AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 2000
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended JUNE 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 000-21956
EVANS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1613155
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification number)
720 AVENUE F NORTH, BAY CITY, TEXAS 77414 (409) 245-2424
(Address including zip code and telephone number, including area code, of
registrant's principal executive offices)
JERRIEL L. EVANS, SR., PRESIDENT
Mailing Address: P.O. Box 2480, Bay City, Texas 77404-2480 (409) 245-2424
Physical Address: 720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports,) and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock of registrant outstanding exclusive of Treasury
shares or shares held by subsidiaries of the registrant at August 18,2000 were
5,477,340.
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheet as of
June 30, 2000 and September 30, 1999 3
Condensed Consolidated Statement of Income for the
Three Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statement of Income for the
Nine Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended June 30, 2000 and 1999 6
Notes to the Condensed Consolidated Financial
Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits Index 26
B. Reports on Form 8-K 26
Signatures 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
JUNE 30, SEPTEMBER 30,
2000 1999
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 344 $ 992
Trade receivables, net of allowance for doubtful
accounts of $160,000 and $290,000, respectively 2,096 2,411
Inventory ........................................ 3,028 2,984
Prepaid expenses and other current assets ........ 368 342
-------- --------
Total current assets .......................... 5,836 6,729
Property and equipment, net ......................... 14,011 14,896
Investment in marketable securities ................. 781 398
Other assets ........................................ 179 319
-------- --------
Total assets ............................... $ 20,807 $ 22,342
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............ $ 7,072 $ 5,920
Current portion of long-term debt ................ 10,899 9,844
Accrued interest ................................. 1,013 688
-------- --------
Total current liabilities ..................... 18,984 16,452
Long-term debt, less current portion ................ 799 1,634
-------- --------
Total liabilities ............................. 19,783 18,086
Redeemable common stock, 40,000 shares issued and
outstanding ...................................... -- 160
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares
authorized, 4,064,929 and 4,064,929 shares issued,
respectively ..................................... 41 41
Additional paid-in capital ....................... 16,093 15,686
Accumulated deficit .............................. (14,793) (11,197)
Unrealized gain on marketable securities ......... 117 --
Treasury stock, 72,589 shares, at cost ........... (434) (434)
-------- --------
Total stockholders' equity .................... 1,024 4,096
-------- --------
Total liabilities and stockholders' equity . $ 20,807 $ 22,342
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
-------- --------
Revenue:
Refined product sales ................... $ 20,636 $ 19,930
Other sales and services ................ 4,242 4,328
-------- --------
Total revenue ........................... 24,878 24,258
Cost of sales .............................. 22,550 21,082
-------- --------
Gross profit ............................... 2,328 3,176
Operating expenses:
Employment expenses ..................... 1,387 1,546
Other operating expenses ................ 782 816
General & administrative expenses ....... 630 783
Depreciation and amortization ........... 363 368
-------- --------
Total operating expenses ................ 3,162 3,513
-------- --------
Operating loss ............................. (834) (337)
Other income (expense)
Interest expense, net ................... (365) (533)
Gain (loss) on sale of assets ........... (16) 213
Loss on marketable securities ........... -- (8,063)
Other, net .............................. 4 --
-------- --------
Loss before benefit from income taxes ...... (1,211) (8,720)
Provision for state income taxes ........... 3 --
-------- --------
Net income (loss) .......................... $ (1,214) $ (8,720)
Comprehensive income (loss) ................ (79) (938)
-------- --------
Comprehensive loss ......................... $ (1,293) $ (7,782)
======== ========
Basic and diluted earnings (loss) per share:
Net income (loss) ....................... $ (.30) $ (2.13)
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except per share amounts)
NINE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
-------- --------
Revenue:
Refined product sales ...................... $ 58,270 $ 51,410
Other sales and services ................... 11,770 13,005
-------- --------
Total revenue .............................. 70,040 64,415
Cost of sales ................................. 62,557 55,030
-------- --------
Gross profit .................................. 7,483 9,385
-------- --------
Operating expenses:
Employment expenses ........................ 4,403 5,226
Other operating expenses ................... 2,596 2,560
General & administrative expenses .......... 1,964 2,436
Depreciation and amortization .............. 1,103 1,208
-------- --------
Total operating expenses ................... 10,066 11,430
-------- --------
Operating loss ................................ (2,583) (2,045)
Other income (expense)
Interest expense, net ...................... (1,262) (1,220)
Gain (loss) on sale of assets .............. (30) 323
Loss on marketable securities .............. -- (8,063)
Other, net ................................. 20 (182)
-------- --------
Loss before benefit from income taxes ......... (3,855) (11,187)
Provision for state income taxes .............. 7 --
-------- --------
Loss from continuing operations ............... (3,862) (11,187)
Discontinued operations:
Gain on disposal of ChemWay, net of
taxes of $0 and $1,203 ..................... 266 3,973
-------- --------
Net income (loss) ............................. $ (3,596) $ (7,214)
Unrealized gain (loss) on marketable securities 117 --
-------- --------
Comprehensive income (loss) ................... $ (3,479) $ (7,214)
======== ========
Basic and diluted earnings (loss) per share:
Net income (loss) .......................... $ (.89) $ (1.89)
======== ========
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)
NINE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
------- -------
Cash flows from operating activities:
Net loss ..................................... $(3,596) $(7,214)
Adjustments:
Depreciation and amortization ............. 1,103 1,208
Deferred income taxes ..................... -- 1,203
Loss (gain) on sale of fixed assets ....... 30 (323)
Gain on disposal of discontinued operations (266) (5,176)
Loss on marketable securities ............. -- 8,063
Stock option compensation expense ......... 247 248
Changes in working capital:
Current assets ......................... 245 454
Current liabilities .................... 1,477 640
------- -------
Total adjustments ............................ 2,836 6,317
------- -------
Net cash provided (used) by operating activities (760) (897)
Cash flows from investing activities:
Capital expenditures ......................... (467) (446)
Proceeds from sale of property and equipment . 219 1,325
Other, net ................................... 140 (76)
------- -------
Net cash provided (used) by investing activities (108) 803
Cash flows from financing activities:
Repayment on notes payable, net .............. (780) (536)
Proceeds of additional bank debt ............. 1,000 --
Net proceeds from exercise of stock options .. -- 1,326
------- -------
Net cash used by financing activities ........... 220 790
------- -------
Net increase (decrease) in cash ................. (648) 696
Cash and cash equivalents, beginning of period .. 992 831
------- -------
Cash and cash equivalents, end of period ........ $ 344 $ 1,527
======= =======
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 of Evans
Systems, Inc. and its subsidiaries (collectively referred to as the "Company")
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. It is recommended that these interim condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company `s Annual Report on Form
10-K for the year ended September 30, 1999. 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. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended June 30, 2000 are
not necessarily indicative of the results which may be expected for any other
interim periods, or for the year ending September 30, 2000. Certain prior period
amounts have been reclassified for comparative purposes.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE B - PROPOSED ASSET SALE
In December 1999, the Company reached an agreement to sell its Texas petroleum
marketing and convenience store assets (the "TSC Agreement") to TSC Services,
Inc. ("TSC"). Under the terms of the agreement, TSC would make a cash payment to
the Company of $12.7 million for substantially all of the fixed assets of the
Texas petroleum marketing and convenience store segments, having a net book
value of $13.0 million at June 30, 2000. On August 17, 2000, the Company
terminated the TSC Agreement pursuant to TSC's failure to perform certain
obligations as defined within the Agreement.
NOTE C - TERMINATION OF MERGER WITH I-NET
On January 23, 2000, the Company executed an Amended and Restated Agreement and
Plan of Merger, (as amended the "Merger Agreement") with I-Net Holdings Inc., a
Delaware Corporation ("I-Net"), pursuant to which a wholly owned subsidiary of
the Company would have been merged with and into I-Net (the "Merger"). The
principal shareholder of I-Net, Richard Dix, is a former officer of the Company.
The Company, I-Net, and the principal shareholder of I-Net agreed to terminate
the Merger Agreement on May 19, 2000, and release each other from any and all
claims arising under the Merger Agreement. The Company has agreed to pay $50,000
to I-Net as partial reimbursement of the expenses incurred by it in conjunction
with the Merger Agreement upon consummation of the TSC Transaction or a similar
sale of substantially all of the Company's assets.
7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - LONG-TERM DEBT
On June 30, 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 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, including, inventories, accounts receivable,
convenience store real estate and equipment. The effect of the Refinancing was
to cure all then outstanding defaults in the Company's credit agreements, and to
extend the final maturity to January 31, 2001. The Refinancing, however, did not
provide any additional borrowing capacity or liquidity for the Company, and the
Company has no available borrowing capacity at this time. 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 was not in compliance with the minimum net worth, fixed charge
coverage ratio, and working capital ratio financial covenants at September 30,
1999, December 31, 1999, March 31, 2000 and June 30, 2000. The bank had waived
such covenant defaults through December 31, 1999. However, the bank has not
waived or amended such covenants past December 31, 1999, and the final maturity
date of such bank debt is January 31, 2001. All of the debt due to this bank
totaling approximately $9,486,000, including the new $1,000,000 facility
discussed below, has been classified as current at June 30, 2000. Management
intends to repay the existing bank debt with new financing, as discussed in Note
K, which would have the effect of increasing the availability of working
capital. There can be no assurance that the Company will be able to do so.
Furthermore, covenants in the Company's loan agreement (i) limit the Company's
ability to make capital expenditures to the greater of $1,000,000 or 25% of
EBITDA, (ii) prohibit the payment of cash dividends and (iii) limit the
Company's ability to incur additional indebtedness. Under the terms of the
Refinancing, interest is payable monthly at an annual rate of two percent above
the bank's established prime lending rate. In addition, the Company is obligated
to make a principal repayment of approximately $41,000 per month. Since the loan
was not repaid by June 30, 1999, the Company became subject to a fee of
$250,000. Furthermore, the Company became obligated to pay additional fees of
$250,000 on August 31, 1999 and December 31, 1999, as the loan obligations were
not repaid by those respective dates. Interest expense for the nine months ended
June 30, 2000 includes $269,000, reflecting the December 31, 1999 fee and
accrued late charges. The additional loan fees totaling $750,000 plus applicable
accrued late charges are included in accrued interest on the accompanying
condensed consolidated balance sheet at June 30, 2000.
On January 26, 2000, the Company closed on an additional $1 million credit
facility with its principal bank lender. The new loan is secured by the
Company's general offices, 7,490 square foot warehouse together with 14,784
square feet of additional warehouse buildings, which are located on three acres
of land approximately 1/2 mile north of the Company's former general offices on
Highway 60. The loan is further secured by a pledge of the Company's rights and
interests in funds held by an escrow agent, which would be payable to the
Company as a result of a breach by TSC of its obligations under the purchase
agreement. Proceeds of the new loan will be used for working capital and to fund
expenses necessary to obtain new financing. Interest on the $1 million loan will
accrue at an annual rate of two percent above the bank's established prime
lending rate, payable monthly. The note became payable on May 1, 2000. However,
the bank has extended the maturity of its loan balance to January 31, 2001.
8
<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 upon,
among other things, the completion of environmental cleanup at several sites,
obtaining a new revolving credit facility in order to provide a minimum of $2.5
million in availability, and a reevaluation of the Company by the United States
Department of Agriculture Rural Development Business and Industry Guaranteed
Loan Program . The required environmental cleanup, consisting of removal of
contaminated soil and tank removal was completed at a cost of $20,807. The
Company estimates that it will cost an additional $9,800 to dispose of the
contaminated soil. The Company has received a commitment from its present bank
lender to provide revolving debt sufficient to meet the requirements of the B&I
Loan. In order to proceed with the B&I Loan, however, the Company will require
additional financing in an amount sufficient to repay the additional $1,000,000
borrowed on January 26, 2000.
NOTE E - SEASONAL NATURE OF BUSINESS
The refined petroleum products market customarily experiences decreased margins
in the fall and winter months followed by increased demand during spring and
summer when construction, travel, and recreational activities increase.
NOTE F - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings (loss) per share for the three and nine months ending
June 30, 2000 were computed using 4,032,340 weighted average common shares
outstanding. Basic and diluted earnings (loss) per share for the three and nine
months ending June 30, 1999 were computed using 4,094,831 and 3,814,699 weighted
average common shares outstanding, respectively.
NOTE G - SALE OF DISCONTINUED OPERATION
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"). The Company's
working capital resources were limited, primarily as a result of its defaults
under its credit agreement with its primary bank lender. As such, the Company
was unable to invest the necessary cash into ChemWay to repay past-due trade
creditors or to purchase raw materials.
In December 1998, the Company sold ChemWay to Affiliated Resources Corporation
("Affiliated") in a stock-for-stock transaction. Management believed the sale to
Affiliated had strategic merit in that Affiliated represent to the Company that
it was prepared to contribute sufficient cash into ChemWay to satisfy ChemWay's
trade creditors and to resume production. In retaining an ownership interest in
Affiliated, management believed that the Company would share in any future
earnings of ChemWay should ChemWay return to profitability. There can be no
assurance, however, that ChemWay will return to profitability or that the market
value of Affiliated common stock will rise in the future.
Affiliated was an unrelated party with respect to the Company, however, the
Chairman and CEO of Affiliated, who was also the President of Southhills
Partners, and one of his legal advisors were potential shareholders of the
Company, having committed to purchase 350,000 shares of the Company's common
stock for $0.75 per share in a private placement transaction on June 1, 1998.
9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In exchange for the common stock of ChemWay, the Company received 1,500,000
shares of Affiliated common stock, representing approximately 9% of the
outstanding Affiliated common stock at December 31, 1998. The number of shares
of Affiliated common stock became subject to a "make whole" provision whereby
the Company became entitled to receive an additional 1,000,000 shares of
Affiliated common stock on December 30, 1999. The Affiliated common stock is
unregistered, however the Company has demand registration rights with respect to
the stock. In December 1999, the Company received an additional 1,000,000 shares
of Affiliated common stock, pursuant to a "make whole" provision in the sales
agreement. The Company recorded an additional gain on sale of ChemWay of
$266,000 in December 1999 to reflect receipt of the additional shares at their
fair value.
Affiliated common stock is currently quoted on the Nasdaq Over-the-Counter
Bulletin Board. In accordance with generally accepted accounting principles, the
Affiliated common stock received in exchange for the common stock of ChemWay was
valued at its "fair value" indicated by the bid price of $6.00 per share, as
quoted on the Nasdaq Over-the-Counter Bulletin Board, which resulted in a gain
of $3,973,000, net of a provision for income taxes of $1,203,000 as follows:
Value of stock received ................... $ 9,000
Less cost of settling claim from
financial advisor ....................... (610)
Net Assets of ChemWay:
Notes and Accounts Receivable, net .. 59
Inventory ........................... 1,031
Prepaid expenses .................... 652
Property and equipment .............. 3,071
Accumulated depreciation ............ (781)
-------
Property and equipment, net ......... 2,290
Deferred income taxes ............... 1,179
Accounts payable and accrued expenses (1,765)
Notes payable ....................... (232)
-------
Net assets ................................ 3,214 (3,214)
======= -------
Pretax gain on sale ....................... 5,176
Provision for income taxes ................ (1,203)
-------
Gain on sale .............................. $ 3,973
=======
The Company's investment in Affiliated common stock is 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 stock has been
volatile, ranging from a reported closing price in the quarter ended June 30,
1998 of $0.88 to a closing price of $6.00 at December 31, 1998, a closing price
of $0.265 at September 30, 1999, a closing price of $0.281 at December 31, 1999,
a closing price of $0.344 at March 31, 2000 and a closing price of $0.313 at
June 30, 2000. The Company recorded an unrealized gain of $39,000 through
Stockholders' Equity and Comprehensive Income on the Affiliated shares to
reflect an increase in fair value from $.265 at September 30, 1999 to $.281 at
December 31, 1999. In March 2000, the Company recorded an unrealized gain of
$157,000 through Stockholders' Equity and Comprehensive Income on the Affiliated
shares to reflect an increase in fair value from $.281 at December 31, 1999 to
$0.344 at March 31, 2000. In June 2000, the Company recorded an unrealized loss
of $79,000 through Stockholders' Equity and Comprehensive Income on the
Affiliated shares to reflect a decrease in fair value from $0.344 at March 31,
2000 to $.313 at June 30, 2000.
10
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Affiliated was a shell company at the time of this transaction, and had no
operations or experience in packaging and marketing automotive chemical
products. At December 31, 1998, Affiliated reported, in its Annual Report on
Form 10-KSB, an accumulated deficit of $7,630,070 and a negative working capital
balance of $912,605. Affiliated reported no revenues from operations during the
last nine months of 1998, and reported a loss from operations of $526,843.
Management does not believe that the stock price of Affiliated will increase in
the foreseeable future and has determined that its investment in Affiliated
common stock is permanently impaired. Accordingly, recorded a realized loss of
$8,602,000, resulting in a carrying value of $398,000 at September 30, 1999.
While the Company currently does not intend to sell its Affiliated common stock,
there can be no assurance that the Company will be able to realize the recorded
value of the Affiliated common stock. As of June 30, 2000, the investment in
Affiliated had a carrying value of $781,000 due to the $266,000 gain described
above and the unrealized gain of $117,000 for the nine months ended June 30,
2000.
NOTE H - CONTINGENT LIABILITIES
A purported class action lawsuit (the lawsuit) was filed in the United States
District Court for the Southern District of Texas against the Company and
several of its current and former officers and directors on behalf of purchasers
of the Company's common stock. The lawsuit was filed after the Company announced
that is would be restating its financial statements for the years of 1997 and
1998, and the first two quarters of 1999, and asserts that the defendants
violated federal securities laws by issuing allegedly false and misleading
statements in 1997, 1998 and 1999 about the Company's financial condition and
results of operations. On May 31, 2000, the lawsuit was dismissed with prejudice
in the United States District Court for the Southern District of Texas.
NOTE I - MARKET FOR THE COMPANY'S COMMON STOCK
In December 1999 the Company received notification from the Nasdaq stock
exchange that it was not in compliance with two requirements for continued
listing on the Nasdaq NMS: the Company did not hold an annual stockholder
meeting in 1998, and the market value of the public float in the Company's
common stock did not meet or exceed a minimum level of $5 million. The Company
was subsequently delisted by Nasdaq on February 17, 2000. The Company's common
stock is now traded on the over-the-counter bulletin board system maintained by
Nasdaq.
NOTE J - SEGMENT REPORTING
During the year ended September 30, 1999, the Company adopted SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information." The prior
year's segment information has been restated to conform to the current-year
presentation. The Company has four reportable segments: Texas petroleum
marketing, Texas convenience stores, Louisiana petroleum marketing and
convenience store operations, and environmental remediation services. The Texas
petroleum marketing segment sells motor fuels to the public through retail
outlets in southeast Texas and supplies the Company's Texas convenience stores
with motor fuels. The Texas convenience stores feature self-service motor fuels
and a variety of food and nonfood merchandise in southeast Texas. The Louisiana
operations sell motor fuels to the public through retail outlets and through
convenience stores that feature self-service motor fuels and a variety of food
and nonfood merchandise in Louisiana. The environmental remediation services
segment serves the petroleum industry in the southeast Texas market area.
11
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Information concerning the Company's business activities is summarized as
follows: (in thousands)
<TABLE>
<CAPTION>
TEXAS TEXAS ENVIRONMENTAL OTHER
PETROLEUM CONVENIENCE LOUISIANA REMEDIATION RECONCILING CONSOLIDATED
QUARTER ENDED MARKETING STORES OPERATIONS SERVICES ITEMS(1) TOTAL
--------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000--
Revenues from external
Customers:
Motor fuel sales ... $ 14,104 $ 4,056 $ 2,475 $ 20,635
Convenience store
sales ............. 2,457 1,289 3,746
Other .............. 219 54 31 $ 193 497
-------- -------- -------- -------- -------- --------
Intersegment revenues 4,596 $ 4,596
-------- -------- -------- -------- -------- --------
Total revenues ....... $ 18,819 $ 6,567 $ 3,795 $ 193 (4,596) $ 24,878
======== ======== ======== ======== ======== ========
Depreciation and
amortization ........ 246 67 32 13 4 362
Operating income
(loss) .............. (212) (184) (173) 29 (294) (834)
June 30, 1999--
Revenues from external
Customers:
Motor fuel sales $ 14,038 $ 3,331 $ 2,533 $ 19,902
Convenience store
sales ............. 2,480 763 3,243
Other .............. 414 132 146 $ 421 1,113
Intersegment revenues. 3,988 $ (3,988)
-------- -------- -------- -------- -------- --------
Total revenues .... $ 18,440 $ 5,943 $ 3,442 $ 421 $ (3,988) $ 24,258
======== ======== ======== ======== ======== ========
Depreciation and
amortization ........ 267 51 33 12 4 367
Operating income
(loss) .............. (48) 53 (87) 134 (389) (337)
</TABLE>
(1) Consists primarily of corporate overhead expenses.
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------- -------
Total operating profit (loss) for reportable segments $ (540) $ 52
Loss on abandonment of assets ....................... -- --
Gain (loss) on sale of assets ....................... (16) 213
Loss on marketable securities ....................... -- (8,063)
Interest expense, net ............................... (365) (533)
Unallocated corporate expenses ...................... (294) (389)
Other, net .......................................... 4 --
------- -------
Total consolidated loss from continuing
operations before income taxes ..................... $(1,211) $(8,720)
======= =======
12
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
TEXAS TEXAS ENVIRONMENTAL OTHER
PETROLEUM CONVENIENCE LOUISIANA REMEDIATION RECONCILING CONSOLIDATED
NINE MONTHS ENDED MARKETING STORES OPERATIONS SERVICES ITEMS (1) TOTAL
<S> <C> <C> <C> <C>
June 30, 2000 --
Revenues from external
Customers:
Motor fuel sales ............... $ 39,501 $ 11,377 $ 7,391 $ 58,269
Convenience store sales ........ 6,982 2,812 9,794
Other .......................... 808 266 149 $ 754 1,977
-------- -------- --------
Intersegment revenues ............. 12,818 $(12,818) --
-------- -------- --------
Total revenues .............. $ 53,127 $ 18,625 $ 10,352 $ 754 $(12,818) $ 70,040
======== ======== ======== ======== ======== ========
Depreciation and
amortization ..................... 754 202 95 39 13 1,103
Operating income (loss) ........... (445) (479) (472) 96 (1,283) (2,583)
June 30, 1999 --
Revenues from external
Customers:
Motor fuel sales ............... $ 35,557 $ 9,056 $ 6,797 $ 51,410
Convenience store sales ........ 7,254 2,093 9,347
Other .......................... 1,889 368 184 $ 1,217 3,658
Intersegment revenues ............. 11,323 -- -- -- $(11,323) --
-------- -------- -------- -------- -------- --------
Total revenues .............. $ 48,769 $ 16,678 $ 9,074 $ 1,217 $ (7,335) $ 64,415
======== ======== ======== ======== ======== ========
Depreciation and
amortization ..................... 840 214 99 42 13 1,208
Operating income (loss) ........... (349 (19) (280) 103 (1,500) (2,045)
</TABLE>
(1) Consists primarily of corporate overhead expenses.
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
NINE MONTHS ENDED JUNE 30,
----------------------------
2000 1999
--------- ---------
Total operating loss for reportable segments ... $ (1,300) $ (545)
Gain (loss) on sale of assets .................. (30) 323
Loss on marketable securities .................. -- (8,063)
Interest expense, net .......................... (1,262) (1,220)
Unallocated corporate expenses ................. (1,283) (1,500)
Other, net ..................................... 20 (182)
----------------------
Total consolidated loss from continuing
operations before income taxes ............... $ (3,855) (11,187)
======================
13
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - MANAGEMENT'S PLANS
The Company has determined, based upon review of the Company's historical
operating performance, that it is unlikely that the Company's revenues will
increase in the foreseeable future in an amount sufficient to offset its
operating expenses without a capital infusion. In order to continue as a going
concern, management believes the Company must either obtain a capital infusion
of either equity or debt or merge the Company with a regional c-store retailer
to increase revenues and gain economies of scale regarding operating expenses.
On July 6, 2000, the Company executed an offering memorandum with Comsight
Holdings, Inc. ("Comsight") whereby Comsight agreed to act as a placement agent
for accredited investors to purchase a minimum of 1,250,000 and a maximum of
3,750,000 shares of the Company's common stock in a private placement at a price
of $0.40 per share. The Company also retained Comsight as its financial advisor
for a period of 2 years, whereby Comsight agreed to assist the Company in
obtaining additional financing necessary to repay its present bank debt, and
provide working capital. As of August 17, 2000, the Company has raised $578,000
and anticipates closing the private placement by August 30, 2000, with a maximum
private placement of $1,500,000. In addition, the Company, working in
conjunction with Comsight Holdings, Inc., has submitted loan packages on
replacing its senior credit facility.
The Company is also evaluating a strategic partnership which will allow the
Company to reinstitute a supply of petroleum products at its terminal facility.
Management anticipates that should the strategic partnership be successful, that
its terminal can return to operations by the end of 2000. Working in conjunction
with its financial advisor, the Company is actively pursuing the refinance of
several unencumbered assets which, if successful, will allow for the upgrade of
several of the Company's retail facilities. The Company also continues to
identify and place for sale non-producing assets that do not fit into future
plans of the Company. Proceeds from these sales will be used to reduce debt and
other general corporate purposes.
Management continues to actively pursue all strategic alternatives and is
presently working towards the closing of either the B&I Lending loan or another
financial source as discussed above. Should management's plans not be
successful, it would be difficult for the Company to continue as a going
concern.
14
<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 JUNE 30, 2000 AND 1999
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 following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the three months ended June 30, 2000 and
1999. This is the third quarter of ESI's fiscal year which begins on October 1
and ends on September 30.
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------- ---------------
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue .................................. $ 14,323 $ 14,452
Gross profit ............................. 763 1,205
Operating expenses ....................... 975 1,253
-------- --------
Operating loss ........................... (212) (48)
TEXAS CONVENIENCE STORES
Revenue .................................. $ 6,567 $ 5,943
Gross profit ............................. 1,026 1,219
Operating expenses ....................... 1,211 1,166
-------- --------
Operating loss ........................... (184) 53
LOUISIANA OPERATIONS
Revenue .................................. $ 3,795 $ 3,442
Gross profit ............................. 378 468
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating expenses ....................... 550 555
-------- --------
Operating loss ........................... (173) (87)
EDCO ENVIRONMENTAL
Revenue .................................. $ 193 $ 421
Gross profit ............................. 161 284
Operating expenses ....................... 132 150
-------- --------
Operating income (loss) .................. 29 134
GENERAL AND ADMINISTRATIVE EXPENSES ...... $ (294) $ (389)
-------- --------
TOTAL
Revenue .................................. $ 24,878 $ 24,258
Gross profit ............................. 2,328 3,176
Operating expenses ....................... 3,162 3,513
-------- --------
Operating loss ........................... (834) (337)
Consolidated revenues increased $620,000 or approximately 2.6% in the quarter
ended June 30, 2000, as compared with the quarter ended June 30, 1999. The
increase, however, is attributable to significantly higher fuel prices which
prevailed during the current year period. Fuel sales increased $706,000 or
approximately 3.5% while other sales and services declined $86,000 or
approximately 2.0% in the quarter ended June 30, 2000, as compared with the
quarter ended June 30, 1999.
Consolidated gross profit declined $848,000 or approximately 26.7% in the
quarter ended June 30, 2000, as compared with the quarter ended June 30, 1999.
Gross profit expressed as a percentage of sales, "Gross Margin", declined to
approximately 9.4% of sales in the quarter ended June 30, 2000, as compared with
approximately 13.1% of sales in the quarter ended June 30, 1999. The decline in
Gross Margin is primarily due to reduced Gross Margins in motor fuels.
Operating expenses declined $351,000 or approximately 10.0% in the quarter ended
June 30, 2000, as compared with the quarter ended June 30, 1999. The decline is
primarily due to a general reduction in staff during 1999. General and
administrative expenses include legal and professional fees of $45,000 in the
quarter ended June 30, 2000 and $215,000 in the quarter ended June 30, 1999.
These non recurring fees are related to the company's previously planned asset
sale and merger activity. General and administrative expenses in the quarter
decreased $95,000. See segment discussion below.
Operating losses increased $497,000 in the quarter ended June 30, 2000, as
compared with the quarter ended June 30, 1999. The increased loss was mainly
attributable to lower margins on motor fuels.
Net loss decreased to $1,214,000 in the quarter ended June 30, 2000, as compared
with $8,720,000 in the quarter ended June 30, 1999. Net loss in the prior year
quarter included losses on marketable securities of $8,063,000
Comprehensive loss of $1,293,000 reflects an unrealized loss on marketable
securities of $79,000 to adjust the carrying value of the Company's 2,500,000
shares of Affiliated common stock to its fair value at June 30, 2000. See Note G
to the unaudited condensed consolidated financial statements included herein.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TEXAS PETROLEUM MARKETING SEGMENT
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets:
A. Gasoline retail facilities with Company-supplied equipment
consisting of pumps, lights, canopies and in many cases
underground storage tanks, at independently owned convenience
stores. Under the terms of the Company's agreements with such
independent store operators ("Special Purpose Leases"), the
Company receives 40 percent or 50 percent of the gasoline gross
profit, depending upon who owns the underground gasoline
equipment.
B. Independently owned gasoline stations and convenience stores ("Open
Dealers") to which the Company provides major oil company brand
names, credit card processing and signs and, without further
investment, receives its customary markup on fuel deliveries.
The Texas Petroleum Marketing segment also supplies lubricants to commercial and
industrial customers.
Revenues decreased $129,000 to $14,323,000 in the quarter ended June 30, 2000,
as compared with revenues of $14,452,000 in the quarter ended June 30, 1999.
Fuel sales in gallons declined approximately 11.6%, to 9,998,000 gallons, as
compared with 11,305,000 gallons in the quarter ended June 30, 1999. The decline
in fuel sales in gallons is primarily due to closing or discontinuing sales to
retail outlets. Average selling price of fuel per gallon increased to $1.41 per
gallon in the quarter ended June 30, 2000, as compared with an average selling
price of $1.24 per gallon in the quarter ended June 30, 1999.
Gross profit decreased $442,000 or approximately 36.7% to $763,000 in the
quarter ended June 30, 2000, as compared with $1,205,000 in the quarter ended
June 30, 1999. Gross Margin declined to approximately 5.3% of sales in the
quarter ended June 30, 2000, as compared with approximately 8.3% of sales in the
quarter ended June 30, 1999. Fuel gross profit per gallon decreased to
approximately $0.070 as compared with $0.085 in the quarters ended June 30, 2000
and 1999, respectively. The decrease in gross profit is attributable to
decreased fuel volume and margins.
Operating expenses in the quarter ended June 30, 2000 declined $278,000 or
approximately 22.2% as compared with the quarter ended June 30, 1999. The
decrease is primarily due to a $229,000 savings in employment expense resulting
from staff reductions implemented during 1999.
The Texas petroleum marketing segment's operating loss increased to $212,000 in
the quarter ended June 30, 2000, as compared to an operating loss of $48,000 in
the quarter ended June 30, 1999. The increased loss is mainly attributable to
decreased fuel volumes and margins.
TEXAS CONVENIENCE STORE SEGMENT
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company operated 17 stores during each of the quarters ended June 30, 2000
and June 30, 1999.
Total revenues in the quarter ended June 30, 2000 increased $624,000 or
approximately 10.5% to $6,567,000, as compared with $5,943,000 in the quarter
ended June 30, 1999. The increase is due to higher fuel prices which prevailed
during the current year. Although fuel sales increased $725,000 or approximately
21.7% to $4,056,000 in the quarter ended June 30, 2000, as compared with
$3,332,000 in the quarter ended June 30, 1999, fuel sales in gallons declined
approximately 10.8% in the current year period. Merchandise sales were
comparable during the two comparative quarters. Other income, consisting
primarily of rental income and commission income, declined approximately $77,000
in the quarter ended June 30, 2000, as compared with the quarter ended June 30,
1999.
Gross profit declined $193,000 or approximately 15.8% to $1,026,000 as compared
with $1,219,000 in the quarter ended June 30, 1999. Gross Margin declined to
approximately 15.6% of sales in the quarter ended June 30, 2000, as compared
with approximately 20.5% of sales in the quarter ended June 30, 1999. The
decline is primarily due to the lower margins on fuel which prevailed during the
current year period. Gross Margin on fuel declined to approximately 7.4% of fuel
sales in the quarter ended June 30, 2000 as compared with approximately 9.3% in
the quarter ended June 30, 1999. Fuel gross profit per gallon in the two
comparative quarters was comparable, at approximately $0.10 per gallon.
Operating expenses increased $45,000, or approximately 3.8% in the quarter ended
June 30, 2000, to $1,211,000, as compared with $1,166,000 in the quarter ended
June 30, 1999.
The Texas Convenience Store segment incurred an operating loss of $184,000 in
the quarter ended June 30, 2000, as compared with an operating profit of $53,000
in the quarter ended June 30, 1999. The increased loss is due to the lower
margins and reduced other income in the current quarter.
LOUISIANA OPERATIONS
At September 30, 1999, the Louisiana Operations segment is comprised of a bulk
fuel storage and distribution facility, seven convenience stores with gasoline,
and a full-service gasoline station without a convenience store, all located in
and around Lake Charles, Louisiana. During the quarter ended December 31, 1999,
the Company took possession of four convenience stores which it had previously
leased to an independent operator, whom the Company supplied with fuel through a
supply agreement. Three of such locations were closed and the Company is
presently operating one of those locations. The Company has previously announced
its intention to sell its Louisiana Operations, however there are presently no
offers under consideration. Management believes that a sale of the Louisiana
Operations segment would not require shareholder approval under Texas law, as
the segment does not comprise a significant portion of the Company's assets,
revenues or cash flows.
Total revenues increased $353,000 or approximately 10.3% in the quarter ended
June 30, 2000, as compared with the quarter ended June 30, 1999. The increase is
primarily attributable to higher overall fuel prices which prevailed during the
current year period. Fuel sales decreased $58,000 or approximately 2.3% to
$2,475,000 in the quarter ended June 30, 2000 as compared with $2,533,000 in the
quarter ended June 30, 1999. Fuel sales in gallons, however, declined 924,000
gallons or approximately 31.0% to 2,058,00 gallons in the quarter ended June 30,
2000, as compared with 2,982,000 gallons in the quarter ended June 30, 1999.
Convenience store merchandise sales increased $524,000 or approximately 68.6% to
$1,288,000 in the quarter ended June 30, 2000 as compared with $764,000 in the
quarter ended June 30, 1999. The increase in merchandise sales is attributable
to the
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Company's adoption of an aggressive pricing policy designed to increase
customer traffic.
Gross profit decreased $91,000 or approximately 19.4% in the quarter ended June
30, 2000, as compared with the quarter ended June 30, 1999. Gross Margin
declined to approximately 10.0% of sales in the quarter ended June 30, 2000, as
compared with approximately 13.6% of sales in the quarter ended June 30, 1999.
The decline in Gross Margin primarily reflects the competitive market conditions
for fuels which prevailed during the current year period, and the Company's
adoption of more aggressive merchandise pricing in its convenience stores,
discussed above.
Operating expenses decreased $5,000 or approximately .9% in the quarter ended
June 30, 2000, as compared with the quarter ended June 30, 1999. The increase in
operating expenses as compared with the comparable prior year quarter is
attributable to the reopening of a previously closed store and to the Company's
attempt to maintain a high level of customer service in its facilities in order
to maintain the business of the Louisiana Operations segment.
The Louisiana Operations segment incurred an operating loss of $173,000 in the
quarter ended June 30, 2000, as compared with an operating profit of $87,000 in
the quarter ended June 30, 1999. The loss is primarily due to increased
operating expenses and reduced Gross Margins, partially offset by increased
revenues in the current year period.
EDCO ENVIRONMENTAL
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Edco's revenues declined $228,000 or approximately 54.1% in the quarter ended
June 30, 2000, as compared with the quarter ended June 30, 1999.
Gross profit in the quarter ended June 30, 2000 decreased $123,000, as compared
with the quarter ended June 30, 1999. The decrease in gross profit is due to the
lower revenues during the current year period.
Operating expenses declined $18,000 in the quarter.
EDCO Environmental reported an operating profit of $29,000 in the quarter ended
June 30, 2000, as compared with an operating profit of $134,000 in the quarter
ended June 30, 1999. The $105,000 decrease is mainly attributable to the lower
revenues realized during the current quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses decreased $95,000 or approximately 20.3% in
the quarter ended June 30, 2000, as compared with the quarter ended June 30,
1999. The decrease is comprised of a $170,000 reduction in legal and
professional fees, $20,000 in other expenses and an increase in employment
related expenses of $95,000. In the quarter ended June 30, 1999 employment
expenses were credited $52,000 for a refund in officers life insurance.
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
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
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
appearing elsewhere in this document.
THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the nine months ended June 30, 2000 and
1999. This is the first nine months of ESI's fiscal year which begins on October
1 and ends on September 30.
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------- ---------------
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue .................................. $ 40,309 $ 37,446
Gross profit ............................. 2,803 3,852
Operating expenses ....................... 3,248 4,201
-------- --------
Operating loss ........................... (445) (349)
TEXAS CONVENIENCE STORES
Revenue .................................. $ 18,625 $ 16,678
Gross profit ............................. 3,038 3,630
Operating expenses ....................... 3,517 3,649
-------- --------
Operating loss ........................... (479) (19)
LOUISIANA OPERATIONS
Revenue .................................. $ 10,352 $ 9,074
Gross profit ............................. 1,145 1,221
Operating expenses ....................... 1,617 1,501
-------- --------
Operating loss ........................... (472) (280)
EDCO ENVIRONMENTAL
Revenue .................................. $ 754 $ 1,217
Gross profit ............................. 497 682
Operating expenses ....................... 401 579
-------- --------
Operating income (loss) .................. 96 103
GENERAL AND ADMINISTRATIVE EXPENSES ...... $ (1,283) $ (1,500)
-------- --------
TOTAL
Revenue .................................. $ 70,040 $ 64,415
Gross profit ............................. 7,483 9,385
Operating expenses ....................... 10,066 11,430
-------- --------
Operating loss ........................... (2,583) (2,045)
Consolidated revenues increased $5,625,000 or approximately 8.7% in the nine
months ended June 30, 2000, as compared with the nine months ended June 30,
1999. The increase, however, is attributable to significantly higher fuel prices
which prevailed during the current year period. Fuel sales increased $6,860,000
or approximately 13.3% while other sales and services declined $1,235,000 or
approximately 9.5% in the nine months ended June 30, 2000, as compared with the
nine months ended June 30, 1999. See segment discussions, below.
Consolidated gross profit declined $1,902,000 or approximately 20.3% in the nine
months ended June
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
30, 2000, as compared with the nine months ended June 30, 1999. Gross Margin
declined to approximately 10.7% of sales in the nine months ended June 30, 2000,
as compared with approximately 14.6% of sales in the nine months ended June 30,
1999. The decline in Gross Margin is primarily due to reduced Gross Margins in
motor fuels.
Operating expenses declined $1,364,000 or approximately 11.9% in the nine months
ended June 30, 2000, as compared with the nine months ended June 30, 1999. The
decline is primarily due to a general reduction in staff during 1999. Operating
expenses in the nine months ended June 30, 2000 and June 30, 1999 included
noncash charges of $247,000 and $197,000, respectively, for compensation expense
on employee stock options. General and administrative expenses include legal and
professional fees of $423,000 in the quarter ended June 30, 2000 and $734,000 in
the quarter ended June 30, 1999. These non recurring fees are related to the
company's previously planned asset sale and merger activity General and
administrative expenses in the nine months ended June 30, 2000 decreased
$217,000. See segment discussion below.
Operating losses increased $538,000 or approximately 26.3% in the nine months
ended June 30, 2000, as compared with the nine months ended June 30, 1999, due
to the lower gross profit in the current year period, the effect of which was
partially offset by reduced operating expenses in the current year period.
Loss from continuing operations decreased to $3,862,000 in the nine months ended
June 30, 2000, as compared with $11,187,000 in the nine months ended June 30,
1999. Loss from continuing operations in the prior year included losses on
marketable securities of $8,063,000 See Note G to the unaudited condensed
consolidated financial statements included herein.
Comprehensive loss of $3,479,000 reflects an unrealized gain on marketable
securities of $117,000 to adjust the carrying value of the Company's 2,500,000
shares of Affiliated common stock to its fair value at June 30, 2000. See Note G
to the unaudited condensed consolidated financial statements included herein.
TEXAS PETROLEUM MARKETING SEGMENT
Revenues increased $2,863,000, or approximately 7.6% to $40,309,000 in the nine
months ended June 30, 2000, as compared with revenues of $37,446,000 in the nine
months ended June 30, 1999. The increase in revenues is due to higher fuel
prices which prevailed during the current year. Fuel sales in gallons declined
approximately 8.4%, to 30,401,000 gallons, as compared with 33,174,000 gallons
in the nine months ended June 30, 1999. The decline in fuel sales in gallons is
primarily due to closing or discontinuing sales to retail outlets. Average
selling price of fuel per gallon increased to $1.30 per gallon in the nine
months ended June 30, 2000, as compared with an average selling price of $1.07
per gallon in the nine months ended June 30, 1999.
Gross profit in the nine months ended June 30, 2000 declined $1,049,000 or
approximately 27.2%, as compared with the nine months ended June 30, 1999. Gross
Margin was approximately 7.0% and 10.3% of sales in the nine month periods ended
June 30, 2000 and 1999, respectively. Average gross profit per gallon sold also
declined, to $0.08 per gallon in the nine months ended June 30, 2000, as
compared with $0.10 per gallon in the nine months ended June 30, 1999. The
decline in total segment gross profit is due to reduced gross profit per gallon
on reduced sales volume in gallons during the current year period.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating expenses in the nine months ended June 30, 2000 declined $953,000 or
approximately 22.7% as compared with the nine months ended June 30, 1999. The
decline is primarily due to expense reductions in employment $777,000, G & A
$66,000, depreciation $86,000, and other operating expenses of $24,000.
The Texas petroleum marketing segment's operating loss of $445,000 in the nine
months ended June 30, 2000, as compared to an operating loss of $349,000 in the
nine months ended June 30, 1999, is due to reduced margins of $1,049,000 which
were $96,000 greater than expense reductions of $953,000.
TEXAS CONVENIENCE STORE SEGMENT
The Company operated 17 stores during each of the nine months ended June 30,
2000 and June 30, 1999.
Total revenues in the nine months ended June 30, 2999 increased $1,947,000 or
approximately 11.7% to $18,625,000, as compared with $16,678,000 in the nine
months ended June 30, 1999. The increase is due to higher fuel prices which
prevailed during the current year. Fuel sales increased $2,282,000 or
approximately 25.1% to $11,377,000 in the nine months ended June 30, 2000, as
compared with $9,095,000 in the nine months ended June 30, 1999, however fuel
sales in gallons declined approximately 7.0% in the current year period.
Merchandise sales declined $179,000 or approximately 2.5% to $6,982,000 in the
nine months ended June 30, 2000, as compared with $7,161,000 in the nine months
ended June 30, 1999. Other income declined $156,000.
Gross profit declined $592,000 or approximately 16.3% to $3,038,000 as compared
with $3,630,000 in the nine months ended June 30, 1999. Gross Margin declined to
approximately 16.3% of sales in the nine months ended June 30, 2000, as compared
with approximately 21.8% of sales in the nine months ended June 30, 1999. The
decline is primarily due to the lower margins on fuel which prevailed during the
current year period. Gross Margin on fuel declined to approximately 6.6%of fuel
sales in the nine months ended June 30, 2000 as compared with approximately
10.0% in the nine months ended June 30, 1999. Fuel gross profit per gallon also
declined to approximately $0.09 per gallon in the nine month period ended June
30, 2000 as compared with approximately $0.10 per gallon in the nine months
ended June 30, 1999. The decline in gross profit per gallon is the result of the
highly competitive environment in which the Company's convenience stores
operate.
Operating expenses in the nine months ended June 30, 2000 declined $132,000 or
approximately 3.6% as compared with the nine months ended June 30, 1999. The
decline in operating expenses is primarily due to G & A and employment expense
reductions which occurred in 1999.
The Texas Convenience Store segment incurred an operating loss of $479,000 in
the nine months ended June 30, 2000, as compared with a loss of $19,000 in the
nine months ended June 30, 1999. The increased loss is due to the lower gross
profit, partially offset by reduced operating expenses in the current year
period.
LOUISIANA OPERATIONS
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total revenues increased $1,278,000 or approximately 14.0% in the nine months
ended June 30, 2000, as compared with the nine months ended June 30, 1999. The
increase is primarily attributable to higher overall fuel prices which prevailed
during the current year period. Fuel sales increased $745,000 or approximately
11.2% to $7,391,000 in the nine months ended June 30, 2000 as compared with
$6,646,000 in the nine months ended June 30, 1999. Fuel sales in gallons,
however, declined 2,020,000 gallons or approximately 23.9% to 6,420,000 gallons
in the nine months ended June 30, 2000, as compared with 8,440,000 gallons in
the nine months ended June 30, 1999. Convenience store merchandise sales
increased $719,000 or approximately 34.3% to $2,812,000 in the nine months ended
June 30, 2000 as compared with $2,093,000 in the nine months ended June 30,
1999. The increase in merchandise sales is primarily attributable to the
Company's adoption of an aggressive pricing policy designed to increase customer
traffic, and to the reopening of one previously closed store in December 1999.
Gross profit decreased $76,000 or approximately 6.2% in the nine months ended
June 30, 2000, as compared with the nine months ended June 30, 1999. Gross
Margin declined to approximately 11.1% of sales in the nine months ended June
30, 2000, as compared with approximately 13.4% of sales in the nine months ended
June 30, 1999. The decline in Gross Margin primarily reflects the competitive
market conditions for fuels which prevailed during the current year period, and
the Company's adoption of more aggressive merchandise pricing in its convenience
stores, discussed above.
Operating expenses increased $116,000 or approximately 7.8% in the nine months
ended June 30, 2000, as compared with the nine months ended June 30, 1999. The
Company has attempted to maintain a high level of customer service in its
facilities in order to maintain the business of the Louisiana Operations
segment.
The Louisiana Operations segment incurred an operating loss of $472,000 in the
nine months ended June 30, 2000, as compared with an operating loss of $280,000
in the nine months ended June 30, 1999.
EDCO ENVIRONMENTAL
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Edco's revenues declined $463,000 or approximately 38.0% in the nine months
ended June 30, 2000, as compared with the nine months ended June 30, 1999.
Revenues in the nine months ended June 30, 1999 reflected the completion of
projects mandated by new underground storage tank environmental regulations,
which became effective in late December 1998.
Gross profit in the nine months ended June 30, 2000 decreased $185,000, as
compared with the nine months ended June 30, 1999. The decrease in gross profit
is due to the lower revenues during the current year period, and to a change in
the segment's mix of business during the current year period.
Operating expenses declined $178,000, reflecting a staff reduction which was
implemented during 1999, and to fewer projects in operation during the current
year period.
EDCO Environmental reported an operating profit of $96,000 in the nine months
ended June 30, 2000, as compared with an operating profit of $103,000 in the
nine months ended June 30, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses decreased $217,000 or approximately 18.5% in
the nine months ended June 30, 2000, as compared with the nine months ended June
30, 1999. The decrease is comprised of a $312,000 reduction in legal and
professional fees, $46,000 in other expenses and an increase in employment
related expenses of $141,000. The increase in employment related expenses were
$52,000 refund in officers life insurance credited in 1999 an increase of
$50,000 in non cash stock compensation and $39,000 in deferred compensation and
insurance cost.
CAPITAL RESOURCES AND LIQUIDITY
Cash used by operating activities was $760,000 for the nine months ended June
30, 2000, as compared with cash used by operating activities of $897,000 in the
nine months ended June 30, 1999. Interest expense in the current year period
included $269,000 in accrued fees and charges under the credit agreement with
the Company's primary bank lender.
Cash and cash equivalents were $344,000 and $992,000 at June 30, 2000 and
September 30, 1999, respectively. The Company had a net working capital deficit
of $13,148,000, as compared with a deficit of $9,723,000 at September 30, 1999.
The working capital deficit is primarily the result of the reclassification of
certain long-term bank debt as a current liability. The increase in the working
capital deficit is primarily due to the Company's operating loss during the nine
months ended June 30, 2000, and to the accrual of $269,000 in fees on the
Company's bank debt, as discussed above.
In December 1998, the Company sold ChemWay to Affiliated Resources Corporation
("Affiliated") in a stock-for-stock transaction. See Note G to the unaudited
condensed consolidated financial statements included herein. Management does not
believe that the stock price of Affiliated will increase in the foreseeable
future and has determined that its investment in Affiliated common stock is
permanently impaired and, accordingly, has recorded a realized loss of
$8,602,000, resulting in a carrying value of $398,000 at September 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. As of June 30, 2000,
the investment in Affiliated had a carrying value of $781,000 due to the
$266,000 gain described above and the unrealized gain of $117,000 for the nine
months ended June 30, 2000.
The Company has determined, based upon review of the Company's historical
operating performance, that it is unlikely that the Company's revenues will
increase in the foreseeable future in an amount sufficient to offset its
operating expenses without a capital infusion. In order to continue as a going
concern, management believes the Company must either obtain a capital infusion
of either equity or debt or merge the Company with a regional c-store retailer
to increase revenues and gain economies of scale regarding operating expenses.
See Note K to the unaudited condensed consolidated financial statements included
herein.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, which have been consolidated, assert 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.
On May 31, 2000, the lawsuit was dismissed with prejudice in the United States
District Court for the Southern District of Texas.
1. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE
----
27. Financial Data Schedule 28
2. REPORTS ON FORM 8-K
None.
26
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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: 8/21/2000 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/ CHARLES N. WAY
Charles N. Way
Controller
And authorized to sign on
behalf of the registrant.
27
