-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ksc+0iA9zmjUJ+7GApJu3nfGtaP7j8n1wVSA2CVKVbbQiTbz3wP2q9sZvkwqfKjP GTB8WF9XWCrBaXYJ7KhGSQ== 0000950132-99-000478.txt : 19990512 0000950132-99-000478.hdr.sgml : 19990512 ACCESSION NUMBER: 0000950132-99-000478 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON HOLDINGS CORP CENTRAL INDEX KEY: 0001061069 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 341863889 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14105 FILM NUMBER: 99616549 BUSINESS ADDRESS: STREET 1: ONE AMERICAN WAY CITY: WARREN STATE: OH ZIP: 44484 BUSINESS PHONE: 3308568800 10-Q 1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) 1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-14105 __________________________________ AVALON HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) Ohio 34-1863889 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One American Way, Warren, Ohio 44484-5555 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 856-8800 Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The registrant had 3,185,240 shares of its Class A Common Stock and 618,091 shares of its Class B Common Stock outstanding as of May 6, 1999. ================================================================================ AVALON HOLDINGS CORPORATION AND SUBSIDIARIES INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 (Unaudited)......................... 3 Condensed Consolidated Balance Sheets at March 31, 1999 (Unaudited) and December 31, 1998.................................................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (Unaudited)......................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 15 Item 2. Changes in Securities........................................... 16 Item 3. Defaults upon Senior Securities................................. 16 Item 4. Submission of Matters to a Vote of Security Holders............. 16 Item 5. Other Information............................................... 16 Item 6. Exhibits and Reports on Form 8-K................................ 16 SIGNATURE.................................................................. 17
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 March 31, -------------------------------- 1999 1998 ------------- ------------- Net operating revenues........................ $19,494 $15,811 Cost and expenses: Cost of operations............................ 17,142 14,052 Selling, general and administrative expense... 2,521 1,573 ------- ------- Income (loss) from operations................. (169) 186 Other income (expense): Interest expense.............................. (1) (24) Interest income............................... 267 22 Other income, net............................. 16 4 ------- ------- Income before income taxes.................... 113 188 Income tax expense............................ 47 97 ------- ------- Net income.................................... $ 66 $ 91 ======= ======= Basic net income per share (*)................ $.02 * ======= ======= Pro forma net income per share (*)............ * $.02 ======= ======= Weighted average shares outstanding (Note 2).. 3,803 3,803 ======= =======
(*) In accordance with the Securities and Exchange Commission regulations, pro forma net income per share has been presented for the year in which the Spin-off occurred. For purposes of determining the pro forma net income per share, all of the Company's common stock issued as a result of the Spin-off is deemed to have been outstanding since the beginning of 1998. See accompanying notes to condensed consolidated financial statements. 3 AVALON HOLDINGS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands, except per share amounts)
March 31, December 31, 1999 1998 ------------ -------------- (Unaudited) Assets - ------ Current assets: Cash and cash equivalents...................................... $21,536 $22,274 Accounts receivable, net....................................... 17,956 16,172 Deferred income taxes.......................................... 317 316 Prepaid expenses and other current assets...................... 1,961 1,904 ------- ------- Total current assets.......................................... 41,770 40,666 Properties and equipment, less accumulated depreciation and amortization of $15,934 in 1999 and $15,326 in 1998........ 23,428 23,300 Costs in excess of fair market value of net assets of acquired businesses, net................................................ 2,436 2,473 Other assets, net............................................... 241 246 ------- ------- Total assets.................................................. $67,875 $66,685 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Accounts payable............................................... $ 8,193 $ 6,279 Accrued payroll and other compensation......................... 857 1,242 Accrued income taxes........................................... 1,072 1,078 Other accrued taxes............................................ 819 922 Other liabilities and accrued expenses......................... 1,883 2,172 ------- ------- Total current liabilities..................................... 12,824 11,693 Deferred income taxes........................................... 1,202 1,209 Other noncurrent liabilities.................................... 845 845 Shareholders' equity: Class A Common Stock, $.01 par value........................... 32 32 Class B Common Stock, $.01 par value........................... 6 6 Paid-in capital................................................ 58,096 58,096 Accumulated deficit............................................ (5,130) (5,196) ------- ------- Total shareholders' equity.................................... 53,004 52,938 ------- ------- Total liabilities and shareholders' equity.................... $67,875 $66,685 ======= =======
See accompanying notes to condensed consolidated financial statements. 4 AVALON HOLDINGS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Operating activities: Net income.............................................................. $ 66 $ 91 Reconciliation of net income to cash provided by operating activities: Depreciation and amortization........................................... 690 623 Provision for deferred income taxes..................................... (8) (8) Provision for losses on accounts receivable............................. 49 44 Gain on sales of property and equipment................................. (9) (5) Changes in assets and liabilities Accounts receivable................................................... (1,833) (489) Prepaid expenses and other current assets............................. (57) 114 Other assets.......................................................... (1) (1) Accounts payable...................................................... 1,914 (247) Accrued payroll and other compensation................................ (385) (23) Accrued income taxes.................................................. (6) (14) Other accrued taxes................................................... (103) (106) Other liabilities and accrued expenses................................ (289) 91 -------- --------- Net cash provided by operating activities........................... 28 70 -------- --------- Investing activities: Capital expenditures.................................................... (778) (428) Proceeds from sales of property and equipment........................... 12 27 -------- --------- Net cash used by investing activities............................... (766) (401) Financing activities: Repayments of long-term debt............................................ -- (88) -------- --------- Net cash used by financing activities............................... -- (88) -------- --------- Decrease in cash and cash equivalents..................................... (738) (419) Cash and cash equivalents at beginning of year............................ 22,274 1,763 -------- --------- Cash and cash equivalents at end of period................................ $21,536 $1,344 ======== =========
See accompanying notes to condensed consolidated financial statements. 5 AVALON HOLDINGS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 1999 Note 1. Basis of Presentation The unaudited condensed consolidated financial statements of Avalon Holdings Corporation and subsidiaries (collectively the "Company" or "Avalon") and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's 1998 Annual Report to Shareholders. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company as of March 31, 1999, and the results of operations and cash flows for the interim periods presented. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. Avalon Holdings Corporation was formed on April 30, 1998 as a subsidiary of American Waste Services, Inc. ("AWS"). Pursuant to the terms of a Contribution and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS (the "Contribution Agreement"), AWS contributed to Avalon its transportation operations, technical environmental operations, waste disposal brokerage and management operations, and golf course and related operations together with certain other assets including the headquarters of AWS and certain accounts receivable. In connection with the contribution, Avalon assumed certain liabilities of AWS including, without limitation, liabilities relating to the termination of employment of certain employees of AWS and costs and potential liabilities relating to the legal proceeding captioned Werbosky v. American -------------------- Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special - ---------------------------- dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro rata and corresponding basis (the "Spin- off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan of Merger dated as of February 6, 1998 entered into by and among USA Waste Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc. (the "Merger"). Note 2. Basic and Pro Forma Net Income Per Share For purposes of determining the basic and pro forma net income per share data for the three months ended March 31, 1999 and 1998, all of the Company's common stock issued as a result of the Spin-off is deemed to have been outstanding for all periods presented. As such, the weighted average number of shares outstanding for all periods presented is 3,803,331. 6 Note 3. Legal Matters In September 1995, certain subsidiaries of Avalon were informed that they had been identified as potentially responsible parties by the Indiana Department of Environmental Management with respect to a Fulton County, Indiana, hazardous waste disposal facility which is subject to remedial action under Indiana environmental laws. Such identification is based upon the subsidiaries having been involved in the transportation of hazardous substances to the facility. During the third quarter of 1997 Avalon's subsidiaries became parties to an Agreed Order for Remedial Investigation/Capital Feasibility Study and the Four County Landfill Site Participation Agreement ("Participation Agreement"). A large number of waste generators and other waste transportation and disposal companies have also been identified as responsible or potentially responsible parties with respect to this facility. Because the relevant law provides for joint and several liability among the responsible parties, any one of them, including Avalon's subsidiaries, could be assessed the entire cost of the remediation, although this is unlikely. Currently, the extent of any liability of any of Avalon's subsidiaries is currently unknown. When Avalon concludes that it is probable that a liability has been incurred with respect to a site, a provision is made in Avalon's financial statements for Avalon's best estimate of the liability based on management's judgment and experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site as well as the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then Avalon provides for the minimum amount within the range, in accordance with generally accepted accounting principles. At March 31, 1999, the Company has an accrued liability of $845,000 relating to this matter included in the Consolidated Balance Sheets under the caption "Other noncurrent liabilities." Avalon's estimates are revised, as deemed necessary, as additional information becomes known. Avalon anticipates obtaining additional information by reason of, among other things, having entered into the Participation Agreement. While the measurement of environmental liabilities is inherently difficult and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter Avalon's expectations at any time, Avalon does not anticipate that the amount of any such revisions will have a material adverse effect on it. In the ordinary course of conducting its business, Avalon also becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, the Company does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, would have a material adverse effect on it. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of Avalon Holdings Corporation and its subsidiaries. As used in this report, the terms "Avalon", or "Company" mean Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise. Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, "forward looking statements." The Company cautions readers that forward looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to risks and factors identified herein and from time to time in the Company's reports filed with the Securities and Exchange Commission. Spin-off - -------- Pursuant to the terms of a Contribution and Distribution Agreement dated as of May 7, 1998 between Avalon and American Waste Services, Inc. ("AWS") (the "Contribution Agreement"), AWS contributed to Avalon its transportation operations, technical environmental operations, waste disposal brokerage and management operations, and golf course and related operations together with certain other assets including the headquarters of AWS and certain accounts receivable. In connection with the contribution, Avalon assumed certain liabilities of AWS including, without limitation, liabilities relating to the termination of employment of certain employees of AWS and costs and potential liabilities relating to the legal proceeding captioned Werbosky v. American -------------------- Waste Services, Inc., et al. On June 17, 1998 AWS distributed, as a special - ---------------------------- dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro rata and corresponding basis (the "Spin- off"). On June 18, 1998, in accordance with the terms of an Agreement and Plan of Merger dated as of February 6, 1998 entered into by and among USA Waste Services, Inc., C&S Ohio Corp. and AWS (the "Merger Agreement"), AWS merged with C&S Ohio Corp. becoming a wholly owned subsidiary of USA Waste Services, Inc. (the "Merger"). Liquidity and Capital Resources - ------------------------------- For the first three months of 1999, the Company utilized existing cash and cash provided by operations to fund capital expenditures and meet operating needs. During the first three months of 1999, capital spending for Avalon totaled $.8 million which was principally related to the purchase of equipment for the transportation operations. Avalon's capital spending in 1999 is expected to be in the range of $5 million to $6 million which will relate principally to capital improvements to the golf course and acquiring additional transportation equipment. Management believes that cash provided from operations, the availability of working capital, as well as Avalon's ability to incur indebtedness, will be for the foreseeable future sufficient to meet operating requirements, fund debt repayments, and fund capital expenditure programs. Avalon does not currently have an existing credit facility. 8 Results of Operations Overall performance Net operating revenues in the first quarter of 1999 increased to $19.5 million compared with $15.8 million in the prior year's first quarter. Cost of operations increased to $17.1 million in the first quarter of 1999 compared with $14.1 million in the prior year quarter primarily as a result of the increase in the level of business of each of the Company's segments. The Company recorded net income of $66,000 or $.02 per share for the first quarter of 1999 compared with net income of $91,000 or $.02 per share for the first quarter of 1998. Net operating revenues and income before taxes for the Company's business segments were as follows (in thousands):
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- Net operating revenues from: Transportation services: External customers revenues.................... $ 7,768 $ 7,964 Intersegment revenues.......................... 1,351 781 ------- ------- Total transportation services.................. 9,119 8,745 ------- ------- Technical environmental services: External customers revenues.................... 7,705 4,631 Intersegment revenues.......................... 32 35 ------- ------- Total technical environmental services......... 7,737 4,666 ------- ------- Waste disposal brokerage and management: External customers revenues.................... 3,831 2,938 Intersegment revenues.......................... 853 25 ------- ------- Total waste disposal brokerage and management services...................................... 4,684 2,963 ------- ------- Other businesses: External customers revenues.................... 190 278 Intersegment revenues.......................... 75 62 ------- ------- Total other businesses......................... 265 340 ------- ------- Segment operating revenues..................... 21,805 16,714 Intersegment eliminations...................... (2,311) (903) ------- ------- Total net operating revenues................... $19,494 $15,811 ------- ------- Income (loss) before taxes: Transportation services........................ $ 328 $ 349 Technical environmental services............... 387 111 Waste disposal brokerage and management services...................................... 324 373 Other businesses............................... (252) (211) ------- ------- Segment income before taxes.................... 787 622 Corporate interest income...................... 233 -- Corporate other expense, net................... (1) -- General corporate expenses..................... (906) (434) ------- ------- Income (loss) before taxes..................... $ 113 $ 188 ------- -------
9 Results of Operations (continued)
Three Months Ended March 31, ------------------ 1999 1998 ------- ------- Interest expense: Transportation services........................ $ -- $ 2 Technical environmental services............... 1 -- Waste disposal brokerage and management services...................................... -- -- Other business................................. -- 22 Corporate...................................... -- -- ------- ------- Total....................................... $ 1 $ 24 ------- ------- Interest income: Transportation services........................ $ 9 $ 10 Technical environmental services............... 11 7 Waste disposal brokerage and management services...................................... 12 2 Other business................................. 2 3 Corporate...................................... 233 -- ------- ------- Total........................................ $ 267 $ 22 ------- ------- Identifiable assets: Transportation services........................ $17,403 $17,288 Technical environmental services............... 12,295 11,751 Waste disposal brokerage and management services...................................... 4,890 3,163 Other businesses............................... 3,894 4,095 Corporate...................................... 29,393 30,388 ------- ------- Total....................................... $67,875 $66,685 ------- -------
(1) Other businesses include the operation of a public golf course and related facilities. 10 Performance in the First Quarter of 1999 compared with the First Quarter of 1998 Segment performance Net operating revenues of the transportation services segment increased to $9.1 million in the first quarter of 1999 compared with $8.7 million in the first quarter of the prior year. The increase in net operating revenues is primarily attributable to an increase in the transportation of hazardous waste, partially offset by a decrease in the net operating revenues of the transportation brokerage operations. Despite the increase in net operating revenues, income before taxes was flat for the first quarter of 1999 compared with the first quarter of 1998 primarily as a result of a change in the mix of transportation services provided and additional selling and administrative expenses. Net operating revenues of the technical environmental services segment increased to $7.7 million in the first quarter of 1999 compared with $4.7 million in the first quarter of the prior year. The increase in net operating revenues was primarily the result of an increase in the level of all the technical environmental services provided. The technical environmental services segment recorded income before taxes of $.4 million in the first quarter of 1999 compared with income before taxes of $.1 million in the first quarter of 1998. The increase in income before taxes is primarily the result of improved operating results of the remediation, engineering and consulting businesses which incurred operating losses in the first quarter of 1998, partially offset by a decrease in the operating income of the laboratory business. Net operating revenues of the waste disposal brokerage and management services segment increased to $4.7 million in the first quarter of 1999 compared with $3 million in the first quarter of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of disposal brokerage and management services provided. Income before taxes for the waste disposal brokerage and management services segment was $.3 million in the first quarter of 1999 and compared with $.4 million in the first quarter of 1998. Despite the significant increase in net operating revenues, income before taxes did not increase, because of increased costs including significantly higher selling and administrative expenses. Interest income Interest income increased to $267,000 in the first quarter of 1999 compared with $22,000 in the first quarter of 1998 primarily because of the additional cash resulting from the capital contribution made by AWS in connection with the Spin- off. General corporate expenses General corporate expenses were $.9 million in the first quarter of 1999 compared with $.4 million in the first quarter of the prior year. General corporate expenses for the first quarter of 1999 were the actual expenses incurred by the Company for such period, while general corporate expenses for the first quarter of 1998 were based upon an allocation of a portion of the general corporate expenses of AWS prior to the Spin-off. The increase in general corporate expenses for the current quarter as compared with the prior year quarter is the result of the Company incurring all of the costs associated with the corporate headquarters contributed to Avalon by AWS and additional expenses resulting from operating as an independent company subsequent to the Spin-off. 11 Net income The Company recorded net income of $66,000 in the first quarter of 1999 compared with net income of $91,000 in the first quarter of the prior year. The Company's overall effective tax rate, including the effect of state income tax provisions, was 41.6% in the first quarter of 1999 compared to 51.6% in the prior year's first quarter. The effective tax rate is higher than statutory rates due to the nondeductibility for tax purposes of the amortization of costs in excess of fair market value of net assets of acquired businesses. Trends and Uncertainties In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, the Company does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, would have a material adverse effect on it. Many currently installed computer systems and software applications are designed to accept only two digit entries in the date code field used to identify years. These date code fields require modification to recognize twenty-first century years. As a result, computer systems and software applications used by many companies may need to be upgraded to comply with the Year 2000 requirements. Significant uncertainty exists concerning the potential effects of failure to comply with such requirements. The Company has completed its assessment of its Year 2000 issues. The Company's assessment process included a review of its computerized systems, including both information technology and non-information technology systems, to ensure that they are capable of processing periods for the Year 2000 and beyond, as well as a review of whether third parties with whom the Company has material relationships are Year 2000 compliant. The Company believes that its current systems and any new or upgraded systems are or will be Year 2000 compliant and that any historical or estimated future costs of remediating any non-compliant system have not been and will not be material. The Company expects that all upgrades and replacements will be completed during the third quarter of 1999. Although the Company does not anticipate a failure of its systems to be Year 2000 compliant, should a failure occur, the Company does not believe that such failure will have a material adverse effect upon the Company's business, results of operations or financial condition. While noncompliance by infrastructure related technologies which affect utilities, communications and financial institutions may have a material adverse effect, the Company is currently unaware of any customer, vendor or supplier which, if not Year 2000 compliant, would have a material adverse effect upon the Company's business, results of operations or financial condition. The federal government and numerous state and local governmental bodies are increasingly considering, proposing or enacting legislation or regulations to either restrict or impede the disposal and/or transportation of waste. A significant portion of Avalon's transportation and disposal brokerage and 12 management revenues is derived from the disposal or transportation of out-of- state waste. Any law or regulation restricting or impeding the transportation of waste or the acceptance of out-of-state waste for disposal could have a significant negative effect on Avalon. Competitive pressures within the environmental industry continue to impact the financial performance of Avalon's transportation services, technical environmental services and waste disposal brokerage and management services. A decline in the rates which customers are willing to pay for its services could adversely impact the future financial performance of Avalon. The Company's waste disposal brokerage and management operations obtain and retain customers by providing service and identifying cost-efficient disposal options unique to a customer's needs. Continued consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and has caused disposal pricing to increase. The Company does not believe that pricing changes alone will have a material effect upon its waste disposal brokerage and management operations. However, consolidation will have the effect of reducing the number of competitors offering disposal alternatives to the Company, which may adversely impact the future financial performance of the waste disposal brokerage and management operations. The Company's operations are somewhat seasonal in nature because a significant portion of the operations are performed primarily in selected northeastern and midwestern states. As a result, the company's financial performance could be adversely affected by winter weather conditions. Avalon's selling, general and administrative expenses and costs of operations after the Spin-off are anticipated to continue to be significantly higher than the historical expenses and costs allocated to Avalon while a part of AWS. Certain selling, general and administrative expenses and costs of operations of AWS that had historically been allocated to subsidiaries of AWS that are not part of Avalon will be selling, general and administrative expenses and costs of operations of Avalon. Market Risk The Company does not have significant exposure to changing interest rates because of the low level of indebtedness of the Company. The Company does not undertake any specific actions to cover its exposure to interest rate risk and the Company is not a party to any interest rate risk management transactions. The Company does not purchase or hold any derivative financial instruments. A 10% change in interest rates would have an immaterial effect on the Company's pretax earnings for the next fiscal year. The Company currently has no debt outstanding and invests in short-term money market funds and other short-term obligations. Accounting Pronouncements During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. This Statement 13 is effective for all quarters of fiscal years beginning after June 15, 1999. While the Company has not yet determined the effects the Statement will have on its financial position or results of its operations, it does not anticipate a material impact. ============================ 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings On or about October 3, 1991, one stockholder owning 100 shares of AWS Class A Common Stock brought suit against AWS and others on behalf of himself and a purported class of other stockholders in the United States District Court for the Southern District of New York, captioned Werbosky v. American Waste -------------------------- Services, Inc., et al. The suit, which was transferred to the United --------------------- States District Court for the Northern District of Ohio, alleged that AWS, the signatories to its registration statement filed with the SEC during October 1990, and AWS's underwriters violated federal securities laws in connection with AWS's public offering of six million shares of AWS Class A Common Stock in October 1990. Among other things, the suit alleged misrepresentations and failures to disclose allegedly material information concerning the nature of AWS's market, the size of AWS's market; AWS's failure to disclose that its landfills were located within a 50-mile radius of each other in Ohio, thus making AWS especially vulnerable to local conditions and competition; AWS's failure to set forth present and imminent competition; and AWS's growth. The plaintiff sought damages in an unspecified amount alleged to have arisen in part from the decline in the price of AWS's stock following the public offering and rescission. On September 26, 1997 the Court granted the defendants' Motion for Summary Judgment and dismissed the plaintiff's case. On December 22, 1998, the United States Court of Appeals for the Sixth Circuit upheld dismissal of the case. On March 22, 1999, the plaintiff's right to additional appeals expired. Avalon had agreed to assume and indemnify AWS for any costs and potential liability with respect to this matter. In September 1995, certain subsidiaries of Avalon were informed that they had been identified as potentially responsible parties by the Indiana Department of Environmental Management with respect to a Fulton County, Indiana hazardous waste disposal facility which is subject to remedial action under Indiana environmental laws. Such identification is based upon the subsidiaries having been involved in the transportation of hazardous substances to the facility. During the third quarter of 1997, these subsidiaries became parties to an Agreed Order for Remedial Investigation/Feasibility Study and the Four County Landfill Site Participation Agreement (the "Participation Agreement"). A large number of waste generators and other waste transportation and disposal companies have also been identified as responsible or potentially responsible parties with respect to this facility. Because the relevant law provides for joint and several liability among the responsible parties, any one of them, including these subsidiaries, could be assessed the entire cost of the remediation, although this is unlikely. Currently, the extent of any ultimate liability of any of these subsidiaries with respect to this facility is unknown. When Avalon concludes that it is probable that a liability has been incurred with respect to a site, provision will be made in Avalon's financial statements reflecting its best estimate of the liability based on management's judgment and experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site as well as the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then Avalon will provide for the minimum amount within the range, in accordance with generally accepted accounting principles. At March 31, 1999, Avalon has an accrued liability of $845,000 relating to this matter. Avalon's estimates are revised, as deemed necessary, as additional 15 information becomes known. Avalon anticipates obtaining additional information by reason of, among other things, having entered into the Participation Agreement. While the measurement of environmental liabilities is inherently difficult and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter Avalon's expectations at any time, Avalon does not anticipate that the amount of any such revisions will have a material adverse effect on it. In addition to the foregoing, in the ordinary course of conducting their businesses, Avalon also becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, would have a material adverse effect on it. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on April 29, 1999; however, no vote of security holders occurred with respect to any matters reportable under this Item 4. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AVALON HOLDINGS CORPORATION (Registrant) Date: May 10, 1999 By: /s/ Timothy C. Coxson ------------------ ---------------------------------------------- Timothy C. Coxson, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1st QUARTER 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. *Identify the financial statement(s) to be referenced in the legend: 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 21,536 0 17,956 0 0 41,770 39,362 15,934 67,875 12,824 0 0 0 38 52,966 67,875 19,494 19,494 17,142 19,663 0 0 1 113 47 66 0 0 0 66 .02 .02
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