UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
AMENDMENT NO.1
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): February 28, 2005
-----------------
AVP, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 005-79737 98-0142664
-------- --------- ----------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
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)
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Acquired Businesses
INDEX TO FINANCIAL STATEMENTS
Independent Registered Public Accounting Firm Report F-2
Balance Sheet as of December 31, 2004 and March 31, 2005 (Unaudited) F-3
Statements of Operations for the Years Ended
December 31, 2004 and 2003 and for the Three Months
Ended March 31, 2005 and 2004 (Unaudited) F-4
Statement of Changes in Stockholders' Equity (Deficiency) for
the Years ended December 31, 2004 and 2003
and for the Three Months Ended March 31, 2005 (Unaudited) F-5
Statements of Cash Flows Deficiency for the Years Ended
December 31, 2004 and 2003
and for the Three Months Ended March 31, 2005 and 2004 (Unaudited) F-6
Notes to Financial Statements F-8
F-1
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'
equity (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-2
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
Balance Sheets
(Unaudited)
December 31, 2004 March 31, 2005
----------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 631,933 $ 4,820,821
Accounts receivable, net of
allowance for doubtful accounts of $10,000 649,137 1,102,843
Prepaid expenses 26,606 554,082
Deferred commission-related party 253,339 190,004
------------ ------------
TOTAL CURRENT ASSETS 1,561,015 6,667,750
------------ ------------
PROPERTY AND EQUIPMENT, net 201,703 316,986
------------ ------------
OTHER ASSETS
Investment in sales-type lease 628,323 604,078
Other assets 42,738 45,228
------------ ------------
TOTAL OTHER ASSETS 671,061 649,306
------------ ------------
TOTAL ASSETS $ 2,433,779 $ 7,634,042
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable - related party $ 2,000,000 $ --
Current portion of long-term debt 1,633,333 1,330,070
Accounts payable 57,157 479,177
Accrued expenses 790,368 1,215,861
Accrued interest 316,630 260,502
Accrued officer compensation 43,208 --
Deferred revenue 325,050 3,294,897
------------ ------------
TOTAL CURRENT LIABILITIES 5,165,746 6,580,507
------------ ------------
OTHER LIABILITIES
Long-term deferred revenue 225,000 225,000
Long-term debt - less current portion 1,100,071 683,334
------------ ------------
TOTAL OTHER LIABILITIES 1,325,071 908,334
------------ ------------
TOTAL LIABILITIES 6,490,817 7,488,841
------------ ------------
REDEEMABLE SERIES A PREFERRED STOCK 3,657,600 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Series A-1 preferred stock, $.001 par value, 2,000,000 shares
authorized,
122,381 and 0 shares issued and outstanding 122 --
Series A convertible preferred stock, $.001 par value, 2,000,000
shares authorized, 0 and 288,014 shares issued and outstanding -- 288
Series B convertible preferred stock, $.001 par value, 2,000,000
shares authorized, 0 and 147,364 shares issued and outstanding -- 147
Common stock, $.001 par value, 40,000,000 shares authorized,
0 and 22,514,742 shares issued and outstanding -- 22,515
Additional paid-in capital 999,190 13,717,431
Accumulated deficit (8,713,950) (13,595,180)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (7,714,638) 145,201
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,433,779 $ 7,634,042
============ ============
See notes to financial statements
F-3
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
---------------------------- ----------------------------
2004 2003 2005 2004
------------ ------------ ------------ ------------
REVENUE
Sponsorships $ 9,918,117 $ 6,222,371 $ -- $ --
Other 2,390,888 1,071,757 103,956 52,698
------------ ------------ ------------ ------------
TOTAL REVENUE 12,309,005 7,294,128 103,956 52,698
EVENT COSTS 9,125,829 6,506,613 -- --
------------ ------------ ------------ ------------
Gross Profit 3,183,176 787,515 103,956 52,698
------------ ------------ ------------ ------------
OPERATING EXPENSES
Marketing 2,435,124 2,024,572 411,600 328,985
Administrative 3,442,479 2,184,557 4,518,384 677,653
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSE 5,877,603 4,209,129 4,929,984 1,006,638
------------ ------------ ------------ ------------
OPERATING LOSS (2,694,427) (3,421,614) (4,826,028) (953,940)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (245,870) (182,396) (70,558) (38,000)
Interest income 67,185 87,751 15,356 24,517
Joint venture loss -- (184,712) -- --
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE (178,685) (279,357) (55,202) (13,483)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,873,112) (3,700,971) (4,881,230) (967,423)
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (2,873,112) $ (3,700,971) $ (4,881,230) $ (967,423)
============ ============ ============ ============
Basic and diluted loss per share $ (0.10) $ (0.12) $ (0.13) $ (0.03)
============ ============ ============ ============
Weighted average common shares
outstanding 29,738,605 29,738,605 37,493,683 29,738,605
============ ============ ============ ============
See notes to financial statements
F-4
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY )
Series A Series B
Series A-1 Preferred Stock Preferred Stock Preferred Stock
-------------------------- ------------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ------------ --------- -----------
Balance, January 1, 2003 -- $ -- -- $ -- -- $ --
Redemption of shares -- -- -- -- -- --
Conversion of loan payable to officer and stockholder -- -- -- -- -- --
Conversion of DMC payable into common stock -- -- -- -- -- --
Cancellation of shares of AVP in transaction with DMC -- -- -- -- -- --
Issuance of preferred stock in transcation with DMC 122,381 122 -- -- -- --
Compensation from issuance of stock options -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- -----------
Balance, December 31, 2003 122,381 122 -- -- -- --
Net loss -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- -----------
Balance, December 31, 2004 122,381 122 -- -- -- --
Merger of AVP, Inc. into the Association
("the reverse merger") (Unaudited) (122,381) (122) 122,381 122 -- --
Conversion of 10% convertible notes (Unaudited) -- -- 70,275 70 -- --
Conversion of redeemable preferred
stock (Unaudited) -- -- 95,358 96 -- --
Private placement units (Unaudited) -- -- -- -- 147,364 147
Consulting expense from issuance of
stock options (Unaudited) -- -- -- -- -- --
Net loss (Unaudited) -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- -----------
Balance, March 31, 2005 (Unaudited) -- $ -- 288,014 $ 288 147,364 $ 147
========== ============ ========== ============ ========= ===========
Common Stock Total Stockholders
-------------------------- Additional Accumulated Equity
Shares Amount Paid 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 -- -- 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 -- -- 999,190 (5,840,838) (4,841,526)
Net loss -- -- -- (2,873,112) (2,873,112)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 -- -- 999,190 (8,713,950) (7,714,638)
Merger of AVP, Inc. into the Association
("the reverse merger") (Unaudited) 22,514,742 22,515 (974,439) -- (951,924)
Conversion of 10% convertible notes (Unaudited) -- -- 2,290,278 -- 2,290,348
Conversion of redeemable preferred
stock (Unaudited) -- -- 3,657,504 -- 3,657,600
Private placement units (Unaudited) -- -- 4,246,876 -- 4,247,023
Consulting expense from issuance of
stock options (Unaudited) -- -- 3,498,022 -- 3,498,022
Net loss (Unaudited) -- -- -- (4,881,230) (4,881,230)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2005 (Unaudited) 22,514,742 $ 22,515 $ 13,717,431 $(13,595,180) $ 145,201
============ ============ ============ ============ ============
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
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
-------------------------- --------------------------
2004 2003 2005 2004
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,873,112) $(3,700,971) $(4,881,230) $ (967,423)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization of property and equipment 57,561 14,529 22,101 4,993
Other amortization 6,033 8,043 2,011 --
Amortization of deferred commissions 294,904 609,256 63,335 73,726
Allowance for doubtful accounts 10,000 -- -- --
Amortization of deferred costs 1,352,100 387,500 -- --
Compensation from issuance of stock options -- 3,809 -- --
Consulting expense from issuance of stock options -- -- 3,498,022 --
Decrease (increase) in operating assets:
Accounts receivable (169,442) (451,483) (453,706) (328,430)
Investment in and due from joint venture 291,084 (291,084) -- 291,084
Prepaid expenses (26,606) 58,994 (527,476) (275,767)
Other assets (1,305) (15,466) (4,500) (5,028)
Increase (decrease) in operating liabilities:
Accounts payable (625,052) 35,046 164,381 (509,342)
Accrued expenses 211,950 305,932 251,555 (317,196)
Accrued officer compensation (167,625) 210,833 (43,208) 169,230
Accrued interest 245,871 -- (56,127) 157,698
Deferred revenue 275,050 (112,500) 2,969,847 2,253,985
----------- ----------- ----------- -----------
NET CASH FLOWS FROM
OPERATING ACTIVITIES (1,118,589) (2,937,562) 1,005,005 547,530
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (228,416) (25,722) (137,384) (14,497)
Investment in sales-type lease 91,215 42,344 24,244 21,967
Cash received in acquisition -- 769,450 -- --
----------- ----------- ----------- -----------
NET CASH FLOWS FROM
INVESTING ACTIVITIES (137,201) 786,072 (113,140) 7,470
----------- ----------- ----------- -----------
See notes to financial statements
F-6
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
-------------------------- --------------------------
2004 2003 2005 2004
----------- ----------- ----------- -----------
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) (950,000) --
Increase (decrease) in payable to DMC
and other related party debt -- (65,995) -- --
Proceeds from private placement units -- -- 4,247,023 --
Issuance of preferred stock -- 910,000 -- --
----------- ----------- ----------- -----------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 1,816,667 1,981,243 3,297,023 --
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 560,877 (170,247) 4,188,888 555,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 71,056 241,303 631,933 71,056
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 631,933 $ 71,056 $ 4,820,821 $ 626,056
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 48,939 $ -- $ 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 -- --
----------- ----------- ----------- -----------
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 --
----------- ----------- ----------- -----------
See notes to financial statements
F-7
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-8
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-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)
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 sponsor accounted for 18% and 23% of revenue,
respectively.
Unaudited Interim Financial Statements
The financial statements as of March 31, 2005 and for the three months ended
March 31, 2005 and 2004 are unaudited, however, in the opinion of the management
of AVP, all adjustments (consisting solely of normal recurring adjustments)
necessary to a fair presentation of the financial statements for the interim
periods have been made.
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-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)
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.
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.
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)
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.
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:
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
-------------------------- --------------------------
2004 2003 2005 2004
----------- ----------- ----------- -----------
Net loss applicable to common
shareholders,
as reported $(2,873,112) $(3,700,971) $(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 (133,288) (53,721) -- (33,322)
----------- ----------- ----------- -----------
Pro forma net loss $(3,006,400) $(3,754,692) $(4,881,230) $(1,000,745)
=========== =========== =========== ===========
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)
Stock Based Compensation (Continued)
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 and for the three months ended March 31, 2005
and 2004 (unaudited):
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
-------------------------- -------------------------
2004 2003 2005 2004
----------- ----------- ----------- -----------
Risk-free interest rate 3.86 - 4.19% 4.0 - 4.5% -- 3.86 - 4.19%
Expected life 4 to 10 years 10 years -- 4 to 10 years
Expected volatility 0% 0% -- 0%
Expected dividend yield 0% 0% -- 0%
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,
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)
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.
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.
Pro Forma 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
F-14
AVP PRO BEACH VOLLEYBALL TOUR, INC.
F/K/A
ASSOCIATION OF VOLLEYBALL PROFESSIONALS, INC.
NOTES TO FINANCIAL STATEMENTS
Pro Forma Net Loss per Basic and Diluted Share of Common Stock (Continued)
outstanding during the period increased by the dilutive effect of outstanding
stock options using the "treasury stock" method. The pro forma 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. The March 31, 2005 and 2004 weighted average shares outstanding gives
effect to the Series A-1 preferred stock conversion to Series A convertible
preferred stock as if it were converted to common stock as of the beginning of
the periods presented. Options, warrants, and other incremental shares to
purchase 123,330,871 and 115,036,340 shares of common stock at December 31, 2004
and 2003, respectively, and 122,116,791 and 115,163,529 shares of common stock
at March 31, 2005 and 2004 (unaudited), respectively, were excluded from the
computation of diluted earnings (loss) per share as their effect would be
anti-dilutive.
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.
F-15
Deferred commissions charged to operations aggregated $294,904 in 2004 and
$609,256 in 2003.
F-16
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 183,600
residual value
Less unearned lease income (162,477)
-----------
Investment in sales-type lease, net $ 628,323
===========
F-17
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
----------------
$ 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-18
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-19
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-20
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 pro forma 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-21
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-22
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 Shares Exercise 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-23
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 $ 0.08 7,269,855 $ 0.08
$.09 .16 8,294,531 3.3 $ 0.16 8,294,531 $ 0.16
-------------- --------- --- ------------ --------- ------------
$-- .16 85,832,927 5.7 $ 0.03 76,525,315 $ 0.03
============== ========== ========== ============ ========== ============
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
Exercise
Number of Shares Price
---------------- ----------------
Options outstanding at January 1, 2003 -- $ --
Granted -- --
Converted DMC options 3,033,450 0.03
Exercised -- --
Cancelled -- --
-------------- ----------------
Options outstanding at December 31, 2003 3,033,450 $ 0.03
Granted -- --
Exercised -- --
Cancelled -- --
-------------- ----------------
Options outstanding at December 31, 2004 3,033,450 $ 0.03
============== ================
F-24
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:
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-25
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-26
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-27
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-28
(b) Pro Forma Financial Information
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., 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. 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 $2.36 million 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) were 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.
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 six of seven
board 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 historical carrying values of the assets and
liabilities of the Association.
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 Association common stock automatically converted into
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 buy a total of approximately
85,832,927 shares of AVP common stock. In conjunction with and
immediately following the merger, AVP issued warrants to purchase of
53,771,332 shares of common stock as consideration for services that
facilitated the merger.
As part of the merger, the Association's preferred
stockholder's converted $3,657,600 of Redeemable Preferred Stock into
23,171,881 shares of AVP common stock, and the holder of a $1,000,000
note payable will convert the note principal into 11,292,614 shares of
AVP common stock. In addition, as part of the merger, holders of AVP's
10% convertible notes converted the notes into 17,076,755 shares of AVP
common stock. Concurrent with the merger, $4,247,023 of new capital was
raised in exchange for 35,809,452 shares of AVP common stock. 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.
F-29
The unaudited pro forma condensed combined statements of
operations combines the historical statements of operations of the
Association and the statements of operations of AVP, giving effect to
the merger as if it had been consummated on January 1, 2004.
The pro forma adjustments give effect to the capital
transactions assuming that there was a sufficient authorization of AVP
common stock at the time of the merger.
You should read this information in conjunction with the:
o Accompanying notes to the Unaudited Pro Forma Condensed
Combined Financial Statements;
o Separate historical financial statements of the Association as
of December 31, 2004 and March 31, 2005 (Unaudited) and for
the years ended December 31, 2004 and 2003 and for the three
month periods ended March 31, 2005 and 2004 (Unaudited);
We present the unaudited pro forma condensed combined
financial information for informational purposes only. The pro forma
information is not necessarily indicative of what our operations
actually would have been had we completed the merger on January 1,
2004. In addition, the unaudited pro forma condensed combined financial
information does not purport to project the future operating results of
the combined companies.
F-30
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 2004
AVP Pro
Beach
Volleyball Pro Forma
Tour, Inc AVP, Inc. Adjustments Pro Forma Combined
--------- --------- ----------- ------------------
Revenue $ 12,309,005 $ -- $ -- $ 12,309,005
Event Costs 9,125,829 -- -- 9,125,829
------------ ------------ ------------ -------------
Gross Profit 3,183,176 -- -- 3,183,176
Operating expenses 5,877,603 1,377,955 -- 7,255,558
------------ ------------ ------------ -------------
Operating Loss (2,694,427) (1,377,955) -- (4,072,382)
------------- ------------- ------------ --------------
Other Income (Loss)
Interest Expense (245,870) (1,185,492) 118,855 (a) (1,873,576)
(561,069)(b)
Interest Income 67,185 118,855 (118,855)(a) 67,185
Other -- 36,764 -- 36,764
------------ ------------ ------------ -------------
Total Other Income (Loss) (178,685) (1,029,873) (561,069) (1,769,627)
------------- ------------- ------------- --------------
Loss Before Income Taxes (2,873,112) (2,407,828) (561,069) (5,842,009)
Income Taxes -- -- -- --
------------ ------------ ------------ -------------
Net Loss $ (2,873,112) $ (2,407,828) $ (561,069) $ (5,842,009)
============= ============= ============= =============
Proforma basic and diluted loss
per share $ (0.04)
=============
Proforma weighted average common
shares outstanding 139,604,049
=============
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
F-31
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the three months ended March 31, 2005
AVP Pro
Beach
Volleyball Pro Forma
Tour, Inc AVP, Inc. Adjustments Pro Forma Combined
--------- --------- ----------- ------------------
Revenue $ 103,956 $ -- $ -- $ 103,956
Event Costs -- -- -- --
------------ ------------ ------------ ------------
Gross Profit 103,956 -- -- 103,956
Operating expenses 4,929,984 -- -- 4,929,984
------------ ------------ ------------ ------------
Operating Loss (4,826,028) -- -- (4,826,028)
------------- ------------ ------------ -------------
Other Income (Loss)
Interest Expense (70,558) (127,725) 16,667 (a) (53,891)
127,725 (b)
Interest Income 15,356 16,667 (16,667)(a) 15,356
------------ ------------ ------------- ------
Total Other Income (Loss) (55,202) (111,058) 127,725 (38,535)
------------- ------------- ------------ -------------
Loss Before Income Taxes (4,881,230) (111,058) 127,725 (4,864,563)
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (4,881,230) $ (111,058) $ 127,725 $ (4,864,563)
============= ============= ============ =============
Proforma basic and diluted loss
per share $ (0.03)
=============
Proforma weighted average common
shares outstanding 139,604,049
=============
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
F-32
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
On February 28, 2005, AVP, Inc ("AVP") and AVP Pro Beach Volleyball
Tour, Inc. (the "Association") consummated a plan of merger. Pursuant
to the Merger Agreement ("Merger"), the Association was the surviving
entity and became a wholly owned subsidiary of AVP. At the time of the
merger, AVP issued to the stockholders of the Association such number
of shares of AVP's common stock that, together with Association stock
options and stock purchase warrants converted into options and warrants
to buy AVP common stock, represented approximately 61.21% of the
aggregate outstanding shares of AVP on a fully diluted basis. Since the
stockholders of the Association received the majority of the voting
shares of AVP, the Association's officers and directors became the
officers and directors of AVP, and AVP adopted the business plan of the
Association. The Association is the accounting acquirer (legal
acquiree), and AVP is the accounting acquiree (legal acquirer). Since
at the completion of the merger, AVP was a shell corporation, the
transaction is being accounted for as a capital transaction. This
transaction is equivalent to the Association issuing stock for the net
assets of AVP, accompanied by a recapitalization of the Association.
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 AVP.
The unaudited proforma condensed combined statement of operations for
the year ended December 31, 2004 include the operations of the
Association for the year ended December 31, 2004 and the operations of
AVP for the year ended January 31, 2005. The unaudited proforma
condensed combined statement of operations for the three months ended
March 31, 2005 include the operations of the Association for the three
months ended March 31, 2005 and AVP for the period from February 1,
2005 through closing of the merger on February 28, 2005. A proforma
condensed combined balance sheet is not presented as the March 31, 2005
historical balance sheet of the Association reflects the merger of AVP
into the Association.
Proforma basic and diluted loss per share were calculated using the
weighted average common shares outstanding including the common shares
issued in the acquisition as if the acquisition occurred on January 1,
2004.
(2) PRO FORMA ADJUSTMENTS
(a) To eliminate the intercompany loans and accrued interest
between AVP and the Association.
(b) To record the issuance of 17,076,755 shares of common stock of
AVP upon the conversion of the 10% convertible notes
aggregating, at January 31, 2005, $2,268,938 including accrued
interest and the accretion of the unamortized note discount of
$561,069. For the month ended February 28, 2005, the accretion
of the unamortized note discount was $127,725.
F-33
(c) Exhibits.
None.
F-34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: July 7, 2005 AVP, INC.
By: /s/ Andrew Reif
-----------------------
Andrew Reif
Chief Operating Officer