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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, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-18995
INTERLINE RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0461653
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
160 West Canyon Crest Road, Alpine, UT 84004
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(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
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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
$4,827,969.
As of April 6, 1998, 14,074,160 shares of the Issuer's common stock were
issued and outstanding, 9,110,934 of which were held by non-affiliates. As of
April 6, 1998, the aggregate market value of shares held by non-affiliates
(based upon the closing price) was approximately $2,004,405
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Interline Resources Corporation (the "Company"), a Utah corporation, is
engaged through its wholly-owned subsidiaries, in commercializing used oil
refining technology, and in operating oil and gas properties and businesses. On
September 26, 1997, the Company filed a Petition for Reorganization under
Chapter 11 (the "Petition") of the United States Bankruptcy Code. The Company is
continuing with its operations as a debtor-in-possession under the Bankruptcy
Code. The Company's subsidiaries did not join the Company in the Petition and
are not directly involved in the Bankruptcy Reorganization Proceeding, however,
because the Company operates through its subsidiaries, the bankruptcy
reorganization will substantially impact the subsidiaries. During the time the
Company is in the Bankruptcy Proceeding, it will be subject to the jurisdiction
of the U.S.
Bankruptcy Court.
On January 23, 1998, the Company filed a Proposed Plan of Reorganization
and Proposed Disclosure Statement to the Plan of Reorganization with the U.S.
Bankruptcy Court that management believes will permit it to reorganize and
provide for payment to creditors and preserve the interest of its shareholders.
A hearing is scheduled with the United States Bankruptcy Court for the District
of Utah, Central Division, for the approval of the Disclosure Statement on May
6, 1998 at 10:00 am.
Some of the information provided in the Proposed Plan of Reorganization
and the Proposed Disclosure Statement to the Plan of Reorganization are
considered forward looking statements within the meaning of Section 27A of the
Securities Act of 1993 and Section 21E of the Securities Exchange Act. Although
the Company's management believes that the expectations reflected in the plan
are reasonable, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its business
or results of operations. Such expectations involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by forward looking
statements.
Based on the following, there can be no assurance that the Company will be
able to develop a reorganization plan which will be acceptable to its creditors
and which will leave the Company with sufficient assets to continue its
operations. There can be no assurance that the Company will not be required to
liquidate and discontinue its operations.
<PAGE>
The Company's current operating subsidiaries are (1) Interline Energy
Services, Inc.("Interline Energy") a Wyoming corporation which manages the
Company's oil and gas operations located in Wyoming and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
Interline Energy Services - Oil and Gas Operations.
The Company has been engaged in the oil and gas industry since 1990. Its
oil and gas operations primarily involve natural gas gathering, natural gas
processing, a crude oil pipeline operation, and oil well production. The
Company's main oil and gas operations are located in east- central Wyoming.
Wyoming operations, located near Douglas, include the Well Draw Gas Plant, a
crude gathering pipeline, a 20.4% interest in the Hatcreek Partnership, NGL
trucking and four producing oil and gas wells.
Well Draw Gas Plant
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 gallon of NGLs each 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 approximately 25 million gallons of NGLs per year, ending
June 1, 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 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 1997, the
Company processed an average of 50,250 gallons per day of NGLs under the Amoco
contract. The Plant processed a total average of 73,425 gallons per day of NGLs
for 1997, including outside sources and liquids from the pipeline. The Amoco
contract accounted for 68.4% of the total NGLs processed by the Plant.
Conoco Pipeline
The Conoco Pipeline, purchased by the Company from Conoco Pipeline Company
in January of 1995 is a 180 mile crude gathering and trunk pipeline with
associated pumping stations and storage tanks. The pipeline transports oil from
oil producing fields in Converse County, Wyoming
<PAGE>
to Conoco's Lance Creek Station where it connects with an interstate crude oil
pipeline system. The Company receives revenues from operation of the Conoco
Pipeline by charging a transportation fee. The pipeline gathered and transported
approximately 301,089 barrels of crude during 1997.
Hat Creek Partnership
The Hat Creek Partnership, of which Interline Energy owns a 20.4%
interest, owns working interests in two oil and gas wells and a 13 mile
gathering line interconnected to the Well Draw Gas Plant. The Company receives
revenues from sales of oil and gas from the oil wells.
Oil Well Production
The Company owns working interests in four wells located in Converse
County, Wyoming. The Company is also the operator of these wells. During 1997,
the wells produced approximately 7,640 barrels of oil and 20,960 Mcf of natural
gas.
NGL Trucking Operations
The Company entered the NGL transportation business to truck liquids for
Amoco Production Company. In the last five years, the Company has greatly
increased its transportation of NGLs and finished product in the Rocky Mountain
region. In the last five 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 646,931
miles per year, carrying a total of 18 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.
Utah Operations
On May 1, 1997, Interline sold its Utah oil and gas operations to Questar
Gas Management Company, a subsidiary of Questar Corporation, for $4 million. The
Company's Utah oil and gas operations were located near Roosevelt, Utah, and
included the Monument Butte Gathering System and the Roseland Wells.
Interline Hydrocarbon - Used Oil Refining.
In January, 1993, the Company acquired certain patent rights to a
reprocessing technology from Petroleum Systems Inc., ("PSI") with the right to
exclusively manufacture, market, use, license, sub-license, and fully
commercialize the patented technology as it relates to the field of
hydrocarbons. Since then, the Company has entered into the following described
transactions:
<PAGE>
Genesis Petroleum
On January 20, 1998 the United States Bankruptcy Court for the District of
Utah approved a settlement agreement between the Company and Genesis Petroleum.
The Company and Genesis were joint ventureres in an used oil refinery located in
Salt Lake City, Utah. The settlement agreement provided for, among other things,
the following: 1) the litigation between them was terminated; 2) Interline paid
Genesis the sum of $750,000; 3) the Company granted Genesis a license to build
and operate three additional used oil refineries using the technology assigned
to it by PSI without the payment of any royalties or other payments to the
Company; 4) the Company transferred all of its rights in the joint venture and
in the Salt Lake Refinery to Genesis; and, 5) all previous agreements between
the Company and Genesis were terminated.
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 refinery in Stoke, England. As part of the transaction, the Company
executed a licensing agreement with the joint venture giving it the right to
own, operate and practice the Interline used oil technology. The terms of the
joint venture provided the Company a 40% ownership interest, and under the
license agreement, the right to receive a 6 cent gross royalty per gallon of oil
processed. The refinery was completed in early 1996 and officially opened in
July 1996. The refinery, with a capacity to process 24,000 gallons of used oil
per day, is in current production. In April of 1997 the Company sold its 40%
interest in the joint venture to John Wheland for $500,000. Whelan is now the
sole owner of the used oil refinery in Stoke-on-Trent, and is authorized to use
the Interline technology under the original licensing agreement. As a result of
the realities of the pricing structure in England for used oil products, and the
higher than expected operating costs to operate the England plant, the 6 cent
royalty called for in the license agreement was reduced to 3 cents and is not
payable until the refinery is profitable. To date, the Company has not received
any royalty revenue from the English plant. Further, John Wheland has only paid
$200,000 of the purchase price and while the Company has demanded payment of the
remaining purchase price the payment remains in dispute. While the Company
believes that a settlement of the disputed payments is likely, there can be no
assurance that an agreement will be reached. In such an event the Company will
seek a legal remedy.
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 and
installation and start up was completed in July of 1997. In April of 1997 the
Company signed a marketing agreement with Dukeun allowing them to be the only
company other than Interline to market the Company's technology in South Korea,
Japan and China.
<PAGE>
In exchange for the marketing rights, Dukeun paid the Company $400,000. For
every unit the Company sells through Dukeun's marketing efforts, the Company
will pay Dukeun a commission of approximately 10 percent of the purchase price
of the plant. The term of the marketing agreement is for 10 years. Additionally,
an amendment to the original license agreement relieves Dukeun of its obligation
to pay a royalty to the Company for this first Dukeun Refinery built in Seoul .
The Company has had only limited contact with the Dukeun Plant and its
operations since September of 1997 when the Company's final start-up employee
returned to the U.S. The Company had expressed concerns as to the abilities of
the operators hired by Dukeun to run the plant and to trouble shoot the
operational problems attendant to the design of the facility. In March of 1998,
a representative of the Company visited the facility and found that they were
having many operational problems and was only using the front end processing
portion of the Plant due to the fouling of the distillation part of the process
caused by excessive carry over of residuum from the first phase processing
equipment. As a result, the Dukeun Plant is only producing a first phase oil
that is suitable for burning.
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 has
been shipped to Australia and installation has commenced with production
expected to commence by August of 1998.
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.
On July 16, 1997, Transpacific announce that it had formed a new
Australian national used oil collection, recycling and refining company called
National Oil Pty. Ltd. with Shell Australia Ltd., and Mobil Oil Australia Ltd.
Transpacific Industries owns 50 percent of National, and Shell and Mobil each
own 25 percent interest. National will be the owner and operator of the
Interline Refinery constructed in Sydney.
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 Company 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.
<PAGE>
The first refinery under the Gadgil Western's exclusive agreement 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, and
to the best knowledge of the Company, the refinery was shutdown. Gadgil Western
has failed to fulfilled the terms of its exclusive license (as reported in the
1995 and 1994 FORM 10-KSB) and is therefore in breach of the agreement and the
Company has treated it as terminated. The Company has not received any royalties
from Gadgil Western nor does it expect to.
Gagon Mechanical - Construction and Manufacturing.
Prior to May 1997, the Company was actively involved in construction projects
(primarily the construction of the Company's used oil refineries) through Gagon
Mechanical, Inc., a wholly-owned subsidiary of the Company. In an attempt to
reduce overhead, the Company's management terminated the operations of Gagon
Mechanical in May 1997. The former president of Gagon Mechanical formed his own
company (G-EPIC, Inc.) to continue with the projects initiated by Gagon
Mechanical. The Company contracted with G-EPIC, Inc. to finish construction of
the refinery for Transpacific Group of Companies of Australia. Substantially all
of the parts for the refinery have been shipped to Australia, and the Company
believes that installation and startup will be complete by August of 1998.
With the desire to wind up the business of Gagon Mechanical and to liquidate its
assets to aid the Company in its plan of reorganization under Chapter 11, the
Company has sought to sell the Gagon Mechanical building, located in Sandy,
Utah, and has received and accepted an offer for $885,106. Net proceeds to the
Company after paying approximately $53,000 for real estate commissions, $4,000
for real property taxes, $8,800 for title insurance and $267,190 for a first
trust deed, the Company will net approximately $552,116. After complying with
the notice requirements of the Bankruptcy Court, the Company believes the sale
will close on or before June 1, 1998.
In connection with the sale of the Sandy building, the Company had the
obligation to remove and clean up all of the various construction materials,
equipment, parts, piping, salvaged equipment as well as the Company's Pilot
Plant including the battery equipment and piping from the premises.
Additionally, all construction equipment associated with the construction and
manufacturing activities carried out by Gagon Mechanical located at the Sandy
building needed to be sold and/or otherwise removed. After receiving a
competitive bid, the Company entered into an agreement to sell the construction
equipment, parts and salvage materials to G-EPIC, Inc., for the sum of $65,000
and G-EPIC's obligation to clean, remove, salvage and otherwise reclaim the
construction yard as well as to place the building in an acceptable condition
for the purchaser. After complying with the notice requirements of the
Bankruptcy Court, the Company believes the sale will close on or before June 1,
1998.
<PAGE>
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.
The Company's main focus is to license and provide technical services to
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.
<PAGE>
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; and (5) the regulation of
underground storage tanks and pits under the Subtitle I of the Resources
Conservation and Recovery Act.
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 utilization 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.
<PAGE>
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, and oil and gas
production. 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, 1998, the Company and its subsidiaries employed 24 full-time
employees and 1 part-time employee, compared to 52 full-time employees as of
March 15, 1997. 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. The Company has entered into a rental agreement with the law firm of
Gregeory, Johnson & Barton on a month to month basis to rent a portion of the
Company's Alpine office.
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.
<PAGE>
The Hat Creek Partnership, of which Interline Energy Services owns 20.4%,
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 owns working interests in 4 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.
In connection with its NGL trucking activities, Interline Energy Services
leases four tractors and owns eight trailers.
ITEM 3. LEGAL PROCEEDINGS
Genesis Petroleum Inc. The Company has previously reported a lawsuit that
had been filed against it in the Third Judicial District Court of Salt Lake
County, State of Utah, by Genesis Petroleum Inc. ("GPI") for breach of a Sale
and Purchase Agreement. Under the Agreement, the Company agreed to purchase
GPI's interest in the Salt Lake City used oil refinery that had been operated by
a joint venture owned by GPI and a subsidiary of the Company. In July 1997, the
Court granted GPI a judgment in the litigation and awarded GPI damages for
breach of contract. The Court awarded GPI damages in the amount of $2,320,836,
less an offset of the value of the assets which the Company had agreed to
purchase from GPI under the Agreement, but as a result of the Company's default,
these assets had been retained by GPI. The Company was to present evidence to
the Court as to the value of the Plant and the amount of the offset (See
Liquidity and Capital Resources). Prior to the Company presenting the Court with
such evidence, GPI and another creditor filed a Petition for Involuntary
Bankruptcy against the Company (described further below).
<PAGE>
On January 20, 1998 the United States Bankruptcy Court for the District of
Utah approved a settlement agreement between the Company and Genesis Petroleum.
The Company and Genesis were joint ventureres in an used oil refinery located in
Salt Lake City, Utah. The settlement agreement provided for, among other things,
the following: 1) the litigation between them was terminated; 2) Interline paid
Genesis the sum of $750,000; 3) the Company granted Genesis a license to build
and operate three additional used oil refineries using the technology assigned
to it by PSI without the payment of any royalties or other payments to the
Company; 4) the Company transferred all of its right in the joint venture and in
the Salt Lake Refinery to Genesis; and, 5) all previous agreements between the
Company and Genesis were terminated.
Petroleum Systems Inc.
The Company's used oil refinery technology was acquired under the terms of
an agreement between the Company as purchaser and Petroleum Systems, Inc.
("PSI") as seller. The agreement provided for the payment of royalties to PSI
pursuant to the terms of the Agreement. The Company and PSI became involved in a
dispute as to the certain royalty matters and in connection therewith, the
Company and PSI were involved in an arbitration proceeding. On July 29, 1997,
PSI filed a lawsuit against the Company in the Third Judicial District Court of
the State of Utah seeking to reacquire all of the technology rights it had
previously assigned to the Company. The Company intends to vigorously defend
this litigation. PSI was one of the two creditors signing the Petition for
Involuntary Bankruptcy.
Involuntary Bankruptcy Petition
On July 29, 1997, PSI and GPI (described above) jointly executed a Petition
for Involuntary Bankruptcy ("Petition") against the Company. As described above,
both of such companies were involved in commercial disputes and litigation
against the Company at the time the Petition was filed. Prior to the time the
Petition was filed, GPI informed the Company that if it did not execute various
documents relating to the purchase of the Salt Lake City refinery prior to 4
p.m. on July 29, 1997, it would file the Petition. The Company did not execute
such documents by 4 p.m. on such date and GPI and PSI filed the Petition.
After the Petition was filed, GPI and PSI filed a Motion to have a Trustee
appointed to manage the Company for the duration of the Bankruptcy Petition. On
August 8, 1997, a hearing on the Motion was held in U.S. Bankruptcy Court. The
Judge dismissed the Motion on the basis that the bankruptcy law required three
creditors to sign the Petition for Involuntary Bankruptcy, but only GPI and PSI
had signed the Petition against the Company. The Company filed a motion to
dismiss the petition as being improperly filed. The court did not enter an order
for relief under Chapter 7 of the Bankruptcy Code based upon the motion to
dismiss.
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the "Petition") of the United States Bankruptcy Code. The
Company is continuing with its operations as a debtor-in-possession under the
Bankruptcy Code. The Company's subsidiaries did
<PAGE>
not join the Company in the Petition and are not directly involved in the
Bankruptcy Reorganization Proceeding, however, because the Company operates
through its subsidiaries, the bankruptcy reorganization will substantially
impact the subsidiaries. During the time the Company is in the Bankruptcy
Proceeding, it will be subject to the jurisdiction of the U.S. Bankruptcy Court.
On January 23, 1998, the Company filed a Proposed Plan of Reorganization
and Proposed Disclosure Statement to the Plan of Reorganization with the U.S.
Bankruptcy Court that management believes will permit it to reorganize and
provide for payments of creditors and preserve the interest of its shareholders.
A hearing is scheduled with the United States Bankruptcy Court for the District
of Utah, Central Division, for the approval of the Disclosure Statement on May
6, 1998 at 10:00 am.
Some of the information provided in the Proposed Plan of Reorganization and
the Proposed Disclosure Statement to the Plan of Reorganization are considered
forward looking statements within the meaning of Section 27A of the Securities
Act of 1993 and Section 21E of the Securities Exchange Act. Although the
Company's management believes that the expectations reflected in the plan are
reasonable, there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effects on its business or results of
operations. Such expectations involve know and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by forward looking statements.
Based on the following, there can be no assurance that the Company will be
able to develop a reorganization plan which will be acceptable to its creditors
and which will leave the Company with sufficient assets to continue in
operations. There can be no assurance that the Company will not be required to
liquidate and discontinue its operations.
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
Prior to July 30, 1997 the Company's common stock was 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. On July 30, 1997 AMEX halted trading of the Companys' common stock
as a result of the announcement of the filing of a petition for involuntary
bankruptcy. The Company determined not to appeal the decision. Currently, the
Company's common stock is listed in the over-the-counter market with price
quotations published on the NASD Electronic Bulletin Board.
<PAGE>
The information contained in the following table was obtained from
information obtained by a licensed stock broker 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
High Low
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 $0.75 $0.44
Second Quarter $0.81 $0.44
Third Quarter $0.63 $0.31
Fourth Quarter $0.22 $0.06
1998
First Quarter $0.31 $0.13
(Through March 23, 1998)
Record Holders of Common Stock
The number of record holders of the Registrant's common stock as of March
23 1998, is 357.
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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is engaged through its wholly-owned subsidiaries, in
commercializing used oil refining technology, and in operating oil and gas
properties and businesses. On September 26, 1997, the Company filed a Petition
for Reorganization under Chapter 11 (the "Petition") of the United States
Bankruptcy Code. The Company is continuing with its operations as a debtor-in-
possession under the Bankruptcy Code. The Company's subsidiaries did not join
the Company in the Petition and are not directly involved in the Bankruptcy
Reorganization Proceeding, however, because the Company operates through its
subsidiaries, the bankruptcy reorganization will substantially impact the
subsidiaries.
On January 23, 1998, the Company filed a Proposed Plan of Reorganization and
Proposed Disclosure Statement to the Plan of Reorganization with the U.S.
Bankruptcy Court that management believes will permit it to reorganize and
provide for payment to creditors and preserve the interest of its shareholders.
A hearing is scheduled with the United States Bankruptcy Court for the District
of Utah, Central Division, for the approval of the Disclosure Statement on May
6, 1998 at 10:00 am.
Some of the information provided in the Proposed Plan of Reorganization and the
Proposed Disclosure Statement to the Plan of Reorganization are considered
forward looking statements within the meaning of Section 27A of the Securities
Act of 1993 and Section 21E of the Securities Exchange Act. Although the
Company's management believes that the expectations reflected in the plan are
reasonable, there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effects on its business or results of
operations. Such expectations involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by forward looking statements.
Based on the following, there can be no assurance that the Company will be able
to develop a reorganization plan which will be acceptable to its creditors and
which will leave the Company with sufficient assets to continue its operations.
There can be no assurance that the Company will not be required to liquidate and
discontinue its operations.
<PAGE>
The Company's current operating subsidiaries are (1) Interline Energy
Services, Inc.("Interline Energy") a Wyoming corporation which manages the
Company's oil and gas operations located in Wyoming and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
Interline Energy Services - Oil and Gas Operations.
The Company has been engaged in the oil and gas industry since 1990. These
operations primarily involve natural gas gathering and processing, crude oil
gathering, fractionation and marketing of natural gas liquids, and oil and gas
production. In May, 1997, the Company sold its Utah gathering and production
operations to subsidiaries of the Questar Corporation of Salt Lake City, Utah,
and is now concentrating on its operations in east-central Wyoming.
During 1997, the Company's gas gathering operations in Wyoming have gone
through a transition period. As gathered natural gas volumes have continued to
decline, substantial changes were needed to optimize the pipeline system for a
lower throughput level. Two large owned compressors were sold in February and
replaced with a single leased compressor more suited for the gas volumes in the
field. Additional measurement check points and liquid cleanout facilities were
installed in order to optimize system performance.
At the Well Draw Gas Plant/Fractionator, self-generation of electric power
was replaced in February with commercial power supplied by Pacific Power and the
two gas engine generator sets were sold. This change reduced the Plant's
reliance on field gas for fuel, and also is a reflection of the declining
availability of field gas for fuel. Operations at Well Draw during 1997
continued to be geared primarily towards fractionation and marketing of natural
gas liquids trucked into the plant from various gas plants located in the
eastern half of Wyoming.
The Company buys mixed liquids from several different plants, transports
them to Well Draw, fractionates the liquids into commercial propane, butane, and
natural gasoline, and re-markets these products for its own account.
Additionally, from time to time the Company enters into agreements for
fractionation of liquids from others on a fee basis, including the Amoco
contract and others. In October KN Gas Gathering began processing approximately
20,000 gallons per day at Well Draw under an agreement which extends to March
31, 1998. The Company is negotiating to continue this service past the primary
term, however it cannot be certain that the contract will be extended. During
1997, natural gas liquids processed at Well Draw included 19,230 gallons per day
for the Company, and 54,195 gallons per day for others, as compared to 23,427
and 60,629 gallons per day respectively in 1996.
The Company's natural gas liquids transportation operation transported
approximately 18 million gallons of raw and finished products during 1997. The
Company operates four tractor-trailer- pup combination units to move unprocessed
natural gas liquids to Well Draw for fractionation, and then to take propane,
butane, and natural gasoline from Well Draw to various refiners, chemical
plants, and end-users. When time permits, these trucks also move liquids on a
common carrier basis for third parties. The Company intends to continue to
emphasize this profitable business segment, and believes that our reputation for
flexibility and customer service will allow us to maximize opportunities.
<PAGE>
One of the greatest factors impacting trucking operations is the
increasing level of regulation from the U.S. Department of Transportation
governing transportation of hazardous materials. This has required significant
increases in man-hours devoted to maintaining safe and legal operation of the
Company's equipment. A safety review and audit of the Company's operations was
performed by the D.O.T. in November, and although several minor record-keeping
discrepancies were found, no serious violations or citations were issued and no
fines were assessed. It has been and is management's expressed policy to operate
all of its businesses in a safe and legal manner.
Oil and natural gas production from the Company's wells in Wyoming
continue to be a small but profitable segment of operations. Although oil and
gas prices held up during the first three quarters of 1997, significant price
declines occurred in November and December and have continued in early 1998.
Despite these decreases, the Company intends to continue producing these wells.
Management is unaware of any significant future capital expenditures for
the future in its oil and gas operations. However, the very nature of equipment
operation, ware and tear and replacement in this type of operation can be
significant. Further, it is noted that most of the revenues earned by the Well
Draw Plant are derived from the Amoco contract which will expire in June 1,
2000. If this contract is not renewed, it will have a substantial impact on the
ability of the Well Draw plant to continue operations. Management continues to
seek other liquids and gas connections to expand and diversify its operations in
Wyoming, however, its operations are in a limited and well defined area and
expansion is difficult.
Interline Hydrocarbon - Used Oil Refining.
The Company has learned much during 1997 concerning the most commercial
way to continue in the used oil refining business. Revenues to the Company can
come from five sources: 1) profits made from constructing the Plant, 2) granting
exclusive territories to licensee, 3) receiving royalties based on either
production or a flat yearly licensing fee, 4) taking partnership interests in
operating Plants by either contributing the technology and/or making cash
contributions for partnership interests and, 5) rather than build the Plant,
sell the construction plans and provide consultation and expertise so that the
customer can build the Plant.
Based on the experiences with the four Plants that have been built by the
Company, management's current feelings are to not be in the construction
business. Further, until the Company gets in better financial condition, it is
not in a position to take interests in operating Plants. Management believes
that the best way for it to capitalize on the technology is to sell the
construction plans of a Plant and provide consultation services to the
purchaser.
It has also become evident to management that demanding royalties based on
production in many situations and countries is difficult. Unless and until the
rerefined oil produced in a Plant can be sold at higher values based on pricing
similar to base lubricating oils, on-going royalties based on production is
difficult to obtain. The most viable opportunities management has discovered are
<PAGE>
in countries that have governmental concessions resulting in economic incentives
for collecting and processing used oil. This reality has been seen in both
Korea, where the royalty was terminated for the first plant, and England where,
as described previously, the royalties were reduced and not payable until
profitable.
Management still believes that there exists economic justification and
interest in the technology. While management continues to receive inquiries
about the technology, the Company is selective as to potential purchasers. From
experience, management is aware of the complicated nature between the balance of
supply and demand. Management has become much more selective in its
consideration of selling the technology to prospective purchasers and unless
favorable conditions exist the Company discourages the purchaser. Management has
become much more active in helping potential customers evaluate their end
product sales markets.
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
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.
During 1997, the following three events have been classified and presented
in the financial statement as discontinued operations.
Salt Lake Refinery - Genesis Petroleum Inc.: As disclosed in previous SEC
filings, the Company recorded a liability for the repurchase of a used oil
refinery located in Salt Lake City, Utah from Genesis Petroleum, the original
purchaser. This liability is a result of Genesis exercising the option, provided
in the sales agreement, to require the Company to repurchase the refinery. Prior
to the option being exercised, the Company was a 26% owner of the joint venture
which operated the used oil refinery and accounted for its investment on the
equity method through June 19, 1996. The original purchaser owned the remaining
74% of the joint venture and operated the plant. The Company had consolidated
the operations of the refinery and joint venture since June 19, 1996 the date
the option was executed.
Effective September 30, 1997, the Company reclassified the operations of
the Genesis Refinery and joint venture into "discontinued operations". The
change in accounting treatment was due to the belief of Company's management
that it will not retain the refinery and ownership in the joint venture.
Subsequently, on December 23, 1997 the Company and Genesis Petroleum entered
into an agreement to settle all claims. (See Legal Proceeding) The consolidated
statement of operations presented for the year ended December 31, 1997 and 1996
reflect the revenue and expense relating to Genesis Refinery under caption
"Income (loss) from discontinued operations". The consolidated statement of
operations for year ended December 31, 1997 and 1996 reflect all
<PAGE>
assets and liabilities relating to the settlement agreement with Genesis
Petroleum under caption "Gain (loss) on disposal of discontinued operations".
The Company has also included in this caption the $750,000 due to Genesis
Petroleum under the settlement agreement which was paid on January 29, 1998.
Utah Oil and Gas Operations: As disclosed in previous SEC filings, on May
1, 1997, the Company sold all assets of its Utah oil and gas operations. The
consolidated statement of operations presented for the year ended December 31,
1997 and 1996, reflect the revenue and expense relating to these assets under
caption "Income (loss) from discontinued operations." The consolidated statement
of operations for year ended December 31, 1997 reflect all assets and
liabilities relating to the sale of the Utah oil and gas operations under
caption "Gain (loss) on disposal of discontinued operations".
Gagon Mechanical Operations: In May 1997, the Company discontinued the
operations of Gagon Mechanical. The consolidated statement of operations
presented for the year ended December 31, 1997 and 1996, reflect the revenue and
expense relating to these assets under caption "Income (loss) from discontinued
operations." The consolidated balance sheet for year ended December 31, 1997
reflect all assets and liabilities relating to the operations under caption "Net
assets of discontinued operations".
Total Revenues
In 1997, revenues decreased $2,125,827 or 30.6%, to $4,827,969 for the
year ended December 31, 1997 as compared to $6,953,796 for the year ended
December 31, 1996. This revenue decrease included a $2,105,954 or 33.0%,
decrease in oil and gas revenues; a $30,049, or 5.3%, decrease in used oil
refining revenues and a $10,176, or 184.4%, increase in other revenues. The oil
and gas revenue decrease was attributed to several liquid purchase contracts
that expired. The Company tried to negotiate new terms for these liquids, but
after considering the very low margins and the risk on the structure of the
pricing, the Company did not except the new terms. The Company's total revenues,
on a segment basis, for 1997 and 1996 were as follows:
The following table excludes any revenues generated from the assets of the Utah
oil and gas operations, Gagon Mechanical construction and manufacturing
operations, and any revenues attributed to the Salt Lake City refinery
operation. The assets of the Utah oil and gas operations were sold May 1, 1997.
Gagon Mechanical operations were discontinued in May 1997, although the Company
is subcontracting to G-EPIC, Inc. the construction of the Australia plant. The
assets of the Salt Lake Refinery were discontinued due to the Company's
agreement with Genesis Petroleum to settle all claims. The results of these
operations are reflected in the consolidated statement of operations under
caption "Income (loss) from discontinued operations".
<PAGE>
Revenues For Year Ended December 31, 1997 and 1996
1997 % 1996 %
- ------------------------------------------------------------------------------
Oil and Gas $4,280,278 88.7% $6,386,232 91.8%
Used Oil refining 531,991 11.0% 562,040 8.1%
Other 15,700 .3% 5,524 .1%
- ------------------------------------------------------------------------------
Total Revenue $4,827,969 100% $6,953,796 100%
==============================================================================
Oil and Gas Revenues
Oil and gas revenues contributed approximately 88.7% of total revenues for
year ended December 31, 1997, as compared to approximately 91.8% for year ended
December 31, 1996. Revenues decreased $2,105,954 or 33.0% to $4,280,278 for the
year ended December 31, 1997 as compared to $6,386,232 ,for year ended December
31, 1996.
The revenues presented in the above table are solely from the Company's
Wyoming operations. This revenue decrease of $2,105,954 or 33.0% is mainly
attributed to several liquid purchase contracts that expired. The Company tried
to negotiate new terms for these liquids, but after considering the very low
margins and the risk on the structure of the pricing, the Company did not except
the new terms.
Used Oil Refining Revenues
Since it commenced operations in the used oil refining business, the
Company has primarily derived revenues attributed to fees for engineering, plant
design, license, exclusively or other services associated with the Company's
used oil refining technology. The revenue attributed to the used oil refining
business varies significantly from quarter to quarter reflecting the status of
the Company's fees and plant design services.
Used oil refining revenues contributed 11.0% of total revenues for the year
ended December 31, 1997 compared to 8.1% for the year ended December 31, 1996.
These revenues decreased $30,049, or .5%, to $531,991 for the year ended
December 31, 1997 compared to $562,040 for the year ended December 31, 1996.
Revenues for 1997 was mainly derived from the marketing agreement with Dukeun
Industrial Company, Ltd. of Seoul, South Korea for $400,000, and engineering
revenues of $100,000 attributed to the Australia refinery. During 1997, the
Company received no revenues for royalties for it used oil technology.
The results of the Salt Lake City refinery operations are reflected in the
consolidated statement of operations under the caption "Income (loss) from
discontinued operations".
<PAGE>
Direct Costs
Direct costs decreased $2,111,070, or 36.1%, to $3,734,992 for the year
ended December 31, 1997 compared to $5,846,062 for the year ended December 31,
1996. The decrease of $2,111,070 for the year ended December 31, 1997 was mainly
attributed to a decrease in the Company's oil and gas revenues. As a percent of
revenues, direct costs decreased to 77.4% for the year ended December 31, 1997
compared to 84.1% for the year ended September 31, 1996. This 6.7% of revenue
decrease is mainly attributed to a decrease in revenue associated with the oil
and gas operations. The liquid contracts associated with the reduction in the
Company revenues, carried lower profit margins then compared to the Company's
existing liquid contracts.
Selling, General and Administrative
Selling, general and administrative expenses decreased $294,641, or 16.8%,
to $1,455,092 for year ended December 31, 1997 compared to $1,749,733 for the
year ended December 31, 1996. As a percent of revenues, selling, general and
administrative expenses were 30.1% for the year ended December 31, 1997 compared
to 25.2% for the year ended December 31, 1996. During the first and second
quarter of 1997, the Company's management developed a plan to increase cash flow
and reduce expenses. Part of the plan included a reduction of personnel,
including both management and operations personnel. During 1997, the Company
reduce 3 management positions and 25 operational positions. The Company did see
outside legal fees increase $48,423, or 52.1%, to $141,352 for the year ended
December 31, 1997 compared to $92,929 for the year ended December 31, 1996. This
$48,423 increase was attributed to the Company's legal proceedings and
bankruptcy filing.
Depreciation and Amortization
Depreciation and amortization expenses decreased $69,022, or 8.4%, to
$756,478 for the year ended December 31, 1997 compared to $825,500 for the year
ended December 31, 1996. As a percent of revenues, depreciation and amortization
expenses increased to 15.7% for the year ended December 31, 1997 compared to
11.9% for the year ended December 31, 1996.
Research and Development
Research and development expenses decreased $460,027, or 74.6%, to $156,446
for the year ended December 31, 1997 compared to $616,473 for the year ended
December 31, 1996. As a percent of revenues, research and development expenses
decreased to 3.2% for the year ended December 31, 1997 compared to 8.9% for the
year ended December 31, 1996.
Research and development expenses were mainly attributable to the
development and enhancement of the Company's used oil refining technology. The
Company will continue to incur research and development expenses as it continues
to develop its used oil refining technology.
<PAGE>
Write-down of asset value
Write-down of asset value increased $325,574, or 86.9%, to $ 700,428 for
the year ended December 31,1997 compared to $374,854 for the year ended December
31, 1996. The write-down of asset value for 1997 was attributed to a write-down
of the Company's marketing and technology rights relating to its used oil
technology. The write down is based on the following facts: 1) the Western Plant
is not in operation and the Company receives no royalty 2) under the terms of
the Genesis Settlement, Interline receives no royalty income, 3) the Korean
Plant royalty has been rescinded, and 4) the English Plant royalty has been
reduced and is not payable until profitable. The Company does have an
expectation of receiving royalties from the Australia Plant.
(Loss) from operations
Loss from operations decreased $483,359, or 19.7 to $1,975,467 for the year
ended December 31, 1997 compared to a $2,458,826 loss for the year ended
December 31, 1996. The $483,359 decrease was mainly attributed to a decrease in
selling, general and administrative expense of $294,641, or 16.8%, to $1,455,092
for the year ended December 31, 1997 compared to $1,749,733 for the year ended
December 31, 1996. The Company also decrease research and development expenses
by $460,027, or 74.6%, to $156,446 for year ended December 31, 1997 compared to
$616,473 for year ended December 31, 1996.
Other income (expenses)
Interest expenses decrease $44,828, or 54.8%, to $37,043 for the year
ended December 31, 1997 compared to $81,871 for the year end December 31, 1996.
The decrease was mainly attributed to a decrease in the Company's debt
obligations during 1997.
Interest expense to related party increase $75,146, or 18.5%, to $480,460 for
the year ended December 31, 1997 compared to $405,314 for the year ended
December 31, 1This increase was mainly attributed to the default status of the
notes. The note agreements provide that upon default, certain default interest
rates become effective immediately.
For the year ended December 31, 1997 gain on sale of assets increased $448,290,
to 488,470 as compared to $40,180 for the year ended December 31, 1996. This
increase was attributed to a gain of $200,000 on the sale of its 40% interest in
the U.K. Refinery. Also during 1997, the Company recognized a gain of $288,471
on the sale of two compressors and two generators .
(Loss) from discontinued operations.
Loss from discontinued operations decreased $1,518,461, or 93.1%, to
$113,040 for the year ended December 31,1997 compared to a loss of $1,631,501
for the year ended December 31, 1996. Income from the Utah oil and gas operation
(sold May 1, 1997) decreased $590,575, or 87.7%, to 82,613 for the year ended
December 31, 1997 compared to income of 673,188 for the year ended December 31,
1996. Losses attributed to the Genesis refinery (discontinued September 30,
1997) decreased $90,788, or 32.2%, to $191,044 for the year ended December 31,
1997 compared to $281,832 for
<PAGE>
the year ended December 31, 1996. Losses from the Gagon Mechanical (discontinued
May 1, 1997) decreased $2,018,248, or 99.8%, to $4,609 for the year ended
December 31, 1997 compared to $2,022,857 for the year ended December 31, 1996.
The Company's total income or loss from discontinued operations, on a segment
basis, for 1997 and 1996 were as follows:
Income (Loss) From Discontinued Operations
1997 1996 Change %
- ------------------------------------------------------------------------------
Utah Oil and Gas $82,613 $673,188 -$590,575 -87.7%
Gagon Mechanical -4,609 -2,022,857 2,018,248 -99.8%
Genesis Refinery -191,044 -281,832 90,788 -32.2%
- ------------------------------------------------------------------------------
Total -113,040 -1,631,501 $1,518,461 -93.0%
==============================================================================
(Loss) on disposal of discontinued operations
(Loss) on disposal of discontinued operations for the year ended December
31, 1997 was $46,799 compared to $0 for the year ended December 31, 1996. The
loss on disposal of discontinued operations included a gain of $2,087,717 on the
sale of the Utah oil and gas operation (sold May 1, 1997) and a loss of
2,134,516 relating to the settlement Genesis Petroleum, Inc. (see Legal
Proceedings). The $2,134,516 loss includes the Company paying Genesis a sum of
$750,000 and the write off of $1,384,616, which represents the transfer of its
rights in the joint venture and in the Salt Lake City used oil refinery.
Liquidity and Capital Resources
Sources of liquidity for the Company are revenues from oil and gas
operations and revenues from the sale of its hydrocarbon refining technology.
Currently, the only consistent ongoing revenue sources to the Company are from
its oil and gas operations in Wyoming. The Company only receives revenues from
its used oil refining technology when a sale or license is executed. While the
Company continues to work with potential purchasers of its technology, such
sales and expected revenues are uncertain and unpredictable. If an acceptable
reorganization plan is accepted in the Company's Chapter 11 bankruptcy
proceeding, management believes that the Company's cash from
<PAGE>
its operating activities and cash retained under the reorganization plan would
be adequate to meet its operating needs in the near term and would provide a
plan to meet debt obligations. Management has put strict restraints on all
capital expenditures with the exception of necessary expenditures to maintain
current operations. The Company will continue to incur research and development
costs as it continues to develop its refining technology. At present these
activities are being performed by current Company employees and part time
contract consultants
If the Company is unable to obtain approval of a reorganization plan under
its Chapter 11 bankruptcy proceeding, the Company may be compelled to file for
liquidation under Chapter 7. The Company can seek to raise additional financing
through the sale of equity, debt and assets but there can be no assurance that
the Company will be able to continue its current operations.
The Company's operations used $410,501 of cash for year ended December 31,
1997 compared to 3,506,194 cash used in operations for the year ended December
31, 1996. The $3,095,693 decrease in cash used by operations was mainly
attributed to changes implemented by management. During 1997, the Company's
management developed a plan to increase cash flow and reduce expenses. The plan
included the following:
1. In May of 1997, the Company discontinued the Gagon Mechanical operations
and has been subcontracting any work formerly done by Gagon. In the year
ended December 31,1997 Gagon's loss from discontinued operations was $4,609
compared to a loss of $2,022,857 for the year ended December 31, 1996;
2. During 1997, the Company reduced its workforce by 28 jobs. Included in the
reduction was 3 management positions and 25 operational positions. This
reduction in workforce reduced the Company's salaries and wages by
approximately $550,000.
3. During 1997, the Company received proceeds in the amount of $5,014,024 on
the sale of assets and reduced debt by $2,461,077. Included in assets sold,
was the Company's Utah oil and gas operations (Monument Butte) for
$4,000,000, the 40% interest in Interline (UK) Joint Venture for $500,000
in which the Company has received 200,000, the sale of two compressors for
$502,111 located in Wyoming and other equipment and vehicles for $11,913.
4. On September 30, 1997, the Company deemed its Salt Lake Refinery operation
to be a discontinued operation. Subsequently, on December 23, 1997, the
Company entered into a agreement with Genesis Petroleum, Inc. to settle all
claims between both parties. The agreement resulted in the Company
transferring all its rights to the Salt Lake Refinery, the payment of
$750,000 (made on January 29, 1997) and granting of a license of the
Company's technology for three additional sites with no license fees to be
paid to the Company. In the year ended December 31, 1997 loss from the Salt
Lake Refinery was $191,044 compared to $281,832 for the year ended December
31, 1996.
5. During 1997, the Company reduced capital expenditures from continuing
operations by $78,023, to $153,378 for the year ended December 31, 1997
compared to $231,401 for the year ended December 31, 1996. For 1998, the
Company has put strict restraints on all capital expenditures with the
exception of necessary expenditures to maintain current operations.
<PAGE>
During 1997, the Company paid a related party $2,350,000 of which
$2,200,000 was proceeds from the sale of the Utah oil and gas operations and
$150,000 was proceeds from the sale of two compressor located in the Wyoming
operations. The $2,350,000 was all applied to principal. As of December 31, 1997
the balance owed to the related party is $2,680,089 in principal and $885,776 in
interest.
Note Payable and Accrued Interest Due to Related Party
Initial Interest Current Accrued
Balance Rate Balance Interest
- -------------------------------------------------------------------------------
Note 1 $250,000 12% $250,000 $90,014
Note 2 1,500,000 12% 1,500,000 285,042
Note 3 780,089 16% 0 426,656
Note 4 2,500,000 16% 930,089 84,064
- -------------------------------------------------------------------------------
Total $5,030,089 $2,680,089 $885,776
===============================================================================
As disclosed in previous SEC filings, three of the following Senior
Secured notes to a shareholder totaled $2,530,089. This amount and the
associated interest was due September 1, 1996. As a result of non payment by the
Company, the notes are currently in default. (An event of default under another
$2.5 million note (see # IV) has occurred, which permits acceleration of the
Company's obligation to repay the principal and interest.)
I. During 1994, the Company issued a $250,000 senior convertible note payable
to a related party. The note bears interest at 10% and was due on September
1, 1996. After December 31, 1994, the note is convertible in full to 67,750
shares of the Company's restricted common stock at the option of the note
holder. As a result of the default, the interest rate has changed to 12%.
II. On February 29, 1996 the Company obtained $1,500,000 in a 6% senior secured
note from the same related party. The obligation was due September 1, 1996.
In the event of a default on the note the principal can be converted to
shares of the Company's common stock at the price of the lesser of $3.20
per share or 80 percent of the average closing price for the Company's
shares for the five consecutive trading days preceding the date of
conversion. The note was secured by all of the issued and outstanding stock
of two subsidiaries, Interline Energy Services and Gagon Mechanical
Contractors. As a result of the default, the interest rate has changed to
12%.
III. On July 19, 1996, the Company obtained $780,089 in a 9.5% senior secured
note from the same related party. The obligation was due September 1, 1996.
The note is secured by the outstanding shares of Interline Energy Services,
Gagon Mechanical and Interline Hydrocarbon. As a result of the default, the
interest rate has changed to 16%.
<PAGE>
IV. On May 15, 1996, the Company obtained $2,500,000 in a 9.25% senior secured
note from the same related party as above. The note is due January 15, 1998
and is secured by the outstanding shares of Interline Energy Services and
Gagon Mechanical. Upon default, the loan may be converted into shares of
the Company's common stock at the lesser of $3.12 per share or 80 percent
of the average closing price for shares of the Company's common stock for
five consecutive trading days preceding the date of conversion. As
additional consideration for the shareholder making the Loan to the
Company, the Company has issued a Warrant to purchase up to 250,000 shares
of common stock at $3.90 per share. As a result of the default, the
interest rate has changed to 16%.
Bankruptcy Proceeding
On July 29, 1997, Genesis Petroleum, Inc. ("GPI") and Petroleum Systems,
Inc. ("PSI") filed a Petition for an involuntary Bankruptcy against the Company.
The Company filed a Motion to Dismiss claiming that the Petition was improperly
filed. The Bankruptcy Court ruled that the court did not have jurisdiction
because only two creditors had joined in the Petition. Another hearing was
scheduled to consider the joiner of additional creditors. On September 26, 1997,
the Company filed its own Petition for Reorganization (Bankruptcy #97C-26571)
under Chapter 11 of the United States Bankruptcy Act.
Since September 26, 1997, the Company has been continuing with its operations
as a debtor-in- possession. On January 23, 1998, the Company filed a Proposed
Plan of Reorganization and Proposed Disclosure Statement to the Plan of
Reorganization with the U.S. Bankruptcy Court that management believes will
permit it to reorganize and provide for payments of creditors and preserve the
interest of its shareholders. A hearing is scheduled with the United States
Bankruptcy Court for the District of Utah, Central Division, for the approval of
the Disclosure Statement on May 6, 1998 at 10:00 am.
Some of the information provided in the Proposed Plan of Reorganization and
the Proposed Disclosure Statement to the Plan of Reorganization are considered
forward looking statements within the meaning of Section 27A of the Securities
Act of 1993 and Section 21E of the Securities Exchange Act. Although the
Company's management believes that the expectations reflected in the plan are
reasonable, there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effects on its business or results of
operations. Such expectations involve know and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by forward looking statements.
Based on the following, there can be no assurance that the Company will be
able to develop a reorganization plan which will be acceptable to its creditors
and which will leave the Company with sufficient assets to continue in
operations. There can be no assurance that the Company will not be required to
liquidate and discontinue its operations.
<PAGE>
Inflation
The Company's business and operations have not been materially affected by
inflation during the past three years and the current calendar quarter. The
Company believes that inflation will not materially nor adversely impact its
business plans for the future.
ITEM 7. FINANCIAL STATEMENTS
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<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, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. 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, 1997, and the results
of their operations and their cash flows for the years ended December 31, 1997
and 1996, 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
has had significant operating losses and has a deficit in working capital. In
addition, on September 26, 1997 the Company filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code. These issues 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
February 27, 1998
<PAGE>
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,153,199
Trade accounts receivable, net 304,090
Inventories 24,169
Notes receivable - current portion 40,000
Other current assets 21,308
Current portion of net assets of discontinued operations 67,624
------------
Total current assets 1,610,390
------------
Property, plant and equipment 6,100,405
Accumulated depreciation, amortization, and depletion (1,791,446)
------------
Net property, plant and equipment 4,308,959
------------
Notes receivable 88,779
Intangible assets, net 1,000,000
Net assets of discontinued operations 616,229
------------
Total assets $ 7,624,357
============
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 298,936
Accrued liabilities 1,030,081
Accrued interest, related party 885,776
Notes payable, related party 2,680,089
Current portion of long-term debt 244,266
------------
Total current liabilities 5,139,148
------------
Long-term debt 605,911
Deferred revenue 61,093
------------
Total liabilities 5,806,152
------------
Commitments and 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; 13,974,167 shares issued and outstanding 69,871
Additional paid-in capital 9,185,517
Retained deficit (7,437,183)
------------
Total stockholders' equity 1,818,205
------------
Total liabilities and stockholders' equity $ 7,624,357
============
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31,
- ------------------------------------------------------------------------------
1997 1996
------------------------
Revenue $4,827,969 $6,953,796
Direct costs 3,734,992 5,846,062
------------------------
Gross margin 1,092,977 1,107,734
------------------------
Selling, general and administrative expenses 1,455,092 1,749,733
Depreciation, depletion and amortization 756,478 825,500
Research and development 156,446 616,473
Write-down of asset value 700,428 374,854
------------------------
Loss from operations (1,975,467) (2,458,826)
------------------------
Other income (expense):
Interest expense, net (37,043) (81,871)
Interest expense, related party (480,460) (405,314)
Other expenses, net - (75,000)
Gain on sale of assets 488,470 40,180
------------------------
Loss before income taxes and discontinued (2,004,500) (2,980,831)
operations
Income taxes - -
Discontinued operations:
Loss from discontinued operations (113,040) (1,631,501)
Loss on disposal of discontinued operations (46,799) -
------------------------
Loss from discontinued operations (159,839) (1,631,501)
------------------------
Net loss $(2,164,339) $(4,612,332)
========================
Loss per common share $ (.15) $ (.32)
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------------------------- Paid-In Retained
Shares Amount Shares Amount Capital Deficit Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 - $ - 13,951,052 $69,755 $8,574,383 $(660,512) $7,983,626
Shares issued for - - 15,000 75 11,175 - 11,250
services
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) 3,982,544
Shares received and
retired in genesis
agreement - - (100,000) (500) 500 - -
Net loss
December 31, 1997 - - - - - (2,164,339) (2,164,339)
-----------------------------------------------------------------------------------------
Balance,
December 31, 1997 - $ - 13,974,167 $69,871 $9,185,517 $(7,437,183) $1,818,205
==========================================================================================
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------
1997 1996
---------------------------
Cash flows from operating activities:
Net loss $ (2,164,339) $ (4,612,332)
Adjustment to reconcile net loss to net cash
provided by
(used in) operating activities:
Depreciation, depletion and amortization 756,478 825,500
Write-down of technology and marketing rights 700,428 374,854
Gain on disposal of assets (488,470) (40,180)
Common stock issued for services - 11,250
(Increase) decrease in:
Accounts receivable 356,891 (429,334)
Inventories (23,497) 18,186
Other current assets 20,373 51,623
Other assets - (136,441)
Increase (decrease) in:
Accounts payable (585,177) 157,026
Accrued liabilities 1,282,858 197,686
Deferred revenue (266,046) 75,968
------------------------
Net cash (used in) continuing operations (410,501) (3,506,194)
Cash provided by (used in) discontinued
operations 2,483,473 (1,153,537)
------------------------
Net cash provided by (used in)
operating activities 2,072,972 (4,659,731)
------------------------
Cash flows from investing activities:
Proceeds from sale of assets 738,002 59,508
Decrease in notes receivable 49,011 50,648
Purchase of property, plant and equipment (153,378) (46,319)
------------------------
Net cash provided by
investing activities 633,635 63,837
------------------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt - 4,258,521
Payments on long-term debt (2,461,077) -
------------------------
Net cash provided by (used in)
financing activities (2,461,077) 4,258,521
------------------------
Net increase (decrease) in cash 245,530 (337,373)
Cash, beginning of year 907,669 1,245,042
------------------------
Cash, end of year $ 1,153,199 $ 907,669
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- ------------------------------------------------------------------------------
1997 1996
------------------------
Supplemental Disclosure of Cash Flow Information
Actual cash amounts paid for:
Interest $ 133,747 $ 326,080
========================
Income taxes $ - $ -
========================
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
$413,547.
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
============
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
December 31, 19979 and 1996
- ------------------------------------------------------------------------------
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:
Oil and Gas
The Company's operations primarily involves natural gas processing and
gathering, crude oil gathering, fractionation, marketing of natural gas
liquids, and oil and gas productions. The gas is 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.
Used Oil Technology
The Company has a license to market a 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 consultation regarding
the process and royalties on the technology.
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.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
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 the operations are included in discontinued operations and
they are not significant in relation to the financial statements taken as a
whole.
Cash Equivalents
For purposes of the consolidated statement of cash flows, cash includes all cash
and investments with original maturities to the Company of three months or less.
Inventories
Inventories consisting of supplies and miscellaneous 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
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
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.
Loss Per Common Share
Loss per share of common stock is calculated based on the weighted average
number of common shares outstanding during the period.
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 1997 presentation.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
2. Going Concern
The Company has sustained significant operating losses in 1997 and 1996, is
currently in default on notes 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 Company filed on September 26, 1997 a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These factors
create an uncertainty about the Company's ability to continue as a going
concern.
The Company has made continuous efforts to negotiate settlements and to sell
certain of its assets to satisfy claims, obligations and to obtain profitable
operations. The ability of the Company to continue as a going concern is
dependent on the Company generating cash from the sale of 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.
3. Notes 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, 1997, the note receivable
balance totaled approximately $129,000 of which $40,000 is due in 1997. Since
payment of the note is contingent upon future earnings, an amount totaling
approximately $61,000 has been recorded as deferred revenue and is recognized
when payments are received. Income related to this note of $16,000 and $24,033
was recognized as income on the note during the years ended December 31, 1997
and 1996, respectively.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
3. Notes Receivables and Deferred Revenue (Continued)
During 1997, the Company created an allowance for a note receivable, as follows:
Note receivable due December 31, 1997 and
currently in default, unsecured with no stated
interest $ 300,000
Allowance (300,000)
-------------
$ -
=============
4. Property and Equipment
Property and equipment at December 31, 1997 consists of the following:
Land $ 134,535
Vehicles 129,273
Machinery and equipment 4,828,404
Buildings and structures 728,877
Office furniture and equipment 279,316
------------
6,100,405
Less accumulated depreciation,
amortization, and depletion (1,791,446)
------------
$ 4,308,959
============
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
5. 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 approximately $2,230,000 of
patent, engineering, and other costs related to this agreement from 1993 to
1997. The Company historically has evaluated the value of its technology and
marketing rights based on comparing the unamortized balance to undiscounted
projected operating income over the remaining technology and marketing rights
amortization period. The Company is currently involved in litigation regarding
the possible violation of certain aspects of the exclusive world wide technology
and marketing rights. The litigation is in preliminary stages and no trial dates
have been set.
As a result of the uncertainty of future operating results and the litigation
relating to the technology and marketing rights, the Company has made a one time
charge at December 31, 1997 of $700,428. These rights are being amortized on a
straight-line basis over seven and seventeen years. Amortization expense of
$175,563 and $168,874 was recorded during the years ended December 31, 1997 and
1996, respectively, and accumulated amortization after the one time charge at
December 31, 1997, totaled $1,228,684.
6. Notes Payable Related Party
Notes payable to a related party at December 31, 1997 are comprised of the
following:
<TABLE>
<S> <C>
Note payable to a shareholder of the Company with interest at a rate of 12%, in
default, 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 shareholder of the Company with interest at a rate of 16%, in
default, 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: $ 930,089
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Notes Payable Related Party (Continued)
<TABLE>
<S> <C>
Unsecured note payable to a shareholder of the Company with interest at a rate
of 12%, in default, convertible in full to 67,750 shares of the Company's common
stock: $ 250,000
------------
$ 2,680,089
=============
</TABLE>
The notes payable to a 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.
7. Long-Term Debt
Long-term debt at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Notes payable to various financial institutions bearing interest at between 6.8%
and 11.25%, due in combined monthly installments of $5,621 including interest,
secured by real est$te: $ 485,175
Notes payable to shareholders due in 1996, interest accruing at between
6.5% and 12%, unsecured: 115,334
Notes payable to various financial institutions, due in combined monthly
installments of $3,971, including interest at rates between 7.9% and 11.9%,
secured by vehicles, inventories, equipment, and receivables: 49,588
Capital lease obligations (see note 8) 200,080
------------
850,177
Less current portion of long-term debt (244,266)
------------
Net long-term debt $ 605,911
==============
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
7. Long-Term Debt (Continued)
Future maturities of long-term debt as of December 31, 1997 are as follows:
Year Amount
------------
1998 $ 244,266
1999 131,064
2000 63,960
2001 30,066
2002 33,079
Thereafter 347,742
------------
$ 850,177
============
8. 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 $12,297. The assets under capital leases have been
capitalized at an aggregate cost of $575,516 and accumulated amortization of
these costs totaled $197,356 at December 31, 1997. Future minimum lease payments
are as follows:
Year Amount
------------
1998 $ 87,477
1999 101,679
2000 34,879
------------
Total minimum lease payments 224,035
Less amount representing interest (23,955)
------------
Present value of minimum lease payments $ 200,080
============
9. 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.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
The Company's income tax (expense) benefit differed from the statutory federal
rates as follows:
1997 1996
----------------------------
Statutory rate applied to loss
before taxes $ 700,000 $ 1,568,000
State income taxes 108,000 226,000
Increase in valuation allowance (808,000) (1,794,000)
-----------------------------
$ - $ -
=============================
Significant components of the Company's deferred tax (assets) and tax
liabilities at December 31, 1997 are as follows:
Depreciation $ 843,000
Revenue recognition on construction contracts 23,000
Net operating losses (3,485,000)
Capital loss carryover and nondeductible accruals (77,000)
Valuation allowance 2,696,000
-------------
$ -
=============
The Company has approximately $9,500,000 of net operating losses available to
offset future income. These net operating losses expire in the years 2005
through 2012. 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.
9. Income Taxes (Cntinued)
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.
10.Discontinued Operations
As part of the Company's restructuring, to reduce expenses, and to satisfy
claims and other obligations, the Company has sold or discontinued several
segments of its operations during the years ended December 31, 1997 and 1996.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
The Company, during 1997, sold for $4,014,604 its oil and gas producing and
gathering system in Utah. The Company realized a gain of $2,087,717 on the
disposal of these operations.
The Company, under a court settlement, agreed to give the Genesis plant, its
ownership in a joint venture and pay $750,000 to its joint venture partner. The
Company received back 100,000 shares of its common stock and was released from
further liability relating to the Genesis plant. The $750,000 was accrued at
December 31, 1997 and was paid subsequent to December 31, 1997. The Company
realized a loss of $2,134,516 on the disposal of the Genesis plant.
During 1997, in an effort to increase cash flow and reduce expenses, the Company
discontinued Gagon.
Condensed discontinued operations are as follows for the years ended December
31, 1997 and 1996:
Year Ended December 31, 1997
----------------------------------------------------
Gagon Oil and Gas Genesis Total
----------------------------------------------------
Revenue $2,327,601 $632,048 $1,160,520 $4,120,169
Costs and expenses (2,332,210) (549,435) (1,351,564) (4,233,209)
----------------------------------------------------
Net loss before income (4,609) 82,613 (191,044) (113,040)
taxes
----------------------------------------------------
Income taxes - - - -
----------------------------------------------------
Net loss $ (4,609) $82,613 $(191,044) $(113,040)
====================================================
Year Ended December 31, 1996
------------------------------------------------------
Gagon Oil and Gas Genesis Total
------------------------------------------------------
Revenue $6,346,036 $2,296,780 $1,415,180 $10,057,996
Costs and expenses (8,368,893) (1,623,592) (1,697,012) (11,689,497)
------------------------------------------------------
Net loss before income (2,022,857) 673,188 (281,832) (1,631,501)
taxes
------------------------------------------------------
Income taxes - - - -
------------------------------------------------------
Net loss $ (2,022,857) $ 673,188 $(281,832) $(1,631,501)
======================================================
10.Related Transactions
Interest expense recorded for related party notes payable (see note 7) totaled
$15,210 and $8,000 for 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
11.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.
12.Write-Down of Asset Value
During 1997, the Company took a one time write-down of capitalized technology
costs totaling $700,428 (see note 5). 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 $374,854. The fair
value was based upon the estimated economic recovery value of the assets.
13.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.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
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.
A schedule of options and warrants at December 31, 1997 is as follows:
Number of Option Price
Options Per Share
----------------------------------
Outstanding at December 31, 1,091,500 $ 1.08 - 5.65
1996
Granted 15,000 4.50
Expired (372,334) 4.50
----------------------------------
Outstanding at December 31, 734,166 $ 1.08 - 5.65
1997
==================================
Options exercisable and shares available for future grant are as follows:
December 31,
------------------------
1997 1996
------------------------
Options exercisable 734,166 1,091,500
Shares available for grant 1,015,834 908,500
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
14.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 1997 and 1996
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,
----------------------------
1997 1996
----------------------------
Net loss - as reported $ (2,164,339) $ (4,612,332)
Net loss - pro forma $ 264,310 $ (5,665,328)
Loss per share - as reported $ (.15) $ (.32)
Loss per share - pro forma $ (.17) $ (.40)
-----------------------------
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
14. Stock-Based Compensation (Continued)
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,
-----------------------
1997 1996
-----------------------
Expected dividend yield $ - $ -
Expected stock price volatility 146% 107%
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 1997 and 1996 are
$1.50 and $2.88, respectively.
The following table summarized information about fixed stock options outstanding
at December 31, 1997:
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 12/31/97 (Years) Price 12/31/97 Price
- -------------------------------------------------------------------------------
$ .64 650,000 .64 1.08 650,000 1.08
4.5-5.65 84,166 2.57 4.71 84,166 4.71
- -------------------------------------------------------------------------------
$.64-5.65 734,166 .86 1.50 734,166 1.50
===============================================================================
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
15. Segment Information
The Company has operations in the segments of gas processing, technology,
marketing rights, and other. The following is a breakdown by segment:
1997 1996
------------------------
Capital expenditures:
Oil and gas $ 149,303 $ 208,719
Used oil refining - 3,733
Other 4,075 18,949
------------------------
Total $ 153,378 $ 231,401
========================
Depreciation and amortization:
Oil and gas $ 524,479 $ 516,816
Used oil refining 170,581 241,192
Other 61,418 67,492
------------------------
Total $ 756,478 $ 825,500
========================
Identifiable assets:
Oil and gas $ 4,063,606 $ 4,765,986
Used oil refining 1,072,298 1,981,774
Other 1,804,600 1,903,051
Discontinued 683,853 3,167,326
------------------------
Total $ 7,624,357 $11,818,137
========================
Revenue:
Oil and gas $ 4,280,278 $ 6,386,232
Used oil refining 531,991 562,040
Other 15,700 5,524
------------------------
Total $ 4,827,969 $ 6,953,796
========================
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
15.Segment Information (Continued)
1997 1996
-------------------------
Direct costs:
Oil and gas $ (3,502,587) $(5,227,516)
Used oil refining (232,405) (617,561)
Other - (985)
-------------------------
Total $ (3,734,992) $(5,846,062)
=========================
Gross margin $ 1,092,977 $ 1,107,734
=========================
Operating expenses:
Oil and gas $ (1,089,497) $(1,237,216)
Used oil refining (1,276,517) (1,593,500)
Other (702,430) (735,049)
--------------------------
Total $ (3,068,444) $(3,565,765)
==========================
Loss from operations $ (1,975,467) $(2,458,031)
==========================
16.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 $3,454 and $5,615 for the years ended December 31, 1997 and
1996, respectively.
17.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, 1997, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet.
- ------------------------------------------------------------------------------
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Satements
Continued
- ------------------------------------------------------------------------------
18.Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS as previously
required. The new standard also requires additional informational disclosures,
and makes certain modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new standard is required to
be adopted by all public companies for reporting periods ending after December
15, 1997, and requires restatement of EPS for all prior periods reported. During
the year ended December 31, 1997, the Company adopted this standard.
Earnings per share information in accordance with SFAS 128 is as follows:
Year Ended December 31, 1997
-----------------------------------
Loss Shares Per-Share
(Numerator)(Denominator) Amount
-----------------------------------
Net loss $(2,164,339)
Less preferred stock
dividends -
-------------
Basic EPS
Loss available to
common stockholders (2,164,339) 13,974,167 $ (.15)
===========
Effect of Dilutive
Securities
Stock options and warrants - -
-------------------------
Diluted EPS
Loss to common
stockholders plus assumed
conversions $(2,164,339) 1,394,167 $ (.15)
=====================================
<PAGE>
18. Earnings Per Share (Continued)
Year Ended December 31, 1996
-----------------------------------
Loss Shares Per-Share
(Numerator)(Denominator) Amount
-----------------------------------
Net loss $ 4,612,332
Less preferred stock
dividends -
-------------
Basic EPS
Loss available to
common stockholders 4,612,332 14,074,137 $ (.32)
===========
Effect of Dilutive
Securities
Stock options - -
-------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $4,612,332 14,074,137 $ (.32)
=====================================
19.Contingency
As part of the construction of the used oil refinery plants and the sale of the
technology to outside parties, the contracts include certain guarantees of
performance by the plants and the sold technology. Should the guarantees of
performance not be met, the contracts provide for certain concessions to be made
by the Company.
- ------------------------------------------------------------------------------
<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:
.
Name Age Position
Michael R. William 46 Director/Chairman/CEO/President
Mark W. Holland 41 Director/Chief Financial Officer
Michael A. Megee 51 Director/Vice President
President, Interline Energy Services
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.
Mark W. Holland. Mr. Holland has been employed as a Controller for the
Company since 1989 and was appointed Chief Financial Officer in 1994. On May 16,
1997, Mr. Holland was appointed as a Director of the Company. 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.
- ------------------------------------------------------------------------------
<PAGE>
Michael A. Megee. Mr. Megee has been employed as President of the oil and
gas operations since joining the Company in 1994. On September 18, 1997 Mr.
Megee was appointed as a Director and Vice President of the Company. Mr. Megee
has 25 years experience in the energy industry, with emphasis on business
development, economic analysis, and management of oil and gas pipelines,
chemicals, coal, and gas processing. Mr. Megee has an accounting degree from
Lamar University in Texas, and was previously employed with Gulf Oil and Coastal
Corporation prior to joining the Company.
- -------------------------------------------------------------------------------
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 $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
---------------------------- ---------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restrict Options/ LTIP Other
Principal ($) ($) Compen- Stock SAR's Payouts Compen-
Postition Year Salary Bonus sation($) Awardsm($) (#) ($) sation($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael R. Williams 1997 $156,216 $-0- $-0- $-0- 7,500(1) $-0- $-0-
President, CEO 1996 $168,000 $-0- $-0- $-0- 7,500(1) $-0- $-0-
Chairman 1995 $198,000 $-0- $-0- $-0- 7,500(1) $-0- $-0-
LaMar Gagon 1997 $33,679 $-0- $-0- $-0- 0 $-0- $-0-
Director/President 1996 $100,000 $-0- $-0- $-0- 24,167(2) $-0- $-0-
Gagon 1995 $100,000 $-0- $-0- $-0- 7,500(2) $-0- $-0-
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
1. According to the Company's 1994 Officers and Directors Stock Option Plan
which was approved by the Company's shareholders on May 10, 1994, Mr.
Williams was granted 7,500 shares of the Company common stock on March 1,
1995, March 1, 1996 and March 1, 1997 at a price of $4.50.
2. According to the Company's 1994 Officers and Directors Stock Option Plan
which was approved by the Company's shareholders on May 10, 1994, Mr. Gagon
was granted 7,500 shares of the Company common stock on March 1, 1995,
March 1, 1996 and March 1, 1997 at a price of $4.50. Mr. Gagon was granted
16,667 shares of the Company's stock at an exercise price of $4.50 per
share, according to a stock option grant approved by shareholders on June
15, 1995. The option was not exercisable until the expiration of six months
from the date of shareholders approval. On May 1, 1997, Mr. Gagon resign
his positions as Director and Officer of the Company.
The Company provides health and life insurance to its employees, including
its officers and certain directors.
Stock Options Granted During 1997
The following table provides information on grants of stock options during
1997 to the persons named in the Summary Compensation Table above.
OPTION GRANTS IN 1997
- -------------------------------------------------------------------------------
Individual
Grants
- -------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------
% of Total
Options Exercise
Options Granted to or Base
Granted Employees Price Expiration
Name (#) in ($/Sh) Date
Fiscal Year
- -------------------------------------------------------------------------------
Michael R. Williams 7,500 25% $4.50 3/1/02
- -------------------------------------------------------------------------------
Option Values at December 31, 1997
No options were exercised during 1997 by the person named in the Summary
Compensation Table. The following table provides information on the unexercised
options at December 31, 1997 owned by the people named in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISED IN 1997
AND YEAR-END 1997 OPTION VALUES
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------------
Number of Value of Unexercised
Unexercised Options at In-the-Money Options at
Year End 1997 (#) Year End 1997 ($)(1)
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Williams -0- -0- 388,000 -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, 1997
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 obtain by a licensed
stock broker on December 31, 1997 ($0.0625).
<PAGE>
Employment Agreements
The Company has no written employment agreement with any officers or
directors. Effective November 1997, Michael R. Williams monthly salary was
reduced from $14,000 to $10,417 by the Company.
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, 1998 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) 3,130,506 21%
160 W. Canyon Crest Rd.
Alpine, UT 84004
Mike Mcgee (2)(6) 15,000 0%
4010 South Poplar Street
Casper, Wyoming 82601
Maurice D. Sabbain (4) 2,120,416 14.5%
c/o Fortress RE
262 East Morehead St.
P.O. Box 700
Burlington, NC 27216
Mark W. Holland (2)(5) 232,220 1.6%
160 W. Canyon Crest Rd.
Alpine, UT 84004
All Officers and Directors 3,377,726 23%
as a Group (3 persons)
Total Shares Issued and 14,608,826 100%
Outstanding(1)
(1) As of April 6, 1998 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 534,666 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 14,608,826 shares issued and outstanding.
(2) These individuals are the officers and directors of the Company.
(3) Mr. Williams is a Director and 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 398,000 shares issuable upon the exercise of currently
exercisable options.
<PAGE>
(4) 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. 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.
(5) Mr. Holland is Director and Chief Financial Officer of the Company.
The number of shares indicated as owned by Mr. Holland includes
178,054 directly owned by Mr. Holland and 54,166 shares which may be
issued upon the exercise of a currently exercisable stock option.
(6) Mr. Megee is a Director and Executive Vice President of the Company.
The number of shares indicated as owned by Mr. Megee is 15,000 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.
<PAGE>
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, 1997 was as
follows:
Total Amount Unpaid as of
Lender of Loans 12/31/97
- -------------------------------------------------------------------------------
Michael R. Williams $89,519 $ -0-
Timothy G. Williams $19,000 $9,000
Gearle D. Brooks $79,985 $21,491
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, 1997 was as follows:
Total Amount Unpaid as of
Lender of Loans 12/31/97
- -------------------------------------------------------------------------------
Michael R. Williams $165,000 $ -0-
Timothy G. Williams $60,000 $ -0-
Gearle D. Brooks $75,000 $64,843
As of April 6, 1998, the Company has not paid the following three Senior
Securities notes due to Maurice D. Sabbah, a 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.
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.
<PAGE>
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.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
<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 two reports on Form 8-K during the
fiscal year ended December 31, 1997.
Exhibits to Form 10-KSB/A
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)
<PAGE>
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)
<PAGE>
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 Agreements N/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
<PAGE>
10.23 Questar Asset Agreement - Utah Oil and Gas Sale
(Incorporated by Reference to Form 8-K
dated May 12, 1997)
10.24 Genesis Petroleum Settlement Agreement
(Incorporated by Reference to Form 8-K
dated January 27, 1998)
21.1 Subsidiaries of Registrant
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
<PAGE>
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: April 6, 1998 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
April 6, 1998 CEO/President /s/ Michael R. Williams
and Director Michael R. Williams
April 6, 1998 Director/ /s/ Michael A. Megee
Secretary Michael A. Megee
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERLINE RESOURCES CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 1,163,199
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<EXCHANGE-RATE> 1
<CASH> 1,153,199
<SECURITIES> 0
<RECEIVABLES> 604,090
<ALLOWANCES> (300,000)
<INVENTORY> 24,169
<CURRENT-ASSETS> 1,610,390
<PP&E> 6,100,405
<DEPRECIATION> (1,791,446)
<TOTAL-ASSETS> 7,624,357
<CURRENT-LIABILITIES> 5,139,148
<BONDS> 0
0
0
<COMMON> 69,871
<OTHER-SE> 1,748,334
<TOTAL-LIABILITY-AND-EQUITY> 7,624,357
<SALES> 0
<TOTAL-REVENUES> 4,827,969
<CGS> 0
<TOTAL-COSTS> 3,734,992
<OTHER-EXPENSES> 2,579,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 517,503
<INCOME-PRETAX> (2,004,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,004,500)
<DISCONTINUED> (159,839)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,164,339)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
