AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1999
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.D. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarter ended JUNE 30, 1999.
[ ] 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., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Mailing Address: P.O. Box 2480, Bay City, Texas 77404-2480 (409) 245-2424
Physical Address: 720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Number of shares of common stock of registrant outstanding exclusive of
Treasury shares or shares held by subsidiaries of the registrant at August 23,
1999 was 3,959,440.
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
Condensed Consolidated Unaudited Balance Sheet as of
June 30, 1999 and September 30, 1998 .................... 3
Condensed Consolidated Unaudited Statement of
Operations and Comprehensive Income (Loss) for the
Three Months Ended June 30, 1999 and 1998 ................ 4
Condensed Consolidated Unaudited Statement of
Operations and Comprehensive Income (Loss) for the
Nine Months Ended June 30, 1999 and 1998 ................. 5
Condensed Consolidated Unaudited Statement of Cash
Flows for the Nine Months Ended June 30, 1999 and 1998 ... 6
Notes to the Condensed Consolidated Financial Statements . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 9
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K
A. Exhibits Index ....................................... 24
B. Reports on Form 8-K .................................. 24
Signatures .................................................. 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
---------- ---------------
ASSETS (As restated)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................... $ 1,527 $ 831
Trade receivables net of allowance for doubtful
accounts of $308,000 and $264,000, respectively 3,588 2,751
Inventory ......................................... 3,138 3,714
Income taxes receivable ........................... 128 128
Prepaid expenses and other current assets ......... 398 775
Deferred income taxes ............................. 78
Current assets of ChemWay ......................... -- 1,637
-------- --------
Total current assets .......................... 8,779 9,914
Property and equipment, net ............................ 15,273 17,037
Investment in marketable securities .................... 937
Other assets ........................................... 499 837
Deferred income taxes .................................. -- 1,291
Noncurrent assets of ChemWay ........................... -- 3,535
-------- --------
Total assets ............................. $ 25,488 $ 32,614
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ............. $ 6,819 $ 6,019
Current portion of long-term debt ................. 2,178 1,698
Current liabilities of ChemWay .................... -- 2,034
-------- --------
Total current liabilities ..................... 8,997 9,751
Long-term debt ......................................... 10,135 11,151
-------- --------
Total liabilities ............................. 19,132 20,902
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares
authorized, 4,094,831 and 3,268,298 shares issued,
respectively ...................................... 41 33
Additional paid-in capital ........................ 15,377 13,811
Retained earnings (deficit) ....................... (8,628) (1,698)
Treasury stock, 72,589 shares, at cost ............ (434) (434)
-------- --------
Total stockholders' equity .................... 6,356 11,712
-------- --------
Total liabilities and stockholders' equity $ 25,488 $ 32,614
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
-------- --------
(As restated)
Revenue:
Refined product sales ........................ $ 20,208 $ 21,925
Other sales and services ..................... 4,050 4,528
-------- --------
Total revenue ................................ 24,258 26,453
Cost of sales ..................................... 21,082 23,205
-------- --------
Gross profit ...................................... 3,176 3,248
-------- --------
Operating expenses:
Employment expenses .......................... 1,546 1,795
Other operating expenses ..................... 816 774
General & administrative expenses ............ 783 771
Depreciation and amortization ................ 368 456
-------- --------
Total operating expenses ..................... 3,513 3,796
-------- --------
Operating loss .................................... (337) (548)
Other income (expense)
Interest expense, net ........................ (533) (160)
Gain on sale of assets ....................... 213
Loss on marketable securities ................ (8,063) --
Other, net ................................... 143
-------- --------
Loss before benefit from income taxes ............. (8,720) (565)
Benefit from income taxes ......................... -- 200
-------- --------
Loss from continuing operations ................... (8,720) (365)
Discontinued operations:
Loss from discontinued operations of
ChemWay .................................... -- (242)
-------- --------
Net loss .......................................... $ (8,720) $ (607)
======== ========
Basic and diluted earnings (loss) per share:
Continuing operations ........................ $ (2.37) $ (.36)
Discontinued operations ...................... - (.35)
Provision for loss on disposition of ChemWay . - (.23)
-------- --------
Net income (loss) ............................ $ (2.37) $ (.94)
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
-------- --------
(As restated)
<S> <C> <C>
Revenue:
Refined product sales ........................... $ 51,688 $ 64,991
Other sales and services ........................ 12,727 14,831
-------- --------
Total revenue ................................... 64,415 79,822
Cost of sales ........................................ 55,030 68,646
-------- --------
Gross profit ......................................... 9,385 11,176
-------- --------
Operating expenses:
Employment expenses ............................. 5,226 6,156
Other operating expenses ........................ 2,560 2,551
General & administrative expenses ............... 2,436 2,048
Depreciation and amortization ................... 1,208 1,426
-------- --------
Total operating expenses ........................ 11,430 12,181
-------- --------
Operating loss ....................................... (2,045) (1,005)
Other income (expense):
Interest expense, net ........................... (1,220) (841)
Gain on sale of assets .......................... 323 (114)
Loss on marketable securities ................... (8,063) --
Other, net ...................................... (201) 212
-------- --------
Loss before benefit from income taxes ................ (11,206) (1,748)
Benefit from income taxes ............................ 19 629
-------- --------
Loss from continuing operations ...................... (11,187) (1,119)
Discontinued operations:
Loss from discontinued operations of
ChemWay, net of tax benefit ................... -- (1,090)
Gain (Provision for loss) on disposal of ChemWay,
net of taxes of $2,249 and $211, respectively . 4,257 (705)
-------- --------
Net income (loss) .................................... $ (6,930) $ (2,914)
Basic and diluted earnings (loss) per share:
Continuing operations ........................... $ (1.82) $ (.36)
Discontinued operations ......................... - (.35)
Provision for loss on disposition of ChemWay .... - (.23)
-------- --------
Net income (loss) ............................... $ (1.82) $ (.94)
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------- -------
(As restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $(6,930) $(2,914)
Adjustments:
Depreciation and amortization ............. 1,208 1,584
Deferred income taxes ..................... 1,369 (1,489)
Loss from discontinued operations ......... -- 1,100
Loss (gain) on sale of fixed assets ....... (323) 114
Gain on disposition of ChemWay ............ (4,257)
Loss on marketable securities ............. 8,628 --
Change in unrealized loss on martable
securities .............................. (938) --
Stock option compensation expense ......... 205 --
Changes in working capital:
Current assets ....................... 1,218 3,898
Current liabilities .................. (699) (1,880)
------- -------
Total adjustments ............................. 5,846 3,327
------- -------
Net cash provided (used) by operating activities ... (1,084) 413
------- -------
Cash flows from investing activities:
Capital expenditures .......................... (446) (1,769)
Proceeds from sale of property and equipment .. 1,325 1,407
Other, net .................................... 68 156
------- -------
Net cash provided (used) by investing activities ... 947 (206)
------- -------
Cash flows from financing activities:
Borrowings (repayment) on notes payable, net . (536) 159
Net proceeds from exercise of stock options ... 1,369 --
------- -------
Net cash provided by financing activities .......... 833 159
------- -------
Net increase (decrease) in cash .................... 696 366
Cash and cash equivalents, beginning of period ..... 831 1,297
------- -------
Cash and cash equivalents, end of period ........... $ 1,527 $ 1,663
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED 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, 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 and nine
month periods ended March 31, 1999 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
At December 31, 1998, the Company was in default of certain financial covenants
contained within its loan agreements with two of its bank lenders. On March 31,
1999, the Company closed on an amendment to its credit agreement with one of its
bank lenders (the "Refinancing"), pursuant to which the bank (i) waived all
previous and continuing covenant defaults; (ii) extended the maturity of its
loan balance to January 31, 2001; and (iii) assumed the amounts outstanding
under the other bank lender's loans under their current terms and conditions.
Under the terms of the Refinancing, such bank lender received a first lien
position on certain assets of the Company, more specifically, inventories,
accounts receivable, convenience store real estate and equipment. The
Refinancing contains financial covenant obligations, including minimum net
worth, minimum earnings before interest, taxes and depreciation ("EBITDA"),
working capital ratio and fixed charge coverage ratio, all as defined within the
loan documents. The Company is presently in compliance with the proposed
financial covenants and 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.
Furthermore, covenants in the Company's loan agreement (i) limit the Company's
ability to make capital expenditures to the greater of $1,000,000 or 25% of
EBITDA, (ii) prohibit the payment of cash dividends and (iii) limit the
Company's ability to incur additional indebtedness. Under the terms of the
Refinancing, interest is payable monthly at an annual rate of two percent above
the bank's established prime lending rate. In addition, the Company is obligated
to make a principal repayment of approximately $41,000 per month. Although the
final maturity date of the loan is January 31, 2001, since the loan was not
repaid by June 30, 1999, the Company became subject to a fee of $250,000, the
payment of which the bank agreed to defer until the earlier of August 31, 1999
or the repayment of the loan; furthermore, the Company could become obligated to
pay additional fees of $250,000 on August 31, 1999 and December 31, 1999 in the
event that the loan obligations are not repaid by those respective dates.
Interest expense in the three and nine month periods ended June 30, 1999
includes the $250,000 payment which was originally due June 30. Management
intends to replace the existing bank debt with new financing which would have
the effect of increasing the availability of working capital and avoid payment
of the fees discussed above, however there can be no assurance that it will be
able to do so.
7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings (loss) per share for the quarters ending June 30,
1999 and June 30, 1998 were computed using 3,675,398 and 3,090,984 weighted
average common shares outstanding, respectively. Basic and diluted loss per
share for the nine months ended June 30, 1999 and June 30, 1998 were computed
using 3,814,699 and 3,090,984 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 an unaffiliated third party, 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
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 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 on the disposition of ChemWay of $4,257,000, net of
provision for income taxes of 2,249,000.
NOTE F - MARKETABLE SECURITIES
Marketable equity securities available for resale are carried at market. The
number of shares of Affiliated common stock at June 30, 1999 was 1,500,000
shares, resulting in a loss of $8,063,000. In accordance with generally accepted
accounting principles, the Affiliated common stock received in exchange for the
common stock of ChemWay was valued at its "fair price" indicated by the closing
price of $0.625 per share.
The Company determined that its investment in Affiliated common stock was
permanently impaired adn, accordingly recoreded a realized osss of $8,063,000 in
the quarter ended June 30, 1999.
The Affiliated common stock is highly illiquid; in addition to being
unregistered, the average trading volume of Affiliated is small in comparison to
the number of shares held by the Company. While the Company does not intend to
sell its Affiliated common stock in the foreseeable future, there can be no
assurance that the Company would be able to realize the value recorded on the
balance sheet should it elect to register and sell its Affiliated common stock.
At December 31, 1998, Affiliated had a retained earnings deficit of $7,630,070
based on historic losses, and a negative working capital balance of $912,605.
Affiliated had no revenues from operations during the last six months of 1998.
There can be no assurance that the Company would be able to realize the value
recorded on the balance sheet should it elect to register and sell its
Affiliated common stock.
NOTE G - PROPOSED MERGER AGREEMENT
On March 3, 1999, the Company announced that it had signed a letter of intent to
merge with Duke & Long Distributing Company, Inc., however such merger
discussions were terminated on April 16, 1999. In conjunction with the proposed
merger, the Company incurred legal and professional fees of $479,700, which are
included within the results of operations in the quarter ended March 31, 1999.
NOTE H - STOCKHOLDERS' EQUITY
The Company received net proceeds of $1,078,000 from the exercise of 429,543
stock options by employees during the nine months ended June 30, 1999.
NOTE I - SUBSEQUENT EVENTS
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In July 1999, two alleged purchasers of ESI common stock, who allegedly bought
their stock between December 29, 1997 and June 8, 1999, brought two
purported class action lawsuits against ESI and several of its current and
former officers and directors in the United States District Court for the
Southern District of Texas. Each of these lawsuits asserted that the defendants
violated federal securities laws by issuing allegedly false and misleading
statements in 1997, 1998 and 1999 about ESI's financial condition and results of
operations. The lawsuits demanded, among other relief, unspecified compensatory
damages, attorneys' fees and the costs of conducting the litigation.
It is not possible at this time to predict the impact that the above lawsuits
may have upon the Company, nor is it possible to predict whether any other suits
or claims may arise out of these matters in the future. It is reasonably likely,
however, that the outcome of any present or future litigation may have a
material adverse impact on the Company's financial condition or results of
operations in one or more future periods. ESI intends to defend itself
vigorously in all the above matters.
9
<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 JUNE 30, 1999 AND 1998
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
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the three months ended June 30, 1999 and
1998. This is the second quarter of ESI's fiscal year which begins on October 1
and ends on September 30.
(AS RESTATED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- ---------------
(In thousands) (In thousands)
PETROLEUM MARKETING(1)
Revenue .................................. $ 15,956 $ 17,547
Gross profit ............................. 1,406 1,256
Operating expenses ....................... 1,847 1,870
-------- --------
Operating loss ........................... (441) (614)
CONVENIENCE STORES
Revenue .................................. 7,881 8,586
Gross profit ............................. 1,486 1,781
Other operating expenses ................. 1,516 1,776
-------- --------
Operating loss ........................... (30) 5
EDCO ENVIRONMENTAL
Revenue .................................. 421 320
Gross profit ............................. 284 211
Other operating expenses ................. 150 150
-------- --------
Operating income (loss) .................. 134 61
TOTAL
Revenue .................................. $ 24,258 $ 26,453
Gross profit ............................. 3,176 3,248
Operating expenses ....................... 3,513 3,796
-------- --------
Operating loss ........................... (337) (548)
(1) Includes expenses of the parent company.
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.
On April 1999, the Company announced that it executed an exclusive marketing
agreement with For A Free Gift.Com, an internet marketing venture, owned by
Access Media and Marketing of Oak Brook, Illinois, pursuant to which the Company
will have exclusive rights to market the program within the convenience store
industry in the U.S. The program, which management intends to preview on July 1,
1999 in its company-operated convenience stores, will use promotional brochures
which will contain discount coupons and will feature manufacturing and retail
products. These flyers and brochures will be distributed to consumers, allowing
the consumer to receive free gifts and coupon discounts both in the store and by
logging on to the for-a-free-e-gift.com website and entering an identification
number contained on the flyer. The company plans to develop the
reverse-marketing concept to provide real-time store specific demographic data
on consumers to advertisers by generating site visits to a-free- gift.com. Each
distributed flyer will contain nine discount coupons that can be redeemed by the
consumer, and each free brochure will contain 60 coupon discounts and special
offers from advertisers and manufacturers. The Company anticipates that revenues
will be generated both from the placement of coupons through the selling of
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
advertising on the flyers/ brochures and sponsor revenues and cost-per-lead data
from the Web site. Under the terms of the agreement Evans will receive 33% of
the advertising and sponsor revenue generated by each participating convenience
store in the program. The company believes this program will add traffic and
value to the participating convenience stores, although there can be no
assurance that it will do so. Management intends to spend approximately $870,000
during the remainder of fiscal 1999 for development and advertising costs
relating to its marketing of the For-A-Free-Gift.Com venture. Management intends
to raise the necessary funding through the sale of common stock in a private
placement, although there can be no assurance that it will be able to do so. In
the event that the Company is unsuccessful in raising the necessary funds, it is
unlikely that the Company would be able to develop the For-A-Free-Gift.Com
venture.
On May 21, 1999 the company continued to implement it's re-positioning strategy
by closing its bulk storage facility and office in El Campo, Texas and
eliminated 35% of its staff in the Petroleum marketing segment. The company also
closed one underperforming store in Bay City, Texas bringing its total company
operated stores to 24. The company also sold its Bay City Tire Store on May 3,
1999. On May 14,1999, the Company executed an agreement to sell its Fuelman
fleet card franchise to a competitor. Management anticipates closing on the
transaction in mid July.
In May 1999, the Company announced that it had named Richard B. Dix as president
and chief operating officer, and further that it intended to relocate its
corporate offices to Houston, Texas from its present facility in Bay City,
Texas. The Company also announced the retirement of the Company's Director and
Secretary, Mrs. Maybell Evans. The Company intends to reposition itself as a
e-commerce based value-added service provider to the convenience store industry.
Under this business model the company intends to offer coupons and discounts to
consumers through internet-based cross-promotion with manufacturers and
advertisers to drive retail consumers to content-based web sites which offer
promotional items and services to the convenience consumer. Management believes
the potential for the Petroleum Marketing segment is limited, and intends to
explore all strategic alternatives that relate to that segment. Mr. Dix resigned
from the Company in July 1999 in order to pursue other interests.
Consolidated sales revenues declined to $24,258,000 in the quarter ended June
30, 1999, from $26,453,000 in the comparable prior year quarter, a decline of
$2,195,000 or approximately 8%. The decline is primarily due to the closing or
selling of underperforming retail locations in the petroleum marketing and
convenience store segments. See segment discussions, below.
Consolidated gross profit in the quarter ended June 30, 1999 was $3,176,000 as
compared with $3,248,000 in the quarter ended June 30, 1998, a decline of
$72,000 or approximately 2%. Gross profit expressed as a percentage of sales
("Gross Margin"), increased to approximately 13.1% of sales during the quarter
ended June 30, 1999 as compared with approximately 12.3% of sales in the
comparable prior year quarter. The increase in Gross Margin is principally
attributable to higher prevailing fuel margins which prevailed during the
current fiscal year period. See segment discussions, below.
Operating expenses in the quarter ended June 30, 1999 were $3,513,000, as
compared with $3,796,000 in the quarter ended June 30, 1998, a decrease of
$283,000 or approximately 7%. Operating expenses included legal and professional
fees of $187,000 related to a number of matters, including the restatement of
the Company's previously reported financial statements, the negotiation of the
purchase agreement with A-Free-Gift.Com, and the refinancing of the Company's
senior debt. After adjusting for these nonrecurring expenses, adjusted operating
expenses declined $468,000 or approximately 12%. The decline in operating
expenses in the quarter ended June 30, 1999, as compared with the previous year
quarter, is primarily due to the closing of underperforming convenience stores,
and to an overall staff reduction.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company incurred a consolidated operating loss of $337,000 in the quarter
ended June 30, 1999, as compared with an operating loss of $548,000 in the
quarter ended June 30, 1998. The difference is primarily as a result of the
lower sales revenues and resulting gross profits in the current year, partially
offset by reduced operating expenses.
PETROLEUM MARKETING SEGMENT
Petroleum Marketing segment's sales revenues declined $1,591,000 to $15,956,000
in the quarter ended June 30, 1999, as compared with $17,547,000 in the quarter
ended June 30, 1998, a decline of approximately 9%. The decline is primarily due
to reduced number of customers which the Company served during the current year
quarter. Fuel prices can be extremely volatile, and are determined by factors
beyond the Company's control. Overall fuel prices have subsequently increased
during the summer of 1999, however there can be no assurance that they will
continue to increase. Fuel sales in gallons was 16,293,000 in the quarter ended
June 30, 1999, as compared with 16,417,000 gallons in the quarter ended June 30,
1998, a decrease of approximately 1%. The Petroleum Marketing segment
distributes to its motor fuel customers both directly from refinery racks, and
through the Company's bulk plant 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 and into 1999: the Company
was unable to sell fuels through various racks with its exchange agreements with
other oil companies. The Company is continuing to seek a new supplier for its
terminal operation, however there can be no assurance that it will be able to do
so.
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 March 31, 1999,
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 remaining net book value of fixed assets at these 16 locations is
included in the $338,000 loss on abandonment of fixed assets recorded in the
quarter ended March 31, 1999. Revenues at the 16 Special Purpose Lease sites
where the underground storage tanks were removed were immaterial to the
Petroleum Marketing Segment, and management believes the closing of these 16
locations will have an immaterial effect on the future operating results of the
segment. Nineteen of the Special Purpose Lease locations sold or closed by the
Company were registered as Leaking Petroleum Storage Tank ("LPST") sites with
the TNRCC. Additionally, the Company purchased insurance, effective December 22,
1998, indemnifying the Company for first party or third party responsibility up
to $1,000,000 per location, arising from future underground storage tank
environmental issues. As such, the Company's potential liability for cleanup is
limited to its deductible amount under either the TNRCC fund, or insurance
coverage carried by the Company. The Company's maximum potential liability for
such 19 locations is $97,500, the sum of the deductible amounts for each
location, however the actual liability could be less, and cannot be determined
at this time. 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 investment in working capital. 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 $1,406,000 in the quarter
ended June 30, 1999, as compared with $1,256,000 in the quarter ended June 30,
1998, an increase of $150,000 or approximately 12%. Gross
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Margin in the quarter ended June 30, 1999 increased to approximately 8.8% of
sales as compared with approximately 7.2% in the quarter ended June 30, 1998.
The increase is attributed to the improved competitive conditions which
prevailed during the third quarter of 1999, as compared to the third quarter of
1998, partially offset by the conversion of Special Purpose Lease customers into
Open Dealers.
Operating expenses in the Petroleum Marketing Segment were $1,847,000 in the
quarter ended June 30, 1999, as compared with $1,870,000 in the quarter ended
June 30, 1998, a decrease of $23,000 or approximately 1%. Operating expenses
included legal and professional fees of $187,000 related to a number of matters,
including the restatement of the Company's previously reported financial
statements, the negotiation of the purchase agreement with A-Free-Gift.Com, and
the refinancing of the Company's senior debt. After adjusting for these
nonrecurring expenses, operating expenses declined $189,000 or approximately 11%
in the quarter ended June 30, 1999 as compared with the quarter ended June 30,
1998. In October 1997, management began a program to reduce the Company's
operating expenses, including the termination of nonessential staff. The effect
of those staff reductions began to take effect during the quarter ended December
31, 1997. The Company further reduced its staff in February 1998. The effect of
the cost reduction programs has slightly exceeded management's expectations, as
additional staff reductions have occurred through attrition. Management expects
to further reduce the Company's operating expenses during 1999 as the Company
continues to exit from the Petroleum Marketing operations. On May 21, 1999, the
Company closed its bulk storage facility in El Campo, Texas and further reduced
its operating and administrative staff by approximately 35%. With these
additional reductions in personnel, management anticipates annualized reductions
in operating expenses of approximately $800,000. On May 3, 1999, the Company
completed the sale of its Bay City, Texas tire store and closed the sales
transaction on June 30, 1999. 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 $441,000 in the
quarter ended June 30, 1999 as compared with an operating loss of $614,000 in
the quarter ended June 30, 1998. The reduced loss in the current year period is
attributable to higher gross margins and reduced operating expenses in the
current year, partially offset by reduced sales revenues.
CONVENIENCE STORE SEGMENT
Sales in the Convenience Store segment were $7,881,000 in the quarter ended June
30, 1999, as compared with $8,586,000 in the quarter ended June 30, 1998, a
decline of approximately 8%. During the quarter ended June 30, 1999 the company
operated 24 stores compared to 29 stores during the comparable quarter ended
June 30, 1998, having closed another nonperforming store in May 1999. Fuel sales
in the quarter ended June 30, 1999 were $4,489,000 as compared with $4,716,000
in the quarter ended June 30, 1998; fuel sales in gallons declined to 4,247,000
gallons in the quarter ended June 30, 1999 as compared with 4,744,000 gallons in
the quarter ended June 30, 1998.
Merchandise sales decreased $325,000 to $3,244,000 as compared with $3,569,000
in the quarter ended June 30, 1998. The decline in merchandise sales is
primarily due to fewer operating stores during the current fiscal year. As a
percentage of total store sales, however, merchandise sales were comparable in
the quarters ended June 30, 1999 and 1998, respectively.
Gross profit declined $295,000 or approximately 16% to $1,486,000 in the quarter
ended June 30, 1999 as compared with $1,781,000 in the quarter ended June 30,
1998 primarily due to the lower sales during the current year period. Gross
Margin in the Convenience Store segment was approximately 18.9% of sales as
compared with approximately 20.7% of sales during the 1999 and 1998 periods,
respectively.
Operating expenses during the quarter ended June 30, 1999 in the Convenience
Store segment were $1,516,000 as compared with $1,776,000 in the quarter ended
June 30, 1998, a decrease of $260,000 or approximately 15%. The decline in
operating expenses is principally attributable to the closing of underperforming
stores during 1998, and
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
to an overall reduction in staff during 1998. On May 21, 1999 the Company
further reduced its administrative staff within the Convenience Store segment.
The Convenience Store segment incurred an operating loss of $30,000 in the
quarter ended June 30, 1999, as compared with an operating profit of $5,000 in
the quarter ended June 30, 1998. The increased loss is due to reduced sales and
resulting gross profits, partially offset by reduced operating expenses during
the current year.
EDCO ENVIRONMENTAL
EDCO Environmental earned an operating profit of $134,000 in the quarter ended
June 30, 1999, as compared with an operating profit of $61,000 in the quarter
ended June 30, 1998, primarily due to increased sales revenues and resultant
gross profits in the current year quarter. EDCO Environmental intends to
continue to focus its attention on environmental remediation projects which have
been pre-approved for reimbursement by the Texas Natural Resource Conservation
Commissions' ("TNRCC") fund, or by private insurers. Management believes that
such opportunities will continue to exist, however there can be no assurance
that they will do so.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
The following table reflects the operating results of the Company's business
segments for the nine months ended June 30, 1999 and 1998.
(AS RESTATED)
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- --------------
(In thousands) (In thousands)
PETROLEUM MARKETING(1)
Revenue .................................. $ 41,319 $ 54,259
Gross profit ............................. 4,326 5,431
Operating expenses ....................... 6,180 5,870
-------- --------
Operating loss ........................... (1,854) (439)
CONVENIENCE STORES
Revenue .................................. 21,879 24,632
Gross profit ............................. 4,376 5,199
Other operating expenses ................. 4,671 5,766
-------- --------
Operating loss ........................... (295) (567)
EDCO ENVIRONMENTAL
Revenue .................................. 1,217 941
Gross profit ............................. 683 546
Other operating expenses ................. 579 545
-------- --------
Operating income (loss) .................. 104 1
TOTAL
Revenue .................................. 64,415 $ 79,822
Gross profit ............................. 9,385 11,176
Operating expenses ....................... 11,430 12,181
-------- --------
Operating loss ........................... (2,045) (1,005)
(1) Includes expenses of the parent company.
On March 3, 1999, the Company announced that it had signed a letter of intent to
merge with Duke & Long Distributing Company, Inc., however such merger
discussions were terminated on April 16, 1999. In conjunction with the proposed
merger, the Company incurred legal and professional fees of $479,700, which are
included within the results of operations in the results for the nine months
ended June 30, 1999.
Operating loss for the nine months ended June 30, 1999 also includes
nonrecurring legal and professional fees of $187,000 related to a number of
matters, including the restatement of the Company's previously reported
financial statements, the negotiation of the purchase agreement with
A-Free-Gift.Com, and the refinancing of the Company's senior debt.
Operating loss for the nine months ended June 30, 1999 included a non-cash
charge of $205,000 to compensation expense, as a result of the application of
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees," with respect to the vesting of certain incentive stock options which
had previously been awarded to employees. Gross profit in the results for the
nine months ended June 30, 1998 included additional gross profit of $434,000,
resulting from the refund of excise taxes which had previously been overpaid.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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. 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 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
In April 1999, the Company announced that it is having discussions with For A
Free Gift.Com, an internet marketing venture, pursuant to which the Company
would have exclusive rights to market the program within the convenience store
industry in the U.S. The Company was named the master distributor for the
Convenience store industry, allowing Evans to target the approximately 90,000
convenience stores operating in the U.S. The program is designed to drive
customers to participating stores through the utilization of free gifts and cost
saving coupons. The store customers then have an opportunity to win additional
free gifts by logging on to the internet web-site and watching a brief message
from participating sponsors. Each participating convenience store acts a
sub-distributor for the program and is compensated, based upon redemption rates
of coupons. The company believes this program will add traffic and value to the
participating convenience stores, although there can be no assurance that it
will do so. Management intends to raise the necessary funding through the sale
of common stock in a private placement, although there can be no assurance that
it will be able to do so. In the event that the Company is unsuccessful in
raising the necessary funds, it is unlikely that the Company would be able to
develop the For-A-Free-Gift.Com venture.
In May 1999, the Company announced that it had named Richard B. Dix as president
and chief operating officer, and further that it intended to relocate its
corporate offices to Houston, Texas from its present facility in Bay City,
Texas. The Company intends to continue to reposition itself as a service
provider to the convenience store industry. Management believes the potential
for the Petroleum Marketing segment is limited, and intends to gradually exit
from that segment. The Company is presently negotiating with various potential
strategic partners with the intent of rapidly creating a significant presence on
the internet. Mr. Dix resigned from the Company in July 1999 in order to pursue
other interests.
Consolidated sales revenues declined to $64,415,000 in the nine months ended
June 30, 1999, from $79,259,000 in the comparable prior year period, a decline
of $14,844,000 or approximately 19%. The decline is primarily due to the lower
fuel prices which prevailed during the current year period, and to the fewer
number of operating store location. See segment discussions, below.
Consolidated gross profit in the nine months ended June 30, 1999, excluding the
effect of the excise tax refund discussed above, was $9,385,000 as compared with
$10,742,000 in the nine months ended June 30, 1998, a decline of $1,357,000 or
approximately 13%. Gross Margin, after taking into consideration the effect of
the excise tax refund recognized during the nine months ended June 30, 1998,
increased to approximately 14.6% of sales during the nine months ended June 30,
1999 as compared with a approximately 13.5% of sales in the comparable prior
year period. The improvement Gross Margin is due to the higher fuel prices and
margins which prevailed during the quarter ended December 31, 1998, as compared
with the quarter ended December 31, 1997, partially offset by the highly
competitive environment which prevailed during the quarter ended March 31, 1999.
See segment discussions, below.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses, excluding the effect of the nonrecurring charges discussed
above, in the six month period ended June 30, 1999 were $11,038,000, as compared
with $12,181,000 in the nine months ended June 30, 1998, a decrease of
$1,143,000 or approximately 9%. The decline in operating expenses in the nine
months ended June 30, 1999, 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, after taking into consideration the effect of the
excise tax refund in the six months ended June 30, 1998, and the nonrecurring
charges in the six months ended June 30, 1999, declined $266,000 in the current
year period: adjusted operating loss was $1,173,000 in the nine months ended
June 30, 1999 as compared with an adjusted operating loss of $1,439,000 in the
nine months ended June 30, 1998. The effect of the reduced adjusted operating
expenses during the current year six month period was partially offset by the
lower sales revenues and gross profits during the current year six month period.
By segment, improved results in the convenience store and EDCO Environmental
segments were offset by higher operating losses in the Petroleum Marketing
segment. See segment discussion, below.
PETROLEUM MARKETING SEGMENT
Petroleum Marketing segment's sales revenues declined $12,940,000 to $41,319,000
in the nine months ended June 30, 1999, as compared with $54,259,000 in the nine
months ended June 30, 1998, a decline of approximately 24%. The decline is
primarily due to the reduced number of customers which the Company served during
the current year, and secondarily due to the lower retail prices which prevailed
during the current year perod. Fuel prices can be extremely volatile, and are
determined by factor's beyond the Company's control. Overall fuel prices have
subsequently increased during the summer of 1999, however there can be no
assurance that they will continue to increase. Fuel sales in gallons was
44,262,000 in the nine months ended June 30, 1999, as compared with 52,000,000
gallons in the nine months ended June 30, 1998, a decrease of approximately 15%.
The Petroleum Marketing segment distributes to its motor fuel customers both
directly from refinery racks, and through the Company's bulk plant facilities.
The Company, through its wholly-owned subsidiary 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 and into 1999: the Company
was unable to sell fuels through various racks with its exchange agreements with
other oil companies. The Company is continuing to seek a new supplier for its
terminal operation, however there can be no assurance that it will be able to do
so.
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 June 30, 1999,
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 remaining net book value of fixed assets at these 16 locations is
included in the $338,000 loss on abandonment of fixed assets recorded in the
nine months ended June 30, 1999. Revenues at the 16 Special Purpose Lease sites
where the underground storage tanks were removed were immaterial to the
Petroleum Marketing Segment, and management believes the closing of these 16
locations will have an immaterial effect on the future operating results of the
segment. Nineteen of the Special Purpose Lease locations sold or closed by the
Company were registered as Leaking Petroleum Storage Tank ("LPST") sites with
the TNRCC. Additionally, the Company purchased insurance, effective December 22,
1998, indemnifying the Company for first party or third party responsibility up
to $1,000,000 per location, arising from future underground storage tank
environmental issues. As such, the Company's potential liability for cleanup is
limited to its deductible amount under either the TNRCC fund, or insurance
coverage carried by the Company. The Company's maximum potential liability for
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
such 19 locations is $97,500, the sum of the deductible amounts for each
location, however the actual liability could be less, and cannot be determined
at this time. 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 $4,326,000 in the nine
months ended June 30, 1999, as compared with $4,997,000 in the nine months ended
June 30, 1998, after taking into consideration the effect of the excise tax
refund, a decline of $671,000 or approximately 13%. Gross Margin in the nine
months ended June 30, 1999, however, increased to approximately 10.5% of sales
as compared with approximately 9.2% in the nine months ended June 30, 1998,
after taking into consideration the effect of the excise tax refund. Gasoline
gross profits are determined primarily by external competitive factors which are
beyond the Company's control, and can be highly volatile. Gross Margins in the
first and third quarters of 1999 were higher than those achieved in the first
quarter of 1998, however Gross Margins in the second quarter of 1999 were
significantly lower than either the first quarter of 1999, or the comparable
second quarter of 1998.
Compensation expense in the nine months ended June 30, 1999 included a non-cash
charge to compensation expense of $196,000, resulting from the vesting of
employee stock options, discussed above. General and administrative expenses
also included legal and professional fees of $479,700, incurred in conjunction
with the proposed merger with Duke and Long Distributing, see above. General and
administrative expenses also includes nonrecurring legal and professional fees
of $187,000 related to a number of matters, including the restatement of the
Company's previously reported financial statements, the negotiation of the
purchase agreement with A-Free- Gift.Com, and the refinancing of the Company's
senior debt.
After taking into consideration the nonrecurring expenses discussed above,
operating expenses in the Petroleum Marketing Segment were $5,317,000 in the
nine months ended June 30, 1999, as compared with $5,870,000 in the nine months
ended June 30, 1998, a decrease of $553,000 or approximately 9%. In October
1997, management began a program to reduce the Company's operating expenses,
including the termination of nonessential staff. The effect of those staff
reductions began to take effect during the nine months ended December 31, 1997.
The Company further reduced its staff in February 1998. The effect of the cost
reduction programs has slightly exceeded management's expectations, as
additional staff reductions have occurred through attrition. Management expects
to further reduce the Company's operating expenses during 1999 as the Company
continues to exit from the Petroleum Marketing operations. On May 21, 1999, the
Company closed its bulk storage facility in El Campo, Texas and further reduced
its operating and administrative staff. Note that the operating expenses of the
parent company are included within the Petroleum Marketing segment results.
Operating loss of the Petroleum Marketing Segment increased to $1,854,000 in the
nine months ended June 30, 1999 as compared with an operating loss of $439,000
in the nine months ended June 30, 1998. The variance is primarily due to the
non-recurring legal and professional fees and the noncash compensation expense
incurred during the nine months ended June 30, 1999. After taking into
consideration those nonrecurring expenses of $863,000, and the $434,000 excise
tax refund discussed above, the comparable results for the Petroleum Marketing
Segment would be an adjusted operating loss of $991,000 in the nine months ended
June 30, 1999 as compared with an adjusted operating loss of $873,000 in the
nine months ended June 30, 1998. The increased adjusted operating loss is
primarily due to the competitive environment with resultant reduced fuel pricing
and gross margins which prevailed during the current year nine months, partially
offset by reduced operating expenses during the current nine month period
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
CONVENIENCE STORE SEGMENT
Sales in the Convenience Store segment were $21,879,000 in the nine months ended
June 30, 1999, as compared with $24,632,000 in the nine months ended June 30,
1998, a decline of approximately 11%. The Company operated 24 stores at the end
of the nine month period ended June 30, 1999 as compared with compared with 34
stores during the comparable period ended June 30, 1998. Fuel sales in the nine
months ended June 30, 1999 were $12,130,000 as compared with $13,647,000 in the
nine months ended June 30, 1998; the lower fuel sales in the current year is due
to the lower retail fuel prices which prevailed during the current year period.
Fuel sales in gallons increased to 12,521,000 in the nine months ended June 30,
1999 as compared to 12,747,000 in the nine months ended June 30, 1998. The
decline in selling prices for fuel during the current year period is primarily
driven by external market forces beyond the Company's control, however it also
reflects Management's decision to price its fuels more aggressively in order to
increase customer traffic and resulting higher-margin merchandise sales.
Merchandise sales decreased $784,000 to $9,452,000 as compared with $10,236,000
in the nine months ended June 30, 1998. The decline in merchandise sales is
primarily due to fewer operating stores during the current fiscal year. As a
percentage of total store sales, however, merchandise sales increased to
slightly over 43% as compared to approximately 42% in the nine month periods
ended June 30, 1999 and 1998, respectively.
Gross profit declined $823,000 or approximately 15% to $4,376,000 in the nine
months ended June 30, 1999 as compared with $5,199,000 in the nine months ended
June 30, 1998 primarily due to the lower gasoline margins which prevailed during
the current year period. Gross Margin in the Convenience Store segment was
approximately 20.0% of sales as compared with approximately 21.1% of sales
during the 1999 and 1998 periods, respectively.
Operating expenses during the nine months ended June 30, 1999 in the Convenience
Store segment were $4,671,000 as compared with $5,766,000 in the nine months
ended June 30, 1998, a decrease of $1,095,000 or approximately 19%. The decline
in operating expenses is principally attributable to the closing of
underperforming stores during 1998, and to an overall reduction in staff during
1998. On May 21, 1999 the Company further reduced its administrative staff
within the Convenience Store segment.
The Convenience Store segment incurred an operating loss of $295,000 in the nine
months ended June 30, 1999, as compared with a loss of $567,000 in the nine
months ended June 30, 1998. The reduced loss is due to reduced operating
expenses during the current year, partially offset by reduced sales and
resulting gross profits.
EDCO ENVIRONMENTAL
EDCO Environmental reported an operating profit of $104,000 in the nine months
ended June 30, 1999, as compared with an operating profit of $1,000 in the nine
months ended June 30, 1998,, primarily due to increased sales revenues and
resultant gross profits. The work performed in conjunction with bringing sites
into compliance with the December 22, 1998 EPA requirements is substantially
complete. EDCO Environmental will continue to focus its attention on
environmental remediation projects which have been pre-approved for
reimbursement by the Texas Natural Resource Conservation Commissions' ("TNRCC")
fund, or by private insurers. Management believes that such opportunities will
continue to exist, however there can be no assurance that they will do so.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 1998, the Company was in default of certain financial covenants
contained within its loan agreements with two of its bank lenders. On March 31,
1999, the Company closed on an amendment to its credit agreement with one of its
bank lenders (the "Refinancing"), pursuant to which the bank would (i) waive all
previous and continuing covenant defaults; (ii) extend the maturity of its loan
balance to January 31, 2001; and
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
(iii) assume the amounts outstanding under the other bank lender's loans under
their current terms and conditions. Under the terms of the Refinancing, such
bank lender received a first lien position on certain assets of the Company,
more specifically, inventories, accounts receivable, convenience store real
estate and equipment. The Refinancing contains certain financial covenant
obligations, including minimum net worth, minimum earnings before interest,
taxes and depreciation ("EBITDA"), working capital ratio and fixed charge
coverage ratio, all as defined within the loan documents. The Company is
presently in compliance with the proposed financial covenants and 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. The effect of the Refinancing was to cure all
outstanding defaults in the Company's credit agreements, and to extend the final
maturity to January 31, 2001, however the Refinancing does not provide any
additional borrowing capacity or liquidity for the Company, and the Company has
no available borrowing capacity at this time. Management intends to replace the
existing bank debt with new financing , discussed below, which would have the
effect of increasing the availability of working capital, however there can be
no assurance that it will be able to do so.
Furthermore, covenants in the Company's loan agreement (i) limit the Company's
ability to make capital expenditures to the greater of $1,000,000 or 25% of
EBITDA, (ii) prohibit the payment of cash dividends and (iii) limit the
Company's ability to incur additional indebtedness. Under the terms of the
Refinancing, interest is payable monthly at an annual rate of two percent above
the bank's established prime lending rate, in addition to which the Company is
obligated to make an additional principal repayment of approximately $41,000 per
month. Although the final maturity date of the loan is January 31, 2001, in the
event that the loan is not repaid by June 30, 1999, the Company will be subject
to a fee of $250,000; furthermore, the Company could be obligated to pay
additional fees of $250,000 on August 31, 1999 and December 31, 1999 in the
event that the loan obligations are not repaid by those respective dates. The
loan agreement pursuant to the Refinancing was amended in July 1999 to defer the
$250,000 fee that was originally due June 30, 1999 to the earlier of August 31,
1999 or the closing of the B&I Loan In conjunction with the Refinancing, the
Company paid a fee of $85,000 to the bank on March 31, 1999.
On July 21, 1999, the Company was notified that it had been approved for term
loans totaling $10 million by the United States Department of Agriculture Rural
Development Business and Industry Guaranteed Loan Program ("B&I Loan".) Proceeds
of the B&I Loan would be used to repay obligations owed under the Refinancing,
and to provide working capital. The closing of the B&I Loan is contingent on,
among other things, the completion of environmental cleanup at several sites and
obtaining a new revolving credit facility in order to provide a minimum of $2.5
million in availability. The environmental cleanup is presently being performed
and the Company believes it will be completed on or before August 31, 1999. The
Company is presently negotiating with a lender to provide revolving debt
sufficient to meet the requirements of the B&I Loan, however there can be no
assurance that it will be successful in obtaining such a loan.
The Company presently plans to spend less than $1,000,000 in capital
expenditures during its fiscal year ended September 30, 1999, primarily to
upgrade existing facilities. The Company plans to finance such expenditures
through operating cash flows, proceeds from the sales of nonessential assets and
lease financing. In addition, the Company plans to spend approximately $870,000
during the remainder of fiscal 1999 for development and advertising costs
relating to its marketing of the For-A-Free-Gift.Com venture. Management intends
to finance these costs with the proceeds from the continued sales of assets
within its existing business units, with additional debt or lease financing, and
through the sale of common stock in a private placement transaction. There can
be no assurance, however, that the Company will be successful in raising such
funds, however, and in the event it is not successful it is unlikely that the
Company would be able to realize value from the For-A-Free-Gift.Com venture.
Cash and cash equivalents were $1,527,000 and $831,000 at June 30, 1999 and
September 30, 1998, respectively. The Company had a net working capital deficit
of $218,000 at March 31, 1999, as compared with net working capital of $163,000
at September 30, 1998. The decline in net working capital is primarily due to
operating losses sustained in the nine months ended June 30, 1999..
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Cash used by operating activities was $1,084,000 in the nine months ended June
30, 1999, as compared with cash provided by operating activities of $413,000 in
the comparable previous fiscal year period. The reduction in cash from operating
activities is primarily due to the improved working capital utilization during
the current fiscal year. Pre-tax loss on continuing operations, net of the
noncash charges for stock option compensation expense and the noncash loss on
marketable securities, increased to 2,919,000 in the nine months ended June 30,
1999 as compared with a pre-tax loss of $1,119,000 in the nine months ended June
30, 1998. The effect of the increased pre-tax loss on cash utilization was
mitigated by the increase in accounts payable, primarily due to the legal and
professional fees incurred during the Company's merger discussions, discussed
above. The Company expects to repay such obligations through the utilization of
the proceeds from the pending sales of assets.
The Company identified certain nonessential assets which it sold during the nine
months ended June 30, 1999; assets disposed of during the current fiscal year
period included the Company's investment in certain of its Special Purpose Lease
locations, assets utilized in the Company's propane business, and the Company's
Fuelman/Gascard franchise. The Company received proceeds of $1,325,000 from the
sale of such assets during the nine months ended June 30, 1999, and recorded a
gain of $323,000 on the sales of such assets. Cash provided by investing
activities was $947,000 in the nine months ended June 30, 1999, as compared with
cash used by investing activities of $206,000 during the nine months ended June
30, 1998; the improvement is attributable to lower capital expenditures and
sales of assets during the current year period.
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.
During the nine months ended June 30, 1999, the Company received proceeds of
$1,063,000, arising from the exercise of employee stock options.
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
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
governmental entities ("Key Business Partners") that are believed to be critical
to business operations after January 1, 2000 are being identified and the
Company has made inquiries of its Key Business Partners 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 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.
23
<PAGE>
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS INDEX
PAGE
27 Financial Data Schedule 26
B. REPORTS ON FORM 8-K
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EVANS SYSTEMS, INC.
(REGISTRANT)
Date: August 23, 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.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,527
<SECURITIES> 0
<RECEIVABLES> 3,896
<ALLOWANCES> 308
<INVENTORY> 3,138
<CURRENT-ASSETS> 8,779
<PP&E> 27,766
<DEPRECIATION> 12,493
<TOTAL-ASSETS> 25,488
<CURRENT-LIABILITIES> 8,997
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 6,315
<TOTAL-LIABILITY-AND-EQUITY> 25,488
<SALES> 64,415
<TOTAL-REVENUES> 64,415
<CGS> 55,030
<TOTAL-COSTS> 11,430
<OTHER-EXPENSES> 201
<LOSS-PROVISION> 7,125
<INTEREST-EXPENSE> 1,220
<INCOME-PRETAX> (10,268)
<INCOME-TAX> (19)
<INCOME-CONTINUING> (10,249)
<DISCONTINUED> 4,257
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,992)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
