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As Filed with the Securities and Exchange Commission on May 14, 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 March 31, 2003
[ ] 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 May 13, 2003 was
9,844,831.
Evans Systems, Inc.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets as of
March 31, 2003 and September 30, 2002 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Income for the
Six Months Ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Certifications 26
Signatures 27
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, September 30,
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 182 $ 491
Trade receivables, net of allowance for doubtful
accounts of $39,000 and $47,000, respectively 1,377 913
Inventory 353 507
Costs and estimated earnings in excess of billings on
uncompleted contracts 76 72
Prepaid expenses and other current assets 102 96
Notes receivable, current portion 52 115
-------------- -------------
Total current assets 2,142 2,194
Property and equipment, net 2,971 3,547
Notes receivable, long term 31 -
Other assets - 30
-------------- -------------
Total assets $ 5,144 $ 5,771
============== =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,122 $ 1,165
Accrued excise, property and other taxes payable 375 385
Advances on line of credit 499 479
Current portion of long-term debt 705 477
Accrued interest 29 10
Billings in excess of costs and estimated earnings on
uncompleted contracts 49 3
-------------- -------------
Total current liabilities 2,779 2,519
Long-term debt, net of current portion 2,733 5,070
-------------- -------------
Total liabilities 5,512 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 (17,226) (18,676)
Treasury stock, 72,589 shares, at cost (434) (434)
-------------- -------------
Total stockholders' equity (deficit) (368) (1,818)
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 5,144 $ 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 March 31,
-----------------------------------
2003 2002
---- ----
Revenues:
Motor fuel sales $ 4,600 $ 4,345
Other sales and services 276 427
-------------- -------------
Total revenues 4,876 4,772
Cost of sales
Motor fuel 4,377 4,023
Other sales and services 120 260
-------------- -------------
Total cost of sales 4,497 4,283
-------------- -------------
Gross profit 379 489
Operating expenses:
Employment expenses 151 275
Other operating expenses 165 179
General & administrative expenses 240 187
Depreciation and amortization 75 121
(Gain) loss on sale of assets (103) (39)
--------------- -------------
Total operating expenses 528 723
-------------- -------------
Operating loss (149) (234)
Other income (expense)
Gain on sale of non-operating assets 1,653 -
Interest expense, net (19) (9)
Other income (expense), net 91 -
Rental income, net 58 -
-------------- -------------
Total other income (expense) 1,783 (9)
-------------- -------------
Income (loss) before income taxes 1,634 (243)
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations 1,634 (243)
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Stores to November 18, 2002 - (47)
-------------- -------------
Total discontinued operations - (47)
-------------- -------------
Net income (loss) $ 1,634 $ (290)
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.16 $ (0.03)
Discontinued operations - (0.01)
-------------- -------------
Earnings (loss) per common share $ 0.16 $ (0.04)
============== =============
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)
Six Months Ended March 31,
--------------------------
2003 2002
---- ----
Revenues:
Motor fuel sales $ 8,429 $ 8,670
Other sales and services 543 625
-------------- -------------
Total revenues 8,972 9,295
Cost of sales
Motor fuel 7,979 8,050
Other sales and services 247 367
-------------- -------------
Total cost of sales 8,226 8,417
-------------- -------------
Gross profit 746 878
Operating expenses
Employment expenses 336 649
Other operating expenses 299 297
General & administrative expenses 396 403
Depreciation and amortization 129 251
(Gain) loss on sale of assets (106) (19)
-------------- -------------
Total operating expenses 1,054 1,581
-------------- -------------
Operating loss (308) (703)
Other income (expense)
Gain on sale of non-operating assets 1,653 -
Interest expense, net (51) (35)
Other income (expense), net 136 (9)
Rental income, net 112 -
-------------- -------------
Total other income (expense) 1,850 (44)
-------------- -------------
Income (loss) before income taxes 1,542 (747)
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations 1,542 (747)
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Store to November 18, 2002 (92) (282)
-------------- -------------
Total discontinued operations (92) (282)
-------------- -------------
Net income (loss) $ 1,450 $ (1,029)
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.16 $ (0.11)
Discontinued operations (0.01) (0.04)
-------------- -------------
Earnings (loss) per common share $ 0.15 $ (0.15)
============== =============
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)
Six Months Ended March 31,
--------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,450 $ (1,029)
Adjustments:
Depreciation and amortization 129 308
(Gain) loss on sale of assets (106) (148)
Gain on sale of non-operating assets (1,653) -
Changes in working capital:
Current assets (320) 61
Other assets 30 77
Current liabilities 30 141
-------------- -------------
Total adjustments (1,890) 439
-------------- -------------
Net cash provided (used) by operating activities (440) (590)
Cash flows from investing activities:
Capital expenditures (29) (24)
Proceeds from sale of property and equipment 217 621
-------------- -------------
Net cash provided (used) by investing activities 188 597
Cash flows from financing activities:
Issuance of notes receivable (66) -
Repayment on notes receivable 98 -
Borrowings under line of credit agreement, net 20 -
Repayment on notes payable (111) (280)
Borrowings under note payable agreements 2 -
-------------- -------------
Net cash provided (used) by financing activities (57) (280)
-------------- -------------
Net increase (decrease) in cash (309) (273)
Cash and cash equivalents, beginning of period 491 604
-------------- -------------
Cash and cash equivalents, end of period $ 182 $ 331
============== =============
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 $ -
============== =============
Foreclosure of ChemWay Warehouse
Relief of assumed debt on foreclosed warehouse $ - $ 501
Net book value of foreclosed warehouse - 471
-------------- -------------
Gain on foreclosure of warehouse $ - $ 30
============== =============
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 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 six month periods ended March 31,
2003 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 and six months ended March
31, 2003 and 2002 are as follows (in thousands):
Quarter Ended March 31, Six Months Ended March 31,
----------------------------- ----------------------------------
2003 2002 2003* 2002
------------ ---------------- ---------------- -----------------
Revenues $ - $ 1,455 $ 342 $ 3,066
============ ================ ================ =================
Gross Profit $ - $ 267 $ 8 $ 560
============ ================ ================ =================
Income (loss) from operations $ - $ (47) $ (92) $ (292)
============ ================ ================ =================
*Through November 18, 2002.
7
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 three and six
months ended March 31, 2002 is as follows (in thousands, except per share
amounts):
Three Months Six Months
Ended Ended
March 31, 2002 March 31, 2002
------------------ ------------------
Net loss as previously reported $ (348) $ (1,059)
Adjustment for effect of a change in accounting principle
that is applied retroactively 58 30
-------------- --------------
Net loss as adjusted $ (290) $ (1,029)
============== ==============
Per share amounts:
Earnings per common share:
Net loss as previously reported $ (0.05) $ (0.15)
Adjustment for effect of a change in accounting principle
that is applied retroactively (0.01) -
-------------- --------------
Net loss as adjusted $ (0.04) $ (0.15)
============== ==============
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).
As of March 31, 2003, the Company had an aggregate of approximately $3,438,000
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% for five years commencing
June 1, 2003, with the principal balance and accrued but unpaid interest due by
December 24, 2007.
Of the remaining principal outstanding aggregating an approximate $838,000,
approximately $525,000 is due to various property taxing districts over the next
three years. At March 31, 2003, the Company was in default under three of these
note agreements aggregating $502,000, and accordingly, the Company has reflected
these notes as currently due on the accompanying condensed consolidated balance
sheet.
8
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 March 31, 2003 and September 30, 2002,
approximately $705,000 and $477,000, respectively, in outstanding principal is
due within one year.
In July 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 and Couey, ("MC"). Terms of the revolving line of
credit call for an annual interest rate of 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. As of March 31, 2003 and September 30,
2002, the Company had approximately $499,000 and $479,000, respectively,
outstanding under this agreement. At March 31, 2003, the Company was in default
on certain loan covenants under this agreement.
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.
In conjunction with this transaction, 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.
Concurrent with the above transactions, 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 $3,500,000 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,
CSS and the Company will share equally all proceeds over and above $3,500,000
resulting from the sale to an unrelated third party buyer. It is management's
opinion that it is very unlikely the Company would excise this option.
9
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.
Note F - Costs and Estimated Earnings on Uncompleted Contracts
At March 31, 2003 and September 30, 2002, costs and estimated earnings on
uncompleted contracts consisted of the following (in thousands):
Mar. 31, Sept. 30,
2003 2002
------------- ------------
Costs incurred to date on uncompleted contracts $ 134 $ 240
Estimated earnings 165 138
------------ ------------
299 378
Billings to date (272) (309)
------------ ------------
Total $ 27 $ 69
============ ============
Included in the accompanying condensed consolidated balance sheets under
the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 76 $ 72
Billings in excess of costs and estimated earnings
on uncompleted contracts (49) (3)
------------- ------------
Total $ 27 $ 69
============= ============
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $282,000 and $250,000 at March 31, 2003 and
September 30, 2002, respectively. There were no material revisions in contract
estimates during the three and six months ended March 31, 2003.
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 six months ending
March 31, 2003 were computed using 9,844,831 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 six months ended
March 31, 2003 as they would have resulted in an antidilutive effect as the
exercise price exceeded the average market price per share during the period.
Basic and diluted earnings (loss) per share for the three and six months ending
March 31, 2002 were computed using 6,759,831 weighted average common shares
outstanding. Stock options and warrants were not included in the computation
10
of diluted earnings (loss) per common share for the three and six months ended
March 31, 2002 as they would have resulted in an antidilutive effect on loss
from continuing operations.
At March 31, 2003, 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 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 March 31, 2003, 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 J - Management's Plans
New management and directors were appointed on June 24, 2002. From that date
through March 31, 2003, 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
11
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 management's plan is to open the Fuel Terminal utilizing a joint
venture, thru-put partner, or supplier to begin operations (Note E). 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 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. Currently, the President and Chief Executive Officer has assumed
the duties of the Chief Financial Officer.
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 B, 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.
12
Information concerning the Company's business activities is summarized as
follows (in thousands):
Texas Environmental Other
Petroleum Remediation Reconciling Consolidated
Three Months Ended Marketing Services Items (1) Total
March 31, 2003-
Revenues from external
Customers:
Motor fuel sales $ 4,600 $ - $ - $ 4,600
Other - 276 - 276
Intersegment revenues - - - -
------- ------ ------ -------
Total revenues $ 4,600 $ 276 $ - $ 4,876
======= ====== ====== =======
Depreciation and
amortization $ 69 $ 4 $ 2 $ 75
Operating income (loss) $ (127) $ 33 $ (55) $ (149)
March 31, 2002-
Revenues from external
Customers:
Motor fuel sales $ 4,345 $ - $ - $ 4,345
Other 88 339 - 427
Intersegment revenues - - - -
------- ------ ------ -------
Total revenues $ 4,433 $ 339 $ - $ 4,772
======= ====== ====== =======
Depreciation and
amortization $ 115 $ 4 $ 2 $ 121
Operating income (loss) $ (85) $ 27 $ (176) $ (234)
(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 March 31,
------------------------
2003 2002
------- -------
Total operating loss for reportable segments $ (94) $ (58)
Rental income, net 91 -
Other income, net 58 -
Interest expense, net (19) (9)
Unallocated corporate overhead expenses (55) (176)
Gain on sale of non-operating assets 1,653 -
------- ------
Total consolidated income (loss) from
continuing operations before income taxes $ 1,634 $ (243)
======= =======
13
Texas Environmental Other
Petroleum Remediation Reconciling Consolidated
Six Months Ended Marketing Services Items (1) Total
March 31, 2003-
Revenues from external
Customers:
Motor fuel sales $ 8,429 $ - $ - $ 8,429
Other - 543 - 543
Intersegment revenues - - - -
------- ----- ------ -------
Total revenues $ 8,429 $ 543 $ - $ 8,972
======= ===== ====== =======
Depreciation and
amortization $ 117 $ 8 $ 4 $ 129
Operating income (loss) $ (204) $ 6 $ (110) $ (308)
March 31, 2002-
Revenues from external
Customers:
Motor fuel sales $ 8,670 $ - $ - $ 8,670
Other 135 490 - 625
Intersegment revenues 762 - (762) -
------- ----- ------ -------
Total revenues $ 9,567 $ 490 $ (762) $ 9,295
======= ===== ====== =======
Depreciation and
amortization $ 238 $ 8 $ 5 $ 251
Operating income (loss) $ (272) $ (23) $ (408) $ (703)
(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):
Six Months Ended March 31,
-----------------------------------
2003 2002
---- ----
Total operating income (loss) for reportable segments $ (198) $ (295)
Rental income, net 112 -
Other income (expense), net 136 (9)
Interest expense, net (51) (35)
Unallocated corporate overhead expenses (110) (408)
Gain on sale of non-operating assets 1,653 -
-------------- -------------
Total consolidated income (loss) from
continuing operations before income taxes $ 1,542 $ (747)
============== ==============
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
14
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
$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.
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 $3,500,000 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, CSS and the
Company will share equally all proceeds over and above $3,500,000 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.
15
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. Currently, the President and Chief Executive Officer has assumed
the duties of the Chief Financial Officer.
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.
16
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.
Results of Operations
Three Months Ended March 31, 2003 and 2002
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 March 31, 2003 and
2002. This is the second quarter of ESI's fiscal year, which begins on October 1
and ends on September 30.
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 4,600 $ 4,433
Gross profit 221 338
Operating expenses 348 423
-------------- -------------
Operating loss (127) (85)
EDCO Environmental
Revenue $ 276 $ 339
Gross profit 158 151
17
Operating expenses 125 124
-------------- -------------
Operating income (loss) 33 27
Unallocated General and Administrative Expenses $ (55) $ (176)
--------------- --------------
Total Continuing Operations
Revenue $ 4,876 $ 4,772
Gross profit 379 489
Operating expenses 528 723
-------------- -------------
Operating loss (149) (234)
Discontinued Texas Convenience Store Operations
Revenue $ - $ 1,455
Gross profit - 267
Operating expenses - 314
-------------- -------------
Operating loss - (47)
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 increased $104,000, or approximately 2%, to $4,876,000 in
the quarter ended March 31, 2003, as compared with revenues of $4,772,000 in the
quarter ended March 31, 2002. The increase was primarily attributable to higher
fuel prices during the quarter.
Fuel sales increased $255,000 while other sales and services decreased $151,000
in the quarter ended March 31, 2003, as compared with the quarter ended March
31, 2002.
Consolidated gross profit decreased $110,000, or approximately 22%, in the
quarter ended March 31, 2003, as compared with the quarter ended March 31, 2002.
Gross profit expressed as a percentage of sales, "Gross Margin", was
approximately 8% of sales in the quarter ended March 31, 2003, as compared to
approximately 10% in the quarter ended March 31, 2002.
Operating expenses declined $195,000 in the quarter ended March 31, 2003, as
compared with the quarter ended March 31, 2002. Operating expenses in the
quarter ended March 31,2003 include a gain on the sale of assets of $103,000
compared to a gain on the sale of assets of $39,000 in the quarter ended March
31, 2002. Operating expenses excluding the gain or loss on sale of assets
declined $131,000 to $631,000 in the quarter ended March 31, 2003 as compared to
$762,000 in the quarter ended March 31, 2002.
The Company had an operating loss of $149,000 in the quarter ended March 31,
2003, as compared to an operating loss of $234,000 in the quarter ended March
31, 2002. Excluding the gain or loss on sale of assets, the quarter ended March
31, 2003 operating loss was $252,000 as compared to an operating loss of
$273,000 in the quarter ended March 31, 2002.
Net income (loss) increased to a net income of $1,634,000 in the quarter ended
March 31, 2003, as compared with a net loss of $290,000 in the quarter ended
March 31, 2002. Net income in the current quarter includes a gain on the sale of
non-operating assets of $1,653,000, interest expense of $19,000, other income of
$91,000 and rental income of $58,000. Net loss for the quarter ended March 31,
2002
18
includes a loss on discontinued operations of $47,000 and interest expense
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 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 $167,000 or approximately 4% to $4,600,000 in the quarter
ended March 31, 2003, as compared with revenues of $4,433,000 in the quarter
ended March 31, 2002. Fuel sales in gallons increased approximately 6%, to
4,128,000 gallons, as compared with 3,878,000 gallons in the quarter ended March
31, 2002. The revenue increase is mainly attributable to increased gallons sold
in the current quarter compared to the quarter ended March 31, 2002.
Gross profit decreased $117,000 or approximately 35%, to $221,000 in the quarter
ended March 31, 2003, as compared with $338,000 in the quarter ended March 31,
2002. Gross Margin decreased to approximately 5% of sales in the quarter ended
March 31, 2003, as compared with approximately 7% of sales in the quarter ended
March 31, 2002.
Operating expenses in the quarter ended March 31, 2003 declined $75,000, or
approximately 18%, as compared with the quarter ended March 31, 2002. Operating
expenses include a $103,000 credit from the gain on sale of assets in the
quarter ended March 31, 2003 as compared to a $39,000 credit from the gain on
sale of assets in the quarter ended March 31, 2002.
The Texas petroleum marketing segment's operating loss increased $42,000 to
$127,000 in the quarter ended March 31, 2003, as compared to an operating loss
of $85,000 in the quarter ended March 31, 2002. Excluding the gain or loss on
sale of assets, the quarter ended March 31, 2003 operating loss was $230,000, as
compared to an operating loss of $124,000 in the quarter ended March 31, 2002.
EDCO Environmental (dba Star Co.)
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Total revenues decreased $63,000, or approximately 19%, to $276,000 in the
quarter ended March 31, 2003, as compared to $339,000 in the quarter ended March
31, 2002.
19
Gross profit in the quarter ended March 31, 2003 increased $7,000 to $158,000,
as compared with $151,000 in the quarter ended March 31, 2002.
Operating expenses increased $1,000 in the quarter ended March 31, 2003 to
$125,000, as compared with $124,000 in the quarter ended March 31, 2002.
EDCO Environmental reported an operating profit of $33,000 in the quarter ended
March 31, 2003, as compared with an operating profit of $27,000 in the quarter
ended March 31, 2002.
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
Unallocated General and Administrative expenses decreased $121,000, or
approximately 69%, to $55,000 in the quarter ended March 31, 2003, as compared
with $176,000 in the quarter ended March 31, 2002.
Six Months Ended March 31, 2003 and 2002
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 six months ended March 31, 2003 and 2002. This is the
first half of ESI's fiscal year, which begins October 1 and ends September 30.
Six Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 8,429 $ 8,805
Gross profit 448 653
Operating expenses 652 925
-------------- -------------
Operating loss (204) (272)
EDCO Environmental
Revenue $ 543 $ 490
Gross profit 298 225
Operating expenses 292 248
-------------- -------------
Operating income (loss) 6 (23)
Unallocated General and Administrative Expenses $ (110) $ (408)
Total Continuing Operations
Revenue $ 8,972 $ 9,295
20
Gross profit 746 878
Operating expenses 1,054 1,581
-------------- -------------
Operating loss (308) (703)
Discontinued Texas Convenience Store Operations
Revenue $ 342 $ 3,066
Gross profit 8 560
Operating expenses 100 842
-------------- -------------
Operating loss (92) (282)
Consolidated revenues declined $323,000, or approximately 3% to $8,972,000 in
the six months ended March 31, 2003, as compared with $9,295,000 in the six
months ended March 31, 2002. Motor fuel sales decreased $241,000 while other
sales and services decreased $82,000 in the six months ended March 31, 2003,
as compared with the six months ended March 31, 2002.
Consolidated gross profit declined $132,000, or approximately 15%, to $746,000
in the six months ended March 31, 2003, as compared with $878,000 in the six
months ended March 31, 2002. Gross Margin declined to approximately 8% of sales
in the six months ended March 31, 2003, as compared with approximately 9% of
sales in the six months ended March 31, 2002.
Operating expenses declined $527,000, or approximately 33%, to $1,054,000 in the
six months ended March 31, 2003, as compared with $1,581,000 in the six months
ended March 31, 2002. Operating expenses include a $106,000 credit from the gain
on sale of assets in the six months ended March 31, 2003 as compared to a
$19,000 credit in the six months ended March 31, 2002. Excluding the gain or
loss on sale of assets, the six months ended March 31, 2003, operating expense
was $1,160,000, as compared to an operating expense of $1,600,000 in the six
months ended March 31, 2002.
The Company incurred an operating loss of $308,000 in the six months ended March
31, 2003, as compared to operating loss of $703,000 in the six months ended
March 31, 2002. Excluding the gain or loss on sale of assets, the six months
ended March 31, 2003, operating loss was $414,000, as compared to an operating
loss of $722,000 in the six months ended March 31, 2002.
Net income increased to $1,450,000 in the six months ended March 31, 2003, as
compared with a net loss of $1,029,000 in the six months ended March 31, 2002.
Net income in the current six months includes a $1,653,000 gain on the sale of
non-operating assets, other income of $136,000, rental income of $112,000,
interest expense of $51,000, and a loss from discontinued operations of the
Texas Convenience Store Segment of $92,000. Net loss for the six months ended
March 31, 2002 includes a $282,000 loss from the discontinued operations of the
Texas Convenience Store Segment, interest expense of $35,000 and other expenses
of $9,000.
Texas Petroleum Marketing Segment
Revenues decreased $376,000, or approximately 4% to $8,429,000 in the six months
ended March 31, 2003, as compared with revenues of $8,805,000 in the six months
ended March 31, 2002. Fuel sales in gallons declined approximately 2% to
7,166,000 gallons, as compared with 7,335,000 gallons in the six months ended
March 31, 2002.
Gross profit declined $205,000, or approximately 31%, to $448,000 in the six
months ended March 31, 2003, as compared with $653,000 in the six months ended
March 31, 2002. Gross Margin was approximately 5% and 7% of revenues in the six
months ended March 31, 2003 and March 31, 2002, respectively.
21
Operating expenses in the six months ended March 31, 2003 decreased $273,000 to
$652,000, as compared with $925,000 in the six months ended March 31, 2002.
Operating expenses include a $106,000 credit from the gain on sale of assets in
the six months ended March 31, 2003 as compared to a $19,000 credit in the six
months ended March 31, 2002. Excluding the gain or loss on sale of assets, the
six months ended March 31, 2003 operating expense was $758,000, as compared to
an operating expense of $944,000 in the six months ended March 31, 2002.
Texas petroleum marketing incurred a operating loss of $204,000 in the six
months ended March 31, 2003, as compared to operating loss of $272,000 in the
six months ended March 31, 2002. Excluding the gain or loss on sale of assets,
the six months ended March 31, 2003 operating loss was $378,000, as compared to
an operating loss of $291,000 in the six months ended March 31, 2002.
EDCO Environmental (dba Star Co.)
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Revenues increased $53,000, or approximately 11%, to $543,000 in the six months
ended March 31, 2003, as compared with $490,000 in the six months ended March
31, 2002.
Gross profit in the six months ended March 31, 2003 increased $73,000 to
$298,000, as compared with $225,000 in the six months ended March 31, 2002.
Gross Margin increased to approximately 55% of revenues in the six months ended
March 31, 2003, as compared with approximately 46% of revenues in the six months
ended March 31, 2001.
Operating expenses increased $44,000, or approximately 18%, to $292,000 in the
six months ended March 31, 2003, as compared with $248,000 in the six months
ended March 31, 2002.
EDCO Environmental reported an operating income of $6,000 in the six months
ended March 31, 2003, as compared with an operating loss of $23,000 in the six
months ended March 31, 2002.
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
Unallocated General and Administrative expenses decreased $298,000, or
approximately 73%, to $110,000 in the six months ended March 31, 2003, as
compared with $408,000 in the six months ended March 31, 2002. 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 $182,000 and $491,000 at March 31, 2003 and 2002,
respectively. The Company had a net working capital deficit of $637,000 at March
31, 2003, as compared with a deficit of $325,000 at September 30, 2002.
22
Cash used by operating activities was $440,000 for the six months ended March
31, 2003. During that period, cash provided by investing activities was
$188,000, which was comprised of capital expenditures of $29,000 offset by
proceeds from the sales of assets of $217,000. Cash used by financing activities
was $57,000, which was comprised of $20,000 of borrowings under the Company's
line of credit agreement, repayment of notes receivable aggregating $98,000
offset by the issuance of notes receivable of $66,000 and new borrowings of
$2,000 offset by $93,000 in debt repayments.
Cash used by operating activities was $590,000 for the six months ended March
31, 2002. During that period, cash provided from investing activities was
$597,000, which was comprised of capital expenditures of $24,000 offset by
proceeds from the sales of assets of $621,000. Cash used by financing activities
was $280,000, which was comprised entirely of debt repayments.
As of March 31, 2003, the Company had an aggregate of approximately $3,438,000
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% for five years commencing
June 1, 2003, with the principal balance and accrued but unpaid interest due by
December 24, 2007.
Of the remaining principal outstanding aggregating an approximate $838,000,
approximately $525,000 is due to various property taxing districts over the next
three years. At March 31, 2003, the Company was in default under these
agreements, and accordingly, the Company has reflected these notes as currently
due on the accompanying condensed consolidated balance sheet.
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 March 31, 2003 and September 30, 2002,
approximately $805,000 and $477,000, respectively, in outstanding principal is
due within one year.
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 and Couey, ("MC"). Terms of the revolving
line of credit call for an annual interest rate of 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. As of March 31, 2003 and
September 30, 2002, the Company had approximately $499,000 and $479,000,
respectively, outstanding under this agreement. At March 31, 2003, the Company
was in default on certain loan covenants under this agreement.
At March 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 assets and its existing bank
line with NewFirst National Bank. There can be no assurance that management's
plans will be successful implemented or that the Company will continue as a
going concern.
23
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 and Acting Chief Financial
Officer concluded that the Company's disclosure controls and procedures have
been effective.
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
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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 March 31, 2003, the Company had defaulted under the Matagorda County, Wharton
County, and Victoria County property tax notes. At March 31, 2003, the Company
had outstanding principal balances due to these counties aggregating $502,000,
which is all reflected as currently due at March 31, 2003, and accrued interest
aggregating $14,500. 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, $9,500 to Wharton County, and $2,000 to Victoria County.
During the quarter ended March 31, 2003, the Company made only 25% of the
required monthly payments to each county.
At March 31, 2003, the Company was in default under the $500,000 revolving line
of credit with NewFirst National Bank, of which $499,000 was outstanding at
March 31, 2003, 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.
25
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 10.1 - Assignment of Lease By and Between Evans Systems, Inc., Way
Energy, Inc. and CSS Lake Jackson Property, L.P.
Exhibit 10.2 - Management Agreement By and Between Evans Systems, Inc. and
CSS Lake Jackson Property, L.P.
Exhibit 99.1 - Certification of Blair R. Couey, as President and Chief
Executive Officer and Acting Chief Financial Officer of the
Company, pursuant to 18 U.S.C. ss. 1350, dated May 13, 2003.
B. Reports on Form 8K
None
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;
26
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: May 13, 2003
By: /s/ Blair R. Couey
-----------------------------------------
Blair R. Couey
President and Chief Executive Officer
and Acting Chief Financial Officer
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: May 13, 2003
EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey
---------------------------------
Blair R. Couey
President and Chief Executive Officer
and Acting Chief Financial Officer
27