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As Filed with the Securities and Exchange Commission on February 19, 2003
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended December 31, 2002
-----------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-21956
EVANS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1613155
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification number)
102 South Mechanic, P.O. Box 550, El Campo, Texas 77437 (979) 245-2424
(Address including zip code and telephone number, including area code, of
registrant's principal executive offices)
Blair R. Couey, President
102 South Mechanic, P.O. Box 550, El Campo, Texas 77437
(979) 245-2424
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 ____
---
Number of shares of common stock of registrant outstanding exclusive of Treasury
shares or shares held by subsidiaries of the registrant at February 18, 2003 was
9,844,831.
1
Evans Systems, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets as of
December 31, 2002 and September 30, 2002 3
Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2002 and 2001 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information 20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Certifications 21
Signatures 22
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
December 31, September 30,
2002 2002
---- ----
Assets
------
Current Assets:
Cash and cash equivalents $ 180 $ 491
Trade receivables, net of allowance for doubtful
accounts of $47,000 and $47,000, respectively 1,108 913
Inventory 382 507
Costs and estimated earnings in excess of billings on
uncompleted contracts 102 72
Prepaid expenses and other current assets 112 96
Notes receivable, current portion 113 115
----------- ----------
Total current assets 1,997 2,194
Property and equipment, net 3,518 3,547
Notes receivable, long term 40 -
Other assets 30 30
----------- ----------
Total assets $ 5,585 $ 5,771
=========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,250 $ 1,165
Accrued excise, property and other taxes payable 334 385
Advances on line of credit 499 479
Current portion of long-term debt 475 477
Accrued interest 18 10
Billings in excess of costs and estimated earnings on
uncompleted contracts 30 3
----------- ----------
Total current liabilities 2,606 2,519
Long-term debt, net of current portion 4,981 5,070
----------- ----------
Total liabilities 7,587 7,589
Stockholders' equity (deficit)
Common stock, $.01 par value, 15,000,000 shares
authorized, 9,844,831 shares issued and outstanding 99 99
Additional paid-in capital 17,193 17,193
Accumulated deficit (18,860) (18,676)
Treasury stock, 72,589 shares, at cost (434) (434)
----------- ----------
Total stockholders' deficit (2,002) (1,818)
----------- ----------
Total liabilities and stockholders' equity $ 5,585 $ 5,771
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Evans Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended December 31,
-------------------------------
2002 2001
---- ----
Revenues:
Motor fuel sales $ 3,829 $ 4,325
Other sales and services 267 198
--------- ---------
Total revenues 4,096 4,523
Cost of sales
Motor fuel 3,602 4,027
Other sales and services 127 107
--------- ---------
Total cost of sales 3,729 4,134
--------- ---------
Gross profit 367 389
Operating expenses:
Employment expenses 185 374
Other operating expenses 134 118
General & administrative expenses 156 216
Depreciation and amortization 54 130
(Gain) loss on sale of assets (3) 20
--------- ---------
Total operating expenses 526 858
--------- ---------
Operating loss (159) (469)
Other income (expense)
Interest expense, net (32) (26)
Other income (expense), net 45 (9)
Rental income, net 54 -
--------- ---------
Total other income (expense) 67 (35)
--------- ---------
Income (loss) before income taxes (92) (504)
Provision for income taxes - -
--------- ---------
Income (loss) from continuing operations (92) (504)
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Stores to November 18, 2002 (92) (235)
--------- ---------
Total discontinued operations (92) (235)
--------- ---------
Net income (loss) $ (184) $ (739)
========= =========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.01) $ (0.07)
Discontinued operations (0.01) (0.04)
--------- ---------
Earnings (loss) per common share $ (0.02) $ (.11)
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Evans Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended December 31,
-------------------------------
2002 2001
---- ----
Cash flows provided (used) by operating activities:
Net income (loss) $ (184) $ (739)
Adjustments:
Depreciation and amortization 54 159
Loss (gain) on sale of fixed assets (3) 20
Changes in working capital:
Current assets (114) 311
Other assets (40) 5
Current liabilities 69 22
----------- -------------
Total adjustments (34) 517
----------- -------------
Net cash provided (used) by operating activities (218) (222)
Cash flows provided (used) by investing activities:
Capital expenditures (25) (8)
Proceeds from sale of property and equipment 3 263
----------- -------------
Net cash provided (used) by investing activities (22) 255
Cash flows used by financing activities:
Borrowings under line of credit agreement, net 20 -
Borrowings under note payable agreements 2 -
Repayment on notes payable (93) (193)
Net proceeds from stock issuance - -
----------- -------------
Net cash used by financing activities (71) (193)
----------- -------------
Net increase (decrease) in cash (311) (160)
Cash and cash equivalents, beginning of period 491 604
----------- -------------
Cash and cash equivalents, end of period $ 180 $ 444
=========== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans
Systems, Inc. and its subsidiaries (dba MC Star and collectively referred to as
the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America, pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated. These financial
statements do not include all information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. It is recommended that these interim unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended December 31, 2002
are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2003. Certain prior
period amounts have been reclassified for comparative purposes.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 these estimates.
Note B - Discontinued Operations
On November 18, 2002, the Company sold its fuel and retail inventory in its
three remaining operating convenience stores and leased the stores and store
equipment to outside operators, effectively discontinuing its Texas Convenience
Store Segment operations. Two lease agreements for two stores to an outside
operator call for lease payments of $2,800 and $3,200 per month for 5 years with
payments beginning December 1, 2002. Each lease maintains one 10-year extension
option. One lease agreement for a store to an outside operator calls for lease
payments of $2,400 per month for 5 years beginning December 1, 2002, with two
5-year extension options. Under the lease agreements, the Company, through its
Texas Petroleum Marketing Segment, executed fuel contracts with these outside
operators, thereby maintaining the fuel volumes. Accordingly, the results of
operations of the Texas Convenience Store segment have been classified as
discontinued operations and prior periods have been restated. The Company has
not allocated interest expense or general corporate overhead to discontinued
operations. Summary operating results for the three months ended December 31,
2002 and 2001 are as follows (in thousands):
Quarter Ended December 31,
--------------------------
2002* 2001
------------ ------------
Revenues $ 342 $ 1,611
============ ============
Gross Profit $ 8 $ 293
============ ============
Income (loss) from operations $ (92) $ (235)
============ ============
*Through November 18, 2002.
6
Note C - Change in Accounting Principal
In September 2002, the Company adopted the first-in, first-out (FIFO) method of
costing gas and diesel fuel inventories. Previously, the last-in, first out
(LIFO) method was used. After taking into consideration the Company's plans to
hold less inventory and provide a faster inventory turn, management believes
that the FIFO method will more accurately reflect fuel inventories at or near
current replacements costs, provide a more realistic fair value measurement of
current assets and will be more representative of industry trends applied by
other regional and local petroleum distributors. In addition, FIFO provides a
uniform method for valuing all Company inventories, as inventories of oil and
grease, automotive products and accessories, chemical products and convenience
store products already utilize the FIFO method of accounting. The financial
statements of prior periods have been restated to apply the new method
retroactively. The otherwise tax liability from this change is offset by net
operating loss carryforwards of the Company generated from previous years
losses. Accordingly, no provision has been recorded. The effect of the
accounting change on net loss as previously reported for the quarter ended
December 31, 2001 is as follows (in thousands, except per share amounts):
Net loss as previously reported $ (711)
Adjustment for effect of a change in accounting principle
that is applied retroactively
(28)
-----------
Net loss as adjusted $ (739)
===========
Per share amounts:
Earnings per common share:
Net loss as previously reported $ (0.11)
Adjustment for effect of a change in accounting principle
that is applied retroactively
-
-----------
Net loss as adjusted $ (0.11)
===========
Note D - Long-Term Debt
As of December 31, 2002, the Company had an aggregate of approximately
$5,456,000 in principal outstanding under various note agreements. Of this
total, one note dated June 24, 2002 for $4,500,000, payable to Cain, Smith &
Strong, L.P. (CSS), has terms that call for payments of interest only at an
annual rate of 10% for five years commencing six months from the closing of the
transaction, with the principal balance and accrued but unpaid interest due at
the end of such period. In January 2003, the Company entered into an agreement
with CSS, which resulted in a reduction of the principal due under this note and
a deferral of interest payment until June 2003 (Note J).
Of the remaining principal outstanding aggregating an approximate $956,000,
approximately $634,000 is due to various property taxing districts over the next
three years. Additionally, $183,000 is due to Travelers Express Co. under a
forbearance note agreement dated June 24, 2002 that calls for payment of
principal and interest over 36 months beginning June 22, 2003. Interest is
calculated at prime plus 50 basis points. The remaining outstanding principal
balance is due under various terms to various third parties. As of December 31,
2002 and September 30, 2002, approximately $475,000 and $477,000, respectively,
in outstanding principal is due within one year.
7
In July 2002, the Company secured a secured a $500,000 revolving line of credit
with NewFirst National Bank secured by the Company's inventory, accounts
receivable, certain property in Bay City, Texas and by the Company's common
stock beneficially owned by Mauritz & Couey ("MC"). Terms of the revolving line
of credit call for an annual interest rate of prime plus 3% with monthly
interest payments beginning August 23, 2002 and all outstanding principal and
accrued but unpaid interest due on or before July 23, 2003. As of December 31,
2002 and September 30, 2002, the Company had approximately $499,000 and
$479,000, respectively, outstanding under this agreement. At December 31, 2002,
the Company was in default on certain loan covenants under this agreement.
Note E - Costs and Estimated Earnings on Uncompleted Contracts
At December 31, 2002 and September 30, 2002, costs and estimated earnings on
uncompleted contracts consisted of the following (in thousands):
Dec. 31, Sept. 30,
2002 2002
--------------- --------------
Costs incurred to date on uncompleted contracts $ 137 $ 240
Estimated earnings 170 138
--------------- --------------
307 378
Billings to date (235) (309)
--------------- --------------
Total $ 72 $ 69
=============== ==============
Included in the accompanying condensed consolidated balance sheets
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 102 $ 72
Billings in excess of costs and estimated earnings
on uncompleted contracts (30) (3)
--------------- --------------
Total $ 72 $ 69
=============== ==============
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $147,000 and $250,000 at December 31, 2002
and September 30, 2002, respectively. There were no material revisions in
contract estimates during the quarter ended December 31, 2002.
Note F - Seasonal Nature of Business
The refined petroleum products market customarily experiences decreased margins
in the fall and winter months followed by increased demand during spring and
summer when construction, travel, agricultural and recreational activities
increase.
Note G - Basic and Diluted Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share for the quarters ending December 31,
2002 and 2001 were computed using 9,844,831 and 6,759,831 weighted average
common shares outstanding, respectively. Stock options and warrants were not
included in the computation of diluted loss per common share for the quarters
ended December 31, 2002 and 2001 since they would have resulted in an
antidilutive effect on loss from continuing operations.
8
At December 31, 2002, the Company had an aggregate 9,844,831 shares of common
stock issued and outstanding and is authorized to issue up to an aggregate
15,000,000 shares of common stock. Of the 5,155,169 shares of common stock
available for issuance, approximately 390,350 shares are reserved for vested
stock options to employees of the Company and 4,268,000 shares are reserved for
Warrants issued and outstanding.
Note H - Contingent Liabilities
The Company is subject to litigation, primarily as a result of vendor claims, in
the ordinary conduct of its operations. As of December 31, 2002, the Company had
no knowledge of any legal proceedings, except as described below, that, by
themselves, or in the aggregate, would not be covered by insurance or could be
expected to have a material adverse effect on the Company.
During the quarter ended December 31, 2002, the Company was notified that a
lawsuit was filed against the Company and several or its current and former
officers and directors on behalf of purchasers of the Company's common stock.
The petition alleges that the Company received funds from a Private Placement
transaction with Comsight Holdings, Inc., whereby Comsight agreed to act as a
placement agent for accredited investors to purchase a minimum of 1,250,000 and
a maximum of 3,750,000 shares of the Company's common stock in a private
placement to accredited investors at $0.40 per share. On August 17, 2000, the
Company issued 1,437,500 shares of common stock for total consideration of
$575,000. The Plaintiff's allege that they never received the common shares or a
refund of the subscription funds. The lawsuit demands, among other relief,
unspecified compensatory damages, attorney's fees and costs of conducting the
litigation. The Company intends to defend itself vigorously in these matters. It
is possible, however, that the outcome of any present or future litigation may
have a material adverse impact on the Company's financial condition or results
of operations in one or more future periods. The Company has not accrued any
liability in connection with this lawsuit.
On June 22, 2002, the Company issued to JPMorgan Chase Bank a non-interest
bearing $2,000,000 contingent note. Under the terms of the contingent note, the
note is payable only upon the occurrence of each of the following conditions:
(i) the closing bid price of the Company's common stock exceeds $5.00 for 180
consecutive trading days; (ii) the Company's debt to equity ratio shall be less
than 50%; (iii) the Company's revenue/debt ratio shall be less than 0.05, and
(iv) the Company's interest burden coverage shall be greater than 20 times.
Should all of these conditions be met, the note would have a maturity date of 5
years from the date such conditions are met. Should the payment conditions not
be met by June 21, 2012, the note will be automatically null and void. The
contingency note's purpose was for JPMorgan, for having made prior concessions
to the Company, to participate in any financial windfall of the Company, should
such an eventuality occur. It is management's opinion that it is very unlikely
this note will become effective prior to the termination date.
Note I - Management's Plans
New management and directors were appointed on June 24, 2002. From that date
through December 31, 2002, an extensive analysis of the Company operations was
performed to determine an achievable growth and liquidity plan. Management came
to the conclusion that a conservative and cost effective plan should concentrate
in areas that management has maintained a successful record of accomplishments.
The Company's future focus will be on developing its Petroleum Marketing Segment
through utilization of new marketing personnel to solicit new customers and
existing personnel to contact and regain customers that were lost in the prior
years. This plan does not require capital intensive expenditures and should
increase revenues and accompanied with the cost reductions in personnel and
overhead that have been accomplished restore the company to profitability.
Consistent with this plan the Company sold its inventory in the three remaining
convenience stores in November 2002 and leased the locations to outside
operators. The Petroleum Marketing Segment executed fuel contracts with these
locations maintaining the fuel volumes. The second phase of managements plan is
to open the Fuel Terminal utilizing a joint venture, thru-put partner, or
supplier to begin operations (Note J). The Fuel Terminal operation will reduce
overall product cost and freight expense, adding additional revenues to the
Petroleum Marketing Segment.
There can be no assurance that management's plans will be successfully
implemented or that the Company will continue as a going concern.
Note J - Subsequent Events
On January 13, 2003, the Company assigned its ground lease with the Port of Bay
City for the fuel terminal to CSS as well as conveyed the terminal facility
assets, including all the tanks and structures at the Port of Bay City, to CSS
for certain concessions by CSS. Those concessions included the agreement of CSS
to waive interest on the Company's note payable to CSS until June 1, 2003, the
9
agreement of CSS to reduce the principal amount due under the note payable by
$2.0 million from $4.5 million to $2.5 million, the agreement of CSS to assume
all property taxes on the terminal facility assets, and the agreement of CSS to
timely perform all obligations of payment and performance of the Port of Bay
City lease agreement.
The Company had been obligated for monthly payments of $108 until September 2006
under the ground lease.
The aggregate net book value of the terminal facility assets at the date of
conveyance was approximately $365,000 and the Company's last independent
appraisal of the terminal facility, dated July 2001, estimated the fair market
value of the terminal facility at approximately $2.0 million. The Company also
had recorded property taxes payable of approximately $117,500 on the terminal
facility assets. Accordingly, in January 2003, the Company recorded the
reduction of the note payable to CSS by $2.0 million, the reduction of property
taxes payable by $117,500, the conveyance of the terminal facility assets of
approximately $365,000 net, and a noncash gain of $1,752,500.
In connection with this transaction, the Company and CSS entered into an Option
Agreement whereby the Company would have the exclusive right and option until
June 21, 2027 to purchase the terminal facility assets and lease agreement back
for the lesser of $3.5 million or the amount of an "Outside Offer". An "Outside
Offer" is defined as an offer to purchase the terminal facility assets and lease
agreement made by an unrelated third party during the option term. In addition,
the Option provides that should the Company not exercise its option, the CSS and
the Company will share equally all proceeds over and above $3.5 million
resulting from the sale to an unrelated third party buyer.
Concurrent with the Option Agreement, CSS also granted a Second Option to
purchase the terminal facility and lease agreement, which is subordinate to the
Company's Option, to Mauritz & Couey, a Texas General Partnership, under the
same terms as the Company's Option. This Second Option was granted in
consideration of $10 and services rendered by Mauritz & Couey.
In conjunction with the above transactions, the Company entered into a
Management Agreement with CSS whereby the Company will provide the management of
all operations, accounting and personnel for the terminal facility and CSS will
provide adequate financing for the operation of the terminal facility. In
consideration for those services, the Company will be entitled to receive 25% of
the gross profit after debt service generated from the operation of the terminal
facility. There can be no assurance that the terminal facility will be
successfully returned to operations.
Note K - Change in Board of Directors and Officers
During December 2002 and January 2003, certain directors and officers of the
Company resigned from their respective positions. Mrs. Lee Ann Cooper resigned
as Chief Financial Officer of the Company and as Secretary/Treasurer of the
Board of Directors. Mrs. Leah Jagot Kelley resigned as Director and Audit
Committee Chairperson. Mr. Jerry Evans, Jr. and Mr. Peter J. Losavio, Jr.
resigned as Directors.
In December 2002, Mr. L.G. Raun, Jr. was named a Director to the Company.
The Company has not replaced Mrs. Kelley's position as Chair of the Audit
Committee. Currently, the audit committee consists of only one member. The
Company also has not replaced Mrs. Cooper's position as Chief Financial Officer
of the Company.
10
Note L- Segment Reporting
Under the guidance of SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information", the Company has two reportable segments: Texas petroleum
marketing and environmental remediation services. The Texas petroleum marketing
segment sells motor fuels to the public through retail outlets in southeast
Texas and supplies the Company's open dealer accounts with motor fuels. The
environmental remediation services segment provides environmental assessment and
remediation services for the petroleum industry in the southeast Texas market
area.
As discussed in Note D, the Company discontinued its Texas convenience stores
segment operations, which featured self-service motor fuels and a variety of
food and nonfood merchandise in southeast Texas. Such operations have been
reflected as discontinued operations and prior periods have been restated.
Information concerning the Company's business activities is summarized as
follows: (in thousands)
Texas Environmental Other
petroleum remediation reconciling Consolidated
Year ended marketing services items (1) total
December 31, 2002-
Revenues from external
Customers:
Motor fuel sales $ 3,829 $ - $ - $ 3,829
Other - 267 - 267
Intersegment revenues - - - -
--------- ----------- -------- ----------
Total revenues $ 3,829 $ 267 $ - $ 4,096
========= =========== ======== ==========
Depreciation and
amortization $ 48 $ 4 $ 2 $ 54
Operating income (loss) $ (77) $ (27) $ (55) $ (159)
December 31, 2001-
Revenues from external
Customers:
Motor fuel sales $ 4,325 $ - $ - $ 4,325
Other 47 151 - 198
Intersegment revenues 762 - (762) -
--------- ----------- -------- ----------
Total revenues $ 5,134 $ 151 $ (762) $ 4,523
========= =========== ======== ==========
Depreciation and
amortization $ 123 $ 4 $ 3 $ 130
Operating income (loss) $ (187) $ (50) $ (232) $ (469)
(1) Consists primarily of corporate overhead expenses.
11
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
Quarter Ended December 31
------------------------------------
2002 2001
-------------- --------------
Total operating income (loss) for reportable segments $ (104) $ (237)
Interest expense, net (32) (26)
Unallocated corporate expenses (55) (232)
Other, net 99 (9)
-------------- --------------
Total consolidated income (loss) from continuing
operations before income taxes $ (92) $ (504)
=============== ==============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
implement its turnaround strategy, changes in costs of raw materials, labor, and
employee benefits, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Quarterly Report on Form 10-Q, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.
Recent Events
On January 13, 2003, the Company assigned its ground lease with the Port of Bay
City for the fuel terminal to CSS as well as conveyed the terminal facility
assets, including all the tanks and structures at the Port of Bay City, to CSS
for certain concessions by CSS. Those concessions included the agreement of CSS
to waive interest on the Company's note payable to CSS until June 1, 2003, the
agreement of CSS to reduce the principal amount due under the note payable by
$2.0 million from $4.5 million to $2.5 million, the agreement of CSS to assume
all property taxes on the terminal facility assets, and the agreement of CSS to
timely perform all obligations of payment and performance of the Port of Bay
City lease agreement.
The aggregate net book value of the terminal facility assets at the date of
conveyance was approximately $365,000 and the Company's last independent
appraisal of the terminal facility, dated July 2001, estimated the fair market
value of the terminal facility at approximately $2.0 million. The Company also
had recorded property taxes payable of approximately $117,500 on the terminal
facility assets. Accordingly, in January 2003, the Company recorded the
reduction of the note payable to CSS by $2.0 million, the reduction of property
taxes payable by $117,500, the conveyance of the terminal facility assets of
approximately $365,000 net, and a noncash gain of $1752,500.
12
In connection with this transaction, the Company and CSS entered into an Option
Agreement whereby the Company would have the exclusive right and option until
June 21, 2027 to purchase the terminal facility assets and lease agreement back
for the lesser of $3.5 million or the amount of an "Outside Offer". An "Outside
Offer" is defined as an offer to purchase the terminal facility assets and lease
agreement made by an unrelated third party during the option term. In addition,
the Option provides that should the Company not exercise its option, the CSS and
the Company will share equally all proceeds over and above $3.5 million
resulting from the sale to an unrelated third party buyer.
Concurrent with the Option Agreement, CSS also granted a Second Option to
purchase the terminal facility and lease agreement, which is subordinate to the
Company's Option, to Mauritz & Couey, a Texas General Partnership, under the
same terms as the Company's Option. This Second Option was granted in
consideration of $10 and services rendered by Mauritz & Couey.
In conjunction with the above transactions, the Company entered into a
Management Agreement with CSS whereby the Company will provide the management of
all operations, accounting and personnel for the terminal facility and CSS will
provide adequate financing for the operation of the terminal facility. In
consideration for those services, the Company will be entitled to receive 25% of
the gross profit after debt service generated from the operation of the terminal
facility. There can be no assurance that the terminal facility will be
successfully returned to operations.
During December 2002 and January 2003, certain directors and officers of the
Company resigned from their respective positions. Mrs. Lee Ann Cooper resigned
as Chief Financial Officer of the Company and as Secretary/Treasurer of the
Board of Directors. Mrs. Leah Jagot Kelley resigned as Director and Audit
Committee Chairperson. In February 2003, Mr. Jerry Evans, Jr. and Mr. Peter J.
Losavio, Jr. resigned as Directors.
In December 2002, Mr. L.G. Raun, Jr. was named a Director to the Company.
The Company has not replaced Mrs. Kelley's position as Chair of the Audit
Committee. Currently, the audit committee consists of only one member. The
Company also has not replaced Mrs. Cooper's position as Chief Financial Officer
of the Company.
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations when such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circum-stances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
13
Revenue Recognition
The Company's policy is to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting
principles. Revenues from motor fuel sales to open dealer accounts are
recognized when delivered. Revenues from motor fuel sales and retail sales at
convenience stores are recognized when sold at the store. Expenses are
recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized using
the percentage-of-completion method, measured by the percentage of cost
incurred to date to estimated total cost at completion for each contract.
Profit recognition is deferred on each contract until progress reaches a
level of completion sufficient to establish the probable outcome. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability that result in revisions to costs are recognized in
the period in which the changes are determined. Because of the inherent
uncertainties in estimating, it is at least reasonably possible that such
changes will occur within the near term.
Inventories
Substantially all inventories are products held for sale. Inventories of oil
and grease, automotive products and accessories utilize the first-in,
first-out (FIFO) method of accounting and are stated at the lower of cost or
market. During fiscal 2002, the Company implemented a change in accounting
principle whereby gas and diesel fuels inventory were valued using the FIFO
method of accounting in place of the last-in, first-out (LIFO) method (see
Change in Accounting Principle below).
Change in Accounting Principle
In September 2002, the Company adopted the first-in, first-out (FIFO) method
of costing gas and diesel fuel inventories. Previously, the last-in, first
out (LIFO) method was used. After taking into consideration the Company's
plans to hold less inventory and provide a faster inventory turn, management
believes that the FIFO method will more accurately reflect fuel inventories
at or near current replacements costs, provide a more realistic fair value
measurement of current assets and will be more representative of industry
trends applied by other regional and local petroleum distributors. In
addition, FIFO provides a uniform method for valuing all company inventories,
as inventories of oil and grease, automotive products and accessories already
utilize the FIFO method of accounting. The financial statements of prior
years have been restated to apply the new method retroactively. The balances
of retained earnings (deficit) for fiscal 2002, 2001, 2000 and prior years
have been adjusted for the effect of applying retroactively the new method of
accounting. The otherwise tax liability from this change is offset by net
operating loss carryforwards of the Company generated from previous years
losses. Accordingly, no provision has been recorded.
For a more comprehensive list of our accounting policies, including those that
involve varying degrees of judgment, see Note 1 of Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2002.
14
Results of Operations
Three Months Ended December 31, 2002 and 2001
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document.
The following table reflects the unaudited operating results of Evans Systems,
Inc. ("Company") business segments for the three months ended December 31, 2002
and 2001. This is the first quarter of the Company's fiscal year, which begins
on October 1 and ends on September 30.
Three Months Three Months
Ended Ended
December 31, 2002 December 31, 2001
----------------- -----------------
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue $ 3,829 $ 4,372
Gross profit 227 315
Operating expenses 304 502
------------- -----------
Operating income (loss) (77) (187)
EDCO ENVIRONMENTAL
Revenue $ 267 $ 151
Gross profit 140 74
Operating expenses 167 124
------------- -----------
Operating income (loss) (27) (50)
UNALLOCATED GENERAL AND ADMIN EXP. $ (55) $ (232)
------------- -----------
TOTAL CONTINUING OPERATIONS
Revenue $ 4,096 $ 4,523
Gross profit 367 389
Operating expenses 526 858
------------- -----------
Operating income (loss) (159) (469)
DISCONTINUED TEXAS CONVENIENCE STORE OPERATIONS
Revenue $ 342 $ 1,611
Gross profit 8 293
Operating expenses 100 528
------------- -----------
Operating loss (92) (235)
On November 18, 2002, the Company sold its fuel and retail inventory in its
three remaining operating convenience stores and leased the stores and store
equipment to outside operators, effectively discontinuing its Texas Convenience
Store Segment operations (now classified as discontinued operations).
Consolidated revenues decreased $427,000, or approximately 9% to $4,096,000 in
the quarter ended December 31, 2002, as compared with revenues of $4,523,000 in
the quarter ended December 31, 2001.
15
Fuel sales declined $496,000 while other sales and services increased $69,000 in
the quarter ended December 31, 2002, as compared with the quarter ended December
31, 2001.
Consolidated gross profit declined $22,000, or approximately 6%, in the quarter
ended December 31, 2002, as compared with the quarter ended December 31, 2001.
Gross profit expressed as a percentage of sales, "Gross Margin", remained
consistent at approximately 9% of sales in the quarter ended December 31, 2002
and 2001.
Operating expenses declined $332,000 in the quarter ended December 31, 2002, as
compared with the quarter ended December 31, 2001. Operating expenses in the
quarter ended December 31,2002 include a gain on the sale of assets of $3,000
compared to a loss on the sale of assets of $20,000 in the quarter ended
December 31, 2001. Operating expenses excluding the gain or loss on sale of
assets declined $309,000 to $529,000 in the quarter ended December 31, 2002 as
compared to $838,000 in the quarter ended December 31, 2001.
The Company had an operating loss of $159,000 in the quarter ended December 31,
2002, as compared to an operating loss of $469,000 in the quarter ended December
31, 2001. Excluding the gain or loss on sale of assets, the quarter ended
December 31, 2002 operating loss was $162,000 as compared to an operating loss
of $449,000 in the quarter ended December 31, 2001.
Net loss decreased to $184,000 in the quarter ended December 31, 2002, as
compared with a loss of $739,000 in the quarter ended December 31, 2001. Net
loss in the current quarter includes a loss on discontinued operations of
$92,000, interest expense of $32,000, other income of $45,000 and rental income
of $54,000. Net loss for the quarter ended December 31, 2001 includes a loss on
discontinued operations of $235,000, interest expense of $26,000 and other
expenses of $9,000.
Texas Petroleum Marketing Segment
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets:
A. Gasoline retail facilities with Company-supplied equipment consisting
of pumps, lights, canopies and in a few cases underground storage
tanks, at independently owned convenience stores. Under the terms of
the Company's agreements with such independent store operators
("Special Purpose Leases"), the Company receives 40 percent or 50
percent of the gasoline gross profit, depending upon who owns the
underground gasoline equipment.
B. Independently owned gasoline stations and convenience stores ("Open
Dealers") to which the Company provides major oil company brand names,
credit card processing and signs and, without further investment,
receives its customary markup on fuel deliveries.
The Texas Petroleum Marketing Segment also supplies lubricants to commercial and
industrial customers.
Revenues decreased $543,000, or approximately 12% to $3,829,000 in the quarter
ended December 31, 2002, as compared with revenues of $4,372,000 in the quarter
ended December 31, 2001. Fuel sales in gallons declined approximately 12%, to
3,038,000 gallons, as compared with 3,457,000 gallons in the quarter ended
December 31, 2001.
16
Gross profit declined $88,000 or approximately 28% to $227,000 in the quarter
ended December 31, 2002, as compared with $315,000 in the quarter ended December
31, 2001. Gross profit expressed as a percentage of sales, "Gross Margin",
decreased to approximately 6% of sales in the quarter ended December 31, 2002,
as compared to approximately 7% of sales in the quarter ended December 31, 2001.
Operating expenses in the quarter ended December 31, 2002 decreased to $304,000
as compared to $502,000 in the quarter ended December 31, 2001. Operating
expenses in the quarter ended December 31,2002 include a gain on the sale of
assets of $3,000 compared to a loss on the sale of assets of $20,000 in the
quarter ended December 31, 2001. Operating expenses excluding the gain or loss
on sale of assets were $307,000 in the quarter ended December 31, 2002 as
compared to $482,000 in the quarter ended December 31, 2001.
Texas Petroleum Marketing had an operating loss of $77,000 in the quarter ended
December 31, 2002, as compared to an operating loss of $187,000 in the quarter
ended December 31, 2001. Excluding the gain or loss on sale of assets, the
quarter ended December 31, 2002 operating loss was $80,000 as compared to an
operating loss of $167,000 in the quarter ended December 31, 2001.
EDCO Environmental, Inc. (dba Star Co.)
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Total revenues in the quarter ended December 31, 2002 increased $116,000 or
approximately 77% to $267,000, as compared with $151,000 in the quarter ended
December 31, 2001.
Gross profit in the quarter ended December 31, 2002 increased $66,000 to
$140,000 in the quarter ended December 31, 2002, as compared with $74,000 in the
quarter ended December 31, 2001.
Operating expenses increased $43,000 to $167,000 as compared with $124,000 in
the quarter ended December 31, 2001.
EDCO Environmental reported an operating loss of $27,000 in the quarter ended
December 31, 2002, as compared with an operating loss of $50,000 in the quarter
ended December 31, 2001.
Discontinued Operations - Texas Convenience Store Segment
On November 18, 2002, the Company sold its fuel and retail inventory in its
three remaining operating convenience stores and leased the stores and store
equipment to outside operators, effectively discontinuing its Texas Convenience
Store Segment operations. The results of the Texas Convenience Store Segment
operations have been classified as discontinued operations and the prior period
has been restated in the accompanying condensed consolidated financial
statements.
Unallocated General and Administrative Expenses
General and Administrative expenses decreased $177,000, or approximately 76%, to
$55,000 in the quarter ended December 31, 2002, as compared to $232,000 in the
quarter ended December 31, 2001.
17
Capital Resources and Liquidity
Cash and cash equivalents were $180,000 and $444,000 at December 31, 2002 and
2001, respectively. The Company had a net working capital deficit of $609,000 at
December 31, 2002, as compared with a deficit of $325,000 at September 30, 2002.
Cash used by operating activities was $218,000 for the three months ended
December 31, 2002. During that period, cash used by investing activities was
$22,000, which was comprised of capital expenditures of $25,000 offset by
proceeds from the sales of assets of $3,000. Cash used by financing activities
was $71,000, which was comprised of $20,000 of borrowings under the Company's
line of credit agreement and new borrowings of $2,000 offset by $93,000 in debt
repayments.
Cash used by operating activities was $222,000 for the three months ended
December 31, 2001. During that period, cash provided from investing activities
was $255,000, which was comprised of capital expenditures of $8,000 offset by
proceeds from the sales of assets of $263,000. Cash used by financing activities
was $193,000, which was comprised of $193,000 in debt repayments.
As of December 31, 2002, the Company had an aggregate of approximately
$5,456,000 in principal outstanding under various note agreements. Of this
total, one note dated June 24, 2002 for $4,500,000 has terms that call for
payments of interest only at an annual rate of 10% for five years commencing six
months from the closing of the transaction, with the principal balance and
accrued but unpaid interest due at the end of such period. In January 2003, the
Company entered into an agreement with CSS, which resulted in a reduction of the
principal due under this note and a deferral of interest payment until June 2003
(Note J to the Condensed Consolidated Financial Statements).
Of the remaining principal outstanding aggregating an approximate $956,000,
approximately $634,000 is due to various property taxing districts over the next
three years. Additionally, $183,000 is due to Travelers Express Co. under a
forbearance note agreement dated June 24, 2002 that calls for payment of
principal and interest over 36 months beginning June 22, 2003. Interest is
calculated at prime plus 50 basis points. The remaining outstanding principal
balance is due under various terms to various third parties. As of December 31,
2002, approximately $475,000 in outstanding principal is due within one year,
compared to approximately $477,000 at September 30, 2002.
In July 2002, the Company secured a secured a $500,000 revolving line of credit
with NewFirst National Bank secured by the Company's inventory, accounts
receivable, certain property in Bay City, Texas and by the Company's common
stock beneficially owned by MC. Terms of the revolving line of credit call for
an annual interest rate of prime plus 3% with monthly interest payments
beginning August 23, 2002 and all outstanding principal and accrued but unpaid
interest due on or before July 23, 2003. As of December 31, 2002, the Company
had approximately $499,000 and $479,000, respectively, outstanding under this
agreement. At December 31, 2002, the Company was in default on certain loan
covenants under this agreement.
At December 31, 2002, the Company had an aggregate 9,844,831 shares of common
stock issued and outstanding and is authorized to issue up to an aggregate
15,000,000 shares of common stock. Of the 5,155,169 shares of common stock
available for issuance, approximately 390,350 shares are reserved for vested
stock options to employees of the Company and 4,268,000 shares are reserved for
Warrants issued and outstanding.
To continue as a going concern, the Company intends to finance its working
capital requirements and capital expenditures through a combination of funds
from operations, selling of non-income producing adding assets and its existing
bank line with NewFirst National Bank. There can be no assurance that
18
management's plans will be successful implemented or that the Company will
continue as a going concern.
New Accounting Pronouncements
SFAS No. 147, "Acquisitions of Certain Financial Institutions-an amendment of
FASB Statements No. 72 and 144 and FASB Interpretation No. 9", was issued in
October 2002, and addresses FASB Statement No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method", provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. The Company does not believe that the
adoption of this Statement will have a material impact on the Company's
financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123", was issued in December
2002. This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported. Managements does not
believe that the adoption of SFAS No.148 will have a material effect on the
Company's financial statements.
In November 2002, the FASB released FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others: an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." FIN
45 establishes new disclosure and liability-recognition requirements for direct
and indirect debt guarantees with specified characteristics. The initial
measurement and recognition requirements of FIN 45 are effective prospectively
for guarantees issued or modified after December 31, 2002. However, the
disclosure requirements are effective for interim and annual financial statement
periods ending after December 15, 2002. Managements does not believe that the
adoption of FIN 45 will have a material effect on the Company's financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer within 90 days of the filing
of this report, the Company's Chief Executive Officer concluded that the
Company's disclosure controls and procedures have been effective.
19
As used herein, "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer or officers and its
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
Part II. Other Information
Item 1. Legal Proceedings
During the quarter ended December 31, 2002, the Company was notified that a
lawsuit was filed against the Company and several or its current and former
officers and directors on behalf of purchasers of the Company's common stock.
The petition alleges that the Company received funds from a Private Placement
transaction with Comsight Holdings, Inc., whereby Comsight agreed to act as a
placement agent for accredited investors to purchase a minimum of 1,250,000 and
a maximum of 3,750,000 shares of the Company's common stock in a private
placement to accredited investors at $0.40 per share. On August 17, 2000, the
Company issued 1,437,500 shares of common stock for total consideration of
$575,000. The Plaintiff's allege that they never received the common shares or a
refund of the subscription funds. The lawsuit demands, among other relief,
unspecified compensatory damages, attorney's fees and costs of conducting the
litigation. The Company intends to defend itself vigorously in these matters. It
is possible, however, that the outcome of any present or future litigation may
have a material adverse impact on the Company's financial condition or results
of operations in one or more future periods. The Company has not accrued any
liability in connection with this lawsuit.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
At December 31, 2002, the Company was in default on certain loan covenants
under this agreement.
Item 4. Submission of Matters to a Vote of Security Shareholders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8K
A. Exhibits.
Exhibit 99.1 - Certification of Blair R. Couey, as President and Chief
Executive Officer of the Company, pursuant to 18 U.S.C.
(S) 1350, dated February 19, 2003.
B. Reports on Form 8K
None
20
Certifications
I, Blair R. Couey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Evans Systems,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 19, 2003
By: /s/ Blair R. Couey
------------------------
Blair R. Couey
President and Chief Executive Officer
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 19, 2003 EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey.
-----------------------------
Blair R. Couey
President and Chief Executive Officer
22