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As Filed with the Securities and Exchange Commission on August 14, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarter ended June 30, 2002
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-21956
EVANS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1613155
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification number)
102 South Mechanic, P.O. Box 550, El Campo, Texas 77437 (979) 245-2424
(Address including zip code and telephone number, including area code,
of registrant's Principal Executive Offices)
Blair R. Couey, President
102 South Mechanic, P.O. Box 550, El Campo, Texas 77437
(979) 245-2424
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
1625 Highway 60, Bay City, Texas 77414
(Former name or former address, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Number of shares of common stock of registrant outstanding exclusive of treasury
shares or shares held by subsidiaries of the registrant at August 13, 2002 were
9,844,831.
EVANS SYSTEMS, INC.
INDEX
Part I. Financial Information
Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets as of
June 30, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Income for the
Nine Months Ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2002 and 2001 6
Notes to the Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Part II. Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 30
2
PART I. FINANCIAL INFORMATION
EVANS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
June 30, September 30,
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 233 $ 604
Trade receivables, net of allowance for doubtful
accounts of $103,000 and $73,000, respectively 913 937
Inventory 562 1,155
Prepaid expenses and other current assets 117 270
-------- --------
Total current assets 1,825 2,966
Property and equipment, net 4,419 8,258
Other assets 230 182
-------- --------
Total assets $ 6,474 $ 11,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,701 $ 4,992
Current portion of long-term debt 387 4,943
Current portion of obligations under capital leases -- 790
Accrued interest 1 1,277
-------- --------
Total current liabilities 2,089 12,002
Long-term debt, net of current portion 5,246 609
Obligations under capital leases, net of current portion -- --
-------- --------
Total liabilities 7,335 12,611
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares
authorized, 9,844,831 and 6,759,831 shares
issued and outstanding, respectively 99 68
Additional paid-in capital 17,193 17,074
Accumulated deficit (17,719) (17,913)
Treasury stock, 72,589 shares, at cost (434) (434)
-------- --------
Total stockholders' equity (861) (1,205)
-------- --------
Total liabilities and stockholders' equity $ 6,474 $ 11,406
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
Evans Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended June 30,
2002 2001
--------- ---------
Revenues:
Motor fuel sales $ 6,147 $ 8,201
Other sales and services 564 1,203
--------- ---------
Total revenues 6,711 9,404
Cost of sales
Motor fuel 5,798 7,553
Other sales and services 419 779
--------- ---------
Total cost of sales 6,217 8,332
--------- ---------
Gross profit 494 1,072
Operating expenses:
Employment expenses 462 660
Other operating expenses 200 227
General & administrative expenses 269 310
Depreciation and amortization 122 238
(Gain) loss on sale of assets (14) (38)
--------- ---------
Total operating expenses 1,039 1,397
--------- ---------
Operating loss (545) (325)
Other income (expense)
Interest expense, net (2) (110)
Other, net 1 30
--------- ---------
Total other income (expense) (1) (80)
--------- ---------
Income (loss) before income taxes (546) (405)
Provision for income taxes -- --
--------- ---------
Income (loss) from continuing operations
before discontinued operations and extraordinary items (546) (405)
Discontinued operations:
Loss from discontinued operations of Evans Oil
of Louisiana to May 17, 2001 (Note C) -- (197)
Gain on disposal of Evans Oil of Louisiana, net
of taxes of $0 -- 87
--------- ---------
Total discontinued operations -- (110)
--------- ---------
Extraordinary gain (loss) on restructuring transactions
Gain on extinguishments of debts (Note B) 4,234 --
Loss on conveyance of assets (Note B) (2,435) --
--------- ---------
Net extraordinary gain on restructuring transactions 1,799 --
--------- ---------
Net income (loss) $ 1,253 $ (515)
========= =========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.08) $ (0.06)
Discontinued operations -- (0.02)
Extraordinary items 0.26 --
--------- ---------
Earnings (loss) per common share $ 0.18 $ (0.08)
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
Evans Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Nine Months Ended June 30,
2002 2001
--------- ---------
Revenues:
Motor fuel sales $ 16,460 $ 27,743
Other sales and services 2,612 5,175
--------- ---------
Total revenues 19,072 32,918
Cost of sales
Motor fuel 15,402 25,164
Other sales and services 1,768 3,502
--------- ---------
Total cost of sales 17,170 28,666
--------- ---------
Gross profit 1,902 4,252
Operating expenses:
Employment expenses 1,596 2,713
Other operating expenses 673 1,044
General & administrative expenses 925 1,181
Depreciation and amortization 430 805
(Gain) loss on sale of assets (162) (966)
--------- ---------
Total operating expenses 3,462 4,777
--------- ---------
Operating loss (1,560) (525)
Other income (expense)
Interest expense, net (37) (533)
Other, net (8) 25
--------- ---------
Total other income (expense) (45) (508)
--------- ---------
Income (loss) before income taxes (1,605) (1,033)
Provision for income taxes - -
Income (loss) from continuing operations
Before discontinued operations and extraordinary items (1,605) (1,033)
Discontinued operations:
Loss from discontinued operations of Evans Oil
of Louisiana to May 17, 2001 (Note C) - (746)
Gain on disposal of Evans Oil of Louisiana, net
of taxes of $0 - 87
--------- ---------
Total discontinued operations - (659)
--------- ---------
Extraordinary gain (loss) on restructuring transactions
Gain on extinguishments of debts (Note B) 4,234 -
Loss on conveyance of assets (Note B) (2,435) -
--------- ---------
Net extraordinary gain on restructuring transactions 1,799 -
--------- ---------
Net income (loss) $ 194 $ (1,692)
========= =========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.23) $ (0.17)
Discontinued operations - (0.11)
Extraordinary items 0.26 -
--------- ---------
Earnings (loss) per common share $ 0.03 $ (0.28)
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
Evans Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended June 30,
2002 2001
------- -------
Cash flows from operating activities:
Net income (loss) $ 194 $(1,692)
Adjustments:
Depreciation and amortization 430 870
Gain on sale of assets (162) (966)
Loss on sale of Evans Oil of Louisiana fixed assets
fixed assets to May 17, 2001 -- 49
Gain on disposal of discontinued operations -- (87)
Extraordinary gain on restructuring transactions (Note B) (1,799) --
Changes in working capital:
Current assets 635 2,913
Other assets (48) 46
Current liabilities (220) (3,184)
------- -------
Total adjustments (1,155) (359)
------- -------
Net cash provided (used) by operating activities (970) (2,051)
Cash flows from investing activities:
Capital expenditures (24) (119)
Proceeds from sale of property and equipment 794 6,801
------- -------
Net cash provided (used) by investing activities 770 6,682
Cash flows from financing activities:
Net proceeds from stock issuance 150 223
Repayment on notes payable, net (321) (4,943)
------- -------
Net cash provided (used) by financing activities (171) (4,720)
------- -------
Net increase (decrease) in cash (371) (89)
Cash and cash equivalents, beginning of period 604 725
------- -------
Cash and cash equivalents, end of period $ 233 $ 636
======= =======
Supplemental Disclosure of Non-Cash Transactions
Foreclosure of ChemWay Warehouse (Note D)
Relief of assumed debt on foreclosed warehouse $ 501 $ --
Net book value of foreclosed warehouse 471 --
------- -------
Gain on foreclosure of warehouse $ 30 $ --
======= =======
Extinguishment of debts under restructuring transactions
Extinguishment of current liabilities (Note B) $ 4,347 $ --
Extinguishment of notes payable (Note B) 5,399 --
Issuance of notes payable (5,512) --
------- -------
Gain on restructuring of debts $ 4,234 --
======= =======
Conveyance of assets under restructuring transactions
Conveyance of fixed assets, net (Note B) $ 2,300 $ --
Conveyance of inventory (Note B) 135 --
------- -------
Loss on conveyance of assets $ 2,435 $ --
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Evans
Systems, Inc. and its subsidiaries (collectively referred to as the "Company")
have been prepared in accordance with accounting principles generally accepted
in the United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission. All significant intercompany balances and
transactions have been eliminated. These financial statements do not include all
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. It is
recommended that these interim condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company`s Annual Report on Form 10-K for the fiscal year ended
September 30, 2001.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended June 30,
2002 are not necessarily indicative of the results which may be expected for any
other interim periods or for the year ending September 30, 2002. Certain prior
period amounts have been reclassified for comparative purposes.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE B - RESTRUCTURING TRANSACTIONS AND CHANGES IN MANAGEMENT
On June 24, 2002, the Company entered into agreements with various third
parties, which resulted in the restructuring and refinancing of certain of the
Company's indebtedness, and changes in the composition of the Company's
management and board of directors (collectively, the "Restructuring
Transactions"). The Restructuring Transactions consisted of the following:
Restructuring of Company Indebtedness
Effective June 24, 2002, Cain, Smith and Strong, II, L.P., a Delaware limited
partnership ("CSS"), completed the following transactions along with the
Company, resulting in the restructuring and payoff of an aggregate of
approximately $9,746,000 of the Company's outstanding indebtedness:
o CSS acquired approximately $5.2 million of indebtedness, inclusive of
approximately $803,000 in accrued interest, owed by the Company to
JPMorgan Chase Bank ("JPMorgan") pursuant to the terms of an
Assignment of Notes and Liens agreement dated as of June 24, 2002 (the
"JPMorgan Indebtedness"). As a result of this transaction, JPMorgan
assigned to CSS all of JPMorgan's right, title and interest under two
promissory notes payable to it by the Company and all of JPMorgan's
security interests in the assets and properties of the Company.
o CSS acquired approximately $789,000 of past due secured indebtedness,
inclusive of approximately $86,000 of accrued interest, owed by the
Company to Deutsche Financial Services under a capital lease
agreement.
o CSS acquired $2,734,367 of indebtedness owed by the Company to certain
of its unsecured creditors.
7
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
o CSS acquired approximately $100,000 of past due indebtedness owed by
the Company to certain of its trust creditors.
In connection with the foregoing transactions, which were consummated pursuant
to various agreements with the Company and forbearance agreements between the
Company, CSS and certain secured and unsecured creditors of the Company, CSS
agreed to the following:
o To discount the amount due and payable under the JPMorgan Indebtedness
from $5,200,000 to $4,500,000 and restructure such indebtedness to
provide for payments of interest only at an annual rate of 10% for
five years commencing six months from the closing of the transaction,
with the principal balance and accrued but unpaid interest due at the
end of such period;
o Extinguish the $789,000 owed to Deutsche Financial Services; and
o Extinguish the $2,734,367 of indebtedness owed to certain unsecured
and trust creditors of the Company.
To consummate the completion of the Restructuring Transactions, the Company
entered into the following transactions:
o Issued a note payable of $183,000 to Travelers Express Co.
("Travelers") under a forbearance agreement. The terms of the note
call for payment of principal and interest over 36 months beginning
June 22, 2003. Interest is calculated at prime plus 50 basis points.
In addition, the Company issued to Travelers a warrant to purchase
93,000 shares of common stock of the Company at a price per share of
$0.05 ("the Travelers Warrant"), the then current market price per
share of the Company's common stock. Under the terms of the Travelers
Warrant, for every $2 of principal paid by the Company under the
$183,000 note, 1 share of common stock subject to the Travelers
Warrant shall expire. Travelers is restricted from exercising the
Warrant until such time as the market price of the Company's common
stock exceeds $2.00 per share for a period of 180 consecutive trading
days (Note H);
o Issued a note payable of $49,421 to Phillips Co. under a forbearance
agreement. The terms of the note call for a monthly payment of $8,237
for 6 months;
o Issued a note payable of $44,600 to McLane Company, Inc. under a
forbearance agreement. The terms of the note call for monthly payments
of $3,717 for 12 months beginning November 22, 2002. Any unpaid
balance is due on or before October 22, 2003; and
o Issued a note payable of $11,432 to Olsham Grundman Frome under a
forbearance agreement. The terms of the note call for monthly payments
of $1,143 for 10 months beginning December 22, 2002. Any unpaid
balance is due on or before September 22, 2003.
In June 2002, the Company cancelled a capital lease agreement for 3 tractor
trucks. Under the agreement, the Company returned the trucks with a net book
value of $12,838 for full satisfaction of amounts due to DaimlerChrysler of
$62,704.
In addition, the Company entered into agreements with its property taxing
districts to settle past due property taxes aggregating $803,783. Under the
terms of such agreements, the Company will pay 10% of the past due amounts
immediately and issue notes payable for the remaining unpaid balance of $723,405
to be paid over 36 months.
8
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company and Mr. J.L. Evans, Sr., former CEO and Chairman, mutually agreed to
release the Company of $55,527 in accrued wages owed Mr. Evans, Sr. and to
cancel his employment agreement with the Company (Note H).
The following summarizes the restructuring transactions and the extraordinary
gain recognized by the consummation of these Restructuring Transactions. 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.
Accounts payable and Accruals Extinguished
Accounts payable $ 2,678,840
Accrued wages 55,527
Accrued taxes 723,405
Accrued interest 888,910
------------
Total accounts payable and accruals extinguished 4,346,682
Notes payable extinguished/restructured
JP Morgan Chase 4,631,670
Duetche Financial 703,889
Chrysler capital lease 62,704
Other 1,002
------------
Total notes payable extinguished/restructured 5,399,265
------------
Total debts extinguished/restructured 9,745,947
New debt issued/restructured
CSS 4,500,000
Travelers 183,000
Phillips 49,421
McLane 44,600
Olsham 11,432
Property tax districts 723,405
------------
Total debt issued/restructured 5,511,858
------------
Extraordinary gain on debt restructuring transactions 4,234,089
Extraordinary loss on assets conveyed to CSS (2,435,000)
------------
Net extraordinary gain on restructuring transactions $ 1,799,089
============
In consideration for CSS' concessions and agreement to restructure the JPMorgan
Indebtedness, the Company conveyed to CSS a net book value of $2,300,000 of idle
or vacant properties and $135,000 of ChemWay inventories located in Texas. The
net book value of the assets conveyed approximated the market value of such
properties at the date of conveyance. The Company also issued warrants to
purchase an aggregate of 4,000,000 shares of common stock to Thomas E. Cain (2.4
million) and CSS (1.6 million) at a per share exercise price of $0.05 (Note H).
The Company also issued to JPMorgan a $2 million zero coupon contingent note,
the payment of which, if ever, is subject to the Company meeting certain
financial covenants and maintaining certain closing bid stock price targets
(Note I). In connection with the restructuring of the JPMorgan Indebtedness, and
in exchange for certain releases, the Company's former CEO and Chairman, J.L.
Evans Sr., conveyed 1,104,015 shares of common stock of the Company beneficially
owned by him to JPMorgan.
9
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
New Management Agreement
The Company entered into a Management and Support Services Agreement (the
"Management Agreement") with Mauritz & Couey, a Texas based general partnership
("MC") to provide certain managerial and operational services to the Company. MC
has been a long-time regional competitor to the Company's petroleum marketing
business and experienced profitable growth over the past 12 years. Under the
terms of the Management Agreement, MC is entitled to be reimbursed for its costs
at a rate of 20% over staff costs plus receive a quarterly bonus of 25% of the
Company's Earnings Before Interest and Taxes based solely on MC's achievement of
the following performance criteria for the Company: (1) Debt/Equity less than 2;
(2) Stockholders Equity of $3,000,000; (3) Current Ratio of 1.07; and (4)
trailing three quarters positive revenue growth.
Changes in the Company's Management
Concurrently with the Restructuring Transactions, the Company accepted the
resignation of its longtime CEO and Chairman, Mr. Evans, its Secretary/Treasurer
and Director Darlene Jones, and outside Director Matt Hession. Matt Hession was
the Chair of the Company's audit committee. His responsibilities will be assumed
by Leah Jagot Kelley, a new independent director of the Company. In addition,
Director compensation was restructured to be performance based. The Company's
new Directors and management team are as follows:
Blair R. Couey President, New Director, and a Principal of MC
Lee Ann Cooper Secretary/Treasurer
Thomas E. Cain New Chairman of the Board
Randy Clapp New Director
Leah Jagot Kelley New Director
Randal Dean Lewis New Director
Jerry Evans, Jr. Director
Peter J. Losavio, Jr. Director
NOTE C - DISCONTINUED 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 $1,152,000 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 three and nine months ended June 30, 2002 and 2001 are
as follows (in thousands):
Quarter Ended June 30, Nine Months Ended June 30,
------------------------- ----------------------------
2002 2001* 2002 2001*
----------- ---------- ------------ ------------
Revenues $ - $ 898 $ - $ 4,708
=========== ========== ============ ============
Gross Profit $ - $ 93 $ - $ 567
=========== ========== ============ ============
Income (loss) from operations $ - $ 197) $ - $ (751)
=========== ========== =========== ============
(* through May 17, 2001)
10
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - SALE OF CERTAIN ASSETS
During the first quarter of fiscal 2002, the Company sold various station and
store equipment for total proceeds of $263,000. The net book value of the assets
sold aggregated $283,000 and the Company recorded a net loss on the sales of
$20,000. During the second quarter of fiscal 2002, the Company sold/retired
various obsolete equipment and vehicles for total proceeds of $18,000. The net
book value of the equipment sold/retired was $41,000 and the Company recorded a
loss of $23,000.
In March 2002, the Company completed the sale of one company owed convenience
store, including land, buildings, station equipment, store equipment and
inventory, for total proceeds of $340,000. The net book value of the assets sold
was $178,612 and the Company recorded a $161,388 gain on the sale during the
quarter.
In February 2002, the lien holder of an Affiliated Resources note secured by a
warehouse and land the Company received from Affiliated Resources by the Deed in
Lieu of Foreclosure notified the Company that the land and warehouse would be
foreclosed on and auctioned in March 2002. As previously reported, the Company
had recorded, in accordance with SAB Topic 5:E, the debt as long-term debt
payable. Accordingly, to record the effects of the foreclosure, the Company
removed the net book value of the land and warehouse of approximately $471,000
from property and equipment, removed the remaining principle book balance of
$501,000 from debt payable and recorded a noncash gain of approximately $30,000
during the second quarter of fiscal 2002.
During the third quarter of fiscal 2002, the Company sold one company owned
convenience store, including a building, station equipment, store equipment and
inventory, for total proceeds of $126,000. The net book value of the assets sold
was $109,689 and the Company recorded a $16,311 gain on the sale during the
quarter. The Company also sold/retired various obsolete equipment and vehicles
for total proceeds of $47,000. The net book value of the equipment sold/retired
was $49,252 and the Company recorded a loss of $2,252.
NOTE E - AGREEMENT TO SALE MARKETING AND SUPPLY CONTRACTS AND CERTAIN ASSETS
On April 5, 2002, State Oil Company, L.L.C. (State Oil) entered into agreements
with the Company to purchase 6 convenience stores and the Exxon Bulk Plant
Facility, Exxon marketing and supply contracts and equipment located at certain
dealer accounts. The convenience stores would be sold for $1,375,000 plus all
fuel and retail inventory at cost. As a provision of the sale, the Company and
State Oil executed a lease dated April 10, 2002 for 5 of the convenience stores
terminating the earlier of July 10, 2002 or closing of the sale for $21,000,
with $7,000 paid on execution of the lease, $7,000 due on May 10, 2002 and the
remaining $7,000 due on June 10, 2002. The Exxon Bulk Plant Facility, the Exxon
marketing and supply contracts and the equipment located at certain dealer
accounts would be sold for $525,000. In June 2002, the Company terminated the
agreement with State Oil as funding had not occurred and the Company was closing
the Restructuring Transactions (Note B). In July 2002, the Company reacquired
access to the 5 leased stores, including all equipment, retail and fuel
inventories. The Company and State Oil have mutually agreed the inventory
received by the Company will be used to satisfy amounts due to the Company from
State Oil and that any remaining receivable or payable will be paid to or paid
by the Company. The Company has not yet determined the final receivable or
payable.
Note F - Seasonal Nature of Business
The motor fuel products market customarily experiences decreased margins in the
fall and winter months followed by increased demand during spring and summer
when construction, travel, and recreational activities increase.
11
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings (loss) per share for the three and nine months ended
June 30, 2002 were computed using 6,965,498 and 6,827,633 weighted average
common shares outstanding, respectively. Basic and diluted earnings (loss) per
share for the three and nine months ended June 30, 2001 were computed using
6,659,831 and 5,951,672 weighted average common shares outstanding,
respectively. Stock options and warrants were not included in the computation of
diluted income (loss) per common share for the three and nine months ended June
30, 2002 and 2001 since they would have resulted in an antidilutive effect on
loss from continuing operations.
NOTE H - COMMON STOCK
On June 24, 2002 and concurrently with the Restructuring Transactions, the
Company completed the private placement of 3,085,000 shares of common stock in
consideration for $150,000, which proceeds were used by the Company to fund the
payment of delinquent fuels taxes. Mauritz & Couey, a Texas-based general
partnership ("MC"), acquired the shares issued in this private placement
transaction. As part of the transaction, MC was granted certain piggyback and
demand registration rights for the acquired shares.
As part of the Restructuring Transactions, the Company cancelled the employment
agreement of Mr. J.L. Evans, Sr., former CEO and President of the Company. In
addition, the Company and Mr. Evans, Sr. mutually agreed to cancel all
outstanding common stock options held by Mr. Evans, Sr. aggregating 575,000.
Concurrently with the cancellation of Mr. Evans' stock options, the Company
issued Mr. Evans, Sr. 175,000 shares of Warrant Stock of the Company at a price
per share of $0.05, the then current market price per share of the Company's
common stock.
As part of the Restructuring Transactions and for payment of services rendered
in facilitating the Restructuring Transactions, the Company issued warrants to
purchase an aggregate of 4,000,000 shares of common stock of the Company at a
price per share of $0.05, the then current market price per share of the
Company's common stock, of which 2,400,000 were issued to Mr. Tom Cain, new
Chairman of the Board of the Company, and 1,600,000 were issued to Cain, Smith &
Strong, L.P., the senior debt holder of the Company (Note B). Focus Capital
Group America, LLC, a buyout and turnaround firm of which Mr. Cain is CEO and
President, helped facilitate the Restructuring Transactions, is a member in CSS
and received its compensation for its role in this transaction through its
ownership interest as a member in CSS. The Company also granted the holders of
these warrants certain piggyback and demand registration rights pursuant to the
terms of a Registration Rights Agreement.
In addition, the Company issued Travelers Express Co. ("Travelers") warrants to
purchase 93,000 shares of common stock of the Company at a price per share of
$0.05, the then current market price per share of the Company's common stock, as
part of the forbearance agreement with Travelers. Under the terms of the
Travelers Warrant, for every $2 the Company reduces the principal amount owed
under the Travelers Note, 1 share of common stock subject to the Travelers
Warrant shall expire. The Warrant is not exercisable by Travelers until such
time as the market price of the Company's common stock exceeds $2.00 per share
for a period of 180 consecutive trading days.
NOTE I - CONTINGENT LIABILITIES
The Company is subject to litigation, primarily as a result of customer claims,
in the ordinary conduct of its operations. As of June 30, 2002, the Company had
no knowledge of any legal proceedings that, individually, or in the aggregate,
could be expected to have a material adverse effect on the Company.
12
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 22, 2002 and as part of the Restructuring Transactions (Note B), the
Company issued to JPMorgan Chase Bank a non-interest bearing $2,000,000
contingent note. Under the terms of the contingent note, the note is payable
only upon the occurrence of each of the following conditions: (i) the closing
bid price of the Company's common stock exceeds $5.00 for 180 consecutive
trading days; (ii) the Company's debt to equity ratio shall be less than 50%;
(iii) the Company's revenue/debt ratio shall be less than 0.05, and (iv) the
Company's interest burden coverage shall be greater than 20 times. Should all of
these conditions be met, the note would have a maturity date of 5 years from the
date such conditions are met. Should the payment conditions not be met by June
21, 2012, the note will be automatically null and void. The contingency note's
purpose was for JPMorgan, for having made prior concessions to the Company, to
participate in any financial windfall of the Company, should such an eventuality
occur. It is management's opinion that it is very unlikely this note will become
effective prior to the termination date.
NOTE J - MANAGEMENT'S PLANS
Effective June 24, 2002, all new management and directors were put in place.
Current management's plans include several simultaneous actions. First,
management intends to revitalize the Company through involvement of staff, key
customers and key vendors. Next, management will seek to grow revenues though
revitalization of stores, facilitating faster inventory turn and through
utilization of sales personnel. Third, management intends to eliminate all
non-value adding costs such as penalties for late payments. Fourth, management
intends to develop and utilize real-time accounting processes to determine how
each operating entity is performing on a current basis. Lastly, management plans
to take the necessary steps to restart the fuel terminal operations.
Management realizes all these objectives are challenging due to the Company's
past five-year history. This, together with having been years delinquent in
payment to vendors, creditors and taxing authorities, has made it imperative to
relaunch the Company in its entirety and thus changing all references to Evans
Systems or Diamond Mini Mart into MC Star, the name the Company will be doing
business under in the future, following shareholder approval of the same.
Management acknowledges the risk in operating the convenience stores but
believes with proper shrink controls, facility upgrades and promotional
activities, the convenience stores can contribute positively to the Company's
results of operations. During the past years, they have operated at a
significant loss. The stores are in good geographical locations, which is a
critical factor in their possibilities.
Management believes the highest priority is to return the fuel terminal to
economic productivity, which has been shut down for the past five years. The
terminal is in a unique geographical position that gives it a solid cost
advantage to all competitive alternatives in delivering fuel to the Company's
operating region. Securing the value associated with the terminal operations is
likely to solve many of the Company's financial challenges.
Other than the fuel terminal, no single asset is critical to the Company's
future and thus, the Company will strongly consider offers to purchase
properties at a fair market value to provide additional working capital.
There can be no assurance that any of management's plans as described above will
be successfully implemented or that the Company will continue as a going
concern, meeting current obligations as they become due.
13
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE K - SUBSEQUENT EVENTS
In July 2002, the Company secured a $500,000 revolving line of credit with
NewFirst National Bank secured by the Company's inventory, accounts receivable,
certain property in Bay City, Texas and by the Company's common stock
beneficially owned by Mauritz & Couey. Terms of the revolving line of credit
call for an annual interest rate of prime plus 3% with monthly interest payments
beginning August 23, 2002 and all outstanding principal and accrued but unpaid
interest due on or before July 23, 2003.
NOTE L - SEGMENT REPORTING
Under SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information", the Company has three reportable segments: Texas petroleum
marketing, Texas convenience stores, and environmental remediation services. The
Texas petroleum marketing segment sells motor fuels to the public through retail
outlets in southeast Texas and supplies the Company's Texas convenience stores
with motor fuels. The Texas convenience stores segment features self-service
motor fuels and a variety of food and nonfood merchandise in southeast Texas.
The environmental remediation services segment serves the petroleum industry in
the southeast Texas market area.
As discussed in Note C, the Company discontinued its Louisiana operations, which
sold motor fuels to the public through retail outlets and through convenience
stores that featured self-service motor fuels and a variety of food and nonfood
merchandise in Louisiana. Such operations have been reflected as discontinued
operations and prior periods have been restated.
14
EVANS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information concerning the Company's business activities is summarized as
follows: (in thousands)
Texas Texas Environmental Other
Petroleum Convenience Remediation Reconciling Consolidated
Three Months Ended Marketing Stores Services Items (1) Total
June 30, 2002-
Revenues from external
Customers:
Motor fuel sales $ 5,702 $ 445 $ -- $ -- $ 6,147
Convenience store sales -- 356 -- -- 356
Other 29 34 145 -- 208
Intersegment revenues 380 -- -- (380) --
------- ------- ------- ------- -------
Total revenues $ 6,111 $ 835 $ 145 $ (380) $ 6,711
======= ======= ======= ======= =======
Depreciation and
amortization $ 90 $ 26 $ 4 $ 2 $ 122
Operating income (loss) $ (74) $ (195) $ (100) $ (176) $ (545)
June 30, 2001-
Revenues from external
Customers:
Motor fuel sales $ 6,656 $ 1,545 $ -- $ -- $ 8,201
Convenience store sales -- 843 -- -- 843
Other 52 92 216 -- 360
Intersegment revenues 1,391 -- -- (1,391) --
------- ------- ------- ------- -------
Total revenues $ 8,099 $ 2,480 $ 216 $(1,391) --
======= ======= ======= ======= =======
Depreciation and
amortization $ 197 $ 34 $ 5 $ 2 $ 238
Operating income (loss) $ (58) $ (62) $ 9 $ (214) $ (325)
(1) Consists primarily of corporate overhead expenses.
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
Quarter Ended June 30,
----------------------
2002 2001
----- -----
Total operating loss for reportable segments $ (369) $ (111)
Interest expense, net (2) (110)
Unallocated corporate overhead expenses (176) (214)
Other, net 1 30
------ -------
Total consolidated income (loss) from continuing
operations before income taxes and extraordinary items $ (546) $ (405)
==+=== =======
15
Texas Texas Environmental Other
Petroleum Convenience Remediation Reconciling Consolidated
Nine Months Ended Marketing Stores Services Items (1) Total
June 30, 2002-
Revenues from external
Customers:
Motor fuel sales $ 14,373 $ 2,087 $ - $ - $ 16,460
Convenience store sales - 1,690 - - 1,690
Other 163 124 635 - 922
Intersegment revenues 1,891 - - (1,891) -
-------- ------- ------- ------- --------
Total revenues $ 16,427 $ 3,901 $ 635 $(1,891) $ 19,072
======== ======= ======= ======= ========
Depreciation and
amortization $ 328 $ 84 $ 12 $ 6 $ 430
Operating income (loss) $ (376) $ (477) $ (123) $ (584) $ (1,560)
June 30, 2001-
Revenues from external
Customers:
Motor fuel sales $ 21,577 $ 6,166 $ - $ - $ 27,743
Convenience store sales - 3,992 - - 3,992
Other 212 297 674 - 1,183
Intersegment revenues 5,352 - - (5,352) -
-------- ------- ------- ------- --------
Total revenues $ 27,141 $10,455 674 $(5,352) $ 32,918
======== ------- ------- ------- --------
Depreciation and
amortization $ 650 $ 134 $ 15 $ 6 $ 805
Operating income (loss) $ 592 $ (190) $ 15 $ (942) $ (525)
(1) Consists primarily of unallocated corporate overhead expenses.
A reconciliation of the Company's segment operating information to consolidated
loss from continuing operations before income taxes is as follows (in
thousands):
Nine Months
Ended June 30,
-------------------
2002 2001
------- -------
Total operating loss for reportable segments $ (976) $ 417
Interest expense, net (37) (533)
Unallocated corporate overhead expenses (584) (942)
Other, net (8) 25
------- -------
Total consolidated income (loss) from continuing
operations before income taxes and extraordinary items $(1,605) $(1,033)
======= =======
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
implement its turnaround strategy, changes in costs of raw materials, labor, and
employee benefits, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Quarterly Report on Form 10-Q, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.
RECENT EVENTS
On April 5, 2002, State Oil Company, L.L.C. ("State Oil") entered into
agreements with the Company to purchase six convenience stores and the Exxon
Bulk Plant Facility, Exxon marketing and supply contracts and equipment located
at certain dealer accounts. The convenience stores were to be sold for
$1,375,000 plus all fuel and retail inventory at cost. As a provision of the
sale, the Company and State Oil executed a lease dated April 10, 2002 for five
of the convenience stores terminating the earlier of July 10, 2002 or closing of
the sale for $21,000, with $7,000 paid on execution of the lease, $7,000 due on
May 10, 2002 and the remaining $7,000 due on June 10, 2002. The Exxon Bulk Plant
Facility, the Exxon marketing and supply contracts and the equipment located at
certain dealer accounts were to be sold for $525,000. In June 2002, the Company
terminated the agreement with State Oil as funding had not occurred and the
Company was closing the Restructuring Agreement (Note B). In July 2002, the
Company reacquired access to the five leased stores, including all equipment,
retail and fuel inventories. The Company and State Oil have mutually agreed the
inventory received by the Company will be used to satisfy amounts due to the
Company from State Oil and that any remaining receivable or payable will be paid
to or paid by the Company. The Company has not yet determined the final
receivable or payable under this transaction.
Effective June 24, 2002, the Company entered into agreements with various third
parties, which resulted in the restructuring and refinancing of certain of the
Company's indebtedness, and changes in the composition of the Company's
management and board of directors (collectively, the "Restructuring
Transactions"). The Restructuring Transactions were comprised of the following:
Restructuring of Company Indebtedness. Effective June 24, 2002, Cain, Smith and
Strong, II, L.P., a Delaware limited partnership ("CSS"), completed the
following transactions, resulting in the restructuring and payoff of an
aggregate of approximately $9,746,000 of the Company's outstanding indebtedness:
o CSS acquired approximately $5.2 million of indebtedness, inclusive of
approximately $803,000 in accrued interest, owed by the Company to
JPMorgan Chase Bank ("JPMorgan") pursuant to the terms of an
Assignment of Notes and Liens agreement dated as of June 24, 2002 (the
"JPMorgan Indebtedness"). As a result of this transaction, JPMorgan
assigned to CSS all of JPMorgan's right, title and interest under two
promissory notes payable to it by the
17
Company and all of JPMorgan's security interests in the assets and
properties of the Company.
o CSS acquired approximately $789,000 of past due secured indebtedness,
inclusive of approximately $86,000 of accrued interest, owed by the
Company to Deutsche Financial Services under a capital lease
agreement.
o CSS acquired approximately $2.7 million of indebtedness owed by the
Company to certain of its unsecured creditors.
o CSS acquired approximately $100,000 of past due indebtedness owed by
the Company to certain of its trust creditors.
In connection with the foregoing transactions, which were consummated pursuant
to various agreements with the Company and forbearance agreements between the
Company, CSS and certain secured and unsecured creditors of the Company, CSS
agreed to the following:
o To discount the amount due and payable under the JPMorgan Indebtedness
from $5,200,000 to $4,500,000 and restructure such indebtedness to
provide for payments of interest only at an annual rate of 10% for
five years commencing six months from the closing of the transaction,
with the principal balance and accrued but unpaid interest due at the
end of such period;
o Extinguish the $789,000 owed to Deutsche Financial Services; and
o Extinguish the approximately $2.7 million of indebtedness owed to
certain unsecured and trust creditors of the Company.
In consideration for CSS' concessions and agreement to restructure the JPMorgan
Indebtedness, the Company:
o Conveyed to CSS $2.3 million of idle or vacant properties located in
Texas;
o Issue to JPMorgan a $2 million zero coupon contingent note, the
payment of which, if ever, is subject to the Company meeting certain
financial covenants and maintaining certain closing bid stock price
targets.
To consummate the completion of the Restructuring Transactions, the Company
entered into the following transactions:
o Issued a note payable of $183,000 to Travelers Express Co.
("Travelers") under a forbearance agreement. The terms of the note
call for payment of principal and interest over 36 months beginning
June 22, 2003. Interest is calculated at prime plus 50 basis points.
In addition, the Company issued to Travelers a warrant to purchase
93,000 shares of common stock of the Company at a price per share of
$0.05 ("the Travelers Warrant"), the then current market price per
share of the Company's common stock. Under the terms of the Travelers
Warrant, for every $2 of principal paid by the Company under the
$183,000 note, 1 share of common stock subject to the Travelers
Warrant shall expire. Travelers is restricted from exercising the
Warrant, if ever, until such time as the market price of the Company's
common stock exceeds $2.00 per share for a period of 180 consecutive
trading days (Note H);
18
o Issued a note payable of $49,421 to Phillips Co. under a forbearance
agreement. The terms of the note call for a monthly payment of $8,237
for 6 months;
o Issued a note payable of $44,600 to McLane Company, Inc. under a
forbearance agreement. The terms of the note call for monthly payments
of $3,717 for 12 months beginning November 22, 2002. Any unpaid
balance is due on or before October 22, 2003; and
o Issued a note payable of $11,432 to Olsham Grundman Frome under a
forbearance agreement. The terms of the note call for monthly payments
of $1,143 for 10 months beginning December 22, 2002. Any unpaid
balance is due on or before September 22, 2003.
In June 2002, the Company cancelled a capital lease agreement for 3 tractor
trucks. Under the agreement, the Company returned the trucks with a net book
value of $12,838 for full satisfaction of amounts due to DaimlerChrysler of
$62,704.
In addition, the Company entered into agreements with its property taxing
districts to settle past due property taxes aggregating $803,783. Under the
terms of such agreements, the Company will pay 10% of the past due amounts
immediately and issue notes payable for the remaining unpaid balance of $723,405
to be paid over 36 months.
As compensation for facilitating the Restructuring Transactions, the Company
issued warrants to purchase an aggregate of 4,000,000 shares of common stock to
Thomas E. Cain (2.4 million) and CSS (1.6 million) at a per share exercise price
of $0.05. Focus Capital Group America, LLC, a buyout and turnaround firm of
which Mr. Cain is CEO and President, helped facilitate the Restructuring
Transactions, is a member in CSS and received its compensation for its role in
this transaction through its ownership interest as a member in CSS. The Company
also granted the holders of these warrants certain piggyback and demand
registration rights pursuant to the terms of a Registration Rights Agreement.
In connection with the restructuring of the JPMorgan Indebtedness, and in
exchange for certain releases, the Company's former CEO and Chairman, J.L. Evans
Sr. conveyed 1,104,015 shares of common stock of the Company beneficially owned
by him to JPMorgan. In connection with his resignation, and in exchange for
certain releases and a warrant to purchase 175,000 shares of Company common
stock at a per share exercise price of $.05, Mr. Evans has also agreed to the
cancellation of his options to purchase an aggregate of 575,000 shares of common
stock.
Private Placement of 3,085,000 shares of Common Stock. Concurrently with the
Restructuring Transactions, the Company completed the private placement of
3,085,000 shares of common stock in consideration for $150,000, which proceeds
were to be used by the Company to fund payment of delinquent fuels taxes.
Mauritz & Couey, a Texas-based general partnership ("MC"), acquired the shares
issued in this private placement transaction. As part of the transaction, MC was
granted certain piggyback and demand registration rights for the acquired
shares.
New Management Agreement. The Company entered into a Management and Support
Services Agreement (the "Management Agreement") with MC to provide certain
managerial and operational services to the Company. Under the terms of the
Management Agreement, MC is entitled to be reimbursed for its costs plus receive
a quarterly bonus based solely on MC's achievement of certain performance
criteria.
19
Changes in the Company's Management. Concurrently with the transactions set
forth above, the Company accepted the resignation of its longtime CEO and
Chairman, Mr. Evans, its Secretary/Treasurer and Director Darlene Jones, and
outside Director Matt Hession. Matt Hession was the Chair of the Company's audit
committee. His responsibilities will be assumed by Leah Jagot Kelley, a new
independent director of the Company. In addition, director compensation was
restructured to be performance based. Information regarding the Company's new
Directors and management is as follows
Blair R. Couey President, New Director, and a Principal of MC
Lee Ann Cooper Secretary/Treasurer
Thomas E. Cain New Chairman of the Board
Randy Clapp New Director
Leah Jagot Kelley New Director
Randal Dean Lewis New Director
Jerry Evans, Jr. Director
Peter J. Losavio, Jr. Director
In July 2002, the Company secured a $500,000 revolving line of credit with
NewFirst National Bank secured by the Company's inventory, accounts receivable,
certain property in Bay City, Texas and by the Company's common stock
beneficially owned by Mauritz & Couey. Terms of the revolving line of credit
call for an annual interest rate of prime plus 3 with monthly interest payments
beginning August 23, 2002 and all outstanding principal and accrued but unpaid
interest due on or before July 23, 2003.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document.
The following table reflects the unaudited operating results of Evans Systems,
Inc. ("ESI" or the "Company") business segments for the three months ended June
30, 2002 and 2001. This is the third quarter of ESI's fiscal year, which begins
on October 1 and ends on September 30.
Three Months Three Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue $ 5,731 $ 6,708
Gross profit 330 469
Operating expenses 404 527
------- -------
Operating loss (74) (58)
TEXAS CONVENIENCE STORES
Revenue $ 835 $ 2,480
Gross profit 122 469
Operating expenses 317 531
------- -------
Operating loss (195) (62)
20
EDCO ENVIRONMENTAL
Revenue $ 145 $ 216
Gross profit 42 134
Operating expenses 142 125
------- -------
Operating income (loss) (100) 9
UNALLOCATED GENERAL AND ADMIN EXPENSE $ (176) $ (214)
------- -------
TOTAL CONTINUING OPERATIONS
Revenue $ 6,711 $ 9,404
Gross profit 494 1,072
Operating expenses 1,039 1,397
------- -------
Operating loss (545) (325)
DISCONTINUED LOUISIANA OPERATIONS
Revenue $ -- $ 898
Gross profit -- 92
Operating expenses -- 289
------- -------
Operating loss -- (197)
Consolidated revenues decreased $2,693,000, or approximately 28.6%, in the
quarter ended June 30, 2002, as compared with the quarter ended June 30, 2001.
The decrease is primarily attributable to the lease of the remaining convenience
stores of the Company to State Oil on April 10, 2002 (Note E of the Notes to the
Condensed Consolidated Financial Statements) and the continued downsizing of the
Company, which had the effect of reducing revenues. Fuel sales decreased
$2,054,000, or approximately 25.0%, while other sales and services declined
$639,000, or approximately 53.1%, in the quarter ended June 30, 2002, as
compared with the quarter ended June 30, 2001.
Consolidated gross profit declined $578,000, or approximately 53.9%, in the
quarter ended June 30, 2002, as compared with the quarter ended June 30, 2001.
Gross profit expressed as a percentage of sales, "Gross Margin", decreased to
approximately 7.4% of sales in the quarter ended June 30, 2002, as compared with
approximately 11.4% of sales in the quarter ended June 30, 2001.
Operating expenses declined $358,000, or approximately 25.6%, in the quarter
ended June 30, 2002, compared with the quarter ended June 30, 2001. Operating
expenses include a $14,000 credit from the gain on sale of assets in the quarter
ended June 30, 2002, as compared to a credit of $38,000 in the quarter ended
June 30, 2001.
Operating losses increased $220,000 in the quarter ended June 30, 2002, as
compared with the quarter ended June 30, 2001. Operating losses were $545,000 in
the quarter ended June 30, 2002, as compared with $325,000 in the quarter ended
June 30, 2001. The increased loss was attributable to the lease of the
convenience stores to State Oil and continued downsizing of the Company.
Net income for the quarter ended June 30, 2002 was $1,253,000, as compared to a
net loss of $515,000 for the quarter ended June 30, 2001. Net income in the
quarter ended June 30, 2002 includes an extraordinary gain on extinguishments of
debts of $4,234,000 and an extraordinary loss on the conveyance of assets of
$2,435,000. Net loss in the quarter ended June 30, 2001 includes a loss from
Louisiana discontinued operations of $197,000 and a gain on the disposal of
Louisiana operations of $87,000.
21
TEXAS PETROLEUM MARKETING SEGMENT
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets as follows:
o Gasoline retail facilities with Company-supplied equipment consisting
of pumps, lights, canopies and in many cases underground storage
tanks, at independently owned convenience stores. Under the terms of
the Company's agreements with such independent store operators
("Special Purpose Leases"), the Company receives 40% or 50% of the
gasoline gross profit, depending upon who owns the underground
gasoline equipment.
o Independently owned gasoline stations and convenience stores ("Open
Dealers") to which the Company provides major oil company brand names,
credit card processing and signs and, without further investment,
receives its customary markup on fuel deliveries.
The Texas Petroleum Marketing segment also supplies lubricants to commercial and
industrial customers.
Revenues decreased $977,000, or approximately 14.6%, to $5,731,000 in the
quarter ended June 30, 2002, as compared with revenues of $6,708,000 in the
quarter ended June 30, 2001. Fuel sales in gallons increased approximately 14.1%
to 4,544,000 gallons, as compared with 3,982,000 gallons in the quarter ended
June 30, 2001. The revenue decrease is mainly attributable to lower average
sales price per gallon of $1.26 in the current quarter compared to $1.65 per
gallon in the quarter ended June 30, 2001.
Gross profit decreased $139,000, or approximately 29.6%, to $330,000 in the
quarter ended June 30, 2002, as compared with $469,000 in the quarter ended June
30, 2001. Gross Margin decreased to approximately 5.8% of sales in the quarter
ended June 30, 2002, as compared with approximately 6.9% of sales in the quarter
ended June 30, 2001. Fuel gross profit per gallon increased to approximately
$0.073, as compared with $0.111 in the quarters ended June 30, 2002 and 2001,
respectively.
Operating expenses in the quarter ended June 30, 2002 declined $123,000, or
approximately 23.3%, as compared with the quarter ended June 30, 2001. Operating
expenses include a $20,000 credit from the gain on sale of assets in the quarter
ended June 30, 2002, as compared to a charge of $6,000 from the loss on the sale
of assets in the quarter ended June 30, 2001.
The Texas petroleum marketing segment's operating loss decreased to $74,000 in
the quarter ended June 30, 2002, as compared to an operating loss of $58,000 in
the quarter ended June 30, 2001. Excluding the gain (loss) on sale of assets,
the quarter ended June 30, 2002 operating loss was $94,000, as compared to an
operating loss of $52,000 for the quarter ended June 30, 2001.
TEXAS CONVENIENCE STORE SEGMENT
The Company operated seven stores from April 1, 2002 to April 10, 2002 at which
date five of the stores were leased to State Oil under a lease-purchase
agreement (Note E to the Condensed Consolidated Financial Statements). The lease
was cancelled on June 2002 and the Company reacquired the stores, equipment and
inventory in July 2002, at which time the Company began the process of reopening
the stores. During July 2002, four stores were reopened. The Company operated
nine stores in the quarter ended June 30, 2001.
Total revenues in the quarter ended June 30, 2002 decreased $1,645,000, or
approximately 66.3%, to $835,000, as compared with $2,480,000 in the quarter
ended June 30, 2001. The decrease is primarily
22
attributable to the Company not operating stores during the majority of the
reporting period. Fuel revenues decreased $1,100,000, or approximately 71.2%, to
$445,000 in the quarter ended June 30, 2002, as compared with $1,545,000 in the
quarter ended June 30, 2001. Fuel sales in gallons declined approximately 74.2%
in the current year period. Merchandise sales decreased by $487,000, or 57.8%,
to $356,000 in the quarter ended June 30, 2002 from $843,000 in the quarter
ended June 30, 2001. Other income, consisting primarily of rental income and
commission income, decreased approximately $58,000 in the quarter ended June 30,
2002, as compared with the quarter ended June 30, 2001.
Gross profit declined $347,000, or approximately 74.0%, to $122,000, as compared
with $469,000 in the quarter ended June 30, 2001. Gross Margin decreased to
approximately 14.6% of sales in the quarter ended June 30, 2002, as compared
with approximately 18.9% of sales in the quarter ended June 30, 2001.
Operating expenses decreased $214,000, or approximately 40.3%, in the quarter
ended June 30, 2002, to $317,000, as compared with $531,000 in the quarter ended
June 30, 2001. Operating expenses in the quarter ended June 30, 2001 include a
credit of $44,000 from the gain on sale of assets. There was no gain or loss on
asset sales during the quarter ended June 30, 2002.
The Texas Convenience Store segment incurred an operating loss of $195,000 in
the quarter ended June 30, 2002, as compared with an operating loss of $62,000
in the quarter ended June 30, 2001. Excluding the gain (loss) on sale of assets,
the quarter ended June 30, 2002 operating loss was $195,000, as compared to an
operating loss of $106,000 for the quarter ended June 30, 2001.
EDCO ENVIRONMENTAL
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Revenues decreased $71,000, or approximately 32.9%, in the quarter ended June
30, 2002, as compared with the quarter ended June 30, 2001.
Gross profit in the quarter ended June 30, 2002 decreased $92,000, as compared
with the quarter ended June 30, 2001.
Operating expenses increased $17,000 in the quarter ended June 30, 2002, as
compared with the quarter ended June 30, 2001.
EDCO Environmental reported an operating loss of $100,000 in the quarter ended
June 30, 2002, as compared with an operating profit of $9,000 in the quarter
ended June 30, 2001.
UNALLOCATED GENERAL AND ADMINISTRATIVE EXPENSES
Unallocated General and Administrative expenses decreased $38,000, or
approximately 17.8%, in the quarter ended June 30, 2002, as compared with the
quarter ended June 30, 2001. The decrease is mainly attributable to the
reduction in employment expenses.
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.
23
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the condensed consolidated
unaudited financial statements and notes thereto appearing elsewhere in this
document.
The following table reflects the unaudited operating results of the Company's
business segments for the nine months ended June 30, 2002 and 2001. This is the
first nine months of ESI's fiscal year, which begins on October 1 and ends on
September 30.
Nine Months Nine Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
(In thousands) (In thousands)
TEXAS PETROLEUM MARKETING
Revenue $ 14,536 $ 21,789
Gross profit 953 1,995
Operating expenses 1,329 1,403
------------- ------------
Operating income (loss) (376) 592
TEXAS CONVENIENCE STORES
Revenue $ 3,901 $ 10,455
Gross profit 682 1,873
Operating expenses 1,159 2,063
------------- ------------
Operating loss (477) (190)
EDCO ENVIRONMENTAL
Revenue $ 635 $ 674
Gross profit 267 384
Operating expenses 390 369
------------- ------------
Operating income (loss) (123) 15
UNALLOCATED GENERAL AND ADMIN EXPENSES $ (584) $ (942)
------------- -------------
TOTAL CONTINUING OPERATIONS
Revenue $ 19,072 $ 32,918
Gross profit 1,902 4,252
Operating expenses 3,462 4,777
------------- ------------
Operating loss (1,560) (525)
DISCONTINUED LOUISIANA OPERATIONS
Revenue $ -- $ 4,707
Gross profit -- 567
Operating expenses -- 1,313
------------- ------------
Operating loss -- (746)
The Company sold its Texaco, Citgo and Diamond Shamrock accounts during the
quarter ended December 31, 2000. During the second quarter of 2001, the Company
sold its Phillips 66 accounts and six of its Company operated convenience
stores. In the third and fourth quarter of 2001, the Company sold three
additional Company operated convenience stores. All of the revenues, cost, and
associated operating expenses of these operations are included in the comparable
nine months ended June 30, 2001.
24
In May 2001 the Company sold substantially all of the assets of Evans Oil of
Louisiana and discontinued its Louisiana operations (now classified as
Discontinued Operations). The Company sold one Company operated convenience
store in March 2002. The majority of its revenues, costs, and associated
operating expenses are included in the nine months ended June 30, 2002. In April
2002, the Company entered into a lease-purchase agreement with State Oil (Note E
to the Condensed Consolidated Financial Statements) for six of its remaining
stores, which had the impact of reducing revenues, costs and associated
operating expenses of these operations during the third quarter of 2002.
Consolidated revenues decreased $13,846,000, or approximately 42.1%, in the nine
months ended June 30, 2002, as compared with the nine months ended June 30,
2001. Fuel sales decreased $11,283,000, or approximately 40.7%, while other
sales and services declined $2,563,000 or approximately 49.5% in the nine months
ended June 30, 2002, as compared with the nine months ended June 30, 2001.
Consolidated gross profit declined $2,350,000, or approximately 55.3%, in the
nine months ended June 30, 2002, as compared with the nine months ended June 30,
2001. Gross Margin decreased to approximately 9.8% of sales in the nine months
ended June 30, 2002, as compared with approximately 12.9% of sales in the nine
months ended June 30, 2001.
Operating expenses declined $1,315,000, or approximately 27.5%, in the nine
months ended June 30, 2002, as compared with the nine months ended June 30,
2001. Operating expenses include a $162,000 credit from the gain on sale of
assets in the nine months ended June 30, 2002 as compared to a $966,000 credit
in the nine months ended June 30, 2001. Excluding the gain or loss on the sale
of assets, the nine months ended June 30, 2002 operating expense was $3,624,000
as compared to an operating expense of $5,743,000 in the nine months ended June
30, 2001.
The Company incurred an operating loss of $1,560,000 in the nine months ended
June 30, 2002, as compared with $525,000 in the nine months ended June 30, 2001.
Excluding the gain or loss on the sale of assets, the nine months ended June 30,
2002 operating loss was $1,722,000 as compared to an operating loss of
$1,491,000 in the nine months ended June 30, 2001.
Loss from continuing operations before extraordinary items for the nine months
ended June 30, 2002 was $1,605,000, as compared to a loss of $1,033,000 for the
nine months ended June 30, 2001.
Net income of $194,000 in the nine months ended June 30, 2002 includes an
extraordinary gain on the extinguishments of debts of $4,234,000 and an
extraordinary loss on the conveyance of assets of $2,435,000. Net loss of
$1,692,000 for the nine months ended June 30, 2001 includes a loss from
Louisiana discontinued operations of $746,000 and a gain on the disposal of
Louisiana of $87,000.
TEXAS PETROLEUM MARKETING SEGMENT
Revenues declined $7,253,000, or approximately 33.3%, to $14,536,000 in the nine
months ended June 30, 2002, as compared with revenues of $21,789,000 in the nine
months ended June 30, 2001. The decrease in revenues is due to the sale of its
Citgo, Texaco, Diamond Shamrock and Phillips 66 accounts in the nine months
ended June 30, 2001. Partial revenues from these accounts are included in the
nine months ended June 30, 2001. Fuel sales in gallons declined approximately
14.3 %, to 11,879,000 gallons, as compared with 13,861,000 gallons in the nine
months ended June 30, 2001. The average selling price of fuel per gallon
decreased to $1.22 per gallon in the nine months ended June 30, 2002, as
compared with an average selling price of $1.53 per gallon in the nine months
ended June 30, 2001.
Gross profit in the nine months ended June 30, 2002 declined $1,042,000, or
approximately 52.2%, as compared with the nine months ended June 30, 2001. Gross
Margin was approximately 6.6% and 9.1%
25
of sales in the nine months ended June 30, 2002 and 2001, respectively.
Operating expenses in the nine months ended June 30, 2002 declined $74,000, or
approximately 5.3%, as compared with the nine months ended June 30, 2001.
Operating expenses include a $41,000 credit from the gain on sale of assets in
the nine months ended June 30, 2002, as compared to a $531,000 credit in the
nine months ended June 30, 2001. Excluding the gain or loss on the sale of
assets, the nine months ended June 30, 2002 operating expense was $1,370,000, as
compared to an operating expense of $1,934,000 in the nine months ended June 30,
2001.
The Texas petroleum marketing segment reported an operating loss of $376,000 in
the nine months ended June 30, 2002, as compared to an operating profit of
$592,000 in the nine months ended June 30, 2001. Excluding the gain or loss on
the sale of assets, the nine months ended June 30, 2002 operating loss was
$417,000, as compared to an operating profit of $61,000 in the nine months ended
June 30, 2001.
TEXAS CONVENIENCE STORE SEGMENT
The Company operated seven stores to April 10, 2002 at which date five of the
stores were leased to State Oil under a lease-purchase agreement (Note E to the
Condensed Consolidated Financial Statements). The lease was cancelled in June
2002 and the Company reacquired the stores, equipment and inventory in July
2002, at which time the Company began the process of reopening the stores.
During July 2002, four stores were reopened. The Company operated nine stores in
the nine months ended June 30, 2001.
Total revenues in the nine months ended June 30, 2002 declined $6,554,000, or
approximately 62.3%, to $3,901,000, as compared with $10,455,000 in the nine
months ended June 30, 2001. Fuel sales decreased $4,079,000, or approximately
66.2%, to $2,087,000 in the nine months ended June 30, 2002, as compared with
$6,166,000 in the nine months ended June 30, 2001. Merchandise sales declined
$2,302,000, or approximately 57.7%, to $1,690,000 in the nine months ended June
30, 2002, as compared with $3,992,000 in the nine months ended June 30, 2001.
Other income decreased $173,000 to $124,000, as compared with $297,000 in the
nine months ended June 30, 2001.
Gross profit declined $1,191,000, or approximately 63.6%, to $682,000, as
compared with $1,873,000 in the nine months ended June 30, 2001. Gross Margin
decreased to approximately 17.5% of sales in the nine months ended June 30,
2002, as compared with approximately 17.9% of sales in the nine months ended
June 30, 2001.
Operating expenses in the nine months ended June 30, 2002 declined $904,000, or
approximately 43.8%, as compared with the nine months ended June 30, 2001.
Operating expenses include a $129,000 credit from the gain on sale of assets in
the nine months ended June 30, 2002, as compared to a $434,000 credit in the
nine months ended June 30, 2001. Excluding the gain or loss on the sale of
assets, the nine months ended June 30, 2002 operating expense was $1,288,000, as
compared to an operating expense of $2,497,000 in the nine months ended June 30,
2001.
The Texas Convenience Store segment incurred an operating loss of $477,000 in
the nine months ended June 30, 2002, as compared with a loss of $190,000 in the
nine months ended June 30, 2001. Excluding the gain or loss on the sale of
assets, the nine months ended June 30, 2002 operating loss was $606,000, as
compared to an operating loss of $624,000 in the nine months ended June 30,
2001.
26
EDCO ENVIRONMENTAL
EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area.
Revenues declined $39,000, or approximately 5.8%, in the nine months ended June
30, 2002, as compared with the nine months ended June 30, 2001.
Gross profit in the nine months ended June 30, 2002 decreased $117,000, as
compared with the nine months ended June 30, 2001. Gross Margin decreased to
approximately 42.0% of sales in the nine months ended June 30, 2002, as compared
with approximately 57.0% of sales in the nine months ended June 30, 2001.
Operating expenses increase $21,000 in the nine months ended June 30, 2002, as
compared with the nine months ended June 30, 2001.
EDCO Environmental reported an operating loss of $123,000 in the nine months
ended June 30, 2002, as compared with an operating profit of $15,000 in the nine
months ended June 30, 2001.
UNALLOCATED GENERAL AND ADMINISTRATIVE EXPENSES
Unallocated general and administrative expenses decreased $358,000, or
approximately 38.0%, in the nine months ended June 30, 2002, as compared with
the nine months ended June 30, 2001. The prior year period includes noncash
compensation expense of $182,000, incurred as a result of the granting of stock
as payment of compensation to the CEO for commissions and deferred salary owed.
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 $233,000 and $636,000 at June 30, 2002 and June
30, 2001, respectively. The Company had a net working capital deficit of
$264,000 at June 30, 2002, as compared with a deficit of $9,036,000 at September
30, 2001. The decrease in the working capital deficit is due to the
restructuring and payoff of an aggregate of approximately $9,746,000 of the
Company's outstanding indebtedness, all of which was classified as current
liabilities at September 30, 2001 (Note B to the Condensed Consolidated
Financial Statements). The restructuring and payoff was offset by current
changes in current assets and current liabilities.
Cash used by operating activities was $970,000 for the nine months ended June
30, 2002. During that period, cash from investing activities was $770,000, which
was comprised of capital expenditures of $24,000 offset by proceeds from the
sales of assets of $794,000. Cash used by financing activities was $371,000,
which was comprised of proceeds of $150,000 from the private placement of common
stock to MC offset by $321,000 in debt repayments.
Cash used by operating activities was $2,051,000 for the nine months ended June
30, 2001. During that period, cash from investing activities was $6,682,000,
which was comprised of capital expenditures of $119,000 offset by proceeds from
the sales of assets of $6,801,000. Cash used by financing activities was
$4,720,000, which was comprised of proceeds of $223,000 from the private
placement of common stock offset by $4,943,000 in debt repayments.
27
As of June 30, 2002, the Company had an aggregate of approximately $5,633,000 in
principal outstanding under various note agreements. Of this total, one note
dated June 24, 2002 for $4,500,000 has terms that call for payments of interest
only at an annual rate of 10% for five years commencing six months from the
closing of the transaction, with the principal balance and accrued but unpaid
interest due at the end of such period. Of the remaining principal outstanding
aggregating an approximate $1,133,000, approximately $723,000 is due to various
property taxing districts over the next three years. Additionally, $183,000 is
due to Travelers Express Co. under a forbearance note agreement dated June 24,
2002 that calls for payment of principal and interest over 36 months beginning
June 22, 2003. Interest is calculated at prime plus 50 basis points (Note B to
the Condensed Consolidated Financial Statements). The remaining outstanding
principal balance is due under various terms to various third parties. As of
June 30, 2002, approximately $387,000 in outstanding principal is due within one
year, compared to approximately $5,733,000 at September 30, 2001.
Subsequent to June 30, 2002, the Company secured a secured a $500,000 revolving
line of credit with NewFirst National Bank secured by the Company's inventory,
accounts receivable, certain property in Bay City, Texas and by the Company's
common stock beneficially owned by MC. Terms of the revolving line
of credit call for an annual interest rate of prime plus 3% with monthly
interest payments beginning August 23, 2002 and all outstanding principal and
accrued but unpaid interest due on or before July 23, 2003.
At June 30, 2002, the Company had an aggregate 9,844,831 shares of common stock
issued and outstanding and is authorized to issue up to an aggregate 15,000,000
shares of common stock. Of the 5,155,169 shares of common stock available for
issuance, approximately 390,350 shares are reserved for vested stock options to
employees of the Company and 4,268,000 shares are reserved for Warrants issued
during the quarter (Note H to the Condensed Consolidated Financial Statements).
The Company intends to finance its working capital requirements and capital
expenditures through a combination of funds from operations and its existing
bank line with NewFirst National Bank. There can be no assurance that any of
management's plans will be successful or that the Company will continue as a
going concern, meeting current obligations as they become due.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 rescinds the following pronouncements: Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt"; Statement No.
44, "Accounting for Intangible Assets of Motor Carriers"; and Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145
related to the rescission of Statement No. 4 shall be effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. The provisions of
this Statement related to Statement No. 13 shall be effective for transactions
occurring after May 15, 2002, with early application encouraged. All other
provisions of this SFAS No. 145 shall be effective for financial statements on
or after May 15, 2002, with early application encouraged. The Company has
elected to implement SFAS No. 145 as it relates to the extraordinary gain
recorded on the Restructuring Transactions (Note B to the Condensed Consolidated
Financial Statements).
28
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities,
such as restructurings, involuntarily terminating employees, and consolidating
facilities initiated after December 31, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2002, the Company had no knowledge of any legal proceedings that,
individually, or in the aggregate, could be expected to have a material adverse
effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 24, 2002, the Company completed the private placement of 3,085,000
shares of common stock in consideration for $150,000, representing the fair
market value of such shares on the date of issuance. The proceeds received from
this private placement were used primarily to fund the Company's payment of
delinquent gas taxes. The shares of common stock issued in this private
placement transaction were issued in reliance on the exemption provided under
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
thereunder.
As compensation for facilitating the Restructuring Transactions, the Company
issued warrants to purchase an aggregate of 4,000,000 shares of common stock to
Thomas E. Cain (2.4 million) and CSS (1.6 million) at a per share exercise price
of $0.05. The warrants have a term expiring on June 21, 2020 and may not be
exercised by the holders thereof if such exercise would trigger a change in
control, as such term is defined under the Internal Revenue Code of 1986, as
amended, causing the loss or impairment of the Company's net operating loss and
capital loss carry forwards. The Company granted the holders of these warrants
certain piggyback and demand registration rights pursuant to the terms of a
Registration Rights Agreement. The warrants issued in this transaction were
issued in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D thereunder.
On June 24, 2002, the Company issued to Travelers Express Co. a warrant to
purchase 93,000 shares of common stock of the Company at a price per share of
$0.05 (the "Travelers Warrant"), the then current market price per share of the
Company's common stock. Under the terms of the Travelers Warrant, for every $2
the Company reduces the principal amount owed to Travelers under a separate
$183,000 note, 1 share of common stock subject to the Travelers Warrant shall
expire. The Travelers Warrant is not exercisable by Travelers until such time as
the market price of the Company's common stock exceeds $2.00 per share for a
period of 180 consecutive trading days. The Travelers Warrant expires on June
22, 2002, if not exercised prior to that time. The warrants issued in this
transaction were issued in reliance on the exemption provided under Section 4(2)
of the Securities Act of 1933, as amended, and Regulation D thereunder.
As part of the Restructuring Transactions, the Company cancelled the employment
agreement of Mr. J.L. Evans, Sr., former CEO and President of the Company. In
addition, the Company and Mr. Evans mutually agreed to cancel all outstanding
common stock options held by Mr. Evans aggregating 575,000. Concurrently with
the cancellation of Mr. Evans' stock options, the Company issued to Mr. Evans a
warrant to purchase 175,000 shares of common stock of the Company at a price per
share of $0.05, the then current market price per share of the Company's common
stock. The warrant expires on June 22, 2002, if not exercised prior to that
time. The warrants issued in this transaction were issued in reliance
29
on the exemption provided under Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
A. Exhibits.
Exhibit 99.1 - Certification of Blair R. Couey, as President and Chief
Executive Officer of the Company, pursuant to 18 U.S.C.
(S)1350, dated August 13, 2002.
Exhibit 99.2 - Certification of Lee Ann Cooper, as Chief Financial
Officer of the Company, pursuant to 18 U.S.C.
(S)1350, dated August 13, 2002.
B. Reports on Form 8K - The following reports on Form 8-K were filed under
the Securities and Exchange Act of 1934 in the quarter ended June 30,
2002:
Current Report on Form 8-K, dated June 28, 2002, announcing
various transactions entered into by the Company with several
third parties, each effective June 24, 2002, in which: (i) the
Company restructured or refinanced certain of its indebtedness;
(ii) the Company completed a private placement of its securities;
and (iii) the Company changed the composition of its management
and board of directors. The agreements effectuating the
Restructuring Transactions are filed as exhibits to the Current
Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 2002 EVANS SYSTEMS, INC.
By: /s/ Blair R. Couey
--------------------------------
Blair R. Couey
President and Chief Executive
Officer
By: /s/ Lee Ann Cooper
-------------------------------
Lee Ann Cooper
Chief Financial Officer
30