Form 10-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RkoKuwg5OUnMWLV9L5Zi4XrPkqs88TN1vM6AQPMinpe/UbOjOJu+g3UB2VDbdfOn AJZbX+j1LXdBEJUNzigYgw== 0001193125-06-058954.txt : 20060320 0001193125-06-058954.hdr.sgml : 20060320 20060320142450 ACCESSION NUMBER: 0001193125-06-058954 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060320 DATE AS OF CHANGE: 20060320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON HOLDINGS CORP CENTRAL INDEX KEY: 0001061069 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 341863889 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14105 FILM NUMBER: 06698322 BUSINESS ADDRESS: STREET 1: ONE AMERICAN WAY CITY: WARREN STATE: OH ZIP: 44484 BUSINESS PHONE: 3308568800 10-K 1 d10k.htm FORM 10-K Form 10-K

2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-14105

AVALON HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Ohio

34-1863889

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One American Way, Warren, Ohio 44484-5555

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (330) 856-8800

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Class A Common Stock, $.01 par value		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of Class A Common Stock held by non-affiliates of the registrant on February 16, 2006 was $14.6 million. Assuming that the market value of Avalon Holdings Corporation’s Class B Common Stock was the same as its Class A Common Stock by reason of its one-to-one conversion rights, the market value of Class B Common Stock held by non-affiliates of the registrant on February 16, 2006 was approximately $6,900. The registrant had 3,190,786 shares of its Class A Common Stock and 612,545 shares of its Class B Common Stock outstanding as of March 3, 2006.

Documents Incorporated by Reference

1.	Portions of the Avalon Holdings Corporation Annual Report to Shareholders for the year ended December 31, 2005 (Parts I and II of Form 10-K).

2.	Portions of the Avalon Holdings Corporation Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference herein into Part III.

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

As used in this report, the terms “Avalon,” “Company,” and “Registrant” mean Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise.

TABLE OF CONTENTS


		Page
Part I

Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	7
Item 2.	Properties	7
Item 3.	Legal Proceedings	8
Item 4.	Submission of Matters to a Vote of Security Holders	8

Part II

Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	9
Item 6.	Selected Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	9
Item 8.	Financial Statements and Supplementary Data	9
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	10
Item 9A.	Controls and Procedures	10
Item 9B.	Other Information	10

Part III

Item 10.	Directors and Executive Officers of the Registrant	11
Item 11.	Executive Compensation	12
Item 12.	Security Ownership of Certain Beneficial Owners and Management	12
Item 13.	Certain Relationships and Related Transactions	12
Item 14.	Principal Accountant Fees and Services	12

Part IV

Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	13

Signatures		15

Note on Incorporation by Reference

Throughout this report various information and data are incorporated by reference from Avalon’s 2005 Annual Report to Shareholders (hereinafter referred to as the “Annual Report to Shareholders”). Any reference in this report to disclosures in the Annual Report to Shareholders shall constitute incorporation by reference of that specific material into this Form 10-K.

PART 1

ITEM 1. BUSINESS

General

Avalon Holdings Corporation (“Avalon”) was formed on April 30, 1998 as a subsidiary of American Waste Services, Inc. (“AWS”). Pursuant to the terms of a Contribution and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS, AWS contributed to Avalon its transportation operations, technical environmental services operations, waste disposal brokerage and management operations, and golf course and related operations, together with certain other assets including the headquarters of AWS and certain accounts receivable. In connection with the contribution, Avalon also assumed certain liabilities of AWS. On June 17, 1998, AWS distributed, as a special dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro rata and corresponding basis (the “Spin-off”). In 2002, Avalon sold the assets of the analytical laboratory business and in January 2004, sold the remediation business and discontinued the engineering and consulting business, which were part of the technical environmental services operations. In July 2004, Avalon sold its transportation operations. The history and organization of the remaining operations, which were contributed to Avalon as a result of the Spin-off, are described below.

In June 1990, AWS purchased approximately 5.6 acres of real estate located in Warren, Ohio on which it constructed Avalon’s corporate headquarters. In connection with the acquisition of such property, Avalon Lakes Golf, Inc. (“ALGI”), a former subsidiary of AWS and now a subsidiary of Avalon, acquired the real and personal property associated with the Avalon Lakes Golf Course, an 18-hole golf course adjacent to the office property. Avalon’s corporate headquarters building has been remodeled to include a clubhouse for the Avalon Golf and Country Club.

Additionally, in 1995, American Waste Management Services, Inc. commenced its waste disposal brokerage and management operations and in 1997, American Landfill Management, Inc., started its captive landfill management operations. Both companies were subsidiaries of AWS and now are subsidiaries of Avalon.

In November 2003, TBG, Inc. (“TBG”), a subsidiary of ALGI, entered into a long-term lease agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. As a result of the transaction, Avalon created a newly organized subsidiary, Avalon Golf and Country Club, Inc. (“AGCC”) which manages the two golf courses and related operations.

Business Segments Information

Avalon’s business segments are waste management services and golf and related operations. The waste management services segment includes waste disposal brokerage and management services and captive landfill management operations. The golf and related operations segment includes the operation and management of two golf courses, dining and banquet facilities and a travel agency.

Waste Management Services

Avalon’s waste management subsidiaries provide hazardous and nonhazardous waste brokerage and management services and captive landfill management services. Waste management services are provided to industrial, commercial, municipal and governmental customers primarily in selected northeastern and midwestern United States markets. For the years 2005, 2004 and 2003, the net operating revenues of the waste management services segment represented approximately 84%, 85% and 89%, respectively, of Avalon’s total segments’ net operating revenues. For the years 2005 and 2004, one customer of the waste management services segment, Timken Company, accounted for approximately 9% and 12%, respectively, of Avalon’s consolidated net operating revenues. For the year 2003, no customer of the waste management services segment individually accounted for 10% or more of Avalon’s consolidated net operating revenues.

American Waste Management Services, Inc. (“AWMS”) assists customers with managing and disposing of wastes at approved treatment and disposal sites based upon a customer’s needs.

Because waste generators remain liable for their waste both before and after disposal, they require assurance that their waste will be safely and properly transported, treated and disposed of. To give customers this confidence, as well as to limit its own potential liability, AWMS has instituted procedures designed to minimize the risks of improper handling or disposal of waste.

Before AWMS will provide waste brokerage or management services, a potential customer must complete a detailed waste profile setting forth the amount, chemical composition and any unique characteristics for each special waste to be handled. Representative samples of the waste are analyzed by a state or federally certified laboratory. In addition, an AWMS representative generally inspects the process generating the waste, the location where the waste may be temporarily stored or the site of the remediation project producing the waste, and interviews representatives of the generator familiar with the waste. This inspection, along with the laboratory results, allows AWMS to determine whether the waste is within acceptable parameters for disposal and, if so, what special handling and treatment procedures must be instituted. If the waste is continuously generated, new representative samples are tested on a periodic basis.

These procedures are important to both AWMS and its customers because the key to proper handling of waste is accurate identification. Hazardous waste which is not identified as such and thus improperly disposed of can result in substantial liability to the waste generator, the disposal facility, AWMS and potentially to all other waste generators that have used the disposal site. Conversely, waste that could safely and legally be disposed of in a solid waste landfill, but is instead sent to a hazardous waste facility for treatment and disposal, will result in substantial and unnecessary expense to the generator.

American Landfill Management, Inc. (“ALMI”) is a landfill management company that provides technical and operational services to customers owning captive disposal facilities. A captive disposal facility only disposes of waste generated by the owner of such facility. ALMI provides turnkey services, including daily operations, facilities management and management reporting for its customers. Currently, ALMI manages one captive disposal facility located in Ohio.

Golf and Related Operations

Avalon’s golf course and related operations segment operates two 18-hole golf courses and related facilities. For the years 2005, 2004 and 2003, the net operating revenues of the golf and related operations segment represented approximately 16%, 15%, and 11%, respectively, of Avalon’s total segments’ net operating revenues.

Avalon Lakes Golf, Inc. (“ALGI”) owns and operates a Pete Dye designed championship golf course located in Warren, Ohio. ALGI generates revenue from membership dues, greens fees, cart rentals, merchandise sales, food and beverage sales. TBG, a subsidiary of ALGI, 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 on November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by TBG. In addition to a championship golf course, the Squaw Creek facilities include a swimming pool, tennis courts and a clubhouse that provides a fitness center, dining and banquet facilities. TBG generates its revenue in the same manner as ALGI. Avalon Travel, Inc., a subsidiary of ALGI, owns and operates a travel agency which generates its revenue from booking travel reservations.

In November 2003, Avalon formed the Avalon Golf and Country Club to manage the two golf courses and related operations. Members of the Avalon Golf and Country Club are entitled to privileges at both facilities. Membership requires payment of a one-time initiation fee as well as annual dues. Members receive several benefits including reduced greens fees and preferential tee times. Both the Avalon Lakes Golf Course and the Squaw Creek Golf Course are also available to the general public. Although the golf courses are 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 Squaw Creek and Avalon Lakes facilities will result in additional memberships in the Avalon Golf and

Country Club. Although Avalon has had a substantial increase in the number of members of the Avalon Golf and Country Club, as of December 31, 2005, Avalon still has not attained its goal. Such additional memberships, if attained, will result in increased net operating revenues; however, there can be no assurance as to when such increased membership will be attained. Failure by Avalon to attain a sufficient number of additional members could adversely affect the future financial performance of Avalon.

The golf courses are significantly dependent upon weather conditions during the golf season as a result of being located in northeast Ohio. Avalon’s financial performance is adversely affected by adverse weather conditions.

Governmental Regulations

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 may also be affected by the trend toward laws requiring the development of waste reduction and recycling or other programs.

ALGI and TBG currently hold liquor licenses for their respective facilities. If, for some reason, either of these facilities were to lose their liquor license, the financial performance of the golf and related operations would be adversely affected.

Sales and Marketing

Avalon’s sales and marketing approach is decentralized, with each operation being responsible for its own sales and marketing efforts. Each operation employs its own sales force which concentrates on expanding its business.

Competition

The hazardous and nonhazardous waste disposal brokerage and management business is highly competitive and fragmented. Avalon’s waste disposal brokerage and management business competes with other brokerage companies as well as with companies which own treatment and disposal facilities. In addition to price, knowledge and service are key factors when competing for waste disposal brokerage and management business. Avalon’s waste disposal brokerage and management operations obtain and retain customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and 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 disposal brokerage and management operations.

Avalon’s two golf courses are located in Warren, Ohio and Vienna, Ohio and compete with many public courses and country clubs in the area.

Insurance

Avalon carries $5,000,000 of liability insurance coverages. This insurance includes coverage for comprehensive general liability, automobile liability and other customary coverages. In addition, Avalon carries comprehensive property damage coverage. Avalon also carries $5,000,000 of liability insurance for the golf courses and related operations which maintain separate insurance coverage. No assurance can be given that such insurance will be available in the future or, if available, that the premiums for such insurance will be reasonable.

If Avalon were to incur a substantial liability for damages not covered by insurance or in excess of its policy limits or at a time when Avalon no longer is able to obtain appropriate liability insurance, its financial condition could be materially adversely affected.

Employees

As of December 31, 2005, Avalon had 143 employees, 25 of whom were employed by the waste management services segment, 96 of whom were employed by the golf course and related operations and 22 of whom were employed in financial and administrative activities. Avalon believes that it has a good relationship with its employees.

Other Business Factors

None of Avalon’s business segments is materially dependent on patents, trademarks, licenses, franchises or concessions, other than permits, licenses and approvals issued by regulatory agencies. Avalon does not sponsor significant research and development activities.

ITEM 1A. RISK FACTORS

The following factors, as well as factors described elsewhere in the Form 10-K, or in other filings by Avalon with the Securities and Exchange Commission, could adversely affect Avalon’s consolidated financial position, results of operations or cash flows. Other factors not presently known to us or that we presently believe are not material could also affect our business operations and financial results.

Voting Control by Management

The holders of the Avalon Class B Common Stock (which has ten votes per share), consisting principally of the management of Avalon, have approximately 66 percent of the aggregate voting power of the outstanding Avalon Common Stock. Thus, the holders of the Avalon Class A Common Stock (which has one vote per share) will not, either alone or acting collectively, be able to elect a majority of the members of Avalon’s Board of Directors (the “Avalon Board”) or control many corporate actions. However, the holders of the Avalon Class A Common Stock have the right to elect 25 percent of the directors of Avalon until the outstanding Avalon Class B Common Stock constitutes less than 50 percent of the total voting power of the outstanding Avalon Common Stock, after which time the holders of the Avalon Class A and Class B Common Stock will vote as a single class for the election of directors and all matters presented for a vote to the shareholders. 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.

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.

Certain Anti-Takeover Provisions of Articles

of Incorporation, Code of Regulations and Ohio Law

The Articles of Incorporation and Code of Regulations of Avalon, as well as Ohio statutory law, contain provisions that may have the effect of discouraging an acquisition of control of Avalon not approved by the Avalon Board. Such provisions may also have the effect of discouraging third parties from making proposals involving an acquisition or change of control of Avalon, although such proposals, if made, might be considered desirable by a majority of the Avalon stockholders. Such provisions could also have the effect of making it more difficult for third parties to cause the replacement of the current management of Avalon without the concurrence of the Avalon Board. These provisions have been

designed to enable Avalon to develop its business and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by the Avalon Board to be in the best interest of Avalon and its stockholders.

Dividend Policy

The dividend policy of Avalon is determined by the Avalon Board. Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore, does not anticipate paying cash dividends in the foreseeable future.

Avalon’s market for shares may be subject to greater volatility

Market fluctuations, as well as economic conditions, may adversely affect the market price of the Avalon Class A Common Stock. Given the relatively small market capitalization of Avalon, the market for its Class A Common Stock may be subject to greater volatility than would be the case for a large company.

A majority of Avalon’s business is not subject to long-term contracts

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.

The golf operations primary source of revenues is derived from the members of the Avalon Golf and Country Club. As such, the golf operations are primarily dependent on the sale and renewal of memberships, on a year to year basis, of the Avalon Golf and Country Club.

Long-lived asset impairment

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.

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 as of 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.

Seasonality

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 Warren, Ohio and Vienna, Ohio and are significantly dependent upon weather conditions during the golf season. As a result, Avalon’s financial performance could be adversely affected by adverse weather conditions.

Environmental Liabilities

Avalon may be subject to liability for environmental contamination caused by pollutants the transportation, treatment or disposal of which was arranged for by Avalon or one of its predecessors.

Although Avalon has compliance guidelines for its waste brokerage and management services operations, Avalon could still incur a substantial liability for environmental damage not covered by or in excess of its insurance policy limits and its financial condition could be adversely affected.

Competitive pressures

The hazardous and nonhazardous waste disposal brokerage and management business is highly competitive and fragmented. Avalon’s waste disposal brokerage and management business competes with other brokerage companies as well as with companies which own treatment and disposal facilities. In addition to price, knowledge and service are key factors when competing for waste disposal brokerage and management business. Avalon’s waste disposal brokerage and management operations obtain and retain customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and may cause disposal pricing to increase. In addition, consolidation may have the effect of reducing the number of competitors offering disposal alternatives which may adversely impact the future financial performance of Avalon’s waste disposal brokerage and management operations.

Potential acquisitions

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. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense. Such potential acquisitions could be financed by existing working capital, secured or unsecured debt, issuance of common stock, or issuance of a security with characteristics of both debt and equity, any of which could impact liquidity in the future.

Government regulations

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 management services revenues is derived from the brokerage of 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 may also be affected by the trend toward laws requiring the development of waste reduction and recycling or other programs.

Changes in laws, regulations and accounting standards

Our implementation of new accounting rules and interpretations or compliance with changes in existing accounting rules could adversely affect our balance sheet or results of operations or cause unanticipated fluctuations in our results of operations in future periods.

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 and the ongoing review by the SEC of how to minimize the costly impact of SOX 404 on small 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.

Accounting estimates and judgments

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 and subsequent adjustments could have a material adverse effect on operating results for the period or periods in which the change is identified.

Inflation

Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs resulting from price inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There were no unresolved comments from the Staff of the U. S. Securities and Exchange Commission at December 31, 2005.

ITEM 2. PROPERTIES

Avalon owns a 37,000 square foot headquarters building located on approximately 5.6 acres of property in Warren, Ohio adjacent to the Avalon Lakes golf course. The corporate and administrative offices of ALMI, ALGI, TBG, AGCC and AWMS are each located at the headquarters building of Avalon in Warren, Ohio. Avalon’s corporate headquarters building also includes a clubhouse, restaurant and pro shop for the Avalon Golf and Country Club at Avalon Lakes Golf Course.

ALGI owns an 18-hole golf course and practice facility on approximately 200 acres, a maintenance and storage building of approximately 12,000 square feet, a restaurant building of approximately 10,400 square feet, and a banquet facility of approximately 7,000 square feet. ALGI currently leases the restaurant building and banquet facility to a third party operator. All of ALGI’s facilities are located in Warren, Ohio.

TBG, Inc. leases and operates the Avalon Golf and Country Club at Squaw Creek in Vienna, Ohio, which includes an 18-hole golf course and practice facility on approximately 224 acres, a swimming pool, four tennis courts and a 67,000 square foot clubhouse that includes a pro shop, fitness center, restaurant and banquet facilities. The clubhouse was renovated and expanded in 2004.

The captive landfill management operations use approximately six pieces of equipment (such as bulldozers, excavators and backhoes) all of which are owned or leased by ALMI.

Avalon owns a 48,000 square foot office building in Export, Pennsylvania. Avalon currently leases approximately 16,000 square feet of this building to two third party tenants. The building is currently held for sale. In December 2005, Avalon and a third party signed an agreement for the sale of the building. Such agreement is subject to due diligence. Avalon expects the sale to be completed in the second quarter of 2006, assuming that contingencies to the sale are satisfied.

Generally, Avalon’s fixed assets are in good condition and are satisfactory for the purposes for which they are intended.

ITEM 3. LEGAL PROCEEDINGS

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 it. See Item 1. “Business—Insurance.”

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Avalon’s security holders during the fourth quarter of 2005.

PART II

Information with respect to the following items can be found on the indicated pages of Exhibit 13.1, the 2005 Annual Report to Shareholders, if not otherwise included herein.


		Page(s)
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common stock information		26
Dividend policy		26

ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Digest of Financial Data for the years 2001 through 2005 under the captions Net operating revenues, Income (loss) from continuing operations, Loss from discontinued operations, Net income (loss), Income (loss) per share from continuing operations, Loss per share from discontinued operations, Net income (loss) per share, Total assets and Long-term obligations under capital leases		23

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations		2-8

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the sub caption “Market Risk” contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent auditors’ report regarding financial statements as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005		22

Financial Statements:
Consolidated Balance Sheets, December 31, 2005 and 2004		9
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		10
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		11
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2005		12
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2005, 2004 and 2003		12
Notes to Consolidated Financial Statements		13-21

Information regarding financial statement schedules is contained in Item 15(a) of Part IV of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Avalon’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 regarding Directors is contained under the caption “Election of Directors” in the Registrant’s definitive Proxy Statement for its 2006 Annual Meeting of Shareholders (the “Proxy Statement”) which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, which information under such caption is incorporated herein by reference. The following information with respect to the Executive Officers of Avalon is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:


Name	Age	Position
Ronald E. Klingle	58	Chairman of the Board, Chief Executive Officer and a Director
Frank Lamanna	42	Treasurer and Chief Financial Officer
Frances R. Klingle	59	Chief Administrative Officer
Kenneth J. McMahon	53	Chief Executive Officer and President of American Waste Management Services, Inc.

The above-listed individuals have been elected to the offices set opposite their names to hold office at the discretion of the Board of Directors of Avalon or its subsidiaries, as the case may be.

Ronald E. Klingle has been a director and Chairman of the Board of Avalon since June 1998. He was Chief Executive Officer from June 1998 until December 2002 and reassumed the position in March 2004. He had been Chairman, Chief Executive Officer and a director of American Waste Services, Inc. since December 1988. Mr. Klingle has over 30 years of environmental experience and received his Bachelor of Engineering degree in Chemical Engineering from Youngstown State University. Mr. Klingle is the spouse of Frances R. Klingle who is the Chief Administrative Officer of Avalon.

Frank Lamanna has been Treasurer and Chief Financial Officer since August 2004. He was Controller from April 2002 until August 2004. Mr. Lamanna had previously been Vice President of Corporate Financial Services from 1999 to April 2002. Mr. Lamanna received a Bachelor of Science in Business Administration in Accounting degree from Youngstown State University. He is also a Certified Public Accountant in the State of Ohio.

Frances R. Klingle has been Chief Administrative Officer since June 1998. She was Controller of Avalon from June 1998 to April 2002. She had been Controller of American Waste Services, Inc. since June 1986. Ms. Klingle received a Bachelor of Arts degree in French from Kent State University and has completed postgraduate work in accounting at Youngstown State University. Ms. Klingle is the spouse of Ronald E. Klingle who is Chairman of the Board, Chief Executive Officer and a director of Avalon.

Kenneth J. McMahon has been Chief Executive Officer and President of American Waste Management Services, Inc. since June 1998. Mr. McMahon had previously been Executive Vice President, Sales and a director of American Waste Services, Inc. since September 1996. Mr. McMahon received a Bachelor of Business Administration degree in finance and his Master of Business Administration degree from Youngstown State University.

CODE OF ETHICS

Avalon has adopted a Code of Ethics in the form of Standards of Business Ethics and Conduct. Such code applies to all employees of Avalon including its principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions.

Copies of Avalon’s Code of Ethics may be obtained without charge by any shareholder. Written requests for copies should be directed to the Secretary of Avalon Holdings Corporation, One American Way, Warren, Ohio 44484.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is contained under the captions “Meetings and Committees of the Board” and “Compensation of Directors and Executive Officers” in the Proxy Statement. The information under such captions is incorporated herein by reference, except that information contained under subpart captions “Board Committee Reports on Executive Compensation” and “Performance Graph” are specifically not incorporated herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is contained under the captions “Voting Securities and Principal Holders Thereof” and “Stock Ownership of Management” in the Proxy Statement which information under such captions is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ted Wesolowski is a director of Avalon and was Chief Executive Officer and President of Avalon from January 1, 2003 until March 15, 2004. Mr. Wesolowski is a shareholder and co-founder of the Pittsburgh, Pennsylvania law firm of Babst, Calland, Clements & Zomnir, P.C. which rendered legal services to Avalon during 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is contained under the caption “Independent Public Accountants” in the Proxy Statement which information under such captions is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)	The following documents are filed as part of this report:

Financial Statements and Independent Auditors’ Report (See Part II, Item 8 of this report regarding incorporation by reference from the 2005 Annual Report to Shareholders)

Financial Statement Schedules required to be filed by Item 8 and Paragraph (d) of this Item 15.

The following financial statement schedule, which is applicable for years ended December 31, 2005, 2004 and 2003, should be read in conjunction with the previously referenced financial statements.

Independent Auditors’ Report on Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts

Such independent auditors’ report and financial statement schedule are at pages 16 and 17 of this report. The other schedules are omitted because of the absence of conditions under which they are required or because the information required is shown in the consolidated financial statements or the notes thereto.

Exhibits

Registrant will furnish to any shareholder, upon written request, any of the following exhibits upon payment by such shareholder of the Registrant’s reasonable expenses in furnishing any such exhibit.


Exhibit No.
2.1		Agreement and Plan of Merger, dated as of February 6, 1998, entered into by and among USA Waste Services, Inc. (“USA”), C&S Ohio Corp. and American Waste Services, Inc. (“AWS”), incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 2.1.

2.2		Form of Contribution and Distribution Agreement, dated as of May 7, 1998, by and between AWS and Avalon Holdings Corporation (“Avalon”), incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 2.2.

3.1		Articles of Incorporation of Avalon incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 3.1.

3.2		Code of Regulations of Avalon incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 3.2.

4.1		Form of certificate evidencing shares of Class A common stock, par value $.01, of Avalon Holdings Corporation incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 4.1.

10.1		Form of Tax Allocation Agreement, dated as of May 7, 1998, by and among AWS, Avalon and USA incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 10.1.

10.2		Avalon Holdings Corporation Long-Term Incentive Plan incorporated herein by reference to Avalon Holdings Corporation Registration Statement on Form 10, Exhibit 10.2.

10.3		Lease Agreement with Squaw Creek Country Club, as referenced as Exhibit 10.3 to the registrant’s Form 10-Q for the period ended September 30, 2003.

10.4		Stock Purchase Agreement dated as of June 30, 2004 between Avalon Holdings Corporation and BMC International, Inc. for the purchase of DartAmericA, Inc., as referenced as Exhibit 10.4 to the registrant’s Form 10-Q for the period ended June 30, 2004.


11.1		Omitted—inapplicable. See “Basic net income (loss) per share” on page 15 of the 2005 Annual Report to Shareholders.

13.1		Avalon Holdings Corporation 2005 Annual Report to Shareholders (except pages and information therein expressly incorporated by reference in this Form 10-K, the Annual Report to Shareholders, is provided for the information of the Commission and is not to be deemed “filed” as part of the Form 10-K).

21.1		Subsidiaries of Avalon Holdings Corporation.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)	Reports on Form 8-K

On March 17, 2006, Avalon disclosed the resignation of Frank Lamanna as Chief Financial Officer and Treasurer.

(c)	Reference is made to Item 15 (a)(3) above for the index of Exhibits.

(d)	Reference is made to Item 15 (a)(2) above for the index to the financial statements and financial statement schedules.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 20^th day of March, 2006.


AVALON HOLDINGS CORPORATION
(Registrant)

By		/s/ Frank Lamanna
		Frank Lamanna - Treasurer and
		Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on the 20^th day of March, 2006.


Signatures		Title
/s/ RONALD E. KLINGLE		Chairman of the Board, Chief Executive
Ronald E. Klingle		Officer and Director

/s/ TED WESOLOWSKI		Director
Ted Wesolowski

/s/ ROBERT M. ARNONI		Director
Robert M. Arnoni

/s/ STEPHEN L. GORDON		Director
Stephen L. Gordon

/s/ THOMAS C. KNISS		Director
Thomas C. Kniss

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors

of Avalon Holdings Corporation

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Avalon Holdings Corporation and subsidiaries referred to in our report dated February 10, 2006, which is included in the 2005 Annual Report to Shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on 10-K for the year 2005. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The information included in Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GRANT THORNTON LLP

Cleveland, Ohio

February 10, 2006

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(thousands of dollars)


DESCRIPTION	Balance at Beginning of Year		Additions					Deductions / (Recoveries) ¹			Balance at End of Year
DESCRIPTION	Balance at Beginning of Year		Charged to Costs and Expenses			Charged to Other Accounts		Deductions / (Recoveries) ¹			Balance at End of Year
Allowance for Doubtful Accounts:

Year ended December 31,

2005	$	569	$	(250	)	$	—	$	(1	)	$	320

2004	$	527	$	107		$	—	$	65		$	569

2003	$	500	$	584		$	—	$	557		$	527

¹	Accounts receivable written-off as uncollectible, net of recoveries.

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX


Exhibit
13.1		2005 Annual Report to Shareholders

21.1		Subsidiaries of Avalon Holdings Corporation

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-13.1 2 dex131.htm ANNUAL REPORT Annual Report

Exhibit 13.1

Avalon Holdings Corporation

LOGO

2005 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

Consolidated Statements of Comprehensive Income (Loss)		12

Notes to Consolidated Financial Statements		13

Report of Independent Registered Public Accounting Firm		22

Digest of Financial Data		23

Company Location Directory		24

Directors and Officers		25

Shareholder Information		26

Financial Highlights

(in thousands, except for per share amounts)


For the year	2005			2004
Net operating revenues	$	34,157		$	30,002
Income (loss) from continuing operations		541			(845	)
Loss from discontinued operations		(151	)		(1,810	)
Net income (loss)		390			(2,655	)
Income (loss) per share from continuing operations		.14			(.22	)
Loss per share from discontinued operations		(.04	)		(.48	)
Net income (loss) per share		.10			(.70	)

At year-end	2005			2004
Working capital	$	11,630		$	9,845
Total assets		43,588			43,540
Shareholders’ equity		36,641			36,259

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 two golf courses and related facilities.

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 2005, Avalon utilized cash provided by operations to fund capital expenditures and meet operating needs.

Avalon’s aggregate capital expenditures in 2005 were $1.0 million which related principally to building improvements, the purchase of golf course and restaurant equipment and the development of software for Avalon’s golf and restaurant operations. Avalon’s aggregate capital expenditures in 2006 are expected to be in the range of $.5 million to $1.0 million, which will relate to building improvements and the purchase of golf course equipment.

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. Avalon has made $6.1 million of leasehold improvements as of December 31, 2005. 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 $11.6 million at December 31, 2005 compared with $9.8 million at December 31, 2004. The increase is primarily the result of an increase in short-term investments and an increase in accounts receivable relating to the waste brokerage and management services operations. As described below, the increase in short-term investments was primarily from the additional monies received in 2005 from an arbitration settlement, payments received on a promissory note and the sale of assets.

The increase in accounts receivable at December 31, 2005 compared with December 31, 2004 is primarily due to increased net operating revenues of the waste management services segment in the fourth quarter of 2005 compared with the fourth quarter of 2004 and a reduction in the allowance for doubtful accounts due to collections on previously reserved accounts.

In the fourth quarter of 2001, Avalon’s remediation business had recorded a pretax charge of $2.2 million to the provision for losses on accounts receivable as a result of IT Group, Inc., and most of its subsidiaries, including IT Corporation (“IT”), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002. The remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim. Such monies were received in February 2005.

Avalon Holdings Corporation and Subsidiaries

On July 15, 2004, Avalon completed the sale of DartAmericA, Inc. for a selling price of approximately $4.2 million. At the closing, BMC International, Inc. (“BMC”) delivered to Avalon $3.0 million in cash and a secured promissory note of $1.0 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericA, Inc.’s balance sheet items from March 31, 2004 to June 30, 2004 and was paid in September 2004. On June 30, 2005, BMC paid Avalon the remaining balance of the promissory note which amounted to approximately $.9 million.

In May 2005, Avalon sold, for approximately $.3 million, the Canfield, Ohio terminal building and property that was transferred to Avalon prior to the completion of the sale of DartAmericA, Inc.

Management believes that anticipated cash provided from future operations and existing working capital, as well as Avalon’s ability to incur indebtedness, will be, for the foreseeable future, sufficient to meet operating requirements and fund capital expenditure programs. Avalon does not currently have a credit facility.

Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

The following table summarizes Avalon’s significant off-balance sheet contractual obligations at December 31, 2005, and the effect such obligations are expected to have on Avalon’s liquidity and cash flows in future periods.


	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years
Operating lease obligations	$	793,000	$	297,000	$	470,000	$	26,000	$	—
Capital lease obligations		705,000		15,000		30,000		30,000		630,000

	$	1,498,000	$	312,000	$	500,000	$	56,000	$	630,000

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 two golf courses and related facilities and a travel agency.

Performance in 2005 compared with 2004

Overall Performance

Net operating revenues increased to $34.2 million in 2005 compared with $30.0 million in 2004. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lesser extent, increased net operating revenues of the golf and related operations segment. Costs of operations increased to $28.5 million in 2005 compared with $24.8 million in 2004. The increase in costs of operations is primarily due to higher net operating revenues of the waste management services segment in which costs have a direct relationship to

Avalon Holdings Corporation and Subsidiaries

revenues. Consolidated selling, general and administrative expenses decreased to $5.6 million in 2005 compared with $6.4 million in 2004 primarily as a result of decreased employee costs and bonuses. In 2004, consolidated selling, general and administrative expenses included approximately $.5 million of non-recurring bonuses. Avalon recorded income from continuing operations of $.5 million in 2005 compared with a loss from continuing operations of $.8 million in 2004.

Segment Performance. Segment performance should be read in conjunction with Note 13 to the Consolidated Financial Statements.

Net operating revenues of the waste management services segment increased to $28.9 million in 2005 compared with $25.7 million in 2004. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided. Income from continuing operations before taxes of the waste management services segment increased to $3.0 million in 2005 compared with $2.5 million in 2004 primarily as a result of the increased level of business of the waste brokerage and management services and a decrease in the provision for losses on accounts receivable. Income from continuing operations before taxes of the captive landfill operations were flat in 2005 compared with 2004.

Avalon’s golf and related operations segment consists primarily of two golf courses, clubhouses that provide dining and banquet facilities and a travel agency. Although the golf courses continue to be available to the general public, the primary source of revenues arise from the members of the Avalon Golf and Country Club. With the addition of the Squaw Creek facilities in November 2003, the Avalon Golf and Country Club has been open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course facilities and the Squaw Creek facilities. As a result of Avalon entering into the long-term lease agreement with Squaw Creek Country Club, net operating revenues associated with membership dues are recognized proportionately over 12 months. Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season.

Net operating revenues of the golf and related operations segment were $5.3 million in 2005 compared with $4.5 million in 2004. The golf courses, which are located in Warren, Ohio and Vienna, Ohio, were unavailable for play during the first three months of 2005 and 2004 due to adverse weather conditions. The increase in net operating revenues is primarily due to an increase in the average number of members during 2005 compared with 2004 and increased merchandise, food and beverage sales. The golf and related operations segment incurred a loss from continuing operations before taxes of $.3 million in 2005 compared with income from continuing operations before taxes of $24,000 in 2004. The decrease is primarily due to increased depreciation expense and increased employee and operating costs associated with operating the Squaw Creek facilities.

Interest Income

Interest income was $.3 million in 2005 compared with $.2 million in 2004. The increase is primarily the result of interest income earned in the first six months of 2005 on a promissory note issued to Avalon in connection with the sale of DartAmerica, Inc. in July 2004 and an increase in short-term investments in 2005 compared with the prior year.

General Corporate Expenses

General corporate expenses decreased to $2.4 million in 2005 compared with $3.4 million in 2004, primarily as a result of decreased employee costs and bonuses. In 2004, general corporate expenses included approximately $.5 million of non-recurring bonuses.

Avalon Holdings Corporation and Subsidiaries

Net Income (Loss)

Including the losses from discontinued operations, Avalon recorded net income of $.4 million in 2005 compared with a net loss of $2.7 million in 2004. In 2005, Avalon’s income tax provision (benefit) on income from continuing operations before taxes was primarily offset by a change in its valuation allowance resulting in a small state tax provision. Although Avalon incurred a loss from continuing operations before taxes in 2004, Avalon did not record a tax benefit in 2004. This was primarily the result of Avalon recording a valuation allowance to reduce the deferred tax assets as management believes it is more likely than not that the deferred tax assets will not be realized.

Performance in 2004 compared with 2003

Overall Performance

Net operating revenues increased to $30.0 million in 2004 compared with $24.7 million in 2003. The increase is primarily the result of higher net operating revenues of both the waste management services segment and the golf and related operations segment. Costs of operations as a percentage of net operating revenues increased to 82.8% in 2004 compared with 82.4% in 2003. Consolidated selling, general and administrative expenses decreased to $6.4 million in 2004 compared with $6.5 million in 2003 primarily as a result of a significant decrease in the provision for losses on accounts receivable and decreased employee costs, partially offset by approximately $.5 million of bonuses paid to certain employees. In 2004, Avalon recorded charges to the provision for losses on accounts receivable of $.1 million compared with $.6 million in 2003. Avalon incurred a loss from continuing operations of $.8 million in 2004 compared with a loss from continuing operations of $1.8 million in 2003.

Segment Performance. Segment performance should be read in conjunction with Note 13 to the Consolidated Financial Statements.

Net operating revenues of the waste management services segment increased to $25.7 million in 2004 compared with $22.3 million in 2003. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided, partially offset by a decrease in the services provided by the captive landfill management operations. Income from continuing operations before taxes for the waste management services segment increased to $2.5 million in 2004 compared with $1.5 million in 2003 primarily as a result of the increased level of business of the waste brokerage and management services and a decrease in the provision for losses on accounts receivable, partially offset by a slight decrease in income from continuing operations before taxes of the captive landfill operations. In 2003, income from continuing operations before taxes included a charge of approximately $.5 million to the provision for losses on accounts receivable due to customers filing bankruptcy.

Net operating revenues of the golf and related operations segment were $4.5 million in 2004 compared with $2.7 million in 2003. The golf courses were closed during the first three months of 2004 and 2003 due to seasonality. The increase in net operating revenues is primarily attributable to significant increases in the average number of members of the Avalon Golf and Country Club in 2004 compared with the prior year, which in turn has significantly increased membership dues, the number of rounds of golf played and food and beverage sales. As a result of Avalon entering into the long-term lease agreement with Squaw Creek Country Club in November 2003, net operating revenues associated with membership dues are recognized proportionately over 12 months. Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season. Despite the increase in net operating revenues, income from continuing operations before taxes decreased to $24,000 in 2004 compared with $66,000 in 2003, primarily as a result of additional operating expenses and employee costs incurred at the Squaw Creek facilities.

Interest Income

Interest income was $.2 million in both 2004 and 2003.

Avalon Holdings Corporation and Subsidiaries

General Corporate Expenses

General corporate expenses decreased to $3.4 million in 2004 compared with $3.6 million in 2003, primarily as a result of decreased employee costs partially offset by approximately $.5 million of bonuses paid to certain employees.

Net Loss

Including the losses from discontinued operations, Avalon incurred a net loss of $2.7 million in 2004 compared with a net loss of $3.6 million in 2003. Although Avalon incurred a loss from continuing operations before taxes in 2004 and 2003, Avalon did not record a tax benefit in either year. This was primarily the result of Avalon recording a valuation allowance to reduce the deferred tax assets as management believes it is more likely than not that the deferred tax assets will not be realized.

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 financial position or results of operations.

Avalon’s waste disposal brokerage and management operations obtain and retain customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and 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 disposal brokerage and management operations.

Avalon Holdings Corporation and Subsidiaries

Economic challenges throughout the industries served by Avalon have resulted in payment defaults by customers. While Avalon continuously endeavors to limit customers 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 two championship golf courses and a clubhouse at both the Avalon Lakes and Squaw Creek facilities. In addition, the Squaw Creek facility has a swimming pool, tennis courts, a fitness center and dining and banquet facilities. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses 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 Squaw Creek and Avalon Lakes facilities will result in an increase in the number of members of the Avalon Golf and Country Club. Such increased membership, if attained, will result in increased net operating revenues; however, there can be no assurance as to when such increased membership will be attained. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon. Although Avalon has had an increase in the number of members of the Avalon Golf and Country Club, as of December 31, 2005, Avalon has not attained its membership goals.

Squaw Creek and Avalon Lakes currently hold liquor licenses for their respective facilities. If, for some reason, either of these facilities were to lose their 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 Warren, Ohio and Vienna, Ohio 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.

Market Risk

Avalon does not have significant exposure to changing interest rates. A 10% change in interest rates would have an immaterial effect on Avalon’s income from continuing operations before income taxes for the next fiscal year. Avalon currently has no debt outstanding and invests primarily in Certificates of Deposits, U.S. Treasury notes, short-term money market funds and other short-term obligations. Avalon does not undertake any specific actions to cover its exposure to interest rate risk and Avalon is not a party to any interest rate risk management transactions.

Avalon does not purchase or hold any derivative financial instruments.

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.

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, 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 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 and payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

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 records a valuation allowance to reduce deferred tax assets when management believes it is more likely than not that the deferred tax assets relating to certain federal and state loss carry forwards will not be realized.

Avalon Holdings Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except for share data)


	December 31,
	2005			2004
Assets
Current Assets:
Cash and cash equivalents	$	7,759		$	7,861
Short-term investments (Note 3)		4,433			1,598
Accounts receivable, less allowance for doubtful accounts of $320 in 2005 and $569 in 2004		5,639			5,299
Prepaid expenses		220			255
Other current assets		255			226
Current assets – discontinued operations (Note 5)		29			1,632

Total current assets		18,335			16,871
Property and equipment, net (Note 6)		17,571			17,774
Leased property under capital leases, net (Notes 4 and 6)		5,740			5,519
Other assets, net		61			880
Noncurrent assets – discontinued operations (Note 5)		1,881			2,496

Total assets	$	43,588		$	43,540

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of obligations under capital leases (Notes 4 and 12)	$	1		$	1
Accounts payable		3,837			3,797
Accrued payroll and other compensation		469			457
Accrued income taxes		145			183
Other accrued taxes		239			210
Other liabilities and accrued expenses (Notes 2 and 8)		1,623			1,629
Current liabilities – discontinued operations (Note 5)		391			749

Total current liabilities		6,705			7,026

Other noncurrent liabilities		9			21
Obligations under capital leases (Notes 4 and 12)		233			234
Contingencies and commitments (Notes 11 and 12)		—			—

Shareholders’ Equity (Note 10):
Class A Common Stock, $.01 par value, one vote per share; authorized 10,500,000 shares; issued and outstanding 3,190,786 shares at December 31, 2005 and 3,185,240 shares at December 31, 2004		32			32
Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued and outstanding 612,545 shares at December 31, 2005 and 618,091 shares at December 31, 2004		6			6
Paid-in capital		58,096			58,096
Accumulated deficit		(21,483	)		(21,873	)
Accumulated other comprehensive loss		(10	)		(2	)

Total shareholders’ equity		36,641			36,259

Total liabilities and shareholders’ equity	$	43,588		$	43,540

See accompanying notes to consolidated financial statements.

Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands, except for per share amounts)


	Year Ended December 31,
	2005			2004			2003
Net operating revenues	$	34,157		$	30,002		$	24,734

Costs and expenses:
Costs of operations		28,532			24,840			20,393
Selling, general and administrative expenses		5,577			6,377			6,530

Operating income (loss) from continuing operations		48			(1,215	)		(2,189	)

Other income:
Interest expense		(14	)		(15	)		—
Interest income		344			195			168
Other income, net		176			190			209

Income (loss) from continuing operations before income taxes		554			(845	)		(1,812	)

Provision for income taxes (Note 7):
Current		13			—			4
Deferred		—			—			—

		13			—			4

Income (loss) from continuing operations		541			(845	)		(1,816	)

Loss from discontinued operations, net of income taxes (Note 5)¹		(151	)		(1,810	)		(1,828	)

Net income (loss)	$	390		$	(2,655	)	$	(3,644	)

Income (loss) per share from continuing operations	$	.14		$	(.22	)	$	(.48	)

Loss per share from discontinued operations	$	(.04	)	$	(.48	)	$	(.48	)

Net income (loss) per share (Note 2)	$	.10		$	(.70	)	$	(.96	)

Weighted average shares outstanding (Note 2)		3,803			3,803			3,803

¹ Year ended December 31, 2005 includes a write-down of a building of $.5 million.

Year ended December 31, 2004 includes a write-down of goodwill of $.5 million, a write-down of long-lived assets of $2.3 million, a write-down of a building of $.2 million, a bad debt recovery of $1.5 million and gains on sale of assets of $.5 million.

Year ended December 31, 2003 includes a write-down of a building of $1.6 million.

See accompanying notes to consolidated financial statements.

Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)


	Year Ended December 31,
	2005			2004			2003
Operating activities:
Income (loss) from continuing operations	$	541		$	(845	)	$	(1,816	)
Reconciliation of income (loss) from continuing operations to cash provided by (used in) operating activities:
Depreciation		988			886			793
Amortization		1			1			1
Amortization of investments		(4	)		8			57
(Benefit) provision for losses on accounts receivable		(249	)		107			584
Loss (gain) from disposal of property and equipment		4			—			(31	)
Gain on sale of investments		—			(2	)		—
Change in operating assets and liabilities:
Accounts receivable		(272	)		(1,786	)		146
Prepaid expenses		35			1,193			(28	)
Other current assets		(29	)		(8	)		(123	)
Other assets		(1	)		(801	)		1
Accounts payable		40			(238	)		1,152
Accrued payroll and other compensation		12			227			70
Accrued income taxes		(38	)		(59	)		6
Other accrued taxes		29			(85	)		24
Other liabilities and accrued expenses		(6	)		182			639
Other noncurrent liabilities		(12	)		21			—

Net cash provided by (used in) operating activities from continuing operations		1,039			(1,199	)		1,475
Net cash provided by operating activities from discontinued operations		1,411			2,241			1,384

Net cash provided by operating activities		2,450			1,042			2,859

Investing activities:
Purchases of investment securities		(4,439	)		—			(6,009	)
Maturities/sales of investment securities		1,600			4,399			5,838
Capital expenditures		(1,015	)		(5,154	)		(607	)
Proceeds from the sale of DartAmericA, Inc.		—			3,192			—
Payment received on note from the sale of DartAmericA, Inc.		1,000			—			—
Proceeds from disposal of property and equipment		5			79			64

Net cash (used in) provided by investing activities from continuing operations		(2,849	)		2,516			(714	)
Net cash provided by (used in) investing activities from discontinued operations		298			1,082			(111	)

Net cash (used in) provided by investing activities		(2,551	)		3,598			(825	)

Financing activities:
Principal payments on capital lease obligations		(1	)		(3	)		—

Net cash used in financing activities from continuing operations		(1	)		(3	)		—

(Decrease) increase in cash and cash equivalents		(102	)		4,637			2,034
Cash and cash equivalents at beginning of year		7,861			3,224			1,190

Cash and cash equivalents at end of year	$	7,759		$	7,861		$	3,224

Significant non-cash investing and financing activities:
Capital lease obligations incurred	$	—		$	238		$	—

For supplemental disclosures of cash flow information, see Note 7.

See accompanying notes to consolidated financial statements.

Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands)


	For The Three Years Ended December 31, 2005
	Shares			Common Stock				Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
	Class A	Class B		Class A		Class B		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
Balance at January 1, 2003	3,185	618		$	32	$	6	$	58,096	$	(15,574	)	$	74		$	42,634
Net loss	—	—			—		—		—		(3,644	)		—			(3,644	)
Unrealized loss on investments	—	—			—		—		—		—			(70	)		(70	)

Balance at December 31, 2003	3,185	618			32		6		58,096		(19,218	)		4			38,920
Net loss	—	—			—		—		—		(2,655	)		—			(2,655	)
Unrealized loss on investments	—	—			—		—		—		—			(6	)		(6	)

Balance at December 31, 2004	3,185	618			32		6		58,096		(21,873	)		(2	)		36,259
Conversion of shares by shareholders (Note 10)	6	(6	)		—		—		—		—			—			—
Net income	—	—			—		—		—		390			—			390
Unrealized loss on investments	—	—			—		—		—		—			(8	)		(8	)

Balance at December 31, 2005	3,191	612		$	32	$	6	$	58,096	$	(21,483	)	$	(10	)	$	36,641

Consolidated Statements of Comprehensive Income(Loss)

(in thousands)


	Year Ended December 31,
	2005			2004			2003
Net income (loss)	$	390		$	(2,655	)	$	(3,644	)
Unrealized loss on investments		(8	)		(6	)		(70	)

Comprehensive income (loss)	$	382		$	(2,661	)	$	(3,714	)

See accompanying notes to consolidated financial statements.

Avalon Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Description of the Business

In 2002, Avalon sold all of the fixed assets of its analytical laboratory business and in January 2004, Avalon sold all of the fixed assets of the remediation services business and discontinued the operations of the engineering and consulting services business. As such, the technical environmental services segment has been eliminated and the results of these operations are included in discontinued operations. All financial information presented has been restated to reflect this change. The captive landfill management operations, which were previously included in the technical environmental services segment, have been combined with the waste disposal brokerage and management services segment to form the waste management services segment.

In July 2004, Avalon sold all of the common stock of DartAmericA, Inc., Avalon’s transportation operations. DartAmericA, Inc.’s wholly owned subsidiaries, Dart Trucking Company, Inc. and Dart Services, Inc., were included in the sale. As a result, the transportation services segment has been eliminated and the results of the transportation operations are included in discontinued operations. All financial information presented has been restated to reflect this change.

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

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 2005 presentation.

Principles of consolidation

The consolidated financial statements include the accounts of Avalon and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents

Cash and cash equivalents include money market instruments and other highly liquid short-term investments that are stated at cost, which approximates market value. Such investments, 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 were not insured by the Federal Deposit Insurance Corporation. The balance of such cash equivalents was $7,721,000 and $7,780,000 at December 31, 2005 and 2004, respectively.

Avalon maintains its cash balances in several financial institutions. These balances may, at times, exceed federal insured limits. Avalon has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk relating to its cash and cash equivalents.

Investment securities

Avalon classifies its investment securities into trading, available-for-sale, or held-to-maturity categories. Securities are classified as trading when Avalon has the intent of selling them in the near term. Trading securities are reported at fair value on the balance sheet, with the

Avalon Holdings Corporation and Subsidiaries

change in fair value during the period included in earnings. Securities are classified as held-to-maturity when Avalon has the ability and intent to hold the securities to maturity. Held-to-maturity securities are reported as either short-term or noncurrent on the balance sheet based upon contractual maturity date and are stated at amortized cost. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value on the balance sheet with the change in fair value reported as a component of other comprehensive income (see Note 3).

Financial instruments

The fair value of financial instruments consisting of cash, cash equivalents, accounts receivable, and accounts payable at December 31, 2005 and 2004 approximates carrying value due to the relative short maturity of these financial instruments. The fair value of available-for-sale investments, based upon market quotes, was $4,433,000 at December 31, 2005 and $1,598,000 at December 31, 2004. The fair value of the secured note receivable at December 31, 2004 approximated its carrying value of $1 million, based upon an evaluation of prevailing market interest rates and other applicable factors. On June 30, 2005, Avalon was paid the remaining balance of the secured note receivable.

Property and equipment

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the asset which varies from 10 to 30 years for land improvements; 5 to 50 years in the case of buildings and improvements; and from 3 to 10 years for machinery and equipment, vehicles and office furniture and equipment (See Note 6).

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.

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. The deferred revenues relating to membership dues at December 31, 2005 and December 31, 2004 were $1.2 million and $1.1 million, respectively, and are included in the Consolidated Balance Sheets under the caption “Other liabilities and accrued expenses”. Prior to Avalon entering into a long-term lease agreement on November 1, 2003 with Squaw Creek Country Club to lease and operate its golf course and related facilities, membership dues were prorated monthly from May through October, which generally represented the golf season.

Accounts Receivable

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 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, the condition of the general economy and the industry as a whole. Avalon writes-off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

Leases

Avalon accounts for its lease agreements pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, “Accounting for Leases”, which categorizes 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 4, 6 and 12).

Avalon Holdings Corporation and Subsidiaries

Asset impairments

Effective January 1, 2002, Avalon adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” In accordance with this statement, 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 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 values. 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.

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 net income (loss) per share

For the years ended December 31, 2005, 2004 and 2003, basic net income (loss) per share has been computed using the weighted average number of common shares outstanding during each period, which was 3,803,331. There were no common equivalent shares outstanding and therefore, diluted per share amounts are equal to basic per share amounts for all years presented.

Note 3. Investment Securities

Avalon held available-for-sale securities of $4,433,000 and $1,598,000 at December 31, 2005 and December 31, 2004, respectively, and are included in the Consolidated Balance Sheets under the caption “Short-term investments”. As a result of the classification of securities as available-for-sale, Avalon recognized unrealized losses of $8,000, $6,000 and $70,000, net of applicable income taxes, for the years ended December 31, 2005, 2004 and 2003, respectively.

Accumulated other comprehensive loss consisted of an unrealized loss of $10,000 at December 31, 2005 and $2,000 at December 31, 2004.

Information regarding investment securities consists of the following (in thousands):


	December 31, 2005
	Amortized Cost		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury Notes	$	1,397	$	(10	)	$	1,387
Certificates of Deposit		3,046		—			3,046

Total	$	4,443	$	(10	)	$	4,433


	December 31, 2004
	Amortized Cost		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury Notes	$	1,600	$	(2	)	$	1,598
Certificates of Deposit		—		—			—

Total	$	1,600	$	(2	)	$	1,598

The amortized cost and estimated fair value of available-for-sale investments at December 31, 2005, by contractual maturity, consists of the following (in thousands):


	Available-For-Sale
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	4,443	$	4,433
Due after one year through five years		—		—

Total	$	4,443	$	4,433

Note 4. Capital Leased Assets

Avalon Holdings Corporation and Subsidiaries

Note 5. Discontinued Operations

Recognizing that the continuing losses incurred by the environmental remediation business would adversely impact Avalon’s future financial performance, in the fourth quarter of 2003, management determined that it was in Avalon’s best interest to sell or discontinue the operation of the environmental remediation business. In January 2004, Avalon sold all of the fixed assets of the remediation business for $.2 million and recorded a gain of $.1 million on the sale. As part of the transaction, the purchaser assumed all of the remediation business’ obligations relating to ongoing projects. The remediation business retained all of its other liabilities and assets, including cash and accounts receivable. The results of operations of the remediation business have been included in discontinued operations.

In the fourth quarter of 2001, the remediation business recorded a pretax charge of $2.2 million to the provision for losses on accounts receivable as a result of IT Group, Inc., and most of its subsidiaries, including IT Corporation (“IT”), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002. The remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim. Such amount was recorded as income in discontinued operations in the third quarter of 2004. The monies were received in February 2005.

In the fourth quarter of 2003, management determined that it was in Avalon’s best interest to discontinue the operations of the engineering and consulting business because the business began to experience losses and Avalon believed that the losses were likely to continue in the future. In January 2004, Avalon discontinued such operations and the results are included in discontinued operations.

Concurrent with the decision to discontinue the technical environmental engineering and consulting business, Avalon decided to sell the building associated with the technical environmental services operations. As a result, the building is classified as held-for-sale and the expenses related to the maintenance and operations of the building are included in discontinued operations. Based upon quoted market prices, in the fourth quarter of 2003, Avalon recorded a $1.6 million write-down of the building, a $.2 million write-down of the building in the fourth quarter of 2004 and a $.2 million write-down of the building in the second quarter of 2005. In October 2005, Avalon reached an agreement in principal with a third party to sell the building for $2.0 million. In December 2005, Avalon and the third party signed an agreement for the sale of the building. Such agreement is subject to due diligence. Avalon expects the sale to be completed in the second quarter of 2006, assuming that contingencies to the sale are satisfied. As such, Avalon recorded an additional $.3 million write-down of the building in the third quarter of 2005 to reflect the purchase price less the costs to sell the building. Such write-downs have been included in discontinued operations.

On July 15, 2004, Avalon completed the sale of DartAmericA, Inc. (“DartAmericA”) for a selling price of approximately $4.2 million. At the closing, BMC International, Inc. (“BMC”) delivered to Avalon $3.0 million in cash and a secured promissory note of $1.0 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The promissory note had an interest rate of 6.875%. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericA’s balance sheet items from March 31, 2004 to June 30, 2004 and was paid in September 2004. On June 30, 2005, BMC paid Avalon the remaining balance of the promissory note which amounted to approximately $.9 million of which, at the time of payment, $.2 million was included in the Consolidated Balance Sheets under the caption “Accounts receivable, less allowance for doubtful accounts” and $.7 million was included under the caption “Other assets, net”. The results of operations of the transportation operations have been included in discontinued operations.

Prior to the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal. In May 2005, Avalon sold this facility for approximately $.3 million and recognized a gain on the sale of approximately $.2 million. Such gain has been included in discontinued operations.

Note 6. Property and Equipment

Property and equipment at December 31, 2005 and 2004 consists of the following (in thousands):


	2005			2004
Land and land improvements	$	10,341		$	10,341
Buildings and improvements		9,428			9,256
Machinery and equipment		1,214			1,202
Vehicles		123			166
Office furniture and equipment		1,510			1,139
Construction in progress		94			162

		22,710			22,266

Less: accumulated depreciation and amortization		(5,139	)		(4,492	)

Property and equipment, net	$	17,571		$	17,774

Avalon Holdings Corporation and Subsidiaries

Leased property under capital leases at December 31, 2005 and 2004 consists of the following (in thousands):


	2005			2004
Leased property under capital leases	$	6,125		$	5,647
Less: accumulated amortization		(385	)		(128	)

Leased property under capital leases, net	$	5,740		$	5,519

Note 7. Income Taxes

Income (loss) before income taxes for each of the three years in the period ended December 31, 2005 was subject to taxation under United States jurisdictions only.

Total provisions (benefits) for income taxes consist of the following (in thousands):


	2005			2004		2003
Continuing operations	$	13		$	—	$	4
Discontinued operations		(54	)		—		(30	)

	$	(41	)	$	—	$	(26	)

The provision (benefit) for income taxes from continuing operations consists of the following (in thousands):


	2005		2004		2003
Current:
Federal	$	—	$	—	$	—
State		13		—		4

		13		—		4

Deferred:
Federal		—		—		—
State		—		—		—

		—		—		—

	$	13	$	—	$	4

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2005 and 2004 are as follows (in thousands):


	2005			2004
Deferred tax assets:
Accounts receivable, allowance for doubtful accounts	$	113		$	201
Reserves not deductible until paid		148			173
Net operating loss carry-forwards
Federal		1,970			2,000
State		448			456
Capital loss carry-forward		2,851			2,903
Other		5			3

Gross deferred tax assets		5,535			5,736
Less valuation allowance		(4,959	)		(5,088	)

Deferred tax assets net of valuation allowance	$	576		$	648

Deferred tax liabilities:
Property and equipment	$	(576	)	$	(648	)
Other		—			—

Gross deferred tax liabilities	$	(576	)	$	(648	)

Net deferred tax asset	$	—		$	—

The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income (loss) from continuing operations before income taxes as a result of the following differences (in thousands):


	2005			2004			2003
Income (loss) before income taxes from continuing operations	$	554		$	(845	)	$	(1,812	)
Federal statutory tax rate		35	%		35	%		35	%

		194			(296	)		(634	)

State income taxes, net of federal income tax benefits		8			—			1
Change in valuation allowance		(210	)		253			583
Other nondeductible expenses		25			33			31
Other, net		(4	)		10			23

	$	13		$	—		$	4

Avalon received net income tax refunds of $4,000, $3,000 and $35,000 in 2005, 2004 and 2003, respectively.

At December 31, 2005, Avalon has taxable loss carryforwards for federal income tax purposes aggregating approximately $5,794,000, which are available to offset future federal taxable income. These carryforwards expire in 2020 through 2025. Avalon has a capital loss carryforward for federal income tax purposes of approximately $8,385,000 which is available to offset future federal capital gain income. This carryforward expires in 2009. In addition, at December 31, 2005, 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 2025. 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 8. Retirement Benefits

Avalon sponsors a defined contribution profit sharing plan that is a qualified tax deferred benefit plan under Section 401(k) of the Internal Revenue Code (the “Plan”). Substantially all employees are eligible to participate in the Plan. The Plan provides for employer discretionary cash contributions as determined by Avalon’s Board of Directors. Discretionary contributions vest on a graduated basis and become 100% vested after six years of service. Plan participants may also contribute a portion of their annual compensation to the Plan, subject to maximums imposed by the Internal Revenue Code and related regulations. Costs charged to operations for Avalon’s contributions were $91,000, $79,000 and $84,000 for the years 2005, 2004 and 2003, respectively. These amounts are contributed in the year subsequent to the year expensed and are included in the respective Consolidated Balance Sheets under the caption “Other liabilities and accrued expenses.”

Avalon Holdings Corporation and Subsidiaries

Note 9. Stock Option Plan

Effective July 1, 1998, Avalon adopted the 1998 Long-term Incentive Plan which provides for the granting of options which are intended to be non-qualified stock options (“NQSO’s”) for federal income tax purposes except for those options designated as incentive stock options (“ISO’s”) which qualify under Section 422 of the Internal Revenue Code. Avalon has reserved 1,300,000 shares of Class A Common Stock for issuance to employees and non-employee directors. NQSO’s may be granted with an exercise price which is not less than 85% of the fair market value of the Class A Common Stock on the date of grant. Options designated as ISO’s shall not be less than 110% of fair market value for employees who are ten percent shareholders and not less than 100% of fair market value for other employees. The Board of Directors may, from time to time, in its discretion grant options to one or more outside directors, subject to such terms and conditions as the Board of Directors may determine, provided that such terms and conditions are not inconsistent with other applicable provisions of the 1998 Long-term Incentive Plan. Options shall have a term of no longer than ten years from the date of grant; except that for an option designated as an ISO which is granted to a ten percent shareholder, the option shall have a term no longer than five years.

No option shall be exercisable prior to one year after its grant, unless otherwise provided by the Option Committee of the Board of Directors (but in no event before 6 months after its grant), and thereafter options shall become exercisable in installments, if any, as provided by the Option Committee. Options must be exercised for full shares of common stock. To the extent that options are not exercised when they become initially exercisable, they shall be carried forward and be exercisable until the expiration of the term of such options. To date, no options have been granted under the 1998 Long-term Incentive Plan.

Note 10. 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.

Note 11. Legal Matters

Note 12. Lease Commitments

Future commitments under long-term, operating leases and capital leases at December 31, 2005 are as follows (in thousands):


	Capital		Operating		Total
2006	$	15	$	297	$	312
2007		15		237		252
2008		15		233		248
2009		15		26		41
2010		15		0		15
After 2010		630		0		630

Total minimum lease payments	$	705	$	793	$	1,498

Less: Amounts representing interest		471

Present value of minimum payments		234
Less: Current portion of obligations under capital leases		1

Long-term portion of obligations under capital leases	$	233

Rental expense included in the Consolidated Statements of Operations amounted to $350,000 in 2005, $332,000 in 2004 and $194,000 in 2003.

Avalon Holdings Corporation and Subsidiaries

Note 13. Business Segment Information

In applying SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” Avalon considered its operating and management structure and the types of information subject to regular review by its “chief operating decision maker.” On this basis, 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 two 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, food and beverage sales. Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented.

In 2005, one customer and its affiliates accounted for approximately 11% of the waste management services segment’s net operating revenues to external customers and approximately 9% of Avalon’s consolidated net operating revenues. In 2004, one customer accounted for approximately 14% of the waste management services segment’s net operating revenues to external customers, and approximately 12% of Avalon’s consolidated net operating revenues. In 2003, no customer individually accounted for 10% or more of Avalon’s consolidated net operating revenues.

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) from continuing operations before taxes.

Business segment information including the reconciliation of segment income to consolidated income (loss) from continuing operations before taxes is as follows (in thousands):


	2005			2004			2003
Net operating revenues from:
Waste management services:
External customers revenues	$	28,864		$	25,493		$	22,137
Intersegment revenues		4			163			201

Total waste management services		28,868			25,656			22,338

Golf and related operations:
External customer revenues		5,293			4,509			2,597
Intersegment revenues		45			38			78

Total golf and related operations		5,338			4,547			2,675

Segment operating revenues		34,206			30,203			25,013
Intersegment eliminations		(49	)		(201	)		(279	)

Total net operating revenues	$	34,157		$	30,002		$	24,734

Income (loss) from continuing operations before taxes:
Waste management services	$	3,001		$	2,488		$	1,512
Golf and related operations		(303	)		24			66
Other businesses		(5	)		—			(13	)

Segment income before taxes		2,693			2,512			1,565
Corporate interest income		251			92			154
Corporate other income, net		43			(7	)		30
General corporate expenses		(2,433	)		(3,442	)		(3,561	)

Income (loss) from continuing operations before taxes	$	554		$	(845	)	$	(1,812	)

Depreciation and amortization:
Waste management services	$	30		$	60		$	84
Golf and related operations		800			650			524
Corporate		155			185			243

Total	$	985		$	895		$	851

Interest income:
Waste management services	$	82		$	92		$	12
Golf and related operations		11			11			2
Corporate		251			92			154

Total	$	344		$	195		$	168

Capital expenditures:
Waste management services	$	17		$	18		$	6
Golf and related operations		913			5,092			575
Corporate		85			44			26

Total	$	1,015		$	5,154		$	607

Identifiable assets at December 31:
Waste management services	$	6,165		$	4,609		$	5,821
Golf and related operations		19,822			19,574			14,825
Other businesses		828			731			557
Corporate		33,369			33,838			28,704
Discontinued operations		1,909			4,128			15,589

Sub Total		62,093			62,880			65,496
Elimination of intersegment receivables		(18,505	)		(19,340	)		(16,442	)

Total	$	43,588		$	43,540		$	49,054

Avalon Holdings Corporation and Subsidiaries

Note 14. Recently Issued Financial Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R). This statement revises FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123-R focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123-R requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The provisions for this statement are effective as of the first interim or annual reporting period that begins after December 15, 2005. As of December 31, 2005, Avalon has not entered into any share-based transactions for employee services and, as such, the adoption of SFAS No. 123-R will have no impact on Avalon’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of AFB No. 20 and FASB Statement No. 3” (SFAS No. 154). SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is deemed impracticable. APB No. 20 “Accounting Changes”, previously required that voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Avalon does not expect the adoption of SFAS No. 154 to have a material impact on its consolidated financial statements.

Avalon Holdings Corporation and Subsidiaries

Note 15. Quarterly financial data (Unaudited)

Selected quarterly financial data for each quarter in 2005 and 2004 is as follows (in thousands except for per share amounts):


	Year Ended December 31, 2005
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net operating revenues	$	7,430		$	8,739		$	9,517		$	8,471		$	34,157
Operating (loss) income from continuing operations		(76	)		(174	)		216			82			48
Income (loss) from continuing operations		32			(65	)		356			218			541
Income (loss) from discontinued operations		80			(10	)		(336	)		115			(151	)
Net income (loss)		112			(75	)		20			333			390
Basic income (loss) per share from continuing operations		.01			(.02	)		.09			.06			.14
Basic income (loss) per share from discontinued operations		.02			—			(.09	)		.03			(.04	)
Basic net income (loss) per share	$	.03		$	(.02	)	$	—		$	.09		$	.10


	Year Ended December 31, 2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net operating revenues	$	6,239		$	7,262		$	8,448		$	8,053		$	30,002
Operating (loss) income from continuing operations		(487	)		(151	)		(609	)		32			(1,215	)
(Loss) income from continuing operations		(411	)		(84	)		(463	)		113			(845	)
(Loss) income from discontinued operations		(614	)		(2,414	)		1,500			(282	)		(1,810	)
Net (loss) income		(1,025	)		(2,498	)		1,037			(169	)		(2,655	)
Basic (loss) income per share from continuing operations		(.11	)		(.02	)		(.13	)		.04			(.22	)
Basic (loss) income per share from discontinued operations		(.16	)		(.64	)		.40			(.08	)		(.48	)
Basic net (loss) income per share	$	(.27	)	$	(.66	)	$	.27		$	(.04	)	$	(.70	)

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, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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 consolidated financial position of Avalon Holdings Corporation and subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Grant Thornton LLP

/s/ Grant Thornton LLP

Cleveland, Ohio

February 10, 2006

Avalon Holdings Corporation and Subsidiaries

Digest of Financial Data


	(All amounts are in thousands, except per share data, percentages and number of employees )
	2005			2004			2003			2002			2001
SELECTED STATEMENT OF OPERATIONS INFORMATION
Net operating revenues	$	34,157		$	30,002		$	24,734		$	23,929		$	25,178
Operating income (loss) from continuing operations		48			(1,215	)		(2,189	)		(2,536	)		(2,659	)
Interest expense		14			15			—			—			—
Income (loss) from continuing operations		541			(845	)		(1,816	)		(2,171	)		(956	)
Loss from discontinued operations		(151	)		(1,810	)		(1,828	)		(3,667	)		(2,374	)
Net income (loss)		390			(2,655	)		(3,644	)		(5,838	)		(3,330	)
Income (loss) per share from continuing operations		.14			(.22	)		(.48	)		(.57	)		(.25	)
Loss per share from discontinued operations		(.04	)		(.48	)		(.48	)		(.97	)		(.63	)
Net income (loss) per share		.10			(.70	)		(.96	)		(1.54	)		(.88	)
Dividends per Class A share		—			—			—			—			—
Dividends per Class B share	$	—		$	—		$	—		$	—		$	—
Weighted average shares used to calculate net income (loss) per share		3,803			3,803			3,803			3,803			3,803

SELECTED CASH FLOW INFORMATION
Net cash provided by (used in) operating activities from continuing operations	$	1,039		$	(1,199	)	$	1,475		$	(153	)	$	(1,062	)
Cash used for capital expenditures	$	1,015		$	5,154		$	607		$	2,488		$	874

SELECTED YEAR-END BALANCE SHEET INFORMATION
Cash and cash equivalents	$	7,759		$	7,861		$	3,224		$	1,190		$	2,290
Current assets		18,335			16,871			17,329			22,666			25,135
Current liabilities		6,705			7,026			10,134			8,881			10,748
Working capital		11,630			9,845			7,195			13,785			14,387
Properties less accumulated depreciation and amortization		17,571			17,774			18,392			19,085			17,358
Leased property under capital leases, net		5,740			5,519			474			—			—
Total assets		43,588			43,540			49,054			51,646			59,967
Current portion of obligations under capital leases		1			1			—			—			—
Long-term obligations under capital leases		233			234			—			—			—
Deferred income tax liability		—			—			—			—			701
Shareholders’ equity	$	36,641		$	36,259		$	38,920		$	42,634		$	48,398

OTHER INFORMATION
Working capital ratio		2.7:1			2.4:1			1.7:1			2.6:1			2.3:1
Quoted market price-Class A Shares:
High	$	5.35		$	4.09		$	2.70		$	3.40		$	3.55
Low	$	2.99		$	2.43		$	1.70		$	1.96		$	2.20
Year-end	$	4.68		$	3.16		$	2.63		$	2.00		$	2.85
Number of employees at year-end		143			120			321			346			422

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) 856-8800

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 Travel, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8400

Avalon Holdings Corporation and Subsidiaries

Directors and Officers

Directors

Ronald E. Klingle

Chairman of the Board

Executive Committee (Chairman)

Compensation Committee (Chairman)

Ted Wesolowski

Shareholder, Babst, Calland, Clements, & Zomnir, P.C.

Executive Committee

Compensation Committee

Robert M. Arnoni

President, Arnoni Development Company, Inc.

Compensation Committee

Audit Committee

Option Plan Committee

Stephen L. Gordon

Partner, Beveridge & Diamond, P.C.

Executive Committee

Audit Committee

Option Plan Committee

Thomas C. Kniss

Partner, Kniss Kletzli & Associates, P.C.

Audit Committee (Chairman)

Option Plan Committee (Chairman)

Officers

Ronald E. Klingle

Chief Executive Officer

Frank Lamanna

Treasurer, Chief Financial Officer and Assistant Secretary

Ted Wesolowski

Secretary

Frances R. Klingle

Chief Administrative Officer

Kenneth R. Nichols

Vice President, Taxes

Richard R. Fees

Controller

Avalon Holdings Corporation and Subsidiaries

Shareholder Information

Common stock information

Avalon’s Class A Common Stock is listed on the American Stock Exchange (symbol: AWX). Quarterly stock information for 2005, 2004 and 2003 as reported by The Wall Street Journal is as follows:


2005:
Quarter Ended	High		Low		Close
March 31	$	3.54	$	2.99	$	3.45
June 30		5.35		3.10		4.01
September 30		4.40		3.89		4.24
December 31		4.75		3.80		4.68


2004:
Quarter Ended	High		Low		Close
March 31	$	4.09	$	2.58	$	3.00
June 30		3.20		2.43		2.90
September 30		3.32		2.80		2.85
December 31		3.30		2.78		3.16


2003:
Quarter Ended	High		Low		Close
March 31	$	2.06	$	1.70	$	1.89
June 30		2.12		1.70		2.06
September 30		2.39		2.05		2.38
December 31		2.70		2.22		2.63

No dividends were paid during 2005.

There are 534 Class A and 11 Class B Common Stock shareholders of record as of the close of business March 3, 2006. 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 59 Maiden Lane, New York, New York 10038.

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 Frank Lamanna, 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.

EX-21.1 3 dex211.htm SUBSIDIARIES OF AVALON HOLDINGS CORPORATION Subsidiaries of Avalon Holdings Corporation

Exhibit 21.1

The following is a list of Avalon’s subsidiaries except for unnamed subsidiaries which considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.


*Subsidiary Name*		*State of Incorporation*
• American Landfill Management, Inc.		Ohio
• American Waste Management Services, Inc.		Ohio
• Avalon Golf and Country Club, Inc.		Ohio
• Avalon Lakes Golf, Inc.		Ohio
• Avalon Travel, Inc.		Ohio
• TBG, Inc.		Ohio

Parent/subsidiary relationships are indicated by indentations. In each case, 100% of the voting securities of each of the subsidiaries is owned by the indicated parent of such subsidiary.

EX-31.1 4 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

AVALON HOLDINGS CORPORATION

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Ronald E. Klingle, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Avalon Holdings Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 20, 2006

/s/ Ronald E. Klingle

Ronald E. Klingle

Chief Executive Officer

EX-31.2 5 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

AVALON HOLDINGS CORPORATION

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Frank Lamanna, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Avalon Holdings Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the registrant and have:

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 20, 2006

/s/ Frank Lamanna

Frank Lamanna

Chief Financial Officer

EX-32.1 6 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Avalon Holdings Corporation (the “registrant”) on Form 10-K for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “report”), I, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. (a) 1350, as adopted pursuant to (a) 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)

The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

/s/ Ronald E. Klingle

Ronald E. Klingle

Chief Executive Officer

March 20, 2006

EX-32.2 7 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Avalon Holdings Corporation (the “registrant”) on Form 10-K for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “report”), I, Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. (a) 1350, as adopted pursuant to (a) 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)

The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

/s/ Frank Lamanna

Frank Lamanna

Chief Financial Officer

March 20, 2006

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