Back to GetFilings.com
As Filed with the Securities Exchange Commission on December 30, 2002
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21956
EVANS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1613155
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
1625 Hwy 60 North, Bay City, Texas 77414 (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)
Securities registered pursuant to Section 12(b) of the Act: None.
----------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange
Title of each class on which registered
- ------------------- ----------------------
Common Stock, par value $.01 per share NASDAQ-OTCBB Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
On December 27, 2002, the aggregate market value of the Registrant's voting
stock held by non-affiliates was approximately $689,138.
On December 27, 2001, there were 9,844,831 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE: None.
PART I
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
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 Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Annual Report on Form 10-K, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.
Item 1. Business
Evans Systems Inc. and its subsidiaries, collectively referred to herein as the
"Company" distributes motor fuels and lubricants to branded retail accounts and
commercial industrial users. At September 30, 2002, the Company operated 3
convenience stores selling gasoline, merchandise and fast food to the motoring
public, and provides environmental remediation services in southern Texas.
In September 2002, the Company adopted the first-in, first-out (FIFO) method of
costing gas and diesel fuel inventories. Previously, the last-in, first out
(LIFO) method was used. After taking into consideration the Company's plans to
hold less inventory and provide a faster inventory turn, management believes
that the FIFO method will more accurately reflect fuel inventories at or near
current replacements costs, provide a more realistic fair value measurement of
current assets and will be more representative of industry trends applied by
other regional and local petroleum distributors. In addition, FIFO provides a
uniform method for valuating all company inventories, as inventories of oil and
grease, automotive products and accessories, chemical products and convenience
store products already utilize the FIFO method of accounting. The financial
statements of prior years have been restated to apply the new method
retroactively. The balances of retained earnings (deficit) for fiscal 2002, 2001
and 2000 have been adjusted for the effect of applying retroactively the new
method of accounting. The otherwise tax liability from this change is offset by
net operating loss carryforwards of the Company generated from previous years
losses. Accordingly, no provision has been recorded.
Operating results for each of the Company's segments follow (in thousands).
Year Ended Year Ended Year Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- --------------
(As Restated) (As Restated)
Texas Petroleum Marketing
Revenue from External Customers $19,689 $27,525 $54,810
Operating Loss (1,024) (56) (425)
Texas Convenience Stores
Revenue $5,045 $12,543 $25,262
Operating Loss (849) (568) (652)
EDCO Environmental
Revenue $1,124 $962 $1,461
Operating Income (Loss) 44 19 227
Unallocated General and
Administrative Expenses (732) (943) (1,682)
Total Continuing Operations
Revenue $25,858 $41,030 $81.533
Operating Loss (2,561) (1,548) (2,532)
Louisiana Operations(1)
Revenue $ - $4,717 $13,796
Operating Loss - (766) (676)
- -----------------
(1) Louisiana operations ceased May 17, 2001 and substantially all of the
assets were sold.
Page 2
Texas Petroleum Marketing
The following table sets forth the revenues of the Texas Petroleum Marketing
segment (in thousands):
Fiscal Year Ended September 30
------------------------------
2002 2001 2000
---- ---- ----
Refined petroleum product sales $19,533 $26,900 $54,414
Non-petroleum product sales 156 625 396
------- ------- -------
Total sales $19,689 $27,525 $54,810
The Texas Petroleum Marketing segment's revenues are primarily derived from the
sale of motor fuels to the public through retail outlets:
o Gasoline retail facilities with Company-supplied equipment consisting of
pumps, lights, canopies and in many cases underground storage tanks, at
independently owned convenience stores. Under the terms of the Company's
agreements with such independent store operators ("Special Purpose
Leases"), the Company receives 40 percent or 50 percent of the gasoline
gross profit, depending upon who owns the underground gasoline equipment.
o Independently owned gasoline stations and convenience stores ("Open
Dealers") to which the Company provides major oil company brand names,
credit card processing and signs and, without further investment, receives
its customary markup on fuel deliveries.
The Texas Petroleum Marketing segment also supplies lubricants to commercial and
industrial customers.
The Texas Petroleum Marketing segment distributes to its motor fuel customers
both directly from refinery racks, and through the Company's bulk plant
facilities. The Company also has a 110,000 barrel terminal facility, located in
Bay City, Texas, from which it had historically distributed motor fuels to the
southeast Texas market. The terminal facility has been closed since fiscal 1998.
During the first quarter of fiscal 2002, the Texas Petroleum Marketing segment
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 segment recorded a net
loss on the sales of $20,000. During the second quarter of fiscal 2002, the
Texas Petroleum Marketing segment sold/retired various obsolete equipment and
vehicles for total proceeds of $18,000. The net book value of the equipment
sold/retired was approximately $41,000 and the segment recorded a loss of
$23,000.
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 Texas Petroleum Marketing segment
sold/retired various obsolete equipment and vehicles for total proceeds of
$47,000. The net book value of the equipment sold/retired was approximately
$49,000 and the Company recorded a loss of $2,000.
During the fourth quarter of fiscal 2002, the Texas Petroleum Marketing segment
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.
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.
Page 3
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
----------------------------------------------
2002 2001 2000
---- ---- ----
Refined petroleum product
sales $2,737 $ 7,379 $15,361
Merchandise sales 2,170 4,814 9,543
Other income 138 350 358
------ -------- -------
Total Sales $5,045 $12,543 $25,262
Number of operating stores
at year-end 3 8 17
At September 30, 2002, the Company operated 3 convenience stores, featuring
self-service motor fuels and a variety of food and non-food merchandise. The
Company's stores are located in smaller communities throughout the gulf coast
region of Texas.
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 approximately $179,000 and the Company recorded a $161,000 gain on the sale
during the quarter.
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 approximately$110,000 and the Company recorded a $16,000 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 approximately$49,000 and the Company recorded a loss of $2,000.
During the fourth quarter of fiscal 2002, the Company sold three company owned
convenience stores, including land, buildings, station equipment, store
equipment and inventory, for total proceeds of approximately $453,000, inclusive
of a note receivable for $112,000 (Note 7). The net book value of the assets
sold was approximately $820,000 and the Company recorded a $367,000 loss 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.
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
Page 4
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 $1,124,000, $962,000 and $1,461,000 in
2002, 2001 and 2000, 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
At September 30, 2002, the Company employed 39 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.
Page 5
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 that 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. Properties
The Company owns 17 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 3 retail locations
and has 1 ground lease for the 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. 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,
2002, 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.
Page 6
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Stock Information
Traded On the Nasdaq Over The Counter Bulletin Board (OTCBB) Quotation System --
The Company's Common Stock, $.01 par value, is listed on the OTCBB exchange
under the Symbol "EVSI." At September 30, 2002, there were approximately 1,285
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 $787,586 on September 30, 2002.
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, 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
October 1, 2001 through December 31, 2001 .15 .11
January 1, 2002 through March 31, 2002 .17 .02
April 1, 2002 through June 30, 2002 .26 .06
July 1, 2002 through September 30, 2002 .38 .08
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 restated certain 1998 thru 2001 financial data to apply the change from the
LIFO method of accounting to the FIFO method of accounting retroactively for
fuel inventories.
Year Ended September 30,
-----------------------------------------------------------
Income Statement Data: 2002 2001 2000 1999 1998
- ---------------------- ------- ------- ------- ------- -------
Revenues $25,858 $41,030 $81,533 $74,579 $91,236
Gross Profit 2,526 4,807 8,894 10,138 11,556
Operating Income (Loss) (2,561) (1,548) (2,532) (2,705) (4,057)
Income (Loss) from Continuing Operations (2,630) (2,313) (5,030) (7,007) (4,615)
Net Income (Loss) (831) (3,046) (5,735) (7,300) (5,542)
Basic Income (loss) from continuing
operations per common share(1) (0.35) (0.38) (1.18) (1.82) (1.48)
Basic earnings (loss) per common share(1) (0.11) (0.50) (1.35) (1.90) (1.78)
Basic weighted average number of common
shares outstanding(1) 7,588 6,134 4,263 3,846 3,116
Diluted earnings (loss) from continuing
operations per common share(1) (0.35) (0.38) (1.18) (1.82) (1.48)
Diluted earnings (loss) per common share(1) (0.11) (0.50) (1.35) (1.90) (1.78)
Weighted average number of common and
common equivalent shares outstanding(1) 7,588 6,134 4,263 3,846 3,116
- --------------
(1) Adjusted for 5% stock dividend paid on January 20, 1997.
Page 7
Balance Sheet Data: 2002 2001 2000 1999 1998
- ------------------- ------- ------- ------- ------- -------
Current Assets $2,194 $3,034 $6,516 $6,830 $10,103
Current Liabilities 2,519 12,002 19,301 16,452 9,751
Current Ratio .87:1 25:1 34:1 42:1 1.04:1
Total Assets 5,771 11,474 21,689 24,475 32,637
Long-Term Debt 5,070 609 716 1,634 11,151
Total Stockholders' Equity (1,818) (1,137) 1,672 6,229 11,735
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.
During the three years in the period ended September 30, 2002, the Company has
recorded operating losses from continuing operations aggregating $9.97 million
and net losses aggregating $9.6 million. At September 30, 2002, the Company has
a working capital deficit of $325,000 and a stockholders' deficit of $1,818,000.
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.
New management and directors were appointed on June 24, 2002. During the three
months ended September 30, 2002 an extensive analysis of the Company operations
was performed to determine an achievable growth and liquidity plan. Management
came to the conclusion that a conservative and cost effective plan should
concentrate in areas that management has maintained a successful record of
accomplishments. The Company's future focus will be on developing its Petroleum
Marketing Segment through utilization of new marketing personnel to solicit new
customers and existing personnel to contact and regain customers that were lost
in the prior years. This plan does not require capital intensive expenditures
and should increase revenues and accompanied with the cost reductions in
personnel and overhead that have been accomplished restore the company to
profitability.
Management determined inventory of approximately $78,000 was obsolete and
written off during the fourth quarter of 2002. The Company was delinquent in
many of its ad valorem property taxes dating back to 1998, amounting to over
$800,000. The involved Texas counties have all been contacted and workout plans
agreed to. However, there can be no assurance that the Company will be able to
generate sufficient cash flows to meet the requirements of the work out plans.
Consistent with this plan the Company sold its inventory in the four remaining
Diamond Mini Mart stores in November 2002 and leased the locations to outside
operators. The Petroleum Marketing Segment executed fuel contracts with these
locations maintaining the fuel volumes. The second phase of managements plan is
to open the Fuel Terminal utilizing a joint venture, thru-put partner, or
supplier to begin operations. The Fuel Terminal operation will reduce overall
product cost and freight expense, adding additional revenues to the Petroleum
Marketing Segment.
The Environmental Segment has made a marginal profit over the years and
maintained a positive cash flow. Management intends to expand the Environmental
Segment by creating a Testing Division. The Company is currently exploring the
feasibility of acquiring through merger a company currently performing line,
tank, and soil testing. Financial institutions have become increasingly aware of
potential environmental hazards and the cost associated there with, on
properties they finance. The need for testing to determine if any pollution
exist on properties will continue for an unforeseeable time into the future. For
this reason management believes adding a testing segment will increase the
revenues and profitability of the Environmental Segment.
Management will continue to reduce debt and provide working capital through the
sale of non-income producing assets.
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.
Page 8
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations when such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circum-stances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
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. Expenses are
recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized
using the percentage-of-completion method, measured by the percentage of
cost incurred to date to estimated total cost at completion for each
contract. Profit recognition is deferred on each contract until progress
reaches a level of completion sufficient to establish the probable outcome.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability that result in revisions to costs
are recognized in the period in which the changes are determined. Because
of the inherent uncertainties in estimating, it is at least reasonably
possible that such changes will occur within the near term.
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. During fiscal
2002, the Company implemented a change in accounting principle whereby gas
and diesel fuels inventory were valued using the FIFO method of accounting
in place of the last-in, first-out (LIFO) method (see Change in Accounting
Principle below).
Change in Accounting Principle
In September 2002, the Company adopted the first-in, first-out (FIFO)
method of costing gas and diesel fuel inventories. Previously, the last-in,
first out (LIFO) method was used. After taking into consideration the
Company's plans to hold less inventory and provide a faster inventory turn,
management believes that the FIFO method will more accurately reflect fuel
inventories at or near current replacements costs, provide a more realistic
fair value measurement of current assets and will be more representative of
industry trends applied by other regional and local petroleum distributors.
In addition, FIFO provides a uniform method for valuating all company
inventories, as inventories of oil and grease, automotive products and
accessories, chemical products and convenience store products already
utilize the FIFO method of accounting. The financial statements of prior
years have been restated to apply the new method retroactively. The
balances of retained earnings (deficit) for fiscal 2002, 2001, 2000 and
prior years have been adjusted for the effect of applying retroactively the
new method of accounting. The otherwise tax liability from this change is
offset by net operating loss carryforwards of the Company generated from
previous years losses. Accordingly, no provision has been recorded.
For a more comprehensive list of our accounting policies, including those which
involve varying degrees of judgment, see Note 1 of Notes to Consolidated
Financial Statements.
Page 9
RESULTS OF OPERATIONS
2002 Compared With 2001
Consolidated revenues from continuing operations decreased $15,172,000 or
approximately 37% to $25,858,000 in the year ended September 30, 2002. 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
during fiscal 2001 and 5 more company operated convenience stores in it's Texas
Convenience Store Segment.
Consolidated gross profit from continuing operations declined $2,281,000 or
approximately 47 % to $2,526,000 in the year ended September 30, 2002. Gross
profit expressed as a percentage of revenues ("Gross Margin") decreased to
approximately 10% of sales in 2002 from approximately 12% of sales in 2001. The
decrease in gross margin in 2002 is mainly attributable to margin decreases
realized in Texas Petroleum Marketing and Texas Convenience Store Segment offset
by increases in the Environmental segment margins. See segment discussions
below.
Consolidated operating expenses declined $1,268,000 or approximately 20% in 2002
to $5,087,000. The decrease in operating expenses were mainly attributable to
savings related to personnel reductions of $1,318,000, general and
administrative expense cost cuts of $316,000, reduced depreciation expense of
$426,000 and other operating expense reductions of $419,000. The effects of
those reductions was offset by a loss on asset sales of $205,000, as compared to
a gain of $1,006,000 in 2001.
Consolidated operating losses increased $1,013,000 to $2,561,000 in 2002 as
compared with a loss of $1,548,000 in 2001. Excluding the effect of gain (loss)
of assets sales on operating losses in 2002 and 2001, consolidated operating
losses decrease $198,000 to $2,356,000 in 2002 compared to $2,554,000 in 2001.
Consolidated loss from continuing operations increased to $2,630,000 in 2002 as
compared to $2,313,000 in 2001. Loss from continuing operations in 2002 includes
$69,000 in interest expense. Loss from continuing operations in 2001 includes
$689,000 in interest expense.
Consolidated net loss decreased $2,215,000 to $831,000 in 2002 as compared to a
net loss of $3,046,000 in 2001. Consolidated net loss in 2002 includes an
extraordinary gain of $1,799,000 on the Restructuring Transactions. Consolidated
net loss in 2001 includes a $733,000 loss on discontinued operations of Evans
Oil of Louisiana.
Texas Petroleum Marketing Segment
Revenues in the Texas Petroleum Marketing Segment decreased $7,836,000 or
approximately 28% to $19,689,000 in 2002, as compared with $27,525,000 in 2001.
Sales in gallons declined to 15,918,000 gallons in 2002 from 17,698,000 gallons
in 2001, a decline of approximately 10%. Average selling price per gallon
increased in 2002 to approximately $1.24 per gallon, as compared with $1.52 per
gallon in 2001. The decrease is due to nation wide cost decreases in 2002 that
lowered selling prices per gallon as compared to 2001.
Gross Profit in 2002 declined to $1,100,000 from $2,104,000 in 2001, a decline
of $1,004,000 or approximately 48%. Gross Margin increased to approximately 6%
of sales in 2002 from approximately 8% of sales in 2001.
Operating expenses in 2002 increased to $2,124,000 from $2,027,000 in 2001, an
increase of $97,000 or approximately 5%, which are inclusive of a loss on asset
sales of $160,000 in 2002 as compared to a gain of $587,000 in 2001. Excluding
the gain (loss) on assets sales, operating expenses decreased to $1,964,000 in
2002 from $2,614,000. The reduced expenses resulted from the Company's reduction
of staff, overhead, other expense expenses, and decreased depreciation expense
due the continued downsizing of the Texas Petroleum Marketing segment through
asset and distribution contract sales.
Operating loss on 2002 of $1,024,000 decreased from a gain in 2001of $77,000, a
change of $1,101,000. Excluding the gain (loss) on assets sales, operating loss
decreased to $865,000 in 2002 from $510,000 in 2001.
Texas Convenience Store Segment
At September 30, 2002, the Company operated 3 convenience stores, featuring
self-service motor fuels and a variety of food and non-food merchandise. The
Company's stores are located in smaller communities throughout the gulf coast
region of Texas.
Page 10
Total sales decreased $7,498,000 or approximately 60% in 2002 to $5,045,000 from
$12,543,000 in 2001. Fuel sales in 2002 were $2,737,000, as compared with
$7,379,000 in 2001. Fuel sales in gallons declined in 2002 to 2,133,000 gallons,
as compared with 5,017,000 gallons in 2001. Merchandise sales decreased
$2,644,000 to $2,170,000, as compared with $4,814,000 in 2001. Average selling
price per gallon decreased in 2002 to approximately $1.28 per gallon, as
compared with $1.47 per gallon in 2001. The decrease is due to nation wide cost
decreases in 2002 that lowered selling prices per gallon.
Gross profit declined to $844,000 in 2002 as compared with $2,127,000 in 2001.
Gross Margin in the Texas Convenience Store segment was approximately 17% in
2002 and 2001. Merchandise Gross Margin decreased in 2002, to approximately 24%
of sales, as compared to approximately 25% of sales in 2001. Fuel Gross Margin
decreased to approximately 7% during 2002, as compared with approximately 9%
during 2001.
Operating expenses during 2002 in the Texas Convenience Store segment was
$1,693,000 as compared with $2,695,000 in 2001, a decrease of $1,002,000 or
approximately 37%.
The Convenience Store segment incurred an operating loss of $849,000 in 2002, as
compared with a loss of $568,000 in 2001. The increased loss is due to declining
margins in fuel sales created by a highly competitive market as well as declined
sales over cost reductions.
EDCO Environmental Segment
EDCO Environmental reported an operating profit of $44,000 in the year ended
September 30, 2002, as compared with $19,000 in 2001. The increase is primarily
attributable to an increase in gross profit of $6,000 as well as a reduction of
operating cost of $18,000 from 2001. 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 $344,000 in 2002 to
$732,000 as compared with $1076,000 in 2001.
2001 Compared With 2000
Consolidated revenues from continuing operations decreased $40,503,000 or
approximately 50% 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 $4,087,000 or
approximately 46% to $4,807,000 in the year ended September 30, 2001. Gross
profit expressed as a percentage of revenues ("Gross Margin") increased to
approximately 12% of sales in 2001 from approximately 11% 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 $984,000 to $1,548,000 in 2001, as
compared with a loss of $2,532,000 in 2000.
Consolidated loss from continuing operations decreased to $2,313,000 in 2001 as
compared to $5,030,000 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.
Page 11
Consolidated net loss decreased $2,689,000 to $3,046,000 in 2001 as compared to
a net loss of $5,735,000 in 2000. Net loss in 2001 and 2000 include losses on
discontinued operations of $733,000 and $705,000, respectively.
Texas Petroleum Marketing Segment
Revenues in the Texas Petroleum Marketing Segment decreased $27,285,000 or
approximately 50% 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 56%. 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 $2,104,000 from $3,915,000 in 2000, a decline
of $1,811,000 or approximately 46%. Gross Margin increased to approximately 8%
of sales in 2001 from approximately 7% 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%. 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
of assets of $580,000.
Operating gain in 2001 of $77,000 increased from a loss of $425,000 in 2000, a
change of $502,000 or approximately a 118% 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% 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 $2,127,000 in 2001 as compared with $4,178,000 in 2000.
Gross Margin in the Texas Convenience Store segment increased in 2001 to
approximately 17% as compared with approximately 16% in 2000. Merchandise Gross
Margin decreased in 2001, to approximately 25% of sales, as compared to
approximately 28% of sales in 2000. Fuel Gross Margin increased to approximately
9% during 2001, as compared with approximately 7% 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%.
The Convenience Store segment incurred an operating loss of $568,000 in 2001, as
compared with a loss of $652,000 in 2000. 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 $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.
Page 12
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.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $491,000 and $604,000 at September 30, 2002 and
2001, respectively. The Company had a net working capital deficit of $325,000 at
September 30, 2002, as compared with a deficit of $8,968,000 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 3 to the Consolidated Financial Statements). The
restructuring and payoff was offset by current changes in current assets and
current liabilities.
Cash used by operating activities was $1,415,000 for the year ended September
30, 2002. During that period, cash provided from investing activities was
$1,080,000, which was comprised of capital expenditures of $39,000 and note
receivable issuances of $115,000 offset by proceeds from the sales of assets of
$1,234,000. Cash provided from financing activities was $222,000, which was
comprised of proceeds of $150,000 from the private placement of common stock to
MC and $479,000 of net proceeds from the Company's line of credit agreement with
NewFirst National Bank, offset by $407,000 in debt repayments.
Cash used by operating activities was $2,967,000 for the year ended September
30, 2001. During that period, cash provided from investing activities was
$7,394,000, which was comprised of capital expenditures of $125,000 offset by
proceeds from the sales of assets of $7,519,000. Cash used by financing
activities was $4,548,000, which was comprised of proceeds of $237,000 from the
private placement of common stock offset by $4,785,000 in debt repayments, net
of new borrowings of $536,000.
As of September 30, 2002, the Company had an aggregate of approximately
$5,547,000 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 54 months commencing 6
months from the closing of the Restructuring 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 $1,047,000,
approximately $709,000 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. The remaining outstanding principal
balance is due under various terms to various third parties. As of September 30,
2002, approximately $477,000 in outstanding principal is due within one year,
compared to approximately $4,943,000 at September 30, 2001.
In July 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. During the year ended September 30,
2002, the Company borrowed an aggregate of $1,050,000 under the agreement and
repaid an aggregate of $571,000. At September 30, 2002, the Company had $479,000
outstanding under the line of credit agreement.
At September 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 14 to the Consolidated Financial
Statements).
Page 13
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require
the accrual, at fair value, of the estimated retirement obligation for tangible
long-lived assets if the company is legally obligated to perform retirement
activities at the end of the related asset's life. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management does not believe that the
initial adoption of this standard will have a material impact on the Company's
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supersedes SFAS 121, "Accounting for the Impairment or Disposal
of Long-Lived Assets and for Long-Lived Assets to be disposed of," but retains
many of its fundamental provisions. Additionally, this statement expands the
scope of discontinued operations to include more disposal transactions. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The adoption of
this standard did not have a material impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement modifies the treatment of sale-leaseback transactions and
extinguishment of debt allowing gains and losses to be treated as income in most
circumstances. SFAS No. 145 is generally effective for transactions occurring
after May 15, 2002. Management does not believe that the initial adoption of
this standard will have a material impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that the Company
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. SFAS
No. 146 is effective for the Company for any exit plans commencing after
December 31, 2002. Management does not believe that the initial adoption of this
standard will have a material impact on the Company's financial statements.
RECENT EVENTS
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.
o CSS acquired approximately $100,000 of past due indebtedness owed by
the Company to certain of its trust creditors.
Page 14
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 54
months commencing six months from the closing of the transaction, with
the principal balance and accrued but unpaid interest due June 24,
2007;
o Extinguish the $789,000 owed to Deutsche Financial Services; and
o Extinguish the $2,734,367 of indebtedness owed to certain 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 (Note 14);
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. Those
agreements are as follows:
o Issued a note payable of $406,474 to Matagorda County Tax
Assessor-Collector. The terms of the note call for monthly payments of
$13,500 for 36 months beginning September 20, 2002. The outstanding
principal balance at September 30, 2002 was approximately $397,000.
o Issued a note payable of $217,120 to Wharton County Tax
Assessor-Collector. The terms of the note call for monthly payments of
$9,500 for 24 months beginning November 30, 2002. The outstanding
principal balance at September 30, 2002 was approximately $217,000.
o Issued a note payable of $26,084 to Jackson County Tax
Assessor-Collector. The terms of the note call for monthly payments of
$1,100 for 24 months beginning September 30, 2002. The outstanding
principal balance at September 30, 2002 was approximately $25,000.
o Issued a note payable of $64,562 to Brazoria County Tax
Assessor-Collector. The terms of the note call for monthly payments of
$8,333 for 8 months beginning July 15, 2002. The outstanding principal
balance at September 30, 2002 was approximately $38,000.
o Issued a note payable of $80,576 to Victoria County Tax
Assessor-Collector. The terms of the note call for monthly payments of
$2,000 until paid in full beginning September 25, 2002. The
outstanding principal balance at September 30, 2002 was approximately
$32,000.
Page 15
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.
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.
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.
(In Thousands)
Accounts payable and Accruals Extinguished
Accounts payable $ 2,679
Accrued wages 55
Accrued taxes 724
Accrued interest 889
-------
Total accounts payable and accruals extinguished 4,347
Notes payable extinguished/restructured
JP Morgan Chase 4,631
Duetche Financial 704
Chrysler capital lease 63
Other 1
-------
Total notes payable extinguished/restructured 5,399
-------
Total debts extinguished/restructured 9,746
New debt issued/restructured
CSS 4,500
Travelers 183
Phillips 49
McLane 45
Olsham 11
Property tax districts 724
-------
Total debt issued/restructured 5,512
-------
Extraordinary gain on debt restructuring transactions 4,234
Extraordinary loss on assets conveyed to CSS (2,435)
-------
Net extraordinary gain on restructuring transactions $ 1,799
=======
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 16). 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.
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
Page 16
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
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company included in this annual
report on Form 10-K are listed under Item 14, Exhibits, Financial Statement
Schedules and Reports on Form 8-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the current
directors and executive officers of the Company.
NAME POSITION AGE
- --------- -------- ---
Thomas E. Cain Chairman of the Board 47
Blair R. Couey Director and President 50
Lee Ann Cooper Director, Secretary and Treasurer 39
Randy Clapp Director 48
Leah Jagot Kelley Director 50
Randal Dean Lewis Director 59
Jerry L. Evans, Jr. Director 37
Peter J. Losavio, Jr. Director 61
The principal occupation of each director and executive officer for at least the
last five years is set forth below:
Thomas E. Cain is President & CEO of Focus Capital Group LLC, which is a buyout,
and turnaround firm 50% owned by Focus Capital Group, Israel. He is also
Chairman of the Board for Frontstep distribution.com the acquisition corp for
Frontstep NASDAQ (FSTP), a $100M ERP software firm for the mid-market
manufacturing market. He currently serves Young Presidents Organization as
Chairman of the MIT/Sloan Presidents Seminar, Chairman of the Global Supply
Chain Conference and group leader for Harvard Business School Presidents
Education. Mr. Cain is also a Director for: Autom, the world's leader of church
goods; Chambers Belt Co. a leading manufacturer of designer leather accessories
for mass merchants; Landiscor, the world leader in aerial surveys;
Page 17
Poore Brothers NASDAQ (SNAK), branded snack food manufacturer of intensely
distinctive products such as TGIFridays; Servus, Eastern Europe's leading
supplier of POS's, ATM's, large commercial system maintenance and support;
WinHolt, leading manufacturer of retail fixture. In 2001, Mr. Cain served as
Chief Technology Officer and Senior VP of Engineering for Interact Commerce, a
$100M Software Company that made ACT and SalesLogix until purchased by Sage. All
product development, globalization, customer/product support and delivery
services reported to him. He holds current Microsoft MCSE+I technical
certifications and a BS in mathematics from Arizona State University. In 1976,
Mr. Cain formed Distribution Architects that became one of North Americas
largest and most successful supply chain execution software companies. As
President & CEO, he merged it 23 years later with Symix Systems.
Blair R. Couey is a lifelong resident of El Campo, Texas and has been the
managing partner of Mauritz and Couey Petroleum Marketing in El Campo, Texas
since 1988. Mr. Couey has been on the Texas Petroleum and convenience Store
Board of Directors, representing Region VII of Gulf Coast of Texas since 1999.
Mr. Couey has also served on the El Campo, Texas Chamber of Commerce, Economic
Development Board and City Development Corp and is a graduate of Sam Houston
Business School.
Lee Ann Cooper has served as the controller of MC since August of 1995. Prior to
joining MC, Ms. Cooper practiced in public accounting performing audits,
reviews, and tax return preparation for individuals, partnerships and
corporations. Ms. Cooper has a degree from Auburn University and is certified to
practice public accounting in the States of Texas and Alabama. She is a member
of the American Institute of Certified Public Accountants, Texas Society of
Certified Public Accountants, and Alabama Society of Certified Public
Accountants.
Randy M. Clapp is a partner in the Texas law firm of Duckett, Bouligny &
Collins, LLP. He practices primarily in the areas of Estate Planning, Products
Liability Defense, Commercial Litigation, Real Estate, Oil and Gas, and Business
Planning. Mr. Clapp is a member of the State Bar of Texas, the U.S. District
Court for the Southern and Eastern Districts of Texas and the U.S. Court of
Military Appeals. He was educated at Trinity University, the University of Texas
School of Law, and the Judge Advocate General's School of Law in the U.S. Army.
Mr. Clapp presently serves on the board of directors of New First National Bank
and MC. He has received numerous awards, and has served as president of the
following organizations: University of Houston Victoria President's Advisory
Council, Wharton County Junior College Board of Trustees, Northside Education
Center, Memorial Hospital El Campo, West Wharton County Hospital District Board
of Trustees, El Campo Economic Development Corporation, Wharton County Bar
Association, El Campo Rotary Club and El Campo Chamber of Commerce.
Leah Jagot Kelley is the Chief Financial Officer for Collateral Protection, Inc.
of Huntsville, Texas and has served in that position since 1986. CPI writes in
excess of $15 million per year in premiums. Prior to becoming Chief Financial
Officer in 1986, Leah was the office manager for CPI from 1976 until 1986 and
has been with the company since 1973. Leah holds numerous professional insurance
licenses.
Randal Dean Lewis, Ph.D has served as Dean of the College of Business
Administration at Sam Houston State University since 1996. He has progressed
through the academic ranks from instructor to professor of marketing during his
academic career. He has published numerous cases, held executive positions in
many community service organizations, and is currently a board member of a
global oil services corporation. During the 1980's, Dr. Lewis took leave from
academia and worked in the banking industry. In addition to his current
administrative duties, Dr. Lewis is active in numerous professional
organizations, consults with deans of business programs regarding AACSB
preparation, and serves on peer review teams.
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 and now serves only as a Director.
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
Page 18
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.
Meetings and Committees of the Board of Directors
During the fiscal year ended September 30, 2002 ("Fiscal 2002"), the Company's
Board of Directors formally met on 3 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 2002. The Board of
Directors has no committees other than Audit Committee.
The Company's Audit Committee, which is comprised of Leah Jagot Kelley
(Chairman) and Randal Dean Lewis, 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 3
occasions during Fiscal 2002.
Compensation of Directors
During Fiscal 2002, 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.
Effective June 24, 2002 and in conjunction with the Restructuring Transactions,
director compensation was restructured to be performance based.
Item 11. Executive Compensation
The following table sets forth, for the fiscal years ended September 30,
2002,2001,and 2000, 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, 2002 who received compensation of at
least $100,000 during the Fiscal 2002 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
----------------------------------------- ----------------------------------------
Other Annual Restricted
Name and Compensation Stock All Other
Principal Position Year Salary($) Bonus($) ($)(1)(2)(3) Awards($) Options(#) Compensation
------------------ ---- --------- -------- ------------- ---------- ---------- ------------
Jerriel L. Evans, Sr. (2)
Chairman of the Board, 2002 73,846 -0- -0- -0- (2)
President and 2001 150,000 -0- 208,000 800,000 (2)
Chief Executive Officer 2000 140,000 -0- 51,600 -0- (2)
Page 19
1. 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.
2. In addition to the compensation for Mr. Evans set forth above, he also
received lease income for the rental of various properties used by the
Company. See Note 15 to the Consolidated Financial Statements,
included herein. The amounts included in Other Annual Compensation are
$25,500, $48,000 and $51,600 for the years 2002, 2001, and 2000,
respectfully.
3. 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
There were no Options/SARs granted during Fiscal 2002 to the Named Officers.
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.
In conjunction with the Restructuring Transactions, the Company cancelled the
employment agreement of Mr. J.L. Evans, Sr. 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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.
Amount and
Nature of Percent of
Name and Address (1) Beneficial Ownership (2) Class (3)
-------------------- ------------------------ ----------
J.L. Evans Systems, Ltd., a Texas Limited Partnership 580,500(4) 5.9%
J.L. Evans, Sr. 644,735(5) 6.5%
Maybell H. Evans 593,000(6) 6.0%
Mauritz & Couey 3,085,000(7) 31.3%
Blair R. Couey 3,085,000(8) 31.3%
Randy Clapp 3,130,000(9) 31.8%
Randal Dean Lewis 12,000 *
J.L. Evans, Jr. 75,250 (10) *
Peter J. Losavio, Jr. 106,700(11) 1.1%
8414 Bluebonnet Blvd., Suite 110
Baton Rouge, LA 70810
All executive officers and Directors as a group (5 persons) 3,323,950 33.8%
- --------------
* less than 1%
Page 20
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 580,500 shares held by J.L. Evans Systems, Ltd., of which Mr.
Evans claims beneficial ownership.
6. Includes 580,500 shares held by J.L. Evans Systems, Ltd., of which Mrs.
Evans claims beneficial ownership.
7. Mauritz & Couey, a Texas General Partnership, is controlled by 8 Texas
Corporations (Ross Couey Corporation, T.N & S.E. Mauritz Corporation,
M.O.W. Corporation, Clapp Investments, Inc., Loli, Inc., Schiurring
Interests, Inc, Coastal Commodities, Inc. and Maurco Corporation).
8. Includes 3,085,000 shares held by Mauritz & Couey, of which Blair Couey
claims beneficial ownership.
9. Includes 3,085,000 shares held by Mauritz & Couey and 45,000 held by Mr.
Clapp's wife, of which Randy Clapp claims beneficial ownership.
10. Includes 50,250 shares issuable to Mr. Evans Jr. upon the exercise of
options.
11. Includes 20,000 shares issuable to Mr. Losavio 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.
Equity Compensation Plan Information
Information concerning equity compensation plans has been provided in Note 14 to
the Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions
During 2002, 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 terminated during March
2002. 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 made monthly
rental payments of $1,500 under a month-to-month rental agreement until April
2002, at which time the agreement was cancelled. The amounts paid under these
leases were $25,500, $48,000 and $51,600 for the years ended September 30, 2002,
2001 and 2000, respectively. There are no future minimum lease commitments as of
September 30, 2002 under these agreements.
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, 2002 and 2001. The Company has also issued various stock options
and warrants to directors, officers and key employees.
Item 14. Controls and Procedures
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and its Chief Financial
Officer within 90 days of the filing of this report, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits
Page 21
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
its principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
I. The following financial statements, schedules and exhibits are filed as part
of this report:
(1) and (2) Financial Statements and Financial Statement Schedules - See
Index to Consolidated Financial Statements on Page F-1.
(3) Exhibits.
See Index to Exhibits on sequential page 23.
II. Reports on Form 8-K - The following reports on Form 8-K were filed under the
Securities and Exchange Act of 1934 during the year ended September 30, 2002:
Current Report on Form 8-K, dated June 24, 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.
CERTIFICATIONS
I, Blair R. Couey, certify that:
1. I have reviewed this report on Form 10-K for Evans Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report.
Date: December 30, 2002
By: /s/ BLAIR R. COUEY
-------------------------------------
Blair R. Couey
President and Chief Executive Officer
I, Lee Ann Cooper, certify that:
1. I have reviewed this report on Form 10-K of Evans Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: December 30, 2002
By: /s/ LEE ANN COOPER
-------------------------------------
Lee Ann Cooper
Vice President, Finance, Chief
Financial Officer and Secretary,
Principal Financial and Accounting
Officer
SIGNATURES
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/ Blair R. Couey /s/ Lee Ann Cooper
- -------------------------------------- ---------------------------------
Blair R. Couey, Lee Ann Cooper
President and Chief Executive Officer Chief Financial Officer
/s/ Thomas E. Cain /s/ Randy M. Clapp
- -------------------------------------- ---------------------------------
Thomas E. Cain Randy M. Clapp
Chairman of the Board of Directors Director
Page 22
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, 1992(1). Filed with May 11, 1993 filing of
Form S-1 Registration #33-62684.
3.3 Certificate Amendment of Articles of Incorporation of Evans
Systems, Inc., filed with the Texas Secretary of State on April
9, 1993. Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
3.4 By-Laws of the Company. Filed with May 11, 1993 filing of Form
S-1 Registration #33-62684.
10.1 Phillips "66" Marketing Agreement dated October 21, 1986. Filed
with May 11, 1993 filing of Form S-1 Registration #33-62684.
10.2 Amoco Lubricants Distributor Agreement dated June 21, 1990 and
Schedule dated January 2, 1992. Filed with May 11, 1993 filing
of Form S-1 Registration #33-62684.
10.3 Diamond Shamrock Storage Lease dated July 12, 1985. Filed with
May 11, 1993 filing of Form S-1 Registration #33-62684.
10.4 Star Enterprise "Texaco" Marketing Agreement effective July 1,
1993. Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.5 Shell Lubricants Reseller Agreement effective January 1, 1992.
Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.6 Texaco Lubricants agreement effective July 1, 1990. Filed with
May 11, 1993 filing of Form S-1 Registration #33-62684.
10.7 Conoco Jobber Franchise Agreement effective April 1, 1990. Filed
with May 11, 1993 filing of Form S-1 Registration #33-62684.
10.8 Mobil Marine Distributor Agreement effective June 3, 1992. Filed
with May 11, 1993 filing of Form S-1 Registration #33-62684.
10.9 Form of Series B Warrants to Purchase Common Stock of
Registrant. Filed with May 11, 1993 filing of Form S-1
Registration #33-62684.
10.10 Coastal Refinery & Marketing, Inc. Facilities Access Agreement,
effective September 5, 1989. Filed with May 11, 1993 filing of
Form S-1 Registration #33-62684.
10.11 FINA Lubricants Marketing Agreement dated February 1, 1989.
Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.12 Texaco Terminating Agreement dated April 30, 1986. Filed with
May 11, 1993 filing of Form S-1 Registration #33-62684.
10.13 Citgo Petroleum Distributor Franchise Agreement effective August
1, 1992. Filed with May 11, 1993 filing of Form S-1 Registration
#33-62684.
10.14 Incentive Stock Option Plan. Filed with May 11, 1993 filing of
Form S-1 Registration #33-62684.
10.15 Form of Incentive Stock Option Agreement. Filed with May 11,
1993 filing of Form S-1 Registration #33-62684.
10.16 Summary Plan Description of E.S.O.P. Filed with May 11, 1993
filing of Form S-1 Registration #33-62684.
10.17 Employment Contract with Bill R. Kincer, incorporated by
reference from Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1994.
10.18 Pruett Petroleum, Inc. and Koonce Petroleum Company, Inc.
agreement dated October 4, 1994, incorporated by reference from
Exhibit 10.29 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1994.
10.19 Employment Agreement with Richard A. Goeggel, effective June 16,
1998, incorporated by reference from Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
10.20 Omitted.
Page 23
Exhibit Sequential Page
Number Description of Document Number
------- ----------------------- ----------------
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.
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, incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the three months ended December 31, 2000
10.31 Amendment to Loan Agreement dated August 31, 1999, incorporated
by reference from the Company's Quarterly Report on Form 10-Q
for the three months ended December 31, 2000
10.32 Amendment to Loan Agreement dated November 30, 1999, incorporated
by reference from the Company's Quarterly Report on Form 10-Q
for the three months ended December 31, 2000
10.33 Stipulated Judgment dated December 1, 2000 in the District Court
of Matagorda, Texas, 130th Judicial District, incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the three months ended December 31, 2000
10.34 Deed in Lieu of Foreclosure dated September 26, 2000 by and
between ChemWay, Inc., Way Energy, Inc. and Evans Systems, Inc.,
incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the three months ended December 31, 2000
10.35 Earnest Money Contract (Convenience Stores) By and Between Evans
Systems, Inc., Diamond Mini-Mart, Inc. and State Oil Company,
LLC, incorporated by reference from Exhibit 10.35 to the
Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 2002.
10.36 Amendment to Loan Agreement and Modification of Note,
incorporated by reference from Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 24, 2002
10.37 Notice of Entire Agreement, incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
June 24, 2002
10.38 Promissory Note, incorporated by reference from Exhibit 10.3 to
the Company's Current Report on Form 8-K dated June 24, 2002
10.39 Release of Claims, incorporated by reference from Exhibit 10.4
to the Company's Current Report on Form 8-K dated June 24, 2002
10.40 Assignment of Notes and Liens, incorporated by reference from
Exhibit 10.5 to the Company's Current Report on Form 8-K dated
June 24, 2002
10.41 Form of Warrants issued to Cain, Smith & Strong II, L.P., Thomas
E. Cain, J.L. Evans, Sr., and Travelers Express Co.,
incorporated by reference from Exhibit 10.6 to the Company's
Current Report on Form 8-K dated June 24, 2002
10.42 Common Stock Purchase Agreement, incorporated by reference from
Exhibit 10.7 to the Company's Current Report on Form 8-K dated
June 24, 2002
10.43 Registration Rights Agreement, incorporated by reference from
Exhibit 10.8 to the Company's Current Report on Form 8-K dated
June 24, 2002
Page 24
Exhibit Sequential Page
Number Description of Document Number
------- ----------------------- ----------------
10.44 Evans Systems, Inc./J.L. Evans Agreement, incorporated by
reference from Exhibit 10.9 to the Company's Current Report on
Form 8-K dated June 24, 2002
10.45 Management and Support Services Agreement, incorporated by
reference from Exhibit 10.10 to the Company's Current Report on
Form 8-K dated June 24, 2002
*18.0 Letter Regarding Change in Accounting Principle
*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
& Trilicek, P. C. included herein.
*99.1 Certification of Blair R. Couey, as President and Chief
Executive Officer of the Company, pursuant to U.S.C.(s)1350,
dated December 30, 2002
*99.2 Certification of Lee Ann Cooper, as Chief Financial Officer of
the Company, pursuant to U.S.C.(s)1350, dated December 30, 2002
- ------------
* Filed herewith.
Page 25
Evans Systems, Inc.
Index to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
Page No.
-------------
Independent Auditor's Report F-2
Consolidated Balance Sheets at September 30, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
September 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended September 30, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
F-1
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, 2002 and 2001 and the related
consolidated statement of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended September 30, 2002. 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.
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, 2002 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2002 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 19 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 19. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ STEPHENSON & TRLICEK, P.C.
Wharton, Texas
December 3, 2002
F-2
Evans Systems, Inc.
Consolidated Balance Sheets
September 30, 2002 and 2001
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
-------- --------
Assets (As Restated)
Current assets:
Cash and cash equivalents $ 491 $ 604
Trade receivables, net of allowance for doubtful receivables of
$47,000 and $73,000, respectively 913 937
Inventory 507 1,223
Costs and estimated earnings in excess of billings on
uncompleted contracts 72 --
Prepaid expenses and other current assets 96 270
Notes receivable, current portion 115 --
-------- --------
Total current assets 2,194 3,034
Property and equipment, net 3,547 8,258
Other assets 30 182
-------- --------
Total assets $ 5,771 $ 11,474
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses $ 1,165 $ 3,781
Accrued excise, property and other taxes payable 385 1,211
Advances on line of credit 479 --
Current portion of long-term debt 477 4,943
Current portion of obligations under capital leases -- 790
Accrued interest 10 1,277
Billings in excess of costs and estimated earnings on
uncompleted contracts 3 --
-------- --------
Total current liabilities 2,519 12,002
Long-term debt, net of current maturities 5,070 609
Obligations under capital leases, net of current maturities -- --
-------- --------
Total liabilities 7,589 12,611
Stockholders' equity (deficit)
Common stock, $0.01 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 (18,676) (17,845)
Treasury stock, 72,589 shares, at cost (434) (434)
-------- --------
Total stockholders' deficit (1,818) (1,137)
-------- --------
Total liabilities and stockholders' equity $ 5,771 $ 11,474
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
Evans Systems, Inc.
Consolidated Statements of Operations
Years Ended September 30, 2002, 2001, and 2000
- --------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
-------- -------- --------
(As Restated) (As Restated)
Revenues:
Motor fuel sales (including consumer excise and state fuel
taxes of $6,887, $10,354 and $22,721, respectively $ 22,270 $ 34,649 $ 69,133
Other sales and services 3,588 6,381 12,400
-------- -------- --------
Total revenues 25,858 41,030 81,533
Cost of sales
Motor fuels 21,029 31,965 64,221
Other sales and services 2,303 4,258 8,418
-------- -------- --------
Total cost of sales 23,332 36,223 72,639
-------- -------- --------
Gross profit 2,526 4,807 8,894
Operating expenses
Employment expenses 1,999 3,317 4,834
Other operating expenses 983 1,402 2,833
Other general and administrative expenses 1,390 1,706 2,335
Depreciation and amortization 510 936 1,387
(Gain) loss on sale of assets 205 (1,006) 37
-------- -------- --------
Total operating expenses 5,087 6,355 11,426
-------- -------- --------
Operating loss (2,561) (1,548) (2,532)
Other income (expense)
Valuation allowance on net assets transferred -- -- (802)
Interest income 7 9 16
Interest expense (67) (689) (1,701)
Other income (expense) (9) (85) (11)
-------- -------- --------
Total other income (expense) (69) (765) (2,498)
-------- -------- --------
Loss from continuing operations before income taxes (2,630) (2,313) (5,030)
Provision (benefit) from income taxes -- -- --
-------- -------- --------
Loss from continuing operations (2,630) (2,313) (5,030)
Discontinued operations
Loss from discontinued operations of Evans Oil -- Louisiana -- (820) (705)
Gain on disposal of Evans Oil of Louisiana -- 87 --
-------- -------- --------
Total discontinued operations -- (733) (705)
Extraordinary gain on restructuring transactions (Note 3) 1,799 -- --
Net loss $ (831) $ (3,046) $ (5,735)
======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.35) $ (0.38) $ (1.18)
Discontinued operations -- (0.12) (0.17)
Extraordinary items 0.24 -- --
-------- -------- --------
Earnings (loss) per common share $ (0.11) $ (0.50) $ (1.35)
======== ======== ========
Basic and diluted weighted average common shares outstanding 7,588 6,134 4,263
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
Evans Systems, Inc.
Consolidated Statements of Cash Flows
Years Ended September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
------- ------- -------
(As Restated) (As Restated)
Cash flows from operating activities
Net loss $ (831) $(3,046) $(5,735)
Adjustments:
Depreciation and amortization 510 936 1,513
Stock option compensation expense -- -- 247
Valuation allowance on net assets transferred (Note 3) -- -- 802
Loss (gain) on sale of assets 205 (1,006) 37
Loss on sale of Evans-Louisiana fixed assets to May 17, 2001 -- 49 --
Gain on disposal of discontinued operations -- (87) --
Extraordinary gain on restructuring transactions (1,799) -- --
Changes in assets and liabilities:
Receivables 24 1,599 (125)
Inventory 581 1,862 --
Prepaid expenses and other current assets 174 (100) 172
Costs and estimated earnings in excess of billings, net (69) -- --
Other assets 152 (46) 253
Accounts payable and accrued expenses (362) (3,128) 2,165
------- ------- -------
Net cash used by operating activities (1,415) (2,967) (671)
Cash flows from investing activities:
Issuance of notes receivable (115) -- --
Capital expenditures (39) (125) (467)
Proceeds from sale of property and equipment 1,234 7,519 404
------- ------- -------
Net cash provided (used) by investing activities 1,080 7,394 (63)
Cash flows from financing activities
New borrowings -- 536 1,000
Net borrowings under line of credit agreement 479 -- --
Reduction of long-term debt (407) (5,281) (1,069)
Reduction of capital lease obligations -- (40) (39)
Net proceeds from stock issuance 150 237 575
------- ------- -------
Net cash provided (used) by financing activities 222 (4,548) 467
------- ------- -------
Net increase (decrease) in cash and cash equivalents (113) (121) (267)
Cash and cash equivalents, beginning of year 604 725 992
------- ------- -------
Cash and cash equivalents, end of year $ 491 $ 604 $ 725
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 445 $ 484 $ 1,341
======= ======= =======
Cash paid for taxes $ -- $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
Evans Systems, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
(in thousands, except common share amounts)
Common stock Additional Retained
--------------------- paid-in earnings Treasury
Shares Amount capital (deficit) stock Total
--------- ------ ------- -------- ------ ------
Balance - September 30, 1999 (unaudited) 4,064,831 $ 41 $15,686 $(9,165) $(434) $6,128
Adjustment for the cumulative effect on prior
years of applying retroactively the new
method of accounting (Note 2) 101
Stock options exercised --
Warrants exercised --
Issuance of common stock 1,437,500 14 561 575
Expiration of redeemable common stock 40,000 -- 160 160
Compensation expense recognized in connection
with options granted 443 443
Net loss for 2000 (as restated) (5,735) (5,735)
--------- ---- ------- -------- ----- -------
Balance - September 30, 2000 (As Restated) 5,542,331 55 16,850 (14,799) (434) 1,571
Stock options exercised
Warrants exercised
Issuance of common stock 1,217,500 13 224 237
Expiration of redeemable common stock --
Compensation expense recognized in connection
with options granted --
Net loss for 2001 (as restated) (3,046) (3,046)
--------- ---- ------- -------- ----- -------
Balance - September 30, 2001 (As Restated) 6,759,831 68 17,074 (17,845) (434) (1,238)
Stock options exercised
Warrants exercised
Issuance of common stock 3,085,000 31 119 150
Compensation expense recognized in connection -- --
with options granted
Net loss for 2002 (831) (831)
--------- ---- ------- -------- ----- -------
Balance - September 30, 2002 9,844,831 $ 99 $17,193 $(18,676) $(434) $(1,919)
========= ==== ======= ======== ===== =======
The accompanying notes are an integral part of these financial statements.
F-6
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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.
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. Expenses are
recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized
using the percentage-of-completion method, measured by the percentage of
cost incurred to date to estimated total cost at completion for each
contract. Profit recognition is deferred on each contract until progress
reaches a level of completion sufficient to establish the probable outcome.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability that result in revisions to costs
are recognized in the period in which the changes are determined. Because
of the inherent uncertainties in estimating, it is at least reasonably
possible that such changes will occur within the near term.
The asset, "Costs and estimated earnings in excess of billing on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings
on uncompleted contracts" represents billings in excess of revenues
recognized. There was no material work in process at September 30, 2001 and
2000.
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.
Fair Value of Financial Instruments
The Company has various financial instruments, including cash, trade
receivables, 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. The revolving credit facility is at
variable market rates.
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. During fiscal
2002, the Company implemented a change in accounting principle whereby gas
and diesel fuels inventory were valued using the FIFO method of accounting
in place of the last-in, first-out (LIFO) method (Note 2).
F-7
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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
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. There were no assets considered impaired at September 30,
2002, 2001 and 2000.
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 2002, 2001
and 2000 since they would have resulted in a antidilutive effect on loss
from continuing operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Management believes that the estimates are reasonable.
F-8
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
Concentration of Credit Risk
The Company performs periodic evaluations of the relative credit standing
of the financial institutions and investment funds that are considered in
the Company's investment strategy. A majority of the Company's trade
receivables are from retail gasoline stations and convenience stores.
Management believes that its credit and collection policies mitigate the
potential effect of a concentration of credit risk in its accounts
receivable.
Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will
require the accrual, at fair value, of the estimated retirement obligation
for tangible long-lived assets if the company is legally obligated to
perform retirement activities at the end of the related asset's life. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
Management does not believe that the initial adoption of this standard will
have a material impact on the Company's financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supersedes SFAS 121, "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be
disposed of," but retains many of its fundamental provisions. Additionally,
this statement expands the scope of discontinued operations to include more
disposal transactions. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The adoption of this standard did not have a
material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement modifies the treatment of sale-leaseback
transactions and extinguishment of debt allowing gains and losses to be
treated as income in most circumstances. SFAS No. 145 is generally
effective for transactions occurring after May 15, 2002. Management does
not believe that the initial adoption of this standard will have a material
impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that
the Company recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. SFAS No. 146 is effective for the Company for any exit plans
commencing after December 31, 2002. Management does not believe that the
initial adoption of this standard will have a material impact on the
Company's financial statements.
Reclassifications and Financial Statements Presented
Certain reclassifications have been made to the 2000 and 2001 financial
statements to conform to the 2002 financial statement presentation. Such
reclassifications had no effect on net loss as previously reported.
2. Change in Accounting Principal
In September 2002, the Company adopted the first-in, first-out (FIFO)
method of costing gas and diesel fuel inventories. Previously, the last-in,
first out (LIFO) method was used. After taking into consideration the
Company's plans to hold less inventory and provide a faster inventory turn,
management believes that the FIFO method will more accurately reflect fuel
inventories at or near current replacements costs, provide a more realistic
fair value measurement of current assets and will be more representative of
industry trends applied by other regional and local petroleum distributors.
In addition, FIFO provides a uniform method for valuating all company
inventories, as inventories of
F-9
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
oil and grease, automotive products and accessories, chemical products and
convenience store products already utilize the FIFO method of accounting.
The financial statements of prior years have been restated to apply the new
method retroactively. The balances of retained earnings (deficit) for
fiscal 2002, 2001 and 2000 have been adjusted for the effect of applying
retroactively the new method of accounting. The otherwise tax liability
from this change is offset by net operating loss carryforwards of the
Company generated from previous years losses. Accordingly, no provision has
been recorded. The effect of the accounting change on net loss as
previously reported for fiscal 2001 and 2000 is as follows (in thousands,
except per share amounts):
2001 2000
------- -------
Net loss as previously reported $(2,746) $(6,002)
Adjustment for effect of a change in accounting principle
that is applied retroactively (300) 267
------- -------
Net loss as adjusted $(3,046) $(5,735)
======= =======
Per share amounts:
Earnings per common share:
Net loss as previously reported $ (0.45) (1.41)
Adjustment for effect of a change in accounting principle
that is applied retroactively (0.05) 0.06
------- -------
Net loss as adjusted $ (0.50) $ (1.35)
======= =======
3. 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.
F-10
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
o CSS acquired $2,734,367 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 54 months commencing six months from the
closing of the transaction, with the principal balance and
accrued but unpaid interest due June 24, 2007;
o Extinguish the $789,000 owed to Deutsche Financial Services; and
o Extinguish the $2,734,367 of indebtedness owed to certain
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
(Note 14);
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. Those
agreements are as follows:
o Issued a note payable of $406,474 to Matagorda County Tax
Assessor-Collector. The terms of the note call for monthly
payments of $13,500 for 36 months beginning September 20, 2002.
The outstanding principal balance at September 30, 2002 was
approximately $397,000.
F-11
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
o Issued a note payable of $217,120 to Wharton County Tax
Assessor-Collector. The terms of the note call for monthly
payments of $9,500 for 24 months beginning November 30, 2002. The
outstanding principal balance at September 30, 2002 was
approximately $217,000.
o Issued a note payable of $26,084 to Jackson County Tax
Assessor-Collector. The terms of the note call for monthly
payments of $1,100 for 24 months beginning September 30, 2002.
The outstanding principal balance at September 30, 2002 was
approximately $25,000.
o Issued a note payable of $64,562 to Brazoria County Tax
Assessor-Collector. The terms of the note call for monthly
payments of $8,333 for 8 months beginning July 15, 2002. The
outstanding principal balance at September 30, 2002 was
approximately $38,000.
o Issued a note payable of $80,576 to Victoria County Tax
Assessor-Collector. The terms of the note call for monthly
payments of $2,000 until paid in full beginning September 25,
2002. The outstanding principal balance at September 30, 2002 was
approximately $32,000.
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 (In Thousands)
Accounts payable $ 2,679
Accrued wages 55
Accrued taxes 724
Accrued interest 889
-------
Total accounts payable and accruals extinguished 4,347
Notes payable extinguished/restructured
JP Morgan Chase 4,631
Duetche Financial 704
Chrysler capital lease 63
Other 1
-------
Total notes payable extinguished/restructured 5,399
-------
Total debts extinguished/restructured 9,746
New debt issued/restructured
CSS 4,500
Travelers 183
Phillips 49
McLane 45
Olsham 11
Property tax districts 724
-------
Total debt issued/restructured 5,512
-------
Extraordinary gain on debt restructuring transactions 4,234
Extraordinary loss on assets conveyed to CSS (2,435)
-------
Net extraordinary gain on restructuring transactions $ 1,799
=======
F-12
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 14).
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 14).
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 16). 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.
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
F-13
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 and 2000 are as follows (in thousands):
2001* 2000
------ -------
Revenues $4,717 $13,796
======= ========
Income (loss) from operations $ (820) $ (705)
======= ========
Gain on sale of discontinued operations $ 87 $ -
======= ========
---------
* Through May 17, 2001
5. Costs and Estimated Earnings on Uncompleted Contracts
At September 30, 2002, costs and estimated earnings on uncompleted
contracts consisted of the following (in thousands):
2002
-----------
Costs incurred to date on uncompleted contracts $ 240
Estimated earnings 138
-----
378
Billings to date (309)
-----
Total $ 69
=====
Included in the accompanying consolidated balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts $ 72
Billings in excess of costs and estimated earnings on uncompleted contracts (3)
-----
Total $ 69
=====
There was no material work in process at September 30, 2001.
The Company's backlog of revenue from work to be performed on uncompleted
contracts amounted to approximately $ at September 30, 2002. There
were no material revisions in contract estimates during the year ended
September 30, 2002.
F-14
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
6. Property and Equipment
Property and equipment consisted of the following at September 30 (in
thousands):
2002 2001
------- -------
Land $ 791 $ 1,857
Buildings 2,418 3,792
Leasehold improvements 21 42
Equipment 5,096 8,103
Transportation equipment 722 1,131
Office equipment 89 2,465
------- -------
9,137 17,390
Less - accumulated depreciation (5,590) (9,132)
------- -------
Property and equipment, net $ 3,547 $ 8,258
======= =======
Year Ended September 30, 2002 Asset Sales
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 approximately
$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 approximately $179,000 and the Company recorded a
$161,000 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 approximately$110,000 and the Company recorded a $16,000
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 approximately$49,000 and the
Company recorded a loss of $2,000.
During the fourth quarter of fiscal 2002, the Company sold three company
owned convenience stores, including land, buildings, station equipment,
store equipment and inventory, for total proceeds of approximately
$453,000, inclusive of a note receivable for $112,000 (Note 7). The net
book value of
F-15
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
the assets sold was approximately $820,000 and the Company recorded a
$367,000 loss 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.
Year Ended September 30, 2001 Asset Sales
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.
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. The net book value of the assets sold
approximated $555,000.
F-16
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
Year Ended September 30, 2000 Asset Sales
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.
7. Notes Receivable
In conjunction with the sale of the 3 company owned convenience stores
during the fourth quarter of fiscal 2002 (Note 6), the Company issued a
note receivable to FMR Enterprises, LLC for $111,848. Terms of the
agreement call for the payment of $29,240 on October 15, 2002, with the
remaining unpaid balance due on or before September 6, 2003. The note is a
zero interest note. The note is secured by 2 tracts of land in Victoria,
Texas. Subsequent to year-end, the Company received the October 15, 2002
payment. Management believes the remaining outstanding balance will be
fully collected.
During the fourth quarter of 2002, the Company also issued a short-term
note receivable to a customer for $4,400 under a workout plan. The note is
a zero interest note. At September 30, 2002, $3,300 was outstanding under
this agreement.
8. 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. 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.
9. Line of Credit Agreement
On July 23, 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 7.75% with monthly interest
payments beginning August 23, 2002 and all outstanding principal and
accrued but unpaid interest due on or before July 23, 2003. During the year
ended September 30, 2002, the Company borrowed an aggregate of $1,050,000
under the agreement and repaid an aggregate of $571,000. At September 30,
2002, the Company had $479,000 outstanding under the line of credit
agreement.
F-17
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
10. Long-Term Debt
Long-term debt is summarized as follows at September 30 (in thousands):
2002 2001
--------- ---------
Notes payable to a bank, at prime plus 2%, past due, secured by property,
equipment, receivables, inventory and common stock of subsidiaries $ - $ 4,747
Notes payable to a bank, at prime to 12%, payable to 2004, secured by
property and equipment, improvements, receivables, inventory and
common stock of subsidiaries. - 95
Note payable to a bank, at 14.9%, payable to 2014, secured by a building - 501
Note payable to CSS, at 10%, payable on June 24, 2007 with interest due
monthly beginning December 24, 2002, secured by all property,
equipment, receivables, inventory, common stock of subsidiaries and
all other properties of the Company (Note 3) 4,500 -
Note payable to Travelers, at prime plus 50 basis points,
principal and interest due monthly for 36 months beginning June 22, 2003 183 -
Note payable to Phillips Co., $8,237 due monthly for 6 months 49 -
Note payable to McLane Company, Inc., $3,717 due monthly for 12 months
beginning November 22, 2002 45 -
Note payable to Olsham Grundman Frome, $1,143 due monthly for
10 months beginning December 22, 2002 11 -
Note payable to Matagorda County, principal and interest of $13,500 due
monthly for 36 months beginning September 20, 2002 397 -
Note payable to Wharton County, principal and interest of $9,500 due
monthly for 24 months beginning November 30, 2002 217 -
Note payable to Jackson County, principal and interest of $1,100 due
monthly for 24 months, beginning September 30, 2002 25 -
Note payable to Brazoria County, principal and interest of $8,333 due
monthly for 8 months, beginning July 15, 2002 38 -
Note payable to Victoria County, principal and interest of $2,000 due
monthly until paid in full, beginning September 25, 2002 32 -
Other 50 209
------- ---------
Total long-term debt 5,547 5,552
Less - current maturities 477 4,943
------- ---------
Total long-term debt, net of current maturities $5,070 $ 609
======= =========
F-18
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
As of September 30, 2002, principal maturities of long-term debt are as
follows (in thousands):
Year ending September 30,
-------------------------
2003 $ 477
2004 328
2005 201
2006 41
2007 4,500
Thereafter -
-------
Total $5,547
=======
11. Capital leases
The Company leased its information systems and trucks under capital lease
obligations due to two financial institutions expiring through 2002.
Amortization of assets under capital leases was 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. In June 2002 and in conjunction with the Restructuring
Transactions (Note 3), CSS acquired and extinguished approximately $789,000
of the past due secured indebtedness, inclusive of $86,000 of accrued
interest, owed by the Company to Deutsche Financial Services for the
Company's information systems.
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.
12. Operating Leases
As of September 30, 2002, the Company leases three convenience store
locations and one ground lease for the terminal facility. The first store
lease calls for monthly payments of $1,000 until August 1, 2006. The second
store lease calls for monthly payments of $689 until July 14, 2007. The
third store lease calls for monthly payments of $800 until November 30,
2007. The ground lease for the terminal facility calls for monthly payments
of $108 until September 30, 2006, at which time the lease can be renewed
for an additional five-year period. At September 30, 2002, the scheduled
future minimum lease payments required under the terms of the operating
leases in effect are (in thousands):
Year ended September 30,
------------------------
2003 $ 33
2004 31
2005 31
2006 20
2007 16
Thereafter 2
------
Total $ 133
======
The Company has 2 subleases. Minimum rentals to be received in the future
under these noncancelable subleases totaled $149,600 as of September 30,
2002.
F-19
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
13. Income Taxes
The difference between the tax effect of net income (loss) applied at the
statutory federal income tax rates is as follows (in thousands):
Year ended September 30,
----------------------------------------------
2002 2001 2000
------- ------------- -------------
(As Restated) (As Restated)
Pre-tax financial net loss $(283) $(1,036) $(1,950)
Permanent items 43 16 85
----- ------- -------
Adjusted pre-tax financial net loss (240) (1,020) (1,865)
Timing items
Difference in book and tax depreciation (67) 129 129
Difference in book and tax gain on sale of assets 230 938 87
----- ------- -------
Net difference in depreciable assets 163 1,067 216
Taxable gain on exchange sale of ChemWay - - 341
Difference in book and tax bad debt expense (11) (71) (1)
Difference in other book and tax items, net (9) (12) 22
----- ------- -------
Total timing items 143 984 578
----- ------- -------
Taxable loss before carryforward of net operating losses (97) (36) (1,287)
----- ------- -------
Carryforward (utilization) of net operating losses 97 36 1,287
----- ------- -------
Taxable income (loss) $ - $ - $ -
===== ======= =======
Deferred tax assets (liabilities) are comprised of the following (in
thousands) at September 30:
2001 2001
------ ------
Net deferred assets and liabilities
Tax effect of differences in underlying carrying value of
net assets for book and tax purposes $(563) $(756)
Bad debt allowance 16 26
Deferred compensation and other liabilities - 10
----- -----
Total net deferred tax assets (liabilities) (547) (720)
Valuation allowance due to prior years net operating and
capital losses 547 720
----- -----
Net deferred tax assets (liabilities) $ - $ -
===== =====
At September 30, 2002, the Company had regular tax net operating loss
carryforwards from continuing operations of approximately $16.7 million
available for federal income tax purposes that expire through 2022 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.
F-20
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
14. Common Stock
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.
On June 1, 1998, the Company agreed to issue 350,000 common shares for
total consideration of $262,500 in a private placement to accredited
investors. Such shares were issued on October 27, 1998. On January 4, 1999,
the Company issued 40,000 common shares valued at $15.25 per share to an
investment advisor for investment advisory services rendered. The
investment advisor has the right to sell the shares back to the Company at
$4 per share until ninety days following the registration of the shares.
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.
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.
F-21
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 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.
On June 24, 2002 and concurrently with the Restructuring Transactions (Note
3), 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 3). Focus Capital Group America, LLC, a buyout and
F-22
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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.
A summary of the option activity under the various plans follows:
Weighted-
Number of average
shares option price
--------------- -----------------
Outstanding at September 30, 1999 (Unaudited) 79,000
Granted in 2000 127,500 $ 8.05
Expired in 2000 (2,000) --
--------
Outstanding at September 30, 2000 204,500
Granted in 2001 790,000 $ 0.16
Expired in 2001 (23,900) 2.46
--------
Outstanding at September 30, 2001 970,600
Granted in 2002 -- $ --
Expired in 2002 (580,250)
--------
Outstanding at September 30, 2002 390,350
========
Although 390,350 options are outstanding at September 30, 2002, only 12,600
underlying common shares are registered under a plan.
F-23
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
A summary of options outstanding and options exercisable at September 30,
2002 is as follows:
Weighted
Average Weighted Weighted
Options Exercise Remaining Average Options Average
Outstanding Price Contractual Life Option Price Exercisable Option Price
---------------- --------------- --------------------- ----------------- ---------------- -----------------
12,600 $ -- 6.66 years -- 12,600 --
290,000 0.16 8.42 years 0.16 290,000 0.16
87,750 3.24 2.23 years 3.24 87,750 3.24
------- -------- ---------- --------- ------- ---------
390,350 $ 0.84 5.83 years $ 0.84 390,350 $ 0.84
======= ======== ========== ========= ======= =========
The weighted average fair value at date of grant for options granted during
2002, 2001 and 2000 are as follows:
2002 2001 2000
-------------- ------------- -------------
Exercise price equals market price $ -- $ 0.16 $ 8.05
Exercise price exceeds market price -- -- --
Exercise price is less than market price -- -- --
The Company applied APB 25 and related interpretations in accounting for
its plans. The following unaudited pro forma data is calculated as if
compensation cost for the Company's stock option plans were determined
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under the Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (in
thousands):
Year ended September 30,
------------------------
2002 2001
---------- ----------
Net loss: (Restated)
As reported $ (831) $ (3,046)
Pro forma (831) (3,070)
Basic and diluted loss per share
As reported $ (0.11) $ (0.50)
Pro forma (0.11) (0.50)
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.
F-24
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
15. Related Party Transactions
During 2002, the Company leased two convenience store locations from Mr.
J.L. Evans, a shareholder of the Company. One ten-year lease commenced in
June 1987 with monthly payments of $2,500, which was terminated during
March 2002. 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 made monthly rental payments of $1,500 under a month-to-month
rental agreement until April 2002, at which time the agreement was
cancelled. The amounts paid under these leases were $25,500, $48,000 and
$51,600 for the years ended September 30, 2002, 2001 and 2000,
respectively. There are no future minimum lease commitments as of September
30, 2002 under these agreements.
Effective June 24, 2002 and in conjunction with the Restructuring
Transactions, 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. The Company paid approximately $38,000 under this
agreement in during the year ended September 30, 2002. At September 30,
2002, the Company owed MC approximately $18,500 for expenses incurred under
this agreement, which is included in accounts payables.
During the fourth quarter of 2002, the Company entered into an agreement
with MC to purchase Texaco branded fuel products under MC's contract with
Texaco at $0.005 above rack price. At September 30, 2002, the Company owed
MC approximately $109,000, which is included in accounts payables.
In addition, from time to time, the Company will deliver fuel loads to MC
customers and MC will deliver fuel loads to the Company's customers. The
Company and MC charged each another freight only at common carrier rates.
At September 30, 2002, the MC owed the Company approximately $12,000 for
freight on fuel the Company hauled for MC, which is included in accounts
receivable.
During July 2002, the Company's primary lender, CSS, advanced the Company
$400,000 to pay for excise taxes. At September 30, 2002, the Company owed
CSS approximately $69,000, which was subsequently paid in October 2002.
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, 2002 and 2001. The Company has also issued
various stock options and warrants to directors, officers and key employees
(see Note 14).
16. 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,
2002, 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.
On June 22, 2002 and as part of the Restructuring Transactions (Note 3),
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
F-25
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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.
17. Employee Benefit Plans
The Company established the ESI Employee Retirement Plan ("the 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 years ended September 30, 2002
and 2001. The Company recorded contributions of $28,000 fiscal 2000. The
Company is in the process of terminating the Plan.
18. Statement of Cash Flows Supplemental Disclosure of Non-Cash Transactions
The following schedule summarizes the Company's supplemental disclosure of
non-cash transactions for the Consolidated Statements of Cash Flows for the
years ended September 30, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
------ ------ ------
Foreclosure of ChemWay Warehouse (Note 5)
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 (Note 3)
Extinguishment of current liabilities $ 4,347 $ -- $ --
Extinguishment of notes payable 5,399 -- --
Issuance of notes payable (5,512) -- --
Conveyance of fixed assets, net (2,300) -- --
Conveyance of inventory (135) -- --
------- ----- -----
Extraordinary gain on restructuring transactions $ 1,799 $ -- $ --
======= ===== =====
F-26
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
19. Results of Operations, Liquidity and Management's Plans
During the three years in the period ended September 30, 2002, the Company
has recorded operating losses from continuing operations aggregating $9.97
million and net losses aggregating $9.6 million. At September 30, 2002, the
Company has a working capital deficit of $325,000 and a stockholders'
deficit of $1,818,000.
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.
New management and directors were appointed on June 24, 2002. During the
three months ended September 30, 2002 an extensive analysis of the Company
operations was performed to determine an achievable growth and liquidity
plan. Management came to the conclusion that a conservative and cost
effective plan should concentrate in areas that management has maintained a
successful record of accomplishments. The Company's future focus will be on
developing its Petroleum Marketing Segment through utilization of new
marketing personnel to solicit new customers and existing personnel to
contact and regain customers that were lost in the prior years. This plan
does not require capital intensive expenditures and should increase
revenues and accompanied with the cost reductions in personnel and overhead
that have been accomplished restore the company to profitability.
Consistent with this plan the Company sold its inventory in the four
remaining Diamond Mini Mart stores in November 2002 and leased the
locations to outside operators. The Petroleum Marketing Segment executed
fuel contracts with these locations maintaining the fuel volumes. The
second phase of managements plan is to open the Fuel Terminal utilizing a
joint venture, thru-put partner, or supplier to begin operations. The Fuel
Terminal operation will reduce overall product cost and freight expense,
adding additional revenues to the Petroleum Marketing Segment.
The Environmental Segment has made a marginal profit over the years and
maintained a positive cash flow. Management intends to expand the
Environmental Segment by creating a Testing Division. The Company is
currently exploring the feasibility of acquiring through merger a company
currently performing line, tank, and soil testing. Financial institutions
have become increasingly aware of potential environmental hazards and the
cost associated there with, on properties they finance. The need for
testing to determine if any pollution exist on properties will continue for
an unforeseeable time into the future. For this reason management believes
adding a testing segment will increase the revenues and profitability of
the Environmental Segment.
Management will continue to reduce debt and provide working capital through
the sale of non-income producing assets. 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.
F-27
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
20. Subsequent Events
During November 2002 and consistent with management's plans (Note 19), the
Company leased its four remaining Diamond Mini Mart stores to outside
operators. The Petroleum Marketing Segment executed fuel contracts with
these locations, maintaining the fuel volumes. Future operations from the
Convenience Store segment will consist primarily of lease income and the
associated expenses of maintaining the leased properties.
21. 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 4, 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.
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.
F-28
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
Information concerning the Company's business activities is summarized as
follows (in thousands):
Texas Texas Environmental Other
petroleum convenience remediation reconciling Consolidated
Year ended marketing stores services items (1) total
September 30, 2002:
Revenues from external customer
Motor fuel sales $ 19,533 $ 2,737 $ -- $ -- $ 22,270
Convenience store sales -- 2,170 -- -- 2,170
Other 156 138 1,124 -- 1,418
Intersegment revenues 2,542 -- -- (2,542) --
-------- -------- -------- -------- --------
Total revenues $ 22,231 $ 5,045 $ 1,124 $ (2,542) $ 25,858
======== ======== ======== ======== ========
Depreciation and amortization 381 105 15 -- 501
Operating income (loss) (1,024) (849) 44 (732) (2,561)
Segment assets 3,596 1,484 669 19 5,768
Expenditures for property and
equipment 39 -- -- -- 39
September 30, 2001:
Revenues from external customer
Motor fuel sales $ 27,270 $ 7,379 $ -- $ -- $ 34,649
Convenience store sales -- 4,814 -- -- 4,814
Other 255 350 962 -- 1,567
Intersegment revenues 6,456 -- -- (6,456) --
-------- -------- -------- -------- --------
Total revenues $ 33,981 $ 12,543 $ 962 $ (6,456) $ 41,030
======== ======== ======== ======== ========
Depreciation and amortization 746 165 19 6 936
Operating income (loss) 77 (568) 19 (1,076) (1,548)
Segment assets 8,255 2,449 629 73 11,406
Expenditures for property and
equipment 96 17 -- 12 125
September 30, 2000:
Revenues from external customer
Motor fuel sales $ 53,772 $ 15,361 $ -- $ -- $ 69,133
Convenience store sales -- 9,543 -- -- 9,543
Other 1,038 358 1,461 -- 2,857
Intersegment revenues 17,309 -- -- (17,309) --
-------- -------- -------- -------- --------
Total revenues $ 72,119 $ 25,262 $ 1,461 $(17,309) $ 81,533
======== ======== ======== ======== ========
Depreciation and amortization 990 328 51 18 1,387
Operating income (loss) (425) (652) 227 (1,682) (2,532)
Segment assets 12,017 6,043 1,189 2,072 21,321
Expenditures for property and
equipment 402 46 6 13 467
(1) Consists primarily of corporate overhead expenses and unallocated corporate
assets. Corporate assets include discontinued operations, income tax assets
and corporate property and equipment.
F-29
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
A reconciliation of the Company's segment operating information to
consolidated loss from continuing operations before income taxes is as
follows (in thousands):
Year ended September 30,
--------------------------------------
2002 2001 2000
------- ------- -------
Total operating loss for reportable segments $(1,829) $ (605) $ (850)
Valuation allowance on net assets transferred -- -- (802)
Interest income 7 9 16
Interest expense (67) (689) (1,701)
Unallocated corporate expenses (732) (943) (1,682)
Other, net (9) (85) (11)
------- ------- -------
Total consolidated loss from continuing
operations before income taxes $(2,630) $(2,313) $(5,030)
======= ======= =======
22. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data is summarized as follows (in thousands,
except for per share amounts):
September 30, 2002
Q1 Q2 Q3 Q4
------- ------- ------- -------
Revenue $ 6,133 $ 6,228 $ 6,711 $ 6,786
Gross profit 710 698 494 624
Operating income (loss) (676) (339) (545) (1,001)
Income (loss) from continuing operations (711) (348) (546) (1,025)
Loss from discontinued operations -- -- -- --
Extraordinary gain, net -- -- 1,799 --
Net income (loss) (711) (348) 1,253 (1,025)
Basic and diluted loss per common share:
Income (loss) per common share:
Continuing operations $ (0.11) $ (0.05) $ (0.08) $ (0.14)
Discontinued operations -- -- -- --
Extraordinary items -- -- 0.26 --
------- ------- ------- -------
Total $ (0.11) $ (0.05) $ 0.18 $ (0.14)
======= ======= ======= =======
F-30
Evans Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
September 30, 2001 (As Restated)
Q1 Q2 Q3 Q4
------- ------ ------ -------
Revenue $14,031 $9,484 $9,403 $ 8,112
Gross profit 1,706 1,285 990 826
Operating income (loss) 228 (618) (406) (752)
Income (loss) from continuing operations (182) (636) (486) (1,009)
Loss from discontinued operations (309) (240) (110) (74)
Extraordinary gain, net
Net income (loss) (491) (876) (596) (1,083)
Basic and diluted loss per common share:
Income (loss) per common share:
Continuing operations $ (0.03) $(0.09) $(0.07) $ (0.16)
Discontinued operations (0.06) (0.04) (0.02) (0.01)
Extraordinary items -- -- -- --
------- ------ ------ -------
Total $ (0.09) $(0.13) $(0.09) $ (0.17)
======= ====== ====== =======
F-31