As filed with the Securities and Exchange Commission on August 14, 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 JUNE 30, 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 exclusive of
Treasury:
Shares or shares held by subsidiaries of the registrant at August 14, 1998:
3,190,984
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheet
June 30, 1998 and September 30, 1997 3
Condensed Consolidated Statement of Income
Three Months Ended June 30, 1998 and 1997 and
Nine Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended June 30, 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 17
B. Reports on Form 8-K 17
Signature 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, September
1998 30, 1997
-------- --------
(in thousands)
Current Assets:
Cash and cash equivalents ........................... $ 1,663 $ 1,297
Trade receivables, net of allowance of
doubtful
receivables of $475,000 and $340,000 ................... 3,205 4,584
Inventory ........................................... 4,445 7,962
Income taxes receivable ............................. 310 310
Prepaid expenses and other current assets ........... 306 618
Deferred income taxes ............................... 191 191
Current assets of ChemWay ........................... 1,310
-------- --------
Total current assets ......................... 11,430 14,962
Property, plant and equipment, net ..................... 17,986 21,610
Other assets ........................................... 879 1,035
Deferred income taxes .................................. 1,732 397
Non-current assets of ChemWay .......................... 2,423
-------- --------
Total assets ................................. $ 34,450 $ 38,004
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............... $ 4,385 $ 8,474
Accrued excise and other taxes payable .............. 364 343
Provision for loss on disposition of
discontinued operation ................................. 1,100
Current portion of long-term debt ................... 8,541 7,837
Current liabilities of ChemWay ...................... 1,853
-------- --------
Total current liabilities .................... 16,243 16,654
Long-term debt ......................................... 4,856 5,401
Non-current liabilities of ChemWay
-------- --------
Total liabilities ............................ 21,099 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 ................................... 1,456 4,054
Treasury stock, 72,589 common shares, at cost ....... (434) (434)
-------- --------
Total stockholders' equity ................... 13,351 15,949
-------- --------
Total liabilities and stockholders' equity ... $ 34,450 $ 38,004
======== ========
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 June 30, Nine Months Ended June 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Refined product sales .................... $ 21,925 $ 29,926 $ 66,760 $ 88,427
Other sales and services ................. 4,528 4,947 13,062 14,304
-------- -------- -------- ---------
Total revenue ........................ 26,453 34,873 79,822 102,731
Cost of sales ............................ 22,989 30,657 68,386 90,192
-------- -------- -------- ---------
Gross profit ............................. 3,464 4,216 11,436 12,539
-------- -------- -------- ---------
Operating expenses:
Employment expenses .................... 1,795 2,169 6,105 6,653
Other operating expenses ............... 751 920 2,540 2,747
General & administrative
expenses ......................... 771 873 2,165 2,436
Depreciation and
amortization ............................. 456 528 1,426 1,377
-------- -------- -------- ---------
Total operating expenses ............. 3,773 4,490 12,236 13,213
-------- -------- -------- ---------
Operating income (loss) .................. (309) (274) (800) (674)
Other income (expense):
Interest expense ....................... (160) (168) (604) (620)
Other, net ............................. 143 60 128 (374)
-------- -------- -------- ---------
Loss before benefit from income taxes .... (326) (382) (1,276) (1,668)
Benefit from income taxes ................ 112 132 455 584
-------- -------- -------- ---------
Loss from continuing operations .......... (214) (250) (821) (1,084)
Discontinued operations:
Loss from discontinued operations of
ChemWay, net of tax benefit ............. (242) (283) (1,070) (657)
Loss on disposal of ChemWay, including
provision for losses of $200,000 during
the phase out period, net of tax benefit (705)
-------- -------- -------- ---------
Net loss ................................. $ (456) $ (533) $ (2,596) $ (1,741)
======== ======== ======== =========
Basic and diluted loss per share:
Continuing operations .................. $ (.07) $ (.08) $ (.26) $ (.35)
Loss from discontinued operations
of ChemWay ............................ (.08) (.09) (.35) (.21)
Loss on disposal of ChemWay ............ (.23)
-------- -------- -------- ---------
Net loss ............................... $ (.15) $ (0.17) $ (0.84) $ (0.56)
======== ======== ======== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
-------------------
1998 1997
------- -------
(in thousands)
Cash flows from operating activities:
Loss from continuing operations .................. $ (821) $(1,084)
Non-cash adjustments:
Depreciation and amortization .............. 1,426 1,377
(Gain) on disposition of fixed assets ..... (150)
Deferred income taxes ...................... (455) (584)
Loss on reclassification of securities ..... 375
Changes in:
Current assets ......................... 1,231 (1,594)
Current liabilities .................... (1,073) 1,860
------- -------
Net cash provided (used)
by operating activities ............... 158 350
------- -------
Cash flows from investing activities:
Capital expenditures ............................. (1,769) (1,881)
Proceeds from sale of property and
equipment ....................................... 1,236 --
Other, net ....................................... (75) (627)
------- -------
Net cash used by
investing activities ................. (608) (2,508)
------- -------
Cash flows from financing activities:
Notes payable, net ............................... 159 688
Deferred revenue ................................. -- 76
Issuance of Common Stock ......................... -- 165
------- -------
Net cash provided (used)
by financing activities ............... 159 929
------- -------
Net cash provided (used) by continuing
operations ........................................... (291) (1,229)
Net cash provided (used) by discontinued
operation ............................................ 657 (750)
------- -------
Net increase (decrease) in cash ........................ 366 (1,979)
Cash and cash equivalents, beginning of
period ............................................... 1,297 4,392
------- -------
Cash and cash equivalents, end of period ............... $ 1,663 $ 2,413
======= =======
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 nine month period ended June 30,
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") would have sold 80% of the issued and
outstanding shares of capital stock of its wholly owned subsidiary, ChemWay
Systems, Inc. ESI would have then dividended its remaining interest to its
shareholders. The Company and the unrelated party were unable to reach a
definitive agreement, however, and the proposed transaction did not close. 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
is continuing to seek a purchaser or joint-venture partner for its Chemway
operation.
The Company recognized gross profit of $434,000 in the second quarter of the
current fiscal year related to the 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, March 31, 1998, and June 30, 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 June 30,
1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it had thirty days to cure the defaults and if the defaults are not cured within
that time, the bank intended to accelerate the maturity of the notes to be
immediately due and payable. These notes total $1,450,000 and are secured by
certain of the Company's convenience stores. The Company has secured a
standstill agreement with this bank, pursuant to which the bank will forbear the
acceleration of its loans until October 30, 1998.
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 September 30, 1998.
The Company has received letters of commitment from a lender, who intends to
provide term financing of $12 million. The proposed financing will be secured by
certain real-estate and equipment assets, and will bear a floating interest
rate. The proposed repayment term of the loans would be 20 years for loans
secured by real-estate, and 15 years for equipment loans. The commitment is
subject to a number of conditions, including but not limited to satisfactory
appraised values and environmental assessments of the assets to be pledged as
collateral. The Company has hired an independent appraiser and environmental
professionals, and the lender is presently conducting its due diligence
examination; there can be no assurance, however, that the proposed loans will be
closed. The loan proceeds would be used to retire the Company's existing senior
bank debt.
The Company has also signed a letter of interest with an asset-based lender who
has proposed to provide up to $8 million in revolving loans, secured by certain
of the Company's accounts receivable and inventory assets. Proceeds of the
revolving loans would be used for working capital and general corporate
purposes. The lender is presently conducting its due diligence examination,
however, and there can be no assurance that the proposed loan will close.
NOTE D -- COMMON STOCK
On June 1, 1998, the Company's Board of Directors voted to issue warrants to
purchase 100,000 shares of ESI's common stock to a consultant, in exchange for
certain consulting services. Proceeds from the warrants will be utilized for
working capital purposes. On July 30, 1998 the Company filed a registration
statement on Form S-8 with the Securities and Exchange Commission pursuant to
such warrants. On June 1, 1998 the Company's Board of Directors also authorized
the Company to issue 350,000 shares of ESI common stock in a private offering
under Regulation D.
NOTE E -- BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the quarters ended June 30, 1998 and June
30, 1997 were computed using 3,090,984 and 3,090,939 weighted average common
shares. Basic and diluted loss per share for the nine months ended June 30, 1998
and June 30, 1997 were computed using 3,090,984 and 3,069,291 weighted average
common shares.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 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 June 30, 1998 and
1997. This is the third fiscal quarter of ESI's fiscal year which begins on
October 1st and ends on September 30th.
Three Months Three Months
Ended Ended
JUNE 30, 1998 JUNE 30, 1997
-------- --------
(in thousands) (in thousands)
PETROLEUM MARKETING(1)
Revenue ..................................... $ 17,547 $ 24,593
Operating Income (Loss) ..................... (375) (201)
CONVENIENCE STORES
Revenue ..................................... 8,586 10,056
Operating Income (Loss) ..................... 5 (65)
EDCO ENVIRONMENTAL
Revenue ..................................... 320 224
Operating Income (Loss) ..................... 61 (8)
TOTAL FROM CONTINUING OPERATIONS
Revenue ..................................... $ 26,453 $ 34,873
Operating Income (Loss) ..................... (309) (274)
CHEMWAY (DISCONTINUED
OPERATION)
Revenue ..................................... 264 3,263
Operating Loss .............................. (320) (320)
TOTAL
Revenue ..................................... $ 26,717 $ 38,136
Operating Loss .............................. (629) (594)
(1) Includes the parent company
During the first quarter of 1998, the Company implemented its turnaround
strategy: to identify and dispose of underperforming assets, to focus on the
Company's core businesses of petroleum marketing and convenience store
retailing, and to reduce the Company's operating expenses. During the second
fiscal quarter, the Company identified the Chemway segment for disposition, and
sold five underperforming convenience stores. Subsequent to the end of the third
quarter, the Company has sold an additional three convenience stores.
Additionally, the Company has identified and has begun the process of selling
its investment in certain of its "special purpose lease" customers, served by
the petroleum marketing segment. In October 1997, management began a program to
reduce its operating expenses, including the termination of certain nonessential
staff. The Company further reduced its staff in February 1998.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
The accompanying financial statements have been restated to reflect the
designation of the Chemway segment as a discontinued operation. Losses in
Chemway during the quarter ended June 30, 1998 were $41,000 less than in the
quarter ended June 30, 1997, primarily as a result of the Company's decision to
cease production activities at Chemway in February 1998.
The Company's loss from continuing operations in the quarter ended June 30, 1998
declined $36,000 as compared with the quarter ended June 30, 1997. Total sales
revenues declined $8,420,000, mainly in the petroleum marketing and convenience
store segments, but the effect was partially offset by improved overall gross
margins and the effects of the Company's expense reduction programs.
PETROLEUM MARKETING
The petroleum marketing segment sales were $17,547,000 in the quarter ended June
30, 1998, as compared to $24,593,000 in the quarter ended June 30, 1997, a
decrease of $7,046,000 or approximately 20%. Sales at the Company's fuel
terminal facility, located at the Port of Bay City, Texas, declined
approximately $2,746,000 during the quarter ended June 30, 1998, as compared
with the comparable previous year quarter. 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
negotiating with another supplier, however there can be no assurance whether or
when the terminal facility will be supplied with fuel. Additionally, the Company
has implemented a program to identify and discontinue serving some of its
lower-volume customers. Fuel sales in gallons were 16,417,000 gallons in the
quarter ended June 30, 1998, as compared to 23,294,000 in the quarter ended June
30, 1997, a decline of 6,877,000 gallons or approximately 29%. Average sales
revenue per gallon was comparable in the two comparable fiscal quarters.
Gross profits for the quarters ended June 30, 1998 and 1997 were $1,452,000 and
$1,988,000 respectively, primarily as a result of the lower sales in the 1998
quarter, discussed above. Gross profit expressed as a percent of sales ("Gross
Margin") declined to 8.3% in the quarter ended June 30, 1998, as compared to
8.5% in the quarter ended June 30, 1997. The reduction in Gross Margin was
primarily due to increased competitive activity in the Company's trade areas.
The Company has adopted a more aggressive pricing structure in certain of its
markets, particularly where other retailers such as grocery chains and
mass-market discount retailers have begun selling gasoline.
Operating expenses decreased $342,000 or approximately 16% in the quarter ended
June 30, 1998, as compared to the quarter ended June 30, 1997, primarily as a
result of the Company's expense reduction program, discussed above. Operating
expenses were 10.5% of revenues in the quarter ended June 30, 1998, and 8.9% in
the quarter ended June 30, 1997; the difference is primarily due to the lower
sales volumes in the current year period, discussed above. Certain expenses of
ESI, the parent company, are included in the petroleum marketing results.
The Petroleum Marketing segment incurred an operating loss of ($375,000) in the
quarter ended June 30, 1998, as compared to a loss of ($201,000) in the quarter
ended June 30, 1997. The increase in operating loss is primarily due to the
lower sales volumes and resultant gross profits during the current year period,
partially offset by reduced operating expenses.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS- CONTINUED
CONVENIENCE STORES
Since early in the current year, the Company has been repositioning its
investment in convenience store assets, by selling underperforming locations.
The Company operated 29 stores at the beginning of the quarter as compared with
39 stores in the quarter ended June 30, 1997. During the fourth fiscal quarter
of 1998, the Company has sold three more underperforming stores. During the
third fiscal quarter of 1998, the Company adopted a more aggressive pricing
structure, featuring more competitive gasoline prices with the intent of
increasing customer traffic and increasing sales of higher-margin convenience
and food items. The Company also further reduced its staff during the quarter
ended June 30, 1998.
Average total sales per store increased during the quarter ended June 30, 1998
to approximately $305,000 per store as compared with approximately $258,000 in
the quarter ended June 30, 1997, an increase of sales per store of approximately
18.2%. The convenience store segment sales were $8,856,000 in the quarter ending
June 30, 1998, as compared to $10,056,000 in the quarter ended June 30, 1997, a
$1,200,000 (11.9%) decrease. The decrease in total sales is attributable to the
fewer number of stores operating during the current fiscal quarter.
Average fuel sales per store increased during the quarter ended June 30, 1998 to
approximately $163,000 per store as compared with approximately $146,000 per
store in the quarter ended June 30, 1997, an increase of average fuel sales per
store of approximately 11.6%. Fuel sales decreased to $4,716,000 in the quarter
ended June 30, 1998, as compared to $5,679,000 in the quarter ended June 30,
1997, primarily as a result of the fewer number of operating stores during the
current fiscal year period. Fuel sales gallonage increased to 4,744,000 gallons
in the quarter ended June 30, 1998, as compared to 4,715,000 in the quarter
ended June 30, 1997. Average fuel gallons per store, however, increased
approximately 35% to approximately 164,000 in the quarter ended June 30, 1998,
as compared with approximately 121,000 gallons in the quarter ended June 30,
1997. The increase in fuel volume per store is attributable to the Company's
more aggressive retail fuel pricing strategy during the current year period.
Average merchandise sales per store increased during the quarter ended June 30,
1998 to approximately $123,000 as compared with approximately $113,000 during
the quarter ended June 30, 1997, an increase in average merchandise sales per
store of approximately 8.9%. The increase is primarily as a result of the
closing of underperforming stores, and to the Company's more aggressive fuel
pricing strategy, discussed above. Total merchandise sales decreased to
$3,569,000 in the quarter ended June 30, 1998, as compared to $4,411,000 in the
quarter ended June 30, 1997, primarily due to the fewer number of operating
stores during the current fiscal year period.
Gross profits for the quarters ended June 30, 1998 and 1997 were $1,781,000 and
$2,057,000 respectively. Gross Margin increased to 20.7% in the quarter ended
June 30, 1998, as compared to 20.5% in the quarter ended June 30, 1997.
Management attributes the increase in gross profit margins to divesting of lower
margin stores during fiscal 1997 and fiscal 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS- CONTINUED
Average operating expenses per store increased during the quarter ended June 30,
1998 to approximately $61,000 as compared with approximately $54,000 during the
quarter ended June 30, 1997, an increase in average operating expenses per store
of approximately 13%. The average operating expense per store increased
primarily as a result of the Company's closing of underperforming stores: the
stores which have been closed were smaller stores which, although less costly to
operate, did not have amenities such as food service departments. Total
operating expenses of $1,776,000 in the quarter ended June 30, 1998 decreased
approximately 16% from $2,122,000 in the quarter ended June 30, 1997, reflecting
the fewer number of operating stores during the current year period, as well as
the effects of the cost reductions which were implemented during the first
fiscal quarter of 1998 (see discussion on the Nine Months Ended June 30, 1998
and 1997, below.)
The Convenience Store Segment generated an operating profit of $5,000 during the
quarter ended June 30, 1998, as compared to a loss of $65,000 during the quarter
ended June 30, 1997. The improvement is primarily due to the reduction in
operating expenses, and to the improvement in gross margins.
EDCO ENVIRONMENTAL
EDCO Environmental management have focused attention on increasing sales by
seeking outside business, and reducing operating expenses. EDCO Environmental
sales were $320,000 in the quarter ended June 30, 1998 as compared to $224,000
in the quarter ended June 30, 1997, a $96,000 (43%) increase. Gross profits for
the quarters ended June 30, 1998, and 1997 were $211,000 and $169,000
respectively. Gross profit margins decreased to 65.9% of sales in the quarter
ended June 30, 1998, as compared to 75.4% of sales in the quarter ended June 30,
1997.
EDCO's operating expenses decreased $27,000, or approximately 15%, in the
quarter ended June 30, 1998, as compared to the quarter ended June 30, 1997,
reflecting improved expense controls and staff reductions. EDCO Environmental
reported an operating income of $61,000 during the quarter ended June 30, 1998,
as compared to an operating loss of ($8,000) during the quarter ended June 30,
1997. The improvement in operating results was due to the increase in sales, and
the reduced operating expenses, as compared with the comparable prior year
period.
CHEMWAY
On February 13, 1998, the Company suspended production activities at its ChemWay
operation. 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.
Chemway's sales during the quarter ended June 30, 1998 were $264,000, primarily
resulting from the disposition of remaining inventory, and some private-label
packaging activities. Sales in the comparable 1997 fiscal quarter were
$3,263,000. Chemway incurred an operating loss of ($331,000) during the quarter
ended June 30, 1998, as compared with an operating loss of ($320,000) in the
quarter ended June 30, 1997.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
The following table reflects the operating results of Evans Systems, Inc.
business segments for the nine months ended June 30, 1998 and 1997.
Nine Months Nine Months
Ended Ended
JUNE 30, 1998 JUNE 30, 1997
(in thousands) (in thousands)
-------- ---------
PETROLEUM MARKETING(1)
Revenue ................................. $ 54,249 $ 72,675
Operating Income (Loss) ................. (156) (397)
CONVENIENCE STORES
Revenue ................................. 24,632 29,138
Operating Loss .......................... (567) (328)
EDCO ENVIRONMENTAL
Revenue ................................. 941 918
Operating Income (Loss) ................. 1 51
TOTAL FROM CONTINUING
OPERATIONS
Revenue ................................. $ 79,822 $ 102,731
Operating Loss .......................... (722) (674)
CHEMWAY
Revenue ................................. 2,532 7,781
Operating Loss .......................... (1,321) (802)
TOTAL
Revenue ................................. $ 82,355 $ 110,512
Operating Loss .......................... (2,043) (1,476)
(1) Includes the parent company
Loss from continuing operations decreased $263,000 in the nine months ended June
30, 1998, as compared with the nine months ended June 30, 1997. The decreased
loss was primarily due to reduced operating expenses and improved gross margins
in the convenience store segment, partially offset by lower sales revenues and
resultant gross profits, particularly in the petroleum marketing and convenience
store segments.
Operating losses of Chemway, whose production activities were discontinued in
February 1998, increased $519,000 in the nine months ended June 30, 1998, as
compared with the nine months ended June 30, 1998; the increased losses
primarily occurred during the first and second quarters, prior to Management's
decision to discontinue production activities.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
PETROLEUM MARKETING
The petroleum marketing segment sales in the nine months ended June 30, 1998
declined $18,426,000 or approximately 25% as compared to the nine months ended
June 30, 1997. The decline in sales revenues is primarily due to the reduced
volume in gallons, and to the lower average sales prices per gallon which were
prevalent through the fiscal 1998 period. Fuel sales in gallons were 52,000,000
gallons in the nine months ended June 30, 1998, as compared to 65,604,000 in the
nine months ended June 30, 1997, a decrease of 13,604,000 gallons or
approximately 21%, primarily as a result of substantially reduced fuel sales by
the Company's terminal facility. 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 negotiating with
a prospective new supplier for the terminal, however there can be no assurance
as to whether or when such an arrangement will be reached.
Gross profits for the nine months ended June 30, 1998 and 1997 were $5,691,000
and $5,895,000 respectively. Gross Margin increased to 10.5% in the nine months
ended June 30, 1998, as compared to 8.1% in the nine months ended June 30, 1997.
The Company recognized additional gross profit of $434,000 in the second quarter
of the current fiscal year due to the refund of certain excise taxes, which had
previously been overpaid. Operating expenses declined $445,000 or approximately
7% in the nine months ended June 30, 1998 as compared with the nine months ended
June 30, 1997, primarily as a result of the Company's expense reduction program.
Expressed as a percentage of sales, however, operating expenses were 11% of
revenues in the nine months ended June 30, 1998, and 9% in the nine months ended
June 30, 1997. Certain expenses of ESI, the parent company, are included in the
petroleum marketing results. 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.
An operating loss of $156,000 in the nine months ended June 30, 1998, as
compared to an operating loss of $397,000 in the nine months ended June 30, 1997
is primarily due to reduced operating expenses and the excise tax refund,
partially offset by lower sales volumes during the fiscal 1998 period.
CONVENIENCE STORES
The Company operated 34 stores at the beginning of the nine month period and
sold five stores during the second fiscal quarter, ending the nine months with
29 stores compared with 39 stores in the nine months ended June 30, 1997. The
Company has subsequently sold another three stores during the fourth fiscal
quarter of 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS- CONTINUED
The convenience store segment sales were $24,632,000 in the nine months ending
June 30, 1998, as compared to $29,138,000 in the nine months ended June 30,
1997, a decline of $4,506,000 or approximately 15.5%. Fuel sales decreased to
$13,647,000 in the nine months ended June 30, 1998, as compared to $16,929,000
in the nine months ended June 30, 1997. Fuel sales in gallons decreased to
12,747,000 gallons in the nine months ended June 30, 1998, as compared to
14,608,000 in the nine months ended June 30, 1997, a decline of 1,861,000
gallons, or approximately 12.7%. Merchandise sales decreased to $10,236,000 in
the nine months ended June 30, 1998, as compared to $11,774,000 in the nine
months ended June 30, 1997. Other income increased to $663,000 in the nine
months ended June 30, 1998, as compared to $435,000 in the nine months ended
June 30, 1997. Management attributes the decrease in sales to the fewer number
of operating stores during the fiscal 1998 period.
Gross profits for the nine month periods ended June 30, 1998 and 1997 were
$5,199,000 and $5,986,000 respectively. Gross Margin increased to 21.1% in the
nine months ended June 30, 1998, as compared to 20.5% in the nine months ended
June 30, 1997. Management attributes the increase in gross profit margins mainly
to divesting of lower margin stores during fiscal 1997 and fiscal 1998, and to
the Company's improved Sales Mix during the current year period (see discussion
for three month period, above.)
Operating expenses were $5,583,000 in the nine months ended June 30, 1998
compared to $6,315,000 in the nine months ended June 30, 1997. The decline is
primarily due to the fewer number of operating stores during the fiscal 1998
period, and to operating staff reductions made during the first and second
quarters of 1998.
Operating losses were $384,000 during the nine months ended June 30, 1998, as
compared to losses of $328,000 during the nine months ended June 30, 1997. The
increased loss in the 1998 period primarily arose during the first and second
quarters, and was partially offset by an operating profit during the third
fiscal quarter of 1998.
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 subsequently sold another four stores during the fourth
fiscal quarter.
EDCO ENVIRONMENTAL
EDCO Environmental sales were comparable in the two comparable nine month
periods. Operating income as $50,000 lower in the nine months ended June 30,
1998, as compared with the nine months ended June 30, 1997; the variance
occurred during the first and second quarters of 1998, and was partially offset
by improved operating results in the third quarter of 1998. See discussion for
the three month period ended June 30, 1998, above.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS- CONTINUED
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 would have sold 80% of the issued and outstanding shares of capital
stock of its wholly owned subsidiary, ChemWay Systems, Inc. ESI would have then
dividended its remaining interest to its shareholders. The Company and the
unrelated party were unable to reach a definitive agreement, however, and the
proposed transaction did not close. 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 is continuing to seek a purchaser or
joint-venture partner for its Chemway operation.
Chemway sales during the nine months ended June 30, 1998 were $2,532,000 as
compared with $7,781,000 during the nine months ended June 30, 1997. In the
first quarter of fiscal 1997, the aerosol production line was out of service in
late November through December for complete refurbishing. Sales during the
fiscal 1998 period were affected by the Company's inability to purchase raw
materials, see "liquidity and capital resources" discussion, below.
Gross profit for the nine month periods ended June 30, 1998 and 1997 were
$55,000 and $1,150,000 respectively. Gross profit margins declined primarily as
a result of the liquidation of inventory at prices below original cost.
Operating expenses decreased $696,000 in the nine months ended June 30, 1998, as
compared to the nine months ended June 30, 1997, primarily as a result of the
shutdown of the production facility in February 1998. Operating losses were
$1256,000 for the nine months ended June 30, 1998, as compared to losses of
$802,000 in the nine months ended June 30, 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 $1,663,000 as of June 30, 1998, as compared to
$1,297,000 at September 30, 1997. The Company had a working capital deficit of
4,863,000 as of June 30, 1998, as compared with a working capital deficit of
$1,692,000 as of September 30, 1997. The working capital deficit is due to the
reclassification of a substantial portion of the Company's debts as a current
liability, as a result of the Company's ongoing defaults under certain of its
borrowing agreements.
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, March 31, 1998, and June 30, 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 June 30,
1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it had thirty days to cure the defaults and if the defaults are not cured within
that time, the bank intended to accelerate the maturity of the notes to be
immediately due and payable. These notes total $1,450,000 and are secured by
certain of the Company's convenience stores. The Company has secured a
standstill agreement with this bank, pursuant to which the bank will forbear the
acceleration of its loans until October 30, 1998.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS- CONTINUED
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 September 30, 1998.
The Company has received letters of commitment from a lender, who intends to
provide term financing of $12 million. The proposed financing will be secured by
certain real-estate and equipment assets, and will bear a floating interest
rate. The proposed repayment term of the loans would be 20 years for loans
secured by real-estate, and 15 years for equipment loans. The commitment is
subject to a number of conditions, including but not limited to satisfactory
appraised values and environmental assessments of the assets to be pledged as
collateral. The Company has hired independent appraiser and environmental
professionals, and the lender is conducting its due diligence examination; there
can be no assurance, however, that the proposed loans will be closed. The loan
proceeds would be used to retire the Company's existing senior bank debt. The
Company has also signed a letter of interest with an asset-based lender who has
proposed to provide up to $8 million in revolving loans, secured by certain of
the Company's accounts receivable and inventory assets. Proceeds of the
revolving loans would be used for working capital and general corporate
purposes. The lender is presently conducting its due diligence examination,
however, and there can be no assurance that the proposed loan will close.
Cash provided by operating activities was $122,000 during the nine months ended
June 30, 1998, as compared to cash provided by continuing operations of $350,000
for the nine months ended June 30, 1997. The decline in cash provided by
continuing operations is primarily due to the reduction of trade payables during
the current fiscal year, partially offset by reduced accounts receivable and
inventory balances, and by a reduced operating loss during the current fiscal
year.
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 would have sold 80% of the issued and
outstanding shares of capital stock of its wholly owned subsidiary, ChemWay
Systems, Inc. Pursuant to the letter agreement, ESI would then dividend its
remaining interest to its shareholders. The Company and the third party were
unable to reach a definitive agreement, however, and the transaction did not
close. The Company is continuing to seek a purchaser or joint-venture partner
for Chemway, however there can be no assurance that one will be found.
On June 1, 1998, the Company's Board of Directors voted to issue warrants to
purchase 100,000 shares of ESI's common stock to a consultant, in exchange for
certain consulting services. Proceeds from the warrants will be utilized for
working capital purposes. On July 30, 1998 the Company filed a registration
statement on Form S-8 with the Securities and Exchange Commission pursuant to
such warrants. On June 1, 1998 the Company's Board of Directors also authorized
the Company to issue 350,000 shares of ESI common stock in a private offering
under Regulation D.
16
<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: August 14, 1998 By: /S/RICHARD A. GOEGGEL
Richard A. Goeggel
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
17
<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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,663
<SECURITIES> 0
<RECEIVABLES> 3,205
<ALLOWANCES> 475
<INVENTORY> 4,445
<CURRENT-ASSETS> 11,430
<PP&E> 20,409
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,630
<CURRENT-LIABILITIES> 34,469
<BONDS> 16,293
0
0
<COMMON> 0
<OTHER-SE> 32
<TOTAL-LIABILITY-AND-EQUITY> 13,288
<SALES> 34,469
<TOTAL-REVENUES> 79,822
<CGS> 79,822
<TOTAL-COSTS> 68,436
<OTHER-EXPENSES> 12,236
<LOSS-PROVISION> (128)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 640
<INCOME-TAX> (1,326)
<INCOME-CONTINUING> (474)
<DISCONTINUED> (852)
<EXTRAORDINARY> (1,070)
<CHANGES> 0
<NET-INCOME> (2,627)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.69)
</TABLE>
