AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2005
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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AVP, INC.
(Exact name of Small Business Issuer in its charter)
DELAWARE 7929 98-0142664
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer identification
incorporation or organization) Classification Code Number) number)
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6100 Center Drive, Suite 900
Los Angeles, CA 90045
(310) 426-8000
(Address of Principal Place of Business or Intended Principal
Place of Business)
Leonard Armato
Chief Executive Officer
6100 Center Drive, Suite 900
Los Angeles, CA 90045
(310) 426-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
David C. Fischer, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154-0037
(212) 407-4000
(212) 407-4990 (fax)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on the Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If the Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Number of Shares Offering Price Per Aggregate Amount of
Securities to be Registered to be Registered Share(2) Offering Price(2) Registration Fee
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Common Stock, $0.001 par 114,248,948 $.285 $32,560,950 $3,833
value per share(1)
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(1) Pursuant to Rule 416 under the Securities Act, the shares being registered
hereunder include such indeterminate number of shares of Common Stock as may be
issuable with respect to the shares being registered hereunder as a result of
stock splits, stock dividends or similar transactions affecting the shares to be
offered by the selling stockholders.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act, using the average of the
bid and asked price as reported on the OTCBB on April 12, 2005.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 15, 2005
PROSPECTUS
114,248,948 SHARES
AVP, INC.
COMMON STOCK
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This prospectus relates to an aggregate of up to 114,248,948 shares of our
common stock, which may be offered by the selling stockholders identified in
this prospectus for their own account. We will not receive any proceeds from the
sale of the shares by these selling stockholders. We may, however, receive
proceeds in the event that some or all of the options or warrants held by the
selling stockholders are exercised for cash.
Unless the context otherwise requires, the terms "we," "us" or "our" refer
to AVP, Inc. and its consolidated subsidiaries.
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Prices of our common stock are quoted on the OTC Bulletin Board under the
symbol "AVPN." Until March 21, 2005, our common stock traded on the OTCBB under
the symbol "ONET." The last reported sales price per share of our common stock,
as reported by the OTCBB on April 12, 2005, was $.30.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is , 2005.
TABLE OF CONTENTS
Notice about Forward Looking Statements......................................1
Prospectus Summary...........................................................2
Risk Factors.................................................................4
Market for Common Equity and Related Stockholder Matters.....................8
Business.....................................................................11
Legal Proceedings............................................................18
Description of Property......................................................18
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................19
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................27
Management...................................................................28
Executive Compensation.......................................................30
Certain Relationships and Related Transactions...............................33
Security Ownership of Certain Beneficial Owners and Management...............34
Description of Securities....................................................36
Indemnification for Securities Act Liabilities...............................39
Plan of Distribution.........................................................39
Selling Stockholders.........................................................42
Legal Matters................................................................48
Experts......................................................................48
Available Information........................................................48
Index to Consolidated Financial Statements...................................F-1
Item 24. Indemnification of Directors, Officers and Employees............II-1
Item 25. Other Expenses of Issuance and Distribution.....................II-1
Item 26. Recent Sales of Unregistered Securities.........................II-1
Item 27. Exhibits........................................................II-3
Item 28. Undertakings....................................................II-5
i
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU SHOULD
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL
OR BUY ANY SHARES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL. THE INFORMATION
IN THIS PROSPECTUS IS CURRENT AS OF THE DATE ON THE COVER.
ii
NOTICE ABOUT FORWARD LOOKING STATEMENTS
When used in this prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "intend," "plans", and similar expressions
are intended to identify forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") regarding events, conditions and financial trends which may
affect our future plans of operations, business strategy, operating results and
financial position. Forward looking statements in this prospectus include
without limitation statements relating to trends affecting our financial
condition or results of operations, our business and growth strategies and our
financing plans.
Such statements are not guarantees of future performance and are subject
to risks and uncertainties and actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Such factors include, among other things the conditions of the markets for live
events, broadcast television, cable television, Internet, entertainment,
professional sports, and licensed merchandise; acceptance of our brands, media
and merchandise within those markets; uncertainties relating to litigation;
risks associated with producing live events both domestically and
internationally; uncertainties associated with international markets; risks
relating to maintaining and renewing key agreements, including television
distribution agreements; and other risks and factors set forth from time to time
in our filings with the Securities and Exchange Commission (the "SEC").
Additional factors are described in our other public reports and filings
with the SEC. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in our securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
Business Overview
AVP, Inc. owns and operates the sole nationally and internationally
recognized U.S. professional beach volleyball tour. AVP's business includes
establishing and managing tournaments; sponsorship sales and sales of broadcast,
licensing, and trademark rights; sales of food, beverage, and merchandise at
tournaments; contracting with players on the tour; and associated activities.
AVP produced 12 men's and 12 women's professional beach volleyball tournaments
throughout the United States in 2004 and has scheduled 14 each for 2005. AVP has
more than 125 of the top professional players under exclusive contracts, as well
as a sizable base of spectators and television viewers that represents an
attractive audience for national, regional, and local sponsors.
Company Information
On February 28, 2005, a wholly owned subsidiary of AVP, then known as
Othnet, Inc., merged with the Association of Volleyball Professionals, Inc.,
pursuant to an Agreement and Plan of Merger, as amended. As a result of the
merger, the Association became Othnet's wholly-owned subsidiary. In connection
with the merger, Othnet changed its name to AVP, Inc. and the Association
changed its name to AVP Pro Beach Volleyball Tour, Inc. Our corporate address is
6100 Center Drive, Suite 900, Los Angeles, CA 90045. Our telephone number is
(310) 426-8000.
Summary of the Offering
Common stock offered by AVP, Inc.:
None
Common stock offered by selling stockholders:
114,248,948 shares of common stock.
Capital stock outstanding:
As of April 12, 2005, we had outstanding 22,514,742 shares of common stock,
334,485 shares of Series A Preferred Stock, and 147,364 shares of Series B
Preferred Stock, each convertible into 243 shares of common stock; and options
and warrants to purchase 155,257,124 shares of common stock.
Proceeds to AVP, Inc.:
We will not receive proceeds from the resale of shares by the selling
stockholders. We may, however, receive proceeds in the event that some or all of
the options or warrants held by the selling stockholders are exercised for cash.
OTC Bulletin Board Symbol:
AVPN
2
In the second half of 2004, we issued $2.36 million of 10% convertible
notes, in units that included common stock and two-year common stock purchase
warrants exercisable at $.21 per share. On February 28, 2005, we consummated a
private placement of units consisting of four shares of our Series B Preferred
Stock and a five-year warrant to purchase up to 243 shares of our common stock
at an exercise price of $0.19548 per share. A total of 36,841 units were sold
for an aggregate purchase price of $5,000,060.52, before commissions and
transaction expenses. The placement agent in the offering, received a cash
commission fee of $500,000 and a five-year warrant to purchase up to 3,580,945
shares of common stock, at an exercise price of $0.13963 per share.
We are registering for resale common stock issued to holders of the
convertible 10% notes; issuable upon conversion of the Series B Preferred Stock,
Series A Preferred Stock issued upon conversion of the 10% convertible notes,
Series A Preferred Stock issued to two of our broadcasters, and upon conversion
of a convertible note issued to one of our merchandisers; and upon exercise of
the warrants issued to the holders of the 10% notes and Series B Preferred
Stock. Holders of the 10% notes and of options to purchase 4,100,000 shares of
common stock also being registered have agreed to refrain from selling their
shares for periods of 90 to 180 days from effectiveness of the registration
statement.
3
RISK FACTORS
An investment in AVP securities is highly speculative and extremely risky.
You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before deciding to buy AVP securities.
Risks Related to our Business
We have limited revenues and anticipate future losses.
AVP has operated at a loss since 2001, when current management was
installed. We cannot predict whether our current or prospective business
activities will ever generate enough revenue to be profitable.
We have a limited operating history.
Our management's limited operating history makes our prospective results
difficult to evaluate. Moreover, we lack the goodwill of an established business
and therefore rely on individual members of current management to create
business strategies and relationships, attract sponsors, and develop tournament
formats and operating procedures necessary for us to survive and prosper. The
departure of one or more of our executives could impair our operations, and, in
particular, the services of our Chief Executive Officer and Tour Commissioner,
Leonard Armato, would be very difficult to replace.
Our success depends on fan interest.
Beach volleyball is a relatively new sport, so its long-term popularity
cannot be assumed, as in the cases of major league baseball, basketball,
football, and basketball, golf, or auto racing. Public tastes change frequently,
so interest in beach volleyball may decline in the future. Our ability to
generate revenue would be threatened by a loss of popular interest in the sport.
We rely on major television networks for distribution.
We require widespread distribution of our programming, to interest
sponsors and other advertisers. There are only four major networks that provide
sufficient market reach, so our choices are limited, and our future ability to
enter into distribution agreements with major networks cannot be assured.
Future difficulty in recruiting players could impair our prospects.
The number of professional beach volleyball players is small in relation
to other professional sports, as is the number of first-rate, non-pro players
who might play professionally in the future. The players' audience appeal is
critical to maintaining popular interest in the sport. Our prospects could
decline, if players on the tour or other qualified players are recruited by
competitors or other volleyball organizations, or decide to pursue other
occupations.
4
We need to hire additional personnel.
Our business requires uniquely trained and experienced professionals, and
our success depends in large part upon our ability to attract, develop,
motivate, and retain highly skilled personnel. Qualified employees will be a
limited resource for the foreseeable future. We lack an experienced principal
financial officer, as well. As a new company with little history, we may have
particular difficulty hiring qualified personnel.
Risks Relating to our Securities
Our currently authorized common stock is less than the total amount of shares
issuable upon conversion of exercisable outstanding securities.
We intend to hold a stockholder meeting to authorize additional common
stock. Pending such approval, a holder of securities convertible into or
exercisable for common stock wishing to convert or exercise may be unable to do
so.
We are subject to cash penalties under a registration rights agreement.
We agreed to register for resale the shares of common stock underlying the
Series B Preferred Stock we issued. The agreement provides that if this does not
become effective by June 28, 2005, we must pay a penalty to the Series B
Preferred Stock investors of approximately $50,000 and thereafter for each month
that the penalty condition is not satisfied, until August 28, 2005, when the
monthly penalty increases to $100,000.
Our stock price may be volatile.
There has only been a limited public market for our securities, and there
can be no assurance that an active trading market will be maintained. The OTCBB
is a relatively unorganized, inter-dealer, over-the-counter market that provides
significantly less liquidity than NASDAQ and the national securities exchanges.
The trading price of our common stock is expected to fluctuate significantly,
and, as is the case for OTCBB securities generally, is not published in
newspapers.
Limitations of the OTCBB can hinder completion of trades.
Trades and quotations on the OTCBB involve a manual process that may delay
order processing. Price fluctuations during a delay can result in the failure of
a limit order to execute or cause execution of a market order at a price
significantly different from the price prevailing when an order was entered.
Consequently, one may be unable to trade in our common stock at optimum prices.
Penny stock regulations may restrict the market for our common stock.
The SEC has adopted regulations that generally define a "penny stock" to
be any equity security having a market price (as defined) less than $5.00 per
share, or an exercise price of less than $5.00 per share, subject to certain
exceptions. As a result, broker-dealers selling our common stock are subject to
additional sales practices when they sell such securities to persons other than
established clients and "accredited investors." For transactions covered by
these rules, before the transaction is executed, the broker-dealer must make a
5
special customer suitability determination; receive the purchaser's written
consent to the transaction; and deliver a risk disclosure document relating to
the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative taking the
order; current quotations for the securities; and, if the broker-dealer is the
sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict trading in our common stock.
Investors should be aware that, according to the SEC, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
o manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
o "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
o excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
o dumping of securities after prices have been manipulated to a high
level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market.
The OTCBB is vulnerable to market fraud.
OTCBB securities are frequent targets of fraud or market manipulation,
both because of their generally low prices and because OTCBB reporting
requirements are less stringent than those of the stock exchanges or NASDAQ.
Increased dealer compensation could adversely affect stock price.
OTCBB dealers' spreads (the difference between the bid and ask prices) may
be large, causing higher purchase prices and less sale proceeds for investors.
Shares eligible for future sale can depress market prices.
Legal restrictions on the sale by former stockholders of our operating
subsidiary of approximately 46,816,000 shares of common stock will lapse on
February 28, 2006. Sales may then be made pursuant to Securities Act Rule 144,
which permits a holder to sell shares in an amount up to the greater of the
average weekly or 1% of the outstanding class in each three-month period,
subject to procedural conditions. All restrictions will lapse respecting
28,860,000 shares on February 28, 2007.
6
An additional 225,531,000 shares of common stock are reserved for issuance
upon conversion or exercise of convertible preferred stock, stock options, and
stock purchase warrants, including shares being offered by this prospectus.
The market's recognition that a large amount of stock might enter the
market suddenly can depress market prices.
Liability of directors for breach of duty of care is limited.
As permitted by Delaware law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty, except in certain cases. Our stockholders' ability to recover
damages for fiduciary breaches may be reduced by the provision. In addition, we
are obligated to indemnify our directors and officers regarding stockholder
suits, under some circumstances.
7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The price of our common stock is quoted on the OTCBB under the symbol
"AVPN." Until March 21, 2005, our predecessor's common stock traded on the OTCBB
under the symbol "ONET."
As of April 12, 2005, we had 22,514,742 outstanding shares of common
stock.
The following table sets forth certain information with respect to the
high and low market prices of our common stock for each quarter during the
fiscal years ended 2003 and 2004:
Year Period High Low
---- ------ ---- ---
Fiscal Year 2004 Fourth Quarter $0.47 $0.26
Third Quarter $0.54 $0.21
Second Quarter $0.38 $0.16
First Quarter $0.42 $0.17
Fiscal Year 2003 Fourth Quarter $0.22 $0.14
Third Quarter $0.29 $0.14
Second Quarter $0.35 $0.04
First Quarter * *
* For the first quarter 2003, our predecessor's common stock traded on the pink
sheets, and the price information is not available at a reasonable cost.
The closing price of our common stock on April 12, 2005 was $.30.
The high and low prices are based on the average bid and ask prices for
common stock, as reported by the OTCBB. Such prices are inter-dealer prices
without retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Stockholders
As of March 31, 2005 , there were 337 holders of record of our common
stock.
Transfer Agent
Our transfer agent is U.S. Stock Transfer Corporation, 1745 Gardena
Avenue, Suite 200, Glendale, CA 91204-2991. Our transfer agent's telephone
number is (818) 502-1404.
8
Dividends
We have never declared or paid any cash dividends, and we expect to not do so
for the foreseeable future.
Information regarding equity compensation plans, as of December 31, 2004, is set
forth in the table below:
Securities Authorized for Issuance Under Equity Compensation Plans
Weighted average
Number of Securities to exercise price of
be issued upon exercise outstanding Number of securities
of outstanding options, options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
------------------------- ------------------- --------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders -- $ -- --
Equity compensation plans
not approved by security
holders 4,100,000 0.25 --
------------------------- ------------------- --------------------
Total 4,100,000 $ 0.25 --
========================= =================== ====================
Information regarding equity compensation plans of our wholly owned subsidiary,
AVP Pro Beach Volleyball Tour, Inc., as of December 31, 2004, is set forth in
the table below:
Securities Authorized for Issuance Under Equity Compensation Plans
Weighted average
Number of Securities to exercise price of
be issued upon exercise outstanding Number of securities
of outstanding options, options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
------------------------- ------------------- --------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders -- $ -- --
Equity compensation plans
not approved by security
holders 13,182,220 0.23 317,780
------------------------- ------------------- -----------------------
Total 13,182,220 $ 0.23 317,780
========================= =================== =======================
9
The information below sets forth, on a pro forma basis, the information in the
immediately preceding table, as it would have been adjusted, if the merger of
Association of Volleyball Professionals, Inc. with Othnet Sub, Inc. had been
consummated as of December 31, 2004.
Weighted average
Number of Securities to exercise price of
be issued upon exercise outstanding Number of securities
of outstanding options, options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
------------------------- ------------------- -------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders -- $ -- --
Equity compensation plans
not approved by security
holders 88,866,377 0.03 2,142,276
------------------------- ------------------- --------------------
Total 88,866,377 $ 0.03 2,142,276
========================= =================== ====================
10
BUSINESS
Business Development
We originally incorporated under the name Malone Road Investments, Ltd.,
on August 6, 1990 in the Isle of Man. We redomesticated in the Turks and Caicos
Islands in 1992, and subsequently domesticated as a Delaware corporation in
1994. Pursuant to Delaware law, we are deemed to have been incorporated in
Delaware as of the date of our formation in the Isle of Man. We changed our name
to PL Brands, Inc. in 1994; changed our name to Othnet, Inc. in March 2001; and
changed our name to AVP, Inc. on March 9, 2005. Since December 2001, we had no
business operations other than to attempt to locate and consummate a business
combination with an operating company.
AVP Acquisition
On February 28, 2005, a wholly owned subsidiary of AVP and Association of
Volleyball Professionals, Inc. consummated a merger pursuant to a merger
agreement signed in June 2004, as amended. The name of the subsidiary before it
merged with AVP was Othnet Merger Sub, Inc. As a result of the merger, the
Association became our wholly owned subsidiary, and we issued to the former
Association stockholders Series A Preferred Stock, which will be converted
automatically into our common stock upon authorization of a sufficient amount of
common stock.
In the second half of 2004, we issued $2.36 million principal amount of
10% convertible notes and lent $2.0 million of the proceeds of the notes to the
Association (the notes were issued in units that included common stock and
common stock purchase warrants). It was a condition to the closing of the
merger, among other things, that at least $2.0 million principal amount of the
notes (and accrued interest) were converted into our Series A Preferred Stock.
Another condition was the closing of a $5.0 million private placement of units
of our Series B Preferred Stock and common stock purchase warrants, which
occurred concurrently with the closing of the merger. Each share of Series A
Preferred Stock and Series B Preferred Stock is convertible into 243 shares of
common stock and carries the number of votes that equals the number of shares
into which it is convertible, except that, until the authorization of additional
shares of common stock, the Series B Preferred Stock will carry ten times the
vote per share that it otherwise would carry.
Upon consummation of the merger and the private placement, AVP's former
stockholders (including holders of stock options and stock purchase warrants)
beneficially owned 61.2% of all common stock beneficially owned by all
beneficial owners of our capital stock.
11
Immediately after the merger, the amounts of our outstanding equity
securities were as follows:
- -------------------------------------------------- -------------------- -------------------------------
Amount of common stock
outstanding or issuable on
Class or type of security Amount of security exercise
- -------------------------------------------------- -------------------- -------------------------------
Common Stock 22,514,742 22,514,742
Series A Preferred Stock 334,485 81,279,855
Series B Preferred Stock 147,364 35,809,452
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Total voting
securities
outstanding 139,604,049
Stock options and warrants 155,257,124
-----------
Total 294,861,173
===========
Pursuant to the merger agreement, our sole officer and director resigned
his officer positions and elected the Association's designees as executive
officers. The director also elected the Association's designees, effective March
25, 2005, following filing and distribution of a statement pursuant to Exchange
Act Rule 14f-1. Othnet's pre-merger director will continue to serve on the board
for at least two years. Additional information regarding arrangements between
AVP and its directors, executive officers, and principal stockholders is set
forth below under "Management," "Executive Compensation," "Certain Relationships
and Related Transactions," and "Security Ownership of Certain Beneficial Owners
and Management."
In connection with the private placement, we agreed, at our expense, to
file a registration statement with the SEC covering resale of the common stock
underlying the shares of Series B Preferred Stock, the warrants, and a warrant
issued to the placement agent, within 45 days following the closing of the
offering and to cause the registration statement to become effective within 120
days from the closing date. If the registration statement is not filed or
declared effective in the required time periods following the closing, we must
pay to the holders of the Series B Preferred Stock, monthly, cash equal to 1% of
the issue price of the Series B Preferred Stock until the registration statement
becomes effective. If the registration statement is not filed or declared
effective within 180 days following the date of closing, the monthly payments
double.
In addition, for a period of 18 months from the date of the closing of the
offering, subject to conditions, the placement agent has a right of first
refusal to lead manage any private or public sale of our securities. We also
agreed that, if we are a party to any merger, acquisition, or any other business
combination within 18 months from the closing of the offering and decide to
engage a financial advisor in connection with the transaction, the placement
agent will have the exclusive right to act as our financial advisor and receive
customary fees in that capacity.
12
Our Business
We own and operate every significant professional beach volleyball event
in the United States, and the AVP Tour is the sole nationally and
internationally recognized U.S. professional beach volleyball tour. Every top
U.S. men's and women's beach volleyball professional, including the women's gold
and bronze medalists in the 2004 Olympic Games, competes on the AVP Tour. Our
business includes establishing and managing tournaments; sponsorship sales and
sales of broadcast, licensing, and trademark rights; sales of food, beverage,
and merchandise at the tournaments; contracting with players in the tour; and
associated activities.
We produced 12 men's and 12 women's professional beach volleyball
tournaments throughout the United States in 2004. We have more than 125 of the
top professional players under exclusive contracts, as well as a sizable and
growing base of spectators and television viewers that represent an attractive
audience for national, regional and local sponsors. We have scheduled 14 events
for April through October 2005, to be held in Fort Lauderdale, FL; Tempe, AZ;
Austin, TX; Santa Barbara, CA; San Diego, CA; Belmar, NJ; Hermosa Beach, CA;
Huntington Beach, CA; Manhattan Beach, CA; Chicago, IL; Las Vegas, NV; Oahu, HA;
Cincinnati, OH; and Boulder, CO. The tournaments are returning to each city in
which events were held in 2004; the Cincinnati and Boulder events are new for
2005.
We believe that beach volleyball has potential for continuing commercial
growth, because of its popularity with a demographic group considered highly
desirable by advertisers--educated, affluent, 18 to 34 year-old, consumers.
Moreover, beach volleyball enjoys significant popularity in the United States
and worldwide and is one of the most popular sports at the Summer Olympics.
Sources of Revenue. We generate revenue principally as follows:
o National Sponsorships: We currently generate by far the greatest
amount of our revenue by selling to national sponsors fully
integrated sponsorships, which include both advertising time during
live or previously taped broadcasts of our tournaments, and
significant on-site exposure at the tournaments in the form of
signage, interactive areas, and the like. In addition to paying for
such advertising time and on-site exposure, sponsors also support
the AVP Tour through retail activation (e.g., national in-store
promotions featuring our brand), media buys that support our events,
and television broadcasts and other promotional activities that
support our brand (e.g., national commercials featuring AVP).
National sponsors that have renewed their agreements with us for
2005 include Nissan, Anheuser-Busch, Pepsi, McDonald's, Microsoft
(through 2007), Gatorade, Sirius Radio, Halls, Nature Valley,
Nautica, Paul Mitchell and Wilson (through 2008).
The amount that we charge each national sponsor depends primarily on
the number of network or cable advertising units that the national
sponsor receives in our broadcasts, as well as the exposure that the
national sponsor receives on-site at our tournaments. We hire
13
independent marketing and promotional valuation companies each
season, to measure the benefits that national sponsors receive, and
provide the valuation results to the national sponsors, to justify
the sponsorship revenues they pay. A large majority of our sponsors
have been in place since 2003 or earlier. In 2004, national
sponsorship revenue accounted for 80% of revenue, with one national
sponsor accounting for 14% of revenue in 2004 (compared to two
national sponsors accounting for 22% and 18% of revenue,
respectively, in 2003). We primarily conduct national sponsorship
sales with our own sales staff.
o Local Sponsorship Revenue: We also receive revenue from local and
regional companies seeking to reach our fan base. We sell a variety
of local packages at various financial levels intended to attract a
wide range of businesses in each of the regions and cities where our
tournaments take place. We rely on a combination of local event
promoters, the sales forces of local market print, television
(including the Fox regional sports network), and radio stations, and
our in-house sales staff to make local and regional sales.
o Corporate Hospitality: We sell corporate hospitality packages called
"Beach Club," which consist of reserved seating areas and table
seating, food, and beverages.
o Ticket Sales: Increasingly, we are charging admission for events
that previously were free to the general public. In 2004, we charged
for general admission at 6 of 12 men's and women's events and
charged for reserved seating at all 12 men's and women's events. In
2005, we expect to charge admission at 10 of our 14 men's and
women's events.
o Food and Beverage Sales: We generate revenue through food, beverage,
and beer sales at events where such concession rights are available.
Generally, we engage a third-party concession operator to conduct
this activity.
o International Television Licensing: We retain all international
television rights to our network and cable broadcasts. In 2004, our
events were broadcast in South Korea, Japan, Canada, France, and
Latin America. In 2005, we have entered an agreement to broadcast
over 60 hours of our programming in China.
o Event Merchandising: We sell event merchandise on-site at our
tournaments as well as through our website. Merchandise includes
t-shirts, fitness wear, shorts, swimsuits, sweatshirts, hats, and
other apparel. We have entered a two-year agreement with Anschutz
Entertainment Group (AEG) for AEG to provide all merchandising
services on our behalf at our tournaments, as well as to host our
online store and assume responsibility for fulfillment.
o Trademark Licensing and Other Ancillary Revenue: In addition to
merchandising, we license our trademarks and logos to Wilson
Sporting Goods Co., for volleyballs, and Sport Fun, Inc., for
volleyball sets.
14
Distribution. We have distribution agreements with NBC, to broadcast
certain events on network television, and with Fox to broadcast the remainder of
our events on cable and satellite television By separate agreement, we contract
with NBC and Fox for production of the programming.
o NBC: NBC broadcasted, live, 10 1/2 hours of five of our events in
2004. We paid NBC a per program fee for such broadcast time and
reserved for our self all of the commercial units in such
broadcasts. We recently agreed with NBC to increase the amount of
broadcast time to 14 hours in 2005.
o Fox: Fox distributes our programming over cable and satellite
television. In 2004, Fox broadcast over 40 hours of live or taped
programming. We recently entered into a production and distribution
agreement with Fox for 2005 and 2006, pursuant to which Fox agreed
to provide increased coverage in both years, and the related
production services, in return for the same number of commercial
units in the broadcasts as Fox received from the previous agreement.
Under this new agreement, Fox receives no compensation, other than
the commercial units.
o Outdoor Life Network: We recently entered into an agreement with
Outdoor Life Network, a cable network distributed in over 60 million
households ("OLN"), for OLN to broadcast over 28 hours of coverage
of the men's and women's semifinals of the 2005 AVP Tour-the finals
being telecast on NBC or Fox, as applicable-and also to provide all
production related services. We will receive several commercial
units per hour in return for giving OLN these television rights.
Marketing. We market and broadcast our tournaments nationally, regionally
and locally. NBC promotes the network tournaments nationally, while Fox promotes
the cable tournaments through its regional network. We also make promotional
arrangements with newspapers and radio and television stations to advertise and
promote our events locally. In addition, we engage public relations firms to
generate interest and coverage of our events and broadcasts.
We maintain contact with volleyball enthusiasts and seek to increase our
fan base through two grassroots programs, AVPNext Amateur and the AVPNext
Semi-pro circuit.
AVPNext Amateur is an outreach program for volleyball players of all skill
levels. AVPNext Amateur, through a national network of recreational tournament
and league organizers, offers both children and adults of all skill levels the
opportunity to participate in the sport of volleyball through weekend
tournaments, instructional camps and clinics, and recreational league play.
AVPNext Semi-pro circuit provides players aspiring to play professionally
and high-level amateurs with opportunities to hone their skills against
top-flight competition and potentially earn exemptions into our professional
tournaments. The 2004 AVPNext Semi-pro circuit included 60 semi-professional
tournaments across the nation, run by local promoters, that offered modest prize
purses, a national ranking, and automatic entries into our pro events.
15
We recently agreed to form a beach volleyball council with USA Volleyball
(USAV), which is recognized by the Federation International de Volleyball (FIVB)
and the United States Olympic Committee as the national governing body for
volleyball in the United States, to oversee the growth and development of beach
volleyball in the U.S. In addition to various growth and development
initiatives, the council will be responsible for developing and overseeing the
Olympics' beach volleyball selection process, including the conduct and
marketing of any Olympic trials, and selecting athletes to represent the United
States in any other international beach volleyball competitions.
Operations. We own and operate all of our events and conduct most AVP Tour
operations and logistics in-house. These operations include:
o Setting up the event, including (i) loading and transporting the
equipment to and from each event; (ii) building the volleyball
courts; (iii) overseeing construction of stadiums by outside
bleacher companies; (iv) mounting signage and inflatables for
sponsors; and (v) constructing media, hospitality, and local
sponsorship areas;
o Addressing local regulations and permits;
o Coordinating the professional players (including registration for
the qualifying and main events);
o Organizing officials for the event;
o Managing the tournament and the spectator experience;
o Providing entertainment (e.g., music) at the event;
o Providing corporate hospitality; and
o Providing media support, e.g., statistics from the tournament, press
releases, etc.
To set up an event for a standard three-day tournament scheduled to begin
on a Friday, we will arrive on Tuesday and require two full days to complete
construction. For tournaments that will be telecast live on NBC, we generally
produce four-day events, and the preparations start one day earlier. We own four
semi-trailers to transport all needed event equipment from a central warehouse
located in Los Angeles to each site. To manage equipment hauling, we schedule
AVP Tour events to occur close to one another or to allow sufficient
transportation time.
Each host city requires us to obtain a different set of licenses to run an
AVP Tour event, a majority of which the city provides without charge. Typical
licenses include event; filming; bleacher; fire and police departments; and food
and concessions. Our staff supervises compliance with local regulations and
permits.
Our exclusive contracts with more than 125 of the top men and women
professional beach volleyball players in the United States prohibit the athletes
from competing in non- AVP professional beach volleyball tournaments anywhere in
the world, unless specifically agreed by us. Each player is responsible for his
or her own housing and travel to and from events. We provide players with food
during the tournament and make medical services available in case of injury.
16
Other personnel essential to operating a successful event include:
o Officials and referees;
o Local volunteers to act as scorekeepers and ball retrievers;
o Local contract workers to sell tickets, operate concession areas,
and, when necessary, parking.
o Outside contractors to provide security, waste clean-up, and other
services required in connection with the event.
We recognize that local support for an AVP Tour event is critical to our
success. We try to hold events in the same locations and at the same times every
year, so that the volleyball tournaments become local civic events, enabling
retailers and community leaders to anticipate and support the tournament
annually. We work with city councils and local leaders and businesses to obtain
financial, sales, logistic, marketing, and promotional support for our events.
Communities often waive the cost of city services, recognizing the benefit of
making our tournaments a regular event. Likewise, we coordinate youth or amateur
tournaments and hold free volleyball clinics in connection with our events, to
generate local goodwill and enthusiasm.
Employees
Currently, we have 22 full-time employees and retain 2 independent
contractors.
Competition
While we believe we have a loyal fan base, the sports and entertainment
industry is highly competitive and is also subject to fluctuations in
popularity, which are not easy to predict. Fundamentally, we compete for
sponsorship dollars, television ratings, and fan base with other sports leagues
and tours, entertainment programming, and other forms of leisure activities. Our
success in these areas depends heavily on continuing to grow the sport's
popularity and audience draw.
Our programming is directed at a hard to reach demographic
group--college-educated men and women aged 18 to 34, earning $50,000 or more per
year--highly prized by advertisers: We compete for an audience that is fiercely
contested.
We believe that our exclusive player contracts significantly reduce the
likelihood that an attempt to establish a competing professional beach tour in
the United States during the term of the contracts would be successful. FIVB
sanctions a series of professional beach volleyball events in various countries
throughout the world and sells sponsorships and television programming in
connection with these events. Our international television licensing competes
with such programming, and we will potentially face competition from such
events, if we expand our events to non-United States locations.
17
Reports to Security Holders
Annual reports. We intend to deliver annual reports containing audited
financial statements to security holders.
Periodic reports and other information. We file annual and quarterly
reports, current reports, proxy statements, and information statements with the
SEC.
Availability of Filings. You may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the
SEC maintains an Internet site (http://www.sec.gov) that contains reports and
proxy and information statements and other information regarding issuers that
file electronically with the SEC. Our Internet site is http://www.avp.com. The
content maintained on our website shall not be deemed to be part of this
prospectus.
LEGAL PROCEEDINGS
We are not a party to any legal or administrative proceedings.
DESCRIPTION OF PROPERTY
We maintain the following properties:
We lease approximately 9,800 square feet of office space in Los Angeles,
California, which houses our executive and administrative offices. The lease
expires March 31, 2010, subject to a five-year renewal option.
We sublease approximately 4,500 square feet of warehouse space in Gardena,
California pursuant to a sublease that expires on February 15, 2008. The space
is used for storing tournament equipment and our trucks are parked there.
We believe that our current facilities are sufficient for our needs.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Financial
Statements and the related notes. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Our actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risks Relating to our Business," "Description of
Business" and elsewhere in this document. See "Forward-Looking Statements."
Overview
AVP owns and operates professional beach volleyball tournaments in the
United States. AVP's revenue comes from national, regional, and local
sponsorships; ticket sales (admissions), Beach Club (corporate hospitality)
sales, food and beverage sales, and merchandise sales; trademark licensing; and
other ancillary sources.
AVP operates its business through its wholly owned subsidiary, AVP Pro
Beach Volleyball Tour, Inc., the predecessor of which was founded by AVP's
current CEO, Leonard Armato, and top players, in 1983, under the name
Association of Volleyball Professionals. In 1990, to concentrate on other
business, Mr. Armato left the company, which continued under management of the
players, but declared bankruptcy in 1999. Mr. Armato bought control of the
company in 2001 through AVP Pro Beach Volleyball Tour, Inc., f/k/a Association
of Volleyball Professionals, Inc., signed more than 100 of beach volleyball's
top players, and obtained FIVB recognition as the U.S. official national tour.
Since then, the Association has steadily expanded its tour, sponsorships, and
revenue.
On February 28, 2005, the Association consummated a merger with Othnet
Merger Sub, Inc., a wholly owned subsidiary of AVP, formerly known as Othnet,
Inc., as a result of which the Association became AVP's wholly owned subsidiary,
and the Association's financial statements, included in this registration
statement, and to which this management's discussion and analysis relates,
became AVP's financial statements. Consummation of the merger changed the
Association's name to its current name, and AVP's name was changed to its
current name on March 9, 2005.
Operating Income (Loss) and Net Income (Loss)
Operating Income (Loss) and Net Income (Loss) % Revenue
- ----------------------------------------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Operating Income (Loss) $(2,694,427) $(3,421,614) (22)% (47)%
Net Income (Loss) $(2,873,112) $(3,700,971) (23)% (51)%
19
The 22% decrease in annual operating loss in 2004 reflects that revenue
increased at a rate exceeding the rate of event costs increases necessary to
generate the revenue. Revenue increased 69% in 2004, producing a 26% gross
profit margin, compared with an 11% gross profit margin in 2003.
We believe that any increased revenue will yield increased gross profit
margins, without requiring material capital investment, for the next several
years.
Revenue
Summary Revenue Percentage
- --------------------------------------------------------- Increase
2004 2003 (Decrease)
----------- ----------- -----------
Sponsorship $9,918,117 $ 6,222,371 59%
Activation Fees 838,776 -- --
Local Revenue 936,110 357,459 162%
Miscellaneous Revenue 683,186 802,049 (15)%
----------- ----------- -----------
$12,376,189 $ 7,381,879 68%
=========== =========== ===========
Revenue per event averaged $1,031,000 in 2004 (based on 12 events)
compared with $738,000 in 2003 (based on 10 events).
Sponsorship Revenue. The 59% increase in national, regional, and local
sponsorship revenue reflects increases in the number of events, the amount of
network and cable commercial units available for sale to sponsors, and the
prices paid by national sponsors for commercial units and on-site exposure. In
2004, 18% of revenue came from one national sponsor, a decrease from 23% from
that sponsor in 2003.
Activation Fees. In 2004, AVP substantially increased its activation
services for sponsors, which AVP began providing in 2003. 2003 amounts were
negligible. AVP operates information booths, distributes handouts, or employs
live or interactive means of providing information about or generating interest
in sponsors' products. Activation services also include arranging for local
media buys or other promotional opportunities in event markets.
A detailed analysis of local and miscellaneous sources of revenue for 2004 and
2003 follows:
Local and Miscellaneous Revenue Percentage
- --------------------------------------------------------------- Increase
2004 2003 (Decrease)
--------- --------- ---------
Local Revenue
Merchandising $ 327,182 $ 164,826 99%
Ticket Sales and Parking 304,875 52,909 476%
Registration Fees 126,506 114,798 10%
Beach Club (Corporate Hospitality) 123,688 9,780 1,165%
Food and Beverages 53,859 15,146 256%
--------- --------- ---------
$ 936,110 $ 357,459 162%
========= ========= =========
20
Percentage
Increase
2004 2003 (Decrease)
--------- --------- ---------
Miscellaneous Revenue
Trademark Licensing $ 339,740 $ 228,494 49%
Site Fees and State Grants 116,934 70,000 67%
Grass Roots Marketing 81,627 89,047 (8)%
International Television Licensing 75,000 22,000 241%
Interest Income 67,185 87,751 (23)%
Other 2,700 304,757 (99)%
--------- --------- ---------
$ 683,186 $ 802,049 (15)%
========= ========= =========
Local Revenue. The increase in local revenue reflects increases in the
number of events, attendance at events, the number of events at which AVP
charged for general or reserved seating, and intensified local marketing and
sales efforts. In 2004, AVP employed local sales forces (including local
promoters and local market print, cable, and radio operators) to assist with
local sponsorship sales and corporate hospitality sales.
Merchandising revenue increased, but profitability of sales decreased,
sharply, from 2004 to 2003. Revenue in 2003 consisted of advances under an
agreement giving a third-party vendor exclusive merchandising rights, which
agreement was not renewed for 2004. Merchandising revenue in 2004 came from
direct sales by AVP, with the cost of merchandise sales of $290,000 included in
event costs.
In 2004, AVP charged for general admission at six of its 12 men's and
women's events, compared with three men's and women's paid admission events in
2003, and charged for reserved seating at all 12 AVP men's and women's events in
2004 compared with none in 2003. This resulted in the large increase in ticket
sales revenue in 2004.
Registration fees are the fees paid by players to compete in both event
qualifying and main draw rounds. The increase in registration fees resulted
primarily from the addition of one full field event in 2004.
The increase in Beach Club (corporate hospitality) revenue in 2004
primarily reflects increased local sales efforts and promotion at each AVP
event.
The increase in food and beverage sales in 2004 reflects an increase in
the number of events where AVP retained food and beverage sale rights as well as
an increase in attendance at events where AVP previously retained such rights.
21
Miscellaneous Revenue. Trademark licensing increased in 2004 due to
increased ball sales by Wilson Sporting Goods (AVP's ball licensee), increased
sales of volleyball sets by Sport-Fun (AVP's volleyball set licensee), and
international television licensing.
AVP realized site fees and state or local government grants of $116,934 in
2004 (compared to $70,000 in 2003) primarily due to an increase in the site fees
paid by the Hard Rock Hotel and Casino in Las Vegas, Nevada to hold an AVP event
at the hotel.
Grassroots marketing revenue declined from $89,047 in 2003 to $81,627 in
2004. This 8% decline was primarily due to a decrease in the amount of
membership fees collected by AVPNext, a division of AVP that organizes
tournaments for aspiring professional and high-level amateur players.
AVP engaged a television licensing agent in 2004 to license AVP's
television programming outside of the United States and expects to realize
approximately $75,000 in licensing fees for airing of AVP tournaments in foreign
territories including South Korea, Japan, Latin America, and France. AVP engaged
a different licensing agent for 2005, which has sold 65 hours of programming to
a major broadcaster in China.
AVP currently leases furniture and personal property to Northrop Grumman
pursuant to a lease expiring in November 2008 that requires payments to AVP of
$13,200 per month. The lease is treated as an investment in sales type lease,
and the interest component of the lease payments is included in interest income.
Other revenue in 2003 primarily reflects a management fee that AVP
received in connection with an international beach volleyball event that AVP
co-promoted with two other organizations in 2003 (the event operated at a loss
and was discontinued), and a sanctioning fee that AVP received in connection
with an event in Hermosa Beach, California in 2003 (AVP elected to hold its own
event in Hermosa Beach, California in 2004 rather than sanction an event owned
by a third party).
Operating Expenses
Summary Costs % Revenue Decrease as
- --------------------------------------------------------------------------------------- % of Revenue
2004 2003 2004 2003 2004 vs. 2003
----------- ----------- ----------- ----------- -----------
Event Costs $ 9,125,829 $ 6,506,613 74% 89% 15%
Administrative 3,442,479 2,184,557 28% 30% 2%
Marketing 2,435,124 2,024,572 20% 28% 8%
Interest Expense 245,870 182,396 2% 3% 1%
Joint Venture Loss -- 184,712 0% 3% 3%
----------- ----------- ----------- -----------
Total Costs $15,249,302 $11,082,850 124% 152% 28%
=========== =========== =========== ===========
22
Event costs include the direct costs of producing an event and costs
related to television airing of broadcasted events. Event costs in 2004
increased 40%, primarily as a result of the number of events and increases in
the size and scope of events to accommodate and entertain a larger fan base.
Event costs as a percentage of revenue improved from 89% in 2003 to 74% in 2004.
Increases in marketing costs resulted from full time employment of AVP's
Chief Marketing Officer; the hiring of a Vice President of Marketing, a Director
of Sponsor Activation, and other marketing support staff; expansion of
activation services; and increases in related marketing expenses. These amounts,
which totaled $2,029,000 in 2004, compared with $1,648,000 in 2003, were
partially offset by a $314,000 reduction in amortization of commissions owed to
a related party, Management Plus Enterprises (MPE), for sponsorship sales
services provided in 2001 and 2002. Amounts incurred for advertising, public
relations, and website services, which totaled approximately $406,000 in 2004,
increased only slightly over 2003 and decreased as a percentage of total
marketing costs.
Administrative costs rose 58% in 2004, due primarily to a $270,000
increase in executive compensation, reflecting full time employment of AVP's
CEO; a $250,000 increase in accounting expenses required by AVP's business
combination with Othnet; a $210,000 increase in legal and consulting fees
associated with AVP's business combination with Othnet; a $190,000 increase in
administrative salary reflecting hiring two administrative support staff, and
salary increases to administrative staff and management staff; a $117,000 in
increased office rent; and a $260,000 increase in other assorted administrative
expenses.
Interest expense in 2004, comprised of interest accrued on debt to Othnet,
MPE, Major League Volleyball, Inc., and Anschutz Entertainment Group, Inc.,
increased from 2003 due to higher level of debt.
Joint venture loss of $184,712 in 2003 was AVP's portion of the loss from
the discontinued international beach volleyball event that AVP co-promoted in
2003 with two other organizations.
Depreciation and Amortization Expense Percentage
- ----------------------------------------------------- Increase
2004 2003 (Decrease)
----------- ----------- -----------
Depreciation Expense $ 57,561 $ 14,529 296%
Amortization Expense 688,437 1,004,799 (31)%
----------- ----------- -----------
$ 745,998 $ 1,019,328 (27)%
=========== =========== ===========
The increase in depreciation expense in 2004 resulted from a 307% increase
in depreciable assets, including banners and flags and equipment; information
technology equipment (e.g., servers); activation equipment (e.g., kiosks and
digital information screens); and leasehold improvements (e.g., installation of
an air conditioning unit in AVP's server room). Furniture and fixtures include
office furniture, and vehicles include trailers used to transport event
equipment.
23
Amortization expenses decreased 31% from 2003, in part because MPE
deferred contract costs were being amortized at a declining rate, reflecting
that contract commission rates under the agreement decrease from year to year.
Deferred commissions charged to operations were $294,904 in 2004, compared to
$609,256 in 2003. In each of 2004 and 2003, amortization also included $387,500
of contract costs, which reflects charges in excess of Fox broadcast and
production services for 2003 and 2004, which AVP prepaid in 2003 by issuing
equity to Fox.
Liquidity and Capital Resources
Cash flows from operating activities for 2004 and 2003 were $(1,118,589)
and $(2,937,562), respectively. Working capital, consisting of current assets
less current liabilities, was $(3,604,731) at December 31, 2004 and $427,528 at
December 31, 2003. Current liabilities in 2004 included $2,000,000 of notes to
Othnet (described below).
In 2004, AVP incurred capital expenditures of approximately $228,000,
consisting of banner and flags, activation equipment, air conditioning unit,
furniture, information technology equipment, and trailers.
In June 2004, the Association borrowed $2,000,000, at an interest rate of
10% per annum, through a series of debentures payable to Othnet. As part of the
merger with Othnet, this liability was converted to equity. In addition, NBC and
Fox had the right to put their Series A preferred stock investment back to AVP
at the end of the 2005 and 2006 seasons for the amount of their respective
investments plus interest at prime plus 2%. Prior to the merger of the
Association and Othnet, Sub, Inc., both NBC and Fox agreed to waive their put
rights.
As a result of the consummation of the $5,000,000 private placement of
units of Othnet Series B Convertible Preferred Stock, Othnet realized net
proceeds of approximately $4,300,000. As of March 30, 2005, AVP's adjusted
working capital aggregated $1,445,000, (inclusive of $3,100,000 in deferred
revenue to be recognized as revenue in the second, third, and fourth quarters of
2005).
Critical Accounting Policies
Revenue and Expense Recognition
The majority of AVP's revenues are derived from sponsorship and
advertising contracts with national and local sponsors. AVP recognizes
sponsorship revenue pro rata over each event during the tour season as the
events occur and collection is reasonably assured. Revenues invoiced and/or
collected prior to their respective events are recorded as deferred revenue.
Event costs are recognized on an event-by-event basis. Event costs billed and/or
paid prior to their respective events are recorded as deferred costs and
expensed at the time the event occurs.
24
Income Taxes
AVP provides deferred income taxes to reflect the impact of temporary
differences between the recorded amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
Temporary differences result from differences between the amounts reported for
financial statement purposes and corresponding amounts for tax purposes.
Deferred income tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Recently Issued Accounting Standards
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities which was subsequently amended in December 2003 and Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements was issued. In
general a variable entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. Special provisions apply to enterprises that have
fully or partially applied Interpretation 46 (Interpretation) prior to issuance
of this Interpretation. Otherwise, application of this Interpretation is
required in financial statements of public entities that have interests in
variable interest entities or potential variable interest entities commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application by small business issuers, to entities other than
special-purpose entities and by nonpublic entities and all other types of
entities is required at various dates in 2004 and 2005. In some instances,
enterprises have the option of applying or continuing to apply Interpretation 46
for a short period of time before applying this Interpretation. The adoption of
the Interpretation did not have any impact on AVP's financial statements.
In December 2003, the SEC released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. SAB No. 104 revises or rescinds portions of the
interpretive guidance related to revenue recognition included in Topic 13 of the
codification of the staff accounting bulletins. SAB No. 104 became effective
when issued, and adoption by AVP did not have a material impact on its financial
position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). ARB 43 previously stated that "...under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current period charges...". This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". In addition, this Statement requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement shall be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after the date this Statement is issued. The provisions
of this Statement shall be applied prospectively. The adoption of this Statement
is not expected to have any impact on AVP's financial statements.
25
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets, which amended APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement shall be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is issued. The
provisions of this Statement shall be applied prospectively. The adoption of
this Statement is not expected to have any impact on AVP's financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based upon the
fair value of the equity or liability instruments issued. Statement 123(R)
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as
originally issued in 1995, established as preferable a fair-value-based method
of accounting for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been used.
Public entities that file as small business issuers will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. AVP has not yet evaluated the impact of the adoption of
SFAS 123(R) and has not determined the impact on AVP's financial position or
results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B.
26
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On March 1, 2005, we replaced Malone & Bailey, PC as our independent
accountants. The decision was approved by our Board of Directors.
Malone & Bailey's reports on our financial statements for the fiscal years
ended April 30, 2004 and 2003 did not contain an adverse opinion or disclaimer
of opinion, except that the reports stated that they were prepared assuming that
we will continue as a going concern, as to which our recurring operating losses
raised substantial doubt. During our fiscal years ended April 30, 2003 and 2004
and the subsequent interim period preceding the termination, there were no
disagreements with Malone & Bailey on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Malone & Bailey, would
have caused Malone & Bailey to make reference to the subject matter of the
disagreements in connection with its report on the financial statements for such
years or subsequent interim periods.
On March 17, 2005, Malone & Bailey provided the SEC with a letter stating
that it agreed with the foregoing statements.
On March 2, 2005, we engaged Mayer Hoffman McCann P.C. as our new
independent accountants. During the two most recent fiscal years and the interim
period preceding the engagement of Mayer Hoffman, we have not consulted with
Mayer Hoffman regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or any matter that
was either the subject of a disagreement or an event identified in paragraph
(a)(1)(iv) of Item 304 of Regulation S-B.
27
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to each of
our executive officers and directors as of April 12, 2005.
Name of Nominee Age Position
- ------------------ --- ----------------------------------
Leonard Armato 52 Chief Executive Officer and Chairman
of the Board of Directors
Bruce Binkow 48 Chief Marketing Officer and Director
Philip Guarascio 63 Director
Scott Painter 37 Director
Andrew Reif 39 Chief Operating Officer and Director
Jeffrey Wattenberg 49 Director
Leonard Armato, our Chief Executive Officer and Tour Commissioner, has
been Chairman, Chief Executive Officer, Tour Commissioner and a director of the
Association since 2001. Previously, Mr. Armato was Chief Executive of Management
Plus Enterprises, Inc., a sports representation and marketing firm owned by Mr.
Armato. Mr. Armato founded MPE in 1988. Mr. Armato will serve as Chairman of the
Board.
Bruce Binkow, our Chief Marketing Officer, has been Chief Marketing
Officer and a director of the Association since 2001. From 1996, Mr. Binkow
worked as executive vice president at MPE, a sports representation and marketing
firm owned by Mr. Armato. Previously, Mr. Binkow was an Executive Vice President
of Marketing at Playboy Enterprises, Inc. from 1987 to 1991.
Philip Guarascio has been a member of the Board of Directors of the
Association since May 2002. Mr. Guarascio has been a consultant for the National
Football League since October 2000 and has been a consultant for the William
Morris Agency, a talent agency, since October 2001. In 2000, he retired as the
Vice President of Marketing and Advertising for General Motors' North American
operations.
Scott Painter has been a member of the Board of Directors of the
Association since May 2002. He was a founder and former Chief Executive Officer
of CarsDirect.com, an online car dealership, from October 1998 to November 1999.
Before then, Mr. Painter was a Vice President and Director of Marketing of
1-800-DENTIST, a dentist referral service, from 1995 to 1997, and Vice President
of Marketing and Corporate Development of 1-800-CAR-SEARCH, a new and used
vehicle location and pricing service, from 1992 to 1993.
Andrew Reif, our Chief Operating Officer, has been Chief Operating Officer
of the Association since 2001. Mr. Reif was Co-President of Baldwin/Cohen
Productions, a motion picture and television programming production company
overseeing the development and production of motion pictures and television
productions, from 1999 to 2000. From 1995 to 1999, Mr. Reif was a Vice President
at International Creative Management, a talent agency.
28
Jeffrey Wattenberg is a member of our Board of Directors. Mr. Wattenberg
had been president, secretary, and director of Othnet since May 2002. For the
last five years, he has been a private investor and has served as an independent
consultant to various entities seeking to raise venture capital.
Board of Directors
Our Board of Directors consists of six (6) seats. Except for Mr.
Wattenberg, each person who serves on our Board of Directors was appointed on
March 25, 2005 in connection with the transactions contemplated by the merger.
Directors will be elected at each annual meeting and thereafter serve until the
next annual meeting at which their successors will be duly elected.
Committees
Following the approval and consummation of the transactions contemplated
by the merger on February 28, 2005, we formed an Audit Committee, Compensation
Committee and Nominating Committee.
The Audit Committee of the Board of Directors consists of Messrs.
Guarascio, Painter and Wattenberg. The Audit Committee recommends engagement of
our independent auditors, approves services performed by such auditors and
reviews and evaluates our accounting system and our system of internal
accounting controls. Mr. Guarascio is "independent" as defined by the SEC.
Currently, the Board of Directors does not have an "audit committee financial
expert" as defined in Item 401(e) of Regulation S-B promulgated by the SEC.
Family Relationships
No director or executive officer is related to any other director or
executive officer by blood or marriage.
29
EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation tables set forth information concerning
the annual and long-term compensation for services in all capacities for the
fiscal years ended December 31, 2004, December 31, 2003 and December 31, 2002,
of those persons who were, at December 31, 2004 (i) the chief executive officer
and (ii) our other most highly compensated executive officers, whose annual base
salary and bonus compensation was in excess of $100,000 (the "Named Executive
Officers"):
Summary Compensation Table
Annual
Compensation
Name and Principal Fiscal
Position Year Salary Bonus
Jeffrey Wattenberg(1) 2004 $40,000 $ 0
President and Chief 2003 $ 0 $ 0
Executive Officer 2002 $ 0 $ 0
Long-Term
Compensation
Restricted Shares
Name and Principal Fiscal Stock Underlying
Position Year Awards Options
Jeffrey Wattenberg(1) 2004 0 2,000,000(2)
President and Chief 2003 825,000(3) 0
Executive Officer 2002 0 0
- ----------
(1) Mr. Wattenberg became President and Chief Executive Officer of Othnet in May
2002. Prior thereto, he was not employed by and held no positions with Othnet.
(2) On February 5, 2004, Mr. Wattenberg was granted an option to acquire up to
2,000,000 shares of common stock of at an exercise price of $0.25 per share.
(3) On March 19, 2003, Mr. Wattenberg was granted 825,000 restricted shares of
Othnet's common stock. The value of the shares as of the date of grant equaled
$156,750 and the value as of April 30, 2004 equaled $165,000 based on the stock
prices on such dates.
30
Option Grants
The following table sets forth certain information with respect to stock
options granted to the person named in the Summary Compensation Table during the
fiscal year ended December 31, 2004.
Option Grants in Last Fiscal Year
Precent of
Total Options
Number of Securities Granted to Exercise
Underlying Options Employees Price Per Expiration
Name Granted in Fiscal Year Share Date
- ------------------ ------------------- -------------- --------- -----------
Jeffrey Wattenberg 2,000,000 100% 0.25 2/4/2009
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information as to each exercise of
stock options during the year ended December 31, 2004, by the persons named in
the Summary Compensation Table and the fiscal year-end value of unexercised
options:
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values
Number of Securities Value of Unexercisable
Underlying Unexercised In-the-Money Options at
Options at FY-End Fiscal Year-End (1)
Shares Acquired Value -------------------------- --------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ --------------- -------- ----------- ------------- ----------- --------------
Jeffrey Wattenberg -0- $0 2,000,000 -0- $ -0- $ -0-
(1) None of the options were "in-the-money" as of December 31, 2004.
Compensation of Directors
Our directors currently do not receive any compensation for service on our
Board of Directors or any committee thereof.
Employment Agreements
Pursuant to the merger agreement, the Association entered into employment
agreements with Messrs. Leonard Armato, the Association's CEO and Chairman and a
director; Bruce Binkow, Chief Marketing Officer and a director; and Andrew Reif,
Chief Operating Officer and a director. Mr. Armato's at-will employment
agreement provides for an annual salary of $350,000; an annual bonus in the
range of fifty percent (50%) of annual salary (based on certain to-be-determined
milestones); health and disability insurance; a $1,000,000 term life insurance
policy; and a monthly car allowance in the amount of $1,000.00. In the event
that Mr. Armato's employment is terminated other than for good cause, he will
receive a payment of one year's base salary. Messrs. Binkow's and Reif's
employment agreements are of substantially the same form as Mr. Armato's, except
that the salaries are $250,000 and $240,000, respectively.
31
In addition, Messrs. Armato, Binkow and Reif will receive five-year common
stock purchase warrants to purchase a total of 10,779,230 shares of our common
stock in the aggregate, at an exercise price equal to the lesser of $0.31 per
share or 110% of the market price of a share on the date of grant, and
participate in a profit sharing pool equal to ten percent (10%) of our EBITDA.
Mr. Scott Painter, a member of the Board of Directors, entered into a
consulting agreement with us whereby he will be compensated as a financial
advisor in specified areas relating to our operations and fund-raising efforts.
For his services, Mr. Painter will receive compensation equal to $150,000 in
cash and will receive five-year common stock purchase warrants to purchase a
total of 5,272,132 shares of our common stock in the aggregate, at an exercise
price equal to the lesser of $0.31 per share or 110% of the market price of a
share on the date of grant.
For one year following the close of the merger on February 28, 2005, we
have retained a firm controlled by Jeffrey Wattenberg, a member of our Board of
Directors, for a $20,000 monthly fee. This fee is expressly for the provision of
consulting, advisory and investor relations services.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Armato is the sole owner of MPE which owned MPE LLC prior to its sale
to AVP. MPE entered into an agreement with AVP on August 15, 2001 pursuant to
which MPE was engaged to secure sponsorship agreements in return for a
commission (the "Sales Agreement"). The Sales Agreement remained in place
through December 31, 2002 and MPE was projected to earn approximately $1.6
million in commissions through 2005 based upon the sponsorship agreements
secured by MPE during the term of the Sales Agreement. MPE assigned the Sales
Agreement to MPE LLC in 2003. MPE LLC was subsequently acquired by AVP in 2003
for a convertible promissory note with a principal amount of approximately $1.4
million, of which $250,000 was paid from the proceeds of the private placement.
The remaining balance will be paid one year from the closing date of the
offering.
Mr. Painter, a member of the Board of Directors, entered into a consulting
agreement with us, whereby he will be compensated as a financial advisor in
specified areas relating to our operations and fund-raising efforts. For his
services, Mr. Painter will receive compensation equal to $150,000 in cash and
will receive five-year common stock purchase warrants to purchase a total of
5,272,132 shares of our common stock in the aggregate, at an exercise price
equal to the lesser of $0.31 per share or 110% of the market price of a share on
the date of grant.
For one year following the close of the merger on February 28, 2005, we
have retained a firm controlled by Jeffrey Wattenberg, a member of our Board of
Directors, for a $20,000 monthly fee. This fee is expressly for the provision of
consulting, advisory and investor relations services. We are including among the
shares offered by this prospectus 2,825,000 shares of common stock held by Mr.
Wattenberg, including 2,000,000 shares of common stock underlying an employee
stock option.
NBC distributes our programming on broadcast television, and Fox
distributes our programming on cable television. NBC and Fox own Series A
Preferred Stock convertible into 22.1% and 42.7%, respectively, of the common
stock that would be outstanding following such conversion (assuming conversion
of only their Series A Preferred Stock), which we have agreed to register for
resale at the same time we register the common stock underlying the Series B
Preferred Stock for resale.
We entered into a two-year agreement with AEG for AEG to provide all
merchandising services on our behalf at our tournaments, as well as to host our
online store and assume responsibility for fulfillment. AEG is the holder of a
note that is convertible into 33.4% of the common stock that would be
outstanding following such conversion (assuming conversion of only the note),
which we have agreed to register for resale at the same time we register the
common stock underlying the Series B Preferred Stock for resale.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock, Series A Preferred Stock and Series B Preferred
Stock as of April 12, 2005, by (i) each person known by us to be the beneficial
owner of more than five percent (5%) of any class of our stock, (ii) each of our
directors and nominees for director, (iii) each of the Chief Executive Officer
and Named Executive Officers, and (iv) all directors and executive officers as a
group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Shares of our stock which are purchasable under options or warrants which are
currently exercisable, or which will become exercisable no later than 60 days
after April 12, 2005, are deemed outstanding for computing the percentage of the
person holding such convertible securities, but are not deemed outstanding for
computing the percentage of any other person. Except as otherwise indicated, the
stockholders listed in the table below have sole voting and investment power
with respect to the shares indicated.
Series A Preferred Stock (*) Series B Preferred Stock Common Stock (1)
---------------------------- ------------------------ -----------------------
Number Percent Number Percent Number Percent
of Shares of Class of Shares of Class of Shares of Class
Leonard Armato (2)(3) 73,901 11.71 -0- -0- 67,460,314 74.98
Bruce Binkow (2)(4) -0- -0- -0- -0- 15,450,001 40.70
Philip Guarascio (2)(4) -0- -0- -0- -0- 1,206,444 5.09
Scott Painter (2)(4) -0- -0- -0- -0- 1,206,444 5.09
Andrew Reif (2)(4) -0- -0- -0- -0- 7,867,917 25.90
Jeffrey Wattenberg (2)(5) -0- -0- -0- -0- 2,825,000 8.16
AEG (6) -0- -0- -0- -0- 11,292,614 33.40
BBVA (7) -0- -0- 9,480 20.00 8,954,550 28.46
Crestview Capital (8) -0- -0- 9,472 20.00 8,952,120 28.45
Highbridge (9) -0- -0- 9,472 20.00 8,952,120 28.45
FOX (10) 69,078 20.65 -0- -0- 16,785,929 42.7
NBC (11) 26,280 7.86 -0- -0- 6,385,951 22.1
All directors and
executive officers as a
group, including those
named above (6 persons) 73,901 11.71 -0- -0- 95,191,127 80.87
- ---------------
* To be converted automatically into common stock upon authorization of
sufficient shares.
(1) Includes shares issuable upon conversion of Series A Preferred Stock and
Series B Preferred Stock reflected in the table opposite the identified person,
as well as exercise of currently exercisable stock options or warrants to
acquire shares, as set forth in the succeeding notes. In accordance with SEC
rules, each owner's percentage is computed assuming conversion or exercise of
only that person's convertible securities, options, or warrants.
(2) Address is c/o AVP Pro Beach Volleyball Tour, Inc., 6100 Center Drive, Suite
900, Los Angeles, CA 90045.
34
(3) Common stock includes 49,540,720 shares issuable upon exercise of currently
exercisable stock options.
(4) All shares of common stock are issuable upon exercise of currently
exercisable stock options and warrants.
(5) Common stock includes 2,000,000 shares issuable upon exercise of currently
exercisable stock options. Excludes unallocated shares underlying a warrant to
be granted to Mr. Wattenberg from among 15,588,186 shares reserved for grant of
such warrants.
(6) Anschutz Entertainment Group, Inc., 1100 South Flower Street, Suite 300, Los
Angeles, CA 90015. All shares of common stock are issuable upon conversion of a
convertible note.
(7) BBVA, Castellana, 81, Planta 22, Madrid, Spain 28046. Common stock includes
1,790,910 shares issuable upon exercise of currently exercisable warrant.
(8) Crestview Capital Master LLC, 95 Revere Drive, Suite A, Northbrook, IL
60062. Common stock includes 1,790,424 shares issuable upon exercise of a
currently exercisable warrant.
(9) Highbridge Capital Management LLC, 9 West 57th Street, 27th Floor, New York,
NY 10019. Common stock includes 1,790,424 shares issuable upon exercise of a
currently exercisable warrant.
(10) National Sports Partners, c/o Fox Sports Net, 10201 W. Pico Boulevard,
Building 101, Suite 5420, Los Angeles, CA 90035.
(11) National Broadcasting Company, Inc., 30 Rockefeller Plaza, New York, NY
10112.
35
DESCRIPTION OF SECURITIES
The following description includes the material terms of our capital
stock. However, it is a summary and is qualified in its entirety by the
provisions of our Certificate of Incorporation, with amendments, all of which
have been filed as exhibits to our registration statement of which this
prospectus is a part.
Capitalization
We are currently authorized to issue 40,000,000 shares of common stock,
$0.001 par value and 2,000,000 shares of preferred stock, $0.001 par value. As
of April 12, 2005, we had outstanding 22,514,742 shares of common stock, 334,485
shares of Series A Preferred Stock, and 147,364 shares of Series B Preferred
Stock, each convertible into 243 shares of common stock; and options and
warrants to purchase 155,257,124 shares of common stock.
We intend to hold a stockholders' meeting to seek approval to amend our
Certificate of Incorporation to increase the amount of common stock authorized
for issuance in order to allow for conversion of the Series B Preferred Stock
and the exercise of the warrants issued in the private placement. If such
authorization does not occur within 180 days from closing of the private
placement, holders will have the right to put their Series B Preferred Stock to
us and obtain the complete return of their funds, although there can be no
assurance that any such funds will be available for distribution to the holders
of the Series B Preferred Stock.
Common Stock
The holders of our common stock are entitled to one vote for each share of
record on all matters to be voted on by stockholders. Our stockholders are not
entitled to cumulative voting. The holders of our common stock are entitled to
receive dividends when, and if, declared by our Board of Directors from funds
legally available therefore. In the event of liquidation, dissolution or winding
up, our holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities,
and after provision has been made for each class of stock having preference over
the common stock, including the shares of Series B Preferred Stock. Holders of
the shares of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
common stock. All of the outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable.
Currently, the amount of our common stock authorized for issuance is less
than the amount into which the Series B Preferred Stock and the warrants issued
and outstanding after the offering are convertible. We intend to hold a
stockholders' meeting to seek approval to amend our Certificate of Incorporation
in order to increase our authorized common stock to allow for conversion.
36
Preferred Stock
Series A Preferred Stock
The Series A Preferred Stock has the same terms as the Series B Preferred
Stock sold in the private placement, except for the voting rights described
below and that the Series A Preferred Stock will be junior to the Series B
Preferred Stock on liquidation. Upon amendment of our Certificate of
Incorporation to increase our authorized common stock available for issuance,
the Series A Preferred Stock will convert automatically into our common stock at
the same conversion rate as is applicable to the Series B Preferred Stock.
Series B Preferred Stock
A holder of the Series B Preferred Stock has no preemptive rights. The
Series B Preferred Stock is not subject to any sinking fund or other obligation
to redeem or retire the Series B Preferred Stock. Unless converted or redeemed,
the Series B Preferred Stock has a perpetual term.
The Series B Preferred Stock is senior to the common stock with respect to
payment of dividends and amounts upon liquidation, dissolution or winding up.
While any Series B Preferred Stock is outstanding, we cannot authorize, create,
or increase the authorized amount of any class or series of stock that ranks
prior or senior to, or in parity with, the Series B Preferred Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution, or winding
up, without the consent of the holders of a majority vote of the Series B
Preferred Stock.
The holders of Series B Preferred Stock will receive dividends when, and
if, declared on our common stock, on an as-converted basis. The holders of
Series B Preferred Stock will be entitled to receive, in the event of
liquidation, dissolution, whether voluntary or involuntary, payment of $33.93
for each share of Series B Preferred Stock held, in preference to holders of any
junior class of stock.
The holders of Series B Preferred Stock have the right, exercisable at any
time, to convert each share into 243 shares of common stock. The conversion
ratio may be increased, on a weighted average basis, upon issuances of the
common stock or securities convertible into common stock at a purchase price or
conversion price less than the Series B Preferred Stock conversion price then in
effect.
37
The holders of Series B Preferred Stock vote with holders of common stock
in all matters in which they are entitled to vote. Until our authorized common
stock has been increased to allow for conversion of the Series B Preferred
Stock, each share of Series B Preferred Stock will have 10 times the number of
votes the share would carry if converted into common stock. Thereafter, each
share of Series B Preferred Stock will carry a number of votes equal to the
number of shares of common stock into which such share is convertible. The
approval of the holders of a majority of the outstanding Series B Preferred
Stock is required to amend our Certificate of Incorporation, which may
materially adversely affect the rights of holders of Series B Preferred Stock,
or to authorize, create, or increase the authorized amount of any class of stock
giving rights senior to, or in parity with, the holders of Series B Preferred
Stock with respect to payment of dividends or amounts upon liquidation,
dissolution, or winding up. Until our authorized common stock is increased as
stated above, holders of Series B Preferred Stock will possess votes
constituting a majority of votes entitled to be cast by our stockholders. Each
purchaser of Series B Preferred Stock has agreed and gave an irrevocable proxy
to vote in favor of increasing our common stock authorized for issuance in
connection with the closing of the merger and the offering.
The Series B Preferred Stock may be redeemed at our election, after the
fifth anniversary of issuance on 30 days notice, at a redemption price of $33.93
per share. On or after February 28, 2006, we will have the option to convert the
Series B Preferred Stock into common stock on 30 days notice, if (1) a resale
registration statement covering the underlying common stock is effective, (2)
our common stock is quoted on the OTCBB or a similar electronic quotation system
or stock exchange, (3) the closing price per share, or the average of the
closing bid and ask prices per share, if applicable, have been at least twice
the quotient obtained by dividing the Series B Preferred Stock redemption price
by its conversion rate, and (4) the daily trading volume of our common stock for
30 consecutive trading days averages at least 2,000,000 shares.
Warrants
In connection with the sale of 10% convertible notes, we issued two-year
warrants to purchase a total of 4,720,000 shares of common stock at a purchase
price of $0.21 per share.
Upon the consummation of the private placement, we issued 36,841 warrants
to purchase common stock to multiple investors. One warrant was attached to
every four (4) shares of Series B Preferred Stock sold in the offering. Each
warrant entitles the holder to purchase 243 shares of our common stock for a
period of five years at an exercise price of $0.19548 per share.
In connection with the offering, Maxim Group LLC, the placement agent in
the offering, received warrants to purchase 3,580,945 shares of our common
stock. The warrants are exercisable for a period of five years at an exercise
price of $0.13963 per share.
38
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Delaware General Corporation Law and our Bylaws provide for
indemnification of our directors for liabilities and expenses that they may
incur in such capacities. In general, our directors and officers are indemnified
with respect to actions taken in good faith and in a manner such person believed
to be in our best interests, and with respect to any criminal action or
proceedings, actions that such person has no reasonable cause to believe were
unlawful. Furthermore, the personal liability of our directors is limited as
provided in our Certificate of Incorporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Act and
is therefore unenforceable.
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. Sales of shares may be made by the selling stockholders, including
their respective donees, transferees, pledgees or other successors-in-interest
directly to purchasers or to or through underwriters, broker-dealers or through
agents. Sales may be made from time to time on the over-the-counter market, or
on any other exchange upon which our shares may trade in the future, at market
prices prevailing at the time of sale, at prices related to market prices, or at
negotiated or fixed prices. The shares may be sold by one or more of, or a
combination of, the following:
o a block trade in which the broker-dealer so engaged will
attempt to sell the shares as agent but o may position and
resell a portion of the block as principal to facilitate the
transaction (including crosses in which the same broker acts
as agent for both sides of the transaction);
o purchases by a broker-dealer as principal and resale by such
broker-dealer, including resales for its account, pursuant to
this prospectus;
o ordinary brokerage transactions and transactions in which the
broker solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in making short sales or in transactions to cover short sales;
and
o put or call option transactions relating to the shares.
39
If the selling stockholders effect such transactions by selling their
shares of common stock to or through underwriters, brokers, dealers or agents,
such underwriters, brokers, dealers or agents may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved). Any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with those
transactions, the broker-dealers or other financial institutions may engage in
short positions or other derivative transactions relating to the shares of our
common stock or of securities convertible into or exchangeable for the shares of
our common stock in the course of hedging positions they assume with the selling
stockholders and may deliver such securities to close out their short positions
or otherwise settle short sales or other transactions. The selling stockholders
may also loan or pledge shares to broker-dealers or other third parties. In
connection with those transactions, the broker-dealers or other third parties
may sell such loaned or pledged shares. The selling stockholders may also enter
into options or other transactions with broker-dealers or other financial
institutions which require the delivery of shares offered by this prospectus to
those broker-dealers or other financial institutions. The broker-dealer or other
financial institution may then resell the shares pursuant to this prospectus (as
amended or supplemented, if required by applicable law, to reflect those
transactions).
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Exchange Act. Penny stocks are stock: (i) with
a price of less than $5.00 per share; (ii) that are not traded on a "recognized"
national exchange; (iii) whose prices are not quoted on the Nasdaq automated
quotation system (Nasdaq listed stock must still have a price of not less than
$5.00 per share); or (iv) in issuers with net tangible assets less than $2.0
million (if the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
40
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
our shares of common stock while such selling stockholder is distributing shares
covered by this prospectus. Accordingly, except as noted below, the selling
stockholders are not permitted to cover short sales by purchasing shares while
the distribution is taking place. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the SEC.
The selling stockholders also may resell all or a portion of their shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
will not receive any proceeds from the sale of any of the shares of common stock
by the selling stockholders.
41
SELLING STOCKHOLDERS
Selling Stockholder Table
This prospectus covers the offer and sale by the selling stockholders of
up to 114,248,948 shares of common stock. All such shares issued or to be issued
are and will be restricted securities as that term is defined in Rule 144 under
the Securities Act, and will remain restricted unless and until such shares are
sold pursuant to this prospectus or otherwise are sold in compliance with Rule
144.
Each of the selling stockholders has represented that it acquired the
shares for investment purposes only and with no present intention of
distributing those shares, except in compliance with all applicable securities
law. In addition, each of the selling stockholders has represented that each
qualifies as an "accredited investor" as such term is defined in Rule 501 under
the Securities Act.
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the options and the warrants, if exercised for cash. The following
table also sets forth the name of each person who is offering the resale of
shares of common stock by this prospectus, the number of shares of common stock
beneficially owned by each person, the number of shares of common stock that may
be sold in this offering and the number and percentage of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rule, beneficial ownership includes any shares as to which the selling
stockholder has sole or shared voting power or investment power and also any
shares the selling stockholder has the right to acquire within 60 days.
42
Percentage Percentage
of of
Shares Outstanding Outstanding
Beneficially Shares Shares Shares
Owned Beneficially to be Sold Beneficially
Before Owned Before in the Owned After
Selling Stockholder Offering Offering Offering Offering
AEG 11,292,614(1) 33.40% 11,292,614 0%
- --------------------------------------------------------------------------------------------------------
BBVA 8,954,550(2) 28.46% 8,954,550 0%
- --------------------------------------------------------------------------------------------------------
Steven Berkowitz 223,560(3) 0.98% 223,560 0%
- --------------------------------------------------------------------------------------------------------
Paul Chiumento 243,000(4) 1.07% 243,000 0%
- --------------------------------------------------------------------------------------------------------
Sheila G. Corvino 88,695(5) 0.39% 88,695 0%
- --------------------------------------------------------------------------------------------------------
Crestview Capital Master LLC 8,952,120(6) 28.45% 8,952,120 0%
- --------------------------------------------------------------------------------------------------------
Meir Duke 894,240(7) 3.82% 894,240 0%
- --------------------------------------------------------------------------------------------------------
Joseph English 894,240(8) 3.82% 894,240 0%
- --------------------------------------------------------------------------------------------------------
Gideon Feingold 447,120(9) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
FOX 16,785,929(10) 42.71% 16,785,929 0%
- --------------------------------------------------------------------------------------------------------
Grossman Family Trust 223,560(11) 0.98% 223,560 0%
- --------------------------------------------------------------------------------------------------------
Daniel D. Hickey 224,775(12) 0.99% 224,775 0%
- --------------------------------------------------------------------------------------------------------
Highbridge International LLC 8,952,120(13) 28.45% 8,952,120 0%
- --------------------------------------------------------------------------------------------------------
Kellogg Capital Group LLC 447,120(14) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
Shalom Maidenbaum 243,000(15) 1.07% 243,000 0%
- --------------------------------------------------------------------------------------------------------
Gil Makov 447,120(16) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
Maxim 3,580,945(17) 13.72% 3,580,945 0%
- --------------------------------------------------------------------------------------------------------
MeadowBrook Opportunity Fund LLC 2,430,000(18) 9.74% 2,430,000 0%
- --------------------------------------------------------------------------------------------------------
NBC 6,385,951(19) 22.10% 6,385,951 0%
- --------------------------------------------------------------------------------------------------------
Carole Rosenblatt 894,240(20) 3.82% 894,240 0%
- --------------------------------------------------------------------------------------------------------
Wayne Saker 223,560(21) 0.98% 223,560 0%
- --------------------------------------------------------------------------------------------------------
SF Capital Partners Ltd. 4,476,060(22) 16.58% 4,476,060 0%
- --------------------------------------------------------------------------------------------------------
MacAllister Smith 133,650(23) 0.59% 133,650 0%
- --------------------------------------------------------------------------------------------------------
Stepping Stone Partners 895,455(24) 3.83% 895,455 0%
- --------------------------------------------------------------------------------------------------------
A. Michael Storiazzi 894,240(25) 3.82% 894,240 0%
- --------------------------------------------------------------------------------------------------------
James D. Sullivan 224,775(26) 0.99% 224,775 0%
- --------------------------------------------------------------------------------------------------------
Raymond & Liana Szeto 447,120(27) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
The Jay Goldman Master LP 1,342,575(28) 5.63% 1,342,575 0%
- --------------------------------------------------------------------------------------------------------
Boris Volman 447,120(29) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
Jerold & Lilli Weinger 670,680(30) 2.89% 670,680 0%
- --------------------------------------------------------------------------------------------------------
Jay & Toni Youngeman 447,120(31) 1.95% 447,120 0%
- --------------------------------------------------------------------------------------------------------
Special K Investors Inc. 2,381,175(32)* 8.09% 2,381,175 0%
- --------------------------------------------------------------------------------------------------------
Eamonn McConnell 1,190,588(33)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
43
Percentage Percentage
of of
Shares Outstanding Outstanding
Beneficially Shares Shares Shares
Owned Beneficially to be Sold Beneficially
Before Owned Before in the Owned After
Selling Stockholder Offering Offering Offering Offering
Stephen Caragol and Michelle
Caragol, joint tenants 1,190,588(34)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
UEB Switzerland 3,571,762(35)* 11.66% 3,571,762 0%
- --------------------------------------------------------------------------------------------------------
Bay Point Investment Partners, LLC 595,294(36)* 2.15% 595,294 0%
- --------------------------------------------------------------------------------------------------------
Lawrence Berk 297,647(37)* 1.09% 297,647 0%
- --------------------------------------------------------------------------------------------------------
Timothy E. Lutes 297,647(38)* 1.09% 297,647 0%
- --------------------------------------------------------------------------------------------------------
Figeac S.A 2,381,175(39)* 8.09% 2,381,175 0%
- --------------------------------------------------------------------------------------------------------
Shai Stern and Michelle Stern,
joint tenants 297,647(40)* 1.09% 297,647 0%
- --------------------------------------------------------------------------------------------------------
Robert Tucker 1,190,588(41)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
Brent A. Lind 416,706(42)* 1.52% 416,706 0%
- --------------------------------------------------------------------------------------------------------
UEB Switzerland 1,190,588(43)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
Winchester Land Company Limited 1,190,588(44)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
Jay Mittman 1,190,588(45)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
Lawrence Investments, LLC 1,190,588(46)* 4.21% 1,190,588 0%
- --------------------------------------------------------------------------------------------------------
Jerry Cohen 595,294(47)* 2.15% 595,294 0%
- --------------------------------------------------------------------------------------------------------
Velma Iva Raleigh Trust 595,294(48)* 2.15% 595,294 0%
- --------------------------------------------------------------------------------------------------------
Elliot Braun 400,000(49)* 0.88% 400,000 0%
- --------------------------------------------------------------------------------------------------------
J. Mittman & Co. Inc. 2,381,175(50)* 8.09% 2,381,175 0%
- --------------------------------------------------------------------------------------------------------
Robert J. Braun and Janet L. Braun,
joint tenants 400,000(51)* 0.88% 400,000 0%
- --------------------------------------------------------------------------------------------------------
Stephen Caragol 397,647(52)*+ 1.73% 397,647 0%
- --------------------------------------------------------------------------------------------------------
J. Mittman & Co. Inc. 2,976,468(53)* 9.91% 2,976,468 0%
- --------------------------------------------------------------------------------------------------------
Robert A. Raleigh 297,647(54)* 1.09% 297,647 0%
- --------------------------------------------------------------------------------------------------------
Jeffrey Wattenberg 2,825,000(55) 11.15% 2,825,000 0%
- --------------------------------------------------------------------------------------------------------
Robert Richman 750,000(56)+ 3.22% 750,000 0%
- --------------------------------------------------------------------------------------------------------
Ron Bearpark 750,000(57)+ 3.22% 750,000 0%
- --------------------------------------------------------------------------------------------------------
J.T.R. Baines 500,000(58)+ 2.17% 500,000 0%
- --------------------------------------------------------------------------------------------------------
- ----------
* Each selling stockholder has agreed not to sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other to donees who agree to be
similarly bound), pledge, hypothecate or otherwise transfer (except for estate
planning purposes to a family member or trust) any shares of common stock
registered in this offering, except for 20% of such shares commencing on the
effective date of the registration statement, an additional 20% of such shares
commencing ninety (90) days from the effective date of the registration
statement, and the remaining 60% of such shares commencing one hundred eighty
(180) days from the effective date of the registration statement, without the
prior written consent of Maxim.
+ Each selling stockholder has agreed not to sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other to donees who agree to be
similarly bound), pledge, hypothecate or otherwise transfer (except for estate
planning purposes to a family member or trust) any shares of common stock
registered in this offering, except for 50% of such shares commencing ninety
(90) days from the effective date of the registration statement, and the
remaining 50% of such shares commencing one hundred eighty (180) days from the
effective date of this registration statement, without the prior written consent
of Maxim.
(1) Consists of 11,292,614 shares of common stock issuable upon conversion of a
convertible note.
(2) Consists of 7,163,640 shares of common stock issuable upon assumed
conversion of 29,480 shares of Series B Preferred Stock, and an additional
1,790,910 shares of common stock issuable upon exercise of outstanding warrants.
(3) Consists of 178,848 shares of common stock issuable upon assumed conversion
of 736 shares of Series B Preferred Stock, and an additional 44,712 shares of
common stock issuable upon exercise of outstanding warrants.
(4) Consists of 194,400 shares of common stock issuable upon assumed conversion
of 800 shares of Series B Preferred Stock, and an additional 48,600 shares of
common stock issuable upon exercise of outstanding warrants.
(5) Consists of 70,956 shares of common stock issuable upon assumed conversion
of 292 shares of Series B Preferred Stock, and an additional 17,739 shares of
common stock issuable upon exercise of outstanding warrants.
(6) Consists of 7,161,696 shares of common stock issuable upon assumed
conversion of 29,472 shares of Series B Preferred Stock, and an additional
1,790,424 shares of common stock issuable upon exercise of outstanding warrants.
44
- ----------
(7) Consists of 715,392 shares of common stock issuable upon assumed conversion
of 2,944 shares of Series B Preferred Stock, and an additional 178,848 shares of
common stock issuable upon exercise of outstanding warrants.
(8) Consists of 715,392 shares of common stock issuable upon assumed conversion
of 2,944 shares of Series B Preferred Stock, and an additional 178,848 shares of
common stock issuable upon exercise of outstanding warrants.
(9) Consists of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
(10) Consists of 16,785,929 shares of common stock issuable upon conversion of
Series A Preferred Stock.
(11) Consists of 178,848 shares of common stock issuable upon assumed conversion
of 736 shares of Series B Preferred Stock, and an additional 44,712 shares of
common stock issuable upon exercise of outstanding warrants.
(12) Consists of 79,820 shares of common stock issuable upon assumed conversion
of 740 shares of Series B Preferred Stock, and an additional 44,955 shares of
common stock issuable upon exercise of outstanding warrants.
(13) Consist of 7,161,696 shares of common stock issuable upon assumed
conversion of 29,472 shares of Series B Preferred Stock, and an additional
1,790,424 shares of common stock issuable upon exercise of outstanding warrants.
(14) Consist of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
(15) Consists of 194,400 shares of common stock issuable upon assumed conversion
of 800 shares of Series B Preferred Stock, and an additional 48,600 shares of
common stock issuable upon exercise of outstanding warrants.
(16) Consists of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
(17) Consists of 3,580,945 shares of common stock issuable upon exercise of
outstanding warrants.
(18) Consists of 1,944,000 shares of common stock issuable upon assumed
conversion of 8,000 shares of Series B Preferred Stock, and an additional
486,000 shares of common stock issuable upon exercise of outstanding warrants.
(19) Consists of 6,385,951 shares of common stock issuable upon conversion of
Series A Preferred Stock.
(20) Consists of 715,392 shares of common stock issuable upon assumed conversion
of 2,944 shares of Series B Preferred Stock, and an additional 178,848 shares of
common stock issuable upon exercise of outstanding warrants.
(21) Consists of 178,848 shares of common stock issuable upon assumed conversion
of 736 shares of Series B Preferred Stock, and an additional 44,712 shares of
common stock issuable upon exercise of outstanding warrants.
(22) Consists of 3,580,848 shares of common stock issuable upon assumed
conversion of 14,736 shares of Series B Preferred Stock, and an additional
895,212 shares of common stock issuable upon exercise of outstanding warrants.
The exercise of the warrants is restricted to limit the holder's beneficial
ownership to less than 5% and 10% of the common stock.
(23) Consists of 106,920 shares of common stock issuable upon assumed conversion
of 440 shares of Series B Preferred Stock, and an additional 26,730 shares of
common stock issuable upon exercise of outstanding warrants.
(24) Consists of 716,364 shares of common stock issuable upon assumed conversion
of 2,948 shares of Series B Preferred Stock, and an additional 179,091 shares of
common stock issuable upon exercise of outstanding warrants.
(25) Consists of 715,392 shares of common stock issuable upon assumed conversion
of 2,944 shares of Series B Preferred Stock, and an additional 178,848 shares of
common stock issuable upon exercise of outstanding warrants.
(26) Consists of 179,820 shares of common stock issuable upon assumed conversion
of 740 shares of Series B Preferred Stock, and an additional 44,955 shares of
common stock issuable upon exercise of outstanding warrants.
(27) Consists of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
(28) Consists of 1,074,060 shares of common stock issuable upon assumed
conversion of 1,105 shares of Series B Preferred Stock, and an additional
268,515 shares of common stock issuable upon exercise of outstanding warrants.
(29) Consists of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
(30) Consists of 536,544 shares of common stock issuable upon assumed conversion
of 2,208 shares of Series B Preferred Stock, and an additional 134,136 shares of
common stock issuable upon exercise of outstanding warrants.
(31) Consists of 357,696 shares of common stock issuable upon assumed conversion
of 1,472 shares of Series B Preferred Stock, and an additional 89,424 shares of
common stock issuable upon exercise of outstanding warrants.
45
- ----------
(32) Includes 1,581,175 shares of common stock issuable upon conversion of
Series A Preferred Stock, and an additional 400,000 shares of common stock
issuable upon exercise of outstanding warrants.
(33) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(34) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(35) Includes 2,371,762 shares of common stock issuable upon conversion of
Series A Preferred Stock, and an additional 600,000 shares of common stock
issuable upon exercise of outstanding warrants.
(36) Includes 395,294 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 100,000 shares of common stock issuable
upon exercise of outstanding warrants.
(37) Includes 197,647 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 50,000 shares of common stock issuable upon
exercise of outstanding warrants.
(38) Includes 197,647 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 50,000 shares of common stock issuable upon
exercise of outstanding warrants.
(39) Includes 1,581,175 shares of common stock issuable upon conversion of
Series A Preferred Stock, and an additional 400,000 shares of common stock
issuable upon exercise of outstanding warrants.
(40) Includes 197,647 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 50,000 shares of common stock issuable upon
exercise of outstanding warrants.
(41) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(42) Includes 276,706 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 70,000 shares of common stock issuable upon
exercise of outstanding warrants.
(43) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(44) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(45) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(46) Includes 790,588 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 200,000 shares of common stock issuable
upon exercise of outstanding warrants.
(47) Includes 395,294 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 100,000 shares of common stock issuable
upon exercise of outstanding warrants.
(48) Includes 395,294 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 100,000 shares of common stock issuable
upon exercise of outstanding warrants.
(49) Includes 200,000 shares of common stock issuable upon exercise of
outstanding warrants.
(50) Includes 1,581,175 shares of common stock issuable upon conversion of
Series A Preferred Stock, and an additional 400,000 shares of common stock
issuable upon exercise of outstanding warrants.
(51) Includes 200,000 shares of common stock issuable upon exercise of
outstanding warrants.
(52) Includes 197,647 shares of common stock issuable upon conversion of Series
A Preferred Stock, 50,000 shares of common stock issuable upon exercise of
outstanding warrants, and 100,000 shares of common stock issuable upon exercise
of an outstanding stock option.
(53) Includes 1,976,468 shares of common stock issuable upon conversion of
Series A Preferred Stock, and an additional 500,000 shares of common stock
issuable upon exercise of outstanding warrants.
(54) Includes 197,647 shares of common stock issuable upon conversion of Series
A Preferred Stock, and an additional 50,000 shares of common stock issuable upon
exercise of outstanding warrants.
(55) Includes 2,000,000 shares of common stock issuable upon exercise of an
outstanding stock option. Mr. Wattenberg has agreed not to sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other to donees who
agree to be similarly bound), pledge, hypothecate or otherwise transfer (except
for estate planning purposes to a family member or trust) 2,000,000 shares of
common stock registered in this offering, except for 50% of such shares
commencing ninety (90) days from the effective date of the registration
statement, and the remaining 50% of such shares commencing one hundred eighty
(180) days from the effective date of the registration statement, without the
prior written consent of Maxim.
(56) Consists of 750,000 shares of common stock issuable upon exercise of an
outstanding stock option.
(57) Consists of 750,000 shares of common stock issuable upon exercise of an
outstanding stock option.
(58) Consists of 500,000 shares of common stock issuable upon exercise of an
outstanding stock option.
46
Relationships with Selling Stockholders
The following information contains a description of how each selling
stockholder acquired the shares to be sold in this offering. None of the selling
stockholders have held a position or office, or had any other material
relationship, with us, except as follows:
All of the selling stockholders, except for Fox, NBC, AEG and five
optionees, acquired their shares either pursuant to the sale of 10% convertible
notes in 2004 or on February 28, 2005, in connection with the consummation the
private placement of units of Series B Preferred Stock and common stock purchase
warrants that closed on the date of the merger.
The notes were issued in units that included common stock and common stock
purchase warrants. It was a condition to the closing of the merger, among other
things, that at least $2.0 million principal amount of the notes (and accrued
interest) were converted into our Series A Preferred Stock. A total of
26,516,694 shares of common stock issued as part of the units, underlying the
warrants included in the units, or issuable on conversion of the Series A
Preferred Stock into which the notes were converted are being registered.
Holders of the notes and the optionees, who hold options exercisable in total
for 4,100,000 shares, have agreed to refrain from selling their shares for
periods of 90 to 180 days from effectiveness of the registration statement, as
set forth in the notes to the table.
We sold an aggregate of 36,841 units of Series B Preferred Stock and
common stock purchase warrants for an aggregate purchase price of $5,000,060.52
and issued the placement agent a warrant to purchase 3,580,945 shares of common
stock. A total of 48,342,760 shares of common stock underlying these units are
being registered.
In addition, we are registering 23,171,880 shares of common stock issuable
upon the conversion of our Series A Preferred Stock that we issued to Fox and
NBC. NBC distributes our programming on broadcast television, and Fox
distributes our programming on cable television. NBC and Fox own Series A
Preferred Stock convertible into 22.1% and 42.7%, respectively, of the common
stock that would be outstanding following such conversion (assuming conversion
of only their Series A Preferred Stock).
47
We are also registering 11,292,614 shares of common stock issuable upon
conversion of a convertible note issued to AEG. AEG provides all merchandising
services on our behalf at our tournaments. AEG's note is convertible into 33.4%
of the common stock that would be outstanding following such conversion
(assuming conversion of only the note).
We are also including among the shares offered by this prospectus
4,825,000 shares of common stock, including 4,000,000 shares of common stock
underling stock option grants made to certain individuals. Of such 4,825,000
shares of common stock, Mr. Wattenberg, a member of our Board of Directors,
holds 2,825,000 shares, including 2,000,000 shares of common stock underlying an
employee stock option.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Loeb & Loeb LLP.
EXPERTS
Our financial statements as of December 31, 2004 and for the years ended
December 31, 2004 and 2003 appearing in this prospectus and registration
statement have been audited by Mayer Hoffman McCann P.C., independent registered
public acccounting firm as set forth in their report appearing elsewhere herein,
and are included in reliance upon the authority of such firm as experts in
accounting and auditing in issuing such reports.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act, relating to the shares of common stock being offered by this prospectus,
and reference is made to such registration statement. This prospectus
constitutes the prospectus of AVP, Inc. and its consolidated subsidiaries filed
as part of the registration statement, and it does not contain all information
in the registration statement, as certain portions have been omitted in
accordance with the rules and regulations of the SEC.
We are subject to the informational requirements of the Exchange Act,
which requires us to file reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information may be inspected
at the public reference room of the SEC at Judiciary Plaza, 450 Fifth Street
N.W., Washington D.C. 20549. Copies of such material can be obtained from the
facility at prescribed rates. Please call the SEC toll free at 1-800-SEC-0330
for information about its public reference room. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov or our website at
http://www.avp.com. Information contained in our web site is not part of this
prospectus.
Our statements in this prospectus about the contents of any contract or
other document are not necessarily complete. You should refer to the copy of our
contract or other document we have filed as an exhibit to the registration
statement for complete information.
48
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. The selling stockholders are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of the document.
We furnish our stockholders with annual reports containing audited
financial statements.
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Registered Public Accounting Firm Report F-1
Balance Sheet as of December 31, 2004 F-2
Statements of Operations for the Years Ended
December 31, 2004 and 2003 F-3
Statement of Changes in Stockholders' Deficency for
the Years ended December 31, 2004 and 2003 F-4
Statements of Cash Flows Deficiency for the Years Ended
December 31, 2004 and 2003 F-5
Notes to Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of AVP Pro Beach Volleyball Tour, Inc.
We have audited the accompanying balance sheet of AVP Pro Beach Volleyball Tour,
Inc. f/k/a Association of Volleyball Professionals, Inc. (AVP) as of December
31, 2004 and the related statements of operations, changes in stockholders'
deficiency and cash flows for the years ended December 31, 2004 and 2003. These
financial statements are the responsibility of AVP's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AVP as of December 31, 2004 and
the results of its operations and its cash flows for the years ended December
31, 2004 and 2003 in conformity with U.S. generally accepted accounting
principles.
Mayer Hoffman McCann P.C.
New York, New York
March 18, 2005
F-1
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
Balance Sheet
December 31,
2004
-----------
ASSETS
CURRENT ASSETS
Cash $ 631,933
Accounts receivable, net of
allowance for doubtful accounts of $10,000 649,137
Prepaid expenses 26,606
Deferred commission-related party 253,339
-----------
TOTAL CURRENT ASSETS 1,561,015
-----------
PROPERTY AND EQUIPMENT, net 201,703
-----------
OTHER ASSETS
Investment in sales-type lease 628,323
Other assets 42,738
-----------
TOTAL OTHER ASSETS 671,061
-----------
TOTAL ASSETS $ 2,433,779
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes payable - related party $ 2,000,000
Current portion of long-term debt 1,633,333
Accounts payable 57,157
Accrued expenses 790,368
Accrued interest 316,630
Accrued officer compensation 43,208
Deferred revenue 325,050
-----------
TOTAL CURRENT LIABILITIES 5,165,746
-----------
OTHER LIABILITIES
Deferred revenue 225,000
Long-term debt - less current portion 1,100,071
-----------
TOTAL OTHER LIABILITIES 1,325,071
-----------
TOTAL LIABILITIES 6,490,817
-----------
REDEEMABLE SERIES A PREFERRED STOCK 3,657,600
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Series A-1 preferred stock $.001 par value, 2,000,000 122
shares authorized, 122,381 shares issued and outstanding
Common stock $.001 par value, 40,000.000 shares authorized, --
no shares issued and outstanding
Additional paid-in capital 999,190
ACCUMULATED DEFICIT (8,713,950)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (7,714,638)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,433,779
===========
See notes to financial statements
F-2
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
2004 2003
------------ ------------
REVENUE
Sponsorships $ 9,918,117 $ 6,222,371
Other 2,390,888 1,071,757
------------ ------------
TOTAL REVENUE 12,309,005 7,294,128
EVENT COSTS 9,125,829 6,506,613
------------ ------------
Gross Profit 3,183,176 787,515
------------ ------------
OPERATING EXPENSES
Marketing 2,435,124 2,024,572
Administrative 3,442,479 2,184,557
------------ ------------
TOTAL OPERATING EXPENSE 5,877,603 4,209,129
------------ ------------
OPERATING LOSS (2,694,427) (3,421,614)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (245,870) (182,396)
Interest income 67,185 87,751
Joint venture loss -- (184,712)
------------ ------------
TOTAL OTHER EXPENSE (178,685) (279,357)
------------ ------------
LOSS BEFORE INCOME TAXES (2,873,112) (3,700,971)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (2,873,112) $ (3,700,971)
============ ============
Proforma net loss per
basic and diluted
share of common stock $ (0.10) $ (0.10)
============ ============
Proforma weighted average
number of basic and
diluted common shares
outstanding 29,738,605 29,738,605
============ ============
See notes to financial statements
F-3
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Series A-1
Preferred Stock Common Stock
------------------------- -------------------------- Additional Total
Paid Accumulated Stockholders'
Shares Amount Shares Amount in Capital Deficit Deficiency
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2003 -- $ -- 674,100 $ 674 $ 1,936,826 $(5,519,186) $(3,581,686)
Redemption of shares -- -- (98,870) (99) (549,901) -- (550,000)
Conversion of loan
payable to officer and
stockholder -- -- 48,528 49 269,906 -- 269,955
Conversion of DMC payable
into common stock -- -- 309,520 309 1,721,555 -- 1,721,864
Cancellation of shares of AVP
in transaction with DMC -- -- (933,278) (933) (3,378,386) 3,379,319 --
Issuance of preferred stock in
transcation with DMC 122,381 122 -- -- 995,381 -- 995,503
Compensation from issuance
of stock options -- -- -- -- 3,809 -- 3,809
Net loss -- -- -- -- -- (3,700,971) (3,700,971)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 122,381 122 -- -- 999,190 (5,840,838) (4,841,526)
Net loss -- -- -- -- -- (2,873,112) (2,873,112)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 122,381 $ 122 -- $ -- $ 999,190 $(8,713,950) $(7,714,638)
=========== =========== =========== =========== =========== =========== ===========
See notes to financial statements
F-4
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,873,112) $(3,700,971)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization of property and equipment 57,561 14,529
Other amortization 6,033 8,043
Amortization of deferred commissions 294,904 609,256
Allowance for doubtful accounts 10,000 --
Amortization of deferred costs 1,352,100 387,500
Compensation from issuance of stock options -- 3,809
Decrease (increase) in operating assets:
Accounts receivable (169,442) (451,483)
Investment in and due from joint venture 291,084 (291,084)
Prepaid expenses (26,606) 58,994
Other assets (1,305) (15,466)
Increase (decrease) in operating liabilities:
Accounts payable (625,052) 35,046
Accrued expenses 211,950 305,932
Accrued officer compensation (167,625) 210,833
Accrued interest 245,871 --
Deferred revenue 275,050 (112,500)
----------- -----------
NET CASH FLOWS FROM
OPERATING ACTIVITIES (1,118,589) (2,937,562)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (228,416) (25,722)
Investment in sales-type lease 91,215 42,344
Cash received in acquisition -- 769,450
----------- -----------
NET CASH FLOWS FROM
INVESTING ACTIVITIES (137,201) 786,072
----------- -----------
See notes to financial statements
F-5
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended December 31,
2004 2003
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,000,000 1,217,238
Repayment of long-term debt (183,333) (80,000)
Decrease in payable to DMC
and other related party debt -- (65,995)
Issuance of preferred stock -- 910,000
----------- -----------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 1,816,667 1,981,243
----------- -----------
NET INCREASE (DECREASE) IN CASH 560,877 (170,247)
CASH, BEGINNING OF YEAR 71,056 241,303
----------- -----------
CASH, END OF YEAR $ 631,933 $ 71,056
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 48,939 $ --
----------- -----------
Income taxes -- --
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING INFORMATION
Note payable incurred in connection with stock redemption $ -- $ 550,000
----------- -----------
Note payable incurred in connection with the acquisition
of commission rights -- 1,157,499
----------- -----------
Conversion of intercompany payable and loan payable
to officer and stockholder into common stock -- 1,991,819
----------- -----------
Issuance of preferred stock for deferred costs -- 1,739,600
----------- -----------
See notes to financial statements
F-6
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
AVP Pro Beach Volleyball Tour, Inc. f/k/a Association of Volleyball
Professionals, Inc. (AVP), incorporated in Delaware on May 29, 2001, is
the sole nationally and internationally recognized U.S. professional beach
volleyball tour for the sport of men's and women's professional beach
volleyball in the United States. AVP operates professional beach
volleyball activities in the United States, including tournaments,
sponsorships sales, broadcast rights, licensing and trademark agreements,
sales of food, beverage and merchandise at tournaments, player contracts
and other associated activities.
On July 28, 2003, AVP merged with Digital Media Campus, Inc. (DMC), its
then sole stockholder, in a transaction accounted for as a transfer
between entities under common control with AVP as the surviving entity
(Note 13). The accompanying financial statements have been prepared
including the net assets and results of operations of DMC from the
transaction date of July 28, 2003.
2. SUBSEQUENT EVENT
On June 29, 2004, Othnet, Inc. (Othnet), a publicly traded company, and
AVP signed a merger agreement pursuant to which AVP agreed to merge with a
wholly-owned subsidiary of Othnet, Othnet Merger Sub. Inc. Among other
conditions, closing of the merger was contingent upon Othnet's lending to
AVP $2,000,000 of proceeds from issuing units consisting of 10%
convertible notes due June 2005 and two shares of Othnet common stock and
a two-year common stock purchase warrant to purchase two shares of common
stock at $.21 per share for each dollar of principal amount of notes, and
Othnet's completing a minimum $4,300,000 net proceeds equity financing
including the required conversion of $2,000,000 principal amount of notes.
In a November 10, 2004 amendment to the agreement, the parties agreed to
engage an exclusive placement agent to privately offer a minimum of
$3,000,000 of Othnet Series B preferred stock and conditioned closing the
merger upon consummation of the private placement, which, in turn, was
conditioned, among other things, upon conversion of the convertible notes.
On February 28, 2005, the merger was consummated, as a result of which AVP
became Othnet's wholly owned subsidiary, and AVP's former stockholders
were issued Othnet Series A Convertible Preferred Stock, (shown as Series
A-1 preferred stock in the accompanying financial statements) which will
convert automatically into common stock upon authorization of a sufficient
amount of common stock. As a result of the merger, AVP's name was changed
to its current name, AVP Pro Beach Volleyball Tour, Inc.
As such, for all disclosures referencing shares authorized and issued,
shares reserved for issuance, per share amounts and other disclosures
relating to equity, amounts have been retroactively restated to reflect
share quantities as altered by the terms of the merger agreement.
Concurrently with the merger, pursuant to the private placement, Othnet
sold $5,000,000 of units consisting of four shares of Othnet Series B
preferred stock and a five-year warrant to purchase 243 shares of common
stock at $.20 per share, and approximately $2,160,000 of the Othnet notes
including accrued interest, were converted into Series A preferred stock.
F-7
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUBSEQUENT EVENT (CONTINUED)
Each share of Series A preferred stock and Series B preferred stock is
convertible into 243 shares of common stock and carries the number of
votes that equals the number of shares into which it is convertible,
except that, until the authorization of additional shares of common stock,
the Series B preferred stock will carry ten times the vote per share that
it otherwise would carry.
AVP agreed to register for resale the shares of common stock underlying
the Series B preferred stock. The agreement provides that if a
registration statement is not filed by April 15, 2005 or does not become
effective by June 28, 2005, AVP must pay a penalty to the Series B
preferred stock stockholder of approximately $50,000 and thereafter for
each month that the penalty condition is not satisfied, until August 28,
2005, when the monthly penalty increases to $100,000.
Upon consummation of the merger and the private offering, AVP's former
stockholders including holders of stock options and stock purchase
warrants beneficially owned approximately 61.2% of all common stock
beneficially owned by all beneficial owners of Othnet common stock.
On March 9, 2005, Othnet changed its name to its current name, AVP, Inc.
In February 2005, the two television networks waived their put rights on
their redeemable Series A preferred stock that AVP respectively issued to
them, and subsequently converted the preferred stock into Othnet Series A
preferred stock pursuant to the merger.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior period amounts have been reclassified to conform to current
period presentations.
Revenue and Expense Recognition
The majority of AVP's revenues are derived from sponsorship and
advertising contracts with national and local sponsors. AVP recognizes
sponsorship revenue pro rata over each event during the tour season as the
events occur and collection is reasonably assured. Revenues invoiced
and/or collected prior to their respective events are recorded as deferred
revenue. Event costs are recognized on an event-by-event basis. Event
costs billed and/or paid prior to their respective events are recorded as
deferred costs and expensed at the time the event occurs.
F-8
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue and Expense Recognition (Continued)
AVP also derives additional revenue from activation services, event ticket
sales, concession rights, event merchandising, licensing, and sanctioning
fees. Revenues and expenses from foregoing ancillary activities are
recognized on an event-by-event basis as the revenues are realized and
collection is reasonably assured. Licensing revenue is recognized as
royalties are earned and collection is reasonably assured.
During 2004 and 2003, the same two sponsors accounted for 33% and 43% of
sponsorship revenue, respectively
Bartering Transactions
AVP barters advertising for products and services. Revenue and related
expenses from barter transactions are recorded at fair value in accordance
with EITF 99-17, Accounting for Advertising Barter Transactions. Revenue
from barter transactions is recognized in accordance with AVP's revenue
recognition policies. Expense for barter transactions is generally
recognized as incurred. Revenue and expense from barter transactions were
not significant during 2004 and 2003.
Accounts Receivable
Accounts receivable consist primarily of amounts due from sponsors and
licensees for sponsorship fees and royalties, respectively. Such amounts
are billed when due under the terms of the respective sponsorship
agreements, or, in the case of royalties, when earned. AVP grants credit
to all qualified customers. Accounts receivable are carried at cost less
an allowance for doubtful accounts, if an allowance is deemed necessary.
AVP does not accrue finance or interest charges. On a periodic basis, AVP
evaluates its accounts receivable and determines the requirement for an
allowance for doubtful accounts, based on history of past write-offs,
collections, and current credit conditions. A receivable is written off
when it is determined that all collection efforts have been exhausted. The
allowance for doubtful accounts as of December 31, 2004 was $10,000.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
F-9
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risks
Financial instruments that potentially subject AVP to a concentration of
credit risk consist principally of cash deposits and receivables. AVP
places its cash deposits with what management believes are high-credit
quality financial institutions. At times, balances with any one financial
institution may exceed the Federal Deposit Insurance Corporation (FDIC)
limit of $100,000. Receivables are due mainly from sponsors and licensees,
all of whom are large national or international consumer products
companies, which management considers to be low credit risks and with whom
management has not experienced any problems in collecting amounts due.
Depreciation
Depreciation of property and equipment are provided for using the
straight-line method over the estimated useful lives of the assets as
follows:
Assets Useful Lives
------ ------------
Furniture and equipment 3 years
Transportation equipment 3 years
Leasehold improvements 6 years
Long-Lived Assets
When facts and circumstances indicate that the cost of long-lived assets
may be impaired, an evaluation of the recoverability is performed by
comparing the carrying value of the assets to the estimated undiscounted
future cash flows. Upon indication that the carrying value of such assets
may not be recoverable, AVP recognizes an impairment loss by a charge
against current operations. If there is an impairment, an impairment
charge would be determined by comparing the carrying amount of the assets
to the applicable estimated future cash flows, discounted at a
risk-adjusted rate or market appraisals. In addition, the remaining
estimated useful life or amortization period for the impaired asset would
be reassessed and revised if necessary.
Comprehensive Income
Comprehensive income consists of net income (loss) and other gains and
losses affecting stockholders' equity that, under U.S. generally accepted
accounting principles are excluded from net income (loss). Such items
consist primarily of unrealized gains and losses on marketable equity
securities and foreign translation gains and losses. AVP has not had any
such items in the prior two years and, consequently, net income (loss) and
comprehensive income (loss) are the same.
F-10
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
AVP advertises primarily through radio and print media. AVP's policy is to
expense advertising costs, including production costs, as incurred.
Advertising expense was $646,394 in 2004 and $327,488 in 2003.
Cash and Cash Equivalents
For purposes of the statements of cash flows, AVP considers all highly
liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
Income Taxes
AVP provides deferred income taxes to reflect the impact of temporary
differences between the recorded amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. Temporary differences result from differences between the
amounts reported for financial statement purposes and corresponding
amounts for tax purposes. Deferred income tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Stock Based Compensation
AVP accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, and complies with
the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation expense is recognized based on
the difference, if any, on the date of grant between the fair value of
AVP's common stock and the amount an employee must pay to acquire the
stock. The expense associated with stock-based compensation is amortized
over the periods the employee performs the related services, generally the
vesting period, consistent with the multiple option method described in
Financial Accounting Standards Board Interpretation (FIN) No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option
or Award Plans.
F-11
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires disclosure
about the method of accounting and the effect of the method used on
reported results in both annual and interim financial statements.
AVP adopted SFAS No. 148 effective for the year ended December 31, 2002,
and has elected to continue to account for its stock-based compensation in
accordance with the provisions of APB No. 25, Accounting for Stock Issued
to Employees. Under APB 25, compensation expense is recognized over the
vesting period based on the excess of the fair market value over the
exercise price on the grant date. If AVP had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under its stock-based compensation plans consistent with the
methodology prescribed by SFAS No. 123, AVP's net loss would increase to
the following pro forma amounts:
Year Ended December 31,
---------------------------------
2004 2003
------------ ------------
Net loss applicable to common shareholders,
as reported $ (2,873,112) $ (3,700,971)
Less stock based employee compensation
expense determined under fair-value-based
methods for all awards, net of related tax effects (133,288) (53,721)
------------ ------------
Proforma net loss $ (3,006,400) $ (3,754,692)
============ ============
The fair value for these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions for
the years ended December 31, 2004 and 2003:
2004 2003
------------ ------------
Risk-free interest rate 3.86 - 4.19% 4.0 - 4.5%
Expected life 4 to 10 years 10 years
Expected volatility 0% 0%
Expected dividend yield 0% 0%
F-12
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities which was subsequently amended in December 2003 and
Accounting Research Bulletin ("ARB") No. 51, Consolidated Financial
Statements was issued. In general a variable entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights
or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. Special provisions apply to
enterprises that have fully or partially applied Interpretation 46
("Interpretation") prior to issuance of this Interpretation. Otherwise,
application of this Interpretation is required in financial statements of
public entities that have interests in variable interest entities or
potential variable interest entities commonly referred to as
special-purpose entities for periods ending after December 15, 2003.
Application by small business issuers, to entities other than
special-purpose entities and by nonpublic entities and all other types of
entities is required at various dates in 2004 and 2005. In some instances,
enterprises have the option of applying or continuing to apply
Interpretation 46 for a short period of time before applying this
Interpretation. The adoption of the Interpretation did not have any impact
on AVP's financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB No.
104 revises or rescinds portions of the interpretive guidance related to
revenue recognition included in Topic 13 of the codification of the staff
accounting bulletins. SAB No. 104 became effective when issued, and
adoption by AVP did not have a material impact on its financial position
or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). ARB 43 previously
stated that "...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs may be
so abnormal as to require treatment as current period charges...". This
Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal". In
addition, this Statement requires that allocation of fixed production
F-13
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards (Continued)
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement shall be effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after the date this Statement is issued. The
provisions of this Statement shall be applied prospectively. The adoption
of this Statement is not expected to have any impact on AVP's financial
statements.
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets, which amended APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This Statement amends Opinion 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of this
Statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date this Statement is issued. The provisions of this
Statement shall be applied prospectively. The adoption of this Statement
is not expected to have any impact on AVP's financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share -
Based Payment. Statement 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share - based payment
transactions be recognized in financial statements. That cost will be
measured based upon the fair value of the equity or liability instruments
issued. Statement 123(R) covers a wide range of share - based compensation
arrangements including share options, restricted share plans, performance
- based awards, share appreciation rights, and employee share purchase
plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock - Based Compensation, and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair - value - based method of
accounting for share - based payment transactions with employees. However,
that Statement permitted entities the option of continuing to apply the
guidance in Opinion 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair - value
- based method been used. Public entities that file as small business
issuers will be required to apply Statement 123(R) as of the first interim
or annual reporting period that begins after December 15, 2005. AVP has
not yet evaluated the impact of the adoption of SFAS 123(R) and has not
determined the impact on AVP's financial position or results of
operations.
Proforma Net Loss per Basic and Diluted Share of Common Stock
Basic earnings (loss) per share is calculated using the average number of
common shares outstanding. Diluted earnings (loss) per share is computed
on the basis of the average number of common shares outstanding during the
period increased by the dilutive effect of outstanding stock options using
the "treasury stock" method. The proforma net loss per basic and diluted
share of common stock gives effect to the conversion of the Series A-1
preferred stock as if it occurred at the beginning of the periods
presented. Options, warrants, and other incremental shares to purchase
88,866,377 and 80,571,846 shares of common stock at December 31, 2004 and
2003, respectively, were excluded from the computation of diluted earnings
(loss) per share as their effect would be anti-dilutive.
F-14
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
4. JOINT VENTURE
During 2003, AVP and two unrelated organizations jointly sponsored an
event in which AVP retained a 1/3 interest. The joint venture was
accounted for using the equity method of accounting.
The joint venture's 2003 operations are summarized as follows:
Revenues $ 643,547
Expenses 1,197,683
-----------
Loss $ (554,136)
===========
AVP's share of loss $ (184,712)
===========
Under the terms of the continuing joint venture agreement, additional
events were to be sponsored, one each in 2004 and 2005. No such event was
held in 2004 or will be held in 2005 as one of the joint venture partners
declined to participate, and AVP and the other partner agreed not to hold
events in 2004 or 2005.
5. DEFERRED COSTS
In 2003, AVP entered into a production and distribution agreement for the
2003 and 2004 tour events with a major television network valued at
$2,649,600. AVP issued preferred stock in payment under the agreement and
capitalized the costs, which were amortized as the events specified in the
agreement occurred. Deferred costs under this agreement at December 31,
2003 aggregated $1,352,100, consisting of $964,600 of deferred event costs
and $387,500 of unamortized contract costs which were amortized to expense
in 2004.
6. DEFERRED COMMISSION - RELATED PARTY
On April 6, 2003, AVP acquired from an officer and stockholder the
commissions the officer was entitled to receive on sponsorship revenues
under sponsorship agreements. The officer had secured the sponsorships for
AVP under a 2001 agreement the officer had with AVP. The aggregate cost of
acquiring the rights of $1,366,737 is being charged to operations over the
term of the related sponsorship agreements and projected revenues
thereunder.
Deferred commissions charged to operations aggregated $294,904 in 2004 and
$609,256 in 2003.
F-15
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
7. PROPERTY AND EQUIPMENT
Property and equipment consist of:
2004
---------
Cost
Furniture and equipment $ 228,489
Transportation equipment 29,244
Leasehold improvements 23,704
---------
Total Cost 281,437
Less accumulated depreciation
and amortization (79,734)
---------
Net property and equipment $ 201,703
=========
Depreciation and amortization expense was $57,561 in 2004 and $14,529 in
2003.
8. INVESTMENT IN SALES-TYPE LEASE
In 2001, AVP leased furniture and equipment associated with a former
office facility to a third party in a lease classified as a sales-type
lease. The unearned lease income is being amortized to income over the
lease term, using the effective interest method. The lease expires in
October 2008. AVP's investment in the sales-type lease at December 31,
2004 is as follows:
Minimum lease payments $ 607,200
Estimated unguaranteed
residual value 183,600
Less unearned lease income (162,477)
---------
Investment in sales-type lease, net $ 628,323
=========
F-16
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
8. INVESTMENT IN SALES-TYPE LEASE (CONTINUED)
The following is a schedule of future minimum lease payments to be
received:
Years Ending December 31,
-------------------------
2005 $ 158,400
2006 158,400
2007 158,400
2008 132,000
----------
Total $ 607,200
==========
The lease obligation is collateralized by the underlying assets.
9. ACCRUED OFFICER COMPENSATION
At December 31, 2004, one officer has elected to defer the payment of
salaries owed to him.
10. NOTES PAYABLE - RELATED PARTY
During 2004, in connection with Othnet's issuing 10% Convertible
Debentures due June 3, 2005 in an aggregate principal amount up to
$2,360,000, AVP issued debentures aggregating $2,000,000 to Othnet, with
whom AVP had entered into a merger agreement. The debenture and accrued
interest may be converted by the holder at any time, based on a conversion
price of the lower of $.08 per share of common stock or 85% of the
offering price in the next round of financing of Othnet common stock, as
defined in the debenture agreement, or any other equity financing
consummated by AVP prior to the maturity of this debenture. As part of the
consummated merger on February 28, 2005, the notes and accrued interest
were converted into common stock.
F-17
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
11. LONG-TERM DEBT
Long-term debt consists of the following:
Note dated August 2002 to an entity who is a partner with
AVP in a joint venture payable, including interest at 5%
per annum, $500,000 in September 2003 and $500,000 in
September 2006.
In April 2003, AVP entered into an option agreement with
the note holder whereby the note holder has the option to
acquire up to $1,000,000 of AVP common stock. The option
price per share of common stock is based upon an aggregate
valuation of AVP equal to the lesser of $10,000,000 or the
aggregate post-money valuation implied by the terms of any
sale or issuance of equity in AVP subsequent to April 21,
2003. Based on the $10,000,000 valuation, the option price
at December 31, 2003 was $.11 per share of common stock.
The note holder may exercise its option at any time prior
to the repayment of the note.
The holder agreed to defer the September 2003 payment
aggregating $556,081, including interest, in anticipation
of converting the note into equity. $ 1,000,000
Related party note dated April 2003, payable in
installments through January 2006 plus interest at 3.75%
per annum. The related party had agreed to defer the
payments due August 2003, January 2004 and August 2004
aggregating $700,000, until February 2005. $950,000 was
paid (the $750,000 deferred until February 2005 and
$250,000 due on January 31, 2005) through March 18, 2005. 1,366,737
Convertible note dated July 2003 payable to a former
stockholder in annual installments of $183,333, plus
interest at 5% per annum, through November 2006. The unpaid
principal and any unpaid interest may be exchanged on or
after November 2004 by the note holder for shares of common
stock of AVP at a per share common stock price equal to the
per share common stock price paid to AVP under AVP's most
recent round of equity financing. The borrowings are
collateralized by AVP's accounts receivable and property
and equipment. 366,667
-----------
Total Long-Term Debt 2,733,404
Less current portion 1,633,333
-----------
Noncurrent portion $ 1,100,071
===========
F-18
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
11. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
Years Ending December 31,
-------------------------
2005 $ 1,633,333
2006 1,100,071
------------
Total Long-Term Debt $ 2,733,404
============
12. REDEEMABLE PREFERRED STOCK
In July 2003, as payment under a production contract with a
major television network whose services were valued at
$1,008,000, AVP issued 950,943 shares of Series A preferred
stock valued at $1,008,000. AVP gave the network the right
to put, at the network's option, any or all of its equity
interest to AVP in 2005 and 2006. The Series A preferred
stock was valued at $1,008,000 plus interest at the prime
rate (5.15% at December 31, 2004) plus 2%. On February 22,
2005, in conjunction with the merger, the network waived
its put option. $ 1,008,000
In July 2003, as payment under a production contract with a
major television network whose services were valued at
$2,649,600, AVP issued 2,498,183 shares of Series A
preferred stock valued at $2,649,600. AVP gave the network
the right to put, at the network's option, all of its
equity interest at either the conclusion of the 2005 AVP
tour season, the conclusion of the 2006 AVP tour season, or
the first time the network's equity interest in AVP is less
than 8% on a fully diluted basis. The Series A preferred
stock was valued at $2,649,600 plus interest at an annual
rate of prime (5.15% at December 31, 2004) plus 2%. On
February 17, 2005, in conjunction with the merger, the
network waived its put option. 2,649,600
-----------
Total $ 3,657,600
===========
F-19
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
13. TRANSACTION WITH DMC
On July 28, 2003, AVP merged with DMC, its sole stockholder, in a
transaction accounted for as a transfer between entities under common
control, with AVP as the surviving entity. To effect the transfer, DMC
shares of Series A-1 Preferred Stock and options to purchase shares of
common stock were exchanged for shares of AVP common stock and options to
purchase shares of AVP common stock on a one-to-one basis.
Simultaneously, each share of AVP common stock issued and outstanding was
cancelled and extinguished without consideration.
In consummating the transfer, AVP cancelled 933,278 shares of common stock
and issued 122,381 shares of Series A-1 preferred stock in exchange for
DMC's net assets of $995,503.
DMC's assets and liabilities acquired in the transaction are summarized as
follows.
Current assets $ 769,450
Investment in sales-type lease 761,882
Other 5,000
----------
1,536,332
Less current liabilities 540,829
----------
Net assets $ 995,503
==========
The accompanying financial statements have been prepared including the net
assets and results of operation of DMC from the transaction date of July
28, 2003.
The following summarized proforma information is provided assuming the
merger had taken place January 1, 2003.
Year Ended
December 31, 2003
(Unaudited)
Revenues $ 7,294,128
Expenses 12,092,187
------------
Net loss $ (4,798,059)
============
F-20
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
14. STOCKHOLDERS' EQUITY
Capitalization
Outstanding shares and their par value give effect to the merger with
Othnet. However, the authorized shares of common stock have not yet been
increased. AVP is in the process of amending its articles of incorporation
to increase the authorized number of shares of common stock and the par
value of the common stock.
The Series A preferred stock was converted into Series A-1 preferred stock
in February 2005. The Series A-1 preferred stock will automatically
convert into common stock after AVP amends its articles of incorporation
to increase the number of authorized shares of common stock.
Stock Issuances
In July 2003, 98,870 shares of common stock were reacquired by AVP in
exchange for a $550,000 note payable.
In July 2003, a note payable to an officer aggregating $269,955 was
exchanged for 48,528 shares of common stock.
In connection with the merger with DMC, an intercompany payable due DMC of
$1,721,864 was exchanged for 309,520 shares of common stock.
To effect the merger with DMC in July 2003, 122,381 shares of Series A-1
preferred stock were issued to the DMC stockholders.
15. STOCK OPTIONS
Stock Option Plans
In 2002, AVP established a stock option plan (the "Plan"). Under the
provisions of the Plan, AVP has reserved 13,500,000 shares of its common
stock for issuance. The Plan provides for the granting of incentive and
non-qualified stock options to purchase common stock to employees,
directors, officers and independent consultants of AVP. All stock options
granted under the Plan are granted and exercisable at such time or times
as determined by AVP's compensation committee (the "Committee").
Outstanding options give effect to the merger with Othnet. However, the
authorized shares under the Plan have not yet been increased. AVP is in
the process of amending the plan to increase the authorized number of
shares under the plan.
As part of the transaction with DMC, existing DMC stock options
aggregating 54,475,838 shares were converted on a share for share basis
into AVP non-qualified options.
F-21
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
15. STOCK OPTIONS (CONTINUED)
Stock Option Plans (Continued)
The exercise price of each optioned share is determined by the Committee;
however the exercise price for incentive stock options, will not be less
than 100%, and in the case of a nonqualified stock option, not less than
85%, of the fair market value of the optioned shares on the date of grant.
Except as otherwise determined by the Committee, options vest and become
exercisable on the first anniversary of the date of grant, and each year
thereafter at a rate of 25% per year. The expiration date of each option
shall be determined by the Committee at the date of grant; however, in no
circumstances shall the option be exercisable after 10 years from the date
of grant.
The following table contains information on the stock options under the
Plan for the years ended December 31, 2004 and 2003. The outstanding
options expire from April 16, 2008 to September 1, 2013.
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Options outstanding at January 1, 2003 6,485,091 $ .02
Granted 16,577,467 .08
Converted DMC options 54,475,838 --
Exercised -- --
Cancelled -- --
---------- ----------
Options outstanding at December 31, 2003 77,538,396 .02
Granted 8,294,531 .16
Exercised -- --
Cancelled -- --
---------- ----------
Options outstanding at December 31, 2004 85,832,927 $ .04
========== ==========
The weighted average fair value of options granted was $ -0- in 2004 and
$.02 in 2003.
F-22
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
15. STOCK OPTIONS (CONTINUED)
The following table summarizes information about AVP's stock-based
compensation plan at December 31, 2004:
Options outstanding and exercisable by price range as of December 31,
2004:
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
-------------- ---------- ----------- ----------- ----------- -----------
$ -- - .03 60,960,929 6.3 $ -- 60,960,929 $ --
$ .03 - .09 16,577,467 9.6 $ .08 7,269,855 $ .08
$ .09 - .16 8,294,531 3.3 $ .16 8,294,531 $ .16
-------------- ----------- ----------- ----------- ----------- -----------
$ -- - .16 85,832,927 5.7 $ .03 76,525,315 $ .03
============== =========== =========== =========== =========== ===========
In connection with stock options granted to employees to purchase common
stock, AVP recorded stock-based compensation expense of $ -0- for the year
ended December 31, 2004 and $3,809 for the year ended December 31, 2003.
Such amounts represent, for each employee stock option, the difference
between the grant date exercise price and the stock price on the date of
the grant.
Other Stock Options
As part of the transaction with DMC, existing DMC non-qualified stock
options granted to other individuals aggregating 3,033,450 shares were
converted on a share-for-share basis into AVP non-qualified options
retaining the original exercise price and expiration date. The outstanding
options expire in June 2010.
The following table contains information on all of AVP's non-plan stock
options for the years ended December 31, 2004 and 2003.
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Options outstanding at January 1, 2003 -- $ --
Granted -- --
Converted DMC options 3,033,450 .03
Exercised -- --
Cancelled -- --
--------- ---------
Options outstanding at December 31, 2003 3,033,450 .03
Granted -- --
Exercised -- --
Cancelled -- --
--------- ---------
Options outstanding at December 31, 2004 3,033,450 $ .03
========= =========
F-23
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures about fair value of financial instruments for AVP's financial
instruments are presented in the table below. These calculations are
subjective in nature and involve uncertainties and significant matters of
judgment and do not include income tax considerations. Therefore, the
results cannot be determined with precision and cannot be substantiated by
comparison to independent market values and may not be realized in actual
sale or settlement of the instruments. There may be inherent weaknesses in
any calculation technique, and changes in the underlying assumptions used
could significantly affect the results.
The following table presents a summary of AVP's financial instruments as
of December 31, 2004:
Carrying Estimated
Amount Fair Value
---------- ----------
Financial Assets:
Cash $ 631,933 $ 631,933
Financial Liabilities:
Notes payable-related party $2,000,000 *
Long-term debt $2,733,404 *
The carrying amounts for cash, receivables, accounts payable and accrued
expenses approximate fair value because of the short maturities of these
instruments.
* The fair value for the Company's long term debt cannot be determined as
the instrument is not actively traded.
17. COMMITMENTS AND CONTINGENCIES
Operating Lease
AVP is obligated under a noncancellable operating lease for its office
facilities. The lease expires March 31, 2010 subject to a five-year
renewal option.
F-24
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Lease (Continued)
The future minimum rental payments, excluding cost escalations, are as
follows:
Years Ending December 31,
-------------------------
2005 $ 282,000
2006 329,000
2007 338,000
2008 347,000
2009 356,000
Thereafter 91,000
------------
Total $ 1,743,000
============
Rent expense was $ 282,442 in 2004 and $165,684 in 2003.
Officer Indemnification
Under the organizational documents, AVP's directors are indemnified
against certain liabilities arising out of the performance of their duties
to AVP. AVP also has an insurance policy for its directors and officers to
insure them against liabilities arising from the performance of their
duties required by their positions with AVP. AVP's maximum exposure under
these arrangements is unknown as this would involve future claims that may
be made against AVP that have not yet occurred. However, based on
experience, AVP expects the risk of loss to be remote.
F-25
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
18. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
2004 2003
---------- ----------
Current
Federal $ -- $ --
State -- --
---------- ----------
Total -- --
---------- ----------
Deferred
Federal -- --
State -- --
---------- ----------
Total -- --
---------- ----------
Total Income Tax Provision (Benefit) $ -- $ --
========== ==========
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
2004 2003
---------- ----------
Federal statutory rate (34)% (34)%
State income taxes, net of federal benefits (6) (6)
Valuation allowance 40 40
---------- ----------
Total -- % -- %
========== ==========
Significant components of deferred income taxes as of December 31, 2004
are as follows:
Net operating loss $ 4,815,000
Accrued compensation 17,000
Valuation allowance (4,832,000)
-----------
Net Deferred Tax $ --
===========
F-26
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
18. INCOME TAXES (CONTINUED)
AVP records a valuation allowance for certain temporary differences for
which it is more likely than not that it will not receive future tax
benefits. AVP assesses its past earnings history and trends and
projections of future net income. AVP recorded a valuation allowance for
the entire amount of the net deferred assets in 2004 and 2003, as it had
determined that it was more likely than not that no deferred tax assets
would be realized. The net change in the valuation allowance for deferred
tax assets was an increase of $1,065,000. AVP will continue to review this
valuation allowance on a quarterly basis and make adjustments as
appropriate.
The tax benefits associated with employee exercises of stock options
reduces income taxes currently payable. However, no benefits were recorded
to additional paid in capital in 2004 and 2003 because their realization
was not more likely than not to occur and consequently, a valuation
allowance was recorded against the entire benefit.
At December 31, 2004, AVP had federal net operating loss carryforwards
aggregating approximately $15,800,000 which expire in the years 2019
through 2024. The amount and availability of the carryforwards are subject
to limitations as the result of changes in ownership.
19. PENSION PLAN
AVP sponsors a 401(k) pension plan for all eligible employees. The Plan
provides for annual contributions at the discretion of AVP. No amounts
were contributed in 2004 or 2003 to the plan.
F-27
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION.
NEITHER THIS PROSPECTUS NOR ANY PROSPECTUS SUPPLEMENT IS AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY JURISDICTION
WHERE AN OFFER OR SOLICITATION IS NOT PERMITTED. NO SALE MADE PURSUANT TO THIS
PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF AVP, INC. SINCE THE DATE OF THIS
PROSPECTUS.
AVP, INC.
114,248,948 SHARES OF COMMON STOCK
------------------------------------
PROSPECTUS
---------------------------------------
APRIL 15, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Delaware General Corporation Law and the Registrant's Bylaws provide
for indemnification of the Registrant's officers and directors for liabilities
and expenses that they may incur in such capacities. In general, the
Registrant's directors and officers are indemnified with respect to actions
taken in good faith and in a manner such person believed to be in the
Registrant's best interests, and with respect to any criminal action or
proceedings, actions that such person has no reasonable cause to believe were
unlawful. Furthermore, the personal liability of the Registrant's directors is
limited as provided in the Registrant's Certificate of Incorporation.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission (the "SEC"), such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and
distribution of the securities being registered, other than the underwriting
discount, are estimated as follows:
SEC Registration Fee.......................................................$ *
Printing and Engraving Expenses............................................$ *
Legal Fees and Expenses....................................................$ *
Accountants' Fees and Expenses.............................................$ *
Miscellaneous Costs........................................................$ *
Total......................................................................$ *
- ----------
* To be filed by amendment.
All of these expenses, except for the SEC registration and filing fees,
represent estimates only. The Registrant will pay all of the expenses of this
offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In April 2002, the Registrant received $300,000 in equity financing from a
private investor by selling 600,000 shares of its common stock at a purchase
price of $0.50 per share. The common stock was issued under the exemption from
registration provided in Section 4(2) of the Securities Act.
II-1
On January 31, 2003, the Registrant agreed to settle $138,653 of accounts
payable owed to a creditor for 200,000 shares of common stock and an unsecured
$30,000 promissory note payable, bearing 10% interest, maturing on March 31,
2003. The common stock was issued under the exemption from registration provided
in Section 4(2) of the Securities Act.
In March 2003, the Registrant issued to five persons (which included Mr.
Wattenberg) a total of 4,000,000 shares of common stock for services rendered.
The common stock was issued under the exemption from registration provided in
Section 4(2) of the Securities Act.
As of December 30, 2003, the Registrant obtained a $100,000 loan from an
unrelated party and issued a $100,000 convertible promissory note, convertible
into shares of common stock of the Registrant at a rate of $0.25 per share. In
connection with the loan, the Registrant issued to the unrelated party 100,000
shares of common stock, and an option to purchase an additional 100,000 shares
of common stock at an exercise price of $0.18 per share. In March 2004, such
party exercised the option to convert the entire principal balance and interest
into shares of common stock. In connection with the conversion, such party was
issued 430,000 shares of common stock which represented (i) the number of shares
on account of the conversion of the entire principal balance and interest
together with (ii) additional shares as an inducement to such person to exercise
such option to convert. The foregoing securities were issued by the Registrant
under the exemption from registration provided in Section 4(2) of the Securities
Act.
In February 2004, certain persons (which included Mr. Wattenberg) were
granted options to acquire up to an aggregate of 4,000,000 shares of common
stock at an exercise price of $0.25 per share. The options were granted under
the exemption from registration provided in Section 4(2) of the Securities Act.
During the months of June through August 2004, the Registrant raised
$2,360,000 through the sale of units to certain private investors ($2,060,000
was raised as of July 31, 2004 and $300,000 was raised in August 2004). Each
unit consisted of a $100,000 principal amount of a 10% convertible promissory
note due one year from its issuance (the "Bridge Notes"), 200,000 shares of
common stock (the "Bridge Stock") and 200,000 common stock purchase warrants
(the "Bridge Warrants"). Accordingly, 4,720,000 shares of Bridge Stock and
4,720,000 Bridge Warrants were issued. All of the securities were issued in
reliance upon an exemption from registration pursuant to Section 4(2) of the
Securities Act.
On February 28, 2005, the Registrant consummated a private placement. Each
unit sold in the offering consisted of 4 shares of the Registrant's Series B
Preferred Stock, each share convertible into 243 shares of the Registrant's
common stock, and a five-year warrant to purchase up to 243 shares of the
Registrant's common stock at an exercise price of $0.19548 per share. As part of
the offering, the Registrant sold an aggregate of 36,841 units for an aggregate
purchase price of $5,000,060.52. In connection with the offering, Maxim, the
placement agent in the offering, received a cash commission fee of $500,000 and
warrants to purchase 3,580,945 shares of common stock. The warrants are
exercisable for a period of five years at an exercise price of $0.13963 per
share. The units were issued under the exemption from registration provided in
Section 4(2) of the Securities Act.
II-2
As a further inducement to the investors participating in the offering,
the Registrant agreed to file with the SEC a registration statement covering the
shares of common stock issuable upon conversion of the Series B Preferred Stock,
and the shares of common stock underlying the warrants purchased by each
investor as part of the units. The cash proceeds of the above sales of
securities of the Registrant will be used for general corporate purposes.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
2.1 Merger Agreement, dated as of June 29, 2004 among Othnet, Exhibit 10.2(1)
Inc., Othnet Merger Sub, Inc. and Association of Volleyball
Professionals, Inc.
2.2 First Amendatory Agreement, dated February 28, 2005, to Exhibit 2.2(2)
Agreement and Plan of Merger, dated June 29, 2004, between
Othnet and AVP.
2.3 Agreement detailing Othnet's liabilities, dated February 28, Exhibit 2.3(2)
2005 between Othnet and AVP.
3.1 Certificate of incorporation, dated May 12, 1994; amendment Exhibit 3(2)
thereto, dated March 22, 2001; certificate of designation,
dated February 25, 2005.
3.2 Bylaws. Exhibit 3.2(4)
4.1 Registration Rights Agreement, dated January 5, 2005, Exhibit 4.1(2)
between Othnet and units investors.
4.2 Form of units warrant. Exhibit 4.2(2)
4.3 Form of warrant for Maxim Group, LLC Exhibit 4.3(4)
5.1 Opinion of Loeb & Loeb LLP (5)
10.1 Executive Employment Agreement between Leonard Armato and Exhibit 10.1(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
10.2 Executive Employment Agreement between Bruce Binkow and Exhibit 10.2(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
II-3
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
10.3 Executive Employment Agreement between Andrew Reif and Exhibit 10.3(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
10.4 Stock Option Agreement between Leonard Armato and Exhibit 10.4(4)
Association of Volleyball Professionals, Inc., dated as of
September 1, 2003.
10.5 Stock Option Agreement between Bruce Binkow and Association Exhibit 10.5(4)
of Volleyball Professionals, Inc., dated as of September 1,
2003.
10.6 Stock Option Agreement between Andrew Reif and Association Exhibit 10.6(4)
of Volleyball Professionals, Inc., dated as of September 1,
2003.
10.7 Pursuant to the Executive Employment Agreements
executed by Messrs. Armato, Binkow and Reif, each
will receive five-year common stock purchase warrants
to purchase a total of 10,779,230 of AVP common stock
at a price of $0.31 per share. Mr. Wattenberg be
granted a warrant covering an undetermined number of
shares from among 15,588,186 shares reserved for a
grant of such warrants.
10.8 Anschutz Entertainment Group, Inc. Promissory Note, dated as Exhibit 10.8(4)
of August 1, 2002 in the principal sum of $1,000,000
and Option Agreement, dated as of April 21, 2003
between AEG and AVP.
10.9 Non-negotiable Promissory Note, dated April 6, 2003 made by Exhibit 10.9(4)
Association of Volleyball Professionals, Inc. to Management
Plus Enterprises, Inc., dated January 3, 2005
10.10 Major League Volleyball, Inc. Secured Convertible Promissory Exhibit 10.10(4)
Note, dated as of July 28, 2003.
10.11 Consulting Agreement between Scott Painter and Association Exhibit 10.11(4)
of Volleyball Professionals, Inc., dated as of June 11, 2003
and amendment dated January 3, 2005.
II-4
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
10.12 Consulting Agreement between Association of Volleyball Exhibit 10.12(4)
Professionals, Inc. and Montecito Capital Partners, Inc.,
dated as of February 28, 2005.
10.13 2002 Stock Option Plan, as amended Exhibit 10.13(4)
16.1 Letter regarding Change in Certifying Accountant. Exhibit 16.1(3)
21 Subsidiaries of AVP, Inc. *
23.1 Consent of Loeb & Loeb LLP (included in Exhibit 5.1) (5)
23.2 Consent of Mayer Hoffman McCann P.C. *
24 Power of Attorney (included in the signature page of this *
registration statement).
- --------------------------------
* Filed herewith.
(1) Filed as an exhibit to Othnet, Inc.'s Annual Report on Form 10-KSB for year
ended April 30, 2004, and incorporated by reference herein.
(2) Filed as an exhibit to AVP, Inc.'s Current Report on Form 8-K dated March 2,
2005, and incorporated by reference herein.
(3) Filed as an exhibit to AVP, Inc.'s Current Report on Form 8-K dated March
17, 2005, and incorporated by reference herein.
(4) Filed as an exhibit to AVP, Inc.'s Annual Report on Form 10-KSB for year
ended December 31, 2004, and incorporated by reference herein.
(5) To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to:
File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
1. Include any prospectus required by Section 10(a)(3) of the Securities
Act;
II-5
2. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement, and
3. Include any additional or changed material information on the plan of
distribution.
For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorizes this
registration statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California, on this 15th day of April, 2005.
AVP, INC.
By: /s/ Leonard Armato
--------------------------
Name: Leonard Armato
Title: Chief Executive Officer
POWER OF ATTORNEY
The officers and directors of AVP, Inc., whose signatures appear below,
hereby constitute and appoint Leonard Armato and Andrew Reif and each of them,
their true and lawful attorneys and agents, each with power to act alone, to
sign, execute and cause to be filed on behalf of the undersigned any amendment
or amendments, including post-effective amendments, to this registration
statement of AVP, Inc. on Form SB-2. Each of the undersigned does hereby ratify
and confirm all that said attorneys and agents shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended
this registration statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates indicated:
Signature Title Date
/s/ Leonard Armato Chairman, Chief Executive Officer, Tour April 15, 2005
- ------------------------------- Commissioner, and Director
Leonard Armato
/s/ Andrew Reif Chief Operating Officer and Director April 15, 2005
- -------------------------------
Andrew Reif
/s/ Bruce Binkow Chief Marketing Officer and Director April 15, 2005
- -------------------------------
Bruce Binkow
/s/ Thomas Torii Controller April 15, 2005
- -------------------------------
Thomas Torii
/s/ Scott Painter Director April 15, 2005
- -------------------------------
Scott Painter
/s/ Philip Guarascio Director April 15, 2005
- -------------------------------
Philip Guarascio
/s/ Jeffrey Wattenberg Director April 15, 2005
- -------------------------------
Jeffrey Wattenberg
EXHIBIT INDEX
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
2.1 Merger Agreement, dated as of June 29, 2004 among Othnet, Exhibit 10.2(1)
Inc., Othnet Merger Sub, Inc. and Association of Volleyball
Professionals, Inc.
2.2 First Amendatory Agreement, dated February 28, 2005, to Exhibit 2.2(2)
Agreement and Plan of Merger, dated June 29, 2004, between
Othnet and AVP.
2.3 Agreement detailing Othnet's liabilities, dated February 28, Exhibit 2.3(2)
2005 between Othnet and AVP.
3.1 Certificate of incorporation, dated May 12, 1994; amendment Exhibit 3(2)
thereto, dated March 22, 2001; certificate of designation,
dated February 25, 2005.
3.2 Bylaws. Exhibit 3.2(4)
4.1 Registration Rights Agreement, dated January 5, 2005, Exhibit 4.1(2)
between Othnet and units investors.
4.2 Form of units warrant. Exhibit 4.2(2)
4.3 Form of warrant for Maxim Group, LLC Exhibit 4.3(4)
5.1 Opinion of Loeb & Loeb LLP (5)
10.1 Executive Employment Agreement between Leonard Armato and Exhibit 10.1(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
10.2 Executive Employment Agreement between Bruce Binkow and Exhibit 10.2(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
10.3 Executive Employment Agreement between Andrew Reif and Exhibit 10.3(4)
Association of Volleyball Professionals, Inc., dated as of
January 3, 2005.
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
10.4 Stock Option Agreement between Leonard Armato and Exhibit 10.4(4)
Association of Volleyball Professionals, Inc., dated as of
September 1, 2003.
10.5 Stock Option Agreement between Bruce Binkow and Association Exhibit 10.5(4)
of Volleyball Professionals, Inc., dated as of September 1,
2003.
10.6 Stock Option Agreement between Andrew Reif and Association Exhibit 10.6(4)
of Volleyball Professionals, Inc., dated as of September 1,
2003.
10.7 Pursuant to the Executive Employment Agreements
executed by Messrs. Armato, Binkow and Reif, each
will receive five-year common stock purchase warrants
to purchase a total of 10,779,230 of AVP common stock
at a price of $0.31 per share. Mr. Wattenberg be
granted a warrant covering an undetermined number of
shares from among 15,588,186 shares reserved for a
grant of such warrants.
10.8 Anschutz Entertainment Group, Inc. Promissory Note, dated as Exhibit 10.8(4)
of August 1, 2002 in the principal sum of $1,000,000
and Option Agreement, dated as of April 21, 2003
between AEG and AVP.
10.9 Non-negotiable Promissory Note, dated April 6, 2003 made by Exhibit 10.9(4)
Association of Volleyball Professionals, Inc. to Management
Plus Enterprises, Inc., dated January 3, 2005
10.10 Major League Volleyball, Inc. Secured Convertible Promissory Exhibit 10.10(4)
Note, dated as of July 28, 2003.
10.11 Consulting Agreement between Scott Painter and Association Exhibit 10.11(4)
of Volleyball Professionals, Inc., dated as of June 11, 2003
and amendment dated January 3, 2005.
10.12 Consulting Agreement between Association of Volleyball Exhibit 10.12(4)
Professionals, Inc. and Montecito Capital Partners, Inc.,
dated as of February 28, 2005.
Exhibit Incorporated by
Number Name of Exhibit Reference to
------- --------------- --------------
10.13 2002 Stock Option Plan, as amended Exhibit 10.13(4)
16.1 Letter regarding Change in Certifying Accountant Exhibit 16.1(3)
21 Subsidiaries of AVP, Inc. *
23.1 Consent of Loeb & Loeb LLP (included in Exhibit 5.1) (5)
23.2 Consent of Mayer Hoffman McCann P.C. *
24 Power of Attorney (included in the signature page of this *
registration statement).
- --------------------------------
* Filed herewith.
(1) Filed as an exhibit to Othnet, Inc.'s Annual Report on Form 10-KSB for year
ended April 30, 2004, and incorporated by reference herein.
(2) Filed as an exhibit to AVP, Inc.'s Current Report on Form 8-K, dated March
2, 2005, and incorporated by reference herein.
(3) Filed as an exhibit to AVP, Inc.'s Current Report on Form 8-K, dated March
17, 2005, and incorporated by reference herein.
(4) Filed as an exhibit to AVP, Inc.'s Annual Report on Form 10-KSB for year
ended December 31, 2004, and incorporated by reference herein.
(5) To be filed by amendment.