<PAGE>
1999
================================================================================
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 March 31, 1999
[_] 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 3,185,240 shares of its Class A Common Stock and 618,091
shares of its Class B Common Stock outstanding as of May 6, 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 Operations for the Three
Months Ended March 31, 1999 and 1998 (Unaudited)......................... 3
Condensed Consolidated Balance Sheets at March 31, 1999 (Unaudited)
and December 31, 1998.................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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............................................... 15
Item 2. Changes in Securities........................................... 16
Item 3. Defaults upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 5. Other Information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
SIGNATURE.................................................................. 17
</TABLE>
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
March 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net operating revenues........................ $19,494 $15,811
Cost and expenses:
Cost of operations............................ 17,142 14,052
Selling, general and administrative expense... 2,521 1,573
------- -------
Income (loss) from operations................. (169) 186
Other income (expense):
Interest expense.............................. (1) (24)
Interest income............................... 267 22
Other income, net............................. 16 4
------- -------
Income before income taxes.................... 113 188
Income tax expense............................ 47 97
------- -------
Net income.................................... $ 66 $ 91
======= =======
Basic net income per share (*)................ $.02 *
======= =======
Pro forma net income per share (*)............ * $.02
======= =======
Weighted average shares outstanding (Note 2).. 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 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>
March 31, December 31,
1999 1998
------------ --------------
(Unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents...................................... $21,536 $22,274
Accounts receivable, net....................................... 17,956 16,172
Deferred income taxes.......................................... 317 316
Prepaid expenses and other current assets...................... 1,961 1,904
------- -------
Total current assets.......................................... 41,770 40,666
Properties and equipment, less accumulated depreciation
and amortization of $15,934 in 1999 and $15,326 in 1998........ 23,428 23,300
Costs in excess of fair market value of net assets of acquired
businesses, net................................................ 2,436 2,473
Other assets, net............................................... 241 246
------- -------
Total assets.................................................. $67,875 $66,685
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable............................................... $ 8,193 $ 6,279
Accrued payroll and other compensation......................... 857 1,242
Accrued income taxes........................................... 1,072 1,078
Other accrued taxes............................................ 819 922
Other liabilities and accrued expenses......................... 1,883 2,172
------- -------
Total current liabilities..................................... 12,824 11,693
Deferred income taxes........................................... 1,202 1,209
Other noncurrent liabilities.................................... 845 845
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............................................ (5,130) (5,196)
------- -------
Total shareholders' equity.................................... 53,004 52,938
------- -------
Total liabilities and shareholders' equity.................... $67,875 $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>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income.............................................................. $ 66 $ 91
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization........................................... 690 623
Provision for deferred income taxes..................................... (8) (8)
Provision for losses on accounts receivable............................. 49 44
Gain on sales of property and equipment................................. (9) (5)
Changes in assets and liabilities
Accounts receivable................................................... (1,833) (489)
Prepaid expenses and other current assets............................. (57) 114
Other assets.......................................................... (1) (1)
Accounts payable...................................................... 1,914 (247)
Accrued payroll and other compensation................................ (385) (23)
Accrued income taxes.................................................. (6) (14)
Other accrued taxes................................................... (103) (106)
Other liabilities and accrued expenses................................ (289) 91
-------- ---------
Net cash provided by operating activities........................... 28 70
-------- ---------
Investing activities:
Capital expenditures.................................................... (778) (428)
Proceeds from sales of property and equipment........................... 12 27
-------- ---------
Net cash used by investing activities............................... (766) (401)
Financing activities:
Repayments of long-term debt............................................ -- (88)
-------- ---------
Net cash used by financing activities............................... -- (88)
-------- ---------
Decrease in cash and cash equivalents..................................... (738) (419)
Cash and cash equivalents at beginning of year............................ 22,274 1,763
-------- ---------
Cash and cash equivalents at end of period................................ $21,536 $1,344
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 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
March 31, 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.
Avalon Holdings Corporation was formed on April 30, 1998 as a subsidiary of
American Waste Services, Inc. ("AWS"). Pursuant to the terms of a Contribution
and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS (the
"Contribution Agreement"), AWS contributed to Avalon its transportation
operations, technical environmental operations, waste disposal brokerage and
management operations, and golf course and related operations together with
certain other assets including the headquarters of AWS and certain accounts
receivable. In connection with the contribution, Avalon assumed certain
liabilities of AWS including, without limitation, liabilities relating to the
termination of employment of certain employees of AWS and costs and potential
liabilities relating to the legal proceeding captioned Werbosky v. American
--------------------
Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special
- ----------------------------
dividend, all of the outstanding shares of capital stock of Avalon to the
holders of AWS common stock on a pro rata and corresponding basis (the "Spin-
off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan
of Merger dated as of February 6, 1998 entered into by and among USA Waste
Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with
C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc.
(the "Merger").
Note 2. Basic and Pro Forma Net Income Per Share
For purposes of determining the basic and pro forma net income per share data
for the three months ended March 31, 1999 and 1998, 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 3,803,331.
6
<PAGE>
Note 3. Legal Matters
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/Capital 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 currently 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.
At March 31, 1999, the Company has an accrued liability of $845,000 relating to
this matter included in the Consolidated Balance Sheets under the caption "Other
noncurrent liabilities."
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.
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") (the
"Contribution Agreement"), AWS contributed to Avalon its transportation
operations, technical environmental operations, waste disposal brokerage and
management operations, and golf course and related operations together with
certain other assets including the headquarters of AWS and certain accounts
receivable. In connection with the contribution, Avalon assumed certain
liabilities of AWS including, without limitation, liabilities relating to the
termination of employment of certain employees of AWS and costs and potential
liabilities relating to the legal proceeding captioned Werbosky v. American
--------------------
Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special
- ----------------------------
dividend, all of the outstanding shares of capital stock of Avalon to the
holders of AWS common stock on a pro rata and corresponding basis (the "Spin-
off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan
of Merger dated as of February 6, 1998 entered into by and among USA Waste
Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with
C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc.
(the "Merger").
Liquidity and Capital Resources
- -------------------------------
For the first three months of 1999, the Company utilized existing cash and cash
provided by operations to fund capital expenditures and meet operating needs.
During the first three months of 1999, capital spending for Avalon totaled $.8
million which was principally related to the purchase of equipment for the
transportation operations. Avalon's capital spending in 1999 is expected to be
in the range of $5 million to $6 million which will relate principally to
capital improvements to the golf course and acquiring additional transportation
equipment.
Management believes that cash provided from operations, the availability of
working capital, as well as Avalon's ability to incur indebtedness, will be for
the foreseeable future sufficient to meet operating requirements, fund debt
repayments, and fund capital expenditure programs. Avalon does not currently
have an existing credit facility.
8
<PAGE>
Results of Operations
Overall performance
Net operating revenues in the first quarter of 1999 increased to $19.5 million
compared with $15.8 million in the prior year's first quarter. Cost of
operations increased to $17.1 million in the first quarter of 1999 compared with
$14.1 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 $66,000 or $.02 per share for the first quarter of 1999 compared
with net income of $91,000 or $.02 per share for the first quarter 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
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net operating revenues from:
Transportation services:
External customers revenues.................... $ 7,768 $ 7,964
Intersegment revenues.......................... 1,351 781
------- -------
Total transportation services.................. 9,119 8,745
------- -------
Technical environmental services:
External customers revenues.................... 7,705 4,631
Intersegment revenues.......................... 32 35
------- -------
Total technical environmental services......... 7,737 4,666
------- -------
Waste disposal brokerage and management:
External customers revenues.................... 3,831 2,938
Intersegment revenues.......................... 853 25
------- -------
Total waste disposal brokerage and management
services...................................... 4,684 2,963
------- -------
Other businesses:
External customers revenues.................... 190 278
Intersegment revenues.......................... 75 62
------- -------
Total other businesses......................... 265 340
------- -------
Segment operating revenues..................... 21,805 16,714
Intersegment eliminations...................... (2,311) (903)
------- -------
Total net operating revenues................... $19,494 $15,811
------- -------
Income (loss) before taxes:
Transportation services........................ $ 328 $ 349
Technical environmental services............... 387 111
Waste disposal brokerage and management
services...................................... 324 373
Other businesses............................... (252) (211)
------- -------
Segment income before taxes.................... 787 622
Corporate interest income...................... 233 --
Corporate other expense, net................... (1) --
General corporate expenses..................... (906) (434)
------- -------
Income (loss) before taxes..................... $ 113 $ 188
------- -------
</TABLE>
9
<PAGE>
Results of Operations (continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Interest expense:
Transportation services........................ $ -- $ 2
Technical environmental services............... 1 --
Waste disposal brokerage and management
services...................................... -- --
Other business................................. -- 22
Corporate...................................... -- --
------- -------
Total....................................... $ 1 $ 24
------- -------
Interest income:
Transportation services........................ $ 9 $ 10
Technical environmental services............... 11 7
Waste disposal brokerage and management
services...................................... 12 2
Other business................................. 2 3
Corporate...................................... 233 --
------- -------
Total........................................ $ 267 $ 22
------- -------
Identifiable assets:
Transportation services........................ $17,403 $17,288
Technical environmental services............... 12,295 11,751
Waste disposal brokerage and management
services...................................... 4,890 3,163
Other businesses............................... 3,894 4,095
Corporate...................................... 29,393 30,388
------- -------
Total....................................... $67,875 $66,685
------- -------
</TABLE>
(1) Other businesses include the operation of a public golf course and related
facilities.
10
<PAGE>
Performance in the First Quarter of 1999 compared with the First Quarter of 1998
Segment performance
Net operating revenues of the transportation services segment increased to $9.1
million in the first quarter of 1999 compared with $8.7 million in the first
quarter of the prior year. The increase in net operating revenues is primarily
attributable to an increase in the transportation of hazardous waste, partially
offset by a decrease in the net operating revenues of the transportation
brokerage operations. Despite the increase in net operating revenues, income
before taxes was flat for the first quarter of 1999 compared with the first
quarter of 1998 primarily as a result of a change in the mix of transportation
services provided and additional selling and administrative expenses.
Net operating revenues of the technical environmental services segment increased
to $7.7 million in the first quarter of 1999 compared with $4.7 million in the
first quarter of the prior year. The increase in net operating revenues was
primarily the result of an increase in the level of all the technical
environmental services provided. The technical environmental services segment
recorded income before taxes of $.4 million in the first quarter of 1999
compared with income before taxes of $.1 million in the first quarter of 1998.
The increase in income before taxes is primarily the result of improved
operating results of the remediation, engineering and consulting businesses
which incurred operating losses in the first quarter of 1998, partially offset
by a decrease in the operating income of the laboratory business.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $4.7 million in the first quarter of 1999 compared with $3
million in the first quarter of the prior year. The increase in net operating
revenues is primarily the result of an increase in the level of disposal
brokerage and management services provided. Income before taxes for the waste
disposal brokerage and management services segment was $.3 million in the first
quarter of 1999 and compared with $.4 million in the first quarter of 1998.
Despite the significant increase in net operating revenues, income before taxes
did not increase, because of increased costs including significantly higher
selling and administrative expenses.
Interest income
Interest income increased to $267,000 in the first quarter of 1999 compared with
$22,000 in the first quarter of 1998 primarily because of the additional cash
resulting from the capital contribution made by AWS in connection with the Spin-
off.
General corporate expenses
General corporate expenses were $.9 million in the first quarter of 1999
compared with $.4 million in the first quarter of the prior year. General
corporate expenses for the first quarter of 1999 were the actual expenses
incurred by the Company for such period, while general corporate expenses for
the first quarter of 1998 were based upon an allocation of a portion of the
general corporate expenses of AWS prior to the Spin-off. The increase in
general corporate expenses for the current quarter as compared with the prior
year quarter is the result of the Company incurring all of the costs associated
with the corporate headquarters contributed to Avalon by AWS and additional
expenses resulting from operating as an independent company subsequent to the
Spin-off.
11
<PAGE>
Net income
The Company recorded net income of $66,000 in the first quarter of 1999 compared
with net income of $91,000 in the first quarter of the prior year. The
Company's overall effective tax rate, including the effect of state income tax
provisions, was 41.6% in the first quarter of 1999 compared to 51.6% in the
prior year's first quarter. The effective tax rate 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.
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 its 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 believes that its current systems and any new or upgraded systems
are or will be Year 2000 compliant and that any historical or estimated future
costs of remediating any non-compliant system have not been and will not be
material. The Company expects that all upgrades and replacements will be
completed during the third quarter of 1999. Although the Company does not
anticipate a failure of its systems to be Year 2000 compliant, 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.
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 Avalon's transportation and disposal brokerage and
12
<PAGE>
management revenues is derived from the disposal or transportation of out-of-
state waste. Any law or regulation restricting or impeding the transportation
of waste or the acceptance of out-of-state waste for disposal could have a
significant negative effect on Avalon.
Competitive pressures within the environmental industry continue to impact the
financial performance of Avalon's transportation services, technical
environmental services and waste disposal brokerage and management services.
A decline in the rates which customers are willing to pay for its services could
adversely impact the future financial performance of Avalon.
The Company's 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 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.
Avalon's selling, general and administrative expenses and costs of operations
after the Spin-off are anticipated to continue to be significantly higher than
the historical expenses and costs allocated to Avalon while a part of AWS.
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.
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.
Accounting Pronouncements
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities. This Statement
13
<PAGE>
is effective for all quarters of fiscal years beginning after June 15, 1999.
While the Company has not yet determined the effects the Statement will have on
its financial position or results of its operations, it does not anticipate a
material impact.
============================
14
<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, alleged 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 alleged
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 December 22, 1998, the
United States Court of Appeals for the Sixth Circuit upheld dismissal of
the case. On March 22, 1999, the plaintiff's right to additional appeals
expired. Avalon had 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. At
March 31, 1999, Avalon has an accrued liability of $845,000 relating to
this matter. Avalon's estimates are revised, as deemed necessary, as
additional
15
<PAGE>
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 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
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 29, 1999;
however, no vote of security holders occurred with respect to any matters
reportable under this Item 4.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<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: May 10, 1999 By: /s/ Timothy C. Coxson
------------------ ----------------------------------------------
Timothy C. Coxson, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer and Duly Authorized Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1st QUARTER
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
*Identify the financial statement(s) to be referenced in the legend:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,536
<SECURITIES> 0
<RECEIVABLES> 17,956
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,770
<PP&E> 39,362
<DEPRECIATION> 15,934
<TOTAL-ASSETS> 67,875
<CURRENT-LIABILITIES> 12,824
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 52,966
<TOTAL-LIABILITY-AND-EQUITY> 67,875
<SALES> 19,494
<TOTAL-REVENUES> 19,494
<CGS> 17,142
<TOTAL-COSTS> 19,663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 113
<INCOME-TAX> 47
<INCOME-CONTINUING> 66
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
