EX-13 3 dex13.txt ANNUAL REPORT ==================================================================== ================================================================================ Avalon Holdings Corporation ================================================================================ [LOGO OF AVALON HOLDINGS CORPORATION] 2001 Annual Report ==================================================================== F i n a n c i a l H i g h l i g h t s (in thousands, except for per share amounts)
For the year 2001 2000 --------------------------------------------------------------------------------------- Net operating revenues............................ $ 77,009 $ 84,290 Loss from operations.............................. (5,444) (4,593) Net loss.......................................... (3,330) (2,433) Net loss per share................................ (.88) (.64) Net cash provided by operating activities......... 3,154 17 Net cash used in investing activities............. (9,084) (7,721) At year-end 2001 2000 --------------------------------------------------------------------------------------- Working capital................................... $ 14,387 $ 21,729 Total assets...................................... 59,967 62,310 Shareholders' equity.............................. 48,398 51,728
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Financial Highlights................................ 1 Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 2 Consolidated Balance Sheets......................... 10 Consolidated Statements of Operations............... 11 Consolidated Statements of Cash Flows............... 12 Consolidated Statements of Shareholders' Equity..... 13 Notes to Consolidated Financial Statements........................................ 14 Independent Auditors' Report........................ 23 Digest of Financial Data............................ 24 Company Location Directory.......................... 25 Directors and Officers.............................. 26 Shareholder Information............................. 27
T h e C o m p a n y Avalon Holdings Corporation provides transportation services, waste disposal brokerage and management services, and technical environmental services including environmental consulting, engineering, site assessment, analytical laboratory, remediation and landfill management services to industrial, commercial, municipal and governmental customers. Avalon Holdings Corporation also owns and operates a golf course. Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- 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 (collectively "Avalon"). This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. 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 For the year 2001, Avalon utilized existing cash and cash provided by operations to fund capital expenditures and meet operating needs. During 2001, capital expenditures for Avalon totaled $1.6 million which was principally related to the capital improvements to Avalon's golf course and the purchase of equipment for Avalon's transportation operations. Avalon's aggregate capital expenditures in 2002 are expected to be in the range of $2 million to $3 million, which will relate principally to remodeling the corporate headquarters to include a clubhouse and pro shop for the Avalon Lakes Golf Club and the purchase of equipment for the transportation operations. Working capital decreased to $14.4 million at December 31, 2001 compared with $21.7 million at December 31, 2000. The decrease is primarily due to the purchase of $6 million of investment securities classified as held-to-maturity and reflected in Avalon's balance sheet as noncurrent investments, and an increase in the allowance for doubtful accounts of $2.3 million compared with the prior year. The increase in accounts receivable, excluding the allowance for doubtful accounts, and the increase in accounts payable are primarily related to a certain remediation project. Avalon has not been paid for the work performed on this project nor has Avalon paid its subcontractors for a substantial amount of work on this project. Additionally, at December 31, 2001, Avalon recorded a charge to the provision for losses on accounts receivable of $2.2 million as a result of Avalon's customer's financial and operational decline in the fourth quarter of 2001 and its subsequent filing for protection from creditors under the provisions of Chapter 11 of the United States Bankruptcy Code in January 2002. The unsuccessful collection of these monies coupled with Avalon's use of existing cash to satisfy its obligations associated with the project will negatively effect its liquidity. The analytical laboratory business of the technical environmental services operations has experienced significant operating losses as a result of a decline in net operating revenues and the fixed nature of many of the costs associated with the laboratory operations. Failure to curtail the continuing losses incurred by the analytical laboratory business will negatively effect Avalon's liquidity. 2 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 and fund capital expenditure programs. Avalon does not currently have a credit facility. Currently, Avalon is not 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. Results of Operations Avalon's primary business segment provides transportation services which 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 assessment, analytical laboratory, remediation and captive landfill management services. The waste disposal brokerage and management services segment provides hazardous and nonhazardous disposal brokerage and management services. The golf and related operations segment includes the operation of a golf course and travel agency. Performance in 2001 compared with 2000 Overall Performance. Net operating revenues decreased to $77 million in 2001 compared with $84.3 million in 2000. The decrease is primarily the result of a 20.7% decrease in the net operating revenues of the transportation services segment and an 18.9% decrease in the net operating revenues of the technical environmental services segment partially offset by an increase in the net operating revenues of the waste disposal brokerage and management services segment and golf and related operations segment. Costs of operations as a percentage of net operating revenues increased slightly to 90.2% in 2001 compared with 90% in 2000 primarily as a result of lower gross margins of the transportation services segment. The analytical laboratory business of Avalon's technical environmental services segment continued to experience operating losses. As a result, in the second quarter of 2001, in accordance with Avalon's asset impairment policy, Avalon recorded a charge of $.5 million for the write- down of costs in excess of fair market value of net assets of acquired businesses. Selling, general and administrative expenses increased to $12.5 million in 2001 from $11.1 million in 2000 primarily as a result of an increase in the provision for losses on accounts receivable. As a result of a remediation business customer's financial and operational decline in the fourth quarter of 2001 and its subsequent filing for protection from creditors under the provisions of Chapter 11 of the United States Bankruptcy Code, Avalon recorded a $2.2 million charge to the provision for losses on accounts receivable in the fourth quarter of 2001. Interest income decreased primarily as a result of lower investment rates. Avalon incurred a net loss of $3.3 million in 2001 compared with a net loss of $2.4 million in 2000. Segment Performance. Segment performance should be read in conjunction with Note 12 to Consolidated Financial Statements. Net operating revenues of the transportation services segment decreased to $36.7 in 2001 from $46.3 in 2000. The decrease is primarily attributable to a significant decrease in the net operating revenues of the transportation brokerage operations and a decrease in the transportation of hazardous waste. The decrease in net operating revenues of the transportation brokerage operations is primarily because the net operating revenues for 2000 included significant revenues related to a one-time project in the New England states. The decreased net operating revenues for the transportation of hazardous waste is primarily a result of a decline in the volume of hazardous waste transported for certain customers. The transportation services segment incurred a loss before taxes of $.2 million in 2001 compared with income before taxes of $1.1 million in 2000. The decrease is primarily the result of the significant decrease in the level of business of both the transportation brokerage operations and the transportation of hazardous waste. The significant decrease in the level of transportation services provided has resulted in the under utilization of many leased power units, thereby increasing costs as a percentage of net operating revenues. 3 Net operating revenues of the technical environmental services segment decreased to $22.1 million in 2001 compared with $27.3 million in 2000 as a result of a decline in the level of business of all operations except for the captive landfill management operations. The technical environmental services segment incurred a loss before taxes of $2.1 million in 2001 compared with a loss before taxes of $1.7 million in the prior year. Income before taxes of Avalon's captive landfill management business in 2001 was relatively unchanged from 2000. Although the total net operating revenues of the remediation business declined, the net operating revenues relating to services performed by employees of the remediation business increased, while the net operating revenues relating to services performed by subcontractors at little or no mark up declined. The increase in the net operating revenues for services performed by employees of the remediation business is primarily related to services performed for a customer on a single significant project. As a result of such customer's financial and operational decline in the fourth quarter of 2001 and its subsequent filing for protection from creditors under the provisions of Chapter 11 of the United States Bankruptcy Code, the remediation business recorded a charge to the provision for losses on accounts receivable of $2.2 million in the fourth quarter of 2001. Consequently, the remediation business incurred a loss before taxes primarily as a result of this charge to the provision for losses on accounts receivable. The analytical laboratory business of Avalon's technical environmental services operations has continued to experience significant operating losses due to increased competition and operational inefficiencies. As a result, during the second quarter of 2001, the laboratory operations implemented a reduction and reorganization of its workforce and, 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 and consideration of discounted cash flows, and comparing such fair values to Avalon's carrying value. As a result, Avalon recorded a write-down of goodwill in the amount of $.5 million. The analytical laboratory operations incurred significantly larger losses before taxes in 2001 compared with the prior year because Avalon has not been able to increase net operating revenues to a level necessary to cover the costs associated with the laboratory operations, many of which are fixed. The engineering and consulting business recorded income before taxes in 2001 as compared with a loss before taxes in the prior year primarily as a result of improved operating margins and decreased selling and general administrative expenses. In 2000 the engineering and consulting business of Avalon's technical environmental services operations experienced a significant loss before taxes due to increased competition, increased operating costs and a decline in net operating revenues compared with the prior year. As a result, Avalon closed its engineering and consulting office in Akron, Ohio and reduced its workforce by approximately 30% in January 2001. In accordance with Avalon's asset impairment policy, Avalon performed an evaluation of the long-lived assets of the engineering and consulting business including goodwill to determine if the carrying value of such assets was recoverable and in the fourth quarter of 2000, Avalon recorded a write-down of goodwill in the amount of $1.1 million and a write-down of other long-lived assets of $.7 million. Net operating revenues of the waste disposal brokerage and management services segment increased to $23 million in 2001 compared with $22 million in 2000. The increase in net operating revenues is primarily related to net operating revenues associated with a significant project during the third quarter of 2001. Excluding the net operating revenues associated with this project, there was a decrease in net operating revenues as a result of a decline in the level of disposal brokerage and management services provided. Despite the increase in net operating revenues, income before taxes was relatively unchanged in 2001 compared with the prior year primarily as a result of higher selling and administrative expenses due to an increase in the sales force. 4 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 $1.2 million in 2001 compared with $.7 million in 2000. The net operating revenues in 2000 are primarily related to the travel agency because the golf course was closed during most of 2000 to make significant capital improvements. Net operating revenues of the travel agency declined slightly in 2001 compared with the prior year. The golf and related operations segment incurred a loss before taxes of $.9 million in 2001 compared with a loss before taxes of $1.1 million in the prior year. The improved results are primarily a result of additional golf revenues in 2001 partially offset by increased expenses of the golf course operations. The golf course, which is located in Warren, Ohio, was closed during the first quarter and part of the second quarter of 2001 due to seasonality. The golf course resumed operations during May 2001. Although the redesigned golf course will continue to be available to the general public, in anticipation of national recognition of the course, during 2001 Avalon created the Avalon Lakes Golf Club. Membership requires payment of a one-time initiation fee as well as annual dues. Members receive several benefits including reduced greens fees and preferential tee times. Interest Income Interest income decreased to $.5 million in 2001 compared with $.9 million in the prior year, primarily due to a decrease in investment rates during 2001 compared with the prior year. General Corporate Expenses General corporate expenses decreased to $3.3 million in 2001 from $3.4 million in the prior year. Net Loss Avalon recorded a net loss of $3.3 million in 2001 compared with a net loss of $2.4 million in the prior year primarily as a result of the foregoing. Avalon's overall effective tax rate, including the effect of state income tax provisions, was 32.5% in 2001 compared with 23.4% in the prior year. The effective tax rate for the current and prior year period is different than the federal statutory rates due to state income taxes, the nondeductibility for tax purposes of the amortization and write-down of costs in excess of fair market value of net assets of acquired businesses and other nondeductible expenses. Performance in 2000 compared with 1999 Overall Performance. Net operating revenues increased to $84.3 million in 2000 from $80.9 million in 1999. The increase is primarily the result of a 15 % increase in net operating revenues of the transportation services segment and a 8.8% increase in the net operating revenues of the waste disposal brokerage and management services segment partially offset by a decline in the net operating revenues of the technical environmental services segment and golf and related operations segment. Costs of operations as a percentage of net operating revenues increased to 90% in 2000 from 85.8% in 1999. The increase is primarily the result of higher costs of operations as a percentage of net operating revenues of the technical environmental services segment, the transportation services segment and the golf and related operations segment. In 2000, the engineering and consulting business of the technical environmental services segment experienced a significant loss before taxes due to increased competition, increased operating costs and a decline in net operating revenues compared with the prior year. As a result, Avalon closed its engineering and consulting offices in Akron, Ohio and reduced its workforce by approximately 30% in January 2001. In accordance with Avalon's asset impairment policy, Avalon recorded charges of approximately $1.1 million for the write-down of costs in excess of fair market value of net assets of acquired businesses ("goodwill") and $.7 million for the write-down of other long-lived assets in the fourth quarter of 2000. Selling and general administrative expenses increased to $11.1 million in 2000 compared with $10.5 million in 1999 primarily as a result of an increase in the provision for losses on accounts receivable as a result of significant write-offs of accounts receivable from customers in the steel business which filed bankruptcy. Other income increased to $.5 million in 2000 compared with $.1 million in 1999 5 primarily as a result of the settlement of Avalon's claim for attorney's fees in connection with a certain legal proceeding. Avalon incurred a net loss of $2.4 million in 2000 compared with net income of $1.2 million in 1999. Segment performance. Segment performance should be read in conjunction with Note 12 to the Consolidated Financial Statements. Net operating revenues of the transportation services segment increased to $46.3 million in 2000 from $40.1 million in 1999. The increase is primarily attributable to an increase in the net operating revenues of the transportation brokerage operations and an increase in the transportation of municipal solid waste partially offset by decreased transportation of hazardous waste. The increase in transportation brokerage net operating revenues was primarily the result of significant revenues related to a one-time project in the New England states. Income before taxes of the transportation services segment decreased to $1.1 million in 2000 compared with $2.3 million in 1999. The decrease is primarily the result of increased costs of operations resulting from higher fuel prices and increased rental, depreciation and employee related expenses, partially offset by improved operating results of the transportation brokerage operations and a decrease in accrued highway fuel tax expense as a result of a successful audit appeal. Also, in 1999, costs of operations were reduced by approximately $.6 million resulting from Avalon reducing its accrued liability associated with anticipated remediation costs of a hazardous waste facility. Net operating revenues of the technical environmental services segment decreased to $27.3 million in 2000 compared with $29 million in 1999. The decrease is primarily attributable to a decrease in net operating revenues of engineering and consulting services. The technical environmental services segment incurred a loss before taxes of $1.7 million in 2000 compared with income before taxes of $2 million in 1999. The engineering and consulting business of Avalon's technical environmental services operations experienced a significant loss before taxes in 2000 due to increased competition, increased operating costs and a decline in net operating revenues compared with the prior year. As a result, Avalon closed its engineering and consulting office in Akron, Ohio and reduced its workforce by approximately 30% in January 2001. In accordance with Avalon's asset impairment policy, Avalon performed an evaluation of the long-lived assets of the engineering and consulting business including 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 engineering and consulting business 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 determined the fair value of the long-lived assets (and measured the extent of the impairment) by discounting the expected future cash flows at the rate of 6%. As a result, in the fourth quarter of 2000, Avalon recorded a write-down of goodwill in the amount of $1.1 million and a write-down of other long-lived assets of $.7 million. The laboratory operations also incurred a loss before taxes in 2000 compared with income before taxes in 1999, which was primarily attributable to increased operating and depreciation expenses and an increase in the provision for losses on accounts receivable as a result of a significant write-off of an account receivable from a customer in the steel industry which filed bankruptcy in the fourth quarter of 2000. Although net operating revenues of the remediation business increased in 2000 compared with 1999, a significant portion of the net operating revenues of the remediation services business is related to work performed by subcontractors, for which Avalon invoices its customers with little or no markup. Income before taxes of the remediation services business decreased as a result of lower net operating revenues relating to work not performed by subcontractors. Income before taxes of Avalon's captive landfill management business was relatively unchanged in 2000 from 1999. Net operating revenues of the waste disposal brokerage and management services segment increased to $22 million in 2000 compared with $18.5 million in 1999. The increase in net operating revenues is primarily the result of an increase in the level of disposal brokerage and management services provided. Income before taxes was $1.1 million in 2000 compared with $1.4 million in 1999. Despite the increase in net operating revenues, income before taxes decreased because of higher selling and administrative expenses, including an increase in the provision for losses on accounts receivable as a result of a significant write- off of an account receivable from a customer in the steel industry which filed bankruptcy. 6 Avalon's golf and related operations segment consists of the operation of a golf course and travel agency. During the third quarter of 1999, Avalon closed the golf course to make significant capital improvements to the course and related facilities. The golf course resumed operations on a limited basis during the third quarter of 2000. Net operating revenues for the golf and related operations segment decreased to $.7 million in 2000 compared with $1.4 million in 1999 primarily as a result of decreased golf revenues. The golf and related operations segment incurred a loss before taxes of $1.1 million in 2000 compared with a loss before taxes of $.2 million in 1999 primarily as a result of decreased net operating revenues and increased expenses associated with the newly renovated golf course. Net operating revenues and results of operations of the travel agency were relatively unchanged in 2000 from 1999. Interest Income Interest income decreased to $.9 million in 2000 compared with $1.1 million in 1999, primarily due to a decline in the average amount of cash and cash equivalents during 2000 compared with 1999 partially offset by an increase in investment rates. General Corporate Expenses General corporate expenses decreased to $3.4 million in 2000 compared with $4.1 million in 1999. Such decrease is primarily the result of lower performance based compensation expense. Net Income (Loss) Avalon incurred a net loss of $2.4 million in 2000 compared with net income of $1.2 million in 1999 primarily as a result of the foregoing. Avalon's overall effective tax rate, including the effect of state income tax provisions, was 23.4% in 2000. The effective tax rate in 2000 was significantly impacted by the nondeductibility for tax purposes of the amortization and write-down of goodwill and other nondeductible expenses. The effective tax rate of 44.4% for 1999 is higher than the federal statutory rate primarily due to state income taxes, the nondeductibility for tax purposes of the amortization of goodwill and other 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 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. A decrease in the level of transportation services provided has resulted in the under utilization of many of these power units. Continuing under utilization of these power units will adversely impact the future financial performance of the transportation operations. 7 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. The analytical laboratory business of the technical environmental services operations has experienced significant operating losses as a result of a decline in net operating revenues and operational inefficiencies. As a result, during the second quarter of 2001, the laboratory operations implemented a reduction and reorganization of its workforce, however, failure to increase net operating revenues has 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. Failure to curtail the continuing operating losses incurred by the analytical laboratory business will 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 realized and there can be no assurance as to when such increases will be attained. Avalon's golf course is located in Warren, Ohio and is significantly dependent upon weather conditions during the golf season. Additionally, all of Avalon's other operations are somewhat seasonal in nature because a significant portion of the operations are performed primarily in selected northeastern and midwestern states. As a result, Avalon's financial performance is adversely affected by winter weather conditions. 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 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. 8 Inflation Impact Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs resulting from price inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time. An increase in fuel prices may subject Avalon's transportation operations to increased operating expenses, which Avalon, in light of competitive market conditions, may not be able to pass on to its customers. 9 Consolidated Balance Sheets (in thousands, except for share data)
December 31, ----------------- 2001 2000 ----------------- Assets Current Assets: Cash and cash equivalents..................................................... $ 5,092 $11,022 Short-term investments (Note 4)............................................... 1,939 759 Accounts receivable, less allowance for doubtful accounts of $2,737 in 2001 and $446 in 2000......................... 14,749 16,156 Refundable income taxes (Note 6).............................................. -- 327 Deferred income taxes (Note 6)................................................ 1,223 564 Prepaid expenses.............................................................. 1,563 1,560 Other current assets.......................................................... 569 564 ----------------- Total current assets........................................................ 25,135 30,952 Noncurrent investments (Note 4)................................................. 5,956 -- Property and equipment, net (Notes 3 and 5)..................................... 28,205 30,099 Costs in excess of fair market value of net assets of acquired businesses, net (Note 3 and Note 13).......................................................... 538 1,082 Other assets, net............................................................... 133 177 ----------------- Total assets............................................................... $59,967 $62,310 ================= Liabilities and Shareholders' Equity Current Liabilities: Accounts payable.............................................................. $ 7,246 $ 5,242 Accrued payroll and other compensation........................................ 1,128 1,249 Accrued income taxes.......................................................... 216 596 Other accrued taxes........................................................... 424 305 Other liabilities and accrued expenses (Note 7)............................... 1,734 1,831 ----------------- Total current liabilities................................................... 10,748 9,223 Deferred income taxes (Note 6).................................................. 701 1,239 Other noncurrent liabilities (Note 10).......................................... 120 120 Contingencies and commitments (Notes 10 and 11)................................. -- -- Shareholders' Equity (Note 9): Class A Common Stock, $.01 par value, one vote per share; authorized 10,500,000 shares, issued 3,185,240 shares at December 31, 2001 and December 31, 2000............................................................ 32 32 Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued 618,091 shares at December 31, 2001 and December 31, 2000............................................................ 6 6 Paid-in capital............................................................... 58,096 58,096 Accumulated deficit........................................................... (9,736) (6,406) ----------------- Total shareholders' equity................................................. 48,398 51,728 ----------------- Total liabilities and shareholders' equity................................. $59,967 $62,310 =================
See accompanying notes to consolidated financial statements. 10 Consolidated Statements of Operations (in thousands, except for per share amounts)
Year Ended December 31, --------------------------- 2001 2000 1999 --------------------------- Net operating revenues.......................................................... $77,009 $84,290 $80,860 Costs and expenses: Costs of operations........................................................... 69,430 75,862 69,349 Write-down of assets (Note 3)................................................. -- 796 -- Write-down of costs in excess of fair market value of net assets of acquired businesses (Note 3).............................................. 486 1,093 -- Selling, general and administrative expenses.................................. 12,537 11,132 10,519 --------------------------- Income (loss) from operations................................................... (5,444) (4,593) 992 Other income (expense): Interest expense.............................................................. -- -- (2) Interest income............................................................... 538 879 1,073 Other income (expense), net................................................... (29) 538 138 --------------------------- Income (loss) before income taxes............................................... (4,935) (3,176) 2,201 Provision (benefit) for income taxes (Note 6): Current....................................................................... (408) (467) 920 Deferred...................................................................... (1,197) (276) 58 --------------------------- (1,605) (743) 978 --------------------------- Net income (loss)............................................................... $(3,330) $(2,433) $ 1,223 =========================== Net income (loss) per share (Note 2)............................................ $ (.88) $ (.64) $ .32 =========================== Weighted average shares outstanding (Note 2).................................... 3,803 3,803 3,803 ===========================
See accompanying notes to consolidated financial statements. 11 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31, ----------------------------------- 2001 2000 1999 ----------------------------------- Operating activities: Net income (loss)........................................................ $ (3,330) $ (2,433) $ 1,223 Reconciliation of net income (loss) to cash provided by operating activities: Depreciation........................................................ 3,055 3,112 2,739 Amortization........................................................ 74 153 223 Write-down of assets................................................ -- 796 -- Write-down of costs in excess of fair market value of net assets of acquired businesses...................................... 486 1,093 -- Provision (benefit) for deferred income taxes....................... (1,197) (276) 58 Provision for losses on accounts receivable......................... 2,467 905 231 (Gain) loss from disposal of property and equipment................. 41 (146) (10) Purchases of trading investments.................................... -- (10,661) -- Sales of trading investments........................................ 734 9,938 -- Unrealized gain on short-term investments........................... -- (11) -- Change in operating assets and liabilities: Accounts receivable............................................ (1,060) (433) (687) Refundable income taxes........................................ 327 (327) -- Prepaid expenses............................................... (3) 7 (99) Other current assets........................................... (5) (150) 22 Other assets................................................... 40 (4) (5) Accounts payable............................................... 2,004 (759) (278) Accrued payroll and other compensation......................... (121) (584) 591 Accrued income taxes........................................... (380) (22) (460) Other accrued taxes............................................ 119 (415) (202) Other liabilities and accrued expenses......................... (97) 234 (575) Other noncurrent liabilities................................... -- -- (725) ----------------------------------- Net cash provided by operating activities................... 3,154 17 2,046 ----------------------------------- Investing activities: Purchases of held-to-maturity investments................................ (7,907) -- -- Purchases of available-for-sale investments.............................. (32) (1,765) -- Sales of available-for-sale investments.................................. 57 1,740 -- Capital expenditures..................................................... (1,609) (8,144) (5,898) Proceeds from disposal of property and equipment......................... 407 448 304 ----------------------------------- Net cash used in investing activities....................... (9,084) (7,721) (5,594) ----------------------------------- Decrease in cash and cash equivalents......................................... (5,930) (7,704) (3,548) Cash and cash equivalents at beginning of year................................ 11,022 18,726 22,274 ----------------------------------- Cash and cash equivalents at end of year...................................... $ 5,092 $ 11,022 $ 18,726 ===================================
See accompanying notes to consolidated financial statements 12 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity (in thousands)
For The Three Years Ended December 31, 2001 ---------------------------------------------------------- Shares Common Stock ----------------- ----------------- Paid-in Accumulated Class A Class B Class A Class B Capital Deficit ----------------- ----------------- -------- ----------- Balance at January 1, 1999...... 3,176 627 $ 32 $ 6 $58,096 $(5,196) Conversion of shares by Shareholders................. 9 (9) -- -- -- -- Net income...................... -- -- -- -- -- 1,223 --------------------------------------------------------- Balance at December 31, 1999.... 3,185 618 32 6 58,096 (3,973) Net loss........................ -- -- -- -- -- (2,433) --------------------------------------------------------- Balance at December 31, 2000.... 3,185 618 32 6 58,096 (6,406) Net loss........................ -- -- -- -- -- (3,330) --------------------------------------------------------- Balance at December 31, 2001.... 3,185 618 $ 32 $ 6 $58,096 $(9,736) =========================================================
See accompanying notes to consolidated financial statements. 13 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 1. Description of the Business Avalon Holdings Corporation ("Avalon") 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, AWS contributed to Avalon its transportation operations, technical environmental services 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 also assumed certain liabilities of AWS. 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"). Avalon provides transportation services, technical environmental services, and waste disposal brokerage and management services to industrial, commercial, municipal and governmental customers primarily in selected northeastern and midwestern U.S. markets. Avalon also owns and operates a golf course and travel agency. Note 2. Summary of Significant Accounting Policies The significant accounting policies of Avalon which are summarized below are consistent with generally accepted accounting principles and reflect practices appropriate to the businesses in which they operate. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to be consistent with the 2001 presentations. Principles of consolidation The consolidated financial statements include the accounts of Avalon and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents Cash and cash equivalents include money market instruments and other highly liquid short-term investments that are stated at cost which approximates market value. Such investments, which mature in three months or less from date of purchase, are considered to be cash equivalents for purposes of the Consolidated Statements of Cash Flows and Consolidated Balance Sheets. The balance of such short-term investments was $3,971,000 and $10,223,000 at December 31, 2001 and 2000, respectively. Such investments were not insured by the Federal Deposit Insurance Corporation. Avalon maintains its cash balances in several financial institutions. These balances may, at times, exceed federal insured limits. Avalon has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk relating to cash and cash equivalents. 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 (see Note 4). 14 Financial instruments The fair value of financial instruments consisting of cash, cash equivalents, receivables, and accounts payable at December 31, 2001 and 2000, approximates carrying value due to the relative short maturity of these financial instruments. The fair value of held-to-maturity investments was $7,911,000 at December 31, 2001. Property and equipment Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the asset which varies from 10 to 30 years for land improvements; 5 to 50 years in the case of buildings and improvements; and from 3 to 10 years for machinery and equipment, transportation equipment and vehicles, and office furniture and equipment (See Note 3). Major additions and improvements are charged to the property and equipment accounts while replacements, maintenance and repairs, which do not improve or extend the life of the respective asset, are expensed currently. The cost of assets retired or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts in the year of disposal. Gains or losses resulting from disposals of property and equipment are credited or charged to operations currently. Interest costs, if any, are capitalized on significant construction projects. Costs in excess of fair market value of net assets of acquired businesses ("goodwill") Goodwill is amortized on a straight-line basis over 25 years. Amortization of these costs was $58,000, $149,000, and $172,000 in 2001, 2000 and 1999, respectively. Accumulated amortization as of 2001 and 2000 was $809,000 and $1,115,000, respectively. During the second quarter of 2001 and the fourth quarter of 2000, in accordance with Avalon's asset impairment policy, a portion of the goodwill was written off (see Note 3 and Note 13). Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue recognition Avalon recognizes revenue for transportation services on the date of delivery. Revenue for waste disposal brokerage and management services and technical environmental services, excluding laboratory services, is recognized as services are performed, while revenue for laboratory services is recognized when the service is completed. On contracts where the percentage-of-completion method is used, revenue is recognized for a portion of the total contract revenue, in the proportion that costs incurred bear to management's estimate of total contract costs to be incurred, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Earnings and costs on contracts are subject to revision throughout the term of the contract, and any required revisions are made in the periods in which the revisions become known. Provision is made for the full amount of anticipated losses in the period in which they are determinable. Costs and estimated earnings in excess of billings on uncompleted contracts represent revenues recognized on contracts for which billings will be presented in accordance with contract provisions. Such revenues are generally expected to be billed and collected within one year. Applicable amounts are included in accounts receivable on the balance sheet. Asset impairments Avalon periodically reviews the carrying value of certain of its assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, Avalon would estimate the undiscounted sum of the expected future cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, Avalon would discount the expected future cash flows of such assets (See Note 3 and Note 13). 15 Environmental liabilities 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. The liability is recognized on an undiscounted basis. Avalon's estimates are revised, as deemed necessary, as additional information becomes known. Basic net income (loss) per share For the years ended December 31, 2001, 2000 and 1999 basic net income (loss) per share has been computed using the weighted average number of common shares outstanding during 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 2001, 2000 and 1999. Comprehensive income Comprehensive income equals net income for all years presented. Note 3. Long-lived Asset Impairments The analytical laboratory business of Avalon's technical environmental services operations has experienced operating losses due to increased competition and operational inefficiencies. As a result, during the second quarter of 2001, the analytical operations implemented a reduction and reorganization of its workforce. Although Avalon believes the operational inefficiencies have been appropriately addressed, the analytical laboratory business has not been able to increase its net operating revenues to a level necessary to cover the continuing costs associated with the laboratory operations, many of which are fixed. Therefore, 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 and consideration of discounted cash flows. As a result, Avalon recorded a write-down of goodwill in the amount of $486,000 which is included in the 2001 Consolidated Statement of Operations under the caption "Write-down of costs in excess of fair market value of net assets of acquired business." The engineering and consulting business of Avalon's technical environmental services operations experienced a significant loss before taxes in 2000 due to increased competition, increased operating costs and a decline in net operating revenues compared with the prior year. As a result, Avalon closed its engineering and consulting office in Akron, Ohio and reduced its workforce by approximately 30% in January 2001. In accordance with Avalon's asset impairment policy, Avalon performed an evaluation of the long-lived assets of the engineering and consulting business including 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 engineering and consulting business 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 determined the fair value of the long-lived assets (and measured the extent of the impairment) by discounting the expected future cash flows at the rate of 6%. As a result, in the fourth quarter of 2000, Avalon recorded a write-down of goodwill in the amount of $1,093,000 and a write-down of other long-lived assets of $747,000. These amounts are included in the 2000 Consolidated Statement of Operations under the captions "Write-down of costs in excess of fair market value of net assets of acquired businesses" and "Write-down of assets", respectively. 16 Note 4. Investments At December 31, 2001, Avalon held $7,895,000 of investment securities classified as held-to-maturity. These securities consist of U.S. Treasury Notes of $1,939,000 and $5,956,000 and are reported on the 2001 Consolidated Balance Sheet under the captions "Short-term investments" and "Noncurrent investments", respectively. The details of the held-to-maturity investments are as follows (in thousands): Held-To Maturity ---------------------------- Amortized Costs Fair Value ---------------------------- At December 31, 2001 U.S. Treasury Notes: Due in One Year or less.............. $1,939 $1,942 Due after one year through five years.................. 5,956 5,969 ---------------------------- Total $7,895 $7,911 ============================ At December 31, 2000, Avalon held debt securities of $734,000 classified as trading securities and $25,000 classified as available-for-sale. These securities are reported on the 2000 Consolidated Balance Sheet under the caption "Short-term investments". Note 5. Property and Equipment Property and equipment at December 31, 2001 and 2000 consists of the following (in thousands): 2001 2000 -------------------- Land and land improvements......... $ 10,643 $ 9,798 Buildings and improvements......... 11,879 11,814 Machinery and equipment............ 5,283 6,019 Transportation equipment and vehicles.................. 13,288 13,692 Office furniture and equipment..... 4,297 4,952 Construction in progress........... 309 494 -------------------- 45,699 46,769 Less accumulated depreciation and amortization................. (17,494) (16,670) -------------------- Property and equipment, net........ $ 28,205 $ 30,099 ==================== Note 6. Income Taxes Income (loss) before income taxes for each of the three years in the period ended December 31, 2001 was subject to taxation under United States jurisdictions only. The provisions (benefits) for income taxes charged to operations consist of the following (in thousands): 2001 2000 1999 ------------------------ Current: Federal...................... $ (466) $(515) $835 State........................ 58 48 85 ------------------------ (408) (467) 920 ------------------------ Deferred: Federal...................... (931) (93) 34 State........................ (266) (183) 24 ------------------------ (1,197) (276) 58 ------------------------ $(1,605) $(743) $978 ======================== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2001 and 2000 are as follows (in thousands): 2001 2000 ----------------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts.... $ 996 $ 156 Reserves not deductible until paid........ 288 205 Net operating loss carry-forwards Federal............................... 919 245 State................................. 460 278 Other..................................... 56 16 ----------------- Gross deferred tax assets................. 2,719 900 Less valuation allowance.................. (385) (35) ----------------- Deferred tax assets net of valuation allowance............................. $ 2,334 $ 865 ----------------- Deferred tax liabilities: Property and equipment.................... $(1,752) $(1,486) Other..................................... (60) (54) ----------------- Gross deferred tax liabilities............ (1,812) (1,540) ----------------- Net deferred tax asset (liability)........ $ 522 $ (675) ================= 17 The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income (loss) before income taxes as a result of the following differences (in thousands): 2001 2000 1999 -------------------------- Income (loss) before income taxes............................. $(4,935) $(3,176) $2,201 Federal statutory tax rate......... 35% 35% 35% -------------------------- (1,727) (1,112) 770 State income taxes, net of federal income tax benefits..... (135) (88) 71 Change in valuation allowance........ 350 -- -- Nondeductible amortization and depreciation........................ 185 423 51 Other nondeductible expenses......... 141 113 119 Change in prior estimate............. (465) (100) -- Other, net........................... 46 21 (33) -------------------------- $(1,605) $ (743) $ 978 ========================== Avalon had net income tax refunds of $343,000 and $118,000 in 2001 and 2000 respectively, and made net income tax payments of $1,376,000 in 1999. At December 31, 2001 Avalon has taxable loss carryforwards for federal income tax purposes aggregating approximately $2,702,000, which are available to offset future federal taxable income. These carryforwards expire in 2020 and 2021. In addition, at December 31, 2001, certain subsidiaries of Avalon have net operating loss carryforwards for state purposes aggregating approximately $6,247,000, which are available to offset future state taxable income. These carryforwards expire at various dates through 2021. A valuation allowance has been provided where it is more likely than not that the deferred tax assets relating to certain of the federal and state loss carryforwards will not be realized. Note 7. Retirement Benefits Avalon sponsors a defined contribution profit sharing plan that is a qualified tax deferred benefit plan under Section 401(k) of the Internal Revenue Code (the "Plan"). Substantially all employees are eligible to participate in the Plan. The Plan provides for employer discretionary cash contributions as determined by Avalon's Board of Directors. Discretionary contributions vest on a graduated basis and become 100% vested after six years of service. Plan participants may also contribute a portion of their annual compensation to the Plan, subject to maximums imposed by the Internal Revenue Code and related regulations. Costs charged to operations for Avalon's contributions were $605,000, $624,000 and $588,000 for the years 2001, 2000 and 1999, respectively. These amounts are included in the Consolidated Balance Sheets under the caption "Other liabilities and accrued expenses." Note 8. Stock Option Plan Effective July 1, 1998, Avalon adopted the 1998 Long-term Incentive Plan which provides for the granting of options which are intended to be non-qualified stock options ("NQSO's") for federal income tax purposes except for those options designated as incentive stock options ("ISO's") which qualify under Section 422 of the Internal Revenue Code. Avalon has reserved 1,300,000 shares of Class A Common Stock for issuance to employees and non-employee directors. NQSO's may be granted with an exercise price which is not less than 85% of the fair market value of the Class A Common Stock on the date of grant. Options designated as ISO's shall not be less than 110% of fair market value for employees who are ten percent shareholders and not less than 100% of fair market value for other employees. The Board of Directors may, from time to time, in its discretion grant options to one or more outside directors, subject to such terms and conditions as the Board of Directors may determine, provided that such terms and conditions are not inconsistent with other applicable provisions of the 1998 Long-term Incentive Plan. Options shall have a term of no longer than ten years from the date of grant; except that for an option designated as an ISO which is granted to a ten percent shareholder, the option shall have a term no longer than five years. No option shall be exercisable prior to one year after its grant, unless otherwise provided by the Option Committee of the Board of Directors (but in no event before 6 months after its grant), and thereafter options shall become exercisable in installments, if any, as provided by the Option Committee. Options must be exercised for full shares of common stock. To the extent that options are not exercised when they become initially exercisable, they shall be carried forward and be exercisable until the expiration of the term of such options. To date, no options have been granted under the 1998 Long-term Incentive Plan. 18 Note 9. Shareholders' Equity Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except for the election of Avalon's Board of Directors, the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters presented for a vote of the shareholders. However, with regard to the election of directors, for as long as the outstanding Class B Common Stock has more than 50% of the total outstanding voting power of all common stock, the holders of the Class A Common Stock, voting as a separate class, will elect the number of directors equal to at least 25% of the total Board of Directors and the holders of the Class B Common Stock, voting as a separate class, will elect the remaining directors. Thereafter, the holders of the Class A and Class B Common Stock will vote together as a single class for the election of directors. The holders of a majority of all outstanding shares of Class A Common Stock or Class B Common Stock, voting as separate classes, must also approve amendments to the Articles of Incorporation that adversely affect the shares of their class. Shares of Class A Common Stock and Class B Common Stock do not have cumulative voting rights. Each share of Class B Common Stock is convertible, at any time, at the option of the shareholder, into one share of Class A Common Stock. Shares of Class B Common Stock are also automatically converted into shares of Class A Common Stock on the transfer of such shares to any person other than Avalon, another holder of Class B Common Stock or a Permitted Transferee, as defined in Avalon's Articles of Incorporation. The Class A Common Stock is not convertible. Note 10. 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 facility 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 amount is included in the Consolidated Balance Sheets under the caption "Other noncurrent liabilities." The extent of any ultimate liability of any of Avalon's subsidiaries with respect to these additional costs is unknown. The measurement of environmental liabilities is inherently difficult and the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter Avalon's 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. 19 Note 11. Lease Commitments Avalon leases certain office facilities, vehicles, machinery and equipment. Future commitments under long-term, noncancellable operating leases at December 31, 2001 are as follows (in thousands): Year ending December 31, ------------------------ 2002...................... $ 2,868 2003...................... 2,716 2004...................... 2,084 2005...................... 1,805 2006...................... 1,153 After 2006................ 340 --------- $ 10,966 ========= Rental expense included in the Consolidated Statements of Operations amounted to $4,877,000 in 2001, $4,616,000 in 2000, and $3,593,000 in 1999. Periodically, Avalon's transportation operations rent additional transportation equipment on a short-term basis in order to meet its hauling obligations. Note 12. Business Segment Information Effective for the year ended December 31, 1998, Avalon adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," requiring that companies disclose segment data based on how management makes resource allocation decisions and evaluates segment operating performance. In applying the Statement, 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 years presented. Avalon's primary business segment provides transportation services that include transportation of hazardous and non-hazardous waste, transportation of general and bulk commodities and transportation brokerage and management services. The technical environmental services segment provides environmental consulting, engineering, site assessments, analytical laboratory, remediation services and operates and manages a captive landfill for an industrial customer. The waste disposal brokerage and management services segment provides hazardous and nonhazardous 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. The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies (see Note 2). Avalon measures segment profit for internal reporting purposes as income (loss) before taxes. Business segment information including the reconciliation of segment income to consolidated income (loss) before taxes is as follows (in thousands): 20
2001 2000 1999 ---------------------------------- Net operating revenues from: Transportation services: External customers revenues........................... $31,570 $ 39,809 $34,607 Intersegment revenues................................. 5,088 6,519 5,483 ---------------------------------- Total transportation services......................... 36,658 46,328 40,090 ---------------------------------- Technical environmental services: External customers revenues........................... 22,090 27,232 28,871 Intersegment revenues................................. 29 73 124 ---------------------------------- Total technical environmental services................ 22,119 27,305 28,995 ---------------------------------- Waste disposal brokerage and management services: External customers revenues........................... 22,282 16,650 15,302 Intersegment revenues................................. 689 5,331 3,231 ---------------------------------- Total waste disposal brokerage and management services 22,971 21,981 18,533 ---------------------------------- Golf and related operations: External customer revenues............................ 1,067 516 1,115 Intersegment revenues................................. 140 228 278 ---------------------------------- Total golf and related operations..................... 1,207 744 1,393 ---------------------------------- Other businesses: External customers revenues........................... -- 83 965 Intersegment revenues................................. -- -- 15 ---------------------------------- Total other businesses................................ -- 83 980 ---------------------------------- Segment operating revenues............................ 82,955 96,441 89,991 Intersegment eliminations............................. (5,946) (12,151) (9,131) ---------------------------------- Total net operating revenues.......................... $77,009 $ 84,290 $80,860 ================================== Income (loss) before taxes: Transportation services............................... $ (234) $ 1,057 $ 2,334 Technical environmental services...................... (2,069) (1,703) 1,991 Waste disposal brokerage and management services...... 1,094 1,104 1,369 Golf and related operations........................... (877) (1,062) (187) Other businesses...................................... 10 (192) (170) ---------------------------------- Segment income (loss) before taxes.................... (2,076) (796) 5,337 Corporate interest income............................. 398 755 944 Corporate other income, net........................... 7 298 2 General corporate expenses............................ (3,264) (3,433) (4,082) ---------------------------------- Income (loss) before taxes............................ $(4,935) $ (3,176) $ 2,201 ================================== Depreciation and amortization: Transportation services............................... $ 1,519 $ 1,622 $ 1,459 Technical environmental services...................... 966 1,141 1,076 Waste disposal brokerage and management services...... 23 9 -- Golf and related operations........................... 407 253 171 Other businesses...................................... -- 32 60 Corporate............................................. 214 208 196 ---------------------------------- Total............................................ $ 3,129 $ 3,265 $ 2,962 ================================== 2001 2000 1999 ---------------------------------- Interest income: Transportation services............................... $ 59 $ 58 $ 38 Technical environmental services...................... 36 27 41 Waste disposal brokerage and management services...... 39 33 40 Golf and related operations........................... 6 6 -- Other businesses...................................... -- -- 10 Corporate............................................. 398 755 944 ---------------------------------- Total.......................................... $ 538 $ 879 $ 1,073 ================================== Other significant noncash items: Write-down of assets: Technical environmental services...................... -- 747 -- Other businesses.................................... -- 49 -- ---------------------------------- Total.......................................... $ -- $ 796 $ -- ================================== Write-down of costs in excess of fair market value of net assets of acquired businesses: Technical environmental services................... $ 486 $ 1,093 $ -- ---------------------------------- Total.......................................... $ 486 $ 1,093 $ -- ================================== Capital expenditures: Transportation services............................... $ 500 $ 2,295 $ 2,593 Technical environmental services...................... 244 1,031 655 Waste disposal brokerage and management services...... 16 104 -- Golf and related operations........................... 513 4,644 2,598 Other businesses...................................... -- -- -- Corporate............................................. 336 70 52 ---------------------------------- Total.......................................... $ 1,609 $ 8,144 $ 5,898 ================================== Identifiable assets at December 31: Transportation services............................... $ 13,349 $ 14,365 $15,653 Technical environmental services...................... 11,365 14,253 16,652 Waste disposal brokerage and management services...... 5,143 4,027 4,358 Golf and related operations........................... 12,267 12,238 7,812 Other businesses...................................... 66 67 446 Corporate............................................. 31,390 31,246 28,793 ---------------------------------- Sub Total......................................... 73,580 76,196 73,714 Elimination of intersegment receivables............... (13,613) (13,886) (7,310) ---------------------------------- Total.......................................... $ 59,967 $ 62,310 $66,404 ==================================
21 Note 13. Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for Avalon are as follows: . All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. . Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. . Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. . Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. . All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. Beginning January 1, 2002 annual and quarterly goodwill amortization of $41,300 and $10,325, respectively, will no longer be recognized. By December 31, 2002 Avalon will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ended March 31, 2002 as a cumulative effect of a change in accounting principle. On August 16, 2001 the Financial Accounting Standards Board issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 is effective for financial statements issued for years beginning June 15, 2002. On October 3, 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Although management is still reviewing the provisions of SFAS 141, 142, 143 and 144, its preliminary assessment is that these Statements will not have a material impact on Avalon's financial position or results of operations. 22 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Note 14. Quarterly financial data (Unaudited) Selected quarterly financial data for each quarter in 2001 and 2000 is as follows:
Year Ended December 31, 2001 ---------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- --------- -------- -------- -------- Net operating revenues................... $ 16,762 $ 17,434 $ 22,270 $ 20,543 $ 77,009 Loss from operations..................... (1,096) (1,296) (243) (2,809) (5,444) Net income (loss)........................ (547) (899) 164 (2,048) (3,330) Net income (loss) per share.............. $ (.14) $ (.24) $ .04 $ (.54) $ (.88) ----------------------------------------------------------------- Year Ended December 31, 2000 ---------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- -------- ------- ------- ------- Net operating revenues................... $ 21,252 $ 21,463 $ 21,968 $ 19,607 $ 84,290 Loss from operations..................... (550) (596) (512) (2,935) (4,593) Net loss................................. (137) (188) (168) (1,940) (2,433) Net loss per share....................... $ (.04) $ (.05) $ (.04) $ (.51) $ (.64) -----------------------------------------------------------------
================================================================================ Independent Auditors' Report The Shareholders and Board of Directors of Avalon Holdings Corporation We have audited the accompanying consolidated balance sheets of Avalon Holdings Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avalon Holdings Corporation and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP /s/ Grant Thornton LLP Cleveland, Ohio March 6, 2002 23 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Digest of Financial Data
(All amounts are in thousands, except per share data, percentages and number) ----------------------------------------------------------------------------- of employees) -------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------- Selected statement of operations information Net operating revenues..................................... $ 77,009 $ 84,290 $ 80,860 $ 74,495 $ 60,687 Income (loss) from operations.............................. (5,444) (4,593) 992 (1,551) (941) Interest expense........................................... -- -- 2 45 118 Net income (loss).......................................... (3,330) (2,433) 1,223 (647) (666) Net income (loss) and pro forma net (loss) per share (*).. (.88) (.64) .32 (.17) (.26) Dividends per Class A share................................ -- -- -- -- -- Dividends per Class B share................................ -- -- -- -- -- Weighted average shares used to calculate net income and pro forma net (loss) per share (*)........................ 3,803 3,803 3,803 3,803 3,803 Selected cash flow information Net cash provided by operating activities...................................... 3,154 17 2,046 1,558 2,749 Cash used for capital expenditures......................... 1,609 8,144 5,898 2,269 2,881 Selected year-end balance sheet information Cash and cash equivalents.................................. 5,092 11,022 18,726 22,274 1,763 Current assets............................................. 25,135 30,952 37,738 40,666 22,078 Current liabilities........................................ 10,748 9,223 10,769 11,693 8,341 Working capital............................................ 14,387 21,729 26,969 28,973 13,737 Properties less accumulated depreciation and amortization............................. 28,205 30,099 26,165 23,300 19,184 Total assets............................................... 59,967 62,310 66,404 66,685 44,517 Current portion of long-term debt.......................... -- -- -- -- 230 Long-term debt............................................. -- -- -- -- 1,006 Deferred income tax liability (non-current)................ 701 1,239 1,354 1,209 1,367 Shareholders' equity....................................... 48,398 51,728 54,161 52,938 32,947 Other information Working capital ratio...................................... 2.3:1 3.4:1 3.5:1 3.5:1 2.6:1 Percent of debt-to-total capital employed.................. -- -- -- -- 4% Quoted market price-Class A Shares: High...................................................... 3.55 5 3/4 7 1/4 9 1/2 N/A Low....................................................... 2.20 2 5/16 4 13/16 5 11/16 N/A Year-end.................................................. 2.85 2 3/4 5 7 1/16 N/A Number of employees at year-end............................ 422 450 470 441 373
(*) In accordance with Securities and Exchange Commission regulations, pro forma per share data has been presented only for 1998, the year in which the Spin-off occurred, and the preceding year. For purposes of determining the pro forma per share data, all of Avalon's common stock issued as a result of the Spin-off is deemed to have been outstanding since the beginning of 1997. 24 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Company Location Directory Corporate Office Avalon Holdings Corporation One American Way Warren, Ohio 44484-5555 (330) 856-8800 Waste Disposal Brokerage and Management Services American Waste Management Services, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800 Golf and Related Operations Avalon Lakes Golf, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8898 Avalon Travel, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8400 Transportation Offices DartAmericA, Inc. Dart Trucking Company, Inc. Dart Services, Inc. TRB National Systems, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8430 Transportation Terminals Dart Trucking Company, Inc. 61 Railroad Street Canfield, Ohio 44406 Dart Trucking Company, Inc. 200 Old Webster Road Oxford, Massachusetts 01540 Dart Trucking Company, Inc. 1807A Route 7 Kenova, West Virginia 25530 Dart Trucking Company, Inc. 11861 S. Cottage Grove Ave. Chicago, Illinois 60628 Dart Trucking Company, Inc. 11 Riverway Place Building 1 Bedford, New Hampshire 03110 Technical Environmental Services Earth Sciences Consultants, Inc. One Triangle Lane Export, Pennsylvania 15632 (724) 733-3000 Antech Ltd. One Triangle Lane Export, Pennsylvania 15632 (724) 733-1161 AWS Remediation, Inc. One Triangle Lane Export, Pennsylvania 15632 (724) 733-1009 American Landfill Management, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800 American Construction Supply, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800 25 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Directors and Officers Directors Ronald E. Klingle /1/(Chairman) /2/(Chairman) Chairman of the Board and Chief Executive Officer Sanford B. Ferguson/1,3,4/ (Chairman) Chairman and Chief Executive Officer of Seven Springs Farm, Inc. Robert M. Arnoni/2,3,4/ President, Arnoni Development Company, Inc. Stephen L. Gordon/3/(Chairman)/4/ Partner, Beveridge & Diamond (law firm) Stephen G. Kilper Chief Executive Officer, American Landfill Management, Inc. Antech, Ltd. AWS Remediation, Inc. Officers Ronald E. Klingle Chairman of the Board and Chief Executive Officer Timothy C. Coxson Treasurer and Chief Financial Officer Chief Executive Officer of DartAmericA, Inc. Jeffrey M. Grinstein Secretary Frances R. Klingle Chief Administrative Officer and Controller Kenneth R. Nichols Vice President, Taxes Frank Lamanna Vice President, Corporate Financial Services 1 Executive Committee 2 Compensation Committee 3 Audit Committee 4 Option Plan Committee 26 Avalon Holdings Corporation and Subsidiaries -------------------------------------------------------------------------------- Shareholder Information Annual meeting of shareholders The annual meeting of shareholders will be held at the Grand Pavilion, One American Way, Warren, Ohio, on Monday, April 29, 2002, at 10:00 a.m. Common stock information Avalon's Class A Common Stock is listed on the American Stock Exchange (symbol: AWX). Quarterly stock information for 2001, 2000 and 1999 as reported by The Wall Street Journal is as follows: 2001: Quarter Ended High Low Close -------------------------------------------------------- March 31 3.55 2.75 3.17 June 30 3.30 2.37 3.00 September 30 3.10 2.20 2.45 December 31 3.00 2.20 2.85 2000: Quarter Ended High Low Close ------------------------------------------------------- March 31 5 3/4 4 5/8 4 3/4 June 30 4 3/4 3 3/8 3 1/2 September 30 3 1/2 3 3 1/16 December 31 3 3/16 2 5/16 2 3/4 1999: Quarter Ended High Low Close ------------------------------------------------------- March 31 7 1/4 5 9/16 6 1/16 June 30 7 1/8 5 3/4 6 3/4 September 30 7 5 1/2 5 5/8 December 31 5 7/8 4 13/16 5 No dividends were paid during 2001. There are 660 Class A and 12 Class B Common Stock shareholders of record as of the close of business March 1, 2002. The number of holders is based upon the actual holders registered on the records of Avalon's transfer agent and registrar and does not include holders of shares in "street names" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies. Dividend policy Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Annual report on Form 10-K Copies of Avalon's annual report on Form 10-K can be obtained free of charge by writing to Avalon Holdings Corporation, One American Way, Warren, Ohio 44484- 5555, Attention: Shareholder Relations. Transfer agent and registrar The transfer agent and registrar for Avalon is American Stock Transfer and Trust Company. All correspondence concerning stock transfers should be directed to them at 59 Maiden Lane, New York, New York 10038. Investor inquiries Security analysts, institutional investors, shareholders, news media representatives and other seeking financial information or general information about Avalon are invited to direct their inquiries to Timothy C. Coxson, Treasurer and Chief Financial Officer, telephone (330) 856-8800. ________________________________________________________________________________ Policy statement on equal employment opportunity and affirmative action Avalon is firmly committed to a policy of equal employment opportunity and affirmative action. Toward this end, Avalon will continue to recruit, hire, train and promote persons in all job titles, without regard to race, color, religion, sex, national origin, age, handicap, ancestry or Vietnam-era or disabled veteran status. We will base all decisions on merit so as to further the principle of equal employment opportunity. This policy extends to promotions and to all actions regarding employment including compensation, benefits, transfers, layoffs, returns from layoff, company-sponsored training and social programs. 27