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| AWX > SEC Filings for AWX > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of Avalon Holdings Corporation and its subsidiaries. As used in this report, the term "Avalon" means Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise.
Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, 'forward looking statements'. Avalon cautions readers that forward looking statements, including, without limitation, those relating to Avalon's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to risks and factors identified herein and from time to time in Avalon's reports filed with the Securities and Exchange Commission.
Liquidity and Capital Resources
For the first three months of 2009, Avalon utilized existing cash and cash provided from operations to fund capital expenditures and meet operating needs.
Avalon's aggregate capital expenditures in 2009 are expected to be in the range of $.2 million to $.5 million. Such expenditures will principally relate to equipment purchases and building improvements for the golf and related operations. During the first three months of 2009, capital expenditures for Avalon totaled approximately $17,000 which was principally related to such building improvements.
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. Avalon has made
approximately $7.3 million of leasehold improvements as of March 31, 2009. Based
upon the amount of leasehold improvements already made and leasehold
improvements anticipated to be made in the future, Avalon expects to exercise
all of its renewal options.
Working capital was $5.0 million at both March 31, 2009 and December 31, 2008.
The decrease in accounts receivable at March 31, 2009 compared with December 31, 2008 is primarily due to lower net operating revenues of the waste management services segment in the first quarter of 2009 compared with the fourth quarter of 2008, partially offset by a small increase in accounts receivable of the golf and related operations segment. The waste management services segment recorded net operating revenues of $7.2 million in the first quarter of 2009 compared with $10.6 million in the fourth quarter of 2008.
The decrease in accounts payable at March 31, 2009 compared with December 31, 2008 is primarily a result of decreased payables due disposal facilities and transporters used by the waste brokerage and management services business as a result of lower net operating revenues in the first quarter of 2009 compared with the fourth quarter of 2008 and the timing of payments to such vendors in the ordinary course of business.
The decrease in accrued payroll and other compensation is primarily due to the payment of bonus incentives of the waste brokerage and management services business which were accrued at December 31, 2008.
The increase in other liabilities and accrued expenses at March 31, 2009 compared with December 31, 2008 is primarily due to an increase in deferred revenues relating to membership dues of the golf and related operations segment. Such deferred revenues increased to $2.2 million at March 31, 2009 compared with $2.0 million at December 31, 2008.
Comparing March 31, 2008 with December 31, 2007, the increase in other current assets is primarily due to an increase in inventories of the golf and related operations due to the opening of the restaurants and banquet facilities at the Sharon facility in the first quarter of 2008. The decrease of $.7 million in accounts payable and $.5 million in accounts receivable is primarily due to the timing of payments to vendors and the collections of receivables from customers of the waste management services segment in the ordinary course of business. The increase in other current liabilities and accrued expenses is primarily due to an increase in deferred revenues relating to membership dues of the golf and related operations segment.
Management believes that anticipated cash provided from future operations, existing working capital, as well as Avalon's ability to incur indebtedness, will be, for the foreseeable future, sufficient to meet operating requirements and fund capital expenditure programs.
Several private country clubs in the northeast Ohio area 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. Avalon 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.
Results of Operations
Overall performance
Net operating revenues in the first quarter of 2009 decreased to $8.8 million from $10.4 million in the prior year's first quarter. The decrease is primarily the result of lower net operating revenues of the waste management services segment, partially offset by an increase in the net operating revenues of the golf and related operations segment. Costs of operations decreased to $7.3 million in the first quarter of 2009 compared with $8.5 million in the prior year's first quarter. The decrease is primarily due to the lower net operating revenues of the waste management services segment, which resulted in lower transportation and disposal costs, as these
costs vary directly with the associated net operating revenues. Fixed costs relating to depreciation and amortization expense increased to $.4 million in the first quarter of 2009 from $.3 million in the prior year's first quarter. Due to such increased costs, the gross profit percentage declined to 13% in the first quarter of 2009 compared with 14.6% in the prior year quarter. Consolidated selling, general and administrative expenses decreased to $1.6 million in the first quarter of 2009 compared with $1.7 million in the first quarter of 2008 primarily due to slightly lower payroll and employee costs. Avalon recorded a net loss of $.4 million or $.11 per share, in the first quarter of 2009 compared with a net loss of $60,000 or $.02 per share, in the first quarter of 2008.
Performance in the First Quarter of 2009 compared with the First Quarter of 2008
Segment performance
Segment performance should be read in conjunction with Note 6 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment decreased approximately 19% to $7.2 million in the first quarter of 2009 compared with $8.9 million in the first quarter of the prior year. For the first quarter of 2009, net operating revenues of the waste brokerage and management services business were $6.6 million compared with $8.2 million in the first quarter of 2008, while the net operating revenues of the captive landfill management operations were $.6 million in the first quarter of 2009 compared with $.7 million in the first quarter of 2008. The decrease in the net operating revenues of the waste brokerage and management services business was primarily due to a decrease of 32% in continuous or ongoing work, partially offset by a 5% increase in event work. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from quarter to quarter. The decrease in continuous work is primarily the result of a slowdown in the economy which negatively affected the production and manufacturing of industrial customers of the waste brokerage and management services business. The decrease in net operating revenues of the captive landfill operations was primarily the result of a decrease in the volume of waste disposed of at the captive landfill. The volume of waste disposed of at the captive landfill is entirely dependent upon the amount of waste generated by the owner of the landfill for whom Avalon manages the facility.
Income before taxes for the waste management services segment decreased to $.6 million in the first quarter of 2009 compared with $.8 million in the first quarter of the prior year. Income before taxes of the waste brokerage and management services business was $.5 million for the first quarter of 2009 compared with $.6 million for the first quarter of 2008. Gross margins of the waste brokerage and management services business improved to 19.7% in the first quarter of 2009 compared with 18.4% in the prior year quarter. Income before taxes of the captive landfill operations decreased to $.1 million in the first quarter of 2009 compared with $.2 million in the first quarter of 2008 primarily due to the decrease in the volume of waste disposed.
Avalon's golf and related operations segment consists primarily of golf courses, clubhouses which provide dining and banquet facilities, and a travel agency. Although the golf courses will continue to be available to the general public, the primary source of revenues will arise from members of the Avalon Golf and Country Club. The golf courses, which are located in northeast Ohio and
western Pennsylvania, were unavailable for play during the first quarter of 2009 and 2008 due to adverse weather conditions. As such, net operating revenues were negatively affected by the adverse weather conditions. Net operating revenues for the golf and related operations were $1.6 million in the first quarter of 2009 compared with $1.4 million in the first quarter of the prior year. The increase in net operating revenues is primarily due to higher food and beverage sales and increased membership dues. In the first quarter of 2009 the dining and banquet facilities at the Sharon club were open for the entire quarter as compared with the first quarter of 2008 when such facilities were only open for the month of March following the completion of the renovation and construction of the Sharon club. The average number of members during the first quarter of 2009 increased to 2,633 compared with 2,398 in the prior year's first quarter. The ability to attract and retain members is very important to the success of the golf and related operations segment. Avalon is continually using different marketing strategies to attract and retain members, such as local television advertising and various membership promotions. However, due to the state of the economy, retaining members and attracting new members is becoming more difficult. A significant decline in members could adversely impact the financial results of the golf and related operations segment. The golf and related operations segment incurred a loss before taxes of $373,000 in the first quarter of 2009 compared with a loss before taxes of $206,000 in the first quarter of the prior year. The increased loss before taxes is primarily due to increased depreciation expense and higher operating expenses.
Interest income
Interest income was $3,000 in the first quarter of 2009 compared with $29,000 in the first quarter of 2008. The decrease is primarily the result of lower average cash and cash equivalents invested during the first quarter of 2009 compared with the first quarter of the prior year.
General corporate expenses
General corporate expenses were $.6 million in the first quarter of 2009 compared with $.7 million in the first quarter of 2008. The lower general corporate expenses were the result of decreases in various expense items.
Net income
Avalon recorded a net loss of $.4 million in the first quarter of 2009 compared with a net loss of $60,000 in the first quarter of 2008. Excluding the minor effect of the state income tax provisions, Avalon's overall effective tax rate was 0% in the first quarter of 2009 and 2008. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. Avalon's income tax benefit on the loss before taxes was offset by a increase in the 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. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.
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 its liquidity, financial position or results of operations.
The Board of Directors of Avalon has explored the possibility of delisting
Avalon's common stock by reducing the number of shareholders of record below
300, thereby eliminating the requirements for compliance with the Sarbanes-Oxley
Act (the "Act"). Avalon believes compliance with the requirements of the Act
could be very costly. However, as a result of the Securities and Exchange
Commission's ("SEC") decision to extend the compliance deadline under
Section 404 of the Act ("SOX 404") for small public companies, the Board of
Directors has decided not to pursue delisting at this time, but intends to
review the situation again as future developments warrant.
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 portion of Avalon's waste brokerage and management services revenues is derived from the disposal and/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 negative effect on Avalon.
Avalon's waste brokerage and management services business obtains and retains 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 may cause disposal pricing to increase. In addition, consolidation has had the effect of reducing the number of competitors offering disposal alternatives which may adversely impact the future financial performance of Avalon's waste brokerage and management services business.
A significant portion of Avalon's business is generated from waste brokerage and management services provided to customers and 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 captive landfill management business is dependent upon a single customer as its sole source of revenue. If the captive landfill management business is unable to retain this customer, Avalon's future financial performance could be adversely impacted.
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 Avalon's future financial performance.
The Avalon Golf and Country Club has golf courses and clubhouses at each of its three facilities. The Squaw Creek and Sharon facilities each have a swimming pool, a fitness center and dining and banquet facilities. The Squaw Creek facility also has tennis courts. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of the three facilities will result in a significant increase in the number of members of the Avalon Golf and Country Club. Although Avalon has been able to increase the number of members of the Avalon Golf and Country Club year-to-year, as of March 31, 2009, Avalon has not attained its membership goals. There can be no assurance as to when such increased membership will be attained and when the golf and related operations will ultimately become profitable. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon.
All three of Avalon's golf course operations currently hold liquor licenses for their respective facilities. If, for some reason, any one of these facilities were to lose its liquor license, the financial performance of the golf and related operations would be adversely affected.
Avalon's operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern states. Additionally, Avalon's golf courses are located in northeast Ohio and western Pennsylvania and are significantly dependent upon weather conditions during the golf season. As a result, Avalon's financial performance is adversely affected by adverse weather conditions.
Management is currently evaluating Avalon's 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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