As filed with the Securities and Exchange Commission on February 17, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended DECEMBER 31, 1997
or
[ ] 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)
720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
(Address including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JERRIEL L. EVANS, SR., PRESIDENT
Mailing Address: P.O. Box 2480, Bay City, Texas 77404-2480 (409) 245-2424
Physical Address: 720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock of registrant outstanding exclusive of Treasury
Shares or shares held by subsidiaries of the registrant at February 12, 1998:
3,163,573
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Number
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
December 31, 1997 and September 30, 1997 ................... 3
Condensed Consolidated Statement of Income
Three Months Ended December 31, 1997 and 1996 ................ 4
Condensed Consolidated Statement of Cash Flows
Three Months Ended December 31, 1997 and 1996 ................ 5
Notes to the Condensed Consolidated Financial Statements ........ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 8
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K
A. Exhibits Index .............................................. 11
B. Reports on Form 8-K ......................................... 11
Signature .......................................................... 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
(in thousands) (in thousands)
------------ --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 169 $ 1,297
Trade receivables, net of allowance of
doubtful
receivable of $302,000 and $340,000 ....................... 4,613 4,584
Inventory .............................................. 6,539 7,962
Income taxes receivable ................................ 310 310
Prepaid expenses and other current assets .............. 619 618
Deferred income taxes .................................. 191 191
-------- --------
Total current assets ............................ 12,441 14,962
Property, plant and equipment, net ........................ 21,562 21,610
Other assets .............................................. 921 1,035
Deferred income taxes ..................................... 928 397
======== ========
Total assets .................................... $ 35,852 $ 38,004
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................. $ 7,335 $ 8,474
Accrued excise and other taxes payable ................. 338 343
Current portion of long-term debt ...................... 7,944 7,837
-------- --------
Total current liabilities ....................... 15,617 16,654
Long-term debt ......................................... 5,231 5,401
-------- --------
Total liabilities ............................... 20,848 22,055
-------- --------
Commitments and contingencies Stockholders' equity:
Common stock $0.01 par value, 15,000,000 shares
authorized, 3,163,573 shares issued ................. 32 32
Additional paid-in capital ............................. 12,297 12,297
Retained earnings ...................................... 3,109 4,054
Treasury stock, 72,589 common shares at cost ........... (434) (434)
-------- --------
Total stockholders' equity ...................... 15,004 15,949
-------- --------
Total liabilities and stockholders' equity ...... $ 35,852 $ 38,004
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
December 31,
------------------------
1997 1996
-------- --------
(in thousands, except per share amounts)
Revenue:
Refined product sales ................. $ 23,382 $ 31,340
Other sales and services .............. 7,124 6,334
-------- --------
Total revenue ..................... 30,506 37,674
Cost of sales ......................... 26,575 33,212
-------- --------
Gross profit .......................... 3,931 4,462
-------- --------
Operating expenses:
Employment expenses ................. 2,556 2,541
Other operating expenses ............ 888 1,087
General & administrative expenses ... 955 922
Depreciation and amortization ...... 527 439
-------- --------
Total operating expenses .......... 4,926 4,989
-------- --------
Operating loss ........................ (995) (527)
Other income/expense:
Interest expense .................... (438) (289)
Other expense, net .................. (43) (364)
-------- --------
Loss before benefit from income
taxes ................................. (1,476) (1,180)
Benefit from income taxes: ............ 531 405
-------- --------
Net loss .............................. $ (945) $ (775)
-------- --------
Basic and diluted loss per share ...... $ (.31) $ (0.26)
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------
1997 1996
------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (945) $ (775)
Non-cash adjustments:
Depreciation and amortization .......................... 527 439
Loss on reclassification of securities ................. 375
Changes in:
Current assets ....................................... 1,393 (131)
Current liabilities .................................. (1,144) 807
------- -------
Net cash provided (used) by operating activities ... (169) 715
------- -------
Cash flows from investing activities:
Capital expenditures ..................................... (565) (640)
Proceeds from sale of property and equipment ............. 86
Other, net ............................................... (417) (28)
------- -------
Net cash used by investing activities .............. (896) (668)
------- -------
Cash flows from financing activities:
Notes payable, net ....................................... (63) (205)
Deferred revenue ......................................... 98
------- -------
Net cash used by financing activities ............. (63) (107)
Net decrease in cash ....................................... (1,128) (60)
Cash and cash equivalents, beginning of period ............. 1,297 2,793
------- -------
Cash and cash equivalents, end of period ................... $ 169 $ 2,733
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to the consolidated financial statements
included in Form 10-K of Evans Systems, Inc. (the Company) for the year ended
September 30, 1997. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended December
31, 1997 are not necessarily indicative of the results that may be expected for
the year ending September 30, 1998.
NOTE B -- SEASONAL NATURE OF BUSINESS
The refined petroleum products market customarily experiences competitive
margins in the fall and winter months followed by increased demand during the
spring and summer when construction, travel, and recreational activities
increase.
NOTE C -- LONG-TERM DEBT
Certain of the Company's notes payable to banks require maintenance of financial
covenants, including current, debt to equity, tangible net worth and debt
service coverage ratios. At September 30, 1997 and December 31, 1997, the
Company was in violation of certain of these covenants. In addition, the Company
was out of compliance with the borrowing base limits with one bank. The banks
have waived these covenant defaults at September 30, 1997 but not as of December
31, 1997. With respect to the out of compliance with the borrowing base limits,
the bank has agreed to a standstill of the breach of the borrowing base limits.
In exchange for these waivers and the standstill agreement, the Company has
pledged the stock of its subsidiaries, pledged the proceeds of the sale of
non-income producing assets, provided the bank a second lien on its office
facility and agreed to a maturity date on April 30, 1998. Long-term debt of
$6,400,000 was reclassified to short-term at September 30, 1997 and December 31,
1997. As of December 31, 1997, ESI had $ 2,563,000 available in unused lines of
credit, however, due to borrowing base limits these unused lines of credit were
not currently available for use.
The Company is in the process of seeking long-term senior debt and replacement
for the current lines of credit. The Company has hired an investment banking
firm to work with management to obtain this senior debt financing. The
investment banker and management believe this financing can be obtained prior to
the current credit lines expiring.
NOTE D -- SUBSEQUENT EVENTS
On February 11, 1998, the Company sold its investment in 5 leased convenience
stores for net cash of approximately $350,000. There was no material charge
related to this transaction.
On February 13, 1998, the Company temporarily suspended further production
activities at its Chemway operation. The Company is seeking additional financing
for Chemway, a joint venture partner or a sale of this segment.
NOTE E -- BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the quarters ending December 31, 1997 and
December 31, 1996 were computed using 3,090,984 and 3,032,973 weighted average
common shares outstanding, respectively.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or "the Company") business segments for the three months ended December 31, 1997
and 1996. This is the first quarter of ESI's fiscal year which begins on October
1st and ends on September 30th.
Three Months Ended
-------------------------------------------
December 31, 1997 December 31, 1996
(in thousands) (in thousands)
----------------- -----------------
PETROLEUM MARKETING(1)
Revenue ........................ $ 20,060 $ 25,979
Operating Loss ................. (282) (26)
CONVENIENCE STORES
Revenue ........................ 8,332 9,586
Operating Loss ................. (225) (90)
CHEMWAY
Revenue ........................ 1,737 1,610
Operating Loss ................. (500) (502)
EDCO ENVIRONMENTAL
Revenue ........................ 377 499
Operating Income ............... 12 91
TOTAL
Revenue ........................ $ 30,506 $ 37,674
Operating Income (Loss) ........ $ (995) $ (527)
(1) Includes the parent company
The Company's net loss for the quarters ended December 31, 1997 and 1996 was
$945,000 and $775,000. The results of the quarter ended December 31, 1996,
included a non-recurring, non-operating loss of $219,000 (net of tax effect)
which resulted from the reclassification of securities available for sale, a
bond fund the Company had held since 1993. In addition, the Company recorded a
non-operating loss of $70,000 (net of tax effect) related to the decision by the
Board of Directors to liquidate its trading portfolio. Without these
non-recurring items, net losses for the quarters ended December 31, 1997 and
1996 would have been $945,000 and $486,000, respectively. The increased net loss
was primarily incurred within the petroleum marketing and convenience store
segments, as discussed below.
ESI's consolidated revenues for the three months ended December 31, 1997, were
$30,508,000, as compared to $37,674,000 during the comparable period ending
December 31, 1996. The $7,166,000 (19.0%) three-month decrease in this year's
revenues was attributable to a $5,919,000 decrease in petroleum marketing
revenues and a $1,254,000 decrease in convenience store revenues.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
ESI's consolidated gross profit for the three months ended December 31, 1997 was
$3,931,000 (12.9%), as compared to $4,462,000 (11.8%) for the three months ended
December 31, 1996.
The Company's operating expenses were $4,926,000 in the quarter ended December
31, 1997, as compared to $4,989,000 in the quarter ended December 31, 1996. The
Company's operating expenses were 16.1% of revenues in the quarter ended
December 31, 1997 and 13.2% in the quarter ended December 31, 1996. Management
took action, including the elimination of nonessential staff, to reduce its
overall levels of operating expenses during October 1997, however the effect of
such reductions did not occur until late in the fiscal quarter ending December
31, 1997.
PETROLEUM MARKETING
The petroleum marketing segment sales were $20,060,000 in the quarter ended
December 31, 1997, as compared to $25,979,000 in the quarter ended December 31,
1996, a $5,919,000 (22.8%) decrease. Fuel sales gallonage were 19,616,000
gallons in the quarter ended December 31, 1997, as compared to 22,885,000 in the
quarter ended December 31, 1996, a 3,269,000 (14.3%) decrease. Gross profits for
the quarters ended December 31, 1997 and 1996 were $1,879,000 and $2,113,000
respectively. Gross profit expressed as a percent of sales ("Gross Margins")
increased to 9.4% in the quarter ended December 31, 1997, as compared to 8.1% in
the quarter ended December 31, 1996. Operating expenses increased $22,000 in the
quarter ended December 31, 1997, as compared to the quarter ended December 31,
1996. Operating expenses were 10.8% of revenues in the quarter ended December
31, 1997, and 8.2% in quarter ended December 31, 1996. Certain expenses of ESI,
the parent company, are included in the petroleum marketing results. Operating
losses were $282,000 in the quarter ended December 31, 1997, as compared to
losses of $26,000 in the quarter ended December 31, 1996. The increase in
operating losses is primarily due to the reduction in sales revenue.
During the first fiscal quarter of 1998, the Company terminated its supply
agreement with the primary fuel supplier to the Company's Bay City terminal
facility. The Company is presently seeking a new supplier for its terminal
operation.
In October 1997, management began a program to reduce its operating expenses,
including the termination of certain nonessential staff, however, the effect of
such reductions did not occur until late in the quarter ended December 31, 1997.
CONVENIENCE STORES
The convenience store segment sales were $8,332,000 in the quarter ending
December 31, 1997, as compared to $9,586,000 in the quarter ended December 31,
1996; a $1,254,000 (13.1%) decrease. Fuel sales decreased to $4,695,000 in the
quarter ended December 31, 1997, as compared to $5,753,000 in the quarter ended
December 31, 1996. Fuel sales gallonage decreased to 4,042,000 gallons in the
quarter ended December 31, 1997, as compared to 5,496,000 in the quarter ended
December 31, 1996; a 1,454,000 (26.5%) decrease. Merchandise sales decreased to
$3,457,000 in in the quarter ended December 31, 1997, as compared to $3,698,000
in the quarter ended December 31, 1996 and other income increased to $180,000 in
the quarter ended December 31, 1997, as compared to $135,000 in the quarter
ended December 31, 1996. Management attributes the decrease in sales to
operating 5 fewer stores in the fiscal 1998 quarter. The Company operated 34
stores during the current fiscal quarter compared with 39 stores in the quarter
ended December 31, 1996.
Gross profit for the quarters ended December 31, 1997 and 1996 were $1,752,000
and $1,907,000 respectively. Gross margins increased to 21.0% in the quarter
ended December 31, 1997, as compared to 19.9% in the quarter ended December
31,1996. Management attributes the increase in gross profit margins mainly to
divesting of lower margin stores during fiscal 1997.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- CONTINUED
Operating expenses were $1,977,000 in the quarter ended December 31, 1997
compared to $1,997,000 in the quarter ended December 31, 1996. Operating losses
were $225,000 during the quarter ended December 31, 1997, as compared to losses
of $90,000 during the quarter ended December 31, 1996.
During the first quarter of fiscal 1998, management implemented certain cost
reduction programs, including improvements in labor scheduling and control, and
reductions in administrative expenses, in order to reduce the convenience
stores' overall operating expenses. Management is continually evaluating its
store operations, and intends to manage its store portfolio to maximize
profitability. Accordingly, the Company has subsequently sold an additional 5
under performing stores in February 1998.
CHEMWAY
Chemway sales were $1,737,000 in the quarter ended December 31, 1997, as
compared to $1,610,000 in the quarter ended December 31, 1996; a $127,000 (7.9%)
increase. In the first quarter of fiscal 1997, the aerosol production line was
out of service in late November through December for complete refurbishing.
Gross profit for the quarters ended December 31, 1997 and 1996 were $105,000 and
$111,000 respectively. Gross profit margins decreased to 6.0% for the quarter
ended December 31, 1997, as compared to 6.9% for the quarter ended December 31,
1996. Operating expense decreased $8,000 in the quarter ended December 31, 1997,
as compared to the quarter ended December 31, 1996. Operating losses were
$500,000 for the quarter ended December 31, 1997, as compared to losses of
$502,000 in the quarter ended December 31, 1996.
Management is presently evaluating its alternatives with respect to the Chemway
operation, and is conducting ongoing discussions with several unrelated parties
who have an active interest in Chemway, either through a joint venture
arrangement or through the purchase of all or part of the Company's ownership in
Chemway. Additionally, management has implemented significant cost reductions at
Chemway, with the intent of reducing its ongoing operating losses and reducing
its finished goods inventories in order to facilitate the sale of Chemway. On
February 13, 1998, the Company temporarily suspended further production
activities at Chemway.
EDCO ENVIRONMENTAL
EDCO Environmental sales were $377,000 in the quarter ended December 31, 1997 as
compared to $499,000 in the quarter ended December 31, 1996; a $122,000 (24.4%)
decrease. Gross profits for the quarters ended December 31, 1997, and 1996 were
$195,000 and $330,000 respectively. Gross profit margins decreased to 51.7% in
the quarter ended December 31, 1997, as compared to 66.2% in the quarter ended
December 31, 1996.
EDCO's operating expenses decreased $56,000 in the quarter ended December 31,
1997, as compared to the quarter ended December 31, 1996. The decrease was
mainly attributable to the transfer of EDCO's service department to the
petroleum marketing segment. Operating income was $12,000 in the quarter ended
December 31, 1997, as compared to $91,000 in in the quarter ended December 31,
1996. Operating income declined due to lower sales and gross margins, partially
offset by reduced operating expenses.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and marketable securities were $169,000 as of December
31, 1997, as compared to $1,297,000 at September 30, 1997. Working capital
deficit was $3,176,000 as of December 31, 1997, an increase from $1,692,000 as
of September 30, 1997. The net decrease in working capital was largely
attributable to a decrease in inventories of $1,432,000 and cash used to finance
operations of $1,128,000 offset by a decrease in payables of $1,139,000.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- CONTINUED
Cash provided (used) by operations was $(169,000) for the quarter ending
December 31, 1997, as compared to $715,000 for the quarter ending December 31,
1996. ESI's current ratio, the ratio of current assets to current liability, was
0.80 at December 31, 1997 and .90 at September 30, 1997.
Certain of the Company's notes payable to banks require maintenance of financial
covenants, including current, debt to equity, tangible net worth and debt
service coverage ratios all as defined in the respective loan agreements. At
September 30, 1997 and December 31, 1997, the Company was in violation of
certain of these covenants. In addition, the Company was out of compliance with
the borrowing base limits with one bank. The bank has waived these covenant
defaults at September 30, 1997 but not at December 31, 1997. The bank has agreed
to a standstill of the breach of the borrowing base limits. In exchange for
these waivers at September 30, 1997 and the standstill agreement, the Company
has pledged the stock of its subsidiaries, pledged the proceeds of the sale of
non-income producing assets, provided the bank a second lien on its office
facility and agreed to a maturity date on April 30, 1998. As of February 13,
1998, ESI had $ 2,160,000 available in unused lines of credit, however, due to
borrowing base limits these unused lines of credit were not currently available
for use.
The Company is presently evaluating alternatives including the refinancing of
its senior debt and current lines of credit; to assist in this endeavor, the
Company retained an investment banking firm in December 1997. Management
believes that such additional financing can be obtained prior to the April 30,
1998 expiration of its current credit facility.
The Company has also identified certain nonessential assets which it intends to
sell. In February 1998, the Company sold its investment in 5 under performing
convenience stores to an unrelated party. In addition, the Company is presently
conducting ongoing discussions with several unrelated parties who have an active
interest in Chemway, either through a joint venture arrangement or through the
purchase of all or part of the Company's ownership in Chemway.
10
<PAGE>
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS INDEX
EXHIBITS SEQUENTIAL PAGE NUMBER
10.1 None
B. REPORTS ON FORM 8-K
No report on Form 8-K has been filed during the quarter for which this report
is filed.
SIGNATURE
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.
EVANS SYSTEMS, INC.
(REGISTRANT)
Date: February 13, 1998 By: /s/LARRY N. MILLER
Larry N. Miller
Chief Financial Officer And authorized
to sign on behalf of the Registrant
By: /s/CHARLES N. WAY
Charles N. Way
Corporate Controller and Director And
authorized to sign on behalf of the Registrant
11
Exhibit To Come
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 169
<SECURITIES> 0
<RECEIVABLES> 4,613
<ALLOWANCES> 302
<INVENTORY> 6,539
<CURRENT-ASSETS> 12,441
<PP&E> 21,562
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,852
<CURRENT-LIABILITIES> 15,617
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 14,972
<TOTAL-LIABILITY-AND-EQUITY> 35,852
<SALES> 30,506
<TOTAL-REVENUES> 30,506
<CGS> 26,575
<TOTAL-COSTS> 31,501
<OTHER-EXPENSES> 43
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438
<INCOME-PRETAX> (1,476)
<INCOME-TAX> (531)
<INCOME-CONTINUING> (945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (945)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>