AVALON HOLDINGS CORP - Quarter Report: 2004 September (Form 10-Q)
Table of Contents
2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2004
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-14105
AVALON HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio | 34-1863889 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One American Way, Warren, Ohio | 44484-5555 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (330) 856-8800
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
The registrant had 3,185,240 shares of its Class A Common Stock and 618,091 shares of its Class B Common Stock outstanding as of November 8, 2004.
Table of Contents
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page | ||
PART I. FINANCIAL INFORMATION |
||
Item 1. Financial Statements |
||
3 | ||
Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited) and December 31, 2003 |
4 | |
5 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
11 | |
Item 4. Controls and Procedures |
18 | |
PART II. OTHER INFORMATION |
||
Item 1. Legal Proceedings |
19 | |
19 | ||
Item 3. Defaults upon Senior Securities |
19 | |
19 | ||
Item 5. Other Information |
19 | |
Item 6. Exhibits and Reports on Form 8-K |
19 | |
20 |
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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net operating revenues |
$ | 8,448 | $ | 6,524 | $ | 21,949 | $ | 18,840 | ||||||||
Costs and expenses: |
||||||||||||||||
Costs of operations |
7,055 | 5,114 | 18,185 | 15,376 | ||||||||||||
Selling, general and administrative expenses |
1,985 | 1,667 | 5,053 | 5,032 | ||||||||||||
Operating loss from continuing operations |
(592 | ) | (257 | ) | (1,289 | ) | (1,568 | ) | ||||||||
Other income: |
||||||||||||||||
Interest income |
62 | 39 | 139 | 134 | ||||||||||||
Other income, net |
88 | 68 | 161 | 139 | ||||||||||||
Loss from continuing operations before income taxes |
(442 | ) | (150 | ) | (989 | ) | (1,295 | ) | ||||||||
Provision (benefit) for income taxes |
| | | | ||||||||||||
Loss from continuing operations |
(442 | ) | (150 | ) | (989 | ) | (1,295 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
Income (loss) from discontinued operations before income taxes |
1,500 | 102 | (1,528 | )1 | (119 | ) | ||||||||||
Provision (benefit) for income taxes |
| | | | ||||||||||||
Income (loss) from discontinued operations |
1,500 | 102 | (1,528 | ) | (119 | ) | ||||||||||
Net income (loss) |
$ | 1,058 | $ | (48 | ) | $ | (2,517 | ) | $ | (1,414 | ) | |||||
Net loss per share from continuing operations |
$ | (.12 | ) | $ | (.04 | ) | $ | (.26 | ) | $ | (.34 | ) | ||||
Net income (loss) per share from discontinued operations |
$ | .40 | $ | .03 | $ | (.40 | ) | $ | (.03 | ) | ||||||
Net income (loss) per share (Note 3) |
$ | .28 | $ | (.01 | ) | $ | (.66 | ) | $ | (.37 | ) | |||||
Weighted average shares outstanding (Note 3) |
3,803 | 3,803 | 3,803 | 3,803 | ||||||||||||
1 | Includes loss on write-down of costs in excess of fair market value of net assets of acquired businesses of $538 and loss on write-down of long-lived assets of $2,319. |
See accompanying notes to condensed consolidated financial statements.
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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
September 30, 2004 |
December 31, 2003 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,664 | $ | 3,224 | ||||
Short-term investments |
1,598 | | ||||||
Accounts receivable, net |
5,676 | 3,620 | ||||||
Prepaid expenses |
492 | 1,598 | ||||||
Other current assets |
190 | 218 | ||||||
Current assets discontinued operations |
1,879 | 8,819 | ||||||
Total current assets |
16,499 | 17,479 | ||||||
Noncurrent investments |
| 6,009 | ||||||
Properties and equipment, less accumulated depreciation and amortization of $4,309 in 2004 and $ 3,755 in 2003 |
17,910 | 18,392 | ||||||
Other assets, net |
933 | 80 | ||||||
Noncurrent prepaid rent |
5,076 | 324 | ||||||
Noncurrent assets discontinued operations |
2,650 | 6,770 | ||||||
Total assets |
$ | 43,068 | $ | 49,054 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,515 | $ | 4,035 | ||||
Accrued payroll and other compensation |
418 | 230 | ||||||
Accrued income taxes |
171 | 242 | ||||||
Other accrued taxes |
142 | 295 | ||||||
Other liabilities and accrued expenses |
1,583 | 1,447 | ||||||
Current liabilities discontinued operations |
820 | 3,885 | ||||||
Total current liabilities |
6,649 | 10,134 | ||||||
Other noncurrent liabilities |
24 | | ||||||
Shareholders equity : |
||||||||
Class A Common Stock, $.01 par value |
32 | 32 | ||||||
Class B Common Stock, $.01 par value |
6 | 6 | ||||||
Paid-in capital |
58,096 | 58,096 | ||||||
Accumulated deficit |
(21,735 | ) | (19,218 | ) | ||||
Accumulated other comprehensive income (loss) |
(4 | ) | 4 | |||||
Total shareholders equity |
36,395 | 38,920 | ||||||
Total liabilities and shareholders equity |
$ | 43,068 | $ | 49,054 | ||||
See accompanying notes to condensed consolidated financial statements.
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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30, |
||||||||
2004 |
2003 |
|||||||
Operating activities: |
||||||||
Loss from continuing operations |
$ | (989 | ) | $ | (1,295 | ) | ||
Reconciliation of loss from continuing operations to cash provided by operating activities: |
||||||||
Depreciation and amortization |
572 | 602 | ||||||
Amortization of investments |
7 | 48 | ||||||
Provision for losses on accounts receivable |
140 | 510 | ||||||
Gain from disposal of property and equipment |
| (30 | ) | |||||
Gain on sale of investments |
(2 | ) | | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,196 | ) | 121 | |||||
Prepaid expenses |
1,106 | (578 | ) | |||||
Other current assets |
28 | (33 | ) | |||||
Noncurrent prepaid rent |
(4,752 | ) | | |||||
Other assets |
(853 | ) | 2 | |||||
Accounts payable |
(520 | ) | 1,090 | |||||
Accrued payroll and other compensation |
188 | 130 | ||||||
Accrued income taxes |
(71 | ) | 44 | |||||
Other accrued taxes |
(153 | ) | (69 | ) | ||||
Other liabilities and accrued expenses |
136 | (57 | ) | |||||
Other noncurrent liabilities |
24 | | ||||||
Net cash (used in) provided by operating activities from continuing operations |
(7,335 | ) | 485 | |||||
Net cash provided by operating activities from discontinued operations |
2,193 | 917 | ||||||
Net cash (used in) provided by operating activities |
(5,142 | ) | 1,402 | |||||
Investing activities: |
||||||||
Purchase of available-for-sale investments |
| (2,014 | ) | |||||
Maturities of available-for-sale investments |
| 1,935 | ||||||
Sales of available-for-sale investments |
4,398 | | ||||||
Capital expenditures |
(169 | ) | (65 | ) | ||||
Proceeds from disposal of property and equipment |
79 | 64 | ||||||
Proceeds from the sale of DartAmericA, Inc. |
3,192 | | ||||||
Net cash provided by (used in) investing activities from continuing operations |
7,500 | (80 | ) | |||||
Net cash provided by (used in) investing activities from discontinued operations |
1,082 | (121 | ) | |||||
Net cash provided by (used in) investing activities |
8,582 | (201 | ) | |||||
Increase in cash and cash equivalents |
3,440 | 1,201 | ||||||
Cash and cash equivalents at beginning of year |
3,224 | 1,190 | ||||||
Cash and cash equivalents at end of period |
$ | 6,664 | $ | 2,391 | ||||
See accompanying notes to condensed consolidated financial statements.
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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2004
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of Avalon Holdings Corporation and subsidiaries (collectively Avalon) and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in Avalons 2003 Annual Report to Shareholders.
In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of Avalon as of September 30, 2004, and the results of its operations and cash flows for the interim periods presented.
The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year.
Note 2. Revenue Recognition for Golf Operations
With the addition of the Squaw Creek Country Club facilities in November 2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course facilities and the Squaw Creek Country Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004. Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season.
Note 3. Basic Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted average number of common shares outstanding each period, which was 3,803,331. There were no common equivalent shares outstanding and therefore diluted per share amounts are equal to basic per share amounts for the three month and nine month periods ended September 30, 2004 and 2003.
Note 4. Investment Securities
Avalon held available-for-sale securities of $1,598,000 at September 30, 2004 which are included in the Condensed Consolidated Balance Sheets under the caption Short-term investments. At December 31, 2003, Avalon held available-for-sale securities of $6,009,000 which are included in the Condensed Consolidated Balance Sheets under the caption Noncurrent investments. As a result of the classification of these securities as available-for-sale, Avalon has recognized unrealized income, net of applicable income taxes, of $2,000 during the three month period ended September 30, 2004, and an unrealized loss of $8,000, net of applicable income taxes, for the nine month period ended September 30, 2004, as a component of other comprehensive income (loss). For the three month and nine month periods ended September 30, 2003, Avalon recognized unrealized losses of $19,000 and $64,000, net of applicable income taxes, respectively, as a component of other comprehensive income (loss).
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Accumulated other comprehensive income (loss) consisted of a loss of $4,000 at September 30, 2004 and income of $4,000 at December 31, 2003.
Information regarding investment securities consists of the following (in thousands):
September 30, 2004 |
December 31, 2003 | ||||||||||||||||||
Amortized Cost |
Gross Unrealized Losses |
Estimated Fair Value |
Amortized Cost |
Gross Unrealized Gains |
Estimated Fair Value | ||||||||||||||
Available-for-Sale: |
|||||||||||||||||||
U.S. Treasury Notes |
$ | 1,602 | $ | (4 | ) | $ | 1,598 | $ | 6,005 | $ | 4 | $ | 6,009 |
The amortized cost and estimated fair value of available-for-sale investments at September 30, 2004, by contractual maturity, consists of the following (in thousands):
Available-for-Sale | ||||||
Amortized Cost |
Estimated Fair Value | |||||
Due in one year or less |
$ | 1,602 | $ | 1,598 |
Note 5. Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income (loss). Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. The unrealized gains and losses, net of applicable taxes, related to available-for-sale securities is the only component of Accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets for Avalon. Comprehensive income (loss), net of related tax effects, is as follows (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2004 |
2003 |
2004 |
2003 |
||||||||||||
Net income (loss) |
$ | 1,058 | $ | (48 | ) | $ | (2,517 | ) | $ | (1,414 | ) | ||||
Unrealized income (loss) on available-for-sale securities | 2 | (19 | ) | (8 | ) | (64 | ) | ||||||||
Total comprehensive income (loss) |
$ | 1,060 | $ | (67 | ) | $ | (2,525 | ) | $ | (1,478 | ) | ||||
Note 6. Prepaid Rent
Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease, which commenced November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations and classified as prepaid rent. At September 30, 2004, the balance of prepaid rent was $5,226,000 of which $150,000 is included in the Condensed Consolidated Balance Sheets under the caption Prepaid expenses, and $5,076,000 is included under the caption Noncurrent prepaid rent. At December 31, 2003 the balance of prepaid rent was $474,000 of which $150,000 was included in the Condensed Consolidated Balance Sheets under the caption Prepaid expenses and $324,000 was included under the caption Noncurrent prepaid rent.
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Note 7. Discontinued Operations
As previously disclosed, Avalon had been evaluating the business and prospects of its transportation operations in light of its financial performance over the past few years. Such evaluation included an examination of each type of transportation service provided and measures needed to increase the profitability of these services, as well as the consideration of other strategic alternatives including, without limitation, the discontinuation of certain operations. In connection with the transportation of municipal solid waste, Avalons transportation operations provided loading services at several municipal solid waste transfer stations. The profitability of such operations was dependent upon the volume of waste delivered to each transfer station. The volume of waste delivered to each transfer station was not within Avalons control and had been less than anticipated. During the second quarter of 2004, Avalon ceased transportation operations at three Massachusetts municipal solid waste transfer stations. In conjunction with the cessation of these transfer station operations, Avalon closed its Oxford, Massachusetts terminal. Also, during the second quarter Avalon sold approximately $.2 million of idle assets of the transportation operations and recognized a gain of approximately $.4 million.
In addition, on June 25, 2004, Avalon announced that it had reached an agreement in principle to sell all of the common stock of DartAmericA, Inc. (DartAmericA), Avalons transportation operations, to BMC International, Inc. (BMC). Based upon the proposed selling price and in accordance with Avalons asset impairment policy, Avalon recorded a write-down of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of approximately $2.3 million in the second quarter of 2004. The results of operations of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations.
On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of approximately $4.2 million. At the closing, BMC delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid in September 2004. By purchasing the common stock of DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed Darts operating lease obligations of approximately $5 million. Prior to the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal. Avalon intends to sell this facility. As a result, this facility is classified as held-for-sale and the expenses related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts.
Avalons environmental remediation operations had continued to experience operating losses as a result of a decline in net operating revenues and operational inefficiencies. Recognizing that the continuing losses incurred by the environmental remediation business would adversely impact Avalons future financial performance, in the fourth quarter of 2003, management determined that it was in Avalons best interest to sell or discontinue the operation of the environmental remediation business. In January 2004, Avalon sold all of the fixed assets of the remediation business for $.2 million and recorded a gain of $.1 million on the sale. As part of the transaction, the purchaser assumed all of the remediation business obligations relating to ongoing projects. The remediation business retained all of its other liabilities and assets, including cash and accounts receivable. The results of operations of the remediation business have been included in discontinued operations.
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In the fourth quarter of 2001, the remediation business recorded a pretax charge of $2.2 million to the provision for losses on accounts receivable as a result of IT Group Inc., and most of its subsidiaries, including IT Corporation (IT), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002. The remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim. Such amount was recorded as income in discontinued operations in the third quarter of 2004.
The financial results of Avalons technical environmental engineering and consulting business had been at a level lower than expected. The business began to experience losses and Avalon believed that the losses were likely to continue in the future. Accordingly, in the fourth quarter of 2003, management determined that it was in Avalons best interest to discontinue the operations of the engineering and consulting business. In January 2004, Avalon discontinued such operations and the results are included in discontinued operations.
Concurrent with the decision to discontinue the technical environmental engineering and consulting business, Avalon decided to sell the building associated with the technical environmental services operations. As a result, the building is classified as held-for-sale and the expenses related to the maintenance and operation of the building are included in discontinued operations.
Note 8. Legal Matters
In the ordinary course of conducting its business, Avalon also becomes involved in lawsuits, administrative proceedings and governmental investigations, including those related to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, would have a material adverse effect on it.
Note 9. Business Segment Information
In applying Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, Avalon considered its operating and management structure and the types of information subject to regular review by its chief operating decision maker. On this basis, Avalons reportable segments include waste management services and golf and related operations. Avalon accounts for intersegment net operating revenues as if the transactions were with third parties. The segment disclosures are presented on this basis for all periods presented.
The waste management services segment provides hazardous and nonhazardous waste management services to industrial, commercial, municipal and governmental customers and manages a captive landfill for an industrial customer. The golf and related operations segment operates two golf courses, a travel agency and a clubhouse that provides dining and banquet facilities. Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented.
For the nine month period ended September 30, 2004, one customer and its affiliates accounted for approximately 14% of the waste services segments net operating revenues to external customers and approximately 12% of Avalons consolidated net operating revenues.
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The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies. Avalon measures segment profit for internal reporting purposes as income (loss) from continuing operations before taxes. Business segment information including the reconciliation of segment income (loss) to consolidated income (loss) from continuing operations before taxes is as follows (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net operating revenues from: |
||||||||||||||||
Waste management services: |
||||||||||||||||
External customers revenues |
$ | 6,755 | $ | 5,379 | $ | 18,427 | $ | 16,698 | ||||||||
Intersegment revenues |
66 | 106 | 138 | 176 | ||||||||||||
Total waste management services |
6,821 | 5,485 | 18,565 | 16,874 | ||||||||||||
Golf and related operations: |
||||||||||||||||
External customers revenues |
1,693 | 1,145 | 3,522 | 2,142 | ||||||||||||
Intersegment revenues |
17 | 17 | 30 | 55 | ||||||||||||
Total golf and related operations |
1,710 | 1,162 | 3,552 | 2,197 | ||||||||||||
Segment operating revenues |
8,531 | 6,647 | 22,117 | 19,071 | ||||||||||||
Intersegment eliminations |
(83 | ) | (123 | ) | (168 | ) | (231 | ) | ||||||||
Total net operating revenues |
$ | 8,448 | $ | 6,524 | $ | 21,949 | $ | 18,840 | ||||||||
Income (loss) from continuing operations before taxes: |
||||||||||||||||
Waste management services |
$ | 642 | $ | 359 | $ | 1,716 | $ | 1,013 | ||||||||
Golf and related operations |
218 | 367 | 143 | 250 | ||||||||||||
Other businesses |
| (19 | ) | (2 | ) | (24 | ) | |||||||||
Segment income before taxes |
860 | 707 | 1,857 | 1,239 | ||||||||||||
Corporate interest income |
25 | 36 | 58 | 125 | ||||||||||||
Corporate other income (expense), net |
(24 | ) | 7 | (10 | ) | 29 | ||||||||||
General corporate expenses |
(1,303 | ) | (900 | ) | (2,894 | ) | (2,688 | ) | ||||||||
Loss from continuing operations before taxes |
$ | (442 | ) | $ | (150 | ) | $ | (989 | ) | $ | (1,295 | ) | ||||
Interest income: |
||||||||||||||||
Waste management services |
$ | 34 | $ | 3 | $ | 73 | $ | 8 | ||||||||
Golf and related operations |
3 | | 8 | 1 | ||||||||||||
Corporate |
25 | 36 | 58 | 125 | ||||||||||||
Total |
$ | 62 | $ | 39 | $ | 139 | $ | 134 | ||||||||
September 30, 2004 |
December 31, 2003 |
|||||||
Identifiable assets: |
||||||||
Waste management services |
$ | 8,001 | $ | 5,821 | ||||
Golf and related operations |
19,652 | 14,825 | ||||||
Other businesses |
731 | 557 | ||||||
Corporate |
28,401 | 28,705 | ||||||
Discontinued operations |
4,529 | 15,589 | ||||||
Sub Total |
61,314 | 65,497 | ||||||
Elimination of intersegment receivables |
(18,246 | ) | (16,443 | ) | ||||
Total |
$ | 43,068 | $ | 49,054 | ||||
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of Avalon Holdings Corporation and its subsidiaries. As used in this report, the term Avalon means Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise.
Statements included in Managements 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 Avalons 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 Avalons reports filed with the Securities and Exchange Commission.
Liquidity and Capital Resources
For the first nine months of 2004, Avalon utilized existing cash and cash provided by the sale of investment securities to fund capital expenditures and meet operating needs.
In the fourth quarter of 2001, Avalons remediation business had recorded a pretax charge of $2.2 million to the provision for losses on accounts receivable as a result of IT Group Inc., and most of its subsidiaries, including IT Corporation (IT), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002. The remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim.
On July 15, 2004, Avalon completed the sale of DartAmericA, Inc. (DartAmericA) to BMC International, Inc. (BMC) for a selling price of approximately $4.2 million. At the closing, BMC delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid in September 2004. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts.
Avalons aggregate capital expenditures in 2004 are expected to be in the range of $.2 million to $.3 million, which relate principally to the purchase of golf equipment. During the first nine months of 2004, capital expenditures for Avalon totaled approximately $.2 million which was principally related to the development of software for the golf course operations and golf equipment.
Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease, which commenced November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a
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given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations and classified as prepaid rent. Construction costs of such leasehold improvements to the Squaw Creek facility totaled $5.2 million at September 30, 2004.
Working capital was $9.9 million at September 30, 2004 compared with $7.3 million at December 31, 2003. The increase is primarily the result of a reclassification of noncurrent investments to short-term investments as a result of a change in maturity dates of certain investments and the increase in cash and cash equivalents relating to the proceeds received from the sale of DartAmericA.
The increase in accounts receivable is primarily due to the increased net operating revenues of the waste management services segment in the third quarter of 2004 compared with the fourth quarter of 2003.
The increase in noncurrent prepaid rent at September 30, 2004 compared with December 31, 2003 is a result of expenditures made by Avalon for leasehold improvements to the Squaw Creek facility in excess of $150,000 which will be carried forward and applied to future leasehold improvement obligations.
The increase in other assets, net at September 30, 2004 compared with December 31, 2003 reflects the noncurrent portion of a $1 million promissory note received from BMC to Avalon for the purchase of DartAmericA.
The decrease in accounts payable at September 30, 2004 compared with December 31, 2003 is primarily due to the reduction in insurance premiums payable for Avalons insurance program. The insurance premiums were reduced significantly as a result of the sale of DartAmericA.
From time to time, Avalon enters into contracts which require surety bonds or other financial instruments to assure performance under the terms thereof. Although Avalon has obtained such bonds or other financial instruments in the past, substantial changes in the bond market have significantly limited Avalons ability to obtain surety bonds. No assurance can be given that such bonds will be available in the future or, if available, that the premiums and/or any collateral requirements for such bonds will be reasonable. The inability of Avalon to obtain surety bonds may adversely impact its future financial performance and any significant collateral requirements may impact Avalons liquidity.
Management believes that anticipated cash provided from future operations and existing working capital, as well as Avalons 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.
Several private country clubs in the Warren, Ohio vicinity are experiencing economic difficulties. Avalon believes some of these clubs may represent an attractive investment opportunity and is giving consideration to the possibility of acquiring one or more additional golf courses. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense. 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.
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Results of Operations
Overall performance
Net operating revenues in the third quarter of 2004 were $8.4 million compared with $6.5 million in the prior years third quarter. Costs of operations increased to $7.1 million in the third quarter of 2004 compared with $5.1 million in the prior year quarter. Selling, general and administrative expenses increased to $2 million in the third quarter of 2004 compared with $1.7 million in the prior year quarter. Avalon incurred a loss from continuing operations of $.4 million or a loss of $.12 per share for the third quarter of 2004 compared with a loss from continuing operations of $.2 million or a loss of $.04 per share for the third quarter of 2003. For the first nine months of 2004, net operating revenues increased to $21.9 million compared with $18.8 million for the first nine months of 2003. Cost of operations were $18.2 million for the first nine months of 2004 compared with $15.4 million for the first nine months of the prior year. Selling, general and administrative expenses were $5 million for the first nine months of 2004 and 2003. Avalon incurred a loss from continuing operations of $1 million or a loss of $.26 per share for the first nine months of 2004 compared with a loss from continuing operations of $1.3 million or a loss of $.34 per share for the first nine months of 2003.
Performance in the Third Quarter of 2004 compared with the Third Quarter of 2003
Segment performance
Segment performance should be read in conjunction with Note 9 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment increased to $6.8 million in the third quarter of 2004 compared with $5.5 million in the third quarter of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of services provided by the waste brokerage and management business, partially offset by a slight decrease in the net operating revenues of the captive landfill management operation. Income from continuing operations before taxes for the waste management services segment were $.6 million in the third quarter of 2004 compared with $.4 million in the third quarter of 2003. The increase was primarily a result of an increase in the level of services provided by the waste brokerage and management business partially offset by a decrease in income from continuing operations before taxes of the captive landfill management operations. The results of the captive landfill management operations in the third quarter of 2003 were higher than the current quarter primarily as a result of a gain on the disposition of a piece of equipment. The income from continuing operations before taxes of the waste management services segment in the third quarter of 2003 included a charge of $. 2 million to the provision for losses on accounts receivable due to a customer filing bankruptcy.
Avalons golf and related operations segment consists primarily of two golf courses, a travel agency and a clubhouse that provides dining and banquet facilities. Although the golf courses will continue to be available to the general public, the primary source of revenue will arise from dues payable by the members of the Avalon Golf and Country Club. With the addition of the Squaw Creek Country Club facilities in November 2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course facilities and the Squaw Creek Country Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004. Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season.
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Net operating revenues of the golf and related operations segment were $1.7 million in the third quarter of 2004 compared with $1.2 million in the third quarter of 2003. The increase in net operating revenues is primarily attributed to an increase in the average number of members of the Avalon Golf and Country Club in the third quarter of 2004 compared with the prior year quarter, which in turn has increased the number of rounds of golf played and food and beverage sales. The golf and related operations segment recorded income from continuing operations before taxes of $.2 million in the third quarter of 2004 compared with income from continuing operations before taxes of $.4 million in the third quarter of 2003. The decrease is primarily the result of additional operating and employee costs incurred at the Squaw Creek Country Club resulting from the opening of the pro shop, bar, restaurant and lounge areas.
Interest income
Interest income was $62,000 in the third quarter of 2004 compared with $39,000 in the third quarter of 2003.
General corporate expenses
General corporate expenses were $1.3 million in the third quarter of 2004 compared with $.9 million in the third quarter of 2003. The increase is primarily a result of approximately $.5 million of bonuses paid in the third quarter of 2004.
Net loss
Avalon recorded net income of $1.1 million in the third quarter of 2004 compared with a net loss of $48,000 in the third quarter of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in both the third quarter of 2004 and 2003. The deferred tax benefit arising from the loss before income taxes was offset by a valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. The overall effective tax rate differs from statutory rates primarily because of the increase in the valuation allowance.
Performance in the first nine months of 2004 compared with the first nine months of 2003
Segment performance
Segment performance should be read in conjunction with Note 9 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment increased to $18.6 million in the first nine months of 2004 compared with $16.9 million in the first nine months of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of brokerage and management services provided. Income from continuing operations before taxes for the waste management services segment increased to $1.7 million in the first nine months of 2004 compared with $1.0 million in the first nine months of the prior year primarily as a result of an increase in the level of business of the waste brokerage and management services. In addition, income from continuing operations before taxes for the first nine months of 2003 included a charge of $.5 million to the provision for losses on accounts receivable due to two customers filing bankruptcy.
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Avalons golf and related operations segment consists primarily of two golf courses, a travel agency and a clubhouse that provides dining and banquet facilities. Although the golf courses will continue to be available to the general public, the primary source of revenue will arise from the members of the Avalon Golf and Country Club. With the addition of the Squaw Creek Country Club facilities in November 2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course facilities and the Squaw Creek Country Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004. Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season.
Net operating revenues of the golf and related operations segment were $3.6 million for the first nine months of 2004 compared with $2.2 million for the first nine months of 2003. The golf courses, which are located in Warren, Ohio and Vienna, Ohio, were closed during the first three months of 2004 and 2003 due to seasonality. The increase in net operating revenues are primarily attributable to a significant increase in the average number of members of the Avalon Golf and Country Club in the first nine months of 2004 compared with the first nine months of the prior year, which in turn has significantly increased membership dues, the number of rounds of golf played and food and beverage sales. The golf and related operations segment recorded income from continuing operations before taxes of $143,000 in the first nine months of 2004 compared with income from continuing operations before taxes of $250,000 in the first nine months of 2003. The decrease in income from continuing operations before taxes is primarily the result of additional operating and employee costs incurred at the Squaw Creek Country Club resulting from the opening of the pro shop, bar, restaurant and lounge areas.
Avalon had been evaluating the business and prospects of its transportation operations in light of its financial performance over the past few years. Such evaluation included an examination of each type of transportation service provided and measures needed to increase the profitability of these services, as well as the consideration of other strategic alternatives including, without limitation, the discontinuation of certain operations. In connection with the transportation of municipal solid waste, Avalons transportation operations provided loading services at several municipal solid waste transfer stations. The profitability of such operations was dependent upon the volume of waste delivered to each transfer station. The volume of waste delivered to each transfer station was not within Avalons control and had been less than anticipated. During the second quarter of 2004, Avalon ceased transportation operations at three Massachusetts municipal solid waste transfer stations. In conjunction with the cessation of these transfer station operations, Avalon closed its Oxford, Massachusetts terminal. Also, during the second quarter, Avalon sold approximately $.2 million of idle assets of the transportation operations and recognized a gain of approximately $.4 million.
In addition, on June 25, 2004, Avalon announced that it had reached an agreement in principle to sell all of the common stock of DartAmericA, Avalons transportation operations, to BMC. Based upon the proposed selling price and in accordance with Avalons asset impairment policy, Avalon recorded a write-down of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of approximately $2.3 million. The results of operations of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations.
On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of approximately $4.2 million. At the closing, BMC delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid in September 2004. Included with the purchase of DartAmericA, BMC also acquired
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DartAmericAs wholly owned subsidiaries including Dart and Dart Services, Inc. and assumed Darts operating lease obligations of approximately $5 million. Prior to the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal, Avalon intends to sell this facility. As a result, this facility is classified as held-for-sale and the expense related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful account.
Interest income
Interest income was $.1 million in both the first nine months of 2004 and 2003.
General corporate expenses
General corporate expenses were $2.9 million in the first nine months of 2004 compared with $2.7 million in the first nine months of 2003. The increase is primarily the result of approximately $.5 million of bonuses paid in the third quarter of 2004 partially offset by decreased employee costs.
Net loss
Avalon recorded a net loss of $2.5 million in the first nine months of 2004 compared with a net loss of $1.4 million in the first nine months of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in both the first nine months of 2004 and 2003. The deferred tax benefit arising from the loss before income taxes was offset by a valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. The overall effective tax rate differs from statutory rates primarily because of the increase in the valuation allowance.
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, management assesses the probability of loss and accrues a liability as appropriate. Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will 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 Avalons waste management revenues are derived from the brokerage of both the disposal and 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.
From time to time, Avalon enters into contracts that require surety bonds or other financial instruments to assure performance under the terms thereof. Although Avalon has obtained such bonds or other financial instruments in the past, substantial changes in the bond market have significantly limited Avalons ability to obtain surety bonds. No assurance can be given that such bonds will be available in the future or, if
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available, that the premiums and/or any collateral requirements for such bonds will be reasonable. The inability of Avalon to obtain surety bonds may adversely impact its future financial performance. Avalons waste disposal brokerage management operations obtain and retain customers by providing services and identifying cost-efficient disposal options unique to a customers 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 has had the effect of reducing the number of competitors offering disposal alternatives which may adversely impact the future financial performance of Avalons waste disposal brokerage and management operations.
Avalons captive landfill management business is dependent upon a single customer as its sole source of revenue.
A significant portion of Avalons business is not subject to long-term contracts. In light of current economic, regulatory and competitive conditions, there can be no assurance that Avalons 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.
Economic challenges throughout the industries served by Avalon have resulted in payment defaults by customers. While Avalon continuously endeavors to limit customer credit risks, customer specific financial downturns are not controllable by management. Significant customer payment defaults would have a material adverse impact upon Avalons future financial performance.
As a result of the acquisition of rights to the Squaw Creek Country Club facilities, the Avalon Lakes Golf Club has become the Avalon Golf and Country Club. In addition to a second championship golf course, the Squaw Creek facility includes a swimming pool, tennis courts and a clubhouse that provides dining and banquet facilities. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses will continue to be available to the general public, the primary source of revenues will be derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of the Squaw Creek and Avalon Lakes facilities will result in a significant increase in the number of members of the Avalon Golf and Country Club. Such increased membership, if attained, will result in increased net operating revenues; however, there can be no assurance as to when such increased membership will be attained. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon. As of September 30, 2004, Avalon has had a substantial increase in the number of members of the Avalon Golf and Country Club but still has not attained its goal.
Avalons golf courses are located in Warren, Ohio and Vienna, Ohio and are significantly dependent upon weather conditions during the golf season. Additionally, all of Avalons other operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern states. As a result, Avalons financial performance is adversely affected by adverse weather conditions.
Avalon believes that the current depressed state of the golf market may result in attractive golf course properties becoming available under favorable terms. In addition to the Squaw Creek transaction previously described, it is possible that Avalon will further expand its involvement in the golf business in the future.
Management is currently evaluating Avalons strategic direction for the future. While there are no specific transactions under negotiation or pending at this time, Avalon does not necessarily intend to limit itself in the future to lines of business which it has historically conducted.
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Market Risk
Avalon does not have significant exposure to changing interest rates. A 10% change in interest rates would have an immaterial effect on Avalons income before taxes for the next fiscal year. Avalon currently has no debt outstanding and invests primarily in U.S. Treasury notes, short-term money market funds and other short-term obligations. Avalon does not undertake any specific actions to cover its exposure to interest rate risk and Avalon is not a party to any interest rate risk management transactions.
Avalon does not purchase or hold any derivative financial instruments.
Item 4. Controls and Procedures
Avalons management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
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Reference is made to Item 3. Legal Proceedings in Avalons Annual Report on Form 10-K for the year ended December 31, 2003 for a description of legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
(b) | Reports on Form 8-K |
On July 15, 2004, Avalon disclosed the completion of the sale of its transportation operations.
On August 31, 2004 Avalon announced the promotion of Frank Lamanna to the position of Chief Financial Officer.
On October 25, 2004 AWS Remediation Inc., through arbitration, was awarded $1.5 million for recovery of accounts receivable.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AVALON HOLDINGS CORPORATION | ||||
(Registrant) | ||||
Date: November 12, 2004 | By: | /s/ Frank Lamanna | ||
Frank Lamanna, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer) |
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