<PAGE>
1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-14105
----------------------------------
AVALON HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-1863889
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One American Way, Warren, Ohio 44484-5555
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 856-8800
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 3,175,802 shares of its Class A Common Stock and 627,572
shares of its Class B Common Stock outstanding as of November 2, 1998.
================================================================================
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 (Unaudited)............. 3
Condensed Consolidated Balance Sheets at September 30,
1998 (Unaudited) and December 31, 1997............................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited).................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities........................................ 18
Item 3. Defaults upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
SIGNATURE............................................................... 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Net operating revenues....................... $21,204 $16,747 $55,101 $43,591
Cost and expenses:
Cost of operations........................... 18,200 14,293 47,661 39,199
Selling, general and administrative expense.. 2,504 2,238 6,996 5,534
------- ------- ------- -------
Income (loss) from operations................ 500 216 444 (1,142)
Other income (expense):
Interest expense............................. -- (28) (44) (88)
Other income, net............................ 313 64 845 191
------- ------- ------- -------
Income (loss) before income taxes............ 813 252 1,245 (1,039)
Income taxes (benefit) expense............... 447 112 685 (254)
------- ------- ------- -------
Net income (loss)............................ $ 366 $ 140 $ 560 $ (785)
======= ======= ======= =======
Basic net income (loss) per share............ $.10 $.04 $.15 $(.21)
======= ======= ======= =======
Weighted average shares outstanding (Note 2). 3,803 3,803 3,803 3,803
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Assets (Unaudited)
- ------
Current assets:
Cash and cash equivalents................. $21,008 1,763
Accounts receivable, net.................. 18,398 19,034
Refundable income taxes................... -- 105
Deferred income taxes..................... 207 199
Prepaid expenses and
other current assets..................... 2,200 977
------- -------
Total current assets..................... 41,813 22,078
Properties and equipment, less accumulated
depreciation and amortization of
$14,832 in 1998 and $13,357 in 1997...... 24,016 19,184
Costs in excess of fair market value of net
assets of acquired businesses, net........ 2,893 3,022
Other assets, net.......................... 237 233
------- -------
Total assets............................. $68,959 $44,517
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt......... $ -- $ 230
Accounts payable.......................... 7,839 4,785
Accrued payroll and other compensation.... 1,146 906
Accrued income taxes...................... 1,538 176
Other accrued taxes....................... 823 872
Other liabilities and accrued expenses.... 1,448 1,372
------- -------
Total current liabilities................ 12,794 8,341
Long-term debt............................. -- 1,006
Deferred income taxes...................... 1,638 1,367
Other noncurrent liabilities............... 845 856
Shareholders' equity :
Class A Common Stock, $.01 par value...... 32 32
Class B Common Stock, $.01 par value...... 6 6
Paid-in capital........................... 57,633 37,458
Accumulated deficit....................... (3,989) (4,549)
------- -------
Total shareholders' equity............... 53,682 $32,947
------- -------
Total liabilities and
shareholders' equity.................... $68,959 $44,517
======= =======
</TABLE>
4
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
--------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) ................................................................... $ 560 $ (785)
Reconciliation of net income (loss) to cash provided (used) by operating activities:
Depreciation and amortization.................................................... 1,963 1,717
Provision for deferred income taxes.............................................. (24) (57)
Provision for losses on accounts receivable...................................... 143 670
Gain on sales of property and equipment.......................................... (15) (44)
Changes in assets and liabilities
Increase in accounts receivable.............................................. (5,126) (14)
(Increase) decrease in refundable income taxes............................... 105 (241)
(Increase) decrease in prepaid expenses and other current assets............. (948) 292
Increase in other assets..................................................... (32) (17)
Increase (decrease) in accounts payable...................................... 2,756 (262)
Increase in accrued payroll and other compensation........................... 240 61
Increase (decrease) in accrued income taxes.................................. 355 (95)
Increase (decrease) in other accrued taxes................................... (24) 94
Increase (decrease) in other liabilities and accrued expenses................ (169) 218
Decrease in other noncurrent liabilities..................................... (11) (81)
---------- ----------
Net cash provided (used) by operating activities............................. (227) 1,456
---------- ----------
Investing activities:
Capital expenditures................................................................. (1,748) (2,060)
Proceeds from sales of property and equipment........................................ 81 165
--------- ----------
Net cash used in investing activities.......................................... (1,667) (1,895)
---------- ----------
Financing activities:
Capital contribution from American Waste Services, Inc. ............................. 22,475 --
Repayments of long-term debt......................................................... (1,236) (227)
Dividends paid to American Waste Services, Inc....................................... (100) (100)
---------- ----------
Net cash provided (used) by financing activities............................. 21,139 (327)
--------- ----------
Increase (decrease) in cash and cash equivalents........................................ 19,245 (766)
Cash and cash equivalents at beginning of year.......................................... 1,763 1,975
--------- ----------
Cash and cash equivalents at end of period.............................................. $21,008 $ 1,209
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of Avalon Holdings
Corporation and subsidiaries (collectively the "Company" or "Avalon") and
related notes included herein have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted consistent with such rules and regulations.
In the opinion of management, these unaudited condensed consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position of the Company as of
September 30, 1998, and the results of operations and cash flows for the interim
periods presented.
The operating results for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Avalon Holdings Corporation was formed on April 30, 1998 as a subsidiary of
American Waste Services, Inc. ("AWS"). Pursuant to the terms of a Contribution
and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS (the
"Contribution Agreement"), AWS contributed to Avalon its transportation
operations, technical environmental operations, waste disposal brokerage and
management operations, and golf course and related operations together with
certain other assets including the headquarters of AWS and certain accounts
receivable. In connection with the contribution, Avalon assumed certain
liabilities of AWS including, without limitation, liabilities relating to the
termination of employment of certain employees of AWS and costs and potential
liabilities relating to the legal proceeding captioned Werbosky v. American
--------------------
Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special
- ----------------------------
dividend, all of the outstanding shares of capital stock of Avalon to the
holders of AWS common stock on a pro rata and corresponding basis (the "Spin-
off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan
of Merger dated as of February 6, 1998 entered into by and among USA Waste
Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with
C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc.
(the "Merger").
6
<PAGE>
The assets and liabilities contributed by AWS to Avalon pursuant to the
Contribution Agreement and Merger Agreement were as follows (in thousands):
Assets contributed:
Cash .............................................$ 4,974
Accounts receivable.................................. 69
Accounts receivable -- AWS subsidiaries.............. 15,965
Current deferred tax benefit......................... 8
Prepaid expenses..................................... 275
Properties, net...................................... 5,100
Notes receivable -- AWS subsidiaries................. 1,536
Other assets......................................... 15
-------
Total assets contributed.........................$ 27,942
=======
Liabilities assumed:
Accounts payable..................................... $ 298
Accounts payable-- Avalon subsidiaries............... 5,688
Other current liabilities............................ 1,227
Deferred federal taxes............................... 295
-------
Total liabilities assumed........................ 7,508
-------
Net assets contribut........................... $20,434
=======
The net assets contributed were recorded as a paid-in capital contribution.
The Accounts receivable--AWS subsidiaries and Notes receivable--AWS subsidiaries
were paid to Avalon prior to the Spin-off. These funds, together with the cash
contributed by AWS of $5 million, are reflected in the financing activities of
the Condensed Consolidated Statements of Cash Flows, under the caption "Capital
contribution from American Waste Services, Inc."
The financial information of Avalon Holdings Corporation for all periods
presented prior to June 18, 1998 reflect the operation of the businesses of the
Company while operating as subsidiaries of American Waste Services, Inc.
For balance sheet presentations, the current capital structure of Avalon
Holdings Corporation is presumed to have existed for all periods presented. For
purposes of determining the basic net income (loss) per share data, all of the
Company's common stock issued as a result of the Spin-off is deemed to have been
outstanding for all the periods presented.
Note 2. Net Income (Loss) Per Share
For purposes of determining the basic net income (loss) per share data for the
three months ended September 30, 1998 and 1997 and the nine months ended
September 30, 1998 and 1997, all of the Company's common stock issued as a
result of the Spin-off is deemed to have been outstanding for all periods
presented. As such, the weighted average number of shares outstanding for all
periods presented is 3,803,374.
Note 3. Debt
During the first nine months of 1998 the Company repaid $1.2 million of long-
term indebtedness of which $1.1 million related to the repayment of a bank loan
associated with the construction of the golf pro shop and banquet facility.
7
<PAGE>
Certain subsidiaries of the Company, which prior to the Spin-off were
subsidiaries of AWS, currently remain as guarantors of outstanding letters of
credit in the aggregate amount of $8.3 million issued prior to the Spin-off. AWS
is primarily liable under the letters of credit and, as such, the Company does
not anticipate any liability relating to such letters of credit. The letters of
credit are currently being utilized by AWS to satisfy the financial assurance
requirements of the Ohio Environmental Protection Agency ("OEPA") for two of
AWS's disposal facilities. These facilities have requested to utilize other
financial assurance mechanisms as provided by Ohio regulations. Upon approval by
the OEPA of such requests, which approval is anticipated to be received in the
near future, the letters of credit will be cancelled and the aforementioned
guaranty obligations will be extinguished.
Note 4. Legal Matters
On or about October 3, 1991, one shareholder owning 100 shares of AWS Class A
Common Stock brought suit against AWS and others on behalf of himself and a
purported class of other stockholders in the United States District Court for
the Southern District of New York, captioned Werbosky v. American Waste
--------------------------
Services, Inc. et al. The suit, which was transferred to the District Court for
- ---------------------
the Northern District of Ohio, alleges that AWS, the signatories to the
registration statement filed with the Securities and Exchange Commission during
October 1990, and AWS's underwriters violated federal securities laws in
connection with AWS's public offering of six million shares of Class A Common
Stock in October 1990. Among other things, the suit alleges misrepresentations
and failures to disclose allegedly material information concerning the nature of
AWS's market; the size of AWS's market; AWS's failure to disclose that its
landfills were located within a 50-mile radius of each other in Ohio, thus
making AWS especially vulnerable to local conditions and competition; AWS's
failure to set forth the present and imminent competition; and AWS's growth. The
plaintiff seeks damages in an unspecified amount alleged to have arisen in part
from the decline in the price of AWS's stock following the public offering, and
rescission.
On September 26, 1997 the Court granted the defendants' motion for Summary
Judgment and dismissed plaintiff's case. On October 25, 1997, pursuant to the
federal rules of appellate procedure, plaintiff filed a notice of appeal. Such
appeal is currently pending and Avalon, on behalf of AWS, intends to vigorously
defend the Court's order. Avalon has agreed to assume and indemnify AWS for any
costs and potential liability with respect to this matter.
In September 1995, certain subsidiaries of Avalon were informed that they had
been identified as potentially responsible parties by the Indiana Department of
Environmental Management with respect to a Fulton County, Indiana, hazardous
waste disposal facility which is subject to remedial action under Indiana
environmental laws. Such identification is based upon the subsidiaries having
been involved in the transportation of hazardous substances to the facility.
During the third quarter of 1997 Avalon's subsidiaries became parties to an
Agreed Order for Remedial Investigation/Feasibility Study and the Four County
Landfill Site Participation Agreement ("Participation Agreement"). A large
number of waste generators and other waste transportation and disposal companies
have also been identified as responsible or potentially responsible parties with
respect to this facility. Because the relevant law provides for joint and
several liability among the responsible parties, any one of them, including
Avalon's subsidiaries, could be assessed the entire cost of the remediation,
although this is unlikely. Currently, the extent of any liability of any of
Avalon's subsidiaries is unknown.
When Avalon concludes that it is probable that a liability has been incurred
with respect to a site, a provision is made in Avalon's financial statements for
Avalon's best estimate of the liability based on management's judgment and
experience, information available from regulatory agencies, and the number,
financial resources and relative degree of responsibility of other potentially
responsible parties who are jointly and severally liable for remediation of that
site as well as the typical allocation of costs among such parties. If a range
of possible outcomes is estimated and no amount within the range appears to be a
8
<PAGE>
better estimate than any other, then Avalon provides for the minimum amount
within the range, in accordance with generally accepted accounting principles.
As such, Avalon accrued a liability in 1995 relating to this matter.
Avalon's estimates are revised, as deemed necessary, as additional information
becomes known. Avalon anticipates obtaining additional information by reason of,
among other things, having entered into the Participation Agreement. While the
measurement of environmental liabilities is inherently difficult and the
possibility remains that technological, regulatory or enforcement developments,
the results of environmental studies or other factors could materially alter
Avalon's expectations at any time, Avalon does not anticipate that the amount of
any such revisions will have a material adverse effect on it.
In the ordinary course of conducting its business, Avalon also becomes involved
in lawsuits, administrative proceedings and governmental investigations,
including those relating to environmental matters. Some of these proceedings may
result in fines, penalties or judgments being assessed against Avalon which,
from time to time, may have an impact on its business and financial condition.
Avalon does not believe that such pending proceedings, individually, or in the
aggregate, would have a material adverse effect on it.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the operations and financial
condition of Avalon Holdings Corporation and its subsidiaries. As used in this
report, the terms "Avalon", or "Company" mean Avalon Holdings Corporation and
its wholly owned subsidiaries, taken as a whole, unless the context indicates
otherwise.
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, 'forward looking statements.' The
Company cautions readers that forward looking statements, including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs, and income, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward looking statements, due to
risks and factors identified herein and from time to time in the Company's
reports filed with the Securities and Exchange Commission.
Spin-off
- --------
Pursuant to the terms of a Contribution and Distribution Agreement dated as of
May 7, 1998 between Avalon and American Waste Services, Inc. ("AWS") (the
"Contribution Agreement"), AWS contributed to Avalon its transportation
operations, technical environmental operations, waste disposal brokerage and
management operations, and golf course and related operations together with
certain other assets including the headquarters of AWS and certain accounts
receivable. In connection with the contribution, Avalon assumed certain
liabilities of AWS including, without limitation, liabilities relating to the
termination of employment of certain employees of AWS and costs and potential
liabilities relating to the legal proceeding captioned Werbosky v. American
--------------------
Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special
- ----------------------------
dividend, all of the outstanding shares of capital stock of Avalon to the
holders of AWS common stock on a pro rata and corresponding basis (the "Spin-
off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan
of Merger dated as of February 6, 1998 entered into by and among USA Waste
Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with
C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc.
(the "Merger").
Liquidity and Capital Resources
- -------------------------------
For the first nine months of 1998, the primary source of cash was from financing
activities which related to the capital contribution made by AWS to Avalon in
connection with the Spin-off. For the first nine months of 1998, the Company
utilized the cash provided by financing activities and existing cash to meet
operating needs, repay indebtedness and fund capital expenditures.
Working capital increased to $29 million at September 30, 1998 from $13.7
million at December 31, 1997 primarily as a result of the capital contribution
made by AWS in connection with the Spin-off.
During the first nine months of 1998, capital spending for Avalon totaled $1.7
million which was principally related to the purchase of equipment for the
transportation and technical environmental services operations. Avalon's capital
spending in 1998 is expected to be in the range of $1.8 million to
10
<PAGE>
$2.8 million. Capital expenditures in 1998 will relate principally to acquiring
additional transportation equipment.
Management believes that cash provided from operations, the availability of
working capital, as well as Avalon's ability to incur indebtedness, will be for
the foreseeable future sufficient to meet operating requirements, fund debt
repayments, and fund capital expenditure programs. Avalon does not currently
have its own credit facilities.
Certain subsidiaries of the Company, which prior to the Spin-off were
subsidiaries of AWS currently remain as guarantors of outstanding letters of
credit in the aggregate amount of $8.3 million issued prior to the Spin-off. AWS
is primarily liable under the letters of credit and, as such, the Company does
not anticipate any liability relating to such letters of credit. The letters of
credit are currently being utilized by AWS to satisfy the financial assurance
requirements of the Ohio Environmental Protection Agency ("OEPA") for two of
AWS's disposal facilities. These facilities have requested to utilize other
financial assurance mechanisms as provided by Ohio regulations. Upon approval by
the OEPA of such requests, which approval is anticipated to be received in the
near future, the letters of credit will be cancelled and the aforementioned
guaranty obligations will be extinguished.
11
<PAGE>
Results of Operations
Overall performance
Net operating revenues in the third quarter of 1998 increased to $21.2 million
compared with $16.7 million in the prior year's third quarter. Cost of
operations increased to $18.2 million in the third quarter of 1998 compared with
$14.3 million in the prior year quarter primarily as a result of the increase in
the level of business of each of the Company's segments. The Company recorded
net income of $366,000 or $.10 per share for the third quarter of 1998 compared
to net income of $140,000 or $.04 per share for the third quarter of 1997. For
the first nine months of 1998, net operating revenues were $55.1 million
compared with $43.6 million for the first nine months of 1997. Cost of
operations increased to $47.7 million in the first nine months of 1998 compared
with $39.2 million in the first nine months of 1997 primarily as a result of the
increase in the level of business of each of the Company's segments. During the
first nine months of 1998, the Company recorded net income of $560,000, or $.15
per share, compared with a net loss of $785,000, or a loss of $.21 per share,
for the first nine months of 1997. Net operating revenues and operating income
for the Company's business segments were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net operating revenues:
Transportation services................................ $ 9,536 $ 9,317 $ 27,947 $ 25,861
Technical environmental services....................... 7,224 4,770 17,430 12,100
Waste brokerage and management services................ 4,849 1,850 10,717 4,878
Other businesses (1)................................... 1,634 1,587 3,096 3,002
--------- ----------- ---------- -----------
Segment operating revenues............................. 23,243 17,524 59,190 45,841
Intersegment elimination............................... (2,039) (777) (4,089) (2,250)
---------- ------------ ----------- ------------
$ 21,204 $ 16,747 $ 55,101 $ 43,591
========= =========== ========== ===========
Operating income (loss) (2):
Transportation services................................ $ 495 $ 503 $ 2,061 $ 1,461
Technical environmental services....................... 259 (718) 575 (2,545)
Waste brokerage and management services................ 302 275 1,004 652
Other businesses (1)................................... 448 596 553 669
--------- ----------- ---------- -----------
Segment operating income (loss)........................ 1,504 656 4,193 237
Interest expense ...................................... -- (28) (44) (88)
Interest income........................................ 300 21 385 61
Other income (expense), net............................ (15) 29 (15) 29
General corporate expenses............................. (976) (426) (3,274) (1,278)
---------- ------------ ----------- ------------
Income (loss) before income taxes...................... $ 813 $ 252 $ 1,245 $ (1,039)
========= =========== ========== ============
</TABLE>
(1) Other businesses include the operation of a public golf course and related
facilities.
(2) Segment operating income reflects the results of operations of each segment
before income taxes, interest income and expense, and items of a general
nature not readily allocable to a separate business segment.
12
<PAGE>
Performance in the Third Quarter of 1998 compared with the Third Quarter of 1997
Segment performance
Net operating revenues of the transportation services segment increased to $9.5
million in the third quarter of 1998 compared to $9.3 million in the third
quarter of the prior year. The increase in net operating revenues is primarily
attributable to an increase in transportation brokerage operations and increased
transportation of hazardous waste, partially offset by a reduction in the
transportation of general commodities. Despite the increase in net operating
revenues, the transportation services segment recorded operating income of $.5
million in the third quarter of 1998 and the third quarter of 1997 primarily as
a result of a change in the mix of transportation services provided.
Net operating revenues of the technical environmental services segment increased
to $7.2 million in the third quarter of 1998 compared with $4.8 million in the
prior year quarter. The increase in net operating revenues was primarily the
result of an increase in the level of engineering, consulting, remediation and
laboratory services provided. The net operating revenues of the technical
environmental services segment in the third quarter also included net operating
revenues associated with the management of a captive landfill which began in the
fourth quarter of 1997. The technical environmental services segment recorded
operating income of $.3 million in the third quarter of 1998 compared with an
operating loss of $.7 million in the third quarter of 1997. The improvement in
operating income is primarily the result of increased engineering and consulting
services and, to a lesser extent, an increase in laboratory services and the
inclusion of the operating income of the management of a captive landfill.
Furthermore, the operating loss incurred in the third quarter of 1997 was
primarily attributable to a write-off of an account receivable in an amount of
$.5 million associated with the settlement of a dispute regarding a remediation
project in Denver, Colorado.
Net operating revenues of the waste disposal brokerage and management segment
increased to $4.8 million in the third quarter of 1998 compared with $1.9
million in the third quarter of the prior year. The increase in net operating
revenues is primarily the result of an increase in the level of disposal
brokerage and management services provided. Operating income for the waste
disposal brokerage and management services segment was $.3 million in both the
third quarter of 1998 and the third quarter of 1997. Despite the significant
increase in net operating revenues, operating income did not increase, because
of increased costs including significantly higher selling and administrative
expenses.
Interest expense
The Company did not have any debt outstanding during the third quarter of 1998
and, as a result, did not incur any interest expense. Interest expense in the
third quarter of 1997 was $28,000.
General corporate expenses
General corporate expenses were $1 million in the third quarter of 1998 compared
with $.4 million in the third quarter of the prior year. General corporate
expenses for the third quarter of 1998 were the actual expenses incurred by the
Company for such period, while general corporate expenses for the third quarter
of 1997 were based upon an allocation of a portion of the general corporate
expenses of AWS prior to the Spin-off. The increase in general corporate
expenses for the current quarter as compared with the prior year quarter is the
result of the Company incurring all of the costs associated with the corporate
13
<PAGE>
headquarters contributed to Avalon by AWS and additional expenses resulting from
operating as an independent company subsequent to the Spin-off.
Net income
The Company recorded net income of $366,000 in the third quarter of 1998
compared with net income of $140,000 in the third quarter of the prior year. The
Company's overall effective tax rate, including the effect of state income tax
provisions, was 55% in the third quarter of 1998 compared to 44.4% in the prior
year's third quarter. The effective tax rate is significantly higher than
statutory rates due to the nondeductibility for tax purposes of the amortization
of costs in excess of fair market value of net assets of acquired businesses.
Performance in the First Nine Months of 1998 compared with the First Nine Months
of 1997
Segment Performance
Net operating revenues of the transportation services segment increased to $27.9
million in the first nine months of 1998 compared with $25.9 million in the
first nine months of the prior year. The increase in net operating revenues is
primarily the result of an increase in transportation brokerage operations and
increased transportation of hazardous and industrial waste, partially offset by
a decrease in the transportation of general commodities. The transportation
services segment recorded operating income of $2.1 million in the first nine
months of 1998 compared to $1.5 million in the first nine months of the prior
year. Operating income of the transportation services segment increased
primarily due to a rebate of $.4 million for workers' compensation premiums from
the State of Ohio in the second quarter and an increase in the level of
business.
Net operating revenues of the technical environmental services segment increased
to $17.4 million in the first nine months of 1998 compared with $12.1 million in
the first nine months of the prior year. The increase in net operating revenues
is primarily attributable to an increase in engineering and consulting services
and the inclusion of the net operating revenues associated with the management
of a captive landfill which began in the fourth quarter of 1997. For the first
nine months of 1998, the technical environmental services segment recorded
operating income of $.6 million compared with an operating loss of $2.5 million
in the first nine months of the prior year. The improvement in operating income
is primarily attributable to increased levels of business and the inclusion of
the operating income from management of a captive landfill. Furthermore, for the
first nine months of 1997, the technical environmental services segment incurred
a significant operating loss which was primarily attributable to losses incurred
in connection with a remediation project in Denver, Colorado. The operating loss
for the first nine months of 1997 was also the result of inefficiencies and
delays at other remediation projects.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $10.7 million in the first nine months of 1998 compared
with $4.9 million in the first nine months of the prior year. The increase in
net operating revenues is primarily the result of an increase in the level of
disposal brokerage business and management services provided. The waste disposal
brokerage and management services segment recorded operating income of $1.0
million in the first nine months of 1998 compared with $.7 million in the first
nine months of 1997. The increase in operating income is primarily attributable
to increased levels of business. Despite the significant increase in net
operating revenues, operating income did not increase proportionately, primarily
because of the increased costs, including
14
<PAGE>
significantly higher selling and administrative expenses and, to a lesser
extent, as a result of reduced margins on the disposal of waste from a certain
remediation project.
Interest expense
Interest expense was $44,000 in the first nine months of 1998 compared with
$88,000 in the first nine months of 1997. The decrease was primarily attributed
to a decrease in the amount of indebtedness outstanding. During the third
quarter of 1998, the Company did not have any debt outstanding.
General corporate expenses
General corporate expenses were $3.3 million for the first nine months of 1998
compared with $1.3 million for the first nine months of the prior year. General
corporate expenses for the first nine months of 1998 reflect an allocation of a
portion of the general corporate expenses of AWS prior to the Spin-off and the
actual expenses incurred by the Company subsequent to the Spin-off. General
corporate expenses for the first nine months of 1997 were based solely upon an
allocation of a portion of the general corporate expenses of AWS prior to the
Spin-off. The increase in general corporate expenses for the first nine months
of 1998 compared with the first nine months of 1997 is primarily attributable to
a one-time charge of $1.4 million for additional compensation and severance paid
in the second quarter of 1998 , the Company incurring all of the costs
associated with the corporate headquarters contributed to Avalon by AWS, and
additional expenses resulting from operating as an independent company
subsequent to the Spin-off.
Net income (loss)
The Company recorded net income of $.6 million for the first nine months of 1998
compared with a net loss of $.8 million for the first nine months of the prior
year primarily as a result of the foregoing. The Company's overall effective
income tax rate, including the effect of state income tax provisions, was 55%
for the first nine months of 1998 compared with 24.4% for the first nine months
of 1997. The effective tax rate is significantly higher than statutory rates due
to the nondeductibility for income tax purposes of the amortization of costs in
excess of fair market value of net assets of acquired businesses.
Trends and uncertainties
In the ordinary course of conducting its business, Avalon becomes involved in
lawsuits, administrative proceedings and governmental investigations, including
those relating to environmental matters. Some of these proceedings may result in
fines, penalties or judgments being assessed against Avalon which, from time to
time, may have an impact on its business and financial condition.
The Company is currently completing its assessment of its Year 2000 issues. The
Company's assessment process includes a review of its computerized systems,
including both information technology and non-information technology systems, to
ensure that they are capable of processing periods for the Year 2000 and beyond,
as well as a review of whether third parties with whom the Company has material
relationships are Year 2000 compliant. The Company's assessment will be
completed by December 31, 1998.
15
<PAGE>
The Company believes that its current systems and any new or upgraded systems
are or will be Year 2000 compliant and that any historical or estimated future
costs of remediating any non-compliant system have not been and will not be
material. The Company does not believe that the failure of its systems to be
Year 2000 compliant will have a material adverse effect upon the Company's
business, results of operations or financial condition.
While non-compliance by infrastructure related technologies which affect
utilities, communications and financial institutions may have a material adverse
effect, the Company is currently unaware of any customer, vendor or supplier
which, if not Year 2000 compliant, would have a material adverse effect upon the
Company's business, results of operations or financial condition.
The federal government and numerous state and local governmental bodies are
increasingly considering, proposing or enacting legislation or regulation to
either restrict or impede the disposal and/or transportation of waste. A
significant portion of Avalon's transportation and disposal brokerage and
management revenues is derived from the disposal or transportation of out-of-
state waste. Any law or regulation restricting or impeding the transportation of
waste or the acceptance of out-of-state waste for disposal could have a
significant negative effect on Avalon.
Competitive pressures within the environmental industry continue to impact the
financial performance of Avalon's transportation services, technical
environmental services and waste disposal brokerage and management services. A
decline in the rates which customers are willing to pay for its services could
adversely impact the future financial performance of Avalon.
The Company's operations are somewhat seasonal in nature because a significant
portion of the operations are performed primarily in selected northeastern and
midwestern states. As a result, the Company's financial performance could be
adversely affected by winter weather conditions.
Historically, a significant portion of Avalon's transportation revenues was a
result of AWS's disposal business. As a result of the transportation operations
no longer being affiliated with AWS, there can be no assurance that such
transportation services and resulting revenues will continue in the future. The
loss of such revenues could, if not replaced, have an adverse impact upon the
Avalon's future financial performance.
There is no assurance that, as a stand-alone company, Avalon's results of
operations will continue at a level similar to its results of operations while a
part of AWS. Avalon may be more susceptible to competitive and market factors
than when Avalon was a part of AWS. Additionally, unfavorable reaction to the
Spin-off and/or Merger by Avalon's customers could adversely affect the business
and operations of Avalon. Avalon's selling, general and administrative expenses
and costs of operations after the Spin-off are anticipated to continue to be
significantly higher than the historical expenses and costs of Avalon because
certain selling, general and administrative expenses and costs of operations of
AWS that had historically been allocated to subsidiaries of AWS that are not
part of Avalon will be selling, general and administrative expenses and costs of
operations of Avalon.
============================
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about October 3, 1991, one stockholder owning 100 shares of AWS
Class A Common Stock brought suit against AWS and others on behalf of
himself and a purported class of other stockholders in the United
States District Court for the Southern District of New York, captioned
Werbosky v. American Waste Services, Inc., et al. The suit, which was
-------------------------------------------------
transferred to the United States District Court for the Northern
District of Ohio, alleges that AWS, the signatories to its registration
statement filed with the SEC during October 1990, and AWS's
underwriters violated federal securities laws in connection with AWS's
public offering of six million shares of AWS Class A Common Stock in
October 1990. Among other things, the suit alleges misrepresentations
and failures to disclose allegedly material information concerning the
nature of AWS's market, the size of AWS's market; AWS's failure to
disclose that its landfills were located within a 50-mile radius of
each other in Ohio, thus making AWS especially vulnerable to local
conditions and competition; AWS's failure to set forth present and
imminent competition; and AWS's growth. The plaintiff sought damages in
an unspecified amount alleged to have arisen in part from the decline
in the price of AWS's stock following the public offering and
rescission.
On September 26, 1997 the Court granted the defendants' Motion for
Summary Judgment and dismissed the plaintiff's case. On October 25,
1997, pursuant to the federal rules of appellate procedure, the
plaintiff filed a notice of appeal. Such appeal is currently pending
and Avalon, on behalf of AWS, intends to vigorously defend the Court's
order. Avalon has agreed to assume and indemnify AWS for any costs and
potential liability with respect to this matter.
In September 1995, certain subsidiaries of Avalon were informed that
they had been identified as potentially responsible parties by the
Indiana Department of Environmental Management with respect to a Fulton
County, Indiana hazardous waste disposal facility which is subject to
remedial action under Indiana environmental laws. Such identification
is based upon the subsidiaries having been involved in the
transportation of hazardous substances to the facility. During the
third quarter of 1997, these subsidiaries became parties to an Agreed
Order for Remedial Investigation/Feasibility Study and the Four County
Landfill Site Participation Agreement (the "Participation Agreement").
A large number of waste generators and other waste transportation and
disposal companies have also been identified as responsible or
potentially responsible parties with respect to this facility. Because
the relevant law provides for joint and several liability among the
responsible parties, any one of them, including these subsidiaries,
could be assessed the entire cost of the remediation, although this is
unlikely. Currently, the extent of any ultimate liability of any of
these subsidiaries with respect to this facility is unknown.
When Avalon concludes that it is probable that a liability has been
incurred with respect to a site, provision will be made in Avalon's
financial statements reflecting its best estimate of the liability
based on management's judgment and experience, information available
from regulatory agencies, and the number, financial resources and
relative degree of responsibility of other potentially responsible
parties who are jointly and severally liable for remediation of that
site as well as the typical allocation of costs among such parties. If
a range of possible outcomes is estimated and no amount within the
range appears to be a better estimate than any other, then Avalon will
provide for the minimum amount within the range, in accordance with
generally accepted accounting principles. As such, Avalon accrued a
liability of in 1995 relating to this
17
<PAGE>
matter. Avalon's estimates are revised, as deemed necessary, as
additional information becomes known. Avalon anticipates obtaining
additional information over the next several months by reason of, among
other things, having entered into the Participation Agreement.
While the measurement of environmental liabilities is inherently
difficult and the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies or other
factors could materially alter Avalon's expectations at any time,
Avalon does not anticipate that the amount of any such revisions will
have a material adverse effect on it.
In addition to the foregoing, in the ordinary course of conducting
their businesses, subsidiaries of Avalon become involved in lawsuits,
administrative proceedings and governmental investigations, including
those relating to environmental matters. Any of these proceedings may
result in fines, penalties or judgments being assessed which, from time
to time, may have an impact on an Avalon subsidiary's business and
financial condition. Avalon does not believe that any pending
proceedings, individually or in the aggregate, would have a material
adverse effect on it.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVALON HOLDINGS CORPORATION
(Registrant)
Date: November 6, 1998 By: /s/ Timothy C. Coxson
------------------ ------------------=---------------------------
Timothy C. Coxson, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer and Duly Authorized Officer)
19
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