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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-18995
INTERLINE RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0461653
------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
160 West Canyon Crest Road, Alpine, UT 84004
-------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 756-3031
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock $.005 Par Value
Title of Class
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No____.
Common stock outstanding at August 13, 1998 - 14,074,167 shares of $.005
par value Common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
FORM 10-QSB
INTERLINE RESOURCES CORPORATION
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheet at
June 30, 1998 1
Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for
six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in the Securities 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 23
Item 6(a) Exhibits 23
Item 6(b) Reports on Form 8-K 23
Signatures 24
<PAGE>
FORWARD LOOKING INFORMATION AND RISK FACTORS
Interline Resources Corporation (the "Company") or its representatives may
make forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operation, press release and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from operations, planned
capital expenditures (including the amount and nature thereof), the effects of
the Company's Bankruptcy proceeding, the Company's projected financial position,
results of operations, business strategy and other plans and objectives for
future operations. These statements are forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act, which reflect Management's current views with respect
to future events and financial performance.
Although the Company believes that the expectations reflected in these
forward looking statements are reasonable, there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected effects on its
business or results of operations. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include but are not limited to the
outcome of the Company's current Bankruptcy Proceeding, the timing and extent of
changes in commodity prices, unforeseen engineering and mechanical or
technological difficulties in connection with the Company's business operations
and other risks.
Theses forward-looking statements are subject to certain risks and
uncertainties including, but not limited to, future financial performance and
future events, competitive pricing for services, costs of obtaining capital as
well as national, regional and local economic conditions. Actual results could
differ materially from those addressed in the forward-looking statements. Due to
such uncertainties and risks, readers are cautioned not to place undue reliance
on such forward-looking statements, which speak only as of the date whereof.
All subsequent oral and written forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
<PAGE>
INTERLINE RESOURCES
CORPORATION
AND SUBSIDIARIES
PART I - ITEM 1
FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1998
The condensed financial statements included have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The Company presumes that the
user of this interim financial information has read or has access to the audited
financial statements for the preceding fiscal year----and in that context, this
disclosure is adequate for a fair presentation of the Company's financial
position.
In the opinion of the Company, all adjustments consisting of only normal
recurring adjustments as of June 30, 1998, have been made. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for the entire year.
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
June 30,
1998
----------
Assets
Current assets:
Cash and cash equivalents $981,458
Accounts receivable - trade 390,373
Income taxes receivable 40,000
Inventories 19,566
Note receivable - current portion 55,700
Net assets of discontinued operations -
Other current assets 20,095
-----------
Total current assets 1,507,192
Property, plant and equipment 6,092,014
Accumulated depreciation and depletion (2,039,145)
------------
Net property, plant & equipment 4,052,869
Note receivable 78,756
Technology and marketing rights 933,121
------------
Total assets $6,571,938
============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
1
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
June 30,
1998
----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $359,280
Accrued liabilities 288,829
Accrued interest, related party 1,063,706
Note payable, related party 2,680,089
Current portion of long-term debt 262,627
Other current liabilities 20,127
-------------
Total current liabilities 4,674,658
-------------
Long-term debt less current maturities 529,443
Deferred income 206,313
-------------
Total liabilities 5,410,414
Stockholders' equity:
Preferred stock - $.01 par value. 25,000,000
shares authorized; 1,000,000 series A shares
authorized; 0 series A shares issued and o/s -
Common stock - $.005 par value. 100,000,000
shares authorized; 14,074,167 shares
outstanding at June 30, 1998 70,371
Additional paid-in capital 9,209,017
Retained earnings (8,117,864)
--------------
Total stockholders' equity 1,161,524
--------------
Total liabilities & stockholders' equity $6,571,938
==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------------------------ ----------------------------
<S> <C> <C> <C>
Revenue $788,063 $813,499 $1,685,633 $2,741,588
Direct costs 559,802 $590,766 1,230,680 1,950,299
------------------------------ ----------------------------
Gross margin 228,261 222,733 454,953 791,289
Selling, general and
administrative expenses 221,415 $261,996 513,809 700,311
Research and development 25,640 $19,397 49,086 117,156
Depreciation, depletion 169,729 $187,734 340,050 387,404
amortization
------------------------------ ----------------------------
(Loss) from operations (188,523) (246,394) (447,992) (413,582)
Other income (expense) net
Interest income (expense) (11,023) ($8,901) (21,109) (24,251)
Interest expense, related party (89,456) ($202,396) (177,931) (323,583)
Gain (loss) from sale of assets 1,334 ($698) 1,334 773,120
------------------------------ ----------------------------
Income (loss) before discontinued operati (287,668) (458,389) (645,698) 11,704
Discontinued operations
Income (loss) from discontinued operati (29,814) ($232,180) (53,868) (523,236)
Gain on disposal of discontinued operat 18,885 $2,087,717 18,885 2,087,717
------------------------------ ----------------------------
Total discontinued operations (10,929) 1,855,537 (34,983) 1,564,481
Net Income (loss) ($298,597) $1,397,148 ($680,681) $1,576,185
============================== ============================
Earning per share
Loss from continuing operations ($0.02) ($0.03) ($0.05) $0.00
Income from discontinued operations ($0.00) $0.13 ($0.00) $0.11
------------------------------ ----------------------------
Income (loss) per common share: ($0.02) ($0.10) ($0.05) $0.11
============================== ============================
Weighted average shares o/s 14,074,167 14,074,167 14,074,167 14,074,167
============================== ============================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
1998 1997
---------------------
Cash flows from operating activities:
Net income (loss) (680,681) 1,576,185
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortizatio 340,050 510,042
Gain on disposal of asset 1,334 (773,120)
Common Stock issued for services 24,000 -
(Increase) decrease in:
Accounts receivable (86,283) (73,054)
Inventories 4,603 (54,715)
Other current assets 1,213 (13,503)
Note receivable (45,677) 16,203
Increase (decrease) in:
Accounts payable 60,344 (1,037,845)
Accrued liabilities (741,252) 253,923
Accrued interest, related party 177,930 (276,415)
Other current liabilities 20,127 137,610
Deferred income 145,220 (102,770)
----------- -----------
Net cash (used) by operating activi (779,072) 162,541
Cash flows from investing activities:
Proceeds from sale of equipment 4,700 524,768
Proceeds from sale of joint venture - 500,000
Purchase of intangible assets - (16,988)
Net assets of discontinued operations 683,853 1,599,791
Purchase of property, plant & equipment (23,115) (265,486)
----------- -----------
Net cash provided (used in) investing activities 665,438 2,342,085
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
INTERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
---------------------------
1998 1997
Cash flows from financing activities:
Proceeds from debt obligations - -
Payment on long-term debt (58,107) (2,043,403)
----------- -----------
Net cash provided (used) by financing a (58,107) (2,043,403)
----------- -----------
Net increase (decrease) in cash (171,741) 461,223
Cash, beginning of year 1,153,199 1,090,810
----------- ------------
Cash, end of quarter 981,458 1,552,033
=========== ============
5
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Oil and Gas Accounting
The Company uses the "successful efforts" method to account for oil and gas
operations. The use of this method results in the capitalization of costs
related to acquisition, exploration and development of revenue producing oil and
gas properties. The costs of unsuccessful exploration efforts are expensed in
the period in which they are determined unrecoverable by future revenues.
Provision for depreciation and depletion of oil and gas properties is based on
the units of production method, based on proven oil and gas reserves.
Segment information concerning oil and gas reserves and related disclosures are
not presented since they are not significant in relation to the financial
statements taken as a whole.
Construction Accounting
Construction revenues are recognized on the percentage-of-completion method of
accounting. Profits on contracts are recorded on the basis of "cost-to-cost"
determination of percentage of completion on individual contracts, commencing
when progress reaches a point where cost and estimate analysis and other
evidence of trend are sufficient to estimate final results with reasonable
accuracy. That portion of the total contract price which is allocable to
contract expenditure incurred and work performed is accrued as earned income. At
the time a loss on a contract becomes known, the entire amount of the estimated
ultimate loss is accrued. Claims for additional revenue are recognized when
settled. The aggregate of cost incurred and income recognized on uncompleted
contracts in excess of related billings is shown as a current asset, and the
aggregate of billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current liability.
Cash Equivalents
For purposes of the consolidated statement of cash flows, cash includes all cash
and investments with original maturities to the Company of three months or less.
Inventories
Inventories consisting of supplies and miscellaneous material are recorded in
the financial statements at their aggregate lower of cost (first-in, first-out)
or market.
Investments
Investments in less than majority owned entities are accounted for using the
equity method. Investments are included in the financial statements under the
caption of "Other Assets."
6
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed
using straight-line and accelerated methods. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized as income for
the period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized. Deductions are
made for retirements resulting from renewals or betterments. The estimated
useful lives are as follows:
Building and equipment 15-25 years
Equipment and vehicles 3-10 years
Amortization
The Company has amortized its marketing and technology rights for the used oil
refining process over seventeen years. This period approximates the assets'
useful lives.
Contingencies
During 1996, the Company entered into an agreement to sell certain assets of the
Company. As part of this agreement, the Company also agreed to guarantee a note
payable between the purchaser and a third party. At June 30, 1998, the remaining
liability on the note was approximately $92,145.
The Company has executed license agreements with licensees to utilize Interlines
used oil technology which includes technology received from Petroleum System,
Inc. ("PSI") through an assignment agreement of certain patent rights (PSI
technology). Under the assignment agreement the Company is obligated to pay
royalties to PSI for those Interline plants using PSI technology. The Company
and PSI have been involved in a dispute as to what payments the Company owes PSI
under the assignment agreement. The Company and PSI were first involved in an
arbitration proceeding to determine the issues between them, but PSI
discontinued resolution through arbitration and on July 29, 1997 filed a lawsuit
against the Company and its wholly owned subsidiary Interline Hydrocarbons in
the Third Judicial District Court of the State of Utah ("State Court Action")
alleging that the Company was in breach of the assignment agreement and that PSI
should be allowed to re-acquire all of the technology rights assigned to the
Company through the assignment agreement. PSI filed its complaint and the
Company has answered, but no other pleadings have been filed. As a result of the
bankruptcy proceeding and its procedural rules the State Court Action was
stayed.
On March 26, 1998, PSI filed claim against the Company in the bankruptcy
proceeding seeking royalties of $420,000, asserting breaches of the assignment
agreement and requesting the return of a prototype production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel, the court entered an
7
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
order denying PSI's claim for $420,000, ordering that the Company to return
Baby M to PSI and denying all other claims brought by PSI.
On May 29, 1998, PSI filed a motion for relief from automatic stay in the
bankruptcy court seeking the right to proceed with its State Court Action
against the Company and its subsidiary Interline Hydrocarbons. After argument
and hearing, the bankruptcy court requested counsel for PSI to prepare an order
granting relief from the automatic stay. The Company has objected to the
proposed order granting relief from the automatic stay and a hearing is set
before the court on August 13, 1998.
Common Stock
During the year ended December 31, 1994, as a condition for a private placement
of the Company's restricted common stock, the Company entered into an agreement
which contains certain restrictive covenants. The Company may not sell its
restricted common stock for a price less than $4.50 or issue options or warrants
of equal effect. The Company also may not repay any related party debt during
this period. These covenants may be waived upon obtaining written consent of the
other party in the agreement.
Profit Sharing Plan
During 1995, the Company commenced a defined contribution retirement plan, which
qualifies under code section 401(k), for all eligible employees. Employees who
work at least 1,000 hours during a year and are over age 21 are eligible to
participate. Employees may contribute up to fifteen percent of their annual
compensation subject to regulatory limitations. The Company also contributes a
discretionary amount on behalf of the participating employees. The Company made
contributions of $1,011 and $1,095 for the three months ended June 30, 1998 and
1997, respectively.
Reclassification
Certain amounts in the prior years financial statements have been reclassified
to conform to the June 30, 1998 presentation.
Discontinued Operations
The financial statements for all periods presented reflect the revenues and
expenses generated from the assets of the Utah oil and gas operations, Gagon
Mechanical construction and manufacturing operations and the Salt Lake City
refinery operations under the caption "Income (loss) from discontinued
operations." The related assets and liabilities of Gagon Mechanical have been
presented on the balance sheet under caption "net assets of discontinued
operations."
8
<PAGE>
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a Utah corporation with its principal and executive offices
located at 160 West Canyon Crest Road, Utah 84004 (801) 756-3031. Interline
Resources Corporation (the "Company"), a Utah corporation, is engaged in two
areas of business, each operating as separate subsidiaries: Interline
Hydrocarbon Inc., a Wyoming corporation, which commercializes the Company's used
oil refining technology; and Interline Energy Services, Inc., a Wyoming
corporation, which manages the Company's oil and gas operations located in
Wyoming.
The Company has invested substantial resources commercializing a used oil
refining technology and has signed license agreements with companies in England,
South Korea, Dubia, Australia and Spain. The Company's first used oil refinery
was constructed in Salt Lake City, Utah in 1996The Company's oil and gas
operations consist of natural gas gathering, natural gas processing and oil well
production all located in Wyoming.
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the "Petition") of the United States Bankruptcy Code. The
Company 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 June 18, 1998, the Company filed a Plan of Reorganization and Disclosure
Statement to the Plan of Reorganization with the United States Bankruptcy Court
for the District of Utah, Central Division. On July 14, 1998, the Company's Plan
of Reorganization and Disclosure Statement to the Plan of Reorganization was
approved and circulation thereof authorized by the United States Bankruptcy
Court for the District of Utah, Central Division. A hearing on confirmation of
the Plan of Reorganization and Disclosure Statement to the Plan of
Reorganization is scheduled with the United States Bankruptcy Court for the
District of Utah, Central Division, for August 27, 1998.
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
9
<PAGE>
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.
While the Company's Plan of Reorganization and Disclosure Statement have
been approved by the Court and sent to all appropriate parties, its acceptance
and confirmation is subject to their approval. There can be no assurance that
the Plan of Reorganization proposed by the Company or as it may be amended will
be acceptable to its creditors and 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 ("Well Draw"), 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. The plant processed a total of 60,664 gallons a day of
natural gas liquids for the three months ended June 30, 1998 compared to gallons
a day for the three months ended June 30, 1997. Of the total gallons processed
9,540 gallons per day was for the Company and
10
<PAGE>
51,124 gallons per day for others, as compared to 65,142 and 10,124 gallons
per day respectively in 1997. In October of 1997, KN Gas Gathering ("KN") began
processing approximately 20,000 gallons per day at Well Draw under an agreement
which extends to March 31, 1998. During April and May of 1998, KN elected not to
process their liquids at the Well Draw Gas Plant. During June of 1998, KN
resumed the processing agreement with the Company on a month to month basis.
During June and July of 1998, the Company processed approximately 20,000 and
40,000 gallons a day respectively.
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.
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.
11
<PAGE>
Interline Hydrocarbon - Used Oil Refining.
Revenues to the Company, from its used oil refining technology can come
from five sources: 1) profits made from constructing a used oil 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
plants, 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 for a Plant and provide consultation services to the
purchaser.
On June 10, 1998 the Company signed an engineering and marketing agreement
with Ecolube, S.A., a subsidiary of Sener Engineering of Madrid, Spain. Under
the agreement, the Company provided Ecolube with engineering specifications and
construction drawings for the building of a 24,000 gallon per day waste oil
re-refinery. The plant will be located in Madrid, Spain. Under the agreement,
Ecolube will construct and operate the plant and produce lubricant base oil.
Interline will receive a $534,000 engineering and licensing payment and receive
a running royalty of $0.0175 on each gallon produced and sold for 10 years.
Ecolube has the right to build additional plants in the Iberian Peninsula (Spain
and Portugal) for a four year period commencing from the date of plant start up.
It has also become evident to management that demanding royalties based on
production in many situations and countries is difficult. Unless and until the
rerefined oil produced in a Plant can be sold at higher values based on pricing
similar to base lubricating oils, on-going royalties based on production is
difficult to obtain. The most viable opportunities management has discovered are
in countries that have governmental concessions resulting in economic incentives
for collecting and processing used oil. This reality has been seen in both
Korea, where the royalty was terminated for the first plant, and England where,
as described previous filings, the royalties were reduced and not payable until
profitable.
Management still believes that there exists economic justification and
interest in the technology. The Company continues to improve the technology, and
on May 28, 1998 filed a patent application in the United States Patent Office
for a new and alternative method from the PSI technology for processing used
oil. This new technology has been implemented in the Korean, Austrialian and
Spanish Plants. While management continues to receive inquiries about the
technology, the Company is selective as to potential purchasers. From
experience, management is aware of the complicated nature between the balance of
supply and demand. Management has become much more selective in its
consideration of selling the technology to prospective purchasers and unless
favorable conditions exist the Company discourages the purchaser. Management has
become much more active in helping potential customers evaluate their end
product sales markets.
12
<PAGE>
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 occurred, and have been classified
and presented in the financial statement as discontinued operations. Readers of
the condensed financial statements should keep in mind that prior comparative
information in this report have been changed to reflect these events.
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 three and six months ended June 30,
1998 and 1997 reflect the revenue and expense relating to Genesis Refinery under
caption "Income (loss) from discontinued operations".
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 three and six months
ended June 30, 1998 and 1997, reflect the revenue and expense relating to these
assets under caption "Income (loss) from discontinued operations." The
consolidated statement of operations presented for the three and six months
ended June 30, 1998 and 1997, reflect the gain or loss on sale of these assets
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 three and six months ended June 30, 1998 and 1997, reflect the
revenue and expense relating to these assets under caption "Income (loss) from
discontinued operations." The consolidated balance sheet for
13
<PAGE>
quarter ended June 30, 1998 reflect all assets and liabilities relating to
the operations under caption "Net assets of discontinued operations". The
consolidated statement of operations presented for the three and six months
ended June 30, 1998 and 1997, reflect the gain or loss on sale of these assets
under caption "Gain (loss) on disposal of discontinued operations."
Total Revenues
Revenues decreased $25,436 or 3.13%, to $788,063 for the three months
ended June 30, 1998 as compared to $813,499 for the three months ended June 30,
1997. The revenue decrease included a $18,754 or 2.51%, decrease in oil and gas
revenues; and an $15,082, or 23.17%, decrease in used oil refining revenues and
an $8,700 increase in other revenues. The Company's total revenues, on a segment
basis, for three months ended June 30, 1998 and 1997 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".
Revenues For Three Months Ended June 30, 1998 and 1997
1998 % 1997 %
- -------------------------------------------------------------------------------
Oil and Gas $729,663 92.59% $748,417 92.00%
Used Oil refining 50,000 6.34% 65,082 8.00%
Other 8,400 1.07% 0 .00%
- -------------------------------------------------------------------------------
Total Revenue $788,063 100% $813,499 100%
===============================================================================
Oil and Gas Revenues
Oil and gas revenues contributed approximately 92.59% of total revenues
for the three months ended June 30, 1998, as compared to approximately 92% for
the three months ended June 30, 1997. Revenues decreased $18,754 or 2.51% to
$729,663 for the three months ended June 30, 1998 as compared to $748,417, for
the three months ended June 30, 1997.
The revenues presented in the above table are solely from the Company's
Wyoming operations. This revenue decrease of $18,754 or 2.51% is mainly
attributed to several liquid purchase contracts that expired. The Company tried
to negotiate new terms for these liquids, but
14
<PAGE>
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 6.34% of total revenues for the
three months ended June 30, 1998 compared to 8.0% for the three months ended
June 30, 1997. The revenues decreased $15,082, or 23.17%, to $50,000 for the
three months ended June 30, 1998 compared to $65,082 for the three months ended
June 30 1997. The revenue of $50,000 for the three months ended June 30, 1998
was derived from the engineering and licensing agreement with Ecolube, S.A., a
subsidiary of Sener Engineering of Madrid, Spain. Under the agreement, the
Company will receive an engineering and licensing payment of $534,000. As of
June 30, 1998, the Company received $200,000 from Ecolube. Of the $200,000
received during the three months ended June 30, 1998, $50,000 has been
classified as revenue and $150,000 has been classified on the balance sheet as
deferred income. During the three and six months ended June 30, 1998 and 1997,
the Company received no revenues for royalties for it used oil technology.
The results of the Salt Lake City refinery operations during the three and
six months ended June 30, 1997, are reflected in the consolidated statement of
operations under the caption "Income (loss) from discontinued operations".
Direct Costs
Direct costs decreased $30,964, or 5.24%, to $559,802 for the three months
ended June 30, 1998 compared to $590,766 for the three months ended June 30,
1997. The decrease of $30,964 for the three months ended June 30, 1998 was
mainly attributed to a decrease in the Company's revenues. As a percent of
revenues, direct costs decreased to 71.04% for the three months ended June 30,
1998 compared to 72.62% for the three months ended June 30, 1997. This 1.58% of
revenue decrease is mainly attributed a reduction in personnel within the
Company's oil and gas operations located in Wyoming.
Selling, General and Administrative
Selling, general and administrative expenses decreased $40,581, or 15.49%,
to $221,415 for the three months ended June 30, 1998 compared to $261,996 for
the three months June 30, 1997. As a percent of revenues, selling, general and
administrative expenses were 28.10% for the three months ended June 30, 1998
compared to 32.21% for the three months ended June 30, 1997. During 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 reduced 3 management
positions and 25
15
<PAGE>
operational positions. During 1998, the Company reduced an additional 4
management positions and 2 operational positions. The Company did incur outside
legal fees of $75,380 for the six months ended June 30, 1998 compared to $71,319
for the six months ended June 30, 1997. These legal costs were mainly attributed
to the Company's legal proceedings and bankruptcy filing.
Depreciation and Amortization
Depreciation and amortization expenses decreased $18,005, or 9.59% to
$169,729 for the three months ended June 30, 1998 compared to $187,734 for the
three months ended June 30, 1997. As a percent of revenues, depreciation and
amortization expenses decreased to 21.54% for the three months ended June 30,
1998 compared to 23.08% for the three months ended June 30, 1997.
Research and Development
Research and development expenses increased $6,243, or 32.19%, to $25,640
for the three months ended June 30, 1998 compared to $19,397 for the year ended
June 30, 1997. As a percent of revenues, research and development expenses
increased to 3.25% for the three months ended June 30, 1998 compared to 2.38%
for the three months ended June 30, 1997.
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.
(Loss) from operations
Loss from operations decreased $57,871, or 23.49%, to $188,523 for the
three months ended June 30, 1998 compared to a $246,394 loss for the three
months ended June 30, 1997. The $57,871 decrease in loss from operations was
mainly attributed to a decrease in selling, general and administrative expense
of $40,581, or 15.49%, to $221,415 for the three months ended June 31, 1998
compared to $261,996 for the three months ended June 30, 1997.
Other income (expenses)
Net interest income (expense) increased $2,122, or 23.84%, to $11,023 for
the three months ended June 30, 1998 compared to $8,901 for the three months end
June 30, 1997. The net increase was mainly attributed to a decrease in interest
earned on the Company's money market and interest bearing accounts.
Interest expense to a related party decreased $110,972 or 54.83%, to
$91,424 for the three months ended June 30, 1998 compared to $202,396 for the
three months ended June 30, 1997. The decrease in interest to a related party
was attributed to the note balance being $5,030,089 during the three months
ended June 30, 1997, and the note balance being $2,680,089 during the three
months ended June 30, 1998. During 1997, the Company paid the related party
$2,350,000. The $2,350,000 was all applied to principle.
(Loss) from discontinued operations.
Loss from discontinued operations decreased $202,366, or 87.16%, to $29,814
for the three months ended
16
<PAGE>
June 30, 1998 compared to a loss of $232,180 for the three months ended
June 30, 1997. Income (loss) from the Utah oil and gas operation (sold May 1,
1997) was $0 for the three month ended June 30, 1998 and 1997. Losses attributed
to the Genesis refinery (discontinued September 30, 1997) decreased $203,800, or
100%, to $-0- for the three months ended June 30, 1998 compared to $203,800 for
the three months ended June 30, 1997. Losses from the Gagon Mechanical
(discontinued May 1, 1997) increased $1,434, or 5.05%, to $29,814 for the three
months ended June 30, 1998 compared to $28,380 for the three months ended June
30, 1997. The Company's total income or loss from discontinued operations, on a
segment basis, for the three months ended June 30, 1998 and 1997 were as
follows:
Income (Loss) From Discontinued Operations
For The Three Months Ended June 30, 1998 and 1997
1998 1997 Change %
- -------------------------------------------------------------------------------
Utah Oil and Gas $0 $0 0 .00%
Gagon Mechanical -29,814 -28,380 -1,434 -5.05%
Genesis Refinery 0 -203,800 -203,800 100.00%
- -------------------------------------------------------------------------------
Total - $29,814 - $232,180 - $202,366 - 87.16%
===============================================================================
Liquidity and Capital Resources
Sources of liquidity for the Company are revenues from oil and gas
operations and revenues from the sale of its hydrocarbon refining technology.
Currently, the only consistent ongoing revenue sources to the Company are from
its oil and gas operations in Wyoming. The Company receives revenues from its
used oil refining technology when a sale or license is executed. On going
royalty fees will be received only from the Austrilian Plant, when operational,
and the Spanish Plant, when constructed and operational. While the Company
continues to work with potential purchasers of its technology, such sales and
expected revenues are uncertain and unpredictable. If an acceptable
reorganization plan is accepted in the Company's Chapter 11 bankruptcy
proceeding, management believes that the Company's cash from 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.
17
<PAGE>
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 $779,072 of cash for the six months ended
June 30, 1998 compared to cash provided by operations of $162,541 for the six
months ended June 30, 1997. Of the $779,072 cash used in operations for the six
months ended June 30, 1998, $750,000 was attributed to an one time payment to
Genesis Petroleum, Inc. to settle all claims (See Item 1 Legal Proceeding).
Without the one time payment to Genesis Petroleum, Inc., cash used in operations
for the six months ended June 30, 1998 was $4,072.
Of the $162,541 cash provided by operations for the six months ended June 30,
1997, $400,000 was attributed to a marketing agreement with Dukeun Industrial
Company of South Korea. Without the one time payment received from Dukeun, the
Company's operations would have used cash of $237,459 for the six months ended
June 30, 1997.
The decrease in cash used by operations (exclusive of the $750,000 payment
to Genesis Petroleum, Inc. and the $400,000 payment received from Dukeun
Industrial Company) was mainly attributed to changes implemented by management.
During 1997 and 1998, the Company's management implemented 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. In the six months ended June 30, 1998, Gagon's loss from discontinued
operations was $53,868 compared to a loss of $278,328 for the six months
ended June 30, 1997.
2. During 1997, the Company reduced its workforce by 28 personnel. 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. During 1998, the Company reduced an additional 4
management positions, 1 operational position and 1 clerical position.
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,
were 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.
On March 1, 1998, the Company sold the Gagon Mechanical construction
equipment, parts and salvage material for the sum of $65,000. Also, on May
28, 1998, the Company sold the Gagon Mechanical building, located in Sandy,
Utah for $885,106. Net proceeds to the Company after commissions, closing
costs and payoff of secured debt was $568,743.
18
<PAGE>
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. For the six months ended June 30, 1998 there where no losses
compared to $328,655 for the six months ended June 30, 1997.
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. Capital
expenditures from continuing operations for the six months ended June 30,
1998 were $23,115 compared to $265,486 for the six months ended June 30,
1997.
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 June 30, 1998 the
balance owed to the related party is $2,680,089 in principal and $1,063,706 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 $104,890
Note 2 1,500,000 12% 1,500,000 374,301
Note 3 780,089 16% 0 500,451
Note 4 2,500,000 16% 930,089 84,064
- -------------------------------------------------------------------------------
Total $5,030,089 $2,680,089 $1,063,706
===============================================================================
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.)
19
<PAGE>
I. During 1994, the Company issued a $250,000 senior convertible note payable
to a related party. The note bears interest at 10% and was due on September
1, 1996. After December 31, 1994, the note is convertible in full to 67,750
shares of the Company's restricted common stock at the option of the note
holder. As a result of the default, the interest rate has changed to 12%.
II. On February 29, 1996 the Company obtained $1,500,000 in a 6% senior secured
note from the same related party. The obligation was due September 1, 1996.
In the event of a default on the note the principal can be converted to
shares of the Company's common stock at the price of the lesser of $3.20
per share or 80 percent of the average closing price for the Company's
shares for the five consecutive trading days preceding the date of
conversion. The note was secured by all of the issued and outstanding stock
of two subsidiaries, Interline Energy Services and Gagon Mechanical
Contractors. As a result of the default, the interest rate has changed to
12%.
III. On July 19, 1996, the Company obtained $780,089 in a 9.5% senior secured
note from the same related party. The obligation was due September 1, 1996.
The note is secured by the outstanding shares of Interline Energy Services,
Gagon Mechanical and Interline Hydrocarbon. As a result of the default, the
interest rate has changed to 16%.
IV. On May 15, 1996, the Company obtained $2,500,000 in a 9.25% senior secured
note from the same related party as above. The note is due January 15, 1998
and is secured by the outstanding shares of Interline Energy Services and
Gagon Mechanical. Upon default, the loan may be converted into shares of
the Company's common stock at the lesser of $3.12 per share or 80 percent
of the average closing price for shares of the Company's common stock for
five consecutive trading days preceding the date of conversion. As
additional consideration for the shareholder making the Loan to the
Company, the Company has issued a Warrant to purchase up to 250,000 shares
of common stock at $3.90 per share. As a result of the default, the
interest rate has changed to 16%.
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.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
On June 18, 1998, the Company filed a Plan of Reorganization and Disclosure
Statement to the Plan of Reorganization with the United States Bankruptcy Court
for the District of Utah, Central Division. On July 14, 1998, the Company's Plan
of Reorganization and Disclosure Statement to the Plan of Reorganization was
approved and circulation thereof authorized by the United States Bankruptcy
Court for the District of Utah, Central Division. A hearing on confirmation of
the Plan of Reorganization and Disclosure Statement to the Plan of
Reorganization is schedule with the United States Bankruptcy Court for the
District of Utah, Central Division, for August 27, 1998.
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.
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;
21
<PAGE>
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 has executed license agreements with licensees to utilize
Interlines used oil technology which includes technology received from Petroleum
System, Inc. ("PSI") through an assignment agreement of certain patent rights
(PSI technology). Under the assignment agreement the Company is obligated to pay
royalties to PSI for those Interline plants using PSI technology. The Company
and PSI have been involved in a dispute as to what payments the Company owes PSI
under the assignment agreement. The Company and PSI were first involved in an
arbitration proceeding to determine the issues between them, but PSI
discontinued resolution through arbitration and on July 29, 1997 filed a lawsuit
against the Company and its wholly owned subsidiary Interline Hydrocarbons in
the Third Judicial District Court of the State of Utah ("State Court Action")
alleging that the Company was in breach of the Assignment agreement and that PSI
should be allowed to re-acquire all of the technology rights assigned to the
Company through the assignment agreement. PSI filed its complaint and the
Company has answered, but no other pleadings have been filed. As a result of the
bankruptcy proceeding, and its procedural rules the State Court Action was
stayed.
On March 26, 1998, PSI filed claim against the Company in the bankruptcy
proceeding seeking royalties of $420,000, asserting breaches of the assignment
agreement and requesting the return of a prototype production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel, the court entered an order
denying PSI's claim for $420,000, ordering that the Company return Baby M to PSI
and denying all other claims brought by PSI.
On May 29, 1998, PSI filed a motion for relief from automatic stay in the
bankruptcy court seeking the right to proceed with its State Court Action
against the Company and its subsidiary Interline Hydrocarbons. After argument
and hearing, the bankruptcy court requested counsel for PSI to prepare an order
granting relief from the automatic stay. The Company has objected to the
proposed order granting relief from the automatic stay and a hearing is set
before the court on August 13, 1998.
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities:
The Company is currently in default on notes due to a shareholder (See
Liquidity and Capital Resources).
Item 4. Submission of Matters to a Vote of Security Holders: None
22
<PAGE>
Item 5. Other Information:
The Company announced on August 13, 1997 that the American Stock Exchange
(AMEX) made a final determination to delist the Company from the AMEX's Emerging
Company marketplace.
As of August 13, 1998, a market is being made of the Company's common
stock on the NASD Bulletin Board under symbol "IRCE".
Item 6(a). Exhibits: None
Item 6(b) Form 8-K: None
23
<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: August 13, 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
- ----------- --------------- ---------------
August 13, 1998 CEO/President /s/ Michael R. Williams
and Director Michael R. Williams
August 13, 1998 Secretary/ /s/ Michael A. Megee
Director Michael A. Megee
24
<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> 981,458
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 981,458
<SECURITIES> 0
<RECEIVABLES> 390,373
<ALLOWANCES> 0
<INVENTORY> 19,566
<CURRENT-ASSETS> 1,507,192
<PP&E> 6,092,014
<DEPRECIATION> (2,039,145)
<TOTAL-ASSETS> 6,571,938
<CURRENT-LIABILITIES> 4,674,658
<BONDS> 0
0
0
<COMMON> 70,371
<OTHER-SE> 1,091,153
<TOTAL-LIABILITY-AND-EQUITY> 6,571,938
<SALES> 0
<TOTAL-REVENUES> 1,685,633
<CGS> 1,230,680
<TOTAL-COSTS> 901,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,040
<INCOME-PRETAX> (645,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (645,698)
<DISCONTINUED> (34,988)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (680,681)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
