline Purchase
In January 1995, the Company purchased 180 miles of crude
oil gathering and trunk pipelines, together with pumping stations
and storage tanks, from Conoco Pipeline Company. The pipeline
transports the 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 pipeline gathers and
transports approximately 350,000 barrels of crude oil per year.
Oil Well Production
The Company owns interests in 19 producing oil and gas wells
in Wyoming and eastern Utah.
2. Utah Operations
The Company owns and operates a natural gas gathering system
in the greater Monument Butte Field of the Uintah Basin in
eastern Utah. This system consists of 28 miles of main trunk line
and 40 miles of lateral lines connecting 146 wells, as well as
six compressors. As a result of increased drilling activity, the
Company connected 37 new wells to the gathering system during
1996, and as a consequence, total gas sales from this system
increased to an average of 4,400 MMBtu per day for the year. In
comparison, 1995 average sales were 3,400 MMBtu per day.
Inland Resources, Inc., supplies a significant portion of
natural gas through the wells owned by Inland in the Monument
Butte field. The contract with Inland to collect its gas expires
in November 1997. Inland has notified the Company that is does
not intend to renew the contract, and it intends to begin its own
collection operations in the same area.
3. Interline Transportation
The Company entered the NGL transportation business to truck
liquids for Amoco Production Company. In the last four years, the
Company has greatly increased its transportation of NGLs and
finished product in the Rocky Mountain region. In the last four
years, Interline has quadrupled its trucking activity. Four years
ago, Interline had one truck and two drivers. Today, Interline
has four trucks and eight drivers. Collectively, these trucks
travel about 700,000 miles per year, carrying a total of 85
million gallons of raw and finished product.
These trucks transport NGLs, propane and butane and natural
gasoline to and from the Well Draw Gas Plant. The trucks travel
as far away as Nebraska, Montana, Utah and Colorado.
The Company is attempting to sell some of its oil and gas
assets to pay down debt. The Company is currently in negotiation
with companies for the sale of these assets. There is no
assurance that any sale or agreement will be made.
Gagon Mechanical Contractors
Gagon Mechanical Contractors, a wholly owned subsidiary of
the Company, was purchased by the Company on Dec. 31, 1993 to
provide expertise and resources necessary for construction of
used oil refineries. Gagon has been in operation since 1971.
Originally, Gagon focused on large contracts in the
industrial and commercial construction businesses. Because of the
low margins associated with commercial construction, the Company
has discontinued its commercial construction division to focus on
manufacturing used oil refineries for purchasers of the Company's
process.
Gagon has expertise in mechanical system construction, such
as process piping, 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, skid packaging,
fabrication and assembly, instrumentation and controls,
insulation and electrical work.
Gagon's construction revenues now almost exclusively 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 built refineries in
Salt Lake City, in Stoke-on-Trent, England, and Seoul, South
Korea. Currently, Gagon is working on the start up of the South
Korean refinery and is constructing the Australian plant. Gagon's
manufacturing site has 22,000 square feet of office and
manufacturing space, five overhead cranes and 15 welding
stations.
Customers and Markets
The Company does not refine the oil it produces from its oil
and gas operations, but does engage in natural gas liquids
processing and fractionation. The Company's production is sold to
unaffiliated oil and gas purchasing companies in the area where
it is produced. Production is transported by trucks and
pipelines. Crude oil, condensate and natural gas liquids are sold
under short-term contracts at competitive prices based on
postings by major purchasers of similar products to whom area
producers sell. Natural gas is sold to major interstate natural
gas pipeline companies generally under one year contracts. The
Company also sells some gas on a month to month spot pricing
basis. In addition, many of the Company's gas contracts
incorporate "market-out" provisions which permit the gas
purchaser to terminate the contract (or reopen negotiations on
the price set forth therein) if the contract price exceeds market
prices.
The availability of a ready market for oil, gas and natural
gas liquids owned or acquired by the Company depends on many
factors beyond its control. These factors include the extent of
domestic production and imports of oil and gas, the proximity and
capacity of natural gas pipelines and other transportation
facilities, fluctuating demand for oil, gas and natural gas
liquids, the marketing of competitive fuels, and the effects of
state and federal regulation of oil and gas production and sales.
Since the Company has engaged in oil and gas activities, it has
not had any material difficulties in marketing its oil and gas
products, and the Company believes this will be the case in the
future.
Used oil refining operations for both feedstock and finished
products depend on many factors, some of which include the
availability of used oil at reasonable prices and the finished
product markets for base oil and/or diesel and burner fuels.
International customers and markets for used oil refining
operations differ depending on the location and political climate
of each country. Typical finished products from a used oil
refinery include base lube stock, industrial lube stock, diesel
fuels, other burner fuels and an asphalt modifier.
Except for the Salt Lake City refinery, the Company's main
focus is to license the Technology with companies worldwide that
have used oil collection services and the ability to market the
finished products.
Governmental Regulation
Interline Energy Services' activities are subject to
existing federal and state laws and regulations which are
applicable to natural gas processing, gas gathering and oil and
gas production. In general, oil and gas production operations and
natural gas processing and their economics are affected by price
control, tax and environmental impacts as well as other laws
relating to the petroleum industry. Crude gathering operations
are regulated as a utility by the state of Wyoming.
Transportation of NGLs and finished products are regulated by the
U.S. Department of Transportation.
Interline Hydrocarbon's activities are subject to
regulations regarding the handling and processing of used oil and
its finished products. These regulations are mandated by the U.S.
Environmental Protection Agency and State Departments of
Environmental Quality (or an equivalent agency). Finished
Products are also regulated in a similar manner.
Gagon Mechanical is regulated by the Occupational Safety and
Health Administration (OSHA) for employee safety in the workplace
and within the industry for mechanical specifications by the
standards of the American Society of Mechanical Engineers (ASME).
The following overview is intended to focus only on the
regulations of primary concern to the Company and is by no means
complete with respect to specific regulatory compliance issues.
The following description of certain laws and regulations are,
therefore, qualified in their entirety by reference thereto.
Environmental Regulation. The Company's activities are
subject to various federal and state laws and regulations which
are applicable to all areas of business. These laws and
regulations cover the discharge of materials into the
environment, or otherwise relate to the protection of the
environment. The environmental regulations to which the Company
is subject include: (1) exposure to asbestos, regulated by the
EPA and OSHA; (2) air quality control, regulated by both the
Federal government under the Federal Clean Air Act and the
various state Departments of Environmental Air Quality; (3)
regulation of solid and hazardous wastes regulated by the EPA
under the Resource Conservation and Recovery Act (RCRA) of 1976;
(4) the Federal Clean Water Act which controls the discharge of
toxic discharges into surface streams; (5) the regulation of
underground storage tanks and pits under the Subtitle I of the
Resources Conservation and Recovery Act; and (6) the manufacture,
processing and distribution in commerce, use, disposal and making
of PCB's regulated under the toxic Substances Control Act passed
in 1976.
The Company's activities are subject to all existing federal
and state laws and regulations governing environmental impacts,
of which the above are representative. Such laws and regulations
may substantially increase operational costs and may prevent or
delay the commencement or continuation of a given operation. The
Company's management believes that its present operations comply
with applicable environmental legislation and regulations, and
that the existence of such regulations have had no material
adverse effect on the Company's operations to date. However,
future compliance may entail significant operating expenses over
time. As with any industry that is subject to such environmental
risks, there exists potential liabilities for the Company.
Transportation Regulation. Transportation of NGLs and
associated finished products are regulated by the U.S. Department
of Transportation. Some of these regulations include requirements
of placards on trucks, in-depth maintenance and record-keeping,
insurance, driver training and safety.
State Regulation of Oil and Gas Production. In all areas
where the Company conducts activities there are statutory
provisions regulating the production of oil and natural gas.
State statutes and regulations require permits for drilling
operations, drilling bonds and reports concerning operations. In
addition, there are state statutes, rules and regulations
governing conservation matters, including the unitization of
pooling of oil and gas properties, establishment of maximum rates
of production from oil and gas wells and the spacing, plugging
and abandonment of such wells. Such provisions may limit the rate
at which oil and gas could otherwise be produced from the
Company's properties including wells owned by others connected to
Company facilities and may restrict the number of wells that may
be drilled on a particular lease or in a particular field.
Operating Hazards and Uninsured Risks
The Company's operations are subject to the risks normally
incident to the operation of natural gas processing plants,
gathering systems, used oil refineries, oil and gas production,
construction, and fabrication. Those risks include fires,
explosions, pipeline ruptures, pollution and hazardous material
releases, equipment malfunction and breakdowns, and operations
errors and omissions, any of which could result in damage to or
destruction of Company facilities or a suspension of operations
or damage to persons or property. Although the Company carries
insurance coverage which management believes to be adequate and
comparable to that carried by other companies in the same
business, the Company is not fully insured against certain of
these risks, either because insurance is unavailable, because
management elects not to insure due to high premium costs, or
because the insurance is not necessary in the judgment of
management. The occurrence of an event not fully insured against
could have a material adverse effect on the Company's financial
position.
Employees
At March 15, 1997, the Company and its subsidiaries employed
52 full-time employees, compared to 148 full-time and 4 part-time
employees as of March 15, 1996. From time to time, the Company
utilizes the services of consulting geologists, engineers and
landmen as well as various laborers, operators, truck drivers,
tradesmen and mechanics.
ITEM 2. PROPERTIES
The Company's executive, administrative and accounting
offices are located at 160 West Canyon Crest Rd., Alpine, Utah
84004. This facility consists of approximately 11,515 square feet
of office space on about five acres of land that is owned by the
Company. Interline Hydrocarbon and Interline Energy Services also
lease an office at 350 West "A" Street, Suite 204, Casper,
Wyoming 82602.
Interline Energy Services' Well Draw Gas Plant is located 17
miles from Douglas, Wyoming. The Plant facilities consist of
17.85 acres of property, gas chillers, gas-to-gas exchangers,
storage tanks, four steel buildings enclosing the equipment, two
generators, compressors, de-ethanizer columns, fractionating
columns, truck weighing scales and scale house and other assets.
The gathering system consists of approximately 251 miles of high
and low pressure pipelines and the associated chart recorders and
wellhead connection meter runs.
The Hat Creek Partnership, of which Interline Energy Services
owns 20%, owns working interests in two oil and gas wells and a
13 mile gathering line interconnected to the Well Draw Gas Plant,
all located in Niobrara County, Wyoming.
Interline Energy Services' Monument Butte Gathering System is
located 30 miles southeast of Duchesne, Utah. The Company's
facilities generally consist of a natural gas gathering system
with an approximate 28 mile trunk line and about 40 miles of
lateral lines connecting some 109 wells. The system is connected
to five compressors, totaling 1,725 horsepower, two of which are
located at a central compression facility which is housed in a
steel building along with other compression equipment including a
glycol dehydrator, absorber, integral scrubber, reboiler assembly
and vertical separator.
Interline Energy Services owns working interests in 19 wells.
The physical assets of each well consist of casing and tubing,
pump jacks and drivers, product storage tanks, separators and
other associated wellhead facilities.
On January 1, 1995, Interline Energy Services acquired a
crude oil gathering pipeline located in Converse and Niobrara
counties of Wyoming from Conoco Pipeline Company. This system
consists of approximately 180 miles of 3, 4, and 6 inch gathering
and trunk lines, five pump stations with a total of approximately
50,000 barrels of storage, various pumps for wellhead and
mainline movement of crude oil, a three acre site with mainline
pumps and another three acre site with a small office building
and shop area, plus several small spare parts storage structures.
Gagon Mechanical Contractors operates from a 3.6 acre site
located at 8531 South 700 West in Sandy, Utah 84070. On the site
is a building with 22,000 square feet of office and manufacturing
space. Equipment includes excavators, backhoes, trenchers, lifts,
welding machines, trailers, trucks and other pipe machines and
related mechanical construction equipment, parts, pipe and
inventory.
Until June 1996, Interline Hydrocarbon had a 26 percent
ownership interest in Genesis, a joint venture between Interline
Hydrocarbon and GPI. In June 1996, GPI decided not to continue
with its exclusive license to the Technology, therefore, the
Company is purchasing GPI's 74 percent interest in the Genesis
Petroleum - Salt Lake used oil refinery joint venture for
approximately $2 million. As a result of the purchase, the
Company will become the sole owner and operator of the refinery
and create a new subsidiary to manage the facility. The Company
is currently seeking to raise the $2 million to make the payment.
ITEM 3. 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 $2.6 million less credits (totaling about $2 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
The Company's common stock is currently listed on the
American Stock Exchange Emerging Company Market Place under the
symbol "IRC.EC" Prior to July, 1994, the Company's common stock
was quoted on the NASDAQ Small Cap Market. The information
contained in the following table was obtained from the American
Stock Exchange and shows the range of representative prices for
the Company's common stock for the periods indicated. The prices
represent quotations between dealers and do not include retail
mark-up, mark-down or commission, and do not necessarily
represent actual transactions
The Company has been notified by the American Stock Exchange
that the Exchange is reviewing the Company's continued listing
eligibility, since it has fallen below the guidelines for
continued listing on the Emerging Company Marketplace of the
Exchange. The Company is working with the American Stock Exchange
for a resolution of this matter; however, there is no assurance
that the Company will continue to be listed on the Exchange.
High Low
1995
First Quarter $4.69 $2.50
Second Quarter $4.25 $2.94
Third Quarter $6.50 $4.00
Fourth Quarter $5.50 $4.00
1996
First Quarter $5.25 $3.50
Second Quarter $4.75 $2.13
Third Quarter $3.00 $1.00
Fourth Quarter $1.44 $0.50
1997
First Quarter $1.06 $0.38
(Through March 14, 1997)
Record Holders of Common Stock
The number of record holders of the Registrant's common
stock as of March 14, 1997, is 372.
Dividends
The Company has not paid any cash dividends to date and does
not anticipate or contemplate paying dividends in the foreseeable
future. It is the present intention of management to utilize all
available funds for the development of the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is engaged in several operations which are
organized into the following three companies for operating and
accounting purposes:
Interline Energy Services - Oil and Gas Operations. The
Company has been engaged in the oil and gas industry since 1990.
Its oil and gas operations primarily involve natural gas
gathering, natural gas processing, a crude oil pipeline
operation, propane retail sales and oil well production. The
Company's main oil and gas operations are located in east-central
Wyoming and eastern Utah. Wyoming operations, located near
Douglas, Wyoming, include the Well Draw Gas Plant, Interline
Crude Gathering Company, NRG Fuels, 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
includes the Monument Butte Gathering System and Roseland Wells.
Presently, the Company is seeking to sell some of the assets of
Interline Energy Services. A majority of the funds from the sale
of the assets are planned to be used to pay a portion of existing
debt.
Gagon Mechanical - Industrial and Commercial Construction.
Gagon Mechanical Contractors, a wholly owned subsidiary of the
Company, provides expertise and resources necessary for
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. Because of the low margins and its desire to
focus on used oil refinery manufacturing, the Company has
discontinued Gagon's industrial and commercial construction
business.
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 built 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
of 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
March 14, 1997, the Company has two plants in production trial
stage: a refinery in Salt Lake City that has been operating since
February 1996 and a refinery in Stoke-on-Trent, England that has
been operating since July 1996. 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.
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.
Results of Operations
Total Revenues
In 1996, revenues decreased $3,394,010, or 16.6%, to
$17,011,792 for the year ended December 31, 1996 as compared to
$20,405,802 for the year ended December 31, 1995. This revenue
decrease included $1,821,335, or 26.5%, increase in oil and gas
revenues, a $4,480,424, or 53.4%, decrease in construction
revenues, a $1,462,141, or 37.5% decrease in manufacturing
revenues and a $727,220, or 58.2%, increase in used oil refining
revenues. The Company's total revenues, on a segment basis, for
1996 and 1995 were as follows:
1996 1995
Oil and Gas $8,688,536 51% $6,867,201 34%
Construction 3,909,283 23% 8,389,707 41%
Manufacturing 2,436,753 14% 3,898,894 19%
Used Oil Refining 1,977,220 12% 1,250,000 6%
Total Revenue $17,011,792 100% $20,405,802 100%
Oil and Gas Revenues
Oil and gas revenues contributed approximately 51.07% of
total revenues for the year ended December 31, 1996 as compared
to approximately 33.65% for the year ended December 31, 1995.
This resulted in an increase of $1,821,335, or 26.52%, to
$8,688,536 for the year ended December 31, 1996 as compared to
$6,867,201 for year ended December 31, 1995.
Wyoming oil and gas operations revenue increased $1,101,919,
or 20.83%, to $6,391,755 for the year ended December 31, 1996 as
compared $5,289,836 for the year ended December 31, 1995. The
increase in revenue was mainly attributed to several new NGL
liquids purchase contracts entered into during 1996.
Utah oil and gas operations revenue increased $719,416, or
45.61%, to $2,296,781 for the year ended December 31, 1996 as
compared to $1,577,365 for the year ended December 31, 1995. This
increase was attributed to a residue volume (MMBtu) increase of
387,536, or 31.98%, to 1,599,240 for year ended December 31,
1996 compared to 1,211,704 for year ended December 31, 1995. This
revenue increase was also attributed an increase in price (MMBtu)
of $.17, or 15.82 %, to $1.25 for year ended December 31, 1996
compared to $1.07 for year ended December 31, 1995. In 1996, the
Company added 37 new wells to its gathering system, compared to
30 new wells for 1995.
Construction Revenues. Construction revenues contributed
approximately 22.98% of total revenues for the year ended
December 31, 1996 compared to 41.11% for the year ended December
31, 1995. This resulted in a decrease of $4,480,424 or 53.40%, to
$3,909,283 for the year ended December 31, 1996 compared to
$8,389,707 for the year ended December 31, 1995. The decrease in
revenue was mainly attributed to management's decision to
discontinued its commercial construction division. Because of
the low margins associated with commercial construction, the
Company has discontinued its commercial construction division to
focus on manufacturing of its used oil refinery.
Manufacturing Revenues. Manufacturing revenues contributed
approximately 14.32% of total revenues for the year ended
December 31, 1996 compared to 19.11% for the year ended December
31, 1995. The $1,462,141 decrease in revenue was attributed to
the Company having two used oil refineries under construction for
1996 compared to three used oil refineries under construction for
1995. During 1996, the Company started construction on a 24,000
a day plant for Transpacific Group of Australia and finished
construction on a plant for Dukeun Industrial of South Korea.
During 1995, the Company had under contract refineries for GPI,
Dukeun Industrial Company of South Korea and the Company's joint
venture partner, Whelan Environmental Services of England.
Used Oil Refining Revenues. Used oil refining revenues
contributed 11.62% of total revenues for the year ended December
31, 1996 compared to 6.13% for the year ended December 31, 1995.
This resulted in an increase of $727,220, or 58.18%, to
$1,977,220 for the year ended December 31, 1996 compared to
$1,250,000 for the year ended December 31, 1995. The $727,220
increase in revenues was mainly attributed to the Company's
ownership in the Genesis plant located in Salt Lake City, Utah.
Direct Costs. Direct costs decreased $946,953, or 5.91%, to
$15,071,513 for the year ended December 31, 1996 compared to
$16,018,466 for the year ended December 31, 1995. The decrease of
$946,953 for 1996 was mainly attributed to a decrease in the
Company's total revenues. As a percent of revenues, direct costs
increased 10.09%, to 88.59% for the year ended December 31, 1996
compared to 78.5% for the year ended December 31, 1995. This
10.09% increase was mainly attributed to cost overruns on several
large commercial construction contracts. The Company also
incurred additional costs associated with the start up and
development of its used oil technology.
Selling, General and Administrative. Selling, general and
administrative expenses increased $334,487, or 12.62%, to
$2,984,725 for year ended December 31, 1996 compared to
$2,650,238 for year ended December 31, 1995. As a percent of
revenues, selling, general and administrative expenses were
17.55% for year ended December 31, 1996 compared to 13.39% for
year ended December 31, 1995. These expenses consist 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.
Depreciation and Amortization. Depreciation and amortization
expenses increased $573,710, or 67.47%, to $1,424,019 for year
ended December 31, 1996 compared to $850,309 for year ended
December 31, 1995. As a percent of revenues, depreciation and
amortization expenses increased to 8.5% for the year ended
December 31, 1996 compared to 4.17% for year ended December 31,
1995. The increase of $573,710 was attributed to the amortization
of its refining technology and marketing rights and an increase
in capital expenditures for year ended December 31, 1995.
Research and Development. Research and development expenses
increased $220,504, or 33.53%, to $878,192 for year ended
December 1996 compared to $657,688 for year ended December 31,
1995. As a percent of revenues, research and development expenses
increased to 5.16% for year ended December 31, 1996 compared to
3.22% for year ended December 31, 1995. Included in research and
development is $751,192 cost overrun associated with the
manufacturing of the Genesis and England refineries. The overrun
is directly related to ongoing modifications during construction.
These modifications will be implemented into the design of future
refineries.
The increase in research and development expenses in 1996
was 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
the future periods.
Write-down of Asset Value. During 1996, the Company
adopted the Financial Accounting and Standard Board's Statement
121, Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed of. During 1996, the Company
wrote down receivables totaling $293,118 and plant and equipment
totaling $265,000.
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 third quarter of 1997.
As of March 28, 1997, the Company has not paid the following
three Senior Secured notes due to a shareholder/director 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 shareholder. 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 shareholder. 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 shareholder. The note 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 shareholder 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%.
Presently, the Company is seeking to sell some of the assets
of Interline Energy Services to satisfy a portion of existing
debt.
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 March 28, 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 Genesis 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 in Balance Sheet
The following represents material changes affecting the
balance sheet as of December 31, 1996 compared to the balance
sheet of December 31, 1995.
Current Assets: Current assets decreased to $3,685,021 as of
December 31, 1996 from $5,580,562 as of December 31, 1995. The
$1,895,541 decrease in current assets is attributed to a decrease
in cash and cash equivalents of $614,409 primarily from the
Company's current year loss, a decrease of $668,343 in accounts
receivable attributed to the downsizing of its commercial
construction division, a decrease of $61,524 in inventories, an
increase in note receivable of $15,000 and a decrease of $566,265
in other current assets attributed to cost in excess of billing
on construction contracts.
Property, Plant and Equipment. Net property, plant and
equipment increased to $11,349,584 as of December 31, 1996 from
$10,461,186 as of December 31, 1995. The $888,398 increase was
attributed to capital expenditures of $2,982,037, a decrease due
to current year depreciation of $1,424,019 and a decrease of
$669,620 from the sale of assets.
Major expenditures consisted of $2,512,291 for the used oil
refining plant located in Salt Lake City, $90,865 for the
purchase of a new tractor and $241,899 for additions to its Utah
gas gathering system.
Intangible Assets. Intangible assets decreased to
$1,875,484 as of December 31, 1996 from $1,953,598 as of December
31, 1995. The $78,114 decrease was attributed to an increase of
$81,150 for legal costs associated with the Company's patent for
used oil refining and a decrease of $159,264 attributed to the
amortization of marketing and technology rights.
Other Assets. Other assets decreased to $80,000 as of
December 31, 1996 from $95,563 as of December 31, 1995. The
$15,563 decrease was attributed to a decrease
in the Company's investment in less than majority owned entities.
Current Liabilities. Current liabilities increased to
$11,300,835 as of December 31, 1996 from $6,902,829 as of
December 31, 1995. The $4,398,006 decrease in current liabilities
is attributed to a decrease of $2,299,302 in accounts payable
which represent payments to vendors, an increase of $232,521 in
accrued liabilities/interest mainly attributed to accrued
interest due to a shareholder/director, an increase of $5,030,089
in note payable due to a shareholder/director, an increase of
$2,027,911 in note payable due to Quaker State Resources for the
Genesis plant purchase, a decrease of $563,540 due to the
reclassification of current portion of long-term debt and capital
lease obligations and a decrease of $29,673 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 $1,829,300 as of December 31, 1996 from $3,392,692 as of
December 31, 1995. The $1,563,392 decrease is attributed to a
decrease in deferred revenue of $752,306 attributed to the
purchase of the Genesis used oil refinery, a principle reduction
of $1,559,708 which represents payments to lenders, an increase
of $563,540 from reclassification of current portion of long-term
debt, and new debt and capital lease obligations of $185,082.
Total Stockholders' Equity. Total stockholders' equity
decreased to $3,982,544 as of December 31, 1996 from $7,983,626
as of December 31, 1995, The $4,001,084 decrease in equity was
attributed to the issuance of common stock for services for
$11,250, 108,115 shares of common stock valued at $600,000 issued
to Quaker State Resources and the current year loss of
$4,612,332.
INFLATION
The Company's business and operations have not been
materially affected by inflation during the past three years and
the current calendar year. The Company believes that inflation
will not materially and adversely impact its business plans for
the future.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial Statement Schedules
All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Contents
Page
Independent Auditors' Report F-1
Consolidated balance sheet, December 31,
1996 F-2
Consolidated statement of operations, years
ended December 31, 1996 and 1995 F-3
Consolidated statement of stockholders'
equity, years ended December 31, 1996
and 1995 F-4
Consolidated statement of cash flows,
years ended December 31, 1996 and 1995 F-5
Notes to consolidated financial statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Interline Resources Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet
of Interline Resources Corporation and subsidiaries as of
December 31, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Interline Resources Corporation
and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 2, the Company's significant operating
losses, and the deficit in working capital raise substantial
doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also
described in Note 2. The accompanying financial statements
do not include any adjustment that might result from the
outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
March 18, 1997
F-1
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
Assets
Current assets:
Cash and cash equivalents $ 1,090,810
Trade accounts receivable, net 2,183,461
Income taxes receivable 80,000
Inventories 55,748
Notes receivable - current portion 55,200
Other current assets 219,802
Total current assets 3,685,021
Property, plant and equipment 14,618,162
Accumulated depreciation, amortization, and depletion (3,268,578)
Net property, plant and equipment 11,349,584
Notes receivable 122,590
Intangible assets, net 1,875,484
Other assets 80,000
Total assets $ 17,112,679
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,193,488
Accrued liabilities 564,408
Accrued interest, related party 405,314
Notes payable, related party 5,030,089
Note payable, used oil refinery 2,027,911
Current portion of long-term debt 624,451
Other current liabilities 455,174
Total current liabilities 11,300,835
Long-term debt 1,652,161
Deferred revenue 177,139
Total liabilities 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 outstanding -
Common stock - $.005 par value. 100,000,000 shares
authorized; 14,074,167 shares issued and outstanding 70,371
Additional paid-in capital 9,185,017
Retained deficit (5,272,844)
Total stockholders' equity 3,982,544
Total liabilities and stockholders' equity $ 17,112,679
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31,
1996 1995
Revenue $ 17,011,792 $ 20,405,802
Direct costs 15,071,513 16,018,466
Gross margin 1,940,279 4,387,336
Selling, general and administrative expenses 2,984,725 2,650,238
Depreciation, depletion and amortization 1,424,019 850,309
Research and development 878,192 657,688
Write-down of asset value 558,118 82,573
(Loss) income from operations (3,904,775) 146,528
Other income (expense):
Interest expense, net (281,624) (278,534)
Interest expense, related party (405,314) (25,000)
Other expenses, net (20,619) (276,088)
Loss before income taxes (4,612,332) (433,094)
Income tax benefit
Current - -
Deferred - -
- -
Net loss $ (4,612,332) $ (433,094)
Loss per common share $ (.33) $ (.03)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1996 and 1995
<CAPTION>
Preferred Stock Common Stock Additional
Earnings Paid-in Retained
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 - $ - 13,661,313 68,307 7,274,851 $(277,418) 7,115,740
Stock options exercised - - 288,889 1,444 1,297,336 - 1,298,780
Shares issued for services - - 850 4 2,196 - 2,200
Net loss
December 31, 1995 - - - - - (433,094) (433,094)
Balance,
December 31, 1995 - - 13,951,052 69,755 8,574,383 (660,512) 7,983,626
Shares issued for services - - 15,000 75 11,175 - 11,250
Shares issued as payment
of note payable - - 108,115 541 599,459 - 600,000
Net loss
December 31, 1996 - - - - - (4,612,332) (4,612,332)
Balance,
December 31, 1996 - $ - 14,074,167 70,371 9,185,017 (5,272,844) 3,985,544
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
<CAPTION>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net loss $(4,612,332) $(433,094)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 1,424,019 850,309
Provision for losses on accounts receivable 25,069 -
Write-down of asset value 558,118 82,573
Gain on disposal of assets (55,513) (7,285)
Common stock issued for services 11,250 2,200
(Increase) decrease in:
Accounts receivable 712,765 (1,014,184)
Inventories 61,524 (18,858)
Other current assets 571,423 (709,127)
Other assets 15,563 112,626
Increase (decrease) in:
Accounts payable (2,772,986) 2,237,045
Accrued liabilities 210,158 453,473
Deferred revenue (2,306) 307,152
Other current liabilities (29,673) 433,525
Net cash (used in) provided by
operating activities (3,882,921) 2,296,355
Cash flows from investing activities:
Proceeds from sale of equipment 134,077 7,285
Cash received in acquisition 117,715 -
Change in restricted cash - 70,000
Decrease in notes receivable from shareholders 50,648 25,190
Purchase of technology and marketing rights (96,503) (538,961)
Purchase of property, plant and equipment (891,629) (2,803,046)
Net cash used in
investing activities (685,692) (3,239,532)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 4,780,113 -
Proceeds from issuance of common stock - 1,298,780
Payments on long-term debt (825,909) (850,419)
Net cash provided by
financing activities 3,954,204 448,361
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
<CAPTION>
<S> <C> <C>
1996 1995
Net decrease in cash (614,409) (494,816)
Cash, beginning of year 1,705,219 2,200,035
Cash, end of year 1,090,810 1,705,219
Supplemental Disclosure of Cash Flow Information
Actual cash amounts paid for:
Interest 326,080 271,349
Income taxes $ - $ -
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
During the year ended December 31, 1996, the following transactions occurred:
Property and equipment with an aggregate value of
$185,082 was purchased with debt.
Property and equipment was sold in exchange for payment
of long-term debt of $483,823.
The Company acquired all of the remaining assets and
assumed certain liabilities from a joint venture operation
for common stock, a note payable, and deferred revenue.
The net assets purchased consisted of the following:
Accounts receivable $ 362,609
Prepaid expenses 5,158
Property and equipment 1,877,911
Intangible assets 10,565
Accounts payable (473,684)
Accrued expenses (22,363)
Net assets purchased 1,760,196
Less common stock issued (600,000)
Less amount financed with note payable (2,027,911)
Deferred revenue 750,000
Net cash received 117,715
During the year ended December 31, 1995, the Company purchased
property and equipment with a total value of $899,267 with long-term debt.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial
statements of Interline Resources Corporation, Inc. (the Company) and
its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation of the Company with
these entities.
Business Activity
The Company's principal segments of operations consist of the
following industries:
Gas Processing
The Company gathers natural gas through a system of pipelines to
its gas processing plant. The gas is then processed and
fractionated into its constituent natural gas liquid products and
remaining residue gas. Residue gas is sold into a major interstate
pipeline and the natural gas liquid products are sold to both end
users and other major refineries for further refinement.
Construction
The Company operates in the construction industry, primarily in
the areas of plumbing, heating, air conditioning and industrial
piping. The Company obtains construction contracts through
competitive bids and operates primarily in the state of Utah. As
a condition for entering into construction contracts the Company
has purchased surety bonds. The bonds are collateralized by
certain assets of the Company and personal guarantees of two
shareholders.
Used Oil
The Company has a license to market a patented technology which
refines various types of oils, producing a usable product. The
Company's marketing efforts extend to a worldwide market.
Revenues are generated through the design and manufacture of the
plants, consultation regarding the process, and royalties on the
technology.
Manufacturing
The Company designs and manufactures refineries which employ the
Company's licensed used oil refining technology. The
manufacturing process includes the initial engineering work
through the final assembly of the refinery on the customer's site.
The Company is required to maintain certification for its
manufacture of pressure vessels and boiler piping. Revenues from
this segment are generated from projects constructed for placement
at local, as well as, international sites.
F-7
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies - Continued
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts
receivable. In the normal course of business, the Company provides
credit terms to its customers. Accordingly, the Company performs
ongoing credit evaluations of its customers and maintains allowances
for possible losses which, when realized, have been within the range
of management's expectations.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
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 Operations
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 costs 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.
F-8
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies - Continued
Inventories
Inventories consisting of supplies and miscellaneous materials are
recorded in the financial statements at their aggregate lower of cost
(first-in, first-out) or market.
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 in operations for the period.
The cost of maintenance and repairs is charged to operations 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:
Estimated
Useful
Life
Buildings and equipment 15-25 years
Equipment and vehicles 3-10 years
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."
Income Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting.
The Company for income taxes uses the completed contracts method of
recognizing construction revenues on long-term contracts. Under this
method, contract revenues are deferred until contract completion.
The income recognition on long-term contracts for financial
reporting, therefore, exceeds the income recognition for tax
reporting. The difference will be taxable when the contracts are
substantially complete. The Company also provides for depreciation
on the straight-line and accelerated methods for financial accounting
while using various accelerated methods for income tax accounting.
The tax effects of these differences are reflected as deferred income
taxes.
Amortization
The Company amortizes its marketing and technology rights for the
refining process over seven and seventeen years. These periods
approximate the assets' estimated useful lives.
F-9
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies - Continued
Loss Per Common Share
Income per share of common stock is calculated based on the weighted
average number of common shares outstanding during the period. The
weighted average shares outstanding at December 31, 1996 and 1995 is
approximately 14,022,067 shares and 13,815,125 shares, respectively.
Fully diluted income per share information is not presented as the
per share amounts are either antidilutive or not different from
presented per share amounts.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassification
Certain amounts in the prior years financial statements have been
reclassified to conform to the 1996 presentation.
2. Going Concern
The Company has sustained significant operating losses in 1996 and
1995, is currently in default on approximately $5,000,000 of note
payable obligations, and it has taken longer than projected to bring
the re-refining technology to economic viability. This has caused
the Company to incur more research and development costs than
originally projected. In addition, the title to ownership of an
operating plant is in dispute due to the Company being in default on
the note payment for the operating plant (see note 9). These factors
create an uncertainty about the Company's ability to continue as a
going concern.
The Company is in negotiations to sell certain of its assets. The
ability of the Company to continue as a going concern is dependent on
the Company generating cash from the sale of certain of its assets,
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.
F-10
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
3. Note Receivables and Deferred Revenue
The Company entered into a contract to modify and refurbish a plant
for another entity. During 1993, the construction was complete and
the Company began receiving payments for this construction. Terms of
the agreement stipulate that the Company will be reimbursed at the
rate of 200% of its actual costs. Payments are received based on the
incremental margin of liquid prices charged over the revenue expected
from gas sales. At December 31, 1996, the note receivable balance
totaled approximately $163,000. Since payment of the note is
contingent upon future earnings, an amount totaling approximately
$77,000 has been recorded as deferred revenue and is recognized when
payments are received. Income related to this note of $24,033 and
$11,952 was recognized as income on the note during the years ended
December 31, 1996 and 1995, respectively.
The Company also has a demand note receivable from a former employee
which totaled $15,200 at December 31, 1996.
During the year ended December 31, 1996 and 1995, the Company
received approximately $100,000 and $1,000,000, respectively, on
contracts and proposed contracts regarding licensing of technology.
These funds were deferred to a future year when it is anticipated
that certain events will occur to complete the earnings process. As
of December 31, 1996, approximately $100,000 remained as deferred
revenue.
4. Accounts Receivable
Accounts receivable consist of the following:
Construction contracts:
Contracts in progress $ 535,552
Completed contracts 232,940
Retainage 411,448
Total construction receivables 1,179,940
Nonconstruction related accounts receivable 1,326,708
2,506,648
Less allowance for doubtful accounts (323,187)
Total accounts receivable $ 2,183,461
F-11
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
5. Construction Contracts in Process
Information with respect to construction contracts in process at
December 31, 1996 follows:
Costs on uncompleted contracts $ 10,834,668
Estimated earnings thereon 576,959
11,411,627
Less billings applicable thereto (11,716,035)
$ (304,408)
Costs and earned profit on construction
contracts - unbilled $ 150,766
Billings in excess of costs and earned
profit on construction contracts (455,174)
$ (304,408)
These balances are included in the financial statements under the
captions of "Other Current Assets" and "Other Current Liabilities."
F-12
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
6. Property and Equipment
Property and equipment at December 31, 1996 consists of the
following:
Vehicles $ 330,000
Machinery and equipment 7,728,914
Buildings and structures 1,635,698
Oil and gas properties 1,167,703
Office furniture and equipment 315,281
Refinery 3,440,566
14,618,162
Less accumulated depreciation,
amortization, and depletion (3,268,578)
$ 11,349,584
The Company entered into a sales agreement for a refinery constructed
by a wholly owned subsidiary. One of the provisions of the agreement
was that the purchaser, at its option, could require the Company to
repurchase the refinery. During 1996, the purchaser opted to require
the Company to repurchase the refinery. At December 31, 1996, the
Company was in default on its repurchase obligation to the purchaser.
Because of the circumstances surrounding this default, a dispute
existed at December 31, 1996 relative to the ownership of the
refinery. At December 31, 1996, the Company did not posses title to
the refinery but has, recorded the asset and the associated liability
for the repurchase.
7. Technology and Marketing Rights
During 1993, the Company entered into an agreement to purchase
exclusive worldwide technology and marketing rights to a refining
process for used oil. The Company is currently in negotiations with
several entities who desire to use its refining process. The Company
capitalized $2,228,602 of patent, engineering, and other costs
related to this agreement from 1993 to 1996. These rights are being
amortized on a straight-line basis over seven and seventeen years.
Amortization expense of $168,874 and $85,418 was recorded during the
years ended December 31, 1996 and 1995, respectively, and accumulated
amortization at December 31, 1996, totaled $353,118.
F-13
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
8. Notes Payable Related Party
Notes payable to a related party at December 31, 1996 are comprised
of the following:
Note payable to a director/shareholder
of the Company with interest at a rate
of 16%, due January 1, 1998, secured by
common stock, 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 days
preceding the date of conversion $2,500,000
Note payable to a director/shareholder
of the Company with interest at a rate
of 12%, due August 29, 1996, secured by
common stock, 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 common stock
for five consecutive trading days
preceding the date of conversion 1,500,000
Note payable to a director/shareholder
of the Company with interest at a rate
of 16%, due September 1, 1996, secured
by common stock 780,089
Unsecured note payable to a
director/shareholder of the Company
with interest at a rate of 12%, due
August 29, 1996, convertible in full to
67,750 shares of the Company's common
stock 250,000
$5,030,089
The notes payable to a director/shareholder 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.
F-14
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
9. Note Payable, Used Oil Refinery
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. The original purchaser
owned the remaining 74% of the joint venture and operated the plant.
At the date of the option being exercised, the Company also became
sole owner of the joint venture and has consolidated the operations
of the joint venture with the Company's operations. Pro forma
information for operations for the entire year have not been
presented as they are immaterial to the financial statements. At
December 31, 1996, the Company was in default on its repurchase
obligation to the purchaser. Such liability associated with this
repurchase obligation is included in the financial statements under
the caption "Note Payable, Used Oil Refinery." This obligation bears
interest at 12%.
10. Long-Term Debt
Long-term debt at December 31, 1996, is as follows:
Notes payable to various financial
institutions bearing interest at
between 6.8% and 11.25%, due in
combined monthly installments of
$15,462 including interest, secured by
real estate $819,540
Note payable to various entities with
interest at between 9.25% and 12%,
requiring combined monthly installments
of $18,674 including interest,
collateralized by the Company's natural
gas gathering system and processing
plants 489,562
Note payable to a financial
institution, due in monthly
installments of $6,468, including
interest at prime plus 3.5% (11.75% at
December 31, 1996), secured by a life
insurance policy, equipment and
accounts receivable 274,433
Notes payable to various financial
institutions, due in combined monthly
installments of $10,069, including
interest at rates between 7.9% and
11.9%, secured by vehicles,
inventories, equipment, and receivables 211,923
F-15
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
10. Long-Term Debt - Continued
Notes payable to officers/shareholders
due in 1996, interest accruing at
between 5% and 12%, unsecured 106,637
Capital lease obligations (see note 11) 374,517
2,276,612
Less current portion of long-term debt 624,451
Net long-term debt $1,652,161
Future maturities of long-term debt as of December 31, 1996 are as
follows:
Year Amount
1997 $ 624,451
1998 334,667
1999 332,431
2000 302,927
2001 217,487
Thereafter 464,649
$ 2,276,612
F-16
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
11. Capital Leases
The Company has entered into several noncancellable capital leases
for equipment. The leases have between two and five year lease
terms, aggregate monthly payments total $10,932. The assets under
capital leases have been capitalized at an aggregate cost of $465,406
and accumulated amortization of these costs totaled $109,257 at
December 31, 1996. Future minimum lease payments are as follows:
Year Amount
1997 $ 146,034
1998 90,446
1999 100,549
2000 81,658
Total minimum lease payments 418,687
Less amount representing interest 44,170
Present value of minimum lease payments $ 374,517
12. Income Taxes
Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently
enacted tax laws and rates that apply to the periods in which they
are expected to affect taxable income. Valuation allowances are
established, if necessary, to reduce the deferred tax asset to the
amount that will more likely than not be realized. Income tax
expense is the current tax payable or refundable for the period plus
or minus the net change in the deferred tax assets and liabilities.
The Company's income tax (expense) benefit differed from the
statutory federal rates as follows:
1996 1995
Statutory rate applied to loss before taxes $ 1,568,000 $ 140,000
State income taxes 226,000 22,000
Increase in valuation allowance (1,794,000) (162,000)
$ - $ -
F-17
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
12. Income Taxes - Continued
Significant components of the Company's deferred tax (assets) and tax
liabilities at December 31, 1996 are as follows:
Depreciation $ 742,000
Revenue recognition on construction contracts 215,000
Net operating losses (2,759,000)
Capital loss carryover (86,000)
Valuation allowance 1,888,000
$ -
The Company has approximately $6,756,000 of net operating losses
available to offset future income. These net operating losses expire
in the years 2005 through 2011. If certain substantial changes in
the Company's ownership should occur, there would be an annual
limitation of the amount of carryforwards which could be utilized.
In addition, the Company has $207,000 of capital loss carryforwards
available to offset income.
It is not possible to estimate the utilization of carrying forward
the available net operating losses to future periods to offset
income. Consequently, a valuation allowance has been established to
offset any tax asset.
13. Related Transactions
Interest expense recorded for related party notes payable (see note
10) totaled $8,000 and $10,000 for 1996 and 1995, respectively.
14. 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 a note payable agreement with a director/shareholder
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 for a two year period ending
October 1996 or until the note payable is satisfied. 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.
F-18
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
15. Write-Down of Asset Value
During 1996, the Company adopted the Financial Accounting and
Standards Board's Statement 121, Accounting for the Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed of.
During 1996, the Company wrote down receivables totaling $293,118 and
plant and equipment totaling $265,000. The fair value was based upon
the estimated economic recovery value of the assets.
16. Stock Option Plan
The Company has a stock option plan for officers and directors of the
Company (Officers Option Plan), under which a maximum of 350,000
options may be granted to purchase common stock at prices generally
not less than the fair market value of common stock at the date of
grant. However, due to certain restrictions placed upon the Company
through loan covenants included in the notes payable to a related
party, the minimum option exercise price on options granted after the
note agreement is $4.50 per share. This minimum exercise price will
remain in effect until all notes payable to the related party are
satisfied. Under the Officers Option Plan, 7,500 options are granted
each year to various officers and directors of the Company.
Additional options may be granted at the discretion of the board of
directors.
The Company also has a stock option plan for non-insiders (Non-Insider
Option Plan), under which a maximum of 750,000 options may be
granted to purchase common stock. Grants are also limited to 250,000
options per year.
Under the Non-Insider Option Plan, all grants are at the discretion
of the board of directors.
All options are exercisable after six months and have a maximum term
not to exceed five years. Options may not be transferred except by
reason of death, with certain exceptions, and termination of
employment accelerates the expiration date of any outstanding options
to 90 days from the date of termination.
F-19
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
16. Stock Option Plan - Continued
A schedule of options and warrants at December 31, 1996 is as
follows:
Number of Option Price
Options Per Share
Outstanding at December 31, 1995 1,086,668 $ 1.08 -5.65
Granted 302,500 4.50
Expired 297,668 4.50
Outstanding at December 31, 1996 1,091,500 $ 1.08 -5.65
Options exercisable and shares available for future grant are as
follows:
December 31,
1996 1995
Options exercisable 1,091,500 1,086,668
Shares available for grant 908,500 930,000
F-20
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
17. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) which established financial
accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for an
employee stock option or similar equity instrument. This statement
gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25 with footnote disclosures of
the pro forma effects if the fair value method had been adopted. The
Company has opted for the latter approach. Accordingly, no
compensation expense has been recognized for the stock option plans.
Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in
1996 and 1995 consistent with the provisions of FAS No. 123, the
Company's results of operations would have been reduced to the pro
forma amounts indicated below:
December 31,
1996 1995
Net loss - as reported $ 4,612,332 $ 433,094
Net loss - pro forma $ 5,665,328 $ 650,621
Loss per share - as reported $ 0.33 $ 0.03
Loss per share - pro forma $ 0.40 $ 0.05
The fair value of each option grant is estimated in the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
December 31,
1996 1995
Expected dividend yield $ - $ -
Expected stock price volatility 107.0% 107.0%
Risk-free interest rate 4.5% 4.5%
Expected life of options 5 years 5 years
The weighted average fair value of options granted during 1996 and
1995 are $2.88 and $2.93 respectively.
F-21
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
17. Stock-Based Compensation - Continued
The following table summarized information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/96 (Years) Price 12/31/96 Price
$ 1.08 650,000 1.64 1.08 650,000 1.08
3.90-5.65 441,500 3.42 4.61 441,500 4.61
$ 1.08-5.65 1,091,500 2.05 1.91 1,091,500 1.91
18. Segment Information
The Company has operations in the segments of gas processing,
construction and other. The following is a breakdown by segment:
1996 1995
Capital expenditures:
Gas processing $ 479,698 $ 2,297,346
Construction - 92,752
Manufacturing 20,358 147,574
Used oil refining 2,601,989 931,236
Other 18,949 233,405
Total $ 3,120,994 $ 3,702,313
Depreciation and amortization:
Gas processing $ 833,668 $ 568,345
Construction 24,722 53,177
Manufacturing 74,166 33,765
Used oil refining 423,971 135,591
Other 67,492 59,431
Total $ 1,424,019 $ 850,309
F-22
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
18. Segment Information - Continued
Identifiable assets:
Gas processing $ 9,219,158 $ 8,076,618
Construction 575,477 3,336,492
Manufacturing 1,529,824 2,310,519
Used oil refining 3,885,169 3,512,414
Other 1,903,051 1,043,104
Total $ 17,112,679 $ 18,279,147
Revenue:
Gas processing $ 8,688,536 $ 6,867,201
Construction 3,909,283 8,389,707
Manufacturing 2,436,753 3,898,894
Used oil refining 1,977,220 1,250,000
Total $ 17,011,792 $ 20,405,802
Operating income:
Gas processing $ 677,939 $ 297,574
Construction (1,205,350) 196,374
Manufacturing (513,242) (548,715)
Used oil refining (2,133,612) 201,295
Other (730,510) -
Gross margin (3,904,775) 146,528
Interest expense (686,938) (303,534)
Other corporate expenses (20,619) (276,088)
Loss before income taxes $ (4,612,332) $ (433,094)
19. Contingencies
The Company is a partner in several joint ventures. The joint
ventures have incurred debt related to the development of the
project. The Company, as a joint venture partner, is contingently
liable for the debt. The debt totals approximately $1,400,000 at
December 31, 1996.
F-23
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
19. Contingencies - Continued
During the year ended December 31, 1996, the Company entered into an
agreement to sell certain assets of the Company. As a part of this
agreement, the Company also agreed to guarantee a note payable
between the purchaser and a third party. At December 31, 1996, the
remaining liability on the note approximated $135,000.
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.
20. 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 $5,615 and $2,218 for the year ended
December 31, 1996 and 1995, respectively.
21. Fair Value of Financial Instruments
None of the Company's debt instruments are held for trading purposes.
The Company estimates that the fair value of all financial
instruments at December 31, 1996, does not differ materially from the
aggregate carrying values of its financial instruments recorded in
the accompanying balance sheet.
F-24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
No disclosure required.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE COMPANY; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The
current directors and executive officers of the Company, who will
serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, are set
forth below:
On March 28,1997, the Company received notice of the
resignation of three directors, Maurice D. Sabbah, Freddy H.
Robinson and Alan Gressel, who were appointed to the Company's
board of directors pursuant to arrangements regarding a loan from
Mr. Sabbah. The Company was advised that these directors resigned
in order to avoid the appearance of a conflict of interest in the
Company's efforts to address its financial situation, including
Mr. Sabbah's loans, which are in default.
Name Age Position
Michael R. Williams 45 Chairman/CEO/President/Director
R. LaMar Gagon 52 Director/President, Gagon Mechanical
Maurice D. Sabbah 68 Director
Freddy H. Robinson 44 Director
Alan Gressel 67 Director
Mark W. Holland 40 Chief Financial Officer
Background information concerning the Company's officers and
directors is as follows:
Michael R. Williams. Mr. Williams has been an officer and
director of the Company since October 1990. He was also
president, founder and majority owner of Interline Natural Gas, a
privately held company acquired by the Company. Mr. Williams
received his Bachelor of Arts degree in Business Management from
Brigham Young University in 1975.
R. LaMar Gagon. Mr. Gagon has been a director of the Company
since 1994. Mr. Gagon is Vice President and founder of the Sandy,
Utah, based Gagon Mechanical Contractors Inc. Gagon Mechanical is
an industrial/commercial contracting company building and
providing mechanical services to the construction, refinery,
mining, government, military and aerospace industries. He studied
mechanical engineering at Brigham Young University, after
graduating from Utah Technical College.
Maurice D. Sabbah. Mr. Sabbah is chairman of the board and
chief executive officer of Fortress RE, a reinsurance and
underwriting manager.
Freddy H. Robinson. Mr. Robinson is managing partner of
Bernard Robinson & Company, LLP, a certified public accounting
firm. He graduated from University of North Carolina at Chapel
Hill and is a certified public accountant.
Alan Gressel. Mr. Gressel is president of Research Oil
Company, a company involved in the collection and disposal of
oils and hazardous wastes. Mr. Gressel has served as president of
the National Oil Recyclers Association (NORA). He received his
Bachelor of Science in Mathematics (Magna Cum Laude) at John
Carroll University and conducted graduate work at Case Western
Reserve University.
Mark W. Holland. Mr. Holland has been employed as a
Controller for the Company since 1989 and was appointed Chief
Financial Officer in 1994. From 1983 to 1989 Mr. Holland was
employed by Savage Industries, Inc. as an accountant and as a
Controller for the Ideal Corporation and Cornelius Development
Corporation subsidiaries. Mr. Holland received his Certified
Public Accountant certification in 1989. Mr. Holland received his
Bachelor of Science degree in Accounting and Business
Administration from Southern Utah State College in 1983.
B. Significant Employees. None.
C. Family Relationships. None.
D. Other: Involvement in Certain Legal Proceedings. None.
E. Compliance With Section 16(a). Section 16 of the
Securities Exchange Act of 1934 requires the filing of reports
for sales of the Company's common stock made by officers,
directors and 10% or greater shareholders. A Form 4 must be filed
within 10 days after the end of the calendar month in which a
sale or purchase occurred. Based upon review of Forms 4 filed
with the Company, those officers and directors were current on
all filings related to Form 4.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation
paid by the Company for services rendered during the last three
years to the Company's Chief Executive Officer and to the
Company's most highly compensated executive officers other than
the CEO, whose annual salary and bonus exceeded $100,000:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restrict Option/ LTIP Other
Principal ($) ($) Compen- Stock SAR's Payouts Compensation
Position Year Salary Bonus sation ($) Awards (#) ($) ($)
Michael R. 1996 $168,000 $-0- $-0- $-0- 7,500(1) $-0- $-0-
Williams 1995 $198,000 $-0- $-0- $-0- 7,500(1) $-0- $-0-
President, 1994 $168,000 $-0- $-0- $-0- 7,500(1) $-0- $-0-
CEO
Chairman
LaMar Gagon 1996 $100,000 $-0- $-0- $-0- 7,500(2) $-0- $-0-
Director/ 1995 $100,000 $-0- $-0- $-0- 24,167(2) $-0- $-0-
President 1994 $100,000 $-0- $-0- $-0- 7,500(2) $-0- $-0-
Gagon
</TABLE>
(1) In February 1994, Mr. Williams was granted an
option to purchase 7,500 shares of the Company's common
stock at a price of $5.65 per share, which was the
estimated market price at the time of grant. The option
was issued pursuant to the Company's 1994 Officer and
Director Stock Option Plan and was approved by the
Company's shareholders on May 10, 1994. The option was
not exercisable until the expiration of six months from
the date of shareholder approval. According to the Plan
approved by shareholders, 7,500 shares of the Company's
stock were granted March 1, 1995 and March 1, 1996 at a
price of $4.50.
(2) In February 1994, Mr. Gagon was granted an option
to purchase 7,500 shares of common stock at a price of
$5.65 per share, which was the estimated market price
at the time of grant. The option was issued pursuant to
the Company's 1994 Officer and Director Stock Option
Plan and was approved by the Company's shareholders on
May 10, 1994. The option was not exercisable until the
expiration of six months from the date of shareholder
approval. According to the Plan approved by
shareholders, 7,500 shares of the Company's stock were
also granted March 1, 1995 and March 1, 1996 at a price
of $4.50. Mr. Gagon was granted 16,667 shares of the
Company's stock at an exercise price of $4.50 per
share, according to a stock option grant approved by
shareholders on June 15, 1995. The option was not
exercisable until the expiration of six months from the
date of shareholder approval.
The Company provides health and life insurance to its
employees, including its officers and certain directors.
Stock Options Granted During 1996
The following table provides information on grants of stock
options during 1996 to the persons named in the Summary
Compensation Table above.
OPTION GRANTS IN 1996
Individual
Grants
(a) (b) (c) (d) (e)
% of Total
Options Exercise
Options Granted to or Base
Granted Employees Price s Expiration
Name (#) in Fiscal Year ($/Sh) Date
LaMar Gagon 7,500 14.3% $4.50 3/1/01
Michael R. Williams 7,500 14.3% $4.50 3/1/01
Option Values at December 31, 1996
No options were exercised during 1996 by the person named in
the Summary Compensation Table. The following table provides
information on the unexercised options at December 31, 1996 owned
by the people named in the Summary Compensation Table above.
<TABLE>
AGGREGATE OPTION EXERCISED IN 1996
AND YEAR-END 1996 OPTION VALUES
(a) (b) (c) (d) (e)
Number of Value of
Unexercised Unexercised
Options at In-the-Money
Year End 1996 (#) Options at
Year End 1996
($)(1)
Shares
Acquired Value
Name on Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Michael R. -0- -0- 380,500 -0- $-0- -0-
Williams
LaMar Gagon -0- -0- 39,167 -0- $-0- -0-
</TABLE>
(1) An "In-the-Money" stock option is an option for which the
market price of the Company's common stock underlying the option
on December 31, 1996 exceeded the option price. The value shown
represents stock price appreciation since the date of grant. The
market price was based upon the closing price of the Company's
common stock on the American Stock Exchange Emerging Company
Marketplace on December 31, 1996 ($0.6875).
Employment Agreements
The Company has no written employment agreement with any
officers or directors. Michael R. Williams is paid a monthly
salary of $14,000 by the Company. LaMar Gagon, a director of the
Company and the president of Gagon Mechanical Contractors, is
paid a monthly salary of $8,333.
Compensation of Directors
The Company's directors receive no compensation for Board of
Directors Meetings attended. On February 24, 1994, the Board of
Directors adopted an Officer and Directors Stock Option Plan. The
Plan was adopted by the Company's shareholders on May 10, 1994
and is a "formula" grant plan. The Plan provides that each
director and officer is to receive an option to purchase 7,500
shares at market value on the initial date of grant or upon
becoming an officer or director of the Company. The initial date
of grant was February 24, 1994. On March 1st of each year
thereafter, an additional option for 7,500 shares is granted.
Such additional options are exercisable at the market value on
such date.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A. Security Ownership of Certain Beneficial Owners. The
following table sets forth information regarding shares of the
Company's common stock beneficially owned as of March 14, 1997
by: (i) each officer and director of the Company; (ii) all
officers and directors as a group; and (iii) each person known by
the Company to beneficially own 5 percent or more of the
outstanding shares of the Company's common stock.
Name and Address Percentage
of Beneficial Owner Shares Owned(1) Owned
Michael R. Williams(2)(3) 3,120,006 21%
160 W. Canyon Crest Rd.
Alpine, UT 84004
R. LaMar Gagon(2)(4) 298,812 2%
8531 S. 700 West
Sandy, UT 84070
Freddy H. Robinson(2)(5) 15,000 0%
P.O. Box 19608
Greensboro, NC 27419
Alan Gressel(2)(6) 15,000 0%
2777 Broadway Ave.
Cleveland, OH 44115
Maurice D. Sabbah(2)(7) 2,127,916 15%
c/o 461 Fifth Avenue
New York, NY
Mark W. Holland(8) 124,720 1%
160 W. Canyon Crest Rd.
Alpine, UT 84004
All Officers and Directors 5,701,454 39%
as a Group (6 persons)
Total Shares Issued and 14,599,993 100%
Outstanding(1)
(1) As of March 14, 1997 there were 14,074,160 shares
of the Company's common stock issued and outstanding.
Under the rules of the Securities and Exchange
Commission and for purposes of the above set forth
chart, all shares issuable to the above referenced
persons upon the exercise of options and warrants and
conversion rights are deemed to be issued and
outstanding. A total of 525,833 shares are issuable
upon currently exercisable options and debentures owned
by the persons set forth in the table above. Therefore,
for purposes of the above set forth chart, there are
deemed to be 14,599,993 shares issued and outstanding.
(2) These individuals are the officers and directors of
the Company.
(3) Mr. Williams is the Company's Chief Executive
Officer. The number of shares indicated as owned by Mr.
Williams includes 2,628,056 beneficially owned, 104,450
shares owned by his minor children and 387,500 shares
issuable upon the exercise of currently exercisable
options.
(4) Includes 252,145 shares owned directly by Mr. Gagon
and 46,667 shares issuable upon the exercise of
currently exercisable stock options. Mr. Gagon is a
director of the Company and is president of a
subsidiary of the Company.
(5) Mr. Robinson received an option of 7,500 shares at
an exercise price of $4.50 when he was appointed a
director and an additional 7,500 shares at an exercise
price of $4.50 per share on March 1, 1997, according to
a director stock option plan approved by shareholders.
Mr. Robinson's wife owns 1,000 shares of common stock,
for which Mr. Robinson disclaims beneficial ownership.
(6) Mr. Gressel received an option of 7,500 shares at
an exercise price of $4.50 when he was appointed a
director and an additional option of 7,500 shares at an
exercise price of $4.50 per share on March 1, 1997,
according to a director stock option plan approved by
shareholders.
(7) Includes 2,052,666 shares which are owned directly
by Mr. Sabbah and 67,750 shares which may be issued
upon the conversion of outstanding debt instrument.
According to a stock option plan approved by
shareholders, he received an option of 7,500 shares at
an exercise price of $4.50 per share when he was made a
director of the Company and he received an additional
option of 7,500 shares at an exercise price of $4.50
per share on March 1, 1997. The number of shares
indicated excludes 29,000 shares owned by Mr. Sabbah's
daughter and 25,000 shares owned by Mr. Sabbah's wife,
as to both of which Mr. Sabbah disclaims beneficial
ownership, and any shares issuable upon conversion of
an aggregate of $5,000,000 of debt instruments issued
by the Company which are convertible into shares of
common stock because of defaults on those debt
instruments.
(8) Mr. Holland is Chief Financial Officer of the
Company. The number of shares indicated as owned by Mr.
Holland includes 78,054 directly owned by Mr. Holland
and 46,666 shares which may be issued upon the exercise
of a currently exercisable stock option.
B. Security Ownership of Management. See Item 11(a) above.
C. Changes in Control. No changes in control of the
Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with the Company's purchase of its corporate
offices in Alpine, Utah, in 1992, Michael R. Williams executed a
personal and individual guarantee agreement for the $250,000 SBA
504 portion of the long-term financing. Michael R. Williams,
Timothy G. Williams and Gearle D. Brooks executed guarantees as
individual guarantors of the commercial bank's $562,000 first
mortgage.
Effective December 31, 1993, the Company acquired Gagon
Mechanical Contractors, Inc., a Utah corporation owned by R.
LaMar Gagon, a director of the Company, and his brother. The
Company issued 200,000 shares of its common stock to the two
shareholders of Gagon Mechanical Contractors, Inc. in exchange
for all of the issued and outstanding shares thereof. Gagon
Mechanical Contractors, Inc. is operated as a wholly owned
subsidiary of the Company.
During 1993, the Company borrowed funds from officers
Michael R. Williams, Timothy G. Williams and Gearle D. Brooks.
These loans accrued interest at the rate of 6% per annum and are
unsecured. The amounts of such loans made by each lender and the
amount due and owed by the Company as of December 31, 1996 was as
follows:
Total Amount Unpaid as of
Lender of Loans 12/31/96
Michael R. Williams $89,519 $ -0-
Timothy G. Williams $19,000 $ 9,000
Gearle D. Brooks $79,985 $48,269
As part of the merger with Interline Natural Gas, the
Company issued a total of $300,000 in long-term notes to the
shareholders of Interline Natural Gas. The amounts of such loans
made by each lender and the amount due and owed by the Company as
of December 31, 1996 was as follows:
Total Amount Unpaid as of
Lender of Loans 12/31/96
Michael R. Williams $165,000 $ -0-
Timothy G. Williams $ 60,000 $ -0-
Gearle D. Brooks $ 75,000 $55,330
As of March 14, 1997, the Company has not paid the following
three Senior Securities notes due to Maurice D. Sabbah, a
director and shareholder of the Company, totaling $2,530,089 and
associated interest due September 1, 1996. As a result, loans
from this person are currently in default. The lender has
indicated to Interline that he does not currently intend to take
remedial action against Interline.
I. During 1994, the Company issued a $250,000 senior
convertible note payable to a shareholder. 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.
II. On February 29, 1996 the Company obtained $1,500,000 in a 6%
senior secured note from a shareholder. 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.
III. On July 19, 1996, the Company obtained $780,089 in a 9.5%
senior secured note from the same shareholder. The note was
due September 1, 1996. The note is secured by the
outstanding shares of Interline Energy Services, Gagon
Mechanical and Interline Hydrocarbon.
IV. On May 15, 1996, the Company obtained $2,500,000 in a 9.25%
senior secured note from the same shareholder 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. By virtue
of cross default provisions in this note, an event of
default under this note has occurred, and its holder has a
right to accelerate the Company's obligation to repay
principal and interest at any time.
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of
the Exchange Act, are the officers and directors of the Company.
For information regarding the shareholdings of the Company's
officers and directors, see Item 11.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. The Exhibits which are filed with this Report or which
are incorporated herein by reference are set forth in the Exhibit
Index.
B. Reports on Form 8-K. The Company filed no reports on
Form 8-K during the last quarter of the fiscal year ended
December 31, 1996.
Exhibits to Form 10KSB
Sequentially
Exhibit Numbered
Number Exhibit Page
3.1 Articles of Incorporation - Incorporated by N/A
Reference to Exhibit 3.1 to Registration
Statement No. 33-25011-D on Form S-18
3.2 Amendment to Articles of Incorporation - N/A
Incorporated by reference to Form 8-A
filed January 18, 1991
3.3 Bylaws - Incorporated by reference to Exhibit N/A
3.2 to Registration Statement 33-25011-D on
Form S-18
10.1 Agreement and Plan of Reorganization - N/A
Northcut Energy effective October 22, 1990.
(Incorporated by reference to Form 8-K filed
October 23, 1990)
10.2 Agreement and Plan of Merger - N/A
Northcut Energy and Interline Natural Gas, Inc.
December 23, 1991. (Incorporated by reference
to Form 8-K dated March 6, 1992)
10.3 License Agreement - Petroleum Systems, Inc. N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.4 License Agreement - Gadgil Western Corporation N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.5 Stock Option Agreement - Michael R. Williams N/A
dated August 29, 1993
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.6 Stock Option Agreement - Timothy G. Williams N/A
dated August 29, 1993
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.7 Stock Option Agreement - Gearle D. Brooks N/A
dated August 29, 1993
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.8 1994 Non-Insider Stock Option Plan N/A
dated February 24, 1994
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.9 1994 Officer and Director Stock Option Plan N/A
dated February 24, 1994
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.10 Agreement and Plan of Reorganization - N/A
Gagon Mechanical Contractors, Inc.
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.11 Quaker State Resources Agreements N/A
(Incorporated by Reference to Form 8-K
dated September 13, 1994)
10.12 Whelan Environmental Services Agreement N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1994)
10.13 Amoco Processing/Transportation Agreement N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.14 PSI Assignment Agreement N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.15 Dukeun Industrial Company Agreements N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.16 Bahrain and Singapore Agreement N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.17 Genesis Petroleum - Salt Lake, L.L.C AgreementsN/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.18 Guarantee - Interline (UK) N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.19 Note Purchase Agreement - Maurice Sabbah N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.20 Note Purchase Agreement - Maurice Sabbah N/A
(Incorporated by Reference to Form 8-K
dated June 27, 1996)
10.21 Transpacific Industries License Agreements
10.22 Q Lube Inc. Letter Agreement -- Termination of
License and Technology Disclosure Agreement
and Related Agreements
21.1 Subsidiaries of Registrant
27 Financial Data Schedule
- -----------------------------------------------------------------
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: March 30, 1997 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
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
March 30, 1997 CEO/President /s/ Michael R. Williams
and Director Michael R. Williams
March 30, 1997 Director/ /s/ R. LaMar Gagon
Secretary R. LaMar Gagon
UNIT PURCHASE AGREEMENT
by and among
INTERLINE HYDROCARBON INC.
and
TRANSPACIFIC INDUSTRIES PTY LTD ACN 010 745 383
Date of Agreement: August 24, 1996
<PAGE>
UNIT PURCHASE AGREEMENT
This Unit Purchase Agreement (the "Agreement") is
dated August 24, 1996 and is by and between the following
Parties:
Interline: INTERLINE HYDROCARBON INC.
a Wyoming corporation
350 West A Street, Suite 204
Casper, Wyoming 82601
U.S.A.
Purchaser: TRANSPACIFIC INDUSTRIES PTY LTD
ACN 010 745 383
10TH Floor Toowong
Tower 9 Sherwood Rd.
Toowong, Queensland
Australia
RECITALS
WHEREAS, Purchaser recognizes and acknowledges that
Interline possesses substantial and valuable technology,
expertise, know-how, information, trade secrets, patent rights
and intellectual property relating to the processing of Used
Oil and the manufacture and operation of equipment for the
processing of Used Oil;
WHEREAS, Purchaser desires to purchase from Interline a
Unit for processing Used Oil to produce Finished Products, as
defined below;
WHEREAS, Interline is willing to construct the Unit and
sell the Unit to Purchaser under the terms and conditions of
this Agreement; and
WHEREAS, Purchaser and Interline have entered into a
License Agreement dated August 24, 1996.
NOW, THEREFORE, the Parties agree as follows:
<PAGE>
SECTION 1 - INTRODUCTION
1.1 The Unit. The "Unit" and "Battery Unit" shall mean
the unit (including equipment and instrumentation) constructed
and assembled by Interline for Purchaser and sold to Purchaser
under this Agreement. A description of the Unit and
Specifications for the Unit are set forth in Exhibits A and B
attached hereto. The Unit is for processing Used Oil.
Interline Technology is utilized in the construction and
operation of the Unit.
1.2 Oil. "Oil" shall mean any oil refined from crude
oil. Oil may contain additives to improve its lubrication,
wear, oxidation, corrosion, and/or other characteristics.
1.3 Used Oil. "Used Oil" shall mean any Oil that has
been used for its intended purpose and as a result of such use
has been contaminated by physical and/or chemical impurities.
1.4 First Phase Process Equipment. "First Phase Process
Equipment" shall mean the equipment and apparatus of the Unit
used to process Used Oil to the point that First Phase Material
is recovered from the Used Oil and is made ready for sale or
use as a Finished Product or is made ready for distillation (or
other separation means) for recovery of Base Oil, Diesel,
Gasoline and Other Finished Products. First Phase Process
Equipment includes MP-FP Vessels, oil/propane separator
equipment, propane recovery equipment, residuum/water separator
equipment and asphalt blending vessels, together with the
associated pumps, piping, and control instrumentation. First
Phase Process Equipment includes the equipment and apparatus
which prepares First Phase Material for further processing to
recover Base Oil, Diesel, Gasoline and Other Finished Products,
but does not include distillation columns or other separation
means for recovering Finished Products from the First Phase
Material.
1.5 MP-FP Vessels. "MP-FP Vessels" shall mean the
vessels used in the operation of the Unit for solvent
extraction. Used Oil is introduced into the MP-FP Vessels,
combined with a carrier, and subjected to solvent extraction
processing utilizing Disclosed Information.
1.6 Finished Products. "Finished Products" are described
below:
When Used Oil is processed by the Unit in accordance
with Interline's instructions, "Residuum" and "First Phase
Material" will result. This is accomplished in MP-FP Vessels.
The Residuum is a "Finished Product" that may be sold or used.
The First Phase Material may be sold or used as a Finished
Product or may be further processed by distillation or other
means to recover other Finished Products, such as Base Oil,
Gasoline and Diesel.
(a) "Residuum" shall mean the colloidal material
separated from lighter Used Oil fractions through the
processing of Used Oil by the Unit. The bottoms recovered from
the further processing of First Phase Material may be combined
with (and thus become part of) the Residuum.
(b) "First Phase Material" shall mean the
hydrocarbon material other than Residuum which results from the
solvent extraction processing of Used Oil through the use of the Unit.
(c) "Base Oil" shall mean the base oil recovered by
the Unit from Used Oil. Base Oil is derived from the
distillation of First Phase Material. Such distillation
process can segregate the Base Oil from the Gasoline and Diesel
fractions and the bottoms.
(d) "Diesel" shall mean the fraction commonly
referred to as diesel that is recovered by the Unit from Used
Oil. Diesel can be derived from the distillation of First
Phase Material.
(e) "Gasoline" shall mean the fraction commonly
referred to as gasoline that is recovered by the Unit from Used
Oil. Gasoline can be derived from the flashing of First Phase
Material.
(f) "Finished Products" shall mean all commercially
marketable products produced as a result of processing Used Oil
by any process, equipment or apparatus of the Unit. Finished
Products include, but are not necessarily limited to, First
Phase Material, Diesel, Gasoline, Base Oil, and Residuum.
Finished Products other than First Phase Material, Diesel,
Gasoline, Base Oil, and Residuum, are sometimes referred to in
this Agreement as "other Finished Products."
1.7 Disclosed Information. "Disclosed Information" is
defined in the License Agreement.
1.8 Proprietary Information. "Proprietary Information"
is defined in the License Agreement.
1.9 Proprietary Materials. "Proprietary Materials" is
defined in the License Agreement.
1.10 Licensed Patents. "Licensed Patents" is defined in
the License Agreement.
1.11 Licensed Technology and Interline Technology.
"Licensed Technology" and "Interline Technology" are defined in
the License Agreement.
1.12 Interline's facilities. Any reference in this
Agreement to Interline's facilities or offices shall also mean
and include the facilities and offices of Interline's
affiliated corporations, including Gagon Brothers Mechanical
Contractors, Inc.
1.13 Licensed Field. "Licensed Field" is defined in the
License Agreement.
1.14 Territory. The "Territory" is defined in the License
Agreement.
1.15 Litres. Any reference in this Agreement to "litre"
or "litres" shall mean the basic unit of capacity in the metric
system, equal to 1 cubic decimeter or 61.025 cubic inches
(3.784 litres per U.S. Gallon).
1.16 Specifications. The "Specifications" shall mean the
descriptions of the Unit set forth in Exhibit A and the
specifications set forth in Exhibit B.
1.17 Unit Site. "Unit Site" shall mean the site in the
Territory selected by Purchaser for the location and operation
of the Unit. The Unit Site must be in the Territory.
1.19 License Agreement. The "License Agreement" shall
mean the License Agreement dated August 24, 1996 by and between
Interline Hydrocarbon, Inc. and Industries Pty Ltd ACN 010 745
383.
SECTION 2 - MANUFACTURE AND PURCHASE OF UNIT
2.1 Manufacture of Unit. Interline shall manufacture a
single Unit for Purchaser. A summary description of the Unit
to be manufactured is set forth in Exhibit A. Interline's
manufacturing duties include the following:
1. Process engineering and design for battery
limits.
2. Procurement and fabrication within battery
limits.
3. Battery limit control instrumentation.
4. Supervision of battery unit assembly and
installation (six weeks only).
5. Battery equipment layout, and bolt arrangement
details.
6. Supervision of battery unit start-up (three weeks
only).
7. Training and schooling of owner operators for two
weeks at Interline. Travel and accommodations not
included (Purchaser must pay).
8. Supply material only of Motor Control Center (MCC)
and Uninterrupted Power Supply (UPS). This does not
include power wiring from MCC to motors.
9. Cooling tower and related pump skid.
10. Heater (furnace), Vessel V-200 and related pump
skid.
11. Flare with control panel and related pump skid.
12. Exchanger and pump skids within battery.
13. ASME Section VIII Pressure Vessels within
battery.
14. Connecting pipe spools between skids, vessels
and pipe rack within battery. Does not include connecting pipe
between heater, V-200 and pump skid; between cooling tower and
pump skid; between flare and pump skid.
15. Electrical and Instrumentation wiring from
equipment to panel or skid connection points on skid.
16. Pipe insulation for skids, not including
connection spools.
17. Heat tracing of skid piping when climate
dictates, not including connection spools.
18. Painting of exposed metal surfaces, not
including skid connection spools.
19. Ladders and Platforms for all related vessels.
20. Vessel packing and internals. Materials only.
21. Structural pipe rack within battery limit.
22. Computer/Program Logic Controls and Man Machine
Interface system.
23. Supervision of connections to battery of
Purchaser furnished pipe and electrical lines.
24. Operating and Maintenance Manuals for Battery
Equipment (2 sets).
25. One-time visit by Heater Technician (5 days
maximum).
26. Tower T-505 and related systems.
27. Clay treatment and related system to treat one
cut of oil from the distillation column.
Purchaser shall promptly provide all information and guidance
needed by Interline in order to design and manufacture the Unit
to meet all applicable laws, ordinances, codes, regulations and
other requirements in the Territory.
2.2 Design Capacity. The "Design Capacity" of the Unit
shall be 91,000 litres of Used Oil (and any other materials
included in the charge to the Unit) processed per 24 hours of
continuous operation.
2.3 Purchase. Purchaser agrees to purchase the Unit from
Interline and agrees to pay for the Unit in accordance with the
terms, conditions and provisions of this Agreement.
2.4 Title. Title to each component of the Unit will pass
to Purchaser after Interline has received payment from
Purchaser for such component. Purchaser shall have no right or
power to sell, lease or encumber any component of the Unit
until after title to the component passes to Purchaser (and
even after passage of title, Section 9 shall continue to
govern). The occurrence before title passes to Purchaser of
any event which creates in any other person any rights with
respect to the Unit component, shall entitle Interline to
immediate and summary possession of the Unit.
2.5 Risk of Loss. Risk of loss, with respect to the
Unit, shall shift to Purchaser when the Unit is delivered to
Purchaser under Paragraph 4.2, or otherwise comes into the
possession or control of Purchaser or their designee, or a
carrier for transit to Purchaser, whichever occurs first.
2.6 Timetable. The Parties shall cooperate with each
other and exercise their best reasonable efforts to meet the
Timetable set forth in Exhibit C.
2.7 Engineering and Instrumentation. In addition to
supplying the Unit, Interline will supply the following:
a. Process engineering and design for the process
described in Exhibit A.
b. Design, installation and testing of Unit control
instrumentation.
2.8 Weights, Measurements, Etc. All references to
weights, measurements, volumes, capacity and amounts, shall be
definitions applied pursuant to the laws and standards of the
United States of America. To the extent the Parties agree in
writing and for a mutually agreeable fee, Interline may convert
weights, measurements, volumes, capacity and amounts to the
laws and standards of Australia.
SECTION 3 - TRAINING AND CONSULTATION
3.1 Initial Training. Purchaser shall receive five days
of "Initial Training" at Interline's facilities in Sandy, Utah,
U.S.A. Initial Training shall be conducted on a Monday through
Friday week reasonably designated by Interline. Initial
Training shall provide instruction with respect to the
operation and use of the Unit. Interline's pilot plant, or
some other appropriate Interline facility, will be used for
Initial Training. Initial Training will be attended by not
more than ten trainees designated by Purchaser. Each day of
training shall be approximately 6 to 8 hours. The Initial
Training shall address operation, maintenance and service of
the Unit. Interline shall provide to the Purchaser staffing
details and the qualifications and experience required for
trainees suitable to undergo Initial Training. Such trainees
must have education and experience in oil refining operations
and maintenance. It is Purchaser's
responsibility to employ trainees meeting these requirements
for the Initial Training. Interline shall provide the
Purchaser with written training guidelines and manuals to back
up the Initial Training.
3.2 Consultation. For one year beginning after
successful completion of the Acceptance Test, Purchaser shall
be entitled to and Interline shall provide consultation, for
Battery Unit issues only, at no additional fee for up to 20
hours per month. Said hours are not cumulative and unused
hours will not be carried forward or credited to other months.
Consultation consists primarily of answers to questions or
problems, and the research, study and other time relating to
such questions or problems. Consultation is not to be used for
training purposes. Consultation is subject to Interline's then-
current consultation policies, limitations and procedures (a
copy of which shall be provided to Purchaser on request).
Consultation may be provided by telephone, fax, e-mail and
other forms of communication. This Paragraph does not obligate
Interline to provide any consultation requiring travel. All
telephone tolls and other expenses will be paid by Purchaser.
Consultation after said year or in excess of the hourly limit
is governed by Paragraph 3.3.
3.3 Additional Consultation and Additional Training. If
Purchaser desires additional consultation or additional
training, such consultation and training will be available to
Purchaser subject to the following:
(a) Additional consultation and additional training
will be available to Purchaser at such times and places as
mutually agreed by Interline and Purchaser. Interline shall
make its personnel available for such consultation and
training.
(b) Interline is entitled to receive its then-
current fees, as established by Interline, for the consultation
and training (details of which shall be provided to Purchaser
on request, but are subject to change). The payments set forth
in this Agreement only entitle Purchaser to the Initial
Training and Consultation described in Paragraphs 3.1 and 3.2
above.
(c) Consultation and training shall only be used by
Purchaser for the purpose of operating the Unit in the
Territory.
(d) All information learned from consultation and
training shall be subject to the provisions and restrictions of
this Agreement and the License Agreement, including
confidentiality and nonuse provisions.
(e) Purchaser shall pay all expenses reasonably
incurred by Interline and its personnel in connection with the
consultation or training.
(f) Interline may decline to provide consultation
and training at any time after five years from the date of this
Agreement or if Purchaser commits an unremedied breach of this
Agreement.
3.4 Expenses. Purchaser shall be responsible for any and
all costs and expenses of its trainees and personnel incurred
in connection with Initial Training, additional training,
consultation under Paragraph 3.2, and/or additional
consultation, including (without limitation) transportation,
meals, accommodations, entertainment, compensation, etc.
Purchaser shall also pay all expenses reasonably incurred by
Interline and its personnel in connection with Initial
Training, additional training, telephone consultation, and/or
additional consultation.
3.5 Purchaser's Personnel. Purchaser shall ensure that
all of its trainees and other personnel and representatives who
visit any of Interline's facilities shall comply with all
safety and other policies, procedures and guidelines of
Interline. Interline shall not be liable for, and Purchaser
shall indemnify Interline and its directors, officers,
employees, shareholders, agents and representative against, and
hold them harmless from, any and all injuries, deaths, damages,
liabilities, losses and claims incurred, caused or asserted by
any of the trainees or any other personnel or representatives
of Purchaser who visit Interline's facilities.
SECTION 4 - ACCEPTANCE, DELIVERY AND INSTALLATION
4.1 Initial Acceptance. Before the Unit is delivered to
Purchaser (see Paragraph 4.2), the Unit shall be inspected by a
representative of Purchaser. It is understood that the Unit
will be in an unassembled condition. It is the responsibility
of Purchaser to report in writing to Interline the basis for
any cause or reason for rejecting the Unit. The unassembled
condition of the Unit shall not be a cause or reason for
rejection. Notwithstanding the Delivery Date indicated in
Exhibit C, Interline shall have no obligation to deliver the
Unit until after the Certificate of Initial Acceptance has been
executed. Purchaser shall promptly make its representative
available for this inspection and purpose when Interline gives
reasonable notice that the Unit is ready for inspection. In
the event that the Unit is rejected by the Purchaser, Interline
shall remedy any default (i.e., a nonconformance with the
Specifications) to the reasonable satisfaction of the
Purchaser, within a reasonable time of receiving the reasons
for rejection.
4.2 Delivery. Following Initial Acceptance, Interline
shall deliver the Unit in a reasonably suitable condition for
transportation to Purchaser at Interline's facilities in Sandy,
Utah, U.S.A. and shall advise the Purchaser in writing of such
delivery. Purchaser shall receive and accept the Unit at such
location. Purchaser shall be responsible for transporting the
Unit from Interline's facilities to the Unit Site in the
Territory. Purchaser's responsibility includes packing and
preparing the Unit for transportation and making all necessary
arrangements for transportation, including the selection of a
carrier. Purchaser shall be responsible for the costs and
expenses (including insurance) of transporting the Unit from
Interline's facilities to Purchaser and the Unit Site in the
Territory. Purchaser is required to insure the shipments for
their full value. It is understood that the Delivery Date (see
Exhibit ture or by the need to remedy any problem that may
cause a rejection of the Unit under Paragraph 4.1. If any
problem is to be remedied, such remedy shall not be
unreasonably delayed. Interline shall assist the Purchaser in
arranging for suitable contractors to pack and transport the
Unit.
4.3 Installation and Start-Up of Unit. Interline shall
supervise (for a six week period) the installation, erection,
assembly, and start-up of the Unit at the Unit site in the
Territory. Purchaser shall provide Interline and its personnel
with access to and use of such facilities, power supplies,
offices and other resources as are reasonably requested by
Interline to facilitate installation, erection, assembly, and
start-up. Purchaser shall also provide: (a) qualified and
skilled personnel and labor to install, erect, assemble, and
start-up the Unit in accordance with Interline's instructions,
and (b) all lifting equipment and other equipment and machinery
reasonably requested by Interline. If installation, erection,
assembly, and/or start-up are delayed due to Purchaser's
failure to promptly comply with Paragraph 5.1 or any other
provision of this Agreement or due to any other fault or delay
of Purchaser, Purchaser shall pay for the time of Interline's
personnel during such delay at Interline's then-current fees
for such personnel and for their expenses.
4.4 Acceptance Test. After installation of the Unit at
Purchaser's Site, Interline shall, with the assistance and
participation of Purchaser's personnel, conduct an Acceptance
Test in accordance with Exhibit D. The Acceptance Test will be
deemed successful if the Specifications in Exhibit B are met.
If any such Specifications are not met, Interline shall take,
at its own cost such remedial action and/or provide such work-
around solutions as it deems appropriate and Purchaser shall
cooperate in the implementation of such remedial action and
work-around solutions. This may include, without limitation,
adjustments and corrections to the Unit, the addition or
replacement of Unit equipment, and/or changes to the operation
of the Unit or its operating parameters. Interline may repeat
the Acceptance Test until it has been successfully completed.
If after six months from the date of the first Acceptance Test,
the Acceptance Test has still not been successfully completed,
then Interline shall pay liquidated damages in accordance with
Paragraph 8.2 and Exhibit E. The six month period will be
extended as reasonably necessary if any malfunctions, problems
or delays are caused by Unit equipment manufactured by third
parties.
4.5 Certificate of Final Acceptance. When the Acceptance
Test has been successfully completed, Purchaser shall execute
and deliver to Interline a Certificate of Final Acceptance
accepting the Unit as installed at the Unit site in the
Territory. It is the responsibility of Purchaser to report in
writing to Interline any nonconformity of the Unit with the
Specifications before executing the Certificate of Final
Acceptance. If any such nonconformity is not reported in
writing by Purchaser to Interline, then the Warranty of
Paragraph 8.2 shall not apply to the nonconformity and
Interline shall have no obligation or liability with respect
thereto and shall pay no liquidated damages with respect
thereto. Any and all warranties, representations and
guarantees of Interline relating to the Unit and its
obligations to manufacture, install, erect, assembly, and start-
up the Unit shall be deemed to have been fully satisfied and
met as soon as the Certificate of Final Acceptance is signed.
4.6 Repeat of Acceptance Test. Purchaser may, at its
option and expense, have the Acceptance Test repeated once at
any time within six months after successful completion of the
Acceptance Test under Paragraph 4.4. Such repeated Acceptance
Test shall be governed by Paragraphs 4.4 and 4.5 (including a
second Certificate of Acceptance) subject to this Paragraph 4.6
which shall govern in the event of a conflict with Paragraph
4.4 or 4.5. Purchaser shall pay for all Interline personnel at
their then-current rates plus expenses involved in the repeated
Acceptance Test (including the inspection referred to below).
Purchaser must perform all reasonable repairs, maintenance and
replacements as may be needed to place the Unit into a
condition at least as good as the condition of the Unit at the
time of the first Acceptance Test. Interline personnel may
inspect the Unit and designate needed repairs, maintenance and
replacements prior to the repeated Acceptance Test. Liquidated
damages are payable by Interline in accordance with Paragraphs
4.4 and 8.2 and Exhibit E. Under no circumstances shall the
total of all liquidated damages under this Agreement exceed the
limits specified in this Agreement (including Exhibit E). If
the Unit has been changed or modified by any person other than Interline
or Interline's personnel, then there shall be no repeated
Acceptance Test and this Paragraph 4.6 shall be of no effect.
SECTION 5 - RESPONSIBILITIES OF PURCHASER
5.1 Site Preparation and other Responsibilities. At its
sole cost and expense, Purchaser shall be responsible for the
selection of the site for the Unit in the Territory (the "Unit
Site") and for the preparation of the Unit Site for the
installation of the Unit and for maintenance of said site and
its environment. At its sole cost and expense, Purchaser shall
be responsible for all tasks and items (including the
procurement thereof) identified in the Infrastructure and Site
Preparation Package which shall be provided by Interline to
Purchaser after the site for the Unit has been selected by
Purchaser and inspected by Interline, and for:
(a) Site Improvements and Requirements
1. The procurement, installation & start-up of
all equipment & resources needed to support the unit.
2. Finished product, chargeoil, water, slop,
asphalt and chemical storage.
3. All civil work, engineering, layout,
excavation for site.
4. Building and facilities for control room,
MCC, Office, Change, Maintenance Storage and Laboratory.
5. All required Concrete and Containment req.
tank farm, heater, cooling tower, chemical storage.
6. Product, heat, transfer fluid, water and
drain supply and return pipe lines.
7. Plant site selection, preparation and
topography survey.
8. Any and all licenses, permits, fees, taxes
or import duties.
9. All site improvements to include support
buildings.
10. Fencing (Temporary Construction and
permanent).
11. Bolt and Anchor embedments (accuracy to
design plus/minus 1/16").
12. All electrical and instrumentation wiring
from MCC to the battery skid connection points, storage
facilities, cooling tower, flare, heater and any other
electrical users.
13. Loading and unloading facility.
14. All needed utilities (e.g., electricity,
water, fuel, waste water disposal, etc.) and other
infrastructure to the Site and Unit.
(b) Required materials and labor to complete battery
installation (not provided by Interline):
1. Wiring from Motor Control Center skid
connection points.
2. Skid to skid; skid to vessel; skid to rack;
electrical and instrumentation wiring.
3. Heat tracing connections between skids,
vessels and rack.
4. Engineering and design of foundation &
containment for battery limit area.
5. Construction of foundation & containment area
to indicate supports, bolts & anchor embedments (accuracy +/- 1/16").
6. Piping, electrical and related items among
and between the battery and the following:
a. heater and heater pumps
b. cooling tower and cooling tower pumps
c. flare and flare pumps
d. storage
e. control room
7. Insulation of vessels and battery limit
skid connecting spools.
8. Insulation maintenance blankets at owners
discretion.
9. Installation of vessel ladders and
platforms provided by Interline.
10. Instrumentation Air Compressor and dryer
(minimum requirements to be specified by Interline).
11. Battery sump pump and drainage system.
12. Fire protection or deluge system as
required. 13. Emergency shower and eye wash
stations as required.
14. Caustic and acid treat systems.
15. Installation of vessel packing and
internals which are provided by Interline.
16. Painting of connecting spools and repairs
(touch-up).
17. Dowtherm A. (require quantity provided by
Interline once site layout is completed).
18. Propane (Approx. 13000 US Gal.).
19. All consumables including but not limited
to: Caustic, Acid, Nitrogen and Diesel.
20. Spare parts required for start-up &
continued operation. (Recommendation provided by Interline).
21. Material Handling equipment (see estimated
material handling & labor list provided under (c) below).
22. Construction and start-up office for
Interline personnel.
23. Operation manual which is to include
Interline's Operating guidelines.
24. Flood lighting at battery limit corners.
25. 3500 KVA Electrical power supplied at
appropriate requirement e.g. 460/415/380 Volt 50/60 Hz.
26. Main amp breaker and transformer to supply
Motor Control center.
27. Alarm printer and color printer (one each).
28. Audible Alarm System.
29. Hazardous Operations Analysis Review
(Interline will participate at applicable daily rates plus
expenses).
30. Cooling tower water treatment.
31. Cooling tower support structure.
32. Water hose station required for
housekeeping, etc.
33. Waste water treatment.
34. Housing for Clay Treat System if required.
(c) Estimated labor & material handling equipment
required to assemble Battery Unit.
Material handling equipment:
a. 125 ton crane for a 1 day period with
operator.
b. 60 ton crane for a 7 day period with
operator.
c. 30 ton crane for a 6 week period with
operator.
d. 10 ton forklift with extension boom for a 6
week period with operator.
e. 2 ton flatbed truck, with driver, for a 6
week period.
f. 1 each 300 AMP welding machine for a 6
week period for each welder.
g. 2 each 60 foot manlift for a 6 week
period.
h. 1 air compressor for 2 weeks (100 CFM).
Trained, professional construction people with
hand tools for 6 week Battery Set-Up:
a. 8 each Certified Welders.
b. 8 each Pipe Fitters.
c. 4 each
Labor/Helper.
d. 6 each
Electricians.
e. 1 each Millwright for 1 week.
f. 1 each Instrument Technician for 4
weeks.
g. 1 each Instrument Technician for 2
weeks.
h. 4 each Insulators for 5 weeks.
i. 3 each Painters for 2 weeks.
Interline has no obligation to provide the following items
unless and only to the extent they are specifically added and
specified by Addendum (in writing and signed by both Parties)
to this Agreement:
1. Insulation maintenance blankets.
2. Site Design and Engineering.
3. Engineering support for permitting and site
development.
4. Complete project management.
5. Total turn key project.
6. End section on the MCC to supply the site
electrical loads.
All personnel supplied by Purchaser must meet normal industry
standards.
5.2 Local Experts and Compliance with Laws. At its sole
cost and expense, Purchaser shall obtain and procure the
services of a local professional engineer and other experts and
professionals as necessary who will ascertain and ensure that
the design, installation, erection, assembly, start-up and
operation of the Unit and the Unit Site comply with local,
national, and all other applicable laws, codes, ordinances and
regulations and will assist Purchaser in obtaining any and all
required permits, licenses and approvals. The responsibility
of complying with all applicable laws, ordinances, codes,
regulations and the like and of obtaining all necessary
permits, licenses and approvals shall rest solely with
Purchaser.
5.3 Raw Materials. At its sole cost and expense,
Purchaser will supply all water, feedstock, chemicals,
utilities and raw materials, in such quantity and quality and
at such specifications provided by Interline as are required to
operate the Unit and process Used Oil.
5.4 Security and Safety. Purchaser shall be responsible
for the security of the Unit and all Unit-related equipment,
engineered items, materials and supplies delivered to the Unit
Site. Purchaser shall take all reasonable steps to ensure the
safety, health, and reasonable comfort of Interline personnel
at the Unit Site. Interline personnel shall comply with all
reasonable instructions of the Purchaser relating to security
or safety.
5.5 Costs and Expenses. In addition to any fees or
charges under this Agreement, Purchaser shall pay for (or
reimburse Interline for) any and all reasonable costs and
expenses incurred by Interline and Interline personnel (other
than the salaries and wages of Interline personnel) in
connection with the installation, erection, assembly, and/or
start-up of the Unit or any other services rendered at
Purchaser's request. Transportation, meals, lodging and other
accommodations for Interline personnel shall be consistent with
reasonable business practice, and the safety, health and
reasonable comfort of Interline personnel shall not be
compromised.
5.6 Interline Personnel. With respect to Interline
personnel, the Parties agree as follows:
(a) Travel. All travel shall be by commercial
airline service via economy class and the most expeditious
route available. All travel and lodging arrangements shall be
made by Interline, but must be reasonable. Purchaser shall
assist Interline at its request in making such arrangements.
(b) Indemnification and Insurance. Interline shall
have the right, but not the obligation, to obtain insurance (or
extend the coverage of currently existing insurance) against
all claims, costs, damages, injuries and expenses, of or to
Interline personnel which may arise in connection with the
performance of duties and obligations under this Agreement of
Interline personnel whilst outside the United States of America
and to charge Purchaser the reasonable costs or additional cost
of such insurance.
(c) Office, Secretarial and Communication Facilities
and Services. Purchaser shall provide each of Interline's
personnel at the Site with suitably furnished, lighted, heated
and air conditioned office space, with suitable secretarial
services, with suitable communication facilities (including
facsimile and telephone) and with suitable space for storing
tools and equipment. The cost of all communications
(telephone, facsimile, telex, cable, etc.) made by Interline
personnel within the scope of their duties while on assignment
to Purchaser shall be paid by Purchaser.
(d) Assistance to Interline personnel. Purchaser
shall give reasonable assistance which Interline personnel may
reasonably require for their health, safety, comfort, or well
being or in order to perform Interline's obligations and duties
under this Agreement.
5.7 No Supervision or Management Services. Except for
the supervision to be given under Paragraph 4.3 above,
Interline and its personnel shall function merely as advisors
and consultants, and Purchaser shall not (i) require or request
that Interline or Interline personnel perform any supervisory
or managerial duties, or (ii) rely upon Interline or Interline
personnel for any supervisory or managerial services.
SECTION 6 - PAYMENTS
6.1 Unit Purchase Price. Purchaser shall pay to
Interline a Unit Purchase Price of Three Million Four Hundred
Thousand Dollars (US$ 3,400,000) as follows:
Each amount specified in Exhibit F shall become due
and payable by Purchaser to Interline at the times specified in
Exhibit F. Each such payment shall be made by Purchaser to
Interline within five days of invoice and shall be made by wire
transfer to Interline's account in accordance with Interline's
wire transfer instructions. Purchaser shall have the right to
inspect and verify as reasonably necessary to confirm that each
payment is due and payable, but this right shall not delay any
payment to Interline, i.e., Purchaser may not delay payment
because an inspection or verification has not been conducted or
completed. Unless the inspection or verification reveals that
the payment in question is not yet due and payable, it must be
paid within five days of invoice.
6.2 No Letter of Credit. Purchaser is not obligated
under this Agreement to provide Interline with a Letter of
Credit.
6.3 Other Payments. For any other payments under this
Agreement (for example, payments for additional consultation or
additional training under Paragraph 3.3 and reimbursable
expenses), Purchaser shall make payment to Interline within 30
days of receipt of Interline's invoice or written request for
reimbursement. Each request for reimbursement will be
accompanied by supporting documentation of the expenses for
which reimbursement is requested.
6.4 Interest. Any payments under this Agreement
(including, without limitation, payments under Paragraphs 6.1
and 6.3 hereof) not made by Purchaser in full when due shall
thereafter bear interest on the unpaid balance (including
accrued but unpaid interest) at the rate of one and one-half
percent (1.5%) per month or the highest rate allowed by
applicable law, whichever is lower. Any interest payable to
Interline may be subject to Australian Withholding Tax.
6.5 United States Dollars. All references to "Dollars"
or $ in this Agreement mean dollars of the United States of
America. All payments to Interline by Purchaser under this
Agreement shall be in lawful money of the United States of
America.
6.6 Taxes. All payments to Interline under this
Agreement are in addition to and exclusive of all sales taxes,
use taxes, other taxes, duties, imports, assessments and
charges of any kind or description levied by any governmental
authorities or agencies and payment for the same shall be the
sole responsibility of Purchaser. Purchaser shall indemnify
Interline and its directors, officers, employees, shareholders,
agents and representatives against, and hold them harmless
from, any and all liability which may be imposed on any of them
arising out of Purchaser's failure to make such payments timely
and in full. This Paragraph 6.6 shall not apply to any income
tax imposed by the United States or the state of Wyoming on
Interline.
6.7 Termination and Repurchase. In the event that the
License Agreement or the "License" thereunder is terminated,
the Purchaser shall offer to sell the Unit back to Interline at
the Repurchase Price and the following shall apply:
(a) Exercise of Option to Repurchase. Interline may
elect to purchase the entire Unit or only the First Phase
Process
Equipment of the Unit. If Interline desires to exercise this
repurchase option, Interline must give written notice to
Purchaser not later than 60 days after the date of the
termination of the License Agreement or the License. The
notice will indicate if Interline is repurchasing the entire
Unit or just the First Phase Process Equipment. Upon payment
of the Repurchase Price to Purchaser, title to the Unit or the
First Phase Process Equipment (whichever is applicable) will
pass to Interline and Purchaser shall deliver the Unit or the
First Phase
Process Equipment (whichever is applicable) to Interline.
(b) Repurchase Price. The Repurchase Price shall be as
follows:
For the entire Unit:
The Unit Purchase Price paid by Purchaser to Interline
for the entire Unit minus 10% for each year after the date that
the Unit is delivered to Purchaser. Partial years shall be pro
rated. For example, if the Unit Purchase is $3,400,000 and the
Unit is repurchased two and one-half years after delivery, then
the Repurchase Price shall equal $3,400,000 minus $850,000 =
$2,550,000.
For the First Phase Process Equipment only:
That portion of the Unit Purchase Price applicable to
the First Phase Process Equipment paid by Purchaser to
Interline minus 10% for each year after the date that the Unit
is delivered to Purchaser. Partial years shall be pro-rated.
If at the time of repurchase, Purchaser owes any money
to Interline, the amount owed may be applied by Interline to the
Repurchase Price.
(c) Option not Exercised. If Interline declines to
exercise its option to repurchase the Unit, then Purchaser must
discontinue all use and operation of the Unit. Purchaser may,
however, dismantle and disassemble the Unit and sell its
components provided that no Disclosed Information or
Proprietary Information is transferred or disclosed. Purchaser
shall first consult with Interline and shall take such steps as
are requested by Interline to protect Disclosed Information and
Proprietary Information. Interline may identify certain key
components of Unit equipment and instrumentation that must not
be sold or transferred by Purchaser.
(d) Sale of Finished Products. Purchaser shall be free
to sell at any time all Finished Products produced by Purchaser
at the Unit prior to termination of the License Agreement or
License.
6.8 Delivery of Unit and Delivery Credit. The Unit will
not be delivered to Purchaser (see Paragraph 4.2) until
Interline's Utah Plant can process Used Oil feedstock at a rate
of at least 77,000 litres per day on average over a period of
28 days or Purchaser becomes entitled to the "Delivery Credit"
as provided below in this Paragraph 6.8. The "Utah Plant"
means Interline's plant in Utah for processing Used Oil. The
Utah Plant utilizes technology sublicensed to Purchaser under
the License Agreement. The 28 day period shall be selected by
Interline and Interline shall provide a production report for
such period to Purchaser. If during the 28 day run, the
operation of the Utah Plant is interrupted or adversely
affected due to mechanical interruption or failure or due to
any cause not the fault of Interline or its technology, then
the run will be discontinued until the interruption, failure or
cause has been cured or eliminated and the Utah Plant is
restored to steady operation to Interline's reasonable
satisfaction. At such time of restoration, the 28 day run
shall resume and shall be extended in duration by the time of
this delay to ensure a full 28 days of acceptable operation for
the purpose of calculating the Used Oil feedstock rate. The
time period during which operation of the Plant is interrupted
or adversely affected as described above shall not be included
in the 28 day period used to calculate the average rate at
which Used Oil feedstock is processed. At any
time after three months from the date that the Unit is ready
for delivery to Purchaser under Paragraph 4.2 and if the Utah
Plant has not satisfied the 77,000 litre per day average rate
as described above, then Interline may credit Purchaser with
the Delivery Credit and may deliver thllows:
The total number of litres of Used Oil processed over the
28 day period shall be calculated and will be referred to
herein as the "Total Number of Litres". [Note that if 77,000
litres of User Oil per day are processed over the 28 day
period, then this Total Number of Litres will be 2,156,000
litres.] The Delivery Credit will be $15,000 for each full
increment of 10,000 litres by which the actual Total Number of
Litres is less than 2,156,000 litres. The amount of the
Delivery Credit may be used by Purchaser as a credit against
any payment to Interline under this Agreement or against any
royalty or other payment under the License Agreement.
SECTION 7 - MAINTENANCE
7.1 Manuals and Schedules. After Purchaser delivers to
Interline the Certificate of Final Acceptance referred to in
Paragraph 4.5, Interline shall provide to Purchaser Maintenance
Manuals for the Unit in sufficient detail to allow qualified
personnel to maintain the Unit in accordance with Interline's
recommendations. These Manuals will be updated from time to
time by Interline to the extent that any further maintenance
requirements or recommendations are developed by Interline for
the Unit following their issue. As Interline becomes aware of
preventative maintenance procedures for the Unit, Interline
will add them to these Manuals or will otherwise disclose them
to Purchaser. Interline has no obligation under this Paragraph
or any other provision of this Agreement with respect to
improvements or changes made to the Unit by Purchaser or any
person other than Interline.
7.2 Interline Maintenance Agreement. This Agreement does
not entitle Purchaser to any maintenance services other than as
set out in Paragraph 7.1. Maintenance services from Interline
are available through an Interline Maintenance Agreement, but
only if such agreement is executed by Interline and Purchaser
and the applicable fees for maintenance services are paid to
Interline.
7.3 Continuing Assistance. Interline shall also ensure
the provision of the following to Purchaser:
(a) Training and Consultation for Purchaser's
personnel as required in Section 3.
(b) Written training guidelines as required in
Paragraph 3.1.
(c) Spare parts list for the Unit for start-up and
normal operation.
SECTION 8 - WARRANTIES, INDEMNIFICATION, DISCLAIMER AND
LIMITATION ON LIABILITY
8.1 Warranty - No Conflict. Each Party represents and
warrants that it has the right and power to enter into this
Agreement and that this Agreement is not contrary to any other
agreement or obligation of the Party.
8.2 Warranty - Unit. Interline warrants that if the Unit
does not successfully complete at least one Acceptance Test
under Section 4 over a seven day period at an average rate of 77,000
litres of Used Oil per 24 hour day, then Interline will pay
liquidated damages in accordance with Exhibit E. This
Agreement defines the entire and only warranties,
representations and guarantees of Interline with respect to the
quality, properties, safety, characteristics, functionality,
usefulness, merchantability, adequacy and suitability of the
Unit and Disclosed Information. The warranties,
representations and guarantees of Interline and Interline's
obligations under Section 4, including any obligation to pay
liquidated damages are subject to the following conditions:
(a) that Purchaser has complied with its obligations under this
Agreement, (b) that Purchaser's operators of the Unit have
completed training to the reasonable satisfaction of Interline
and the Purchaser, (c) that a reasonable number (as determined
by Interline) of preliminary runs have been conducted prior to
Acceptance Testing, (d) that Acceptance Testing is conducted in
a timely manner unless delayed due to the fault or delay of
Interline, and (e) that the Unit has not been damaged or
misused by anyone other than Interline after delivery to
Purchaser. THE SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH OF ANY
SUCH WARRANTIES, REPRESENTATIONS OR GUARANTEES IS SET FORTH IN
THIS AGREEMENT.
8.3 Warranty - Manufacturers. In addition to any other
warranty provided under this Agreement, Interline agrees to
assign to Purchaser, and hereby does assign to Purchaser, all
manufacturers' and contractors' warranties relative to the Unit
or Unit construction to the extent that they are assignable by
Interline to Purchaser.
8.4 Warranty - Infringement. Interline warrants that as
of the date of this Agreement Interline has no actual knowledge
that the Unit or any Disclosed Information to be used by
Purchaser with the Unit infringes any patent, trade secret or
copyright of a third party. There is no express or implied
warranty of noninfringement except as expressly stated above in
this Paragraph 8.4. It is the responsibility of Purchaser to
conduct such patent searches and intellectual property
investigations in Australia and elsewhere that Purchaser deems
appropriate. The risk of patent and intellectual property
infringement is borne by Purchaser.
8.5 Disclaimer. INTERLINE MAKES NO REPRESENTATION,
WARRANTY OR GUARANTEE, EXPRESS, IMPLIED OR BY OPERATION OF LAW,
RELATING IN ANY WAY TO THE UNIT, DISCLOSED INFORMATION,
LICENSED PATENTS, FINISHED PRODUCTS PRODUCED AT THE UNIT,
TRAINING, CONSULTATION OR ANY OTHER MATTER RELATING TO THIS
AGREEMENT OR THE LICENSE AGREEMENT, NOT EXPRESSLY SET FORTH IN
THIS AGREEMENT OR THE LICENSE AGREEMENT. ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NONINFRINGEMENT ARE DISCLAIMED AND EXCLUDED BY
INTERLINE.
8.6 Limitation on Liability. IN NO EVENT SHALL INTERLINE
BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN REASONABLY FORESEEABLE
GENERAL DAMAGES. IN NO EVENT SHALL THE AGGREGATE LIABILITY OF
INTERLINE UNDER THIS AGREEMENT OR RELATING TO ITS SUBJECT
MATTER EXCEED THE UNIT PURCHASE PRICE ACTUALLY RECEIVED BY
INTERLINE UNDER THIS AGREEMENT. IN NO EVENT SHALL INTERLINE'S
AGGREGATE LIABILITY FOR THE ACCEPTANCE TEST OR ANY FAILURE TO
MEET SPECIFICATIONS EXCEED THE $500,000 LIQUIDATED DAMAGES AS
SPECIFIED IN EXHIBIT E.
8.7 Indemnification - By Purchaser. Purchaser shall
indemnify Interline and its directors, officers, shareholders,
employees and representatives against, and hold them harmless
from, any and all claims, liabilities, demands, damages,
expenses
and losses arising out of any use, sale or other disposition of
any Finished Products or other products produced at the Unit or
arising out of operation of the Unit.
8.8 Allocation of Risk. This Agreement defines and
represents a mutually agreed upon allocation of risk between
the Parties and the consideration given and received under this
Agreement has been adjusted to reflect such allocation of risk.
SECTION 9 - CONFIDENTIALITY
9.1 Acknowledgment. Purchaser acknowledges that it is
obligated under Section 8 of the License Agreement.
9.2 Protection of Unit. Purchaser acknowledges that the
Unit and Software embody or include Proprietary Information and
that to protect Proprietary Information the following
restrictions are reasonable and necessary. Except as expressly
authorized in writing by Interline, Purchaser shall not (a)
reverse engineer the Unit, (b) create any drawings, diagrams,
flow charts or other documents containing technical information
about the Unit, (c) construct or assemble any facility, plant
or processing equipment based on the Unit or any part thereof,
or (d) allow any person or entity to inspect, reverse engineer
or access the Unit. The Unit shall not be sold or transferred
by Purchaser without the advance written consent of Interline.
It is also understood and agreed that any sale or transfer by
Purchaser of the Unit would require a transfer of the
Purchaser's sublicense under the License Agreement and the
agreement of the purchaser or transferee to the terms and
conditions of this Agreement, the License Agreement, and the
sublicense.
SECTION 10 - GOVERNMENTS AND COUNTRIES
10.1 Purchaser's Responsibility. Purchaser shall obtain
for the Parties all approvals, permits, licenses, etc.
necessary for this Agreement and for the performance of
obligations under this Agreement (including payments to
Interline) required by the Government of Australia or any of
its agencies or ministries or under any law, regulation,
ordinance or requirement of Australia or any of its
subdivisions.
10.2 Export Act. Purchaser hereby warrants and certifies
that no part of Disclosed Information or Interline Technology
or the Unit shall be made available or exported by Purchaser to
any country in contravention of any law or regulation of the
United States, including the Export Administration Act of 1979
and regulations relating thereto. This Agreement and
Interline's obligations hereunder are subject to such laws and
regulations.
10.3 Impairment by Government Regulation. In the event
that the government of Australia or the United States, or any
agency, ministry or subdivision thereof, adopts or interprets
any measure, regulation or law, which is in conflict with the
terms of this Agreement or which has the effect of impairing
the object of this Agreement, either Party may propose
negotiations for an appropriate modification of this Agreement.
The Parties shall in good faith attempt to agree upon an
appropriate modification giving effect as closely as possible
to the original intent.
10.4 Different Customs, Laws and Languages. Purchaser
acknowledges that Australia is at a great distance from
Interline, and has customs and laws which are foreign to and
unknown by Interline. Accordingly, in an effort to help
Interline in its performance of its obligations, Purchaser
shall assist Interline in dealing with any problems arising
from such distance and differences.
SECTION 11 - GENERAL PROVISIONS
11.1 Attorneys' Fees. In the event of any litigation or
arbitration between the Parties, the prevailing Party shall be
entitled to recover from the nonprevailing Party any and all
costs, including reasonable attorneys' fees, incurred by the
prevailing Party. Such relief shall be in addition to any
other relief, award or damages to which the prevailing Party
may be entitled.
11.2 Severability. In case any one or more of the
provisions contained herein shall, for any reason, be held to
be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement, and this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision(s) had never been contained herein; provided that
such invalid, illegal or unenforceable provision(s) shall first
be curtailed, limited or eliminated to the extent necessary to
remove such invalidity, illegality or unenforceability with
respect to the applicable law as it shall then be applied.
11.3 Governing Law. This Agreement shall be governed,
construed and enforced in accordance with the laws of
Australia. Licensee warrants to Interline that this Agreement
does not include any provision which is contrary to, or invalid
or unenforceable under, the laws of Australia. Any litigation
or arbitration between the Parties involving Interline shall be
conducted exclusively in Australia. The Parties hereby submit
to such jurisdiction and venue. Such jurisdiction and venue
shall be exclusive.
11.4 Final Agreement. This Agreement constitutes the
final and complete agreement between the Parties concerning the
subject matter of this Agreement and supersedes all prior
agreements, understandings, negotiations, letters of intent and
discussions, written or oral, between the Parties with respect
thereto. Any modification, revision or amendment of this Agree
Any waiver of, or promise not to enforce, any right under this
Agreement shall not be enforceable unless evidenced by a
writing signed by the Party making said waiver or promise.
11.5 Waiver. Any Waiver of, or promise not to enforce, any
right under this Agreement shall not be enforceable unless evidenced by a
writing signed by the Party making said waiver or promise.
11.6 Headings. The headings in this Agreement are for the
purpose of convenience only and shall not limit, enlarge or
affect any of the covenants, terms, conditions or provisions of
this Agreement.
11.7 Language. The language used in this Agreement shall
be deemed to be the language chosen by the Parties to express
their mutual intent, and no rule of strict construction shall
be applied against any Party.
11.8 Notices. All notices, requests, consents, demands
and other communications under this Agreement must be in writing
and shall be sent to the Parties at the addresses set forth
below, or to such other person and place as any Party may
designate for itself by notice to the other Parties:
Interline: Interline Hydrocarbon Inc.
350 West A Street, Suite
204 Casper, Wyoming 82601
U.S.A.
Attention: President
With a copy to:"Interline Legal
Department" 160 West Canyon
Crest Alpine, Utah 84004
U.S.A.
Purchaser: Transpacific Industries Pty Ltd
10TH Floor Toowong Tower
9 Sherwood Rd.
Toowong, Queensland
Australia
11.9 Force Majeure. Except for obligations to make payment,
no Party shall be liable to the other Party for any failure of (or delay
in performance of) its obligations hereunder due to any cause or
circumstance which is beyond its reasonable control including, but
without limiting thAssignments. Purchaser has neither the right nor the
power to assign this Agreement or any rights hereunder without first
obtaining the written consent of Interline. Interline shall not
withhold consent if the assignment is to a person or entity who
purchases or acquires the Unit and who first delivers to Interline a
written acceptance of this Agreement and Purchaser's obligations
thereunder. Purchaser may assign this Agreement to a Sublicensee (see
License Agreement) approved by Interline.
11.10 English Language. All communications between the
Parties concerning anything within the scope of this Agreement
(including disclosures, training, consultation, and the Acceptance Test)
shall be in the English language.
11.11 Assignments. Purchaser has neither the right nor the
power to assign this Agreement or any rights hereunder without first
obtaining the written consent of Interline. Interline shall not withhold
consent if the assignment is to a person or entity who purchases or
acquires the Unit and who first delivers to Interline a written
acceptance of this Agreement and Purchaser's obligations thereunder.
Purchaser may assign this Agreement to a Sublicensee (see License
Agreement)
approved by Interline.
11.12 Delegation of Duties. Interline may delegate
duties and otherwise render its performance under this
Agreement through independent contractors selected by
Interline.
11.13 Relationships. Purchaser is not a partner,
joint venturer, agent or representative of Interline.
11.14 Termination Option. If government approval of
this Agreement is required (see Paragraph 10.1), but not
obtained, either Party may terminate this Agreement. In the
event of such termination, Section 9 shall survive.
11.15 Insolvency, Bankruptcy. If Purchaser becomes
insolvent, makes any assignment of its assets or business for
the benefit of creditors, or if a trustee or receiver is
appointed to administer or conduct its business or affairs, or
if it is adjudged in any legal proceeding to be either a
voluntary or involuntary bankrupt, or if anything similar to
the foregoing occurs under the laws and practices of Australia,
then Interline may terminate this Agreement. If Interline
becomes insolvent,
makes any assignment of its assets or business for the benefit
of creditors, or if a trustee or receiver is appointed to
administer or conduct its business or affairs, or if it is
adjudged in any legal proceeding to be either a voluntary or
involuntary bankrupt, or if anything similar to the foregoing
occurs under the laws and practices of the United States, then:
(1) Purchaser's sublicense rights under the ormation needed to
complete the Unit if the Unit has not already been completed,
and (3) Interline expressly authorizes the Purchaser pursuant
to Paragraph 9.2(c) to use the technical information provided
to it under this Agreement to complete the construction and
assembly of the Unit.
11.16 Construction and Interpretation. This Agreement is
written in the English language and shall be construed and
interpreted in accordance with such language, regardless of any
translations that may be prepared or executed. All references
to weights, measurements, volumes, capacity and amounts, shall
be definitions applied pursuant to the laws and standards of
the United States of America. All references to "Dollars",
"$", money or funds in this Agreement mean dollars of the
United States of America. All payments to Interline by
Purchaser under this Agreement shall be in lawful money of the
United States of America.
11.17 Non-Frustration, Other Instruments, Further
Assurances. No Party to this Agreement shall commit any act or
take any action which frustrates or hampers the rights of the
other Party under this Agreement. Each Party shall act in good
faith and engage in fair dealings when taking any action under
or related to this Agreement. The Parties agree to execute any
other documents, instruments, or writings as may be reasonably
required in connection with the performance of this Agreement
and the realization of the benefits and protections hereof.
11.18 Execution. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one
and the same instrument. The individuals signing below
represent that they are duly authorized to do so by and on
behalf of the Party for whom they are signing.
AGREED TO AND ACCEPTED BY:
THE COMMON SEAL of )
TRANSPACIFIC INDUSTRIES PTY. LTD. )
LTD ACN 010 745 383 )
is affixed in accordance with )
its articles of association )
in the presence of: )
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
Name of Authorized Person Name of Authorized Person
________________________________ ______________________________
Office Held Office Held
INTERLINE HYDROCARBON, INC.
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
___________________________
<PAGE>
EXHIBIT A
THE UNIT
1 SUMMARY
1.1 Process Description
The Interline Process relies on propane extraction followed by
vacuum distillation to clean and re-refine Used Oil. The
recovered Base Oil may require clay or an equivalent finishing
step to produce the required colors mentioned in Exhibit B,
entitled "Specifications".
The first step of the process dissolves the Used Oil with
propane and rejects most of the Used Oil additives and any water
present in the feedstock to the Unit. The water is sent to an
industrial sewer (supplied by Purchaser) while the additive
package is blended with the heaviest Oil from the vacuum
distillation section to produce an asphalt extender. Other
alternatives for disposal of water (supplied by Purchaser)
include use of evaporative cooler, use of a fired heater and
removal from site for disposal at another facility.
The propane is recovered from the Oil-propane mix and reused to
dissolve additional Used Oil feedstock. The Oil is then further
refined by boiling the lighter gasoline and diesel material out
of the Base Oil. The Base Oil is then distilled to improve
color and remove metals or other impurities that may be present.
A clay treatment or equivalent finishing step will be used to
meet the color specification as detailed in Schedule B.
1.2 Equipment
A more detailed description of the equipment involved is
included below in the form of several P&ID's (Process and
Instrument Diagrams) identified in Exhibit A-2.1. A general
description of the equipment is provided below.
The equipment will be skid mounted to the extent feasible. The
Oil charge section will consist of Oil and propane charge pumps,
a feed preheat exchanger, and a propane surge vessel.
The Propane Extraction section consists of a mixing vessel
together with a settling vessel. The Propane Recovery section
has a solution feed tank, a solvent flash drum for propane
removal, heat exchangers and propane condensers.
Following the extraction/recovery section is the gasoline
removal section. This section consists of an atmospheric tower,
heat exchangers and a compressor which removes any propane or
gasolinetype material which may still be present in the Oil.
The vacuum distillation section consists of a single tower,
pumps, heat exchangers, coolers and vacuum producing equipment
necessary to boil the Base Oil thus removing metals and other
contaminants remaining after the extraction process. An asphalt
mixing vessel is provided to mix the Residuum recovered from the
propane extraction together with the heaviest material from the
vacuum distillation section.
2 DETAILED DESCRIPTION OF EQUIPMENT
2.1 Process and Instrument Drawings. See Exhibit A-2.1
2.2 Plans and Drawings. See Exhibit A-2.2
2.3 Detailed Equipment List. See Exhibit A-2.3
<PAGE>
EXHIBIT A-2.1
PROCESS AND INSTRUMENT DRAWINGS
[This Exhibit will be prepared and provided by Interline after
this Unit Purchase Agreement is signed by both Parties. It
will then be added to this Agreement as Exhibit A-2.1.]
<PAGE>
EXHIBIT A-2.2
PLANS AND DRAWINGS
[This Exhibit will be prepared and provided by Interline after
this Unit Purchase Agreement is signed by both Parties. It
will then be added to this Agreement as Exhibit A-2.2.]
<PAGE>
EXHIBIT A-2.3
DETAILED EQUIPMENT LIST
[This Exhibit will be prepared and provided by Interline after
this Unit Purchase Agreement is signed by both Parties. It
will then be added to this Agreement as Exhibit A-2.3.]
<PAGE>
EXHIBIT B
SPECIFICATIONS
The Unit supplied by Interline has been supplied to process
Australian Used Oil feedstock that meets the following
specifications (samples from Australia lab test July 11,
1996):
Used Oil Feed Specifications
Maximum Contaminants
Water 10%
Fuel(1) 8%
Solid Residuum(2) 7%
First Phase Oil Specification(3)
Specific Gravity at 60F 0.865 - 0.887
Maximum material boiling over 1000F 5%
Typical D-1160 distillation curve as follows:
Distillation Result
(AET,DEGREES F) IBP
439
5% 520
10% 612
20% 728
30% 757
40% 782
50% 793
60% 826
70% 852
80% 884
90% 937
95% 999
END POINT 1000
MIN. RECOVERY 95%
Notes:
(1) Fuel is any hydrocarbon material not meeting
lube base-oil specifications. This material must all boil at a
lower temperature than the base oil. Contamination with heavy
fuel oil (i.e., 380 CST. material) will cause the product base
oil to have an undesirable viscosity index.
(2) This is the solid material recovered from the
propane extraction step.
(3) This is the material which was soluble in the
propane and separated from the solids described in 2 above.
The properties are to be measured after the propane solvent has
been removed.
It is Purchaser's responsibility to provide Used Oil feedstock
meeting these specifications and descriptions for the
Acceptance Tests. Based on a Used Oil feedstock quality set
out above, the Unit supplied by Interline will meet the
following operational specifications:
1. The Unit will have a design capacity to process up to
91,000 litres of Used Oil per 24-hour day and will consistently
process an average of 77,000 litres of Used Oil per 24-hour
day, based on 330 days of operation per year. The 77,000
litres per 24-hour day rate shall be used for purposes of the
seven day Acceptance Test.
2. Since the Finished Products produced are directly related
to the quality of the Used Oil feed to the Unit, the Unit design
will be based on the sample of Used Oil received from
Purchaser.
3. Based on the Used Oil feedstock specifications stated
above, it is anticipated the Finished Products produced will be
approximately as follows:
(a) Water: Less than 10% by volume will be water, as
determined by a laboratory distillation.
(b) Fuel: The fuel (Diesel and Gasoline) composition
will be less than 10% by volume, as determined by a laboratory
distillation.
(c) Asphalt Extender: The asphalt extender should not
constitute more than 15% by volume.
(d) Base Oil: The Base Oil (including light and heavy
neutrals) will not be less than 65% by volume.
(e) Color: The ASTM Color Rating (ASTM test number D-
15924-63T or D-1500-64) for one selected heavy neutral cut of Base
Oil, after clay treatment, will be 3.5 or less.
<PAGE>
EXHIBIT C
TIMETABLE
1. Completion of Unit fabrication and preparation for
shipping: within eight (8) months of signing of this Agreement
provided that Purchaser does not fail to make payments when
due.
2. Delivery of the Unit to the Unit Site shall be the
responsibility of the Purchaser.
3. Completion of Unit installation: within two (2)
months
after arrival of the Unit at the Unit Site.
4. Completion of the Acceptance Test: within six (6)
months after installation of the Unit at the Unit Site, but the
Acceptance Test shall not be delayed by Purchaser.
Interline may accelerate the time table.
<PAGE>
EXHIBIT D
ACCEPTANCE TEST
Test Requirements:
The Unit will meet the Specifications detailed in Exhibit
B provided that the conditions and Used Oil feedstock quality
during the Acceptance Test are equal to the design conditions.
Acceptance Test Run:
1. Interline will select a time convenient for Purchaser
and Interline and appropriate for the Acceptance Test run to be
carried out.
2. Interline will specify all Unit process conditions,
feedstocks, catalysts, additives, flow rates and compositions,
and other appropriate operating parameters and conditions for
the Acceptance Test run. Test conditions will be set when the
detailed process design and engineering for the Unit are
submitted to Purchaser for its approval. The duration of the
Acceptance Test run shall be one week, i.e., seven days at 24
hours per day (except for color as indicated in Paragraph 6
below).
3. Purchaser shall provide all raw materials and
manpower specified by Interline, and shall cause the Unit to operate, at
Purchaser's expense, according to the conditions set by
Interline.
4. The volume of Used Oil processed shall be metered or
measured for volume through means or instrumentation designated
by Interline and approved by the Purchaser, such approval shall
not be unreasonably withheld.
5. If, during the Acceptance Test run, interruptions,
operating mishaps, mistakes or other situations occur which are
deemed by Interline to be detrimental to the performance of the
Unit or to the Finished Products, Interline may cause the
Acceptance Test run to be repeated, or Purchaser may, at its
option, certify that the Acceptance Test run has been
successfully completed.
6. With respect to color only, the Acceptance Test run
shall apply to only one cut and will require the taking of one
base oil sample after every hour period has elapsed, i.e., 24
samples in 24 hours. The ASTM color rating data will then be
averaged to determine if the Acceptance Test has been satisfied
for color. The Acceptance Test period for color shall only be
this 24 hour period and shall not be for an entire week.
<PAGE>
EXHIBIT E
LIQUIDATED DAMAGES
In the event that liquidated damages are payable under
Paragraph 8.2 of the Unit Purchase Agreement, then the
following shall apply. The liquidated damages shall be in the
form of a credit against Royalties payable to Interline under
the License Agreement. The amount of such credit, if any,
shall be as follows:
(a) If the Unit processes Used Oil at an average rate
below the 77,000 litres per 24-hour period rate, then for every
1,000 litres it is below the 77,000 litre rate, the credit
shall be $42,000, up to a maximum total credit under this
subsection (a) of $250,000. The average rate over the entire
seven day Acceptance Test period shall be used.
(b) In addition to the amount, if any, provided in (a)
above, if the average of Base Oil duly produced, sampled and
tested from the Unit during the seven day Acceptance Test
period fails to exhibit a color of 3.5 or less following clay
treatment as determined by ASTM test number D-15924-63T or D-
1500-64, then for each 1/2 point increment that the color is
worse than 3.5, there shall be an additional credit of $125,000
per 1/2 point increment, up to a maximum total credit of $250,000
under this subsection (b).
(c) If the Base Oil is less than 65% by volume as
provided in Paragraph 3 (d) of Exhibit B, then for each full 1%
under 65% the credit shall be $12,500, up to a maximum total
credit of $125,000 under this subsection (c).
Acceptance Test run results must be used to calculate the
liquidated damages under (a), (b) and (c) above. If more than
one Acceptance Test is conducted, Interline shall select the
Acceptance Test to be used for the calculation of liquidated
damages payable hereunder. In no event (except for the
"Exception" stated below) shall Interline be required to give
any credit to Purchaser other than against Royalties otherwise
payable under the License Agreement, and the total of all
credits (i.e., total liquidated damages under the Agreement and
this Exhibit B) shall not exceed $500,000.
Exception: If the Unit never produces Finished Products
because of Interline's fault and the Unit's failure to meet the
Specifications in the Acceptance Test, then Purchaser may
require Interline to pay to Purchaser an amount equal to the
credit. Interline acknowledges that this is reasonable, because
under such circumstances there will be no royalty against which
the credit can be taken. This payment is subject to the above
$500,000 limit.
EXHIBIT F
<TABLE>
PAYMENT SCHEDULE - UNIT PURCHASE
PRICE
<CAPTION>
TERMS
Item Description Signing of Purchase Vendor Rec'd Delivery to Assembly Assembly Assembly Assembly Accept- Total
No. Agreement Order (1) Material Interline 25% (4) 50% (4) 75% (4) 100% (4) ance (5)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Down Payment 200,000 $200,000
2 Process 74,125 222,374 $296,499
Pumps
3 Compressor 13,914 41,741 $55,655
4 Heat 52,191 104,383 52,191 $208,765
Exchanger
5 Fired Heater 39,873 53,164 39,873 $132,910
6 Cooling 5,469 16,408 $21,877
Tower
7 Flare 4,178 13,477 708 708 708 708 $20,487
8 Clay Press 26,677 80,032 $106,709
9 Piping & 101,453 382,622 58,698 58,698 58,698 58,698 $718,867
Valves
10 Structure 10,047 41,471 8,498 8,498 8,498 8,498 $85,510
11 Ladders and 2,499 10,517 2,265 2,265 2,265 2,265 $22,076
Platforms
12 Process 8,169 25,530 767 767 767 767 $36,767
Internals
13 Fab Support 24,516 24,516 24,516 24,516 $98,064
&
Consumables
14 Insulation 9,704 40,756 8,733 8,733 8,733 8,733 $85,392
15 Paint 12,589 12,589 $25,178
16 Controls 20,495 73,327 8,881 8,881 8,881 8,881 $129,346
17 Instrument- 39,387 123,025 3,647 3,647 3,647 3,647 $177,000
ation
18 Electrical 14,003 60,973 14,223 14,223 14,223 14,223 $131,868
19 Motor 26,324 82,002 2,274 2,274 2,274 2,274 $117,422
Control
Center (MCC)
20 Heat Trace 3,286 10,748 669 669 669 669 $16,710
21 Engineering 47,623 35,717 35,717 $119,057
& Quality
Control
22 Vessels 31,864 169,657 55,548 55,548 55,548 55,548 $423,713
23 Acceptance 170,128 $170,128
Test
Complete
TOTAL 200,000 483,658 157,547 1,518,990 225,144 237,733 202,017 204,784 170,128 $3,400,000
</TABLE>
(1) Means date that Interline submits purchase order to vendor.
(2) Means date that Interline's vendor receives the designated item.
(3) Means the date that the designated item is delivered to Interline.
(4) Assembly percentage applies to designated item and will be reported by
Interline to Purchaser. Purchaser has right to
inspect and verify as provided in Paragraph 6.1
of this Unit Purchase Agreement.
(5) Acceptance means acceptance under Paragraph
4.4 (but not Paragraph 4.6) of this Unit
Purchase Agreement.
LICENSE AGREEMENT
by and among
INTERLINE HYDROCARBON
INC. and
SINPATIC ENTERPRISES LTD.
Date of Agreement: August 24, 1996
<PAGE>
LICENSE AGREEMENT
This License Agreement (the "Agreement") is dated August
24, 1996 and is by and between the following Parties:
Interline: INTERLINE HYDROCARBON INC.
a Wyoming corporation
350 West A Street, Suite 204
Casper, Wyoming 82601
U.S.A.
Licensee: Sinpatic Enterprises Ltd.
11/F, Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
RECITALS
WHEREAS, Licensee recognizes and acknowledges that
Interline possesses substantial and valuable technology,
expertise, knowhow, information, trade secrets, patent rights
and intellectual property relating to the processing of Used
Oil and the manufacture and operation of equipment for the
processing of Used Oil;
WHEREAS, Licensee desires to obtain an exclusive license
from Interline for the use of Licensed Technology in the
Territory; and
WHEREAS, Interline is willing to grant the license to
Licensee in the Territory, but only under the terms and
conditions of this Agreement.
NOW, THEREFORE, the Parties agree as follows:
<PAGE>
SECTION 1 - INTRODUCTION
1.1 Units.
(a) Initial Unit. The "Initial Unit" and the
"Initial Battery Unit" shall mean the "Unit" (including its
equipment and instrumentation) to be constructed and assembled
by Interline for Licensee or its Sublicensee in accordance with
the Unit Purchase Agreement. The Initial Unit is for
processing Used Oil. Interline Technology is utilized in the
construction and operation of the Initial Unit.
(b) Other Units. "Other Units" shall mean plants,
equipment and facilities for processing Used Oil in which
Interline Technology is utilized in the construction and/or
operation thereof. "Other Units" do not include the Initial
Unit.
(c) Units. "Units" shall mean any of the Initial
Unit and Other Units. A "Unit" may be either the Initial Unit
or one of the Other Units.
1.2 Oil. "Oil" shall mean any oil refined from crude
oil. Oil may contain additives to improve its lubrication,
wear, oxidation, corrosion, and/or other characteristics.
1.3 Used Oil. "Used Oil" shall mean any Oil that has
been used for its intended purpose and as a result of such use
has been contaminated by physical and/or chemical impurities.
1.4 First Phase Process Equipment. "First Phase Process
Equipment" shall mean the equipment and apparatus of a Unit
used to process Used Oil to the point that First Phase Material
is recovered from the Used Oil and is made ready for sale or
use as a Finished Product or is made ready for distillation (or
other separation means) for recovery of Base Oil, Diesel,
Gasoline and Other Finished Products. First Phase Process
Equipment includes MP-FP Vessels, oil/propane separator
equipment, propane recovery equipment, residuum/water separator
equipment and asphalt blending vessels, together with the
associated pumps, piping, and control instrumentation. First
Phase Process Equipment includes the equipment and apparatus
which prepares First Phase Material for further processing to
recover Base Oil, Diesel, Gasoline and Other Finished Products,
but does not include distillation columns or other separation
means for recovering Finished Products from the First Phase
Material.
1.5 MP-FP Vessels. "MP-FP Vessels" shall mean the
vessels used in the operation of a Unit for solvent extraction.
Used Oil is introduced into the MP-FP Vessels, combined with a
carrier, and subjected to solvent extraction processing
utilizing Disclosed Information.
1.6 Finished Products. "Finished Products" are described
below:
When Used Oil is processed by a Unit in accordance
with Interline's instructions, "Residuum" and "First Phase
Material" will result. This is accomplished in MP-FP Vessels.
The Residuum is a "Finished Product" that may be sold or used.
The First Phase Material may be sold or used as a Finished
Product or may be further processed by distillation or other
means to recover other Finished Products, such as Base Oil,
Gasoline and Diesel.
(a) "Residuum" shall mean the colloidal material
separated from lighter Used Oil fractions through the
processing of Used Oil by a Unit. The bottoms recovered from
the further processing of First Phase Material may be combined
with (and thus become part of) the Residuum.
(b) "First Phase Material" shall mean the
hydrocarbon material other than Residuum which results from the
solvent extraction processing of Used Oil through the use of a
Unit.
(c) "Base Oil" shall mean the base oil recovered by
a Unit from Used Oil. Base Oil is derived from the
distillation of First Phase Material. Such distillation
process can segregate the Base Oil from the Gasoline and Diesel
fractions and the bottoms.
(d) "Diesel" shall mean the fraction commonly
referred to as diesel that is recovered by a Unit from Used
Oil. Diesel can be derived from the distillation of First
Phase Material.
(e) "Gasoline" shall mean the fraction commonly
referred to as gasoline that is recovered by a Unit from Used
Oil. Gasoline can be derived from the flashing of First Phase
Material.
(f) "Finished Products" shall mean all commercially
marketable products produced as a result of processing Used Oil
by any process, equipment or apparatus of a Unit. Finished
Products include, but are not necessarily limited to, First
Phase Material, Diesel, Gasoline, Base Oil, and Residuum.
Finished Products other than First Phase Material, Diesel,
Gasoline, Base Oil, and Residuum, may be referred to as "other
Finished Products."
1.7 Disclosed Information. "Disclosed Information" shall
mean any and all information, technology, data, expertise, know
how, trade secrets, intellectual property, inventions,
processes, ideas, product formulations, compositions, operating
procedures, operating conditions (including temperatures,
pressures, flow rates, etc.), specifications, Unit designs,
equipment configurations, and the like, which are disclosed or
transferred by Interline (and/or any of its independent
contractors) to Licensee or a Sublicensee. All information
learned by Licensee or a Sublicensee from any Unit manufactured
by Interline or any of its affiliates shall be deemed part of
the Disclosed Information. Information disclosed to Licensee
or its Sublicensee under the Unit Purchase Agreement (and
Information disclosed to a Sublicensee under any other
agreement between a Sublicensee and Interline (or its
affiliate) for the manufacture or sale of a Unit), including
information disclosed through training and consultation, is
Disclosed Information. Disclosed Information does not include
any new information or technology created by Licensee or a
Sublicensee as part of Licensee Improvements.
1.8 Proprietary Information. "Proprietary Information"
shall mean any and all Disclosed Information (whether or not
reduced to writing and in any stage of development) except for
Disclosed Information that is in the public domain at the time
of disclosure by Interline to Licensee or a Sublicensee.
Proprietary Information, which subsequent to disclosure by
Interline to Licensee or a Sublicensee, becomes part of the
public domain through no fault of Licensee shall thereafter
cease to be Proprietary Information. Public domain status must
be established through printed publications and/or other
credible, tangible evidence. Furthermore, anything which becomes
lawfully and legitimately available to Licensee or a
Sublicensee from a third party (who did not directly or
indirectly acquire the same from Interline or Interline's
licensors or assignors) shall be released from the provisions
of Section 8 (entitled "Confidentiality"), butsuch use and
disclosure as are permitted by such third party. Specific
items of Disclosed Information shall not be excluded from the
scope of Proprietary Information merely because they can be
assembled by selection and combination of subject matter within
the scope of the above exceptions, or merely because they are
encompassed within more general subject matter within the scope
of the above exceptions.
1.9 Proprietary Materials. "Proprietary Materials" shall
mean any and all writings, records, documents and other
tangible media in which Proprietary Information is embodied,
stored or recorded or from which Proprietary Information can be
transferred, retrieved, reproduced, read or utilized. Software
and Documentation under Section 2 shall be presumed to be
Proprietary Materials.
1.10 Licensed Patents. "Licensed Patents" shall mean any
and all patents and patent applications owned by Interline or
licensed to Interline with a right to grant sublicenses, but
only to the extent that such patents or patent applications are
relevant to a Unit or its operation or the processing of Used
Oil by a Unit to produce Finished Products. Any of the
Licensed Patents which terminates or expires or which is held
to be invalid or unenforceable by a court or tribunal of
competent jurisdiction (after resolution of any appeals) shall
at such time cease to be included within the scope of the
Licensed Patents. There is no representation as to the number,
if any, of Licensed Patents applicable to this Agreement or to
the scope of such Patents or the countries of issuance. A list
of the patents and patent applications presently owned by
Interline and/or licensed to Interline with a right to grant
sublicenses is attached hereto as Exhibit A. It is understood
that Exhibit A may be expanded to include other patents and
patent applications as relevant patents issue and/or as
additional relevant applications are filed. For example,
patents and/or patent applicaure may be added to Exhibit A if
and as such patents issue and such patent applications are
filed. It is expressly agreed that Licensed Patents do not
include any patents obtained by the Licensee which claim
Licensee's Improvements.
1.11 Licensed Technology or Interline Technology.
"Licensed Technology" or "Interline Technology" means the
Disclosed Information, Proprietary Information, and Proprietary
Materials provided by Interline to Licensee or a Sublicensee
under this Agreement or the Unit Purchase Agreement or another
agreement for the manufacture or purchase of a Unit.
1.12 Interline's facilities. Any reference in this
Agreement to Interline's facilities or offices shall also mean
and include the facilities and offices of Interline's
affiliated corporations, including Gagon Brothers Mechanical
Contractors, Inc.
1.13 "Licensed Field" shall mean the processing of Used
Oil to recover Finished Products. Expressly excluded from
Licensed Field and this License Agreement are any hydrocarbon
products which are extracted from tar sands or oil shales, or
which are extracted from crude oil from which wax is extracted
as a primary marketable product, or which are extracted from
soil or other similar media artificially contaminated with
hydrocarbons. Licensee shall not use the Disclosed Information
for any purpose or use outside of the Licensed Field.
1.14 Territory. The "Territory" shall mean the country of
Australia. The Territory does not include any geographic area
outside of Australia.
1.15 Litres. Any reference in this Agreement to "litre"
or "litres" shall mean the basic unit of capacity in the metric
system, equal to 1 cubic decimeter or 61.025 cubic inches
(3.784 litres per U.S. Gallon).
1.16 Software and Documentation. "Software" and
"Documentation" mean the software and documentation identified
in Exhibit B and any other software and documentation under
Paragraph 2.1.
1.17 Unit Purchase Agreement. The "Unit Purchase
Agreement"
shall mean the Unit Purchase Agreement dated August 24, 1996 by
and between Interline Hydrocarbon Inc. and Transpacific
Industries Pty Ltd ("Transpacific") for the Initial Unit.
Transpacific may assign the Unit Purchase Agreement to a
company who is a Sublicensee under this License Agreement.
Other purchase agreements for the purchase of other Units from
Interline may be entered into by Licensee, Transpacific or
other Sublicensees.
1.18 Sublicensees. "Sublicensees" shall mean any
sublicensees under Paragraph 4.2.
SECTION 2 - SOFTWARE AND DOCUMENTATION
2.1 Provided Directly to Licensee. Pursuant to this
Agreement, Interline shall provide Licensee (or Transpacific or
its assignee of the Unit Purchase Agreement) with copies of the
Software and Documentation for use only in connection with the
Initial Unit. The Software will be provided to Licensee in
object code form only. Licensee (and Transpacific and its
assignee of the Unit Purchase Agreement) are not entitled to
any of the source code or proprietary programming documentation
relating to the Software. Other Sublicensees may receive other
software and documentation from Interline if they purchase
Units from Interline. Such other software and documentation
may be different from the Software and Documentation of Exhibit
B, but shall be governed by this Agreement as "Software" and
"Documentation."
2.2 Ownership. Notwithstanding anything in this
Agreement to the contrary, Licensee and Sublicensees do not obtain, nor
will they receive, any ownership of the Software or
Documentation received from Interline or copies thereof or the
copyrights, trade secrets or other intellectual property
therein. Interline is the owner thereof.
SECTION 3 - THE LICENSE
3.1 Grant of License. Subject to the terms and
conditions of this Agreement, Interline hereby grants to Licensee, and
Licensee hereby accepts, an exclusive, nontransferable license
to utilize Licensed Technology: (a) to operate Units in the
Territory to process Used Oil in the Licensed Field and (b) to
sell throughout the world the Finished Products resulting
therefrom. This license is referred to in this Agreement as
the "License." Except for the license to sell under (b)
above, the License is strictly limited to the Units, the
Territory and the Licensed Field, and is subject to Licensee's (and
Sublicensees') compliance with this Agreement. Licensee shall
not use Interline Technology outside of the scope of the
License. Rights not expressly granted in this Agreement are
reserved by Interline.
3.2 License of Licensed Patent(s). The License includes
a license under Licensed Patent(s) subject to all restrictions
and limitations applicable to the License, including the
Territory and the Licensed Field. Licensed Patent(s) to
Interline Improvements are included in the License only if the
Interline Improvements are disclosed and licensed to Licensee
in accordance with Paragraph 5.2.
3.3 Term. The License shall become effective on the date
of this Agreement and shall continue in force for a term of
ninety-nine (99) years, unless terminated earlier by the mutual
consent of the Parties or as otherwise provided in this
Agreement. It is understood that as each Licensed Patent or
other form of intellectual property expires or terminates or is
abandoned or cancelled, it shall cease to be part of the
License.
3.4 Termination. The License may be terminated at any
time by Interline if Licensee or a Sublicensee breaches any material
provision of this Agreement and fails to cure said breach
within 60 days of receiving notice in writing from Interline of
the breach. Termination of the License shall not limit or
affect the other legal and equitable remedies available to
Interline for any breach by Licensee or a Sublicensee of this
Agreement.
3.5 Effect of Termination. Following termination of the
License, Interline shall have no further obligation or
liability under this Agreement, and Licensee and Sublicensees:
(a) shall cease all use of Disclosed Information and
Proprietary Information, (b) shall not thereafter produce any
product, or process any Used Oil, utilizing any part of the
Disclosed Information or Proprietary Information, (c) shall
immediately deliver to Interline (or dispose of in accordance
with Interline's instructions) all Software and Documentation
(and copies thereof) in the possession or control of Licensee
or a Sublicensee, and (d) shall offer to sell the Initial Unit
back to Interline at the Repurchase Price in accordance with
the applicable provisions of the Unit Purchase Agreement (and
make similar offers with respect to Other Units). The
requirements of (d) above apply only to the Sublicensee or
Licensee who owns or controls the Unit. Licensee shall use its
best endeavours to procure that any Sublicensee offers to sell
its Unit(s) in accordance with the foregoing. Licensee and
Sublicensees shall be free to sell at any time all Finished
Products produced by Licensee or Sublicensees under the license
before termination of thy granted to Licensee or Sublicensees
under this Agreement are reserved by Interline.
3.6 Reservation of Rights. Rights not expressly granted
to Licensee or Sublicensees under this Agreement are reserved by
Interline.
3.7 Patent Markings. Any products sold, marketed or
distributed by Licensee or a Sublicensee which are made from or
embody any invention within, or which otherwise are within, the
scope of any Licensed Patents, shall bear (or their containers
shall bear) such marking or notice of patent or patent pending
as may be appropriate under applicable law as Interline shall
reasonably request.
3.8 Right to Inspect. Interline and its representatives
shall have the right, from time to time, to inspect any Unit
and its operation and Finished Products produced by any Unit,
at any reasonable time. Licensee and Sublicensees shall cooperate
therewith and shall make full disclosure thereof to Interline.
Interline shall have the right to take samples of Finished
Products produced by any Unit.
3.9 Trademarks. Nothing in this Agreement authorizes
Licensee or any Sublicensee to use any trademark, service mark,
name, logo or commercial symbol of Interline. Licensee and
Sublicensees shall make no use of any trademark, service mark,
name, logo or commercial symbol of Interline.
3.10 Ownership. Licensee and Sublicensees acknowledge
that Interline is the owner of the Proprietary Information and
Licensed Patents licensed to Licensee under this Agreement. To
the extent permitted by applicable law: (a) Licensee and
Sublicensees shall not challenge or contest the validity or
enforceability of any Proprietary Information or Licensed
Patent(s), and (b) if Licensee or any Sublicensee does so,
Interline may terminate the License or this Agreement.
3.11 Meaning of Exclusivity. The License is exclusive as
described in this Paragraph 3.11. "Exclusivity" or "exclusive"
as used in this Agreement shall mean that Interline shall not
use, nor license another licensee to use, any Licensed Tecitory
will not be processed outside of Licensee's exclusive Territory
by Interline or other licensees to recover Finished Products.
There is no assurance that Finished Products recovered by
Interline or its other licensees will not be purchased by
customers who are located in Licensee's exclusive Territory.
There is no assurance by Licensee that Finished Products
recovered by Licensee or its Sublicensee from the processing of
Used Oil at a Unit within the Territory will not be purchased
by customers who are located outside of the Territory. It is
also agreed that Licensee's exclusivity of any kind is limited
to the Licensed Field.
3.12 Retaining Exclusivity. Licensee will forfeit all
rights of exclusivity and the License and this Agreement will
be nonexclusive, if the following goals are not met by Licensee
within the time period stated below:
(a) Not later than two years after acceptance of the
Initial Unit under Paragraphs 4.4 and 4.5 (but not Paragraph
4.6) of the Unit Purchase Agreement, Licensee or its
Sublicensee shall order a second Unit from Interline for
operation in the Territory. Within two months of acceptance of
the second Unit (similar to acceptance under Paragraphs 4.4 and
4.5 of the Unit Purchase Agreement but with respect to the
specifications for the second Unit), the Units (i.e., Initial
Unit and second Unit) operated by Licensee and/or Sublicensees
in the Territory must be processing at least 154,000 litres of
Used Oil per day to produce Finished Products and must
thereafter maintain or exceed this level on average over each
six month period. Licensee and its Sublicensees must not
unreasonably delay the purchase, delivery, installation or
acceptance of the second Unit.
(b) Not later than four years after acceptance of the
Initial Unit under Paragraphs 4.4 and 4.5 (but not Paragraph
4.6) of the Unit Purchase Agreement, Licensee or its
Sublicensee shall order a third Unit from Interline for
operation in the Territory. Within two months of acceptance of
the third Unit (similar to acceptance under Paragraphs 4.4 and
4.5 of the Unit Purchase Agreement but with respect to the
specifications for the third Unit), the Units (i.e., Initial
Unit, second Unit, and third Unit) operated by Licensee and/or
Sublicensees in the Territory must be processing at least
231,000 litres of Used Oil per day to
produce Finished Products and must thereafter maintain or
exceed this level on average over each six month period.
Licensee and its Sublicensees must not unreasonably delay the
purchase, delivery, installation or acceptance of the third
Unit.
EXCEPTIONS: (1) If the second Unit is sufficiently large
to enable Licensee and its Sublicensees to meet the 231,000
litres per day goal and if they actually meet such goal as
stated above, then the mere absence of a third Unit shall not
cause Licensee to forfeit its exclusivity. (2) If the 231,000
litres per day rate of (b) above is not viable under then-
current market conditions in Australia, then the 231,000 litres
per day rate shall be reduced to such rate as is economically
viable and such reduced rate shall be used for the purposes of
(b) above, but in no event shall such rate be reduced below
154,000 litres per day. (3) The above time periods will be
extended by the duration of any delay caused by the failure of
Interline to meet its obligations under this Agreement or the
Unit Purchase Agreement.
For the purposes of this Paragraph 3.12 the terms "current
market conditions in Australia" and "economically viable" will
take into account the following:
(a) The locations of Used Oil in Australia.
(b) The transport costs of transporting the Used Oil to
the Unit.
(c) The volume of the Used Oil located in any particular
place.
(d) The quality of the Used Oil available in the
Australian market.
(e) The economic viability limits of a Unit established
in a particular place.
(f) The expanse of Australia and the economics of
processing Used Oil profitably.
3.13 Best Efforts. Licensee will use its best efforts to
find Sublicensees, establish Units in the Territory, and to
maximize the potential return (e.g., Royalty) to Interline.
SECTION 4 - SUBLICENSING AND ASSIGNMENTS
4.1 Sublicenses and Assignment. The License is personal
to Licensee. Except for the sublicenses under Paragraph 4.2
below, Licensee shall have neither the right nor the power to
grant any sublicense under the License or this Agreement or to
otherwise license or transfer any Disclosed Information,
Proprietary Information, Proprietary Materials or Licensed
Patents without the prior written consent of Interline. Such
consent shall not be unreasonably withheld. Licensee has
neither the right nor the power to encumber, pledge or
hypothecate the License or to assign, convey or transfer the
License without Interline's advance written consent.
4.2 Sublicense. If Transpacific assigns the Unit
Purchase Agreement to a Sublicensee, then Licensee shall grant
to the Sublicensee a sublicense under the License and this
Agreement. Licensee shall first obtain the Sublicensee's
agreement to and execution of Exhibit C, a copy of which will
be delivered to Interline. Licensee may grant other
sublicenses to other sublicensees approved by Interline. Each
such sublicensee must first agree to and execute a document in
the form of Exhibit C, but with the correct name of the
sublicensee. Copies thereof will be delivered to Interline.
Each Unit shall require a sublicense.
4.3 Sale of Unit. It is also understood and agreed that
any sale or transfer by the Licensee or a Sublicensee of a Unit
will require a transfer of the License or sublicense.
Therefore, Licensee or the Sublicensee must first procure from
any acquirer of a Unit and transferee of the License or
sublicense a written agreement to accept and comply with the
terms and conditions of this Agreement, and shall deliver a
copy thereof to Interline. The acquirer or transferee must
first be approved by Interline. Interline shall not
unreasonably withhold such approval.
SECTION 5 - TECHNOLOGY EXCHANGE
5.1 Technology Exchange. For so long as Licensee or a
Sublicensee is obligated to pay the Royalty to Interline,
Licensee and Sublicensees shall keep Interline informed of
"Licensee Improvements", and Interline shall inform Licensee or
Sublicensees of "Interline Improvements."
5.2 Interline Improvements. An "Interline Improvement"
shall be any improvement or invention created or acquired by
Interline that Interline believes may be an advantageous
addition or change to a Unit sold by Interline (or its
affiliate) for Licensee or a Sublicense or to the process for
processing Used Oil that is practiced by such Unit or otherwise
useful to Licensee or a Sublicensee in connection with its use
of such Unit. Interline has no obligation to disclose or
license any Interline Improvement to Licensee or any
Sublicensee if such disclosure or license would be in violation
of any obligation of Interline to any third party or would
obligate Interline to pay any fee or other consideration to a
third party or to otherwise account to a third party, or if for
any other reason Interline cannot make disclosure thereof to
Licensee or a Sublicensee. If is or Interline becomes
restricted from disclosing Interline Improvements to Licensee
because of restrictions in an agreement with a third party,
then Interline shall inform Licensee that Interline may not
disclose such Improvements to Licensee. Interline shall advise
the Purchaser of the name and contact details of any such third
party to whom Interline Improvements have been disclosed but of
which Interline has an obligation not to disclose.
5.3 Licensee Improvements. A "Licensee Improvement" is
any improvement, addition or change to a Unit or the process
practiced by a Unit, other than an Interline Improvement.
Licensee Improvements include any other ideas, inventions,
information and technology which Licensee or a Sublicensee
discloses to Interline.
5.4 Licenses. Interline Improvements disclosed by Interline to
Licensee or a Sublicensee shall be licensed to Licensee as Disclosed
Information and Proprietary Information under and as part of the
License and shall be governed by this Agreement and its restrictions.
Licensee and Sublicensees hereby license Interline to use and
implement for any purpose, and to sublicense to third parties, any
and all Licensee Improvements disclosed by Licensee or a Sublicensee
to Interline. This license includes a license under any and all
patents and other intellectual property held or controlled at
any time by Licensee or any Sublicensee applicable to the
Licensee Improvements.
SECTION 6 - PAYMENTS
6.1 Royalty to Interline. Licensee shall pay to Interline
a Royalty of U.S. $0.0159 per litre based on all Finished
Products
(excluding Residuum) produced by any Unit and sold. Licensee
shall also pay to Interline a Royalty, based on all Residuum
produced by any Unit and sold, equal to the lesser of: (i) U.S.
$0.0159 per litre or (ii) the actual sales price of the
Residuum. Sublicensees must ensure that this Royalty is paid to
Interline.
6.2 Interest. Any payments under this Agreement
(including, without limitation, payments under Paragraphs 6.1
and 6.2 hereof) not made by Licensee in full when due shall
thereafter bear interest on the unpaid balance (including
accrued but unpaid interest) at the rate of one and one-half
percent (1.5%) per month or the highest rate allowed by
applicable law, whichever is lower.
6.3 United States Dollars. All references to "Dollars"
or $ in this Agreement mean dollars of the United States of
America. All payments to Interline under this Agreement shall
be in lawful money of the United States of America.
6.4 Taxes. Each Party shall be responsible for its own
taxes. Notwithstanding the foregoing or anything in this
Agreement to the contrary, Interline shall not be responsible
for any Hong Kong taxes, duties or assessments relating to this
Agreement, and Licensee shall make full and timely payment of
all such Hong Kong taxes, duties and assessments in addition
to, and without reduction of, the Royalties and other payments
to Interline under this Agreement.
6.5 Measurement. The amount of Finished Products
produced by Units and sold, which is the basis upon which the Royalty
set forth above shall be due and payable to Interline, shall be
determined by sales, accounting and other records as detailed
in Paragraph 6.9. If any Finished Products are not sold, but
are used by Licensee or a Sublicensee or any company affiliated
with any of them, then such Finished Products shall be deemed
sold at fair market value for the purpose of the Royalty
payable to Interline.
6.6 Quarterly Production Reports. Within 30 days of the
end of each quarter, Licensee and each Sublicensee shall
deliver to Interline a Production Report accurately setting
forth the number of litres of Used Oil (and other materials, if
any) processed by each Unit each day during the quarter. The
Production Report shall also state the kinds and quantities of
Finished Products produced by each Unit during the quarter.
This report shall be provided to Interline with the Royalty
Settlement Statement of Paragraph 6.7.
6.7 Royalty Payments. Royalties shall be pair of each
year. Within 30 days of the end of each quarter, Licensee and
each Sublicensee shall pay the Royalty for the quarter and
shall deliver to Interline a Royalty Settlement Statement
showing the number of litres of Finished Products sold during
the quarter and the Royalty amount payable to Interline for
that quarter. Each Royalty Settlement Statement and each
Production Report shall be signed by an officer of Licensee and
an officer of each Sublicensee who shall certify in writing in
the Statement and the Report that they are complete and
accurate. Royalty payments shall be made after deduction of
applicable withholding taxes required by Australian taxing
authorities based on Royalties paid to Interline under this
Agreement.
6.8 Efforts to Process Used Oil. Licensee shall use its
best reasonable efforts to ensure that it or its Sublicensees
use Units to process Used Oil in commercial quantities to
produce and sell Finished Products.
6.9 Records. Licensee and Sublicensees shall keep true
and accurate records, files and books of account containing all
the data reasonably required for the full computation and
verification of the amounts to be paid hereunder, the
information to be given in the reports and statements provided
for herein, and any other normal and reasonable records
necessary to verify and substantiate performance of Licensee's
and Sublicensees' obligations hereunder. Interline, or its
designated representative, shall have access to the books and
records of Licensee and Sublicensees during normal business
hours for the purpose of determining or confirming all billings
and payments made hereunder, and verifying and substantiating
the performance of Licensee's and Sublicensees' obligations
hereunder. Licensee and Sublicensees shall retain all such
records, files and books of account for a period of at least
five years after their preparation or such other period, if
longer, as required under law.
6.10 Requirements. Licensee has requested that Interline be
available upon such advance written notice as Interline may
reasonably require, to manufacture Units for Licensee and Sublicensees in
the Territory. In consideration of Interline's willingness to
be available for such purpose, Licensee on behalf of itself and
its Sublicensees agrees and warrants that Licensee and
Sublicensees will purchase all of their requirements for Units
from Interline (or affiliates designated by Interline).
Interline agrees that Interline (and/or such affiliates) will
manufacture such Units for Licensee and its Sublicensees. The
schedule for the manufacture, delivery and installation of such
Units will be as mutually agreed. The purchase agreements to
be used for this purpose will be similar in form and substance
to the Unit Purchase Agreement for the Initial Unit. The
pricing shall be at Interline's then-current reasonable pricing
for the Units requested and may be further adjusted to reflect
services and other requests of Licensee or Sublicensees. The
Parties acknowledge that the terms of this Agreement have been
negotiated on a commercial basis and that Interline has not
tied or conditioned the grant of the License or rights under
this Agreement on Licensee's acceptance of this Paragraph 6.10
or any commitment to purchase Units.
SECTION 7 - WARRANTIES, INDEMNIFICATION, DISCLAIMER
AND LIMITATION ON LIABILITY
7.1 Warranty - No Conflict. Each Party represents and
warrants that it has the right and power to enter into this
Agreement and that this Agreement is not contrary to any other
agreement or obligation of the Party.
7.2 Warranty - Infringement. Interline warrants that as
of the date of this Agreement Interline has no actual knowledge
that any Disclosed Information to be used by Licensee or a
Sublicensee in accordance with this Agreement infringes any
patent, trade secret or copyright of a third party. There is
no express or implied warranty of noninfringement except as
expressly stated above in this Paragraph 7.2. It is the
responsibility of Licensee and Sublicensees to conduct such
patent searches and intellectual property investigations in
Australia and elsewhere that they deem appropriate. The risk
of patent and intellectual property infringement is borne by
Licensee and Sublicensees.
7.3 Disclaimer. INTERLINE MAKES NO REPRESENTATION,
WARRANTY OR GUARANTEE, EXPRESS, IMPLIED OR BY OPERATION OF LAW,
RELATING IN ANY WAY TO ANY UNIT, DISCLOSED INFORMATION,
PROPRIETARY INFORMATION, LICENSED PATENTS, FINISHED PRODUCTS
PRODUCED AT ANY UNIT, TRAINING, CONSULTATION OR ANY OTHER
MATTER RELATING TO THIS AGREEMENT OR THE UNIT PURCHASE
AGREEMENT, NOT EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE
UNIT PURCHASE AGREEMENT. ANY AND ALL IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND
NONINFRINGEMENT ARE DISCLAIMED AND EXCLUDED BY INTERLINE.
7.4 Limitation on Liability. IN NO EVENT SHALL INTERLINE
BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN REASONABLY FORESEEABLE
GENERAL DAMAGES. IN NO EVENT SHALL THE AGGREGATE LIABILITY OF
INTERLINE UNDER THIS AGREEMENT OR RELATING TO ITS SUBJECT
MATTER EXCEED THE ROYALTY ACTUALLY RECEIVED BY INTERLINE UNDER
THIS AGREEMENT.
7.5 Indemnification - By Licensee. Licensee shall
indemnify Interline and its directors, officers, shareholders,
employees and representatives against, and hold them harmless
from, any and all claims, liabilities, demands, damages,
expenses and losses arising out of any use, sale or other
disposition of any Finished Products or other products produced
at a Unit or arising out of Licensee's or a Sublicensee's
operation of a Unit.
7.6 Allocation of Risk. This Agreement defines and
represents a mutually agreed upon allocation of risk between
the Parties and the consideration given and received under this
Agreement has been adjusted to reflect such allocation of risk.
SECTION 8 - CONFIDENTIALITY
8.1 Acknowledgment. Licensee and Sublicensees
acknowledge that Proprietary Information is of great value to Interline and
that such value depends in significant part upon the
preservation of the confidentiality of the same. Licensee and
Sublicensees shall take all reasonable precautions to prevent
any use or disclosure of Proprietary Information not expressly
authorized in writing by Interline.
8.2 Restrictions. Except as expressly authorized in
writing by Interline, Licensee and Sublicensees shall not (a)
disclose Proprietary Information to any person or entity, (b)
transfer Proprietary Materials to any person or entity, (c)
allow any person or entity to gain access to Proprietary
Information or Proprietary Materials, (d) aid or encourage any
unauthorized use or commercial exploitation of Proprietary
Information or Proprietary Materials, (e) file any patent
applications disclosing or claiming any Proprietary
Information, or (f) fail to report to Interline any
infringement or misappropriation of Proprietary Information or
Proprietary Materials known to Licensee or a Sublicensee.
Licensee and Sublicensees shall not disclose to any third party
any of the terms, provisions or conditions of this Agreement or
the Unit Purchase Agreement except as required by law or
government regulation.
8.3 Employees. Licensee and Sublicensees may disclose
Proprietary Information to their employees and allow them
access to Proprietary Materials on a need to know basis for
purposes related to this Agreement and/or for operation of the
Units within the Territory; provided, however, that Licensee or
the Sublicensee first obtains from each such employee a written
agreement to abide by and respect the restrictions and
obligations of this Section 8. Said written agreement shall be
in a form reasonably acceptable to Interline.
8.4 Disclosure to Independent Contractors. Interline
shall not unreasonablent contractors, to the extent that such
disclosure is necessary for the installation, erection,
assembly, start-up, operation and/or maintenance of a Unit.
Licensee or the Sublicensee must first obtain the written
agreement of the independent contractor to abide by and respect
the restrictions and obligations of this Section 8. Said
written agreement shall be in a form reasonably acceptable to
Interline.
8.5 Return of Proprietary Materials. Upon termination of
the License for any reason, Licensee and Sublicensees shall
immediately deliver to Interline (or otherwise dispose of in
accordance with Interline's reasonable instructions) any and
all Proprietary Materials in the possession or control of
Licensee or any Sublicensee or any of their employees or
independent contractors. Licensee and Sublicensees shall then
certify in writing delivered to Interline that the foregoing
has been fully accomplished.
8.6 Licensee Improvements. Licensee and Sublicensees
shall not disclose any Licensee Improvement containing
Proprietary Information to any other person or entity if the
disclosure of the License Improvement would result in the
disclosure of any Proprietary Information.
8.7 Injunctive Relief. Licensee and Sublicensees
acknowledge that any breach of any of the covenants or
provisions contained in this Section 8 will give rise to
irreparable injury to Interline inadequately compensable in
damages or other legal remedies alone. Accordingly, Interline
may seek and obtain preliminary and permanent injunctive relief
and other equitable remedies against the breach or threatened
breach of said covenants or provisions. Such relief shall be
in addition to any other legal or equitable remedies which may
be available to Interline.
SECTION 9 - GOVERNMENTS AND COUNTRIES
9.1 Licensee's Responsibility. Licensee shall obtain for
the Parties all approvals, permits, licenses, etc. necessary
for this Agreement and for the performance of obligations under
this Agreement (including payments to Interline) required by
the Governments of Australia or Hong Kong or any of their
agencies or ministries or under any law, regulation, ordinance
or requirement of Australia or Hong Kong or any of their
subdivisions.
9.2 Export Act. Licensee hereby warrants and certifies
that no part of Disclosed Information or Licensed Technology
shall be made available or exported by Licensee or any
Sublicensee to any country in contravention of any law or
regulation of the United States, including the Export
Administration Act of 1979 and regulations relating thereto.
This Agreement and Interline's obligations hereunder are
subject to such laws and regulations.
9.3 Impairment by Government Regulation. In the event
that the government of Australia or Hong Kong or the United
States, or any agency, ministry or subdivision thereof, has,
adopts or interprets any measure, regulation or law which is in
conflict with the terms of this Agreement or which has the
effect of impairing the object of this Agreement, either Party
may propose negotiations for an appropriate modification of
this Agreement. The Parties shall in good faith attempt to
agree upon an appropriate modification giving effect as closely
as possible to the original intent.
9.4 Different Customs, Laws and Languages. Licensee
acknowledges that Australia and Hong Kong are at a great
distance from Interline, and have customs and laws which are
foreign to and unknown by Interline. Accordingly, in an effort
to help Interline in its performance of its obligations,
Licensee shall assist Interline in dealing with any problems
arising from such distance and differences.
SECTION 10 - GENERAL PROVISIONS
10.1 Attorneys' Fees. In the event of any litigation or
arbitration between the Parties, the prevailing Party shall be
entitled to recover from the nonprevailing Party any and all
costs, including reasonable attorneys' fees, incurred by the
prevailing Party. Such relief shall be in addition to any
other relief, award or damages to which the prevailing Party
may be entitled.
10.2 Severability. In case any one or more of the
provisions contained herein shall, for any reason, be held to
be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement, and this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision(s) had never been contained herein; provided that
such invalid, illegal or unenforceable provision(s) shall first
be curtailed, limited or eliminated to the extent necessary to
remove such invalidity, illegality or unenforceability with
respect to the applicable law as it shall then be applied.
10.3 Governing Law. This Agreement shall be governed,
construed and enforced in accordance with the laws of
Australia. Licensee warrants to Interline that this Agreement
does not include any provision which is contrary to, or invalid
or unenforceable under, the laws of Australia. Any litigation
or arbitration between the Parties involving Interline shall be
conducted exclusively in Australia. The Parties hereby submit
to such jurisdiction and venue. Such jurisdiction and venue
shall be exclusive.
10.4 Final Agreement. This Agreement constitutes the
final and complete agreement between the Parties concerning the
subject matter of this Agreement and supersedes all prior
agreements, understandings, negotiations, letters of intent and
discussions, written or oral, between the Parties with respect
thereto. Any modification, revision or amendment of this Agre
Any waiver of, or promise not to enforce, any right under this
Agreement shall not be enforceable unless evidenced by a
writing signed by the Party making said waiver or promise.
10.5 Waiver. Any waiver of, or promise not to enforce, any
right under this Agreement shall not be enforceable unless envidenced by a
writing signed by the Party making said waiver or promise.
10.6 Headings. The headings in this Agreement are for the
purpose of convenience only and shall not limit, enlarge or
affect any of the covenants, terms, conditions or provisions of
this Agreement.
10.7 Language. The language used in this Agreement shall
be deemed to be the language chosen by the Parties to express
their mutual intent, and no rule of strict construction shall
be applied against any Party.
10.8 Notices. All notices, requests, consents, demands
and other communications under this Agreement must be in writing
and shall be sent to the Parties at the addresses set forth
below, or to such other person and place as any Party may
designate for itself by notice to the other Parties:
Interline: Interline Hydrocarbon Inc.
350 West A Street, Suite 204
Casper, Wyoming 82601
U.S.A.
Attention: President
With a copy to:"Interline Legal Department"
160 West Canyon Crest
Alpine, Utah 84004
U.S.A.
Licensee: Sinpatic Enterprises Ltd.
11/F, Tower 2, The
Gateway 25-27 Canton
Road Kowloon, Hong Kong
10.9 Force Majeure. Except for obligations to make
payment, no Party shall be liable to the other Party for any
failure of (or delay in performance of) its obligations
hereunder due to any cause or circumstance which is beyond its
reasonable control including, but without limiting the
generality of the foregoing, any such failure or delay that is
caused by strike, lockout, labor shortage, unavailability of
personnel, equipment or parts, fire, explosion, shipwreck, act
of God or the public enemy, war, riot, interference by the
military or governmental authorities, or compliance with the
laws of the United States or with the laws or orders of any
applicable government authority.
10.10 English Language. All communications between
the Parties concerning anything within the scope of this
Agreement (including disclosures and the exchange of Licensee
Improvements and Interline Improvements and any litigation or
arbitration) shall be in the English language. This Agreement
is written in the English language and no translation of this
Agreement into any other language shall supersede this English
language version of the Agreement.
10.11 Assignments. Licensee has neither the right nor
the power to assign this Agreement or any rights hereunder
without first obtaining the written consent of Interline.
Interline shall not withhold consent if the assignment is to a
person or entity who: (a) acquires the Units, (b) delivers to
Interline a written acceptance of this Agreement and Licensee's
obligations thereunder, and (c) demonstrates to Interline's
reasonable satisfaction is financially stable and able to meet
such obligations. Interline may assign this Agreement to a
successor who acquires substantially all of Interline's
ownership interests in the Interline Technology.
10.12 Delegation of Duties. Interline may delegate
duties and otherwise render its performance under this Agreement
through independent contractors selected by Interline.
10.13 Relationships. Licensee is not a partner, joint
venturer, agent or representative of Interline.
10.14 Termination Option. If government approval of
this Agreement is required (see Paragraph 9.1), but not obtained,
either Party may terminate this Agreement by written notice to
the other Party. In the event of such termination, Section 8
shall survive and Paragraph 3.5 shall apply.
10.15 Insolvency, Bankruptcy. If Licensee becomes
insolvent, makes any assignment of its assets or business for
the benefit of creditors, or if a trustee or receiver is
appointed to administer or conduct its business or affairs, or
if it is adjudged in any legal proceeding to be either a
voluntary or involuntary bankrupt, or if anything substantially
similar to the foregoing occurs under the laws and practices of
Australia, then all the rights granted to Licensee herein
(including the License) shall forthwith cease and terminate
without prior notice or legal action by the other Party. If
Interline becomes insolvent, makes any assignment of its assets
or business for the benefit of creditors, or if a trustee or
receiver is appointed to administer or conduct its business or
affairs, or if it is adjudged in any legal proceeding to be
either a voluntary or involuntary bankrupt, or if anything
similar to the foregoing occurs under the laws and practices of
the United States, then Licensee's license and rights under the
License Agreement may not be terminated as a result thereof.
10.16 Construction and Interpretation. This Agreement is
written in the English language and shall be construed and
interpreted in accordance with such language, regardless of any
translations that may be prepared or executed. All references
to weights, measurements, volumes, capacity and amounts, shall
be definitions applied pursuant to the laws and standards of
the United States of America. All references to "Dollars",
"$", money or funds in this Agreement mean dollars of the
United States of America. All payments to Interline by
Licensee under this Agreement shall be in lawful money of the
United States of America.
10.17 Non-Frustration, Other Instruments, Further
Assurances. No Party to this Agreement shall commit any act or
take any action which frustrates or hampers the rights of the
other Party under this Agreement. Each Party shall act in good
faith and engage in fair dealing when taking any action under
or related to this Agreement. The Parties agree to execute any
other documents, instruments, or writings as may be reasonably
required in connection with the performance of this Agreement
and the realization of the benefits and protections hereof.
10.18 Execution. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one
and the same instrument. The individuals signing below
represent that they are duly authorized to do so by and on
behalf of the Party for whom they are signing.
AGREED TO AND ACCEPTED BY:
THE COMMON SEAL of )
SINPATIC ENTERPRISES LTD. )
is affixed in accordance with )
its articles of association )
in the presence of: )
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
Name of Authorized Person Name of Authorized Person
________________________________ ______________________________
Office Held Office Held
INTERLINE HYDROCARBON, INC.
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
Name of Authorized Person Name of Authorized Person
________________________________ ______________________________
Office Held Office Held
<PAGE>
EXHIBIT A
PATENTS
U.S. Patent
U.S. Patent No. 5,286,380
"Apparatus for Contaminated Oil Reclamation"
Issued: February 15, 1994
Inventor: Craig R. Mellen
U. S. Patent Application
Serial No. 08/197,473
"Process for Contaminated Oil
Reclamation" Filed: February 15,
1994 Inventor: Craig R. Mellen
Serial No. 08/532,707
"Removal of Contaminants From Oil"
Filed: October 13, 1995
Inventors: Craig R. Mellen, Albert L.
Jordan, Gearle D. Brooks, Kevin
K. Norton, Curtis E. Morgan and
Robert J. Snow
International Patent Application
No. PCT/US95/01861
"Removal of Contaminants From Oil"
Priority Date: February 15, 1994
Inventors: Craig R. Mellen, Albert L.
Jordan, Gearle D. Brooks, Kevin
K. Norton, Curtis E. Morgan and
Robert J. Snow
<PAGE>
EXHIBIT B
SOFTWARE AND DOCUMENTATION
<PAGE>
EXHIBIT C
SUBLICENSE
("Sublicensee") shall be, and is hereby made, a "Sublicensee"
under the "License" and License Agreement dated August 24,
1996 to which this Exhibit C is attached. As a precondition
to such sublicense, Sublicensee agrees to respect and abide by
the License Agreement and to comply with all obligations of
Sinpatic Enterprises Ltd. ("Licensee") under the License
Agreement.
AGREED TO AND ACCEPTED BY:
THE COMMON SEAL of )
)
)
("Sublicensee") )
is affixed in accordance with )
its articles of association )
in the presence of: )
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
Name of Authorized Person Name of Authorized Person
________________________________ ______________________________
Office Held Office Held
THE COMMON SEAL of )
SINPATIC ENTERPRISES LTD. )
is affixed in accordance with )
its articles of association )
in the presence of: )
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
Name of Authorized Person Name of Authorized Person
________________________________ ______________________________
Office Held Office Held
INTERLINE HYDROCARBON, INC.
________________________________ ______________________________
Signature of Authorized Person Signature of Authorized Person
________________________________ ______________________________
June 19, 1996
Mr. Michael R. Williams
Interline Resources Corporation
160 W. Canyon Crest Road
Alpine, Utah 84004
Re: Letter Agreement - Termination of License and Technology
Disclosure Agreement and Related Agreements
Dear Mike:
This letter (hereinafter "Letter Agreement") will serve
as an agreement governing the termination of certain
agreements between Interline Resources Corporation
(hereinafter "Interline"), and Q Lube, Inc., a Delaware
corporation which assigned its interest therein to Quaker
State Resources, Inc., a Nevada corporation, which
subsequently changed its name to Genesis Petroleum, Inc.
(hereinafter "Genesis"), and Genesis Petroleum-Salt Lake,
L.L.C. (hereinafter "L.C.") including that certain License
and Technology Disclosure Agreement ("License Agreement")
dated September 13, 1994, the Unit Purchase Agreement dated
September 13, 1994, all Letters of Understanding or other
agreements between the parties, together with all amendments
and/or collateral agreements relating thereto. The date
Interline executes this Letter Agreement shall be referred
to herein as the "Effective Date."
With respect thereto, the parties agree as follows:
1. Sale of Unit and Equipment. Genesis agrees that
upon payment in full of the amounts set forth in Paragraph 2
below, Genesis and/or its affiliates shall transfer and
convey to Interline Resources, Inc., title in and to the
Unit and all other assets or improvements located at Woods
Cross, Utah site (the "Premises") which are owned by Genesis
or its affiliates, including without limitation, the
following:
a. Unit (as defined in the Unit Purchase Agreement);
b. Distillation tower(s);
c. Flare;
d. All site improvements;
e. All ancillary equipment;
f. Lab and all lab equipment; and
g. All interest of Genesis as a member of the L.C.
2. Interline Payment. As payment for the assets
referenced in Paragraph 1, and as partial reimbursement for
exclusivity fees as provided in the License Agreement and
reimbursement of costs incurred by Genesis and its
affiliates in organizing the L.C., obtaining permits,
purchasing equipment and fixtures, completing improvements
at the site, and supplying operating capital which remains
in the L.C. account, Interline shall pay to Genesis the sum
of Two Million Six Hundred Twenty Seven Thousand Nine
Hundred Eleven Dollars ($2,627,911.00), less the offset
agreed upon in Paragraph 6 below. In addition, Interline
shall pay Genesis Rent in the amount of One Hundred Twenty
Five Thousand Dollars ($125,000.00), Accounting Fees in the
amount of Two Thousand Dollars ($2,000.00) and the current
balance for Intercompany Accounts net of capital
contributions as of May 31, 1996. As of May 31, 1996 the
Intercompany Account balance was One Hundred Sixty Five
Thousand Nine Hundred Twenty Five Dollars ($165,925.00).
Said Intercompany Account balance shall be adjusted to
account for L.C. activities and adjustments from June 1,
1996 through June 19, 1996. Such amount shall be payable
within one hundred twenty (120) days from the Effective
Date. If such amount is not paid when due, Genesis shall be
entitled to all remedies at law or equity, shall be entitled
to interest on the unpaid balance at the rate of Twelve
Percent (12%) per annum and shall be entitled to recover all
costs incurred in enforcing this agreement, including
reasonable attorneys fees.
3. Unit Operations. Notwithstanding the provisions
of Paragraph 2 above, the L.C. and/or its affiliates shall
continue to be the sole operator of all Unit operations
located on or about the Premises, until payment in full of
all amounts set forth in Paragraph 2 above has been received
by Genesis. Interline shall be entitled to all profits and
obligated for all loses incurred from June 19, 1996 forward.
In addition to the payment referenced in Paragraph 2,
Interline agrees to reimburse Genesis, the L.C. and/or their
affiliates for all reasonable expenses incurred by Genesis
and/or the L.C. and their affiliates in the operation of the
Unit, Unit related equipment, and all other assets at the
Premises from and after the Effective Date of this Letter
Agreement. Such expenses shall be reconciled on a monthly
basis, and all reimbursements shall also be made on a
monthly basis within Ten (10) days after Interline receives
notice of such expenses. Notwithstanding the foregoing
provision, Interline shall have the right to pre-approve
extraordinary expenses incurred by Genesis, the L.C. and
their affiliates in connection with the above-referenced
operations; however, Genesis and the L.C. will not be
required to seek the prior approval of Interline for
reasonable and/or standard operating expenses.
4. Indemnity. Interline hereby agrees to indemnify
and hold Genesis and its affiliates harmless from any or all
liabilities or claims, including all court costs and
attorney's fees, that may result from any claim arising from
or relating to the operations of the Unit, Unit related
equipment, and all other assets located at or about the
Premises, including, but not limited to, the handling, sale
and disposal of materials at the Premises from and after the
date Genesis or any of its affiliates transfers title in and
to the Unit and related equipment as provided in Paragraph 1
above, and transfers control of the Unit and its operation
to Interline. Genesis and its affiliates will give
Interline prompt written notice of the claim and the right
to defend and settle the claim. Genesis and its affiliates
will reasonably cooperate with Interline in the defense and
settlement of the claim. Interline shall be permitted to
select reasonable counsel of their choice, subject to the
approval of Genesis, which approval shall not be
unreasonably withheld. The Intercompany Accounts balance
referenced in Paragraph 2 already contains an accrual for
disposal of materials. As a result, Genesis will have no
further liability for any materials requiring disposal,
including, but not limited to, contaminated water and
solids.
5. Right to "Genesis" Name. Interline agrees that
prior to the transfer by Genesis of all of its membership
interest and other right and title in and to the L.C.,
Genesis shall cause the L.C. to return to Genesis all of the
L.C.'s rights in and to the name "Genesis Petroleum-Salt
Lake", and Interline shall have thirty (30) days from the
date of such transfer to acquire and register a new name for
the L.C.
6. Interline Stock. On the Effective Date, the
parties shall offset the sum of Six Hundred Thousand Dollars
($600,000.00) against the amounts due and owing from
Interline to Genesis pursuant to Paragraph 2 herein. In
exchange for this offset, on the Effective Date hereof,
Interline shall transfer to Genesis .769 percent of the
issued and outstanding common stock of Interline
(hereinafter "Stock".)
7. Termination of Agreements and License Rights. The
parties agree that the Unit Purchase Agreement shall be
terminated on the Effective Date hereof. The Parties
further agree that all rights of Genesis and its affiliates
in and to the licenses granted in the License Agreement
shall be terminated effective upon receipt of the payment of
all sums set forth in Paragraph 2 above. At such time, all
of the agreements referred to in the first paragraph of this
Letter Agreement shall be terminated and neither party or
its affiliates shall have any obligation or liability to the
other party or its affiliates, except as set forth in this
Letter Agreement. Provided, however, in the event such sums
are not timely paid, Genesis and its affiliates shall retain
all license rights in the License Agreement, specifically
including the right to operate the existing Unit. The
confidentiality provisions contained in Paragraph 13.1 of
the License Agreement shall survive termination.
8. Further Assurances. The parties agree to act in
good faith to accomplish the intent of this agreement and to
execute all further documents as may be hereafter required
to effectuate and carry out the intent and terms of this
Agreement.
In the event the foregoing is an acceptable recitation
of the facts and agreements of the parties, and if Interline
is in full agreement therewith, please execute this Letter
in the place duly provided below, and return the Letter to
me as soon as possible.
Sincerely,
GENESIS PETROLEUM, INC.
Shane D. Smoot
<PAGE>
ACKNOWLEDGMENT
Interline Resources Corporation has read the terms of
the foregoing Letter Agreement governing the terminating of
all prior agreements between the parties, and, with the
intent that such provisions and terms contained in the
Letter Agreement be legally binding, do hereby fully consent
and agree to the terms of the Letter Agreement.
INTERLINE RESOURCES CORPORATION
By:________________________________
Its:_______________________________
Date:______________________________
SUBSIDIARIES OF INTERLINE RESOURCES CORPORATION
Interline Hydrocarbon, Inc.
Subsidiaries: Interline (UK) Limited (40% ownership)
Genesis Petroleum - Salt Lake City L.L.C. (26% ownership)
Interline Energy Services, Inc.
Subidiaries: Interline Crude Gathering Company
NRG Fuels, Inc.
Subsidiaries: Interline Transportation Company
Gagon Mechanical Contractors, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS DOCUMENT CONTAINS SUMMARY FINANCIAL INFORMATION FROM INTERLINE RESOURCES
CORPORATION DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERNECE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,090,810
<SECURITIES> 0
<RECEIVABLES> 2,641,848
<ALLOWANCES> 323,187
<INVENTORY> 55,748
<CURRENT-ASSETS> 3,685,021
<PP&E> 14,618,162
<DEPRECIATION> 3,268,578
<TOTAL-ASSETS> 17,112,679
<CURRENT-LIABILITIES> 11,300,835
<BONDS> 0
0
0
<COMMON> 70,371
<OTHER-SE> 3,912,173
<TOTAL-LIABILITY-AND-EQUITY> 17,112,679
<SALES> 17,011,792
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</TABLE>
