EVANS SYSTEMS INC, 10-K405, 2001-01-12

EVANS SYSTEMS INC
10-K405, 2001-01-12
PETROLEUM BULK STATIONS & TERMINALS

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AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON JANUARY 12, 2001

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One) (Amendment No. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended SEPTEMBER 30, 2000
OR
[ ] 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)

1625 HWY 60 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: 1625 Hwy 60 North, Bay City, Texas 77414 (409) 245-2424
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act: None

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.01 per share NASDAQ-OTCBB Exchange

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

On January 10, 2001, the aggregate market value of the Registrant's voting
stock held by non-affiliates was approximately $720,516.

On January 10, 2001, there were 5,542,429 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE: None.
<PAGE>
PART I

This Annual Report on Form 10-K 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
consummate the sale of its operations or to close on its proposed refinancing,
changes in costs of raw materials, labor, and employee benefits, as well as
general market conditions, competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. In assessing forward-looking statements
included herein, readers are urged to carefully read those statements. When used
in the Annual Report on Form 10-K, the words "estimate," "anticipate," "expect,"
"believe," and similar expressions are intended to be forward-looking
statements.

ITEM 1. BUSINESS

Evans Systems, Inc. ("ESI"), through its wholly-owned subsidiaries, collectively
referred to herein as the "Company," is a vertically integrated company which
has historically been engaged in the following business segments:

o Texas petroleum marketing operations;
o Texas convenience store operations;
o environmental remediation services;
o Louisiana operations; and
o packaging and marketing of automotive after-market chemical
products.

The Company began in 1968 with a single gasoline station in Bay City, Texas,
emphasizing service and careful attention to customers' preferences and needs.
The Company has expanded over the years, and now distributes the products of
seven major oil companies, and operates a chain of convenience stores throughout
southeast Texas and southern Louisiana.

After sustaining losses during 1997, in early fiscal 1998 the management of ESI
developed and began to implement its turnaround strategy. Among other things,
the strategy included a decision to refocus the Company on its "core" business
segments: petroleum marketing and convenience store operations. Within these
"core" segments, the Company sold or closed lower-volume outlets. The Company
also took actions, including the elimination of nonessential corporate staff, to
reduce overhead expenses. See "Texas Petroleum Marketing" and "Texas Convenience
Store" segment discussions, below.

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"). ChemWay's financial
results have been reclassified as a "discontinued operation" for financial
reporting purposes. In December 1998, the Company sold ChemWay in a
stock-for-stock transaction to Affiliated Resources Corporation ("Affiliated").
See "ChemWay" below.

In December 1999, the Company reached an 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 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 March 31, 2000. In addition, TSC agreed to assume
certain capital lease obligations of approximately $0.6 million, and agreed to
purchase the segments' inventories at the Company's cost, estimated by
management at $2.4 million. The sale was approved by the Board of Directors and
subject to approval by the Company's shareholders. Terms of the agreement called
for the sale of substantially all of the property and equipment and inventories
in the Texas petroleum marketing and Texas convenience store segments. On August
17, 2000, the Company terminated the TSC Agreement pursuant to TSC's failure to
perform certain obligations as defined within the agreement.

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. To induce I-Net to agree to the
immediate termination of the Merger Agreement, the Company has agreed to pay
$50,000 to I-Net as partial reimbursement of the

Page 2
<PAGE>
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.

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.

Operating results for each of the Company's segments follow (in thousands):

YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 1998
-------------- -------------- --------------
TEXAS PETROLEUM MARKETING
Revenue from External Customers . $ 54,810 $ 50,164 $ 64,458
Operating Loss .................. (601) (1,335) (987)

TEXAS CONVENIENCE STORES
Revenue ......................... $ 25,262 $ 22,873 $ 25,626
Operating Loss .................. (742) (34) (543)

LOUISIANA OPERATIONS
Revenue ......................... $ 13,796 $ 12,694 $ 12,878
Operating Loss .................. (676) (334) (88)

EDCO ENVIRONMENTAL
Revenue ......................... $ 1,461 $ 1,542 $ 1,152
Operating Income (Loss) ......... 262 177 (81)

CORPORATE EXPENSES .............. (1,682) (1,854) (2,295)

TOTAL CONTINUING OPERATIONS
Revenue ......................... $ 95,329 $ 87,273 $ 104,114
Operating Loss .................. (3,439) (3,380) (3,994)

CHEMWAY(1)
Revenue ......................... $ 75 $ 2,268
Operating Income (Loss) ......... (317) (1,697)

TOTAL
Revenue ......................... $ 95,329 $ 87,348 106,382
Operating income (Loss) ......... (3,439) (3,697) (5,688)
(1) ChemWay was sold on December 30, 1998.

TEXAS PETROLEUM MARKETING

The following table sets forth the revenues of the Texas Petroleum Marketing
segment (in thousands):

FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
2000 1999 1998
-------- -------- --------
Refined petroleum product
sales ...................................... $ 54,414 $ 49,143 $ 63,077
Non-petroleum product
sales ...................................... 396 1,021 1,381
-------- -------- --------
Total Sales ................................ $ 54,810 $ 50,164 $ 64,458

Page 3
<PAGE>
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets:

o 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.

o 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.

The Texas Petroleum Marketing segment distributes to its motor fuel customers
both directly from refinery racks, and through the Company's bulk plant
facilities. The Company also has a 110,000 barrel terminal facility, located in
Bay City, Texas, from which it has historically distributed motor fuels to the
southeast Texas market. During the first fiscal quarter of 1998, the Company's
supply agreement with the primary fuel supplier to the Bay City terminal
facility was terminated. The terminal facility has remained closed since then
and has adversely effected the Texas Petroleum Marketing segment's performance
during 1998, 1999, and 2000.

Under regulations issued by the U.S. Environmental Protection Agency ("EPA"),
all underground storage tanks in the State of Texas were required to meet
certain standards of protection as of December 22, 1998. During 1998, the
Company evaluated the revenues generated by its Special Purpose Lease accounts,
and determined that it could not justify further investment at approximately 46
of such locations. Accordingly, management decided to either sell or close those
identified lower-volume Special Purpose Lease facilities. As of September 30,
1998, the Company sold its investment at 23 of the lower-volume Special Purpose
Lease accounts, and has subsequently sold the equipment at seven additional
sites. Additionally, the Company has discontinued the delivery of motor fuels,
and has removed the underground storage tanks at 16 Special Purpose Lease sites.
The Special Purpose Lease locations where the Company sold its investment in
equipment are now served by the Company as Open Dealers. See "Environmental
Issues," below.

The effect of the conversion of Special Purpose Lease customers into Open
Dealers is reduced gross margin, working capital requirements, and capital
investment, resulting in an improved return on investment. Since the Company's
margins on Open Dealer accounts are contractually fixed, however, the Texas
Petroleum Marketing Segment's gross margins may be less volatile in the future,
as a larger percentage of the segment's business will be at fixed margins.

On May 21, 1999, the company closed its bulk storage facility and office in El
Campo, Texas and eliminated 35% of its staff in the Texas Petroleum Marketing
segment. The company also sold its Bay City Tire Store on May 3, 1999. On June
30, 1999, the Company sold its Fuelman fleet card franchise to a competitor.

TEXAS CONVENIENCE STORES

The following table sets forth the revenues of the Texas Convenience Store
segment (in thousands):

FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
2000 1999 1998
-------- -------- --------
Refined petroleum product
sales ...................................... $ 15,361 $ 12,705 $ 14,069
Merchandise sales .......................... 9,543 9,599 10,783
Other income ............................... 358 569 774
-------- -------- --------
Total Sales ................................ $ 25,262 $ 22,873 $ 25,626

Number of operating stores
at year-end ................................ 17 17 19

At September 30, 2000, the Company operated 17 convenience stores, featuring
self-service motor fuels and a variety of food and non-food merchandise. Eight
of the Company's convenience stores are co-branded with nationally recognized
fast food franchises or food service operations.

Page 4
<PAGE>
The Company's stores are located in smaller communities throughout the gulf
coast region of Texas.

During fiscal 1998, the Company discontinued operations at seven underperforming
convenience stores, and sold the equipment and business to independent
convenience store operators. In each of these transactions, the Company retained
the wholesale gasoline business through an Open Dealer contract.

The Company closed two underperforming Texas convenience stores during 1999, one
of which was subsequently leased to an independent operator who also agreed to
purchase fuel from the Company as an Open Dealer.

LOUISIANA OPERATIONS

The following table sets forth the revenues of the Louisiana Operations segment
(in thousands):

FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
2000 1999 1998
-------- -------- --------
Refined petroleum product
sales ...................................... $ 10,042 $ 9,671 $ 10,014
Merchandise sales .......................... 3,694 2,882 2,706
Other income ............................... 60 141 158
-------- -------- --------
Total Sales ................................ $ 13,796 $ 12,694 $ 12,878

Number of operating stores
at year-end ................................ 8 7 7

At September 30, 2000 Louisiana operations are comprised of a fuel bulk storage
facility and distribution center, one full-service station without a convenience
store, and eight convenience stores, located in and around Lake Charles,
Louisiana. The Company has previously announced its intention to sell its
Louisiana operations, however there can be no assurance that a sale on terms
satisfactory to the Company will be completed.

EDCO ENVIRONMENTAL

EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area. EDCO
Environmental currently focuses its efforts on the following activities:

Underground storage tank ("UST") removal UST regulator upgrades
Site assessments for regulatory agencies UST repairs and maintenance
Site clean up reimbursement

EDCO Environmental has provided environmental remediation services to
approximately 100 customers ranging from gasoline stations, convenience stores,
public utilities, banks, major oil companies, large industrial corporations,
various small local enterprises and a variety of governmental institutions and
enterprises. The environmental protection business is primarily the result of
government mandate. In the mid-1980's, the EPA initiated a program for the
management of USTs throughout the U.S.

The EPA now requires stage II vapor recovery improvements at fuel facilities
rather than through on-board canisters in new motor vehicles. The deadline for
compliance with the UST improvement guidelines was December 1998.

A number of states, including Texas, have established remediation funds to
assist owners/operators in the clean-up of leaking USTs. In Texas, this was
accomplished through the Groundwater Protection Act ("GPA"), which became
effective on September 1, 1989. The GPA, as amended, provides clean-up funds for
eligible expenses, less applicable deductibles. The fund is continually financed
by a fee assessed on motor fuels sold in the state. Financing programs secured
by assignments of rights to reimbursement by the Texas Natural Resource
Conservation Commission ("TNRCC") can be obtained for leaking petroleum storage
tank sites impacted by releases from USTs. For locations where contamination
already exists, the UST owner/operator must comply with TNRCC clean-up
regulations or risk fines of up to $10,000 per day and disqualification from the
benefits and funding of the GPA.

EDCO Environmental reported revenues of $1,461,000, $1,542,000 and $1,152,000 in
2000, 1999 and 1998, respectively.

Page 5
<PAGE>
The TNRCC is continuing to provide reimbursements for clean-up of those
contaminated locations which were registered with the TNRCC on or before
December 28, 1998. Cleanup of locations which became known after December 28,
1998 is generally funded by private insurance or by the location owner.

CHEMWAY (DISCONTINUED MARCH 31, 1998; SOLD DECEMBER 30, 1998)

ChemWay packages aerosol and liquid chemical products for the aftermarket
automotive industry. In February 1998, the Company suspended production and, in
March 1998, announced plans to sell its investment in ChemWay. On December 30,
1998, the Company completed the sale of ChemWay to an unrelated third party,
Affiliated.

The Company received 1,500,000 shares of common stock of Affiliated,
representing approximately nine percent of the outstanding common stock of
Affiliated, in exchange for all of the common stock of ChemWay. See Note 4 to
the Consolidated Financial Statements, included herein. 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 at December 30, 1999. The Affiliated common stock is unregistered,
however the Company has demand registration rights with respect to such stock.

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 low closing price in the quarter ended June
30, 1998 of $0.88 to a closing price of $6.00 at December 31, 1998 to closing
prices of $0.265 and $0.406 at September 30, 1999 and September 30, 2000,
respectively.

There can be no assurance that the Company would be able to realize the recorded
value of the Affiliated common stock.

EMPLOYEE RELATIONS

The Company employs 197 people, none of whom are represented by any collective
bargaining organizations. The Company has had no work stoppages, slow downs or
strikes. On July 1, 1997, the Company implemented an employee directed 401K
plan.

Management considers its employee relations to be satisfactory.

COMPETITION

All of the Company's business segments operate in a highly competitive
environment. The Company competes on the basis of price, service, and quality.
In addition, each of the respective business systems faces special competitive
factors. In all phases of operations, the Company encounters strong competition
from a number of companies, including some companies with significantly greater
resources than the Company. Many of these larger competitors possess and employ
financial and personnel resources substantially in excess of those which are
available to the Company. The Company's Texas Petroleum Marketing Segment, Texas
Convenience Store Segment and Louisiana Operations Segment also compete with
integrated oil companies which, in some cases, own or control a majority of
their Petroleum Marketing facilities or convenience store locations. These major
oil companies may offer their products to the Company's competitors on more
favorable terms than those available to the Company from its suppliers. A
significant number of companies, including integrated oil companies and
petroleum products distribution companies, distribute petroleum products through
a larger number of facilities than the Company.

The convenience store industry is a retail service-oriented industry. It is
distinguished from other retail businesses by its emphasis on location and
convenience rather than price, and a commitment to customers who need to
purchase items quickly at extended hours. Convenience stores feature a wide
variety of items including groceries, dairy products, tobacco products,
beverages, and health and beauty aids. Many sell petroleum on a self-service
basis. Stores are generally designed with ample customer parking and quick
checkout procedures to maximize convenience as well as encourage impulse buying
of high margin items.

The convenience store industry is highly competitive, fragmented, and
regionalized. It is characterized by a few large companies and many small
independent companies. Several competitors are substantially larger and have
greater resources than the Company. The Company's primary competitors include
Diamond Shamrock, RaceTrac, Thomas Petroleum, and E-Z Mart. The Company also
competes with other convenience stores, small supermarkets, grocery stores, and
major and independent gasoline distributors who have converted units to
convenience stores.

EDCO Environmental is a full service environmental company. In the past, the
remediation industry was not highly competitive, but increasingly companies are
entering the environmental business. Management of EDCO Environmental
anticipates that the business will become increasingly competitive in the years
ahead.

Page 6
<PAGE>
The remediation industry is characterized by a few large companies, some medium
sized companies such as EDCO Environmental, and many small independent
companies. Some competitors are larger and have greater resources than EDCO
Environmental. EDCO Environmental competes primarily with engineering firms and
private contractors in addition to other environmental remediation companies.

The continued growth in the remediation service is dependent upon market
penetration, customer base, government regulations, funding, and legislative
changes. EDCO Environmental's growth in underground storage tank upgrading
depends upon its ability to work efficiently, meet price competition, and will
be adversely affected by restrictions upon reimbursements by the Texas Natural
Resource Conservation Commission (See "Business," "EDCO Environmental Systems,
Inc.").

ITEM 2. PROPERTIES

The Company has extensive real estate interests in Texas and Louisiana. The
Company owns 42 commercial parcels of real estate in Texas and 2 in Louisiana.
The properties are comprised of convenience stores, service stations, plants and
unimproved sites suitable for retail development. It also leases another 25
convenience store locations and 4 other facilities under operating lease
agreements with varying terms and lives.

In July 1999, The Company vacated its former general office facility, which was
located in a 10,300 square foot, free-standing building located on a 15-acre
tract with 400 feet of frontage along Highway 60 North in Bay City, Texas. The
former general office facility has been listed for sale. EDCO Environmental's
facilities include a 19,200 square foot shop, fabrication, and maintenance
building adjacent to the administration building. Subsequent to September 30,
2000 the company closed on the sale of EDCO Environmental's facilities on
November 21, 2000 and the former general office portion on December 29, 2000.

The Company relocated its general offices into space in its additional office
and administrative operations (5,985 square feet) and 7,490 square foot
warehouse together with 14,784 square feet of additional warehouse buildings,
located on 3 acres of land on Highway 60. Bulk storage equipment, including 14
fuel storage tanks and 20 lube oil and antifreeze tanks, are located adjacent to
the warehouses

ITEM 3. LEGAL PROCEEDINGS

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. On May 31, 2000, the lawsuit was dismissed with
prejudice in the United States District Court for the Southern District of
Texas.

The Company is also subject to litigation, primarily as a result of customer
claims, in the ordinary conduct of its operations. In the opinion of management,
there are no legal proceedings other than discussed above which, by themselves
or in the aggregate could be expected to have a material adverse effect on the
consolidated financial position of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

STOCK INFORMATION

Traded On the Nasdaq Over The Counter Bulletin Board Quotation System -- The
Company's Common Stock, $.01 par value, is listed on the OTCBB exchange under
the Symbol "EVSI." At September 30, 2000, there were approximately 1,046
shareholders of record. The Company has not paid any cash dividends, and the
Company currently has no plans to adopt a regular cash dividend.

The aggregate market value of the Company's voting stock held by non-affiliates
was approximately $1.9 million on September 30, 2000.

Page 7
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The high and low price range for the last two years, based on the closing sales
price as reported by NASDAQ\OTCBB, is listed below:

DATES HIGH LOW
----- ------ ------
October 1, 1998 through December 31, 1998 ............ 15 5/8 6 7/16
January 1, 1999 through March 31, 1999 ............... 18 3/4 15 1/4
April 1, 1999 through June 30, 1999 .................. 32 3 5/8
July 1, 1999 through September 30, 1999 .............. 2 1/8 1 3/8
October 1, 1999 through December 31,1999 ............. 2 7/16 1/2
January 1, 2000 through March 31, 2000 ............... 9 3/4 1 3/8
April 1, 2000 through June 30, 2000 .................. 2 7/16 3/8
July 1, 2000 through September 30, 2000 .............. 1 1/2 3/8

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data which should be
read in conjunction with the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included herein. Amounts are in thousands, except per-share data.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------------------------------
INCOME STATEMENT DATA: 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................................. $ 95,329 $ 87,273 $ 104,114 $ 137,996 $ 133,007
Gross Profit ............................................. 10,141 11,854 13,868 14,765 17,266
Operating Income (Loss) .................................. (3,439) (3,380) (3,994) (3,682) 359
Income (Loss) from Continuing Operations ................. (5,200) (13,306) (4,605) (3,458) (185)
Net Income (Loss) ........................................ (4,934) (9,333) (5,453) (4,804) 1,119
Basic Income (loss) from continuing
operations per common share(1) ........................... (1.22) (3.46) (1.48) (1.12) (.06)
Basic earnings (loss) per common share(1) ................ (1.16) (2.43) (1.75) (1.56) .37
Basic weighted average number of common
shares outstanding(1) .................................... 4,263 3,846 3,116 3,075 3,010
Diluted earnings (loss) from continuing
operations per common share(1) ........................... (1.22) (3.46) (1.48) (1.12) (.06)
Diluted earnings (loss) per common share(1) .............. (1.16) (2.43) (1.75) (1.56) .37
Weighted average number of common and
common equivalent shares outstanding(1) .................. 4,263 3,846 3,116 3,075 3,010

1 Adjusted for 5% stock dividend paid on January 20, 1997
<CAPTION>
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Current Assets ........................................... $ 6,148 $ 6,729 $ 9,914 $ 14,962 $ 18,726
Current Liabilities ...................................... 19,301 16,452 9,751 17,333 9,724
Current Ratio ............................................ .32:1 .41:1 1.02:1 .86:1 1.93:1
Total Assets ............................................. 20,709 22,342 32,448 38,218 41,073
Long-Term Debt ........................................... 716 1,634 11,151 5,401 10,400
Total Stockholders' Equity ............................... 692 4,096 11,546 15,484 19,748
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the historical financial
statements and notes thereto appearing elsewhere in this document.

In December 1999, the Company signed an agreement to sell its Texas petroleum
marketing and convenience store operations to TSC Services, Inc., ("TSC") for
cash consideration of $12.7 million (the "TSC Transaction". TSC also agreed to
assume certain capital lease obligations which the Company estimated would total
approximately $0.9 million at the time of closing. In addition, TSC would
acquire the Company's inventories in the Texas petroleum marketing and Texas
convenience store segments at the Company's

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cost, estimated by management at approximately $2.4 million. The sale was
approved by the Board of Directors and subject to approval by the Company's
shareholders. Terms of the agreement called for the sale of substantially all of
the property and equipment and inventories in the Texas petroleum marketing and
Texas convenience store segments. On August 17, 2000, the Company terminated the
TSC Agreement pursuant to TSC's failure to perform certain obligations as
defined within the agreement.

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.

In the Fourth Quarter of 2000, The company began implementation of a strategy to
reduce debt by selling certain identified assets aligned along brand
representation in an effort to concentrate on fewer brands which management
feels have the most future profit potential. As a part of this strategy,
management implemented an additional 22% staff reduction in early October. By
the end of the First fiscal quarter of 2001, the company had closed on the sale
of some its Citgo, Texaco (Motiva) and Diamond Shamrock dealer and consignment
accounts. The company has Phillips 66 accounts under earnest money contract,
with closing expected in January 2001. Management plans to continue its Chevron
and Exxon branded company operated and dealer locations. The company also closed
on the sale of it's Corporate Office and warehouse facility in Bay City and has
placed for sale other properties. Proceeds from the sale are being used towards
the reduction of debt. The Company has reached an agreement in principle with
its primary lender which could lead to a significant reduction in debt.

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 the second quarter of 2001.
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.

RESULTS OF OPERATIONS

2000 COMPARED WITH 1999

Consolidated revenues from continuing operations increased $8,056,000 or
approximately 9.2% to $95,329,000 in the year ended September 30, 2000. The
increase, primarily in the Texas Petroleum Marketing segment, is primarily due
to the increased selling price per gallon of fuel in 2000 compared to 1999.
Consolidated gross profit from continuing operations declined $1,713,000 or
approximately 14.5% to $10,141,000 in the year ended September 30, 2000. Gross
profit expressed as a percentage of revenues ("Gross Margin") decreased to
approximately 10.6% of sales in 2000 from approximately 13.6% of sales in 1999.
Gross Margin declined in all segments. The decline in gross profit in 2000 is
mainly due to competitive gasoline pricing on rising fuel cost. See segment
discussions below.

Consolidated operating expenses of continuing operations declined $1,654,000 or
approximately 10.9% in 2000 to $13,580,000. The decrease in operating expenses
were mainly attributable to savings related to personnel reductions $1,137,000,
general and administrative expense cost cuts of $435,000 and depreciation of
$76,000.

Consolidated operating losses increased $59,000 to $3,439,000 in 2000 as
compared with a loss of $3,380,000 in 1999. The company made significant expense
reductions in 2000; however, the decline in margins resulted in a virtually
unchanged operating loss.

Consolidated comprehensive loss of $4,582,000 in 2000 includes a $266,000 gain
on disposal of Chemway and a $352,000 unrealized gain on the Company's
investment in Affiliated common stock. The comprehensive loss of $9,333,000 in
1999 includes a loss on impairment of the Company's investment in Affiliated
common stock of $8,602,000, partially offset by a gain on the sale of ChemWay of
$3,973,000, net of income taxes.

TEXAS PETROLEUM MARKETING SEGMENT

Revenues in the Texas Petroleum Marketing Segment increased $4,646,000 or
approximately 9.3% to $54,810,000 in 2000, as compared with $50,164,000 in 1999.
Sales in gallons declined to 40,158,000 gallons in 2000 from 44,441,000 gallons
in 1999, a decline of approximately 9.6%. Average selling price per gallon
increased in 2000 to approximately $1.34 per gallon, as compared

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with $1.13 per gallon in 1999. The increase is due to nation wide cost increases
in 2000 which pressured higher selling prices per gallon.

Gross Profit in 2000 declined to $3,747,000 from $4,401,000 in 1999, a decline
of $654,000 or approximately 14.9%. Gross Margin decreased to approximately 6.8%
of sales in 2000 from approximately 8.8% of sales in 1999.

Operating expenses in 2000 declined to $4,373,000 from $5,736,000 in 1999, a
decline of $1,363,000 or approximately 23.8%. The reduced expenses resulted from
the company's implementation of programs started in 1999 to reduce staff, a
$1,086,000 savings, cut overhead, a $97,000 savings, other expense reductions of
$73,000 and decreased depreciation expense of $107,000.

Operating loss in 2000 decreased to $601,,000 from $1,335,000 in 1999, a
decrease of $734,000 or approximately a 53.1% improvement, as a result of
expense reductions.

TEXAS CONVENIENCE STORE SEGMENT

At September 30, 2000, the Company operated 17 convenience stores, featuring
self-service motor fuels and a variety of food and non-food merchandise. Eight
of the Company's convenience stores are co-branded with a nationally recognized
fast food franchises or food service operations. The Company's stores are
located in smaller communities throughout the gulf coast region of Texas.

Total sales increased $2,389,000 or approximately 10.4% in 2000 to $25,262,000
from $22,873,000 in 1999. Fuel sales in 2000 were $15,361,000 as compared with
$12,659,000 in 1999; fuel sales in gallons declined in 2000 to 10,869,000
gallons as compared with 12,753,000 gallons in 1999. Merchandise sales decreased
$56,000 to $9,543,000 as compared with $9,599,000 in 1999. Average selling
price per gallon increased in 2000 to approximately $1.41 per gallon, as
compared with $.99 per gallon in 1999. The increase is due to nation wide cost
increases in 2000 which pressured higher selling prices per gallon.

Gross profit declined to $4,080,000 in 2000 as compared with $4,768,000 in 1999.
Gross Margin in the Texas Convenience Store segment declined in 2000 to
approximately 16.1% as compared with approximately 20.9% in 1999. Merchandise
Gross Margin decreased in 2000, to approximately 28.4% of sales, as compared to
approximately 32.1% of sales in 1999. Fuel Gross Margin decreased to
approximately 6.6% during 2000, as compared with approximately 8.7% during 1999.

Operating expenses during 2000 in the Texas Convenience Store segment was
$4,822,000 as compared with $4,802,000 in 1999, a increase of $20,000 or
approximately .4%.

The Convenience Store segment incurred an operating loss of $742,000 in 2000, as
compared with a loss of $34,000 in 1999. The increased loss is due to declining
margins in fuel and merchandise sales created by a highly competitive market.

LOUISIANA OPERATIONS SEGMENT

Sales increased $1,102,000 or approximately 8.7% to $13,796,000 in 2000 from
$12,694,000 in 1999. Sales of fuels and other refined petroleum products
increased $290,000 or approximately 3.8% to $10,102,000 in 2000 as compared with
$9,671,000 in 1999. Convenience store merchandise sales increased $812,000 in
2000, or approximately 22.0%, to $3,694,000 as compared with $2,882,000 in 1999.

Gross profits declined $264,000 or approximately 14.8% in 2000, to $1,514,000 as
compared with $1,778,000 in 1999. Gross Margin declined to approximately 11.0%
of sales in 2000, as compared with approximately 14.0% of sales in 1999. Gross
Margin on fuel sales declined to approximately 6.6% of sales in 2000, as
compared with approximately 9.3% of sales in 1999, primarily due to the
competitive retail fuel pricing which prevailed in 2000. Merchandise Gross
Margin in 2000 declined to approximately 19.7% of sales, as compared to
approximately 23.5% of sales in 1999. The Company generally reduced its
merchandise retail pricing in 2000 in an attempt to increase sales.

Operating expenses in 2000 were $2,191,000, a increase of $79,000 or
approximately 3.7% as compared to 1999.

Operating loss in 2000 increased to $676,000, as compared with a loss of
$334,000 in 1999. The increased loss in 2000 is attributable to lower gross
profit margins in 2000, and increased operating expenses.

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EDCO ENVIRONMENTAL SEGMENT

EDCO Environmental reported an operating profit of $262,000 in the year ended
September 30, 2000, as compared with $177,000 in 1999. The increase is primarily
attributable to a $193,000 reduction in operating expenses. EDCO Environmental
will continue to focus its attention on environmental remediation projects which
have been pre-approved for reimbursement by the Texas Natural Resource
Conservation Commissions' ("TNRCC") fund, or by private insurers. Management
believes that such opportunities will continue to exist, however there can be no
assurance that they will do so.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses declined $172,000 in 2000, to $1,682,000 as
compared with $1,854,000 in 1999. Corporate expenses in 2000 included a non-cash
charge of $247,000 to compensation expense, as a result of the application of
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees," with respect to the vesting of certain incentive stock options which
had previously been awarded to employees. 2000 expenses also include
nonrecurring legal and professional charges of $224,000 arising from the
proposed merger with I-Net Holdings Inc. and the proposed sale of substantially
all of it's fixed assets to TSC Services Inc. and $157,000 in penalties for late
payment of motor fuels taxes.

General and administrative expenses in 1999 included a non-cash charge of
$404,000 to compensation expense, as a result of the application of Accounting
Principles Board Option No. 25, "Accounting for Stock Issued to Employees," with
respect to the vesting of certain incentive stock options which had previously
been awarded to employees. 1999 expenses also includes a noncash charge of
$61,000, representing the market value of the Company's common stock contributed
to the Company's 401-K employee benefit plan, nonrecurring legal and
professional fees of $480,000 arising from the proposed merger with Duke & Long
Distributing Company, and legal and professional fees of $339,000 arising from a
number of matters, including the restatement of the Company's previously
reported financial statements, the negotiation of the purchase agreement with
A-Free-Gift.Com, and the refinancing of the Company's senior debt.

1999 COMPARED WITH 1998

Consolidated revenues from continuing operations declined $16,841,000 or
approximately 16.18% to $87,273,000 in the year ended September 30, 1999. The
decline, primarily in the Texas Petroleum Marketing segment, is primarily due to
the closing of underperforming or low volume locations and to the lower fuel
prices which prevailed during the current year period. See segment discussions,
below.

Consolidated gross profit from continuing operations declined $2,014,000 or
approximately 14.5% to $11,854,000 in the year ended September 30, 1999. Gross
profit expressed as a percentage of revenues ("Gross Margin") increased to
approximately 13.6% of sales in 1999 from approximately 13.3% of sales in 1998.
Gross Margin improved in the Texas Petroleum Marketing and EDCO Environmental
segments, and declined in the Texas Convenience Stores and Louisiana Operations
segments in 1999, as compared with 1998. The decline in gross profit in 1999 is
due to reduced revenues in the current year, partially offset by higher Gross
Margins which prevailed in 1999. See segment discussions, below.

Consolidated operating expenses of continuing operations declined $2,628,000 or
approximately 14.7% in 1999 to $15,234,000. Operating expenses declined in each
of the Company's segments in 1999, as compared with 1998. The decline in
operating expenses is due to the closing of underperforming locations and to a
general reduction in staff which occurred in 1999.

Consolidated operating losses of continuing operations declined $614,000 or
approximately 15.4% to $3,380,000 in 1999 as compared with a loss of $3,994,000
in 1998. The reduced operating loss is due to reduced operating expenses in
1999, partially offset by reduced gross profits.

Consolidated net loss of $9,333,000 in 1999 includes the loss on impairment of
the Company's investment in Affiliated common stock of $8,602,000, partially
offset by a gain on sale of ChemWay of $3,973,000, net of income taxes. General
and administrative expenses in 1999 included a non-cash charge of $404,000 to
compensation expense, as a result of the application of Accounting Principles
Board Option No. 25, "Accounting for Stock Issued to Employees," with respect to
the vesting of certain incentive stock options which had previously been awarded
to employees. 1999 expenses also includes a noncash charge of $61,000,
representing the market value of the Company's common stock contributed to the
Company's 401-K employee benefit plan, nonrecurring legal and professional fees
of $480,000 arising from the proposed merger with Duke & Long Distributing
Company, and legal and professional fees of $339,000 arising from a number of
matters, including the restatement of the Company's previously reported

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financial statements, the negotiation of the purchase agreement with
A-Free-Gift.Com, and the refinancing of the Company's senior debt.

General and administrative expenses in 1998 included non-cash compensation
expense of $1,133,000 arising from the vesting of certain incentive stock
options which had previously been awarded to employees. Adjusting 1999 and 1998
for the $1,284,000 and $1,133,000 in non-cash and nonrecurring expenses,
respectively, and adjusting for the non-cash gain on sale of ChemWay and
subsequent loss on impairment in marketable securities, adjusted net loss in
1999 of $3,420,000 declined $900,000 from an adjusted net loss of $4,320,000 in
1998.

TEXAS PETROLEUM MARKETING SEGMENT

The effect of the conversion of Special Purpose Lease customers into Open
Dealers is to increase the Company's sales revenues with reduced gross margin,
working capital requirements, and capital investment, resulting in an improved
return on investment. Since the Company's margins on Open Dealer accounts are
contractually fixed, however, the Texas Petroleum Marketing Segment's gross
margins may be less volatile in the future, as a larger percentage of the
segment's business will be at fixed margins.

Sales in the Texas Petroleum Marketing Segment declined $14,294,000 or
approximately 22.2% to $50,164,000 in 1999, as compared with $64,458,000 in
1998. Sales in gallons declined to 44,441,000 gallons in 1999 from 60,158,000
gallons in 1998, a decline of approximately 26.13%. Average selling price per
gallon increased in 1999 to approximately $1.13 per gallon, as compared with
$1.07 per gallon in 1998. The increase is due to the conversion of Special
Purpose Lease customers into Open Dealers during late 1998 and early 1999.
Although the Company realizes a higher average selling price per gallon, the
Company's gross profit per gallon on sales to Open Dealers can be significantly
lower than on sales to Special Purpose Lease customers.

Gross Profit in 1999 declined to $4,401,000 from $5,461,000 in 1998, a decline
of $1,060,000 or approximately 19.4%. Gross Margin increased to approximately
8.77% of sales in 1999 from approximately 8.47% of sales in 1998.

Operating expenses in 1999 declined to $5,736,000 from $6,448,000 in 1998, a
decline of $712,000 or approximately 11.0%, primarily as a result of a general
reduction in staff.

Operating loss in 1999 increased to $1,335,000 from $987,000 in 1998, an
increase of $348,000 or approximately 35.3%, as a result of lower revenues and
gross profits in 1999, partially offset by reduced operating expenses in 1999.

TEXAS CONVENIENCE STORE SEGMENT

At September 30, 1999, the Company operated 17 convenience stores, featuring
self-service motor fuels and a variety of food and non-food merchandise. Eight
of the Company's convenience stores are co-branded with a nationally recognized
fast food franchised or licensed food service operation. The Company's stores
are located in smaller communities throughout the gulf coast region of Texas.

Total sales declined $2,753,000 or approximately 10.7% in 1999 to $22,873,000
from $25,626,000 in 1998. Fuel sales in 1999 were $12,659,000 as compared with
$13,965,000 in 1997; fuel sales in gallons also declined in 1999, to 12,753,000
gallons as compared

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with 13,131,000 gallons in 1998. The decrease in fuel sales revenues is due to
the lower retail selling prices for fuels which prevailed during 1999, and to
fewer operating stores during the current year. Merchandise sales decreased
$1,184,000 to $9,599,000 as compared with $10,783,000 in 1998. The decline in
merchandise sales is primarily due to fewer operating stores during 1999.

Gross profit declined to $4,768,000 in 1999 as compared with $5,615,000 in 1998.
Gross Margin in the Texas Convenience Store segment declined in 1999 to
approximately 20.85% as compared with approximately 21.91% in 1998. Merchandise
Gross Margin increased in 1999, to approximately 32.08% of sales, as compared to
approximately 31.18% of sales in 1998. Fuel Gross Margin, however, decreased to
approximately 8.74% during 1999, as compared with approximately 10.0% during
1998.

Operating expenses during 1999 in the Texas Convenience Store segment was
$4,802,000 as compared with $6,158,000 in 1998, a decrease of $1,356,000 or
approximately 22.0%. The decline in operating expenses is principally
attributable to the closing of 2 underperforming stores during 1999, and to an
overall reduction in staff during late 1998.

The Convenience Store segment incurred an operating loss of $34,000 in 1999, as
compared with a loss of $543,000 in 1998. The reduced loss is due to reduced
operating expenses during the current year, partially offset by reduced sales
and resulting gross profits.

LOUISIANA OPERATIONS SEGMENT

At September 30, 1999 Louisiana operations are comprised of a fuel bulk storage
facility and distribution center, one full-service station without a convenience
store, and seven convenience stores, located in and around Lake Charles,
Louisiana.

Sales declined $184,000 or approximately 1.4% to $12,694,000 in 1999 from
$12,878,000 in 1998. Sales of fuels and other refined petroleum products
declined $343,000 or approximately 3.4% to $9,671,000 in 1999 as compared with
$10,014,000 in 1998. Convenience store merchandise sales increased $176,000 in
1999, or approximately 6.5%, to $2,882,000 as compared with $2,706,000 in 1998.

Gross profits declined $387,000 or approximately 17.9% in 1999, to $1,778,000 as
compared with $2,165,000 in 1998. Gross Margin declined to approximately 14.0%
of sales in 1999, as compared with approximately 16.8% of sales in 1998. Gross
Margin on fuel sales declined to approximately 9.3% of sales in 1999, as
compared with approximately 11.8% of sales in 1998, primarily due to the
competitive retail fuel pricing which prevailed in the Louisiana market area in
1999. Merchandise Gross Margin in 1999 declined to approximately 23.5% of sales,
as compared to approximately 27.3% of sales in 1998. The Company generally
reduced its merchandise retail pricing in 1999 to meet competition.

Operating expenses in 1999 were $2,112,000, a reduction of $141,000 or
approximately 6.3% as compared to 1998. The reduction in operating expenses
primarily reflects a reduction in staff which was implemented in 1999.

Operating loss in 1999 increased to $334,000, as compared with a loss of $88,000
in 1998. The increased loss in 1999 is attributable to lower sales and resultant
gross profits in 1999, partially offset by reduced operating expenses.

EDCO ENVIRONMENTAL SEGMENT

EDCO Environmental reported an operating profit of $177,000 in the year ended
September 30, 1999, as compared with an operating loss of $81,000, primarily due
to increased sales revenues and resultant gross profits. The work performed in
conjunction with bringing sites into compliance with the December 22, 1998 EPA
requirements is substantially complete. EDCO Environmental will continue to
focus its attention on environmental remediation projects which have been
pre-approved for reimbursement by the Texas Natural Resource Conservation
Commissions' ("TNRCC") fund, or by private insurers. Management believes that
such opportunities will continue to exist, however there can be no assurance
that they will do so.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses declined $441,000 in 1999, to $1,854,000 as
compared with $2,295,000 in 1998. Corporate expenses in 1999 included a non-cash
charge of $404,000 to compensation expense, as a result of the application of
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees," with respect to the vesting of certain incentive stock options which
had previously been awarded to employees. 1999 expenses also includes a noncash
charge of $61,000, representing the market value of the Company's common stock
contributed to the Company's 401-K employee benefit plan, nonrecurring legal and
professional fees of $480,000 arising from the proposed merger with Duke & Long
Distributing Company, and legal and professional fees of $339,000 arising from a
number of matters, including the restatement of the Company's previously
reported

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financial statements, the negotiation of the purchase agreement with
A-Free-Gift.Com, and the refinancing of the Company's senior debt.

General and administrative expenses in 1998 included non-cash compensation
expense of $1,133,000 arising from the vesting of certain incentive stock
options which had previously been awarded to employees. Adjusting 1999 and 1998
for the $1,284,000 and $1,133,000 in non-cash and nonrecurring expenses,
respectively, adjusted corporate expenses in 1999 of $570,000 declined $592,000
or approximately 51.0% as compared with adjusted expenses of $1,162,000 in 1998.

CAPITAL RESOURCES AND LIQUIDITY

Cash and cash equivalents were $725,000 and $992,000 at September 30, 2000 and
1999, respectively. The Company had a net working capital deficit of
$13,153,000, as compared with a deficit of $9,723,000 at September 30, 1999. The
working capital deficit is primarily the result of $9,153,000 in secured debt,
and $704,000 in capital lease obligations being classified as current
liabilities in 2000. At 9/30/1999 $8,712,000 in secured debt and $293,000 in
capital lease obligations were classified as current liabilities. The notes
payable on the secured debt totaling $9,153,000 mature January 31,2001 The
capital lease obligations were in default at September 30,2000. The Company has
placed for sale certain properties with the proceeds from the sales intended to
reduce debt. The Company has reached an agreement in principle with its primary
lender which could lead to a significant reduction in debt. Management 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 the second quarter of 2001. Management is
actively pursuing the refinance of it's existing bank debt with several
potential lenders. The new financing would be amortized over a longer period
more reflective of the lives of the colateral. The new financing in conjunction
with the planned debt reduction from asset sales, would have the effect of
increasing the availability of working capital. However, there can be no
assurance that management's plans described above will be successful.

Cash used by operating activities was $671,000 and $618,000 in the years ended
September 30, 2000 and 1999, respectively.

The Company's investment in marketable securities is $1,016,000, representing
2,500,000 shares of Affiliated Resources Corporation common stock at September
30,2000 market value of $0.406. The stock is illiquid with low average trading
volume. There can be no assurance that the Company would be able to realize the
recorded value of the Affiliated common stock.

During the year ended September 30, 2000, the Company received proceeds of
$575,000, arising from the issuance of common stock in a private placement
transaction.

The Company's common stock was 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. The Company's ability to raise additional equity
capital in the future could be adversely affected as a result of the Company's
common stock no longer being listed on a national exchange.

As a result of matters discussed above, there is substantial doubt about the
Company's ability to continue as a going concern.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes new accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, "Accounting For Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", which defers the
effective date of SFAS No. 133 for one year to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting For Certain Derivative Instruments and
Certain Hedging Activities - an amendment to FASB Statement No. 133", which
amends the accounting and reporting standards of Statement 133 for certain
derivative instruments and certain hedging activities. The Company has not
entered into, and is not expected to enter into, any material transactions
involving derivative instruments or hedging activities. Therefore, management
believes there would be no material effect to the Company's financial statements
as a result of implementation of these statements.

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RECENT EVENTS

On December 4, 2000 the company entered into a stipulated judgment against
Affiliated Resources Corp, and Chemway pertaining to the company's sale of
ChemWay to Affiliated in December 1998. The judgment granted by the 130th
Judicial District Court of Texas was for $6,000,000 arising from Affiliated's
failure to fund the put right at $4.00 per share on the 2,500,000 shares of
Affiliated stock that the company had received as consideration for the 1998
transaction. As stipulated in the judgment, the Company received a deed in lieu
of foreclosure for the ChemWay assets and improvements as sole payment of the
judgment. Management is presently evaluating all strategic alternatives relating
to the recently reclaimed assets.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company included in this annual
report on Form 10-K are listed under Item 14, Exhibits, Financial Statement
Schedules and Reports on Form 8-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.
PART III

ITEMS 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the current
directors and executive officers of the Company.

NAME POSITION AGE
---- -------- ---
Jerriel L. Evans, Sr. Chairman of the Board, President and Chief 61
Executive Officer

Peter J. Losavio, Jr. Vice Chairman of the Board 59

Maybell H. Evans Secretary 61

Darlene N. Jones Director, Treasurer and Administrative Manager 42

Charles N. Way Director, and Controller 58

Richard A. Goeggel Director, Vice President and Chief Financial 49
Officer

Julie H. Edwards Director 42

Matt Hessions Director 49

Carl W. Schafer Director 64

Jerry L. Evans, Jr. Vice President of Corporate Relations and 35
Human Resources

The principal occupation of each director and executive officer for at least the
last five years is set forth below:

JERRIEL L. EVANS, SR. has been a member of the Company's Board of Directors
since August, 1968. Mr. Evans founded the Company in 1968. Mr. Evans founded the
Company in 1968 and has served as its Chairman of the Board, President and Chief
Executive Officer since that time. Mr. Evans was born in Flint, Texas, in 1939
and subsequently moved to Woodsboro, Texas, where he graduated from Woodsboro
High School in 1957. Mr. Evans attended San Antonio Community College where he
majored in Business Administration. From 1954 to 1960, Mr. Evans owned and
operated a gasoline service station. From 1960 to 1968, Mr. Evans was employed
by Amoco Oil Company where he held various sales and managerial positions. In
1985, he was awarded top salesman for the Kansas City Region. Because the region
comprised several states, the honor bestowed upon Mr. Evans was very
prestigious. Additionally, in 1992, Mr. Evans was selected as a Regional
Finalist for the Entrepreneur of the year Award granted annually by Ernst &
Young and Merrill Lynch.

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<PAGE>
PETER J. LOSAVIO, JR. has been a member of the Company's Board of Directors
since May, 1993. Mr. Losavio was born in Baton Rouge, Louisiana in 1949 and
graduated from Baton Rouge High School in 1967. He received his Bachelor of
Science degree in chemistry from Tulane University in 1970, and his Masters
degree in chemistry from Tulane University in 1973. He graduated from Louisiana
State University Law School in Baton Rouge, Louisiana in 1975 and received a
masters of laws in taxation from the University of Florida in 1976. Mr. Losavio
is a Board Certified Tax Attorney. He became a licensed and certified accountant
in Louisiana in 1979. He completed the certified financial planning program
offered by the College for Financial Planning in Denver, Colorado in 1987. From
1980 to present, Mr. Losavio has been an instructor in the College of Business
Administration at Louisiana State University, teaching corporate tax,
partnership taxation, Sub S, estate planning, and tax practices and procedures.
Mr. Losavio has been a co-author and lecturer for various continuing education
programs sponsored by the Society of Louisiana Certified Public Accountants and
National Business Institute. He was a speaker at the 1990 Louisiana Advanced Tax
Workshop. From 1990 to present, he has been a member of the Ad Hoc Advisory
Committee to the Commissioner of Securities for the State of Louisiana. From
1980 to present, he has been as assistant bar examiner. In 1980, he was Chairman
of the Tax Committee for the Society of Louisiana Certified Public Accountants.

MATT HESSION is a 1976 graduate of Nicholls State in Louisiana and a veteren of
the United States Marine Corp. Mr. Hession has founded (10) ten companies over
his professional career. He was most recently CEO of Key Medical Services of
Baton Rogue, La and is currently on the Board of Directors of Amedisys (AMED).
Matt is also a member of the National Management Turnaround Association. He
presently does turnaround management work as owner of his private consulting
firm.

MAYBELL H. EVANS was a member of the Company's Board of Directors from August
1968 to June 1999. Ms. Evans has also served as the Company's Secretary since
its inception. Ms. Evans was born in Holliday, Texas in 1939 and graduated from
Sweeny High School, Sweeny, Texas, in 1957. She joined the Company full time in
1968, managing accounts receivable, collections, and corporate affairs.

DARLENE E. JONES has been a member of the Company's Board of Directors since
December, 1992. Ms. Jones is also Treasurer and serves as the Administrative
Manager for the Company. She has held these positions since 1993. Ms. Jones was
born in San Antonio, Texas, in 1958, and graduated from Bay City High School in
1976. She then attended and graduated in 1980 from Southwestern University where
she received a Bachelor of Science degree in Biology/Chemistry. Subsequently,
Ms. Jones complete course work involving computer systems technology. She joined
the Company in 1980.

CHARLES N. WAY has been a member of the Company's Board of Directors since March
1982. Mr. Way also serves as Controller of the Company. He has held these
positions since June 1980 and March 1982, respectively. Mr. Way previously
served as the Company's Chief Financial Officer from June 1980 until June 1997.
Mr. Way joined the Company in June of 1979. He was born in Houston, Texas, in
1942 and graduated from Jessie H. Jones High School in 1961. He received a
B.B.A. degree in Accounting from Texas A&M University in 1966. He was employed
with Texaco, Inc. from 1966 to 1968 where he served as an accountant. From 1968
to 1973, Mr. Way served as an Accounting Division Manager with Tenneco Oil
Company. From 1973 to 1976, he was employed as a Controller with News, Inc. And
Subsidiaries. From 1976 to 1979, Mr. Way owned and operated All-Ways Automotive
& Tire Service in Houston, Texas.

RICHARD A. GOEGGEL has been a member of the Company's Board of Directors since
December 1998. Mr. Goeggel was born in St. Louis, Missouri in 1951 and earned
his A.B. degree in Economics and M.B.A. in Finance & Accounting from Cornell
University in 1974 and 1976 respectively. Until 1997, Mr. Goeggel was employed
as Vice President and CFO of Truck Accessories Group, Inc. From 1995 to 1996 he
served as financial advisor to the Board of Directors of Stanley Stores, Inc.;
and from 1989 to 1995 he was employed with AppleTree Markets, Inc. as Vice
President, treasurer and director. Mr. Goeggel joined the Company in January
1998 as financial advisor and was hired as Vice President and Chief Financial
Officer in June 1998. Mr. Goeggel resigned as Chief Financial Officer and from
the Board of Directors on August 1, 2000.

JULIE H. EDWARDS has been a member of the Company's Board of Directors since
December 1997. Ms. Edwards was born in Charleston, West Virginia in 1959 and
earned her Bachelor of Science degree in geology and geophysics from Yale
University in 1980. Ms. Edwards earned her Masters degree in Business
Administration/Finance from Wharton Graduate School in 1985. Ms. Edwards was
employed with Smith Barney, Harris Upham & Co. from 1984 to 1991 and served as
Vice President of Corporate Finance with Smith Barney, Harris Upham & Co., from
1988 to 1991. Since 1991, Mrs. Edwards has been employed with Frontier Oil
Corporation as Senior Vice President of Finance and Chief Financial Officer.
Mrs. Edwards resigned from the companys' Board of Directors in July 2000.

CARL W. SCHAFER has been a member of the Company's Board of Directors since
December 1992. Mr. Schafer was born in Chicago, Illinois in 1936 and obtained
his primary and secondary education in Illinois. He received his Bachelor of
Arts with distinction from

Page 16
<PAGE>
the University of Rochester in 1958. He served with the U. S. Bureau of the
Budget as a budget examiner (1961-1964), a legislative analyst (1964-1966),
deputy director of budget preparation (1966-1968), director of budget
preparation (1968-1969), and as staff assistant to the U. S. House of
Representative Appropriations Committee (1969). He served with Princeton
University as director of the budget (1969), treasurer (1972-1976), financial
vice president, treasurer and chief financial officer (1976-1987). He served as
a principal of Rockefeller and Company, Inc., from 1987 to 1990. He is currently
president of the Atlantic Foundation, Princeton, New Jersey. He served as
co-chairman of the New Jersey Governor's Task Force on improving New Jersey's
Economic and Regulatory Climate from 1982 to 1983, and is currently a trustee or
director of Roadway Express, Inc., Wainoco Oil Corporation, Nutraceutix, Inc.,
Electronic Clearing House, Inc., the Paine Webber and Guardian Groups of Mutual
Funds, Harbor Branch Institution, Inc., the Jewish Guild for the Blind, the
Johnson Atelier and School of Sculpture, and Hidden Lakes Gold Mines, Ltd. He is
a member of the advisory council of Domain Partners and a member of the
International Advisory Council of William Sword and Company, Inc. Mr. Schafer
resigned from the Company's Board of Directors in July 2000.

JERRY L. EVANS, JR. has been with the Company for the past fifteen years having
started with the Company as a Store Associate in 1983. Mr. Evans graduated from
Bay City High School in 1983 and attended both Wharton Junior college and
Southwest Texas State, where he focused on Communications and Political Science.
Mr. Evans served as Vice President of Investor Relations from 1993 to 1998 when
he was appointed Vice President of Corporate and Investor Relations and Human
Resources in April 1998. Mr. Evans is active on several organization and
community committees having served as Chairman of the Matagorda County
Republican Party, City Councilman for Bay City, Chairman of the Home Rule
Charter Commission and the Board of Directors of the Texas Petroleum Marketers
and Convenience Store Association.

There are no family relationships between any directors and executive officers
of the Company except that Jerriel L. Evans, Sr. and Maybell H. Evans are
husband and wife and Jerry L. Evans, Jr. and Darlene E. Jones are their son and
daughter, respectively.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During the fiscal year ended September 30, 2000 ("Fiscal 2000"), the Company's
Board of Directors formally met on eight occasions. Each of the directors
attended (or participated by telephone) more than 75% of such meetings of the
Board of Directors and Committees on which he served during Fiscal 2000. The
Board of Directors has no committees other than the Compensation Committee and
the Audit Committee.

The Company's Compensation Committee, which is comprised of Peter J. Lasavio
(Chairman), Carl W. Schafer, and Julie H. Edwards, reviews and approves the
compensation of the Company's executive officers and administers and interprets
the Company's stock option plans. The Compensation Committee met or took action
on one occasion during Fiscal 2000.

The Company's Audit Committee, which is comprised of Carl W. Schafer (Chairman),
Peter J. Losavio, and Julie H. Edwards recommends the Company's independent
auditors, reviews the scope of their engagement, consults with the auditors,
reviews the results of their examination, acts as liaison between the Board of
Directors and the auditors and reviews various Company policies, including those
relating to accounting and internal controls. The Audit Committee met or took
action on one occasion during Fiscal 2000. The board appointed Mr. Matt Hession
chairman of the Audit Committee upon the acceptance of Mr. Carl Schafer's
resignation.

COMPENSATION OF DIRECTORS

During Fiscal 2000, each director, who is not an employee of the Company
receives a monthly retainer fee of $500. Employees of the Company receive no
additional compensation for service as a director. All directors are reimbursed
for their reasonable out-of-pocket expenses incurred in connection with their
duties to the Company.

In December 1999, the Company granted certain members of the Board of Directors
options to acquire an aggregate of 7,500 shares at $.8125 per share.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal years ended September 30,
2000,1999,and 1998, certain summary information concerning annual and long-term
compensation paid by the Company for services in all capacities to the company
of the Chief Executive Officer, and the other most highly compensated executive
officers of the Company at September 30, 2000 who received compensation of at
least $100,000 during the Fiscal 2000 (collectively, the "Named Officers").

Page 17
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------------- --------------------------------------
OTHER ANNUAL RESTRICTED
NAME AND COMPENSATION STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($) OPTIONS(#) COMPENSATION
------------------ ---- -------- -------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerriel L. Evans, Sr.(2)
Chairman of the Board, 2000 140,000 -0- 51,600 -0- (2)
President and 1999 96,250 -0- 54,300 75,000 (2)
Chief Executive Officer 1998 125,093 -0- 111,600 -- 91,500 (2)

Richard A. Goeggel (3)
Vice-President and 2000 77,077 -0- -- -0- --
Chief Financial Officer 1999 120,000 -0- -- -0- --
1998 85,000 -0- -- 50,000 --

Richard B. Dix (4)
Executive Vice-President 2000 -0- -0- -- -- -0- --
1999 51,508 -0- -- -- -- --
1998 108,000 -0- -- -- 35,000 --
</TABLE>

I. Although the officers receive certain perquisites, the value of such
perquisites did not exceed for any officer the lesser of $50,000 or 10% of
the officer's salary and bonus.

II. In addition to the compensation for Mr. Evans set forth above, he also
receives lease income for the rental of various properties used by the
Company. See Note 10 to the Consolidated Financial Statements, included
herein.

III. Mr. Goeggel's employment with the Company (including time spent as a
consultant) began in January 1998. Mr. Goeggel resigned from the Company
on August 1, 2000.

IV. Mr. Dix's employment with the Company began in April 1998. Mr. Dix left
the Company on June 11, 1999 to pursue other business interests.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information concerning Options/SARs
granted during Fiscal 2000 to the Named Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE OF ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM(2)
--------------------------------------
SHARES % OF TOTAL
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(#) IN FISCAL 2000 ($/SHARE)(1) DATE 5%($) 10%($)
---- ---------- -------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jerriel L. Evans, Sr. 75,000 76% 5.00 4/16/03 214,996 342,244
</TABLE>
I. The exercise price of the options granted is equal to the market value of
the Company's Common Stock on the date of grant.

Potential realizable value of each grant assumes that the market prices of the
underlying security appreciates at annualized rates of 5% and 10% over the term
of the award. Actual gains, if any, on stock option exercises are dependent on
the future performance of common stock. There can be no assurance that the
amounts reflected on this table will be achieved.

EMPLOYMENT AGREEMENTS

J. L. Evans, Sr. and the Company entered into an employment agreement, dated
October 1, 1998, for Mr. Evans to serve as President and Chief Executive
Officer of the Company through September 30, 2001. The agreement provides for an
annual base salary of

Page 18
<PAGE>
$120,000 during the first year of its term, $140,000 during the second year of
its term, $150,000 during the third year of its term and for annual increases in
each of the remaining years to be determined by the Board of Directors. The
agreement also provides for an annual bonus in an amount equal to 7 1/2% of the
net consolidated after-tax profits of the Company. The agreement provides that
certain options granted to Mr. Evans will vest upon a change of control of the
Company. During the term of his employment with the Company, Mr. Evans is also
entitled to participation in all other benefit plans provided by the Company to
its executives, four weeks paid vacation per year and a $500 per month car
allowance. The agreement also restricts Mr. Evans from competing with the
Company or soliciting customers or other business for any entity other than the
Company during the term of the agreement and from disclosing certain
confidential information with respect to the Company.

Richard A. Goeggel and the Company entered into an employment agreement, dated
June 22, 1998, for Mr. Goeggel to serve as Vice President and Chief Financial
Officer of the Company through June 15, 2000. The agreement provides for an
annual base salary of $120,000 during the first year of its term and for annual
increases in each of the remaining years to be determined by the Board of
Directors. The agreement provides that certain options granted to Mr. Goeggel
will vest upon a change of control of the Company. During the term of his
employment with the Company, Mr. Goeggel is also entitled to (i) participation
in all other benefit plans provided by the Company to its executives, and (ii)
two weeks paid vacation per year. Upon a change of control of the Company that
results in Mr. Goeggel's removal as Vice-President or Chief Financial Officer, a
significant change in the conditions of his employment or other breach of the
agreement, Mr. Goeggel has the right to elect to deem his employment to have
been terminated by the Company and receive a lump sum payment equal to the
remaining term of the agreement (which amount shall be reduced such that all
payments will be deductible to the Company and not subject to the excise tax
imposed by the United States Internal Revenue Code of 1986, as amended). Except
as expressly permitted in the agreement, Mr. Goeggel is also restricted from
competing with the Company or soliciting customers or other business for any
entity other than the Company during the term of the agreement and from
disclosing certain confidential information with respect to the Company. Mr.
Goeggel resigned as Chief Financial Officer on August 1, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information concerning ownership of the Company's
Common Stock, as of December 31, 2000, by (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, (ii) each of the Company's directors, (iii) each Named Officer, and (iv)
all current directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS(1) OWNERSHIP(2) CLASS(3)
------------------- ------------- ----------
<S> <C> <C>

J. L. Evans Systems, Ltd., a Texas Limited Partnership 752,000(4) 13.6%
J. L. Evans, Sr. 939,460(5) 16.9%
Maybell H. Evans 775,300(6) 13.9%
Charles N. Way 20,342(7) *
Richard A. Goeggel 50,000(8) *
Darlene E. Jones 15,000(9) *
J. L. Evans, Jr. 11,420(10) *
Carl W. Schafer 10,750(11) *
c/o The Atlantic Foundation
16 Faber Road
Princeton, NJ 08540
Peter J. Losavio, Jr. 15,900(12) *
8414 Bluebonnet Blvd., Suite 110
Baton Rouge, LA 70810
Julie H. Edwards 7,500(13) *
3826 Coleridge
Houston, TX 77005
All executive officers and Directors as a group (10 persons) 1,079,922 19.4%
</TABLE>

* less than 1%

Page 19
<PAGE>
I. Unless otherwise indicated, the address of each beneficial owner is c/o
the Company, Post Office Box 2480, Bay City, Texas 77404-2480.

II. Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3") and unless otherwise indicated,
represents shares of which the beneficial owner has sole voting and
investment power.

III. The percentage of class is calculated in accordance with Rule 13d-3 and
assumes that the beneficial owner has exercised any options or other
rights to subscribe which are execrable within sixty (60) days and that no
other options or rights to subscribe have been exercised by anyone else.

IV. The general partner is J.L. Evans Evans Management, Inc. (controlled by
J.L. Evans, Sr. and Maybell H. Evans) and the limited partners are Jerriel
L. Evans, Sr., Maybell H. Evans, and their children, Darlene E. Jones,
Jerriel L. Evans, Jr., and Terry W. Evans.

V. Includes 752,000 shares held by J.L. Evans Systems, Ltd., of which Mr.
Evans claims beneficial ownership. Includes 75,000 shares issuable upon
the exercise of options.

VI. Includes 752,000 shares held by J.L. Evans Systems, Ltd., of which Mrs.
Evans claims beneficial ownership.

VII. Includes 7,000 shares issuable to Mr. Way upon the exercise of options.

VIII. Includes 50,000 shares issuable to Mr. Goeggel upon the exercise of
options.

IX. Includes 5,000 shares issuable to Mrs. Jones upon the exercise of options.

X. Includes 9,000 shares issuable to Mr. Evans, Jr. upon the exercise of
options.

XI. Includes 10,000 shares issuable to Mr. Schafer upon the exercise of
options.

XII. Includes 5,000 shares issuable to Mr. Losavio upon the exercise of
options.

XIII. Includes 7,500 shares issuable to Mrs. Edwards upon the exercise of
options.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Officers, directors and greater than ten percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file.

The Company believes, based solely on review of copies of such forms furnished
to the Company, or written representations that no Form 5's were required, that
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with during Fiscal
2000, except that J. L. Evans Systems, Ltd. inadvertently filed a Form 5 late.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 2000, the Company leased two convenience store locations from Mr. J.L.
Evans, Sr., the largest shareholder of the Company. One ten-year lease commenced
in June 1987 with monthly lease payments of $2,500 which was renewed for one
additional five-year period. One five-year lease commenced in March 1995 with
monthly lease payments of $1,800 and allows for two five-year automatic renewals
at the Company's option, which were not exercised by the Company. The amounts
paid under these leases were $51,600, $54,300, and $76,800 for the years ended
September 30, 2000, 1999 and 1998, respectively. Future minimum lease
commitments as of September 30, 2000 are $52,500.

From time to time, the Company makes advances to individuals who are
shareholders, directors, officers and/or employees. Such advances are usually
unsecured and accrue interest at 9%. There were no advances outstanding at
September 30, 2000 and 1999.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

I. The following financial statements, schedules and exhibits are filed as
part of this report:

(1) and (2) Financial Statements and Financial Statement Schedules.
See Index to Consolidated Financial Statements on Page F-1.
(3) Exhibits.
See Index to Exhibits on sequential page 25.

II. Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended September 30,
2000.

Page 20
<PAGE>
EVANS SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

PAGE NO.
---------

Report of Independent Public Accountants F-2

Consolidated Balance Sheets at September 30, 2000, 1999 and 1998 F-3

Consolidated Statements of Operations for the Years Ended
September 30, 2000, 1999 and 1998 F-4

Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998 F-5

Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended September 30, 2000, 1999 and 1998 F-6

Notes to Consolidated Financial Statements F-7

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Evans Systems, Inc.

We have audited the accompanying consolidated balance sheet of Evans Systems,
Inc. and its subsidiaries at September 30, 2000 and the related consolidated
statement of operations, stockholders' equity and comprehensive income, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements of
Evans Systems, Inc. as of September 30, 1999 and 1998 were audited by other
auditors whose report dated January 13, 2000, on those statements included an
explanatory paragraph describing conditions that raised substantial doubt about
the Company's ability to continue as a going concern.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Evans Systems, Inc. at
September 30, 2000 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters also are described in Note 13. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ STEPHENSON & TRLICEK, P.C.
Stephenson & Trlicek, P.C.

Wharton, Texas
January 5, 2001

F-2
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------

(IN THOUSANDS) 2000 1999
-------- --------

ASSETS

Current assets:
Cash and cash equivalents ......................... $ 725 $ 992
Trade receivables, net of allowance
for doubtful receivables of $285,000
and $290,000 respectively ....................... 2,536 2,411
Inventory ......................................... 2,717 2,984
Prepaid expenses and other current assets ......... 170 342
-------- --------
Total current assets ............................ 6,148 6,729
Property and equipment, net ....................... 13,409 14,896
Investment in marketable securities ............... 1,016 398
Other assets ...................................... 136 319
-------- --------

Total assets .................................... $ 20,709 $ 22,342
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued expenses ............. $ 7,575 $ 5,920
Current portion of long-term debt ................. 9,910 9,521
Current portion of obligations under
capital leases ................................... 744 323
Accrued interest .................................. 1,072 688
-------- --------
Total current liabilities ....................... 19,301 16,452
Long-term debt, net of current
maturities ....................................... 630 1,088
Obligations under capital leases, net
of current maturities ............................ 86 546
-------- --------
Total liabilities ............................... 20,017 18,086
Commitments and contingencies
Redeemable common stock, -0- and
40,000 shares issued and outstanding,
respectively ..................................... -- 160
Stockholders' equity
Common stock, $0.01 par value,
15,000,000 shares authorized,
5,542,429 and 4,064,929 shares
issued, respectively ............................. 55 41
Additional paid-in capital ........................ 16,850 15,686
Accumulated deficit ............................... (16,131) (11,197)
Unrealized gain on marketable securities .......... 352 --
Treasury stock, 72,589 shares, at cost ............ (434) (434)
-------- --------
Total stockholders' equity ...................... 692 4,096
-------- --------

Total liabilities and stockholders' equity ...... $ 20,709 $ 22,342
======== ========

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Motor fuel sales (including consumer excise and state
fuel taxes of $22,721, $20,000 and $20,391, respectively .. $ 79,054 $ 70,243 $ 83,830
Other sales and services ................................... 16,275 17,030 20,284
--------- --------- ---------
Total revenues ........................................... 95,329 87,273 104,114
Cost of sales ................................................ 85,188 75,419 90,246
--------- --------- ---------
Gross profit ................................................. 10,141 11,854 13,868
Operating expenses
Employment expenses ........................................ 5,727 6,864 8,881
Other operating expenses ................................... 3,552 3,558 3,998
Other general and administrative expenses .................. 2,788 3,223 3,088
Depreciation and amortization .............................. 1,513 1,589 1,895
--------- --------- ---------
Total operating expenses ................................. 13,580 15,234 17,862
--------- --------- ---------
Operating loss ............................................... (3,439) (3,380) (3,994)
Other income (expense)
Loss on impairment of marketable securities ................ -- (8,602) --
Gain (loss) on sale of assets .............................. (37) 381 46
Interest income ............................................ 16 94 22
Interest expense ........................................... (1,725) (1,802) (1,387)
Other income (expense) ..................................... (15) (44) --
--------- --------- ---------
Total other income (expense) ............................. (1,761) (9,973) (1,319)
--------- --------- ---------
Loss from continuing operations before income taxes .......... (5,200) (13,353) (5,313)
Provision (benefit) from income taxes ........................ -- (47) (708)
--------- --------- ---------
Loss from continuing operations .............................. (5,200) (13,306) (4,605)
Discontinued operations
Loss from discontinued operations of ChemWay to
March 31, 1998, less applicable income taxes (Note 3) .... -- -- (848)
Gain on disposal of ChemWay, net of income taxes
of $0 and $1,203 ......................................... 266 3,973 --
--------- --------- ---------
Net loss ..................................................... (4,934) (9,333) (5,453)

Unrealized gain on marketable securities ..................... 352 -- --
--------- --------- ---------
Comprehensive loss ........................................... $ (4,582) $ (9,333) $ (5,453)
========= ========= =========

Basic and diluted earnings (loss) per common share:
Continuing operations ...................................... $ (1.22) $ (3.46) $ (1.48)
Discontinued operations .................................... 0.06 1.03 (0.27)
--------- --------- ---------
Earnings (loss) per common share ........................... $ (1.16) $ (2.43) $ (1.75)
========= ========= =========
Basic and diluted weighted average common shares outstanding 4,263 3,846 3,116
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ............................................. $(4,934) $(9,333) $(5,453)
Adjustments:
Depreciation and amortization ...................... 1,513 1,589 2,105
Stock option compensation expense .................. 247 404 1,401
Deferred operating loss of ChemWay ................. -- -- (644)
Gain on disposal of ChemWay ........................ (266) (5,176) --
Loss (gain) on sale of assets ...................... 37 (381) (46)
Deferred income taxes .............................. -- 1,203 (1,452)
Loss on marketable securities ...................... -- 8,602 --
Changes in assets and liabilities:
Receivables ...................................... (125) 340 1,817
Inventory ........................................ 267 730 3,092
Prepaid expenses and other ....................... 355 883 71
Accounts payable and accrued expenses ............ 2,235 393 (1,684)
Income taxes receivable/payable .................. -- 128 182
------- ------- -------
Net cash used by operating activities .......... (671) (618) (611)
Cash flows from investing activities:
Capital expenditures ................................. (467) (641) (1,386)
Proceeds from sale of property and equipment ......... 404 1,606 1,610
Other ................................................ -- -- (45)
------- ------- -------
Net cash provided by investing activities ...... (63) 965 179

Cash flows from financing activities
New borrowings ....................................... 1,000 322 1,715
Reduction of long-term debt .......................... (1,069) (1,607) (1,607)
Reduction of capital lease obligations ............... (39) (86) (256)
Net proceeds from stock issuance ..................... 575 1,185 114
------- ------- -------
Net cash provided (used) by financing activities 467 (186) (34)
------- ------- -------
Net increase (decrease) in cash and cash equivalents . (267) 161 (466)

Cash and cash equivalents, beginning of year ......... 992 831 1,297
------- ------- -------
Cash and cash equivalents, end of year ............... $ 725 $ 992 $ 831
======= ======= =======

Supplemental disclosure of cash flow information:
Cash paid for interest ............................. $ 1,341 $ 1,320 $ 1,169
======= ======= =======
Cash paid for taxes ................................ $ -- $ 47 $ 58
======= ======= =======

Supplemental disclosure of noncash transactions
Sale of ChemWay in exchange for marketable equity
securities (Note 3) ............................... $ 266 $ 9,000 $ --
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998

(IN THOUSANDS, EXCEPT COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS UNREALIZED
------------------------- PAID-IN (ACCUMULATED GAIN ON TREASURY
SHARES AMOUNT CAPITAL DEFICIT) SECURITIES STOCK TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1997 3,163,573 $ 32 $ 12,297 $ 3,589 $ -- $ (434) $ 15,484

Warrants exercised .......... 104,725 1 152 153
Compensation expense
recognized in connection
with options granted ....... 1,362 1,362
Net loss and comprehensive
loss for 1998 .............. (5,453) (5,453)
---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance - September 30, 1998 3,268,298 33 13,811 (1,864) -- (434) 11,546

Stock options exercised ..... 383,818 4 711 715
Warrants exercised .......... 62,813 1 187 188
Issuance of common stock .... 350,000 3 729 732
Compensation expense
recognized in connection
with options granted ....... 248 248
Net loss and comprehensive
loss for 1999 .............. (9,333) (9,333)
---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance - September 30, 1999 4,064,929 41 15,686 (11,197) -- (434) 4,096

Stock options exercised
Warrants exercised ..........
Issuance of common stock .... 1,437,500 14 561 575
Issuance of redeemable common
stock ..................... 40,000 -- 160 160
Compensation expense
recognized in connection
with options granted ...... 443 443
Net loss for 2000 .......... (4,934) (4,934)
Comprehensive income for 2000 352 352
---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance - September 30, 2000 5,542,429 $ 55 $ 16,850 $ (16,131) $ 352 $ (434) $ 692
========== ========== ========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS OPERATIONS
Evans Systems, Inc. and its subsidiaries (the Company) are engaged in
petroleum marketing, convenience store operations and environmental
remediation services. The Company operates primarily along the Gulf Coast
Regions of Texas and Louisiana.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Evans Systems,
Inc. and its subsidiaries. All significant intercompany transactions have
been eliminated.

BASIS OF ACCOUNTING
The Company's policy is to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting
principles. Revenues from motor fuel sales and other sales and services are
recognized in the period in which they are earned. Expenses are recognized
in the period in which they are incurred.

CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents. Cash and cash equivalents are stated at cost which
approximates fair market value.

INVENTORIES
Substantially all inventories are products held for sale. Inventories of oil
and grease, automotive products and accessories, chemical products and
convenience store products utilize the first-in, first-out (FIFO) method of
accounting and are stated at the lower of cost or market. Gas and diesel
fuels inventory is valued using the last-in, first-out (LIFO) method which
resulted in inventory being $368,000 and $100,000 less at September 30, 2000
and 1999 than replacement cost. During 1999, fuel inventory quantities were
reduced. The reduction resulted in a liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years, the effect of
which decreased cost of sales by $77,000.

PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated utilizing the
straight-line method of computing depreciation over their estimated useful
lives. The cost of assets retired and the related accumulated depreciation
are removed from the accounts and any gain or loss is included in the
results of operations when incurred. Repairs and maintenance are charged to
expense as incurred. Expenditures for major additions and replacements that
extend the lives of assets are capitalized and depreciated over their
remaining estimated useful lives. The Company depreciates assets over the
following estimated useful lives:

Buildings 15-41 years
Leasehold improvements Life of lease, up to 31 years
Equipment 15 years
Transportation equipment 5 years
Office equipment 5-7 years

F-7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the realizability of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Asset impairment is determined to exist if estimated future
cash flows, undiscounted and without interest charges, are less than the
carrying amount.

MARKETABLE SECURITIES
The Company's investments classified as marketable securities are considered
as "available for sale". Such securities are recorded at market value with
unrealized gains and losses being recognized as a separate component of
shareholders' equity. Any "other than temporary" impairments to the market
value of the securities are recognized as expense during the period in which
the impairment incurs.

STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its plans.

INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.

The Company recognizes income tax expense based on the liability method of
accounting for income taxes. Deferred tax assets and liabilities are
recognized for the income tax effect of temporary differences between the
tax basis of assets and liabilities and their carrying values for financial
reporting purposes. Deferred tax expense or benefit is the result of changes
in deferred tax assets and liabilities during the period. The Company has
recorded a valuation allowance to reflect the estimated amount of deferred
tax assets that more likely than not will be realized.

EARNINGS (LOSS) PER SHARE
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings
per share, which is based on the weighted average number of common shares as
well as all potentially dilutive common shares outstanding. Stock options
and warrants are the only potentially dilutive shares the Company has
outstanding for the periods presented. Stock options and warrants were not
included in the computation of diluted loss per share for 2000, 1999 and
1998 since they would have resulted in a antidilutive effect on loss from
continuing operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, including cash, trade
receivables, marketable securities, accounts payable, accrued expenses,
revolving credit facilities and notes payable. The carrying values of cash,
trade receivables, accounts payable, accrued expenses and notes payable
approximate current fair value. Revolving credit facilities are at variable
market rates.

USE OF ESTIMATES
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 at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Management believes that the estimates are reasonable.

F-8
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

CONCENTRATION OF CREDIT RISK
The Company performs periodic evaluations of the relative credit standing of
the financial institutions and investment funds that are considered in the
Company's investment strategy. A majority of the Company's trade receivables
are from retail gasoline stations and convenience stores. Management
believes that its credit and collection policies mitigate the potential
effect of a concentration of credit risk in its accounts receivable.

ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which establishes new
accounting and reporting standards for derivative instruments. In June 1999,
the FASB issued SFAS No. 137, "Accounting For Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", which defers the effective date of SFAS No. 133 for one year to be
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting For
Certain Derivative Instruments and Certain Hedging Activities -an amendment
to FASB Statement No. 133", which amends the accounting and reporting
standards of Statement 133 for certain derivative instruments and certain
hedging activities. The Company has not entered into, and is not expected to
enter into, any material transactions involving derivative instruments or
hedging activities. Therefore, management believes there would be no
material effect to the Company's financial statements as a result of
implementation of these statements.

RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 financial statement presentation. Such reclassifications
had no effect on net loss as previously reported.

2. AGREEMENT TO SELL OPERATIONS AND PLAN OF MERGER

The Company agreed in December 1999 to sell its Texas petroleum marketing
and convenience store operations to TSC Services, Inc. (TSC) for cash of
$12.7 million for substantially all the assets of the Texas petroleum
marketing and Texas convenience store segments, plus the assumption of
capital lease obligations and the cost of inventory on hand at the closing
date, also to be received in cash. On August 17, 2000, the Company
terminated the agreement pursuant to TSC's failure to perform certain
obligations as defined by the purchase agreement. In August 2000, the
Company received the TSC escrow deposit of $203,865, which was recorded as
other income (expense) in the accompanying consolidated statements of
operations.

On January 23, 2000, the Company executed Agreement and Plan of Merger,
which was amended on March 1, 2000 (as amended the Merger Agreement), with
I-Net Holdings, Inc. (I-Net), a Delaware Corporation, pursuant to which a
wholly owned subsidiary of the Company would have been merged with and into
I-Net. The principal shareholder of I-Net was a former officer of the
Company. The Company and 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 in conjunction with the
Merger Agreement upon consummation of the TSC transaction or a similar sale
of substantially all of the Company's assets.

F-9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

3. DISCONTINUED OPERATION AND LOSS ON IMPAIRMENT OF MARKETABLE SECURITIES

In February 1998, the Company suspended the production activities of its
ChemWay operation, which was engaged in the packaging and marketing of
automotive after-market chemical products. In March 1998, the Company made
the decision to sell ChemWay and recorded an estimated loss of $705,000 (net
of applicable income tax benefit of $395,000), which included a provision
for losses of $200,000 during the phase-out period.

The results of operations of ChemWay have been classified as discontinued
operations and prior periods have been restated. Summary of operating
results are as follows (in thousands):

YEAR ENDED SEPTEMBER 30,
1999(i) 1998
------- -------

Revenues ............................... $ 75 $ 2,268
Earnings (loss) from operations ........ (32) (1,694)
Income tax expense (benefit) ........... -- (593)
Income (loss) of ChemWay ............... (32) (1,262)
Loss deferred by the Company
pending the sale of ChemWay .......... 32 414
------- -------
Loss from discontinued operations
as reported .......................... $ -- $ (848)
======= =======

(i) Through December 30, 1998.

On December 30, 1998, the Company completed the sale of ChemWay to
Affiliated Resources Corporation (Affiliated), an unrelated party with
respect to the Company; however, the Chairman and CEO of Affiliated and one
of his legal advisors were potential shareholders of the Company, having
committed to purchase 350,000 common shares of the Company for $0.75 per
share in a private placement transaction on June 1, 1998 (Note 9). At the
time of the sale, management believed that the sale to Affiliated had
strategic merit in that Affiliated represented 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. However,
there can be no assurance that ChemWay will return to profitability or that
the market value of Affiliated common stock will increase in the future.

The Company received 1.5 million shares of common stock of Affiliated,
representing approximately 9% of the outstanding Affiliated common stock at
December 31, 1998, in exchange for all the outstanding common stock of
ChemWay. As a result of the sale, the estimated loss on disposal and the
related provision for losses during the phase-out period recorded in the
second and third quarters of 1998 were reversed during the fourth quarter of
1998.

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, 1999, Affiliated reported, in its Annual Report on
Form 10-KSB, an accumulated deficit of $10,031,466 and a negative working
capital balance of $1,769,064. Affiliated reported revenues from operations
of $519,374 and a loss from operations of $2,524,088 during 1999. In its
September 30, 2000 quarterly report on

F-10
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

Form 10-QSB, Affiliated reported a loss from operations of $4,475,670, a net
loss of $11,675,314, a negative working capital balance of $1,502,593 and an
accumulated deficit of $20,355,020. Affiliated common stock is quoted on the
Nasdaq Over-the-Counter Bulletin Board. In accordance with generally
accepted accounting principals, 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 gain of $3,973,000, net of a provision for income taxes of
$1,203,000, as follows (in thousands):

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, net of
accumulated depreciation of $781,000 ............. 2,290
Deferred income taxes .............................. 1,179
Accounts payable and accrued expenses .............. (1,765)
Notes payable ...................................... (232)
-------
Net assets .................................... 3,214
-------
Pretax gain on sale of ChemWay ...................... 5,176

Provision for income taxes .......................... (1,203)
-------
Gain on sale of ChemWay ............................. $ 3,973
=======

In accordance with the terms of the sales agreement, the Company became
entitled to receive an additional one million shares of common stock of
Affiliated on December 30, 1999 since the average closing price of
Affiliated common stock fell below an agreed-upon price. In December 1999,
the Company received the additional one million shares and recorded a gain
on sale of ChemWay of $266,000 to reflect receipt of the additional shares
at $0.266 per share at December 30, 1999.

The Company's investment in Affiliated common stock is unregistered and
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 reported closing prices of
$6.00 at December 31, 1998 to closing prices $0.265 and $0.406 at September
30, 1999 and September 30, 2000, respectively. 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, recorded a realized loss of
$8,602,000 in 1999, reflecting the decline in Affiliated stock value to
$0.265 per share at September 30, 1999, resulting in a carrying value of
$398,000 at September 30, 1999. As of September 30, 2000, the Affiliated
stock had increase in value to $0.406 per share and, accordingly, the
Company recorded an unrealized gain of $352,000 through Stockholders' Equity
and Comprehensive Income. The unrealized gain in 2000 and the gain on sale
of ChemWay of $266,000 described above resulted in a carrying value of the
Investment in Affiliated of $1,016,000 at September 30, 2000. 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.

F-11
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30 (in
thousands):
2000 1999
------- -------

Land ................................. $ 2,648 $ 2,582
Buildings ............................ 6,003 6,028
Leasehold improvements ............... 756 795
Equipment ............................ 13,362 13,979
Transportation equipment ............. 1,458 1,639
Office equipment ..................... 2,475 2,475
------- -------
26,702 27,498
Less - accumulated depreciation ...... 13,293 12,602
------- -------
Property and equipment, net .......... $13,409 $14,896
======= =======

5. LONG-TERM DEBT

Long-term debt is summarized as follows at September 30 (in thousands):

2000 1999
------- -------
Notes payable to a bank, at prime plus 2%,
payable on January 31, 2001, secured by
property and equipment, receivables,
inventory and common stock of subsidiaries ... $ 9,153 $ 8,712
Notes payable to banks, at prime to 12%,
payable to 2004, secured by property and
equipment, improvements, receivables,
inventory and common stock of subsidiaries ... 591 1,022
Notes payable to a financial institution, 8%
to 11%, payable to 2005, secured by property,
equipment, improvements, inventory, accounts
receivable and 20,000 treasury shares ........ 320 342
Notes payable to a financial institution,
9.26% to 10.75%, payable to 2005, secured by
property, equipment and improvements ......... 199 224
Other .......................................... 277 309
------- -------
Total long-term debt ........................... 10,540 10,609
Less - current maturities ...................... 9,910 9,521
------- -------
Total long-term debt, net of current
maturities ................................. $ 630 $ 1,088
======= =======

On March 31, 1999, the Company amended its credit agreement with one of its
bank lenders (the Refinancing), pursuant to which the bank (i) waived all
previous and continuing covenant defaults; (ii) extended the maturity of its
loan balance to January 31, 2001; and (iii) assumed the amounts outstanding
under the other bank lender's loans under their current terms and
conditions. Under the terms of the Refinancing, such bank lender received a
first-lien position on all the assets of the

F-12
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

Company. The refinancing contains certain financial covenant obligations,
including minimum net worth, minimum earnings before interest, taxes and
depreciation, working capital ratio and fixed charge coverage ratio.
Further, the Company is prohibited by its bank agreement from payment of any
cash dividends and from obtaining additional debt without the bank's
consent.

At September 30, 2000 and 1999, the Company was in violation of
substantially all of these covenants; however, the bank has waived such
covenant defaults through January 31, 2001. Since there can be no assurance
that the Company can comply with the financial covenants subsequent to
January 31, 2001, nor has the bank waived or amended such covenants or the
final maturity date past January 31, 2001, all of the debt due to this bank
approximating $9,153,000, including the additional $1,000,000 credit
facility discussed below, has been classified as current at September 30,
2000. Further, as the loan was not repaid prior to June 30, 1999, the
Company became subject to a fee of $250,000. The Company also incurred
additional fees of $250,000 on August 31, 1999 and December 31, 1999, as the
loan obligations were not repaid by those respective dates. The loan fees
aggregating $750,000 and $500,000 at September 30, 2000 and 1999,
respectively, are included in accrued interest on the accompanying
consolidated balance sheets. Accordingly, interest expense includes $250,000
and $500,000, reflecting the fiscal year 2000 and 1999 fees incurred,
respectively.

On January 26, 2000, the Company closed on an additional $1,000,000 credit
facility with its principal bank lender. The new credit facility is secured
by the Company's general offices, three acres of land and a 7,490 square
foot warehouse together with 14,784 square feet of additional warehouse
buildings. The credit facility is further secured by a pledge of the
Company's rights and interests in funds held by an escrow agent, which would
be due to the Company as a result of a breach by TSC of its obligations
under the purchase agreement. Proceeds of the new credit facility were used
for working capital and to fund expenses necessary to obtain new financing.
Interest on the credit facility will accrue at an annual rate of 2% 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.

At September 30, 2000, the Company was in default with two notes payable to
a financial institution, and accordingly, all debt due to this financial
institution aggregating $320,000 has been classified as current at September
30, 2000. Subsequently, one of these notes payable totaling $256,000 was
repaid from proceeds on the sale of the Company's former corporate office
building. The Company is currently negotiating an amended repayment plan for
the remaining note payable to this financial institution. There can be no
assurance that management's plans described above will be successful.

As of September 30, 2000 (after consideration of the debt refinancing
described above), scheduled principal maturities of long-term debt are as
follows (in thousands):

YEAR ENDING SEPTEMBER 30,
-------------------------
2001 $ 9,910
2002 206
2003 154
2004 99
2005 71
Thereafter 100
-------
Total $10,540
=======

F-13
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

6. CAPITAL LEASES

The Company leases it's information systems and trucks under capital lease
obligations due to two financial institutions expiring through 2002.
Amortization of assets under capital leases is over the life of the lease and
is included in depreciation and amortization expense. The cost of the
information systems and trucks acquired under capital leases was $1,436,000.
Accumulated amortization was $1,098,000 and $878,000 at September 30, 2000
and 1999, respectively.

Future minimum lease payments under capital lease obligations as of
September 30, 2000 are as follows (in thousands):

YEAR ENDING SEPTEMBER 30,
-----------------------
2001 $ 833
2002 91
-----
Total minimum lease payments $ 924
Less: Amount representing interest (94)
-----
Present value of minimum lease payments $ 830
=====

The Company currently is in default with its capital lease obligations due
to a financial institution for the information systems assets. Accordingly,
the capital lease obligation of approximately $704,000 at September 30, 2000
has been classified as current portion of obligations under capital leases
on the accompanying consolidated balance sheet at September 30, 2000.

7. INCOME TAXES

Income taxes are attributable to the following (in thousands):

YEAR ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
------- ------- -------
Current:
Federal $ -- $ (79) $ (43)
State -- 32 108
------- ------- -------
-- (47) 151
------- ------- -------
Deferred
Federal -- 1,056 (1,085)
State -- 147 (137)
------- ------- -------
-- 1,203 (1,222)
------- ------- -------
Total $ -- $ 1,156 $(1,071)
======= ======= =======

F-14
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

The difference between income taxes at the statutory federal and effective
income tax rates is as follows (in thousands):

YEAR ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
------- ------- -------
Taxes computed by applying
federal statutory rate $(1,678) $(2,780) $(2,279)
State taxes, net of federal
benefit -- 118 (120)
Stock option compensation
expenses 84 150 518
Change in deferred tax asset
valuation allowance 1,580 3,900 782
Other, net 14 (232) 28
------- ------- -------
Total $ -- $ 1,156 $(1,071)
======= ======= =======

The provision for (benefit from) income taxes consists of the following (in
thousands):

YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
----- ------- -------

Continuing operations $ -- $ (47) $ (708)
Discontinued operations -- 1,203 (363)
----- ------- -------
Total $ -- $ 1,156 $(1,071)
===== ======= =======

Deferred tax assets (liabilities) are comprised of the following (in
thousands) at September 30:

2000 1999
------- -------
Deferred tax liabilities
Book/tax depreciation differences $ 715 $(2,520)
Other (1) (16)
------- -------
Total 714 (2,536)
Deferred tax assets
Net operating loss carryforward 866 5,307
Marketable securities -- 1,266
Alternative minimum tax credit -- 454
Net capital loss carryforwards -- 211
Allowance for doubtful accounts -- 107
Investment tax credit -- 26
Section 263A inventory adjustment -- 16
Other -- 62
------- -------
Total 1,580 7,449
Valuation allowance (1,580) (4,913)
------- -------
Net deferred tax assets $ -- $ --
======= =======

F-15
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

At September 30, 2000, the Company had regular tax net operating loss
carryforwards from continuing operations of $16.7 million available for
federal income tax purposes that expire through 2020 and capital loss
carryforwards of $9.2 million.

Changes in the Company's ownership, as defined under Section 382 of the
Internal Revenue Code, could result in certain limitations on the annual
amount of net operating losses that may be utilized.

8. OPERATING LEASES

The Company leases twenty-five convenience store locations and four other
facilities under operating lease agreements with varying lives and terms.
Two of these leases are with related parties (Note 10). At September 30,
2000, the scheduled future minimum lease payments required under the terms
of the operating leases in effect are (in thousands):

YEAR ENDED SEPTEMBER 30,
------------------------
2001 $ 422
2002 317
2003 231
2004 136
2005 69
Thereafter 244
-------
Total $ 1,419
=======

In addition, the Company rented one facility on a month-to-month basis from
an unrelated party. The lease was terminated in January 2000. Rent paid for
this facility totaled $2,000 for the year ended September 30, 2000.

The Company has 10 subleases. Minimum rentals to be received in the future
under these noncancelable subleases totaled $185,700 as of September 30,
2000.

9. COMMON STOCK

In August 1992, the Company issued warrants to purchase shares of the
Company's common stock at an exercise price of $2.86 per share. In June
1997, the Company extended the expiration date of the remaining warrants to
August 1, 2002 and recorded compensation expense of $38,000. In 2000, 1999
and 1998, -0-, 62,813 and 4,725, respectively, of such warrants were
exercised. At September 30, 2000, there were no warrants outstanding to
purchase shares.

In December 1994 and May 1995, the Company issued warrants to purchase
262,500 shares of the Company's common stock at an exercise price of $4.76
per share. These warrants expired in May 1997 and December 1999.

In May 1998, the Company issued warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.00 per share in exchange
for certain consulting services and recorded compensation expense of
$38,500. The warrants were exercised in July 1998.

In December 1994, the Company adopted the ESI Stock Benefit Plan. Up to
420,000 shares of the Company's common stock may be purchased or granted
under the plan, and provision has been made for automatic increases in such
amount of shares in the event the number of common shares issued by

F-16
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

the Company increases to specified levels. An option granted under the plan
by the Board of Directors to a key employee may be an incentive stock option
or a nonqualified option and may be accompanied by stock appreciation rights
or limited rights. Incentive stock options must be granted at an exercise
price of not less than 100% of the then fair market value of the stock.
Nonqualified stock options must be granted at an exercise price of not less
than 90% of the then fair market value of the stock. All options shall
expire upon termination of employment or within five or ten years of the
date of grant. Nonemployee directors shall be automatically granted
nonqualified options to purchase 2,500 shares of common stock annually.
Vesting is to be determined by the Board of Directors.

In August 1995, the Company granted contingent stock awards to two
individuals. The individuals were granted an aggregate of 105,000 shares of
restricted common stock that vested in fiscal 1998, 1997 and 1996, subject
to achievements of certain profitability levels. In 1998, 1997 and 1996,
such provisions were not met and all grants were cancelled.

In May and December 1997, the Company granted certain employees options to
purchase an aggregate of 330,600 shares of common stock at exercise prices
ranging from $1.31 to $4.00. The options vested upon the Company's common
stock reaching a market value of $6.50 per share for five consecutive days
as specified in the agreements. The grants would be canceled if such
provisions were not met. The provisions were met in November 1998. The
Company recorded compensation expense of $1.1 million and $229,000 for
continuing and discontinued operations, respectively, in the fourth quarter
of 1998 for the difference in the exercise prices of the options and the
market price of the Company's stock at September 30, 1998. Additional
compensation expense of $208,000 and $40,000 for continuing and discontinued
operations, respectively, was recorded in the first quarter of 1999 for the
difference in the market price of the Company's stock at September 30, 1998
and $6.50 per share.

On June 1, 1998, the Company agreed to issue 350,000 common shares for total
consideration of $262,500 in a private placement to accredited investors.
Such shares were issued on October 27, 1998. On January 4, 1999, the Company
issued 40,000 common shares valued at $15.25 per share to an investment
advisor for investment advisory services rendered. The investment advisor
has the right to sell the shares back to the Company at $4 per share until
ninety days following the registration of the shares.

In December 1998, the Company granted certain members of the Board of
Directors options to acquire an aggregate of 7,500 shares at $11.63 per
share.

In December 1998, the Board of Directors agreed to grant a five-year option
to acquire 75,000 shares at $11.63 per share to the chief executive officer,
vesting over three years.

In May 1999, the Company granted certain employees options to receive an
aggregate of 24,000 shares of common stock, of which 9,500 have subsequently
expired. The shares vest one year from the date of grant and may be
exercised 180 days thereafter. The closing price of the Company's common
stock was $30.56 per share and $196,000 was recorded as compensation expense
in fiscal 1999. Additional compensation expense of $247,000 was recorded
through the third quarter of fiscal year 2000.

In December 1999, the Company granted certain members of the Board of
Directors options to acquire an aggregate of 7,500 shares at $0.81 per
share.

F-17
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

In January 2000, the Board of Directors agreed to issue five-year options to
various officers and key employees of the Company aggregating 45,000 shares
of common stock at $3.31 per share, with 30,500 shares vesting immediately.
All options granted in 2000 are nonqualifying options and are not covered by
the current stock option plan.

A summary of the option activity under the various plans follows:

WEIGHTED-
AVERAGE
NUMBER OF OPTION
SHARES PRICE
-------- --------

Outstanding at September 30, 1997 89,206 $5.42

Granted in 1998 403,800 1.67
Expired in 1998 (54,149) 5.00
--------

Outstanding at September 30, 1998 438,857 1.43

Granted in 1999 31,500 1.85
Exercised in 1999 (383,818) 1.77
Expired in 1999 (7,539) 0.03
--------

Outstanding at September 30, 1999 79,000

Granted in 2000 127,500 8.05
Expired in 2000 (2,000) --
--------

Outstanding at September 30, 2000 204,500
========

Although 204,500 options are outstanding at September 30, 2000, only 34,500
underlying common shares are registered under a plan. A summary of options
outstanding and options exercisable at September 30, 2000 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OPTIONS EXERCISE REMAINING AVERAGE OPTIONS AVERAGE
OUTSTANDING PRICE CONTRACTUAL LIFE OPTION PRICE EXERCISABLE OPTION PRICE
----------- ------------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
14,500 $ 0 8.7 years $ -- 12,700 $ --
15,000 $.81 - $1.63 3.4 years 1.11 15,000 1.11
95,000 $ 3.31 4.3 years 3.31 77,000 3.31
80,000 $ 11.63 3.2 years 11.63 30,000 11.63
------- ------------ --------- ------ ------- ------
204,500 $ 6.17 6.31 years $ 6.17 134,700 $ 4.61
======= ============ ========== ====== ======= ======
</TABLE>

F-18
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

The weighted average fair value at date of grant for options granted during
2000, 1999 and 1998 are as follows:

2000 1999 1998
------ ------ ------

Exercise price equals market price $ 8.05 $ 7.59 $ 1.32
Exercise price exceeds market price -- -- 1.59
Exercise price is less than market price -- 30.55 1.82

The Company applied APB 25 and related interpretations in accounting for its
plans. The following unaudited pro forma data is calculated as if
compensation cost for the Company's stock option plans were determined based
upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under the Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (in
thousands):

YEAR ENDED SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
Net loss:
As reported $ (4,934) $ (9,333)
Pro forma (4,959) (9,412)

Basic and diluted loss per share
As reported $ (1.16) $ (2.43)
Pro forma (1.16) (2.45)

The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following assumptions for 2000: no dividend
yield, volatility of 92%, risk-free interest rate of 4.5% to 4.8% and an
expected life of 4 to 6 years. For 1999, the following assumptions were
used: no dividend yield, volatility of 92%, risk-free interest rate of 4.5%
to 4.9% and an expected life of 3.7 to 5 years.

On June 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 to accredited investors at $0.40 per share. The Company also
retained Comsight as its financial advisor for a period of two years. On
August 17, 2000, the Company issued 1,437,500 shares of common stock for
total consideration of $575,000.

10. RELATED PARTY TRANSACTIONS

During 2000, the Company leased two convenience store locations from Mr.
J.L. Evans, the largest shareholder of the Company. One ten-year lease
commenced in June 1987 with monthly payments of $2,500, which was renewed
for one additional five-year period. One five-year lease commenced in March
1995 with monthly lease payments of $1,800 and allows for two five-year
automatic renewals at the Company's option, which were not exercised by the
Company. The amounts paid under these leases were $51,600, $54,300 and
$76,800 for the years ended September 30, 2000, 1999 and 1998, respectively.
Future minimum lease commitments as of September 30, 2000 are $52,500.

F-19
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

From time to time the Company makes advances to individuals who are
shareholders, directors, officers and/or employees. Such advances are
usually unsecured and accrue interest at 9%. There were no advances
outstanding at September 30, 2000 and 1999.

11. CONTINGENT LIABILITIES

During 1999, a purported class action lawsuit was 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 asserted that the
defendants violated federal securities laws by issuing allegedly false and
misleading financial statements in 1997, 1998 and 1999 about the Company's
financial condition and results of operations. The lawsuit demanded, among
other things, unspecified compensatory damages, attorney's 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.

The Company is subject to litigation, primarily as a result of customer
claims, in the ordinary conduct of its operations. As of September 30, 2000,
the Company had no knowledge of any legal proceedings, other than as
described above, which, by themselves, or in the aggregate, could be
expected to have a material adverse effect on the Company.

12. EMPLOYEE BENEFIT PLANS

The Company established the ESI Employee Retirement Plan, a defined
contribution benefit plan, effective July 1, 1997. Employees are eligible
for participation in the plan upon attaining the age of 21 and completion of
1 year of service and 1,000 hours or more of service. The Company
contributes an amount equal to 50% of employee voluntary contributions up to
a maximum of 5% of the employee's compensation. Such contributions may be
made in the common stock of the Company. The Company recorded contributions
of $28,000, $61,000 and $45,000 during fiscal 2000, 1999 and 1998,
respectively.

13. RESULTS OF OPERATIONS, LIQUIDITY AND MANAGEMENT'S PLANS

During the three years in the period ended September 30, 2000, the Company
has recorded operating losses from continuing operations aggregating $10.8
million and net losses aggregating $19.7 million. At September 30, 2000, the
Company has a working capital deficit of $13.2 million and stockholders'
equity of $692,000. In addition, the Company is in violation of various debt
covenants, which default has been waived by the bank through January 31,
2001 (Note 5).

In December 1999, the Company received notification from Nasdaq stock
exchange that the Company was not in compliance with two requirements for
continued listing on the Nasdaq NMS: the Company did not hold an annual
stockholders 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. The Company's ability to raise additional
equity capital in the future could be adversely affected with the Company's
common stock no longer listed on a national exchange.

In December 2000, the Company and its primary lender reached an agreement in
principal, which could lead to a substantial reduction of debt due to this
lender. However, there can be no assurance that such an agreement will be
successful. Management of the Company is currently holding talks with
several potential lending institutions to replace its existing bank debt
with new financing. The new financing would have the effect of increasing
the availability of working capital; however, the

F-20
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

Company may ultimately be required to enter into other strategic
transactions in order to generate positive cash flow and to meet its current
and future obligations. The Company is also actively pursuing the
refinancing of several unencumbered assets that, if successful, will allow
for the upgrade of several of the Company's retail facilities.

During the fourth quarter of 2000, the Company implemented a strategy to
reduce outstanding debt by the selling of certain identified assets aligned
along brand representation in an effort to concentrate on fewer brands,
which management believes have the most profit potential. As a phase of this
strategy, management implemented a 22% staff reduction in early October. By
the close of the first quarter of 2001, the Company had closed on the sale
of some of its Citgo, Texaco (Motiva) and Diamond Shamrock dealer and
consignment accounts and had some of its Phillips 66 accounts under earnest
money contract, with closing expected in January 2001. Management plans to
continue its Chevron and Exxon branded company operated stores and dealer
locations.

In addition, the Company has closed on the sale of its former corporate
office and warehouse facility during the first quarter of 2001 (Note 5) and
has plans to sell additional properties in efforts to reduce its debt to
creditors and provide working capital.

The Company is also evaluating a strategic partnership that would allow the
Company to reinstitute a supply of petroleum products to its terminal
facility. Management believes that should the strategic partnership be
successful that its terminal can return to operations by the second quarter
of 2001.

There can be no assurance that management's plans as described above will be
successful.

14. SUBSEQUENT EVENTS

On December 4, 2000, the Company entered into a stipulated judgment against
Affiliated Resources Corp. (Affiliated) and ChemWay pertaining to the
Company's sale of ChemWay to Affiliated in December 1998. The judgment
granted by the 130th Judicial District Court of Texas was for $6,000,000,
arising from Affiliated's failure to fund the put right at $4.00 per share
of the 2,500,000 shares of Affiliated common stock the Company had received
as consideration for the sale. As stipulated in the judgment, the Company
received a deed in lieu of foreclosure for certain ChemWay assets as sole
payment for the $6,000,000 judgment. The ChemWay assets to be received were
appraised at approximately $3.5 million at the date of the judgment.
Management is presently evaluating all strategic alternatives relating to
the assets received by deed in lieu of foreclosure.

15. SEGMENT REPORTING

During the year ended September 30, 1999, the Company adopted SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information". Prior
years' 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 sell 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 segments serves the
petroleum industry in the southeast Texas market area.

F-21
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income (loss). Intersegment sales and
transfers are accounted for as if such sales or transfers wee to third
parties, that is, at current market prices.

F-22
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

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>
September 30, 2000:
Revenues from external
customer
Motor fuel sales $ 53,772 $ 15,361 $ 9,921 $ -- $ -- $ 79,054
Convenience store sales -- 9,543 3,694 -- -- 13,237
Other 1,038 358 181 1,461 -- 3,038
Intersegment revenues 17,309 -- -- -- (17,309) --
--------- --------- --------- --------- --------- ---------

Total revenues $ 72,119 $ 25,262 $ 13,796 $ 1,461 $ (17,309) $ 95,329
========= ========= ========= ========= ========= =========

Depreciation and amortization 990 328 126 51 18 1,513
Operating income (loss) (601) (742) (676) 262 (1,682) (3,439)
Segment assets 11,405 6,043 2,072 1,189 -- 20,709
Expenditures for property
and equipment 402 46 13 6 -- 467

September 30, 1999:
Revenues from external
customer
Motor fuel sales $ 47,913 $ 12,659 $ 9,671 $ -- $ -- $ 70,243
Convenience store sales -- 9,599 2,882 -- -- 12,481
Other 2,251 615 141 1,542 -- 4,549
Intersegment revenues 14,239 -- -- -- (14,239) --
--------- --------- --------- --------- --------- ---------

Total revenues $ 64,403 $ 22,873 $ 12,694 $ 1,542 $ (14,239) $ 87,273
========= ========= ========= ========= ========= =========

Depreciation and amortization 1,097 286 130 58 18 1,589
Operating income (loss) (1,335) (34) (334) 177 (1,854) (3,380)
Segment assets 11,698 6,360 2,115 1,284 885 22,342
Expenditures for property
and equipment 354 81 133 -- 73 641

September 30, 1998:
Revenues from external
customer
Motor fuel sales $ 60,146 $ 13,965 $ 9,719 $ -- $ -- $ 83,830
Convenience store sales -- 10,783 2,706 -- -- 13,489
Other 4,312 878 453 1,152 -- 6,795
Intersegment revenues 15,074 -- -- -- (15,074) --
--------- --------- --------- --------- --------- ---------
Total revenues
$ 79,532 $ 25,626 $ 12,878 $ 1,152 $ (15,074) $ 104,114
========= ========= ========= ========= ========= =========

Depreciation and amortization 1,250 369 147 112 17 1,895
Operating income (loss) (987) (543) (88) (81) (2,295) (3,994)
Segment assets 16,654 6,657 1,953 957 1,055 27,276
Expenditures for property
and equipment 655 1,188 52 5 (514) 1,386
</TABLE>

(1) Consists primarily of corporate overhead expenses and unallocated
corporate assets. Corporate assets include corporate property and
equipment, discontinued operations, income tax assets and other
unallocated corporate assets.

F-23
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

A reconciliation of the Company's segment operating information to
consolidated loss from continuing operations before income taxes is as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Total operating loss for reportable segments $ (1,757) $ (1,526) $ (1,699)
Loss on impairment of marketable securities -- (8,602) --
Interest income 16 94 22
Interest expense (1,725) (1,802) (1,387)
Unallocated corporate expenses (1,682) (1,854) (2,295)
Other, net (52) 337 46
-------- -------- --------
Total consolidated loss from continuing
operations before income taxes $ (5,200) $(13,353) $ (5,313)
======== ======== ========
</TABLE>

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Unaudited quarterly financial data is summarized as follows (in thousands,
except for per share amounts):

<TABLE>
<CAPTION>
-------- -------- -------- --------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 22,012 $ 23,150 $ 24,878 $ 25,289
Gross profit 2,585 2,570 2,328 2,658
Operating income (loss) (667) (1,082) (834) (856)
Loss on impairment of marketable securities -- -- -- --
Income (loss) from continuing operations (1,214) (1,430) (1,211) (1,345)
Gain from sale of discontinued operations 266 -- -- --
Net income (loss) (948) (1,434) (1,214) (1,338)

Basic and diluted loss per common share:
Income (loss) per common share:
Continuing operations $ (0.30) $ (0.36) $ (0.30) $ (0.31)
Discontinued operations
0.06 -- -- --
-------- -------- -------- --------
Total $ (0.24) $ (0.36) $ (0.30) $ (0.31)
======== ======== ======== ========
</TABLE>

F-24
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
-----------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 20,998 $ 19,159 $ 24,258 $ 22,858
Gross profit 3,393 2,816 3,176 2,469
Operating income (loss) (695) (1,013) (337) (1,335)
Loss on impairment of marketable securities -- -- (8,063) (539)
Income (loss) from continuing operations (778) (1,689) (8,720) (2,119)
Gain from sale of discontinued operations 3,973 -- -- --
Net income (loss) 3,195 (1,689) (8,720) (2,119)

Basic and diluted loss per common share:
Income (loss) per common share:
Continuing operations $ (0.22) $ (0.44) $ (2.13) $ (0.55)
Discontinued operations 1.13 -- -- --
-------- -------- -------- --------
Total $ 0.91 $ (0.44) $ (2.13) $ (0.55)
======== ======== ======== ========
</TABLE>

F-25
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

/S/ J.L. EVANS, SR.
-------------------------------
Jerriel L. Evans, Sr.
Chairman of the Board and Chief
Executive Officer

January 12, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date(s) indicated:

<TABLE>
<CAPTION>
<S> <C>
/s/ J.L. EVANS, SR. /s/ PETER J. LOSAVIO, JR.
------------------------------------------------- ---------------------------------------
Jerriel L. Evans, Sr., January 12, 2001 Peter J. Losavio, Jr., January 12, 2001
Chairman of the Board and Chief Executive Officer Director

/s/ CHARLES N. WAY /s/ MATT HESSIONS
------------------------------------------------- ---------------------------------------
Charles N. Way, January 12, 2001 Matt Hessions, January 12, 2001
Corporate Controller and Director Director

/s/ DARLENE E. JONES
-------------------------------------------------
Darlene E. Jones, January 12, 2001
Treasurer and Director
</TABLE>

Page 21
<PAGE>
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
--------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company filed with the
Texas Secretary of State on October 22, 1968(1). Filed
with May 11, 1993 filing of Form S-1 Registration
#33-62684.
3.2 Certificate of Amendment to Articles of Incorporation of
Evans Systems, Inc., filed with the Texas Secretary of
State on September 21, 1992(1). Filed with May 11, 1993
filing of Form S-1 Registration #33-62684.
3.3 Certificate Amendment of Articles of Incorporation of
Evans Systems, Inc., filed with the Texas Secretary of
State on April 9, 1993. Filed with May 11, 1993 filing of
Form S-1 Registration #33-62684.
3.4 By-Laws of the Company. Filed with May 11, 1993 filing of
Form S-1 Registration #33-62684.
10.1 Phillips "66" Marketing Agreement dated October 21, 1986.
Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.2 Amoco Lubricants Distributor Agreement dated June 21, 1990
and Schedule dated January 2, 1992. Filed with May 11,
1993 filing of Form S-1 Registration #33-62684.
10.3 Diamond Shamrock Storage Lease dated July 12, 1985. Filed
with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.4 Star Enterprise "Texaco" Marketing Agreement effective
July 1, 1993. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.5 Shell Lubricants Reseller Agreement effective January 1,
1992. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.6 Texaco Lubricants agreement effective July 1, 1990. Filed
with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.7 Conoco Jobber Franchise Agreement effective April 1, 1990.
Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.8 Mobil Marine Distributor Agreement effective June 3, 1992.
Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.9 Form of Series B Warrants to Purchase Common Stock of
Registrant. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.10 Coastal Refinery & Marketing, Inc. Facilities Access
Agreement, effective September 5, 1989. Filed with May 11,
1993 filing of Form S-1 Registration #33-62684.
10.11 FINA Lubricants Marketing Agreement dated February 1,
1989. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.12 Texaco Terminating Agreement dated April 30, 1986. Filed
with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.13 Citgo Petroleum Distributor Franchise Agreement effective
August 1, 1992. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.14 Incentive Stock Option Plan. Filed with May 11, 1993
filing of Form S-1 Registration #33-62684.
10.15 Form of Incentive Stock Option Agreement. Filed with May
11, 1993 filing of Form S-1 Registration #33-62684.
10.16 Summary Plan Description of E.S.O.P. Filed with May 11,
1993 filing of Form S-1 Registration #33-62684.
10.17 Employment Contract with Bill R. Kincer, incorporated by
reference from Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1994.
10.18 Pruett Petroleum, Inc. and Koonce Petroleum Company, Inc.
agreement dated October 4, 1994, incorporated by reference
from Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended September 30, 1994.
10.19 Employment Agreement with Richard A. Goeggel, effective
June 16, 1998, incorporated by reference from Exhibit
10.19 to the Company's Annual Report on Form 10-K for the
year ended September 30, 1998.
10.20 Omitted.
10.21 Employment Agreement with J.L. Evans, Sr., effective April
6, 1998, incorporated by reference from Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year
ended September 30, 1998.

Page 22
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
--------------------------------------------------------------------------------
10.22 Stock Purchase Agreement dated as of October 30, 1998 by
and among the Company, Synaptix Systems Corporation, a
Colorado corporation, d.b.a. Affiliated Resources
Corporation, and Way Energy, Inc., a Delaware corporation,
incorporated by reference from Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
10.23 Amendment No. 1 to Stock Purchase Agreement, dated
December 39, 1998 by and among the Company, Synaptix
Systems Corporation, a Colorado corporation, d.b.a.
Affiliated Resources Corporation, and Way Energy, Inc., a
Delaware corporation, incorporated by reference from
Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1998.
10.24 Loan Agreement between the Company and Texas Commerce Bank
National Association, dated as of August 30, 1996,
incorporated by reference from Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999.
10.25 Amendment to Loan Agreement dated August 4, 1997,
incorporated by reference from Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999.
10.26 Amendment to Loan Agreement dated December 24, 1997,
incorporated by reference from Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999.
10.27 Amendment to Loan Agreement dated April 23, 1998,
incorporated by reference from Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999.
10.28 Amendment to Loan Agreement dated March 31, 1999,
incorporated by reference from Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999.
10.29 Asset Purchase Agreement dated December 3, 1999, by and
between TSC Services, Inc., Evans Systems, Inc., Diamond
Mini Mart, Inc., Evans Oil Co., EDCO, Inc., and Way Energy
Systems, Inc. incorporated by reference from Exhibit 2.1
to the Company's Current Report on Form 8-K dated December
9, 1999.
10.30 Amendment to Loan Agreement dated June 30, 1999
10.31 Amendment to Loan Agreement dated August 31, 1999
10.32 Amendment to Loan Agreement dated November 30, 1999
*22.0 Subsidiaries of Registrant
*23.0 Consent to the incorporation by reference in the Company's
Registration Statements on Forms S-8 of the report of
Stephenson & Trilicek, P. C. included herein.

*Filed herewith.

Page 23