<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 June 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 August 1, 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 Six Months Ended June 30, 1998 and
1997 (Unaudited)........................................... 3
Condensed Consolidated Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997.......................... 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 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............... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 16
Item 2. Changes in Securities............................... 17
Item 3. Defaults upon Senior Securities..................... 17
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 17
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
SIGNATURE..................................................... 18
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 Six Months Ended
June 30, June 30,
------------------------ --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net operating revenues........................... $ 18,086 $ 13,682 $ 33,897 $ 26,844
Cost and expenses:
Cost of operations............................... 15,409 11,957 29,461 24,906
Selling, general and administrative
expense......................................... 2,919 1,656 4,492 3,296
--------- --------- --------- ---------
Income (loss) from operations.................... (242) 69 (56) (1,358)
Other income (expense):
Interest expense.................................. (20) (29) (44) (60)
Other income, net................................. 506 54 532 127
--------- --------- --------- ---------
Income (loss) before income taxes................. 244 94 432 (1,291)
Income taxes (benefit) expense.................... 141 73 238 (366)
--------- --------- --------- ---------
Net income (loss)................................. $ 103 $ 21 $ 194 $ (925)
========= ========= ========= =========
Basic net income (loss) per share................. $ .03 $ .01 $ .05 $ (.24)
========= ========= ========= =========
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>
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents......................................... $23,025 $ 1,763
Accounts receivable, net.......................................... 14,272 19,034
Refundable income taxes........................................... -- 105
Deferred tax benefit.............................................. 207 199
Prepaid expenses and other current assets......................... 1,655 977
------- -------
Total current assets............................................... 39,159 22,078
Properties and equipment, less accumulated depreciation
and amortization of $14,293 in 1998 and $13,353 in 1997........... 23,717 19,184
Costs in excess of fair market value of net assets of acquired
businesses, net................................................... 2,936 3,022
Other assets, net.................................................. 236 233
------- -------
Total assets..................................................... $66,048 $44,517
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt................................. $ 18 $ 230
Accounts payable.................................................. 5,860 4,785
Accrued payroll and other compensation............................ 868 906
Accrued income taxes.............................................. 1,211 176
Other accrued taxes............................................... 713 872
Other liabilities and accrued expenses............................ 1,571 1,372
------- -------
Total current liabilities........................................ 10,241 8,341
Long-term debt..................................................... -- 1,006
Deferred income taxes.............................................. 1,646 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............................................... (4,355) (4,549)
------- -------
Total shareholders' equity....................................... 53,316 32,947
------- -------
Total liabilities and shareholders' equity....................... $66,048 $44,517
======= =======
</TABLE>
4
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)......................................................... $ 194 $ (925)
Reconciliation of net income (loss) to cash provided by operating activities:
Depreciation and amortization........................................... 1,248 1,128
Provision for deferred income taxes..................................... (16) (50)
Provision for losses on accounts receivable............................. 89 81
Gain on sales of fixed assets........................................... (12) (43)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............................ (946) 1,830
(Increase) decrease in refundable income taxes........................ 105 (451)
(Increase) decrease in prepaid expenses and other current assets...... (403) 481
Increase in other assets.............................................. (2) (2)
Increase (decrease) in accounts payable............................... 777 (1,674)
Increase (decrease) in accrued payroll and other compensation......... (38) 48
Increase in accrued income taxes...................................... 28 8
Increase (decrease) in other accrued taxes............................ (134) 132
Increase (decrease) in other liabilities and accrued expenses......... (46) 178
Decrease in other noncurrent liabilities.............................. (11) -
------- -------
Net cash provided by operating activities............................. 833 741
------- -------
Investing activities:
Capital expenditures...................................................... (804) (1,540)
Proceeds from sales of fixed assets....................................... 76 134
------- -------
Net cash used in investing activities................................. (728) (1,406)
------- -------
Financing activities:
Capital contribution from American Waste Services, Inc.................... 22,475 --
Repayments of long-term debt.............................................. (1,218) (150)
Dividends paid to American Waste Services, Inc............................ (100) (100)
------- -------
Net cash provided (used) in financing activities........................ 21,157 (250)
------- -------
Increase (decrease) in cash and cash equivalents............................ 21,262 (915)
Cash and cash equivalents at beginning of year.............................. 1,763 1,975
------- -------
Cash and cash equivalents at end of period.................................. $23,025 $ 1,060
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 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
June 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, any liabilities relating to
the termination of employment of certain employees of AWS and any 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").
The assets and liabilities contributed by AWS to Avalon pursuant to the
Contribution Agreement and Merger Agreement were as follows (in thousands):
<TABLE>
<CAPTION>
Assets contributed:
<S> <C>
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 contributed................. $20,434
=======
</TABLE>
6
<PAGE>
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 June 30, 1998 and 1997 and the six months ended June 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 six 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.
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
7
<PAGE>
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
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.
____________________________________________
____________________________________________
8
<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 term "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, any liabilities relating to
the termination of employment of certain employees of AWS and any 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 bases (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 six months of 1998, Avalon utilized existing cash to meet
operating needs, repay indebtedness, and fund capital expenditure programs.
Cash provided by operations for the first six months of 1998 and 1997 totaled
$.8 million and $.7 million, respectively. The primary source of cash in the
first six months of 1998 was from financing activities which primarily related
to the capital contribution by AWS to Avalon.
Working capital increased to $28.9 million at June 30, 1998 from $13.7 million
at December 31, 1997 primarily as a result of the capital contributions made by
AWS in connection with the Spin-off.
9
<PAGE>
During 1998, capital spending for Avalon totaled $.8 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 $1.5 million to $3.0 million. Capital
expenditures in 1998 will relate principally to acquiring 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 American Waste Services, Inc. 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.
10
<PAGE>
Results of Operations
- ---------------------
Overall performance
Net operating revenues in the second quarter of 1998 increased to $18.1 million
compared with $13.7 million in the prior year's second quarter. Cost of
operations increased to $15.4 million in the second quarter of 1998 compared
with $12 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 $103,000 or $.03 per share for the second quarter of 1998
compared to net income of $21,000 or $.01 per share for the second quarter of
1997. For the first six months of 1998, net operating revenues were $33.9
million compared with $26.8 million for the first six months of 1997. Cost of
operations increased to $29.5 million in the first six months of 1998 compared
with $24.9 million in the first six 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 six months of 1998, the Company recorded net income of $194,000, or $.05
per share, compared with a net loss of $925,000, or a loss of $.24 per share,
for the first six 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 Six Months Ended
June 30, June 30,
------------------- ----------------
1998 1997 1998 1997
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Net operating revenues:
Transportation services.................. $ 9,666 $ 8,679 $18,411 $16,544
Technical environmental services......... 5,540 3,348 10,206 7,330
Waste brokerage and management services.. 2,905 1,144 5,868 3,028
Other businesses (1)..................... 1,122 1,046 1,462 1,415
------- ------- ------- -------
Segment operating revenues............... 19,233 14,217 35,947 28,317
Intersegment elimination................. (1,147) (535) (2,050) (1,473)
------- ------- ------- -------
$18,086 $13,682 $33,897 $26,844
======= ======= ======= =======
Operating income (2):
Transportation services.................. $ 1,225 $ 600 $ 1,566 $ 958
Technical environmental services......... 212 (466) 316 (1,827)
Waste brokerage and management services.. 331 157 702 377
Other businesses (1)..................... 297 239 105 73
------- ------- ------- -------
Segment operating income (loss).......... 2,065 530 2,689 (419)
Interest expense......................... (20) (29) (44) (60)
Interest income.......................... 63 19 85 40
General corporate expenses............... (1,864) (426) (2,298) (852)
------- ------- ------- -------
Income before income taxes............... $ 244 $ 94 $ 432 $(1,291)
======= ======= ======= =======
</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.
11
<PAGE>
Performance in the Second Quarter of 1998 compared with the Second Quarter of
1997
Segment performance
Net operating revenues of the transportation services segment increased 11.5% to
$9.7 million in the second quarter of 1998 compared to $8.7 million in the
second quarter of the prior year. The increase in net operating revenues is
primarily attributable to an increase in transportation brokerage operations
and, to a lesser extent, increased transportation of hazardous and industrial
waste. The transportation services segment recorded operating income of $1.2
million in the second quarter of 1998 compared to $.6 million in the second
quarter of 1997. Operating income of the transportation services segment
increased primarily due to a rebate of $.4 million of workers' compensation
premiums from the State of Ohio and an increase in the level of business.
Net operating revenues of the technical environmental services segment increased
to $5.5 million in the second quarter of 1998 compared with $3.3 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 second 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 $.2 million in the second quarter of 1998 compared with an
operating loss of $.5 million in the second quarter of 1997. The improvement in
operating income is primarily the result of increased engineering and consulting
services and, to a lesser extent, the inclusion of the operating income of the
management of a captive landfill and an increase in laboratory services.
Net operating revenues of the waste disposal brokerage and management segment
increased to $2.9 million in the second quarter of 1998 compared with $1.1
million in the second 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. The waste disposal brokerage and management
services segment recorded operating income of $.3 million in the second quarter
of 1998 compared with $.2 million in the second quarter of 1997. The increase
in operating income is primarily attributable to increased levels of business.
Operating margins during the second quarter of 1998 were lower than operating
margins for the prior year quarter as a result of reduced margins on the
disposal of waste from a certain remediation project.
Interest expense
Interest expense was $20,000 in the second quarter of 1998 compared to $29,000
in the second quarter of the prior year. The decrease was primarily attributed
to a decrease in the amount of principal outstanding. During the second quarter
of 1998, the Company repaid the bank loan associated with the construction of
the golf pro shop and banquet facility.
12
<PAGE>
General corporate expenses
General corporate expenses were $1.9 million in the second quarter of 1998
compared with $.4 million in the second quarter of the prior year. Included in
the general corporate expenses in the second quarter of 1998 and the second
quarter of 1997 are corporate expenses of approximately $.4 million relating to
AWS which were allocated to Avalon's businesses. The increase in general
corporate expenses in the second quarter of 1998 compared to the prior year
quarter is primarily attributable to a one-time charge for additional
compensation and severance paid in the second quarter of 1998 which amounted to
$1.4 million.
Net income
The Company recorded net income of $103,000 in the second quarter of 1998
compared with net income of $21,000 in the second quarter of the prior year.
The Company's overall effective tax rate, including the effect of state income
tax provisions, was 57.8% in the second quarter of 1998 compared to 78.5% in the
prior year's second 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 Six Months of 1998 compared with the First Six Months
of 1997
Segment Performance
Net operating revenues of the transportation services segment increased to $18.4
million in the first six months of 1998 compared with $16.5 million in the first
six months of the prior year. The increase in net operating revenues is
primarily the result of an increase in transportation brokerage operations and,
to a lesser extent, increased transportation of hazardous and industrial waste.
The transportation services segment recorded operating income of $1.6 million in
the first six months of 1998 compared to $1.0 million in the first six 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 $10.2 million in the first six months of 1998 compared with $7.3 million in
the first six 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 and, to a lesser
extent, an increase in remediation and laboratory services provided. For the
first six months of 1998, the technical environmental services segment recorded
operating income of $.3 million compared with an operating loss of $1.8 million
in the first six 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. For the first six
months of 1997, the technical environmental services segment incurred a
significant operating loss which
13
<PAGE>
was primarily attributable to losses incurred during the first quarter of 1997
in connection with a remediation project in Denver, Colorado. The operating loss
for the first six months of 1997 was also the result of inefficiencies and
delays at other remediation projects and decreased levels of engineering and
consulting services.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $5.9 million in the first six months of 1998 compared with
$3.0 million in the first six 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. The waste disposal
brokerage and management services segment recorded operating income of $.7
million in the first six months of 1998 compared with $.4 million in the first
six months of 1997. The increase in operating income is primarily attributable
to increased levels of business. Operating margins for the first six months of
1998 were slightly lower than operating margins for the prior year period 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 six months of 1998 compared with
$60,000 in the first six months of 1997. The decrease was primarily attributed
to a decrease in the amount of principal outstanding. During the second quarter
of 1998, the Company repaid the bank loan associated with the construction of
the golf pro shop and banquet facility.
General corporate expenses
General corporate expenses were $2.3 million for the first six months of 1998
compared with $.9 million for the first six months of the prior year. Included
in the general corporate expenses for the first six months of 1998 and 1997 are
corporate expenses of approximately $.9 million relating to AWS which were
allocated to Avalon's businesses. The increase in general corporate expenses
for the first six months of 1998 compared with the first six months of the prior
year is primarily attributable to a one-time charge for additional compensation
and severance paid in the second quarter of 1998 which amounted to $1.4 million.
Net income (loss)
The Company recorded net income of $.2 million for the first six months of 1998
compared with a net loss of $.9 million for the first six 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 six months of 1998 compared with 28.4% for the first six months of
1997. 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.
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
14
<PAGE>
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 currently is assessing its computer systems to ensure that they are
capable of processing periods for the year 2000 and beyond. The Company's
assessment of its computer systems will be complete by December, 1998. The
Company does not believe that the cost of its compliance or the possible failure
to comply by third parties with whom the Company currently conducts business
will have a material adverse effect on its business, financial condition or
results of operations. The Company anticipates that it will be in compliance
prior to the year 2000.
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
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
further decline in the rates which customers are willing to pay for its services
could adversely impact the future financial performance of Avalon.
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 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.
____________________________________________
____________________________________________
15
<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 matter.
16
<PAGE>
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
17
<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: August 13, 1998 By: /s/ Timothy C. Coxson
---------------------- ---------------------------------------
Timothy C. Coxson, Executive Vice President,
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
18
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