LOEB & LOEB LLP
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e-mail: dfischer@loeb.com
July 27, 2005
Jennifer G. Williams
Special Counsel
Securities and Exchange Commission
Washington DC 20549-0402
Re: AVP, Inc.
Registration Statement on Form SB-2
File No. 333-124084
-----------------------------------
Dear Ms. Williams:
Our responses to your July 7, 2005 letter regarding the captioned
matter are numbered to correspond to the paragraph numbers of your letter, of
which a copy is enclosed.
1. As discussed (in part) with Mr. Bazley, in the first half of
2004, the Association reserved a stock option pool for players, intending the
grants to be exempt under Rule 504. The Association intended to set the exercise
price at the same $1.06 per share paid by NBC and Fox the year before, but
adjusted downward to $1.0328 per share to reflect the dilutive effect of the
issuances to NBC and Fox. On this basis, the option pool would consist of
968,233 shares, the number stated in Section 7.b of the Player Agreements, but
the $1.06 per price per share was mistakenly inserted.* However, no precise
formula for allocating the stock option pool shares among the players had been
fixed at the time the players signed their agreements, which said that
allocations would be based on each player's performance in Association events.
(The allocations were made later in 2004).
- ----------------------
* Further adjustments resulted in a pool of 969,274 shares and an exercise
price of $1.0317 per share.
LOS ANGELES
NEW YORK
CHICAGO
NASHVILLE
LOEB & LOEB LLP
July 27, 2005
Page 2
In May 2005, after the Merger, the players were informed of their
allocations, as converted into options to buy AVP common stock. The options were
converted using the $1.03 exercise price, but the conversion ratios of all
outstanding AVP securities were adjusted to accommodate rounding of the Series B
Preferred Stock conversion ratio (to 243 to 1) and a second time to avoid
fractional shares. A player option pool of 6,524,941 shares with a per share
exercise price of $.1578, or an aggregate exercise price of approximately
$1,030,000, resulted. AVP will reduce the exercise price to $.15325 to reduce
the aggregate price below $1,000,000.
Assuming that Section 7.b of the player agreements constituted an
offer, it's our view that the incorrect exercise price should not disqualify the
Rule 504 exemption. That the Association intended the exercise price to be $1.03
is demonstrated by its use of that number in its conversion calculations
(contained in a complex, 15,400-cell spread sheet) and the odd number of option
shares constituting the option pool. No harm to investors resulted from the
error, and we believe that neither the precise number of shares constituting the
stock option pool nor a $.03 per share difference in exercise price would have
been material to the players, particularly when the correct price was more
favorable.
We believe, in any case, that Section 7.b could not constitute a
legally enforceable offer, because of indefiniteness, i.e., at the time the
player agreements were signed, no specific amount of shares were being offered
to any player, and no formula existed at the time for determining the amount of
shares. We believe that the grant of replacement stock options to purchase AVP
stock did not constitute an offer or sale under Rule 145, because no consent of
the option holders was sought or required; the replacement options do not
constitute an offer to issue AVP stock, because not currently exercisable.
2. This disclosure is included in the third-to-last paragraph under
the caption Business--Our Business--Operations. As stated therein, the stock
options will become exercisable after effectiveness of a registration statement
covering the underlying securities.
3. The dates of the meetings were April 26; May 3, 12, and 24; and
June 8. Because the information related to future possibilities as to which AVP
has made no specific plans, we consider the information to be immaterial and
therefore not subject to Regulation FD.
LOEB & LOEB LLP
July 27, 2005
Page 3
4. We have provided this disclosure as the second sentence of the
third paragraph of the cover page.
5. We have deleted the word "sizable".
6. The number of shares of Common Stock outstanding has been
corrected.
7. We have revised the subheadings in accordance with the comment.
8. We have characterized as AVP's belief those statements as to
which no data is provided.
9. AVP remains greatly concerned about the potentially significant
adverse effect that disclosing the identity of the greater than 10% revenue
contributor (the "10% sponsor") could have on AVP's ability to negotiate the
best terms with sponsors. The registration statement discloses in the MD&A that
a single national sponsor accounted for 18% of revenue for 2004, versus 23% of
revenue in 2003, and in the risk factors that AVP has no agreement beyond 2005
with its largest sponsor for 2004. Based on this disclosure, investors should be
on notice that revenue from this sponsor, beyond the current season, cannot be
assumed. Moreover, informing investors of the sponsor's identity will not enable
them to predict whether that sponsor will renew the arrangement, because the
sponsor makes no public disclosure of its plans for allocating its advertising
budget, and its financial information provides no basis for investors to make
any such assessment. In any case, its sponsorship expenditures with AVP are
entirely insignificant in relation to its OPERATIONS.
Management disagrees with the view expressed by Mr. Bazely that
investors can readily deduce from information already contained in the
registration statement that the 10% sponsor is one of two of those identified.
There are at least five major national sponsors, and what each pays depends on
the particular combination of advertising media and on-site benefits offered by
AVP that the sponsor chooses. Additionally, even if a potential sponsor could
confidently reduce the five possible sponsors to two, the uncertainty would be
to AVP's advantage.
LOEB & LOEB LLP
July 27, 2005
Page 4
Note that the 2004 and 2003 contribution information referred to
above was included in the MD&A in AVP's 2004 Form 10-KSB, filed in April, more
than three months ago. If the Staff's position that the sponsor's identity could
be easily reduced to one of two sponsors, and therefore AVP's advertising rates
are readily determinable, were accurate, AVP's management would not resist the
disclosure to the great extent that it does, because these determinations could
have been made already. However, AVP continues to negotiate and conclude
sponsorship agreements without receiving any sense that the new sponsors have
made such determinations.
Finally, I'd like to re-emphasize the point made in our earlier
letter, contrasting analogous provisions in Regulations S-K and S-B relating to
this subject. Reg. S-K, Item 101(c)(vii) requires discussion of,
The dependence of the segment upon a single customer, or a few
customers, the loss of any one or more of which would have a
material adverse effect on the segment. The name of any customer and
its relationship, if any, with the registrant or its subsidiaries
shall be disclosed if sales to the customer by one or more segments
are made in an aggregate amount equal to 10 percent or more of the
registrant's consolidated revenues and the loss of such customer
would have a material adverse effect on the registrant and its
subsidiaries taken as a whole.
Note that, even in this item, the obligation to identify a greater than 10%
customer is not absolute, and AVP's management in all candor believes that it is
more likely than not that the revenue from the sponsor in question can be
replaced, if necessary. Accordingly, we believe that the risk factor mentioned
above is entirely adequate to protect investors.
In any case, in contrast with the above provision of Reg. S-K, Reg.
S-B Item 101(b)(6) requires the small business issuer only to include in its
description of its business, its "Dependence on one or a few customers." We
believe the disclosure already contained in the registration statement meets
this requirement, which, we believe, also, does not dictate the degree of detail
that the Staff is requesting, i.e., the identity of any greater than 10%
sponsor. Given the express (albeit conditional) language in Reg. S-K, we believe
it inaccurate to infer such a requirement from the more general and far briefer
Reg. S-B provision.
LOEB & LOEB LLP
July 27, 2005
Page 5
10. The list includes the 10% sponsor.
11. As discussed with Mr. Bazley, the statement that there were no
written agreements resulted from a misunderstanding. We are filing the
agreements under Rule 406.
12. Please see response 11.
13. We have added this disclosure in the third paragraph under the
caption Executive Compensation--Employment Agreements.
14. MPE LLC was purchased from a single owner, Management Plus
Enterprises, which is solely owned by AVP's CEO; no securities were issued,
other than a promissory note (assuming the note would be considered a
security)..
15. The note has been revised in accordance with the comment.
16. This change has been made.
17. Please see response 11.
18. We confirm that the natural persons referred to in the comment
will be identified in a pre-effective amendment.
19. We have deleted the paragraph.
20. The revenue and expense recognition accounting policy in the
financial statements has been expanded upon to further define how receivables
and revenues are recognized. Furthermore, the MD&A liquidity and capital
resources disclosures have been expanded upon to include a discussion of the
increases.
21. MD&A liquidity and capital resources disclosures have been
expanded upon to include a discussion of the increases.
22. The statement of changes in stockholders' equity (deficiency)
has been changed to reflect the equity securities received by AVP as if they had
been outstanding since the inception of AVP. The equity securities received by
AVP has been shown as Series A-1 preferred which will convert automatically into
common stock upon authorization of a sufficient amount of common stock. The
shares of Othnet at the date of the acquisition were reflected as an issuance as
of the date of the reverse merger transaction in the financial statements
previously filed. No changes were required in the earnings per share
calculations as the amounts were correct in the financial statements previously
filed.
LOEB & LOEB LLP
July 27, 2005
Page 6
23. Footnote 2 to the financial statements has been changed to
include the disclosure.
24. The amended Form 10-QSB is being filed concurrently with this
filing.
25. The disclosure has been added to the financial statements.
26. Maxim Group LLC is a full service broker-dealer and NASD member
firm. In connection with the solicitation of investors in connection with the
AVP, Inc. private placement, Maxim and its registered sales representatives
contacted clients and other persons or entities with which it had a pre-existing
relationship and presented the AVP, Inc. investment opportunity to them. In
connection with its solicitation of investors, Maxim did not offer the
securities of AVP, Inc. by any form of general solicitation or general
advertising.
27. The engagement with Maxim was signed in November 2004, following
completion of the bridge financing conducted in June through August. Pursuant to
the engagement, the lock-ups were solicited from bridge investors between
December and closing. The lock-ups do not cover securities sold by Maxim.
Cordially,
/s/ David C. Fischer
David C. Fischer
Enclosure
Division of UNITED STATES
Corporation Finance SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0402
July 7, 2005
Leonard Armato
Chief Executive Officer AVP, Inc.
6100 Center Drive, Suite 900
Los Angeles, CA 90045
Re: AVP, Inc.
Amendment No. 1 to Registration Statement on Form SB-2
File No. 333-124084
Filed June 9, 2005
Dear Mr. Armato:
We have reviewed your filing and have the following comments. Where
indicated, we think you should revise your document in response to these
comments. If you disagree, we will consider your explanation as to why our
comment is inapplicable or a revision is unnecessary. Please be as detailed as
necessary in your explanation. In some of our comments, we may ask you to
provide us with supplemental information so we may better understand your
disclosure. After reviewing this information, we may or may not raise additional
comments.
Please understand that the purpose of our review process is to assist you
in your compliance with the applicable disclosure requirements and to enhance
the overall disclosure in your filing. We look forward to working with you in
these respects. We welcome any questions you may have about our comments or on
any other aspect of our review. Feel free to call us at the telephone numbers
listed at the end of this letter.
General
1. We note your response to prior comment 3. Please note that you cannot
register the stock options that were offered prior to the filing of a
registration statement. It appears to the staff that the terms under
Section 7.b of the player agreement relating to options represents an
offer of the options. Please tell us what exemption from registration the
company relied upon for the offer of the stock options to your players.
Also, please advise whether the players received any other information on
the options other than the terms of the player agreement. In the
alternative, please provide a legal analysis why the terms of the player
agreement should not be viewed as an offer of the options, including the
grant date of the options.
2. In this regard, please disclose the terms of the options granted to the
players in an appropriate section in the prospectus. If the term of the
options allow a player to exercise the option within one year, it is
deemed to be immediately exercisable. Therefore, a registration statement
must be on file to register the underlying securities before the option is
exercisable. See Section A.9, of the Division of Corporation Finance's
Manual of Publicly Available Telephone Interpretations dated July 1999
available on our website at http://www.sec.gov/divisions/corpfin.shtml.
3. We note your response to prior comment 4. Please tell us the dates of the
meetings with analysts. Also, please explain whether and by what means you
made the information you provided to analysts public in compliance with
Regulation FD.
Prospectus Cover Page
4. We reissue prior comment 7. It is not clear whether the selling
stockholders will be offering their shares of your common stock to the
public based on the prices quoted on the OTC Bulletin Board. Please revise
to clarify on the cover page.
Prospectus Summary, page 1
Business Overview, page 1
5. Quantify your statement that you have a "sizable base of spectators and
television viewers...."
Summary of the Offering, page 2
Capital stack outstanding, page 3
6. Please explain why the exercise of 30,952 shares of Series B Preferred
Stock yielded an additional 7,520,873 shares of common stock outstanding
rather than 7,521,336 shares. Refer to the change in outstanding common
shares and Series B Preferred shares from your prior disclosure.
Risk Factors, page 3
7. Revise your subheadings to ensure that it reflects the risk that you
discuss in your text. Most of your subheadings merely state facts about
your company, such as "We have a history of losses and anticipated future
losses," "We may require additional financing," "We rely on short-term
sponsorship agreements for most of our revenues," and "AVP's management
began operating AVP only recently." Succinctly state in your subheadings
the risk that may result from the facts or uncertainties.
Business, page 9
Our Business, page 10
8. We note your response to prior comment 19. To the extent these statements
cannot be objectively verified, characterize them as beliefs.
Alternatively, disclose in the prospectus the bases provided in your
response.
9. We note your response but reissue prior comment 20 in part. You must
identify here and in your risk factor the sponsor that attributed to 10%
or more of your total revenue in 2004. Refer to Item 101(a)(6) of
Regulation S-B. Also, you cannot request confidential treatment for
information that is material to investors. See Section W2 of the Staff
Legal Bulletin No. 1 available on our website. Please revise accordingly.
10. In this regard, we note that you disclose the name of most of your
sponsors on page 11. If true, please revise to clarify that none of these
sponsors currently account for 10% or more of your revenues.
11. We note your response to prior comment 22. Please disclose the fact that
your production and distribution agreements with NBC, Fox and OLN have not
been reduced to writing. In this regard, you should disclose in the risk
factors that Iack of enforceability of your agreements with these parties.
MD&A, page 17
12. You indicate that the majority of your revenues are derived from
sponsorship and advertising contracts. As a result, your distribution
agreements with FOX and NBC appear to be critical to the success of your
operations. If you have no written contractual agreements with these
networks as you represent in your response to prior comment 22, this fact
appears to constitute a known uncertainty that should be prominently
disclosed in MD&A. Please revise or advise.
Executive Compensation, Page 28
13. We note your response to prior comment 28. Please disclose on page 30 the
specific efforts provided to you by Mr. Painter as discussed in your
response.
Certain Relationships and Related Transactions, page 30
14. We reissue prior comment 29. Clarify the dates of the "private placement"
and "offering" as they relate to the acquisition of MPE LLC by the
Association. In addition, please disclose this transaction in the list of
recent sales of unregistered securities and include the required
information pursuant to Item 701 of Regulation
Selling Stockholders, page 37
15. Please revise footnote 58 to clarify what "other such outstanding
securities" have not been converted or exercised.
16. Refer to the last sentence of the second paragraph. Please revise your
disclosure to clarify that selling shareholders "may be deemed"
underwriters.
17. We note your response to prior comment 38. Where the selling
securityholder is a broker-dealer, disclose that that seller is an
underwriter. Where the selling securityholder is an affiliate of a
broker-dealer, disclose whether to the best of your knowledge these
entities purchased the securities in the ordinary course of business and,
if at the time of the purchase of the securities to be resold, the selling
securityholder had any agreements or understandings, directly or
indirectly, with any person to distribute the securities. If you are
unable to make these assertions for any selling securityholder identified
as an affiliate of broker-dealers, then you must identify the seller as an
underwriter.
18. We note your response to prior comment 39. Confirm that you will update
the selling securityholder table, through pre-effective amendment, to
identify the natural person or persons who have voting and/or investment
control over any selling stockholders.
Available Information, page 48
19. We reissue prior comment 40. Refer to the second paragraph in this
section. You may refer readers to related documents for a more complete
reading or understanding, but should not infer that the prospectus does
not contain all material information from those documents, even if
summarized, or that the statements made in the prospectus are in any way
inaccurate_ Please revise accordingly.
Balance Sheet, page F-3
20. Your accounts receivable balance has increased by approximately $454,000.
However, you have not recognized any revenues. As such, it is not clear
how you increased your accounts receivable balance. Therefore, please tell
us and provide us with support regarding this increase in accounts
receivable.
21. Additionally, your deferred revenues balance has increase by approximately
$3,000,000. However, there is no disclosure in your filing describing the
change in this account. As such, please revise both your footnote and MD&A
disclosures to address the aforementioned issue.
Statements of Changes in Stockholders Equity (Deficiency) page F-5
22. When updating your financials, the consolidated statement of equity should
be retroactively restated (a recapitalization) for the equivalent number
of shares received in the merger after giving effect to any differences in
par value of the issuer's and acquirer's stock with an offset to paid in
capital. As such, your statement of changes in stockholders deficiency
should reflect the equity securities received by the accounting acquirer
(AVP), from the accounting acquire (Othnet), as if they had been
outstanding since the inception of AVP and rolled forward to the beginning
balance based on the ratio of shares issued to shares acquired. Further,
the outstanding shares of Othnet at the date of acquisition should be
reflected as an issuance on the date the reverse merger transaction
occurred. Accordingly, please ensure that any changes made to the
consolidated statement of equity are reflected in your earnings per share
calculation, as necessary (i.e. changes to the number of shares
outstanding).
Subsequent Event, page F-7
23. We see that you have identified and discussed your method of accounting
for the fiscal 2003 merger with DMC in footnote 13. Please address your
method of accounting for the February 2005 merger in your footnotes, as
well.
24. The loss per share information presented in this document is inconsistent
with the loss per share information provided in your Form 10-QSB for the
Quarter Ended March 31, 2005. Please revise as appropriate.
Pro-forma Net Loss per Common Share, page F-14
25. We note your response to prior comment 43. However, we reissue our prior
comment. Please disclose your calculation of weighted average shares. Your
calculation should individually disclose the number of outstanding
options, warrants and shares issuable upon conversion of outstanding
convertible debt or preferred stock, that could potentially dilute basic
earnings per share in the future, but that were not included in the
computation of diluted earnings per share for the periods presented in
your financial statements because their impact was anti-dilutive for the
periods presented in your financial statements. Refer to the requirements
of paragraph 40 of SFAS No. 128
Part II.
Item 26. Recent Sales
26. We note that the investors were solicited by Maxim Group. Please explain
how Maxim solicited investors and how such solicitation falls within the
exemption of Section 4(2) of the Securities Act.
27. We note that you raised $2,360,000 during the months of June through
August 2004. However, we also note the dates of the lock-up agreements
with Maxim for these securities offerings range from December 2004 through
February 2005. Please revise to clarify the dates of the offering or
advise why no revision is necessary.
Closing
As appropriate, please amend your registration statement. In response to
these comments. You may wish to provide us with marked copies of the amendment
to expedite our review. Please furnish a cover letter with your amendment that
keys your responses to our comments and provides any requested supplemental
information. Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing your amendment
and responses to our comments.
You may contact Juan Migone at (202) 551-3312 or Margery Reich at (202)
551-3347 if you have questions regarding comments on the financial statements
and related matters. Please contact Mathew C. Bazley at (202) 551-3382, or me,
at (202) 551-3348 with questions,
Sincerely,
/S/ Jennifer G. Williams
------------------------------
Jennifer G. Williams
Special Counsel
cc: Via Facsimile: (212) 214-0686
David C. Fischer
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154