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As Filed with the Securities and Exchange Commission on May 20, 2005
- --------------------------------------------------------------------------------
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, 2005
--------------
[_] 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 20, 2005 was
10,430,196.
Evans Systems, Inc.
Index
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2005 and September 30, 2004 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Income for the
Six Months Ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
2
Part I. Financial Information
Item 1. Financial Statements
Evans Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
March 31, September 30,
2005 2004
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 184 $ 341
Trade receivables, net of allowance for doubtful
accounts of $23,000 and $28,000, respectively 565 509
Inventory 149 83
Costs and estimated earnings in excess of billings on
uncompleted contracts 177 178
Prepaid expenses and other current assets 51 51
Notes receivable, current portion 44 127
----------- ----------
Total current assets 1,170 1,289
Property and equipment, net 1,874 1,946
Other assets - -
----------- ----------
Total assets $ 3,044 $ 3,235
=========== ==========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 766 $ 567
Accrued excise, property and other taxes payable 659 633
Current portion of long-term debt 126 143
Accrued interest 220 90
Billings in excess of costs and estimated earnings on
uncompleted contracts - -
---------- ---------
Total current liabilities 1,771 1,433
Long-term debt, net of current portion 2,621 2,652
---------- ---------
Total liabilities 4,392 4,085
Stockholders' equity (deficit):
Common stock, $.01 par value, 15,000,000 shares
authorized, 10,471,831 shares issued and
outstanding 105 105
Additional paid-in capital 17,262 17,262
Accumulated deficit (18,281) (17,783)
Treasury stock, 72,589 shares, at cost (434) (434)
----------- ----------
Total stockholders' equity (deficit) (1,348) (850)
----------- ----------
Total liabilities and stockholders' equity $ 3,044 $ 3,235
=========== ==========
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,
----------------------------
2005 2004
---- ----
Revenues:
Motor fuel sales $ 340 $ 29
Other sales and services 699 282
-------------- -------------
Total revenues 1,039 311
Cost of sales
Motor fuel 331 24
Other sales and services 575 143
-------------- -------------
Total cost of sales 906 167
-------------- -------------
Gross profit 133 144
Operating expenses:
Employment expenses 95 50
Other operating expenses 118 94
General & administrative expenses 86 32
Depreciation and amortization 39 19
(Gain) loss on sale of assets (20) -
-------------- -------------
Total operating expenses 318 195
-------------- -------------
Operating loss (185) (51)
Other income (expense)
Interest expense, net (75) (36)
Other income (expense), net 1 8
Rental income, net 28 35
-------------- -------------
Total other income (expense) (46) 7
-------------- -------------
Income (loss) before income taxes (231) (44)
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations (231) (44)
Discontinued operations (Note C):
Loss from discontinued operations of Texas
Petroleum Marketing to July 1, 2004 - (78)
-------------- -------------
Total discontinued operations - -
-------------- -------------
Net income (loss) $ (231) $ (122)
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.02) $ (0.00)
Discontinued operations - (0.01)
-------------- -------------
Earnings (loss) per common share $ (0.02) $ (0.01)
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
Evans Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Six Months Ended March 31,
--------------------------
2005 2004
---- ----
Revenues:
Motor fuel sales $ 788 $ 29
Other sales and services 1,226 447
-------------- -------------
Total revenues 2,014 476
Cost of sales
Motor fuel 700 24
Other sales and services 990 231
-------------- -------------
Total cost of sales 1,690 255
-------------- -------------
Gross profit 324 221
Operating expenses
Employment expenses 275 140
Other operating expenses 190 137
General & administrative expenses 200 79
Depreciation and amortization 77 38
(Gain) loss on sale of assets (20) (3)
-------------- -------------
Total operating expenses 722 391
-------------- -------------
Operating loss (398) (170)
Other income (expense)
Interest expense, net (151) (51)
Other income (expense), net (3) 8
Rental income, net 54 67
-------------- -------------
Total other income (expense) (100) 24
-------------- -------------
Income (loss) before income taxes (498) (146)
Provision for income taxes - -
-------------- -------------
Income (loss) from continuing operations (498) (146)
Discontinued operations (Note C):
Loss from discontinued operations of Texas
Petroleum Marketing to July 1, 2004 - (194)
-------------- -------------
Total discontinued operations - (194)
-------------- -------------
Net income (loss) $ (498) $ (340)
============== =============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.05) $ (0.02)
Discontinued operations - (0.02)
-------------- -------------
Earnings (loss) per common share $ (0.05) $ (0.04)
============== =============
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,
--------------------------
2005 2004
---- ----
Cash flows from operating activities:
Net income (loss) $ (498) $ (340)
Adjustments:
Depreciation and amortization 77 100
(Gain) loss on sale of assets (20) (3)
Write-off of note receivable - 15
Changes in working capital:
Current assets (121) (391)
Current liabilities 355 684
------------- ------------
Total adjustments 291 405
------------- ------------
Net cash provided (used) by operating activities (207) 65
Cash flows from investing activities:
Issuance of notes receivable (14) (6)
Repayment on notes receivable 97 24
Capital expenditures - (6)
Proceeds from sale of property and equipment 15 4
------------- ------------
Net cash provided (used) by investing activities 98 16
Cash flows from financing activities:
Repayment on notes payable (48) (79)
Borrowings under note payable agreements - -
------------- ------------
Net cash provided (used) by financing activities (48) (79)
------------- ------------
Net increase (decrease) in cash (157) 2
Cash and cash equivalents, beginning of period 341 216
------------- ------------
Cash and cash equivalents, end of period $ 184 $ 218
============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans
Systems, Inc. and its subsidiaries (dba MC Star, Inc. and collectively referred
to as the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America, pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated. These financial
statements do not include all information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. It is recommended that these interim unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2004.
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,
2005 are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2005. Certain prior
period amounts have been reclassified for comparative purposes.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Note B - Texas Convenience Store Operations
On November 18, 2002, the Company sold its 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. Under the lease agreements, the Company executed fuel contracts with
these outside operators, thereby maintaining the fuel volumes. The results of
operations of the Texas Convenience Store segment were classified as
discontinued operations and prior periods were restated. In April 2004, the
Company reacquired control of 2 of the stores due to the inability of the
lessee's to make required payments and the lessee's inability to maintain the
stores and equipment in proper working order. After unsuccessful attempts to
re-lease the stores, management reopened the stores as company-owned stores
during late April 2004. In addition, in July 2004, the Company reacquired
control of the remaining store due to the lessee's inability to make required
payments and reopened the store as a company-owned store. Accordingly, the
Company has reestablished its Texas Convenience Store Segment and the prior
period results of operations of these stores previously reported as discontinued
operations have been reclassified and included in income from continuing
operations for all periods presented. As a result of these transactions, the
three and six month periods ended March 31, 2004 do not include convenience
store operations as the Company's fiscal year 2004 only included operations from
April 2004 to September 30, 2004.
7
Note C - Discontinued Operations - Texas Petroleum Marketing Segment
On July 1, 2004, the Company entered into an agreement with Mauritz & Couey (MC)
whereby the Company conveyed its Exxon, Chevron and unbranded fuel distribution
contracts and certain petroleum marketing distribution assets, accounts
receivable and inventory with a net book value aggregating $1,629,000 to MC for
relief of amounts owed to MC for fuel purchases and management fees of
approximately $1,705,000, the assumption of the Company's line of credit
obligation by MC of $399,000 and the issuance of a note receivable of $88,000.
As a result of the transaction, the Company discontinued its petroleum marketing
distribution segment and effectively disposed of the segment's assets.
The results of operations of the Texas Petroleum Marketing 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. The otherwise tax liability from this transaction is
offset by net operating loss carryforwards of the Company generated from
previous years losses. Accordingly, no provision has been recorded. Summary
operating results for the three and six month periods ended March 31, 2004 is as
follows (in thousands):
Quarter Ended Six Months Ended
Mar. 31, 2004 Mar. 31, 2004
--------------------- ----------------------
Revenues $ 4,182 $ 8,096
===================== ======================
Gross Profit $ 191 $ 375
===================== ======================
Income (loss) from operations $ (78) $ (194)
===================== ======================
Note D - Long-Term Debt
As of March 31, 2005, the Company had an aggregate of approximately $2,747,000
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. At March 31, 2005, the Company had accrued interest of approximately
$220,000
Of the remaining principal outstanding aggregating an approximate $147,000,
approximately $82,000 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 $65,000 is due under 3 note
agreements with various terms to unrelated third parties. At March 31, 2005, two
notes were due within one year and the Company was in default under the third
note agreement, and accordingly, has reflected that note as currently due on the
accompanying condensed consolidated balance sheet.
8
Note E - Costs and Estimated Earnings on Uncompleted Contracts
At March 31, 2005 and September 30, 2004, costs and estimated earnings on
uncompleted contracts consisted of the following (in thousands):
Mar. 31, Sept. 30,
2005 2004
------------ ----------
Costs incurred to date on uncompleted contracts $ 221 $ 189
Estimated earnings 79 83
------------ ----------
300 272
Billings to date
(123) (94)
------------ ----------
Total $ 177 $ 178
============ ==========
Included in the accompanying condensed consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 177 $ 178
Billings in excess of costs and estimated earnings
on uncompleted contracts - -
------------ ----------
Total $ 177 $ 178
============ ===========
There were no material revisions in contract estimates during the three and six
months ended March 31, 2005.
Note F - 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 G - Basic and Diluted Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share for the three and six months ending
March 31, 2005 were computed using 10,471,831 weighted average common shares
outstanding. Basic and diluted earnings (loss) per share for the three and six
months ending March 31, 2004 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, 2005 and 2004 as they would have resulted in an
antidilutive effect on loss from continuing operations.
At March 31, 2005, the Company had an aggregate 10,471,831 shares of common
stock issued, with 10,430,196 issued and outstanding after consideration of
treasury stock. The Company is authorized to issue up to an aggregate 15,000,000
shares of common stock. Of the 4,569,804 shares of common stock available for
issuance, approximately 390,350 shares are reserved for vested stock options to
employees of the Company and 4,159,403 shares are reserved for Warrants.
9
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 March 31, 2005, 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
at March 31, 2005.
Other contingent liabilities
- ----------------------------
The environmental protection business is primarily the result of government
mandate. A number of states, including Texas, have established remediation funds
to assist owners/operators in the clean up of leaking underground storage tanks
("USTs"). In Texas, this was accomplished through the Groundwater Protection Act
("GPA"), which became effective on September 1, 1989. The GPA, as amended,
provides clean-up funds for eligible expenses, less applicable deductibles.
Financing programs secured by assignments of rights to reimbursement by the
Texas Commission on Environmental Quality ("TCEQ") can be obtained for leaking
petroleum storage tank sites impacted by releases from USTs. The Company's
environmental subsidiary EDCO Environmental, Inc. (dba StarCo Enviroservices,
Inc. and referred to as StarCo) has provided environmental remediation services
to customers almost entirely through reimbursement funding by the TCEQ. Under
current Texas law and the requirements of the TCEQ, on September 30, 2005,
funding for the TCEQ's reimbursement programs will terminate. All environmental
work on TCEQ approved reimbursement locations must be completed on or before
September 30, 2005 in order to be considered for reimbursement. All
reimbursement applications must be submitted prior to September 30, 2006 for
reimbursement. The termination of the TCEQ reimbursement program will have an
adverse impact on StarCo's ability to operate, as the majority of StarCo's
business is through reimbursement contracts. Management is currently monitoring
the Texas legislature to determine if the deadline will be extended and
additional funds appropriated to the TCEQ for the reimbursement programs. There
are currently two bills pending in the Texas Legislature that would extend
deadlines and appropriate additional funds. Should those deadlines not be
extended or additional funding appropriated to the TCEQ for reimbursement
programs, StarCo could cease future work under reimbursement contracts by the
end of the Company's second quarter. There can be no assurance that the
deadlines will be extended or that additional funds will be appropriated to the
TCEQ.
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.
10
Note I - Management's Plans
The Company has experience operating losses for each of the last 3 years
aggregating $1,334,000. The Company also recorded operating losses from its
Petroleum Marketing segment, now discontinued, aggregating $2.58 million during
the three years in the period ended September 30, 2004. At March 31, 2005, the
Company has a working capital deficit of $601,000 and a stockholders' deficit of
$1,348,000.
The Environmental Segment has made a marginal profit over the years and
maintained a positive cash flow. Management is currently monitoring the Texas
legislature to determine if the deadline for TCEQ reimbursement funding will be
extended and additional funds appropriated to the TCEQ for the reimbursement
programs. The termination of the TCEQ reimbursement program will have an adverse
impact on StarCo's ability to operate, as the majority of StarCo's business is
through reimbursement contracts. For that reason, 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.
Management is currently evaluating the operating effectiveness of its Texas
Convenience Store Operations as well as the future capital needs of the
convenience store locations to determine an appropriate strategic plan for those
locations.
Management will continue to reduce debt and provide working capital through the
sale of non-income producing assets. There can be no assurance that any of
management's plans as described above will be successfully implemented, that the
TCEQ deadlines will be extended or that additional funds will be appropriated to
the TCEQ, 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 C, the Company discontinued its Texas petroleum marketing
segment, which sold motor fuels to the public through retail outlets in
southeast Texas and supplied the Company's open dealer accounts with motor
fuels. Such operations have been reflected as discontinued operations and prior
periods have been restated.
11
Information concerning the Company's business activities is summarized as
follows (in thousands):
Texas Environmental Other
Convenience remediation reconciling Consolidated
Quarter ended stores services items (1) total
March 31, 2005-
Revenues from external
Customers:
Motor fuel sales $ 340 $ - $ - $ 340
Other 381 318 - 699
Intersegment revenues - - - -
------ ------ ------ -------
Total revenues $ 721 $ 318 $ - $ 1,039
====== ====== ====== =======
Depreciation and
amortization $ 16 $ 6 $ 17 $ 39
Operating income (loss) $ (114) $ (22) $ (49) $ (185)
March 31, 2004-
Revenues from external
Customers:
Motor fuel sales $ - $ - $ 29 $ 29
Other - 252 30 282
Intersegment revenues - - - -
------ ------ ------ -------
Total revenues $ - $ 252 $ 59 $ 311
====== ====== ====== =======
Depreciation and
amortization $ - $ 4 $ 15 $ 19
Operating income (loss) $ - $ 7 $ (58) $ (51)
(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 March 31,
-----------------------
2005 2004
---- -----
Total operating loss for reportable segments $ (136) $ 7
Rental income, net 28 35
Other income, net 1 8
Interest expense, net (75) (36)
Unallocated corporate overhead expenses (49) (58)
---------- ----------
Total consolidated income (loss) from
continuing operations before income taxes $ (231) $ (44)
========== ==========
12
Texas Environmental Other
Convenience remediation reconciling Consolidated
Six months ended stores services items (1) total
March 31, 2005-
Revenues from external
Customers:
Motor fuel sales $ 788 $ - $ - $ 788
Other 600 626 - 1,226
Intersegment revenues - - - -
------- ------ ------ -------
Total revenues $ 1,388 $ 626 $ - $ 2,014
======= ====== ====== ========
Depreciation and
amortization $ 32 $ 10 $ 35 $ 77
Operating income (loss) $ (245) $ (55) $ (98) $ (398)
March 31, 2004-
Revenues from external
Customers:
Motor fuel sales $ - $ - $ 29 $ 29
Other - 417 30 447
Intersegment revenues - - - -
------- ------ ------ -------
Total revenues $ - $ 417 $ 59 $ 476
======= ====== ====== ========
Depreciation and
amortization $ - $ 8 $ 30 $ 38
Operating income (loss) $ - $ (118) $ (52) $ (170)
(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):
Six Months Ended March 31,
--------------------------
2005 2004
---- ----
Total operating income (loss) for reportable segments $ (300) $ (52)
Rental income, net 54 67
Other income (expense), net (3) 8
Interest expense, net (151) (51)
Unallocated corporate overhead expenses (98) (118)
----------- -----------
Total consolidated income (loss) from
continuing operations before income taxes $ (498) $ (146)
=========== ===========
13
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.
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations when such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circum-stances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
The Company's policy is to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting
principles. Revenues from motor fuel sales to open dealer accounts are
recognized when delivered. Revenues from motor fuel sales and retail sales
at convenience stores are recognized when sold at the store. Expenses are
recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized
using the percentage-of-completion method, measured by the percentage of
cost incurred to date to estimated total cost at completion for each
contract. Profit recognition is deferred on each contract until progress
reaches a level of completion sufficient to establish the probable outcome.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability that result in revisions to costs
are recognized in the period in which the changes are determined. Because
of the inherent uncertainties in estimating, it is at least reasonably
possible that such changes will occur within the near term.
14
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, 2004.
Results of Operations
Three Months Ended March 31, 2005 and 2004
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, 2005 and
2004. This is the second quarter of ESI's fiscal year, which begins on October 1
and ends on September 30.
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
-------------- --------------
(In thousands) (In thousands)
TEXAS CONVENIENCE STORES
Revenue $ 721 $ -
Gross profit 71 -
Operating expenses 185 -
-------------- --------------
Operating income (loss) (114) -
EDCO ENVIRONMENTAL
Revenue $ 318 $ 252
Gross profit 62 136
Operating expenses 84 195
-------------- --------------
Operating income (loss) (22) (59)
UNALLOCATED OPERATIONS
Revenue $ - $ 59
Gross profit - 8
Operating expenses 49 -
-------------- --------------
Operating income (loss) (49) 8
TOTAL CONTINUING OPERATIONS
Revenue $ 1,039 $ 311
Gross profit 133 144
Operating expenses 318 195
-------------- --------------
Operating income (loss) (185) (51)
DISCONTINUED TEXAS PETROLEUM MARKETING
Revenue $ - $ 4,182
Gross profit - 191
Operating expenses - 269
-------------- --------------
Operating loss - (78)
15
On July 1, 2004, the Company entered into an agreement with Mauritz & Couey (MC)
whereby the Company conveyed its Exxon, Chevron and unbranded fuel distribution
contracts and certain petroleum marketing distribution assets, accounts
receivable and inventory to MC for relief of amounts owed to MC for fuel
purchases and management fees, the assumption of the Company's line of credit
obligation by MC and the issuance of a note receivable. As a result of the
transaction, the Company discontinued its petroleum marketing distribution
segment and effectively disposed of the segment's assets.
Consolidated revenues increased $728,000 to $1,039,000 in the quarter ended
March 31, 2005, as compared with revenues of $311,000 in the quarter ended March
31, 2004. The increase is primarily attributable to the presentation of
operations of the Texas Convenience Store segment due to the reestablishment of
that Segment in April 2004. The Texas Convenience Store segment results of
operations only include operations for the quarter ended March 31, 2005 as the
stores were leased to outside operators during the quarter ended March 31, 2004
as the segment was discontinued from November 18, 2002 to April 2004. The
Company subsequently reacquired control of those stores in April 2004 (2 stores)
and July 2004 (1 store). Revenues from the Environmental segment increased
$66,000, primarily due to increase site closure reimbursement work as the TCEQ
funding deadline approaches.
Consolidated gross profit decreased $11,000 in the quarter ended March 31, 2005,
as compared with the quarter ended March 31, 2004. Gross profit expressed as a
percentage of sales, "Gross Margin", decreased to approximately 12% of sales in
the quarter ended March 31, 2005 as compared to 54% of sales in the quarter
ended March 31, 2004. The decrease in gross margin in 2005 is mainly
attributable to the higher profit margin of the Environmental segment negatively
impacted by the lower profit margins of the Texas Convenience Store segment,
which had increased operations in 2005 over 2004.
Operating expenses increased $123,000 in the quarter ended March 31, 2005, as
compared with the quarter ended March 31, 2004. The increase in operating
expenses was mainly attributable to the increased operations of the convenience
store segment.
The Company had an operating loss of $185,000 in the quarter ended March 31,
2005, as compared to an operating loss of $51,000 in the quarter ended March 31,
2004.
Net loss increased to $231,000 in the quarter ended March 31, 2005, as compared
with a loss of $122,000 in the quarter ended March 31, 2004. Net loss for the
quarter ended March 31, 2005 includes interest expense of $75,000, rental income
of $28,000 and other income of $1,000. Net loss for the quarter ended March 31,
2004 includes a loss on discontinued operations of $78,000, interest expense of
$36,000, rental income of $35,000 and other income of $8,000.
16
Texas Convenience Store Segment
The Company's stores are located in smaller communities throughout the gulf
coast region of Texas and feature self-service motor fuels and a variety of food
and non-food merchandise. During the quarter ended March 31, 2005, the Company
operated 3 convenience stores. During the quarter ended March 31, 2004, the
Company did not operate any convenience stores, as all company owned stores had
been leased to outside operators when the Company originally discontinued its
C-store operations on November 18, 2002. However, the Company reacquired control
of the 3 stores during April and July of 2004, at which time the Company
reestablished its Texas Convenience Store segment. Accordingly, there is no
comparative analysis of the results of operations of this segment between the
quarters ended March 31, 2005 and 2004.
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, 2005 increased $66,000 to
$318,000, as compared with $252,000 in the quarter ended March 31, 2004.
Revenues from the Environmental segment increased primarily due to increase site
closure reimbursement work as the TCEQ funding deadline approaches.
Gross profit in the quarter ended March 31, 2005 decreased by $74,000 to
$62,000, as compared with $136,000 in the quarter ended March 31, 2004. The
environmental segment has continued to experience decreased profit margins under
its TCEQ reimbursement contracts. Operating expenses decreased $185,000 to
$84,000 as compared with $195,000 in the quarter ended March 31, 2004.
The Environmental segment reported an operating loss of $22,000 in the quarter
ended March 31, 2005, as compared with an operating loss of $59,000 in the
quarter ended March 31, 2004.
Discontinued Operations - Texas Convenience Store Segment
On July 1, 2004, the Company entered into an agreement with Mauritz & Couey (MC)
whereby the Company conveyed its Exxon, Chevron and unbranded fuel distribution
contracts and certain petroleum marketing distribution assets, accounts
receivable and inventory to MC for relief of amounts owed to MC for fuel
purchases and management fees, the assumption of the Company's line of credit
obligation by MC and the issuance of a note receivable. As a result of the
transaction, the Company discontinued its petroleum marketing distribution
segment and effectively disposed of the segment's assets. The results of
operations of the Texas Petroleum Marketing 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. The otherwise tax liability from this transaction is offset by net
operating loss carryforwards of the Company generated from previous years
losses. Accordingly, no provision has been recorded.
Unallocated General and Administrative Expenses
General and Administrative expenses increased to $49,000 in the quarter ended
March 31, 2005. These costs consist primarily of corporate overhead and other
unallocated expenses.
17
Six Months Ended March 31, 2005 and 2004
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, 2005 and 2004. This is the
first half of ESI's fiscal year, which begins October 1 and ends September 30.
Six Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
(In thousands) (In thousands)
TEXAS CONVENIENCE STORES
Revenue $ 1,388 $ -
Gross profit 188 -
Operating expenses 433 -
-------------- --------------
Operating income (loss) (245) -
EDCO ENVIRONMENTAL
Revenue $ 626 $ 417
Gross profit 136 213
Operating expenses 191 331
-------------- --------------
Operating income (loss) (55) (118)
UNALLOCATED OPERATIONS
Revenue $ - $ 59
Gross profit - 8
Operating expenses 98 60
-------------- --------------
Operating income (loss) (98) (52)
TOTAL CONTINUING OPERATIONS
Revenue $ 2,014 $ 476
Gross profit 324 221
Operating expenses 722 391
-------------- --------------
Operating income (loss) (398) (170)
DISCONTINUED TEXAS PETROLEUM MARKETING
Revenue $ - $ 8,096
Gross profit - 375
Operating expenses - 569
-------------- --------------
Operating loss - (194)
Consolidated revenues increased $1,538,000 to $2,014,000 in the six months ended
March 31, 2005, as compared with $476,000 in the six months ended March 31,
2004. The increase is primarily attributable to the presentation of operations
of the Texas Convenience Store segment due to the reestablishment of that
Segment in April 2004. The Texas Convenience Store segment results of operations
only include operations for the six months ended March 31, 2005 as the stores
were leased to outside operators during the six months ended March 31, 2004 as
the segment was discontinued from November 18, 2002 to April 2004. The Company
subsequently reacquired control of those stores in April 2004 (2 stores) and
July 2004 (1 store). Revenues from the Environmental segment increased $66,000,
primarily due to increase site closure reimbursement work as the TCEQ funding
deadline approaches.
18
Consolidated gross profit increased $103,000 to $324,000 in the six months ended
March 31, 2005, as compared with $221,000 in the six months ended March 31,
2004. Gross Margin declined to approximately 16% of sales in the six months
ended March 31, 2005, as compared with approximately 46% of sales in the six
months ended March 31, 2004. The decrease in gross margin in 2005 is mainly
attributable to the higher profit margin of the Environmental segment negatively
impacted by the lower profit margins of the Texas Convenience Store segment,
which had increased operations in 2005 over 2004.
Operating expenses increased $331,000 to $722,000 in the six months ended March
31, 2005, as compared with $391,000 in the six months ended March 31, 2004. The
increase in operating expenses was mainly attributable to the increased
operations of the convenience store segment.
The Company incurred an operating loss of $398,000 in the six months ended March
31, 2005, as compared to operating loss of $170,000 in the six months ended
March 31, 2004.
Net loss increased to a net loss of $498,000 in the six months ended March 31,
2005, as compared with a net loss of $340,000 in the six months ended March 31,
2004. Net loss in the current six months includes other expenses of $3,000,
rental income of $54,000, and interest expense of $151,000. Net loss in the six
months ended March 31, 2004 includes other income of $8,000, rental income of
$67,000, interest expense of $51,000, and a loss from discontinued operations of
the Texas Petroleum Marketing Segment of $194,000.
Texas Convenience Store Segment
The Company's stores are located in smaller communities throughout the gulf
coast region of Texas and feature self-service motor fuels and a variety of food
and non-food merchandise. During the quarter ended March 31, 2005, the Company
operated 3 convenience stores. During the quarter ended March 31, 2004, the
Company did not operate any convenience stores, as all company owned stores had
been leased to outside operators when the Company originally discontinued its
C-store operations on November 18, 2002. However, the Company reacquired control
of the 3 stores during April and July of 2004, at which time the Company
reestablished its Texas Convenience Store segment. Accordingly, there is no
comparative analysis of the results of operations of this segment between the
quarters ended March 31, 2005 and 2004.
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 six months ended March 31, 2005 increased $209,000 to
$626,000, as compared with $417,000 in the six months ended March 31, 2004.
Revenues from the Environmental segment increased primarily due to increase site
closure reimbursement work as the TCEQ funding deadline approaches.
Gross profit in the six months ended March 31, 2005 decreased by $77,000 to
$136,000, as compared with $213,000 in the six months ended March 31, 2004. The
environmental segment has continued to experience decreased profit margins under
its TCEQ reimbursement contracts. Operating expenses decreased $140,000 to
$191,000 as compared with $331,000 in the six months ended March 31, 2004.
19
The Environmental segment reported an operating loss of $55,000 in the six
months ended March 31, 2005, as compared with an operating loss of $118,000 in
the six months ended March 31, 2004.
Discontinued Operations - Texas Convenience Store Segment
On July 1, 2004, the Company entered into an agreement with Mauritz & Couey (MC)
whereby the Company conveyed its Exxon, Chevron and unbranded fuel distribution
contracts and certain petroleum marketing distribution assets, accounts
receivable and inventory to MC for relief of amounts owed to MC for fuel
purchases and management fees, the assumption of the Company's line of credit
obligation by MC and the issuance of a note receivable. As a result of the
transaction, the Company discontinued its petroleum marketing distribution
segment and effectively disposed of the segment's assets. The results of
operations of the Texas Petroleum Marketing 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. The otherwise tax liability from this transaction is offset by net
operating loss carryforwards of the Company generated from previous years
losses. Accordingly, no provision has been recorded.
Unallocated General and Administrative Expenses
General and Administrative expenses increased to $98,000 in the six months ended
March 31, 2005. These costs consist primarily of corporate overhead and other
unallocated expenses.
Capital Resources and Liquidity
Cash and cash equivalents were $184,000 and $218,000 at March 31, 2005 and 2004
respectively. The Company had a net working capital deficit of $601,000 at March
31, 2005, as compared with a deficit of $144,000 at September 30, 2004.
Cash used by operating activities was $207,000 for the six months ended March
31, 2005. During that period, cash provided by investing activities was $98,000,
which was comprised of repayments of notes receivable of $97,000 and proceeds
from the sale of assets of $15,000 offset by new note issuances of $14,000. Cash
used by financing activities was $48,000, which was comprised entirely of
repayments of notes payable.
Cash provided by operating activities was $65,000 for the six months ended March
31, 2004. During that period, cash provided by investing activities was $16,000,
which was comprised of repayments of notes receivable of $24,000 and proceeds
from the sale of assets of $4,000 offset by new note issuances of $6,000 and
capital expenditures of $6,000. Cash used by financing activities was $79,000,
which was comprised entirely of repayments of notes payable.
As of March 31, 2005, the Company had an aggregate of approximately $2,747,000
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. At March 31, 2005, the Company had accrued interest of approximately
$220,000
20
Of the remaining principal outstanding aggregating an approximate $147,000,
approximately $82,000 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 $65,000 is due under 3 note
agreements with various terms to unrelated third parties. At March 31, 2005, the
2 notes were due within one year and the Company was in default under the third
note agreement, and accordingly, has reflected that note as currently due on the
accompanying condensed consolidated balance sheet.
At March 31, 2005, the Company had an aggregate 10,471,831 shares of common
stock issued, with 10,430,196 issued and outstanding after consideration of
treasury stock. The Company is authorized to issue up to an aggregate 15,000,000
shares of common stock. Of the 4,569,804 shares of common stock available for
issuance, approximately 390,350 shares are reserved for vested stock options to
employees of the Company and 4,159,403 shares are reserved for Warrants.
To continue as a going concern, the Company intends to finance its working
capital requirements 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
There are numerous factors that affect the Company's business and the results of
its operations. These factors include general economic and business conditions;
the level of demand for products and services and the level and intensity of
competition in the convenience store and environmental remediation industry.
The convenience store industry is highly competitive, fragmented, and
regionalized. It is characterized by a few large companies and many small
independent companies. Several competitors are substantially larger and have
greater resources than the Company. The Company's stores compete with other
convenience stores, small supermarkets, grocery stores, and major and
independent gasoline distributors who have converted units to convenience
stores.
The Company's environmental subsidiary StarCo Enviroservices has provided
environmental remediation services to customers almost entirely through
reimbursement funding by the TCEQ, with a smaller percentage funded by private
companies and insurance. Under current Texas law and the requirements of the
TCEQ, on September 30, 2005, funding for the TCEQ's reimbursement programs will
terminate. All environmental work on TCEQ approved reimbursement locations must
be completed on or before September 30, 2005 in order to be considered for
reimbursement. All reimbursement applications must be submitted prior to
September 30, 2006 for reimbursement. The TCEQ reimbursement funding program is
slated for discussion and possible extension during the 2005 Texas Legislative
session. The termination of the TCEQ reimbursement program will have an adverse
impact on StarCo's ability to operate. Management is currently monitoring the
Texas legislature to determine if the deadline will be extended and additional
funds appropriated to the TCEQ for the reimbursement programs. Should those
deadlines not be extended or additional funding appropriated to the TCEQ for
reimbursement programs, StarCo could cease future work under reimbursement
contracts by the end of the Company's second quarter. There can be no assurance
that the deadlines will be extended or that additional funds will be
appropriated to the TCEQ.
21
Item 4. Controls and Procedures
The management of the Company, with the participation of the Chief Executive
Officer and Acting Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this Report. Based on that evaluation, the Chief Executive Officer and Acting
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective in enabling the Company to record, process,
summarize, and report information required to be included in the Company's
periodic SEC filings within the required time period.
In addition, the management of the Company, with the participation of the
Company's Chief Executive Officer and Acting Chief Financial Officer, has
evaluated whether any change in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during the Company's fourth fiscal quarter. Based on that
evaluation, the Company's Chief Executive Officer and Acting Chief Financial
Officer have concluded that there has been no change in the Company's internal
control over financial reporting during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The Company is subject to litigation, primarily as a result of customer and
vendor claims, in the ordinary conduct of its operations. Except as described
below, as of March 31, 2005, the Company had no knowledge of any legal
proceedings, which, 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
at March 31, 2005.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
At March 31, 2005, the Company was in default under a note payable agreement, of
which approximately $14,000 was outstanding at March 31, 2005, as the Company
defaulted under the loan repayment provisions of the agreement. The Company is
currently paying one-quarter of the required monthly payment.
Item 4. Submission of Matters to a Vote of Security Shareholders
None.
22
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8K
A. Exhibits.
Exhibit 31 - Certification of Blair R. Couey, Chief Executive
Officer and Acting Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934
Exhibit 32 - Certification of Blair R. Couey, Chief Executive
Officer and Acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
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 20, 2005
EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey.
---------------------------------
Blair R. Couey
President and Chief Executive Officer
and Acting Chief Financial Officer
23