10-Q 1 d10q.txt FORM 10-Q 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended 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 ---------------------------------- 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. ================================================================================ 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