As Filed with the Securities and Exchange Commission on August 23, 2004
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 June 30, 2004
-------------
[_] 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 August 23, 2004 was
9,846,831.
1
Evans Systems, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets as of
June 30, 2004 and September 30, 2003 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Income for the
Nine Months Ended June 30, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, September 30,
2004 2003
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 585 $ 216
Trade receivables, net of allowance for doubtful
accounts of $22,000 and $28,000, respectively 1,212 831
Inventory 473 371
Costs and estimated earnings in excess of billings on
uncompleted contracts 211 172
Prepaid expenses and other current assets 76 103
Notes receivable, current portion 43 67
-------- --------
Total current assets 2,600 1,760
Property and equipment, net 2,518 2,744
Other assets -- --
-------- --------
Total assets $ 5,118 $ 4,504
======== ========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,342 $ 895
Accrued excise, property and other taxes payable 182 394
Advances on line of credit 399 399
Current portion of long-term debt 599 673
Accrued interest 32 28
Billings in excess of costs and estimated earnings on
uncompleted contracts 10 2
-------- --------
Total current liabilities 3,564 2,391
Long-term debt, net of current portion 2,652 2,706
-------- --------
Total liabilities 6,216 5,097
Stockholders' equity (deficit):
Common stock, $.01 par value, 15,000,000 shares
authorized, 9,846,831 shares issued and
outstanding 99 99
Additional paid-in capital 17,193 17,193
Accumulated deficit (17,956) (17,451)
Treasury stock, 72,589 shares, at cost (434) (434)
-------- --------
Total stockholders' equity (deficit) (1,098) (593)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 5,118 $ 4,504
======== ========
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 June 30,
2004 2003
---- ----
Revenues:
Motor fuel sales $ 4,867 $ 4,342
Other sales and services 358 263
------- -------
Total revenues 5,225 4,605
Cost of sales
Motor fuel 4,691 4,107
Other sales and services 142 76
------- -------
Total cost of sales 4,833 4,183
------- -------
Gross profit 392 422
Operating expenses:
Employment expenses 194 161
Other operating expenses 149 126
General & administrative expenses 148 191
Depreciation and amortization 50 54
(Gain) loss on sale of assets 7 4
------- -------
Total operating expenses 548 536
------- -------
Operating loss (156) (114)
Other income (expense)
Gain on sale of non-operating assets -- --
Interest expense, net (47) (65)
Other income (expense), net 3 --
Rental income, net 35 64
------- -------
Total other income (expense) (9) (1)
------- -------
Income (loss) before income taxes (165) (115)
Provision for income taxes -- --
------- -------
Net income (loss) $ (165) $ (115)
======= =======
Basic and diluted earnings (loss) per share:
Net income (loss) per common share $ (0.02) $ (0.01)
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
Evans Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Nine Months Ended June 30,
2004 2003
---- ----
Revenues:
Motor fuel sales $ 12,992 $ 12,980
Other sales and services 805 940
-------- --------
Total revenues 13,797 13,920
Cost of sales
Motor fuel 12,436 12,288
Other sales and services 373 457
-------- --------
Total cost of sales 12,809 12,745
-------- --------
Gross profit 988 1,175
Operating expenses
Employment expenses 509 557
Other operating expenses 404 446
General & administrative expenses 441 605
Depreciation and amortization 150 183
(Gain) loss on sale of assets 4 (102)
-------- --------
Total operating expenses 1,508 1,689
-------- --------
Operating loss (520) (514)
Other income (expense)
Gain on sale of non-operating assets -- 1,653
Interest expense, net (98) (116)
Other income (expense), net 11 136
Rental income, net 102 176
-------- --------
Total other income (expense) 15 1,849
-------- --------
Income (loss) before income taxes (505) 1,335
Provision for income taxes -- --
-------- --------
Net income (loss) $ (505) $ 1,335
======== ========
Basic and diluted earnings (loss) per share:
Net income (loss) per common share $ (0.05) $ 0.13
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
Evans Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended June 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss) $ (505) $ 1,335
Adjustments:
Depreciation and amortization 150 183
(Gain) loss on sale of assets 4 (102)
Gain on sale of non-operating assets -- (1,653)
Note receivable bad debt write off 15 --
Changes in working capital:
Current assets (495) 59
Other assets -- 30
Current liabilities 1,247 (111)
------- -------
Total adjustments 921 (1,594)
------- -------
Net cash provided (used) by operating activities 416 (259)
Cash flows from investing activities:
Capital expenditures (12) (45)
Proceeds from sale of property and equipment 84 220
------- -------
Net cash provided (used) by investing activities 72 175
Cash flows from financing activities:
Issuance of notes receivable (17) (86)
Repayment on notes receivable 26 125
Borrowings under line of credit agreement, net -- 20
Repayment on notes payable (128) (134)
Borrowings under note payable agreements -- 2
------- -------
Net cash provided (used) by financing activities (119) (73)
------- -------
Net increase (decrease) in cash 369 (157)
Cash and cash equivalents, beginning of period 216 491
------- -------
Cash and cash equivalents, end of period $ 585 $ 334
======= =======
Supplemental Disclosure of Non-Cash Transactions
Sale of Terminal Facility (Note E)
Proceeds through relief of debt and taxes $ -- $ 2,018
Net book value of terminal facility -- 365
------- -------
Gain on sale of terminal facility $ -- $ 1,653
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans
Systems, Inc. and its subsidiaries (dba MC Star, Inc. 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 and nine month periods ended June 30,
2004 are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2004. 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 - 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. 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 were classified as
discontinued operations and prior periods were restated as a result of these
transactions. In April 2004, the Company reacquired control of 2 of the stores
due to the inability of the lessee's to make required payments under the lease
agreement and the lessee's inability to maintain the stores and equipment in
proper working order. After unsuccessful attempts to re-lease the stores,
management reopened the stores as company-owned stores during late April 2004.
In addition, in July 2004, the Company reacquired control of the remaining store
due to the lessee's inability to make required payments under the lease
agreement and reopened the store as a company-owned store. Accordingly, the
Company has reestablished its Texas Convenience Store Segment and the prior
period results of operations of these stores previously reported as discontinued
operations have been reclassified and included in income from continuing
operations for all period presented.
7
Note C - Line of Credit Agreement
On July 23, 2002, the Company 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. Terms of the revolving line of credit
call for an annual interest rate 7.75% with monthly interest payments beginning
August 23, 2002 and all outstanding principal and accrued but unpaid interest
due on or before July 23, 2003. In July 2003, the Bank extended the due date of
the line of credit to November 22, 2003. Effective November 20, 2003, the
Company and the Bank agreed to a second amendment to the line-of-credit
agreement whereby the due date of the line of credit was extended to March 20,
2004. The Company does not have any available credit remaining under this
agreement. At June 30, 2004, the Company had $399,000 outstanding under the line
of credit agreement and was in default under certain covenants provided for in
the line of credit agreement.
Note D - Long-Term Debt
In January 2003, the Company entered into an amended agreement with Cain, Smith
& Strong, L.P. ("CSS") that resulted in a reduction of the principal due under
the note dated June 24, 2002 in the original amount of $4,500,000 to $2,600,000,
a deferral of interest payment until June 2003 and the assumption of property
taxes by CSS aggregating approximately $118,000 (Note E).
Effective September 30, 2003, the Company CSS entered into an Option Contract
whereby CSS agreed to waive interest due on the CSS note from the original
commencement date of June 1, 2003 until June 1, 2004. In consideration for the
interest waiver, the Company granted CSS Lake Jackson Property, L.P. (CSS Lake
Jackson), a Delaware Limited Partnership whose partners are also partners of
CSS, the Option to purchase the Chevron Bulk Plant and two company owned stores.
The Option may be exercised by CSS Lake Jackson by written notice at any time on
or before June 1, 2004. Upon exercise of the Option, the terms and conditions to
the sale of the properties would the sum of $211,000 for the Chevron Bulk Plant,
$770,000 for one store and $350,000 for the second store. The conveyance of the
properties would be made "as is".
As of June 30, 2004, the Company had an aggregate of approximately $3,251,000 in
principal outstanding under various note agreements. Of this total, one note
dated June 24, 2002 for $2,600,000, payable to CSS, has amended terms that call
for payments of interest only at an annual rate of 10% commencing June 1, 2004,
with the principal balance and accrued interest due by December 24, 2007.
Of the remaining principal outstanding aggregating an approximate $651,000,
approximately $436,000 is due to various property taxing districts over the next
three years. At June 30, 2004, the Company was in default under these note
agreements, and accordingly, the Company has reflected these notes as currently
due on the accompanying condensed consolidated balance sheet. In addition,
Matagorda and Wharton Counties have filed tax suits against the Company for
delinquent taxes.
Additionally, approximately $118,000 is due to Travelers Express Co. under a
forbearance note agreement dated June 24, 2002 in the original amount of
$183,000 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 of approximately $97,000 is due
under 3 note agreements with various terms to unrelated third parties. At June
30, 2004, the Company was in default under these note agreements, and
accordingly, the Company has reflected these notes as currently due on the
accompanying condensed consolidated balance sheet.
8
Note E - Sale of Non-Operating Terminal Facility
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
$1,900,000 from $4,500,000 to $2,600,000, 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 terminal facility had not
been in operation since fiscal 1997 and the Company had been unsuccessful in
reopening the terminal due to working capital deficiencies.
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 $2,000,000. The Company also had
recorded property taxes payable of approximately $118,000 on the terminal
facility assets. Accordingly, in January 2003, the Company recorded the
reduction of the note payable to CSS by $1,900,000, the reduction of property
taxes payable by $118,000, the conveyance of the terminal facility assets of
approximately $365,000, net, and a noncash gain of $1,653,000.
Note F - Costs and Estimated Earnings on Uncompleted Contracts
At June 30, 2004 and September 30, 2003, costs and estimated earnings on
uncompleted contracts consisted of the following (in thousands):
June 30, Sept. 30,
2004 2003
--------------- --------------
Costs incurred to date on uncompleted contracts $ 473 $ 144
Estimated earnings 192 87
----- -----
665 231
Billings to date (464) (61)
----- -----
Total $ 201 $ 170
===== =====
Included in the accompanying condensed consolidated balance sheets under
the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 211 $ 172
Billings in excess of costs and estimated earnings
on uncompleted contracts (10) (2)
----- -----
Total $ 201 $ 170
===== =====
9
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $106,000 and $91,000 at June 30, 2004 and
September 30, 2003, respectively. There were no material revisions in contract
estimates during the three and nine months ended June 30, 2004.
Note G - Seasonal Nature of Business
The motor fuel products market customarily experiences decreased margins in the
fall and winter months followed by increased demand during spring and summer
when construction, travel, and recreational activities increase.
Note H - Basic and Diluted Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share for the three and nine months ending
June 30, 2004 and 2003 were computed using 9,846,831 weighted average common
shares outstanding. Stock options and warrants were not included in the
computation of diluted earnings (loss) per common share for the three and nine
months ended June 30, 2004 as they would have resulted in an antidilutive effect
on loss from continuing operations. Stock options and warrants were not included
in the computation of diluted earnings (loss) per common share for the three and
nine months ended June 30, 2003 as they would have resulted in an antidilutive
effect as the exercise price exceeded the average market price per share during
the period.
At June 30, 2004, the Company had an aggregate 9,846,831 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 5,153,169 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 I - Contingent Liabilities
The Company is subject to litigation, primarily as a result of vendor claims, in
the ordinary conduct of its operations. As of June 30, 2004, 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 fiscal 2003, Matagorda County, Victoria County, Jackson County, Wharton
and Brazoria County filed tax suits against the Company for failure to pay prior
years ad valorem taxes. As of June 30, 2004, the Company had paid off the
Victoria, Jackson and Brazoria county ad valorem taxes and those suits had been
dismissed. The Company has accrued all prior years ad valorem taxes not under
note agreements and has reflected the Matagorda and Wharton County notes payable
as currently due at June 30, 2004 and September 30, 2003.
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.
10
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 J - Management's Plans
New management and directors were appointed on June 24, 2002. From that date
through June 30, 2004, 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.
Management has made several transactions during the past nine months focused on
stabilizing the Company's financial position. The most recent step implemented
by management is discussed in Note K. The second phase of management's plan is
to open the Fuel Terminal utilizing a joint venture, thru-put partner, or
supplier to begin operations. As discussed in Note E, the Company sold the fuel
terminal with the intent that once opened, the Company will benefit through its
management contract as well as the reduced overall product cost and freight
expense, adding additional revenues to the Petroleum Marketing Segment.
The Environmental Segment has made a marginal profit over the years and
maintained a positive cash flow. Management. Starco Environmental is currently
holding merger negotiations with Morco Testing, Inc. (Morco) of Pasadena, Texas.
Morco has an intensive line and tank testing division and tank cleaning division
already in place, which management believes would compliment Starco's current
operations. Financial institutions have become increasingly aware of potential
environmental hazards and the cost associated there with, on properties they
finance. The need for testing to determine if any pollution exist on properties
will continue for an unforeseeable time into the future. For this reason
management believes adding a testing segment will increase the revenues and
profitability of the Environmental 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 K - Subsequent Events
Effective July 1, 2004, the Company sold its accounts receivable, inventory, Bay
City office building and bulk plant, its Chevron and Exxon equipment contracts
in exchange for relief of debt of amounts owed to Mauritz & Couey (M&C) for fuel
and oil purchases, management fees and other purchases as well as the assumption
of the NewFirst National Bank's Line of Credit. The difference, if any, between
the fair value of the assets transferred and the debt forgiven and/or assumed by
M&C will be paid to the Company, which management estimates will not be
significant to the Company.
11
In addition, the Company entered into an agreement with M&C to deliver fuel for
M&C based on contractual freight rates plus a $.02 per gallon delivered
commission. Management estimates, based on prior fuel gallons sold, the
commission earned will be approximately $24,000 a month.
Due to the increased requirements imposed by the major oil companies on fuel
distributors, there have become heightened concerns on the possibility of the
Exxon and Chevron contracts being cancelled with the lack of working capital or
means to acquire additional financing to upgrade the locations to comply with
the oil company's standards. Another major factor was the expiration of the
NewFirst National Bank's line of credit, whereas NewFirst National Bank had a
security interest in the assets described above. The due date has been extended
several times and attempts to renew were unsuccessful.
This transaction will create certain opportunities for the company including
decreased monthly operating costs such as insurance premiums, repairs to
contractually binding locations, interest payments, and personnel costs. Gross
revenues will be reduced by approximately $1,400,000 a month, as well as a
similar reduction of operating costs required to do business. Management feels
the company will overall be profitable.
In addition, the Company has an agreement in principal with StarCo Energy, an
affiliate of Cain, Smith, & Strong II, L.P.(CSS),a Delaware limited partnership,
on a sales leaseback transaction for a company-owned bulk plant and three
company-owned store properties with independent appraisal values of $1,423,000
for payment of property taxes that are due on the properties in the approximate
amount of $67,000 and a reduction of principal and interest owed to CSS (Note D)
by approximately $1,356,000. This transaction would bring the company current
with its interest obligations to CSS, provide for a significant reduction in
amounts owed to CSS, and reduce the Company's outstanding property tax
liability. The Company would lease the three store properties under an agreement
that calls for a monthly lease payment equal to 25% of the monthly operating
profits of the three stores.
Note L - Segment Reporting
Under the guidance of SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information", the Company has three reportable segments: Texas petroleum
marketing, Texas convenience stores 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 Texas convenience store segment, through its store locations,
features self-service motor fuels and a variety of food and nonfood merchandise
in southeast Texas. The environmental remediation services segment provides
environmental assessment and remediation services for the petroleum industry in
the southeast Texas market area.
12
Information concerning the Company's business activities is summarized as
follows (in thousands):
Texas Texas Environmental Other
Petroleum Convenience Remediation Reconciling Consolidated
Three Months Ended Marketing Stores Services Items (1) Total
June 30, 2004
Revenues from external
Customers:
Motor fuel sales $ 4,687 $ 180 $ -- $ -- $ 4,867
Convenience store sales -- 72 -- -- 72
Other -- -- 286 -- 286
Intersegment revenues -- -- -- -- --
------- ------- ------- ------- -------
Total revenues $ 4,687 $ 252 $ 286 $ -- $ 5,225
======= ======= ======= ======= =======
Depreciation and
amortization $ 29 $ 15 $ 4 $ 2 $ 50
Operating income (loss) $ (110) $ (82) $ 51 $ (15) $ (156)
June 30, 2003
Revenues from external
Customers:
Motor fuel sales $ 4,342 $ -- $ -- $ -- $ 4,342
Convenience store sales -- -- -- -- --
Other -- -- 263 -- 263
Intersegment revenues -- -- -- -- --
------- ------- ------- ------- -------
Total revenues $ 4,342 $ -- $ 263 $ -- $ 4,605
======= ======= ======= ======= =======
Depreciation and
amortization $ 48 $ -- $ 4 $ 2 $ 54
Operating income (loss) $ (118) $ -- $ 51 $ (47) $ (114)
(1) Consists primarily of unallocated corporate overhead expenses.
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 June 30,
2004 2003
---- -----
Total operating loss for reportable segments $(141) $ (67)
Rental income, net 35 64
Other income, net 3 --
Interest expense, net (47) (65)
Unallocated corporate overhead expenses (15) (47)
Gain on sale of non-operating assets -- --
----- -----
Total consolidated income (loss)
before income taxes $(165) $(115)
===== =====
13
Texas Texas Environmental Other
Petroleum Convenience Remediation Reconciling Consolidated
Nine Months Ended Marketing Stores Services Items (1) Total
June 30, 2004
Revenues from external
Customers:
Motor fuel sales $ 12,812 $ 180 $ -- $ -- $ 12,992
Convenience store sales -- 72 -- -- 72
Other 31 -- 702 -- 733
Intersegment revenues -- -- -- -- --
-------- -------- -------- -------- --------
Total revenues $ 12,843 $ 252 $ 702 $ -- $ 13,797
======== ======== ======== ======== ========
Depreciation and
amortization $ 117 $ 15 $ 12 $ 6 $ 150
Operating income (loss) $ (372) $ (82) $ 17 $ (83) $ (520)
June 30, 2003
Revenues from external
Customers:
Motor fuel sales $ 12,771 $ 209 $ -- $ -- $ 12,980
Convenience store sales -- 134 -- -- 134
Other -- -- 806 -- 806
Intersegment revenues -- -- -- -- --
-------- -------- -------- -------- --------
Total revenues $ 12,771 $ 343 $ 806 $ -- $ 13,920
======== ======== ======== ======== ========
Depreciation and
amortization $ 165 $ -- $ 12 $ 6 $ 183
Operating income (loss) $ (322) $ (92) $ 57 $ (157) $ (514)
(1) Consists primarily of unallocated corporate overhead expenses.
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
Nine Months Ended June 30,
2004 2003
---- ----
Total operating income (loss) for reportable segments $ (437) $ (357)
Rental income, net 102 176
Other income (expense), net 11 136
Interest expense, net (98) (116)
Unallocated corporate overhead expenses (83) (157)
Gain on sale of non-operating assets -- 1,653
------- -------
Total consolidated income (loss)
before income taxes $ (505) $ 1,335
======= =======
14
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
Effective July 1, 2004, the Company sold its accounts receivable, inventory, Bay
City office building and bulk plant, its Chevron and Exxon equipment contracts
in exchange for relief of debt of amounts owed to Mauritz & Couey (M&C) for fuel
and oil purchases, management fees and other purchases as well as the assumption
of the NewFirst National Bank's Line of Credit. Any difference between the fair
value of the assets transferred and the debt forgiven and/or assumed by M&C will
be repaid to the Company. In addition, the Company entered into an agreement
with M&C to deliver fuel for M&C based on contractual freight rates plus a $.02
per gallon delivered commission. Management estimates, based on prior fuel
gallons sold, the commission earned will be approximately $24,000 a month.
Due to the increased requirements imposed by the major oil companies on fuel
distributors, there have become heightened concerns on the possibility of the
Exxon and Chevron contracts being cancelled with the lack of working capital or
means to acquire additional financing to upgrade the locations to comply with
the oil company's standards. Another major factor was the expiration of the
NewFirst National Bank's line of credit, whereas NewFirst National Bank had a
security interest in the assets described above. The due date has been extended
several times and attempts to renew were unsuccessful.
This transaction will create certain opportunities for the company including
decreased monthly operating costs such as insurance premiums, repairs to
contractually binding locations, interest payments, and personnel costs. Gross
revenues will be reduced by approximately $1,400,000 a month, as well as a
similar reduction of operating costs required to do business. Management feels
the company will overall be profitable.
15
In addition, the company has entered into a long-term sales leaseback
transaction with Cain, Smith & Strong II, L.P., a Delaware limited partnership
("CSS") on a bulk plant and three store properties with independent appraisal
values of $1,423,000 for payment of property taxes that are due on the
properties in the approximate amount of $67,000 and a reduction of principal and
interest owed to CSS (Note D) in the approximate amount of $1,356,000. This
transaction will bring the company current with its interest obligations to CSS.
The Company will lease the three store properties under an agreement that calls
for a monthly lease payment equal to 25% of the monthly operating profits of the
three stores.
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.
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.
16
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, 2003.
Results of Operations
Three Months Ended June 30, 2004 and 2003
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 operating results of Evans Systems, Inc.
("Company") business segments for the three months ended June 30, 2004 and 2003.
This is the second quarter of the Company's fiscal year, which begins on
October 1 and ends on September 30.
Three Months Ended
June 30, 2004 June 30, 2003
------------- -------------
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 4,687 $ 4,342
Gross profit 171 236
Operating expenses 281 354
------- -------
Operating loss (110) (118)
Texas Convenience Store Operations
Revenue $ 252 $ --
Gross profit 16 --
Operating expenses 98 --
------- -------
Operating loss (82) --
EDCO Environmental
Revenue $ 286 $ 263
Gross profit 205 186
Operating expenses 154 135
------- -------
Operating income 51 51
Unallocated General and Administrative Expenses $ (15) $ (47)
------- -------
Total Operations
Revenue $ 5,225 $ 4,605
Gross profit 392 422
Operating expenses 548 536
------- -------
Operating loss (156) (114)
17
Consolidated revenues increased $620,000, or approximately 13%, to $5,225,000 in
the quarter ended June 30, 2004, as compared with revenues of $4,605,000 in the
quarter ended June 30, 2003. The increase was primarily attributable to higher
fuel prices during the quarter and the addition of Texas Convenience Store
segment revenues during the current quarter.
Fuel sales increased $345,000 while other sales and services increased $95,000
in the quarter ended June 30, 2004, as compared with the quarter ended June 30,
2003.
Consolidated gross profit decreased $30,000, or approximately 7%, in the quarter
ended June 30, 2004, as compared with the quarter ended June 30, 2003. Gross
profit expressed as a percentage of sales, "Gross Margin", was approximately 8%
of sales in the quarter ended June 30, 2004, as compared to approximately 9% in
the quarter ended June 30, 2003.
Operating expenses increased $12,000 in the quarter ended June 30, 2004, as
compared with the quarter ended June 30, 2003. Operating expenses in the quarter
ended June 30, 2003 include a loss on the sale of assets of $7,000. Operating
expenses excluding the gain or loss on sale of assets increased $9,000 to
$541,000 in the quarter ended June 30, 2004 as compared to $532,000 in the
quarter ended June 30, 2003.
The Company had an operating loss of $156,000 in the quarter ended June 30,
2004, as compared to an operating loss of $114,000 in the quarter ended June 30,
2003. Excluding the gain or loss on sale of assets, the quarter ended June 30,
2004 operating loss was $1499,000 as compared to an operating loss of $110,000
in the quarter ended June 30, 2003.
Net income (loss) decreased to a net loss of $165,000 in the quarter ended June
30, 2004, as compared with a net loss of $115,000 in the quarter ended June 30,
2003. Net loss for the quarter ended June 30, 2003 includes interest expense of
$65,000 and rental income of $64,000. Net loss in the current quarter includes
interest expense of $47,000, other income of $3,000 and rental income of
$35,000.
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 many 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 increased $345,000, or approximately 8%, to $4,687,000 in the quarter
ended June 30, 2004, as compared with revenues of $4,342,000 in the quarter
ended June 30, 2003. Fuel sales in gallons increased approximately 6%, to
4,028,000 gallons, as compared with 3,787,000 gallons in the quarter ended June
30, 2003. The revenue decrease is mainly attributable to increased gallons sold
in the current quarter compared to the quarter ended June 30, 2003.
18
Gross profit decreased $65,000, or approximately 28%, to $171,000 in the quarter
ended June 30, 2004, as compared with $236,000 in the quarter ended June 30,
2003. Gross Margin decreased to approximately 4% of sales in the quarter ended
June 30, 2004, as compared with approximately 5% of sales in the quarter ended
June 30, 2003.
Operating expenses in the quarter ended June 30, 2004 declined $73,000, or
approximately 21%, as compared with the quarter ended June 30, 2003.
The Texas petroleum marketing segment's operating loss decreased $8,000 to
$110,000 in the quarter ended June 30, 2004, as compared to an operating loss of
$118,000 in the quarter ended June 30, 2003. Excluding the gain or loss on sale
of assets, the quarter ended June 30, 2004 operating loss was $103,000, as
compared to an operating loss of $114,000 in the quarter ended June 30, 2003.
Environmental Segment
EDCO Environmental (dba Star Co.) provides environmental assessment and
remediation services for the petroleum distribution industry in the southeast
Texas market area.
Total revenues in the quarter ended June 30, 2004 increased $23,000, or
approximately 9%, to $286,000, as compared to $263,000 in the quarter ended June
30, 2003.
Gross profit in the quarter ended June 30, 2004 increased $19,000 to $205,000,
as compared with $186,000 in the quarter ended June 30, 2003.
Operating expenses increased $19,000 in the quarter ended June 30, 2004 to
$154,000, as compared with $135,000 in the quarter ended June 30, 2003.
The Environmental segment reported an operating income of $51,000 in both the
quarter ended June 30, 2004 and the quarter ended June 30, 2003.
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. In April 2004, the Company reacquired control of 2 of
the stores due to the inability of the lessee's to make required payments under
the lease agreement and the lessee's inability to maintain the stores and
equipment in proper working order. After unsuccessful attempts to re-lease the
stores, management reopened the stores as company-owned stores during late April
2004. In addition, in July 2004, the Company reacquired control of the remaining
store due to the lessee's inability to make required payments under the lease
agreement and reopened the store as a company-owned store. Accordingly, the
Company has reestablished its Texas Convenience Store Segment and the prior
period results of operations of these stores previously reported as discontinued
operations have been reclassified and included in income from continuing
operations for all period presented. However, as the Company did not operate any
stores between November 18, 2002 and April 2004, there is no comparative
analysis between the current quarter and the quarter ended June 30, 2003.
19
Unallocated General and Administrative Expenses
Unallocated general and administrative expenses decreased $32,000, or
approximately 68%, to $15,000 in the quarter ended June 30, 2004, as compared
with $47,000 in the quarter ended June 30, 2003.
Nine Months Ended June 30, 2004 and 2003
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 operating results of the Company
business segments for the nine months ended June 30, 2004 and 2003. This is the
first half of ESI's fiscal year, which begins October 1 and ends September 30.
Nine Months Ended
June 30, 2004 June 30, 2003
------------- -------------
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 12,843 $ 12,771
Gross profit 550 684
Operating expenses 922 1,006
-------- --------
Operating loss (372) (322)
Texas Convenience Store Operations
Revenue $ 252 $ 343
Gross profit 16 7
Operating expenses 98 99
-------- --------
Operating loss (82) (92)
EDCO Environmental
Revenue $ 702 $ 806
Gross profit 422 484
Operating expenses 405 427
-------- --------
Operating income (loss) 17 57
Unallocated General and Administrative Expenses $ (83) $ (157)
Total Operations
Revenue $ 13,797 $ 13,920
Gross profit 988 1,175
Operating expenses 1,508 1,689
-------- --------
Operating loss (520) (514)
Consolidated revenues declined $123,000, or approximately 1% to $13,797,000 in
the nine months ended June 30, 2004, as compared with $13,920,000 in the nine
months ended June 30, 2003. Motor fuel sales increased $12,000 while other sales
and services decreased $135,000 in the nine months ended June 30, 2004, as
compared with the nine months ended June 30, 2003.
20
Consolidated gross profit declined $187,000, or approximately 16%, to $988,000
in the nine months ended June 30, 2004, as compared with $1,175,000 in the nine
months ended June 30, 2003. Gross Margin declined to approximately 7% of sales
in the nine months ended June 30, 2004, as compared with approximately 8% of
sales in the nine months ended June 30, 2003.
Operating expenses declined $181,000, or approximately 11%, to $1,508,000 in the
nine months ended June 30, 2004, as compared with $1,689,000 in the nine months
ended June 30, 2003. Operating expenses include a $4,000 charge from the loss on
sale of assets in the nine months ended June 30, 2004 as compared to a $102,000
credit from the gain on sale of assets in the nine months ended June 30, 2003.
Excluding the gain or loss on sale of assets, the nine months ended June 30,
2004, operating expenses were $1,504,000, as compared to operating expenses of
$1,791,000 in the nine months ended June 30, 2003.
The Company incurred an operating loss of $520,000 in the nine months ended June
30, 2004, as compared to operating loss of $514,000 in the nine months ended
June 30, 2003. Excluding the gain or loss on sale of assets, the nine months
ended June 30, 2004, operating loss was $516,000, as compared to an operating
loss of $616,000 in the nine months ended June 30, 2003.
Net income (loss) decreased to a net loss of $505,000 in the nine months ended
June 30, 2004, as compared with net income of $1,335,000 in the nine months
ended June 30, 2003. Net loss in the current nine months includes other income
of $11,000, rental income of $102,000, and interest expense of $98,000. Net
income in the nine months ended June 30, 2003 includes a $1,653,000 gain on the
sale of non-operating assets, other income of $136,000, rental income of
$176,000 and interest expense of $116,000.
Texas Petroleum Marketing Segment
Revenues increased $72,000, or approximately 1% to $12,843,000 in the nine
months ended June 30, 2004, as compared with revenues of $12,771,000 in the nine
months ended June 30, 2003. Fuel sales in gallons declined approximately 1% to
10,882,000 gallons, as compared with 10,953,000 gallons in the nine months ended
June 30, 2003.
Gross profit declined $134,000, or approximately 20%, to $550,000 in the nine
months ended June 30, 2004, as compared with $684,000 in the nine months ended
June 30, 2003. Gross Margin was approximately 4% and 5% of revenues in the nine
months ended June 30, 2004 and June 30, 2003, respectively.
Operating expenses in the nine months ended June 30, 2004 decreased $84,000 to
$922,000, as compared with $1,006,000 in the nine months ended June 30, 2003.
Operating expenses include a $4,000 charge from the loss on sale of assets in
the nine months ended June 30, 2004 as compared to a $102,000 credit in the nine
months ended June 30, 2003. Excluding the gain or loss on sale of assets, the
nine months ended June 30, 2004 operating expenses were $918,000, as compared to
operating expenses of $1,108,000 in the nine months ended June 30, 2003.
Texas petroleum marketing incurred a operating loss of $372,000 in the nine
months ended June 30, 2004, as compared to operating loss of $322,000 in the
nine months ended June 30, 2003. Excluding the gain or loss on sale of assets,
the nine months ended June 30, 2004 operating loss was $368,000, as compared to
an operating loss of $424,000 in the nine months ended June 30, 2003.
21
Environmental Segment
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Revenues decreased $104,000, or approximately 13%, to $702,000 in the nine
months ended June 30, 2004, as compared with $806,000 in the nine months ended
June 30, 2003.
Gross profit in the nine months ended June 30, 2004 decreased $62,000 to
$422,000, as compared with $484,000 in the nine months ended June 30, 2003.
Gross Margin was approximately 60% of revenues in the nine months ended June 30,
2004 and the nine months ended June 30, 2003.
Operating expenses decreased $22,000, or approximately 5%, to $405,000 in the
nine months ended June 30, 2004, as compared with $427,000 in the nine months
ended June 30, 2003.
The Environmental segment reported operating income of $17,000 in the nine
months ended June 30, 2004, as compared with an operating income of $57,000 in
the nine months ended June 30, 2003.
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. In April 2004, the Company reacquired control of 2 of
the stores due to the inability of the lessee's to make required payments under
the lease agreement and the lessee's inability to maintain the stores and
equipment in proper working order. After unsuccessful attempts to re-lease the
stores, management reopened the stores as company-owned stores during late April
2004. In addition, in July 2004, the Company reacquired control of the remaining
store due to the lessee's inability to make required payments under the lease
agreement and reopened the store as a company-owned store. Accordingly, the
Company has reestablished its Texas Convenience Store Segment and the prior
period results of operations of these stores previously reported as discontinued
operations have been reclassified and included in income from continuing
operations for all period presented. However, as the Company did not operate any
stores between November 18, 2002 and April 2004, the operational results of the
Texas Convenience Store segment represent only one quarter of operations (April
2004 to June 2004) in the nine months ended June 30, 2004 and only one quarter
(October 1, 2002 to November 18, 2002) in the quarter ended June 30, 2003.
Unallocated General and Administrative Expenses
Unallocated General and Administrative expenses decreased $74,000, or
approximately 47%, to $83,000 in the nine months ended June 30, 2004, as
compared with $157,000 in the nine months ended June 30, 2003. The decrease is
primarily attributable to new managements focus on reducing general and
corporate overhead expenses.
Capital Resources and Liquidity
Cash and cash equivalents were $585,000 and $216,000 at June 30, 2004 and
September 30, 2003, respectively. The Company had a net working capital deficit
of $964,000 at June 30, 2004, as compared with a deficit of $631,000 at
September 30, 2003.
22
Cash provided by operating activities was $416,000 for the nine months ended
June 30, 2004. During that period, cash provided by investing activities was
$72,000, which was comprised of capital expenditures of $12,000 offset by
proceeds from the sales of assets of $84,000. Cash used by financing activities
was $119,000, which was comprised of repayment of notes receivable aggregating
$26,000 offset by the issuance of notes receivable of $17,000 and debt
repayments of $128,000.
Cash used by operating activities was $259,000 for the nine months ended June
30, 2003. During that period, cash provided by investing activities was
$175,000, which was comprised of capital expenditures of $45,000 offset by
proceeds from the sales of assets of $220,000. Cash used by financing activities
was $73,000, which was comprised of $20,000 of borrowings under the Company's
line of credit agreement, repayment of notes receivable aggregating $125,000
offset by the issuance of notes receivable of $86,000 and new borrowings of
$2,000 offset by $134,000 in debt repayments.
As of June 30, 2004, the Company had an aggregate of approximately $3,251,000 in
principal outstanding under various note agreements. Of this total, one note
dated June 24, 2002 for $2,600,000, payable to CSS, has amended terms that call
for payments of interest only at an annual rate of 10% commencing June 1, 2004,
with the principal balance and accrued but unpaid interest due by December 24,
2007.
Of the remaining principal outstanding aggregating an approximate $651,000,
approximately $436,000 is due to various property taxing districts over the next
three years. At June 30, 2004, the Company was in default under these note
agreements, and accordingly, the Company has reflected these notes as currently
due on the accompanying condensed consolidated balance sheet. In addition,
Matagorda and Wharton Counties have filed tax suits against the Company for
delinquent taxes.
Additionally, approximately $118,000 is due to Travelers Express Co. under a
forbearance note agreement dated June 24, 2002 in the original amount of
$183,000 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 of approximately $97,000 is due
under 3 note agreements with various terms to unrelated third parties. At June
30, 2004, the Company was in default under these note agreements, and
accordingly, the Company has reflected these notes as currently due on the
accompanying condensed consolidated balance sheet.
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 and selling of non-income producing assets. There can be no
assurance that management's plans will be successful implemented or that the
Company will continue as a going concern.
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 and Acting Chief Financial
Officer concluded that the Company's disclosure controls and procedures have
been effective.
23
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
The Company is subject to litigation, primarily as a result of vendor claims, in
the ordinary conduct of its operations. As of June 30, 2004, 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 fiscal 2003, Matagorda County, Victoria County, Jackson County, Wharton
and Brazoria County filed tax suits against the Company for failure to pay prior
years ad valorem taxes. As of June 30, 2004, the Company had paid off the
Victoria, Jackson and Brazoria county ad valorem taxes and those suits had been
dismissed. The Company has accrued all prior years ad valorem taxes not under
note agreements and has reflected the Matagorda and Wharton County notes payable
as currently due at June 30, 2004 and September 30, 2003.
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.
24
Item 3. Defaults Upon Senior Securities
At June 30, 2004, the Company had defaulted under the Matagorda County and
Wharton County property tax notes. At June 30, 2004, the Company had outstanding
principal balances due to these counties aggregating $436,000, which is all
reflected as currently due at June 30, 2004, and accrued interest aggregating
$8,000. The defaults occurred due to the Company's inability to make required
monthly principal and interest payments under the notes. Under the agreements,
the Company was obligated to make monthly payments of $13,500 to Matagorda
County and $9,500 to Wharton County. During the nine months ended June 30, 2004,
the Company made only partial payments of the required monthly payments to each
county.
At June 30, 2004, the Company was in default under the $500,000 revolving line
of credit with NewFirst National Bank, of which $399,000 was outstanding at June
30, 2004, as the Company defaulted under the loan covenant provisions of the
agreement. The Company is current on the monthly interest payments required
under the agreement. The Company does not have any available credit remaining
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 31 - Section 302 Certification of Blair R. Couey, as Chief
Executive Officer and Acting Chief Financial Officer
Exhibit 32 - Section 906 Certification of Blair R. Couey, Chief
Executive Officer and Acting Chief Financial Officer
B. Reports on Form 8K - The following reports on Form 8-K were filed
under the Securities and Exchange Act of 1934 in the quarter ended
June 30, 2004:
Current Report on Form 8-K, dated July 1, 2004 announcing certain
transactions with Mauritz & Couey and CSS, in which the Company sold
various assets for certain debt relief and/or debt assumptions
Exhibit 10.1 - Bill of Sale for accounts receivable and inventory
Exhibit 10.2 - Bill of Sale
Exhibit 10.3 - Deed of Trust
Exhibit 10.4 - General Warranty Deed
Exhibit 10.5 - Promissory Note
Exhibit 10.6 - Security Agreement (Goods, Equipment, Inventory, & Farm
Equipment)
25
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: August 23, 2004
EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey.
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Blair R. Couey
President and Chief Executive Officer
and Acting Chief Financial Officer
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