AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 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 DECEMBER 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., PRESIDENT
Mailing Address: P.O. Box 2480, Bay City, Texas 77404-2480 (409) 245-2424
Physical Address: 720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
NONE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares of common stock of registrant outstanding exclusive of Treasury
shares or shares held by subsidiaries of the registrant at February 9, 2000 were
4,032,340.
<PAGE>
EVANS SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Financial Statements (Unaudited) Page Number
-----------
Condensed Consolidated Balance Sheet as of
December 31, 1999 and September 30, 1999....................3
Condensed Consolidated Statement of Income for the
Three Months Ended December 31, 1999 and 1998...............4
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended December 31, 1999 and 1998...............5
Notes to the Condensed Consolidated Financial Statements....6
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..........................................22
B. Reports on Form 8-K.....................................22
Signatures.......................................................22
2
<PAGE>
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................... $ 60 $ 992
Trade receivables, net of allowance for doubtful
accounts of $195,000 and $290,000, respectively 3,831 2,411
Inventory ......................................... 2,960 2,984
Prepaid expenses and other current assets ......... 497 342
------------ ------------
Total current assets ........................... 7,348 6,729
Property and equipment, net .......................... 14,651 14,896
Investment in marketable securities .................. 703 398
Other assets ......................................... 203 319
------------ ------------
Total assets ................................ $ 22,905 $ 22,342
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............. $ 7,256 $ 5,920
Current portion of long-term debt ................. 9,922 9,844
Accrued interest .................................. 981 688
------------ ------------
Total current liabilities ...................... 18,159 16,452
Long-term debt ....................................... 1,273 1,634
------------ ------------
Total liabilities .............................. 19,432 18,086
------------ ------------
Commitments and contingencies
Redeemable common stock, 40,000 shares issued and
outstanding ....................................... 160 160
------------ ------------
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 ........................ 15,812 15,686
Accumulated deficit ............................... (12,145) (11,197)
Unrealized gain on marketable securities .......... 39 --
Treasury stock, 72,589 shares, at cost ............ (434) (434)
------------ ------------
Total stockholders' equity ..................... 3,313 4,096
------------ ------------
Total liabilities and stockholders' equity .. $ 22,905 $ 22,342
============ ============
</TABLE>
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 DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Revenue:
Refined product sales ....................... $ 18,481 $ 16,676
Other sales and services .................... 3,531 4,322
------------ ------------
Total revenue ............................... 22,012 20,998
Cost of sales .................................. 19,427 17,605
------------ ------------
Gross profit ................................... 2,585 3,393
------------ ------------
Operating expenses:
Employment expenses ......................... 1,459 2,055
Other operating expenses .................... 800 1,002
General & administrative expenses ........... 620 604
Depreciation and amortization ............... 373 427
------------ ------------
Total operating expenses .................... 3,252 4,088
------------ ------------
Operating loss ................................. (667) (695)
Other income (expense)
Interest expense, net ....................... (555) (272)
Gain on sale of assets ...................... 1 221
Other, net .................................. 7 (32)
------------ ------------
Loss before benefit from income taxes .......... (1,214) (778)
Benefit from income taxes ...................... -- --
------------ ------------
Loss from continuing operations ................ (1,214) (778)
Discontinued operations:
Gain on disposal of ChemWay, net of
taxes of $0 and $1,203 ...................... 266 3,973
------------ ------------
Net income (loss) .............................. $ (948) $ 3,195
============ ============
Unrealized gain on marketable securities ....... 39 --
------------ ------------
Comprehensive income (loss) .................... $ (909) $ 3,195
============ ============
Basic and diluted earnings (loss) per share:
Continuing operations ....................... $ (.30) $ (.22)
Discontinued operations ..................... .06 1.13
------------ ------------
Net income (loss) ........................... $ (.24) $ 0.91
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ (948) $ 3,195
Adjustments:
Depreciation and amortization .................... 373 427
Deferred income taxes ............................ -- 1,203
Loss (gain) on sale of fixed assets .............. (1) (221)
Gain on disposal of discontinued operations ...... (266) (5,176)
Stock option compensation expense ................ 126 248
Changes in working capital:
Current assets ................................ (1,551) 187
Current liabilities ........................... 1,629 365
------------ ------------
Total adjustments ................................... 310 (2,967)
------------ ------------
Net cash provided (used) by operating activities ....... (638) 228
------------ ------------
Cash flows from investing activities:
Capital expenditures ................................ (163) (166)
Proceeds from sale of property and equipment ........ 19 432
Other, net .......................................... 134 (76)
------------ ------------
Net cash provided (used) by investing activities ....... (10) 190
------------ ------------
Cash flows from financing activities:
Repayment on notes payable, net ..................... (284) (231)
Net proceeds from stock issuance .................... -- 156
------------ ------------
Net cash used by financing activities .................. (284) (75)
------------ ------------
Net increase (decrease) in cash ........................ (932) 343
Cash and cash equivalents, beginning of period ......... 992 831
------------ ------------
Cash and cash equivalents, end of period ............... $ 60 $ 1,174
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
Except as disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
annual report on Form 10-K of Evans Systems, Inc. (the "Company") for the year
ended September 30, 1999. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended December 31, 1999 are not necessarily indicative of the results which may
be expected for the year ending September 30, 2000.
During the year ended September 30, 1999, the Company adopted SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." Prior year
segment information presented below has been restated to conform to the current
year presentation.
NOTE B - PROPOSED ASSET SALE
In December 1999, the Company reached agreement to sell its Texas petroleum
marketing and convenience store assets (the "TSC Transaction") 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 the fixed assets of the Texas petroleum
marketing and convenience store segments. In addition, TSC agreed to assume
certain capital lease obligations of approximately $0.9 million, and has agreed
to purchase the segments' inventories at the Company's cost, estimated by
management at $2.4 million. The sale has been approved by the Board of Directors
and is subject to approval by the Company's shareholders. Terms of the agreement
call for the sale of substantially all of the property and equipment and
inventories in the Texas petroleum marketing and Texas convenience store
segments. Management believes the TSC Transaction will close in April 2000, and
will provide sufficient cash to repay the Company's existing bank debt,
described above, although there can be no assurance that the transaction will
close.
NOTE C - PROPOSED MERGER WITH I-NET
On January 23, 2000, the Company executed a Plan of Merger (the "Merger
Agreement") by and among the Company, and I-Net Holdings, a Delaware Corporation
("I-Net"), pursuant to which I-Net Acquisition Corp. will be merged with and
into I-Net (the "Merger"). I-Net, a new company based in Dallas, Texas, will be
mainly engaged in acquiring, developing and managing a network of
business-to-business electronic commerce companies. Upon consummation of the
Merger, I-Net will become a wholy-owned subsidiary of the Company, the
outstanding shares of I-Net will be converted into an aggregate of approximately
15,000,000 shares of the Company's common stock, $.01 par value per share (the
"Company Common Stock"), and the outstanding options to purchase shares of I-Net
common stock will entitle the holders thereof to purchase an aggregate of
approximately 4,000,000 shares of Company Common Stock. If the TSC Transaction
and Merger are approved and consummated, the Company's historical operations and
its business focus will change. In addition, the exchange of shares with the
shareholders of I-Net and the election of I-Net's nominees to the Company's
Board of Directors will result in a change of control of the Company.
6
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Merger is contingent upon, among other things, approval by the Company's
shareholders, closing of the TSC Transaction, and a requirement that I-Net raise
approximately $15 million in cash to be used to fund the combined company's
planned internet and electronic commerce operations. There can be no assurance
that such conditions will be satisfied or that the merger will be consummated.
NOTE D - LONG-TERM DEBT
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 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 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, 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.
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 and December 31, 1999, however the bank has waived such covenant
defaults through December 31, 1999. Since there is no assurance that the Company
can comply with the covenants subsequent to December 31, 1999, nor has the bank
waived or amended such covenants past December 31, 1999, all of the debt due to
this bank has been classified as current at December 31, 1999. Management
intends to repay the existing bank debt with proceeds from the TSC Transaction,
as defined above, or in the event such transaction is not consummated, to
replace the existing bank debt with new financing, discussed in Note B, 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, since the loan was not
repaid by June 30, 1999, the Company became subject to a fee of $250,000, the
payment of which the bank agreed to defer until the earlier of February 28, 2000
or the repayment of the loan; 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 in the
three months ended December 31, 1999 includes $269,000, reflecting the December
31, 1999 fee, and accrued late charges on the deferred fees, discussed above.
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 the TSC Transaction. Proceeds of the new loan will be
used for working capital, and to fund expenses necessary to close the
7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TSC Transaction or the B&I Loan. Interest on the $1 million loan will accrue at
an annual rate of two percent above the bank's established prime lending rate,
and is payable monthly. The note is payable on the earlier of (i) the
consummation of the TSC Transaction, (ii) closing of the B&I Loan, or (iii) May
1, 2000.
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 and
obtaining a new revolving credit facility in order to provide a minimum of $2.5
million in availability. 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 the event that the TSC Transaction does not close, the Company intends to
proceed with the B&I Loan. There can be no assurance that management's plans
will be successful.
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 quarters ending December 31,
1999 and December 31, 1998 were computed using 4,032,340 and 3,497,853 weighted
average common shares outstanding, respectively. Stock options and warrants were
not included in the computation of diluted loss per common share for the
quarters ended December 31, 1999 and 1998 since they would have resulted in an
antidilutive effect on loss from continuing operations.
NOTE G - SALE OF DISCONTINUED OPERATION
On December 30, 1998, the Company completed the sale of its subsidiary, ChemWay
Systems, Inc. ("ChemWay") to an unrelated 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
Company also received an additional 1,000,000 shares of Affiliated common stock
on December 30, 1999 pursuant to a "make whole" provision in the sales
agreement. The Affiliated common stock is unregistered, however the Company has
demand registration rights with respect to such stock.
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 at the
transaction date, resulting in a recorded gain of $3,973,000, net of a provision
for income taxes of $1,203,000 in the quarter ended December 31, 1998.
The Company's investment in Affiliated common stock is illiquid; in addition,
the average trading volume of
8
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and
a closing price of $0.281 at December 31, 1999.
At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-KSB,
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 its quarterly report on Form 10-QSB for the quarter
ended September 30, 1999, Affiliated reported revenues from operations of
$486,000, a net loss of $1.6 million, negative working capital of $1.6 million,
an accumulated deficit of $9.2 million and stockholders' equity of $5.0 million.
At September 30, 1999, management did not believe that the stock price of
Affiliated would increase in the foreseeable future and determined that its
investment in Affiliated common stock was permanently impaired. Accordingly, the
Company 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.
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 a gain on sale of ChemWay of $266,000 in
December 1999 to reflect receipt of the additional shares at their fair value.
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.
NOTE H - CONTINGENT LIABILITIES
A purported class action lawsuit has been filed in 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
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. The lawsuit demands,
among other relief, unspecified compensatory damages, attorney's fees and costs
of conducting the litigation. It is not possible, at this time, to predict the
impact that the lawsuit 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 reasonable possible, 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. The Company
intends to defend itself vigorously in these matters.
NOTE I - 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
9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. As described in Note B, the Company
has agreed to sell its Texas petroleum marketing and Texas convenience store
segments. 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.
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
YEAR ENDED MARKETING STORES OPERATIONS SERVICES ITEMS (1) TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1999-
Revenues from external
Customers:
Motor fuel sales ...... $ 12,471 $ 3,624 $ 2,353 $ 18,448
Convenience store sales 2,267 762 3,029
Other ................. 98 85 45 $ 307 535
---------- ---------- ----------
Intersegment revenues .... 4,085 $ (4,085) --
---------- ---------- ----------
Total revenues ..... $ 16,654 $ 5,976 $ 3,160 $ 307 $ (4,085) $ 22,012
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ............ 257 67 32 13 4 373
Operating income (loss) .. (88) (21) (233) 78 (403) (667)
Dec. 31, 1998-
Revenues from external
Customers:
Motor fuel sales ...... $ 11,534 $ 2,979 $ 2,163 $ 16,676
Convenience store sales 2,425 651 3,076
Other ................. 756 150 35 $ 305 1,246
Intersegment revenues .... 4,053 -- -- -- $ (4,053) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues ..... $ 16,343 $ 5,554 $ 2,849 $ 305 $ (4,053) $ 20,998
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ............ 292 82 33 16 4 427
Operating income (loss) .. 118 (11) (199) (114) (489) (695)
</TABLE>
10
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
QUARTER ENDED DEC. 31
-------------------------
1999 1998
---------- ----------
Total operating loss for reportable segments ....... $ (264) $ (206)
Gain on sale of discontinued operation ............. 266 3,973
Interest expense, net .............................. (555) (272)
Unallocated corporate expenses ..................... (403) (489)
Other, net ......................................... 8 189
---------- ----------
Total consolidated loss from continuing
operations before income taxes ..................... $ (948) $ 3,195
========== ==========
NOTE J - MANAGEMENT'S PLANS
In order to continue as a going concern, the Company must either close the TSC
Transaction or the B&I Loan, as described above, complete the Merger with I-Net
or otherwise raise additional capital and, ultimately, generate cash flow from
operations. There can be no assurance that management's plans will be
successful.
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 DECEMBER 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
The following table reflects the operating results of Evans Systems, Inc. ("ESI"
or the "Company") business segments for the three months ended December 31, 1999
and 1998. This is the first quarter of ESI's fiscal year which begins on October
1 and ends on September 30.
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
TEXAS PETROLEUM MARKETING
Revenue ...................................... $ 12,569 $ 12,290
Gross profit ................................. 963 1,680
Operating expenses ........................... 1,051 1,562
------------ ------------
Operating loss ............................... (88) 118
TEXAS CONVENIENCE STORES
Revenue ...................................... $ 5,976 $ 5,554
Gross profit ................................. 1,058 1,257
Operating expenses ........................... 1,079 1,268
------------ ------------
Operating loss ............................... (21) (11)
LOUISIANA OPERATIONS
Revenue ...................................... $ 3,160 $ 2,849
Gross profit ................................. 339 359
Operating expenses ........................... 572 558
------------ ------------
Operating loss ............................... (233) (199)
EDCO ENVIRONMENTAL
Revenue ...................................... $ 307 $ 305
Gross profit ................................. 225 97
Operating expenses ........................... 147 211
------------ ------------
Operating income (loss) ...................... 78 (114)
GENERAL AND ADMINISTRATIVE EXPENSES .......... $ (403) $ (489)
------------ ------------
TOTAL
Revenue ...................................... $ 22,012 $ 20,998
Gross profit ................................. 2,585 3,393
Operating expenses ........................... 3,252 4,088
------------ ------------
Operating loss ............................... (667) (695)
Consolidated revenues increased $1,014,000 or approximately 487% in the quarter
ended December 31, 1999, as compared with the quarter ended December 31, 1998.
The increase, however, is attributable to significantly higher fuel prices which
prevailed during the current year period. Fuel sales increased $1,805,000 or
approximately 10.8% while other sales and services declined $791,000 or
approximately 18.3% in the quarter ended December 31, 1999, as compared with the
quarter ended December 31, 1998. The decline in other sales and services is due
to the Company's decision to discontinue servicing lower volume customers, and
to close underperforming convenience stores during 1999. See segment
discussions, below.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Consolidated gross profit declined $808,000 or approximately 23.8% in the
quarter ended December 31, 1999, as compared with the quarter ended December 31,
1998. Gross profit expressed as a percentage of sales, "Gross Margin", declined
to approximately 11.7% of sales in the quarter ended December 31, 1999, as
compared with approximately 16.2% of sales in the quarter ended December 31,
1998. The decline in Gross Margin is primarily due to reduced Gross Margins in
motor fuels.
Operating expenses declined $836,000 or approximately 20.4% in the quarter ended
December 31, 1999, as compared with the quarter ended December 31, 1998. The
decline is primarily due to a general reduction in staff during 1999. Operating
expenses in the quarters ended December 31, 1999 and December 31, 1998 included
noncash charges of $126,000 and $205,000, respectively, for compensation expense
on employee stock options. Adjusted for the noncash compensation charge,
operating expenses declined $757,000 or approximately 19.4%.
Operating losses were comparable in the quarters ended December 31, 1999 and
1998. The effect of lower sales and gross profits on operating loss in the
current year period was offset by lower operating expenses.
Loss from continuing operations increased to $1,214,000 in the quarter ended
December 31, 1999, as compared with $778,000 in the quarter ended December 31,
1998. The increased loss from continuing operations is primarily a result of
higher interest expense in the current year period; the quarter ended December
31, 1998 also included a $221,000 gain on sale of fixed assets. Interest expense
in the current year period includes an accrual of $269,000 in fees to the
Company's primary bank lender. See Note D to the unaudited condensed
consolidated financial statements included herein.
The Company recorded an addition to the gain on sale of ChemWay in December 1999
of $266,000, reflecting the receipt by the Company of an additional 1,000,000
shares of Affiliated common stock. See Note G to the unaudited condensed
consolidated financial statements included herein.
Comprehensive loss of $909,000 reflects an unrealized gain on marketable
securities of $39,000 to adjust the carrying value of the Company's 2,500,000
shares of Affiliated common stock to its fair value at December 31, 1999. See
Note G to the unaudited condensed consolidated financial statements included
herein.
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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenues increased $279,000, or approximately 2.3% to $12,569,000 in the quarter
ended December 31, 1999, as compared with revenues of $12,290,000 in the quarter
ended December 31, 1998. The increase in revenues is due to higher fuel prices
which prevailed during the current year. Fuel sales in gallons declined
approximately 8.5%, to 10,614,000 gallons, as compared with 11,597,000 gallons
in the quarter ended December 31, 1998. The decline in fuel sales in gallons is
primarily due to the closing of underperforming outlets.
Gross profit declined $717,000 or approximately 42.7% to $963,000 in the quarter
ended December 31, 1999, as compared with $1,680,000 in the quarter ended
December 31, 1998. Gross profit expressed as a percentage of sales, "Gross
Margin", declined to approximately 7.7% of sales in the quarter ended December
31, 1999, as compared with approximately 13.7% of sales in the quarter ended
December 31, 1998. Gross profit per gallon declined to approximately $0.091 as
compared with $0.145 in the quarters ended December 31, 1999 and 1998,
respectively. The decline in Gross Margin, and gross profit per gallon, is
partially due to the conversion of a number of the Company's outlets from a
Special Purpose Lease arrangement to an Open Dealer status, as well as to
competitive conditions in the Company's market areas. The decline in gross
profit is primarily due to the reduced sales volume (in gallons), and
secondarily due to lower margins during the quarter ended December 31, 1999.
Operating expenses in the quarter ended December 31, 1999 declined $511,000 or
approximately 32.7% as compared with the quarter ended December 31, 1998. The
decline is primarily due to staff reductions which were implemented during 1999.
The Texas petroleum marketing segment's operating loss of $88,000 in the quarter
ended December 31, 1999, as compared to an operating profit o f $118,000 in the
quarter ended December 31, 1998, is attributable to the reduced sales volumes
(in gallons) and the lower Gross Margins which prevailed during the current year
period, partially offset by the Company's expense reduction programs.
TEXAS CONVENIENCE STORE SEGMENT
The Company operated 17 stores during the quarter ended December 31, 1999, as
compared with 19 stores in the quarter ended December 31, 1998.
Total revenues in the quarter ended December 31, 1999 increased $422,000 or
approximately 7.6% to $5,976,000, as compared with $5,554,000 in the quarter
ended December 31, 1998. The increase is due to higher fuel prices which
prevailed during the current year. Although fuel sales increased $645,000 or
approximately 21.6% to $3,624,000 in the quarter ended December 31, 1999, as
compared with $2,979,000 in the quarter ended December 31, 1998, fuel sales in
gallons declined approximately 3.6% in the current year period. Merchandise
sales declined $158,000 or approximately 6.5% to $2,267,000 in the quarter ended
December 31, 1999, as compared with $2,425,000 in the quarter ended December 31,
1998.
Gross profit declined $199,000 or approximately 15.8% to $1,058,000 as compared
with $1,257,000 in the quarter ended December 31, 1998. Gross Margin declined to
approximately 17.7% of sales in the quarter ended December 31, 1999, as compared
with approximately 22.6% of sales in the quarter ended December 31, 1998. 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 7.7%of fuel
sales in the quarter ended December 31, 1999 as compared with approximately
10.1% in the quarter ended December 31, 1998. Fuel gross profit per gallon
declined to approximately $0.096 per gallon in the current quarter, as compared
with approximately $0.100 in the comparable prior year quarter.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating expenses declined $189,000 or approximately 14.9% to $1,079,000 in the
quarter ended December 31, 1999, as compared with $1,268,000 in the quarter
ended December 31, 1998. The decline is primarily due to reduced labor expenses,
resulting from staff reductions which occurred during 1999, and to the closing
of two underperforming stores during 1999; personnel costs declined $113,000 or
approximately 16.2% in the quarter ended December 31, 1999, as compared with the
quarter ended December 31, 1998.
The Texas Convenience Store segment incurred an operating loss of $21,000 in the
quarter ended December 31, 1999, as compared with a loss of $11,000 in the
quarter ended December 31, 1998. The increased loss is due to the lower
merchandise sales and lower gross profit in the current quarter, partially
offset by reduced operating expenses.
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.
Total revenues increased $311,000 or approximately 10.9% in the quarter ended
December 31, 1999, as compared with the quarter ended December 31, 1998. The
increase is primarily attributable to higher overall fuel prices which prevailed
during the current year period. Fuel sales increased $190,000 or approximately
8.8% to $2,353,000 in the quarter ended December 31, 1999 as compared with
$2,163,000 in the quarter ended December 31, 1998. Fuel sales in gallons,
however, declined 505,000 or approximately 18.5% to 2,217,00 gallons in the
quarter ended December 31, 1999, as compared with 2,722,000 gallons in the
quarter ended December 31, 1998. Convenience store merchandise sales increased
$111,000 or approximately 17.02% to $762,000 in the quarter ended December 31,
1999 as compared with $651,000 in the quarter ended December 31, 1998. The
increase in merchandise sales is attributable to the Company's adoption of an
aggressive pricing policy designed to increase customer traffic.
Gross profit decreased $20,000 or approximately 5.6% in the quarter ended
December 31, 1999. Gross Margin declined to approximately 10.7% of sales in the
quarter ended December 31, 1999, as compared with approximately 12.6% of sales
in the quarter ended December 31, 1998. 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 were comparable in the two comparable periods; operating
expenses increased $14,000 or approximately 2.5% in the quarter ended December
31, 1999 as compared with the quarter ended December 31, 1998. The Company
incurred expenses of $18,000 associated with the repossession and closing of
three convenience stores, discussed above. 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.
Operating losses were comparable in the two comparable periods. The increased
loss of $34,000 reflects reduced Gross Margins and the increase in operating
expenses during the current year period.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EDCO ENVIRONMENTAL
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Edco's revenues were comparable in the two comparable quarters.
Gross profit in the quarter ended December 31, 1999 increased $128,000 in the
quarter ended December 31, 1999, as compared with the quarter ended December 31,
1998. The increase in gross profit reflects a change in the segments business
mix; during the current year period EDCO Environmental conducted operations
which utilized less materials and more internal labor than in the previous year
comparable quarter.
Operating expenses declined $64,000, reflecting a staff reduction which was
implemented during 1999.
EDCO Environmental reported an operating profit of $78,000 in the quarter ended
December 31, 1999, as compared with an operating loss of $114,000 in the quarter
ended December 31, 1998. The improvement in operating results is attributable to
the increased gross profits and reduced operating expenses in the current year
period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses decreased $86,000 or approximately 17.6% in
the quarter ended December 31, 1999, as compared with the quarter ended December
31, 1998. The current year period includes legal and professional fees and other
expenses associated with the negotiation of the TSC Transaction and the Merger,
and $126,000 in noncash compensation expense, incurred as a result of the
vesting of certain employee stock options. The prior year period includes
$205,000 in noncash compensation expense, resulting from the vesting of certain
employee stock options.
CAPITAL RESOURCES AND LIQUIDITY
On January 23, 2000, the Company executed a Plan of Merger (the "Merger
Agreement") by and among the Company, and I-Net Holdings, a Delaware Corporation
("I-Net"), pursuant to which I-Net Acquisition Corp. will be merged with and
into I-Net (the "Merger"). I-Net, a new company based in Dallas, Texas, will be
mainly engaged in acquiring, developing and managing a network of
business-to-business electronic commerce companies. Upon consummation of the
Merger, I-Net will become a wholy-owned subsidiary of the Company, the
outstanding shares of I-Net will be converted into an aggregate of approximately
15,000,000 shares of the Company's common stock, $.01 par value per share (the
"Company Common Stock"), and the outstanding options to purchase shares of I-Net
common stock will entitle the holders thereof to purchase an aggregate of
approximately 4,000,000 shares of Company Common Stock. If the TSC Transaction
and Merger are approved and consummated, the Company's historical operations and
its business focus will change. In addition, the exchange of shares with the
shareholders of I-Net and the election of I-Net's nominees to the Company's
Board of Directors will result in a change of control of the Company. The Merger
is contingent upon, among other things, approval by the Company's shareholders,
closing of the TSC Transaction, and a requirement that I-Net raise approximately
$15 million in cash to be used to fund the combined company's planned internet
and electronic commerce operations. There can be no assurance that such
conditions will be satisfied or that the merger will be consummated.
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 covenant defaults; (ii) extended the
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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, 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. 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 and December 31, 1999, however the bank has
waived such covenant defaults through December 31, 1999. Since there is no
assurance that the Company can comply with the covenants subsequent to December
31, 1999, nor has the bank waived or amended such covenants past December 31,
1999, all of the debt due to this bank has been classified as current at
December 31, 1999. Management intends to repay the existing bank debt with
proceeds from the TSC Transaction, or in the event such transaction is not
consummated, 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, since the loan was not
repaid by June 30, 1999, the Company became subject to a fee of $250,000, the
payment of which the bank agreed to defer until the earlier of February 28, 2000
or the repayment of the loan; furthermore, the Company became obligated to pay
additional fees of $250,000 on August 31, 1999 and December 31, 1999 as the loan
obligations are not repaid by those respective dates. Interest expense in the
quarter ended December 31, 1999 includes $269,000, reflecting the December 31,
1999 fee and accrued late charges discussed above.
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 and
obtaining a new revolving credit facility in order to provide a minimum of $2.5
million in availability. 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 December 1999, the Company reached agreement to sell its Texas petroleum
marketing and convenience store assets to TSC. Under the terms of the agreement,
TSC would make a cash payment to the Company of $12.7 million for the fixed
assets of the Texas petroleum marketing and convenience store segments. In
addition, TSC agreed to assume certain capital lease obligations of
approximately $0.9 million, and has agreed to purchase the segments' inventories
at the Company's cost, estimated by management at $2.5 million. The sale has
been approved by the Board of Directors and is subject to approval by the
Company's shareholders. Terms of the agreement call for the sale of
substantially all of the property and equipment and inventories in the Texas
petroleum marketing and Texas convenience store segments. Management believes
the TSC Transaction will close in April 2000, and will provide sufficient cash
to repay the Company's existing bank debt, described above, although there can
be no assurance that the transaction will close.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, and warehouse facility, 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 the TSC Transaction. Proceeds of the new loan will be
used for working capital, and to fund expenses necessary to close the TSC
Transaction or the B&I Loan. Interest on the $1 million loan will accrue at an
annual rate of two percent above the bank's established prime lending rate, and
is payable monthly. The note is payable on the earlier of (i) the consummation
of the TSC Transaction, (ii) closing of the B&I Loan, or (iii) May 1, 2000.
In the event that the TSC Transaction does not close, the Company intends to
proceed with the B&I Loan. There can be no assurance that management's plans
will be successful.
Cash used by operating activities was $636,000 in the quarter ended December 31,
1999, as compared with cash provided by operating activities of $228,000 in the
quarter ended December 31, 1998. Although operating losses were comparable in
the two quarters, the higher fuel prices which prevailed during the quarter
ended December 31, 1999 resulted in an increase in customer accounts receivable
balances and inventory values in the quarter ended December 31, 1999. The effect
of increased inventory and accounts receivable was partially mitigated by a
smaller increase in trade accounts payable balances.
Cash and cash equivalents were $60,000 and $992,000 at December 31, 1999 and
September 30, 1999, respectively. The Company had a net working capital deficit
of $10,811,000, 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
quarter ended December 31, 1999, and to the accrual of $269,000 in fees on the
Company's bank debt, as discussed above.
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. 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 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 Company recorded a gain on the disposition of
ChemWay of $3,973,000, net of provision for income taxes of $1,203,000 in the
quarter ended December 31, 1998.
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 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 $0.265 per share at
September 30, 1999. At September 30, 1999, management did not believe that the
stock price of Affiliated would increase in the foreseeable future and
determined that its investment in Affiliated common stock was permanently
impaired and, accordingly, 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.
The Company recorded an increase to the gain on sale of ChemWay of $266,000 in
the quarter ended December 31, 1999, resulting from the receipt of an additional
1,000,000 shares of Affiliated common stock. The Company
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
also recorded an unrealized gain on marketable securities of $39,000 resulting
from the increase in the fair value of the Affiliated shares from $0.265 per
share at September 30, 1999 to $0.281 per share at December 31, 1999.
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 and a closing
price of $0.265 at September 30, 1999.
At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-KSB,
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 its quarterly report on Form10-QSB for the quarter
ended September 30, 1999, Affiliated reported revenues from operations of
$486,000, a net loss of $1.6 million, negative working capital of $1.6 million,
an accumulated deficit of $9.2 million and stockholders' equity of $5.0 million.
See Note G to the unaudited condensed financial statements included herein.
In the quarter ended December 31, 1998, the Company received proceeds of
$156,000 from the sale of common stock in a private placement, and the exercise
of employee stock options.
On January 26, the Company executed an agreement with accredited investors to
sell up to 500,000 shares of common stock in a private placement. The Company
expects to receive approximately $1,000,000 for the sale of 333,333 shares of
common stock by February 19, 2000. The Company intends to utilize the proceeds
to fund costs associated with closing the TSC Transaction and the Merger, and
for working capital. There can be no assurance that the private placement will
be consummated.
A purported class action lawsuit has been filed 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 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.
The lawsuit demands, among other relief, unspecified compensatory damages,
attorney's fees and costs of conducting the litigation. It is not possible, at
this time, to predict the impact that the lawsuit 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 reasonable possible, 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. The Company intends to defend itself vigorously in these
matters. See Note I to the unaudited condensed financial statements, included
herein.
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
had a hearing on such matters with Nasdaq on January 14, 2000 and informed
Nasdaq that the aggregate market value of the Company's voting stock held by
non-affiliates was in compliance, with an aggregate market value of
approximately $6.3 million on January 10, 2000. Furthermore, Nasdaq was
appraised of the Company's intention to proceed with the TSC Transaction, and
was informed of the Company's merger negotiations with I-Net. The Company
intends to file a preliminary proxy with the Securities and Exchange Commission
and intends to hold its shareholder meeting on April 3, 2000. The Company's
common stock remains listed on the Nasdaq:NMS, and management believes that is
has either complied with, or proposed a cure to the deficiencies. The Company's
ability to raise additional equity capital in the future, however, could be
adversely
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
affected if the Company's common stock were no longer listed on a national
exchange.
In order to continue as a going concern, the Company must either close the TSC
Transaction or the B&I Loan, as described above, complete the Merger with I-Net
or otherwise raise additional capital and, ultimately, generate cash flow from
operations. There can be no assurance that management's plans will be
successful.
21
<PAGE>
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS INDEX PAGE
----
27. Financial Data Schedule 23
B. REPORTS ON FORM 8-K
Current Report on Form 8-K dated December 10, 1999 reporting the Company's
agreement to sell its Texas based petroleum marketing and convenience store
assets to TSC Services, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EVANS SYSTEMS, INC.
(REGISTRANT)
Date: February 14, 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/ RICHARD A. GOEGGEL
---------------------
Richard A. Goeggel
Vice president and Chief
Financial Officer And authorized
to sign on behalf of the
registrant.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 4,026
<ALLOWANCES> 195
<INVENTORY> 2,960
<CURRENT-ASSETS> 7,348
<PP&E> 27,534
<DEPRECIATION> 12,883
<TOTAL-ASSETS> 22,905
<CURRENT-LIABILITIES> 18,159
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 3,272
<TOTAL-LIABILITY-AND-EQUITY> 22,905
<SALES> 22,012
<TOTAL-REVENUES> 22,012
<CGS> 19,427
<TOTAL-COSTS> 3,252
<OTHER-EXPENSES> (8)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 555
<INCOME-PRETAX> (1,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,214)
<DISCONTINUED> 266
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (948)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
