EVANS SYSTEMS INC
10-Q, 1999-02-16
PETROLEUM BULK STATIONS & TERMINALS
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       AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 1999

- --------------------------------------------------------------------------------


                                  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, 1998

      [ ]   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, 1999:
3,932,940.

<PAGE>
                             EVANS SYSTEMS, INC.

                                    INDEX


PART I.     FINANCIAL INFORMATION

      Financial Statements (Unaudited)                            Page Number
            Condensed Consolidated Balance Sheet as of
            December 31, 1998 and September 30, 1998                  3

            Condensed Consolidated Statement of Income for the
            Three Months Ended December 31, 1998 and 1997             4

            Condensed Consolidated Statement of Cash Flows for the
            Three Months Ended December 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                                     7


PART II.    OTHER INFORMATION

      Exhibits and Reports on Form 8-K
            A. Exhibits Index                                        15
            B. Reports on Form 8-K                                   15

      Signatures                                                     15


                                     2
<PAGE>
PART I.     FINANCIAL INFORMATION

                               EVANS SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)
                                 (in thousands)

                                                  DECEMBER 31,     SEPTEMBER 30,
                                                     1998              1998
                                                 --------------   --------------
               ASSETS

Current Assets:
   Cash and cash equivalents ....................   $  1,174         $    831  
   Trade receivables, net of allowance for                       
      doubtful accounts of $193,000 and                          
      $264,000, respectively ....................      2,972            2,796
   Inventory ....................................      3,460            3,714
   Income taxes receivable ......................        128              128
   Prepaid expenses and other current assets ....        801              775
   Deferred income taxes ........................         78               78
   Current assets of ChemWay ....................       --              1,658
      Total current assets ......................      8,613            9,980
                                                    --------         --------
Property and equipment, net .....................     16,864           17,231
Investment in marketable securities .............      4,500     
Other assets ....................................        742              837
Deferred income taxes ...........................      1,467            1,750
Noncurrent assets of ChemWay ....................       --              3,390
                                                    --------         --------
         Total assets ...........................   $ 32,186         $ 33,188
                                                    ========         ========
                                                                 
     LIABILITIES AND STOCKHOLDERS' EQUITY                        
                                                                 
Current liabilities:                                             
   Accounts payable and accrued expenses ........   $  5,143         $  4,939
   Current portion of long-term debt ............      1,698            1,698
   Current liabilities of ChemWay ...............       --              2,100
                                                    --------         --------
      Total current liabilities .................      6,841            8,737
Long-term debt ..................................     10,920           11,151
                                                    --------         --------
      Total liabilities .........................     17,761           19,888
                                                    --------         --------
                                                                 
Commitments and contingencies                                    
                                                                 
Stockholders' equity:                                            
   Common stock, $.01 par value, 15,000,000                      
   shares authorized, 3,529,897 and 3,268,298                    
   shares issued, respectively ..................         35               33
   Additional paid-in capital ...................     14,213           13,811
   Retained earnings (deficit) ..................        611             (110)
   Treasury stock, 72,589 shares, at cost .......       (434)            (434)
                                                    --------         --------
      Total stockholders' equity ................     14,425           13,300
                                                    --------         --------
         Total liabilities and                                   
           stockholders' equity .................   $ 32,186         $ 33,188
                                                    ========         ========

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                             FINANCIAL STATEMENTS


                                     3
<PAGE>
                               EVANS SYSTEMS, INC.
                   CONDENSED CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)
                    (in thousands, except per share amounts)

                                              THREE MONTHS ENDED DECEMBER 31,
                                              -------------------------------
                                                     1998         1997
                                                  --------      --------
Revenue:
   Refined product sales ......................   $ 16,676      $ 23,382
   Other sales and services ...................      4,322         5,387
                                                  --------      --------
   Total revenue ..............................     20,998        28,769

Cost of sales .................................     17,546        24,943
                                                  --------      --------

Gross profit ..................................      3,452         3,826
                                                  --------      --------

Operating expenses:
   Employment expenses ........................      2,055         2,237
   Other operating expenses ...................        700           946
   General & administrative expenses ..........        604           665
   Depreciation and amortization ..............        427           473
                                                  --------      --------
   Total operating expenses ...................      3,786         4,321
                                                  --------      --------
Operating loss ................................       (334)         (495)

Other income (expense)
   Interest expense, net ......................       (272)         (338)
   Gain on sale of assets .....................        326
   Other, net .................................       --             (43)
                                                  --------      --------

Loss before benefit from income taxes .........       (280)         (876)

Benefit from income taxes .....................         86           316
                                                  --------      --------

Loss from continuing operations ...............       (194)         (560)

Discontinued operations:
   Loss from discontinued operations of
   ChemWay, net of tax benefit of $215 ........       --            (385)
   Gain on disposal of ChemWay, net of
   taxes of $211 ..............................        915          --
                                                  --------      --------

Net income (loss) .............................   $    721      $   (945)
                                                  ========      ========
Basic and diluted earnings (loss)  per share:
   Continuing operations ......................   $   (.05)     $   (.18)
   Discontinued operations ....................        .26          (.13)
                                                  --------      --------
   Net income (loss) ..........................   $    .21      $   (.31)
                                                  ========      ========


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS


                                     4

<PAGE>
                               EVANS SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

                                                 THREE MONTHS ENDED DECEMBER 31,
                                                 -------------------------------
                                                        1998            1997
                                                      -------         -------
Cash flows from operating activities:
   Net income (loss) ..............................   $   721         $  (945) 
   Adjustments:                                                    
      Depreciation and amortization ...............       427             527
      Deferred income taxes .......................       125            (531)
      Gain on sale of fixed assets ................      (326)           --
      Gain on disposal of discontinued operations .    (1,126)           --
      Stock option compensation expense ...........       205            --
      Changes in working capital:                                  
         Current assets ...........................        52           1,393
         Current liabilities ......................       204          (1,144)
                                                      -------         -------
   Total adjustments ..............................      (439)            245
                                                      -------         -------
Net cash provided (used) by operating activities ..       282            (700)
                                                      -------         -------
                                                                   
Cash flows from investing activities:                              
   Capital expenditures ...........................      (166)           (565)
   Proceeds from sale of property and equipment ...       346              86
   Other, net .....................................       (47)            114
                                                      -------         -------
Net cash provided (used) by investing activities ..       133            (365)
                                                      -------         -------
                                                                   
Cash flows from financing activities:                              
   Repayment on notes payable, net ................      (231)            (63)
   Net proceeds from stock issuance ...............       159            --
                                                      -------         -------
Net cash used by financing activities .............       (72)            (63)
                                                      -------         -------
                                                                   
                                                                   
Net increase (decrease) in cash ...................       343          (1,128)
Cash and cash equivalents, beginning of period ....       831           1,297
                                                      -------         -------
Cash and cash equivalents, end of period ..........   $ 1,174         $   169
                                                      -------         -------
                                                                

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
                              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.
Except as disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
annual report on Form 10-K of Evans Systems, Inc. (the "Company") for the year
ended September 30, 1998. 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, 1998 are not necessarily indicative of the results which may
be expected for the year ending September 30, 1999.

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 spring
and summer when construction, travel, and recreational activities increase.

NOTE C - LONG-TERM DEBT

On January 13, 1999, the Company received a commitment letter (the
"Refinancing") from one of its present bank lenders, pursuant to which the bank
would (i) waive all previous covenant defaults; (ii) extend the maturity of its
loan balance to January 31, 2001; and (iii) assume the amounts outstanding under
another bank lender's loans under their present terms and conditions. Under the
proposed term of the Refinancing, such bank lender would receive a first-lien
position on substantially all of the assets of the Company. The refinancing
would contain certain financial covenant obligations, including minimum net
worth, minimum earnings before interest, taxes and depreciation, working capital
ratio and fixed charge coverage ratio. Management intends to complete the
Refinancing and believes the Company will be able to comply with the proposed
financial covenants during the next year, however there can be no assurance that
it will be able to do so.

NOTE D - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE

Basic and diluted earnings (loss) per share for the quarters ending December 31,
1998 and December 31, 1997 were computed using 3,476,885 and 3,090,984 weighted
average common shares outstanding, respectively.

NOTE E - SALE OF DISCONTINUED OPERATION

On December 30, 1998, the Company completed the sale of its subsidiary, ChemWay
Systems, Inc. ("ChemWay") to Affiliated Resources Corporation ("Affiliated").
The Company received 1.5 million shares of common stock of Affiliated in
exchange for all of the common stock of ChemWay. The Company recorded a gain on
the disposition of ChemWay of $915,000, net of a provision for income taxes of
$211,000.


                                     6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
implement its turnaround strategy, changes in costs of raw materials, labor, and
employee benefits, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Quarterly Report on Form 10-Q, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.



                            RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997

The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document.


              THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK



                                     7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the three months ended December 31, 1998
and 1997. This is the first quarter of ESI's fiscal year which begins on October
1 and ends on September 30.
 
                                        THREE MONTHS      THREE MONTHS
                                            ENDED             ENDED
                                      DECEMBER 31, 1998  DECEMBER 31, 1997
                                      -----------------  -----------------
                                       (IN THOUSANDS)     (IN THOUSANDS)
PETROLEUM MARKETING(1)
Revenue ...........................       $ 13,490           $ 20,060
Gross profit ......................          1,836              1,879
Operating expenses ................          2,052              2,161
                                          --------           --------
Operating loss ....................           (216)              (282)

CONVENIENCE STORES
Revenue ...........................          7,203              8,332
Gross profit ......................          1,519              1,752
Operating expenses ................          1,555              1,977
                                          --------           --------
Operating loss ....................            (36)              (225)

EDCO ENVIRONMENTAL
Revenue ...........................            305                377
Gross profit ......................             97                195
Operating expenses ................            179                183
                                          --------           --------
Operating income (loss) ...........            (82)                12

TOTAL
Revenue ...........................       $ 20,998           $ 28,769
Gross profit ......................          3,452              3,826
Operating expenses(2) .............          3,786              4,321
                                          --------           --------
Operating loss ....................           (334)              (495)

(1)  Includes expenses of the parent company.

(2)  Includes non-cash compensation expense of $205,000 related to the vesting 
     of employee stock options, $196,000 of which was in the Petroleum Marketing
     segment.

After sustaining losses during 1997, in early fiscal 1998 the management of ESI
developed and began to implement its turnaround strategy. Among other things,
the strategy included a decision to refocus the Company on its "core" business
segments: petroleum marketing and convenience store operations. Within these
"core" segments, the Company sold or closed lower-volume outlets. The Company
also took actions, including the elimination of nonessential corporate staff, to
reduce overhead expenses.

In February 1998, ESI discontinued operations in the packaging and marketing of
automotive after-market chemical products, previously operated through its
wholly-owned subsidiary, ChemWay Systems, Inc. ("ChemWay"). On December 30,
1998, the Company sold ChemWay to Affiliated Resources Corporation
("Affiliated") in a stock-for- stock transaction. See "ChemWay" below. In
exchange for the common stock of ChemWay, the Company received 1,500,000 shares
of Affiliated common stock; the number of shares of Affiliated common stock
could be subject to a "make whole" provision whereby the Company could receive
up to an additional 1,000,000 shares of


                                     8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Affiliated common stock should the market value of such stock be below $6
million at the one year anniversary of the closing of the transaction The
Company recorded a gain of $915,000 (net of a provision for income taxes of
$211,000) on the disposition of ChemWay.

Consolidated sales revenues from continuing operations declined to $20,998,000
in the quarter ended December 31, 1998, from $28,769,000 in the comparable prior
year quarter, a decline of $7,771,000 or approximately 27%. During 1998, the
Company implemented its turnaround strategy to rationalize its base of stores
and customers, which resulted in sales declines in each of the Company's
business segments. Additionally, sales of fuels through the Company's terminal
facility during the quarter ended December 31, 1998 declined $2,388,000, as
compared with the quarter ended December 31, 1997, as a result of the
termination of the Company's supply agreement for such facility. See segment
discussions below.

Gross profit in the quarter ended December 31, 1998 was $3,452,000 as compared
with $3,826,000 in the quarter ended December 31, 1997, a decline of $374,000 or
approximately 9.8%. Gross profit expressed as a percentage of sales ("Gross
Margin"), however, increased to approximately 16.4% of sales during the quarter
ended December 31, 1998 as compared with a approximately 13.3% of sales in the
comparable prior year quarter. The improvement in Gross Margin is principally
attributable to the closing of unprofitable stores and improved management of
the Company's daily pricing of fuels.

Operating expenses in the quarter ended December 31, 1998 were $3,786,000, as
compared with $4,321,000 in the quarter ended December 31, 1997, a decrease of
$535,000 or approximately 12.4%. Operating expenses in the quarter ended
December 31, 1998 include a noncash charge of $205,000 in compensation expense,
as a result of the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") with respect to the
vesting of certain incentive stock options which had previously been awarded to
employees. The decline in operating expenses in the quarter ended December 31,
1998, as compared with the previous year quarter, is primarily due to the
closing of underperforming convenience stores, and to an overall staff
reduction.

Consolidated operating losses from continuing operations decreased $161,000;
operating losses on continuing operations were $334,000 in the quarter ended
December 31, 1998 as compared with $495,000 in the quarter ended December 31,
1997. As noted above, current year results include a non-cash charge of $205,000
resulting from the vesting of certain incentive stock options which had
previously been awarded to employees. Adjusted for the effect of the noncash
compensation expense charge, operating losses from continuing operations
declined $366,000. The Petroleum Marketing and Convenience Store segments
reported reduced operating losses during the quarter ended December 31, 1998,
which was partially offset by an increased operating loss in the Edco
Environmental segment.

The Company reported a net profit of $721,000 during the quarter ended December
31, 1998, as compared with a net loss of $945,000 during the quarter ended
December 31, 1997. The improvement in operating results during the current
fiscal year period is primarily due to a gain of $915,000 (net of tax effect) on
the disposition of ChemWay, and to reduced operating losses, partially offset by
the $205,000 non-cash compensation expense discussed above.


PETROLEUM MARKETING SEGMENT

Petroleum Marketing segment's sales revenues declined $6,570,000 to $13,490,000
in the quarter ended December 31, 1998, as compared with $20,060,000 in the
quarter ended December 31, 1997, a decline of approximately 33%. Fuel sales in
gallons was 13,263,000 in the quarter ended December 31, 1998, as compared with
19,616,000 gallons in the quarter ended December 31, 1997, a decrease of
approximately 32%. The Petroleum Marketing segment distributes to its motor fuel
customers both directly from refinery racks, and through the Company's bulk
plant

                                     9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

facilities. The Company, through its wholly-owned subsidiary Way Energy Systems,
Inc. ("Way Energy") also has a 110,000 barrel terminal facility, located in Bay
City, Texas, from which it has historically distributed motor fuels to the
southeast Texas market. During the quarter ended December 31, 1997, the
Company's supply agreement with the primary fuel supplier to the Bay City
terminal facility was terminated. The loss of the fuel supply agreement had an
adverse effect upon the Petroleum Marketing segment's performance during the
remainder of 1998: the Company was unable to sell fuels through its exchange
agreements with other major oil companies. Way Energy had no sales during the
quarter ended December 31, 1998, as compared with sales during the quarter ended
December 31, 1997 of $2,388,000. 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.

Under regulations issued by the U.S. Environmental Protection Agency ("EPA"),
all underground storage tanks in the State of Texas were required to meet
certain standards of protection as of December 22, 1998. During 1998, the
Company evaluated the revenues generated by its Special Purpose Lease accounts,
and determined that it could not justify further investment at approximately 46
of such locations. Accordingly, management decided to either sell or close those
identified lower-volume Special Purpose Lease facilities. As of December 31,
1998, the Company sold its investment at 30 of the lower-volume Special Purpose
Lease accounts. Additionally, the Company has discontinued the delivery of motor
fuels, and has removed the underground storage tanks at 16 Special Purpose Lease
sites. The Special Purpose Lease locations where the Company sold its investment
in equipment are now served by the Company as Open Dealers.

The effect of the conversion of Special Purpose Lease customers into Open
Dealers is to reduce the Company's sales revenues, gross profits, and working
capital requirements. Since the Company's margins on Open Dealer accounts are
contractually fixed, however, the Petroleum Marketing Segment's gross margins
may be less volatile in the future, as a larger percentage of the segment's
business will be at fixed margins.

Gross profit in the Petroleum Marketing Segment was $1,836,000 in the quarter
ended December 31, 1998, as compared with $1,879,000 in the quarter ended
December 31, 1997, a decline of $43,000 or approximately 2.3%. Gross Margin,
however, improved in the quarter ended December 31, 1998, to approximately 13.6%
of sales as compared with approximately 9.4% in the quarter ended December 31,
1997. Gross profit per gallon sold increased in the quarter ended December 31,
1998, to approximately $0.138, as compared to $0.096 in the quarter ended
December 31, 1997, primarily due to improved management of the Company's daily
pricing of fuels.

Operating expenses in the Petroleum Marketing Segment were $2,052,000 in the
quarter ended December 31, 1998, as compared with $2,161,000 in the quarter
ended December 31, 1997, a decrease of $109,000 or approximately 5.0%. Included
in the results for the quarter ended December 31, 1998, however, is a noncash
charge of $196,000 for compensation expenses resulting from the vesting of
incentive stock options to employees. Operating expenses, adjusted for the
non-cash charge discussed above, declined $305,000 or approximately 14.1% in the
quarter ended December 31, 1998, as compared with the comparable prior year
period, reflecting management's cost reduction programs implemented during 1998.
Note that the operating expenses of the parent company are included within the
Petroleum Marketing segment results.

Operating loss of the Petroleum Marketing Segment decreased to $216,000 in the
quarter ended December 31, 1998 as compared with $282,000 in the quarter ended
December 31, 1997. The decreased loss is due to a higher Gross Margin and
reduced operating expenses during the quarter ended December 31, 1998, partially
offset by reduced sales revenues and by the $196,000 compensation expense
charge, discussed above.

CONVENIENCE STORE SEGMENT


                                     10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Sales in the Convenience Store segment were $7,203,000 in the quarter ended
December 31, 1998, as compared with $8,332,000 in the quarter ended December 31,
1997, a decline of approximately 14%. During the quarter ended December 31, 1998
the company operated 26 stores compared to 34 stores during the comparable
quarter ended December 31, 1997. Fuel sales in the quarter ended December 31,
1998 were $3,975,000 as compared with $4,695,000 in the quarter ended December
31, 1997; fuel sales in gallons, however, increased in the quarter ended
December 31, 1998, to 4,075,000 gallons as compared with 4,042,000 gallons in
the comparable prior year quarter. The increase in fuel gallon sales is
attributable to the Company's more aggressive retail pricing strategy during the
quarter ended December 31, 1998. Merchandise sales decreased $378,000 to
$3,079,000 as compared with $3,457,000 in the quarter ended December 31, 1997.
The decline in merchandise sales is primarily due to fewer operating stores
during the current fiscal year.

Gross profit declined to $1,519,000 in the quarter ended December 31, 1998 as
compared with $1,752,000 in the quarter ended December 31, 1997 due to lower
sales revenues during the current fiscal year period. Gross Margin in the
Convenience Store segment was comparable during 1998 and 1997 at approximately
21.1% and 21.0% of sales, respectively.

Operating expenses during the quarter ended December 31, 1998 in the Convenience
Store segment were $1,555,000 as compared with $1,977,000 in the quarter ended
December 31, 1997, a decrease of $422,000 or approximately 21.3%. The decline in
operating expenses is principally attributable to the closing of eight
underperforming stores during 1998, and to an overall reduction in staff during
1998.

The Convenience Store segment incurred an operating loss of $36,000 in the
quarter ended December 31, 1998, as compared with a loss of $225,000 in the
quarter ended December 31, 1997. The reduced loss is due to reduced operating
expenses during the current year, partially offset by reduced sales and
resulting gross profits.

EDCO ENVIRONMENTAL

During the quarter ended December 31, 1998, EDCO Environmental focused its
attention on bringing the Company's underground storage tanks into compliance
with the new regulations promulgated by the U.S. Environmental Protection
Agency, which became effective on December 22, 1998. As a result, sales revenues
of Edco Environmental declined $72,000 to $305,000 in the quarter ended December
31, 1998, as compared with $377,000 in the quarter ended December 31, 1997, a
decline of approximately 19.1%. Gross profit was $97,000 in the quarter ended
December 31, 1998 as compared with $195,000 in the comparable prior year fiscal
quarter; the decline is also attributable to management's decision to utilize
the services of Edco Environmental to bring the Company's facilities into
compliance with the new regulations.

Operating expenses at EDCO Environmental decreased $4,000 in the quarter ended
December 31, 1998, to $179,000 as compared with $183,000 in the quarter ended
December 31, 1997, a decrease of approximately 2.2%.

EDCO Environmental incurred an operating loss of $82,000 in the quarter ended
December 31, 1998, as compared with an operating profit of $12,000 in the
quarter ended December 31, 1997, primarily due to reduced sales revenues and
resultant gross profits as a result of the utilization of Edco Environmental
personnel to complete projects for the Company's other segments.

CHEMWAY

Production activities at the ChemWay facility ceased in February 1998, and the
ChemWay segment was classified as a discontinued operation as of March 31, 1998.
During the quarter ended December 31, 1997, the Company


                                     11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

incurred a loss on the operation of ChemWay of $385,000, net of tax benefit.
Costs associated with ChemWay during the quarter ended December 31, 1998 were
recognized as a reduction of the gain associated with the disposition of ChemWay
on December 30, 1998. The Company recognized a gain, net of taxes, of $915,000
on the sale of ChemWay.

                       CAPITAL RESOURCES AND LIQUIDITY

On January 13, 1999, the company received a commitment letter from one of its
present bank lenders (the "Refinancing"), pursuant to which the bank would (i)
waive all previous covenant defaults; (ii) extend the maturity of its loan
balance to January 31, 2001; and (iii) assume the amounts outstanding under the
other bank lender's loans under their current terms and conditions. Under the
proposed terms of the Refinancing, such bank lender would receive a first lien
position on substantially all of the assets of the Company. The Refinancing
would contain certain financial covenant obligations, including minimum net
worth, minimum earnings before interest, taxes and depreciation, working capital
ratio and fixed charge coverage ratio. Management believes the Company will be
able to comply with the proposed financial covenants during the foreseeable
future, however there can be no assurance that the Company will be able to do
so.

Cash and cash equivalents were $1,174,000 and $831,000 at December 31, 1998 and
September 30, 1998, respectively. The Company had net working capital of
$1,772,000 at December 31, 1998, as compared with $1,243,000 at September 30,
1998.

Cash provided by operating activities was $282,000 in the quarter ended December
31, 1998, as compared with cash used by operating activities of $700,000 in the
comparable previous fiscal year period. The improvement in cash from operating
activities is primarily due to the improved working capital utilization during
the current fiscal year; the Company's investment in net working capital
declined $529,000 during the quarter ended December 31, 1998. Pre-tax loss on
continuing operations, net of the noncash charge for stock option compensation
expense, declined from $876,000 in the quarter ended December 31, 1997 to
$75,000 in the quarter ended December 31, 1998.

The Company identified certain nonessential assets which it sold during the
quarter ended December 31, 1998; assets disposed of during the current fiscal
year period included the Company's investment in certain of its Special Purpose
Lease locations, and assets utilized in the Company's propane business. The
Company received cash proceeds of $346,000 from the sale of such assets during
the quarter ended December 31, 1998. Cash provided by investing activities was
$133,000 in the quarter ended December 31, 1998, as compared with cash used by
investing activities of $365,000 during the quarter ended December 31, 1997; the
improvement is attributable to lower capital expenditures and sales of assets
during the quarter ended December 31, 1998.

In December 1998, the Company completed the sale of its ChemWay subsidiary, in a
stock-for-stock exchange with Affiliated. Although the Company did not receive
any cash consideration in the transaction, Affiliated agreed to repay
outstanding trade credit liabilities of ChemWay of approximately $2,100,000.

On October 27, 1998, the Company issued 350,000 shares in a private placement to
private, accredited investors, pursuant to a purchase agreement dated June 1,
1998, for total consideration of $262,500.


                                     12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

                                  YEAR 2000

As many computer systems and other equipment with embedded chips or processors
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 ("Y2K") issue. The
Y2K issue can arise at any point in the Company's supply, processing,
distribution and financial systems.

The Company is in the process of implementing a Y2K readiness program with the
objective of having all of the Company's significant Business Systems
functioning properly with respect to the Y2K before January 1, 2000.

The first component of the Y2K readiness program is to identify the internal
Business Systems of the Company that are susceptible to system failures or
processing errors as a result of the Y2K issue. This effort is substantially
complete; management believes it has identified the Business Systems that may
require remediation or replacement. Management is presently assessing the
priority of each Business System remediation or replacement project.

The second component of the Y2K readiness program involves the actual
remediation and replacement of Business Systems. The Company is primarily
utilizing internal resources to complete this project. The Company's objective
is to complete substantially all remediation and replacement of internal
Business Systems by September 1999.

As part of the Y2K readiness program, significant service providers, vendors,
suppliers, customers and governmental entities ("Key Business Partners") that
are believed to be critical to business operations after January 1, 2000 are
bing identified and steps are being undertaken in an attempt to reasonably
ascertain their stage of Y2K readiness.

The Company utilizes a limited number of Business Systems in the conduct of its
operations, however due to the significant number of Key Business Partners, the
Company presently believes that it may experience some disruption in its
business due to the Y2K problem. More specifically, the Company could be
materially adversely affected if utilities, private businesses and governmental
entities with which it does business or that provide essential services are not
Y2K ready. The possible consequences of the Company or Key Business Partners not
being fully Y2K compliant by January 1, 2000 include, among other things, delays
in the delivery of products, delays in the receipt of supplies, invoice and
collection errors, and inventory and supply obsolescence. Consequently, the
business and results of operations of the Company could be materially adversely
affected by a temporary inability of the Company to conduct its business in the
ordinary course for a period of time after January 1, 2000. However, the Company
believes that its Y2K readiness program, including the contingency planning
discussed below, should significantly reduce the adverse effect any such
disruptions may have.

Concurrently with the Y2K readiness measures described above, the Company is
developing contingency plans intended to mitigate the possible disruption in
business operations that may result from the Y2K issue. Contingency plans may
include stockpiling supplies, increasing inventory levels, and securing
alternate sources of supply. Once developed, contingency plans and related cost
estimates will be continually refined as additional information becomes
available.

Since much of the Company's cost of its Y2K readiness program has been internal
resources, who are also involved in other duties related to the Company's
ongoing operations, the cost of the Y2K readiness program is not known, however
the Company does not believe that such costs are material. The costs are being
expressed as they are incurred, and are being funded through operating cash
flow. The costs associated with the replacement of computer



                                     13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

systems, hardware or equipment, if necessary, substantially all of which would
be capitalized, is not presently available.

The Company's Y2K readiness program is an ongoing process; the estimated
completion dates and costs of the Y2K readiness program is subject to change.

THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE
BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO COMPLETING THE
PLAN INCLUDE THE AVAILABILITY OF RESOURCES, OUR ABILITY TO DISCOVER AND CORRECT
THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON SPECIFIC FACILITIES, AND THE ABILITY OF KEY BUSINESS PARTNERS TO BRING
THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE.



                                     14
<PAGE>
PART II.  OTHER INFORMATION

EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS INDEX                                  PAGE
                                                  ------
   27.   Financial Data Schedule                    16


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 16, 1999                   By:   /s/ J.L. EVANS, SR.
                                              ---------------------
                                                J.L. Evans, Sr.
                                                Chairman of the Board and
                                                Chief Executive Officer
                                                And authorized to sign on
                                                behalf of the
                                                registrant


                                          By:   /s/ RICHARD A. GOEGGEL
                                              ----------------------------
                                                Richard A. Goeggel
                                                Vice president and
                                                Chief Financial Officer
                                                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>                   3-MOS
<FISCAL-YEAR-END>                     SEP-30-1999
<PERIOD-END>                          DEC-31-1998
<CASH>                                      1,174      
<SECURITIES>                                    0           
<RECEIVABLES>                               3,165      
<ALLOWANCES>                                  193        
<INVENTORY>                                 3,460
<CURRENT-ASSETS>                            8,613      
<PP&E>                                     29,469     
<DEPRECIATION>                             12,605       
<TOTAL-ASSETS>                             32,186  
<CURRENT-LIABILITIES>                       6,841     
<BONDS>                                         0      
                           0          
                                     0          
<COMMON>                                       35          
<OTHER-SE>                                 14,390         
<TOTAL-LIABILITY-AND-EQUITY>               32,186     
<SALES>                                    20,998     
<TOTAL-REVENUES>                           20,998     
<CGS>                                      17,546     
<TOTAL-COSTS>                               3,786     
<OTHER-EXPENSES>                                0      
<LOSS-PROVISION>                                0          
<INTEREST-EXPENSE>                            272          
<INCOME-PRETAX>                              (280)       
<INCOME-TAX>                                  (86)      
<INCOME-CONTINUING>                          (194)       
<DISCONTINUED>                                915       
<EXTRAORDINARY>                                 0        
<CHANGES>                                       0               
<NET-INCOME>                                  721
<EPS-PRIMARY>                                0.21
<EPS-DILUTED>                                0.21
                                      

</TABLE>


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