UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 000-26454
AVP, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 98-0142664
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 Center Drive, Suite 900, Los Angeles, CA 90045
--------------------------------------------------------
(Address of principal executive offices - Zip code)
(310) 426 - 8000
----------------
(Registrant's telephone number, including area code)
1
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
As of May 23, 2005, the Registrant had approximately 22,514,742 shares of
Common Stock outstanding.
2
AVP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION........................ .................4
ITEM 1. FINANCIAL STATEMENTS......................... .................4
Balance Sheet as of March 31, 2005
(Unaudited)......................................... .................5
Statements of Operations for
the three months ended March 31, 2005 and 2004
(Unaudited)......................................... .................6
Statement of Changes in Stockholder's Equity for
the three months ended March 31, 2005
(Unaudited)......................................... ................ 7
Statements of Cash Flows for
the three months ended March 31, 2005 and 2004
(Unaudited)......................................... .................8
Notes to Financial Statements (Unaudited).......... .................10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION........................... .................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS.......................... .................20
ITEM 4. CONTROLS AND PROCEDURES..................... .................20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................... .................20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS... .................20
ITEM 5. OTHER INFORMATION........................... .................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............ .................21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVP, INC.
Index to Financial Information
Period Ended March 31, 2005
PAGES
Financial Statements
Unaudited Balance Sheet 5
Unaudited Statements of Operations 6
Unaudited Statement of Changes in Stockholder's Equity 7
Unaudited Statements of Cash Flows 8 - 9
Unaudited Notes to Financial Statements 10 - 16
4
AVP, INC.
Balance Sheet
March 31, 2005
(Unaudited)
March 31,
2005
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,820,821
Accounts receivable, net of
allowance for doubtful accounts of $10,000 1,102,843
Prepaid expenses 554,082
Deferred commission-related party 190,004
-----------
TOTAL CURRENT ASSETS 6,667,750
-----------
PROPERTY AND EQUIPMENT, net 316,986
OTHER ASSETS
Investment in sales-type lease 604,078
Other assets 45,228
-----------
TOTAL OTHER ASSETS 649,306
-----------
TOTAL ASSETS $ 7,634,042
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,330,070
Accounts payable 479,177
Accrued expenses 1,215,861
Accrued interest 260,502
Deferred revenue 3,294,897
-----------
TOTAL CURRENT LIABILITIES 6,580,507
-----------
OTHER LIABILITIES
Long-term deferred revenue 225,000
Long-term debt - less current portion 683,334
-----------
TOTAL OTHER LIABILITIES 908,334
-----------
TOTAL LIABILITIES 7,488,841
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, 288
288,014 shares issued and outstanding
Series B convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, 147
147,364 shares issued and outstanding
Common stock, $.0001 par value, 40,000,000 shares authorized, 22,515
22,514,742 shares issued and outstanding
Additional paid-in capital 13,717,431
ACCUMULATED DEFICIT (13,595,180)
-----------
TOTAL STOCKHOLDERS' EQUITY 145,201
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,634,042
===========
5
AVP, INC.
Statements of Operations
Three Months Ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended March 31,
2005 2004
------------ ------------
REVENUE
Sponsorships $ -- $ --
Other 103,956 52,698
------------ ------------
TOTAL REVENUE 103,956 52,698
EVENT COSTS -- --
------------ ------------
Gross Profit 103,956 52,698
------------ ------------
OPERATING EXPENSES
Marketing 411,600 328,985
Administrative 4,518,384 677,653
------------ ------------
TOTAL OPERATING EXPENSE 4,929,984 1,006,638
------------ ------------
OPERATING LOSS (4,826,028) (953,940)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (70,558) (38,000)
Interest income 15,356 24,517
Joint venture loss -- --
------------ ------------
TOTAL OTHER EXPENSE (55,202) (13,483)
------------ ------------
LOSS BEFORE INCOME TAXES (4,881,230) (967,423)
INCOME TAXES -- --
------------ ------------
NET LOSS
$ (4,881,230) $ (967,423)
============ ============
Basic and diluited loss per share
$ (0.22) $ (0.06)
============ ============
Weighted average common shares
outstanding 22,514,742 17,364,279
============ ============
6
AVP, INC.
Statement of Changes in Stockholder's Equity
Three Months Ended March 31, 2005
(Unaudited)
Series A Series B
Preferred Stock Preferred Stock Common Stock
---------------------------------------------------------------------------------
Additional
Shares Amount Shares Amount Shares Amount Paid in Capital
----------------------------------------------------------------------------------
Balance, January 1, 2005 122,381 $ 122 - $ - - $ - $ 999,190
Merger of AVP, Inc. into the
Association
("the reverse merger") - - - - 22,514,742 22,515 (974,439)
Conversion of 10% convertible
notes 70,275 70 - - - - 2,290,278
Conversion of redeemable preferred
stock 95,358 96 - - - - 3,657,504
Private placement units - - 147,364 147 - - 4,246,876
Consulting expense from issuance of
stock options - - - - - - 3,498,022
Net loss - - - - - - -
----------- --------- ----------- --------- ----------- ---------- --------------
Balance, March 31, 2005 288,014 $ 288 147,364 $ 147 22,514,742 $ 22,515 $ 13,717,431
=========== ========= =========== ========= =========== ========== ==============
Total
Accumulated Stockholders'
Deficit Equity
----------------- -------------
Balance, January 1, 2005 $ (8,713,950) $ (7,714,638)
Merger of AVP, Inc. into the
Association
("the reverse merger") - (951,924)
Conversion of 10% convertible
notes - 2,290,348
Conversion of redeemable preferred
stock - 3,657,600
Private placement units - 4,247,023
Consulting expense from issuance of
stock options - 3,498,022
-
Net loss (4,881,230) (4,881,230)
----------------- -------------
Balance, March 31, 2005 $ (13,595,180) $ 145,201
================= =============
7
AVP, INC.
Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended March 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,881,230) $ (967,423)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization of property and
equipment 22,101 4,993
Other amortization 2,011 --
Amortization of deferred commissions 63,335 73,726
Consulting expense from issuance of stock options 3,498,022 --
Decrease (increase) in operating assets:
Accounts receivables (453,706) (328,430)
Investment in and due from joint venture -- 291,084
Prepaid expenses (527,476) (275,767)
Other assets (4,500) (5,028)
Increase (decrease) in operating liabilities:
Accounts payable 164,381 (509,342)
Accrued expenses 251,555 (317,196)
Accrued officer compensation (43,208) 169,230
Accrued interest (56,127) 157,698
Deferred revenue 2,969,847 2,253,986
----------- -----------
NET CASH FLOWS FROM
OPERATING ACTIVITIES 1,005,005 547,530
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (137,384) (14,497)
Investment in sales-type lease 24,244 21,967
----------- -----------
NET CASH FLOWS FROM
INVESTING ACTIVITIES (113,140) 7,470
----------- -----------
8
AVP, INC.
Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
(Unaudited)
(CONTINUED)
Three Months Ended March 31,
2005 2004
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of capital stock 4,247,023 --
Debt repayments (950,000) --
----------- -----------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 3,297,023 --
----------- -----------
NET INCREASE IN CASH 4,188,888 555,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 631,933 71,056
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,820,821 $ 626,056
=========== ===========
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
Net liabilities assumed in merger
Cash $ 4,217 --
Accounts payable (261,857) --
Accrued Expenses (173,934) --
----------- -----------
$ (431,574) --
----------- -----------
Conversion of Association redeemable preferred stock into
Series A convertible preferred stock $ 3,657,600 --
----------- -----------
Conversion of notes payable into
Series A convertible preferred stock $ 2,290,348 --
----------- -----------
9
AVP, INC.
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of AVP, Inc. have
been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and should be read in conjunction with the
audited financial statements and notes thereto contained in AVP, Inc.'s
latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal
year 2004, as reported in the Form 10-KSB as previously filed with the
SEC, have been omitted.
2. MERGER
On February 28, 2005, upon filing a certificate of merger with the
Delaware Secretary of State, a wholly owned subsidiary of AVP, Inc.
("AVP") named Othnet Merger Sub, Inc., a Delaware corporation, and AVP Pro
Beach Volleyball Tour, Inc., a Delaware corporation (the "Association"),
consummated a merger pursuant to an Agreement and Plan of Merger dated as
of June 29, 2004, as amended. As a result of the merger, the Association,
which survived the merger, became AVP's wholly owned subsidiary, and AVP
issued to Association stockholders Series A Convertible Preferred Stock,
which will be converted automatically into AVP common stock upon
authorization of a sufficient amount of common stock.
In the second half of 2004, AVP issued $2,360,000 principal amount of 10%
convertible notes and, as required by the merger agreement, lent
$2,000,000 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 $2,000,000 principal amount of the notes (and
accrued interest) be converted into Series A Convertible Preferred Stock.
Another condition was the closing of a private placement of units of
Series B Convertible Preferred Stock and common stock purchase warrants,
gross proceeds of which was $5,000,000, concurrently with the merger
closing.
Each share of Series A preferred stock and Series B preferred stock is
convertible into 243 shares of AVP 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.
10
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (Continued)
Immediately prior to the merger, the Association had outstanding 4,443,944
shares of $0.0001 par value common stock ("Association common stock"). In
accordance with the merger agreement, the outstanding shares of the
Association's common stock was converted into 122,381 shares of Series A
Convertible Preferred stock which is exchangeable for 29,738,605 shares of
AVP's common stock. The Association also had outstanding options and
warrants to purchase a total of 12,732,220 shares of Association common
stock that, as a result of the merger agreement, now represent the right
to purchase 85,832,927 shares of the AVP common stock.
As part of the merger, the Association's preferred stockholder's converted
$3,657,600 of Redeemable Preferred Stock into 95,358 shares of Series A
Convertible Preferred stock which is exchangeable for 23,171,881 shares of
AVP common stock. In addition, as part of the merger, holders of the 10%
convertible notes converted them into 70,275 shares of Series A
Convertible Preferred stock which in turn is exchangeable for 17,076,755
shares of AVP common stock. Concurrent with the merger, AVP raised through
private placement $5,000,000 of private placement units representing
147,364 shares of Series B Convertible Preferred Stock which is
exchangeable for 35,809,452 shares of AVP common stock.
An Association note holder has indicated its intention to exercise its
option to convert its $1,000,000 note payable into 46,472 shares of Series
A Convertible Preferred Stock which is exchangeable for 11,292,614 shares
of AVP common stock.
The Series A and Convertible Preferred Stock, will convert automatically
into common stock upon authorization of a sufficient amount of common
stock.
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 presented reflecting share
quantities as altered by the terms of the merger agreement.
In conjunction with the merger, AVP is obligated to issue warrants to
purchase 53,771,332 shares of common stock as consideration for services
that facilitated the merger.
As a result of the merger, AVP will have 139,604,049 shares of common
stock outstanding and will have outstanding stock options and warrants to
acquire AVP common stock aggregating 155,257,124 shares.
11
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (Continued)
Upon consummation of the merger and the private offering, the
Association's former stockholders held Series A Preferred Stock entitling
them to cast 58.22% of votes entitled to be cast at an election of AVP
directors; the Association's executive officers became AVP's executive
officers, and Association designees hold five of six Board of Directors
seats.
Accordingly, the Association, which was the acquired entity, from the
legal standpoint, is the acquirer from the accounting standpoint, and AVP
is the accounting acquiree.
Because AVP was a publicly traded shell corporation at the time of the
merger, the transaction is being accounted for as a capital transaction,
the equivalent of AVP's issuing stock for the Association's net assets,
accompanied by a recapitalization of AVP. The accounting is identical to
that resulting from a reverse acquisition, except that there are no
adjustments to the historic carrying values of the assets and liabilities
of the Association.
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 does not become effective by June 28, 2005, AVP
must pay a penalty to the Series B preferred stock stockholder of
approximately $50,000 for each month that the penalty condition is not
satisfied, until August 28, 2005, when the monthly penalty increases to
$100,000.
3. STOCK OPTIONS
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.
12
AVP, INC.
Notes to Financial Statements
(Unaudited)
3. STOCK OPTIONS (CONTINUED)
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:
Three Months Ended March 31,
--------------------------
2005 2004
----------- -----------
Net loss applicable to common shareholders,
as reported $(4,881,230) $ (967,423)
Less stock based employee compensation
expense determined under fair-value-based
methods for all awards, net of related tax effects -- (33,322)
----------- -----------
Pro forma net loss $(4,881,230) $(1,000,745)
=========== ===========
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 three months ended March 31, 2005 and the year ended December 31,
2004:
2005 2004
---------- -------------
Risk-free interest rate -- 3.86 - 4.19%
Expected life -- 2 to 10 years
Expected volatility -- 0%
Expected dividend yield -- 0%
The following table contains information on the stock options for the
period ended March 31, 2005 and the year ended December 31, 2004. The
outstanding options expire from December 31, 2005 to September 1, 2013.
13
AVP, INC.
Notes to Financial Statements
(Unaudited)
3. STOCK OPTIONS (CONTINUED)
Weighted
Average
Number of Exercise
Shares Price
---------- -----------
Options outstanding at January 1, 2004 77,538,396 $ 0.02
Granted 12,294,531 0.19
Exercised -- --
Cancelled -- --
---------- -----------
Options outstanding at December 31, 2004 89,832,927 $ 0.04
Granted -- --
Exercised -- --
Cancelled -- --
---------- -----------
Options outstanding at March 31, 2005 89,832,927 $ 0.04
========== ===========
The weighted average fair value of options granted was $-0- in 2005 and
$-0- in 2004.
The following table summarizes information about AVP's stock-based
compensation plan at March 31, 2005:
Options outstanding and exercisable by price range as of March 31, 2005:
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
------------- ----------- -------------------- ------------------- ------------- --------------
$.00 - .03 60,960,929 6.0 $ 0.00 60,960,929 $ 0.00
$.03 - .09 16,577,467 9.3 $ 0.08 7,269,855 $ 0.08
$.09 - .16 8,294,531 3.0 $ 0.16 8,294,531 $ 0.16
$.17 - .25 4,000,000 4.0 $ 0.25 4,000,000 $ 0.25
------------- ----------- -------------------- ------------------- ------------- --------------
$.00 - .25 89,832,927 5.3 $ 0.04 80,525,315 $ 0.04
============= =========== ==================== =================== ============= ==============
In connection with stock options granted to employees to purchase common
stock, AVP recorded no stock-based compensation expense the periods ended
March 31, 2005 and March 31, 2004.
Other Stock Options
Non-qualified stock options granted to other individuals aggregating
20,531,504 shares and expire from June 2006 to June 2010.
14
AVP, INC.
Notes to Financial Statements
(Unaudited)
3. STOCK OPTIONS (CONTINUED)
The following table contains information on all of AVP's non-plan stock
options for the period ended March 31, 2005 and the year ended December
31, 2004.
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Options outstanding at January 1, 2004 3,133,450 $ 0.03
Granted 4,730,110 0.21
Exercised -- --
Cancelled -- --
---------- ----------
Options outstanding at December 31, 2004 7,863,560 0.14
Granted 12,667,944 0.45
Exercised -- --
Cancelled -- --
---------- ----------
Options outstanding at March 31, 2005 20,531,504 $ 0.33
========== ==========
The weighted average fair value of options granted was $.28 in 2005 and
$.21 in 2004.
The following table summarizes information about AVP's non-qualified stock
options at March 31, 2005:
Options outstanding and exercisable by price range as of March 31, 2005:
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 - .15 3,033,450 5.0 $ 0.03 3,033,450 $ 0.03
$.16 - .34 4,964,746 1.6 $ 0.21 4,964,746 $ 0.21
$.35 - .50 12,533,308 5.0 $ 0.45 12,533,308 $ 0.45
------------- ----------- -------------------- ------------------- ------------- --------------
$.03 - .50 20,531,504 4.2 $ 0.33 20,531,504 $ 0.33
============= =========== ==================== =================== ============= ==============
In connection with stock options granted to non-employees to purchase
common stock as a result of the private placement, AVP recorded consulting
expense of $3,498,022 for the period ended March 31, 2005 and $ -0- for
the period ended March 31, 2004. Such amounts represent, for each
non-employee stock option, the valuation under SFAS 123 on the date of the
grant.
15
AVP, INC.
Notes to Financial Statements
(Unaudited)
4. 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.
The future minimum rental payments, excluding cost escalations, as of
March 31, 2005 are as follows:
Years Ending December 31,
2005 $ 242,000
2006 329,000
2007 338,000
2008 347,000
2009 356,000
Thereafter 91,000
----------
Total $1,703,000
==========
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.
Employment Agreements
AVP has entered into "at will" employment agreements with three officers.
In addition to base salary, the employment agreements provide for annual
performance bonuses and profit sharing bonuses. The performance bonuses
range from 30% to 50% of the respective officer's base salary. The
performance bonuses awarded, if any, will be based upon achieving certain
milestones and targets as determined by the Board of Directors'
Compensation Committee. The employment agreements also provide that AVP
will set aside 10% of the net profits (as defined by EBITDA or such other
specification as determined by the Compensation Committee) to establish a
Profit Sharing Bonus Pool. The Compensation Committee and the AVP's
President will determine the allocation of the Profit Sharing Bonus Pool
among officers eligible to participate in the Profit Sharing Bonus Pool.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Background
AVP, Inc. was originally incorporated under the name Malone Road Investments,
Ltd., on August 6, 1990 in the Isle of Man. The corporation was redomesticated
in the Turks and Caicos Islands in 1992, and subsequently domesticated as a
Delaware corporation in 1994. Pursuant to Delaware law, the corporation is
deemed to have been incorporated in Delaware as of the date of its formation in
the Isle of Man. The company changed its name to PL Brands, Inc. in 1994;
changed its name to Othnet, Inc., in March 2001; and changed its name to the
current one on March 9, 2005. AVP had no business operations other than to
attempt to locate and consummate a business combination with an operating
company since December 2001.
AVP Acquisition
On February 28, 2005, a wholly owned subsidiary of AVP and AVP Pro Beach
Volleyball Tour, Inc., f/k/a Association of Volleyball Professionals, Inc., a
Delaware corporation (the "Association"), consummated a merger pursuant to an
Agreement and Plan of Merger dated as of June 29, 2004, as amended. The name of
the subsidiary before it merged with the Association was Othnet Merger Sub, Inc.
As a result of the merger, the Association became AVP's wholly owned subsidiary,
and AVP issued to Association stockholders AVP Series A Convertible Preferred
Stock, which will be converted automatically into AVP common stock upon
authorization of a sufficient amount of common stock.
AVP's Business
AVP owns and operates professional beach volleyball events in the United States
through its wholly owned subsidiary, the Association. 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 produced 12 men's and 12 women's professional beach volleyball tournaments
throughout the United States in 2004. AVP has 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 represents an attractive audience
for national, regional, and local sponsors. AVP has 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.
AVP's beach volleyball tournament season customarily commences in early April
and continues until late September or early October.
Results of Operations
Results of Operations
Operating Income (Loss) and Net Income (Loss) % Revenue
Three Months Ended March 31, Three Months Ended March 31,
2005 2004 2005 2004
--------------- -------------- --------------- --------------
Operating Income (Loss) $ (4,826,028) $ (953,940) (4,642)% (1,810)%
Net Income (Loss) $ (4,881,231) $ (967,423) (4,695)% (1,836)%
The 406% increase in quarterly operating loss primarily reflects a $3,498,022
charge to consulting expense as a result of non-employee warrant valuation under
SFAS 123. In addition, there are merger-related legal costs, SEC reporting
requirements costs, and consulting fees payable in connection with the merger
and miscellaneous other expenses as well as budgeted 2005 salary increases which
contributed to the increase in quarterly operating loss for March 31, 2005.
Revenue
The following chart reflects comparative revenues with respect to AVP's
significant revenue drivers. 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. AVP's beach volleyball
tournament season customarily commences in early April and continues until late
September or early October. AVP did not produce any beach volleyball events in
the first quarter of 2005 or 2004. Accordingly, AVP did not recognize any
sponsorship revenue or activation fees in the quarters ending March 31, 2005 and
2004.
- --------------------------------------------------------------
Summary Revenue
- --------------------------------------------------------------
Three Months Ended March 31, Percentage
2005 2004 Increase
-------------- -------------- --------------
Sponsorship $ - $ - -
Activation Fees - - -
Local Revenue - - -
Miscellaneous Revenue 103,956 52,698 97 %
-------------- -------------- --------------
$ 103,956 $ 52,698 97 %
============== ============== ==============
The increase in revenue primarily reflects an increase in trademark licensing
revenue relating to AVP's volleyball license agreement with Wilson Sporting
Goods. AVP and Wilson entered into a new license agreement effective January 1,
2005 which provided for an increase in the royalty and minimum guarantee payable
to AVP in connection with volleyball sales.
Operating Expenses
- ------------------------------------------------ ----------------------------
Summary Costs % Revenue (Increase)
- ------------------------------------------------ ----------------------------
Decrease as
Three Months Ended March 31, Three Months Ended March 31, % of Revenue
2005 2004 2005 2004 2005 vs. 2004
--------------- -------------- -------------- ------------- ---------------
Event Costs $ - $ - 0% 0% -
Administrative 4,518,384 677,653 4346% 1286% (3,061)%
Marketing 411,600 328,985 396% 624% 228 %
Interest Expense 70,559 38,000 68% 72% 4 %
--------------- -------------- -------------- ------------- ---------------
Total Costs $ 5,000,543 $ 1,044,638 4810% 1982% (2,828)%
=============== ============== ============== ============= ===============
Event costs include the direct costs of producing an event and costs related to
television airing of broadcasted events. Event costs are recognized on an
event-by-event basis and event costs billed and/or paid prior to their
respective events are recorded as deferred costs and expensed at the time the
event occurs. Since no event took place in the quarters ended March 31, 2005 and
2004, no event costs were recognized.
The increase in administrative costs of $3,840,731 (or 567%) primarily reflects
a $3,498,022 charge to consulting expense as a result of non-employee warrant
valuation under SFAS 123 for warrants granted on February 28, 2005 as a result
of the merger. In addition, the increase in administrative costs include
merger-related legal costs, SEC reporting requirements costs, consulting fees
payable in connection with the merger aggregating $130,000 and budgeted 2005
salary increases.
17
The increase in marketing costs of $82,615 (or 25%) primarily reflects an
outside third party public relations agency engaged by AVP in January 2005.
The increase in interest expense of $32,559 (or 86%) is due to the interest
incurred in connection with the $2,000,000 loan that AVP made to the Association
in 2004.
- --------------------------------------------------
Depreciation and Amortization Expense
- --------------------------------------------------
Percentage
Three Months Ended March 31, Increase
2005 2004 (Decrease)
--------------- --------------- ---------------
Depreciation Expense $ 21,050 $ 4,993 322 %
Amortization Expense 66,396 73,726 (10)%
--------------- --------------- ---------------
$ 87,447 $ 78,719 11 %
=============== =============== ===============
The increase in depreciation expense of $16,057 resulted from an 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).
Liquidity and Capital Resources
Cash flows from operating activities for the three months ended March 31, 2005
and 2004 were $(1,383,208) and $(933,422), respectively. Working capital,
consisting of current assets less current liabilities, was $87,243 at March 31,
2005 and $(1,624,706) at March 31, 2004.
Cash flows provided from financing activities for the three months ended March
31, 2005 and 2004 were $4,247,023 and $0, respectively. As a result of the
consummation of the $5,000,000 private placement Series B Convertible Preferred
Stock on February 28, 2005, AVP realized net proceeds of $4,247,023.
Cash flows used in financing activities for the three months ended March 31,
2005 and 2004 were $950,000 and $0, respectively. During the three months ended
March 31, 2005, AVP repaid $950,000 on a note payable owed to Management Plus
Enterprises, Inc., a related party, in connection with sponsorship sales
services.
Capital expenditures for the three months ended March 31, 2005 and 2004 were
$137,384 and $14,497, respectively. During the three months ended March 31,
2005, AVP purchased banners and flags and a trailer in preparation for the 2005
tour season, as well as, computer equipment.
In June 2004, the Association borrowed $2,000,000 from AVP, at an interest rate
of 10% per annum. As part of the merger, this liability was converted to equity.
In addition, NBC and Fox had the right to put their Series A preferred stock
investment back to the Association at the end of the 2005 and 2006 seasons for
the amount of their respective investments. Prior to the merger, both NBC and
Fox agreed to waive their put rights and converted the Association preferred
stock holdings aggregating $3,657,600 into AVP Series A Preferred Stock.
18
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.
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.
Off-Balance Sheet Arrangements
As part of its ongoing business, AVP does not participate in transactions with
unconsolidated entities such as special purpose entities or structured finance
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other limited purposes.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
ITEM 4. CONTROLS AND PROCEDURES
AVP's management has evaluated, with the participation of its principal
executive and financial officers, the effectiveness of AVP's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of
the end of the period covered by this report. Based on this evaluation, these
officers have concluded that, as of March 31, 2005, AVP's disclosure controls
and procedures are effective to provide reasonable assurance that information
required to be disclosed by AVP in reports that it files or submits under the
Exchange Act is accumulated and communicated to AVP's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 28, 2005, the merger between AVP's wholly owned subsidiary, Othnet
Acquisition, Inc., and the Association was consummated, as a result of which the
Association became AVP's wholly owned subsidiary, and the Association's former
stockholders were issued AVP Series A Convertible Preferred Stock, which will
convert automatically into common stock upon authorization of a sufficient
amount of common stock.
The 3rd through 7th paragraphs of Note 2 and the 4th paragraph through the end
of Note 3 of the Notes to Financial Statements are incorporated by reference.
Except as otherwise set forth below, the exchange of Association equity
securities for AVP equity securities was exempt pursuant to Section 4(2) of the
Securities Act.
Sale of units of Series B Convertible Preferred Stock and Common Stock Purchase
Warrants was exempt pursuant to Securities Act Rule 506. All investors were
accredited. The placement agent received a 10% commission on closing of the
$5,000,000 gross proceeds offering of the units.
The exchange of Association employee stock options for employee stock options to
purchase 1,631,235 shares of AVP Common Stock was exempt pursuant to Rule 701.
The material incorporated by reference contains information relating to options
to purchase 6,542,941 shares of Common Stock reserved for issuance to Tour
players, which will be issued pursuant to a Securities Act registration
statement. The material incorporated by reference also contains information
relating to warrants to purchase 53,771,332 shares to be granted pursuant to the
merger agreement; Section 4(2) of the Securities Act will be relied upon with
respect to such grant.
20
ITEM 5. OTHER INFORMATION
STOCKHOLDER PROPOSALS: To be included in AVP's proxy statement for the
2005 annual meeting, a stockholder proposal must be received by June 13, 2005,
addressed to:
AVP, Inc.
6100 Center Drive, Suite 900
Los Angeles, California 90045
ATTN: Secretary
ITEM 6. EXHIBITS
31.1 - Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 - Certification of President and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
21
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the __ day of May,
2005.
AVP, INC.
(Registrant)
By: /s/ Andrew Reif
-------------------
Andrew Reif
Chief Operating Officer and
Chief Financial Officer
21