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<DAILY TROUBLE>
Friday, June 4, 1999

Evans Systems, Inc.
(Nasdaq: EVSI)
Phone:  409-245-2424
Price  (6/3/99): $4 5/32

HOW DID IT FIND TROUBLE?

Pop! That's probably the best way to describe what has happened to shares of Evans Systems over the past few weeks. It was only May 20 when the stock was featured in this column's sister column, the Daily Double, after the impressive run that saw Evans' shares explode skyward to nearly 40 times what they were a year earlier.

Fast-forward two weeks and the story is almost the exact opposite. This is one Double that ended up as a popped bubble in a shockingly fast way. Going against the company are its recently released negative quarterly earnings, a fairly harsh story that ran in the Texas edition of the Wall Street Journal, and the general malaise seen in most Internet stocks. Combine all those factors and it is little wonder that the shares of Evans Systems have sold off, albeit the speed and magnitude of the drop has been fairly dramatic.

Just how dramatic has the drop been? It was little over two weeks ago that Evans was featured in the Daily Double at a price of $31 7/16, but today (6/3) the shares are all the way back down to $4 5/32. In other words, it has been the type of move every short seller dreams about. From obscure penny stock to hyped Internet issue back to penny stock, Evans has nearly completed the cycle. As usual, a price chart tells the story best.

BUSINESS DESCRIPTION

Based in the southern Texas town of Bay City, Evans Systems' primary business is that it distributes gasoline to a wide variety of retail convenience stores in southeastern Texas and southwestern Louisiana. Over three-quarters of the company's revenue came from petroleum sales in the most recent quarter.

The company also operates a small environmental clean-up business that specializes in recapturing petroleum from leaking underground gas tanks. Furthermore, the company recently sold its stake in ChemWay, a maker of various petroleum-based automotive products such as lubricants and degreasers. These two businesses combined contributed a mere $3.5 million (roughly 3%) to Evans' total sales in 1998.

Evans also operates about two dozen convenience stores and one full-service gas station in the same region. As part of a fairly large restructuring, over the past several months the company has sold off numerous tangential assets and closed many of its underperforming outlets. The company is also in the process of moving its headquarters to Houston and concentrating on electronic commerce and marketing.

The first step of this new positioning has Evans in an agreement with A-Free-Gift.com to be the exclusive distributor of the company's promotional packets to convenience stores throughout the country.

FINANCIAL FACTS

Income Statement
12-month sales:      $90.9 million 
12-month income:     ($5.0 million)*
12-month EPS:        ($1.50)*
Profit Margin:         N/A
Market Cap:          $16.5 million 
(*From continuing operations)

Balance Sheet 
Cash:                 $1.1 million
Current Assets:       $8.5 million
Total Assets:        $35.0 million
Current Liabilities:  $8.4 million
Long-term Debt:      $10.7 million
Total Liabilities:   $19.1 million 

Ratios
Price-to-earnings:     N/A  
Price-to-sales:        0.18
Price-to-book:         1.0  

HOW COULD YOU HAVE SEEN IT COMING?

It was obvious that the run-up over the past twelve months was not due to the company selling more beef jerky and petroleum. Rather, the explosion upward was thanks to excitement about its new online focus. While it is a widely held opinion that e-commerce and the Internet hold awesome potential in the future, it's important to differentiate the real players from the fakers. Evans does not even have a corporate website up and running, and the associated site that is supposed to bring the company all of its profits, www.a-free-gift.com, is, to put it kindly, not exactly the slickest or most involved site around. These are not the signs of an Internet powerhouse.

Even if you grant Evans some slack for being in the start-up stage, an investor should have questioned precisely how the Evans business model was going to add value for its clients. When reading the recent Daily Double, the types of questions that should have been asked were plainly laid out. Specifically, who exactly was going to foot the bill for the promotional incentives Evans wishes to distribute? There remains to be a clear answer. One thing is for sure -- nothing in this world comes for free.

Finally, the whole notion of turning a company with expertise in distributing gas and running convenience stores into a major e-commerce force seems almost too bizarre to believe. The precedent is there, believe it or not. Zapata (NYSE: ZAP) was the first Texas company to attempt a strange conversion when it went from focusing on fish oil to Internet portals. But as followers of Zapata can attest, such drastic change rarely comes easy.

WHERE TO FROM HERE?

There may be something to the reverse marketing idea Evans and www.a-free-gift.com have proposed, but it is anything but a proven concept at this point. Plus, what sort of online expertise does the management of Evans bring to the table that investors should value? There are many questions surrounding Evans that remain unanswered.

Nevertheless, there have been some recent insider buys at the company with the stock price in the upper teens. Moreover, the stock is now trading near its book value, but the company may also have more write-downs coming as it continues to restructure and refocus.

The battle between the Evans faithful and the swarms of short-sellers that have discovered the stock is not likely to abate any time soon, and continued volatility can be nearly guaranteed. The true value of the company rests on whether or not its Internet ventures are successful, and that is anything but a certain proposition at this point. Either way, Evans has to be one of the strangest and most interesting stories to cross the wires in recent months.

--Paul Larson (TMFParlay@aol.com)

Change the World... work for the Fool.

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