UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 005-79737
AVP, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 98-0142664
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 Center Drive, Suite 900, Los Angeles, CA 90045
--------------------------------------------------------
(Address of principal executive offices - Zip code)
(310) 426 - 8000
----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of July 27, 2005, the Registrant had approximately 30,036,074 shares of
Common Stock outstanding.
2
AVP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION..........................................4
ITEM 1. FINANCIAL STATEMENTS...........................................4
Balance Sheet as of June 30, 2005
(Unaudited)...........................................................5
Statements of Operations for
the three and six months ended June 30, 2005 and 2004
(Unaudited)...........................................................6
Statement of Changes in Stockholders' Equity for
the six months ended June 30, 2005
(Unaudited)...........................................................7
Statements of Cash Flows for
the six months ended June 30, 2005 and 2004
(Unaudited)...........................................................8
Notes to Financial Statements (Unaudited)............................10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.............................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................21
ITEM 4. CONTROLS AND PROCEDURES.......................................21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.....................21
ITEM 5. OTHER INFORMATION.............................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................22
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVP, INC.
Index to Financial Information
Period Ended June 30, 2005
PAGES
Financial Statements
Unaudited Balance Sheet 5
Unaudited Statements of Operations 6
Unaudited Statement of Changes in Stockholders' Deficiency 7
Unaudited Statements of Cash Flows 8 - 9
Unaudited Notes to Financial Statements 10 -16
4
AVP, INC.
Balance Sheet
June 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,278,256
Accounts receivable, net of
allowance for doubtful accounts of $10,000 234,610
Prepaid Expense 1,240,818
Deferred commission-related party 126,670
------------
TOTAL CURRENT ASSETS 5,880,354
------------
PROPERTY AND EQUIPMENT, net 447,571
------------
OTHER ASSETS
Investment in sales-type lease 579,229
Other assets 43,217
------------
TOTAL OTHER ASSETS 622,446
------------
TOTAL ASSETS $ 6,950,371
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,130,070
Accounts payable 653,705
Accrued expenses 1,173,802
Accrued interest 270,520
Deferred revenue 2,975,579
------------
TOTAL CURRENT LIABILITIES 6,203,676
------------
OTHER LIABILITIES
Long-term deferred revenue 225,000
Long-term debt - less current portion 683,334
------------
TOTAL OTHER LIABILITIES 908,334
------------
TOTAL LIABILITIES 7,112,010
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Series A convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, 288,014 shares issued and outstanding 288
Series B convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, 147,364 shares issued and outstanding
147
Common stock, $.001 par value, 40,000,000 shares authorized,
22,514,742 shares issued and outstanding 22,515
Additional paid-in capital 15,431,397
Accumulated deficit (15,615,988)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (161,641)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 6,950,371
============
See notes to financial statements
5
AVP, INC.
Statements of Operations
Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE
Sponsorships $ 3,424,395 $ 4,733,414 $ 3,424,395 $ 4,733,414
Other 885,050 768,008 989,006 820,706
------------ ------------ ------------ ------------
TOTAL REVENUE 4,309,445 5,501,422 4,413,401 5,554,120
EVENT COSTS 2,769,579 3,107,860 2,769,579 3,107,860
------------ ------------ ------------ ------------
Gross Profit 1,539,866 2,393,562 1,643,822 2,446,260
------------ ------------ ------------ ------------
OPERATING EXPENSES
Marketing 685,100 842,770 1,096,700 1,171,755
Administrative 2,885,214 1,123,701 7,403,598 1,794,469
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSE 3,570,314 1,966,471 8,500,298 2,966,224
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (2,030,448) 427,091 (6,856,476) (519,964)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (28,013) (37,546) (98,571) (75,547)
Interest income 37,653 17,144 53,009 34,777
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 9,640 (20,402) (45,562) (40,770)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (2,020,808) 406,689 (6,902,038) (560,734)
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,020,808) $ 406,689 $ (6,902,038) $ (560,734)
============ ============ ============ ============
Basic and diluted income (loss) per share ($ 0.04) $ 0.01 ($ 0.15) ($ 0.02)
============ ============ ============ ============
Weighted average common shares outstanding
52,253,347 29,738,605 44,707,197 29,738,605
============ ============ ============ ============
See notes to financial statements
6
AVP, INC.
Statement of Changes in Stockholders' Deficiency
Six Months Ended June 30, 2005
(Unaudited)
Series A Series B
Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------------
Additional Total
Paid in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Deficiency
------- ---- ------- ---- ---------- -------- ------------ ------------ -----------
Balance, January 1, 2005 122,381 $122 -- $ -- $ -- $ 999,190 $ (8,713,950) $(7,714,638)
Merger of AVP, Inc. into
the Association ("the
reverse merger") -- -- -- -- 22,514,742 22,515 (974,439) -- (951,924)
Conversion of 10%
convertible notes 70,275 70 -- -- -- -- 2,290,278 -- 2,290,348
Conversion of redeemable
preferred stock 95,358 96 -- -- -- -- 3,657,504 -- 3,657,600
Private placement units
(net of offering costs of
$753,038) -- -- 147,364 147 -- -- 4,246,876 -- 4,247,023
Consulting expense from
issuance of warrants -- -- -- -- -- -- 5,211,988 -- 5,211,988
Net loss -- -- -- -- -- -- -- (6,902,038) (6,902,038)
------- ---- ------- ---- ---------- -------- ------------ ------------ -----------
Balance, June 30, 2005 288,014 $288 147,364 $147 22,514,742 $ 22,515 $ 15,431,397 $(15,615,988) $ (161,641)
======= ==== ======= ==== ========== ======== ============ ============ ===========
See notes to financial statements
7
AVP, INC.
Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004
(Unaudited)
Six Months Ended June 30,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,902,038) $ (560,734)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization of property and equipment 63,080 7,095
Other amortization 4,022 4,022
Amortization of deferred commissions 126,670 147,452
Amortization of deferred costs -- 342,233
Compensation from issuance of stock options and warrants 5,211,988 5,714
Decrease (increase) in operating assets:
Accounts receivable 414,527 (258,153)
Investment in and due from joint venture -- 291,084
Prepaid expenses (1,214,212) (191,107)
Other assets (4,500) (2,670)
Increase (decrease) in operating liabilities:
Accounts payable 338,906 (491,298)
Accrued expenses 209,501 (48,249)
Accrued officer compensation (43,208) 159,167
Accrued interest (46,109) --
Deferred revenue 2,650,529 (263,250)
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 809,155 (858,694)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (308,949) (22,084)
Investment in sales-type lease 49,094 44,483
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (259,855) 22,399
------------ ------------
See notes to financial statements
8
AVP, INC.
Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004
(Unaudited)
(CONTINUED)
Six Months Ended June 30,
2005 2004
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of capital stock 5,000,061 --
Offering costs (753,038) --
Proceeds from borrowing -- 1,500,000
Debt repayments (1,150,000) --
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 3,097,023 1,500,000
------------ ------------
NET INCREASE IN CASH 3,646,323 663,705
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 631,933 71,056
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,278,256 $ 734,761
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 66,934 --
------------ ------------
Income taxes -- --
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING INFORMATION
Net liabilities assumed in merger
Cash $ 4,217 --
Accounts payable (261,857) --
Accrued expenses (173,934) --
------------ ------------
$ (431,574) --
------------ ------------
Conversion of Association redeemable preferred stock
into Series A convertible preferred stock $ 3,657,600 --
------------ ------------
Conversion of notes payable into Series A convertible
preferred stock $ 2,290,348 --
------------ ------------
See notes to financial statements
9
AVP, INC.
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of AVP, Inc. have
been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and should be read in conjunction with the
audited financial statements and notes thereto contained in AVP, Inc.'s
latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal
year 2004, as reported in the Form 10-KSB as previously filed with the
SEC, have been omitted.
2. MERGER
On February 28, 2005, upon filing a certificate of merger with the
Delaware Secretary of State, a wholly owned subsidiary of AVP, Inc.
("AVP") named Othnet Merger Sub, Inc., a Delaware corporation, and AVP Pro
Beach Volleyball Tour, Inc., a Delaware corporation (the "Association"),
consummated a merger pursuant to an Agreement and Plan of Merger dated as
of June 29, 2004, as amended. As a result of the merger, the Association,
which survived the merger, became AVP's wholly owned subsidiary, and AVP
issued to Association stockholders Series A Convertible Preferred Stock,
which will be converted automatically into AVP common stock upon
authorization of a sufficient amount of common stock.
In the second half of 2004, AVP issued $2,360,000 principal amount of 10%
convertible notes and, as required by the merger agreement, lent
$2,000,000 of the proceeds of the notes to the Association (the notes were
issued in units that included common stock and common stock purchase
warrants). It was a condition to the closing of the merger, among other
things, that at least $2,000,000 principal amount of the notes (and
accrued interest) be converted into Series A Convertible Preferred Stock.
Another condition was the closing of a private placement of units of
Series B Convertible Preferred Stock and common stock purchase warrants,
gross proceeds of which was $5,000,000, concurrently with the merger
closing.
Each share of Series A preferred stock and Series B preferred stock is
convertible into 243 shares of AVP common stock and carries the number of
votes that equals the number of shares into which it is convertible,
except that, until the authorization of additional shares of common stock,
the Series B preferred stock will carry ten times the vote per share that
it otherwise would carry.
10
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (CONTINUED)
Immediately prior to the merger, the Association had outstanding 4,443,944
shares of $0.0001 par value common stock ("Association common stock"). In
accordance with the merger agreement, the outstanding shares of the
Association's common stock were converted into 122,381 shares of Series A
Convertible Preferred stock which is exchangeable for 29,738,605 shares of
AVP's common stock. The Association also had outstanding options and
warrants to purchase a total of 12,732,220 shares of Association common
stock that, as a result of the merger agreement, now represent the right
to purchase 85,399,084 shares of the AVP common stock.
As part of the merger, the Association's preferred stockholder's converted
$3,657,600 of Redeemable Preferred Stock into 95,358 shares of Series A
Convertible Preferred stock which is exchangeable for 23,171,881 shares of
AVP common stock. In addition, as part of the merger, holders of the 10%
convertible notes converted them into 70,275 shares of Series A
Convertible Preferred stock which in turn is exchangeable for 17,076,755
shares of AVP common stock. Concurrent with the merger, AVP raised through
private placement $5,000,000 of private placement units representing
147,364 shares of Series B Convertible Preferred Stock, exchangeable for
35,809,452 shares of AVP common stock.
An Association note holder has indicated its intention to exercise its
option to convert its $1,000,000 note payable into 46,472 shares of Series
A Convertible Preferred Stock which is exchangeable for 11,292,614 shares
of AVP common stock.
The Series A Convertible Preferred Stock will convert automatically into
common stock upon authorization of a sufficient amount of common stock.
As such, for all disclosures referencing shares authorized and issued,
shares reserved for issuance, per share amounts and other disclosures
relating to equity, amounts have been presented reflecting share
quantities as altered by the terms of the merger agreement.
In conjunction with the merger, AVP was obligated to issue warrants to
purchase 56,775,904 shares of common stock as consideration for services
that facilitated the merger.
As a result of the merger and upon the authorization of a sufficient
amount of common stock, AVP will have 139,604,049 shares of common stock
outstanding and will have outstanding stock options and warrants to
acquire AVP common stock aggregating 155,257,124 shares.
11
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (CONTINUED)
Upon consummation of the merger and the private offering, the
Association's former stockholders held Series A Preferred Stock entitling
them to cast 58.22% of votes entitled to be cast at an election of AVP
directors; the Association's executive officers became AVP's executive
officers, and Association designees hold five of six Board of Directors
seats.
Accordingly, the Association, which was the acquired entity from the legal
standpoint, is the acquirer from the accounting standpoint, and AVP, which
was the acquiree from the legal standpoint, 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.
AVP agreed to register for resale the shares of common stock underlying
the Series B preferred stock. The agreement provides that if a
registration statement does not become effective by June 28, 2005, AVP
must pay a penalty to the Series B preferred stock stockholder of
approximately $50,000 for each month or any portion thereof that the
penalty condition is not satisfied, until August 28, 2005, when the
monthly penalty increases to $100,000 for each month or any portion
thereof.
3. CAPITALIZATION
AVP intends, subject to stockholder approval, to amend its Certificate of
Incorporation increasing the number of authorized shares of common stock
from 40,000,000 shares to 300,000,000 shares.
4. 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 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. Options and other incremental shares to purchase 224,998,679
and 115,365,047 shares of common stock at June 30, 2005 and 2004,
respectively, were excluded from the computation of diluted earnings
(loss) per share as their effect would be anti-dilutive.
12
AVP, INC.
Notes to Financial Statements
(Unaudited)
5. STOCK OPTIONS
AVP adopted SFAS No. 148 effective for the year ended December 31, 2002, and has
elected to continue to account for its stock-based compensation in accordance
with the provisions of APB No. 25, Accounting for Stock Issued to Employees.
Under APB 25, compensation expense is recognized over the vesting period based
on the excess of the fair market value over the exercise price on the grant
date.
If AVP had elected to recognize compensation expense based upon the fair value
at the grant date for awards under its stock-based compensation plans consistent
with the methodology prescribed by SFAS No. 123, AVP's net loss would increase
to the following pro forma amounts:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders, as reported $ (2,020,808) $ 406,689 $ (6,902,038) $ (560,734)
Less stock based employee compensation expense determined under
fair-value-based methods for all awards, net of related
tax effects (4,479,997) (33,322) (4,479,997) (66,644)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (6,500,805) $ 373,367 $(11,382,035) $ (627,378)
============ ============ ============ ============
Net income (loss) per share of common
stock:
Basic and diluted
As reported $ (0.04) $ 0.01 $ (0.15) $ (0.02)
============ ============ ============ ============
Pro forma $ (0.12) $ 0.01 $ (0.25) $ (0.02)
============ ============ ============ ============
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 six months ended June 30, 2005 and the year ended December 31, 2004:
2005 2004
----------------- ----------------
Risk-free interest rate 3.66 - 3.93% 3.86 - 4.19 %
Expected life 4 years 4 to 10 years
Expected volatility 100% 0%
Expected dividend yield 0% 0%
13
AVP, INC.
Notes to Financial Statements
(Unaudited)
5. STOCK OPTIONS (CONTINUED)
The following table contains information on the stock options for the period
ended June 30, 2005 and the year ended December 31, 2004. The outstanding
options expire from December 31, 2005 to September 1, 2013.
Weighted
Number of Average
Shares Exercise Price
------------ ------------
Options outstanding at January 1, 2004 77,744,235 $ 0.02
Granted 7,654,849 0.16
Exercised -- --
Cancelled -- --
------------ ------------
Options outstanding at December 31, 2004 85,399,084 $ 0.03
Granted 32,095,930 0.22
Converted Othnet options 2,004,284 0.25
Exercised -- --
Cancelled -- --
------------ ------------
Options outstanding at June 30, 2005 119,499,298 $ 0.09
============ ============
The weighted average fair value of options granted was $0.14 in 2005 and
$-0- in 2004.
The following table summarizes information about AVP's stock-based
compensation plan at June 30, 2005:
Options outstanding and exercisable by price range as of June 30, 2005:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Range of Weighted Average Weighted Weighted
Exercise Prices Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Life in Price Price
Years
----------------- ---------------- ------------- ----------- -------------- -------------
$.00 - .03 61,189,433 6.0 $0.00 61,189,433 $0.00
$.03 - .09 16,554,802 9.3 $0.08 7,269,855 $0.08
$.09 - .16 7,654,849 3.1 $0.16 6,932,481 $0.16
$.17 - .25 34,100,214 4.9 $0.22 34,100,214 $0.22
----------------- ---------------- ------------- ----------- -------------- -------------
$.00 - .25 119,499,298 3.9 $0.09 109,491,983 $0.08
================= ================ ============= =========== ============== =============
In connection with stock options granted to employees to purchase
common stock, AVP did not record any stock-based compensation expense
the six months ended June 30, 2005 and June 30, 2004.
14
AVP, INC.
Notes to Financial Statements
(Unaudited)
5. STOCK OPTIONS (CONTINUED)
Other Stock Options
Non-qualified stock options granted to other individuals aggregating
35,225,435 shares expire from June 2006 to June 2010.
The following table contains information on all of AVP's non-plan stock
options for the period ended June 30, 2005 and the year ended December 31,
2004.
Weighted
Number of Average
Shares Exercise Price
------------ ------------
Options outstanding at January 1, 2004 3,029,303 $ 0.03
Granted -- --
Exercised -- --
Cancelled -- --
------------ ------------
Options outstanding at December 31, 2004 3,029,303 $ 0.03
Granted 24,910,560 0.34
Converted Othnet options 7,285,572 0.22
Exercised -- --
Cancelled -- --
------------ ------------
Options outstanding at March 31, 2005 35,225,435 $ 0.29
============ ============
The weighted average fair value of options granted was $0.21 in 2005 and
-0- in 2004.
The following table summarizes information about AVP's non-qualified stock
options at June 30, 2005:
Options outstanding and exercisable by price range as of June 30, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Range of Average Weighted Weighted
Exercise Prices Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Life in Years Price Price
------------------ ------------- -------------- ------------ -------------- -----------
$.03 - .15 3,029,303 5.0 $0.03 3,029,303 $0.03
$.16 - .34 19,211,860 3.6 $0.22 19,211,860 $0.22
$.35 - .50 12,984,272 5.0 $0.45 12,984,272 $0.45
------------------ ------------- -------------- ------------ -------------- -----------
$.03 - .50 35,225,435 4.2 $0.29 35,225,435 $0.29
================== ============= ============== ============ ============== ===========
In connection with stock options granted to non-employees to purchase
common stock as a result of the private placement, AVP recorded consulting
expense of $5,211,988 and $-0- for the six months ended June 30, 2005 and
2004, respectively. Such amounts represent, for each non-employee stock
option, the valuation under SFAS 123 on the date of the grant.
15
AVP, INC.
Notes to Financial Statements
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
Operating Lease
AVP is obligated under a noncancellable operating lease for its office
facilities. The lease expires March 31, 2010 subject to a five-year
renewal option.
The future minimum rental payments, excluding cost escalations, as of June
30, 2005 are as follows:
Years Ending December 31,
2005 $ 161,000
2006 329,000
2007 338,000
2008 347,000
2009 356,000
Thereafter 91,000
-----------
Total $ 1,622,000
===========
Officer Indemnification
Under the organizational documents, AVP's directors are indemnified
against certain liabilities arising out of the performance of their duties
to AVP. AVP also has an insurance policy for its directors and officers to
insure them against liabilities arising from the performance of their
duties required by their positions with AVP. AVP's maximum exposure under
these arrangements is unknown as this would involve future claims that may
be made against AVP that have not yet occurred. However, based on
experience, AVP expects the risk of loss to be remote.
Employment Agreements
AVP has entered into "at will" employment agreements with three officers.
In addition to base salary, the employment agreements provide for annual
performance bonuses and profit sharing bonuses. The performance bonuses
range from 30% to 50% of the respective officer's base salary. The
performance bonuses awarded, if any, will be based upon achieving certain
milestones and targets as determined by the Board of Directors'
Compensation Committee. The employment agreements also provide that AVP
will set aside 10% of the net profits, as defined or as determined by the
Compensation Committee, to establish a Profit Sharing Bonus Pool. The
Compensation Committee and the AVP's President will determine the
allocation of the Profit Sharing Bonus Pool among officers eligible to
participate in the Profit Sharing Bonus Pool.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Background
AVP, Inc. was originally incorporated under the name Malone Road Investments,
Ltd., on August 6, 1990 in the Isle of Man. The corporation was redomesticated
in the Turks and Caicos Islands in 1992, and subsequently domesticated as a
Delaware corporation in 1994. Pursuant to Delaware law, the corporation is
deemed to have been incorporated in Delaware as of the date of its formation in
the Isle of Man. The company changed its name to PL Brands, Inc. in 1994;
changed its name to Othnet, Inc., in March 2001; and changed its name to the
current one on March 9, 2005. AVP had no business operations other than to
attempt to locate and consummate a business combination with an operating
company since December 2001.
AVP Acquisition
On February 28, 2005, a wholly owned subsidiary of AVP and AVP Pro Beach
Volleyball Tour, Inc., f/k/a Association of Volleyball Professionals, Inc., a
Delaware corporation (the "Association"), consummated a merger pursuant to an
Agreement and Plan of Merger dated as of June 29, 2004, as amended. The name of
the subsidiary before it merged with the Association was Othnet Merger Sub, Inc.
As a result of the merger, the Association became AVP's wholly owned subsidiary,
and AVP issued to Association stockholders AVP Series A Convertible Preferred
Stock, which will be converted automatically into AVP common stock upon
authorization of a sufficient amount of common stock.
AVP's Business
AVP owns and operates professional beach volleyball events in the United States
through its wholly owned subsidiary, the Association. AVP's revenue comes from
national, regional, and local sponsorships; ticket sales (admissions), Beach
Club (corporate hospitality) sales, food and beverage sales, and merchandise
sales; trademark licensing; and other ancillary sources.
AVP produced 12 men's and 12 women's professional beach volleyball tournaments
throughout the United States in 2004. AVP has more than 125 of the top
professional players under exclusive contracts, as well as a base of spectators
and television viewers that AVP believes represents an attractive audience for
national, regional, and local sponsors. AVP has scheduled 14 events for April
through October 2005, to be held in Fort Lauderdale, FL; Tempe, AZ; Austin, TX;
Santa Barbara, CA; San Diego, CA; Belmar, NJ; Hermosa Beach, CA; Huntington
Beach, CA; Manhattan Beach, CA; Chicago, IL; Las Vegas, NV; Oahu, HA;
Cincinnati, OH; and Boulder, CO. The tournaments are returning to each city in
which events were held in 2004; the Cincinnati and Boulder events are new for
2005.
AVP's beach volleyball tournament season customarily commences in early April
and continues until late September or early October.
Results of Operations for the three months ended June 30, 2005 and 2004
- ---------------------------------------------------------------------------- -------------------------------------
Operating Income (Loss) and Net Income (Loss) % Revenue
- ---------------------------------------------------------------------------- -------------------------------------
Three Months Ended June 30, Three Months Ended June 30,
2005 2004 2005 2004
------------------ --------------- ----------------- ----------------
Operating Income (Loss) $ (2,030,448) $ 427,091 (47%) 8%
Net Income (Loss) $ (2,020,808) $ 406,689 (47%) 7%
17
The 575% increase in operating loss for the three months ended June 30, 2005
primarily reflects a $1,713,966 charge to consulting expense as a result of
non-employee warrants valuation under SFAS 123, a decrease of $1.2 million in
recognized revenue for the three months ended June 30, 2005 (see "Revenue"
section below), a decrease in amortization expense of $340,000, a decrease of
event costs of $340,000 and a decrease in marketing costs of $160,000. In
addition, there are $385,000 of merger-related legal costs, SEC reporting
requirements costs, and consulting fees payable in connection with the merger
and miscellaneous other expenses as well as budgeted 2005 salary increases which
contributed to the increase in the quarterly operating loss for the three months
ended June 30, 2005.
Revenue
The following chart reflects comparative revenues with respect to AVP's
significant revenue drivers. The majority of AVP's revenues are derived from
sponsorship and advertising contracts with national and local sponsors. AVP
recognizes sponsorship revenue pro rata based upon prize money per event as the
events occur during the tour season and collection is reasonably assured. AVP's
beach volleyball tournament season customarily commences in early April and
continues until late September or early October.
- ------------------------------------------------------------------
Summary Revenue
- ------------------------------------------------------------------
Three Months Ended June 30,
Percentage
2005 2004 Increase
-------------- --------------- ----------------
Sponsorship $ 3,424,395 $ 4,733,414 (28%)
Activation Fees 190,133 315,943 (40%)
Local Revenue 458,348 214,452 114%
Miscellaneous Revenue 236,569 237,613 0%
-------------- --------------- ----------------
Total Revenue $ 4,309,445 $5,501,422 (22%)
============== =============== ================
Sponsorship revenue for the three months ended June 30, 2005 decreased
approximately $1.3 million as compared to the three months ended June 30, 2004.
The decrease in sponsorship revenue was primarily due to only five events taking
place in the three months ended June 30, 2005 (out of 14 events in 2005)
compared to six events taking place in the three months ended June 30, 2004 (out
of 12 events in 2004). Accordingly, only $3,424,395 of sponsorship revenue (out
of $12.7 million of contracted for 2005 sponsorship revenue) is being allocated
to the five events taking place in the three months ended June 30, 2005 compared
to $4,733,414 of sponsorship revenue (out of $9.9 million of sponsorship revenue
recognized in 2004) for the six events taking place in the three months ended
June 30, 2004.
The decrease in activation fees was primarily due to five events taking place in
the current quarter compared to six events taking place in the prior year
quarter. Accordingly, only 29% of contracted for activation revenue for 2005 is
being allocated to the three months ended June 30, 2005 compared to 45% of
revenue for the three months ended June 30, 2004. The decrease also results from
an anticipated decline in annual gross activation revenue of 17% as a result of
one sponsor from 2004 not returning as a sponsor in 2005.
Local revenue increased 114% as a result of significant increases in ticketing
sales, Beach Club and concession revenue. For the five events held through June
30, 2005, four events were gated and generated general admission ticketing
revenue. Through June 30, 2004 only two events of the six events held were gated
with general admission ticketing revenue. For the three months ended June 30,
the average local revenue per event for 2005 and 2004 was $91,670 and $35,742,
respectively.
18
Operating Expenses
- ------------------------------------------------------- -------------------------------
Summary Costs % Revenue
- ------------------------------------------------------- ------------------------------- (Increase)
Decrease as
Three Months Ended June 30, Three Months Ended June 30, % of Revenue
2005 2004 2005 2004 2005 vs. 2004
------------- --------------- ------------- -------------- ----------------
Event Costs $ 2,769,579 $3,107,860 64% 56% (8%)
Administrative 2,885,214 1,123,701 67% 20% (47%)
Marketing 685,100 842,770 16% 15% (1%)
Interest Expense 28,013 37,546 1% 1% 0%
------------- --------------- ------------- -------------- ----------------
Total Costs $ 6,367,906 $5,111,877 148% 93% (55%)
============= =============== ============= ============== ================
Event costs include the direct costs of producing an event and costs related to
television airing of network broadcasted events. Event costs are recognized on
an event-by-event basis and event costs billed and/or paid prior to their
respective events are recorded as deferred costs and expensed at the time the
event occurs.
The decrease of 11% in event costs was primarily due to one less event taking
place during the three months ended June 30, 2005 compared to six events taking
place during the three months ended June 30, 2004. For the three months ended
June 30, the average event costs in 2005 and 2004 were $553,916 and $517,977,
respectively, with a 8% increase in event costs as a percentage of revenue. The
increase in average event costs for the three months ended June 30, 2005 is
primarily attributable to increases in prize money, increase in staging costs
and an increase in equipment rentals which increases offset a decrease in event
costs due to no cable time buy and no cable television production costs for the
cable events.
The 157% increase in administrative costs primarily reflects a $1,713,966 charge
to consulting expense as a result of non-employee warrants valuation under SFAS
123 for warrants granted during the three months ended June 30, 2005. In
addition, the increase in administrative costs includes merger-related legal
costs, accounting fees, SEC reporting requirements, consulting fees payable in
connection with the merger aggregating $385,000, and budgeted 2005 salary
increases. The increase in administrative costs was offset by a decrease in
amortization expense which resulted from the elimination of cable network
deferred costs expensed in June 2004.
The decrease in marketing costs of $157,670 primarily resulted from a reduction
in merchandise costs of $185,000 for the three months ended June 30, 2005 as
compared to the three months ended June 30, 2004. Also contributing to the
decrease was a reduction in activation costs of $22,000. The decreased marketing
costs was offset by a $35,000 increase in AVPNext expenses and a $16,000
increase in public relations costs.
The decrease in interest expense of $9,533 reflects a reduction in debt.
- -----------------------------------------------------------------------------------
Depreciation and Amortization Expense
- -----------------------------------------------------------------------------------
Percentage
Three Months Ended June 30, Increase
2005 2004 (Decrease)
------------------ ------------------ ------------------
Depreciation Expense $ 39,992 $ 2,102 1803%
Amortization Expense 66,396 409,840 (84%)
------------------ ------------------ ------------------
Total $ 106,388 $ 411,942 (74%)
================== ================== ==================
19
The increase in depreciation expense of $37,890 resulted from an increase in
depreciable assets, including banners and flags and equipment; information
technology equipment (e.g., servers); activation equipment (e.g., kiosks and
digital information screens); and leasehold improvements (e.g., installation of
an air conditioning unit in AVP's server room).
The decrease in amortization expense of $343,444 resulted from the elimination
of cable network deferred costs expensed in June 2004.
Results of Operations for the six months ended June 30, 2005 and 2004
- ---------------------------------------------------------------------------- -------------------------------------
Operating Income (Loss) and Net Income (Loss) % Revenue
- ---------------------------------------------------------------------------- -------------------------------------
Six Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------------ --------------- ----------------- ----------------
Operating Income (Loss) $(6,856,476) $(519,964) (155%) (9%)
Net Income (Loss) $(6,902,038) $(560,734) (156%) (10%)
The 1,219% increase in operating loss for the six months ended June 30, 2005
primarily reflects a $5,211,398 charge to consulting expense as a result of
non-employee warrants valuation under SFAS 123, a decrease of $1.2 million in
recognized revenue for the six months ended June 30, 2005 (see "Revenue" below),
a decrease in amortization expense of $340,000 a decrease in event costs of
$340,000 and a decrease in marketing costs of $75,000. In addition, there are
$515,000 of merger-related legal costs, SEC reporting requirements costs, and
consulting fees payable in connection with the merger and miscellaneous other
expenses as well as budgeted 2005 salary increases which contributed to the
increase in the quarterly operating loss for the six months ended June 30, 2005.
Revenue
- ------------------------------------------------------------------
Summary Revenue
- ------------------------------------------------------------------
Six Months Ended June 30, Percentage
Increase
2005 2004
-------------- --------------- ----------------
Sponsorship $ 3,424,395 $ 4,733,414 (28%)
Activation Fees 190,133 315,943 (40%)
Local Revenue 458,348 214,452 114%
Miscellaneous Revenue 340,525 290,311 17%
-------------- --------------- ----------------
Total Revenue $ 4,413,401 $ 5,554,120 (21%)
============== =============== ================
Sponsorship revenue for the six months ended June 30, 2005 decreased
approximately $1.3 million as compared to the six months ended June 30, 2004.
The decrease in sponsorship revenue was primarily due to only five events taking
place in the six months ended June 30, 2005 (out of 14 events in 2005) compared
to six events taking place in the six months ended June 30, 2004 (out of 12
events in 2004). Accordingly, only $3,424,395 of sponsorship revenue (out of
$12.7 million of contracted for 2005 sponsorship revenue) is being allocated to
the five events taking place in the six months ended June 30, 2005 compared to
$4,733,414 of sponsorship revenue (out of $9.9 million of sponsorship revenue
recognized in 2004) for the six events taking place in the six months ended June
30, 2004.
20
The decrease in activation fees was primarily due to five events taking place
during the six months ended June 30, 2005 compared to six events taking place
during the six months ended June 30, 2004. Accordingly, only 29% of contracted
for activation revenue for 2005 is being allocated to the six months ended June
30, 2005 compared to 45% of revenue for the six months ended June 30, 2004. The
decrease also results from an anticipated decline in annual gross activation
revenue of 17% as a result of one sponsor from 2004 not returning as a sponsor
in 2005.
Local revenue increased 114% as a result of significant increases in ticketing
sales, Beach Club and concession revenue. For the five events held through June
30, 2005, four events were gated and generated general admission ticketing
revenue. For the six months ended June 30, 2004 only two events of the six
events held were gated with general admission ticketing revenue. For the six
months ended June 30, the average local revenue per event for 2005 and 2004 was
$91,670 and $35,742, respectively.
The increase in miscellaneous revenue primarily reflects an increase in
trademark licensing revenue relating to AVP's volleyball license agreement with
Wilson Sporting Goods. AVP and Wilson entered into a new license agreement
effective January 1, 2005 which provided for an increase in the royalty and
minimum guarantee payable to AVP in connection with volleyball sales.
Operating Expenses
- -------------------------------------------------------- --------------------------------
Summary Costs % Revenue
- -------------------------------------------------------- -------------------------------- (Increase)
Decrease as
Six Months Ended June 30, Six Months Ended June 30, % of Revenue
2005 2004 2005 2004 2005 vs. 2004
-------------- ---------------- ------------- -------------- -----------------
Event Costs $2,769,579 $ 3,107,860 63% 56% (7%)
Administrative 7,403,598 1,794,469 168% 32% (135%)
Marketing 1,096,700 1,171,755 25% 21% (4%)
Interest Expense 98,571 75,547 2% 1% (1%)
-------------- ---------------- ------------- -------------- -----------------
Total Costs $11,368,448 $ 6,149,631 258% 111% (147%)
============== ================ ============= ============== =================
Event costs include the direct costs of producing an event and costs related to
television airing of broadcasted events. Event costs are recognized on an
event-by-event basis and event costs billed and/or paid prior to their
respective events are recorded as deferred costs and expensed at the time the
event occurs.
The decrease in event costs was primarily due to one less event taking place
during the six months ended June 30, 2005 compared to six events taking place
during the six months ended June 30, 2004. For the six months ended June 30, the
average event costs in 2005 and 2004 were $553,916 and $517,977, respectively,
with a 7% increase in event costs as a percentage of revenue. The increase in
average event costs for the six months ended June 30, 2005 is primarily
attributable to increases in prize money, increase in staging costs and an
increase in equipment rentals which increases offset a decrease in event costs
due to no cable time buy and no cable television production costs for the cable
events.
The 313% increase in administrative costs primarily reflects a $5,211,988 charge
to consulting expense as a result of non-employee warrants valuation under SFAS
123 for warrants granted on February 28, 2005 as a result of the merger. In
addition, the increase in administrative costs includes merger-related legal
costs, accounting fees, SEC reporting requirements, consulting fees payable in
connection with the merger aggregating $515,000, and budgeted 2005 salary
increases. The increase in administrative costs was offset by a decrease in
amortization expense which resulted from the elimination of cable network
deferred costs expensed in June 2004.
21
The decrease in marketing costs of $75,055 primarily resulted from a reduction
in merchandise costs of $177,000 for the six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. Also contributing to the
decrease was a reduction in activation costs of $22,000. The decreased marketing
costs was offset by a $69,000 increase in public relations costs and a $33,000
increase in AVPNext expenses.
The 30% increase in interest expense of $23,024 is due to the interest incurred
in connection with the $2,000,000 loan that AVP made to the Association in June
2004.
- -----------------------------------------------------------------------------------
Depreciation and Amortization Expense
- -----------------------------------------------------------------------------------
Percentage
Six Months Ended June 30, Increase
2005 2004 (Decrease)
------------------ ------------------ ------------------
Depreciation Expense $ 63,080 $ 7,095 789%
Amortization Expense 130,692 493,707 (74%)
------------------ ------------------ ------------------
$ 193,772 $ 500,802 (61%)
================== ================== ==================
The increase in depreciation expense of $55,985 resulted from an increase in
depreciable assets, including banners and flags and equipment; information
technology equipment (e.g., servers); activation equipment (e.g., kiosks and
digital information screens); and leasehold improvements (e.g., installation of
an air conditioning unit in AVP's server room).
The decrease in amortization expense of $363,015 resulted primarily from the
elimination of cable network deferred costs which were being amortized in the
six months ended June 30, 2004.
Liquidity and Capital Resources
Net cash flows from operating activities for the six months ended June 30, 2005
and 2004 were $809,155 and $(858,694), respectively. Working capital, consisting
of current assets less current liabilities, was $(323,322) at June 30, 2005 and
$(149,886) at June 30, 2004. The negative working capital for the six months
ended June 30, 2005 and 2004 resulted primarily from deferred revenue being
recognized for sponsorship payments received for events occurring after June 30,
2005 and 2004, respectively.
At June 30, 2005 and 2004, accounts receivable had decreased $414,527 and
increased $258,153, respectively, and deferred revenues had increased $2,650,529
and decreased $263,250, respectively, over their respective amounts at December
31, 2004 and 2003, as AVP invoices and collects receivables prior to holding
certain events. Deferred revenue increased as a result of the receipt of
payments that will be recognized as revenue on an event-by-event basis.
Net cash flows provided from financing activities for the six months ended June
30, 2005 and 2004 were $3,097,023 and $1,500,000, respectively. As a result of
the consummation of the $5,000,000 private placement Series B Convertible
Preferred Stock on February 28, 2005, AVP realized proceeds of $4,247,023, net
of offering costs of $753,038. During the six months ended June 30, 2004, AVP
borrowed $1,500,000 in the form of bridge financing notes.
22
During the six months ended June 30, 2005, AVP repaid $950,000 on a note payable
owed to Management Plus Enterprises, Inc., a related party, in connection with
sponsorship sales services and $200,000 to holders of the bridge financing
notes.
Capital expenditures for the six months ended June 30, 2005 and 2004 were
$308,949 and $22,084, respectively. During the six months ended June 30, 2005,
AVP purchased sand, tents, banners and flags and a trailer in preparation for
the 2005 tour season, as well as, computer equipment.
In June 2004, the Association borrowed $2,000,000 from AVP, at an interest rate
of 10% per annum. As part of the merger, this liability was converted to equity.
In addition, NBC and Fox had the right to put their Series A preferred stock
investment back to the Association at the end of the 2005 and 2006 seasons for
the amount of their respective investments. Prior to the merger, both NBC and
Fox agreed to waive their put rights and converted the Association preferred
stock holdings aggregating $3,657,600 into AVP Series A Preferred Stock.
Critical Accounting Policies
Revenue and Expense Recognition
The majority of AVP's revenues are derived from sponsorship and advertising
contracts with national and local sponsors. AVP recognizes sponsorship revenue
pro rata based upon prize money per event during the tour season as the events
occur and collection is reasonably assured. AVP invoices when AVP has the
contractual right to receive the invoiced amounts or has earned the revenue.
Cash collected prior to their respective events are recorded as deferred
revenue. Event costs are recognized on an event-by-event basis. Event costs
billed and/or paid prior to their respective events are recorded as deferred
costs and expensed at the time the event occurs.
Income Taxes
AVP provides deferred income taxes to reflect the impact of temporary
differences between the recorded amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
Temporary differences result from differences between the amounts reported for
financial statement purposes and corresponding amounts for tax purposes.
Deferred income tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Off-Balance Sheet Arrangements
As part of its ongoing business, AVP does not participate in transactions with
unconsolidated entities such as special purpose entities or structured finance
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other limited purposes.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
ITEM 4. CONTROLS AND PROCEDURES
AVP's management has evaluated, with the participation of its principal
executive and financial officers, the effectiveness of AVP's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of
the end of the period covered by this report. Based on this evaluation, these
officers have concluded that, as of June 30, 2005, AVP's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by AVP in reports that it files or submits under the
Exchange Act is accumulated and communicated to AVP's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
STOCKHOLDER PROPOSALS: To be included in AVP's proxy statement for the
2006 annual meeting, a stockholder proposal must be received by March 20, 2006,
addressed to:
AVP, Inc.
6100 Center Drive, Suite 900
Los Angeles, California 90045
ATTN: Secretary
ITEM 6. EXHIBITS
31.1 - Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 - Certification of President and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
24
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 15th day of
August, 2005.
AVP, INC.
(Registrant)
By: /s/ Andrew Reif
-------------------
Andrew Reif
Chief Operating Officer and
Chief Financial Officer