AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1999
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.D. 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, 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 May 24, 1999 was
4,094,831.
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
Condensed Consolidated Unaudited Balance Sheet
as of March 31, 1999 and September 30, 1998 3
Condensed Consolidated Unaudited Statement of
Operations and Comprehensive Income (Loss) for the
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Unaudited Statement of
Operations and Comprehensive Income (Loss) for the
Six Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Unaudited Statement of
Cash Flows for the Six Months Ended
March 31, 1999 and 1998 6
Notes to the Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K
A. Exhibits Index 28
B. Reports on Form 8-K 28
Signatures 28
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
------------ --------------
(As restated)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 1,060 $ 831
Trade receivables, net of allowance for doubtful
accounts of $308,000 and $264,000, respectively ............. 3,209 2,751
Inventory ..................................................... 3,364 3,714
Income taxes receivable ....................................... 128 128
Prepaid expenses and other current assets ..................... 582 775
Deferred income taxes ......................................... -- 78
Current assets of ChemWay ..................................... -- 1,637
-------- --------
Total current assets ..................................... 8,343 9,914
Property and equipment, net ......................................... 15,981 17,037
Investment in marketable securities ................................. 8,062
Other assets ........................................................ 892 837
Deferred income taxes ............................................... -- 1,125
Noncurrent assets of ChemWay ........................................ -- 3,535
-------- --------
Total assets ........................................ $ 33,278 $ 32,448
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................... $ 6,675 $ 6,019
Current portion of long-term debt ............................. 1,704 1,698
Current liabilities of ChemWay ................................ -- 2,034
-------- --------
Total current liabilities ................................ 8,379 9,751
Long-term debt ...................................................... 10,733 11,151
-------- --------
Total liabilities ........................................ 19,112 20,902
-------- --------
Commitments and contingencies
Redeemable common stock ............................................. 160 --
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares
authorized, 4,167,420 and 3,268,298 shares
issued, respectively ........................................ 41 33
Additional paid-in capital .................................... 15,827 13,811
Stock subscription receivable ................................. (132) --
Retained earnings (deficit) ................................... (358) (1,864)
Unrealized loss on marketable securities ...................... (938) --
Treasury stock, 72,589 shares, at cost ........................ (434) (434)
-------- --------
Total stockholders' equity ............................... 14,006 11,546
-------- --------
Total liabilities and stockholders' equity .......... $ 33,278 $ 32,448
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
-------- --------
(As restated)
<S> <C> <C>
Revenue:
Refined product sales .............................................. $ 14,804 $ 19,684
Other sales and services ........................................... 4,355 4,916
-------- --------
Total revenue ...................................................... 19,159 24,600
Cost of sales ............................................................ 16,343 20,483
-------- --------
Gross profit ............................................................. 2,816 4,117
-------- --------
Operating expenses:
Employment expenses ................................................ 1,625 2,124
Other operating expenses ........................................... 742 831
General & administrative expenses .................................. 569 612
Legal and professional fees arising due to merger discussions ...... 480 --
Depreciation and amortization ...................................... 413 497
-------- --------
Total operating expenses ........................................... 3,829 4,064
-------- --------
Operating loss ........................................................... (1,013) 53
Other income (expense)
Interest expense, net .............................................. (415) (343)
Loss on sale of assets ............................................. (107)
Loss on abandonment of assets ...................................... (111) --
Other, net ......................................................... (150) 112
-------- --------
Loss before benefit from income taxes .................................... (1,689) (285)
Benefit from income taxes ................................................ -- 105
-------- --------
Loss from continuing operations .......................................... (1,689) (180)
Discontinued operations:
Loss from discontinued operations of
ChemWay, net of tax benefit of $215 ........................... -- (463)
Provision for loss on disposal of ChemWay, net of
tax benefit of $395 ........................................... -- (705)
-------- --------
Net loss ................................................................. (1,689) (1,348)
Increase in unrealized loss on marketable securities ..................... (938) --
Comprehensive loss ....................................................... $ (2,627) $ (1,348)
======== ========
Basic and diluted earnings (loss) per share:
Continuing operations .............................................. $ (.44) $ (.06)
Discontinued Operations ............................................ -- (.15)
Provision for loss on discontinued operations ...................... -- (.23)
-------- --------
Net income (loss) .................................................. $ (.44) $ (.44)
======== ========
</TABLE>
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>
SIX MONTHS ENDED MARCH 31,
---------------------------
1999 1998
-------- --------
(As restated)
<S> <C> <C>
Revenue:
Refined product sales .............................................. $ 31,480 $ 43,066
Other sales and services ........................................... 8,677 10,303
-------- --------
Total revenue ...................................................... 40,157 53,369
Cost of sales ............................................................ 33,948 45,441
-------- --------
Gross profit ............................................................. 6,209 7,928
-------- --------
Operating expenses:
Employment expenses ................................................ 3,680 4,361
Other operating expenses ........................................... 1,744 1,777
General & administrative expenses .................................. 1,173 1,277
Legal and professional fees arising due to merger discussions ...... 480 --
Depreciation and amortization ...................................... 840 970
-------- --------
Total operating expenses ........................................... 7,917 8,385
-------- --------
Operating loss ........................................................... (1,708) (457)
Other income (expense):
Interest expense, net .............................................. (687) (681)
Gain on sale of assets ............................................. 110 (114)
Loss on abandonment of assets ...................................... --
Other, net ......................................................... (182) 69
-------- --------
Loss before benefit from income taxes .................................... (2,467) (1,183)
Benefit from income taxes ................................................ -- 429
-------- --------
Loss from continuing operations .......................................... (2,467) (754)
Discontinued operations:
Loss from discontinued operations of
ChemWay, net of tax benefit ........................................ -- (848)
(Provision for Loss) Gain on disposal of ChemWay, net of
taxes of $1,203 .................................................... 3,973 (705)
-------- --------
Net income (loss) ........................................................ 1,506 (2,307)
Increase in unrealized loss on marketable securities ..................... (938) --
Comprehensive income (loss) .............................................. $ 568 $ (2,307)
======== ========
Basic and diluted earnings (loss) per share:
Continuing operations .............................................. $ (.67) $ (.25)
Discontinued operations ............................................ -- (.27)
Gain on sale of ChemWay ............................................ 1.08 --
Provision for loss on disposition of ChemWay ....................... (.23)
-------- --------
Net income (loss) .................................................. $ .41 $ (.75)
======== ========
</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>
SIX MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
(As restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 1,506 $(2,307)
Adjustments:
Depreciation and amortization ....................... 840 1,077
Deferred income taxes ............................... 1,203 (1,155)
Loss from discontinued operations ................... -- 1,100
Loss (gain) on sale of fixed assets ................. (110) 114
Gain on disposal of discontinued operations ......... (5,176) --
Stock option compensation expense ................... 248 --
Changes in working capital:
Current assets ................................. 30 3,373
Current liabilities ............................ 656 (2,781)
------- -------
Total adjustments ........................................ (2,309) 1,728
------- -------
Net cash provided (used) by operating activities ............... (803) (579)
------- -------
Cash flows from investing activities:
Capital expenditures ..................................... (355) (956)
Proceeds from sale of property and equipment ............. 681 620
Other, net ............................................... (76) 25
------- -------
Net cash provided (used) by investing activities ............... 250 (311)
------- -------
Cash flows from financing activities:
Borrowings (repayment) on notes payable, net ............ (412) 656
Net proceeds from exercise of stock options .............. 1,194 --
------- -------
Net cash used by financing activities .......................... 782 656
------- -------
Net increase (decrease) in cash ................................ 229 (234)
Cash and cash equivalents, beginning of period ................. 831 1,297
------- -------
Cash and cash equivalents, end of period ....................... $ 1,060 $ 1,063
------- -------
</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 six
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 financial
covenants and management believes the Company will be able to comply with the
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, 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, 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 Company's credit
agreement pursuant to the Refinancing was amended in July 1999 to extend the due
date of the $250,000 fee which was due on June 30, 1999 to the earlier of August
31, 1999 or the closing of the B&I Loan, discussed below.
7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
NOTE D - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings (loss) per share for the quarters ending March 31,
1999 and March 31, 1998 were computed using 3,855,974 and 3,090,984 weighted
average common shares outstanding, respectively. Basic and diluted loss per
share for the six months ended March 31, 1999 and March 31, 1998 were computed
using 3,673,978 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 $3,973,000, net of a
provision for income taxes of $1,203,000.
NOTE F - MARKETABLE SECURITIES
Marketable equity securities available for resale are carried at market. At
March 31, 1999, the Company holds 1,500,000 shares of Affiliated common stock.
In accordance with generally accepted accounting principles, the Affiliated
common stock received in exchange for the common stock of ChemWay was initially
recorded at its "fair value" of $6.00 per share resulting in a carrying value of
$9 million. Subsequent to the exchange of ChemWay common stock for Affiliated
common stock, the Affiliated stock declined in value to $5.38 per share at March
31, 1999. Management believes that the reduction in the stock price of
Affiliated may be temporary and, accordingly, has recorded an unrealized loss of
$938,000 at March 31, 1999 in stockholders' equity.
The Company's investment in Affiliated common stock is unregistered and highly
illiquid; in addition, the average trading volume of Affiliated is small in
comparison to the number of shares held by the Company. The trading price of
Affiliated common stock has been very volatile, ranging from a reported low
closing price in the quarter ended June 30, 1998 of $0.88 to a closing price of
$6.00 at December 31, 1998 and a closing price of $5.38 at March 31, 1999. 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 recorded value of the Affiliated common stock.
At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-K, an
accumulated deficit of $7,630,070 based on historic losses, and a negative
working capital balance of $912,605. Affiliated reported no revenues from
operations during the last six months of 1998, and reported a loss from
operations of $526,843.
NOTE G - PROPOSED MERGER AGREEMENT
8
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $1,038,000 from the exercise of stock
options by employees to purchase 499,934 shares of common stock during the
quarter ended March 31, 1999. On January 4, 1999, the Company issued 40,000
common shares valued at $15.25 per share to an investment advisor for investment
advisory services rendered. The investment advisor has the right to put the
shares back to the Company at $4.00 per share until at least December 31, 1999.
NOTE I - 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, 1999 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:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue ........................................... $ 19,188 $ 19,159 $ 24,600 $ 24,600
Cost of sales ..................................... 16,361 16,343 20,454 20,483
-------- -------- -------- --------
Gross profit ...................................... 2,827 2,816 4,146 4,117
Operating expense ................................. 5,098 3,829 4,064 4,064
-------- -------- -------- --------
Operating loss .................................... (2,271) (1,013) 82 53
Interest expense .................................. (490) (415) (268) (343)
Other ............................................. (373) (261) 112 5
-------- -------- -------- --------
Loss from continuing operations
before taxes ...................................... (3,134) (1,689) (74) (285)
Income tax (benefit) .............................. 1,083 -- 27 105
-------- -------- -------- --------
Loss from continuing operations ................... (2,051) (1,689) (47) (180)
Loss from discontinued operations ................. -- -- (443) (463)
Provision for loss on disposal of
discontinued operations ........................... -- -- (705) (705)
-------- -------- -------- --------
Net loss .......................................... (2,051) (1,689) (1,195) (1,348)
Increase in unrealized gain (loss) on
marketable securities ....................... 2,458 (938) -- --
-------- -------- -------- --------
Comprehensive income ( loss) ...................... $ 407 $ (2,627) $ (1,195) $ (1,348)
======== ======== ======== ========
</TABLE>
9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Basic and diluted loss per share:
Continuing operations ............................ $ (.54) $ (.44) $ (.02) $ (.06)
Discontinued operations .......................... -- -- (.14) (.15)
Provision for loss on
disposition of ChemWay ......................... -- -- (.23) (.23)
-------- -------- -------- --------
Net loss ......................................... $ (.54) $ (.44) $ (.39) $ (.44)
======== ======== ======== ========
SIX MONTHS ENDED MARCH 31,
-------------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ----------- ------------- -------------
Revenue ............................................ $ 40,186 $ 40,157 $ 53,369 $ 53,369
Cost of sales ...................................... 33,907 33,948 45,397 45,441
-------- -------- -------- --------
Gross profit ....................................... 6,279 6,209 7,972 7,928
Operating expense .................................. 8,884 7,917 8,385 8,385
-------- -------- -------- --------
Operating loss ..................................... (2,605) (1,708) (413) (457)
Interest expense ................................... (762) (687) (606) (681)
Other .............................................. (47) (72) 69 (45)
-------- -------- -------- --------
Loss from continuing operations
before taxes ..................................... (3,414) (2,467) (950) (1,183)
Income tax benefit ................................. 1,169 -- 343 429
-------- -------- -------- --------
Loss from continuing operations .................... (2,245) (2,467) (607) (754)
Loss from discontinued operations .................. -- -- (828) (848)
Provision for loss on disposal of
discontinued operations .......................... -- -- (705) (705)
Gain on disposal of discontinued
operations ....................................... 915 3,973 -- --
-------- -------- -------- --------
Net income (loss) .................................. (1,330) 1,506 (2,140) (2,307)
Increase in unrealized gain (loss)
on marketable securities ......................... 2,458 (938) -- --
-------- -------- -------- --------
Comprehensive income (loss) ........................ $ 1,128 $ 568 $ (2,140) $ (2,307)
======== ======== ======== ========
Basic and diluted earnings (loss) per share:
Continuing operations ............................ $ (.62) $ (.67) $ (.19) $ (.25)
Discontinued operations .......................... -- -- (.27) (.27)
Gain (provision for loss) on
disposition of ChemWay ......................... .25 1.08 (.23) (.23)
-------- -------- -------- --------
Net income (loss) ................................ $ (.37) $ .41 $ (.69) $ (.75)
======== ======== ======== ========
</TABLE>
10
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - SUBSEQUENT EVENTS
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.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
11
<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, 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
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table reflects the restated operating results of Evans Systems,
Inc. ("ESI" or the "Company") business segments for the three months ended March
31, 1999 and 1998. This is the second quarter of ESI's fiscal year which begins
on October 1 and ends on September 30.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------- ----------------
(In thousands) (In thousands)
<S> <C> <C>
PETROLEUM MARKETING(1)
Revenue ............................................................. $ 11,873 $ 16,642
Refund of previously overpaid excise taxes .......................... -- 434
Gross profit, excluding excise tax refund ........................... 1,143 1,877
Legal and professional fees arising from merger discussions ......... 480 --
Other operating expenses ............................................ 1,595 1,839
-------- --------
Operating loss ...................................................... (932) 472
CONVENIENCE STORES
Revenue ............................................................. 6,795 7,714
Gross profit ........................................................ 1,371 1,666
Other operating expenses ............................................ 1,548 2,013
-------- --------
Operating loss ...................................................... (177) (347)
EDCO ENVIRONMENTAL
Revenue ............................................................. 491 244
Gross profit ........................................................ 302 140
Other operating expenses ............................................ 206 212
-------- --------
Operating income (loss) ............................................. 96 (72)
TOTAL
Revenue ............................................................. $ 19,159 $ 24,600
Refund of previously overpaid excise taxes .......................... -- 434
Gross profit, excluding excise tax refund ........................... 2,816 3,683
Legal and professional fees arising from merger discussions ......... 480 --
Other operating expenses ............................................ 3,349 4,064
-------- --------
Operating loss ...................................................... (1,013) 53
</TABLE>
(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 quarter ended March 31, 1999.
Gross profit in the comparable quarter ended March 31, 1998 included additional
gross profit of $434,000, resulting from the refund of excise taxes which had
previously been overpaid.
13
<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. The Company's general and administrative expenses
declined $43,000, or approximately 7% in the quarter ended March 31, 1999 as
compared with the quarter ended March 31, 1998. Furthermore, the Company sold
its ChemWay subsidiary in December 1998.
In 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 is intended to 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
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, which transaction closed on June 30, 1999.
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. In July 1999,
Mr. Dix resigned from the Company both as an officer and director in order to
pursue other interests.
Consolidated sales revenues declined to $19,159,000 in the quarter ended March
31, 1999, from $24,600,000 in the comparable prior year quarter, a decline of
$5,441,000 or approximately 22%. The decline is primarily due to the lower fuel
prices which prevailed during the current year quarter. See segment discussions,
below.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Consolidated gross profit in the quarter ended March 31, 1999, excluding the
effect of the excise tax refund discussed above, was $2,816,000 as compared with
$3,683,000 in the quarter ended March 31, 1998, a decrease of $867,000 or
approximately 24%. Gross profit expressed as a percentage of sales ("Gross
Margin"), decreased to approximately 14.7% of sales during the quarter ended
March 31, 1999 as compared with approximately 15.0% of sales in the comparable
prior year quarter, after taking into consideration the effect of the excise tax
refund. The reduction in Gross Margin is principally attributable to the
competitive pricing of fuels which prevailed during the current year quarter,
and to the conversion of petroleum dealers from Special Purpose Leases to Open
Dealers, as defined below. See segment discussions, below.
Operating expenses in the quarter ended March 31, 1999 were $3,829,000, as
compared with $4,064,000 in the quarter ended March 31, 1998, a decrease of
$235,000 or approximately 6%. After taking into consideration legal and
professional fees of $480,000 associated with the proposed merger, discussed
above, adjusted operating expenses in the quarter ended March 31, 1999 were
$3,349,000, a decrease of $715,000 or approximately 18%. The decrease is
primarily attributable to the overall staff reductions which have been
implemented since March 31, 1998.
Consolidated operating losses, after taking into consideration the effect of the
excise tax refund in the quarter ended March 31, 1998, and the nonrecurring
charges in the quarter ended March 31, 1999, increased $152,000, primarily as a
result of the competitive fuel pricing environment and resulting reduced gross
profits in the petroleum marketing segment which prevailed during the current
year quarter.
PETROLEUM MARKETING SEGMENT
Petroleum Marketing segment's sales revenues declined $4,769,000 to $11,873,000
in the quarter ended March 31, 1999, as compared with $16,642,000 in the quarter
ended March 31, 1998, a decline of approximately 29%. The decline is primarily
due to the lower fuel prices which prevailed during the current year quarter,
and secondarily due to the 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 May 1999, however there can be no assurance that
they will continue to increase. Fuel sales in gallons was 14,706,000 in the
quarter ended March 31, 1999, as compared with 15,966,000 gallons in the quarter
ended March 31, 1998, a decrease of approximately 8%; the Company's average
selling price for fuels was $0.81 and $1.04 in the quarters ended March 31, 1999
and 1999, respectively. 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
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 $1,143,000 in the quarter
ended March 31, 1999, as compared with $2,311,000 in the quarter ended March 31,
1998, a decline of $1,168,000 or approximately 50%. Gross profit in the prior
year quarter, however, included additional gross profit of $434,000, resulting
from the refund of excise taxes which had previously been overpaid. After taking
into consideration the effect of the excise tax refund in the 1998 quarter,
gross profit decreased $734,000 or approximately 39%. Gross Margin in the
quarter ended March 31, 1999 declined to approximately 9.6% of sales as compared
with approximately 11.3% in the quarter ended March 31, 1998, after taking into
consideration the effect of the excise tax refund. Gross profit per gallon sold
declined in the quarter ended March 31, 1999, to approximately $0.078, as
compared to $0.118 in the quarter ended March 31, 1998. The decrease is
attributed to the conversion of Special Purpose Lease customers into Open
Dealers, and to the competitive retail environment for motor fuels which
prevailed during the quarter ended March 31, 1999.
General and administrative expenses in the Petroleum Marketing Segment also
included $480,000 in legal and professional fees, arising as a result of the
Company's terminated merger discussions.
After taking into consideration the one-time fees discussed above, operating
expenses in the Petroleum Marketing Segment were $1,595,000 in the quarter ended
March 31, 1999, as compared with $1,839,000 in the quarter ended March 31, 1998,
a decrease of $244,000 or approximately 13%. 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. The Company also has entered into an agreement to
sell its Fuelman franchise to a competitor, and anticipates the closing of the
transaction in July 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 increased to $932,000 in the
quarter ended March 31, 1999 as compared with an operating profit of $472,000 in
the quarter ended March 31, 1998. The variance is primarily attributable to
reduced gross profit in the current year quarter, as compared with the
comparable prior year quarter, partially offset by reduced operating expenses in
the quarter ended March 31, 1999 as compared with the quarter
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
ended March 31, 1998.
CONVENIENCE STORE SEGMENT
Sales in the Convenience Store segment were $6,795,000 in the quarter ended
March 31, 1999, as compared with $7,714,000 in the quarter ended March 31, 1998,
a decline of approximately 12%. During the quarter ended March 31, 1999 the
company operated 25 stores compared to 29 stores during the comparable quarter
ended March 31, 1998. The Company closed another nonperforming store in May
1999. Fuel sales in the quarter ended March 31, 1999 were $3,666,000 as compared
with $4,278,000 in the quarter ended March 31, 1998; the lower sales in the
current year is due to the lower retail fuel prices which prevailed during the
current year period. Fuel sales in gallons were comparable at during the two
comparative quarters, however average retail selling price per gallon declined
to approximately $0.93 in the quarter ended March 31, 1999 as compared with
$1.08 in the quarter ended March 31, 1998. The decline in selling prices for
fuel 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 $107,000 to $3,129,000 as compared with $3,236,000
in the quarter ended March 31, 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 45% as compared to approximately 42% in the quarters ended March
31, 1999 and 1998, respectively.
Gross profit declined $295,000 or approximately 18% to $1,371,000 in the quarter
ended March 31, 1999 as compared with $1,666,000 in the quarter ended March 31,
1998 primarily due to the lower gasoline margins which prevailed during the
current year period. Gross Margin in the Convenience Store segment was
approximately 20.2% of sales as compared with approximately 21.6% of sales
during the 1999 and 1998 periods, respectively.
Operating expenses during the quarter ended March 31, 1999 in the Convenience
Store segment were $1,548,000 as compared with $2,013,000 in the quarter ended
March 31, 1998, a decrease of $465,000 or approximately 23%. 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 $177,000 in the
quarter ended March 31, 1999, as compared with a loss of $347,000 in the quarter
ended March 31, 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
Revenues at EDCO Environmental increased $247,000 or approximately 101% in the
quarter ended March 31, 1999 as compared with the quarter ended March 31, 1998;
the Company has been more aggressive in seeking work in the current year period.
Gross profit in the quarter ended March 31, 1999 increased $162,000 or
approximately 116% as compared with the quarter ended March 31, 1998, primarily
due to the increased revenues during the current year period. EDCO
Environmental's operating expenses in the two comparable quarters were
comparable.
EDCO Environmental earned an operating profit of $96,000 in the quarter ended
March 31, 1999, as compared with an operating loss of $72,000 in the quarter
ended March 31, 1998, primarily due to increased sales revenues and resultant
gross profits, and to slightly reduced operating expenses in the current year
quarter. 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
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
be no assurance that they will do so.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
The following table reflects the operating results of the Company's business
segments for the six months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------- ----------------
(In thousands) (In thousands)
<S> <C> <C>
PETROLEUM MARKETING(1)
Revenue ................................................................. $ 25,363 $ 36,702
Refund of previously overpaid excise taxes .............................. -- 434
Gross profit, excluding excise tax refund ............................... 2,920 3,741
Non-cash compensation expense, arising from the vesting
of stock options .................................................. 196 --
Legal and professional fees arising from merger discussions ............. 480 --
Other operating expenses ................................................ 3,657 4,000
-------- --------
Operating loss .......................................................... (1,413) 175
CONVENIENCE STORES
Revenue ................................................................. 13,998 16,046
Gross profit ............................................................ 2,890 3,418
Other operating expenses ................................................ 3,155 3,990
-------- --------
Operating loss .......................................................... (265) (572)
EDCO ENVIRONMENTAL
Revenue ................................................................. 796 621
Gross profit ............................................................ 399 335
Other operating expenses ................................................ 429 395
-------- --------
Operating income (loss) ................................................. (30) (60)
TOTAL
Revenue ................................................................. 40,157 $ 53,369
Refund of previously overpaid excise taxes .............................. -- 434
Gross profit, excluding excise tax refund ............................... 6,209 7,494
Non-cash compensation expense, arising from the vesting
of stock options .................................................. 205 --
Legal and professional fees arising from merger discussions ............. 480 --
Other operating expenses ................................................ 7,232 8,385
-------- --------
Operating loss .......................................................... (1,708) (457)
</TABLE>
(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 six months
ended March 31, 1999.
Operating loss for the six months ended March 31, 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
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 six months ended March 31, 1998 included additional gross profit of
$434,000, resulting from the refund of excise taxes which had previously been
overpaid.
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. The Company's general and administrative expenses
declined $309,000 or approximately 24% in the six months ended March 31, 1999
as compared with the six months ended March 31, 1998.
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 The shares of Affiliated received by the Company are unregistered,
however the Company does have the right to register such shares at any time. The
Company recorded a gain of $3,973,000 (net of a provision for income taxes of
$1,203,000) on the disposition of ChemWay, based upon the quoted price of $6 per
share of Affiliated on the NASDAQ bulleting board on the date of the
transaction.
The Company recorded an unrealized loss of $938,000 on March 31, 1999, based
upon the quoted price of $5.375 for Affiliated on the NASDAQ bulletin board on
that date. The price of Affiliated is highly volatile, and the reported value of
the Company's shares of Affiliated common stock is subject to significant
variation. The quoted price of Affiliated common stock on August 17, 1999 on the
NASDAQ bulletin board was $0.50 per share.
The Company's investment in Affiliated common stock is unregistered and highly
illiquid; in addition, the average trading volume of Affiliated is small in
comparison to the number of shares held by the Company. The trading price of
Affiliated common stock has been very volatile, ranging from a reported low
closing price in the quarter ended June 30, 1998 of $0.88 to a closing price of
$6.00 at December 31, 1998 and a closing price of $0.63 at June 30, 1999. 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 recorded value of the Affiliated common stock.
At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-K, an
accumulated deficit of $7,630,070 based on historic losses, and a negative
working capital balance of $912,605. Affiliated reported no revenues from
operations during the last six months of 1998, and reported a loss from
operations of $526,843.
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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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. In July 1999, Mr. Dix resigned from his directorship and position
with the Company in order to pursue other interests.
Consolidated sales revenues declined to $40,157,000 in the six months ended
March 31, 1999, from $53,369,000 in the comparable prior year period, a decline
of $13,212,000 or approximately 25%. 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 six months ended March 31, 1999, excluding the
effect of the excise tax refund discussed above, was $6,209,000 as compared with
$7,494,000 in the six months ended March 31, 1998, a decline of $1,285,000 or
approximately 17%. Gross Margin, after taking into consideration the effect of
the excise tax refund recognized during the six months ended March 31, 1998,
increased to approximately 15.5% of sales during the six months ended March 31,
1999 as compared with a approximately 14.0% 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.
Operating expenses, excluding the effect of the nonrecurring charges discussed
above, in the six month period ended March 31, 1999 were $7,233,000, as compared
with $8,385,000 in the six months ended March 31, 1998, a decrease of $1,152,000
or approximately 14%. The decline in operating expenses in the six months ended
March 31, 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 quarter ended March 31, 1998, and the nonrecurring
charges in the quarter ended March 31, 1999, increased $132,000 in the current
year period: adjusted operating loss was $1,023,000 in the six months ended
March 31, 1999 as compared with an adjusted operating loss of $891,000 in the
six months ended March 31, 1998. The effect of the reduced adjusted operating
expenses during the current year six month period was 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 $11,339,000 to $25,363,000
in the six months ended March 31, 1999, as compared with $36,702,000 in the six
months ended March 31, 1998, a decline of approximately 31%. 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 peirod. Fuel prices can be extremely volatile, and are
determined by factor's beyond the Company's control. Overall fuel prices have
subsequently increased during May 1999, however there can be no assurance that
they will continue to increase. Fuel sales in gallons was 27,969,000 in the six
months ended March 31, 1999, as compared with 35,583,000 gallons in the six
months ended March 31, 1998, a decrease of approximately 21%; the Company's
average selling price for fuels was $1.058 and $1.063 in the quarters ended
March 31, 1999 and 1999, respectively. 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
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 six
months 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 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 $2,920,000 in the six months
ended March 31, 1999, as compared with $3,741,000 in the six months ended March
31, 1998, after taking into consideration the effect of the excise tax refund, a
decline of $821,000 or approximately 22%. Gross Margin in the six months ended
March 31, 1999, however, increased to approximately 11.5% of sales as compared
with approximately 10.2% in the six months ended March 31, 1998, after taking
into consideration the effect of the excise tax refund. Gross profit per gallon
sold was comparable at approximately $0.104 per gallon, in the two comparable
six month periods. 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 quarter 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.
General and administrative expenses in the Petroleum Marketing Segment included
$480,000 in legal and professional fees, arising as a result of the Company's
merger discussions. Compensation expense in the six months ended March 31, 1999
included a non-cash charge to compensation expense of $196,000, resulting from
the vesting of employee stock options, discussed above.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
After taking into consideration the one-time fees discussed above, operating
expenses in the Petroleum Marketing Segment were $3,657,000 in the six months
ended March 31, 1999, as compared with $4,000,000 in the six months ended March
31, 1998, a decrease of $343,000 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 six 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 $1,413,000 in the
six months ended March 31, 1999 as compared with an operating profit of $175,000
in the six months ended March 31, 1998. After taking into consideration the
costs associated with the merger transactions of $480,000 and non-cash
compensation expenses of $196,000 and the $434,000 excise tax refund, all as
discussed above, the comparable results for the Petroleum Marketing Segment
would be an adjusted operating loss of $737,000 in the six months ended March
31, 1999 as compared with an adjusted operating loss of $259,000 in the six
months ended March 31, 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 six months, partially offset by
reduced operating expenses during the current six month period
CONVENIENCE STORE SEGMENT
Sales in the Convenience Store segment were $13,998,000 in the quarter ended
March 31, 1999, as compared with $16,046,000 in the quarter ended March 31,
1998, a decline of approximately 13%. The Company operated 25 stores at the end
of the six month period ended March 31, 1999 as compared with compared with 34
stores during the comparable period ended March 31, 1998. The Company closed
another nonperforming store in May 1999. Fuel sales in the six months ended
March 31, 1999 were $7,641,000 as compared with $8,998,000 in the six months
ended March 31, 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 8,032,000 in the six months ended March 31, 1999
as compared to 8,003,000 in the six months ended March 31, 1998, however average
retail selling price per gallon declined to approximately $0.95 in the six
months ended March 31, 1999 as compared with $1.12 in the six months ended March
31, 1998. The decline in selling prices for fuel 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 $459,000 to $6,208,000 as compared with $6,667,000
in the six months ended March 31, 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 44% as compared to approximately 42% in the six month periods
ended March 31, 1999 and 1998, respectively.
Gross profit declined $528,000 or approximately 15% to $2,890,000 in the six
months ended March 31, 1999 as compared with $3,418,000 in the six months ended
March 31, 1998 primarily due to the lower gasoline margins which prevailed
during the current year period. Gross Margin in the Convenience Store segment
was approximately 20.6% of sales as compared with approximately 21.3% of sales
during the 1999 and 1998 periods, respectively.
Operating expenses during the six months ended March 31, 1999 in the Convenience
Store segment were $3,155,000 as compared with $3,990,000 in the six months
ended March 31, 1998, a decrease of $835,000 or approximately 21%. The decline
in operating expenses is principally attributable to the closing of
underperforming stores during
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 $265,000 in the six
months ended March 31, 1999, as compared with a loss of $572,000 in the six
months ended March 31, 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
Revenues of EDCO Environmental increased $175,000 or approximately 28% in the
six months ended March 31, 1999, as compared with the six months ended March 31,
1998. The Company has become more aggressive in seeking remediation work,
particularly during the quarter ended March 31, 1999. Gross profit in the six
months ended March 31, 1999 increased $64,000 or approximately 19% as compared
with the six months ended March 31, 1998, primarily due to the increased
revenues during the current year period.
Operating expenses of EDCO Environmental increased $34,000 or approximately 9%
in the six months ended March 31, 1999 as compared with the six months ended
March 31, 1998. Operating expenses in the quarter ended December 31, 1998 were
higher than in the comparable prior year quarter, however expenses in the
quarter ended March 31, 1999 were lower than either the quarter ended March 31,
1998 or the quarter ended December 31, 1998. The company reduced staff at EDCO
Environmental in early calendar 1999.
EDCO Environmental reported an operating loss of $30,000 in the six months ended
March 31, 1999, as compared with an operating loss of $60,000 in the six months
ended March 31, 1998. 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 (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 financial covenants
and management believes the Company will be able to comply with the 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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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, as defined below. 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 $1,060,000 and $831,000 at March 31, 1999 and
September 30, 1998, respectively. The Company had a net working capital deficit
of $36,000 at March 31, 1999, as compared with working capital of $163,000 at
September 30, 1998. The decline in net working capital is primarily due to the
disposition of ChemWay in December 1998.
Cash used by operating activities was $803,000 in the six months ended March 31,
1999, as compared with cash used by operating activities of $579,000 in the
comparable previous fiscal year period. The reduction in cash from operating
activities is primarily due to higher operating losses in the current year
period. Pre-tax loss on continuing operations, net of the noncash charges for
stock option compensation expense increased to $2,262,000 in the six months
ended March 31, 1999 as compared with a pre-tax loss of $1,183,000 in the six
months ended March 31, 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 six
months ended March 31, 1999; assets disposed of during the current fiscal year
period included the Company's investment in certain of its Special Purpose Lease
locations, and assets utilized in the Company's propane business. The Company
received cash proceeds of $681,000 from the sale of such assets during the six
months ended March 31, 1999, and recorded a gain of $110,000 on the sales of
such assets. Cash provided by investing activities was $250,000 in the six
months ended
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
March 31, 1999, as compared with cash used by investing activities of $311,000
during the six months ended March 31, 1998; the improvement is attributable to
lower capital expenditures and sales of assets during the six months ended March
31, 1999.
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. See
Notes E and F to the condensed consolidated unaudited financial statements,
included herein.
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. On January 4, 1999, the Company
issued 40,000 common shares valued at $15.25 per share to an investment advisor
for investment advisory services rendered. The investment advisor has the right
to put the shares back to the Company at $4.00 per share until at least December
31, 1999.
During the six months ended March 31, 1999, the Company received proceeds of
$1,064,000, arising from the exercise of employee stock options and warrants.
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.
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
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
is to complete substantially all remediation and replacement of internal
Business Systems by September 1999.
As part of the Y2K readiness program, significant service providers, vendors,
suppliers, customers and governmental entities ("Key Business Partners") that
are believed to be critical to business operations after January 1, 2000 are
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.
27
<PAGE>
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS INDEX
PAGE
27 Financial Data Schedule 29
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: September 7, 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.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,060
<SECURITIES> 0
<RECEIVABLES> 3,517
<ALLOWANCES> 308
<INVENTORY> 3,364
<CURRENT-ASSETS> 8,343
<PP&E> 28,635
<DEPRECIATION> 12,654
<TOTAL-ASSETS> 33,278
<CURRENT-LIABILITIES> 8,379
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 13,965
<TOTAL-LIABILITY-AND-EQUITY> 33,278
<SALES> 40,157
<TOTAL-REVENUES> 40,157
<CGS> 33,948
<TOTAL-COSTS> 7,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687
<INCOME-PRETAX> (2,467)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,467)
<DISCONTINUED> 3,973
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,506
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
</TABLE>
