Back to GetFilings.com
2002
================================================================================
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 June 30, 2002
[_] 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 August 7, 2002.
================================================================================
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2002 and 2001 (Unaudited) .............................................. 3
Condensed Consolidated Balance Sheets at June 30, 2002 (Unaudited)
and December 31, 2001 ........................................................................ 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (Unaudited) .............................................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................ 19
Item 2. Changes in Securities and Use of Proceeds ........................................ 19
Item 3. Defaults upon Senior Securities .................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders .............................. 19
Item 5. Other Information ................................................................ 19
Item 6. Exhibits and Reports on Form 8-K ................................................. 19
SIGNATURE ........................................................................................ 20
2
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)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2002 2001 2002 2001
------------- ------------ ------------ -------------
Net operating revenues ............................... $16,248 $16,666 $31,969 $32,678
Cost and expenses:
Cost of operations ................................... 14,781 14,731 29,646 29,166
Selling, general and administrative expense .......... 2,208 2,417 4,477 4,781
------- ------- ------- -------
Loss from operations ................................. (741) (482) (2,154) (1,269)
Other income:
Interest income ...................................... 67 144 144 325
Other income, net .................................... 209 39 241 110
------- ------- ------- -------
Loss from continuing operations before income
taxes ............................................ (465) (299) (1,769) (834)
Income tax benefit.................................... - (105) - (299)
------- ------- ------- -------
Loss from continuing operations ...................... (465) (194) (1,769) (535)
Loss from discontinued operations .................... (370) (705) (697) (911)
------- ------- ------- -------
Net loss ............................................. $ (835) $ (899) $(2,466) $(1,446)
======= ====== ======= =======
Basic loss per share from continuing
operations ........................................ $ ( .12) $ (.05) $ (.47) $ (.14)
======= ======= ======= =======
Basic loss per share from discontinued
operations ........................................ $ ( .10) $ (.19) $ (.18) $ (.24)
======= ======= ======= =======
Basic net loss per share ............................. $ ( .22) $ (.24) $ (.65) $ (.38)
======= ======= ======= =======
Weighted average shares outstanding (Note 2) ......... 3,803 3,803 3,803 3,803
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
3
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents ................................................... $ 2,166 $ 4,807
Short-term investments ...................................................... 3,171 1,939
Accounts receivable, net .................................................... 13,840 14,235
Deferred income taxes ....................................................... 1,210 1,210
Prepaid expenses and other current assets ................................... 1,617 2,091
Current assets - discontinued operations .................................... 698 1,180
----------- ------------
Total current assets ...................................................... 22,702 25,462
Noncurrent investments ......................................................... 4,002 5,956
Properties and equipment, less accumulated depreciation
and amortization of $15,974 in 2002 and $15,183 in 2001 ..................... 28,327 27,471
Costs in excess of fair market value of net assets of acquired
businesses, net ............................................................. 538 538
Other assets, net .............................................................. 131 133
Noncurrent assets - discontinued operations .................................... 224 836
----------- ------------
Total assets ................................................................ $ 55,924 $ 60,396
=========== ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................................ $ 5,375 $ 7,034
Accrued payroll and other compensation ...................................... 883 991
Accrued income taxes ........................................................ 525 543
Other accrued taxes ......................................................... 286 424
Other liabilities and accrued expenses ...................................... 1,829 1,578
Current liabilities - discontinued operations ............................... 108 505
----------- ------------
Total current liabilities ................................................. 9,006 11,075
Deferred income taxes .......................................................... 803 803
Other noncurrent liabilities ................................................... 131 120
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 ......................................................... (12,202) (9,736)
Accumulated other comprehensive income ...................................... 52 -
----------- ------------
Total shareholders' equity ................................................ 45,984 48,398
----------- -------------
Total liabilities and shareholders' equity ................................ $ 55,924 $ 60,396
=========== ============
See accompanying notes to condensed consolidated financial statements.
4
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended
June 30,
-----------------------
2002 2001
--------- --------
Operating activities:
Net loss ........................................................................... $ (2,466) $ (1,446)
Reconciliation of net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................................. 1,213 1,400
Amortization of investments .................................................... 62 -
Loss from discontinued operations .............................................. 697 911
Deferred income tax benefit .................................................... - (508)
Provision for losses on accounts receivable .................................... 235 61
Gain on disposal of property and equipment ..................................... (35) (40)
Purchases of trading investments ............................................... - (32)
Sales of trading investments ................................................... - 734
Changes in operating assets and liabilities
Accounts receivable ........................................................ 160 2,375
Refundable income taxes .................................................... - 327
Prepaid expenses and other current assets .................................. 474 571
Other assets ............................................................... 2 28
Accounts payable ........................................................... (1,659) (1,221)
Accrued payroll and other compensation ..................................... (108) 84
Accrued income taxes ....................................................... (18) 218
Other accrued taxes ........................................................ (138) (56)
Other liabilities and accrued expenses ..................................... 251 88
Other noncurrent liabilities ............................................... 11 -
--------- --------
Net cash (used in) provided by operating activities ................... (1,319) 3,494
--------- ----------
Investing activities:
Sales of available-for-sale investments ............................................ - 25
Sales of held-to-maturity investments .............................................. 712 -
Capital expenditures ............................................................... (2,076) (726)
Proceeds from sales of property and equipment ...................................... 42 199
--------- ----------
Net cash used in investing activities ............................................ (1,322) (502)
--------- ----------
(Decrease) increase in cash and cash equivalents ...................................... (2,641) 2,992
Cash and cash equivalents at beginning of year ........................................ 4,807 10,700
--------- ----------
Cash and cash equivalents at end of period ............................................ $ 2,166 $ 13,692
========= ==========
See accompanying notes to condensed consolidated financial statements.
5
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2002
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of Avalon Holdings
Corporation and subsidiaries (collectively "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 Avalon's 2001 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 Avalon as of June
30, 2002, 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 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 six months ended June 30, 2002 and
2001.
Note 3. Investment Securities
Avalon classifies its investment securities into trading, available-for-sale, or
held-to-maturity categories. Securities are classified as trading when Avalon
has the intent of selling them in the near term. Trading securities are reported
at fair value on the balance sheet, with the change in fair value during the
period included in earnings. Securities are classified as held-to-maturity when
Avalon has the ability and intent to hold the securities to maturity.
Held-to-maturity securities are reported as either short-term or noncurrent on
the balance sheet based upon contractual maturity date and are stated at
amortized cost. Securities that are not classified as either trading or
held-to-maturity are classified as available-for-sale and reported at fair value
on the balance sheet with the change in fair value reported as a component of
other comprehensive income.
Avalon held no trading securities at either June 30, 2002 or December 31, 2001.
During the second quarter of 2002, Avalon sold $.7 million of securities that
had been classified as held-to-maturity. At the time of acquisition, Avalon
intended to hold these securities until maturity; however, because of the filing
for protection from creditors under the United States Bankruptcy Code by a
customer which owed Avalon $2.2 million, Avalon was forced to sell these
held-to-maturity securities to meet its operating and capital requirements. As a
result of the sale of a portion of the held-to-maturity securities, in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", Avalon transferred all the remaining securities from the
held-to-maturity category to the available-for-sale category. The
6
securities transferred had an amortized cost of $7.1 million and a fair value of
$7.2 million at the date of the transfer. As a result of the classification of
these securities as available-for-sale, during the second quarter of 2002,
Avalon recognized unrealized gains, net of applicable income taxes, of $52,000
as a separate component of shareholders' equity.
Information regarding investment securities subject to SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", consists of the
following (in thousands):
June 30, 2002 December 31, 2001
--------------------------------------- ---------------------------------------------
Gross Estimated Gross Estimated
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Value Cost Gains Value
--------------------------------------- ---------------------------------------------
Available-for-Sale
U.S. Treasury Notes $7,121 $52 $7,173 - - -
Held-to-Maturity
U.S. Treasury Notes - - - $7,895 $16 $7,911
The amortized cost and estimated fair value of debt securities at June 30, 2002,
by contractual maturity, for available-for-sale investments consists of the
following (in thousands):
Available-for-Sale
------------------
Amortized Estimated
Cost Fair Value
----------------------------------
Due in one year or less $ 3,153 $ 3,171
Due after one year
through five years 3,968 4,002
---------------------------------
$ 7,121 $ 7,173
==================================
Note 4. Comprehensive Income
Comprehensive income is comprised of two components: net income and other
comprehensive income. Comprehensive income is the change in equity during a
period from transactions and other events and circumstances from nonowner
sources. The unrealized gains and losses, net of applicable taxes, related to
available-for-sale securities is the only component of "Accumulated other
comprehensive income" in the Condensed Consolidated Balance Sheets for Avalon.
Comprehensive income, net of related tax effects, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ----------- ------------ -----------
Net loss ........................ $ (835) $ (899) $ ( 2,466) $ (1,446)
Unrealized gains on
available-for-sale securities . 52 - 52 -
----------- ----------- ------------ -----------
Total comprehensive income ...... $ (783) $ (899) $ (2,414) $ (1,446)
=========== =========== ============ ===========
7
Note 5. Discontinued Operations
As a result of significant operating losses incurred by Avalon's analytical
laboratory business, during the second quarter of 2001 the laboratory operations
implemented a reduction and reorganization of its workforce. In accordance with
Avalon's asset impairment policy, Avalon performed an evaluation of the
long-lived assets of the Export, Pennsylvania analytical laboratory operations
including the costs in excess of fair market value of net assets of acquired
businesses ("goodwill") to determine if the carrying value of such assets was
recoverable. To ascertain whether an impairment existed, Avalon estimated the
undiscounted sum of the expected future cash flows of the Export, Pennsylvania
analytical laboratory operations to determine if such sum was less than the
carrying value of the long-lived assets. The evaluation indicated the existence
of an impairment and Avalon measured the extent of the impairment by determining
the fair value of the long-lived assets based upon quoted market prices. As a
result, Avalon recorded a write-down of goodwill in the amount of $.5 million.
Despite the foregoing, Avalon's analytical laboratory business continued to
experience significant operating losses as a result of a decline in net
operating revenues and operational inefficiencies. The inability to increase net
operating revenues continued to adversely impact the financial performance of
the analytical laboratory business because of the fixed nature of many of the
costs associated with the laboratory operations. Recognizing that the continuing
losses incurred by the analytical laboratory business would adversely impact its
future financial performance, in the second quarter of 2002 management
determined that it was in Avalon's best interest to discontinue operating the
analytical laboratory business. Accordingly, on May 1, 2002, Avalon sold all of
the operating assets of its Export, Pennsylvania analytical laboratory business.
Proceeds from the sale were approximately $.4 million which equaled the net book
value of the assets that were sold. As part of the transaction, the purchaser
entered into a lease agreement with Avalon to remain in the Export building. In
addition, Avalon has had discussions with the same purchaser and anticipates
selling its radio-chemistry laboratory operations within the next several
months. As a result of the anticipated sale, Avalon recorded a charge of $.1
million for the write-down of such long-lived assets to fair value. Accordingly,
during the second quarter of 2002, the assets of the analytical laboratory
business were reclassified as held for sale in the June 30, 2002 and December
31, 2001 Condensed Consolidated Balance Sheets and the results of operations for
the current and prior periods of the analytical laboratory operations, including
the loss for the write-down of the long-lived assets to fair value, have been
included in discontinued operations.
Note 6. 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 was based upon the subsidiaries having
been involved in the transportation of hazardous substances to the facility.
During the fourth quarter of 1999, Avalon became a party to an Agreed Order and
a Participation Agreement regarding the remediation of a portion of this site.
The Participation Agreement provides for, among other things, the allocation of
all site remediation costs except for approximately $3 million. Avalon's total
liability for the allocated costs under the Participation Agreement was
approximately $71,000, which Avalon has paid.
The additional unallocated site remediation costs are currently estimated to be
approximately $3 million and Avalon's total accrued liability relating to the
remediation of this portion of the site on an undiscounted basis is $120,000,
which is included in the Condensed Consolidated Balance Sheets under the caption
"Other noncurrent liabilities." The extent of any ultimate liability of any of
Avalon's subsidiaries with respect to these additional costs is unknown. 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
8
expectations at any time. Currently, however, because of the expected sharing
among responsible and potentially responsible parties, the availability of legal
defenses, and typical settlement results, Avalon currently estimates that the
ultimate liability of this matter will be consistent with the amounts recorded
on Avalon's financial statements.
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 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.
Note 7. Goodwill and Other Intangible Assets
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible
Assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are
no longer subject to amortization, but will be tested for impairment annually
and whenever there is an impairment indicator.
In accordance with SFAS 142, Avalon discontinued the amortization of goodwill
and intangible assets with indefinite lives effective January 1, 2002. For the
quarter ended June 30, 2001, if goodwill amortization of approximately $11,000
had not been recorded, loss from operations would have decreased to $471,000;
net loss to $888,000; and net loss per share would have been $.23. For the six
months ended June 30, 2001, if goodwill amortization of $21,000 had not been
recorded, loss from operations would have decreased to $1,248,000; net loss to
$1,425,000; and net loss per share would have been $.37.
Avalon's transportation segment is the only reporting unit with goodwill
recorded on its balance sheet. Avalon has completed its transitional fair value
based impairment test of goodwill as of January 1, 2002. To ascertain whether an
impairment existed, Avalon estimated the undiscounted sum of the expected future
cash flows of the transportation segment. Based upon such analysis, the fair
value of the transportation segment, including goodwill, exceeded the carrying
amount of such net assets. Therefore, no impairment existed.
Note 8. Business Segment Information.
For business segment information, Avalon considered its operating and management
structure and the types of information subject to regular review by its "chief
operating decision maker." On this basis, Avalon's reportable segments include
transportation services, technical environmental services, waste disposal
brokerage and management services, and golf and related operations. Avalon
accounts for intersegment net operating revenues as if the transactions were to
third parties. The segment disclosures are presented on this basis for all
periods presented.
Avalon's primary business segment provides transportation services that include
transportation of hazardous and nonhazardous waste, transportation of general
and bulk commodities, and transportation brokerage and management services. The
technical environmental services segment provides environmental consulting,
engineering, site assessments, remediation services and operates and manages a
captive landfill for an industrial customer. The waste disposal brokerage and
management services segment provides hazardous and nonhazardous waste disposal
brokerage and management services. The golf and related operations segment
includes the operations of a golf course and travel agency. Avalon does not have
significant operations located outside the United States and, accordingly,
geographical segment information is not presented.
9
The accounting policies of the segments are consistent with those described for
the consolidated financial statements in the summary of significant accounting
policies. Avalon measures segment profit for internal reporting purposes as
income (loss) before taxes. Business segment information including the
reconciliation of segment income (loss) to income (loss) from continuing
operations before income taxes is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Net operating revenues from:
Transportation services:
External customers revenues ........................ $ 8,396 $ 7,813 $ 17,086 $ 15,217
Intersegment revenues .............................. 887 1,110 1,877 2,311
---------- --------- --------- ---------
Total transportation services ...................... 9,283 8,923 18,963 17,528
---------- --------- --------- ---------
Technical environmental services:
External customers revenues ........................ 2,691 4,394 5,677 8,394
Intersegment revenues .............................. - 1 - 3
---------- --------- --------- ---------
Total technical environmental services ............. 2,691 4,395 5,677 8,397
---------- --------- --------- ---------
Waste disposal brokerage and management services:
External customers revenues ........................ 4,702 4,164 8,659 8,674
Intersegment revenues .............................. 65 79 110 266
---------- --------- --------- ----------
Total waste disposal brokerage and management
services ......................................... 4,767 4,243 8,769 8,940
---------- --------- --------- ----------
Golf and related operations:
External customers revenues ........................ 459 295 547 393
Intersegment revenues .............................. 20 54 34 91
---------- --------- --------- ----------
Total golf and related operations .................. 479 349 581 484
---------- --------- --------- ----------
Segment operating revenues ......................... 17,220 17,910 33,990 35,349
Intersegment eliminations .......................... (972) (1,244) (2,021) (2,671)
---------- --------- --------- ----------
Total net operating revenues ....................... $ 16,248 $ 16,666 $ 31,969 $ 32,678
--------- --------- -------- ----------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Income (loss) before taxes:
Transportation services ............................ $ 233 $ (31) $ (131) $ (138)
Technical environmental services ................... (54) 540 (115) 805
Waste disposal brokerage and management
services ......................................... 164 156 269 392
Golf and related operations ........................ (94) (279) (332) (514)
Other businesses ................................... - - (1) (3)
--------- ---------- --------- ---------
Segment income (loss) before taxes ................. 249 386 (310) 542
Corporate interest income .......................... 56 106 116 241
Corporate other income, net ........................ 37 7 38 11
General corporate expenses ......................... (807) (798) (1,613) (1,628)
--------- ---------- --------- ---------
Loss from continuing operations before income
taxes ........................................... $ (465) $ (299) $ (1,769) $ (834)
--------- ---------- --------- ---------
10
Business Segment Information (continued)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2002 2001 2002 2001
-------- ---------- --------- --------
Interest income:
Transportation services .............................. $ 4 $ 17 $ 11 $ 37
Technical environmental services ..................... 3 9 8 19
Waste disposal brokerage and management
services ........................................... 3 11 8 25
Golf and related operations .......................... 1 1 1 3
Corporate ............................................ 56 106 116 241
-------- ---------- --------- --------
Total ........................................... $ 67 $ 144 $ 144 $ 325
-------- ---------- --------- --------
June 30, December 31,
2002 2001
------------- -------------
Identifiable assets:
Transportation services ............................ $ 13,539 $ 13,349
Technical environmental services ................... 10,125 10,063
Waste disposal brokerage and management
services ......................................... 5,032 5,143
Golf and related operations ........................ 14,070 12,292
Other businesses ................................... 72 66
Corporate .......................................... 26,616 31,080
Discontinued operations ............................ 922 2,016
------------ -------------
Sub Total ..................................... 70,376 74,009
Elimination of intersegment receivables ............ (14,452) (13,613)
------------ -------------
Total ......................................... $ 55,924 $ 60,396
============ =============
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the operations and financial
condition of Avalon Holdings Corporation and its subsidiaries. As used in this
report, the term "Avalon" means 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.'
Avalon cautions readers that forward looking statements, including, without
limitation, those relating to Avalon'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 Avalon's reports
filed with the Securities and Exchange Commission.
Liquidity and Capital Resources
Avalon's capital expenditures in 2002, excluding acquisitions, are expected to
be in the range of $2 million to $3 million, which relate principally to
remodeling the corporate headquarters to include a clubhouse and pro shop for
the Avalon Lakes Golf Club. During the first six months of 2002, capital
expenditures for Avalon totaled $2.1 million which were principally related to
the remodeling of the corporate headquarters.
Working capital decreased to $13.7 million at June 30, 2002 compared with $14.4
million at December 31, 2001. The decrease is primarily the result of utilizing
cash to fund capital expenditures partially offset by a reclassification of
certain noncurrent investments to short-term investments.
The decrease in Accounts payable at June 30, 2002 compared with December 31,
2001 is primarily the result of the payment of insurance premiums during the
first six months of 2002 and the payment to subcontractors for remediation
services performed for a customer on a single significant 2001 project. As a
result of this customer's financial and operational decline in the fourth
quarter of 2001 and its subsequent filing for protection from creditors under
the provisions of Chapter 11 of the United States Bankruptcy Code, Avalon's
remediation business has not been paid approximately $2.2 million for work
performed on this project. The unsuccessful collection of these monies combined
with Avalon's use of existing cash to satisfy its obligations associated with
the project, has had a negative effect on Avalon's liquidity.
Management believes that cash provided from operations, existing 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 a credit facility.
Avalon is not aggressively pursuing potential acquisition candidates but will
continue to consider acquisitions that make economic sense. While Avalon 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.
12
Results of Operations
Overall performance
Net operating revenues in the second quarter of 2002 decreased to $16.2 million
compared with $16.7 million in the prior year's second quarter. Cost of
operations were $14.8 million in the second quarter of 2002 compared with $14.7
million in the prior year quarter. Avalon incurred a loss from continuing
operations of $.5 million or a loss of $.12 per share for the second quarter of
2002 compared with a loss from continuing operations of $.2 million or a loss of
$.05 per share for the second quarter of 2001. As a result of the sale of the
analytical laboratory operations and the classification of the radio-chemistry
laboratory assets as held for sale, the results of Avalon's laboratory business
are reported as discontinued operations. The loss from discontinued operations
was $.4 million in the second quarter of 2002 compared with a loss of $.7
million in the second quarter of the prior year. For the first six months of
2002, net operating revenues decreased to $32 million compared with $32.7
million for the first six months of 2001. Cost of operations were $29.6 million
for the first six months of 2002 compared with $29.2 million for the first six
months of the prior year. During the first six months of 2002, Avalon recorded a
loss from continuing operations of $1.8 million or a loss of $.47 per share
compared with a loss from continuing operations of $.5 million or a loss of
$.14 per share for the first six months of 2001. For the first six months of
2002, the loss from discontinued operations was $.7 million compared with a loss
from discontinued operations of $.9 million for the first six months of the
prior year.
Performance in the Second Quarter of 2002 compared with the Second Quarter of
2001
Segment performance
Segment performance should be read in conjunction with Note 8 to the Condensed
Consolidated Financial Statements.
Net operating revenues of the transportation services segment increased to $9.3
million in the second quarter of 2002 compared with $8.9 million in the second
quarter of the prior year. The increase in net operating revenues is primarily
attributable to a significant increase in the level of business of the
transportation brokerage operations and an increase in the level of
transportation of municipal solid waste, partially offset by a decrease in the
transportation of hazardous waste. The increase in transportation brokerage net
operating revenues is primarily related to a single customer and the increase in
net operating revenues relating to the transportation of municipal solid waste
is primarily a result of higher volumes and increased pricing of municipal solid
waste transported. The decrease in net operating revenues relating to the
transportation of hazardous waste is primarily a result of a decline in the
volume of hazardous waste transported. The transportation services segment
recorded income before taxes of $.2 million for the second quarter of 2002
compared with a loss before taxes of $31,000 for the second quarter of 2001. The
improvement in income before taxes is primarily the result of increased net
operating revenues of the transportation brokerage operations and an increase in
the price and volume of municipal solid waste transported.
Net operating revenues of the technical environmental services segment decreased
to $2.7 million in the second quarter of 2002 compared with $4.4 million in the
second quarter of the prior year. The decrease in net operating revenues was
primarily the result of a decrease in the net operating revenues of the
engineering and consulting business and the remediation services business due to
a decrease in the level of business. During the second quarter of 2001, the net
operating revenues of the remediation services
13
business were significantly higher as a result of a large project. The technical
environmental services segment incurred a loss before taxes of $54,000 in the
second quarter of 2002 compared with income before taxes of $.5 million in the
second quarter of 2001. The decrease in income before taxes is primarily a
result of the decline in net operating revenues of the remediation services
business and the engineering and consulting business. During the second quarter
of 2001, a significant portion of the net operating revenues and income before
taxes of the remediation services business was attributable to a large single
project. During the second quarter of 2002, net operating revenues and income
before taxes of the captive landfill management business were relatively
unchanged from the prior year quarter.
As a result of the sale of the analytical laboratory operations and the
classification of the radio-chemistry laboratory assets as held for sale during
the second quarter of 2002, the results of Avalon's analytical laboratory
operations, which were previously included in the technical environmental
services segment, are reported as discontinued operations. See Note 5 to the
Condensed Consolidated Financial Statements.
Net operating revenues of the waste disposal brokerage and management services
segment increased to $4.8 million in the second quarter of 2002 compared with
$4.2 million in the second quarter of the prior year. The increase in net
operating revenues is primarily the result of an increase in the level of
disposal brokerage and management services provided. Despite the increase in net
operating revenues, income before taxes increased only slightly in the second
quarter of 2002 compared with the second quarter of 2001 primarily as a result
of lower margin projects.
Avalon's golf and related operations segment consists primarily of the operation
of a golf course and travel agency. The golf course, which is located in Warren,
Ohio, was closed until May 2001. Net operating revenues for the golf and related
operations segment increased to $.5 million in the second quarter of 2002
compared with $.3 million in the second quarter of 2001. The increase in net
operating revenues is primarily the result of increased membership in the Avalon
Lakes Golf Club which has resulted in additional membership dues, greens fees
and cart rental revenues, partially offset by a decrease in net operating
revenues associated with the travel agency. The golf and related operations
segment incurred a loss before taxes of $.1 million in the second quarter of
2002 compared with a loss of $.3 million in the second quarter of 2001. The
decrease in loss before taxes of the golf and related operations segment is
primarily a result of the increased membership of the Avalon Lakes Golf Club and
the fact that the golf course was closed during the first six weeks of the
second quarter of 2001.
Interest income
Interest income decreased to $67,000 in the second quarter of 2002 compared with
$144,000 in the second quarter of 2001 primarily due to a decline in the average
amount of cash and cash equivalents and investments during the second quarter of
2002 compared with the prior year quarter as a result of the utilization of cash
and investments to fund capital expenditures. Investment rates also decreased
during the second quarter of 2002 compared with the prior year quarter.
General corporate expenses
General corporate expenses were $.8 million in both the second quarter of 2002
and 2001.
Net income
Avalon incurred a net loss of $.8 million in the second quarter of 2002 compared
with a net loss of $.9 million in the second quarter of the prior year. Avalon's
overall effective tax rate, including the effect of
14
state income tax provisions, was 0% in the second quarter of 2002. The deferred
tax benefit arising from the loss before income taxes was offset by a valuation
allowance. A valuation allowance is provided when management believes that it is
more likely than not that deferred tax assets relating to certain federal and
state loss carryforwards will not be realized. Avalon's overall effective tax
rate, including the effect of state income tax provisions, was 35.1% in the
second quarter of 2001. The overall effective tax rate is different than
statutory rates primarily due to state income taxes, the increase in the
valuation allowance, and nondeductible expenses.
Performance in the First Six Months of 2002 compared with the First Six Months
of 2001
Segment performance
Net operating revenues of the transportation services segment increased to $19
million for the first six months of 2002 compared with $17.5 million for the
first six months of the prior year. The increase in net operating revenues is
primarily attributable to a significant increase in the level of business of the
transportation brokerage operations and an increase in the level of
transportation of municipal solid waste, partially offset by a significant
decrease in the level of transportation of hazardous waste. The increase in net
operating revenues of the transportation brokerage operations is primarily
related to a single customer and the increase in the net operating revenues
relating to transportation of municipal solid waste is primarily as a result of
higher volumes and increased pricing in the second quarter of 2002. The decrease
in the net operating revenues for the transportation of hazardous waste is a
result of a decline in the volume of hazardous waste transported. The
transportation services segment incurred a loss before taxes of $.1 million for
the first six months of 2002 and 2001. Although net operating revenues
increased, the loss before taxes remained relatively unchanged during the first
six months of 2002 compared with the first six months of the prior year
primarily as a result of reduced operating margins within the transportation
brokerage operations and the significant decrease in the level of hazardous
waste transportation services provided, partially offset by increased volumes
and higher prices associated with the transportation of municipal solid waste.
Net operating revenues of the technical environmental services segment decreased
to $5.7 million in the first six months of 2002 compared with $8.4 million in
the first six months of 2001. The decrease is primarily attributable to a
decrease in net operating revenues of the remediation services business and the
engineering and consulting business. The decrease in the net operating revenue
of the remediation services business for the first six months of 2002 is
primarily as a result of a decrease in the level of business in the second
quarter of 2002. During the second quarter of 2001, the net operating revenues
of the remediation services business were significantly higher as a result of a
large project. The decrease in the net operating revenues of the engineering and
consulting business is primarily the result of a decrease in the level of
business during the first six months of 2002 compared with the first six months
of the prior year. The decrease in income before taxes is primarily as a result
of the decline in net operating revenues of the remediation services business
and the engineering and consulting business combined with the recording of
charges to the provision for losses on accounts receivable as a result of
customer bankruptcies in the first quarter of 2002. During the second quarter of
2001, a significant portion of the net operating revenues and income before
taxes of the remediation services business was attributable to a large single
project. During the first six months of 2002 net operating revenues and income
before taxes of the captive landfill management business were relatively
unchanged from the prior year period.
As a result of the sale of the analytical laboratory operations and the
classification of the radio-chemistry laboratory assets as held for sale during
the second quarter of 2002, the results of Avalon's analytical laboratory
operations, which were previously included in the technical environmental
services segment, are reported as discontinued operations. See Note 5 to the
Condensed Consolidated Financial Statements.
15
Net operating revenues of the waste disposal brokerage and management services
segment decreased to $8.8 million in the first six months of 2002 compared with
$8.9 million in the first six months of 2001. The decrease in net operating
revenues is primarily the result of a decrease in the level of disposal
brokerage and management services provided during the first quarter of 2002.
Income before taxes decreased to $.3 million for the first six months of 2002
compared with $.4 million for the first six months of the prior year as a result
of the decreased net operating revenues and lower operating margins.
Avalon's golf and related operations segment consists primarily of the
operations of a golf course and travel agency. The golf course, which is located
in Warren, Ohio, was closed until May 2001. Net operating revenues for the golf
and related operations segment increased to $.6 million for the first six months
of 2002 compared with $.5 million of the first six months of 2001. The increase
in net operating revenues is primarily the result of increased membership in the
Avalon Lakes Golf Club which has resulted in additional membership dues, greens
fees and cart rental revenues, partially offset by a decrease in net operating
revenues associated with the travel agency. The golf and related operations
segment incurred a loss before taxes of $.3 million in the first six months of
2002 compared with a loss before taxes of $.5 million in the first six months of
the prior year. The decrease in the loss before taxes of the golf and related
operations segment is primarily as a result of the increased membership of the
Avalon Lakes Golf Club and the fact that the golf course was closed for the
first six weeks of the second quarter of 2001.
Interest Income
Interest income decreased to $.1 million for the first six months of 2002
compared with $.3 million for the first six months of the prior year, primarily
due to a decline in the average amount of cash and cash equivalents and
investments during the first six months of 2002 compared with the first six
months of the prior year as a result of the utilization of cash and investments
to fund capital expenditures. Investment rates also decreased during the first
six months of 2002 compared with the first six months of 2001.
General Corporate Expenses
General corporate expenses were $1.6 million in both the first six months of
2002 and 2001.
Net Income
Avalon recorded a net loss of $2.5 million in the first six months of 2002
compared with a net loss of $1.4 million in the first six months of the prior
year. Avalon's overall effective tax rate, including the effect of state income
tax provisions, was 0% in the first six months of 2002. The deferred tax benefit
arising from the loss before income taxes was offset by a valuation allowance. A
valuation allowance is provided when management believes that it is more likely
than not that deferred tax assets relating to certain federal and state loss
carryforwards will not be realized. Avalon's overall effective tax rate,
including the effect of state income tax provisions, was 35.9% in the first six
months of 2001. The overall effective tax rate is different than statutory rates
primarily due to state income taxes, the increase in the valuation allowance,
and nondeductible expenses.
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
16
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.
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 Avalon's
transportation and disposal brokerage and management revenues is derived from
the disposal or transportation of out-of-state waste. Any law or regulation
restricting or impeding the transportation of waste or the acceptance of
out-of-state waste for disposal could have a significant negative effect on
Avalon.
As is the case with any transportation company, an increase in fuel prices will
subject Avalon's transportation operations to increased operating expenses,
which, in light of competitive market conditions, Avalon may not be able to pass
on to its customers.
Avalon's transportation operations utilize power units which are subject to
long-term leases. The level of transportation services provided has resulted in
the under utilization of many of these power units. Continuing under utilization
of these power units will adversely impact the future financial performance of
the transportation operations.
Insurance costs, particularly within the transportation industry, have risen
dramatically over the past several months. An increase in insurance premiums
will subject Avalon's operations to increase operating expenses, which, in light
of competitive market conditions, Avalon may not be able to pass on to its
customers.
Competitive pressures 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 could adversely impact the future financial performance of
Avalon.
Avalon's waste disposal brokerage and management operations obtain and retain
customers by providing services and identifying cost-efficient disposal options
unique to a customer's needs. 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. Avalon does not believe
that industry 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
which may adversely impact the future financial performance of Avalon's waste
disposal brokerage and management operations.
A significant portion of Avalon's business is not subject to long-term
contracts. In light of current economic, regulatory, and competitive conditions,
there can be no assurance that Avalon's current customers will continue to
transact business with Avalon at historical levels. Failure by Avalon to retain
its current customers or to replace lost business could adversely impact the
future financial performance of Avalon.
Avalon's golf course competes with many public and private courses in the area.
As a result of the significant capital improvements to Avalon's golf course, the
greens fees charged customers to play a round of golf have been increased
substantially. Although Avalon believes that the capital improvements made to
the golf course justify the increased greens fees and will result in increased
net operating
17
revenues and increased income before taxes, such increases have not been
realized and there can be no assurance as to when such increases will be
attained.
Avalon's golf course is located in Warren, Ohio and is significantly dependent
upon weather conditions during the golf season. Additionally, all of Avalon's
other 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, Avalon's financial performance is adversely
affected by winter weather conditions.
Avalon anticipates selling its radio-chemistry laboratory operations within the
next several months. In the interim, continuing losses incurred by the
radio-chemistry laboratory will adversely impact its future financial
performance.
Market Risk
Avalon does not have significant exposure to changing interest rates. A 10%
change in interest rates would have an immaterial effect on Avalon's income
before taxes for the next fiscal year. Avalon currently has no debt outstanding
and invests primarily in U.S. Treasury notes, short-term money market funds and
other short-term obligations. Avalon does not undertake any specific actions to
cover its exposure to interest rate risk and Avalon is not a party to any
interest rate risk management transactions.
Avalon does not purchase or hold any derivative financial instruments.
============================
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to "Item 3. Legal Proceedings" in Avalon's Annual
Report on Form 10-K for the year ended December 31, 2001 for a
description of legal proceedings.
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
Avalon's Annual Meeting of Shareholders was held on April 29, 2002;
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
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
None
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVALON HOLDINGS CORPORATION
(Registrant)
Date: August 13, 2002 By: /s/ Timothy C. Coxson
-------------------- ---------------------------------------------
Timothy C. Coxson, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer and Duly Authorized Officer)
20