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 September 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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
the Exchange Act Rule 12b-2).
Yes |_| No |X|
As of October 31, 2005, the Registrant had approximately 100,023,393
shares of common stock outstanding.
2
AVP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION......................... .....................4
ITEM 1. FINANCIAL STATEMENTS.......................... .....................4
Balance Sheet as of September 30, 2005
(Unaudited).......................................... .....................5
Statements of Operations for the three
and nine months ended September 30, 2005 and 2004
(Unaudited).......................................... .....................6
Statement of Changes in Stockholders' Deficiency for
the nine months ended September 30, 2005
(Unaudited).......................................... .....................7
Statements of Cash Flows for
the nine months ended September 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. CONTROLS AND PROCEDURES....................... ....................26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................. ....................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............. ....................27
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVP, INC.
Index to Financial Statements
Period Ended September 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
September 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,784,242
Accounts receivable, net of
allowance for doubtful accounts of $10,000 2,075,489
Prepaid expenses 317,350
Deferred commission-related party 63,335
------------
TOTAL CURRENT ASSETS 4,240,416
------------
PROPERTY AND EQUIPMENT, net 462,552
------------
OTHER ASSETS
Investment in sales-type lease 562,319
Other assets 41,206
------------
TOTAL OTHER ASSETS 603,525
------------
TOTAL ASSETS $ 5,306,493
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,130,070
Accounts payable 1,062,516
Accrued expenses 1,983,326
Accrued interest 294,812
Deferred revenue 501,104
------------
TOTAL CURRENT LIABILITIES 4,971,828
------------
OTHER LIABILITIES
Long-term deferred revenue 225,000
Long-term debt - less current portion 683,334
------------
TOTAL OTHER LIABILITIES 908,334
------------
TOTAL LIABILITIES 5,880,162
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock, 2,000,000 shares authorized:
Series A convertible preferred stock, $.001 par value, 1,000,000 shares authorized, --
no shares issued and outstanding
Series B convertible preferred stock, $.001 par value, 250,000 shares authorized,
116,412 shares issued and outstanding 116
Common stock, $.001 par value, 300,000,000 shares authorized,
100,023,393 shares issued and outstanding 100,023
Additional paid-in capital 30,560,760
Accumulated deficit (31,234,568)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (573,669)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 5,306,493
============
See notes to financial statements
5
AVP, INC.
Statements of Operations
Three and Nine Months Ended September 30, 2005 and 2004
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE
Sponsorships $ 8,508,522 $ 4,863,801 $ 11,932,917 $ 9,597,215
Other 1,305,739 1,435,309 2,294,745 2,256,015
------------ ------------ ------------ ------------
TOTAL REVENUE 9,814,261 6,299,110 14,227,662 11,853,230
EVENT COSTS 8,222,872 5,512,285 10,992,451 8,620,145
------------ ------------ ------------ ------------
Gross Profit 1,591,389 786,825 3,235,211 3,233,085
------------ ------------ ------------ ------------
OPERATING EXPENSES
Marketing 622,711 615,779 1,719,411 1,787,534
Administrative 1,398,162 1,364,705 3,589,770 3,153,459
Stock compensation expense 84,623 -- 5,296,612 5,714
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,105,496 1,980,484 10,605,793 4,946,707
------------ ------------ ------------ ------------
OPERATING LOSS (514,107) (1,193,659) (7,370,582) (1,713,622)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (24,292) (82,938) (122,863) (158,485)
Interest income 41,745 15,612 94,755 50,389
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 17,453 (67,326) (28,108) (108,096)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (496,654) (1,260,985) (7,398,690) (1,821,718)
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (496,654) $ (1,260,985) $ (7,398,690) $ (1,821,718)
============ ============ ============ ============
Basic and diluted loss per share $ (0.00) $ (0.04) $ (0.09) $ (0.06)
============ ============ ============ ============
Weighted average common shares
outstanding 100,023,393 29,738,610 82,353,011 29,738,610
============ ============ ============ ============
See notes to financial statements
6
AVP, INC.
Statement of Changes in Stockholders' Deficiency
Nine Months Ended September 30, 2005
(Unaudited)
Series A Series B
Preferred Stock Preferred Stock Common Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2005 -- $ -- -- $ -- 29,738,610 $ 29,738
Merger of AVP, Inc. into the Association
("the reverse merger") -- -- -- -- 22,514,742 22,515
Conversion of 10% convertible notes payable -- -- -- -- 17,076,825 17,077
Conversion of redeemable preferred
stock -- -- -- -- 23,171,880 23,172
Private placement units
(net of offering costs of $753,038) -- -- 147,364 147 -- --
Conversion to common stock -- -- (30,952) (31) 7,521,336 7,521
Compensation expense from issuance of
warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2005 -- $ -- 116,412 $ 116 100,023,393 $ 100,023
============ ============ ============ ============ ============ ============
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficiency
------------ ------------ ------------
Balance, January 1, 2005 $ 16,091,502 $(23,835,878) $ (7,714,638)
Merger of AVP, Inc. into the Association
("the reverse merger") (974,439) -- (951,924)
Conversion of 10% convertible notes payable 2,273,271 -- 2,290,348
Conversion of redeemable preferred
stock 3,634,428 -- 3,657,600
Private placement units
(net of offering costs of $753,038) 4,246,876 -- 4,247,023
Conversion to common stock (7,490) -- --
Compensation expense from issuance of
warrants 5,296,612 -- 5,296,612
Net loss -- (7,398,690) (7,398,690)
------------ ------------ ------------
Balance, September 30, 2005 $ 30,560,760 $(31,234,568) $ (573,669)
============ ============ ============
See notes to financial statements
7
AVP, INC.
Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
Nine Months
Ended September 30,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,398,690) $(1,821,718)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization of property and equipment 112,085 37,894
Amortization of deferred commissions 190,004 220,778
Other amortization 6,033 6,033
Amortization of deferred costs -- 1,352,100
Amortization of deferred rent 24,850 124,090
Compensation from issuance of stock options and warrants 5,296,612 5,714
Decrease (increase) in operating assets:
Accounts receivable (1,426,353) (1,930,448)
Investment in and due from joint venture -- 291,084
Prepaid expenses (290,744) (272,746)
Other assets (4,500) 3,457
Increase (decrease) in operating liabilities:
Accounts payable 747,717 753,929
Accrued expenses 994,174 578,224
Accrued officer compensation (43,208) 159,167
Accrued interest (21,817) 265,683
Deferred revenue 176,054 50,756
----------- -----------
NET CASH FLOWS FROM
OPERATING ACTIVITIES (1,637,783) (176,003)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (372,935) (219,973)
Investment in sales-type lease 66,004 72,026
----------- -----------
NET CASH FLOWS FROM
INVESTING ACTIVITIES (306,931) (147,947)
----------- -----------
See notes to financial statements
8
AVP, INC.
Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(CONTINUED)
Nine Months
Ended September 30,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of capital stock $ 5,000,061 $ --
Offering costs (753,038) --
Proceeds from borrowing -- 2,000,000
Debt repayments (1,150,000) --
----------- -----------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 3,097,023 2,000,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,152,309 1,676,050
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 631,933 71,056
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,784,242 $ 1,747,106
=========== ===========
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 common stock 3,657,600 --
----------- -----------
Conversion of 10% convertible notes payable into
common 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, as amended. In the opinion of management, all adjustments,
consisting only 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 that 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 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, loaned
$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 common 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 $5,000,061, concurrently with the merger closing.
Each share of 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.
In accordance with the merger agreement, the outstanding shares of the
Association's common stock were converted into 29,738,610 shares of AVP
common stock. The Association also had outstanding options and warrants
that, as a result of the merger agreement, now represent the right to
purchase 88,428,387 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 23,171,880
shares of AVP common stock. In addition, as part of the merger, holders
of the 10% convertible notes converted them into 17,076,825 shares of
AVP common stock.
10
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (CONTINUED)
Concurrent with the merger, AVP raised through private placement
$5,000,061 of private placement units representing 147,364 shares of
Series B Convertible Preferred Stock, which are convertible into
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 11,292,614 shares of
AVP common stock.
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, AVP has 100,023,393 shares of common stock
outstanding at September 30, 2005 and will have outstanding stock
options and warrants to acquire AVP common stock aggregating
154,724,733 shares.
Upon consummation of the merger and the private offering, the
Association's former stockholders held common 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 acquirer 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 provided that if a
registration statement was not filed by April 15, 2005 or did not
become effective by June 28, 2005, AVP must pay a penalty to the Series
B preferred stock stockholder of approximately $50,000 for each month
that the penalty condition is not satisfied, until August 28, 2005,
when the monthly penalty increased to $100,000 for each month. The
registration statement became effective on November 1, 2005 and,
accordingly, AVP incurred $311,505 in penalties.
On August 23, 2005 the stockholders gave approval to amend the Articles
of Incorporation increasing the number of authorized shares of common
stock to 300,000,000 shares and to effect a 1 for 10 reverse stock
split. AVP expects to effectuate the 1 for 10 reverse stock split
within 60 days from the date of effectiveness of the registration
statement.
11
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. MERGER (CONTINUED)
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 agreements and
the authorization of additional shares.
3. RESCISSION OFFER
Options granted in 2004 to AVP players under AVP's 2002 Stock Option
Plan were not exempt from registration or qualification under federal
and state securities laws and AVP did not obtain the required
registrations or qualifications. As a result, AVP intends to make a
rescission offer to the holders of these options beginning
approximately 30 days after the effective date of its registration
statement. If this rescission is accepted, AVP could be required to
make aggregate payments to the holders of options of up to $240,000,
which includes statutory interest, based on options outstanding as of
September 30, 2005. If any or all of the offerees reject the rescission
offer, AVP may continue to be liable for this amount under federal and
state securities laws. As management believes there is only a remote
likelihood the rescission offer will be accepted by any of the option
holders in an amount that would result in a material expenditure by
AVP, no liability has been recorded. Management does not believe that
this rescission offer will have a material effect on AVP's financial
position, results of operations or cash flows.
4. 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. Options
and other incremental shares to purchase 194,305,461 and 115,365,047
shares of common stock at September 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 No. 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 September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Net loss applicable to common
stockholders, as reported $ (496,654) $ (1,260,985) $ (7,398,690) $ (1,821,718)
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) (99,966)
------------------ ------------------ ------------------ ------------------
Pro forma net loss $ (4,976,651) $ (1,294,307) $ (11,878,687) $ (1,921,684)
================== ================== ================== ==================
Net loss per share of common stock:
Basic and diluted
As reported $ (0.00) $ (0.04) $ (0.09) $ (0.06)
================== ================== ================== ==================
Pro forma $ (0.05) $ (0.04) $ (0.14) $ (0.06)
================== ================== ================== ==================
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 nine months ended September 30, 2005 and 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
nine months ended September 30, 2005 and the year ended December 31,
2004. The outstanding options expire from December 31, 2005 to
September 1, 2013.
Weighted Average
Number of 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 September 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 September 30, 2005:
Options outstanding and exercisable by price range as of September 30,
2005:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life in Exercise Number Exercise
Prices Outstanding Years Price Exercisable Price
----------------- ---------------- ------------- ----------- -------------- -------------
$ .00 - .03 61,189,433 4.3 $0.00 61,189,433 $0.00
.04 - .09 16,554,802 7.9 0.08 10,748,639 0.08
.09 - .16 7,654,849 3.6 0.16 7,015,498 0.16
.17 - .25 34,100,214 3.7 0.22 34,100,214 0.22
----------------- ---------------- ------------- ----------- -------------- -------------
$ .00 - .25 119,499,298 4.6 $0.09 113,053,784 $0.09
================= ================ ============= =========== ============== =============
In connection with stock options granted to employees to purchase
common stock, AVP did not record any stock-based compensation expense
in the nine months ended September 30, 2005 and 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 nine months ended September 30, 2005 and the year ended
December 31, 2004.
Weighted Average
Number of 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 0.31
Converted Othnet options 7,285,572 0.24
Exercised -- --
Cancelled -- --
--------------- ---------------
Options outstanding at September 30, 2005 35,225,435 $ 0.27
=============== ===============
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 September 30, 2005:
Options outstanding and exercisable by price range as of September 30,
2005:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life in Exercise Number Exercise
Prices Outstanding Years Price Exercisable Price
----------------- ---------------- ------------- ----------- -------------- -------------
$ .03 - .15 6,610,248 4.5 $0.09 6,610,248 $0.09
.16 - .34 19,211,860 2.9 0.22 19,211,860 0.22
.35 - .50 9,403,327 4.2 0.50 9,403,327 0.50
------------------ ------------- -------------- ------------ -------------- -----------
$ .03 - .50 35,225,435 3.6 $0.27 35,225,435 $0.27
================== ============= ============== ============ ============== ===========
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 $5,296,612 and $-0- for the nine months ended
September 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
September 30, 2005 are as follows:
Years Ending December 31,
-------------------------
2005 $ 81,000
2006 329,000
2007 338,000
2008 347,000
2009 356,000
Thereafter 91,000
----------------
Total $ 1,542,000
================
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 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 common stock.
Recent Developments
On August 23, 2005, AVP's stockholders approved a one-for-ten reverse stock
split, which AVP expects to effect by the end of 2005.
There can be no assurance that the reverse stock split will increase the market
price of our Common Stock or that any increase will be proportional to the
reverse-split ratio. For example, using the $0.15 per share closing price of our
Common Stock on October 20, 2005, there can be no assurance that the post-split
market price of our Common Stock would be $1.50 or greater. Accordingly, the
total market capitalization of our Common Stock immediately after the reverse
stock split or at any time thereafter could be lower than the total market
capitalization before the reverse stock split.
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 14 men's and 14 women's professional beach volleyball tournaments
throughout the United States in 2005. 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 produced 14 events from April
through October 2005, 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 returned to each city in which events were held in
2004; the Cincinnati and Boulder events were new for 2005.
17
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 September 30, 2005 and 2004
- ------------------------------------------------------------------------------- ----------------------------------------
Operating Loss and Net Loss % Revenue
- ------------------------------------------------------------------------------- ----------------------------------------
Three Months Ended September 30, Three Months Ended September 30,
2005 2004 2005 2004
------------------ ------------------ ----------------- -------------------
Operating Loss $ (514,107) $ (1,193,659) (5%) (19%)
Net Loss $ (496,654) $ (1,260,985) (5%) (20%)
The 57% decrease in the three month operating loss primarily reflects an
increase of $3.5 million in recognized revenue for the three months ended
September 30, 2005 (see "Revenue" section below) which offset an increase in
event costs of $2.7 million.
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
- --------------------------------------------------------------------------
Percentage
Three Months Ended September 30, Increase
2005 2004 (Decrease)
----------------- ----------------- -----------------
Sponsorship $ 8,508,522 $ 4,863,801 75%
Activation Fees 396,973 505,245 (21%)
Local Revenue 667,008 363,574 83%
Miscellaneous Revenue 241,758 566,490 (57%)
Interest Income 41,745 15,612 167%
----------------- -----------------
Total Revenue $ 9,856,006 $6,314,722 56%
================= =================
Sponsorship revenue for the three months ended September 30, 2005 increased
approximately $3.6 million as compared to the three months ended September 30,
2004. For the three months ended September 30, the average sponsorship revenue
per event for 2005 and 2004 were $1,063,565 and $972,760, respectively. The
increase in sponsorship revenue was primarily due to an increase in
contracted-for annual sponsorship revenue from $9.9 million in 2004 to $12.7
million in 2005, as well as eight events taking place in the three months ended
September 30, 2005 (out of 14 events in 2005) compared to only five events in
the three months ended September 30, 2004 (out of 12 events in 2004).
Accordingly, $8,508,522 of sponsorship revenue (out of $12.7 million of
contracted-for 2005 sponsorship revenue) is being allocated to the eight events
taking place in the three months ended September 30, 2005 compared to $4,863,801
of sponsorship revenue (out of $9.9 million of sponsorship revenue recognized in
2004) for the five events taking place in the comparable period.
The 21% decrease in activation fees is the result of one sponsor from 2004 not
returning as a sponsor in 2005.
Local revenue for the three months ended September 30, 2005 increased 83% as
compared to the three months ended September 30, 2004. This increase in local
revenue resulted from three additional events taken place during the three
months ended September 30, 2005, as well as increases in per event ticket sales
and Beach Club revenue. In particular, AVP was able to charge admissions
("gate") to more events than in previous years, which resulted in additional
ticketing revenue in 2005. For the eight events held in the three months ended
September 30, 2005, five events were gated and generated general admission
ticketing revenue, compared to three gated events out of five events for the
2004 three month period. Average local revenue per event for 2005 and 2004 third
quarters were $83,376 and $72,715, respectively.
18
The decrease in miscellaneous revenue primarily reflects a decrease in
merchandising revenue attributable to AVP's recognizing net merchandising
revenue for the three months ended September 30, 2005 versus recognizing gross
merchandising revenue as the company did for the three months ended September
30, 2004. In 2005, AVP engaged AEG Merchandise Inc. (a division of Anschutz
Entertainment Group) to serve as AVP's event merchandiser for 2005 and 2006. AVP
receives a royalty on all merchandising revenue. In 2004, AVP performed all
merchandising services in-house and gross merchandising revenue was included in
Miscellaneous Revenue (with costs of goods sold included in operating expenses
under marketing costs). The remaining decrease stemmed from a small decline in
site fees for one event and a small decline in trademark and recognized
international television licensing.
The increase in interest income of $26,133 reflects interest earned on the
realized proceeds from the private placement consummated on February 28, 2005.
Gross Profit
- ------------------------------------------------------------------------------
Gross Profit
- ------------------------------------------------------------------------------
Three Months Ended September 30,
2005 2004
------------------- -----------------
Revenue $9,814,261 $ 6,299,110
Event Costs 8,222,872 5,512,285
------------------- -----------------
Gross Profit $ 1,591,389 $ 786,825
=================== =================
Gross Profit % 16% 12%
=================== =================
AVP's gross profit margin increased to 16% for the three months ended September
30, 2005 compared to 12% for the three months ended September 30, 2004 and
primarily reflects a larger percentage of revenue being recognized in connection
with the events taking place during the three months ended September 30, 2005
compared to the same period in 2004.
Operating Expenses
- ------------------------------------------------------------- ---------------------------------------
Summary Costs % Revenue
- ------------------------------------------------------------- --------------------------------------- (Increase)
Decrease as
Three Months Ended September 30, Three Months Ended September 30, % of Revenue
2005 2004 2005 2004 2005 vs. 2004
---------------- ------------------ ----------------- ------------------ ------------------
Event Costs $8,222,872 $5,512,285 84% 87% 3%
Administrative 1,398,162 1,364,705 14% 22% 8%
Stock Compensation 84,623 -- 1% -- (1%)
Marketing 622,711 615,779 6% 10% 4%
Interest Expense 24,292 82,938 0% 1% 1%
---------------- ------------------ ----------------- ------------------ ------------------
Total Costs $10,352,660 $7,575,707 105% 120% 15%
================ ================== ================= ================== ==================
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.
19
The 49% increase in event costs was primarily due to three additional events
taking place during the three months ended September 30, 2005 (eight events
compared to only five events taking place during the three months ended
September 30, 2004). For the three months ended September 30, the average event
costs in 2005 and 2004 were $1,027,859 and $1,102,457, respectively, with a 3%
decrease in event costs as a percentage of revenue. The decrease in event costs
is primarily attributable to the fact that under AVP's 2005 and 2006 agreement
with Fox Sports Net, AVP no longer pays for its broadcast time or any production
costs in connection with the telecast of AVP events on cable television.
Stock compensation expense reflects a $84,623 charge to consulting expense as a
result of non-employee warrants valued under SFAS 123 for warrants granted.
Marketing costs did not fluctuate significantly for the three months ended
September 30, 2005 as compared to the three months ended September 30, 2004.
The decrease in interest expense of $58,646 reflects a reduction in short-term
debt.
- -----------------------------------------------------------------------------------
Depreciation and Amortization Expense
- ----------------------------------------------------------------------------------- Percentage
Three Months Ended September 30, Increase
2005 2004 (Decrease)
------------------ ------------------ ------------------
Depreciation Expense $ 48,018 $ 30,799 56%
Amortization Expense 66,333 75,737 (12%)
------------------ ------------------
Total $ 114,351 $ 106,536 7%
================== ==================
The increase in depreciation expense of $17,219 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 $9,404 resulted from the reduction in
deferred commission.
Results of Operations for the nine months ended September 30, 2005 and 2004
- -------------------------------------------------------------------------- -------------------------------------
Operating Loss and Net Loss % Revenue
- -------------------------------------------------------------------------- -------------------------------------
Nine Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
------------------- ------------------ ---------------- ----------------
Operating Loss $(7,370,582) $ (1,713,622) (52%) (14%)
Net Loss $(7,398,690) $ (1,821,718) (52%) (15%)
The 330% increase in the nine month operating loss primarily reflects increased
administrative costs related to the merger and financing and registration
statement filing. Specifically the administrative cost incluse a $5,296,612
charge to consulting expense as a result of non-employee warrants valued under
SFAS 123, $657,000 of merger-related legal and accounting costs, $119,000 of SEC
reporting requirement costs, $190,000 of consulting fees payable in connection
with the merger, and $208,000 of related financing and registration costs and
fees. Such charges and costs were partially offset by a decrease in amortization
expense, which resulted from the elimination of cable network deferred costs
expensed in 2004.
Excluding such warrant consulting expense, merger-related costs and fees and
financial registration costs and fees, net loss for the nine months ended
September 30, 2005 would have been $927,688 compared to $1,821,718 for the same
period in 2004, a decrease of 49%.
20
Revenue
- -------------------------------------------------------------------------
Summary Revenue
- ------------------------------------------------------------------------- Percentage
Nine Months Ended September 30, Increase
2005 2004 (Decrease)
------------------ ------------------ ------------------
Sponsorship $11,932,917 $ 9,597,215 24%
Activation Fees 587,106 821,188 (29%)
Local Revenue 1,125,356 578,025 95%
Miscellaneous Revenue 582,283 856,802 (32%)
Interest Income 94,755 50,389 88%
------------------ ------------------
Total Revenue $ 14,322,417 $ 11,903,619 20%
================== ==================
Sponsorship revenue for the nine months ended September 30, 2005 increased
approximately $2.3 million as compared to the 2004 nine month period. For the
2005 and 2004 nine month periods, the average sponsorship revenue per event were
$917,917 and $872,474, respectively. The increase in sponsorship revenue was
primarily due to an increase in contracted-for annual sponsorship revenue from
$9.9 million in 2004 to $12.7 million in 2005, as well as thirteen events taking
place in the first nine months of 2005 (out of 14 events in 2005) compared to
only eleven events taking place in the nine months ended September 30, 2004 (out
of 12 events in 2004). Accordingly, $11,932,917 of sponsorship revenue (out of
$12.7 million of contracted-for 2005 sponsorship revenue) was allocated to the
thirteen events taking place in the nine months ended September 30, 2005
compared to $9,597,215 of sponsorship revenue (out of $9.9 million of
sponsorship revenue recognized in 2004) for the eleven events taking place in
the 2004 nine month period.
The 29% decrease in activation fees is the result of one sponsor from 2004 not
returning as a sponsor in 2005.
Local revenue for the nine months ended September 30, 2005 increased 95%, as
compared to the nine months ended September 30, 2004. This increase in local
revenue resulted from two additional events taking place during the nine months
ended September 30, 2005, as well as increases in per event ticket sales and
Beach Club revenue. In particular, AVP was able to gate more events than in
previous years, which resulted in additional ticketing revenue. For the 13
events held through September 30, 2005, nine events were gated and generated
general admission ticketing revenue. For the 2004 comparable period, only five
of the 11 events held were gated with general admission ticketing revenue. For
the 2005 and 2004 nine month periods, average local revenue per event were
$86,566 and $52,548, respectively.
The decrease in miscellaneous revenue is primarily due to a decrease in
merchandising revenue attributable to AVP's recognizing net merchandising
revenue for the nine months ended September 30, 2005 versus recognizing gross
merchandising revenue as the company did for the nine months ended September 30,
2004. In 2005, AVP engaged AEG Merchandise Inc. (a division of Anschutz
Entertainment Group) to serve as AVP's event merchandiser for 2005 and 2006. AVP
receives a royalty on all merchandising revenue. In 2004, AVP performed all
merchandising services in-house, and gross merchandising revenue was included in
Miscellaneous Revenue (with costs of goods sold included in operating expenses
under marketing costs). The remaining decrease stemmed from a small decline in
site fees for one event and a small decline in trademark and recognized
international television licensing.
21
The increase in interest income of $44,366 reflects interest earned on the
realized proceeds from the private placement consummated on February 28, 2005.
Gross Profit
- --------------------------------------------------------------------------------------
Gross Profit
- --------------------------------------------------------------------------------------
Nine Months Ended September 30,
2005 2004
---------------------- ----------------------
Revenue $14,227,662 $ 11,853,230
Event Costs 10,992,451 8,620,145
---------------------- ----------------------
Gross Profit $ 3,235,211 $ 3,233,085
====================== ======================
Gross Profit % 23% 27%
AVP's gross profit margin for the nine months ended September 30, 2005 was 23%
compared to 27% for the nine months ended September 30, 2004. The decrease in
the gross profit margin primarily reflects increases in prize money, staging
costs and advertising costs. In 2004, AVP reached an agreement with the players
to extend the exclusive player agreements through December 31, 2008 and agreed
to increase prize money from $1.6 million in 2004 to a minimum of $3.0 million
in 2005 (an increase of 87.5%), with minimum prize money increasing by $500,000
in 2006, 2007 and 2008. Accordingly, management expects prize money to increase
at a significantly lower rate in the future. Staging costs also increased as a
result of AVP using an enhanced stadium for its 2005 events, which included
corporate suites at all events. AVP sold few corporate suites in the first two
quarters of 2005 but recognized significantly improved sales in the third
quarter 2005 and management expects increased corporate suite sales at the
majority of events in 2006 without a corresponding increase in staging costs.
Management expects gross profit margins to increase in the future through
increases in sponsorship revenue as well as by entering into agreements with
local promoters in which local promoters take on more of the event costs and pay
AVP promoter/sanctioning fees in return for the right to exploit local revenue
opportunities.
Operating Expenses
- ----------------------------------------------------------- ---------------------------------------
Summary Costs % Revenue
- ----------------------------------------------------------- --------------------------------------- (Increase)
Decrease as
Nine Months Ended September 30, Nine Months Ended September 30, % of Revenue
2005 2004 2005 2004 2005 vs. 2004
----------------- ---------------- ---------------- ------------------ ------------------
Event Costs $ 10,992,451 $ 8,620,145 77% 73% (4%)
Administrative 3,589,770 3,159,173 25% 27% 2%
Stock Compensation 5,292,612 -- 37% -- (37%)
Marketing 1,719,411 1,787,534 12% 15% 3%
Interest Expense 122,863 158,485 1% 1%
----------------- ---------------- ---------------- ------------------ ------------------
Total Costs $ 21,721,107 $ 13,725,337 152% 116% (36%)
================= ================ ================ ================== ==================
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 increase in event costs was primarily due to two additional events taking
place during the nine months ended September 30, 2005 (13 events compared to 11
events taking place during the nine months ended September 30, 2004). For the
2005 and 2004 nine month periods, average event costs were $845,573 and
$783,650, respectively, with a 4% increase in event costs as a percentage of
revenue. The increase in event costs is primarily attributable to increases in
prize money, staging costs, and advertising, which offset a decrease in event
costs due to the elimination of any television broadcast fees or production
costs in connection with its cable events in 2005.
22
The 14% increase in administrative costs primarily reflects charges and
expenses related to the merger and financing and registration statement filing.
The increase in administrative costs includes merger-related legal
costs of $441,000, accounting fees of $216,000, SEC filing costs of $119,000,
consulting fees payable in connection with the merger of $190,000, and costs
related to financing and the registration of securities aggregating $208,000, as
well as budgeted 2005 salary increases. Increases in administrative costs were
partially offset by a decrease in amortization expense which resulted from the
elimination of cable network deferred costs expensed in 2004.
The $5,296,612 charge to stock compensation was the result of non-employee
warrants valued under SFAS 123 for warrants granted on February 28, 2005 as a
result of the merger.
The decrease in marketing costs of $68,123 primarily resulted from a reduction
in merchandise costs of $254,000 for the nine months ended September 30, 2005,
as a result of AVP's no longer conducting merchandise sales in-house and
therefore no longer incurring costs of good sold. The decrease in merchandising
costs was partially offset by a $72,000 increase in AVPNext expenses as well as
$116,000 of budgeted 2005 salary increases.
The 22% decrease in interest expense of $35,622 reflects a reduction in
short-term debt.
- -----------------------------------------------------------------------------------
Depreciation and Amortization Expense
- -----------------------------------------------------------------------------------
Percentage
Nine Months Ended September 30, Increase
2005 2004 (Decrease)
------------------ ------------------ ------------------
Depreciation Expense $ 112,085 $ 37,894 196%
Amortization Expense 196,037 226,811 (14%)
------------------ ------------------
Total $ 308,122 $ 264,705 16%
================== ==================
The increase in depreciation expense of $74,191 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 $30,774 resulted from deferred
commissions.
Liquidity and Capital Resources
Cash flows from operating activities for the nine months ended September 30,
2005 and 2004 were $(1,637,783) and $(176,003), respectively. Working capital
deficiency, consisting of current assets less current liabilities, was $731,412
at September 30, 2005 and $3,220,725 at September 30, 2004. The negative working
capital for the nine months ended September 30, 2005 resulted from deferred
revenue being recognized for sponsorship payments received for events occurring
after September 30, 2005 and additional accounts payable and accrued expenses
related to the merger and registration statement. The negative working capital
for the nine months ended September 30, 2004 resulted from an increase in debt.
During the nine months ended September 30, 2004, AVP borrowed $2,000,000 in the
form of bridge financing notes.
23
At September 30, 2005 and 2004, accounts receivable had increased $1,426,353 and
$1,930,448, respectively, and deferred revenues had increased $176,054 and
$50,756, respectively, over their respective amounts at December 31, 2004 and
2003, as AVP invoices and collects payments 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.
Cash flows provided from financing activities for the nine months ended
September 30, 2005 and 2004 were $3,097,023 and $2,000,000, respectively. As a
result of the consummation of the $5,000,061 private placement of 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 nine months ended
September 30, 2004, AVP borrowed $2,000,000 in the form of bridge financing
notes.
During the nine months ended September 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 nine months ended September 30, 2005 and 2004 were
$372,935 and $219,973, respectively. During the nine months ended September 30,
2005, AVP purchased sand, tents, banners and flags and a trailer for the 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 redeemable 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 redeemable preferred stock holdings aggregating $3,657,600 into AVP
common 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. Cash collected before the related
events is 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.
24
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.
25
ITEM 3. 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, subject to the following paragraphs, that, as of
September 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.
Management determined that there were material weaknesses in its disclosure
controls and procedures with respect to recording and reporting of a business
combination in 2003 between companies under common control and in recording and
reporting capital transactions that resulted in conversions of preferred stock
to common stock in the second quarter of 2005. A material weakness is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. A significant
deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects the Company's ability to initiate, authorize, record, process
or report external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the Company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
Subsequent to December 31, 2004, it was determined that AVP did not have
adequate controls in place to properly record the merger in 2003 with Digital
Media Campus, Inc. in accordance with generally accepted accounting principles.
As a result, AVP has restated its financial statements for the years ended
December 31, 2004 and 2003 to reflect the correct accounting for the merger
transaction as a transfer between entities under common control. AVP was also
required to restate its interim quarterly financial statements for 2004 and all
of its annual and previously filed 2005 quarterly filings with the SEC as a
result of improperly accounting for the merger.
Subsequent to September 30, 2005, it was determined that AVP did not have
adequate controls in place to properly record capital transactions that had
occurred in the second quarter of 2005 in accordance with generally accepted
accounting principles. During the second quarter of 2005 certain Series B
preferred stockholders converted their Series B preferred stock into common
stock. However, the transactions were not properly recorded at the time they
occurred. As a result, AVP has restated its interim quarterly financial
statements and previous filed quarterly filing with SEC for the period ended
June 30, 2005 as a result of improperly accounting for these capital
transactions.
AVP has taken steps to correct the material weaknesses identified through the
addition of additional personnel and professional consultants with enhanced
financial accounting and reporting experience and will continue to evaluate the
material weaknesses and will take all necessary action to correct the internal
control deficiencies so identified. AVP will also further develop and enhance
its internal control policies, procedures, systems and staff to allow it to
mitigate the risk that material accounting errors might go undetected and be
included in its financial statements.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 4. Submission of Matters to a Vote of Security Holders
The matters submitted and the number of votes cast at the Annual
Stockholders Meeting held on August 23, 2005 were as follows:
- --------------------------------------------------------------------------------
1. Election of Directors Number of votes cast
- --------------------------------------------------------------------------------
Name of Nominee For Withheld
- --------------------------------------------------------------------------------
Leonard Armato 97,091,444 769,654
Bruce Binkow 97,091,444 769,654
Philip Guarascio 97,091,444 769,654
Scott Painter 97,091,444 769,654
Jeffrey Wattenberg 97,091,444 769,654
Roger L. Werner, Jr. 97,091,444 769,654
- --------------------------------------------------------------------------------
Number of votes cast
- -----------------------------------------------------------------------------------------------
Broker Non-
For Against Abstain Votes
- -----------------------------------------------------------------------------------------------
2. Ratification of appointment of auditors 95,878,028 39 1,983,031 0
- -----------------------------------------------------------------------------------------------
3. Increase in authorized Common Stock to
300,000,000 shares 76,584,496 595,155 107,000 0
- -----------------------------------------------------------------------------------------------
4. One for ten reverse stock split 95,572,018 1,786,370 502,712 0
- -----------------------------------------------------------------------------------------------
5. Amended and restated certificate of
incorporation, reducing authorized
Commmon Stock to 80,000,000 shares 89,467,203 3,965,154 4,428,741 0
- -----------------------------------------------------------------------------------------------
6. 2005 Incentive Stock Plan 77,434,453 5,918,985 2,541,508 11,966,152
- -----------------------------------------------------------------------------------------------
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
27
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
November, 2005.
AVP, INC.
(Registrant)
By: /s/ Andrew Reif
-------------------
Andrew Reif
Chief Operating Officer and
Chief Financial Officer
28