UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
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)
1
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
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 September 30, 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 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' Deficiency 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...............................................18
ITEM 3. CONTROLS AND PROCEDURES.........................................26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...............................................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 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 - 18
4
AVP, INC.
Balance Sheet
June 30, 2005
(Unaudited)
(As restated)
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,278,256
Accounts receivable, net of
allowance for doubtful accounts of $10,000 234,610
Prepaid expenses 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 1,173,804
Accrued interest 270,520
Deferred revenue 2,975,579
------------
TOTAL CURRENT LIABILITIES 6,203,678
------------
OTHER LIABILITIES
Long-term deferred revenue 225,000
Long-term debt - less current portion 683,334
------------
TOTAL OTHER LIABILITIES 908,334
------------
TOTAL LIABILITIES 7,112,012
------------
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 30,476,136
Accumulated deficit (30,737,916)
------------
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 EXPENSES 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 $ (0.02) $ 0.01 $ (0.09) $ (0.02)
============= ============= ============= =============
Weighted average common shares outstanding
96,680,577 29,738,610 73,187,404 29,738,610
============= ============= ============= =============
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
--------------------------- ---------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2005 (As
previously reported) -- $ -- -- $ -- 29,738,610 $ 29,738
Restatement adjustment (Net of tax) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2005 (As restated) -- -- -- -- 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 of preferred stock -- -- (30,952) (31) 7,521,336 7,521
Consulting expense from issuance of
warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2005 -- $ -- 116,412 $ 116 100,023,393 $ 100,023
============ ============ ============ ============ ============ ============
Total
Additional Accumulated Stockholders'
Paid-in Capital Deficit Deficiency
------------ ------------ ------------
Balance, January 1, 2005 (As
previously reported) $ 969,574 $ (8,713,950) $ (7,714,638)
Restatement adjustment (Net of tax) 15,121,928 (15,121,928) --
------------ ------------ ------------
Balance, January 1, 2005 (As restated) 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 of preferred stock (7,490) -- --
Consulting expense from issuance of
warrants 5,211,988 -- 5,211,988
Net loss -- (6,902,038) (6,902,038)
------------ ------------ ------------
Balance, June 30, 2005 $ 30,476,136 $(30,737,916) $ (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
Consulting expense 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 209,500 (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 AND CASH EQUIVALENTS 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 common stock 3,657,600 --
----------- -----------
Conversion of 10% convertible notes payable into common stock 2,290,348 --
----------- -----------
Conversion of Series B preferred stock into common stock 7,521 --
----------- -----------
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. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to December 31, 2004, management determined that the method
of recording and reporting the merger in 2003 with Digital Media
Campus, Inc. should have been reported as a transfer between entities
under common control as if the merger had occurred January 1, 2003. As
a result, AVP restated its financial statements for the year ended
December 31, 2004.
In addition, subsequent to September 30, 2005, management determined
that certain Series B preferred stockholders converted their Series B
preferred stock into common stock during the second quarter of 2005.
However, the transactions were not properly recorded at the time they
occurred. As a result, AVP is restating its financial statements for
June 30, 2005.
The following table identifies the adjustments made to the previously
released June 30, 2005 unaudited financial statements as a result of
the restatements.
Decrease in Series B preferred stock $ (31)
Increase in common stock 7,521
Increase in additional paid-in capital 15,114,438
Increase in accumulated deficit (15,121,928)
------------
Net equity adjustment $ --
============
The following provides comparative financial statement information as
restated compared to that previously reported:
10
AVP, INC.
Notes to Financial Statements
(Unaudited)
2. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
(As previously
reported) (As restated)
------------ ------------
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, 147,364 and 116,412 shares issued and
outstanding 147 116
Common stock, $.001 par value, 300,000,000 shares authorized,
92,502,057 and 100,023,393 shares issued and outstanding 92,502 100,023
Additional paid-in capital 15,361,698 30,476,136
Accumulated deficit (15,615,988) (30,737,916)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY $ (161,641) $ (161,641)
============ ============
3. 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.
11
AVP, INC.
Notes to Financial Statements
(Unaudited)
3. MERGER (CONTINUED)
As part of the merger, the Association's preferred stockholders
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. 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, 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 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 June 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 is 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.
12
AVP, INC.
Notes to Financial Statements
(Unaudited)
3. MERGER (CONTINUED)
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 effect the 1 for 10 reverse stock split within 60
days from the effective date of the registration statement.
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.
4. 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
June 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.
5. NET INCOME(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 June 30, 2005 and 2004, respectively, were
excluded from the computation of diluted earnings (loss) per share as
their effect would be anti-dilutive.
13
AVP, INC.
Notes to Financial Statements
(Unaudited)
6. 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 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 $ (0.02) $ 0.01 $ (0.09) $ (0.02)
============ ============ ============ ============
Pro forma $ (0.07) $ 0.01 $ (0.16) $ (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 2004:
Six Months
Ended June 30,
--------------------------------------
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%
14
AVP, INC.
Notes to Financial Statements
(Unaudited)
6. 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 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 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
-------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
----------------- ---------------- ------------- ----------- -------------- -------------
$ .00 - .03 61,189,433 4.5 $0.00 61,189,433 $0.00
.04 - .09 16,554,802 8.2 0.08 9,587,406 0.08
.10 - .16 7,654,849 3.8 0.16 6,971,072 0.16
.17 - .25 34,100,214 4.0 0.22 34,100,214 0.22
----------------- ---------------- ------------- ----------- -------------- -------------
$ .00 - .25 119,499,298 4.8 $0.09 111,848,126 $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 2004.
15
AVP, INC.
Notes to Financial Statements
(Unaudited)
6. STOCK OPTIONS (CONTINUED)
Other Stock Options
Non-qualified stock options granted to other individuals total
35,225,435 shares and 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.
Number of Weighted 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 0.31
Converted Othnet options 7,285,572 0.24
Exercised -- --
Cancelled -- --
---------- ----------
Options outstanding at June 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 June 30, 2005:
Options outstanding and exercisable by price range as of June 30, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
------------------ ------------- -------------- ------------ -------------- -----------
$ .03 - .15 6,610,248 4.8 $0.09 6,610,248 $0.09
.16 - .34 19,211,860 3.2 0.22 19,211,860 0.22
.35 - .50 9,403,327 4.5 0.50 9,403,327 0.50
------------------ ------------- -------------- ------------ -------------- -----------
$ .03 - .50 35,225,435 3.5 $0.27 35,225,435 $0.27
================== ============= ============== ============ ============== ===========
In connection with warrants 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.
16
AVP, INC.
Notes to Financial Statements
(Unaudited)
7. 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 President will
determine the allocation of the Profit Sharing Bonus Pool among
officers eligible to participate in the Profit Sharing Bonus Pool.
17
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.
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.
Restatement of Financial Statements
Subsequent to December 31, 2004, management determined that the method of
recording and reporting the merger in 2003 with Digital Media Campus, Inc.
should have been reported as a transfer between entities under common control as
if the merger had occurred January 1, 2003. As a result, AVP restated its
financial statements for the years ended December 31, 2004 and 2003. The net
effect of the restatement had no aggregate effect on AVP's stockholders'
deficiency.
18
In addition, subsequent to September 30, 2005, management determined that
certain Series B preferred stockholders converted their Series B preferred stock
into common stock during the second quarter of 2005. However, the transactions
were not properly recorded at the time they occurred. As a result, AVP is
restating its financial statements for June 30, 2005.
The following table identifies the adjustments made to the previously released
June 30, 2005 unaudited financial statements as a result of the restatements.
Decrease in Series B preferred stock $ (31)
Increase in common stock 7,521
Increase in additional paid-in capital 15,114,438
Increase in accumulated deficit (15,121,928)
------------
Net equity adjustment $ --
============
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 Loss $(2,030,448) $ 427,091 (47%) 8%
Net Loss $(2,020,808) $ 406,689 (47%) 7%
The 575% increase in the three month operating loss primarily reflects a
$1,713,966 charge to consulting expense as a result of non-employee warrants
valued 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 in 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
--------------------------- Increase
2005 2004 (Decrease)
---------- ---------- ----------
Sponsorship $3,424,395 $4,733,414 (28%)
Activation Fees 190,133 315,943 (40%)
Local Revenue 458,348 214,452 114%
Miscellaneous Revenue 274,222 254,757 8%
---------- ----------
Total Revenue $4,347,098 $5,518,566 (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.
For the three months ended June 30, the average sponsorship revenue per event
for 2005 and 2004 was $684,879 and $788,902, respectively. 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.
19
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.
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 event costs 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 valued 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.
20
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 relation 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 1,803%
Amortization Expense 66,396 409,840 (84%)
---------- ----------
Total $ 106,388 $ 411,942 (74%)
========== ==========
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 Loss and Net Loss % Revenue
- ---------------------------------------------------------- ----------------------------------------
Six Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Operating Loss $ (6,856,476) $ (519,964) (155%) (9%)
Net Loss $ (6,902,038) $ (560,734) (156%) (10%)
The 1,219% increase in the six months operating loss primarily reflects a
$5,211,988 charge to consulting expense as a result of non-employee warrants
valued under SFAS 123, a decrease of $1,200,000 in recognized revenue for the
six months ended June 30, 2005 (see "Revenue" section 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.
21
Revenue
- --------------------------------------------------
Summary Revenue
- --------------------------------------------------
Percentage
Six Months Ended June 30, Increase
2005 2004 (Decrease)
---------- ---------- ----------
Sponsorship $3,424,395 $4,733,414 (28%)
Activation Fees 190,133 315,943 (40%)
Local Revenue 458,348 214,452 114%
Miscellaneous Revenue 393,534 325,088 21%
---------- ----------
Total Revenue $4,466,410 $5,588,897 (20%)
========== ==========
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.
For the six months ended June 30, the average sponsorship revenue per event for
2005 and 2004 was $684,879 and $788,902, respectively. 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.
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.
22
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% (136%)
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% 110% (148%)
============== ================ ============= ============== =================
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
event costs 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 valued 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.
The decrease in marketing costs of $75,000 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 were offset by a $69,000 increase in public relation 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%)
------------------ -----------------
Total $ 193,772 $ 500,802 (61%)
================== =================
23
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
Cash flows from operating activities for the six months ended June 30, 2005 and
2004 were $809,155 and $(858,694), respectively. Working capital deficiency,
consisting of current assets less current liabilities, was $323,324 at June 30,
2005 and $149,886 at June 30, 2004. The negative working capital as of June 30,
2005 and 2004 resulted 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 collects revenues 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 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 $5,000,061 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.
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 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.
24
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 over each 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.
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 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 quarterly financial statements and
previously filed quarterly filings with the SEC for the period ended June 30,
2005 as a result of improperly accounting for these capital transactions.
26
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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 21st day of
November 2005.
AVP, INC.
(Registrant)
By: /s/ Andrew Reif
-------------------
Andrew Reif
Chief Operating Officer and
Chief Financial Officer
28