<PAGE>
1999
================================================================================
UNITED STATES
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, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from __________ to ___________
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
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 3,185,240 shares of its Class A Common Stock and 618,091
shares of its Class B Common Stock outstanding as of November 5, 1999.
================================================================================
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited)...................... 3
Condensed Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998..................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited)...................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities and Use of Proceeds......................... 17
Item 3. Defaults upon Senior Securities................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURE................................................................... 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net operating revenues........................ $21,513 $21,204 $60,549 $55,101
Cost and expenses:
Cost of operations............................ 17,499 18,200 51,318 47,661
Selling, general and administrative expense... 3,142 2,504 8,179 6,996
------- ------- ------- -------
Income from operations........................ 872 500 1,052 444
Other income (expense):
Interest expense.............................. (1) -- (2) (44)
Interest income............................... 276 300 807 385
Other income (expenses), net.................. (74) 13 (27) 460
------- ------- ------- -------
Income before income taxes.................... 1,073 813 1,830 1,245
Income taxes expense.......................... 461 447 787 685
------- ------- ------- -------
Net income.................................... $ 612 $ 366 $ 1,043 $ 560
======= ======= ======= =======
Basic net income per share *.................. $ .16 $ * $ .27 $ *
======= ======= ======= =======
Pro forma net income per share *.............. $ -- $ .10 $ -- $ .15
======= ======= ======= =======
Weighted average shares outstanding (Note 2).. 3,803 3,803 3,803 3,803
======= ======= ======= =======
</TABLE>
* In accordance with the Securities and Exchange Commission regulations, pro
forma net income per share has been presented for the year in which the Spin-
off from American Waste Services, Inc. occurred. For purposes of determining
the pro forma net income per share, all of the Company's common stock issued
as a result of the Spin-off is deemed to have been outstanding since the
beginning of 1998.
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,
1999 1998
------------- -----------
Assets (Unaudited)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $20,202 $22,274
Accounts receivable, net....................................... 17,850 16,172
Deferred income taxes.......................................... 317 316
Prepaid expenses and other current assets...................... 2,730 1,904
------- -------
Total current assets.......................................... 41,099 40,666
Properties and equipment, less accumulated depreciation
and amortization of $16,865 in 1999 and $15,326 in 1998........ 24,408 23,300
Costs in excess of fair market value of net assets of acquired
businesses, net................................................ 2,362 2,473
Other assets, net............................................... 234 246
------- -------
Total assets.................................................. $68,103 $66,685
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable............................................... $ 6,972 $ 6,279
Accrued payroll and other compensation......................... 1,772 1,242
Accrued income taxes........................................... 1,597 1,078
Other accrued taxes............................................ 789 922
Other liabilities and accrued expenses......................... 1,404 2,172
------- -------
Total current liabilities..................................... 12,534 11,693
Deferred income taxes........................................... 1,188 1,209
Other noncurrent liabilities.................................... 400 845
Shareholders' equity:
Class A Common Stock, $.01 par value........................... 32 32
Class B Common Stock, $.01 par value........................... 6 6
Paid-in capital................................................ 58,096 58,096
Accumulated deficit............................................ (4,153) (5,196)
------- -------
Total shareholders' equity.................................... 53,981 52,938
------- -------
Total liabilities and shareholders' equity.................... $68,103 $66,685
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net income.......................................................... $ 1,043 $ 560
Reconciliation of net income to cash from operating activities:
Depreciation and amortization..................................... 2,146 1,963
Provision for deferred income taxes............................... (22) (24)
Provision for losses on accounts receivable....................... 188 143
(Gain) loss on sales and disposal of property and equipment....... 134 (15)
Changes in assets and liabilities
Accounts receivable............................................ (1,866) (5,021)
Prepaid expenses and other current assets...................... (826) (948)
Other assets................................................... (6) (32)
Accounts payable............................................... 119 2,756
Accrued payroll and other compensation......................... 530 240
Accrued income taxes........................................... 519 355
Other accrued taxes............................................ (133) (24)
Other liabilities and accrued expenses......................... (768) (169)
Other noncurrent liabilities................................... (445) (11)
------- -------
Net cash provided (used) by operating activities............ 613 (227)
------- -------
Investing activities:
Capital expenditures................................................ (2,830) (1,748)
Proceeds from sales of property and equipment....................... 145 81
------- -------
Net cash used by investing activities....................... (2,685) (1,667)
------- -------
Financing activities:
Capital contribution from American Waste Services, Inc.............. -- 22,475
Repayments of long-term debt........................................ -- (1,236)
Dividends paid to American Waste Services, Inc...................... -- (100)
------- -------
Net cash provided by financing activities................... -- 21,139
------- -------
Increase (decrease) in cash and cash equivalents..................... (2,072) 19,245
Cash and cash equivalents at beginning of year....................... 22,274 1,763
------- -------
Cash and cash equivalents at end of period........................... $20,202 $21,008
======= =======
</TABLE>
Noncash investing activities:
Capital expenditures of $574 are included in Accounts Payable at September 30,
1999.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1999
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. The accompanying unaudited
condensed consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 1998 Annual Report to Shareholders.
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, 1999, 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.
The Company has no items that qualify as a component of other comprehensive
income as defined in Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income and, therefore, comprehensive income equals net
income for all periods presented.
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, 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.
Note 2. Net Income Per Share
For purposes of determining the basic and pro forma net income per share data
for the three months and nine months ended September 30, 1999 and 1998, all of
the Company's common stock issued as a result
6
<PAGE>
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 3,803,331. Diluted net income per share is equal to basic net
income per share.
Note 3. Legal Matters
In September 1995, certain subsidiaries of the Company 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 was based upon the subsidiaries having
been involved in the transportation of hazardous substances to the facility. 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. Although unlikely, because the relevant
law provides for joint and several liability among the responsible parties, any
one of them, including the Company's subsidiaries, could be assessed the
remaining unallocated costs of the remediation which are currently estimated to
be $10 million. Currently, the extent of any ultimate liability of any of the
Company's subsidiaries is unknown; however, based upon recent information, the
Company's allocable share of site costs is anticipated to be in the range of 2%
to 4%. As a result, during the third quarter of 1999, the Company reduced its
accrued liability relating to this matter, on an undiscounted basis, to $400,000
which is included in the Condensed Consolidated Balance Sheets under the caption
"Other noncurrent liabilities." The Company is currently attempting to enter
into a participation agreement and become a party to an agreed order regarding
the remediation of a portion of the site. If successful, the Company's
potential liability regarding this site may be further reduced. The Company
expects to resolve the extent of its ultimate liability during the year 2000.
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.
Although the outcome of such lawsuits or other proceedings cannot be predicted
with certainty, the Company does not believe that any uninsured ultimate
liabilities, fines or penalties resulting from such pending proceedings,
individually or in the aggregate, would have a material adverse effect on it.
7
<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"), 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.
Liquidity and Capital Resources
- -------------------------------
For the first nine months of 1999, the Company utilized existing cash and cash
provided by operations to fund capital expenditures and meet operating needs.
During the first nine months of 1999, capital spending for Avalon totaled $3.4
million which was principally related to the purchase of equipment for the
Company's transportation operations and capital improvements to the Company's
golf course. Avalon's capital spending in 1999 is expected to be in the range
of $6 million to $7.5 million which will relate principally to capital
improvements to the golf course and acquiring additional transportation
equipment. On August 2, 1999, the Company closed the golf course to begin the
capital improvements, which are expected to be in the range of $3.5 million to
$4 million. The timing of such expenditures is subject, among other things, to
weather conditions. In addition to the capital improvements to the golf course,
the Company anticipates capital expenditures of approximately $1 million for
improvements to the golf course related facilities. The majority of these
additional expenditures are anticipated to occur in the year 2000. The Company
does not expect the golf course to resume operations until the third quarter of
2000.
8
<PAGE>
During the third quarter of 1999 the Company renewed its insurance program for
the period September 1, 1999 to August 31, 2000 resulting in an increase in
prepaid insurance expense. Such increase is included in the change in "Prepaid
expenses and other current assets" on the Condensed Consolidated Statements of
Cash Flows for the nine months ended September 30, 1999.
During the third quarter of 1999 the Company made a discretionary cash
contribution for the 1998 plan year in the amount of $690,000 to the Company
sponsored defined contribution profit sharing plan that is a qualified tax
deferred benefit plan under Section 401(k) of the Internal Revenue Code. Such
amount was included in other liabilities and accrued expenses at December 31,
1998 and is reflected in the change in "Other liabilities and accrued expenses"
on the Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999.
During the third quarter of 1999 the Company reduced its accrued liability
associated with anticipated remediation costs of a hazardous waste disposal
facility by $445,000. Such reduction is reflected in the change in "Other
noncurrent liabilities" on the Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999.
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 and fund
capital expenditure programs. Avalon does not currently have an existing credit
facility.
9
<PAGE>
Results of Operations
Overall performance
Net operating revenues in the third quarter of 1999 increased to $21.5 million
compared with $21.2 million in the prior year's third quarter. Cost of
operations decreased to $17.5 million in the third quarter of 1999 compared with
$18.2 million in the prior year quarter. The Company recorded net income of $.6
million or $.16 per share for the third quarter of 1999 compared with net income
of $.4 million or $.10 per share for the third quarter of 1998. For the first
nine months of 1999, net operating revenues were $60.5 million compared with
$55.1 million for the first nine months of 1998. Cost of operations increased
to $51.3 million for the first nine months of 1999 compared with $47.7 million
for the first nine months of the prior year. During the first nine months of
1999, the Company recorded net income of $1 million or $.27 per share compared
with $.6 million or $.15 per share for the first nine months of 1998. Net
operating revenues and income before taxes for the Company's business segments
were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net operating revenues from:
Transportation services:
External customers revenues..................... $ 9,387 $ 8,234 $25,456 $24,980
Intersegment revenues........................... 1,538 1,302 3,983 2,967
------- ------- ------- -------
Total transportation services.................. 10,925 9,536 29,439 27,947
------- ------- ------- -------
Technical environmental services:
External customers revenues..................... 7,778 7,193 22,800 17,321
Intersegment revenues........................... 34 31 102 109
------- ------- ------- -------
Total technical environmental services......... 7,812 7,224 22,902 17,430
------- ------- ------- -------
Waste disposal brokerage and management:
External customers revenues..................... 3,616 4,257 10,440 9,935
Intersegment revenues........................... 972 592 2,761 782
------- ------- ------- -------
Total waste disposal brokerage and management
services....................................... 4,588 4,849 13,201 10,717
------- ------- ------- -------
Other businesses: (1)
External customers revenues..................... 732 1,520 1,853 2,865
Intersegment revenues........................... 61 114 233 231
------- ------- ------- -------
Total other businesses......................... 793 1,634 2,086 3,096
------- ------- ------- -------
Segment operating revenues...................... 24,118 23,243 67,628 59,190
Intersegment eliminations....................... (2,605) (2,039) (7,079) (4,089)
------- ------- ------- -------
Total net operating revenues................... $21,513 $21,204 $60,549 $55,101
------- ------- ------- -------
</TABLE>
10
<PAGE>
Results of Operations (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (loss) before taxes:
Transportation services.......................... $ 967 $ 503 $ 1,691 $ 2,083
Technical environmental services................. 806 265 1,721 595
Waste disposal brokerage and management
services........................................ 541 307 1,086 1,016
Other businesses................................. (148) 455 (167) 526
------- ------- ------- -------
Segment income before taxes...................... 2,166 1,530 4,331 4,220
Corporate interest income........................ 245 274 709 314
Corporate other expense, net..................... (2) (15) 2 (15)
General corporate expenses....................... (1,336) (976) (3,212) (3,274)
------- ------- ------- -------
Income before taxes.............................. $ 1,073 $ 813 $ 1,830 $ 1,245
------- ------- ------- -------
Interest expense:
Transportation services.......................... $ -- $ -- $ -- $ 3
Technical environmental services................. 1 -- 2 --
Waste disposal brokerage and management
services........................................ -- -- -- --
Other business................................... -- -- -- 41
Corporate........................................ -- -- -- --
------- ------- ------- -------
Total........................................ $ 1 $ -- $ 2 $ 44
------- ------- ------- -------
Interest income:
Transportation services.......................... $ 10 $ 8 $ 28 $ 26
Technical environmental services................. 10 6 31 20
Waste disposal brokerage and management
services........................................ 8 5 32 12
Other business................................... 3 7 7 13
Corporate........................................ 245 274 709 314
------- ------- ------- -------
Total........................................ $ 276 $ 300 $ 807 $ 385
------- ------- ------- -------
September 30 December 31
1999 1998
------- -------
Identifiable assets:
Transportation services.......................... $17,769 $17,288
Technical environmental services................. 12,650 11,751
Waste disposal brokerage and management
services........................................ 4,125 3,163
Other businesses................................. 4,016 4,095
Corporate........................................ 29,543 30,388
------- -------
Total........................................ $68,103 $66,685
------- -------
</TABLE>
(1) Other businesses include the operation of a public golf course and related
facilities.
11
<PAGE>
Performance in the Third Quarter of 1999 compared with the Third Quarter of 1998
Segment performance
Net operating revenues of the transportation services segment increased to $10.9
million in the third quarter of 1999 compared with $9.5 million in the third
quarter of the prior year primarily due to an increase in the transportation of
hazardous waste and municipal solid waste, partially offset by a decrease in the
transportation of general commodities. The transportation services segment
recorded income before taxes of $1 million in the third quarter of 1999 compared
with $.5 million in the third quarter of 1998. The increase was primarily the
result of the Company reducing its accrued liability associated with anticipated
remediation costs of a hazardous waste facility by approximately $.4 million.
Net operating revenues of the technical environmental services segment increased
to $7.8 million in the third quarter of 1999 compared with $7.2 million in the
third quarter of the prior year. The increase in net operating revenues was
primarily the result of an increase in laboratory services provided, increased
engineering and consulting services, and higher net operating revenues
associated with the Company's captive landfill management operations. The
technical environmental services segment recorded income before taxes of $.8
million in the third quarter of 1999 compared with income before taxes of $.3
million in the third quarter of 1998. The increase in income before taxes is
primarily the result of improved operating margins of the remediation services
business and improved operating results of the Company's captive landfill
management operations.
Net operating revenues of the waste disposal brokerage and management services
segment decreased to $4.6 million in the third quarter of 1999 compared with
$4.8 million in the third quarter of the prior year primarily due to a decrease
in the level of disposal brokerage and management services provided. Income
before taxes for the waste disposal brokerage and management services segment
increased to $.5 million in the third quarter of 1999 compared with $.3 million
in the third quarter of 1998. The increase is primarily a result of a reduction
in operating costs of approximately $.3 million arising from the Company
reaching a favorable agreement with a third party vendor concerning amounts
previously accrued by the Company for disposal and transportation services.
The Company's other businesses consist primarily of the operation of a public
golf course and restaurant. During the third quarter of 1999, the Company
closed the golf course to make significant capital improvements to the course
and related facilities. As a result, net operating revenues decreased to $.8
million in the third quarter of 1999 compared with $1.6 million in the third
quarter of the prior year. The other businesses incurred a loss before taxes of
approximately $.1 million in the third quarter of 1999 compared with income
before taxes of $.5 million in the third quarter of the prior year. The Company
does not expect the golf course to resume operations until the third quarter of
2000.
Interest income
Interest income decreased to $276,000 in the third quarter of 1999 compared with
$300,000 in the third quarter of 1998 primarily because of a lower amount of
cash available to be invested during the third quarter of 1999.
12
<PAGE>
General corporate expenses
General corporate expenses were $1.3 million in the third quarter of 1999
compared with $1 million in the third quarter of the prior year. The increase
is primarily the result of higher performance related incentive compensation
expense.
Net income
The Company recorded net income of $612,000 in the third quarter of 1999
compared with net income of $366,000 in the third quarter of the prior year.
The Company's overall effective tax rate, including the effect of state income
tax provisions, was 43% in the third quarter of 1999 compared to 55% in the
prior year's third quarter. The effective tax rate for the current and prior
year period is 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 1999 compared with the First Nine Months
of 1998
Segment performance
Net operating revenues of the transportation services segment increased to $29.4
million in the first nine months of 1999 compared with $27.9 million for the
first nine months of the prior year. The increase is primarily attributable to
an increase in the transportation of municipal solid waste and hazardous waste,
offset by a decrease in the transportation of general commodities and a decrease
in transportation brokerage operations. Income before taxes of the
transportation services segment decreased to $1.7 million for the first nine
months of 1999 compared with $2.1 million for the first nine months of the prior
year. The decrease in income before taxes when compared with the first nine
months of 1998 is primarily due to decreased transportation brokerage
operations, increased fuel costs and higher selling and general administrative
expenses. Income before taxes for the first nine months of 1999 included a
reduction in operating costs of approximately $.4 million resulting from the
Company reducing its accrued liability associated with anticipated remediation
costs of a hazardous waste facility. Income before taxes for the first nine
months of 1998 included a one-time rebate of $.4 million for workers'
compensation premiums from the State of Ohio
Net operating revenues of the technical environmental services segment increased
to $22.9 million in the first nine months of 1999 compared with $17.4 million in
the first nine months of 1998. The increase is primarily attributable to an
increase in net operating revenues of remediation services and engineering and
consulting services. A significant portion of such increased revenues is
related to work performed by subcontractors, for which the Company invoices its
customers with little or no markup. Income before taxes for the first nine
months of 1999 increased to $1.7 million compared with $.6 million for the first
nine months of the prior year. The increase is primarily the result of improved
operating results of the remediation, consulting and the captive landfill
management operations, partially offset by a slight decrease in income before
taxes of the laboratory business. The Company's remediation services business
incurred a loss before taxes for the first nine months of 1998.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $13.2 million in the first nine months of 1999 compared
with $10.7 million in the first nine months of
13
<PAGE>
1998. The increase in net operating revenues is primarily the result of an
increase in the level of disposal brokerage and management services provided
during the first six months of 1999 as compared with the first six months of
1998 which preceded the Spin-off. Income before taxes for the waste disposal
brokerage and management services segment increased to $1.1 million for the
first nine months of 1999 compared with $1 million for the first nine months of
the prior year. The increase is primarily a result of a reduction in operating
costs of approximately $.3 million arising from the Company reaching a favorable
agreement with a third party vendor during the third quarter of 1999 concerning
amounts previously accrued by the Company for disposal and transportation
services. Excluding this reduction in operating costs, income before taxes
actually decreased primarily as a result of significantly higher selling and
administrative expenses.
The Company's other businesses consist primarily of the operation of a public
golf course and restaurant. During the third quarter of 1999 the Company closed
the golf course to make significant capital improvements to the course and
related facilities. As a result, net operating revenues for the first nine
months of 1999 decreased to $2.1 million compared with $3.1 million for the
first nine months of the prior year. The other businesses incurred a loss
before taxes of approximately $.2 million for the first nine months of 1999
compared with income before taxes of $.5 million for the first nine months of
1998. The Company does not expect the golf course to resume operations until
the third quarter of 2000.
Interest Income
Interest income increased to $807,000 for the first nine months of 1999 compared
with $385,000 for the first nine months of 1998, primarily because the cash
resulting from the Spin-off was invested for the full nine months of 1999 as
compared with the cash only having been available for three and a half months in
the prior year.
General Corporate Expenses
General corporate expenses were $3.2 million in the first nine months of 1999
compared with $3.3 million for the first nine months of the prior year. General
corporate expenses for the first nine months of 1999 were the actual expenses
incurred by the Company for such period, which includes all of the costs
associated with the corporate headquarters contributed to the Company by AWS and
additional expenses resulting from operating as an independent company
subsequent to the Spin-off. General corporate expenses for the first nine
months of 1998 included approximately $.9 million of corporate expenses which
were allocated to the Company by AWS prior to the Spin-off and included a one-
time charge of $1.4 million for additional compensation and severance which was
paid in the second quarter of 1998.
Net Income
The Company recorded net income of $1 million in the first nine months of 1999
compared with net income of $.6 million in the first nine months of the prior
year. The Company's overall effective tax rate, including the effect of state
income tax provisions, was 43% in the first nine months of 1999 compared to 55%
in the first nine months of the prior year. The effective tax rate for the
current and prior year period is 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.
14
<PAGE>
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. Although
the outcome of such lawsuits or other proceedings cannot be predicted with
certainty, the Company does not believe that any uninsured ultimate liabilities,
fines or penalties resulting from such pending proceedings, individually or in
the aggregate, would have a material adverse effect on it.
Many currently installed computer systems and software applications are designed
to accept only two digit entries in the date code field used to identify years.
These date code fields require modification to recognize twenty-first century
years. As a result, computer systems and software applications used by many
companies may need to be upgraded to comply with the Year 2000 requirements.
Significant uncertainty exists concerning the potential effects of failure to
comply with such requirements. The Company has completed the assessment of its
Year 2000 issues. The Company's assessment process included 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
significant information technology systems include its accounting systems, the
technical services project management systems, the transportation services
dispatch and operations management systems, and certain equipment used to
provide laboratory analyses. The Company believes that each of its significant
computerized systems is Year 2000 compliant. All upgrades and replacements were
completed during the third quarter of 1999 and the associated costs of
remediating any non-compliant system have not been material. Although the
Company does not anticipate a failure of its systems, should a failure occur,
the Company does not believe that such failure will have a material adverse
effect upon the Company's business, results of operations or financial
condition. The Company does not have any formalized contingency plans. While
noncompliance 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 regulations to
either restrict or impede the disposal and/or transportation of waste. A
significant portion of the Company'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 the Company.
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 the Company.
The Company's waste disposal brokerage and management operations obtain and
retain customers by providing service and identifying cost-efficient disposal
options unique to a customer's needs. Continued
15
<PAGE>
consolidation within the solid waste industry has resulted in reducing the
number of disposal options available to waste generators and has caused disposal
pricing to increase. The Company does not believe that pricing changes alone
will have a material effect upon its waste disposal brokerage and management
operations. However, consolidation will have the effect of reducing the number
of competitors offering disposal alternatives to the Company, which may
adversely impact the future financial performance of the waste disposal
brokerage and management operations.
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.
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 the Company are and will continue to be selling, general and
administrative expenses and costs of operations of the Company.
During the third quarter of 1999 the Company closed its golf course to make
significant capital improvements to the course and related facilities. The
Company does not expect the golf course to resume operations until the third
quarter of 2000.
Market Risk
The Company does not have significant exposure to changing interest rates
because of the low level of indebtedness of the Company. The Company does not
undertake any specific actions to cover its exposure to interest rate risk and
the Company is not a party to any interest rate risk management transactions.
The Company does not purchase or hold any derivative financial instruments.
A 10% change in interest rates would have an immaterial effect on the Company's
pretax earnings for the next fiscal year. The Company currently has no debt
outstanding and invests in short-term money market funds and other short-term
obligations.
============================
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In September 1995, certain subsidiaries of the Company 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 was based
upon the subsidiaries having been involved in the transportation of
hazardous substances to the facility. 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. Although unlikely, because the relevant law provides for
joint and several liability among the responsible parties, any one of them,
including the Company's subsidiaries, could be assessed the remaining
unallocated costs of the remediation which are currently estimated to be
$10 million. Currently, the extent of any ultimate liability of any of the
Company's subsidiaries with respect to this facility is unknown; however,
based upon recent information, the Company's allocable share of site costs
is anticipated to be in the range of 2% to 4%. As a result, during the
third quarter of 1999, the Company reduced its accrued liability relating
to this matter, on an undiscounted basis, to $400,000. The Company is
currently attempting to enter into a participation agreement and become a
party to an agreed order regarding the remediation of a portion of the
site. If successful, the Company's potential liability regarding this site
may be further reduced. The Company expects to resolve the extent of its
ultimate liability during the year 2000.
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 the Company'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, 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. Although
the outcome of such lawsuits or other proceedings cannot be predicted with
certainty, Avalon does not believe that any uninsured ultimate liabilities,
fines or penalties resulting from such pending proceedings, individually or
in the aggregate, would have a material adverse effect on it.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
17
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 16, 1999 to report the dismissal
of KPMG LLP as the Company's independent public accountant and the
engagement of Grant Thornton LLP as the Company's new independent public
accountant.
The Company filed a Form 8-K on September 9, 1999 to report the death of Darrell
D. Wilson, President, Chief Operating Officer and a Director of the Company.
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 11, 1999 By: /s/ Timothy C. Coxson
-------------------- ----------------------------------
Timothy C. Coxson, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer and Duly Authorized Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3RD QUARTER
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,202
<SECURITIES> 0
<RECEIVABLES> 17,850
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,099
<PP&E> 41,273
<DEPRECIATION> 16,865
<TOTAL-ASSETS> 68,103
<CURRENT-LIABILITIES> 12,534
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 53,943
<TOTAL-LIABILITY-AND-EQUITY> 68,103
<SALES> 21,513
<TOTAL-REVENUES> 21,513
<CGS> 17,499
<TOTAL-COSTS> 20,641
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 1,073
<INCOME-TAX> 461
<INCOME-CONTINUING> 612
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 612
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
