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2002
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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
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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 7, 2002.
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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001 (Unaudited) .................................... 3
Condensed Consolidated Balance Sheets at September 30, 2002 (Unaudited)
and December 31, 2001 ................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
Item 4. Controls and Procedures ..................................................... 18
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
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 ................................................................ 21
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 Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net operating revenues .............................. $ 19,116 $ 21,414 $ 51,085 $ 54,092
Cost and expenses:
Cost of operations .................................. 16,538 19,000 46,184 48,166
Selling, general and administrative expense ......... 4,308 2,497 8,785 7,278
----------- ----------- ------------ -----------
Loss from operations ................................ (1,730) (83) (3,884) (1,352)
Other income:
Interest income ..................................... 57 125 201 450
Other income, net ................................... 100 136 341 246
----------- ----------- ------------ -----------
Income (loss) from continuing operations
before income taxes .............................. (1,573) 178 (3,342) (656)
Income tax benefit .................................. -- (67) -- (366)
----------- ----------- ------------ -----------
Income (loss) from continuing operations ............ (1,573) 245 (3,342) (290)
Loss from discontinued operations ................... (63) (81) (760) (992)
----------- ----------- ------------ -----------
Net income (loss) ................................... $ (1,636) $ 164 $ (4,102) $ (1,282)
=========== =========== ============ ===========
Basic income (loss) per share from continuing
operations ....................................... $ (.41) $ .06 $ (.88) $ (.08)
=========== =========== ============ ===========
Basic loss per share from discontinued
operations ....................................... $ ( .02) $ (.02) $ (.20) $ (.26)
=========== =========== ============ ===========
Basic net income (loss) per share ................... $ (.43) $ .04 $ (1.08) $ (.34)
=========== =========== ============ ===========
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)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents ................................................... $ 2,050 $ 4,807
Short-term investments ...................................................... 2,354 1,939
Accounts receivable, net .................................................... 14,720 14,235
Deferred income taxes ....................................................... 1,223 1,223
Prepaid expenses and other current assets ................................... 3,133 2,091
Current assets - discontinued operations .................................... 75 840
------------- ------------
Total current assets ...................................................... 23,555 25,135
Noncurrent investments ......................................................... 4,023 5,956
Properties and equipment, less accumulated depreciation
and amortization of $16,545 in 2002 and $15,194 in 2001 ..................... 28,477 27,493
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 .................................... -- 712
------------- ------------
Total assets ................................................................ $ 56,724 $ 59,967
============= ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable ............................................................ $ 8,293 $ 7,091
Accrued payroll and other compensation ...................................... 1,130 991
Accrued income taxes ........................................................ 192 216
Other accrued taxes ......................................................... 343 424
Other liabilities and accrued expenses ...................................... 1,514 1,578
Current liabilities - discontinued operations ............................... 38 448
------------- ------------
Total current liabilities ................................................. 11,510 10,748
Deferred income taxes .......................................................... 701 701
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 ......................................................... (13,838) (9,736)
Accumulated other comprehensive income ...................................... 86 --
------------- ------------
Total shareholders' equity ................................................ 44,382 48,398
------------- ------------
Total liabilities and shareholders' equity ................................ $ 56,724 $ 59,967
============= ============
See accompanying notes to condensed consolidated financial statements.
4
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- ---------
Operating activities:
Loss from continuing operations ................................................... $ (3,342) $ (290)
Reconciliation of loss from continuing operations to cash from
operating activities:
Depreciation and amortization .................................................. 1,835 2,088
Amortization of investments .................................................... 86 --
Deferred income tax benefit .................................................... -- (503)
Provision for losses on accounts receivable .................................... 2,208 95
Gain on disposal of property and equipment ..................................... (40) (150)
Gain on investments ............................................................ (2) --
Sales of trading investments ................................................... -- 734
Changes in operating assets and liabilities
Accounts receivable .......................................................... (2,693) 595
Refundable income taxes ...................................................... -- 327
Prepaid expenses and other current assets .................................... (1,042) (583)
Other assets ................................................................. 1 31
Accounts payable ............................................................. 1,202 1,638
Accrued payroll and other compensation ....................................... 139 365
Accrued income taxes ......................................................... (24) (126)
Other accrued taxes .......................................................... (81) (13)
Other liabilities and accrued expenses ....................................... (64) (358)
Other noncurrent liabilities ................................................. 11 --
-------- --------
Net cash (used in) provided by operating activities from continuing
operations ................................................................. (1,806) 3,850
Net cash used in operating activities from discontinued operations .......... (171) --
-------- --------
Net cash (used in) provided by operating activities ......................... (1,977) 3,850
-------- --------
Investing activities:
Sales of available-for-sale investments ........................................... 808 51
Purchases of available-for-sale investments ....................................... -- (32)
Sales of held-to-maturity investments ............................................. 712 --
Capital expenditures .............................................................. (2,829) (917)
Proceeds from sales of property and equipment ..................................... 51 331
-------- --------
Net cash used in investing activities from continuing operations ............ (1,258) (567)
Net cash provided by (used in) investing activities from
discontinued operations .................................................... 478 (130)
-------- --------
Net cash used in investing activities ....................................... (780) (697)
-------- --------
(Decrease) increase in cash and cash equivalents ................................... (2,757) 3,153
Cash and cash equivalents at beginning of year ..................................... 4,807 10,700
-------- --------
Cash and cash equivalents at end of period ......................................... $ 2,050 $ 13,853
======== ========
See accompanying notes to condensed consolidated financial statements.
5
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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
September 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 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, 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 September 30, 2002 or December 31,
2001. During the second quarter of 2002, Avalon sold certain 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. As a
6
result of the classification of these securities as available-for-sale, Avalon
has recognized unrealized gains, net of applicable income taxes, of $86,000 for
the first nine months of 2002 as a separate component of shareholders' equity.
Information regarding investment securities consists of the following (in
thousands):
September 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 $6,291 $86 $6,377 -- -- --
Held-to-Maturity
U.S. Treasury Notes -- -- -- $ 7,895 $16 $7,911
The amortized cost and estimated fair value of available-for-sale investments at
September 30, 2002, by contractual maturity, consist of the following (in
thousands):
Available-for-Sale
------------------
Amortized Estimated
Cost Fair Value
--------------------------
Due in one year or less ....................... $ 2,334 $ 2,354
Due after one year through five years ......... 3,957 4,023
--------------------------
Total .......................... $ 6,291 $ 6,377
==========================
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 non-owner
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 Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net income (loss) ........................... $ (1,636) $ 164 $ ( 4,102) $ (1,282)
Unrealized gains on
available-for-sale securities ............. 34 -- 86 --
-------- -------- --------- ---------
Total comprehensive income (loss) ........... $ (1,602) $ 164 $ (4,016) $ (1,282)
======== ======== ========= =========
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 in
the second quarter of 2001. 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, in anticipation of the sale of the
operating assets of its radio-chemistry laboratory business, Avalon recorded a
charge of $.1 million during the second quarter of 2002 for the write-down of
such long-lived assets to fair value. On September 1, 2002, Avalon sold all of
the operating assets of its radio-chemistry laboratory business for
approximately $.1 million which equaled the adjusted net book value of the
assets that were sold. The assets of the analytical laboratory business were
reclassified as held for sale in the December 31, 2001 Condensed Consolidated
Balance Sheet. The remaining assets and liabilities of the analytical laboratory
business are classified in the September 30, 2002 Condensed Consolidated Balance
Sheet under the captions "Current assets-discontinued operations" and "Current
liabilities-discontinued operations." 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
8
developments, the results of environmental studies or other factors could
materially alter Avalon's 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 September 30, 2001, if goodwill amortization of approximately
$10,000 had not been recorded, loss from operations would have decreased to
$73,000; net income would have increased to $174,000; and net income per share
would have increased to $.05. For the nine months ended September 30, 2001, if
goodwill amortization of $31,000 had not been recorded, loss from operations
would have decreased to $1,321,000; net loss to $1,251,000; and net loss per
share would have been $.33.
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 and therefore, no impairment appears to have 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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Net operating revenues from:
Transportation services:
External customers revenues ............................. $ 7,780 $ 8,106 $ 24,866 $ 23,323
Intersegment revenues ................................... 1,116 1,461 2,993 3,772
--------- -------- --------- ---------
Total transportation services ........................... 8,896 9,567 27,859 27,095
--------- -------- --------- ---------
Technical environmental services:
External customers revenues ............................. 3,750 5,202 9,427 13,596
Intersegment revenues ................................... -- 3 -- 6
--------- -------- --------- ---------
Total technical environmental services .................. 3,750 5,205 9,427 13,602
--------- -------- --------- ---------
Waste disposal brokerage and management services:
External customers revenues ............................. 6,667 7,629 15,326 16,303
Intersegment revenues ................................... 265 225 375 491
--------- -------- --------- ---------
Total waste disposal brokerage and management
services .............................................. 6,932 7,854 15,701 16,794
--------- -------- --------- ---------
Golf and related operations:
External customers revenues ............................. 919 477 1,466 870
Intersegment revenues ................................... 31 29 65 120
--------- -------- --------- ---------
Total golf and related operations ....................... 950 506 1,531 990
--------- -------- --------- ---------
Segment operating revenues .............................. 20,528 23,132 54,518 58,481
Intersegment eliminations ............................... (1,412) (1,718) (3,433) (4,389)
--------- -------- --------- ---------
Total net operating revenues ............................ $ 19,116 $ 21,414 $ 51,085 $ 54,092
--------- -------- --------- ---------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- --------- --------- ----------
Income (loss) from continuing operations before taxes:
Transportation services ................................. $ (1,886) $ 160 $ (2,017) $ 22
Technical environmental services ........................ 471 491 356 1,296
Waste disposal brokerage and management
services .............................................. 487 446 756 838
Golf and related operations ............................. 184 (119) (148) (633)
Other businesses ........................................ -- 7 (1) 4
--------- -------- --------- ---------
Segment income (loss) before taxes ...................... (744) 985 (1,054) 1,527
Corporate interest income ............................... 48 94 164 335
Corporate other income, net ............................. 41 (5) 79 6
General corporate expenses .............................. (918) (896) (2,531) (2,524)
--------- -------- --------- ---------
Income (loss) from continuing operations before
income taxes ......................................... $ (1,573) $ 178 $ (3,342) $ (656)
--------- -------- --------- ---------
10
Business Segment Information (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
2002 2001 2002 2001
-------- --------- ------- -------
Interest income:
Transportation services ............................. $ 4 $ 14 $ 15 $ 51
Technical environmental services .................... 1 6 9 25
Waste disposal brokerage and management
services .......................................... 3 9 11 34
Golf and related operations ......................... 1 2 2 5
Corporate ........................................... 48 94 164 335
--------- ---------- ------ -------
Total .......................................... $ 57 $ 125 $ 201 $ 450
--------- ---------- ------ -------
September 30, December 31,
2002 2001
------------- --------------
Identifiable assets:
Transportation services ............................. $ 11,571 $ 13,349
Technical environmental services .................... 11,838 10,098
Waste disposal brokerage and management
services .......................................... 6,242 5,143
Golf and related operations ......................... 14,403 12,292
Other businesses .................................... 72 66
Corporate ........................................... 27,588 31,080
Discontinued operations ............................. 75 1,552
--------- ----------
Sub Total ...................................... 71,789 73,580
Elimination of intersegment receivables ............. (15,065) (13,613)
--------- ----------
Total .......................................... $ 56,724 $ 59,967
========= ==========
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 $3.0 million to $3.5 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 nine months of 2002, capital
expenditures for Avalon totaled $2.8 million which were principally related to
the remodeling of the corporate headquarters.
Working capital decreased to $12 million at September 30, 2002 compared with
$14.4 million at December 31, 2001. The decrease is primarily the result of
utilizing cash to fund capital expenditures and an increase in the allowance for
doubtful accounts as a result of a customer's financial and operational decline,
partially offset by a reclassification of certain noncurrent investments to
short-term investments.
Avalon recorded a charge in the third quarter of 2002 to the provision for
losses on accounts receivable of $1.9 million as a result of a customer's
financial and operational decline. The unsuccessful collection of these monies
coupled with Avalon's use of existing cash to satisfy its obligations associated
with this receivable has negatively affected its liquidity.
The increase in accounts payable at September 30, 2002 compared with December
31, 2001 is primarily the result of higher insurance premiums payable at
September 30, 2002 due to the timing of the annual renewal of Avalon's insurance
program. The increase in prepaid expenses and other current assets is primarily
due to the renewal of Avalon's insurance program in September 2002.
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 third quarter of 2002 decreased to $19.1 million
compared with $21.4 million in the prior year's third quarter. Cost of
operations were $16.5 million in the third quarter of 2002 compared with $19
million in the prior year quarter. Avalon incurred a loss from continuing
operations of $1.6 million or a loss of $.41 per share for the third quarter of
2002 compared with income from continuing operations of $.2 million or $.06 per
share for the third quarter of 2001. In the third quarter of 2002, Avalon
recorded a charge of $1.9 million to the provision for losses on accounts
receivable as a result of a customer of Avalon's transportation services segment
experiencing a financial and operational decline. The results of Avalon's
laboratory business are reported as discontinued operations. The loss from
discontinued operations was $.1 million in both the third quarter of 2002 and
2001. For the first nine months of 2002, net operating revenues decreased to
$51.1 million compared with $54.1 million for the first nine months of 2001.
Cost of operations were $46.2 million for the first nine months of 2002 compared
with $48.2 million for the first nine months of the prior year. During the first
nine months of 2002, Avalon incurred a loss from continuing operations of $3.3
million or a loss of $.88 per share compared with a loss from continuing
operations of $.3 million or a loss of $.08 per share for the first nine months
of 2001. For the first nine months of 2002, the loss from discontinued
operations was $.8 million compared with a loss from discontinued operations of
$1 million for the first nine months of the prior year.
Performance in the Third Quarter of 2002 compared with the Third 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 decreased to $8.9
million in the third quarter of 2002 compared with $9.6 million in the third
quarter of the prior year. The decrease in net operating revenues is primarily
attributable to a decrease in the level of business of the transportation
brokerage operations and a decrease in the transportation of hazardous waste,
partially offset by higher volumes and increased pricing for municipal solid
waste transportation. 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
incurred a loss before taxes of $1.9 million for the third quarter of 2002
compared with income before taxes of $.2 million for the third quarter of 2001.
The decrease is primarily the result of a charge of $1.9 million to the
provision for losses on accounts receivable as a result of a customer's
financial and operational decline.
Net operating revenues of the technical environmental services segment decreased
to $3.8 million in the third quarter of 2002 compared with $5.2 million in the
third quarter of the prior year. The decrease in net operating revenues is
primarily the result of a significant decrease in the net operating revenues of
the remediation services business and engineering and consulting business due to
a decrease in the level of business. During the third quarter of 2002, although
the total net operating revenues of the remediation business declined
significantly, the net operating revenues relating to services performed by
employees of the remediation business declined only slightly, while the net
operating revenues relating to services performed by subcontractors, which are
billed at little or no markup, declined significantly. The technical
environmental services segment recorded income before taxes of $.5 million in
both the third quarter of
13
2002 and 2001. During the third 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 third 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, 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 decreased to $6.9 million in the third quarter of 2002 compared with
$7.9 million in the third quarter of 2001. The net operating revenues in the
third quarter of 2001 included net operating revenues of $2.4 million relating
to one significant project. Excluding the effect of the net operating revenues
associated with this project in 2001, net operating revenues increased as a
result of an increase in the level of disposal brokerage and management services
provided. Notwithstanding reduced net operating revenues, income before taxes
increased slightly in the third quarter of 2002 compared with the third quarter
of 2001 primarily as a result of higher profit margins.
Avalon's golf and related operations segment consists primarily of the operation
of a golf course and travel agency. Net operating revenues for the golf and
related operations segment increased to $1 million in the third quarter of 2002
compared with $.5 million in the third 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,
cart rental revenues and food and beverage sales. The golf and related
operations segment recorded income before taxes of $.2 million in the third
quarter of 2002 compared with a loss of $.1 million in the third quarter of
2001. The increase in income before taxes of the golf and related operations
segment is primarily a result of the increased membership of the Avalon Lakes
Golf Club and an increase in the number of rounds of golf played.
Interest income
Interest income decreased to $57,000 in the third quarter of 2002 compared with
$125,000 in the third quarter of 2001 primarily due to a decline in the average
amount of cash and cash equivalents and investments during the third 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 third quarter of 2002 compared with the prior year quarter.
General corporate expenses
General corporate expenses were $.9 million in both the third quarter of 2002
and 2001.
Net income
Avalon incurred a net loss of $1.6 million in the third quarter of 2002 compared
with net income of $.2 million in the third quarter of the prior year. Avalon's
overall effective tax rate, including the effect of state income tax provisions,
was 0% in the third 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 37.6% in the third
quarter of 2001. The overall effective tax rate is different than statutory
rates primarily due to state income taxes, the valuation allowance, and
nondeductible expenses.
14
Performance in the First Nine Months of 2002 compared with the First Nine Months
of 2001
Segment performance
Net operating revenues of the transportation services segment increased to $27.9
million for the first nine months of 2002 compared with $27.1 million for the
first nine 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 during the first six months of 2002 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. 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 $2 million for the first nine
months of 2002 compared with net income before taxes of $22,000 for the first
nine months of 2001. The decrease is primarily the result of a charge of $1.9
million to the provision for losses on accounts receivable as a result of a
customer's financial and operational decline.
Net operating revenues of the technical environmental services segment decreased
to $9.4 million in the first nine months of 2002 compared with $13.6 million in
the first nine 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 nine months of 2002 is
primarily the result of a decrease in the level of business in the second and
third quarters of 2002. During the first nine months of 2001, the net operating
revenues of the remediation services business were significantly higher as a
result of a large project which included a significant amount of net operating
revenues relating to subcontractor costs which are billed at little or no
markup. 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 nine months of 2002 compared with the first nine
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. A significant portion of the
net operating revenues and income before taxes of the remediation services
business during the second and third quarters of 2001 was attributable to a
large single project. During the first nine 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 in 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 decreased to $15.7 million in the first nine months of 2002 compared
with $16.8 million in the first nine months of 2001. The net operating revenue
for the first nine months of 2001 included net operating revenues of $2.4
million relating to a single project. Excluding the effect of the net operating
revenues associated with this project in 2001, net operating revenues increased
as a result of an increase in the level of disposal brokerage and management
services provided. Income before taxes was $.8 million for the first nine months
of 2002 and 2001. Excluding the effect of the one large project in the third
quarter of 2001, income before taxes increased as a result of higher margin
projects.
15
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 $1.5 million for the first nine
months of 2002 compared with $1 million of the first nine 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, cart rental revenues and food and beverage sales,
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 first nine months of 2002 compared with a loss
before taxes of $.6 million in the first nine months of the prior year. The
decrease in the 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
an increase in the number of rounds of golf played 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 $.2 million for the first nine months of 2002
compared with $.5 million for the first nine months of the prior year, primarily
due to a decline in the average amount of cash and cash equivalents and
investments during the first nine months of 2002 compared with the first nine
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
nine months of 2002 compared with the first nine months of 2001.
General Corporate Expenses
General corporate expenses were $2.5 million in both the first nine months of
2002 and 2001.
Net Income
Avalon incurred a net loss of $4.1 million in the first nine months of 2002
compared with a net loss of $1.3 million in the first nine months of the prior
year. Avalon's overall effective tax rate, including the effect of state income
tax provisions, was 0% in the first nine 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 55.8% in the
first nine months of 2001. The overall effective tax rate is different than
statutory rates primarily due to state income taxes, the valuation allowance,
adjustments to prior estimates 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 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
16
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. The 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 year. The increase in insurance premiums has
increased Avalon's 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 revenues and increased income before taxes, such increases have
not been fully 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
17
midwestern states. As a result, Avalon's financial performance is adversely
affected by winter weather conditions.
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.
ITEM 4. CONTROLS AND PROCEDURES
Avalon's management, including the Chief Executive Officer and Chief Financial
Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
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
None
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: November 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
AVALON HOLDINGS CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Ronald E. Klingle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avalon Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Ronald E. Klingle
- ---------------------
Ronald E. Klingle
Chief Executive Officer
21
AVALON HOLDINGS CORPORATION
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Timothy C. Coxson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avalon Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Timothy C. Coxson
- ---------------------
Timothy C. Coxson
Chief Financial Officer
22