<PAGE>
2000
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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, 2000
[ ] 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
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 November 6, 2000.
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<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 and Nine
Months Ended September 30, 2000 and 1999 (Unaudited)............................................ 3
Condensed Consolidated Balance Sheets at September 30, 2000 (Unaudited)
and December 31, 1999........................................................................... 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2000 and 1999 (Unaudited).................................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited)................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 18
Item 2. Changes in Securities and Use of Proceeds.............................................. 18
Item 3. Defaults upon Senior Securities........................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
Item 5. Other Information...................................................................... 18
Item 6. Exhibits and Reports on Form 8-K....................................................... 18
SIGNATURE......................................................................................... 19
</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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net operating revenues........................ $21,968 $21,513 $64,683 $60,549
Cost and expenses:
Cost of operations............................ 19,766 17,499 58,317 51,318
Selling, general and administrative expense... 2,714 3,142 8,024 8,179
------- ------- ------- -------
Income (loss) from operations................. (512) 872 (1,658) 1,052
Other income (expense):
Interest income............................... 220 276 700 807
Other income (expense), net................... 217 (75) 233 (29)
------- ------- ------- -------
Income (loss) before income taxes............. (75) 1,073 (725) 1,830
Income tax expense (benefit).................. 93 461 (232) 787
------- ------- ------- -------
Net income (loss)............................. $ (168) $ 612 $ (493) $ 1,043
------- ======= ------- =======
Basic net income (loss) per share............. $ (.04) $.16 $ (.13) $ . 27
======= ======= ======= =======
Weighted average shares outstanding (Note 2).. 3,803 3,803 3,803 3,803
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents...................................... $10,630 $18,726
Short-term investments......................................... 1,483 --
Accounts receivable, net....................................... 18,010 16,628
Deferred income taxes.......................................... 403 403
Prepaid expenses and other current assets...................... 2,620 1,981
------- -------
Total current assets.......................................... 33,146 37,738
Properties and equipment, less accumulated depreciation
and amortization of $17,535 in 2000 and $16,644 in 1999........ 30,976 26,165
Costs in excess of fair market value of net assets of acquired
businesses, net................................................ 2,212 2,324
Other assets, net............................................... 178 177
------- -------
Total assets.................................................. $66,512 $66,404
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable............................................... $ 7,821 $ 6,001
Accrued payroll and other compensation......................... 1,284 1,833
Accrued income taxes........................................... 313 618
Other accrued taxes............................................ 319 720
Other liabilities and accrued expenses......................... 1,653 1,597
------- -------
Total current liabilities..................................... 11,390 10,769
Deferred income taxes........................................... 1,334 1,354
Other noncurrent liabilities.................................... 120 120
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............................................ (4,466) (3,973)
------- -------
Total shareholders' equity.................................... 53,668 54,161
------- -------
Total liabilities and shareholders' equity.................... $66,512 $66,404
======= =======
</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,
-----------------
2000 1999
------- -------
<S> <C> <C>
Operating activities:
Net income (loss)................................................................. $ (493) $ 1,043
Reconciliation of net income (loss) to cash from operating activities:
Depreciation and amortization................................................... 2,407 2,146
Provision for deferred income taxes............................................. (20) (22)
Provision for losses on accounts receivable..................................... 130 188
(Gain) loss on sales and disposal of property and equipment..................... (106) 134
Changes in assets and liabilities...............................................
Accounts receivable.......................................................... (1,512) (1,866)
Prepaid expenses and other current assets.................................... (639) (826)
Other assets................................................................. (4) (6)
Accounts payable............................................................. 936 119
Accrued payroll and other compensation........................................ (549) 530
Accrued income taxes......................................................... (305) 519
Other accrued taxes.......................................................... (401) (133)
Other liabilities and accrued expenses......................................... 56 (768)
Other noncurrent liabilities................................................. -- (445)
------- -------
Net cash provided (used) by operating activities..................... (500) 613
------- -------
Investing activities:
Purchases and sales of short-term investments, net............................... (1,483) --
Capital expenditures............................................................. (6,391) (2,830)
Proceeds from sales of property and equipment.................................... 278 145
------- -------
Net cash used by investing activities................................ (7,596) (2,685)
------- -------
Decrease in cash and cash equivalents.............................................. (8,096) (2,072)
Cash and cash equivalents at beginning of year..................................... 18,726 22,274
------- -------
Cash and cash equivalents at end of period......................................... $10,630 $20,202
======= =======
</TABLE>
Noncash investing activities:
Capital expenditures of $884 are included in Accounts Payable at September 30,
2000.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
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 1999 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, 2000, 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.
Note 2. Basic Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted average
number of common shares outstanding each period which was 3,803,331. There were
no common equivalent shares outstanding and therefore diluted per share amounts
are equal to basic per share amounts for the three and nine months ended
September 30, 2000 and 1999.
Note 3. Short-Term Investments
The Company's securities investments that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities. Trading securities are recorded at fair value on the balance sheet,
with the change in fair value during the period included in earnings. Trading
securities are invested primarily in debt securities and are included in the
Condensed Consolidated Balance Sheet under the caption "Short-term investments".
The balance of the Company's trading securities at September 30, 2000 was
approximately $1.2 million. As of September 30, 2000 the unrealized gain on
trading securities was approximately $11,000.
Securities investments that the Company has the intent and ability to hold to
maturity are classified as held-to-maturity securities and recorded at amortized
cost. At September 30, 2000, the Company had no held-to-maturity securities.
Securities investments not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities. Available-for-sale
securities are recorded at fair value on the balance sheet, with the change in
fair value during the period excluded from earnings and recorded net of tax as a
separate component of equity. Available-for-sale securities are invested
primarily in debt securities and are included in the Condensed Consolidated
Balance Sheet under the caption "Short-term investments". The balance of the
Company's available-for-sale securities at September 30, 2000 was approximately
$ .3 million. At September 30, 2000, the cost of available-for-sale
securities approximated their fair value and therefore the Company had no
unrealized gains or losses on these securities.
6
<PAGE>
Note 4. Comprehensive Income
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 (loss)
equals net income (loss) for all periods presented.
Note 5. Income Taxes
The provision for the income tax expense (benefit) differs from the amount of
income tax determined by applying the applicable U.S. statutory federal income
tax rate to income (loss) before income taxes as a result of state income taxes,
net of federal income tax benefits, the nondeductibility of the amortization of
costs in excess of fair market value of net assets of acquired businesses, and
other nondeductible items. The income tax expense for the third quarter of 2000
includes an adjustment to reflect the effect of the aforementioned nondeductible
items on estimated taxable income (loss) of the Company for the year ended
December 31, 2000.
Note 6. 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 and the extent of any ultimate liability
of any of the Company's subsidiaries is unknown. During the fourth quarter of
1999, the Company became a party to an Agreed Order and a Participation
Agreement regarding the remediation of a portion of the site. The Participation
Agreement provides for, among other things, the allocation of all site
remediation costs except for approximately $3 million. The Company's total
liability for the allocated costs under the Participation Agreement was
approximately $71,000. The Company paid $54,000 in the fourth quarter of 1999
and the remaining $17,000 was paid in the third quarter of 2000.
The additional unallocated site remediation costs are currently estimated to be
approximately $3 million. The extent of any ultimate liability of any of the
Company's subsidiaries with respect to these additional costs is unknown;
however, the Company's allocable share of these site costs is currently
estimated to be 4%. As a result, the Company's total accrued liability relating
to the remediation of this site on an undiscounted basis is $120,000 which is
included in the September 30, 2000 and December 31, 1999 Condensed Consolidated
Balance Sheets under the caption "Other noncurrent liabilities."
In the ordinary course of conducting its business, the Company also becomes
involved in lawsuits, administrative proceedings and governmental
investigations, including those related to environmental matters. Some of these
proceedings may result in fines, penalties or judgments being assessed against
the Company 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>
Note 7. Business Segment Information.
For business segment information, the Company considered its operating and
management structure and the types of information subject to regular review by
its "chief operating decision maker." On this basis, the Company's reportable
segments include transportation services, technical environmental services,
waste disposal brokerage and management services, and golf and related
operations.
As a result of the significant capital improvements to the golf course, the
Company has reclassified the operations of the golf course and travel agency
from other businesses into a separate segment, the golf and related operations
segment. All prior periods have been restated to reflect this change.
The Company accounts for intersegment net operating revenue as if the
transactions were to third parties. The segment disclosures are presented on
this basis for all periods presented.
The Company's primary business segment provides transportation services that
include transportation of hazardous and nonhazardous waste as well as general
and bulk commodities. The technical environmental services segment provides
environmental consulting, engineering, site assessments, analytical laboratory,
remediation services and operates and manages a captive landfill for an
industrial customer. The waste disposal brokerage and management services
segment provides disposal brokerage and management services for both hazardous
and nonhazardous waste. The golf and related operations segment includes the
operation of a public golf course and travel agency. The Company does not have
significant operations located outside the United States and, accordingly,
geographical segment information is not presented.
8
<PAGE>
The accounting policies of the segments are consistent with those described for
the consolidated financial statements in the summary of significant accounting
policies. The Company measures segment profit for internal reporting purposes
as income (loss) before taxes. Business segment information including the
reconciliation of segment income to consolidated income (loss) before taxes is
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net operating revenues from:
Transportation services:
External customers revenues.................... $ 10,603 $ 9,387 $31,512 $25,456
Intersegment revenues.......................... 1,614 1,538 4,779 3,983
-------- ------- ------- -------
Total transportation services.................. 12,217 10,925 36,291 29,439
-------- ------- ------- -------
Technical environmental services:
External customers revenues.................... 7,324 7,778 20,783 22,800
Intersegment revenues.......................... 15 34 60 102
-------- ------- ------- -------
Total technical environmental services......... 7,339 7,812 20,843 22,902
-------- ------- ------- -------
Waste disposal brokerage and management:
External customers revenues.................... 3,833 3,616 11,889 10,440
Intersegment revenues.......................... 1,687 972 4,189 2,761
-------- ------- ------- -------
Total waste disposal brokerage and management
services...................................... 5,520 4,588 16,078 13,201
-------- ------- ------- -------
Golf and related operations:.................... 203 347 416 1,051
Intersegment revenues.......................... 49 61 185 218
-------- ------- ------- -------
Total golf and related operations.............. 252 408 601 1,269
-------- ------- ------- -------
Other businesses:
External customers revenues.................... 5 385 83 802
Intersegment revenues.......................... -- -- -- 15
-------- ------- ------- -------
Total other businesses......................... 5 385 83 817
-------- ------- ------- -------
Segment operating revenues..................... 25,333 24,118 73,896 67,628
Intersegment eliminations...................... (3,365) (2,605) (9,213) (7,079)
-------- ------- ------- -------
Total net operating revenues................... $ 21,968 $21,513 $64,683 $60,549
-------- ------- ------- -------
</TABLE>
9
<PAGE>
Business Segment Information (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) before taxes:
Transportation services.................. $ 627 $ 967 $ 845 $ 1,691
Technical environmental services......... 92 806 388 1,721
Waste disposal brokerage and management
services................................ 439 541 1,054 1,086
Golf and related operations.............. (378) (149) (759) (33)
Other businesses......................... (84) 1 (190) (134)
--------- ------- ------- -------
Segment income before taxes.............. 696 2,166 1,338 4,331
Corporate interest income................ 180 245 608 709
Corporate other income, net.............. 18 (2) 30 2
General corporate expenses............... (969) (1,336) (2,701) (3,212)
--------- ------- ------- -------
Income (loss) before taxes............... $ (75) $ 1,073 $ (725) $ 1,830
--------- ------- ------- -------
Interest income:
Transportation services.................. $ 19 $ 10 $ 42 $ 28
Technical environmental services......... 10 10 22 31
Waste disposal brokerage and management
services................................ 9 8 24 32
Golf and related operations.............. 2 3 4 4
Other businesses......................... -- -- -- 3
Corporate................................ 180 245 608 709
--------- ------- ------- -------
Total................................ $ 220 $ 276 $ 700 $ 807
--------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Identifiable assets:
Transportation services.................. $ 15,874 $15,653
Technical environmental services......... 17,577 16,652
Waste disposal brokerage and management..
services................................ 5,088 4,358
Golf and related operations.............. 12,020 7,812
Other businesses......................... 326 446
Corporate................................ 28,896 28,793
------------ ------------
Sub Total.............................. 79,781 73,714
Elimination of Intersegment Receivables.. (13,269) (7,310)
------------ ------------
Total.................................. $ 66,512 $66,404
============ ===========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS 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.
Liquidity and Capital Resources
-------------------------------
For the first nine months of 2000, the Company utilized existing cash to fund
capital expenditures and meet operating needs.
During the first nine months of 2000, capital expenditures for the Company
totaled $7.3 million which was principally related to capital improvements to
the golf course and to a lesser extent the purchase of equipment for the
Company's transportation and technical environmental services operations. The
Company's total capital expenditures in 2000 are expected to be in the range of
$7.5 million to $8 million which will relate principally to capital improvements
to the golf course, golf course related facilities and acquiring additional
transportation equipment.
On August 2, 1999, the Company closed the golf course to begin a significant
capital improvement program. In addition to the capital improvements to the
golf course, the Company initiated capital expenditures for improvements to golf
course related facilities. During 1999 and the first nine months of 2000, golf
course capital expenditures amounted to approximately $5.5 million and
expenditures for golf course related facilities amounted to approximately $1
million. The golf course resumed operations on a limited basis during the third
quarter of 2000.
Working capital decreased to $21.8 million at September 30, 2000 compared with
$27 million at December 31, 1999. The decrease is primarily the result of
utilizing existing cash for capital expenditures, partially offset by an
increase in Accounts receivable.
The increase in Accounts receivable at September 30, 2000 compared with December
31, 1999 is primarily due to increased net operating revenues of the
transportation and technical environmental services segments during the third
quarter of 2000 compared with the fourth quarter of 1999.
The increase in Prepaid expenses and other current assets is primarily due to
the renewal of the Company's insurance program in September 2000.
The decrease in Accrued payroll and other compensation at September 30, 2000
compared with December 31, 1999 is primarily the result of a payment made during
the first quarter of 2000 for accrued performance-based compensation from 1999.
11
<PAGE>
Management believes that cash provided from operations, the availability of
working capital, as well as the Company's ability to incur indebtedness, will
be, for the foreseeable future, sufficient to meet operating requirements and
fund capital expenditure programs. The Company does not currently have a credit
facility.
The Company is not aggressively pursuing potential acquisition candidates but
will continue to consider acquisitions that make economic sense. While the
Company has not entered into any pending agreements for acquisitions, it may do
so at any time. Such potential acquisitions could be financed by existing
working capital, secured or unsecured debt, issuance of common stock, or
issuance of a security with characteristics of both debt and equity, any of
which could impact liquidity in the future.
Results of Operations
Overall performance
Net operating revenues in the third quarter of 2000 increased to $22 million
compared with $21.5 million in the prior year's third quarter. Cost of
operations increased to $19.8 million in the third quarter of 2000 compared with
$17.5 million in the prior year quarter. The Company recorded a net loss of $.2
million or a loss of $.04 per share for the third quarter of 2000 compared with
net income of $.6 million or $.16 per share for the third quarter of 1999. For
the first nine months of 2000, net operating revenues were $64.7 million
compared with $60.5 million for the first nine months of 1999. Cost of
operations increased to $58.3 million for the first nine months of 2000 compared
with $51.3 million for the first nine months of the prior year. During the
first nine months of 2000, the Company recorded a net loss of $.5 million or a
loss of $.13 per share compared with net income of $1 million or $.27 per share
for the first nine months of 1999.
Performance in the Third Quarter of 2000 compared with the Third Quarter of 1999
Segment performance
Segment performance should be read in conjunction with Note 7 to the Condensed
Consolidated Financial Statements.
Net operating revenues of the transportation services segment increased to $12.2
million in the third quarter of 2000 compared with $10.9 million in the third
quarter of the prior year. The increase in net operating revenues is primarily
attributable to an increase in the net operating revenues of transportation
brokerage operations and an increase in the transportation of municipal solid
waste partially offset by a decrease in the transportation of hazardous waste.
Income before taxes decreased to $.6 million for the third quarter of 2000
compared with $1 million for the third quarter of 1999 primarily as a result of
increased costs of operations resulting from higher fuel prices and increased
rental, depreciation and employee related expenses partially offset by a
decrease in accrued highway fuel tax expense as a result of a successful audit
appeal.
Net operating revenues of the technical environmental services segment decreased
to $7.3 million in the third quarter of 2000 compared with $7.8 million in the
third quarter of the prior year. The decrease in net operating revenues was
primarily the result of a decrease in the level of consulting, engineering and
laboratory services provided partially offset by increased net operating
revenues of the remediation business. A significant portion of the net
operating revenues of the engineering and consulting and remediation business is
related to work performed by subcontractors, for which the Company invoices its
12
<PAGE>
customers with little or no markup. The technical environmental services
segment recorded income before taxes of $.1 million in the third quarter of 2000
compared with income before taxes of $.8 million in the third quarter of 1999.
The decrease in income before taxes is primarily the result of increased
expenses coupled with decreased net operating revenues of the laboratory
operations and decreased income before taxes of the engineering and consulting
and remediation services business resulting from lower net operating revenues
relating to work not performed by subcontractors. The engineering and
consulting business and laboratory operations both incurred a loss before taxes
in the third quarter of 2000 compared with income before taxes in the third
quarter of the prior year.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $5.5 million in the third quarter of 2000 compared with
$4.6 million in the third quarter of the prior year. The increase in net
operating revenues is primarily the result of an increase in the level of
disposal brokerage and management services provided. Income before taxes for
the waste disposal brokerage and management services segment was $.4 million in
the third quarter of 2000 compared with $.5 million in the third quarter of
1999. Despite the increase in net operating revenues, income before taxes
decreased because of higher selling and administrative expenses.
The Company's golf and related operations segment consists of the operation of a
public golf course and travel agency. During the third quarter of 1999, the
Company closed the golf course to make significant capital improvements to the
course and related facilities. The golf course resumed operations on a limited
basis during the third quarter of 2000. Net operating revenues for the golf and
related operations segment decreased to $.3 million for the third quarter of
2000 compared with $.4 million for the third quarter of 1999 primarily as a
result of decreased golf course revenues. The golf and related operations
segment incurred a loss before taxes of $.4 million for the third quarter of
2000 compared with a loss before taxes of $.1 million for the third quarter of
the prior year primarily as a result of decreased net operating revenues and
increased expenses associated with the newly renovated golf course. Net
operating revenues and results of operations of the travel agency were
relatively unchanged from the third quarter of the prior year.
Interest income
Interest income decreased to $.2 million in the third quarter of 2000 compared
with $.3 million in the third quarter of 1999 primarily due to the decline in
the average amount of cash and cash equivalents during the third quarter of 2000
compared with the prior year quarter, partially offset by an increase in
investment rates.
General corporate expenses
General corporate expenses decreased to $1 million in the third quarter of 2000
compared with $1.3 million in the third quarter of the prior year. Such
decrease is primarily the result of lower performance based compensation
expense.
Net income
The Company incurred a net loss of $.2 million in the third quarter of 2000
compared with net income of $.6 million in the third quarter of the prior year.
The Company's overall effective tax rate, including the effect of state income
tax provisions, was substantially higher in the third quarter of 2000 compared
with the prior year's third quarter primarily as a result of significantly lower
income before taxes. The
13
<PAGE>
effective tax rate for the current and prior year period is higher than the
federal statutory rates due to state income taxes, the nondeductibility for tax
purposes of the amortization of costs in excess of fair market value of net
assets of acquired businesses and other nondeductible expenses. The income tax
expense for the third quarter of 2000 includes an adjustment to reflect the
effect of the aforementioned nondeductible items on estimated taxable income
(loss) of the Company for the year ended December 31, 2000.
Performance in the First Nine Months of 2000 compared with the First Nine Months
of 1999
Segment performance
Net operating revenues of the transportation services segment increased to $36.3
million for the first nine months of 2000 compared with $29.4 million for the
first nine months of the prior year. The increase is primarily attributable to
an increase in the net operating revenues of the transportation brokerage
operations and an increase in the transportation of municipal solid waste
partially offset by decreased transportation of hazardous waste. Income before
taxes of the transportation services segment decreased to $.8 million for the
first nine months of 2000 compared with $1.7 million for the first nine months
of the prior year. The decrease is primarily the result of increased costs of
operations resulting from higher fuel prices and increased rental, depreciation
and employee related expenses, partially offset by improved operating results of
the transportation brokerage operations and a decrease in accrued highway fuel
tax expense as a result of a successful audit appeal.
Net operating revenues of the technical environmental services segment decreased
to $20.8 million in the first nine months of 2000 compared with $22.9 million in
the first nine months of 1999. The decrease is primarily attributable to a
decrease in net operating revenues of remediation services and engineering and
consulting services. Income before taxes for the first nine months of 2000
decreased to $.4 million compared with $1.7 million for the first nine months of
the prior year. The decrease is primarily the result of a decrease in the level
of services provided by the remediation, engineering and consulting business and
increased expenses of the laboratory operations. The laboratory operations and
the engineering and consulting business both incurred losses before taxes for
the first nine months of 2000 compared with income before taxes for the first
nine months of the prior year.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $16.1 million in the first nine months of 2000 compared
with $13.2 million in the first nine months of 1999. 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 was
$1.1 million for the first nine months of 2000 and 1999. Despite the increase
in net operating revenues, income before taxes did not increase because of
higher selling and administrative expenses.
The Company's golf and related operations segment consists of the operation of a
public golf course and travel agency. During the third quarter of 1999, the
Company closed the golf course to make significant capital improvements to the
course and related facilities. The golf course resumed operations on a limited
basis during the third quarter of 2000. Net operating revenues for the golf and
related operations segment decreased to $.6 million for the first nine months of
2000 compared with $1.3 million for the first nine months of 1999 primarily as a
result of deceased golf revenues. The golf and related operations segment
incurred a loss before taxes of $.8 million for the first nine months of 2000
compared with a loss before taxes of $33,000 in the first nine months of the
prior year primarily as a result of decreased net
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operating revenues and increased expenses associated with the newly renovated
golf course. Net operating revenues and results of operations of the travel
agency were relatively unchanged from the first nine months of the prior year
period.
Interest Income
Interest income decreased to $.7 million for the first nine months of 2000
compared with $.8 million for the first nine months of the prior year, primarily
due to a decline in the average amount of cash and cash equivalents during the
first nine months of 2000 compared with the first nine months of the prior year,
partially offset by an increase in investment rates.
General Corporate Expenses
General corporate expenses decreased to $2.7 million in the first nine months of
2000 compared with $3.2 million for the first nine months of the prior year.
Such decrease is primarily the result of lower performance based compensation
expense.
Net Income
The Company incurred a net loss of $.5 million in the first nine months of 2000
compared with net income of $1 million in the first nine months of the prior
year. The Company's effective tax rate, including the effect of state income
tax provisions, was 32% for the first nine months of 2000. The effective tax
rate for this first nine months of 2000 was significantly impacted by the
nondeductibility for tax purposes of the amortization of costs in excess of fair
market value of net assets of acquired businesses and other nondeductible
expenses. The effective tax rate of 43% for the prior year period is higher
than the federal statutory rates due to state income taxes, the nondeductibility
for tax purposes of the amortization of costs in excess of fair market value of
net assets of acquired businesses and other nondeductible expenses.
Trends and Uncertainties
In the ordinary course of conducting its business, the Company 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 the Company
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.
The federal government and numerous state and local governmental bodies are
continuing to consider 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.
As in the case with any transportation company, an increase in fuel prices will
subject the Company's transportation operations to increased operating expenses,
which the Company, in light of competitive
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market conditions, may not be able to pass on to its customers. During the first
nine months and continuing into the fourth quarter of 2000, the Company's
transportation operations experienced significant increases in fuel prices, some
of which the Company has not and will not be able to pass on to its customers.
Competitive pressures within the environmental industry continue to impact the
financial performance of the Company'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 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.
As a result of the significant capital improvements to the golf course, the
green fees charged customers to play a round of golf have been increased
substantially. Although the Company believes that the capital improvements made
to the golf course justify the increased green fees and will result in increased
net operating revenues and increased income before taxes, there can be no
assurance as to when such increases will be attained.
The Company's golf course is located in Warren, Ohio and is significantly
dependent upon weather conditions during the golf season. Additionally, 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.
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.
Currently, a 10% change in interest rates would have an immaterial effect on the
Company's income before taxes for the next fiscal year. The Company currently
has no debt outstanding and invests in short-term money market funds and other
short and long term obligations.
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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 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not purchase or hold any derivative financial instruments and, as
such, the Company does not anticipate this Statement to have any impact on its
financial position or results of operations.
============================
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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 and the extent of any ultimate liability
of any of the Company's subsidiaries is unknown. During the fourth quarter of
1999, the Company became a party to an Agreed Order and a Participation
Agreement regarding the remediation of a portion of the site. The Participation
Agreement provides for, among other things, the allocation of all site
remediation costs except for approximately $3 million. The Company's total
liability for the allocated costs under the Participation Agreement was
approximately $71,000. The Company paid $54,000 in the fourth quarter of 1999
and the remaining $17,000 was paid in the third quarter of 2000.
The additional unallocated site remediation costs are currently estimated to be
approximately $3 million. The extent of any ultimate liability of any of the
Company's subsidiaries with respect to these additional costs is unknown;
however, the Company's allocable share of these site costs is currently
estimated to be 4%. As a result, the Company's total accrued liability relating
to the remediation of this site on an undiscounted basis is $120,000 which is
included in the September 30, 2000 and December 31, 1999 Condensed Consolidated
Balance Sheets under the caption "Other noncurrent liabilities."
In the ordinary course of conducting its business, Avalon also becomes involved
in lawsuits, administrative proceedings and governmental investigations,
including those related to environmental matters. Some of these proceedings may
result in fines, penalties or judgments being assessed against the Company
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.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
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
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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 10, 2000 By: /s/ Timothy C. Coxson
--------------------- ----------------------------------
Timothy C. Coxson, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer and Duly Authorized Officer)
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