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10-K - FORM 10-K - AVALON HOLDINGS CORPavalon_10k-123111.htm
EX-31.1 - EXHIBIT 31.1 - AVALON HOLDINGS CORPex31-1.htm
EX-21.1 - EXHIBIT 21.1 - AVALON HOLDINGS CORPex21-1.htm
EX-31.2 - EXHIBIT 31.2 - AVALON HOLDINGS CORPex31-2.htm
EX-32.1 - EXHIBIT 32.1 - AVALON HOLDINGS CORPex32-1.htm
EX-32.2 - EXHIBIT 32.2 - AVALON HOLDINGS CORPex32-2.htm
EXCEL - IDEA: XBRL DOCUMENT - AVALON HOLDINGS CORPFinancial_Report.xls
Exhibit 13.1
 
Avalon Holdings Corporation



2011 Annual Report
 
 
 
 

 
 
Contents
 
Financial Highlights
 1
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 2
   
Consolidated Balance Sheets
 9
   
Consolidated Statements of Operations
10
   
Consolidated Statements of Cash Flows
11
   
Consolidated Statements of Shareholders’ Equity
12
   
Notes to Consolidated Financial Statements
13
   
Report of Independent Registered Public Accounting Firm
 20
   
Management’s Report on Internal Controls over Financial Reporting
 21
   
Company Location Directory
22
   
Directors and Officers
 23
   
Shareholder Information
 24
 
 
 

 
 
   
   
Financial Highlights
(in thousands, except for per share amounts)
 
For the year
2011
 
2010
 
Net operating revenues
$ 53,986   $ 43,453  
Income (loss) before income taxes
  865     (502 )
Net income (loss)
  776     (543 )
Net income (loss) per share
  .20     (.14 )
             
At year-end
  2011     2010  
Working capital
$ 8,019   $ 6,590  
Total assets
  53,367     47,337  
Shareholders’ equity
  39,950     38,977  
   
   
The Company

Avalon Holdings Corporation provides waste management services to industrial, commercial, municipal and governmental customers in selected northeastern and midwestern U.S. markets. Avalon Holdings Corporation also owns the Avalon Golf and Country Club, which operates golf courses and related facilities.
 
   
 
 
1

 
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 2011, Avalon utilized cash provided by operations and existing cash to fund capital expenditures and meet operating needs.

Avalon’s aggregate capital expenditures in 2011 were $1.4 million. Such expenditures related principally to building improvements for the golf and related operations segment.  Avalon’s aggregate capital expenditures in 2012 are expected to be in the range of $.6 million to $.8 million, which will principally relate to building improvements and equipment purchases for the golf and related operations.

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities.  The lease 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.  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 $8.0 million at December 31, 2011 compared with $6.6 million at December 31, 2010. The increase was primarily due to an increase in cash and cash equivalents and accounts receivable, partially offset by an increase in accounts payable and accrued payroll and other compensation.

The increase in accounts receivable of $4.7 million at December 31, 2011 compared with December 31, 2010 is primarily due to significantly higher net operating revenues of the waste management services segment in the fourth quarter of 2011 compared with the fourth quarter of 2010.

The increase in accounts payable of $4.5 million at December 31, 2011 compared with December 31, 2010 is primarily due to an increase in amounts due to disposal facilities and transportation carriers of the waste brokerage and management services business as a result of higher net operating revenues in the fourth quarter of 2011 compared with the fourth quarter of 2010 and the timing of payments to vendors in the ordinary course of business.

The increase in accrued payroll and other compensation of $.4 million at December 31, 2011 compared with December 31, 2010 is primarily the result of an increase in accrued bonuses of the waste brokerage and management services business at year end.

On March 21, 2008, Avalon entered into a $3.5 million unsecured line of credit agreement with The Huntington National Bank. Avalon has never borrowed monies under the line of credit. On April 26, 2011, the line of credit was reduced to $1 million. Interest on borrowings accrues at LIBOR plus 1.75%. The agreement provides  for a minimum interest rate of 3.25%. The line of credit contains certain financial and other covenants, customary representations, warranties and events of defaults. Avalon was in compliance with the debt covenants at December 31, 2011 and expects to meet the covenants throughout 2012. The line of credit is renewed annually. At December 31, 2011 and December 31, 2010, there were no borrowings under the line of credit.
 
 
2

 
Avalon Holdings Corporation and Subsidiaries

 
Management believes that anticipated cash provided from future operations and existing working capital, as well as Avalon’s ability to borrow money under its credit facility, will be, for the foreseeable future, sufficient to meet operating requirements and fund capital expenditure programs.

Growth Strategy:  Our growth strategy for the waste management services segment will focus on increasing revenue, gaining market share and enhancing shareholder value through internal growth. Although we are a waste management services company, we do not own any landfills or provide waste collection services. However, because of our many relationships with various disposal facilities and transporters, we are able to be more flexible and provide alternative solutions to a customer’s waste disposal or recycling needs. We intend to capitalize on our management and sales staff which has extensive experience in all aspects of the waste business. As such, we intend to manage our internal growth as follows:

 •    Sales and Marketing Activities.  We will focus on retaining existing customers and obtaining new business through our well-managed sales and marketing activities.  We seek to manage our sales and marketing activities to enable us to capitalize on our position in many of the markets in which we operate. We provide a tailored program to all of our customers in response to their particular needs. We accomplish this by centralizing services to effectively manage their needs, such as minimizing their procurement costs.

We currently have a number of professional sales and marketing employees in the field who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective customers. We emphasize our rate and cost structures when we train new and existing sales personnel. We intend to hire additional qualified professional sales personnel to expand into different geographical areas.
 
•    Long-Term Agreements.  We seek to obtain long-term agreements with all of our customers. By obtaining such long-term agreements, we will have the opportunity to grow our revenue base at the same rate as the underlying revenue growth of these customers.  We believe this positions us to minimize revenue deterioration and experience internal growth rates that are generally higher than our industry’s overall growth rate.   Additionally, we believe that by securing a base of long-term recurring revenue, we are better able to protect our market position from competition and our business may be less susceptible to downturns in economic conditions.

•    Development Activities.  We will seek to identify opportunities to further position us as an integrated service provider in markets where we provide services.  In addition, we will continue to utilize the extensive experience of our management and sales staff to bid on significant one-time projects and those that require special expertise. Where appropriate, we may seek to obtain permits that would provide vertically integrated waste services or expand the service offerings or leverage our existing volumes with current vendors to provide for long term, cost competitive strategic positioning within our existing markets.

Due to the increase of oil and gas drilling in the Marcellus Shale and Utica Shale regions located in northeast Ohio and western Pennsylvania, Avalon is exploring and researching the possibility of drilling deep waste water disposal wells for the disposal of the brine waters from such drilling and, as such, has purchased options on a number of properties for this purpose.
 
For the golf and related operations, 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. 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, utilizing its line of credit, 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, the waste management services segment, provides hazardous and nonhazardous waste brokerage and management services and captive landfill management services.  The golf and related operations segment includes the operation of golf courses and related facilities and a travel agency.
 
 
3

 
Avalon Holdings Corporation and Subsidiaries

 
Performance in 2011 compared with 2010

Overall Performance

Net operating revenues increased to $54.0 million in 2011 compared with $43.5 million in 2010.  The increase is primarily the result of a significant increase in the net operating revenues of the waste management services segment. Costs of operations increased to $45.0 million in 2011 compared with $35.8 million in 2010. The increase is primarily due to higher transportation and disposal costs of the waste management services segment, as these costs vary directly with the net operating revenues. Fixed costs relating to depreciation and amortization expense were $1.7 million in both 2011 and 2010. Consolidated selling, general and administrative expenses increased to $7.3 million in 2011 compared with $6.8 million in 2010. The increase is primarily due to an increase in employee costs and increased bonuses and incentives. Avalon recorded net income of $.8 million or $.20 per share in 2011 compared with a net loss of $.5 million or $.14 per share in 2010.

Segment Performance.  Segment performance should be read in conjunction with Note 12 to the Consolidated Financial Statements.

Net operating revenues of the waste management services segment increased approximately 28% to $43.5 million in 2011 compared with $33.9 million in 2010.  Net operating revenues of the waste brokerage and management services business increased to $40.8 million in 2011 from $31.3 million in 2010 and the net operating revenues of the captive landfill management operations increased to $2.7 million in 2011 from $2.6 million in 2010.
 
The increase in net operating revenues of the waste brokerage and management services business was primarily due to an increase of 36% in continuous or ongoing work and an increase of 25% in event work. The increase in the net operating revenues from continuous work is primarily the result of customers increasing their production or operations, which, in turn, increased the amount of waste generated requiring disposal. The increase in net operating revenues from event work was primarily due to two significant projects in the fourth quarter of 2011, which generated $6.2 million in net operating revenues. 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 year to year.  Net operating revenues of the captive landfill management operations increased in 2011 compared with 2010 primarily as a result of an increase in the volume of waste disposed of at the landfill, partially offset by a decrease in the sales of construction mats. The volume of waste disposed of at the 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 of the waste management services segment increased to $3.6 million in 2011 compared with $2.8 million in 2010. The increase is primarily due to the aforementioned increase in net operating revenues of the waste brokerage and management services business. Income before taxes of the waste brokerage and management services business was $3.1 million in 2011 compared with $2.3 million in 2010. The overall gross profit percentage of the waste brokerage and management services business declined to 17.5% in 2011 compared with 18.5% for the prior year. The decrease was primarily due to substantially lower gross margins associated with the large event work projects mentioned above. Due to the competitiveness in the bidding process for large event work, lower gross margins were needed to win the bid for these projects. Income before taxes of the captive landfill management operations was $.5 million in both 2011 and 2010.

Net operating revenues of the golf and related operations segment were $10.6 million in 2011 compared with $9.6 million in 2010.  Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and western Pennsylvania, were minimal during the first three months of 2011 and 2010. The average number of members during 2011 increased to 3,036 compared with 2,804 in 2010. Net operating revenues from membership dues, food and beverage sales, merchandise sales and spa services increased in 2011 compared with 2010. Although the net operating revenues from membership dues increased in 2011 compared with 2010, the average net operating revenues per member from membership dues decreased slightly due to a change in the mix between social and golf members and from promotional membership programs. The golf and related operations segment incurred a loss before taxes of $.3 million in 2011 compared with a loss before taxes of $.6 million in 2010. The results in 2011 include other income of $.4 million from an initial one-time bonus payment for leasing approximately 200 acres of the Avalon Lakes Golf Course to an energy company for the purpose of drilling for oil and gas. Excluding the effect of the one-time bonus payment, the results in 2011 declined by $.1 million compared to 2010 primarily as a result of higher employee costs and increases in advertising and membership sales promotion.  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/or various membership promotions. However, due to the state of the economy, retaining members and attracting new members has been difficult.  A significant decline in members could adversely impact the financial results of the golf and related operations segment.
 
 
4

 
Avalon Holdings Corporation and Subsidiaries

 
Interest Income

Interest income was $5,000 in 2011 compared with $24,000 in 2010.  The decrease was primarily the result of lower average investment rates.

Other Income, net

Other income, net was $796,000 in 2011 compared with $253,000 in 2010.  In 2011, other income consisted primarily of an initial one-time bonus payment of $.4 million as a result of  leasing approximately 200 acres of land for the purpose of drilling for oil and gas. In 2010, other income consisted primarily of rental income, service charges to members and gas and oil royalty payments.

General Corporate Expenses

General corporate expenses were $2.6 million in 2011 compared with $2.7 million in 2010. The decrease was primarily due to lower salary and wages in 2011 as a result of Mr. Steven M. Berry’s resignation as Chief Executive Officer in the first quarter of 2011, partially offset by an increase in bonuses. In addition, in 2010, Avalon incurred approximately $.1 million of non-recurring maintenance expenses at the corporate headquarters’ building.

Net Income

Avalon recorded net income of $.8 million in 2011 compared with a net loss of $.5 million in 2010. Excluding the effect of state income tax provisions and some minor tax credits, Avalon’s overall effective tax rate was 0% for 2011 and 2010. The overall effective tax rate is different than statutory rates primarily due to a change the valuation allowance. As such, Avalon’s income tax provision in 2011 and income tax benefit in 2010 were offset by a change in the valuation allowance. A valuation allowance has been provided when it is more likely than not that the 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 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.  Avalon’s waste brokerage and management services business may not be able to pass these price increases onto some of its customers, which, in turn, may adversely impact Avalon’s future financial performance.
 
 
5

 
Avalon Holdings Corporation and Subsidiaries

 
A significant portion of Avalon’s business is generated from waste brokerage and management services provided to customers that  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 for use by the general public, the primary source of revenues will be generated by the members of the Avalon Golf and Country Club.  Avalon believes that the combination of its three facilities will result in additional memberships in the Avalon Golf and Country Club. Due to the state of the economy, the ability to retain current members and attract new members has been difficult.  Although Avalon has been able to retain and increase the number of members of the Avalon Golf and Country Club, as of December 31, 2011, Avalon has not attained its membership goals.  There can be no assurance as to when such goals will be attained and when the golf and related operations will ultimately become profitable.  Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. A significant decline in members 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 entered into lease agreements with an energy company to lease approximately 200 acres of land for the purpose of drilling for oil and gas. Such lease agreements provide for Avalon to receive an initial one-time bonus payment and potential royalty payments in the future. In December 2011, Avalon received initial one-time bonus payments of approximately $.4 million. At this time, the royalty payments associated with these leases are not determinable.

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.

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 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.
 
 
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Avalon Holdings Corporation and Subsidiaries


Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles requires management to make judgments, assumptions, and estimates that affect reported amounts.  Significant accounting policies used in the preparation of Avalon’s Consolidated Financial Statements are described in Note 2 to the consolidated financial statements.  Estimates are used when accounting for, among other things, the allowance for doubtful accounts, asset impairments, compensation costs relating to stock options granted, contingencies and administrative proceedings, environmental matters and taxes.

The majority of Avalon’s accounts receivable are due from industrial and commercial customers.  Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.  Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts.  Accounts receivable outstanding longer than the contractual payment terms are considered past due.  Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole.  Bankruptcy or economic challenges of a particular customer represent uncertainties that are not controllable by management.  If management’s assessments change due to different assumptions or if actual collections differ from management’s estimates, future operating results could be impacted.  Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

Avalon recognizes share-based compensation expense related to stock options issued to employees and directors. Avalon estimates the fair value of the stock options granted using a Monte Carlo simulation. The Monte Carlo simulation was selected to determine the fair value because it incorporates six minimum considerations;  1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

The expected term, or time until the option is exercised, is typically based on historical exercising behavior of previous option holders of a company’s stock. Due to the fact that the first options granted were in 2010 and 2011, and as such, no historical exercising behavior available, we estimated the expected term of each award to be half the maximum term.

Avalon amortizes the fair value of the stock options over the expected term or requisite service period. If accelerated vesting occurs based on the market performance of Avalon’s common stock, the compensation costs related to the vested stock options that have not previously been amortized are recognized upon vesting.

Certain events or changes in circumstances may indicate that the recoverability of the carrying value of long-lived assets should be assessed.  Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses.  If an event occurs or changes in circumstances are present, Avalon estimates the future cash flows expected to result from the use of the applicable groups of long-lived assets and their eventual disposition.  If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value, Avalon would recognize an impairment loss to the extent the carrying value of the groups of long-lived assets exceeds their fair value.  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 estimated future cash flows.
 
 
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Avalon Holdings Corporation and Subsidiaries


The ability to accurately predict future cash flows may impact the determination of fair value.  Avalon’s assessments of cash flows represent management’s best estimate at the time of the impairment review. Avalon estimates the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets.  The key variables that management must estimate include, among other factors, sales, costs, inflation and capital spending.  Significant management judgment is involved in estimating these variables, and they include inherent uncertainties. If different cash flows had been estimated in the current period, the value of the long-lived assets could have been materially impacted.  Furthermore,
Avalon’s accounting estimates may change from period to period as conditions in markets change, and this could materially impact financial results in future periods.

When Avalon concludes that it is probable that an environmental liability has been incurred, 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.  Such revisions may impact future operating results.  Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.

Avalon recognizes deferred tax assets and liabilities based on differences between financial statement carrying amounts and the tax bases of assets and liabilities. Avalon also records tax benefits when it believes that it is more likely than not that the benefit will be sustained by the tax authority. Avalon regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences to reduce its deferred assets to the amount that it believes is more likely than not to be realized. Avalon has considered future taxable income in assessing the need for the valuation allowance. The $2,035,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $2,043,000 of deferred tax assets. Avalon has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of these reviews. The net deferred tax asset of $8,000 as of December 31, 2011 is likely to be utilized upon the filing of certain state tax returns. If future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should Avalon ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $808,000 valuation allowance as of December 31, 2011, would be reversed as a benefit to the provision for income taxes in the period such determination was made.
 
 
8

 
Avalon Holdings Corporation and Subsidiaries

 
Consolidated Balance Sheets
(in thousands, except for share data)
   
December 31,
 
   
2011
   
2010
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 7,324     $ 5,565  
Accounts receivable, less allowance for doubtful accounts of $168 in 2011 and 2010
    12,885       8,202  
Prepaid expenses
    281       341  
Refundable income taxes
    2       14  
Other current assets
    717       600  
Total current assets
    21,209       14,722  
                 
Property and equipment,
    26,079       27,265  
Leased property under capital leases, net
    5,984       5,314  
Noncurrent deferred tax asset
    8       8  
Other assets, net
    87       28  
Total assets
  $ 53,367     $ 47,337  
Liabilities and Shareholders’ Equity
               
Current Liabilities:
               
Current portion of obligations under capital leases
  $ 1     $ 1  
Accounts payable
    9,643       5,173  
Accrued payroll and other compensation
    755       383  
Accrued income taxes
    20        
Other accrued taxes
    260       269  
Deferred Revenues
    2,105       1,988  
Other liabilities and accrued expenses
    406       318  
Total current liabilities
    13,190       8,132  
                 
Obligations under capital leases
    227       228  
Contingencies and commitments
           
                 
Shareholders’ Equity:
               
Class A Common Stock, $.01 par value, one vote per share; authorized 10,500,000 shares; issued and outstanding 3,191,038 shares at December 31, 2011 and December 31, 2010
    32       32  
Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued and outstanding 612,293 shares at December 31, 2011 and December 31, 2010
    6       6  
Paid-in capital
    58,413       58,216  
Accumulated deficit
    (18,501 )     (19,277 )
                 
Total shareholders’ equity
    39,950       38,977  
                 
Total liabilities and shareholders’ equity
  $ 53,367     $ 47,337  
 
See accompanying notes to consolidated financial statements.
 
 
9

 
Avalon Holdings Corporation and Subsidiaries

 
Consolidated Statements of Operations
(in thousands, except for per share amounts)

   
Year Ended December 31,
 
   
2011
   
2010
 
Net operating revenues
  $ 53,986     $ 43,453  
                 
Costs and expenses:
               
Costs of operations
    44,979       35,751  
Depreciation and amortization
    1,663       1,684  
Selling, general and administration expenses
    7,266       6,783  
Operating income (loss)
    78       (765 )
                 
Other income (expense):
               
Interest expense
    (14 )     (14 )
Interest income
    5       24  
Other income, net
    796       253  
Income (loss) before income taxes
    865       (502 )
Provision for income taxes
    89       41  
Net income (loss)
  $ 776     $ (543 )
                 
Net income (loss) per share –basic
  $ .20     $ (.14 )
Net income (loss) per share –diluted
  $ .20     $ (.14 )
                 
Weighted average shares outstanding - basic
    3,803       3,803  
Weighted average shares outstanding - diluted
    3,852       3,803  

See accompanying notes to consolidated financial statements.
 
 
10

 
Avalon Holdings Corporation and Subsidiaries

 
Consolidated Statements of Cash Flows
(in thousands)
   
Year Ended December 31,
 
   
2011
   
2010
 
Operating activities:
           
Net income (loss)
  $ 776     $ (543 )
Reconciliation of net income (loss) to cash provided by (used in) operating activities:
               
Depreciation
    1,662       1,683  
Amortization
    1       1  
Compensation costs – stock options
    197       120  
Provision for losses on accounts receivable
    27       14  
Gain from disposal of property and equipment
    (108 )     (24 )
Change in operating assets and liabilities:
               
Accounts receivable
    (4,710 )     (1,122 )
Prepaid expenses
    60       (50 )
Refundable income taxes
    12       11  
Other current assets
    (117 )     (32 )
Other assets, net
    (60 )     29  
Accounts payable
    4,470       54  
Accrued payroll and other compensation
    372       (162 )
Accrued income taxes
    20        
Other accrued taxes
    (9 )     (5 )
Deferred revenues
    117       45  
Other liabilities and accrued expenses
    88       72  
Net cash provided by operating activities
    2,798       91  
                 
Investing activities:
               
Capital expenditures
    (1,414 )     (411 )
Proceeds from disposal of property and equipment
    376       24  
Net cash used in investing activities
    (1,038 )     (387 )
                 
Financing activities:
               
Principal payments on capital lease obligations
    (1 )     (1 )
Net cash used in financing activities
    (1 )     (1 )
                 
                 
                 
Increase (decrease) in cash and cash equivalents
    1,759       (297 )
Cash and cash equivalents at beginning of year
    5,565       5,862  
Cash and cash equivalents at end of year
  $ 7,324     $ 5,565  
                 
                 
                 
Supplemental disclosures of cash flow information:
               
                 
Cash paid during the year for interest expense
  $ 14     $ 14  
Cash received during the year as interest income
  $ 5     $ 24  
                 
For supplemental cash flow information regarding income taxes, see Note 6.                
 
See accompanying notes to consolidated financial statements.
 
 
11

 
Avalon Holdings Corporation and Subsidiaries

 
Consolidated Statements of Shareholders’ Equity
(in thousands)

   
For The Two Years Ended December 31, 2011
 
                                           
   
Shares
   
Common Stock
   
Paid-in
   
Accumulated
       
   
Class A
    Class B    
Class A
    Class B    
Capital
    Deficit     Total  
                                           
Balance at January 1, 2010
    3,191       612     $ 32     $ 6     $ 58,096     $ (18,734 )   $ 39,400  
                                                         
Stock options – Compensation costs
                            120             120  
                                                         
Net loss
                                  (543 )     (543 )
                                                         
Balance at December 31, 2010
    3,191       612     $ 32     $ 6     $ 58,216     $ (19,277 )   $ 38,977  
                                                         
Stock options – Compensation costs
                            197             197  
                                                         
Net income
                                  776       776  
                                                         
Balance at December 31, 2011
    3,191       612     $ 32     $ 6     $ 58,413     $ (18,501 )   $ 39,950  
 
See accompanying notes to consolidated financial statements.
 
 
12

 
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”).   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.

Avalon provides waste management services to industrial, commercial, municipal and governmental customers in selected northeastern and midwestern U.S. markets and manages a captive landfill for an industrial customer.  In addition, Avalon owns the Avalon Golf and Country Club, which 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, while the Sharon facility offers spa services. Avalon also owns and operates a 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 2011 presentation.

Subsequent Events

Avalon evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.

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 that are stated at cost, which approximate market value.  Investments with original maturities of 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.  Such investments are not insured by the Federal Deposit Insurance Corporation.  The balance of cash and cash equivalents was $7.3 million and $5.6 million at December 31, 2011 and 2010, respectively.
 
Avalon maintains its cash balances in various 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 its cash and cash equivalents.

Financial instruments
 
The fair value of financial instruments consisting of cash, cash equivalents, accounts receivable, and accounts payable at December 31, 2011 and 2010 approximates carrying value due to the relative short maturity of these financial instruments.

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 0 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, vehicles and office furniture and equipment (See Note 5).

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, would be capitalized on significant construction projects.

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. A valuation allowance is recorded against net deferred tax assets when management believes it is more likely than not that such deferred tax assets will not be realized. Avalon recognizes any interest and penalty assessed by taxing authorities as a component of interest expense and other expense, respectively.
 
 
13

 
Avalon Holdings Corporation and Subsidiaries

 
Revenue recognition

Avalon recognizes revenue for waste management services as services are performed.  Revenues for the golf operations are recognized as services are provided with the exception of membership dues which are recognized proportionately over twelve months based upon each member’s anniversary date.  The deferred revenues relating to membership dues at December 31, 2011 and December 31, 2010 were $2.1 million and $2.0 million, respectively.

Accounts Receivable

The majority of Avalon’s accounts receivable is due from industrial and commercial customers.  Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.  Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Customer accounts that are outstanding longer than the contractual payment terms are considered past due.  Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due,  Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole.  Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

Leases

Avalon applies the accounting rules for leases to categorize leases at their inception as either operating or capital leases depending on certain defined criteria. Leasehold improvements are capitalized at cost and are amortized over the lesser of their expected useful life or the life of the lease (See Notes 3, 5 and 11).

Stock-Based compensation

Avalon recognizes share-based compensation expense related to stock options issued to employees and directors. Avalon estimates the fair value of the stock options granted using a Monte Carlo simulation. The Monte Carlo Simulation was selected to determine the fair value because it incorporates six minimum considerations;  1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

The expected term, or time until the option is exercised, is typically based on historical exercising behavior of previous option holders of a company’s stock. Due to the fact that the first options granted were in 2010 and 2011, and as such,  no historical exercising behavior available, we estimated the expected term of each award to be half the maximum term.

Avalon amortizes the fair value of the stock options over the expected term or requisite service period. If accelerated vesting occurs based on the market performance of Avalon’s common stock, the compensation costs related to the vested stock options that have not previously been amortized are recognized upon vesting.

Asset impairments
 
Avalon reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  If indicators of impairment exist, Avalon would determine whether the estimated undiscounted sum of the future cash flows of such assets and their eventual disposition is less than its carrying amount.  If less, an impairment loss would be recognized if, and to the extent that the carrying amount of such assets exceeds their respective fair value.  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 estimated future cash flows. Avalon does not believe there was a triggering event in 2011 or 2010 as the golf operations’ future cash flows have not changed significantly and asset values have remained relatively stable.

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, 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.  Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.
 
Basic and dilutive net income (loss) per share

For the years ended December 31, 2011 and 2010, Avalon had 3,803,331weighted averages shares outstanding which were used to calculate basic net income (loss) per share. Avalon had potentially weighted average dilutive shares of 48,618 and 67,623 in 2011 and 2010, respectively. For the year ended December 31, 2010, the potentially weighted average dilutive shares were not included in the calculation, because to do so would have been anti-dilutive for the period. The earnings per share calculation for the years ended December 31, 2011 and 2010 is as follows:
       
   
2011
   
2010
 
    (in thousands)  
Net income (loss)
  $ 776     $ (543)  
Shares used in computing basic income (loss) per share
    3,803       3,803  
Potentially dilutive shares from stock options
    489        
Shares used in computing dilutive income (loss) per share
    3,852       3,803  
Net income (loss) per share –basic
  $ .20     $ (.14 )
Net income (loss) per share –dilutive
  $ .20     $ (.14 )
 
 
14

 
Avalon Holdings Corporation and Subsidiaries

 
Note 3.  Capital Leased Assets

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities.  The lease 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.  Based upon the amount of leasehold improvements already made and leasehold improvements anticipated to be made in the future, Avalon expects to exercise all its renewal options.

Note 4. Credit Facility

On March 21, 2008, Avalon entered into a $3.5 million unsecured line of credit agreement with The Huntington National Bank. Avalon has never borrowed monies under the line of credit. On April 26, 2011, the line of credit was reduced to $1 million. Interest on borrowings accrues at LIBOR plus 1.75%. The agreement provides for a minimum interest rate of 3.25%. The line of credit contains certain financial and other covenants, customary representations, warranties and events of defaults. Avalon was in compliance with the debt covenants at December 31, 2011 and expects to meet the covenants throughout 2012. The line of credit is renewed annually. At December 31, 2011 and December 31, 2010, there were no borrowings under the line of credit.

Note 5.  Property and Equipment
 
Property and equipment at December 31, 2011 and 2010 consists of the following (in thousands):
 
   
2011
    2010  
Land and land improvements
  $ 11,806     $ 11,799  
Buildings and improvements
    19,456       19,764  
Machinery and equipment
    2,924       2,794  
Vehicles
    268       222  
Office furniture and equipment
    2,946       2,909  
      37,400       37,488   
Less: accumulated depreciation and amortization
    (11,321 )     (10,223 )
Property and equipment, net
  $ 26,079     $ 27,265  
 
Leased property under capital leases at December 31, 2011 and 2010 consists of the following (in thousands):
 
     
2011
      2010  
Leased property under capital leases
  $ 8,523     $ 7,481  
Less: accumulated amortization
    (2,539 )     (2,167 )
Leased property under capital leases, net
  $ 5,984     $ 5,314  
 
Note 6.  Income Taxes

Income (loss) before income taxes for each of the two years in the period ended December 31, 2011 was subject to taxation under United States jurisdictions only. The provision for income taxes consists of the following (in thousands):
 
   
2011
   
2010
 
Current:
           
Federal
  $ (2 )   $ (1 )
State
    91       42  
 
    89       41  
Deferred:                
Federal
           
State
           
    $ 89     $ 41  

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2011 and 2010 are as follows (in thousands):
 
   
2011
     2010  
Deferred tax assets:
           
Accounts receivable, allowance for doubtful accounts
  $ 62     $ 62  
Reserves not deductible until paid
    115       47  
Net operating loss carryforwards
               
Federal
    2,001       2,323  
State
    441       356  
Federal Tax Credit
    214       139  
Capital loss carryforward
    10        
Other
    8       10  
Gross deferred tax assets
    2,851       2,937  
Less valuation allowance
    (808 )     (905 )
Deferred tax assets net of valuation allowance
  $ 2,043     $ 2,032  
                 
Deferred tax liabilities:
               
Property and equipment
  $ (2,035 )   $ (2,024 )
Other
           
Gross deferred tax liabilities
  $ (2,035 )        $ (2,024 )
Net deferred tax asset
  $ 8     $ 8  
 
 
15

 
Avalon Holdings Corporation and Subsidiaries

 
The $2,035,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $2,043,000 of deferred tax assets. Avalon has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of these reviews. If future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should Avalon ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $808,000 valuation allowance as of December 31, 2011, would be reversed as a benefit to the provision for income taxes in the period such determination was made.

The provision 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):

   
2011
    2010  
Income (loss) before income taxes     
  $ 865     $ (502 )
Federal statutory tax rate
    35 %               35 %
     
    303       (176 )
                 
State income taxes, net of federal income tax benefits
    59       27  
Change in valuation allowance
    (97 )     249  
Capital loss carryforward                               
    (10 )             
Increase in available federal tax credit
    (75 )     (32 )
Other nondeductible expenses
    12       45  
Increase  in net operating loss carryforward: state
    (87 )     (83 )
                                                                               federal
    (1 )                 5  
Other, net
    (15 )                6  
    $
89
    $ 41  

Avalon is subject to income taxes in the U.S. federal and various states jurisdictions.  With few exceptions, Avalon is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for the years before 2007. Avalon recognizes any interest and penalty assessed by taxing authorities as a component of interest expense and other expense, respectively.  There were no accruals for the payment of interest and penalties for 2011 and 2010.

Avalon made net income tax payments of $70,000 and $32,000 in 2011 and 2010, respectively. At December 31, 2011, Avalon has taxable loss carryforwards for federal income tax purposes aggregating approximately $5,886,000 which are available to offset future federal taxable income.  These carryforwards expire in 2021 through 2030. Avalon has a capital loss carryforward for federal tax purposes of approximately $29,000 which is available to offset future federal capital gain income. This carryforward expires in 2016.  In addition, at December 31, 2011, certain subsidiaries of Avalon have net operating loss carryforwards for state purposes which are available to offset future state taxable income. These carryforwards expire at various dates through 2032.  A valuation allowance has been provided because 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 five 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.  The Board decided not to make a discretionary employer contribution for 2011or 2010.

Note 8.  Long-term Incentive Plan

On August 12, 2009, the Board of Directors of Avalon approved the renewal of the expired 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. The name of the plan was changed to the 2009 Long-term Incentive Plan (“the Option Plan”) to reflect the year of approval. On October 6, 2009, at a Special Meeting of Shareholders, the shareholders approved the Option Plan. 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 100% 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 Option 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. No option may be exercised by an optionee after his or her termination of employment for any reason with Avalon or an affiliate, except in certain situations provided by the Option Plan.
 
 
16

 
Avalon Holdings Corporation and Subsidiaries

 
The purpose of the Avalon Holdings Corporation 2009 Long-term Incentive Plan (the “Plan”) is (a) to improve individual employee performance by providing long-term incentives and rewards to employees of Avalon, (b) to assist Avalon in attracting, retaining and motivating employees and non-employee directors with experience and ability, and (c) to associate the interests of such employees and directors with those of the Avalon shareholders. Under the Plan, 1,300,000 shares have been reserved for the issuance of stock options. During the first quarter of 2010, 980,000 stock options were granted under the Plan. Of these options granted, 450,000 were forfeited in February 2011 and 50,000 cancelled in March 2011. In March 2011, 280,000 stock options were granted under the Plan. The stock options vest ratably over a five year period and have a contractual term of ten years from the date of grant. At the end of each contractual vesting period, the share price of the Avalon common stock, traded on a public stock exchange (NYSE Amex), must reach a predetermined price within three years following such contractual vesting period before the stock options are exercisable (See table below). If the Avalon common stock price does not reach the predetermined price, the stock options will either be cancelled or the period will be extended at the discretion of the Board of Directors.

Compensation costs were approximately $197,000 and $120,000 for the years ended December 31, 2011 and December 31, 2010, respectively, based upon the estimated fair value calculation. The deferred tax benefit recorded was offset by an increase to the valuation allowance. As of December 31, 2011, there was approximately $.5 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.21 years.

The Monte Carlo Simulation was selected to determine the fair value because it incorporates six minimum considerations;  1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

The expected term, or time until the option is exercised, is typically based on historical exercising behavior of previous option holders of a company’s stock. Due to the fact that the first options granted were in 2010 and 2011 and as such, no historical exercising behavior available, we estimated the expected term of each award to be half the maximum term. Because of the nature of the vesting as described above, the options were separated into five blocks, with each block having its own vesting period and expected term. Assuming the vesting occurs ratably over the vesting period for each option block, the average vesting term (requisite service period) for each option block was calculated to be 2.54, 3.54, 4.54, 5.54 and 6.54 years for option blocks 1 through 5, respectively. As such, the expected terms were calculated to be 6.27, 6.77, 7.27, 7.77 and 8.27 years, for option blocks 1 through 5, respectively.

The current fair value of the underlying equity was determined to be equal to Avalon’s publicly traded stock price as of the grant dates times the sum of the Class A and Class B common shares outstanding.

The expected volatility was based on the observed volatility of Avalon common stock for a five year period prior to the grant dates. The expected volatility that was used ranged from 60.9% to 61.7% with a weighted average expected volatility of 61.2%. There were no expected dividends and the risk-free interest rate(s), which ranged from 2.06% to 2.28%, were based on yield data for U. S. Treasury securities over a period consistent with the expected term. The following table is a summary of the stock option activity during 2011and 2010:
 
   
Number
of Options
Granted
   
 
Weighted
Average
Exercise Price
   
Weighted
Average
Fair Value
at Grant Date
 
Outstanding – January 1, 2010
                 
Granted in 2010
    980,000     $ 2.52     $ 1.04  
Outstanding – December 31, 2010
     980,000     $ 2.52     $ 1.04  
Granted in 2011
    280,000       2.89       1.20  
Options cancelled
    (50,000 )     3.35       1.42  
Forfeited (a)
    (450,000 )     2.48       1.02  
Outstanding – December 31, 2011
      760,000     $ 2.63     $ 1.09  
Options Vested
    96,000                  
Exercisable – December 31, 2011
     -0-                  

(a)  
450,000 stock options were forfeited in 2011 due to the resignation of Mr. Steven Berry, Chief Executive Officer, effective February 15, 2011.

The stock options vest and become exercisable based upon achieving two critical metrics as follows:
 
1)  
Contract Vesting Term:  The stock options vest ratably over a five year period.
2)  
The Avalon common stock price traded on a public stock exchange (NYSE Amex) must reach the predetermined vesting price within three years after the options become vested under the Contract Vesting Term
 
 
17

 
Avalon Holdings Corporation and Subsidiaries

 
The table below represents the period and predetermined stock price needed for vesting.

 
Begins
Vesting
Ends
Vesting
Predetermined
Vesting Price
Block 1
12 mo. after Grant Dates
48 mo. after Grant Dates
  $ 3.43
Block 2
24 mo. after Grant Dates
60 mo. after Grant Dates
  $ 4.69
Block 3
36 mo. after Grant Dates
72 mo. after Grant Dates
  $ 6.43
Block 4
48 mo. after Grant Dates
84 mo. after Grant Dates
  $ 8.81
Block 5
60 mo. after Grant Dates
96 mo. after Grant Dates
 $12.07

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 to 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 Common Stock (one vote per share) and Class B Common Stock (ten votes per share) 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 the ordinary course of conducting its business, Avalon 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 its liquidity, financial position or results of operations.

Note 11. Lease Commitments

Avalon leases golf carts, machinery and equipment, and copiers under operating leases and land and land improvements under a capital lease. Future commitments under long-term, operating leases and capital lease at December 31, 2011 are as follows (in thousands):
 
   
Capital
   
Operating 
    Total  
2012
  $ 15     $ 330     $ 345  
2013
    15       256       271  
2014
    15       75       90  
2015
    15             15  
2016
    15             15  
After 2016
    540             540  
Total minimum lease payments
    615     $ 661     $ 1,276  
Less: Amounts representing interest
    387                  
Present value of minimum payments
    228                  
Less: Current portion of obligations under capital leases
    1                  
Long-term portion of obligations under capital leases
  $ 227                  
 
Rental expense included in the Consolidated Statements of Operations amounted to $443,000 in 2011 and $421,000 in 2010.

Note 12.  Business Segment Information

Avalon’s reportable segments include waste management services and golf and related operations. In determining the segment information, Avalon considered its operating and management structure and the types of information subject to regular review by its “chief operating decision maker.”  On this basis, Avalon’s reportable segments include waste 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, the waste management services segment, provides hazardous and nonhazardous brokerage and management services to industrial, commercial, municipal and governmental customers and manages a captive landfill for an industrial customer.  The golf and related operations segment includes the operations of golf courses and related facilities and a travel agency.  Revenue for the golf and related operations segment consists primarily of membership dues, greens fees, cart rentals, merchandise, tennis, spa services and food and beverage sales.  Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented. In 2011, one customer accounted for 22% of the waste management services segment’s net operating revenues to external customers and 18% of the consolidated net operating revenues. In 2010, one customer accounted for 12% of the waste management services segment’s net operating revenues to external customers and 9% of the consolidated net operating revenues.
 
 
18

 
Avalon Holdings Corporation and Subsidiaries

 
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):

 
 
2011
   
2010
 
Net operating revenues from:
           
Waste management services:
           
External customers revenues
  $ 43,463     $ 33,888  
Intersegment revenues
           
Total waste management services
    43,463       33,888  
                 
Golf and related operations:
               
External customer revenues
    10,523       9,565  
Intersegment revenues
    53       56  
Total golf and related operations
    10,576       9,621  
                 
Segment operating revenues
    54,039       43,509  
Intersegment eliminations
    (53 )     (56 )
Total net operating revenues
  $ 53,986     $ 43,453  
                 
Income (loss) before taxes:
               
Waste management services
  $ 3,568     $ 2,791  
Golf and related operations
    (293 )     (595 )
Segment income before taxes
    3,275       2,196  
Corporate interest income
    5       24  
Corporate other income, net
    160       (21 )
General corporate expenses
    (2,575 )     (2,701 )
Income before taxes
  $ 865     $ (502 )
                 
Depreciation and amortization:
               
Waste management services
  $ 34     $ 25  
Golf and related operations
    1,509       1,536  
Corporate
    120       123  
Total
  $ 1,663     $ 1,684  
                 
Interest income:
               
Waste management services
  $     $  
Corporate
    5       24  
Total
  $ 5     $ 24  
                 
Capital expenditures:
               
Waste management services
  $ 104     $ 95  
Golf and related operations
    1,261       269  
Corporate
    49       47  
Total
  $ 1,414     $ 411  
 
Identifiable assets at December 31:
 
      2011       2010  
Waste management services
  $ 16,869     $ 11,648  
Golf and related operations
    30,140       30,233  
Corporate
    41,840       40,006  
Sub Total
    88,849       81,887  
Elimination of intersegment receivables
    (35,482 )     (34,550 )
Total
  $ 53,367     $ 47,337  
 
The increase of $5.2 million in identifiable assets of the waste management services segment is primarily the result of an increase in accounts receivable due to higher net operating revenues in the fourth quarter of 2011 compared with the fourth quarter of 2010.  The increase of $1.8 million in identifiable assets of corporate is primarily due to an increase in cash and cash equivalents.

Note 13.  Recent Accounting Pronouncements

In May 2011, The Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. Avalon does not expect the adoption of ASU No. 2011-04 will have a material impact on its consolidated financial statements.
 
 
19

 
Avalon Holdings Corporation and Subsidiaries


Report of Independent Registered Public Accounting Firm

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, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Avalon Holdings Corporation and subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 
/s/ Grant Thornton LLP

Cleveland, Ohio
March 15, 2012
 
 
20

 
Avalon Holdings Corporation and Subsidiaries


Management’s Annual Report on Internal Control over Financial Reporting

The management of Avalon, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) of the Securities and Exchange Act of 1934, as amended.  Avalon’s internal control system was designed to provide reasonable assurance as to the reliability of the preparation and presentation of the consolidated financial statements for external reporting and the safeguarding of assets from unauthorized use or disposition.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2011, based upon the framework and criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Ronald E. Klingle                                                                                           /s/ Timothy C. Coxson
Chief Executive Officer                                                                                      Chief Financial Officer
 
March 15, 2012
 
 
21

 
Avalon Holdings Corporation and Subsidiaries

 
Company Location Directory
 
Corporate Office

Avalon Holdings Corporation
One American Way
Warren, Ohio 44484-5555
(330) 856-8800
 
Waste Management
Services

American Waste Management
Services, Inc.
One American Way
Warren, Ohio 44484-5555
(330) 856-8800

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) 856-880
Golf and Related
Operations

Avalon Golf and Country Club
One American Way
Warren, Ohio 44484-5555
(330) 856-8898

Avalon Lakes Golf Course
One American Way
Warren, Ohio 44484-5555
(330) 856-8898

Squaw Creek Golf Course
761 Youngstown-Kingsville Road
Vienna, Ohio 44473
(330) 539-5103

Avalon Country Club at Sharon, Inc.
1030 Forker Blvd.
Hermitage, PA  16148-1566
(724) 981-6700

Avalon Travel, Inc.
One American Way
Warren, Ohio 44484-5555
(330) 856-8400
 
 
22

 
Avalon Holdings Corporation and Subsidiaries

 
Directors and Officers
 
Directors
 
Ronald E. Klingle
Chairman of the Board and
Chief Executive Officer
Executive Committee (Chairman)
Compensation Committee
 
Timothy C. Coxson
Treasurer, Chief Financial Officer
and Secretary
Compensation Committee (Chairman)
 
Kurtis D. Gramley
Chairman and Chief Executive Officer,
Edgewood Surgical Hospital
Audit Committee (Chairman)
Executive Committee
Option Plan Committee
 
Stephen L. Gordon
Partner, Beveridge & Diamond, P.C.
Compensation Committee
Audit Committee
Option Plan Committee (Chairman)
 
David G. Bozanich
Director of Finance, City of Youngstown
Audit Committee
Executive Committee
Option Plan Committee
Officers

 Ronald E. Klingle
Chairman of the Board and Chief Executive Officer
 
Timothy C. Coxson
Treasurer, Chief Financial Officer
and Secretary
 
Frances R. Klingle
Chief Administrative Officer
 
Richard R. Fees
Controller
 
 
23

 
Avalon Holdings Corporation and Subsidiaries

 
Shareholder
Information

Common stock information

Avalon’s Class A Common Stock is listed on the NYSE Amex (symbol: AWX).  Quarterly stock information for 2011 and 2010 as reported by The Wall Street Journal is as follows:

2011:
                 
Quarter Ended
 
High
   
Low
   
Close
 
March 31
  $ 3.10     $ 2.44     $ 2.82  
June 30
    3.49       2.61       2.75  
September 30
    2.88       2.20       2.24  
December 31
    2.91       2.11       2.90  

2010:
                 
Quarter Ended
 
High
   
Low
   
Close
 
March 31
  $ 3.89     $ 2.16     $ 3.41  
June 30
    3.55       2.33       2.50  
September 30
    2.97       2.34       2.90  
December 31
    2.99       2.65       2.73  
 
No dividends were paid during 2011.

There are 425 Class A and 10 Class B Common Stock shareholders of record as of the close of business March 2, 2012.  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 or by visiting Avalon’s web-site at  www.avalonholdings.com.

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 6201 15th Avenue, Brooklyn, New York 11219.

Investor inquiries

Security analysts, institutional investors, shareholders, news media representatives and others 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.

 
24