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).
- ----------------- (1) Louisiana operations ceased May 17, 2001 and substantially all of the assets were sold.
Texas Petroleum Marketing
The following table sets forth the revenues of the Texas Petroleum Marketing segment (in thousands):
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.
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):
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
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.
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.
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.
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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None. PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Stock Information
Traded On the Nasdaq Over The Counter Bulletin Board (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:
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain selected financial data which should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein. Amounts are in thousands, except per-share data. The Company has 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.
- -------------- (1) Adjusted for 5% stock dividend paid on January 20, 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto appearing elsewhere in this document.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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:
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company included in this annual report on Form 10-K are listed under Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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.
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;
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
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.
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
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.
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.
- -------------- * less than 1%
1. Unless otherwise indicated, the address of each beneficial owner is c/o the Company, Post Office Box 2480, Bay City, Texas 77404-2480. 2. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act ("Rule 13d-3") and unless otherwise indicated, represents shares of which the beneficial owner has sole voting and investment power. 3. The percentage of class is calculated in accordance with Rule 13d-3 and assumes that the beneficial owner has exercised any options or other rights to subscribe which are execrable within sixty (60) days and that no other options or rights to subscribe have been exercised by anyone else. 4. The general partner is J.L. Evans Management, Inc. (controlled by J.L. Evans, Sr. and Maybell H. Evans) and the limited partners are Jerriel L. Evans, Sr., Maybell H. Evans, and their children, Darlene E. Jones, Jerriel L. Evans, Jr., and Terry W. Evans. 5. Includes 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.
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.
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
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.
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.
(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
INDEX TO EXHIBITS
- ------------ * Filed herewith.
Evans Systems, Inc. Index to Consolidated Financial Statements September 30, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
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
Evans Systems, Inc. Consolidated Balance Sheets September 30, 2002 and 2001 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Operations Years Ended September 30, 2002, 2001, and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Cash Flows Years Ended September 30, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Evans Systems, Inc. Consolidated Statements of Stockholders' Equity Years Ended September 30, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
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).
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.
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
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):
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.
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.
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.
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:
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):
--------- * 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):
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.
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):
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
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.
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.
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):
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.
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):
Deferred tax assets (liabilities) are comprised of the following (in thousands) at September 30:
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.
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.
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
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:
Although 390,350 options are outstanding at September 30, 2002, only 12,600 underlying common shares are registered under a plan.
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:
The weighted average fair value at date of grant for options granted during 2002, 2001 and 2000 are as follows:
The Company applied APB 25 and related interpretations in accounting for its plans. The following unaudited pro forma data is calculated as if compensation cost for the Company's stock option plans were determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (in thousands):
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.
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
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):
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.
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.
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):
(1) Consists primarily of corporate overhead expenses and unallocated corporate assets. Corporate assets include discontinued operations, income tax assets and corporate property and equipment.
Evans Systems, Inc. Notes to Consolidated Financial Statements 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):
22. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data is summarized as follows (in thousands, except for per share amounts):
Evans Systems, Inc. Notes to Consolidated Financial Statements September 30, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
September 30, 2001 (As Restated)