As Filed with the Securities and Exchange Commission on May 14, 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 March 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-21956
EVANS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1613155
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification number)
102 South Mechanic, P.O. Box 550, El Campo, Texas 77437
(979) 245-2424
(Address including zip code and telephone number, including area code, of
registrant's principal executive offices)
Blair R. Couey, President
102 South Mechanic, P.O. Box 550, El Campo, Texas
77437 (979) 245-2424
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares of common stock of registrant outstanding exclusive of Treasury
shares or shares held by subsidiaries of the registrant at May 13, 2004 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, 2004 and September 30, 2003 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Income for the
Six Months Ended March 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, September 30,
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 218 $ 216
Trade receivables, net of allowance for doubtful
accounts of $23,000 and $28,000, respectively 934 831
Inventory 397 371
Costs and estimated earnings in excess of billings on
uncompleted contracts 415 172
Prepaid expenses and other current assets 122 103
Notes receivable, current portion 34 67
-------------- -------------
Total current assets 2,120 1,760
Property and equipment, net 2,649 2,744
Other assets - -
-------------- -------------
Total assets $ 4,769 $ 4,504
============= ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,804 $ 895
Accrued excise, property and other taxes payable 167 394
Advances on line of credit 399 399
Current portion of long-term debt 627 673
Accrued interest 28 28
Billings in excess of costs and estimated earnings on
uncompleted contracts 4 2
-------------- -------------
Total current liabilities 3,029 2,391
Long-term debt, net of current portion 2,673 2,706
-------------- -------------
Total liabilities 5,702 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 (17,791) (17,451)
Treasury stock, 72,589 shares, at cost (434) (434)
--------------- --------------
Total stockholders' equity (deficit) (933) (593)
--------------- --------------
Total liabilities and stockholders' equity (deficit) $ 4,769 $ 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 March 31,
-------------------------------
2004 2003
---- ----
Revenues:
Motor fuel sales $ 4,211 $ 4,600
Other sales and services 282 276
-------------- -------------
Total revenues 4,493 4,876
Cost of sales
Motor fuel 4,015 4,377
Other sales and services 143 120
-------------- -------------
Total cost of sales 4,158 4,497
-------------- -------------
Gross profit 335 379
Operating expenses:
Employment expenses 157 151
Other operating expenses 109 165
General & administrative expenses 148 240
Depreciation and amortization 50 75
(Gain) loss on sale of assets - (103)
-------------- --------------
Total operating expenses 464 528
-------------- -------------
Operating loss (129) (149)
Other income (expense)
Gain on sale of non-operating assets - 1,653
Interest expense, net (36) (19)
Other income (expense), net 8 91
Rental income, net 35 58
-------------- -------------
Total other income (expense) 7 1,783
-------------- -------------
Income (loss) before income taxes (122) 1,634
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations (122) 1,634
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Stores to November 18, 2002 - -
-------------- -------------
Total discontinued operations - -
-------------- -------------
Net income (loss) $ (122) $ 1,634
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.01) $ 0.16
Discontinued operations - -
-------------- -------------
Earnings (loss) per common share $ (0.01) $ 0.16
============== =============
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)
Three Months Ended March 31,
-------------------------------
2004 2003
---- ----
Revenues:
Motor fuel sales $ 8,125 $ 8,429
Other sales and services 447 543
-------------- -------------
Total revenues 8,572 8,972
Cost of sales
Motor fuel 7,745 7,979
Other sales and services 231 247
-------------- -------------
Total cost of sales 7,976 8,226
-------------- -------------
Gross profit 596 746
Operating expenses
Employment expenses 315 336
Other operating expenses 255 299
General & administrative expenses 293 396
Depreciation and amortization 100 129
(Gain) loss on sale of assets (3) (106)
--------------- --------------
Total operating expenses 960 1,054
-------------- -------------
Operating loss (364) (308)
Other income (expense)
Gain on sale of non-operating assets - 1,653
Interest expense, net (51) (51)
Other income (expense), net 8 136
Rental income, net 67 112
-------------- -------------
Total other income (expense) 24 1,850
-------------- -------------
Income (loss) before income taxes (340) 1,542
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations (340) 1,542
Discontinued operations (Note B):
Loss from discontinued operations of Texas
Convenience Store to November 18, 2002 - (92)
-------------- --------------
Total discontinued operations - (92)
-------------- --------------
Net income (loss) $ (340) $ 1,450
============== ==============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.04) $ 0.16
Discontinued operations - (0.01)
-------------- --------------
Earnings (loss) per common share $ (0.04) $ 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,
-------------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss) $ (340) $ 1,450
Adjustments:
Depreciation and amortization 100 129
(Gain) loss on sale of assets (3) (106)
Gain on sale of non-operating assets - (1,653)
Write-off of note receivable 15 -
Changes in working capital:
Current assets (391) (320)
Other assets - 30
Current liabilities 684 30
-------------- -------------
Total adjustments 405 (1,890)
-------------- --------------
Net cash provided (used) by operating activities 65 (440)
Cash flows from investing activities:
Capital expenditures (6) (29)
Proceeds from sale of property and equipment 4 217
-------------- -------------
Net cash provided (used) by investing activities (2) 188
Cash flows from financing activities:
Issuance of notes receivable (6) (66)
Repayment on notes receivable 24 98
Borrowings under line of credit agreement, net - 20
Repayment on notes payable (79) (111)
Borrowings under note payable agreements - 2
-------------- -------------
Net cash provided (used) by financing activities (61) (57)
--------------- --------------
Net increase (decrease) in cash 2 (309)
Cash and cash equivalents, beginning of period 216 491
-------------- -------------
Cash and cash equivalents, end of period $ 218 $ 182
============== =============
6
Supplemental Disclosure of Non-Cash Transactions
Sale of Terminal Facility (Note E)
Proceeds through relief of debt and taxes $ - $ 2,018
Net book value of terminal facility - 365
-------------- -------------
Gain on sale of terminal facility $ - $ 1,653
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
7
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Evans Systems, Inc. and its subsidiaries (dba MC Star, Inc. and collectively
referred to as the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America, pursuant to the
rules and regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated. These financial
statements do not include all information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. It is recommended that these interim unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended March 31,
2004 are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2004. Certain prior
period amounts have been reclassified for comparative purposes.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Note B - 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 Six Months
Ended Ended
Mar. 31, 2003 Mar. 31, 2003*
------------------ ------------------
Revenues $ - $ 342
================== ==================
Gross Profit $ - $ 8
================== ==================
Income (loss) from operations $ - $ (92)
================== ==================
*Through November 18, 2002.
8
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 March 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".
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, 2004, the Company had an aggregate of approximately
$3,300,000 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 $700,000,
approximately $466,000 is due to various property taxing districts over the next
three years. At March 31, 2004, the Company was in default under these note
agreements, and accordingly, the Company has reflected these notes as currently
due on the accompanying condensed consolidated balance sheet. In addition,
Matagorda, Victoria and Jackson Counties have filed tax suits against the
Company for delinquent taxes.
Additionally, approximately $134,000 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.
9
The remaining outstanding principal balance of $100,000 is due under 3 note
agreements with various terms to unrelated third parties. At March 31, 2004, the
Company was in default under these note agreements, and accordingly, the Company
has reflected these notes as currently due on the accompanying condensed
consolidated balance sheet.
Note E - Sale of Non-Operating Terminal Facility
On January 13, 2003, the Company assigned its ground lease with the Port of Bay
City for the fuel terminal to CSS as well as conveyed the terminal facility
assets, including all the tanks and structures at the Port of Bay City, to CSS
for certain concessions by CSS. Those concessions included the agreement of CSS
to waive interest on the Company's note payable to CSS until June 1, 2003, the
agreement of CSS to reduce the principal amount due under the note payable by
$1,900,000 from $4,500,000 to $2,600,000, the agreement of CSS to assume all
property taxes on the terminal facility assets, and the agreement of CSS to
timely perform all obligations of payment and performance of the Port of Bay
City lease agreement. The Company had been obligated for monthly payments of
$108 until September 2006 under the ground lease. The terminal facility had not
been in operation since fiscal 1997 and the Company had been unsuccessful in
reopening the terminal due to working capital deficiencies.
The aggregate net book value of the terminal facility assets at the date of
conveyance was approximately $365,000 and the Company's last independent
appraisal of the terminal facility, dated July 2001, estimated the fair market
value of the terminal facility at approximately $2,000,000. The Company also had
recorded property taxes payable of approximately $118,000 on the terminal
facility assets. Accordingly, in January 2003, the Company recorded the
reduction of the note payable to CSS by $1,900,000, the reduction of property
taxes payable by $118,000, the conveyance of the terminal facility assets of
approximately $365,000, net, and a noncash gain of $1,653,000.
Note F - Costs and Estimated Earnings on Uncompleted Contracts
At March 31, 2004 and September 30, 2003, costs and estimated earnings on
uncompleted contracts consisted of the following (in thousands):
Mar. 31, Sept. 30,
2004 2003
--------------- --------------
Costs incurred to date on uncompleted contracts $ 500 $ 144
Estimated earnings 209 87
--------------- --------------
709 231
Billings to date (298) (61)
--------------- --------------
Total $ 411 $ 170
=============== ==============
Included in the accompanying condensed consolidated balance
sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 415 172
Billings in excess of costs and estimated earnings
on uncompleted contracts (4) (2)
--------------- --------------
Total $ 411 $ 170
=============== ==============
10
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $88,000 and $91,000 at March 31, 2004 and
September 30, 2003, respectively. There were no material revisions in contract
estimates during the three and six months ended March 31, 2004.
Note G - Seasonal Nature of Business
The motor fuel products market customarily experiences decreased margins in the
fall and winter months followed by increased demand during spring and summer
when construction, travel, and recreational activities increase.
Note H - Basic and Diluted Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share for the three and six months ending
March 31, 2004 and 2003 were computed using 9,846,831 weighted average common
shares outstanding. Stock options and warrants were not included in the
computation of diluted earnings (loss) per common share for the three and six
months ended March 31, 2004 as they would have resulted in an antidilutive
effect on loss from continuing operations. Stock options and warrants were not
included in the computation of diluted earnings (loss) per common share for the
three and 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.
At March 31, 2004, the Company had an aggregate 9,846,831 shares of common stock
issued and outstanding and is authorized to issue up to an aggregate 15,000,000
shares of common stock. Of the 5,153,169 shares of common stock available for
issuance, approximately 390,350 shares are reserved for vested stock options to
employees of the Company and 4,268,000 shares are reserved for Warrants issued
and outstanding.
Note I - Contingent Liabilities
The Company is subject to litigation, primarily as a result of vendor claims, in
the ordinary conduct of its operations. As of March 31, 2004, the Company had no
knowledge of any legal proceedings, except as described below, that, by
themselves, or in the aggregate, would not be covered by insurance or could be
expected to have a material adverse effect on the Company.
During fiscal 2003, Matagorda County, Victoria County, Jackson County 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 March 31, 2004 and September 30, 2003.
During the quarter ended December 31, 2002, the Company was notified that a
lawsuit was filed against the Company and several or its current and former
officers and directors on behalf of purchasers of the Company's common stock.
The petition alleges that the Company received funds from a Private Placement
transaction with Comsight Holdings, Inc., whereby Comsight agreed to act as a
placement agent for accredited investors to purchase a minimum of 1,250,000 and
a maximum of 3,750,000 shares of the Company's common stock in a private
placement to accredited investors at $0.40 per share. On August 17, 2000, the
Company issued 1,437,500 shares of common stock for total consideration of
$575,000. The Plaintiff's allege that they never received the common shares or a
refund of the subscription funds. The lawsuit demands, among other relief,
11
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, 2004, an extensive analysis of the Company operations was
performed to determine an achievable growth and liquidity plan. Management came
to the conclusion that a conservative and cost effective plan should concentrate
in areas that management has maintained a successful record of accomplishments.
The Company's future focus will be on developing its Petroleum Marketing Segment
through utilization of new marketing personnel to solicit new customers and
existing personnel to contact and regain customers that were lost in the prior
years. This plan does not require capital intensive expenditures and should
increase revenues and accompanied with the cost reductions in personnel and
overhead that have been accomplished restore the company to profitability.
Consistent with this plan the Company sold its inventory in the three remaining
convenience stores in November 2002 and leased the locations to outside
operators. The Petroleum Marketing Segment executed fuel contracts with these
locations maintaining the fuel volumes. The second phase of management's plan is
to open the Fuel Terminal utilizing a joint venture, thru-put partner, or
supplier to begin operations. As discussed in Note E, the Company sold the fuel
terminal with the intent that once opened, the Company will benefit through its
management contract as well as the reduced overall product cost and freight
expense, adding additional revenues to the Petroleum Marketing Segment.
The Environmental Segment has made a marginal profit over the years and
maintained a positive cash flow. Management 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.
12
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.
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, 2004-
Revenues from external
Customers:
Motor fuel sales $ 4,211 $ - $ - $ 4,211
Other 31 251 - 282
Intersegment revenues - - - -
---------- ------------- ------------ ------------
Total revenues $ 4,242 $ 251 $ - $ 4,493
======= ====== ======= ======
Depreciation and
amortization $ 44 $ 4 $ 2 $ 50
Operating income (loss) $ (135) $ 21 $ (15) $ (129)
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)
(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,
--------------------------
2004 2003
---- ----
Total operating loss for reportable segments $ (114) $ (94)
Rental income, net 35 91
Other income, net 8 58
Interest expense, net (36) (19)
Unallocated corporate overhead expenses (15) (55)
Gain on sale of non-operating assets - 1,653
-------------- -------------
Total consolidated income (loss) from
continuing operations before income taxes $ (122) $ 1,634
=============== =============
13
Texas Environmental Other
Petroleum Remediation Reconciling Consolidated
Six Months Ended Marketing Services Items (1) Total
March 31, 2004-
Revenues from external
Customers:
Motor fuel sales $ 8,125 $ - $ - $ 8,125
Other 31 416 - 447
Intersegment revenues - - - -
------- ----- ------- --------
Total revenues $ 8,156 $ 416 $ - $ 8,572
======= ====== ======= =======
Depreciation and
amortization $ 88 $ 8 $ 4 $ 100
Operating income (loss) $ (262) $ (38) $ (64) $ (364)
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)
(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,
-------------------------------
2004 2003
---- ----
Total operating income (loss) for reportable segments $ (300) $ (198)
Rental income, net 67 112
Other income (expense), net 8 136
Interest expense, net (51) (51)
Unallocated corporate overhead expenses (64) (110)
Gain on sale of non-operating assets - 1,653
----------- ----------
Total consolidated income (loss) from
continuing operations before income taxes $ (340) $ 1,542
============ ==========
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
implement its turnaround strategy, changes in costs of raw materials, labor, and
employee benefits, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Quarterly Report on Form 10-Q, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.
Recent Events
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.
15
Revenue Recognition
The Company's policy is to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting
principles. Revenues from motor fuel sales to open dealer accounts are
recognized when delivered. Revenues from motor fuel sales and retail sales
at convenience stores are recognized when sold at the store. Expenses are
recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized using
the percentage-of-completion method, measured by the percentage of cost
incurred to date to estimated total cost at completion for each contract.
Profit recognition is deferred on each contract until progress reaches a
level of completion sufficient to establish the probable outcome. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability that result in revisions to costs
are recognized in the period in which the changes are determined. Because of
the inherent uncertainties in estimating, it is at least reasonably possible
that such changes will occur within the near term.
Inventories
Substantially all inventories are products held for sale. Inventories of oil
and grease, automotive products and accessories utilize the first-in,
first-out (FIFO) method of accounting and are stated at the lower of cost or
market. During fiscal 2002, the Company implemented a change in accounting
principle whereby gas and diesel fuels inventory were valued using the FIFO
method of accounting in place of the last-in, first-out (LIFO) method (see
Change in Accounting Principle below).
For a more comprehensive list of our accounting policies, including those that
involve varying degrees of judgment, see Note 1 of Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2003.
Results of Operations
Three Months Ended March 31, 2004 and 2003
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document.
The following table reflects the operating results of Evans Systems, Inc.
("Company") business segments for the three months ended March 31, 2004 and
2003. 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, 2004 March 31, 2003
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 4,242 $ 4,600
Gross profit 195 221
Operating expenses 330 348
-------------- -------------
Operating loss (135) (127)
EDCO Environmental
Revenue $ 251 $ 276
Gross profit 140 158
Operating expenses 119 125
-------------- -------------
Operating income (loss) 21 33
16
Unallocated General and Administrative Expenses $ (15) $ (55)
--------------- --------------
Total Continuing Operations
Revenue $ 4,493 $ 4,876
Gross profit 335 379
Operating expenses 464 528
------- -------------
Operating loss (129) (149)
Discontinued Texas Convenience Store Operations
Revenue $ - $ -
Gross profit - -
Operating expenses - -
------- -------------
Operating loss - -
Consolidated revenues decreased $383,000, or approximately 8%, to $4,493,000 in
the quarter ended March 31, 2004, as compared with revenues of $4,876,000 in the
quarter ended March 31, 2003. The increase was primarily attributable to higher
fuel prices during the quarter.
Fuel sales decreased $389,000 while other sales and services increased $6,000 in
the quarter ended March 31, 2004, as compared with the quarter ended March 31,
2003.
Consolidated gross profit decreased $44,000, or approximately 12%, in the
quarter ended March 31, 2004, as compared with the quarter ended March 31, 2003.
Gross profit expressed as a percentage of sales, "Gross Margin", was
approximately 7% of sales in the quarter ended March 31, 2004, as compared to
approximately 8% in the quarter ended March 31, 2003.
Operating expenses declined $64,000 in the quarter ended March 31, 2004, as
compared with the quarter ended March 31, 2003. Operating expenses in the
quarter ended March 31, 2003 include a gain on the sale of assets of $103,000.
Operating expenses excluding the gain or loss on sale of assets declined
$167,000 to $464,000 in the quarter ended March 31, 2004 as compared to $631,000
in the quarter ended March 31, 2003.
The Company had an operating loss of $129,000 in the quarter ended March 31,
2004, as compared to an operating loss of $149,000 in the quarter ended March
31, 2003. Excluding the gain or loss on sale of assets, the quarter ended March
31, 2004 operating loss was $129,000 as compared to an operating loss of
$252,000 in the quarter ended March 31, 2003.
Net income (loss) decreased to a net loss of $122,000 in the quarter ended March
31, 2004, as compared with a net income of $1,634,000 in the quarter ended March
31, 2003. Net loss for the quarter ended March 31, 2004 includes interest
expense of $36,000, other income of $8,000 and rental income of $35,000. 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.
17
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 decreased $358,000 or approximately 8% to $4,242,000 in the quarter
ended March 31, 2004, as compared with revenues of $4,600,000 in the quarter
ended March 31, 2003. Fuel sales in gallons increased approximately 6%, to
3,888,000 gallons, as compared with 4,128,000 gallons in the quarter ended March
31, 2003. The revenue decrease is mainly attributable to decreased gallons sold
in the current quarter compared to the quarter ended March 31, 2003.
Gross profit decreased $26,000 or approximately 12%, to $195,000 in the quarter
ended March 31, 2004, as compared with $221,000 in the quarter ended March 31,
2003. Gross Margin decreased to approximately 5% of sales in the quarter ended
March 31, 2004, as compared with approximately 5% of sales in the quarter ended
March 31, 2003.
Operating expenses in the quarter ended March 31, 2004 declined $18,000, or
approximately 5%, as compared with the quarter ended March 31, 2003. Operating
expenses include a $103,000 credit from the gain on sale of assets in the
quarter ended March 31, 2003.
The Texas petroleum marketing segment's operating loss increased $8,000 to
$135,000 in the quarter ended March 31, 2004, as compared to an operating loss
of $127,000 in the quarter ended March 31, 2003. Excluding the gain or loss on
sale of assets, the quarter ended March 31, 2004 operating loss was $135,000, as
compared to an operating loss of $230,000 in the quarter ended March 31, 2003.
Environmental Segment
EDCO Environmental (dba Star Co.) provides environmental assessment and
remediation services for the petroleum distribution industry in the southeast
Texas market area.
Total revenues in the quarter ended March 31, 2004 decreased $25,000, or
approximately 9%, to $251,000, as compared to $276,000 in the quarter ended
March 31, 2003.
Gross profit in the quarter ended March 31, 2004 decreased $18,000 to $140,000,
as compared with $158,000 in the quarter ended March 31, 2003.
Operating expenses decreased $6,000 in the quarter ended March 31, 2004 to
$119,000, as compared with $125,000 in the quarter ended March 31, 2003.
18
The Environmental segment reported an operating income of $21,000 in the quarter
ended March 31, 2004, as compared with an operating income of $33,000 in the
quarter ended March 31, 2003.
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 $40,000, or
approximately 73%, to $15,000 in the quarter ended March 31, 2004, as compared
with $55,000 in the quarter ended March 31, 2003.
Six Months Ended March 31, 2004 and 2003
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document. The following table reflects the operating results of the Company
business segments for the 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, 2004 March 31, 2003
(In thousands) (In thousands)
Texas Petroleum Marketing
Revenue $ 8,156 $ 8,429
Gross profit 379 448
Operating expenses 641 652
-------------- -------------
Operating loss (262) (204)
EDCO Environmental
Revenue $ 416 $ 543
Gross profit 217 298
Operating expenses 255 292
-------------- -------------
Operating income (loss) (38) 6
Unallocated General and Administrative Expenses $ (64) $ (110)
Total Continuing Operations
Revenue $ 8,572 $ 8,972
Gross profit 596 746
Operating expenses 960 1,054
------- -------------
Operating loss (364) (308)
Discontinued Texas Convenience Store Operations
Revenue $ - $ 342
Gross profit - 8
Operating expenses - 100
------- -------------
Operating loss - (92)
19
Consolidated revenues declined $400,000, or approximately 4% to $8,572,000
in the six months ended March 31, 2004, as compared with $8,972,000 in the six
months ended March 31, 2003. Motor fuel sales decreased $304,000 while other
sales and services decreased $96,000 in the six months ended March 31, 2004, as
compared with the six months ended March 31, 2003.
Consolidated gross profit declined $150,000, or approximately 20%, to
$596,000 in the six months ended March 31, 2004, as compared with $746,000 in
the six months ended March 31, 2003. Gross Margin declined to approximately 7%
of sales in the six months ended March 31, 2004, as compared with approximately
8% of sales in the six months ended March 31, 2003.
Operating expenses declined $94,000, or approximately 9%, to $960,000 in
the six months ended March 31, 2004, as compared with $1,054,000 in the six
months ended March 31, 2003. Operating expenses include a $3,000 credit from the
gain on sale of assets in the six months ended March 31, 2004 as compared to a
$106,000 credit in the six months ended March 31, 2003. Excluding the gain or
loss on sale of assets, the six months ended March 31, 2004, operating expenses
were $963,000, as compared to operating expenses of $1,160,000 in the six months
ended March 31, 2003.
The Company incurred an operating loss of $364,000 in the six months ended
March 31, 2004, as compared to operating loss of $308,000 in the six months
ended March 31, 2003. Excluding the gain or loss on sale of assets, the six
months ended March 31, 2004, operating loss was $367,000, as compared to an
operating loss of $414,000 in the six months ended March 31, 2003.
Net income (loss) decreased to a net loss of $340,000 in the six months
ended March 31, 2004, as compared with net income of $1,450,000 in the six
months ended March 31, 2003. Net loss in the current six months includes other
income of $8,000, rental income of $67,000, and interest expense of $51,000. Net
income in the six months ended March 31, 2003 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.
Texas Petroleum Marketing Segment
Revenues decreased $273,000, or approximately 3% to $8,156,000 in the six
months ended March 31, 2004, as compared with revenues of $8,429,000 in the six
months ended March 31, 2003. Fuel sales in gallons declined approximately 4% to
6,854,000 gallons, as compared with 7,166,000 gallons in the six months ended
March 31, 2003.
Gross profit declined $69,000, or approximately 15%, to $379,000 in the six
months ended March 31, 2004, as compared with $448,000 in the six months ended
March 31, 2003. Gross Margin was approximately 5% and 5% of revenues in the six
months ended March 31, 2004 and March 31, 2003, respectively.
Operating expenses in the six months ended March 31, 2004 decreased $11,000 to
$641,000, as compared with $652,000 in the six months ended March 31, 2003.
Operating expenses include a $3,000 credit from the gain on sale of assets in
20
the six months ended March 31, 2004 as compared to a $106,000 credit in the six
months ended March 31, 2003. Excluding the gain or loss on sale of assets, the
six months ended March 31, 2004 operating expenses were $644,000, as compared to
operating expenses of $758,000 in the six months ended March 31, 2003.
Texas petroleum marketing incurred a operating loss of $262,000 in the six
months ended March 31, 2004, as compared to operating loss of $204,000 in the
six months ended March 31, 2003. Excluding the gain or loss on sale of assets,
the six months ended March 31, 2004 operating loss was $265,000, as compared to
an operating loss of $378,000 in the six months ended March 31, 2003.
Environmental Segment
EDCO Environmental provides environmental assessment and remediation
services for the petroleum distribution industry in the southeast Texas market
area.
Revenues decreased $127,000, or approximately 23%, to $416,000 in the six months
ended March 31, 2004, as compared with $543,000 in the six months ended March
31, 2003.
Gross profit in the six months ended March 31, 2004 decreased $81,000 to
$217,000, as compared with $298,000 in the six months ended March 31, 2003.
Gross Margin decreased to approximately 52% of revenues in the six months ended
March 31, 2004, as compared with approximately 55% of revenues in the six months
ended March 31, 2003.
Operating expenses decreased $37,000, or approximately 13%, to $255,000 in
the six months ended March 31, 2004, as compared with $292,000 in the six months
ended March 31, 2003.
The Environmental segment reported an operating loss of $38,000 in the six
months ended March 31, 2004, as compared with an operating income of $6,000 in
the six months ended March 31, 2003.
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 $46,000, or
approximately 42%, to $64,000 in the six months ended March 31, 2004, as
compared with $110,000 in the six months ended March 31, 2003. The decrease is
primarily attributable to new managements focus on reducing general and
corporate overhead expenses.
Capital Resources and Liquidity
Cash and cash equivalents were $218,000 and $182,000 at March 31, 2004 and 2003
respectively. The Company had a net working capital deficit of $909,000 at March
31, 2004, as compared with a deficit of $631,000 at September 30, 2003.
21
Cash provided by operating activities was $65,000 for the six months ended March
31, 2004. During that period, cash used by investing activities was $2,000,
which was comprised of capital expenditures of $6,000 offset by proceeds from
the sales of assets of $4,000. Cash used by financing activities was $61,000,
which was comprised of repayment of notes receivable aggregating $24,000 offset
by the issuance of notes receivable of $6,000 and $79,000 in debt repayments.
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.
As of March 31, 2004, the Company had an aggregate of approximately $3,300,000
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 $700,000,
approximately $466,000 is due to various property taxing districts over the next
three years. At March 31, 2004, the Company was in default under these note
agreements, and accordingly, the Company has reflected these notes as currently
due on the accompanying condensed consolidated balance sheet. In addition,
Matagorda, Victoria and Jackson Counties have filed tax suits against the
Company for delinquent taxes.
Additionally, approximately $134,000 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 $100,000 is due under 3 note
agreements with various terms to unrelated third parties. At March 31, 2004, the
Company was in default under these note agreements, and accordingly, the Company
has reflected these notes as currently due on the accompanying condensed
consolidated balance sheet.
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 March 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 March 31, 2004, the Company had an aggregate 9,846,831 shares of common stock
issued and outstanding and is authorized to issue up to an aggregate 15,000,000
shares of common stock. Of the 5,153,169 shares of common stock available for
issuance, approximately 390,350 shares are reserved for vested stock options to
employees of the Company and 4,268,000 shares are reserved for Warrants issued
and outstanding.
22
To continue as a going concern, the Company intends to finance its working
capital requirements and capital expenditures through a combination of funds
from operations and selling of non-income producing assets. There can be no
assurance that management's plans will be successful implemented or that the
Company will continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer within 90 days of the filing
of this report, the Company's Chief Executive Officer and Acting Chief Financial
Officer concluded that the Company's disclosure controls and procedures have
been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer or officers and its
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
Part II. Other Information
Item 1. Legal Proceedings
The Company is subject to litigation, primarily as a result of vendor claims, in
the ordinary conduct of its operations. As of March 31, 2004, the Company had no
knowledge of any legal proceedings, except as described below, that, by
themselves, or in the aggregate, would not be covered by insurance or could be
expected to have a material adverse effect on the Company.
During fiscal 2003, Matagorda County, Victoria County, Jackson County 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 March 31, 2004 and September 30, 2003.
23
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, 2004, the Company had defaulted under the Matagorda County, Wharton
County, and Victoria County property tax notes. At March 31, 2004, the Company
had outstanding principal balances due to these counties aggregating $466,000,
which is all reflected as currently due at March 31, 2004, and accrued interest
aggregating $24,000. The defaults occurred due to the Company's inability to
make required monthly principal and interest payments under the notes. Under the
agreements, the Company was obligated to make monthly payments of $13,500 to
Matagorda County, $9,500 to Wharton County, and $2,000 to Victoria County.
During the six months ended March 31, 2004, the Company made only partial
payments of the required monthly payments to each county.
At March 31, 2004, the Company was in default under the $500,000 revolving line
of credit with NewFirst National Bank, of which $399,000 was outstanding at
March 31, 2004, as the Company defaulted under the loan covenant provisions of
the agreement. The Company is current on the monthly interest payments required
under the agreement.
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
24
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: May 14, 2004
EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey
- -----------------------------------------
Blair R. Couey
President and Chief Executive Officer and
Acting Chief Financial Officer
25