ITEM 1. BUSINESS
Evans Systems Inc. through its subsidiaries, collectively referred to herein as the "Company" distributes motor fuels and lubricants to branded retail accounts and commercial industrial users. The Company currently operates 8 convenience stores selling gasoline, merchandise and fast food to the motoring public, and provides environmental remediation services in southern Texas.
Operating results for each of the Company's segments follow (in thousands):
(1) Louisiana operations ceased May 17, 2001 and substantially all of the assets were sold. (2) 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 2001 2000 1999 ------- ------- ------- Refined petroleum product sales $26,900 $54,414 $49,143 Non-petroleum product sales 625 396 1,021 ------- ------- ------- Total sales $27,525 $54,810 $50,164
The Texas Petroleum Marketing segment's revenues are primarily derived from the sale of motor fuels to the public through retail outlets:
. 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.
. 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 affected the Texas Petroleum Marketing segment's performance during 1999, 2000, and 2001.
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.
During the first quarter of 2001, the Texas Petroleum Marketing segment closed on the sale of some of its Citgo, Texaco (Motiva) and Diamond Shamrock dealer and consignment accounts. Net proceeds from the sale of the Citgo, Texaco and Diamond Shamrock dealer and consignment accounts approximated $194,000, $642,000 and $450,000, respectively, which were used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $587,000, inclusive of a $159,000 net gain on the sales of the distribution contracts. The net book value of the assets sold approximated $699,000, which consisted primarily of fuel dispensing equipment and tanks at the respective dealer and consignment locations.
During the second quarter of 2001, the Texas Petroleum Marketing segment closed on the sale of its Phillips 66 dealer and consignment accounts. Net proceeds from the sale of the Phillips 66 dealer and consignment accounts approximated $556,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $238,000, inclusive of a $75,000 gain on the sale of the distribution contract. The net book value of the assets sold approximated $318,000, which consisted primarily of fuel dispensing equipment and tanks.
The Texas Petroleum Marketing segment also closed on the sale of three independent dealer and consignment accounts during the second quarter of 2001. Net proceeds from the sale of the independent dealer and consignment accounts approximated $178,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $8,000. The net book value of the assets sold approximated $170,000, which consisted primarily of fuel dispensing equipment and tanks at the dealer and consignment locations.
TEXAS CONVENIENCE STORES
The following table sets forth the revenues of the Texas Convenience Store segment (in thousands):
Fiscal Year Ended September 30 --------------------------- 2001 2000 1999 ------- ------- ------- Refined petroleum product sales $ 7,379 $15,361 $12,705 Merchandise sales 4,814 9,543 9,599 Other income 350 358 569 ------- ------- ------- Total Sales $12,543 $25,262 $22,873
Number of operating stores at year-end 8 17 17
At September 30, 2001, the Company operated 8 convenience stores, featuring self-service motor fuels and a variety of food and non-food merchandise. One of the Company's convenience stores is co-branded with a nationally recognized fast food franchise and four have company food service operations. The Company's stores are located in smaller communities throughout the gulf coast region of Texas.
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.
During the second quarter of 2001, the Company closed on the sale of six company operated stores for total net proceeds of approximately $2,574,000, which were used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $201,000. The net book value of the assets sold approximated $2,373,000, inclusive of $225,000 in fuel and retail inventory.
During the third quarter of 2001, the Company closed on the sale of one company operated store and one store previously leased to others for total proceeds, net of closing costs, of approximately $1,063,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $22,000 during the third quarter of 2001. The net book value of the assets sold approximated $1,041,000, inclusive of $76,000 in fuel and retail inventory.
During the fourth quarter of 2001, the Company closed on the sale of one company operated store for total proceeds, net of closing costs, of approximately $595,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $40,000 during the fourth quarter of 2001. The net book value of the assets sold approximated $555,000.
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 $962,000, $1,461,000 and $1,542,000 in 2001, 2000 and 1999, respectively. 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 that became known after December 28, 1998 are generally funded by private insurance or by the location owner.
DISCONTINUED - LOUISIANA OPERATIONS
On May 17, 2001, the Company closed on the sale of substantially all the assets and inventory of Evans Oil of Louisiana (EOLA) for total cash, net of closing costs, of $1,078,000 and discontinued its Louisiana operations. The assets and inventory sold had a net book value of approximately $723,000 and $268,000, respectively, on May 17, 2001. The Company recorded a net gain on the sale of discontinued operations of approximately $87,000. The proceeds of the sale were used to reduce outstanding debt. The results of operations of EOLA have been classified as discontinued operations and prior periods have been restated.
EMPLOYEE RELATIONS
The Company employs 84 people, none of whom are represented by any collective bargaining organizations. The Company has had no work stoppages, slow downs or strikes.
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 employ financial and personnel resources substantially in excess of those which are available to the Company. The Company's Texas Petroleum Marketing Segment and Texas Convenience Store 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.
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.
ITEM 2. PROPERTIES
The Company owns 31 commercial parcels of real estate in Texas. The properties are comprised of convenience stores, service stations, plants and unimproved sites suitable for retail development. It also leases another 9 retail locations and 1 fuel terminal under operating lease agreements with varying terms and lives.
The Company's general offices are located on 3 acres of land on Highway 60 in Bay City Texas in a 13,475 square foot building. Adjacent to the offices are 14,784 square feet of additional warehouse buildings together with bulk storage equipment, including 14 fuel storage tanks and 20 lube oil and antifreeze tanks.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation, primarily as a result of customer and vendor claims, in the ordinary conduct of its operations. As of September 30, 2001, the Company had no knowledge of any legal proceedings, which, by themselves, or in the aggregate, would not be covered by insurance or could be expected to have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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, 2001, there were approximately 1,281 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 $980,000 on September 30, 2001.
The high and low price range for the last two years, based on the closing sales price as reported by NASDAQ\OTCBB, are below:
Dates High Low - ----- ---- --- October 1,1999 through December 31,1999 2.43 .50 January 1,2000 through March 31, 2000 9 .75 1.38 April 1,2000 through June 30, 2000 2 .43 .38 July 1, 2000 through September 30, 2000 1.50 .38 October 1, 2000 through December 31, 2000 .53 .20 January 1, 2001 through March 31, 2001 .25 .13 April 1, 2001 through June 30, 2001 .25 .13 July 1, 2001 through September 30, 2001 .18 .11
ITEM 6.
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. The Company has reclassified certain 1997 thru 2000 financial data to conform with the 2001 financial data presentation. Such reclassifications had no effect on net loss as previously reported.
(1) Adjusted for 5% stock dividend paid on January 20, 1997.
ITEM 7.
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 the fourth quarter of 2000, the Company began implementation of a strategy to reduce debt by selling certain identified assets. As a part of downsizing the Company has reduced it's staff from 197 to 84 at September 30, 2001. The Company plans to continue its Chevron and Exxon branded company operated and dealer locations. The Company has determined that it is unlikely the Company's revenues will increase in the foreseeable future in an amount sufficient to offset its operating expenses without a sufficient working capital infusion. In order to continue as a going concern, management believes the Company must obtain a capital infusion of either equity or debt in amounts sufficient to reduce its current outstanding debts and provide additional working capital to expand its operations or it must continue to sell its assets. There can be no assurance that management's plans as described above will be successful.
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Consolidated revenues from continuing operations decreased $40,503,000 or approximately 49.6% to $41,030,000 in the year ended September 30, 2001. The decrease is primarily attributable to the sale of it's Citgo, Texaco, Diamond Shamrock, and Phillips 66 accounts in the Texas Petroleum Marketing Segment, nine company operated convenience stores in it's Texas Convenience Store Segment, and the sale of it's Louisiana Operations Segment (now classified as Discontinued Operations). Consolidated gross profit from continuing operations declined $3,520,000 or approximately 40.8 % to $5,107,000 in the year ended September 30, 2001. Gross profit expressed as a percentage of revenues ("Gross Margin") increased to approximately 12.4% of sales in 2001 from approximately 10.6% of sales in 2000. The increase in gross margin in 2001 is mainly attributable to margin increases realized in Texas Petroleum Marketing and Texas Convenience Store Segment with a lesser decline in Environmental margins. See segment discussions below.
Consolidated operating expenses declined $5,071,000 or approximately 44.3% in 2001 to $6,355,000. The decrease in operating expenses were mainly attributable to savings related to personnel reductions of $1,518,000, general and administrative expense cost cuts of $628,000, depreciation of $450,000, other expense reductions of $1,432,000 and a $1,043,000 reduction of expenses related to the gain on sale of assets.
Consolidated operating losses decreased $1,551,000 to $1,248,000 in 2001 as compared with a loss of $2,799,000 in 2000.
Consolidated loss from continuing operations decreased to $2,013,000 in 2001 as compared to $5,297,000 in 2000. Loss from continuing operations in 2001 includes 689,000 in interest expense. Loss from continuing operations in 2000 includes an $802,000 valuation allowance on ChemWay net assets transferred (following the guidance under SAB Topic 5:E) and $1,701,000 in interest expense.
Consolidated net loss decreased $3,256,000 to $2,746,000 in 2001 as compared to a net loss of $6,002,000 in 2000.
TEXAS PETROLEUM MARKETING SEGMENT
Revenues in the Texas Petroleum Marketing Segment decreased $27,285,000 or approximately 49.7% to $27,525,000 in 2001, as compared with $54,810,000 in 2000. Sales in gallons declined to 17,698,000 gallons in 2001 from 40,158,000 gallons in 2000, a decline of approximately 55.9%. Average selling price per gallon increased in 2001 to approximately $1.52 per gallon, as compared with $1.34 per gallon in 2000. The increase is due to nation wide cost increases in 2001 that pressured higher selling prices per gallon.
Gross Profit in 2001 declined to $2,294,000 from $3,747,000 in 2000, a decline of $1,453,000 or approximately 38.7%. Gross Margin increased to approximately 8.3% of sales in 2001 from approximately 6.8% of sales in 2000.
Operating expenses in 2001 declined to $2,027,000 from $4,340,000 in 2000, a decline of $2,313,000 or approximately 53.2%. The reduced expenses resulted from the company's implementation of programs started in 1999 to reduce staff, a $158,000 savings, cut overhead, a $957,000 savings, other expense reductions of $374,000, decreased depreciation expense of $244,000, and increased gain of sale on assets of $580,000.
Operating gain in 2001 of $266,000 increased from a loss of $593,000 in 2000, a change of $859,000 or approximately a 144.8% improvement, as a result of the expense reductions described above.
TEXAS CONVENIENCE STORE SEGMENT
At September 30, 2001, the Company operated 8 convenience stores, featuring self-service motor fuels and a variety of food and non-food merchandise. One of the Company's convenience stores is co-branded with a nationally recognized fast food franchise and four have company food service operations. The Company's stores are located in smaller communities throughout the gulf coast region of Texas.
Total sales decreased $12,719,000 or approximately 50.3% in 2001 to $12,543,000 from $25,262,000 in 2000. Fuel sales in 2001 were $7,379,000 as compared with $15,361,000 in 2000; fuel sales in gallons declined in 2001 to 5,017,000 gallons as compared with 10,869,000 gallons in 2000. Merchandise sales decreased $4,729,000 to $4,814,000 as compared with $9,543,000 in 2000. Average selling price per gallon increased in 2001 to approximately $1.47 per gallon, as compared with $1.41 per gallon in 2000. The increase is due to nation wide cost increases in 2001 that pressured higher selling prices per gallon.
Gross profit declined to $2,238,000 in 2001 as compared with $4,080,000 in 2000. Gross Margin in the Texas Convenience Store segment increased in 2001 to approximately 17.8% as compared with approximately 16.1% in 2000. Merchandise Gross Margin decreased in 2001, to approximately 24.6% of sales, as compared to approximately 28.4% of sales in 2000. Fuel Gross Margin increased to approximately 9.5% during 2001, as compared with approximately 6.6% during 2000.
Operating expenses during 2001 in the Texas Convenience Store segment was $2,695,000 as compared with $4,830,000 in 2000, a decrease of $2,135,000 or approximately 44.2%.
The Convenience Store segment incurred an operating loss of $457,000 in 2001, as compared with a loss of $751,000 in 2000. The decreased loss is attributable to expense reductions exceeding the decline in gross profit by $293,000 in 2001 compared to 2000.
EDCO ENVIRONMENTAL SEGMENT
EDCO Environmental reported an operating profit of $19,000 in the year ended September 30, 2001, as compared with $227,000 in 2000. The decrease is primarily attributable to a $224,000 decrease in gross profit. EDCO Environmental will continue to focus its attention on environmental remediation projects that 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.
UNALLOCATED GENERAL AND ADMINISTRATIVE EXPENSES
Unallocated general and administrative expenses declined $606,000 in 2001, to $1,076,000 as compared with $1,682,000 in 2000.
DISCONTINUED - LOUISIANA OPERATIONS
The company sold substantially all of the assets of Evans Oil of Louisiana Inc. on May 17, 2001 and discontinued its Louisiana operations. The results of the Louisiana operations have been classified as discontinued operations and prior periods have been restated in the accompanying financial statements.
2000 COMPARED WITH 1999
Consolidated revenues from continuing operations increased $6,954,000 or approximately 9.3% to $81,533,000 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 $1,510,000 or approximately 14.9% to $8,627,000 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 declined $1,417,000 or approximately 11.0% in 2000 to $11,426,000. The decrease in operating expenses were mainly attributable to savings related to personnel reductions $1,187,000, general and administrative expense cost cuts of $406,000, depreciation of $84,000, other expense reductions of $117,000 and a $377,000 additional expense related to the loss on sale of assets.
Consolidated operating losses increased $93,000 to $2,799,000 in 2000 as compared with a loss of $2,706,000 in 1999. The company made significant expense reductions in 2000; however, the decline in margins nullified the benefits of expense reductions.
Consolidated loss from continuing operations decreased to $5,297,000 in 2000 as compared to $7,008,000 in 1999. Loss from continuing operations in 2000 includes an $802,000 valuation allowance on ChemWay net assets transferred (following the guidance under SAB Topic 5:E) and $1,701,000 in interest expense. Loss from continuing operations in 1999 includes a $784,000 valuation allowance on ChemWay net assets transferred (following the guidance under SAB Topic 5:E) and $1,802,000 in interest expense.
Consolidated net loss decreased $1,299,000 to $6,002,000 in 2000 as compared to a net loss of $7,301,000 in 1999.
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 with $1.13 per gallon in 1999. The increase is due to nation wide cost increases in 2000 that 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 $4,340,000 from $5,414,000 in 1999, a decline of $1,074,000 or approximately 19.9%. 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 $122,000 savings, other expense reductions of $73,000,decreased depreciation expense of $107,000 and a $314,000 additional charge related to a reduced gain on sale of assets in 2000 from 1999.
Operating loss in 2000 decreased to $593,000 from $1,013,000 in 1999, a decrease of $420,000 or approximately a 41.5% improvement, as a result of the expense reductions described above.
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 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 that pressured higher selling prices per gallon.
Gross profit declined to $4,079,000 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 $4,830,000 as compared with $4,784,000 in 1999, an increase of $46,000 or approximately 0.9%.
The Convenience Store segment incurred an operating loss of $751,000 in 2000, as compared with a loss of $16,000 in 1999. The increased loss is due to declining margins in fuel and merchandise sales created by a highly competitive market.
EDCO ENVIRONMENTAL SEGMENT
EDCO Environmental reported an operating profit of $227,000 in the year ended September 30, 2000, as compared with $177,000 in 1999. The increase is primarily attributable to a $158,000 reduction in operating expenses partially offset by a reduction in gross profit margins. EDCO Environmental will continue to focus its attention on environmental remediation projects that 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.
UNALLOCATED 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 that 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.
DISCONTINUED - LOUISIANA OPERATIONS
The company sold substantially all of the assets of Evans Oil of Louisiana Inc. on May 17, 2001 and discontinued its Louisiana operations. The results of the Louisiana operations have been classified as discontinued operations and prior periods have been restated in the accompanying financial statements.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $604,000 and $725,000 at September 30, 2001 and 2000, respectively. The Company had a net working capital deficit of $9,000,000, as compared with a deficit of $13,153,000 at September 30, 2000. The Company has been operating under a working capital deficit for 3 years. Cash used by operating activities was $2,217,000 and $671,000 in the years ended September 30, 2001 and 2000, respectively.
In the Fourth Quarter of 2000, The Company began implementation of a strategy to reduce debt by selling certain identified assets. . As a part of downsizing the Company has reduced it's staff from 197 to 84 at September 30, 2001. The Company has determined that it is unlikely the Company's revenues will increase in the foreseeable future in an amount sufficient to offset its operating expenses without a sufficient working capital infusion. In order to continue as a going concern, management believes the Company must obtain a capital infusion of either equity or debt in amounts sufficient to reduce its current outstanding debts and provide additional working capital to expand it's operations or it must continue to sell its assets. Management is currently holding talks with several potential lending institutions to replace its existing bank debt with new financing. There can be no assurance that management's plans as described above will be successful.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which establishes new accounting and reporting standards for business combinations. The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The Company has not entered into, and is not expected to enter into, any material business combinations, as defined by SFAS No. 141. At September 30, 2001, the Company did not have goodwill or other intangible assets, as defined by SFAS No. 142. Therefore, management believes there would be no material effect to the Company's financial statements as a result of implementation of these statements.
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 1,500,000 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 (see Note 3). Management is presently evaluating all strategic alternatives relating to the recently reclaimed assets
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has restated previously reported financial results for fiscal year 2000 and 1999 to give effect to the application of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 5:E, Accounting for Divestiture of a Subsidiary or Other Business Operation, for the sale of ChemWay to Affiliated Resources Corporation (Note 3). After reviewing the guidance we realized that the sale of ChemWay, although a divestiture for legal purposes, was not a divestiture for accounting purposes. The financial statements of the Company as of September 30, 1999 were originally audited by PricewaterhouseCoopers LLP. Their report on the 1999 financial statements was before the restatement and included uncertainty language concerning the Companies ability to continue as a going concern. PricewaterhouseCoopers LLP has declined to audit the 1999 restated financial statements after the effects of the application of SAB Topic 5:E were recorded. To meet the disclosure requirements and avoid the cost of reauditing the 1999 financial statements the Company has elected to present the 1999 restated financial statements as unaudited in the accompanying consolidated financial statements. Since PricewaterhouseCoopers LLP has declined to reissue their reports the 1998 financial statements, although they have not been revised are also labeled as unaudited. The Company's decision to engage Stephenson & Trlicek, P. C. to audit the 2000 financial statements preceded the change in accounting for the sale of ChemWay and was approved by the Audit Committee and Board of Directors. We have discussed the restatement of the financial statements with our prior auditors, Audit Committee and the Board of Directors. The Company's current auditor's have issued an audit report on the 2000 restated financial statements and 2001 financial statements.
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 62 Executive Officer
Peter J. Losavio, Jr. Vice Chairman of the Board 60
Darlene N. Jones Director, Secretary and Treasurer 43
Charles N. Way Director, and Controller 59
Matt Hessions Director 50
Jerry L. Evans, Jr. Vice President of Corporate Relations and 36 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.
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 veteran 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.
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. Mr. Way resigned as a director on 10/21/01 and was laid off on November 14, 2001 due to the downturn in business.
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 County 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. Mr. Evans was laid off on November 14, 2001due to the downturn in business.
There are no family relationships between any directors and executive officers of the Company except that Jerry L. Evans, Jr. and Darlene E. Jones are Jerriel L. Evans, Sr. son and daughter, respectively.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended September 30, 2001 ("Fiscal 2001"), the Company's Board of Directors formally met on six 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 2001. 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 and Matt Hession, 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 2001.
The Company's Audit Committee, which is comprised of Matt Hession (Chairman) and Peter J. Losavio, 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 two occasions during Fiscal 2001.
COMPENSATION OF DIRECTORS
During Fiscal 2001, 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 March 2001, the Company granted members of the Board of Directors options to acquire an aggregate of 595,000 shares at $0.156 per share.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended September 30, 2001,2000,and 1999, 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, 2001 who received compensation of at least $100,000 during the Fiscal 2001 (collectively, the "Named Officers").
SUMMARY COMPENSATION 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 11 to the Consolidated Financial Statements, included herein. The amounts included in Other Annual Compensation are $48,000, $51,600, and $54,300 for the years 2001, 2000, and 1999 respectfully
III. Mr. Evans was granted 800,000 shares of the company's common stock on March 22, 2001 in payment of accrued commissions due of $160,000 included as Other Annual Compensation for 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning Options/SARs granted during Fiscal 2001 to the Named Officers.
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 March 22, 2001, for Mr. Evans to serve as President and Chief Executive Officer of the Company through September 30, 2004. The agreement provides for an annual base salary of $150,000 per year. The agreement provides that a 500,000 share stock option be granted to Mr. Evans with vesting of 200,000 occurring on March 22, 2001, and 300,000 vesting in equal monthly amounts over the three year term of the employment contract or 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.
ITEM 12.
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, 2001, 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.
* less than 1%
1. Unless otherwise indicated, the address of each beneficial owner is c/o the Company, Post Office Box 2480, Bay City, Texas 77404-2480. 2. 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. 3. 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. 4. The general partner is J.L. 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. 5. Includes 752,000 shares held by J.L. Evans Systems, Ltd., of which Mr. Evans claims beneficial ownership. Includes 575,000 shares issuable upon the exercise of options. 6. Includes 752,000 shares held by J.L. Evans Systems, Ltd., of which Mrs. Evans claims beneficial ownership. 7. Includes 37,000 shares issuable to Mr. Way upon the exercise of options. 8. Includes 35,000 shares issuable to Mrs. Jones upon the exercise of options. 9. Includes 37,000 shares issuable to Mr. Evans Jr. upon the exercise of options. 10. Includes 20,000 shares issuable to Mr. Losavio upon the exercise of options. 11. Includes 17,500 shares issuable to Mr. Hession 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 2001
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2001, 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 two 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. However, the Company is making monthly rental payments of $1,500 under a month to month rental agreement. The amounts paid under these leases were $48,000, $51,600, and $54,300 for the years ended September 30, 2001, 2000 and 1999, respectively. Future minimum lease commitments as of September 30, 2001 are $22,500.
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, 2001 and 2000. The Company has also issued various stock options to directors, officers and key employees.
ITEM 14.
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.
(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, 2001.
EVANS SYSTEMS, INC. Index to Consolidated Financial Statements September 30, 2001, 2000 and 1999 - ---------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Evans Systems, Inc.
We have audited the accompanying consolidated balance sheets of Evans Systems, Inc. and its subsidiaries at September 30, 2001 and 2000 and the related consolidated statement of operations, stockholders' equity and comprehensive income, and cash flows for the years 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 are unaudited.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.
In our opinion, the 2001 and 2000 financial statements referred to above present fairly, in all material respects, the financial position of Evans Systems, Inc. at September 30, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 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 are described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Stephenson and Trlicek, P. C.
Wharton, Texas December 28, 2001
EVANS SYSTEMS, INC. Consolidated Balance Sheets September 30, 2001 and 2000 - ---------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Operations Years Ended September 30, 2001, 2000 and 1999 - ---------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Cash Flows Years Ended September 30, 2001, 2000 and 1999 - ---------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Stockholders' Equity Years Ended September 30, 2001, 2000 and 1999 - ---------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Notes to Consolidated Financial Statements September 30, 2001, 2000 and 1999 - ---------------------------------
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 to open dealer accounts are recognized when delivered. Revenues from motor fuel sales and retail sales at convenience stores are recognized when sold at the store. Environmental segment revenues are recognized on the percentage of completion method. There was no material work in process at September 30, 2001, 2000 and 1999. 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 $68,000 and $368,000 less at September 30, 2001 and 2000 than replacement cost.
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 5 -15 years Transportation equipment 5 -10 years Office equipment 3 - 7 years
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
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.
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, which reflects 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 2001, 2000 and 1999 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.
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.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which establishes new accounting and reporting standards for business combinations. The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The Company has not entered into, and is not expected to enter into, any material business combinations, as defined by SFAS No. 141. At September 30, 2001, the Company did not have goodwill or other intangible assets, as defined by SFAS No. 142. Therefore, management believes there would be no material effect to the Company's financial statements as a result of implementation of these statements.
RECLASSIFICATIONS AND FINANCIAL STATEMENTS PRESENTED
Certain reclassifications have been made to the 1999 and 2000 financial statements to conform to the 2001 financial statement presentation. Such reclassifications had no effect on net loss as previously reported. Disclosures herein relating to the 1999 financial statements are unaudited.
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 obtain adequate financing in order to close the sale, 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 mutually agreed to terminate the Merger Agreement on May 19, 2000 due to I-Net's inability to timely raise sufficient capital and the Company's need to focus on closing the TSC transaction. Further, both I-Net and the Company mutually agreed to 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.
3. DISCONTINUED OPERATION AND NET ASSETS TRANSFERRED UNDER CONTRACTUAL AGREEMENT
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.
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 shareholders of the Company, having purchased 350,000 common shares of the Company for $0.75 per share in a private placement transaction on October 27, 1998 (Note 9). At the time of the sale, management believed that the sale to Affiliated
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
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.
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 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.
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. As a provision of the Purchase Agreement, the Company maintained the right to Put the 1.5 million shares at $4 per share if Affiliated did not pay off certain ChemWay indebtedness, or obtain the Company's release from its guarantee of that indebtedness, secure financing in the amount of $1,500,000 and perform its other obligations under the Purchase Agreement. Due to Affiliated's inability to comply with all the conditions set forth in the Purchase Agreement and their further inability to achieve viability or sufficient independent financing, the Company's most substantive right was its security interest in the ChemWay assets and all accretions. Further, under the terms of the Purchase 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.
Following the guidance provided by the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 5:E, the Company has determined that although a legal transfer of business ownership of ChemWay to Affiliated has occurred, guidance under SAB Topic 5:E reflects that a divestiture for accounting purposes should not be recognized. Under SAB Topic 5:E, the existence of the put agreement precluded sale accounting due to the contingent nature of the consideration received, as the value of the Affiliated common shares received was essentially secured with the ChemWay assets. Had the put agreement been relinquished, sale accounting would have applied to this transaction. If the put was exercised by the Company and Affiliated was unable to satisfy its obligations under the put, the assets would likely be relinquished to the Company. Accordingly, the assets and liabilities of ChemWay have been segregated in the consolidated balance sheet as "Net assets transferred under contractual agreement". Under SAB Topic 5:E, accounting for this transaction is similar to the equity method of accounting prescribed under APB No. 18, in that the net assets of ChemWay are accounted for as a single line item and impairment is recognized based on the results of its operations. Under SAB Topic 5:E, any operating losses of ChemWay would be the best available evidence of a change in valuation of the business. Accordingly, the Company has recorded a valuation allowance during 2000 and 1999 based on management's analysis of internal reports of ChemWay's operating performance by Affiliated during those respective years. During 2000 and 1999, the Company recorded $802,000 and $784,000, respectively, as a valuation allowance on the net assets transferred under contractual agreement. Further, although the Company was legally
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
released from all the liabilities of ChemWay totaling $1,997,000, SAB Topic 5:E does not allow the Company to reflect such debt release or any gain recognition in the financial statements as the risks of ownership under SAB Topic 5:E are not transferred unless the Put agreement was relinquished.
In addition, the 1.5 million shares of Affiliated common stock and the additional 1 million shares received in December 1999 are not reflected on the Company's financial statements as they are effectively collateral held for payment under SAB Topic 5:E. Accordingly, the Company has not reflected the investment in or changes in market value of the Affiliated common stock. The closing price of Affiliated common stock was $0.406, $0.266, $0.265 and $6.00 at September 30, 2000, December 30, 1999, September 30, 1999 and December 31, 1998, respectively.
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 1,500,000 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. Management is presently evaluating all strategic alternatives relating to the assets received by deed in lieu of foreclosure.
In connection with this transaction and to protect the assets received, the Company assumed the outstanding debt of $506,860 on a warehouse building received under the Stipulated Judgment and Deed in Lieu of Foreclosure. The note bears interest at 14.9% for 15 years and calls for monthly principal and interest payments of $7,103. The note is secured by the warehouse building.
In accordance with SAB Topic 5:E, the ChemWay assets returned on December 4, 2000 are reflected as a reclassification of net assets transferred under contractual agreements of $1,628,000 ($2,134,860 in net property and equipment less $506,860 in notes payable) to their respective financial statement captions. Accordingly, the $506,860 note payable assumed by the Company was reclassified as long-term debt payable and the remaining net asset value of $2,134,860 was reclassified to property and equipment. No gain or loss was recognized on the exchange of certain ChemWay assets for the Affiliated common stock held by the Company. No other liabilities of ChemWay or Affiliated were assumed or are the responsibility of the Company.
The following summarizes the net assets transferred and valuation allowance charges (in thousands):
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
4. DISCONTINUED OPERATIONS OF EVANS OIL OF LOUISIANA
On May 17, 2001, the Company closed on the sale of substantially all the assets and inventory of Evans Oil of Louisiana (EOLA) for total cash, net of closing costs, of $1,152,000 and discontinued its Louisiana operations. The assets and inventory sold had a net book value of approximately $806,000 and $259,000, respectively, on May 17, 2001. The Company recorded a net gain on the sale of discontinued operations of approximately $87,000. The proceeds of the sale were used to reduce outstanding debt. The results of operations of EOLA have been classified as discontinued operations and prior periods have been restated. The Company has not allocated interest expense or general corporate overhead to discontinued operations. The otherwise tax liability from this transaction is offset by net operating loss carryforwards of the Company generated from previous years losses. Accordingly, no provision has been recorded. Summary operating results for the year ended September 30, 2001, 2000 and 1999 are as follows (in thousands):
* Through May 17, 2001
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30 (in thousands):
During the first quarter of 2001, the Company closed on the sale of some of its Citgo, Texaco (Motiva) and Diamond Shamrock dealer and consignment accounts. Net proceeds from the sale of the Citgo, Texaco and Diamond Shamrock dealer and consignment accounts approximated $194,000, $642,000 and $450,000, respectively, which were used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $587,000, inclusive of a $159,000 net gain on the sales of the distribution contracts. The net book value of the assets sold approximated $699,000, which consisted primarily of store equipment and fuel dispensing equipment and tanks at the respective dealer and consignment locations.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
During February 2001, the Company closed on the sale of its Phillips 66 dealer and consignment accounts. Net proceeds from the sale of the Phillips 66 dealer and consignment accounts approximated $556,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $238,000, inclusive of a $75,000 gain on the sale of the distribution contract. The net book value of the assets sold approximated $318,000, which consisted primarily of store equipment and fuel dispensing equipment and tanks at the dealer and consignment locations.
During the second quarter of 2001, the Company closed on the sale of three independent dealer and consignment accounts. Net proceeds from the sale of the independent dealer and consignment accounts approximated $178,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $8,000. The net book value of the assets sold approximated $170,000, which consisted primarily of store equipment and fuel dispensing equipment and tanks at the dealer and consignment locations.
During the second quarter of 2001, the Company also closed on the sale of six company operated stores for total net proceeds of approximately $2,574,000, which were used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sale of approximately $201,000. The net book value of the assets sold approximated $2,373,000, inclusive of $225,000 in fuel and retail inventory.
During the third quarter of 2001, the Company closed on the sale of one company operated store and one store previously leased to others for total proceeds, net of closing costs, of approximately $1,063,000, which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $22,000 during the third quarter of 2001. The net book value of the assets sold approximated $1,041,000, inclusive of $76,000 in inventory.
During the fourth quarter of 2001, the Company closed on the sale of one company operated store for total proceeds, net of closing costs, of approximately $595,000 which was used for working capital and to reduce the Company's outstanding debt. The Company recorded a net gain on the sales of approximately $40,000 during the fourth quarter of 2001. The net book value of the assets sold approximated $555,000.
The following summarizes the Company's sales of assets during the year ended September 30, 2001 (in thousands):
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
During fiscal 2000, the Company sold various store and transportation equipment for total proceeds of $404,000. The store and transportation equipment sold had an aggregate net book value of $441,000 and the Company recorded a $37,000 loss on the sale of fixed assets for the year ended September 30, 2000.
6. LONG-TERM DEBT
Long-term debt is summarized as follows at September 30 (in thousands):
As of September 30, 2001, principal maturities of long-term debt, after consideration of the defaults described below, are as follows (in thousands):
On March 31, 1999, the Company amended its credit agreement with its primary lender (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
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
terms of the Refinancing, such bank lender received a first-lien position on substantially all the assets of the 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.
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 primary 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 extended the maturity of its loan balance to January 31, 2001.
In December 2000, the Company and its primary lender reached a workout agreement (the Workout Agreement) whereby the total debt due to this bank at December 31, 2000 of approximately $8,970,700 plus accrued interest and penalties of $1,113,600 would be restructured to terms that call for the payment of $7.5 million on or before June 15, 2001 in full satisfaction of all amounts due to this bank. Under the terms of the Workout Agreement, sales of Company assets, including the sales of Evans Oil of Louisiana, certain Texas C-stores and sales of certain Texas Petroleum Marketing Supply contracts, will be used to pay the $7.5 million. The Workout Agreement further states that should the June 15, 2001 deadline not be met, $8.5 million will be due on or before August 15, 2001. The Workout Agreement also provides that should the August 15, 2001 deadline not be met, all the outstanding principal, accrued interest and penalties due to this lender will become due.
On May 16, 2001, the Company accepted a commitment from Advisco Capital Corp. (ACC) to make available to the Company an $8.8 million secured term loan and secured revolving credit facility (the Financing). The Financing would bear an interest rate of 1.25%, payable monthly for a term of two years, with an option to renew for an additional 1 year. Funding of the loan was subject to the completion and satisfaction, to ACC's approval, of certain requirements and covenants of the Financing. Those requirements and covenants included, but were not limited to, the submission of a Business Plan by the Company, evidence of compliance with all government agencies having jurisdiction, and submission of a workout plan with the Company's unsecured creditors, requiring such unsecured creditors to agree to have their claims paid in accordance with terms and conditions satisfactory to ACC and forbear from taking any action against the Company provided their obligations are paid as agreed. In September 2001, the Financing agreement was mutually terminated by the Company and ACC due to the inability of the Company and ACC to close the loan prior to the August 15, 2001 workout agreement deadline with the Company's primary lender.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
As the Company was unable to comply with the conditions of the Workout Agreement subsequent to August 15, 2001, and as the bank has not extended the Workout Agreement past August 15, 2001, all of the outstanding debt due to this bank approximating $4,747,000 has been classified as current at September 30, 2001. The Company also has accrued interest and penalties of $1,027,000 as of September 30, 2001 due to this bank. The Company is currently holding talks with the bank regarding the outstanding principal, interest and penalties; however, no formal agreements or additional workout terms have been agreed upon and there can be no assurance that such agreements will be realized or successful.
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. As of September 30, 2001, both of these notes payable were repaid in full from proceeds on the sale of the Company's former corporate office building and other asset sales.
Management is currently holding talks with several potential lending institutions to replace its existing bank debt with new financing. However, there can be no assurance that such agreements or new financing will be realized or successful.
7. 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 $1,312,000 and $1,098,000 at September 30, 2001 and 2000, respectively.
Future minimum lease payments under capital lease obligations as of September 30, 2001 are as follows (in thousands):
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, 2001 has been classified as current portion of obligations under capital leases on the accompanying consolidated balance sheet at September 30, 2001.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
8. INCOME TAXES
Income taxes are attributable to the following (in thousands):
The difference between the tax effect of net income (loss applied at the statutory federal income tax rates is as follows (in tho
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
The provision for (benefit from) income taxes consists of the following (in thousands):
Deferred tax assets (liabilities) are comprised of the following (in thousands) at September 30:
At September 30, 2001, the Company had regular tax net operating loss carryforwards from continuing operations of $16.4 million available for federal income tax purposes that expire through 2021 and capital loss carryforwards of $7.7 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.
9. OPERATING LEASES
The Company leases seven convenience store locations and one other facility under operating lease agreements with varying lives and terms. One of these leases is with a related party (Note 11).
At September 30, 2001, the scheduled future minimum lease payments required under the terms of the operating leases in effect are (in thousands):
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
The Company also rents two stores on a month-to-month basis from unrelated parties. Rents paid for these stores totaled $34,000 as of September 30, 2001. The Company also rented one store on a month-to-month basis from a related party (Note 11).
The Company has 5 subleases. Minimum rentals to be received in the future under these noncancelable subleases totaled $176,600 as of September 30, 2001.
10. 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 and 1999, -0- and 62,813, respectively, of such warrants were exercised. At September 30, 2000, there were no warrants outstanding to purchase shares.
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 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 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 (Note 3). 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. During fiscal 2000, the redemption provision on those shares expired. Accordingly, the Company recorded the reclassification of those shares into stockholder's equity as "Expiration of redeemable common stock" on the accompanying statement of stockholder's equity.
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, of which 5,000 options expired during 2001.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
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 12,900 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 during 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 of which 5,000 options expired in 2001.
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, of which 3,000 have subsequently expired and 36,000 shares are vested. All options granted in 2000 are nonqualifying options and are not covered by the current stock option plan.
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.
In March 2001, the Company granted certain members of the Board of Directors options to acquire an aggregate of 5,000 shares at $0.156 per share.
In March 2001, the Board of Directors agreed to issue ten-year options to various officers and key employees of the Company aggregating 285,000 shares of common stock at $0.156 per share, with all shares vesting immediately. All options granted in 2001 are nonqualifying options and are not covered by a current stock option plan.
On March 22, 2001, the Board of Directors of the Company granted the Chief Executive Officer (CEO) and Chairman of the Board 1,117,500 shares of the Company's common stock in line with the terms of an Employment Agreement dated October 1, 1998. Of the 1,117,500 shares granted, 800,000 shares were granted as payment of accrued commissions due the CEO of approximately $160,000. The remaining 317,500 shares were granted as payment of accrued deferred salaries due the CEO of approximately $63,500. All shares were granted at an effective price per share of $.20. The Company recorded additional paid-in capital of $211,000. The closing price of the Company's stock on March 22, 2001 was $.156 per share.
On March 22, 2001, the Board of Directors of the Company approved a new employment agreement for the CEO and Chairman of the Board. As stipulated in the employment agreement, the Board of Directors granted a 5 year stock option to the CEO for 500,000 shares of common stock, with 200,000 shares vesting immediately at the market value of the stock ($.156 per share at March 22, 2001) and the remaining 300,000 shares vested in equal monthly amounts of the Company's common stock over the three year term of the employment agreement. The options granted are nonqualifying options and are not covered by the current stock option plan.
On September 17, 2001, the Company issued Strategic Group, a financial advisor group, 100,000 shares of the Company's common stock at the then market price as payment in full for financial
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
services rendered to the Company. The price of the Company's common stock was $.14 per share on September 17, 2001. Accordingly, the Company recorded professional fees of $14,000 in connection with the common stock issuance.
A summary of the option activity under the various plans follows:
Although 970,600 options are outstanding at September 30, 2001, only 13,600 underlying common shares are registered under a plan. A summary of options outstanding and options exercisable at September 30, 2001 is as follows:
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
The weighted average fair value at date of grant for options granted during 2001, 2000 and 1999 are as follows:
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):
The fair value of the options granted is estimated using the Black-Scholes option-pricing model with the following assumptions for 2001: no dividend yield, volatility of 91%, risk-free interest rate of 4.5% to 4.7% and an expected life of 4 to 7 years. For 2000, the following assumptions were used: 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.
11. RELATED PARTY TRANSACTIONS
During 2001, 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 two additional five-year periods. 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. However, the Company is making monthly rental payments of $1,500 under a month-to-monthly rental agreement. The amounts paid under these leases were $48,000, $51,600 and $54,300 for the years ended September 30, 2001, 2000 and 1999, respectively. Future minimum lease commitments as of September 30, 2001 are $22,500.
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, 2001 and 2000. The Company has also issued various stock options to directors, officers and key employees (see Note 10).
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
12. CONTINGENT LIABILITIES
The Company is subject to litigation, primarily as a result of customer claims, in the ordinary conduct of its operations. As of September 30, 2001, the Company had no knowledge of any legal proceedings, which, by themselves, or in the aggregate, would not be covered by insurance or could be expected to have a material adverse effect on the Company.
13. 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. No company matching contributions were made during the year ended September 30, 2001. The Company recorded contributions of $28,000 and $61,000 during fiscal 2000 and 1999, respectively.
14. RESULTS OF OPERATIONS, LIQUIDITY AND MANAGEMENT'S PLANS
During the three years in the period ended September 30, 2001, the Company has recorded operating losses from continuing operations aggregating $14.3 million and net losses aggregating $16.0 million. At September 30, 2001, the Company has a working capital deficit of $9.0 million and a stockholders' deficit of $1,205,000. In addition, the Company is in default on various loans with certain lenders (Note 6).
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.
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 2000. Management plans to continue its Chevron and Exxon branded company operated stores and dealer locations.
Management is currently holding talks with several potential lending institutions to replace its existing bank debt with new financing.
The Company has determined, based upon review of the Company's historical operating performance, that it is unlikely that the Company's revenues will increase in the foreseeable future in an amount sufficient to offset its operating expenses without continued downsizing and a capital infusion. In order to continue as a going concern, management believes the Company must continue to sell its assets and obtain a capital infusion of either equity or debt in amounts sufficient to reduce its current outstanding debts and provide additional working capital. There can be no assurance that management's plans as described above will be successful.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
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. As described in Note 4, the Company discontinued its Louisiana Operations and has reflected such operations as discontinued operations. Prior periods have been restated. The environmental remediation services segments serves the petroleum industry in the southeast Texas market area.
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 were to third parties; that is, at current market prices.
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Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
Information concerning the Company's business activities is summarized as follows (in thousands):
(1) Consists primarily of corporate overhead expenses and unallocated corporate assets. Corporate assets include discontinued operations, income tax assets and corporate property and equipment.
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
A reconciliation of the Company's segment operating information to consolidated loss from continuing operations before income taxes is as follows (in thousands):
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data is summarized as follows (in thousands, except for per share amounts):
Evans Systems, Inc. Notes to Consolidated Financial Statements--(Continued) September 30, 2001, 2000 and 1999 - ---------------------------------
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 14, 2002
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:
/s/ J.L. Evans, Sr. /s/ Peter J. Losavio, Jr. - ----------------------------- --------------------------- Jerriel L. Evans, Sr., Peter J. Losavio, Jr., January 14, 2002 January 14, 2002 Chairman of the Board and Director Chief Executive Officer
/s/ Darlene E. Jones /s/ Matt Hessions - ----------------------------- --------------------------- Darlene E. Jones, Matt Hessions, January 14, 2002 January 14, 2002 Secretary, Treasurer and Director Director
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL 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, 19921. 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.
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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 10.33 Stipulated Judgment dated December 1, 2000 in the District Court of Matagorda, Texas, 130th Judicial District 10.34 Deed in Lieu of Foreclosure dated September 26, 2000 by and between ChemWay, Inc., Way Energy, Inc. and Evans Systems, Inc. *21.0 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 & Trlicek, P. C. included herein.
*Filed herewith.