AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1999
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended MARCH 31, 1998
[ ] 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 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 April 30, 1998:
3,090,984
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) PAGE NUMBER
Condensed Consolidated Balance Sheet as of
March 31, 1998 and September 30, 1997 .................... 3
Condensed Consolidated Statement of Income
for the Three Months Ended March 31, 1998
and 1997 ................................................. 4
Condensed Consolidates Statement of Income
for the Six Months Ended March 31, 1998
and 1997 ................................................. 5
Condensed Consolidated Statement of Cash
Flows for the Six Months Ended March 31,
1998 and 1997 ............................................ 6
Notes to the Condensed Consolidated
Financial Statements ..................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 11
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K
A. Exhibits Index ........................................ 20
B. Reports on Form 8-K ................................... 20
Signatures ..................................................... 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(As restated)
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 1,063 $ 1,297
Trade receivables, net of allowance
for doubtful accounts of $301,000
and $340,000, respectively ................ 3,456 4,584
Inventory ................................... 4,369 7,962
Income taxes receivable ..................... 310 310
Prepaid expenses and other current
assets .................................... 240 618
Deferred income taxes ....................... 191 191
Current assets of ChemWay ................... 1,694 --
------- -------
Total current assets ..................... 11,323 14,962
Property and equipment, net .................... 18,217 21,551
Investment in marketable securities
Other assets ................................... 960 1,035
Deferred income taxes .......................... 1,494 670
Noncurrent assets of ChemWay ................... 2,892 --
------- -------
Total assets .......................... $34,886 $38,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....... $ 4,744 $ 9,496
Current portion of long-term debt ........... 7,872 7,837
Provision for loss on disposition on
discontinued operations ................... 1,100 --
Current liabilities of ChemWay .............. 4,524 --
-------- --------
Total current liabilities ................ 18,240 17,333
Long-term debt ................................. 3,469 5,401
-------- --------
Total liabilities ........................ 21,709 22,734
======== ========
Commitments and contingencies
Stockholders' equity:
Common stock, $.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 ........................... 1,282 3,589
Treasury stock, 72,589 shares, at cost ...... (434) (434)
-------- --------
Total stockholders' equity ............... 13,177 15,484
-------- --------
Total liabilities and stockholders'
equity .............................. $ 34,886 $ 38,218
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
(As restated)
Revenue:
Refined product sales ....................... $ 19,684 $ 27,161
Other sales and services .................... 4,916 4,633
------------ ------------
Total revenue ............................... 24,600 31,794
Cost of sales .................................. 20,483 28,359
------------ ------------
Gross profit ................................... 4,117 3,435
------------ ------------
Operating expenses:
Employment expenses ......................... 2,124 2,255
Other operating expenses .................... 831 864
General & administrative expenses ........... 612 779
Depreciation and amortization ............... 497 450
------------ ------------
Total operating expenses .................... 4,064 4,348
------------ ------------
Operating gain (loss)........................... 53 (913)
Other income (expense)
Interest expense, net ....................... (343) (188)
Loss on sale of assets ...................... (107) --
Other, net .................................. 112 (63)
------------ ------------
Loss before benefit from income taxes .......... (285) (1,164)
Benefit from income taxes ...................... 105 423
------------ ------------
Loss from continuing operations ................ (180) (741)
Discontinued operations:
Loss from discontinued operations of
ChemWay, net of tax benefit ................. (463) (31)
Loss on disposal of ChemWay, including
provision for losses of $200,000
during the phase out period, net of
tax benefit ............................... (705) --
------------ ------------
Net loss ....................................... $ (1,348) $ (772)
============ ============
Basic and diluted earnings (loss) per share:
Continuing operations ....................... $ (.06) $ (.24)
Loss from discontinued operations
of ChemWay ................................ (.15) (.01)
Loss on disposal of ChemWay ................. (.23) --
------------ ------------
Net income (loss) ........................... $ (.44) $ (.25)
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(in thousands, except per share amounts)
SIX MONTHS ENDED MARCH 31,
-------------------------
1998 1997
--------- ---------
(As restated)
Revenue:
Refined product sales ...................... $ 43,066 $ 58,501
Other sales and services ................... 10,303 9,357
-------- --------
Total revenue .............................. 53,369 67,858
Cost of sales ................................. 45,441 60,479
-------- --------
Gross profit .................................. 7,928 7,379
-------- --------
Operating expenses:
Employment expenses ........................ 4,361 4,485
Other operating expenses ................... 1,777 1,827
General & administrative expenses .......... 1,277 1,563
Depreciation and amortization .............. 970 849
-------- --------
Total operating expenses ................... 8,385 8,724
-------- --------
Operating loss ................................ (457) (1,345)
Other income (expense)
Interest expense, net ...................... (681) (411)
Loss on sale of assets ..................... (114) (32)
Other, net ................................. 69 (429)
-------- --------
Loss before benefit from income taxes ......... (1,183) (2,217)
Benefit from income taxes ..................... 429 797
-------- --------
Loss from continuing operations ............... (754) (1,420)
Discontinued operations:
Loss from discontinued operations
of ChemWay, net of tax benefit ........... (848) (404)
Loss on disposal of ChemWay, including
provision for losses of $200,000
during the phase out period, net of
tax benefit .............................. (705) --
-------- --------
Net loss ...................................... $ (2,307) $ (1,824)
======== ========
Basic and diluted earnings (loss) per
share:
Continuing operations ...................... $ (.25) $ (.47)
Loss from discontinued operations
of ChemWay ............................... (.27) (.13)
Loss on disposal of ChemWay ................ (.23) --
-------- --------
Net income (loss) .......................... $ (.75) $ (.60)
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED MARCH 31,
---------------------------
1998 1997
---------- -----------
(As restated)
Cash flows from operating activities:
Net loss ....................................... $(2,307) $(1,824)
Adjustments:
Depreciation and amortization ............... 1,077 935
Deferred income taxes ....................... (1,155) (1,010)
Loss on sale of fixed assets ................ 114 32
Provision for loss on disposition
of discontinued operations ................ 1,100
Loss on reclassification of securities ...... -- 375
Changes in working capital:
Current assets ........................... 3,373 1,381
Current liabilities ...................... (2,781) 1,579
------- -------
Total adjustments .............................. 1,728 3,292
------- -------
Net cash provided (used) by operating
activities ...................................... (579) 1,468
------- -------
Cash flows from investing activities:
Capital expenditures ........................... (956) (992)
Proceeds from sale of property and equipment ... 620 --
Other, net ..................................... 25 22
------- -------
Net cash provided (used) by investing activities .. (311) (970)
------- -------
Cash flows from financing activities:
Borrowings on notes payable, net ............... 656 (523)
Deferred revenue ............................... -- 76
Proceeds from issue of common stock ............ -- 165
------- -------
Net cash used by financing activities ............. 656 (282)
------- -------
Net increase (decrease) in cash ................... (234) 216
Cash and cash equivalents, beginning of period .... 1,297 2,793
------- -------
Cash and cash equivalents, end of period .......... $ 1,063 $ 3,009
------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS
6
<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, 1997. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended March 31, 1998 are not necessarily indicative of the results which
may be expected for the year ending September 30, 1998.
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which Evans Systems, Inc. ("ESI") will sell 80% of the issued and outstanding
shares of capital stock of its wholly owned subsidiary, ChemWay Systems, Inc.
ESI will dividend its remaining interest to its shareholders. The transaction is
in the due diligence stage and the terms could be revised based on the outcome
of that investigation. The transaction is subject to a number of conditions,
including the execution of a definitive agreement, the approval of a senior debt
holder of ESI, and various regulatory and corporate approvals. There can be no
assurance that a definitive agreement will be entered into or that this
transaction will be successfully consummated. The ChemWay operating results are
presented as discontinuing operations on the Condensed Consolidated Statement of
Income. On May 12, 1998 the Company's Board of Directors determined that the
Company would dispose of ChemWay.
The Company recognized gross profit of $434,000 in the second quarter of the
current fiscal year related to the anticipated refund of certain excise taxes
which had previously been overpaid. Of the $434,000, $293,000 was attributable
to periods prior to September 30, 1997.
NOTE B - SEASONAL NATURE OF BUSINESS
The refined petroleum products market customarily experiences competitive
margins in the fall and winter months followed by increased demand during spring
and summer when construction, travel, and recreational activities increase.
NOTE C -- LONG-TERM DEBT
Certain of the Company's notes payable to banks require maintenance of financial
covenants, including current, debt to equity, tangible net worth and debt
service coverage ratios all as defined in the respective loan agreements. At
September 30, 1997, December 31, 1997, and March 31, 1998, the Company was in
violation of certain of these covenants. In addition, the Company was out of
compliance with the borrowing base limits with one bank. The banks have waived
these covenant defaults at September 30, 1997 but not as of March 31, 1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it has thirty days to cure the defaults and if the defaults are not cured within
that time, the bank will accelerate the maturity of the notes to be
7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
immediately due and payable. These notes total $1,822,000 and are secured by
certain of the Company's convenience stores.
The bank where the Company is out of compliance with the borrowing base limits
has agreed to a standstill of the breach of the borrowing base limits. In
exchange for these waivers and the standstill agreement, the Company has pledged
the stock of its subsidiaries, pledged the proceeds of the sale of non-income
producing assets, provided the bank a second lien on its office facility and
agreed to a maturity date of April 30, 1998. The bank subsequently extended the
maturity date to June 30, 1998.
The Company and a New York based lender are in negotiations for an $11,000,000
credit facility to replace its current lines of credit. There can be no
assurance that these negotiations will be successful.
NOTE D -- BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the quarters ended March 31, 1998 and March
31, 1997 were computed using 3,090,984 and 3,084,501 weighted average common
shares. Basic and diluted loss per share for the six months ended March 31, 1998
and March 31, 1997 were computed using 3,090,984 and 3,058,468 weighted average
common shares.
NOTE F - RESTATEMENT
The Company has restated previously reported annual and interim financial
results of fiscal years 1998 and 1997, and the three and six month periods ended
March 31, 1998 to give effect to the write-down of certain assets (including
credit card receivables, property and equipment costs and certain deferred
income tax assets) and the accrual of certain liabilities. All disclosures
related to 1998 and 1997 included herein have been amended, as appropriate, to
reflect the restatement. The effect of the restatement discussed above on the
statement of operations is as follows:
8
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
QUARTER ENDED MARCH 31,
--------------------------------------
1998 1997
------------------ ------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
Revenue ................................ $ 24,600 $ 24,600 $ 31,794 $ 31,794
Cost of sales .......................... 20,454 20,483 27,821 28,359
-------- -------- -------- --------
Gross profit ........................... 4,146 4,117 3,973 3,435
Operating expense ...................... 4,064 4,064 4,348 4,348
-------- -------- -------- --------
Operating loss ......................... 82 53 (375) (913)
Interest expense ....................... (268) (343) (188) (188)
Other .................................. 112 5 (63) (63)
-------- -------- -------- --------
Loss from continuing
operations before taxes .............. (74) (285) (626) (1,164)
Income tax benefit ..................... (27) (105) (224) (423)
-------- -------- -------- --------
Loss from continuing
operations ........................... (47) (180) (402) (741)
Loss from discontinued
operations ........................... (443) (463) -- --
Provision for loss on
disposal of discontinued operations .. (705) (705) (31) (31)
-------- -------- -------- --------
Net loss ............................... $ (1,195) $ (1,348) $ (433) $ (772)
======== ======== ======== ========
Basic and diluted loss
per share:
Continuing operations ............... $ (.02) $ (.06) $ (.13) $ (.24)
Discontinued operations ............. (.14) (.15) (.01) (.01)
Provision for loss on
disposition of discontinued
operations ........................ (.23) (.23) -- --
-------- -------- -------- --------
Net loss ............................ $ (.39) $ (.44) $ (.14) $ (.25)
======== ======== ======== ========
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
------------------ ------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
Revenue ................................ $ 53,369 $ 53,369 $ 67,858 $ 67,858
Cost of sales .......................... 45,397 45,441 59,534 60,479
-------- -------- -------- --------
Gross profit ........................... 7,972 7,928 8,324 7,379
Operating expense ...................... 8,385 8,385 8,724 8,724
-------- -------- -------- --------
Operating loss ......................... (413) (457) (400) (1,345)
Interest expense ....................... (606) (681) (411) (411)
Other .................................. 69 (45) (429) (461)
-------- -------- -------- --------
Loss from continuing
operations before taxes .............. (950) (1,183) (1,240) (2,217)
Income tax benefit ..................... (343) (429) (436) (797)
-------- -------- -------- --------
Loss from continuing
operations ........................... (607) (754) (804) (1,420)
Loss from discontinued
operations ........................... (828) (848) (404) (404)
Provision for loss on
disposal of discontinued
operations ........................... (705) (705) -- --
-------- -------- -------- --------
Net loss ............................... $ (2,140) $ (2,307) $ (1,208) $ (1,824)
======== ======== ======== ========
Basic and diluted loss per share:
Continuing operations ................ $ (.19) $ (.25) $ (.26) $ (.47)
Discontinued operations .............. (.27) (.27) (.13) (.13)
Provision for loss on
disposition of discontinued
operations ......................... (.23) (.23) -- --
-------- -------- -------- --------
Net loss ............................ $ (.69) $ (.75) $ (.39) $ (.60)
======== ======== ======== ========
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
10
<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 Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Quarterly Report on Form 10-Q, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 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
11
<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 March 31, 1998
and 1997, as restated. This is the second quarter of ESI's fiscal year which
begins on October 1 and ends on September 30.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(In thousands) (In thousands)
PETROLEUM MARKETING(1)
Revenue ........................ $ 16,642 $ 22,103
Gross profit ................... 2,311 1,251
Operating expenses ............. 1,839 1,958
-------- --------
Operating loss ................. 472 (707)
CONVENIENCE STORES
Revenue ........................ 7,714 9,496
Gross profit ................... 1,666 2,022
Operating expenses ............. 2,013 2,196
-------- --------
Operating loss ................. (347) (174)
EDCO ENVIRONMENTAL
Revenue ........................ 244 195
Gross profit ................... 140 162
Operating expenses ............. 212 194
-------- --------
Operating income (loss) ........ (72) (32)
TOTAL
Revenue ........................ $ 24,600 $ 31,794
Gross profit ................... 4,117 3,435
Operating expenses(2) .......... 4,064 4,348
-------- --------
Operating loss ................. 53 (913)
(1) Includes expenses of the parent company.
The Company's net losses for the quarters ended March 31, 1998 and 1997 were
$1,348,000 and $772,000, respectively. The increased net loss was primarily
attributable to the increased losses in ChemWay and the convenience stores
offset by increased income in the petroleum marketing segment, as discussed
below.
ESI's consolidated revenues from continuing operations for the three months
ended March 31, 1998, were $24,600,000, as compared to $31,794,000 during the
comparable period ending March 31, 1997. The $7,194,000 (22.6%) three-month
decrease in this year's revenues was primarily attributable to a $5,461,000
decrease in petroleum marketing revenues and a $1,782,000 decrease in
convenience store revenues .
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ESI's consolidated gross profit from continuing operations for the three months
ended March 31, 1998 was $4,117,000 or approximately 16.7% of consolidated
revenues, as compared to $3,435,000 or approximately 10.8% of consolidated
revenues for the three months ended March 31, 1997. ESI recognized additional
gross profit of $434,000 in the second quarter of the current fiscal year due to
the anticipated refund of certain excise taxes which had previously been
overpaid. The Company's gross profit in the quarter ended March 31, 1998 was
15.0% of sales before the excise tax credit.
The Company's operating expenses of continuing operations were $4,064,000 in the
quarter ended March 31, 1998, as compared to $4,348,000 in the quarter ended
March 31, 1997. The Company's operating expenses were 16.5% of revenues in the
quarter ended March 31, 1998 and 13.7% in the quarter ended March 31, 1997.
Operating expenses decreased for the quarter due to management's program to
reduce expenses.
The Company earned operating income of $53,000 in the quarter ended March 31,
1998 as compared with an operating loss of $913,000 in the quarter ended March
31, 1997. The improved operating results are due to higher gross profits in the
petroleum marketing segment, partially as a result of the excise tax refund
discussed above, and reduced operating expenses in the petroleum marketing and
convenience store segments, partially offset by increased losses in the
convenience store and Edco Environmental segments. See segment discussions,
below.
PETROLEUM MARKETING SEGMENT
The petroleum marketing segment sales were $16,642,000 in the quarter ended
March 31, 1998, as compared to $22,103,000 in the quarter ended March 31, 1997,
a $5,461,000 (24.7%) decrease. Fuel sales gallonage were 15,966,000 gallons in
the quarter ended March 31, 1998, as compared to 19,425,000 in the quarter ended
March 31, 1997, a 3,459,000 (17.8%) decrease. Gross profits for the quarters
ended March 31, 1998 and 1997 were $2,311,000 and $1,251,000 respectively. Gross
profit expressed as a percent of sales ("Gross Margin") increased to 13.9% in
the quarter ended March 31, 1998, as compared to 5.7% in the quarter ended March
31, 1997. Petroleum marketing gross profit in the three months ended March 31,
1998 includes an adjustment of $434,000 due to the anticipated refund of
previous overpayment of certain excise taxes. (See above.) Gross Margin in the
petroleum marketing segment, before the excise tax credit, was 11.3% of sales in
the quarter ended March 31, 1998. Operating expenses decreased $119,000 in the
quarter ended March 31, 1998, as compared to the quarter ended March 31, 1997.
Operating expenses were 11.1% of revenues in the quarter ended March 31, 1998,
and 8.9% in the quarter ended March 31, 1997. Certain expenses of ESI, the
parent company, are included in the petroleum marketing results. Operating
income was $472,000 in the quarter ended March 31, 1998, as compared to a loss
of $707,000 in the quarter ended March 31, 1997. The increase in operating
income is due to the recognition of additional gross profit due to the
overpayment of excise taxes of $434,000, decreased operating expenses of
$119,000, and other increased gross profit of $626,000.
During the first fiscal quarter of 1998, the Company's supply agreement with the
primary fuel supplier to the Company's Bay City terminal facility was
terminated. The Company is presently seeking a new supplier for its terminal
operation.
In October 1997, management began a program to reduce its operating expenses,
including the termination of certain nonessential staff, however, the effect of
such reductions did not occur until late in the quarter ended December 31, 1997.
The Company further reduced its staff in February 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONVENIENCE STORE SEGMENT
The Company operated 34 stores at the beginning of the quarter and sold 5 stores
during the current fiscal quarter, ending the quarter with 29 stores compared
with 39 stores in the quarter ended March 31, 1997.
The convenience store segment sales were $7,714,000 in the quarter ending March
31, 1998, as compared to $9,496,000 in the quarter ended March 31, 1997, a
$1,782,000 (18.8%) decrease. Fuel sales decreased to $4,278,000 in the quarter
ended March 31, 1998, as compared to $5,497,000 in the quarter ended March 31,
1997. Fuel sales gallonage decreased to 3,961,000 gallons in the quarter ended
March 31, 1998, as compared to 4,397,000 in the quarter ended March 31, 1997, a
436,000 (9.9%) decrease. Merchandise sales decreased to $3,236,000 in the
quarter ended March 31, 1998, as compared to $3,680,000 in the quarter ended
March 31, 1997 and other income decreased to $200,000 in the quarter ended March
31, 1998, as compared to $319,000 in the quarter ended March 31, 1997.
Management attributes the decrease in sales to operating a weighted average of
19% fewer stores for the fiscal 1998 quarter compared to the fiscal 1997
quarter.
Gross profit for the quarters ended March 31, 1998 and 1997 were $1,666,000 and
$2,022,000 respectively. Gross Margin increased to 21.6% in the quarter ended
March 31, 1998, as compared to 21.3% in the quarter ended March 31, 1997.
Management attributes the increase in gross profit margins mainly to divesting
of lower margin stores during fiscal 1997 and fiscal 1998.
Operating expenses were $2,013,000 in the quarter ended March 31, 1998 compared
to $2,196,000 in the quarter ended March 31, 1997. Operating losses were
$347,000 during the quarter ended March 31, 1998, as compared to losses of
$174,000 during the quarter ended March 31, 1997.
During the first quarter of fiscal 1998, management implemented certain cost
reduction programs, including improvements in labor scheduling and control, and
reductions in administrative expenses, in order to reduce the convenience
stores' overall operating expenses. Management is continually evaluating its
store operations, and intends to manage its store portfolio to maximize
profitability. Accordingly, the Company sold five under performing stores in
February 1998, and has announced that it intends to sell or close four stores in
May 1998.
EDCO ENVIRONMENTAL
EDCO Environmental sales were $244,000 in the quarter ended March 31, 1998 as
compared to $195,000 in the quarter ended March 31, 1997, a $49,000 (25.0%)
increase. Gross profits for the quarters ended March 31, 1998, and 1997 were
$140,000 and $162,000 respectively. Gross profit margins decreased to 57.4% in
the quarter ended March 31, 1998, as compared to 83.0% in the quarter ended
March 31, 1997.
EDCO's operating expenses increased $18,000 in the quarter ended March 31, 1998,
as compared to the quarter ended March 31, 1997. Operating losses were $72,000
and $32,000 for the quarters ending March 31, 1998 and 1997, respectively.
Operating income declined due to lower sales and Gross Margin, and increased
operating expenses.
CHEMWAY
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which ESI will sell 80% of the issued and outstanding shares of capital stock of
its wholly owned subsidiary, ChemWay Systems, Inc. ESI will dividend its
remaining interest to its shareholders. There can be no
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
assurance that a definitive agreement will be entered into or that this
transaction will be successfully consummated. ChemWay sales were $532,000 in the
quarter ended March 31, 1998, as compared to $2,908,000 in the quarter ended
March 31, 1997. Operating expense decreased $128,000 in the quarter ended March
31, 1998, as compared to the quarter ended March 31, 1997. Operating losses were
$501,000 for the quarter ended March 31, 1998, as compared to an operating
income of $20,000 in the quarter ended March 31, 1997. Because of the ongoing
operating losses of ChemWay, on May 12, 1998 the Company's Board of Directors
determined that the Company would dispose of ChemWay.
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the six months ended March 31, 1998 and
1997.
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(In thousands) (In thousands)
PETROLEUM MARKETING(1)
Revenue .......................... $ 36,702 $ 48,082
Gross profit ..................... 4,175 2,958
Operating expenses ............... 4,000 4,098
-------- --------
Operating loss ................... 175 (1,140)
CONVENIENCE STORES
Revenue .......................... 16,046 19,082
Gross profit ..................... 3,418 3,929
Operating expenses ............... 3,990 4,193
-------- --------
Operating loss ................... (572) (264)
EDCO ENVIRONMENTAL
Revenue .......................... 621 694
Gross profit ..................... 335 492
Operating expenses ............... 395 433
-------- --------
Operating income (loss) .......... (60) 59
TOTAL
Revenue .......................... $ 53,369 $ 67,858
Gross profit ..................... 7,928 7,379
Operating expenses(2) ............ 8,385 8,724
-------- --------
Operating loss ................... (457) (1,345)
(1) Includes expenses of the parent company.
The Company's net losses for the six months ended March 31, 1998 and 1997 were
$2,307,000 and $1,824,000, respectively. The decreased net loss was primarily
attributable to an operating profit in the petroleum marketing segment,
primarily due to the excise tax refund discussed above, and reduced losses in
ChemWay as a result of the Company's decision to suspend production, partially
offset by increased losses in the convenience stores, as discussed below.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ESI's consolidated revenues from continuing operations for the six months ended
March 31, 1998, were $53,369,000, as compared to $67,858,000 during the
comparable period ending March 31, 1997. The $14,489,000 (21.4%) six month
decrease in this year's revenues was primarily attributable to a $11,380,000
decrease in petroleum marketing revenues and a $3,036,000 decrease in
convenience store revenues.
ESI's consolidated gross profit from continuing operations for the six months
ended March 31, 1998 was $7,928,000 or approximately 14.9% of consolidated
revenues, as compared to $7,379,000 or approximately 10.9% of consolidated
revenues for the six months ended March 31, 1997. The Company recognized
additional gross profit of $434,000 in the second quarter of the current fiscal
year reflecting the anticipated refund of certain excise taxes which were
previously overpaid. Of the $434,000, $293,000 was attributable to periods prior
to September 30, 1997. The Company's gross profit in the quarter ended March 31,
1998 was 14.1% of sales before the excise tax credit.
The Company's operating expenses were $8,385,000 in the six months ended March
31, 1998, as compared to $8,724,000 in the six months ended March 31, 1997. The
Company's operating expenses were 15.7% of revenues in the six months ended
March 31, 1998 and 12.9% in the six months ended March 31, 1997. Management took
action, including the elimination of nonessential staff, to reduce its overall
levels of operating expenses during October 1997, however the effect of such
reductions did not occur until late in the fiscal quarter ending December 31,
1997.
PETROLEUM MARKETING SEGMENT
The petroleum marketing segment sales were $36,702,000 in the six months ended
March 31, 1998, as compared to $48,082,000 in the six months ended March 31,
1997, a $11,380,000 (23.7%) decrease. Fuel sales gallonage were 35,583,000
gallons in the six months ended March 31, 1998, as compared to 42,309,000 in the
six months ended March 31, 1997, a 6,726,000 (15.9%) decrease. Gross profits for
the six months ended March 31, 1998 and 1997 were $4,175,000 and $2,958,000
respectively. Gross Margin increased to 11.4% in the six months ended March 31,
1998, as compared to 6.2% in the six months ended March 31, 1997. The Company
recognized additional gross profit of $434,000 in the second quarter of the
current fiscal year due to the anticipated refund of certain excise taxes as
discussed above. Gross Margin in the petroleum marketing segment was 10.2% of
sales in the six month period ending March 31, 1998 before the excise tax
credit. Operating expenses decreased $98,000 in the six months ended March 31,
1998, as compared to the six months ended March 31, 1997. Operating expenses
were 10.9% of revenues in the six months ended March 31, 1998, and 8.5% in the
six months ended March 31, 1997. Certain expenses of ESI, the parent company,
are included in the petroleum marketing results. Operating income was $175,000
in the six months ended March 31, 1998, as compared to an operating loss of
$1,140,000 in the six months ended March 31, 1997. The increase in operating
income was primarily due to the recognition of gross profit related to the
overpayment excise taxes of $434,000, other increased gross profit and to the
decreased operating expenses.
During the first fiscal quarter of 1998, the Company's supply agreement with the
primary fuel supplier to the Company's Bay City terminal facility was
terminated. The Company is presently seeking a new supplier for its terminal
operation.
In October 1997, management began a program to reduce its operating expenses,
including the termination of certain nonessential staff, however, the effect of
such reductions did not occur until late in the quarter ended December 31, 1997.
The Company further reduced its staff in February 1998.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONVENIENCE STORE SEGMENT
The Company operated 34 stores at the beginning of the six month period and sold
5 stores during the current fiscal quarter, ending the six months with 29 stores
compared with 39 stores in the six month ended March 31, 1997.
The convenience store segment sales were $16,046,000 in the six months ending
March 31, 1998, as compared to $19,082,000 in the six months ended March 31,
1997, a $3,036,000 (15.9%) decrease. Fuel sales decreased to $8,998,000 in the
six months ended March 31, 1998, as compared to $11,295,000 in the six months
ended March 31, 1997. Fuel sales gallonage decreased to 8,003,000 gallons in the
six months ended March 31, 1998, as compared to 9,893,000 in the six months
ended March 31, 1997, a 1,890,000 (19.1%) decrease. Merchandise sales decreased
to $6,667,000 in the six months ended March 31, 1998, as compared to $7,198,000
in the six months ended March 31, 1997 and other income decreased to $381,000 in
the six months ended March 31, 1998, as compared to $589,000 in the six months
ended March 31, 1997. Management attributes the decrease in sales to operating a
weighted average of 16.5% fewer stores for the current six month period.
Gross profit for the six month period ended March 31, 1998 and 1997 were
$3,418,000 and $3,929,000 respectively. Gross Margin increased to 21.3% in the
six months ended March 31, 1998, as compared to 20.6% in the six months ended
March 31, 1997. Management attributes the increase in gross profit margins
mainly to divesting of lower margin stores during fiscal 1997 and fiscal 1998.
Operating expenses were $3,990,000 in the six months ended March 31, 1998
compared to $4,193,000 in the six months ended March 31, 1997. Operating losses
were $572,000 during the six months ended March 31, 1998, as compared to losses
of $264,000 during the six months ended March 31, 1997.
During the first quarter of fiscal 1998, management implemented certain cost
reduction programs, including improvements in labor scheduling and control, and
reductions in administrative expenses, in order to reduce the convenience
stores' overall operating expenses. Management is continually evaluating its
store operations, and intends to manage its store portfolio to maximize
profitability. Accordingly, the Company sold five under performing stores in
February 1998, and has announced that it intends to sell or close four stores in
May 1998.
EDCO ENVIRONMENTAL
EDCO Environmental sales were $621,000 in the six months ended March 31, 1998 as
compared to $694,000 in the six months ended March 31, 1997, a $73,000 (10.5%)
decrease. Gross profits for the six month periods ended March 31, 1998, and 1997
were $335,000 and $492,000 respectively. Gross profit margins decreased to 53.9%
in the six months ended March 31, 1998, as compared to 70.9% in the six months
ended March 31, 1997.
EDCO's operating expenses decreased $38,000 in the six months ended March 31,
1998, as compared to the six months ended March 31, 1997. The decrease was
mainly attributable to the transfer of EDCO's service department to the
petroleum marketing segment. Operating losses were $60,000 in the six months
ended March 31, 1998, as compared to an operating income of $59,000 for the six
months ending March 31, 1997. Operating income declined due to lower sales and
Gross Margin, partially offset by reduced operating expenses.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CHEMWAY
On February 13, 1998, the Company suspended further production activities at its
ChemWay operation. On April 7, 1998, the Company and an unrelated party entered
into a Letter of Intent to enter into a stock purchase agreement pursuant to
which ESI will sell 80% of the issued and outstanding shares of capital stock of
its wholly owned subsidiary, ChemWay Systems, Inc. ESI will dividend its
remaining interest to its shareholders. There can be no assurance that a
definitive agreement will be entered into or that this transaction will be
successfully consummated.
ChemWay sales were $2,269,000 in the six months ended March 31, 1998, as
compared to $4,518,000 in the six months ended March 31, 1997. In the first
quarter of fiscal 1997, the aerosol production line was out of service in late
November through December for complete refurbishing. Gross profit for the six
month periods ended March 31, 1998 and 1997 were $80,000 and $734,000
respectively. Gross profit margins decreased to 3.5% for the six months ended
March 31, 1998, as compared to 16.2% for the six months ended March 31, 1997.
Gross profit decreased due to the liquidation of inventory at prices below cost.
Operating expense decreased $136,000 in the six months ended March 31, 1998, as
compared to the six months ended March 31, 1997. Operating losses were
$1,001,000 for the six months ended March 31, 1998, as compared to losses of
$484,000 in the six months ended March 31, 1997. Because of the ongoing
operating losses of ChemWay, on May 12, 1998 the Company's Board of Directors
determined that the Company would dispose of ChemWay.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $1,063,000 as of March 31, 1998, as compared to
$1,297,000 at September 30, 1997. Working capital deficit was $6,917,000 as of
March 31, 1998, an increase from $2,371,000 as of September 30, 1997. The net
decrease in working capital was primarily attributable to a decrease in
inventories of $1,557,000, the loss provision for ChemWay of $1,100,000, a
decrease in receivables of $95,000 offset by a decrease in accounts payable of
$2,440,000.
Cash used by operating activities was $579,000 for the six months ended March
31, 1998, as compared to cash provided by operating activities of $1,468,000 for
the six months ended March 31, 1997. ESI's current ratio, the ratio of current
assets to current liability, was .62 at March 31, 1998 and .86 at September 30,
1997.
Certain of the Company's notes payable to banks require maintenance of financial
covenants, including current, debt to equity, tangible net worth and debt
service coverage ratios all as defined in the respective loan agreements. At
September 30, 1997, December 31, 1997, and March 31, 1998 the Company was in
violation of certain of these covenants. In addition, the Company was out of
compliance with the borrowing base limits with one bank. The banks waived these
covenant defaults at September 30, 1997 but not at March 31, 1998.
The Company was given notice on April 30, 1998 by one of its lending banks that
it has thirty days to cure the defaults and if the defaults are not cured within
that time, the bank will accelerate the maturity of the notes to be immediately
due and payable. These notes total $1,816,000 and are secured by certain of the
Company's convenience stores.
The bank where the Company is out of compliance with the borrowing base limits
has agreed to a standstill of the breach of the borrowing base limits. In
exchange for these waivers and the standstill agreement, the Company has pledged
the stock of its subsidiaries, pledged the proceeds of the sale of non-income
producing assets, provided the bank a second lien on its office facility and
agreed to a maturity date of April 30, 1998. The bank subsequently extended the
maturity date to June 30, 1998.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company and a New York based lender are in negotiations for an $11,000,000
credit facility to replace its current lines of credit. There can be no
assurance that these negotiations will be successful.
The Company has also identified certain nonessential assets which it intends to
sell. In February 1998, the Company sold its investment in 5 under performing
convenience stores to an unrelated party. On February 13, 1998, the Company
suspended further production activities at its ChemWay operation. The Company
and an unrelated party entered into a Letter of Intent to enter into a stock
purchase agreement pursuant to which ESI will sell 80% of the issued and
outstanding shares of capital stock of its wholly owned subsidiary, ChemWay
Systems, Inc. ESI will dividend its remaining interest to its shareholders.
There can be no assurance that a definitive agreement will be entered into or
that this transaction will be successfully consummated.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
19
<PAGE>
PART II. OTHER INFORMATION
A. EXHIBITS INDEX PAGE
27. Financial Data Schedule 21
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: September 3, 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.
20
<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-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,063
<SECURITIES> 0
<RECEIVABLES> 3,757
<ALLOWANCES> 301
<INVENTORY> 4,369
<CURRENT-ASSETS> 11,323
<PP&E> 31,486
<DEPRECIATION> 13,269
<TOTAL-ASSETS> 34,886
<CURRENT-LIABILITIES> 18,240
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 13,145
<TOTAL-LIABILITY-AND-EQUITY> 34,886
<SALES> 24,600
<TOTAL-REVENUES> 24,600
<CGS> 20,483
<TOTAL-COSTS> 4,064
<OTHER-EXPENSES> 5
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343
<INCOME-PRETAX> (285)
<INCOME-TAX> (105)
<INCOME-CONTINUING> (180)
<DISCONTINUED> (1,168)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,348)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
