As Filed with the Securities and Exchange Commission on February 17, 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 December 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 February 13, 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
December 31, 2003 and September 30, 2003 3
Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2003 and 2002 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 19
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
December 31, September 30,
2003 2003
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 245 $ 216
Trade receivables, net of allowance for doubtful
accounts of $24,000 and $28,000, respectively 782 831
Inventory 396 371
Costs and estimated earnings in excess of billings on
uncompleted contracts 256 172
Prepaid expenses and other current assets 83 103
Notes receivable, current portion 44 67
-------------- -------------
Total current assets 1,806 1,760
Property and equipment, net 2,693 2,744
Other assets - -
-------------- -------------
Total assets $ 4,499 $ 4,504
============== =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,149 $ 895
Accrued excise, property and other taxes payable 395 394
Advances on line of credit 399 399
Current portion of long-term debt 639 673
Accrued interest 48 28
Billings in excess of costs and estimated earnings on
uncompleted contracts - 2
-------------- -------------
Total current liabilities 2,620 2,391
Long-term debt, net of current portion 2,690 2,706
-------------- -------------
Total liabilities 5,310 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 (17,669) (17,451)
Treasury stock, 72,589 shares, at cost (434) (434)
-------------- -------------
Total stockholders' deficit (811) (593)
-------------- -------------
Total liabilities and stockholders' equity $ 4,499 $ 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 December 31,
-----------------------------------
2003 2002
---- ----
Revenues:
Motor fuel sales $ 3,914 $ 3,829
Other sales and services 165 267
-------------- -------------
Total revenues 4,079 4,096
Cost of sales
Motor fuel 3,730 3,602
Other sales and services 88 127
-------------- -------------
Total cost of sales 3,818 3,729
-------------- -------------
Gross profit 261 367
Operating expenses:
Employment expenses 158 185
Other operating expenses 146 134
General & administrative expenses 145 156
Depreciation and amortization 50 54
(Gain) loss on sale of assets (3) (3)
--------------- --------------
Total operating expenses 496 526
-------------- -------------
Operating loss (235) (159)
Other income (expense)
Interest expense, net (15) (32)
Other income (expense), net - 45
Rental income, net 32 54
-------------- -------------
Total other income (expense) 17 67
-------------- -------------
Income (loss) before income taxes (218) (92)
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations (218) (92)
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Stores to November 18, 2002 - (92)
-------------- --------------
Total discontinued operations - (92)
-------------- --------------
Net income (loss) $ (218) $ (184)
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.02) $ (0.01)
Discontinued operations - (0.01)
-------------- -------------
Earnings (loss) per common share $ (0.02) $ (0.02)
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Evans Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended December 31,
-----------------------------------
2003 2002
---- ----
Cash flows provided (used) by operating activities:
Net income (loss) $ (218) $ (184)
Adjustments:
Depreciation and amortization 50 54
Loss (gain) on sale of fixed assets (3) (3)
Changes in working capital:
Current assets (17) (114)
Other assets - (40)
Current liabilities 263 69
-------------- -------------
Total adjustments 293 (34)
-------------- --------------
Net cash provided (used) by operating activities 75 (218)
Cash flows provided (used) by investing activities:
Capital expenditures - (25)
Proceeds from sale of property and equipment 4 3
-------------- -------------
Net cash provided (used) by investing activities 4 (22)
Cash flows used by financing activities:
Borrowings under line of credit agreement, net - 20
Borrowings under note payable agreements - 2
Repayment on notes payable (50) (93)
Net proceeds from stock issuance - -
-------------- -------------
Net cash used by financing activities (50) (71)
-------------- -------------
Net increase (decrease) in cash 29 (311)
Cash and cash equivalents, beginning of period 216 491
-------------- -------------
Cash and cash equivalents, end of period $ 245 $ 180
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Evans Systems, Inc. and its subsidiaries (dba MC Star and collectively referred
to as the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America, pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated. These financial
statements do not include all information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. It is recommended that these interim unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company`s Annual Report
on Form 10-K for the fiscal year ended September 30, 2003.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended December 31, 2003
are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Note B - Discontinued Operations
On November 18, 2002, the Company sold its fuel and retail inventory in its
three remaining operating convenience stores and leased the stores and store
equipment to outside operators, effectively discontinuing its Texas Convenience
Store Segment operations. Two lease agreements for two stores to an outside
operator call for lease payments of $2,800 and $3,200 per month for 5 years with
payments beginning December 1, 2002. Each lease maintains one 10-year extension
option. One lease agreement for a store to an outside operator calls for lease
payments of $2,400 per month for 5 years beginning December 1, 2002, with two
5-year extension options. Under the lease agreements, the Company, through its
Texas Petroleum Marketing Segment, executed fuel contracts with these outside
operators, thereby maintaining the fuel volumes. Accordingly, the results of
operations of the Texas Convenience Store segment have been classified as
discontinued operations and prior periods have been restated. The Company has
not allocated interest expense or general corporate overhead to discontinued
operations. Summary operating results for the three months ended December 31,
2002 are as follows (in thousands):
Quarter Ended
Dec. 31, 2002*
----------------
Revenues $ 342
================
Gross Profit $ 8
================
Income (loss) from operations $ (92)
================
*Through November 18, 2002.
6
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 December 31, 2003, 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
Effective September 30, 2003, the Company and Cain, Smith & Strong, L.P.
(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 December 31, 2003, the Company had an aggregate of approximately
$3,328,000 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 $728,000,
approximately $473,000 is due to various property-taxing districts over the next
three years. At December 31, 2003, 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, Victoria and Jackson Counties have filed tax suits against the
Company for delinquent taxes.
Additionally, approximately $151,000 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 $104,000 is due under 4 note
agreements with various terms to unrelated third parties. At December 31, 2003,
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.
7
Note E - Costs and Estimated Earnings on Uncompleted Contracts
At December 31, 2003 and September 30, 2003, costs and estimated earnings
on uncompleted contracts consisted of the following (in thousands):
Dec. 31, Sept. 30,
2003 2003
------------- ------------
Costs incurred to date on uncompleted contracts $ 204 $ 144
Estimated earnings 137 87
------------- ------------
341 231
Billings to date (85) (61)
------------- ------------
Total $ 256 170
============= ============
Included in the accompanying condensed consolidated balance sheets
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 256 $ 172
Billings in excess of costs and estimated earnings
on uncompleted contracts - (2)
------------- ------------
Total $ 256 $ 170
============= ============
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $87,000 and $91,000 at December 31, 2003 and
September 30, 2003, respectively. There were no material revisions in contract
estimates during the quarter ended December 31, 2003.
Note F - Seasonal Nature of Business
The refined petroleum products market customarily experiences decreased
margins in the fall and winter months followed by increased demand during spring
and summer when construction, travel, agricultural and recreational activities
increase.
Note G- Basic and Diluted Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share for the quarters ending
December 31, 2003 and 2002 were computed using 9,846,831 weighted average common
shares outstanding, respectively. Stock options and warrants were not included
in the computation of diluted loss per common share for the quarters ended
December 31, 2003 and 2002 since they would have resulted in an antidilutive
effect on loss from continuing operations.
At December 31, 2003, 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.
8
Note H - Contingent Liabilities
The Company is subject to litigation, primarily as a result of vendor
claims, in the ordinary conduct of its operations. As of December 31, 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 fiscal 2003, Matagorda County, Victoria County, Jackson County and
Brazoria County filed tax suits against the Company for failure to pay prior
years ad valorem taxes. The Company has accrued all prior years ad valorem taxes
not under note agreements and has reflected the Matagorda, Victoria and Jackson
County notes payable as currently due at December 31, 2003 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.
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.
9
Note I - Management's Plans
New management and directors were appointed on June 24, 2002. During the
eighteen months ended December 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
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 four remaining Diamond Mini Mart stores in November 2002 and
leased the locations to outside operators. The Petroleum Marketing Segment
executed fuel contracts with these locations maintaining the fuel volumes. The
second phase of managements plan is to open the Fuel Terminal utilizing a joint
venture, thru-put partner, or supplier to begin operations. The Fuel Terminal
operation will reduce 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 intends to expand the Environmental
Segment by creating a Testing Division. The Company is currently exploring the
feasibility of acquiring through merger a company currently performing line,
tank, and soil testing. 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 J- 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.
Information concerning the Company's business activities is summarized as
follows: (in thousands)
10
Texas Environmental Other
petroleum remediation reconciling Consolidated
Year ended marketing services items (1) total
December 31, 2003-
Revenues from external
Customers:
Motor fuel sales $ 3,914 $ - $ - $ 3,914
Other - 165 - 165
Intersegment revenues - - - -
---------- ------------- ----------- ------------
Total revenues $ 4,079 $ 165 $ - $ 4,079
========== ============= =========== ============
Depreciation and
amortization $ 44 $ 4 $ 2 $ 50
Operating income (loss) $ (127) $ (59) $ (49) $ (235)
December 31, 2002-
Revenues from external
Customers:
Motor fuel sales $ 3,829 $ - $ - $ 3,829
Other - 267 - 267
Intersegment revenues
Total revenues - - - -
---------- ------------- ----------- ------------
$ 3,829 $ 267 $ - $ 4,096
========== ============= =========== ============
Depreciation and
amortization $ 48 $ 4 $ 2 $ 54
Operating income (loss) $ (77) $ (27) $ (55) $ (159)
(1) Consists primarily of 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 December 31
----------------------------
2003 2002
----------- ------------
Total operating income (loss) for reportable segments $ (186) $ (104)
Interest expense, net (15) (32)
Unallocated corporate expenses (49) (55)
Other, net 32 99
---------- ----------
Total consolidated income (loss) from continuing
operations before income taxes $ (218) $ (92)
========== ==========
11
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
In December 2003, Mrs. Christie Karasek resigned as Secretary/Treasurer of
the Board of Directors. The Company currently has 3 director positions
unoccupied, including the Secretary and Treasurer positions to the board of
directors. The Company does not have any committees as of December 31, 2003.
Currently, the President and Chief Executive Officer has assumed the duties of
the Chief Financial Officer, who resigned in December 2002.
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 circumstances. 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 gas, diesel and other fuels, 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.
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.
12
Results of Operations
Three Months Ended December 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 unaudited operating results of Evans
Systems, Inc. ("Company") business segments for the three months ended December
31, 2003 and 2002. This is the first quarter of the Company's fiscal year, which
begins on October 1 and ends on September 30.
Three Months Three Months
Ended Ended
December 31, 2003 December 31, 2002
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue $ 3,914 $ 3,829
Gross profit 184 227
Operating expenses 311 304
-------------- --------------
Operating income (loss) (127) (77)
EDCO ENVIRONMENTAL
Revenue $ 165 $ 267
Gross profit 77 140
Operating expenses 136 167
---------------- --------------
Operating income (loss) (59) (27)
UNALLOCATED GENERAL AND ADMIN EXP. $ (49) $ (55)
-------------- -------------
TOTAL CONTINUING OPERATIONS
Revenue $ 4,079 $ 4,096
Gross profit 261 367
Operating expenses 496 526
-------------- --------------
Operating income (loss) (235) (159)
DISCONTINUED TEXAS CONVENIENCE STORE OPERATIONS
Revenue $ - $ 342
Gross profit - 8
Operating expenses - 100
-------------- -------------
Operating loss - (92)
13
On November 18, 2002, the Company sold its fuel and retail inventory in its
three remaining operating convenience stores and leased the stores and store
equipment to outside operators, effectively discontinuing its Texas Convenience
Store Segment operations (now classified as discontinued operations).
Consolidated revenues decreased $17,000 to $4,079,000 in the quarter ended
December 31, 2003, as compared with revenues of $4,096,000 in the quarter ended
December 31, 2002.
Fuel sales increased $85,000 while other sales and services decreased
$102,000 in the quarter ended December 31, 2003, as compared with the quarter
ended December 31, 2002.
Consolidated gross profit declined $106,000, or approximately 29%, in the
quarter ended December 31, 2003, as compared with the quarter ended December 31,
2002. Gross profit expressed as a percentage of sales, "Gross Margin", decreased
to approximately 6% of sales in the quarter ended December 31, 2003 as compared
to 9% of sales in the quarter ended December 31, 2002.
Operating expenses increased $30,000 in the quarter ended December 31, 2003, as
compared with the quarter ended December 31, 2002. Operating expenses in the
quarter ended December 31, 2003 include a gain on the sale of assets of $3,000
compared to a gain on the sale of assets of $3,000 in the quarter ended December
31, 2002. Operating expenses excluding the gain or loss on sale of assets
increased $7,000 to $499,000 in the quarter ended December 31, 2003 as compared
to $529,000 in the quarter ended December 31, 2002.
The Company had an operating loss of $235,000 in the quarter ended December 31,
2003, as compared to an operating loss of $159,000 in the quarter ended December
31, 2002. Excluding the gain or loss on sale of assets, the quarter ended
December 31, 2003 operating loss was $238,000 as compared to an operating loss
of $162,000 in the quarter ended December 31, 2002.
Net loss increased to $218,000 in the quarter ended December 31, 2003, as
compared with a loss of $184,000 in the quarter ended December 31, 2002. Net
loss for the quarter ended December 31, 2003 includes interest expense of
$15,000 and rental income of $32,000. Net loss for the quarter ended December
31, 2002 includes a loss on discontinued operations of $92,000, interest expense
of $32,000, other income of $45,000 and rental income of $54,000.
14
Texas Petroleum Marketing Segment
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets:
A. Gasoline retail facilities with Company-supplied
equipment consisting of pumps, lights, canopies and in
a few cases underground storage tanks, at independently
owned convenience stores. Under the terms of the
Company's agreements with such independent store
operators ("Special Purpose Leases"), the Company
receives 40 percent or 50 percent of the gasoline gross
profit, depending upon who owns the underground
gasoline equipment.
B. Independently owned gasoline stations and convenience
stores ("Open Dealers") to which the Company provides
major oil company brand names, credit card processing
and signs and, without further investment, receives its
customary markup on fuel deliveries.
The Texas Petroleum Marketing Segment also supplies lubricants to commercial and
industrial customers.
Revenues increased $85,000, or approximately 2%, to $3,914,000 in the quarter
ended December 31, 2003, as compared with revenues of $3,829,000 in the quarter
ended December 31, 2002. Fuel sales in gallons increased approximately 2%, to
3,098,000 gallons, as compared with 3,038,000 gallons in the quarter ended
December 31, 2002.
Gross profit declined $43,000 or approximately 19%, to $184,000 in the quarter
ended December 31, 2003, as compared with $227,000 in the quarter ended December
31, 2002. Gross profit expressed as a percentage of sales, "Gross Margin",
decreased to approximately 5% of sales in the quarter ended December 31, 2003,
as compared to approximately 6% of sales in the quarter ended December 31, 2002.
Operating expenses in the quarter ended December 31, 2003 increased to $311,000
as compared to $304,000 in the quarter ended December 31, 2002. Operating
expenses in the quarter ended December 31, 2003 include a gain on the sale of
assets of $3,000 compared to a gain on the sale of assets of $3,000 in the
quarter ended December 31, 2002. Operating expenses excluding the gain or loss
on sale of assets were $314,000 in the quarter ended December 31, 2003 as
compared to $307,000 in the quarter ended December 31, 2002.
Texas Petroleum Marketing had an operating loss of $127,000 in the quarter ended
December 31, 2003, as compared to an operating loss of $77,000 in the quarter
ended December 31, 2002. Excluding the gain or loss on sale of assets, the
quarter ended December 31, 2003 operating loss was $130,000 as compared to an
operating loss of $80,000 in the quarter ended December 31, 2002.
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 December 31, 2003 decreased $102,000 or
approximately 38% to $165,000, as compared with $267,000 in the quarter ended
December 31, 2002.
Gross profit in the quarter ended December 31, 2003 decreased $63,000 to
$77,000, as compared with $140,000 in the quarter ended December 31, 2002.
15
Operating expenses decreased $31,000 to $136,000 as compared with $167,000 in
the quarter ended December 31, 2002.
The Environmental segment reported an operating loss of $59,000 in the quarter
ended December 31, 2003, as compared with an operating loss of $27,000 in the
quarter ended December 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
General and Administrative expenses decreased $6,000, or approximately 11%, to
$49,000 in the quarter ended December 31, 2003, as compared to $55,000 in the
quarter ended December 31, 2002.
Capital Resources and Liquidity
Cash and cash equivalents were $245,000 and $180,000 at December 31, 2003 and
2002, respectively. The Company had a net working capital deficit of $814,000 at
December 31, 2003, as compared with a deficit of $631,000 at September 30, 2003.
Cash provided by operating activities was $75,000 for the three months ended
December 31, 2003. During that period, cash provided by investing activities was
$4,000, which was comprised of proceeds from the sales of assets of $4,000. Cash
used by financing activities was $50,000, which was comprised of $50,000 in debt
repayments.
Cash used by operating activities was $218,000 for the three months ended
December 31, 2002. During that period, cash used by investing activities was
$22,000, which was comprised of capital expenditures of $25,000 offset by
proceeds from the sales of assets of $3,000. Cash used by financing activities
was $71,000, which was comprised of $20,000 of borrowings under the Company's
line of credit agreement and new borrowings of $2,000 offset by $93,000 in debt
repayments.
As of December 31, 2003, the Company had an aggregate of approximately
$3,328,000 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 $728,000,
approximately $473,000 is due to various property-taxing districts over the next
three years. At December 31, 2003, 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, Victoria and Jackson Counties have filed tax suits against the
Company for delinquent taxes.
16
Additionally, approximately $151,000 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 $104,000 is due under 4 note
agreements with various terms to unrelated third parties. At December 31, 2003,
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.
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 December 31, 2003, 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.
At December 31, 2003, 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.
To continue as a going concern, the Company intends to finance its working
capital requirements and capital expenditures through a combination of funds
from operations, selling of non-income producing adding assets and its existing
bank line with NewFirst National Bank. There can be no assurance that
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 and Acting Chief Financial
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 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.
17
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 fiscal 2003, Matagorda County, Victoria County, Jackson County and
Brazoria County filed tax suits against the Company for failure to pay prior
years ad valorem taxes. The Company has accrued all prior years ad valorem taxes
not under note agreements and has reflected the Matagorda, Victoria and Jackson
County notes payable as currently due at December 31, 2003 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
Item 3. Defaults Upon Senior Securities
At December 31, 2003, the Company had defaulted under the Matagorda County,
Wharton County Jackson County, and Victoria County property tax notes. At
December 31, 2003, the Company had outstanding principal balances due to these
counties aggregating $473,000, which is all reflected as currently due at
December 31, 2003, and accrued interest aggregating $34,500. 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, $1,100 to Jackson County and $2,000 to Victoria County. During
the quarter ended December 31, 2003, the Company made only partial payments of
the required monthly payments to each county.
18
At December 31, 2003, the Company was in default under the $500,000 revolving
line of credit with NewFirst National Bank, of which $399,000 was outstanding at
December 31, 2003, as the Company defaulted under the loan covenant provisions
of the agreement, as amended. The Company is current on the monthly interest
payments required under the 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
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 13, 2004
EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey
---------------------------------
Blair R. Couey
President and Chief Executive Officer
and Acting Chief Financial Officer