UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1998
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 exclusve of
Treasury: Shares or shares held by subsidiaries of the registrant at April
30, 1998: 3,090,984
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheet
March 31, 1998 and September 30, 1997 .................... 3
Condensed Consolidated Statement of Income
Three Months Ended March 31, 1998 and 1997 and
Six Months Ended March 31, 1998 and 1997 ................... 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended March 31, 1998 and 1997 ................... 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 .......................................... 15
B. Reports on Form 8-K ..................................... 15
Signature ....................................................... 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
-------------- -------------
ASSETS (in thousands) (in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................... $ 1,063 $ 1,297
Trade receivables, net of allowance of
doubtful receivables of $301,000 and $340,000 ..... 3,456 4,584
Inventory ........................................... 4,369 7,962
Income taxes receivable ............................. 310 310
Prepaid expenses and other current assets ........... 240 618
Deferred income taxes ............................... 191 191
Current assets of ChemWay ........................... 1,726
-------- --------
Total current assets ......................... 11,355 14,962
Property, plant and equipment, net ..................... 18,390 21,610
Other assets ........................................... 960 1,035
Deferred income taxes .................................. 1,135 397
Non-current assets of ChemWay .......................... 2,880
-------- --------
Total assets ................................. $ 34,720 $ 38,004
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............... $ 3,606 $ 8,474
Accrued excise and other taxes payable .............. 340 343
Provision for loss on disposition of discontinued
operation ......................................... 1,100
Current portion of long-term debt ................... 7,872 7,837
Current liabilities of ChemWay ...................... 4,524
-------- --------
Total current liabilities .................... 17,442 16,654
Long-term debt ......................................... 3,245 5,401
Non-current liabilities of ChemWay ..................... 224
-------- --------
Total liabilities ............................ 20,911 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 ................................... 1,914 4,054
Treasury stock, 72,589 common shares, at cost ....... (434) (434)
-------- --------
Total stockholders' equity ................... 13,809 15,949
-------- --------
Total liabilities and stockholders' equity ... $ 34,720 $ 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)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
1998 1997 1998 1997
---------- ----------- --------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Refined product sales ..................... $ 19,684 $ 27,161 $ 43,066 $ 58,501
Other sales and services .................. 4,916 4,633 10,303 9,357
-------- -------- -------- --------
Total revenue ........................ 24,600 31,794 53,369 67,858
Cost of sales ............................. 20,454 27,821 45,397 59,534
-------- -------- -------- --------
Gross profit .............................. 4,146 3,973 7,972 8,324
-------- -------- -------- --------
Operating expenses:
Employment expenses ..................... 2,124 2,255 4,361 4,485
Other operating expenses ................ 831 864 1,777 1,827
General & administrative
expenses .............................. 612 779 1,277 1,563
Depreciation and amortization ........... 497 450 970 849
-------- -------- -------- --------
Total operating expenses ............. 4,064 4,348 8,385 8,724
-------- -------- -------- --------
Operating income (loss) ................... 82 (375) (413) (400)
Other income (expense):
Interest expense ........................ (268) (188) (606) (411)
Other, net .............................. 112 (63) 69 (429)
-------- -------- -------- --------
Loss before benefit from income
taxes ................................... (74) (626) (950) (1,240)
Benefit from income taxes ................. 27 224 343 436
-------- -------- -------- --------
Loss from continuing operations ........... (47) (402) (607) (804)
Discontinued operations:
Loss from discontinued operations
of ChemWay, net of tax benefit .......... (443) (31) (828) (404)
Loss on disposal of ChemWay,
including provision for
losses of $200,000 during the
phase out period, net of tax
benefit ................................. (705) (705)
-------- -------- -------- --------
Net loss .................................. $ (1,195) $ (433) $ (2,140) $ (1,208)
======== ======== ======== ========
Basic and diluted loss per share:
Continuing operations ................... $ (.02) $ (.13) $ (.19) $ (.26)
Loss from discontinued
operations of ChemWay .................. (.14) (.01) (.27) (.13)
Loss on disposal of ChemWay ............. (.23) (.23)
-------- -------- -------- --------
Net loss ................................ $ (.39) $ (0.14) $ (0.69) $ (0.39)
======== ======== ======== ========
</TABLE>
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>
SIX MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------ ----------
(in thousands) (in thousands)
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations ................. $ (607) $ (804)
Non-cash adjustments:
Depreciation and amortization ............. 970 849
Deferred income taxes ..................... (343) (436)
Loss on reclassification of securities .... 375
Changes in:
Current assets ........................ 1,122 496
Current liabilities ................... (2,976) 976
------- -------
Net cash provided (used) by
operating activities ................. (1,834) 1,456
------- -------
Cash flows from investing activities:
Capital expenditures ............................ (956) (642)
Proceeds from sale of property and equipment .... 652
Other, net ...................................... (75) (12)
------- -------
Net cash used by investing
activities .......................... (379) (654)
------- -------
Cash flows from financing activities:
Notes payable, net .............................. 686 (523)
Deferred revenue ................................ 76
Issuance of Common Stock ........................ 165
------- -------
Net cash provided (used) by
financing activities ................. 686 (282)
------- -------
Net cash provided (used) by continuing operations .... (1,527) 520
Net cash provided (used) by discontinued operation .... 1,293 (316)
------- -------
Net increase (decrease) in cash ....................... (234) 204
Cash and cash equivalents, beginning of period ........ 1,297 2,793
------- -------
Cash and cash equivalents, end of period .............. $ 1,063 $ 2,997
======= =======
</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 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 six month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1998.
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which Evans Systems, Inc. ("ESI") will sell 80% of the issued and outstanding
shares of capital stock of its wholly owned subsidiary, ChemWay Systems, Inc.
ESI will dividend its remaining interest to its shareholders. The transaction is
in the due diligence stage and the terms could be revised based on the outcome
of that investigation. The transaction is subject to a number of conditions,
including the execution of a definitive agreement, the approval of a senior debt
holder of ESI, and various regulatory and corporate approvals. There can be no
assurance that a definitive agreement will be entered into or that this
transaction will be successfully consummated. The ChemWay operating results are
presented as discontinuing operations on the Condensed Consolidated Statement of
Income. On May 12, 1998 the Company's Board of Directors determined that the
Company would dispose of ChemWay.
The Company recognized gross profit of $434,000 in the second quarter of the
current fiscal year related to the anticipated refund of certain excise taxes
which had previously been overpaid. Of the $434,000, $293,000 was attributable
to periods prior to September 30, 1997.
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.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
6
<PAGE>
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 all as defined in the respective loan agreements. At
September 30, 1997, December 31, 1997, and March 31, 1998, 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 March 31, 1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it has thirty days to cure the defaults and if the defaults are not cured within
that time, the bank will accelerate the maturity of the notes to be immediately
due and payable. These notes total $1,525,000 and are secured by certain of the
Company's convenience stores.
The bank where the Company is out of compliance with the borrowing base limits
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 of April 30, 1998. The bank subsequently extended the
maturity date to June 30, 1998.
The Company and a New York based lender are in negotiations for an $11,000,000
credit facility to replace its current lines of credit. There can be no
assurance that these negotiations will be successful.
NOTE E -- BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the quarters ended March 31, 1998 and March
31, 1997 were computed using 3,090,984 and 3,084,501 weighted average common
shares. Basic and diluted loss per share for the six months ended March 31, 1998
and March 31, 1997 were computed using 3,090,984 and 3,058,468 weighted average
common shares.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or "the Company") business segments for the three months ended March 31, 1998
and 1997. This is the second fiscal quarter of ESI's fiscal year which begins on
October 1st and ends on September 30th.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- ---------------
(in thousands) (in thousands)
PETROLEUM MARKETING(1)
Revenue .............................. $ 16,642 $ 22,103
Operating Income (Loss) .............. 501 (169)
CONVENIENCE STORES
Revenue .............................. 7,714 9,496
Operating Loss ....................... (347) (174)
EDCO ENVIRONMENTAL
Revenue .............................. 244 195
Operating Loss ....................... (72) (32)
TOTAL FROM CONTINUING OPERATIONS
Revenue .............................. $ 24,600 $ 31,794
Operating Income (Loss) .............. 82 (375)
CHEMWAY (DISCONTINUED OPERATION)
Revenue .............................. 532 2,908
Operating Income (Loss) .............. (501) 20
TOTAL
Revenue .............................. $ 25,132 $ 34,702
Operating Loss ....................... (419) (355)
(1) Includes the parent company
The Company's net losses for the quarters ended March 31, 1998 and 1997 were
$1,195,000 and $433,000, respectively. The increased net loss was primarily
attributable to the increased losses in ChemWay and the convenience stores
offset by increased income in the petroleum marketing segment, as discussed
below.
ESI's consolidated revenues from continuing operations for the three months
ended March 31, 1998, were $24,600,000, as compared to $31,794,000 during the
comparable period ending March 31, 1997. The $7,194,000 (22.6%) three-month
decrease in this year's revenues was primarily attributable to a $5,461,000
decrease in petroleum marketing revenues and a $1,782,000 decrease in
convenience store revenues.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CONTINUED
ESI's consolidated gross profit from continuing operations for the three months
ended March 31, 1998 was $4,146,000 (16.9%), as compared to $3,973,000 (12.5%)
for the three months ended March 31, 1997. ESI recognized additional gross
profit of $434,000 in the second quarter of the current fiscal year due to the
anticipated refund of certain excise taxes which had previously been overpaid.
The Company's gross profit in the quarter ended March 31, 1998 was 14.8% of
sales before the excise tax credit.
The Company's operating expenses of continuing operations were $4,064,000 in the
quarter ended March 31, 1998, as compared to $4,348,000 in the quarter ended
March 31, 1997. The Company's operating expenses were 16.5% of revenues in the
quarter ended March 31, 1998 and 13.7% in the quarter ended March 31, 1997.
Operating expenses decreased for the quarter due to management's program to
reduce expenses.
PETROLEUM MARKETING
The petroleum marketing segment sales were $16,642,000 in the quarter ended
March 31, 1998, as compared to $22,103,000 in the quarter ended March 31, 1997,
a $5,461,000 (24.7%) decrease. Fuel sales gallonage were 15,966,000 gallons in
the quarter ended March 31, 1998, as compared to 19,425,000 in the quarter ended
March 31, 1997, a 3,459,000 (17.8%) decrease. Gross profits for the quarters
ended March 31, 1998 and 1997 were $2,340,000 and $1,793,000 respectively. Gross
profit expressed as a percent of sales ("Gross Margin") increased to 14.1% in
the quarter ended March 31, 1998, as compared to 8.1% in the quarter ended March
31, 1997. Petroleum marketing gross profit in the three months ended March 31,
1998 includes an adjustment of $434,000 due to the anticipated refund of
previous overpayment of certain excise taxes. (See above.) Gross Margin in the
petroleum marketing segment, before the excise tax credit, was 11.5% of sales in
the quarter ended March 31, 1998. Operating expenses decreased $124,000 in the
quarter ended March 31, 1998, as compared to the quarter ended March 31, 1997.
Operating expenses were 11.1% of revenues in the quarter ended March 31, 1998,
and 8.8% in the quarter ended March 31, 1997. Certain expenses of ESI, the
parent company, are included in the petroleum marketing results. Operating
income was $501,000 in the quarter ended March 31, 1998, as compared to a loss
of $169,000 in the quarter ended March 31, 1997. The increase in operating
income is due to the recognition of additional gross profit due to the
overpayment of excise taxes of $434,000, decreased operating expenses of
$124,000, and other increased gross profit of $113,000.
During the first fiscal quarter of 1998, the Company's supply agreement with the
primary fuel supplier to the Company's Bay City terminal facility was
terminated. 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.
The Company further reduced its staff in February 1998.
CONVENIENCE STORES
The Company operated 34 stores at the beginning of the quarter and sold 5 stores
during the current fiscal quarter, ending the quarter with 29 stores compared
with 39 stores in the quarter ended March 31, 1997.
The convenience store segment sales were $7,714,000 in the quarter ending March
31, 1998, as compared to $9,496,000 in the quarter ended March 31, 1997, a
$1,782,000 (18.8%) decrease. Fuel sales decreased to $4,278,000 in the quarter
ended March 31, 1998, as compared to $5,497,000 in the quarter ended March 31,
1997. Fuel sales gallonage decreased to 3,961,000 gallons in the quarter ended
March 31, 1998, as compared to 4,397,000 in the quarter ended March 31, 1997, a
436,000 (9.9%) decrease. Merchandise sales decreased to $3,236,000 in the
quarter ended March 31, 1998, as compared to $3,680,000 in the quarter ended
March 31, 1997 and other income decreased to $200,000 in the quarter ended March
31, 1998, as compared to $319,000
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- CONTINUED
in the quarter ended March 31, 1997. Management attributes the decrease in sales
to operating a weighted average of 19% fewer stores for the fiscal 1998 quarter
compared to the fiscal 1997 quarter.
Gross profit for the quarters ended March 31, 1998 and 1997 were $1,666,000 and
$1,869,000 respectively. Gross Margin increased to 21.6% in the quarter ended
March 31, 1998, as compared to 21.2% in the quarter ended March 31, 1997.
Management attributes the increase in gross profit margins mainly to divesting
of lower margin stores during fiscal 1997 and fiscal 1998.
Operating expenses were $2,013,000 in the quarter ended March 31, 1998 compared
to $2,195,000 in the quarter ended March 31, 1997. Operating losses were
$347,000 during the quarter ended March 31, 1998, as compared to losses of
$174,000 during the quarter ended March 31, 1997.
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 sold five under performing stores in
February 1998, and has announced that it intends to sell or close four stores in
May 1998.
EDCO ENVIRONMENTAL
EDCO Environmental sales were $244,000 in the quarter ended March 31, 1998 as
compared to $195,000 in the quarter ended March 31, 1997, a $49,000 (25.0%)
increase. Gross profits for the quarters ended March 31, 1998, and 1997 were
$140,000 and $162,000 respectively. Gross profit margins decreased to 57.4% in
the quarter ended March 31, 1998, as compared to 81.4% in the quarter ended
March 31, 1997.
EDCO's operating expenses decreased $23,000 in the quarter ended March 31, 1998,
as compared to the quarter ended March 31, 1997. Operating losses were $72,000
and $32,000 for the quarters ending March 31, 1998 and 1997, respectively.
Operating income declined due to lower sales and Gross Margin, partially offset
by reduced operating expenses.
CHEMWAY
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which ESI will sell 80% of the issued and outstanding shares of capital stock of
its wholly owned subsidiary, ChemWay Systems, Inc. ESI will dividend its
remaining interest to its shareholders. There can be no assurance that a
definitive agreement will be entered into or that this transaction will be
successfully consummated.
ChemWay sales were $532,000 in the quarter ended March 31, 1998, as compared to
$2,908,000 in the quarter ended March 31, 1997. Operating expense decreased
$128,000 in the quarter ended March 31, 1998, as compared to the quarter ended
March 31, 1997. Operating losses were $501,000 for the quarter ended March 31,
1998, as compared to an operating income of $20,000 in the quarter ended March
31, 1997. Because of the ongoing operating losses of ChemWay, on May 12, 1998
the Company's Board of Directors determined that the Company would dispose of
ChemWay.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or "the Company") business segments for the six months ended March 31, 1998 and
1997.
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
--------------- ---------------
(in thousands) (in thousands)
PETROLEUM MARKETING(1)
Revenue ............................. $ 36,702 $ 48,082
Operating Income (Loss) ............. 219 (195)
CONVENIENCE STORES
Revenue ............................. 16,046 19,082
Operating Loss ...................... (572) (264)
EDCO ENVIRONMENTAL
Revenue ............................. 621 694
Operating Income (Loss) ............. (60) 59
TOTAL FROM CONTINUING OPERATIONS
Revenue ............................. $ 53,369 $ 67,858
Operating Loss ...................... (413) (400)
CHEMWAY
Revenue ............................. 2,269 4,518
Operating Loss ...................... (1,001) (482)
TOTAL
Revenue ............................. $ 55,638 $ 72,376
Operating Loss ...................... (1,414) (882)
(1) Includes the parent company
The Company's net losses for the six months ended March 31, 1998 and 1997 were
$2,140,000 and $1,208,000, respectively. The increased net loss was primarily
attributable to the increased losses in ChemWay and the convenience stores
offset by increased income in the petroleum marketing segment, as discussed
below.
ESI's consolidated revenues from continuing operations for the six months ended
March 31, 1998, were $53,369,000, as compared to $67,858,000 during the
comparable period ending March 31, 1997. The $14,489,000 (21.4%) six month
decrease in this year's revenues was primarily attributable to a $11,380,000
decrease in petroleum marketing revenues and a $3,036,000 decrease in
convenience store revenues.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CONTINUED
ESI's consolidated gross profit from continuing operations for the six months
ended March 31, 1998 was $7,972,000 (14.9%), as compared to $8,324,000 (12.3%)
for the six months ended March 31, 1997. The Company recognized additional gross
profit of $434,000 in the second quarter of the current fiscal year reflecting
the anticipated refund of certain excise taxes which were previously overpaid.
Of the $434,000, $293,000 was attributable to periods prior to September 30,
1997. The Company's gross profit in the quarter ended March 31, 1998 was 13.8%
of sales before the excise tax credit.
The Company's operating expenses were $8,385,000 in the six months ended March
31, 1998, as compared to $8,724,000 in the six months ended March 31, 1997. The
Company's operating expenses were 15.7% of revenues in the six months ended
March 31, 1998 and 12.9% in the six months ended March 31, 1997. 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 $36,702,000 in the six months ended
March 31, 1998, as compared to $48,082,000 in the six months ended March 31,
1997, a $11,380,000 (23.7%) decrease. Fuel sales gallonage were 35,583,000
gallons in the six months ended March 31, 1998, as compared to 42,309,000 in the
six months ended March 31, 1997, a 6,726,000 (15.9%) decrease. Gross profits for
the six months ended March 31, 1998 and 1997 were $4,219,000 and $3,907,000
respectively. Gross Margin increased to 11.5% in the six months ended March 31,
1998, as compared to 8.1% in the six months ended March 31, 1997. The Company
recognized additional gross profit of $434,000 in the second quarter of the
current fiscal year due to the anticipated refund of certain excise taxes as
discussed above. Gross Margin in the petroleum marketing segment was 10.7% of
sales in the six month period ending March 31, 1998 before the excise tax
credit. Operating expenses decreased $102,000 in the six months ended March 31,
1998, as compared to the six months ended March 31, 1997. Operating expenses
were 10.9% of revenues in the six months ended March 31, 1998, and 8.5% in the
six months ended March 31, 1997. Certain expenses of ESI, the parent company,
are included in the petroleum marketing results. Operating income was $219,000
in the six months ended March 31, 1998, as compared to an operating loss of
$195,000 in the six months ended March 31, 1997. The increase in operating
income was primarily due to the recognition of gross profit related to the
overpayment excise taxes of $434,000, other increased gross profit and to the
decreased operating expenses.
During the first fiscal quarter of 1998, the Company's supply agreement with the
primary fuel supplier to the Company's Bay City terminal facility was
terminated. 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.
The Company further reduced its staff in February 1998.
CONVENIENCE STORES
The Company operated 34 stores at the beginning of the six month period and sold
5 stores during the current fiscal quarter, ending the six months with 29 stores
compared with 39 stores in the six month ended March 31, 1997.
The convenience store segment sales were $16,046,000 in the six months ending
March 31, 1998, as compared to $19,082,000 in the six months ended March 31,
1997, a $3,036,000 (15.9%) decrease. Fuel sales decreased to $8,998,000 in the
six months ended March 31, 1998, as compared to $11,295,000 in the six months
ended
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- CONTINUED
March 31, 1997. Fuel sales gallonage decreased to 8,003,000 gallons in the six
months ended March 31, 1998, as compared to 9,893,000 in the six months ended
March 31, 1997, a 1,890,000 (19.1%) decrease. Merchandise sales decreased to
$6,667,000 in the six months ended March 31, 1998, as compared to $7,198,000 in
the six months ended March 31, 1997 and other income decreased to $381,000 in
the six months ended March 31, 1998, as compared to $589,000 in the six months
ended March 31, 1997. Management attributes the decrease in sales to operating a
weighted average of 16.5% fewer stores for the current six month period.
Gross profit for the six month period ended March 31, 1998 and 1997 were
$3,418,000 and $3,930,000 respectively. Gross Margin increased to 21.3% in the
six months ended March 31, 1998, as compared to 20.4% in the six months ended
March 31, 1997. Management attributes the increase in gross profit margins
mainly to divesting of lower margin stores during fiscal 1997 and fiscal 1998.
Operating expenses were $3,990,000 in the six months ended March 31, 1998
compared to $4,195,000 in the six months ended March 31, 1997. Operating losses
were $572,000 during the six months ended March 31, 1998, as compared to losses
of $264,000 during the six months ended March 31, 1997.
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 sold five under performing stores in
February 1998, and has announced that it intends to sell or close four stores in
May 1998.
EDCO ENVIRONMENTAL
EDCO Environmental sales were $621,000 in the six months ended March 31, 1998 as
compared to $694,000 in the six months ended March 31, 1997, a $73,000 (10.5%)
decrease. Gross profits for the six month periods ended March 31, 1998, and 1997
were $335,000 and $488,000 respectively. Gross profit margins decreased to 54.0%
in the six months ended March 31, 1998, as compared to 70.3% in the six months
ended March 31, 1997.
EDCO's operating expenses decreased $34,000 in the six months ended March 31,
1998, as compared to the six months ended March 31, 1997. The decrease was
mainly attributable to the transfer of EDCO's service department to the
petroleum marketing segment. Operating losses were $60,000 in the six months
ended March 31, 1998, as compared to an operating income of $59,000 for the six
months ending March 31, 1997. Operating income declined due to lower sales and
Gross Margin, partially offset by reduced operating expenses.
CHEMWAY
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which ESI will sell 80% of the issued and outstanding shares of capital stock of
its wholly owned subsidiary, ChemWay Systems, Inc. ESI will dividend its
remaining interest to its shareholders. There can be no assurance that a
definitive agreement will be entered into or that this transaction will be
successfully consummated.
ChemWay sales were $2,269,000 in the six months ended March 31, 1998, as
compared to $4,518,000 in the six months ended March 31, 1997. In the first
quarter of fiscal 1997, the aerosol production line was out of
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- CONTINUED
service in late November through December for complete refurbishing. Gross
profit for the six month periods ended March 31, 1998 and 1997 were $80,000 and
$734,000 respectively. Gross profit margins decreased to 3.5% for the six months
ended March 31, 1998, as compared to 16.2% for the six months ended March 31,
1997. Gross profit decreased due to the liquidation of inventory at prices below
cost. Operating expense decreased $136,000 in the six months ended March 31,
1998, as compared to the six months ended March 31, 1997. Operating losses were
$1,001,000 for the six months ended March 31, 1998, as compared to losses of
$484,000 in the six months ended March 31, 1997. Because of the ongoing
operating losses of ChemWay, on May 12, 1998 the Company's Board of Directors
determined that the Company would dispose of ChemWay.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $1,063,000 as of March 31, 1998, as compared to
$1,297,000 at September 30, 1997. Working capital deficit was $6,087,000 as of
March 31, 1998, an increase from $1,692,000 as of September 30, 1997. The net
decrease in working capital was primarily attributable to an increase in the
current portion of long term debt of $2,588,000, a decrease in inventories of
$2,085,000, the loss provision for ChemWay of $1,100,000, a decrease in
receivables of $961,000 offset by a decrease in accounts payable of $2,900,000.
Cash used by continuing operations was $1,834,000 for the six months ended March
31, 1998, as compared to cash provided by continuing operations of $1,456,000
for the six months ended March 31, 1997. ESI's current ratio, the ratio of
current assets to current liability, was .65 at March 31, 1998 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, December 31, 1997, and March 31, 1998 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 waived these
covenant defaults at September 30, 1997 but not at March 31, 1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it has thirty days to cure the defaults and if the defaults are not cured within
that time, the bank will accelerate the maturity of the notes to be immediately
due and payable. These notes total $1,525,000 and are secured by certain of the
Company's convenience stores.
The bank where the Company is out of compliance with the borrowing base limits
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 of April 30, 1998. The bank subsequently extended the
maturity date to June 30, 1998.
The Company and a New York based lender are in negotiations for an $11,000,000
credit facility to replace its current lines of credit. There can be no
assurance that these negotiations will be successful.
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. On February 13, 1998, the Company
suspended further production activities at its ChemWay operation. The Company
and an unrelated party entered into a Letter of Intent to enter into a stock
purchase agreement pursuant to which ESI will sell 80% of the issued and
outstanding shares of capital stock of its wholly owned subsidiary, ChemWay
Systems, Inc. ESI will dividend its remaining interest to its shareholders.
There can be no assurance that a definitive agreement will be entered into or
that this transaction will be successfully consummated.
14
<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: May 14, 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
15
<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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,063
<SECURITIES> 0
<RECEIVABLES> 3,456
<ALLOWANCES> 301
<INVENTORY> 4,369
<CURRENT-ASSETS> 11,355
<PP&E> 20,869
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,720
<CURRENT-LIABILITIES> 17,442
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 13,777
<TOTAL-LIABILITY-AND-EQUITY> 34,720
<SALES> 53,369
<TOTAL-REVENUES> 53,369
<CGS> 45,397
<TOTAL-COSTS> 8,385
<OTHER-EXPENSES> (69)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> (950)
<INCOME-TAX> (343)
<INCOME-CONTINUING> (607)
<DISCONTINUED> (1,533)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,140)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
