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U.S. SECURITIES AND EXCHANGE COMMISSION
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, 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:
Common Stock $.005 Par Value
Title of Class
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No____.
Check if there is no disclosure of delinquent 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 definitive 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, 1998 were
$3,536,797
As of March 17, 1999, 14,066,052 shares of the Issuer's common stock were
issued and outstanding, 9,169,826 of which were held by non-affiliates. As of
March 17, 1999, the aggregate market value of shares held by non-affiliates
(based upon the closing price) was approximately $733,586.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company is a Utah corporation with its principal and executive offices
located at 160 West Canyon Crest Road, Utah 84004 (801) 756-3031. Interline
Resources Corporation (the "Company"), a Utah corporation, is engaged in two
areas of business, each operating as separate subsidiaries: Interline
Hydrocarbon Inc., a Wyoming corporation, which commercializes the Company's used
oil refining technology; and Interline Energy Services, Inc., a Wyoming
corporation, which manages the Company's oil and gas operations located in
Wyoming.
The Company has invested substantial resources commercializing a used oil
refining technology and has signed license agreements with companies in England,
South Korea, Dubia, Australia and Spain. The Company's first used oil refinery
was constructed in Salt Lake City, Utah in 1996. The Company's oil and gas
operations consist of natural gas gathering, natural gas processing,
transportation and oil well production all located in Wyoming.
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the "Petition") of the United States Bankruptcy Code. The
Company continued its operations as a debtor-in-possession under the Bankruptcy
Code. The Company's subsidiaries did not join the Company in the Petition and
were not directly involved in the Bankruptcy Reorganization Proceeding.
On June 18, 1998, the Company filed a Plan of Reorganization and
Disclosure Statement to the Plan of Reorganization with the United States
Bankruptcy Court for the District of Utah, Central Division. On July 14, 1998,
the Company's Plan of Reorganization and Disclosure Statement to the Plan of
Reorganization was approved and circulation thereof authorized by the United
States Bankruptcy Court for the District of Utah, Central Division.
On September 10, 1998, the plan of reorganization under Chapter 11 of
Interline Resources Corporation was confirmed by the United States Bankruptcy
Court for the District of Utah. As a result, restraints on the activities of
Interline imposed by the Bankruptcy code have been removed. Interline reached
agreement with its major creditor during the Chapter 11 case and the terms of
the agreement (See Part 1 - Item 2 - Liquidity and Capital Resources) were
incorporated in the plan. All other creditors were paid in full under the plan.
The Company's current operating subsidiaries are (1) Interline Energy
Services, Inc.("Interline Energy") a Wyoming corporation which manages the
Company's oil and gas operations located in Wyoming and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
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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 nominal 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. During 1998, the plant processed a total average
of 78,100 gallons per day of NGLs compared to total average of 73,425 gallons
per day during 1997.
Amoco Agreement
During 1994, the Company entered into a six year contract with Amoco
Production Company to process NGLs. The agreement expires June 1, 2000. The
Amoco agreement is the largest liquids contract the Company has entered into
since it purchased the Plant in 1990. To fulfill the contract, the Company made
modifications to the Well Draw Gas Plant to increase its processing capacity
from about 90,000 to approximately 150,000 gallons per day. The Company also
constructed an amine treating unit to reduce sulfur concentrations of the NGLs
at Amoco's Bairoil, Wyoming plant where the NGLs are collected. In 1998, the
Company processed an average of 45,800 gallons per day of NGLs under the Amoco
contract compared to an average of 50,250 gallons per day for 1997. The Amoco
contract accounted for 58.64% of the total NGLs processed for 1998 and 68.4% for
1997.
KN Gas Gathering Agreement
During 1998, the Company entered into a agreement with KN Gas Gathering,
Inc. ("KNGG") to process NGLs on a month to month basis. During 1998, the
Company processed an average of 22,400 gallons per day of NGLs under this
agreement. The KNGG contract accounted for 28.68% of the total NGLs process for
1998. During the first part 1999, the Company has processed an average of 31,650
gallons per day of NGLs for KNGG. In the past, NGLs local markets seem to weaken
during the warm months and liquid prices decline. Because of the seasonal change
in liquid
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prices, KNGG has informed the Company of the possibility of not processing their
liquids during the summer months.
Conoco Pipeline
The Conoco Pipeline, purchased by the Company from Conoco Pipeline Company
in January of 1995 is a 180 mile crude gathering and trunk pipeline with
associated pumping stations and storage tanks. The pipeline transports oil from
oil producing fields in Converse County, Wyoming to Conoco's Lance Creek Station
where it connects with an interstate crude oil pipeline system. The Company
receives revenues from operation of the Conoco Pipeline by charging a
transportation fee. The pipeline gathered and transported approximately 242,387
barrels of crude during 1998 compared to 301,089 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 1998,
the wells produced approximately 6,343 barrels of oil and 14,708 Mcf of natural
gas compared to approximately 7,640 barrels of oil and 20,960 Mcf of natural gas
for 1997.
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 operation.
Four years ago, Interline had one truck and two drivers. Today, Interline has
five trucks and ten drivers. Collectively, these trucks travel about 684,611
miles per year, carrying a total of 27 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.
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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.
The Company has now developed a new technology which does not utilize PSI
technology. As a result, on September 10, 1998 the Company reassigned all of the
intellectual rights it obtained from PSI under the assignment agreement, back to
PSI. The only plants that utilize the PSI technology are the Dubai Plant which
has been shut down and essentially abandoned, the Genesis Plant which has been
shut down and no longer operates, and the England Plant which currently
operates. Under the terms of the assignment agreement, the Company is obligated
to assign all royalties payable from plants utilizing PSI technology back to
PSI. The Company did so on September 10, 1998. Because all future plants will
contain only the Company's technology and not PSI technology, no royalties will
be payable to PSI.
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, 6) Genesis transfer to the Company
108,115 shares of the Company's common stock owned by Genesis.
In July of 1998, Quaker State sold the Genesis Plant to a third party.
That third party has not operated the plant, and it is currently shut down.
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
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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. As a result, on November 19, 1998 the Company instituted a legal
proceeding against John Whelan in the High Court of Justice, Queen's Bench
Division, Bristol District Registry, Bristol Mercantile Court. This action is
currently pending..
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 per day 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. 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. The plant was
completed in August of 1998, and start up procedures continue.
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
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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.
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.
In late 1998 and early 1999, certain banks that had extended credit to
Gadgil Western commenced proceedings to sell the Dubai refinery. The Company has
contacted several companies who had express interest in bidding at the sell. The
Company has offered to help the successful purchaser put the plant back into
operation. The Company would provide consulting and operational services on a
fee basis.
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. The Company shipped all the parts
to the refinery to Australia during 1998. The installation and startup was
commenced in August of 1998.
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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 sold the Gagon Mechanical building, located in Sandy,
Utah, 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, was approximately $552,116.
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 getting approval from the Bankruptcy Court, the Company
closed the transaction on March 17, 1998.
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.
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
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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.
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.
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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.
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 17, 1999, the Company and its subsidiaries employed 24 full-time
employees and 1 part-time employee, compared to 24 full-time employees and 1
part-time employee as of March 17, 1998. During 1998, the Company reduce three
management and one operations positions. Also during 1998, with the expansion of
its transportation division, the Company hire four new drivers. 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 11,659 square feet
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of office space on about 1.5 acres of land that is owned by the Company.
Interline Hydrocarbon and Interline Energy Services also lease an office at 3211
Energy Lane, Suite 105, Casper, Wyoming 82602.
Interline Energy Services' Well Draw Gas Plant is located 17 miles from
Douglas, Wyoming. The Plant facilities consist of 17.85 acres of property, gas
chillers, gas-to-gas exchangers, storage tanks, four steel buildings enclosing
the equipment, two generators, compressors, de-ethanizer columns, fractionating
columns, truck weighing scales and scale house and other assets. The gathering
system consists of approximately 251 miles of high and low pressure pipelines
and the associated chart recorders and wellhead connection meter runs.
The Hat Creek Partnership, of which Interline Energy Services owns 20.4%,
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
has five tractors and eight trailers. Interline also leases (month to month) two
trailers from an outside party.
ITEM 3. LEGAL PROCEEDINGS
Bankruptcy Proceedings
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the "Petition") of the United States Bankruptcy Code. The
Company continued its operations as a debtor-in-possession under the Bankruptcy
Code. The Company's subsidiaries did not join the Company in the Petition and
were not directly involved in the Bankruptcy Reorganization Proceeding.
On June 18, 1998, the Company filed a Plan of Reorganization and
Disclosure Statement to the Plan of Reorganization with the United States
Bankruptcy Court for the District of Utah,
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Central Division. On July 14, 1998, the Company's Plan of Reorganization and
Disclosure Statement to the Plan of Reorganization was approved and circulation
thereof authorized by the United States Bankruptcy Court for the District of
Utah, Central Division.
On September 10, 1998, the plan of reorganization under Chapter 11 of
Interline Resources Corporation was confirmed by the United States Bankruptcy
Court for the District of Utah. As a result, restraints on the activities of
Interline imposed by the Bankruptcy code have been removed. Interline reached
agreement with its major creditor during the Chapter 11 case and the terms of
the agreement were incorporated in the plan. All other creditors will be paid in
full under the plan.
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 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, 6) Genesis transferred to the Company
108,115 shares of the Company's common stock owned by Genesis.
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.
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The Company and PSI have been involved in a dispute as to what payments
the Company owes PSI under the assignment agreement. The Company and PSI were
first involved in an arbitration proceeding to determine the issues between
them, but PSI discontinued resolution through arbitration and on July 29, 1997
filed a lawsuit against the Company and its wholly owned subsidiary Interline
Hydrocarbons in the Third Judicial District Court of the State of Utah ("State
Court Action") alleging that the Company was in breach of the Assignment
agreement and that PSI should be allowed to re-acquire all of the technology
rights assigned to the Company through the assignment agreement. PSI filed its
complaint and the Company answered, but as a result of the bankruptcy
proceeding, and its procedural rules the State Court Action was stayed until the
bankruptcy proceedings were resolved.
On March 26, 1998, PSI filed claim against the Company in the bankruptcy
proceeding seeking royalties of $420,000, asserting breaches of the assignment
agreement and requesting the return of a prototype production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel, the court entered an order
denying PSI's claim for $420,000, ordering that the Company return Baby M to PSI
and denying all other claims brought by PSI. The Company has returned Baby M to
PSI.
On May 29, 1998, PSI filed a motion for relief from the automatic stay in
the bankruptcy court seeking the right to proceed with its State Court Action
against the Company and the Company's subsidiary Interline Hydrocarbons. After
argument and hearing, the bankruptcy court requested counsel for PSI to prepare
an order granting relief from the automatic stay. The Company objected to the
proposed order granting relief from the automatic stay and a hearing was set
before the court on August 13, 1998. After argument, the Court entered its order
granting relief from the automatic stay, but limited PSI cause of action against
the Company by prohibiting any money damage to be assessed against the Company.
On September 10, 1998, on its own initiative, the Third District Court
scheduled an Order to Show Cause for on October 15, 1998. Its purpose was to
advise the court as to the progress of the action. The hearing was held on
October 15, 1998 and the court entered an order that the case be certified ready
for trail within 90 days - January 13, 1999. PSI was to amend or otherwise file
a new complaint against the Company. PSI took no steps to proceed on its
complaint against the Company and on January 9, 1999 the Company filed a motion
to dismiss the PSI claim. On January 27, 1999 the court granted the motion, and
extend its order dismissing the lawsuit.
Interline U.K.
In April of 1997, the Company sold its 40% interest in the England Plant
joint Venture to John Wheland for $500,000. John Wheland has only paid $200,000
of the purchase price and while the Company demanded payment of the remaining
purchase price the payment remains in dispute. Additionally, in connection with
the sale of the Company's interest in the joint venture, the joint venture was
to pay the Company $100,000 for certain construction charges and services it
performed
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on the plant. The joint venture has not made this payment, and its payment is in
dispute. As a result, on November 19, 1998 the Company instituted a legal
proceeding against John Whelan in the High Court of Justice, Queen's Bench
Division, Bristol District Registry, Bristol Mercantile Court. This action is
currently pending.
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 under the symbol IRCE
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
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 $0.35 $0.21
Second Quarter $0.35 $0.13
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Third Quarter $0.27 $0.10
Fourth Quarter $0.18 $0.06
1999
----
First Quarter $0.11 $0.05
(Through March 17, 1999)
Record Holders of Common Stock
The number of record holders of the Registrant's common stock as of March
17 1999, is 376.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a Utah corporation with its principal and executive offices
located at 160 West Canyon Crest Road, Utah 84004 (801) 756-3031. Interline
Resources Corporation (the "Company"), a Utah corporation, is engaged in two
areas of business, each operating as separate subsidiaries: Interline
Hydrocarbon Inc., a Wyoming corporation, which commercializes the Company's used
oil refining technology; and Interline Energy Services, Inc., a Wyoming
corporation, which manages the Company's oil and gas operations located in
Wyoming.
The Company has invested substantial resources commercializing a used oil
refining technology and has signed license agreements with companies in England,
South Korea, Dubia, Australia and Spain. The Company's first used oil refinery
was constructed in Salt Lake City, Utah in 1996. The Company's oil and gas
operations consist of natural gas gathering, natural gas processing,
transportation and oil well production all located in Wyoming.
On September 26, 1997, the Company filed a Petition for Reorganization
under Chapter 11 (the "Petition") of the United States Bankruptcy Code. The
Company continued its operations as a debtor-in-possession under the Bankruptcy
Code. The Company's subsidiaries did not join the
15
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Company in the Petition and were not directly involved in the Bankruptcy
Reorganization Proceeding.
On June 18, 1998, the Company filed a Plan of Reorganization and
Disclosure Statement to the Plan of Reorganization with the United States
Bankruptcy Court for the District of Utah, Central Division. On July 14, 1998,
the Company's Plan of Reorganization and Disclosure Statement to the Plan of
Reorganization was approved and circulation thereof authorized by the United
States Bankruptcy Court for the District of Utah, Central Division.
On September 10, 1998, the plan of reorganization under Chapter 11 of
Interline Resources Corporation was confirmed by the United States Bankruptcy
Court for the District of Utah. As a result, restraints on the activities of
Interline imposed by the Bankruptcy code have been removed. Interline reached
agreement with its major creditor during the Chapter 11 case and the terms of
the agreement (See Part 1 - Item 2 - Liquidity and Capital Resources) were
incorporated in the plan. All other creditors will be paid in full under the
plan.
The Company's current operating subsidiaries are (1) Interline Energy
Services, Inc.("Interline Energy") a Wyoming corporation which manages the
Company's oil and gas operations located in Wyoming and (2) Interline
Hydrocarbons, Inc. ("Interline Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.
Interline Energy Service - Oil and Gas Operations
The Company has been engaged in the oil and gas industry since 1990. These
operations primarily involve natural gas gathering and processing, crude oil
gathering, fractionation and marketing of natural gas liquids, and nominal 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.
At the Well Draw Gas Plant ("Well Draw") 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. The Company enters into agreements for
fractionation of liquids from others on a fee basis, including the Amoco
contract and others. The plant processed and fractionated a total of 78,100
gallons a day of natural gas liquids for the year ended December 31, 1998
compared to 73,425 gallons a day for the year ended December 31, 1997. Of the
total gallons fractionated and processed, 9,900 gallons per day was for the
Company and 68,200 gallons per day for others, as compared to 19,230 and 54,195
gallons per day respectively in 1997. In 1998, the Company processed an average
of 45,800 gallons a day of NGLs for Amoco and an average of 22,400 gallons per
day of NGLs for KNGG.
The Company's natural gas liquids transportation operation transported
approximately 27 million gallons of raw and finished products during the year
ended December 31, 1998. The Company operates five tractor-trailer-pup
combination units to move unprocessed natural gas liquids
16
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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.
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 have declined significantly from historical prices, the Company
intends to continue producing these wells.
Management is unaware of any significant future capital expenditures except
for the addition to the office and control room at the Well Draw Gas Plant The
total cost of this addition will approximately will be approximately $60,000.
However, the very nature of equipment operation, wear and tear and replacement
in this type of operation can be significant. Further, it is noted that most of
the revenues earned by the Well Draw Plant are derived from the Amoco contract
which will expire in June 1, 2000. If this contract is not renewed, it will have
a substantial impact on the ability of the Well Draw plant to continue
operations. Management continues to seek other liquids and gas connections to
expand and diversify its operations in Wyoming, however, its operations are in a
limited and well defined area and expansion is difficult.
Interline Hydrocarbon - Used Oil Refining Revenues to the Company, from its
used oil refining technology can come from five sources: 1) profits made from
constructing 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 five 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. As
of March 15, 1999, the Company has recorded revenues of $350,000 of the $534,000
based on meeting certain criteria's in the contract.
17
<PAGE>
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.
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.
18
<PAGE>
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 years ended December 31, 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 year ended December 31,
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 year ended December 31, 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 year ended December 31, 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 year
December 31, 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 $1,291,172 or 26.74%, to $3,536,797 for the year ended
December 31, 1998 as compared to $4,827,969 for the year ended December 30,
1997. The revenue decrease included a $1,210,877 or 28.29%, decrease in oil and
gas revenues; a $98,623, or 18.54% decrease in used oil refining revenues and an
$18,328 increase in other revenues. The Company's total revenues, on a segment
basis, for the year ended December 31, 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".
19
<PAGE>
Revenues For Year December 31, 1998 and 1997
1998 % 1997 %
- ----------------------------------------------------------------------
Oil and Gas $3,069,401 86.78% $4,280,278 88.66%
Used Oil refining 433,368 12.25% 531,991 11.02%
Other 34,028 .97% 15,700 .32%
- ----------------------------------------------------------------------
Total Revenue $3,536,797 100% $4,827,969 100%
======================================================================
Oil and Gas Revenues
Oil and gas revenues contributed approximately 86.78% of total revenues
for the year ended December 31, 1998, as compared to approximately 88.66% for
the year ended December 31, 1997. Revenues decreased $1,210,877 or 28.29% to
$3,069,401 for the year ended December 31, 1998 as compared to $4,280,278 for
the year ended December 31, 1997.
The revenues presented in the above table are solely from the Company's
Wyoming operations. This revenue decrease of $1,210,877 or 28.29% 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. During 1998, the Company's focus has been on increasing cash
flows by increasing the margins as it relates to its liquid purchase contracts.
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 12.25% of total revenues for the
year ended December 31, 1998 compared to 11.02% for the year ended December 31,
1997. The revenues decreased of $98,623, or 18.54%, to $433,368 for the year
ended December 31, 1998 compared to $531,991 for the year ended December 31,
1997. The $433,368 revenue for year ended December 31, 1998 was mainly derived
of $83,368 which was associated with the Australian refinery and $350,000 for
the engineering and licensing agreement with Ecolube, S.A., a subsidiary of
Sener Engineering of Madrid, Spain. Under the Ecolube agreement, the Company
will receive a total engineering and licensing payment of $534,000. As of
December 31, 1998, the Company has recorded revenues of $350,000 from Ecolube.
During the year ended December 31, 1998 and 1997, the Company received no
revenues for royalties for it used oil technology.
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<PAGE>
The results of the Salt Lake City refinery operations during the year
ended December 31, 1997, are reflected in the consolidated statement of
operations under the caption "Income (loss) from discontinued operations".
Direct Costs
Direct costs decreased $1,419,084 or 37.99%, to $2,315,908 for the year
ended December 31, 1998 compared to $3,734,992 for the year ended December 31,
1997. As a percent of revenues, direct costs decreased to 65.48% for the year
ended December 31, 1998 compared to 77.36% for the year ended December 31, 1997.
The decrease of $1,419,084 for the year ended December 31, 1998 was mainly
attributed to the Company's decrease in oil and gas revenues caused by the low
margin liquid contracts the Company did not renew. Also during 1998, the Company
reduced operational personnel in the Wyoming oil and gas division.
Selling, General and Administrative
Selling, general and administrative expenses decreased $312,838, or
21.50%, to $1,142,254 for the year ended December 31, 1998 compared to
$1,455,092 for the year December 31, 1997. As a percent of revenues, selling,
general and administrative expenses were 32.30% for the year ended December 31,
1998 compared to 30.14% for the year ended December 31, 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 operational positions. During 1998, the Company reduced an
additional 3 management positions and 1 operational position. The Company did
incur outside legal fees of $146,474 for the year ended December 31, 1998
compared to $167,648 for the year ended December 31, 1997. These legal costs
were mainly attributed to the Company's legal proceedings, patent protection and
bankruptcy filing.
Depreciation and Amortization
Depreciation and amortization expenses decreased $101,775 or 13.45% to
$654,703 for the year ended December 31, 1998 compared to $756,478 for the year
ended December 31, 1997. As a percent of revenues, depreciation and amortization
expenses increased to 18.51% for the year ended December 31, 1998 compared to
15.67% for the year ended December 31, 1997.
Research and Development
Research and development expenses decreased $85,150, or 54.43%, to $71,296
for the year ended December 31, 1998 compared to $156,446 for the year ended
December 31, 1997. As a percent of revenues, research and development expenses
increased to 2.02% for the year ended December 31, 1998 compared to 3.24% for
the year ended December 31, 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.
21
<PAGE>
(Loss) from operations
Loss from operations decreased $1,328,103, or 67.23%, to $647,364 for the
year ended December 31, 1998 compared to a $1,975,467 loss for the year ended
December 31, 1997. The $1,328,103 decrease in loss from operations was mainly
attributed to an increase in gross margin of $127,912 from the Company's focus
on increasing margins on liquid contracts. Also the Company's selling, eneral
and administrative expenses decreased by $312,838, or 21.50%, and research and
development expenses decrease by $85,150, or 54.43%. These decreases were
attributed to the plan implemented by management to increase cash flow and
reduce expenses. During 1997, the Company wrote down asset value of $700,428
compared to $0 for 1998.
Other income (expenses)
Net interest income (expense) decreased $13,415, or 36.21%, to $23,628 for
the year ended December 31, 1998 compared to $37,043 for the year end December
31, 1997. The net decrease was mainly attributed to an increase in interest
earned on the Company's money market and interest bearing accounts.
Interest expense to a related party decreased $362,514 or 75.45%, to
$117,946 for the year ended December 31, 1998 compared to $480,460 for the year
ended December 31, 1997. This $362,514 decrease in interest expense to a related
party was attributed to the Company new note agreement. As part of the plan of
reorganization under Chapter 11 the Company executed a new note agreement for
$3,600,000. Subsequently to the new note, the Company owed this related party
$3,743,795, which included $2,680,089 in principal and $1,063,706 in interest.
Income (Loss) from discontinued operations
Loss from discontinued operations is $-0- for the year ended December 31,
1998 compared to a loss of $113,040 for the year ended December 31, 1997. The
Company's total income (loss) from discontinued operations, on a segment basis,
for the year ended December 31, 1998 and 1997 were as follows:
Income (Loss) From Discontinued Operations
For The Year Ended December 31, 1998 and 1997
1998 1997 Change
- ----------------------------------------------------------------
Utah Oil and Gas $0 $82,613 -$82,613
Gagon Mechanical 0 -4,609 4,609
Genesis Refinery 0 -191,044 191,044
- -----------------------------------------------------------------
Total $0 -$113,040 $113,040
=================================================================
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Liquidity and Capital Resources
Sources of liquidity for the Company are revenues from oil and gas
operations and revenues from the sale of its hydrocarbon refining technology.
Currently, the only consistent ongoing revenue sources to the Company are from
its oil and gas operations in Wyoming. The Company receives revenues from its
used oil refining technology when a sale or license is executed. On going
royalty fees will be received only from the Australia Plant, and the Spanish
Plant, when constructed and operational. While the Company continues to work
with potential purchasers of its technology, such sales and expected revenues
are uncertain and unpredictable.
On September 10, 1998, the Company's plan of reorganization under Chapter
11 was confirmed by the United States Bankruptcy Court for the District of Utah.
Management believes that the Company's cash from the oil and gas operating
activities, cash received from the sale of its hydrocarbon refining technology
and cash retained under the reorganization plan will be adequate to meet its
operating needs in the near term and would provide a plan to meet debt
obligations. Because of certain assumptions made in the plan of reorganization,
if the Company is unable to receive cash from the marketing of its hydrocarbon
refining technology there can be no assurance that the Company will be able to
continue its current operations.
Since September 10, 1998 when the Bankruptcy Plan was confirmed, the
Company has not receive any cash from the marketing of it refining technology.
On September 22, 1999, the Company is obligated to make the first principal
installment of $750,000 under the new trust deed note (see new terms of trust
deed below) due to its major creditor. If the Company is unable to receive cash
from the marketing of it refining technology or raise additional financing
through the sale of equity, debt or assets, then the Company could be force to
cease operations and liquidate the assets of the Company.
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
The Company's net cash used by continuing operations was $875,424 for the
year ended December 31, 1998 compared to net cash used by continuing operations
of $410,501 for the year ended December 31, 1997. Of the $875,424 cash used in
continuing operations for the year ended December 31, 1998, $750,000 was
attributed to an one time payment to Genesis Petroleum, Inc. to settle all
claims (See Item 1 - Legal Proceeding). Without the one time payment to Genesis
Petroleum, Inc., cash used in continuing operations for the year ended December
31, 1998 was $125,424.
The decrease in cash used by operations (exclusive of the $750,000 payment
to Genesis Petroleum, Inc.) was mainly attributed to changes implemented by
management. During 1997 and
23
<PAGE>
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, 1998, Gagon's loss from discontinued operations was $-0-
compared to a loss of $4,609 for the year ended December 31, 1997. In the
year ended December 31, 1998, Gagon's loss on the disposal of discontinued
operations was $8,643.
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, 2 operational positions.
3. During 1997, the Company received proceeds in the amount of $5,014,024 on
the sale of discontinued and other 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.
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, 1998), 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 year ended December 31, 1998 there where no losses.
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 year ended December 31,
1998 were $166,335.
24
<PAGE>
On September 9, 1998, the plan of reorganization under Chapter 11 was
confirmed by the United States Bankruptcy Court for the District of Utah. The
Company reached agreement with its major creditor during the Chapter 11 case and
the terms of the agreement were incorporated in the plan.
The terms of the agreement included a new trust deed note dated September
22, 1998 for $3,600,000, together with interest at the rate of 7% per annum on
the unpaid principal. The Company will make quarterly payments of all accrued
interest beginning on December 22, 1998 and continuing until September 22, 2002.
The Company will also make principal payment of $750,000 on September 22, 1999;
$1,000,000 on September 22, 2000; $1,000,000 on September 22, 2001 and $850,000
on September 22, 2002. The note is secured by Trust Deeds securing a security
interest in the Company's Alpine Office located in Alpine, Utah and a security
interest in all assets of Interline Energy Service, Inc. As obligated in the
previous agreements, the Company executed a new Pledge Agreement with this major
creditor pledging stock of the Company and stock of all subsidiaries of the
Company.
Year 2000 Compliance
The Year 2000 (Y2K) issue is the result of computer programs being written
using two digits rather than four to define the applicable year. This could
result in a system failure or miscalculations causing disruptions of operations,
including, but not limited to, a temporary inability to process transactions,
including invoices or other similar normal business activities.
The Company is in the process of assessing its computer equipment,
accounting software, telephone systems, scanning equipment and other
miscellaneous systems. The Company's compliance plan provides for the conversion
of noncompliant systems in the second and third quarter of 1999. The Company
estimates that the cost to complete these efforts will not exceed $30,000.
The Company has begun discussion with its significant vendors and
customers on the need to be 2000 compliant. The Company plans to mail
questionnaires to its significant vendors, customers and service providers to
assist in an assessment of whether they will be Year 2000 compliant. If they are
not, such failure could affect the Company's ability sell its oil and gas
products and receive payments, to receive natural gas liquid products from its
customers to generate revenues and the ability to get vendors and service
providers to provide products and service in support of the Company's
operations. The Company expects to complete this assessment by June 30, 1999.
Although the Company has no reason to believe that its vendors and customers
will not be compliant by the year 2000, the Company is unable to determine the
extent to which Year 2000 issues will effect its vendors and customers.
The Company has not yet begun a comprehensive analysis of the operational
problems and costs that would be reasonable likely to result from failure by the
Company and significant third
25
<PAGE>
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with most
reasonably likely worst case scenario, and such scenario has not been clearly
identified. The Company plans to complete such analysis and contingency planning
by June 30, 1999.
The Company presently does not plan to incur significant problems due to
the Year 2000 issue. However, if all Year 2000 issues are not properly and
timely identified, assessed, remediated and tested, there can be no assurance
that the Year 2000 issue will not materially impact the Company's results of
operations or adversely affect its relationship with customers, vendor, or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material impact on the Company's results of
operations.
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.
26
<PAGE>
- ------------------------------------------------------------------------------
Page
Independent Auditors' Report 28
Consolidated balance sheet, December 31, 1998 29
Consolidated statement of operations, years 31
ended December 31, 1998 and 1997
Consolidated statement of stockholders' 32
equity, years ended December 31, 1998
and 1997
Consolidated statement of cash flows, 33
years ended December 31, 1998 and 1997
Notes to consolidated financial statements 35
27
<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, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997. 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, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
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, from September 26, 1997 to September 10, 1998 the Company petitioned
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 18, 1999
28
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 762,459
Trade accounts receivable,
net of allowance for doubtful accounts of $276,040 269,720
Inventories 55,225
Notes receivable - current portion 20,000
Other current assets 20,495
------------
Total current assets 1,127,899
------------
Property, plant and equipment 6,245,308
Accumulated depreciation, amortization, and depletion (2,288,754)
------------
Net property, plant and equipment 3,956,554
------------
Notes receivable 89,721
Intangible assets,
net of accumulated amortization of $1,371,541 857,143
------------
Total assets $ 6,031,317
------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29
<PAGE>
INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
December 31, 1998
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 367,167
Accrued liabilities 189,975
Current portion of long-term debt 913,597
------------
Total current liabilities 1,470,739
------------
Long-term debt 3,465,988
Deferred revenue 52,052
------------
Total liabilities 4,988,779
------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock - $.01 par value, 25,000,000 shares
authorized, no shares issued and outstanding -
Common stock - $.005 par value. 100,000,000 shares
authorized; 14,066,052 shares issued and outstanding 70,330
Additional paid-in capital 9,209,058
Retained deficit (8,236,850)
------------
Total stockholders' equity 1,042,538
------------
Total liabilities and stockholders' equity $ 6,031,317
------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statement of Operations
Years Ended December 31,
- ------------------------------------------------------------------------------
1998 1997
------------------------
Revenue $ 3,536,797 $ 4,827,969
Direct costs 2,315,908 3,734,992
------------------------
Gross margin 1,220,889 1,092,977
------------------------
Operating expenses:
Selling, general and administrative expenses 1,142,254 1,455,092
Depreciation, depletion and amortization 654,703 756,478
Research and development 71,296 156,446
Write-down of asset value - 700,428
------------------------
Total operating expenses 1,868,253 3,068,444
------------------------
Loss from operations (647,364) (1,975,467)
------------------------
Other income (expense):
Interest expense, net (23,628) (37,043)
Interest expense, related party (117,944) (480,460)
(Loss) gain on sale of assets (2,088) 488,470
------------------------
Loss before income taxes and discontinued
operations (791,024) (2,004,500)
Income taxes - -
Discontinued operations:
Loss from discontinued operations - (113,040)
Loss on disposal of discontinued operations (8,643) (46,799)
------------------------
Loss from discontinued operations (8,643) (159,839)
------------------------
Net loss $ (799,667 $(2,164,339)
-------------------------
Loss per common share $ (.06) $ (.15)
------------------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
<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, 1997 - - $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 - - - - - 2,164,339 2,164,339
-----------------------------------------------------------------------------------------
Balance,
December 31, 1997 - - 13,974,167 69,871 9,185,517 (7,437,183) 1,818,205
Shares issued for
services - - 100,000 500 23,500 - 24,000
Shares received and
retired in genesis
agreement - - (8,115) (41) 41 - -
Net loss - - - - - 799,667 799,667
-----------------------------------------------------------------------------------------
Balance,
December 31, 1998 - $ - 14,066,052 $70,330 $9,209,058 $(8,236,850) $1,042,538
=========================================================================================
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1998 1997
------------------------
Cash flows from operating activities:
Net loss $ (799,667) $(2,164,339)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 654,809 756,478
Write-down of technology and marketing rights - 700,428
Loss (gain) on disposal of assets 2,088 (488,470)
Common stock issued for services 24,000 -
Forgiveness of debt (20,000) -
(Increase) decrease in:
Accounts receivable 34,370 356,891
Inventories (31,056) (23,497)
Other current assets 813 20,373
Increase (decrease) in:
Accounts payable 68,231 (585,177)
Accrued liabilities (799,971) 1,282,858
Deferred revenue (9,041) (266,046)
------------------------
Net cash (used in) continuing operations (875,424) (410,501)
Cash provided by (used in) discontinued
operations 683,853 2,483,473
------------------------
Net cash (used in) provided by
operating activities (191,571) 2,072,972
------------------------
Cash flows from investing activities:
Proceeds from sale of assets 4,700 738,002
Decrease in notes receivable 19,058 49,011
Purchase of property, plant and equipment (88,935) (153,378)
------------------------
Net cash provided by
investing activities 65,177 633,635
------------------------
Cash flows from financing activities-
payments on long-term debt (133,992) (2,461,077)
------------------------
Net increase (decrease) in cash (390,740) 245,530
Cash, beginning of year 1,153,199 907,669
------------------------
Cash, end of year $ 762,459 $ 1,153,199
------------------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
<PAGE>
Consolidated Statement of Cash Flows
Continued
- ------------------------------------------------------------------------------
1998 1997
------------------------
Supplemental Disclosure of Cash Flow Information
Actual cash amounts paid for:
Interest $ 181,019 $ 133,747
------------------------
Income taxes $ - $ -
------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities
During the year ended December 31, 1998, the following transactions occurred:
o Property and equipment with an aggregate value of $77,400 was purchased
with debt.
o As part of the bankruptcy proceedings $925,911 of accrued interest was
included as part of long-term debt.
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- ------------------------------------------------------------------------------
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 technology which refines various types of used 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.
- ------------------------------------------------------------------------------
35
<PAGE>
Notes to Consolidated Financial Statements
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
- ------------------------------------------------------------------------------
36
<PAGE>
Notes to Consolidated Financial Statements
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 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 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.
2. Going Concern
The Company has sustained significant operating losses in 1998 and 1997, and it
has taken longer than projected to bring the re-refining technology to economic
viability. This has caused the Company to incur more research and development
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. On September 10, 1998 the bankruptcy court approved the Company's plan.
Under terms of the confirmed plan certain obligations were restructured. It is
not known if the Company will be able to meet its obligations under the
confirmed plan. These factors create an uncertainty about the Company's ability
to continue as a going concern.
- ------------------------------------------------------------------------------
37
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
2. Going Concern
Continued
The Company has made continuous efforts to negotiate settlements 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 technology, and attaining future profitable operations.
The consolidated financial statements do not include any adjustment that might
be necessary if the Company is unable to continue as a going concern.
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, 1998, the note receivable
balance totaled approximately $110,000 of which $20,000 is due in 1999. Since
payment of the note is contingent upon future earnings, an amount totaling
approximately $52,000 has been recorded as deferred revenue and is recognized
when payments are received. Income related to this note of $9,000 and $16,000
was recognized as income on the note during the years ended December 31, 1998
and 1997, respectively.
The Company has another note receivable totaling $300,000 with no interest rate
which was due December 31, 1997. The note is unsecured. The Company established
$300,000 allowance reserve to affect the note receivable.
- ------------------------------------------------------------------------------
38
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
4. Property and Equipment
Property and equipment at December 31, 1998 consists of the following:
Land $ 134,535
Vehicles 130,838
Machinery and equipment 4,967,740
Buildings and structures 728,877
Office furniture and equipment 283,318
------------
6,245,308
Less accumulated depreciation,
amortization, and depletion (2,288,754)
------------
$ 3,956,554
------------
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. In
addition, the Company has developed its own technology relating refining used
oil. The Company is currently in negotiations with several entities who desire
to use its refining process. The Company capitalized $2,228,684 of patent,
engineering, and other costs related to this agreement. 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.
As a result of the uncertainty of future operating results and the litigation
relating to the technology and marketing rights, the Company took a charge at
December 31, 1997 of $700,428. These rights are being amortized on a
straight-line basis over seven years. Amortization expense of $142,857 and
$175,563 was recorded during the years ended December 31, 1998 and 1997,
respectively, and accumulated amortization after the one time charge at December
31, 1998, totaled $1,371,541.
- ------------------------------------------------------------------------------
39
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Long-Term Debt
Long-term debt at December 31, 1998, is as follows:
Note payable to a shareholder of the Company with interest at a rate of 7%
secured by a Trust Deed and a security interest in assets of the Company $
3,600,000
Notes payable to various financial institutions bearing interest at between 7.0%
and 11.25%, due in combined monthly installments of $5,621 including interest,
secured by real estate
462,948
Notes payable to shareholders with interest
accruing at 7.0% unsecured 99,145
Notes payable to various financial institutions, due in combined monthly
installments of $3,973, including interest at rates between 10.25% and 11.9%,
secured by vehicles
88,777
Capital lease obligations (see note 7) 128,715
------------
4,379,585
Less current portion of long-term debt (913,597)
------------
Net long-term debt $ 3,465,988
============
6. Long-Term Debt
Continued
Future maturities of long-term debt as of December 31, 1998 are as follows:
Year Amount
------------
1999 $ 913,597
2000 1,100,099
2001 1,066,689
2002 893,408
2003 104,738
Thereafter 301,054
------------
$ 4,379,585
============
- ------------------------------------------------------------------------------
40
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
7. Capital Leases
The Company has entered into several noncancellable capital leases for
equipment. The leases have between three and four year lease terms, aggregate
monthly payments total $5,279. The assets under capital leases have been
capitalized at an aggregate cost of $237,371 and accumulated amortization of
these costs totaled $95,329 at December 31, 1998. Future minimum lease payments
are as follows:
Year Amount
------------
1999 $ 100,931
2000 35,912
------------
Total minimum lease payments 136,843
Less amount representing interest (8,128)
------------
Present value of minimum lease payments $ 128,715
============
8. 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.
- ------------------------------------------------------------------------------
41
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
8. Income Taxes
Continued
The Company's income tax (expense) benefit differed from the statutory federal
rates as follows:
1998 1997
------------------------
Statutory rate applied to loss
before taxes $ 272,000 $ 700,000
State income taxes 40,000 108,000
Increase in valuation allowance (312,000) (808,000)
------------------------
$ - $ -
========================
Significant components of the Company's deferred tax assets (liabilities) and
tax liabilities at December 31, 1998 are as follows:
Depreciation $(455,000)
Net operating losses 3,125,000
Capital loss carryover and nondeductible accruals 77,000
Valuation allowance (2,747,000)
------------
$ -
============
The Company has approximately $9,192,000 of net operating losses available to
offset future income. These net operating losses expire in the years 2005
through 2013. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation of the amount of carryforwards which
could be utilized. In addition, the Company has $207,000 of capital loss
carryforwards available to offset income.
It is not possible to estimate the utilization of carrying forward the available
net operating losses to future periods to offset income. Consequently, a
valuation allowance has been established to offset any tax asset.
9 Discontinued
Operations
As part of the Company's restructuring, to reduce expenses, and to satisfy
claims and other obligations, the Company has sold or
- ------------------------------------------------------------------------------
42
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
discontinued several segments of its operations during the years ended December
31, 1997 and 1996.
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 in prior years had an interest in a joint venture which owned a
plant (Genesis) which refined various types of used oil. In 1997, 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 in 1997 and 8,115 shares in 1998, 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 during the year ended
December 31, 1998. The Company realized a loss of $2,134,516 on the disposal of
the Genesis plant in 1997.
During 1997, in an effort to increase cash flow and reduce expenses, the Company
discontinued Gagon.
Condensed discontinued operations are as follows for the year ended December 31,
1997:
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 taxes (4,609) 82,613 (191,044) (113,040)
---------------------------------------------------
Income taxes - - - -
---------------------------------------------------
Net loss $ (4,609) $ 82,613 $(191,044) $(113,040)
---------------------------------------------------
10.Related Transactions
Interest expense recorded for related party notes payable (see note 6) totaled
$117,946 and $480,460 for 1998 and 1997, respectively.
- ------------------------------------------------------------------------------
43
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
11.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. Under the Officers Option Plan, 7,500
options are granted each year to various officers and directors of the Company.
Additional options may be granted at the discretion of the board of directors.
The Company also has a stock option plan for non-insiders (Non-Insider Option
Plan), under which a maximum of 750,000 options may be granted to purchase
common stock. Grants are also limited to 250,000 options per year.
Under the Non-Insider Option Plan, all grants are at the discretion of the board
of directors.
All options are exercisable after six months and have a maximum term not to
exceed five years. Options may not be transferred except by reason of death,
with certain exceptions, and termination of employment accelerates the
expiration date of any outstanding options to 90 days from the date of
termination.
A schedule of options and warrants at December 31, 1998 is as follows:
Number of Option Price
Options Per Share
--------------------------------------
Outstanding at December 31, 734,166 $ 1.08 - 5.65
1997
Granted 22,500 4.50
Expired 650,000 1.08
Forfeited 7,500 4.50
--------------------------------------
Outstanding at December 31, 99,166 $ 4.50 - 5.65
1998
--------------------------------------
Options exercisable and shares available for future grant are as follows:
December 31,
------------------------
1998 1997
------------------------
Options exercisable 99,166 734,166
Shares available for grant 950,834 1,015,834
- ------------------------------------------------------------------------------
44
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12.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 1998 and 1997
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,
----------------------------
1998 1997
----------------------------
Net loss - as reported $ (799,667 $ (2,164,339)
Net loss - pro forma $ (803,711 $ (2,214,514)
Loss per share - as reported $ (.06) $ (.15)
Loss per share - pro forma $ (.06) $ (.16)
----------------------------
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,
-----------------------
1998 1997
-----------------------
Expected dividend yield $ - $ -
Expected stock price volatility 141% 146%
Risk-free interest rate 5% 4.5%
Expected life of options 5 years 5 years
------------------------
The weighted average fair value of options granted during 1998 and 1997 are $.18
and $3.30, respectively.
The following table summarized information about fixed stock options outstanding
at December 31, 1998:
- ------------------------------------------------------------------------------
45
<PAGE>
12.Stock-Based Compensation
Continued
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
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 12/31/98 (Years) Price 12/31/98 Price
-------------------------------------------------------------------------
4.5-5.65 99,166 2.17 4.67 99,166 4.67
-------------------------------------------------------------------------
13.Significant
Customers
The Company has a customer whose sales exceed 10% of total revenues. Sales to
this customer were approximately $1,220,000 and $1,369,000 for the years ended
December 31, 1998 and 1997, respectively.
14.Segment Information
The Company has operations in the segments of gas processing, technology,
marketing rights, and other. The following is a breakdown by segment:
1998 1997
------------------------
Capital expenditures:
Oil and gas $ 134,545 $ 149,303
Used oil refining 27,788 -
Other 4,002 4,075
------------------------
Total $ 166,335 $ 153,378
========================
Depreciation and amortization:
Oil and gas $ 454,362 $ 524,479
Used oil refining 144,407 170,581
Other 56,040 61,418
------------------------
Total $ 654,809 $ 756,478
========================
- ------------------------------------------------------------------------------
46
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
14.Segment Information
Continued
1998 1997
------------------------
Identifiable assets:
Oil and gas $ 3,890,643 $ 4,063,606
Used oil refining 1,010,640 1,072,298
Other 1,130,034 1,804,600
Discontinued - 683,853
------------------------
Total $ 6,031,317 $ 7,624,357
========================
Revenue:
Oil and gas $ 3,069,401 $ 4,280,278
Used oil refining 433,368 531,991
Other 34,028 15,700
------------------------
Total $ 3,536,797 $ 4,827,969
========================
Direct costs:
Oil and gas $ (2,124,046) $(3,502,587)
Used oil refining (191,862) (232,405)
Other - -
------------------------
Total $ (2,315,908) $(3,734,992)
========================
Gross margin $ 1,220,889 $ 1,092,977
========================
Operating expenses:
Oil and gas $ (925,413)$(1,089,497)
Used oil refining (419,137) (1,276,517)
Other (523,703) (702,430)
------------------------
Total $ (1,868,253) $(3,068,444)
========================
Loss from operations $ (647,364) $(1,975,467)
========================
- ------------------------------------------------------------------------------
47
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
15.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 $712 and $3,454 for the years ended December 31, 1998 and 1997,
respectively.
16.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, 1998, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet.
17.Earnings Per Share
Financial accounting standards require companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows (in
thousands, except per share amounts):
Years Ended
December 31,
----------------------------
1998 1997
----------------------------
Basic EPS:
Net loss available to common
stockholders $ (799,667) $ (2,164,339)
----------------------------
Weighted average common shares 14,065,800 13,974,167
----------------------------
Net income per share $ (.06) $ (.15)
----------------------------
- ------------------------------------------------------------------------------
48
<PAGE>
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
17.Earnings Per Share
Continued
Diluted EPS:
Net loss available to common
stockholders $ (799,667 $ (2,164,339)
--------------------------
Weighted average common shares 14,065,800 13,974,167
--------------------------
Net income per share $ (.06) $ (.15)
--------------------------
18.Contingency
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Statement No. 132 is effective for years beginning
after December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial statements.
19.Recent Accounting Pronouncements
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. No amounts have been included in the financial statements for
any contingencies.
- ------------------------------------------------------------------------------
49
<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. Williams 47 Director/Chairman/CEO/President
Mark W. Holland 42 Director/Chief Financial Officer
Laurie Evans 34 Director/Vice President of
Marketing 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
50
<PAGE>
Science degree in Accounting and Business Administration from Southern Utah
State College in 1983.
Laurie Evans. Ms. Evans joined the Company in January 1996, and has been a
member of the Company's executive management team serving as Assistant for the
President since July 1997. In September of 1998, Ms. Evans was appointed
Director for the Company and Vice President of Marketing for Interline Energy
Services. In addition to her duties of marketing, Ms Evans makes a significant
contribution in the areas of accounting and operations of the Company. Upon
joining the Company, Ms Evans brought seven years of previous management
experience in retail and medical. Ms. Evans attended Brigham Young University,
where she pursued an undergraduate degree in Business Management.
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 $100,000:
51
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
---------------------------- ---------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restrict Options/ LTIP Other
Principal ($) ($) Compen- Stock SAR's Payouts Compen-
Postition Year Salary Bonus sation($) Awardsm($) (#) ($) sation($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael R. Williams 1998 $125,000 $-0- $-0-- $-0- 7,500(1) $-0- $-0-
President, CEO 1997 $156,216 $-0- $-0-- $-0- 7,500(1) $-0- $-0-
Chairman 1996 $168,000 $-0- $-0-- $-0- 7,500(1) $-0- $-0-
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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,
1996, March 1, 1997 and March 1, 1998 at a price of $4.50.
The Company provides health and life insurance to its employees, including
its officers and certain directors.
Stock Options Granted During 1998
The following table provides information on grants of stock options during
1997 to the persons named in the Summary Compensation Table above.
OPTION GRANTS IN 1997
- -------------------------------------------------------------------------------
Individual
Grants
- -------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------
% of Total
Options Exercise
Options Granted to or Base
Granted Employees Price Expiration
Name (#) in ($/Sh) Date
Fiscal Year
- -------------------------------------------------------------------------------
Michael R. Williams 7,500 33.33% $4.50 3/1/02
- -------------------------------------------------------------------------------
52
<PAGE>
Option Values at December 31, 1998
No options were exercised during 1998 by the person named in the Summary
Compensation Table. The following table provides information on the unexercised
options at December 31, 1998 owned by the people named in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISED IN 1997
AND YEAR-END 1997 OPTION VALUES
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------------
Number of Value of Unexercised
Unexercised Options at In-the-Money Options at
Year End 1998 (#) Year End 1998 ($)(1)
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Williams -0- -0- 37,500 -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, 1998 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,
1998 ($0.08).
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.
53
<PAGE>
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) 2,703,006 19.08%
160 W. Canyon Crest Rd.
Alpine, UT 84004
Maurice D. Sabbah(4) 2,052,666 14.49%
c/o Fortress RE
262 East Morehead St.
PO Box 700
Burlington, NC 27216
Mark W. Holland(2)(5) 239,720 1.69%
160 W. Canyon Crest Rd.
Alpine, UT 84004
Laurie Evans(2) (6) 7,500 .05%
777 North 1570 West
Pleasant Grove, Utah 84062
All Officers and Directors 2,950,226 20.82%
as a Group (3 persons)
Total Shares Issued and 14,165,218 100%
Outstanding(1)
(1)As of March 17, 1999 there were 14,066,052 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 99,166 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 14,165,218 shares issued and outstanding.
54
<PAGE>
(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
2,561,056 beneficially owned, 104,450 shares owned by his minor children
and 37,500 shares issuable upon the exercise of currently exercisable
options.,
(4) Includes 2,052,666 shares which are owned directly by Mr.
Sabbah. 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.
(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 61,666 shares which may be
issued upon the exercise of a currently exercisable stock option.
(6) Mrs. Evans is Director and Vice President of Marketing for
Interline Energy Services. The number of shares indicated as owned by Mrs.
Evans includes 0 directly owned by Mrs. Evans and 7,500 shares which may
be issued upon the exercise of a currently exercisable stock option. The
number of shares indicated excludes 3,500 shares owned by Mrs. Evans
spouse of which Mrs. Evans disclaims beneficial ownership.
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.
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 7% 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, 1998 was as
follows:
55
<PAGE>
Total Amount Unpaid as of
Lender of Loans 12/31/98
------ ------------ ------------
Michael R. Williams $89,519 $ -0-
Timothy G. Williams $19,000 $14,676
Gearle D. Brooks $79,985 $19,626
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, 1998 was as follows:
Total Amount Unpaid as of
Lender of Loans 12/31/98
Michael R. Williams $165,000 $ -0-
Timothy G. Williams $ 60,000 $ -0-
Gearle D. Brooks $ 75,000 $64,843
On September 9, 1998, the plan of reorganization under Chapter 11 was
confirmed by the United States Bankruptcy Court for the District of Utah. Under
the plan, the Company will pay Mr. Brooks and Mr. Williams quarterly payments of
interest and 2.16% of the principal balance. The Company also reached agreement
with Maurice D. Sabbah, a shareholder of the Company. The following terms of the
agreement were incorporated in the plan.
The terms of the agreement included a new trust deed note dated September
22, 1998 for $3,600,000, together with interest at the rate of 7% per annum on
the unpaid principal. The Company will make quarterly payments of all accrued
interest beginning on December 22, 1998 and continuing until September 22, 2002.
The Company will also make principal payment of $750,000 on September 22, 1999;
$1,000,000 on September 22, 2000; $1,000,000 on September 22, 2001 and $850,000
on September 22, 2002. The note is secured by Trust Deeds securing a security
interest in the Company's Alpine Office located in Alpine, Utah and a security
interest in all assets of Interline Energy Service, Inc. As obligated in the
previous agreements, the Company executed a new Pledge Agreement with this major
creditor pledging stock of the Company and stock of all subsidiaries of the
Company.
56
<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
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 one reports on Form 8-K during
the fiscal year ended December 31, 1998.
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)
56
<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.
57
<PAGE>
(Incorporated by Reference to Form 10-KSB
dated December 31, 1993)
10.11 Quaker State Resources Agreements - N/A
(Incorporated by Reference to Form 8-K
dated September 13, 1994)
10.12 Whelan Environmental Services Agreement - N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1994)
10.13 Amoco Processing/Transportation Agreement - N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.14 PSI Assignment Agreement - N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.15 Dukeun Industrial Company Agreements - N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.16 Bahrain and Singapore Agreement - N/A
(Incorporated by Reference to Form 10-KSB
dated December 31, 1995)
10.17 Genesis Petroleum - Salt Lake, L.L.C 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
58
<PAGE>
(Incorporated by Reference to Form 8-K
dated June 27, 1996)
10.21 Transpacific Industries License Agreements - N/A
10.22 Q Lube Inc. Letter Agreement -- Termination of - N/A
License and Technology Disclosure Agreement
and Related Agreements
10.23 Questar Asset Agreement - Utah Oil and Gas Sale - N/A
(Incorporated by Reference to Form 8-K
dated May 12, 1997)
10.24 Genesis Petroleum Settlement Agreement - N/A
(Incorporated by Reference to Form 8-K
dated January 27, 1998)
21.1 Subsidiaries of Registrant - N/A
87.1 Financial Data Schedule 61
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
59
<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: March 17, 1999 INTERLINE RESOURCES CORPORATION
By/s/ Michael R. Williams
--------------------------------
Michael R. Williams
CEO/President
Principal Executive Officer
Director
By/s/ Mark W. Holland
--------------------------------
Mark W. Holland
Chief Financial Officer / Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date Title Signature
March 17, 1999 CEO/President /s/ Michael R. Williams
and Director -----------------------------
Michael R. Williams
March 17, 1999 Director/ /s/ Laurie Evans
Secretary -----------------------------
Laurie Evans
60
<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> 762,459
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 762,459
<SECURITIES> 0
<RECEIVABLES> 545,760
<ALLOWANCES> (276,040)
<INVENTORY> 55,225
<CURRENT-ASSETS> 1,127,899
<PP&E> 6,245,308
<DEPRECIATION> (2,258,754)
<TOTAL-ASSETS> 6,031,317
<CURRENT-LIABILITIES> 1,470,739
<BONDS> 0
0
0
<COMMON> 70,330
<OTHER-SE> 972,208
<TOTAL-LIABILITY-AND-EQUITY> 6,031,317
<SALES> 0
<TOTAL-REVENUES> 3,536,797
<CGS> 0
<TOTAL-COSTS> 2,315,908
<OTHER-EXPENSES> 1,870,341
<LOSS-PROVISION> (649,452)
<INTEREST-EXPENSE> 141,572
<INCOME-PRETAX> (798,024)
<INCOME-TAX> 0
<INCOME-CONTINUING> (791,024)
<DISCONTINUED> (8,643)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (799,667)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
