August 9, 2006
RESCISSION OFFER
AVP, INC.
OPTIONS TO PURCHASE
652,494 SHARES OF
COMMON STOCK
Pursuant to this document, we are offering to repurchase options exercisable for
up to 652,494 shares of our common stock, which we granted in 2004 to players on
our professional beach volleyball tour.
Unless the context otherwise requires, the terms "AVP," "we," "us" or "our"
refer to AVP, Inc. and its consolidated subsidiaries.
Prices of our common stock are quoted on the OTC Bulletin Board under the symbol
"AVPI." Until March 21, 2005, our common stock traded on the OTCBB under the
symbol "ONET," and until December 16, 2005, our common stock traded on the OTCBB
under the symbol "AVPN." The last reported sales price per share of our common
stock, as reported by the OTCBB on July 21, 2006, was $0.80. There is no market
for our stock options.
The Rescission Offer
o We are offering to rescind our grant to players on the 2004 AVP Tour of
stock options to purchase a total of 652,494 shares of our common stock.
o The repurchase price for the stock options subject to the rescission offer
is 20% of the per share exercise price multiplied by the number of shares
subject to the options, or $0.3156 per share subject to the options. If
you accept our rescission offer and surrender your option, in addition to
the rescission price, you will receive interest, from May 1, 2004 through
the date that the rescission offer expires, at the interest rate required
by your state of residence, as set forth below.
State Interest rate
- -------------- -------------
California 7%
Florida 9%
Hawaii 10%
Oregon 9%
South Carolina 6%
Federal law does not provide a specific interest rate to be used in the
calculation of the consideration to be received in connection with the
repurchases of securities by an issuer in a rescission offer.
o The rescission offer will expire on September 8, 2006.
See "Risk Factors" beginning on page 15 to read about certain factors you should
consider before accepting or rejecting the rescission offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this document is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this document is August 9, 2006.
Table of Contents
Page
----
SUMMARY ................................................................. 6
RESCISSION OFFER ........................................................ 8
RISK FACTORS ............................................................ 15
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................ 20
BUSINESS ................................................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ......................................................... 28
MANAGEMENT .............................................................. 38
EXECUTIVE COMPENSATION .................................................. 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ........................................... 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 44
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES .......................... 46
EXPERTS ................................................................. 46
AVAILABLE INFORMATION ................................................... 47
INDEX TO FINANCIAL STATEMENTS ........................................... 48
i
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR REPRESENT ANYTHING
NOT CONTAINED IN THIS DOCUMENT. YOU SHOULD NOT RELY ON ANY UNAUTHORIZED
INFORMATION. WE ARE OFFERING TO REPURCHASE OUR STOCK OPTIONS ONLY FROM PERSONS
REFERRED TO ON THE COVER OF THIS DOCUMENT IN JURISDICTIONS WHERE SUCH OFFERS AND
SALES ARE PERMITTED. THE INFORMATION IN THIS DOCUMENT IS CURRENT AS OF THE DATE
ON THE COVER.
QUESTIONS AND ANSWERS ABOUT THE RESCISSION OFFER
You should read the following questions and answers, together with the more
detailed information regarding the rescission offer and the risk factors set
forth elsewhere in this document, before deciding whether to accept or reject
the rescission offer.
Q: Why are we making the rescission offer?
A: Pursuant to their AVP Player Agreements, we granted stock options to players
on AVP's 2004 Tour (the "Eligible Players"), intending that the grant would be
exempt under federal securities law. Because of a typographical error in the
agreements, the stock options grants did not qualify for the intended exemption.
Consequently, these option grants might have violated the U.S. Securities Act of
1933 and the state securities laws of California, Florida, Hawaii, Oregon and
South Carolina. The rescission offer is intended to address these federal and
state securities laws compliance issues.
Q: Which options are included in the rescission offer?
A: We are offering, upon the terms and conditions described in this document, to
rescind the grant of options to purchase up to a total of 652,494 shares of our
common stock (the "2004 Options"), which are held by 132 Eligible Players.
Q: When does the rescission offer expire?
A: Our rescission offer will expire on September 8, 2006.
Q: What will I receive if I accept the rescission offer?
A: If you accept our rescission offer, we will repurchase the options at a price
equal to 20% of the $1.578 per share exercise price multiplied by the number of
shares subject to the options, or $0.3156 per share subject to the options, plus
interest at the current statutory rate per year, from May 1, 2004 through the
date the rescission offer expires.
The legal rates of interest for the repurchase of options in the relevant
states are as follows:
State Interest rate
- -------------- -------------
California 7%
Florida 9%
Hawaii 10%
Oregon 9%
South Carolina 6%
We believe that your acceptance of the rescission offer will preclude you
from later seeking similar relief under general theories of estoppel, and we are
unaware of any federal or state case law to the contrary. However, we urge you
to consult with an attorney regarding all of your legal rights and remedies
before deciding whether or not to accept the rescission offer.
1
Q: How did you decide upon the rescission price?
A: The rescission price for a cash sale is based on the purchase price. In the
case of rescission of a grant of an unexercised stock option, for which no cash
consideration was exchanged, it is customary, instead, to use an amount equal to
20% of the amount equal to the per share exercise price multiplied by the number
of shares subject to the option, which convention we have adopted for this
rescission offer.
Q: How can I calculate the amount that I would receive if I accepted the
rescission offer?
A: The amount you would receive would equal the product obtained by multiplying
the number of shares subject to your option ("option shares") by .3156 (i.e.,
20% of the $1.578 per share exercise price) and adding interest on that amount
at the interest rate applicable to the state in which you reside for the period
May 1, 2004 through September 8, 2006. Accordingly, you can compute the amount
you would receive if you accept the rescission offer by multiplying the number
of option shares by the applicable factor in the following table (assuming
payment on August 31, 2006):
Rescission amount for
State Factor* 1,000 share option
- -------------- ------- ---------------------
California .36715 $367.15
Florida .38818 $388.18
Hawaii .38924 $389.24
Oregon .38818 $388.18
South Carolina .35978 $359.78
* The factor is calculated as:
.3156 + (.3156 x [applicable interest rate] x (28/12))
You will not have any right to exercise your option if you elect to
rescind the option grant.
Q: Have any officers, directors or holders of at least 5% of AVP stock advised
AVP whether they will participate in the rescission offer?
A: None of our officers, directors or holders of at least 5% of AVP stock are
eligible to participate in this rescission offer.
Q: If I do not accept the offer, can I exercise my stock option?
A: You cannot exercise your stock option until a Securities Act registration
statement covering the option shares has been filed with the SEC and becomes
effective. We plan to file a registration statement shortly after the rescission
offer is concluded.
Q: What do I need to do now to accept or reject the rescission offer?
A: To accept or reject the rescission offer, you must complete and sign the
accompanying election form (see Appendix A) and return it in the enclosed return
envelope to Andrew Reif, Secretary, AVP, Inc., 6100 Center Drive, Suite 900, Los
Angeles CA 90045, as soon as possible, but in no event later than September 8,
2006.
Q: Can I accept the rescission offer in part?
A: If you accept the rescission offer, then you must accept the rescission offer
with respect to your entire option.
2
Q: What happens if I do not return my rescission offer election form?
A: If you do not return your election form before the expiration date of our
rescission offer, you will be deemed to have rejected our offer.
Q: What remedies or rights do I have now that I will not have after the
rescission offer?
A: It is unclear whether or not you will have a right of rescission under
federal securities laws after the rescission offer. The staff of the Securities
and Exchange Commission is of the opinion that a person's right of rescission
created under the Securities Act of 1933 may survive the rescission offer.
However, federal courts in the past have ruled that a person who rejects or
fails to accept a rescission offer is precluded from later seeking similar
relief. Generally, the federal statute of limitations for noncompliance with the
requirement to register securities under the Securities Act of 1933 is one year.
The state remedies and statutes of limitations vary and depend upon the
state in which you purchased the shares. The following is a summary of the
statutes of limitations and the effect of the rescission offer for the states in
which the shares covered by this rescission offer were sold. This summary is not
complete. For a more detailed description of the various state rescission laws,
see "Rescission Offer--Effect of Rescission Offer."
California: The 2004 Options might have been granted in violation of the
California Corporate Securities Law. Generally, the California
statute of limitations for noncompliance with the requirement
to register or qualify securities under the California
Corporate Securities Law is the earlier of two years after the
noncompliance occurred, or one year after discovery of the
facts constituting such noncompliance. Under Section 25503 of
the California statute, any person who offers or sells a
security to any person residing in California without
compliance with the qualification requirements shall be liable
to the purchaser, who may sue to recover the consideration he
paid for such security with interest at the rate of 7%. If the
consideration given for the security is not capable of being
returned, the purchaser may recover damages equal to the value
of the consideration plus interest at 7%.
Regardless, if the options were issued to you in California,
you will no longer have any right of rescission under
California law after the expiration of our rescission offer,
unless you affirmatively reject our offer before the
expiration date of the offer.
Florida: The 2004 Options might have been granted in violation of the
Florida Securities and Investor Protection Act. Under Section
517.211 of the Florida Securities and Investor Protection Act,
the purchaser who is sold a security in violation of the
Florida statute may bring an action against the seller to
rescind the sale. The purchaser, however, will lose the right
of rescission under such provision, if he refuses or fails,
within 30 days of receipt, to accept a written offer from the
seller to take back the security and to refund the amount paid
by the purchaser, with interest at the rate of 9% (7% until
December 31, 2005). Generally, the Florida statute of
limitations for noncompliance with the requirement to
3
register or qualify securities is four years from the date of
the violation. Regardless, if the options were issued to you
in Florida, you will no longer have any right of rescission
under Florida law after the expiration of our rescission
offer.
Hawaii: The 2004 Options might have been granted in violation of the
Uniform Securities Act of Hawaii. Under Section 485.20 of the
Uniform Securities Act of Hawaii, any sale of a security
without registration is voidable at the election of the
purchaser, who may bring an action in any court of competent
jurisdiction to recover the full amount he paid for the
security, upon tender of the security, plus interest at the
rate of 10% and court costs and reasonable attorneys' fees.
The purchaser loses his right under such section if he refuses
or fails to accept within 30 days of the date thereof a
written offer from the seller to take back the security and to
refund the amount paid by the purchaser, together with
interest at the rate of 10% per year. The statute of
limitation for commencing suit for the recovery of the
purchase price by the purchaser under Section 485.20, is the
earlier of five (5) years from the date of sale or two (2)
years from the discovery of the facts constituting the
noncompliance, but in any event not more than seven (7) years
from the date of sale. Regardless, if the options were issued
to you in Hawaii, you will no longer have any right of
rescission under Hawaii law after the expiration of our
rescission offer.
Oregon: The 2004 Options might have been granted in violation of the
Oregon Securities Law. Under Section 59.125 of the Oregon
Securities Law, the seller of a security in violation of the
Oregon Securities Law is liable to the purchaser upon tender
of the security for the consideration paid for the security,
and interest at a rate equal to 9%. The purchaser, however,
may not commence suit if, before suit, he receives a written
notice from the seller containing an offer to pay the amount
the purchaser would be entitled to recover upon tender of the
security and a statement of the effect on his right, if he
fails to respond within 30 days of receipt of the notice. The
statute of limitations for commencing a suit under Section
59.115 is 3 years after the sale. Regardless, if the options
were issued to you in Oregon, you will no longer have any
right of rescission under Oregon law after the expiration of
our rescission offer.
South Carolina: The 2004 Options might have been granted in violation of the
Uniform Securities Law of South Carolina. Under Section
35-1-1490 of the Uniform Securities Law of South Carolina any
person who offers or sells a security in violation of the
registration requirements is liable to the purchaser, who may
sue, either at law or in equity,
4
to recover the consideration paid for the security, together
with interest at 6%, plus costs and reasonable attorneys'
fees, less the amount of any income received on the security,
upon tender of the security. However, the purchaser is barred
from bringing action if he receives before suit, a written
offer to refund the consideration paid together with 6%
interest from the date of payment, less the amount of any
income received on the security, and he fails to accept the
offer within 30 days of its receipt. Generally, the statute of
limitations for noncompliance with the requirement to register
or qualify securities under the South Carolina Securities Act
is 3 years after the contract of sale. Regardless, if the
options were issued to you in South Carolina, you will no
longer have any right of rescission under South Carolina law
after the expiration of our rescission offer, unless you
affirmatively reject our offer before the expiration date of
our offer, in which case you will retain your right of
rescission.
We believe that your acceptance of the rescission offer will preclude you
from later seeking similar relief. Regardless of whether you accept the
rescission offer, we believe that any remedies you may have after the rescission
offer expires would not be greater than an amount you would receive in the
rescission offer.
Q: How will the rescission offer be funded?
A: The rescission offer will be funded from our existing cash balances. If all
persons eligible to participate in the rescission offer accept our offer to the
full extent, our results of operations, cash balances or financial condition
will not be affected materially.
Q: Can I change my mind after I have mailed my signed election form?
A: Yes. You can change your decision about accepting or rejecting our rescission
offer at any time before the expiration date. You can do this by completing and
submitting a new election form. Any new election forms must be received by us
prior to the expiration date to be valid. We will not accept any election forms
after the expiration date.
Q: Who can help answer my questions?
A: You can call Andrew Reif, Secretary, AVP, Inc., 6100 Center Drive, Suite 900,
Los Angeles, CA 90045, (310) 426-7122, areif@avp.com with questions about the
rescission offer.
Q: Where can I get more information about AVP?
A: You can obtain more information about AVP from the filings we make from time
to time with the Securities and Exchange Commission. These filings are available
on the Securities and Exchange Commission's website at www.sec.gov.
5
SUMMARY
The following summary highlights selected information contained in this
document. This summary does not contain all the information you should consider
in deciding whether to accept or reject the rescission offer. Before making an
investment decision, you should read the entire document carefully, including
the "risk factors" section.
Recent Developments
In May 2006, AVP sold 2,941,180 shares of common stock and five-year warrants to
purchase 588,236 shares of common stock at price of $1.00 per share, to
accredited investors, for a total price $2,500,003, and on June 9, 2006, AVP
sold 3,529,410 shares of common stock and five-year warrants to purchase 705,882
shares of common stock at price of $1.00 per share, to an accredited investor,
for a total price of $2,999,998.50 (the "2006 Financing"). In addition to its
cash commission, the placement agent received a warrant to purchase 621,177
shares of common stock on substantially the same terms as the warrants sold to
investors. Pursuant to the Securities Purchase Agreement, AVP filed a re-sale
registration statement on June 22, 2006, which was declared effective by the
Securities and Exchange Commission on June 30, 2006. Additionally, the
Securities Purchase Agreement gives the investors rights of first negotiation
regarding future issuances of common stock, subject to exceptions.
Business Overview
AVP owns and operates the sole nationally recognized U.S. professional beach
volleyball tour. AVP has more than 200 of the top professional players under
exclusive contracts, as well as a base of spectators and television viewers that
we believe represents an attractive audience for national, regional, and local
sponsors. AVP's business includes establishing and managing tournaments;
sponsorship sales and sales of broadcast, licensing, and trademark rights; sales
of food, beverage, and merchandise at tournaments; contracting with players on
the tour; and associated activities. AVP produced 14 men's and 14 women's
professional beach volleyball tournaments throughout the United States in 2005
and has scheduled 16 each in 2006.
Company Information
On February 28, 2005, a wholly owned subsidiary of AVP, then known as Othnet,
Inc., merged with the Association of Volleyball Professionals, Inc. (the
"Association"), pursuant to an Agreement and Plan of Merger, as amended (the
"Merger"). As a result of the Merger, the Association became Othnet's
wholly-owned subsidiary, and its name changed to AVP Pro Beach Volleyball Tour,
Inc. We changed "Othnet" to our current name shortly thereafter. Our corporate
address is 6100 Center Drive, Suite 900, Los Angeles, CA 90045. Our telephone
number is (310) 426-8000.
Rescission Offer
Total common stock subject to the rescission offer: 652,494.
Total capital stock outstanding: As of June 30, 2006, we had outstanding
19,654,908 shares of common stock, 71,020 shares of Series B Convertible
Preferred Stock, which are convertible into 1,979,327 shares of common stock at
a 27.87 to 1 conversion rate; and options and warrants to purchase a total of
18,452,402 shares of common stock.
Proceeds to AVP: We will not receive any proceeds from the rescission offer.
OTC Bulletin Board Symbol: AVPI.
6
Summary Financial Information
The following summary financial information is derived from our financial
statements included at the end of this prospectus.
Statement of Operations Data
Three Months Ended Year Ended
March 31, December 31,
------------------------- -------------------------
2006 2005 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Revenue (includes interest income) $ 143,955 $ 119,312 $15,693,312 $12,376,190
=========== =========== =========== ===========
Net Loss $(1,488,546) $(4,881,230) $(8,963,956) $(2,873,112)
=========== =========== =========== ===========
Source of revenue as a percent of revenue
Sponsorship 0.0% 0.0% 82.3% 80.1%
Activation fees 0.0% 0.0% 4.1% 6.8%
----------- ----------- ----------- -----------
0.0% 0.0% 86.4% 86.9%
----------- ----------- ----------- -----------
Local Revenue
Merchandising 0.0% 1.5% 0.7% 2.6%
Ticket sales and parking 0.0% 0.0% 4.0% 2.5%
Registration fees 0.0% 0.0% 1.1% 1.0%
Beach Club (corporate hospitality) 0.0% 0.0% 2.4% 1.0%
Food and beverages 0.0% 0.0% 0.4% 0.5%
----------- ----------- ----------- -----------
0.0% 1.5% 8.6% 7.6%
----------- ----------- ----------- -----------
Miscellaneous Revenue
Trademark licensing 85.1% 76.1% 2.5% 2.8%
Site fees and state grants 0.0% 0.0% 0.4% 0.9%
Grass roots marketing 0.2% 9.5% 0.8% 0.7%
International television licensing 0.0% 0.0% 0.2% 0.6%
Interest income 14.7% 12.9% 0.7% 0.5%
Other 0.0% 0.0% 0.4% 0.0%
----------- ----------- ----------- -----------
100.0% 98.5% 5.0% 5.50%
----------- ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
Balance Sheet Data
March 31, December 31,
------------------------- -------------------------
2006 2005 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Working capital (deficiency) $(1,679,827) $ 87,243 $(1,197,861) $(3,604,731)
Total assets $ 3,517,553 $7,634,042 $ 2,675,538 $ 2,433,779
Total liabilities $ 4,598,698 $7,488,841 $ 3,279,798 $10,148,417
Stockholders' equity (deficiency) $(1,081,145) $ 145,201 $ (604,260) $(7,714,638)
7
RESCISSION OFFER
Background
Stock option grants we made in 2004 to players on our Tour ("Eligible
Players") pursuant to AVP Player Agreements might not have been exempt from
registration or qualification under federal and state securities laws.
Specifically, the aggregate exercise price of the options granted to the
Eligible Players was intended to be $1,000,000, to qualify for a Rule 504
exemption from registration under the Securities Act, but a typographical error
in the AVP Player Agreements caused the aggregate exercise price to exceed the
limit by $30,000. To address this possible violation, we are making this
rescission offer to all holders of the options so granted. If our rescission
offer were accepted by all offerees, we would be required to make an aggregate
payment to the holders of these options totaling approximately $254,000,
including interest.
The rescission offer is being made to 132 holders of options to purchase
652,494 shares of our common stock.
The rescission offer will remain open until September 8, 2006 (30 days
from its commencement) and will be registered under the Securities Act of 1933
and qualified in each state where such qualification is required. By making this
rescission offer, we are not waiving any applicable statute of limitations.
Rescission Offer and Price
We are offering to 132 Eligible Players to rescind the grants of stock
options, to purchase a total of 652,494 shares of our common stock granted
pursuant to AVP Player Agreements we signed with our players in 2004. The
rescission price for each option will equal 20% of the $1.578 per share exercise
price multiplied by the number of shares subject to the options ("option
shares"), or $0.3156 per share option share, plus interest at the applicable
state rate, from May 1, 2004 through the date the rescission offer expires.
If you accept our rescission offer and hold options to acquire our common
stock, we will repurchase all options granted to you at a price equal to 20% of
the per share exercise price multiplied by the number of shares subject to the
options, or $0.3156 per share subject to the options, plus interest at the
current statutory rate per year, from the date of grant through the date the
rescission offer expires.
If you accept our rescission offer, you will be entitled to receive
interest at the applicable statutory interest rate per year in accordance with
your state of residence. You will not, however, be entitled to any payments for
interest or otherwise unless you affirmatively elect to participate in the
offer. The legal rates of interest for the repurchase of the options in the
Rescission States are as follows:
State Interest Rate
- -------------- -------------
California 7%
Florida 9%
Hawaii 10%
Oregon 9%
South Carolina 6%
You can compute the amount you would receive if you accept the rescission offer
by multiplying the number of option shares by the applicable factor in the
following table:
8
Rescission amount for
State Factor 1,000 share option
- -------------- ------ ---------------------
California .36715 $367.15
Florida .38188 $381.88
Hawaii .38924 $389.24
Oregon .38188 $381.88
South Carolina .35978 $359.78
Acceptance
You may accept the rescission offer by completing, signing and delivering
the enclosed election form indicating the options to be repurchased on or before
the close of business on September 8, 2006, which date and time we refer to in
this document as the expiration date. All acceptances of the rescission offer
will be deemed to be effective on the expiration date and the right to accept
the rescission offer will terminate on the expiration date. Acceptances or
rejections may be revoked in a written notice to Andrew Reif, Secretary, AVP,
Inc., 6100 Center Drive, Suite 900, Los Angeles, CA 90045, areif@avp.com, if
received prior to the end of business on the expiration date. Within 15 business
days after the expiration date, we will pay for any stock options as to which
the rescission offer has been validly accepted.
If you submit an election form after the expiration time, regardless of
whether your form is otherwise complete, your election will not be accepted, and
you will be deemed to have rejected our rescission offer. If you do not accept
the rescission offer, you cannot exercise your stock option until a Securities
Act registration statement covering the option shares has been filed with the
SEC and becomes effective. We plan to file a registration statement shortly
after the rescission offer is concluded.
Neither we nor our officers and directors make any recommendations to you
with respect to the rescission offer contained herein. You are urged to read the
rescission offer carefully and to make an independent evaluation with respect to
its terms.
Rejection or Failure to Affirmatively Accept
If you fail to accept, or if you affirmatively reject the rescission offer
by so indicating on the enclosed election form, you will retain ownership of the
options in accordance with the terms of our stock plans, and you will not
receive any cash for those securities in connection with the rescission offer.
If you do not accept the rescission offer and retain your stock options, you
cannot exercise your stock option until a Securities Act registration statement
covering the option shares has been filed with the SEC and becomes effective. We
plan to file a registration statement shortly after the rescission offer is
concluded.
Solicitation
We have not retained, nor do we intend to retain, any person to make
solicitations or recommendations to you in connection with the rescission offer.
Effect of Rescission Offer
It is unclear whether the rescission offer will terminate our liability,
if any, for failure to register or qualify the issuance of the securities under
either federal or state securities laws. Accordingly, should the rescission
offer be rejected by any or all offerees, we may continue to be contingently
liable under the Securities Act of 1933 and applicable state securities laws for
the purchase price of these shares and the value of the options up to an
aggregate amount of approximately $254,000 which includes statutory interest. In
addition, it is possible that an option holder
9
could argue that the offered rescission price, does not represent an adequate
remedy for the potential violation of the applicable securities laws in
connection with the issuance of the option. If a court were to impose a greater
remedy, our liability as a result of the potential securities violations would
be higher.
We believe that your acceptance of the rescission offer will preclude you
from later seeking similar relief under general theories of estoppel, and we are
unaware of any federal or state case law to the contrary. However, we urge you
to consult with an attorney regarding all of your legal rights and remedies
before deciding whether or not to accept the rescission offer.
Regardless whether you accept the rescission offer, we believe that any
remedies you may have after the rescission offer expires would not be greater
than an amount you would receive in the rescission offer.
Below is a discussion of our contingent liability as a result of potential
securities laws violations resulting from our grants of the options relating to
the shares covered by the rescission offer on a state-by-state basis. Each state
has different laws with respect to rights under common law and fraud and the
following discussion of state law does not relate to the antifraud provisions of
applicable securities laws or rights under common law or equity.
California
Under California law, an issuer is civilly liable to a purchaser of its
securities sold in violation of the registration or qualification requirements
of Section 25110 of the California Corporate Securities Law. The purchaser may
sue to recover the consideration paid for such securities with interest at 7%
per year, less the amount of any income received from ownership of the
securities, upon the tender of such securities at any time prior to the earlier
of the two year anniversary of the noncompliance with the registration or
qualification requirements or the one year anniversary of the discovery by the
purchaser of the facts constituting such noncompliance.
However, we may terminate the rights of the purchasers to seek additional
remedies under the California Corporate Securities Law by making a written
rescission offer before suit is commenced by the purchaser, approved as to form
by the California Commissioner of Corporations where the offer:
o states the respect in which liability under the registration
or qualification requirements may have arisen;
o offers to repurchase the securities for a cash price payable
upon delivery of the securities or offering to pay the
purchaser an amount in cash equal in either case to the amount
recoverable by the purchaser, or offering to rescind the
transaction by putting the parties back in the same position
as before the transaction;
o provides that such offer may be accepted by the purchaser at
any time within a specified period of not less than 30 days
after the date of receipt of the offer unless rejected earlier
during such period by the purchaser;
o sets forth the provisions of the rescission offer requirements
under the California Corporate Securities Law; and
o contains such other information as the California Commissioner
of Corporations may require by rule or order, including the
following legend:
THIS OFFER OF REPURCHASE HAS BEEN APPROVED BY THE COMMISSIONER OF
CORPORATIONS IN ACCORDANCE WITH SECTION 25507(b) OF THE CORPORATE
SECURITIES LAW OF 1968 ONLY AS TO ITS FORM. SUCH APPROVAL DOES NOT
IMPLY A FINDING BY THE COMMISSIONER THAT ANY STATEMENTS MADE HEREIN
OR IN ANY ACCOMPANYING DOCUMENTS ARE TRUE OR COMPLETE; NOR DOES IT
IMPLY A FINDING THAT THE AMOUNT OFFERED BY THE SELLER IS EQUAL TO
THE AMOUNT RECOVERABLE BY THE BUYER OF THE SECURITY IN ACCORDANCE
WITH SECTION 2553 IN A SUIT AGAINST THE SELLER, AND THE COMMISSIONER
DOES NOT ENDORSE THE
10
OFFER AND MAKES NO RECOMMENDATION AS TO ITS ACCEPTANCE OR REJECTION.
If the purchaser fails to accept such offer in writing within the
specified time period of not less than 30 days after the date of receipt of the
offer, that purchaser will no longer have any right of rescission under
California law. However, if the purchaser affirmatively rejects the offer within
the 30 day period on the ground that the amounts offered are inadequate under
the California statute, such purchaser will retain his right of rescission.
We must also file with the California Commissioner of Corporations, in
such form as the California Commissioner of Corporations prescribes by rule, an
irrevocable consent appointing the Commissioner of Corporations or its successor
in office to be our attorney to receive services of any lawful process in any
noncriminal suit, action or proceeding against us or our successor, which arises
under California law after the consent has been filed with the same force and
validity as if served personally on us.
We believe this rescission offer complies in all material respects with
the rescission offer requirements of the California Corporate Securities Law.
Florida
Under Florida law, an issuer is civilly liable to a purchaser of its
securities sold in violation of the registration or qualification requirements
of the Florida Securities and Investor Protection Act. The purchaser may sue
either at law or in equity to recover the consideration paid for such
securities, together with interest at 9% per year from the date of payment of
the purchase price to the date of repayment, less any income received on the
securities. If the purchaser no longer owns such securities, the purchaser may
recover damages in an amount equal to the difference between the purchase price
and the amount the purchaser received on the sale of such securities, plus
interest at 7%.
However, we may terminate the rights of the purchasers to seek additional
remedies under the Florida Securities and Investor Protection Act by making a
written rescission offer, before suit, to refund the consideration paid together
with interest at 7% from the date of payment of the purchase price by the
purchaser to the date of repayment. If the purchaser no longer owns the security
at the time of receipt of such written offer, he will be entitled to receive
from us an amount equal to the difference between the amount he paid for the
security and the amount he received on the sale of the security, with interest
on the full amount paid for the security at the rate of 7% for the period from
the date of payment of the purchase price through the date of repayment. If the
purchaser fails to accept such offer within 30 days of its receipt, the
purchaser will no longer have any right of rescission under Florida law.
We believe that this rescission offer complies in all material respects
with the rescission offer requirements of the Florida statute.
Hawaii
Under Hawaii law, an issuer is civilly liable to a purchaser of its
securities sold in violation of the registration or qualification requirements
of the Hawaii Uniform Securities Act. The purchaser may sue either at law or in
equity to recover the consideration paid for such securities, together with
interest and all taxable court costs and reasonably attorneys fees, such
interest to be at the rate of 10% a year computed from the date of payment of
the purchase price to the date of repayment, less any income received on the
securities, at any time prior to the earlier of five years from the date of sale
or two years from the discovery of the facts constituting the violation, but in
any event no longer than seven years from the date of sale.
However, we may terminate the rights of the purchasers to seek additional
remedies under the Hawaii Uniform Securities Act by making a written rescission
offer, before suit, to refund the consideration paid together with interest at
10% per year for the period from the date of payment by the purchaser to the
date of repayment. If the purchaser refuses or fails to accept such offer within
30 days of its receipt, that purchaser will no longer have any right of
rescission under Hawaii law.
We believe that this rescission offer complies in all material respects
with the rescission offer requirements of the Hawaii Uniform Securities Act.
11
Oregon
Under Oregon law, an issuer is civilly liable to a purchaser of its
securities sold in violation of the registration or qualification requirements
of the Oregon Securities Law. The purchaser may sue either at law or in equity
to recover the consideration paid for such securities, plus interest from the
date of payment, at the rate equal to the greater of the interest specified in
Section 82.010 of the Oregon Securities Law for money judgments, which is 9%, or
the interest provided in the security if the security is an interest-bearing
security, less any amount received on the security, at any time prior to the
three year anniversary of the contract of sale. If the purchaser no longer owns
the security, the purchaser may recover damages in the amount that would be
recoverable upon tender, less the value of the security when the purchaser
disposed of it and less the interest on such value at the rate specified above,
at any time prior to the three year anniversary of the contract of sale.
However, we may terminate the rights of the purchasers to seek the
foregoing remedies under the Oregon Securities Law by making a written
rescission offer, before suit, to refund the consideration paid for such
securities, plus interest from the date of payment, at the rate equal to the
greater of the interest specified in Section 82.010 of the Oregon Securities Law
for money judgments, which is 9%, or the interest provided in the security if
the security is an interest-bearing security, less any amount received on the
security, and a statement of the effect on the purchaser's right if he fails to
respond within 30 days of receipt of the notice, or if the purchaser no longer
owns the security at the time of the receipt of such notice, within 30 days of
the date of the notice, informing the issuer of purchaser's inability to tender
back the security. A purchaser may commence suit after receipt of notice: (1) if
the purchaser who still owned the security when the notice was received,
accepted the payment offer within 30 days of receipt, and has not been paid the
full amount offered, or (2) if the purchaser no longer owns the security at the
time of receipt of the notice, and within 30 days after receipt, gave written
notice of inability to tender back the security. If the purchaser fails to
accept such offer within 30 days of its receipt, that purchaser will no longer
have any right of rescission under Oregon law.
We believe that this rescission offer complies in all material respects
with the rescission offer requirements of the Oregon Securities Law.
South Carolina
Under South Carolina law, an issuer is civilly liable to a purchaser of
its securities sold in violation of the registration or qualification
requirements of the South Carolina Uniform Securities Law. The purchaser may sue
either at law or in equity to recover the consideration paid for such
securities, plus interest at 6% per year from the date of payment, plus costs,
and reasonable attorneys' fees, less any income received on the securities, or
if the purchaser no longer owns the security, for damages in an amount that
would be recoverable upon tender, less the value of the security at the time the
purchaser disposed of it, plus interest at 6% per year from the date of
disposition, at any time prior to the three year anniversary of the contract of
sale.
However, we may terminate the rights of the purchasers to seek the
foregoing remedies under the South Carolina Uniform Securities Law by making a
written rescission offer, before suit, to refund the consideration paid together
with interest at 6% per year for the period from the date of payment by the
purchaser to the date of repayment, less the amount of any income received on
the security. If the purchaser fails to accept such offer within 30 days of its
receipt, that purchaser will no longer have any right of rescission under South
Carolina law, unless the purchaser affirmatively rejects the offer within that
period, in which case the purchaser will retain his right to bring suit.
We believe that this rescission offer complies in all material respects
with the rescission offer requirements of the South Carolina Uniform Securities
Law.
Funding the Rescission Offer
The rescission offer will be funded from our existing cash balances. If
all persons eligible to participate accept our offer to repurchase options to
the full extent, our results of operations, cash balances or financial condition
will not be affected materially.
12
Directors, Officers and Major Stockholders
None of our directors, officers or holders of at least 5% of AVP stock are
eligible to participate in this offer.
13
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences of the Rescission Offer
In the opinion of Loeb & Loeb LLP, the following are the material U.S. federal
income tax consequences of the proposed rescission offer to our option holders
accept the rescission offer. However, this discussion does not address all
income tax considerations that may be relevant to you in light of your
individual circumstances, including if you are a foreign person, a person who is
not an individual or a person subject to the alternative minimum tax provisions
of the Internal Revenue Code of 1986, as amended. Also, we do not address any
foreign, state or local tax considerations. ACCORDINGLY, YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
RESCISSION OFFER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO YOU OF THE RESCISSION OFFER.
Redemption of Unexercised Options
If you accept the rescission offer with respect to your stock option, you will
recognize income on the cash that you receive for United States income tax
purposes as of the date that it is paid to you. Any applicable withholding taxes
or charges on the cash payment will be withheld from your cash payment and paid
to the appropriate tax authority, as permitted or required by law. The payment
of cash will be treated as ordinary income for United States income tax purposes
in the year you receive it.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY, AND IS INCLUDED
FOR GENERAL INFORMATION ONLY. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE RESCISSION OFFER, IN
LIGHT OF YOUR SPECIFIC CIRCUMSTANCES, INCLUDING THE TRANSACTION IN WHICH THE
SHARES WERE ACQUIRED.
14
RISK FACTORS
You should carefully consider the risks described below, together with all of
the other information included in this document, before making a decision to
accept or reject our rescission offer. If any of the following risks actually
occurs, our business, financial condition or operating results could be
materially and adversely affected.
Risks Related to the Rescission Offer
WE MAY CONTINUE TO HAVE POTENTIAL LIABILITY EVEN AFTER THIS RESCISSION OFFER IS
MADE.
Certain option grants made by us in 2004 may not have complied with the
Securities Act of 1933, because these securities transactions were not
registered under federal securities laws and we did not seek to qualify these
securities for exemption from registration. In addition, such securities
transactions were not qualified under state securities laws, and we did not take
affirmative steps to ensure the availability of any applicable exemptions from
qualification under these state securities laws. To address these issues, we are
making the rescission offer to all holders of outstanding options subject to
rescission. However, the Securities Act of 1933 does not provide that a
rescission offer will extinguish a holder's right to rescind the grant of an
option that were not registered or exempt from the registration requirements
under the Securities Act of 1933. Consequently, should any recipients of our
rescission offer reject the offer, we may remain liable under the Securities Act
of 1933 for the purchase price of the options that are subject to the rescission
offer.
YOUR FEDERAL RIGHT OF RESCISSION MAY NOT SURVIVE IF YOU AFFIRMATIVELY REJECT OR
FAIL TO ACCEPT THE RESCISSION OFFER.
If you affirmatively reject or fail to accept the rescission offer, it is
unclear whether or not you will have a right of rescission under federal
securities laws after the expiration of the rescission offer. The staff of the
Securities and Exchange Commission is of the opinion that a person's right of
rescission created under the Securities Act of 1933 may survive the rescission
offer. However, federal courts in the past have ruled that a person who rejects
or fails to accept a rescission offer is precluded from later seeking similar
relief.
WE CANNOT PREDICT WHETHER THE AMOUNTS YOU WOULD RECEIVE IN THE RESCISSION OFFER
WOULD BE GREATER THAN THE FAIR MARKET VALUE OF OUR SECURITIES.
The amount you would receive in the rescission offer is fixed and is not
tied to the fair market value of our common stock at the time the rescission
offer closes. As a result, if you accept the rescission offer, you may receive
less than the fair market value of the securities you would be tendering to us.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, ANTICIPATE FUTURE LOSSES, AND MAY NEVER BECOME
PROFITABLE.
AVP has operated at a loss since 2001, when current management was
installed. Losses for 2005 and 2004 were $9,000,000 and $2,900,000,
respectively. (The net loss of $9,000,000 includes a $5,600,000 charge to
consulting expense as a result of non-employee warrants valuation.) Losses for
the first three months of 2006 and 2005, were $1,500,000 and $4,900,000,
respectively. We cannot predict whether our current or prospective business
activities will ever generate enough revenue to be profitable. If we do not
generate enough revenue to be profitable, our business might have to be
discontinued, in which case, investors would lose all or most of their
investment in AVP.
WE MAY REQUIRE ADDITIONAL FINANCING, AND ANY INABILITY TO OBTAIN ADDITIONAL
FINANCING WHEN REQUIRED COULD CAUSE OUR BUSINESS TO FAIL.
In 2005, our net use of cash from operations (cash receipts from revenue
less operating disbursements, including overhead departments -- executive,
administrative, marketing -- and event related disbursements) was approximately
$180,000 per month. At this rate, we would use all of our cash on hand and
current receivables as of
15
June 30, 2006 by September 30, 2009, after settling estimated rescission
expenses. However, lower revenue or increased expenses in the future could
reduce this period.
WE RELY ON SHORT-TERM SPONSORSHIP AGREEMENTS FOR MOST OF OUR REVENUE, SO WE
CANNOT ASSURE, LONG TERM, THAT WE WILL RECEIVE SUFFICIENT CASH FLOW TO MAINTAIN
THE VIABILITY OF OUR BUSINESS.
In 2005, national sponsorship revenue accounted for 78% (including two
national sponsors responsible for 27%) of total revenue. Of AVP's 15 sponsors in
2005, ten have agreements that extend to at least 2006; seven that extend to at
least 2007; four that extend to at least 2008, and one through 2009.
Accordingly, AVP's continued operations will depend, among other things, on
AVP's ability to renew current AVP sponsors and attract new sponsors, as well as
increase sponsorship rates.
AVP'S MANAGEMENT BEGAN OPERATING AVP ONLY RECENTLY, MAKING AN ASSESSMENT OF
MANAGEMENT'S FUTURE PERFORMANCE RELATIVELY DIFFICULT TO ASSESS.
Our management began operating the Association in 2001 and AVP in 2005, so
it has only a limited track record upon which investors can assess management's
effectiveness. Consequently, investors are likely to have greater difficulty in
accurately predicting whether an investment in AVP will be prosperous.
AVP'S LIMITED OPERATING HISTORY MAKES AVP HIGHLY RELIANT ON MANAGEMENT.
We lack the goodwill of an established business and therefore rely on
individual members of current management to create business strategies and
relationships, attract sponsors, and develop tournament formats and operating
procedures necessary for us to survive and prosper. The departure of one or more
of our executives could impair our operations, and, in particular, the services
of our Chief Executive Officer and Tour Commissioner, Leonard Armato, would be
very difficult to replace. If we are unable to find suitable replacements for
departed management, we might incur losses that impair investors' investments in
AVP.
OUR SUCCESS DEPENDS ON FAN INTEREST, SO OUR BUSINESS COULD FAIL IF WE ARE UNABLE
TO MAINTAIN INTEREST IN OUR SPORT.
Beach volleyball is a relatively new sport, so its continuing popularity
cannot be assumed, unlike baseball, basketball, football, golf, or auto racing.
Public tastes change frequently, so interest in beach volleyball may decline in
the future. Our ability to generate revenue and earn profits would be threatened
by a loss of popular interest in the sport. If we do not generate enough revenue
to be profitable, our business might have to be discontinued, in which case,
investors would lose all or most of their investment in AVP.
WE MAY BE UNABLE TO COMPETE WITH LARGER OR MORE ESTABLISHED SPORTS LEAGUES FOR
CORPORATE ADVERTISING BUDGETS.
We face a large and growing number of competitors in the sports and
entertainment industry. Many of these competitors have substantially greater
financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition, and more established
relationships in the industry than does AVP. As a result, certain of these
competitors may be in better positions to obtain corporate advertising. AVP
cannot be sure that it will be able to compete successfully with existing or new
competitors.
THERE ARE ONLY A FEW MAJOR BROADCAST AND CABLE NETWORKS THAT CAN DISTRIBUTE OUR
PROGRAMMING TO A SUFFICIENTLY LARGE AUDIENCE, SO WE HAVE ONLY VERY LIMITED
ALTERNATIVES IF ONE OR MORE OF OUR TELEVISION DISTRIBUTORS PERFORMS
UNSATISFACTORILY, INSISTS ON UNFAVORABLE CONTRACT TERMS, OR ELECTS NOT TO CARRY
OUR PROGRAMMING.
We require widespread distribution of our programming to interest sponsors
and other advertisers. There are only four major broadcast networks and only
several major cable networks that include sports programming and provide
sufficient market reach, so our choices are limited, and our future ability to
enter into distribution agreements with major broadcast and/or cable networks
cannot be assured. If we are unable to make suitable distribution arrangements,
we likely would incur losses that impair investors' investments in AVP. If we
are unable to secure distribution after the expiration of our current network
and cable broadcast agreements, our business will be materially adversely
affected.
16
DIFFICULTY IN RETAINING CURRENT PLAYERS OR RECRUITING FUTURE PLAYERS COULD
IMPAIR OUR PROSPECTS.
The number of professional beach volleyball players is small in relation
to other professional sports, as is the number of first-rate, non-pro players
who might play professionally in the future. The players' audience appeal is
critical to maintaining popular interest in the sport. Our prospects could
decline and investors' investments in AVP impaired, if players on the tour or
other qualified players are recruited by competitors or other volleyball
organizations or decide to pursue other occupations.
IF WE ARE UNABLE TO HIRE ADDITIONAL NEEDED PERSONNEL, OUR GROWTH PROSPECTS WILL
BE LIMITED, OR OUR OPERATIONS MAY BE IMPAIRED.
Our business requires uniquely trained and experienced professionals, and
our success depends in large part upon our ability to attract, develop,
motivate, and retain highly skilled personnel. Qualified employees will be a
limited resource for the foreseeable future. Our chief financial officer lacks
experience in public accounting or as a public company principal financial
officer. As a new company with little history, we may have particular difficulty
hiring qualified personnel. If we are unable to retain necessary personnel, our
business probably will suffer, and investors may incur losses on their
investment in AVP.
Risks Relating to our Securities
IF ACCEPTED IN ITS ENTIRETY, THE RECISSION OFFER WOULD REQUIRE US TO PAY THE
PLAYERS $254,000, INCLUDING INTEREST, FROM THE DATE OF THEIR 2004 EXCLUSIVE
AGREEMENTS.
In our exclusivity agreements with our players, we agreed to grant stock options
to eligible AVP players based upon their performance results. The share amounts
were allocated following the 2004 season.
The grants of these options were not exempt from registration or qualification
under federal and state securities laws, and AVP did not obtain the required
registrations or qualifications. Therefore, we are offering to repurchase the
options at a price of $0.3156 per share subject to the option, which price
equals 20% of the options' per share exercise price. If every player accepts the
rescission offer, we would pay a total of $254,000, including through August 31,
2006.
OUR STOCK PRICE MAY BE VOLATILE.
There has only been a limited public market for our securities, and there
can be no assurance that an active trading market will be maintained. The OTCBB
is a relatively unorganized, inter-dealer, over-the-counter market that provides
significantly less liquidity than NASDAQ and the other national securities
markets. The trading price of our common stock is expected to fluctuate
significantly, and, as is the case for OTCBB securities generally, is not
published in newspapers.
LIMITATIONS OF THE OTCBB CAN HINDER COMPLETION OF TRADES.
Trades and quotations on the OTCBB involve a manual process that may delay
order processing. Price fluctuations during a delay can result in the failure of
a limit order to execute or cause execution of a market order at a price
significantly different from the price prevailing when an order was entered.
Consequently, one may be unable to trade in our common stock at optimum prices.
PENNY STOCK REGULATIONS MAY RESTRICT THE MARKET FOR OUR COMMON STOCK.
The SEC has adopted regulations that generally define a "penny stock" to
be any equity security having a market price (as defined) less than $5.00 per
share, or an exercise price of less than $5.00 per share, subject to certain
exceptions. As a result, broker-dealers selling our common stock are subject to
additional sales practices when they sell such securities to persons other than
established clients and "accredited investors." For transactions covered by
these rules, before the transaction is executed, the broker-dealer must make a
special customer suitability determination; receive the purchaser's written
consent to the transaction; and deliver a risk disclosure document relating to
the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative taking the
order; current quotations for the securities; and, if the broker-
17
dealer is the sole market maker, the broker-dealer must disclose this fact and
the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict trading in our common stock.
ACCORDING TO THE SEC, THE MARKET FOR PENNY STOCKS HAS SUFFERED IN RECENT YEARS
FROM PATTERNS OF FRAUD AND ABUSE.
Such patterns include:
o control of the market for the security by one or a few
broker-dealers that are often related to the promoter or
issuer;
o manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases;
o "boiler room" practices involving high pressure sales tactics
and unrealistic price projections by inexperienced sales
persons;
o excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
o dumping of securities after prices have been manipulated to a
high level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market.
THE OTCBB IS VULNERABLE TO MARKET FRAUD.
OTCBB securities are frequent targets of fraud or market manipulation,
both because of their generally low prices and because OTCBB reporting
requirements are less stringent than those of the stock exchanges or NASDAQ.
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT STOCK PRICE.
OTCBB dealers' spreads (the difference between the bid and ask prices) may
be large, causing higher purchase prices and less sale proceeds for purchasers
or sellers of our securities.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE, INCLUDING SHARES ISSUABLE UPON
CONVERSION OR EXERCISE OF OUTSTANDING SECURITIES, CAN DEPRESS MARKET PRICES.
Legal restrictions on the sale by former Association stockholders of
approximately 6,420,304 shares of common stock lapsed on February 28, 2006.
Sales of these shares may now be made pursuant to Securities Act Rule 144,
which, in AVP's case, permits a holder in each three-month period to sell shares
in an amount up to 1% of the outstanding class, subject to procedural
conditions. All restrictions will lapse respecting 4,624,511 shares on February
28, 2007. An additional 18,452,402 shares of common stock are reserved for
issuance upon conversion or exercise of convertible preferred stock, stock
options, and stock purchase warrants. The market's recognition that a large
amount of stock might enter the market suddenly can depress market prices.
POTENTIAL CONTROL BY MANAGEMENT.
Currently, all AVP directors and officers as a group hold AVP voting
securities representing approximately 8.6% of the votes that can be cast by
holders of all AVP voting securities. If AVP's management exercised all rights
to acquire AVP voting stock held by them, and no other holder of securities
exercisable for AVP voting securities did so, AVP's management would control
approximately 41.8% of votes that could be cast. If, in addition, all other
holders of AVP rights to acquire AVP voting stock exercised those rights, AVP's
management would hold about
18
31.6% of the outstanding votes. In the former case, AVP's management, as a
practical matter, could elect all directors and take any other action authorized
for stockholders to take (other than actions requiring the class vote of holders
of Series B Preferred Stock). In the latter case, although management would not
control a majority of the outstanding votes, its 31.6% ownership would give it a
strong advantage in regard to election of directors or other action requiring
stockholder approval, because management would need holders of more than 18.4%
of the votes to vote for management's proposals. Defeat of a management proposal
would require votes against by holders of more than 73.5% of all votes held by
non-management stockholders, a very difficult amount to achieve.
LIABILITY OF DIRECTORS FOR BREACH OF DUTY OF CARE IS LIMITED.
As permitted by Delaware law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty, except in certain cases. Our stockholders' ability to recover
damages for fiduciary breaches may be reduced by the provision. In addition, we
are obligated to indemnify our directors and officers regarding stockholder
suits, under some circumstances.
19
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The price of our common stock is quoted on the OTCBB under the symbol "AVPI."
Until March 21, 2005, our common stock traded on the OTCBB under the symbol
"ONET," and until December 16, 2005, our common stock traded on the OTCBB under
the symbol "AVPN."
As of June 30, 2006, we had 19,654,908 shares of common stock outstanding. The
following table sets forth certain information with respect to the high and low
market prices of our common stock for the periods indicated. Price information
has been retroactively adjusted for the 1-for-10 reverse stock split effected
December 16, 2005.
Year Quarter High Low
- ---- ------- ----- -----
2006 1st $1.95 $0.99
2005 4th 2.00 1.20
3rd 2.60 1.40
2nd 3.40 1.40
1st 4.40 3.20
2004 4th 4.70 2.60
3rd 5.40 2.10
2nd 3.80 1.60
1st 4.20 1.70
The high and low prices are based on the average bid and ask prices for our
common stock, as reported by the OTCBB. Such prices are inter-dealer prices
without retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Stockholders
As of July 13, 2006, there were 347 holders of record of our common stock.
Transfer Agent
Our transfer agent is U.S. Stock Transfer Corporation, 1745 Gardena Avenue,
Suite 200, Glendale, CA 91204-2991. Our transfer agent's telephone number is
(818) 502-1404.
Dividends
We have never declared or paid any cash dividends, and we expect to not do so
for the foreseeable future. We expect to retain earnings, if any, to fund our
business.
Equity Compensation Plans
Information regarding AVP's equity compensation plans, as of December 31, 2005,
is set forth in the table below:
20
Number of Securities
to be issued upon Weighted average
exercise of outstanding exercise price of Number of securities
options, warrants and outstanding options, remaining available for
rights warrants and rights future issuance
Plan Category (a) (b) (c)
- ----------------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders -- $ -- --
Equity compensation
plans not approved by
security holders 12,318,193 $0.84 17,681,807
---------- ----- ----------
Total 12,318,193 $0.84 17,681,807
========== ===== ==========
21
BUSINESS
Business Development
We originally incorporated under the name Malone Road Investments, Ltd., on
August 6, 1990, in the Isle of Man. We re-domesticated in the Turks and Caicos
Islands in 1992 and subsequently domesticated as a Delaware corporation in 1994.
Pursuant to Delaware law, we are deemed to have been incorporated in Delaware as
of the date of our formation in the Isle of Man. We changed our name to PL
Brands, Inc. in 1994; changed our name to Othnet, Inc. in March 2001; and
changed our name to AVP, Inc. on March 9, 2005. Since December 2001 until the
Merger (as defined below), we had no business operations other than to attempt
to locate and consummate a business combination with an operating company.
On February 28, 2005, the Association and a wholly owned subsidiary of AVP
consummated the Merger, pursuant to the Merger Agreement, signed in June 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 our
wholly owned subsidiary, and the Association's former stockholders (including
holders of stock options and stock purchase warrants) beneficially owned 61.2%
of all common stock beneficially owned by all beneficial owners of our capital
stock. Concurrent with the merger, we closed a private placement of units of
Series B Convertible Preferred Stock and common stock purchase warrants, gross
proceeds of which was $5,000,061 (the "February 2005 Financing"). On December
16, 2005, AVP effected a one-for-10 reverse stock split, which is reflected in
all share amounts in this prospectus.
Our Business
We own and operate professional beach volleyball tournaments in the United
States. The AVP tour is the sole nationally recognized U.S. professional beach
volleyball tour. Every top U.S. men's and women's beach volleyball professional,
including the women's gold and bronze medalists in the 2004 Olympic Games,
competes on the AVP tour. Our business includes establishing and managing
tournaments; sponsorship sales and sales of broadcast, licensing, and trademark
rights; sales of food, beverage, and merchandise at the tournaments; contracting
with players in the tour; and associated activities.
We produced 14 men's and 14 women's professional beach volleyball tournaments
throughout the United States from April through October 2005. For 2006, we have
scheduled 16 men's and 16 women's events to be held in Fort Lauderdale, FL;
Tempe, AZ; Santa Barbara, CA; Huntington Beach, CA; Hermosa Beach, CA;
Sacramento, CA; Seaside Heights, NJ; Atlanta, GA; Birmingham, AL; Chicago, IL;
Manhattan Beach, CA; Brooklyn (Coney Island), NY; Boulder, CO; Cincinnati, OH;
Las Vegas, NV; and Lake Tahoe, NV. Ten of the 16 cities are the same as last
year. We have more than 200 of the top professional players under exclusive
contracts, as well as a growing base of spectators and television viewers that
we believe represent an attractive audience for national, regional, and local
sponsors.
We believe that beach volleyball has potential for continuing commercial growth
because of its popularity with a demographic group we believe is considered
highly desirable by advertisers--educated, affluent, 18 to 34 year-old,
consumers. Moreover, we believe that beach volleyball enjoys significant
popularity in the United States and worldwide, as evidenced by National
Broadcasting Company's strong television ratings and the attendance figures for
beach volleyball at the 2004 Athens Summer Games.
Sources of Revenue. We generate revenue principally as follows:
o National Sponsorships: We currently generate by far the
greatest amount of our revenue by selling to national sponsors
fully integrated sponsorships, which include both advertising
time during live or previously taped broadcasts of our
tournaments and significant on-site exposure at the
tournaments in the form of signage, interactive areas, and the
like. In addition to paying for advertising time and on-site
exposure, sponsors support the AVP tour through retail
activation (e.g., national in-store promotions featuring our
brand), media buys that support our events, and other
promotional activities that support our brand (e.g., print ads
and television commercials featuring AVP branding). National
sponsors include Crocs (through 2008), Bud Light (through
2008) Microsoft (through 2007), Gatorade (through 2009),
Nautica (through 2008), Paul Mitchell
22
(through 2008), Jose Cuervo Tequila (through 2008), Wilson
(through 2008), McDonald's and Nature Valley. Many of our
sponsors have been in place since 2003 or earlier.
On April 12, 2006, AVP entered a multi-year sponsorship
agreement with Crocs, Inc. pursuant to which Crocs is the
title sponsor of the AVP Tour through the final event of the
2008 AVP tour season. The agreement is significant to AVP's
2006 projected revenue.
The amount that we charge each national sponsor depends
primarily on the number of network or cable advertising units
that the national sponsor receives in our broadcasts, as well
as the exposure that the national sponsor receives on-site at
our tournaments. We hire independent marketing and promotional
valuation companies each season to measure the benefits that
national sponsors receive and provide these valuation results
to our national sponsors to validate their investment in AVP.
National sponsorship revenue accounted for 78% of revenue in
2005, with two national sponsors accounting for 27% of total
revenue. We conduct national sponsorship sales primarily with
our own sales staff.
o Local Sponsorship Revenue: We also receive revenue from local
and regional companies seeking to reach our fan base. We sell
a variety of local packages at various financial levels
intended to attract a wide range of businesses in each of the
regions and cities where our tournaments take place. We rely
on a combination of local event promoters, the sales forces of
local market print, television, and radio stations, and our
in-house sales staff to make local and regional sales.
o Promoter Fee Revenue: In 2005, we entered an agreement with an
event promoter in Cincinnati for the promoter pay AVP a fee in
exchange for the right to exploit local revenue, including
ticket sales, parking, concessions, and ancillary revenue. The
event promoter was also required to pay for specified event
expenses such as the stadium, sand, various operational costs
(hotel accommodations, certain event personnel, security,
etc.), event permits, and marketing costs. We expect to have
similar arrangements with a total of eight promoters for 2006.
o Activation Fees: We also receive revenue from AVP sponsors who
wish to use AVP's sponsorship services and support personnel
to create, build and/or implement on-site activation in
support of their sponsorship. This revenue is recognized as
activation fees rather than sponsorship revenue when the
agreement with the sponsor specifically sets out specific
activation services and fees that are payable in connection
with the sponsor's sponsorship.
o Corporate Hospitality: In 2005, we sold corporate "suites", as
well as individual hospitality packages called "Beach Club
Packages", which consisted of reserved seating areas and table
seating, food, and beverages. In 2006, we have continued suite
sales and increased the amount of reserved seating, but
eliminated Beach Club Packages.
o Ticket Sales: Increasingly, we are charging admission for
events that previously were free to the general public. In
2005, we charged for general admission at 10 of our 14 men's
and women's events and charged for reserved seating at all 14
events. In 2006, we expect to charge for general admission at
13 of 16 events and for reserved seating at all 16 events.
o Food and Beverage Sales: We generate revenue through food,
beverage, and beer sales at events where such concession
rights are available. Generally, we engage a third-party
concession operator to conduct this activity on our behalf.
o International Television Licensing: We retain all
international television rights to our network and cable
broadcasts. Our events have been broadcast in such countries
as China, South Korea, Japan, Canada and France, as well as
Latin America in the past. We have engaged SFX, Inc. to
license our television programming internationally in 2006.
o Event Merchandising: We sell event merchandise on-site at our
tournaments as well as through our website. Merchandise
includes t-shirts, fitness wear, shorts, swimsuits,
sweatshirts, hats, and other apparel. We entered a two-year
agreement ending in 2006 with Anschutz Entertainment Group
23
(AEG) for AEG to provide all merchandising services on our
behalf at our tournaments, as well as to host our online store
and assume responsibility for fulfillment.
o Trademark Licensing and Other Ancillary Revenue: In addition
to merchandising, we license our trademarks and logos to
Wilson Sporting Goods Co., for volleyballs, and Sport Fun,
Inc., for volleyball net systems. In addition, we have
recently entered licensing agreements with Crocs, Inc for AVP
branded footwear, and Warnaco Swimwear, Inc. for AVP-SPEEDO
co-branded apparel for sale at AVP events, online and retail.
Distribution. We have distribution agreements with National Broadcasting
Company (NBC) and Fox Broadcasting Company (FBC) to broadcast certain of our
events on network television, and with Fox Sport Net (FSN) to broadcast the
remainder of our events on cable and satellite television. By separate
agreements, we contract with NBC, FBC and FSN for production of the programming.
o NBC: NBC broadcast 15 hours of five of our events in 2005. We
paid NBC a per program fee for such broadcast time and
retained all of the commercial units in the broadcasts. We
have arranged for 11 hours to be broadcast on NBC in 2006.
o FBC: FBC will broadcast 3 hours of coverage of the men's and
women's finals at two events in 2006. AVP retains all the
commercial units in the broadcast. FBC received AVP common
stock in exchange for the broadcast time and production.
o FSN: FSN distributes our programming over cable and satellite
television. In 2005, FSN broadcast over 45 hours of live or
taped programming. For 2006, FSN will broadcast all 16 events
(including replaying the events broadcast by NBC and FBC). FSN
will distribute the programming and provide production
services in return for the same number of commercial units in
the broadcasts as FSN received during 2005 and previously. AVP
does not pay FSN any compensation for the broadcast time or
television production services that FSN provides; FSN's only
compensation is the commercial units that FSN retains in the
broadcasts.
Marketing. We market our tournaments and their broadcasts nationally,
regionally, and locally. NBC and FBC promote the network tournaments nationally,
while FSN promotes the cable tournaments through its regional cable network. We
make promotional arrangements with newspapers and radio and television stations
to advertise and promote our events locally. In addition, we engage public
relations firms to generate interest and coverage of our events and broadcasts.
We maintain contact with volleyball enthusiasts and seek to increase our fan
base through our AVPNext grassroots program.
AVPNext is an outreach program for volleyball players of all skill levels. The
program features a national network of recreational tournament and league
organizers, offers both children and adults of all skill levels opportunities to
participate in the sport of volleyball through weekend tournaments,
instructional camps/clinics, and recreational league play.
AVPNext also provides aspiring semi-pro players and high-level amateurs the
opportunity to play against top-flight competition and potentially earn
exemptions into our professional tournaments. The 2005 AVPNext circuit included
65 tournaments across the nation, mainly run by local promoters. The tournaments
generally offered modest prize purses, an opportunity to establish a national
ranking, and in some select tournaments an automatic entry into our professional
tournaments.
Operations. We own all of our events, and, except for events that we
license to local event promoters, we operate and conduct most AVP Tour
operations and logistics in-house. These operations include:
o Setting up the event, including loading and transporting the
equipment to and from each event; building the volleyball
courts; overseeing construction of stadiums by outside
bleacher companies; mounting signage and inflatables for
sponsors; and constructing media, hospitality, and local
sponsorship areas;
24
o Addressing local regulations and permits;
o Coordinating the professional players (including registration
for the qualifying and main events);
o Organizing officials for the event;
o Managing the tournament and the spectator experience;
o Providing entertainment (e.g., music) at the event;
o Providing corporate hospitality; and
o Providing media support, e.g., tournament statistics, press
releases, etc.
To set up an event for a standard three-day tournament scheduled to begin on a
Friday, we generally arrive on Monday and require three full days to complete
construction. For tournaments that will be telecast live on NBC or FBC, we
generally produce four-day events, and the preparations start earlier. We own
four semi-trailers to transport all event equipment from a central warehouse
located in Los Angeles to each site. To manage equipment hauling, we schedule
tour events to occur close to one another or to allow sufficient transportation
time.
Each host city requires us to obtain a different set of permits to run a tour
event, a majority of which the city provides without charge. Typical permits
include event; filming; bleacher; fire and police departments; and food and
concessions. Our staff supervises compliance with local regulations and permits.
Our exclusive contracts with more than 200 of the top men and women professional
beach volleyball players in the United States prohibit the athletes from
competing in non-AVP professional beach volleyball tournaments anywhere in the
world, unless specifically provided for in the contract or otherwise agreed by
us. All players sign the same standard AVP player contract. The player contracts
extend through December 31, 2008 and provide for:
o a minimum amount of prize money during each year of the term
($3,000,000 in 2005, with $500,000 increases for each
subsequent year);
o a minimum of ten men's and ten women's events per year;
o medical benefits for the top 100 ranked men's and women's
players; and
o restrictions as to the logos or insignias athletes may wear at
AVP events.
Each player is responsible for his or her own housing and travel to and from
events. We provide players with food during the tournament and make medical
services available in case of injury.
In 2004, AVP also reserved 652,494 shares for issuance upon exercise of stock
options allocated to the players based upon their performance during the 2004
season. These four-year stock options will become exercisable (at a price of
$1.578 per share) upon effectiveness of a registration statement under the
Securities Act, except insofar as this rescission offer is accepted.
Other personnel essential to operating a successful event include:
o Officials and referees;
o Local volunteers to assist in the operation of scoreboards and
act as ball retrievers;
o Local contract workers to sell tickets, operate concession
areas, and supervise parking; and
o Outside contractors to provide security, waste clean-up, and
other services required in connection with the event.
25
We recognize that local support for an AVP tour event is critical to our
success. We try to hold events in the same locations and at the same times every
year, so that the volleyball tournaments become local civic events, enabling
retailers and community leaders to anticipate and support the tournament
annually. We work with city councils and local leaders and businesses to obtain
financial, sales, logistic, marketing, and promotional support for our events.
Communities often waive the cost of city services, recognizing the benefit of
making our tournaments a regular event. Likewise, we coordinate youth or amateur
tournaments and hold free volleyball clinics in connection with our events to
generate local goodwill and enthusiasm.
Employees
Currently, we have 28 full-time employees and retain 3 independent contractors.
Competition
While we believe we have a loyal fan base, the sports and entertainment industry
is highly competitive and is also subject to fluctuations in popularity, which
are not easy to predict. Fundamentally, we compete for sponsorship revenue,
television ratings, and fan base with other sports leagues and tours,
entertainment programming, and other forms of leisure activities. Our success in
these areas depends heavily on continuing to grow the sport's popularity.
Our programming is directed at a hard to reach demographic
group--college-educated men and women aged 18 to 34, earning $50,000 or more per
year--whom we believe are highly prized by advertisers: We compete for an
audience that is fiercely contested.
We believe that our exclusive player contracts significantly reduce the
likelihood that an attempt to establish a competing professional beach tour in
the United States during the term of the contracts would be successful.
Federation International de Volleyball (FIVB) sanctions a series of professional
beach volleyball events in various countries throughout the world and sells
sponsorships and television programming in connection with these events. We
allow our players to compete in some FIVB events as provided for in our player
agreements. Our international television licensing competes with FIVB
programming, and we will potentially face competition from the FIVB if we expand
our events to non-United States locations. In addition, FIVB might claim the
authority, but refuse, to sanction any AVP event in another country.
Reports to Security Holders
Annual reports. We deliver annual reports containing audited financial
statements to security holders.
Periodic reports and other information. We file annual and quarterly reports,
current reports, proxy statements, and information statements with the SEC.
Availability of Filings. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an
Internet site (http://www.sec.gov) that contains reports and proxy and
information statements and other information regarding issuers that file
electronically with the SEC. Our Internet site is http://www.avp.com.
Legal Proceedings
A complaint was filed by Carl Schneider and Schneider Productions, LLC on
October 24, 2005 in the United States District Court, Central District of
California, in which the plaintiffs seek damages for copyright infringement in
connection with the allegedly unauthorized use of a still photograph in a
television commercial that was broadcast on NBC and FSN in 2005.
Discovery has only recently commenced and therefore management is unable to
determine or predict the outcome of this claim or the impact, if any, on the
Company's financial condition or results of operations. Accordingly, the Company
has not recorded a provision for this matter in its financial statements.
26
Properties
We maintain the following properties:
We lease approximately 12,000 square feet of office space in Los Angeles,
California, which houses our executive and administrative offices, with annual
base rent of approximately $308,000. The lease expires March 31, 2010, subject
to a five-year renewal option.
We sublease approximately 4,500 square feet of warehouse space in Gardena,
California pursuant to a sublease that expires on February 15, 2008, with annual
base cost of approximately $34,000. The space is used for storing tournament
equipment, and our trucks are parked there.
We believe that our current facilities are sufficient for our needs.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements and the
related notes. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Our actual results and the timing of
certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under Risk Factors -- Risks Related to our Business.
Overview
AVP owns and operates professional beach volleyball tournaments in the United
States. AVP's revenue comes from national, regional, and local sponsorships;
ticket sales (general and reserved admissions); corporate hospitality sales;
food and beverage sales; promoter fees; merchandise sales; trademark licensing;
and other ancillary sources.
AVP operates its business through its wholly owned subsidiary, the Association,
the predecessor of which was founded in 1983 by AVP's current CEO, Leonard
Armato, and top players, under the name Association of Volleyball Professionals.
In 1990, to concentrate on other business, Mr. Armato left the company, which
continued under management of the players, but declared bankruptcy in 1999. Mr.
Armato bought control of the company in 2001 through the Association and signed
more than 100 of beach volleyball's top players. Since then, the Association has
steadily expanded its tour, sponsorships, and revenue.
On February 28, 2005, the Association consummated the Merger with Othnet Merger
Sub, Inc., a wholly owned subsidiary of AVP, as a result of which the
Association became AVP's wholly owned subsidiary. Consummation of the Merger
changed the Association's name to its current name, AVP Pro Beach Volleyball
Tour, Inc., and AVP's name was changed to its current name, AVP, Inc., on March
9, 2005.
For all disclosures referencing shares issued, per share amounts, and other
disclosures relating to equity, amounts have been retroactively restated to
reflect share quantities as altered by the terms of the Merger Agreement, the
increase in authorized shares, and the one-for-ten stock split.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
OPERATING INCOME (LOSS) AND NET INCOME (LOSS)
Operating Income (Loss) and Net Income (Loss) % of Revenue
Three Months Ended March 31, Three Months Ended March 31,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----- -----
Operating Income (Loss) $(1,501,472) $(4,826,028) (1223)% (4642)%
Net Income (Loss) $(1,488,546) $(4,881,230) (1212)% (4695)%
The 69% decrease in operating loss in 2006 primarily reflects a decrease in
consulting expense of $3,487,296 as no new options or warrants were granted
during the three months ending March 31, 2006, compared to 1,266,794 of warrants
granted for the three months ended March 31, 2005. The reduction in consulting
expense offset increases in depreciation, player recruitment expenses as well as
salary increases and additional new hires.
Excluding such warrant consulting expense, net loss for the three months ended
March 31, 2005 would have been approximately $1,383,208 compared to $1,477,820
for 2006, an increase of 7%.
28
REVENUE
Summary Revenue
Three Months Ended March 31, Percentage
---------------------------- Increase
2006 2005 (Decrease)
-------- -------- ----------
Sponsorship $ - $ - -%
Activation Fees - - -%
Local Revenue - - -%
Miscellaneous Revenue 122,816 103,956 18%
-------- --------
Total Revenue $122,816 $103,956 18%
======== ========
The preceding chart compares revenues from 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
during the tour, as the events occur and collection is reasonably assured, in
the proportion that prize money for an event bears to total prize money for the
season. AVP's beach volleyball tournament season customarily commences in early
April and continues until late September or early October. We did not produce
any beach volleyball events in the first quarters of 2006 or 2005. Accordingly,
we did not recognize any sponsorship revenue, activation fees, or local revenue
in the quarters ended March 31, 2006 and 2005.
The 18% increase in miscellaneous revenue primarily reflects an increase in
trademark licensing revenue in connection with volleyball and volleyball net
systems sales.
GROSS PROFIT
Gross Profit
Three Months Ended March 31,
----------------------------
2006 2005
-------- --------
Revenue $122,816 $103,956
Event Costs - -
-------- --------
Gross Profit $122,816 $103,956
======== ========
Gross Profit % 100% 100%
======== ========
AVP's gross profit for 2006 increased approximately $19,000, or 18% above gross
profit in 2005, primarily due to an increase in trademark licensing revenue.
Since no events took place in the quarters ended March 31, 2006 and 2005 and no
event costs were recognized, the gross margin percentage achieved in 2006
remained unchanged at 100% from the prior year's.
OPERATING EXPENSES
Summary Costs % of Revenue
Increase
Three Months Ended March 31, Three Months Ended March 31, (Decrease) in
---------------------------- ---------------------------- % of Revenue
2006 2005 2006 2005 2006 vs. 2005
---------- ---------- ---- ----- -------------
Event Costs $ - $ - 0% 0% 0%
Administrative 1,068,338 4,518,384 870% 4,346% 3476%
Marketing 555,950 411,600 453% 396% (57)%
Interest Expense 8,213 70,558 7% 68% 61%
---------- ---------- ---- ----- ----
Total Costs $1,632,501 $5,000,542 1330% 4810% 3480%
========== ========== ==== ===== ====
Event costs include the direct cost of producing an event and costs related to
television airing. Event costs are recognized on an event-by-event basis, and
event costs billed and/or paid prior to their respective events are
29
recorded as deferred costs and expensed at the time the event occurs. Since no
events took place in the quarters ended March 31, 2006 and 2005, no event costs
were recognized.
Administrative costs decreased 76% in 2006, due primarily to a significant
reduction in consulting expense as no options or warrants were granted for the
period ending March 31, 2006. For the period ending March 31, 2005,
administrative costs included a $3,498,022 charge to stock compensation for
non-employee warrants valued under SFAS 123 for warrants granted on February 28,
2005, as a result of the Merger. The decrease in consulting expense offset
increases in depreciation expense and 2006 salaries increases.
The 35% increase in marketing costs of $144,350 primarily reflects hiring of a
head of sales and other marketing personnel and increases in miscellaneous
marketing expenditures including logo design cost as a result of new 2006
season, as well as holding of an inaugural high performance camp to recruit top
college volleyball players to play on the AVP tour.
Interest expense in 2006 decreased 88% from 2005 due to elimination of
short-term debt to Management Plus Enterprises, Inc, (MPE), Anschutz
Entertainment Group, Inc. (AEG), Major League Volleyball, Inc. (MLV), and the
Bridge Financing from the Merger.
Depreciation and Amortization Expense
Three Months Ended March 31, Percentage
---------------------------- Increase
2006 2005 (Decrease)
------- ------- ----------
Depreciation Expense $36,545 $22,101 65%
Amortization Expense 2,011 65,346 (97)%
------- -------
$38,556 $87,447 (56)%
======= =======
The increase in depreciation expense of $14,444 resulted from an increase in
depreciable assets, including information technology equipment; activation
equipment; and transportation equipment (e.g., trailer).
Amortization expense decreased 97% from 2005, primarily due to the absence in
2006 of MPE deferred commission costs. The underlying MPE sponsorship sales
service contract was fully amortized in 2005.
Interest Income
Three Months Ended March 31,
---------------------------- Percentage
2006 2005 Increase
------- ------- ----------
Interest Income $21,139 $15,356 38%
The increase in interest income of $5,783 reflects additional interest earned on
the proceeds realized from the February 2005 Financing consummated on February
28, 2005.
Liquidity and Capital Resources
Cash flows from operating activities for the three months ended March 31, 2006
and 2005 were $(14,565) and $989,649, respectively. Working capital, consisting
of current assets less current liabilities, was $(1,679,827) at March 31, 2006
and $87,243 at March 31, 2005. The negative working capital at March 31, 2006
resulted from deferred revenue being recognized for sponsorship payments
received for events occurring after March 31, 2006, and using cash for payments
of accounts payable and accrued liabilities related to the merger and delayed
effectiveness of the registration statement.
At March 31, 2006 and 2005, accounts receivable had decreased $202,903 and
increased $453,706, respectively, and deferred revenues had increased $2,597,165
and $2,969,847, respectively, over their respective amounts at March 31, 2006
and 2005, as AVP collects revenues prior to holding certain events.
On April 12, 2006, AVP entered a multi-year sponsorship agreement with Crocs,
Inc. pursuant to which Crocs became the title sponsor of the AVP Tour through
the final event of the 2008 AVP Tour season. The agreement is significant to
AVP's 2006 projected revenue.
30
Pursuant to the May 2006 Financing, AVP sold 6,470,590 shares of common stock
and five-year warrants to purchase 1,294,118 shares of common stock at price of
$1.00 per share, to accredited investors, for a total price $5,500,001.50.
Oppenheimer & Co., Inc. acted as the placement agent and, in addition to its
commission, received a warrant to purchase 621,177 shares of common stock on
substantially the same terms as the warrants sold to investors. The sale of the
securities is exempt from registration pursuant under Securities Act section
4(2), due to the limited number of investors, all of which are accredited. The
Securities Purchase Agreement requires AVP to file a re-sale registration
statement by June 23, 2006 and gives the investors rights of first negotiation
regarding future issuances of common stock, subject to exceptions.
Capital expenditures for the three months ended March 31, 2006 and 2005 were
$64,216 and $137,384, respectively. During the three months ended March 31,
2006, AVP purchased a scoreboard and a trailer in preparation for the 2006 tour
season, as well as computer equipment. During the three months ended March 31,
2005, AVP purchased information technology equipment, activation equipment,
banners and flags in preparation for the 2005 tour season.
Cash flows provided from financing activities for 2006 and 2005 were $(416,737)
and $3,297,023, respectively. In February 2006, AVP paid the remaining principal
amount due on the promissory note to MPE with whom Leonard Armato, the Chief
Executive Officer and Chairman of the Board of Directors of the Company, was
affiliated. This note constituted the purchase price delivered by AVP to MPE for
the interests in MPE Sales, LLC in connection with sponsorship sales services.
In 2005, upon consummation of the February 2005 Financing, AVP realized proceeds
of $4,247,023, net of offering costs of $753,038. Also, in 2005, AVP repaid
$950,000 on the promissory note to MPE.
Year Ended December 31, 2005 versus December 31, 2004
Operating Income (Loss) and Net Income (Loss)
Operating Income (Loss) and Net Income (Loss)
% of Revenue
------------
2005 2004 2005 2004
----------- ----------- ---- ----
Operating Income (Loss) $(8,908,127) $(2,694,427) (57)% (22)%
Net Income (Loss) $(8,963,956) $(2,873,112) (58)% (23)%
The 231% increase in annual operating loss in 2005 primarily reflects a
$5,640,132 charge to consulting expense, as a result of non-employee warrants
valuation under SFAS 123, and $1,259,646 of Merger-related legal costs, SEC
reporting requirements costs, and consulting fees payable in connection with the
Merger, and the related financing and registration of securities. Such charges
and costs were partially offset by a 27% increase in revenue in 2005.
Excluding such warrant consulting expense, Merger-related costs and fees, SEC
reporting requirement costs, and financial registration costs and fees, net loss
for the year ended December 31, 2005 would have been approximately $2,064,178
compared to $2,873,112 for 2004, a decrease of 28%.
Summary Revenue
Percentage
Increase
2005 2004 (Decrease)
----------- ----------- ----------
Sponsorship $12,918,471 $ 9,918,117 30%
Activation Fees 638,300 838,776 (24)%
Local Revenue 1,241,222 608,928 104%
Miscellaneous Revenue 783,289 943,184 (17)%
----------- -----------
Total Revenue $15,581,282 $12,309,005 27%
=========== ===========
Revenue per event averaged $1,112,949 in 2005 (based on 14 events), compared
with $1,025,750 in 2004 (based on 12 events).
Sponsorship Revenue. The 30% increase in national, regional, and local
sponsorship revenue was primarily due to an increase in contracted-for annual
sponsorship revenue, from $9.9 million in 2004 to $12.9 million in 2005. The
increase in contracted-for sponsorship revenue reflects increases in the number
of events, the amount of network and cable commercial units included in
sponsorship packages, and the prices paid by national sponsors for commercial
units and on-site exposure. Several 2005 AVP sponsors (including the sponsor
responsible for 17% of 2005 revenue) did not renew for 2006. AVP's revenue for
2006 and beyond will depend primarily on our ability to sign new
31
sponsors to replace non-renewing sponsors, re-sign existing sponsors, and
increase the rates of our sponsorship fees. In addition, we entered into an
agreement with an event promoter in Cincinnati in 2005 pursuant to which the
promoter paid AVP a license fee in exchange for the exclusive right to exploit
local revenue, including local sponsorship, ticket sales, parking, concessions,
and ancillary revenue. This license fee was included in sponsorship revenue for
2005. AVP expects to have similar arrangements with a total of eight promoters
in 2006.
Activation Fees. The decrease in activation fees resulted primarily from two
2004 sponsors who used AVP's activation services not returning in 2005. In 2005,
a total of 8 sponsors engaged AVP to create, build and/or implement on-site
activation programs on behalf of those sponsors. One of the 2005 sponsors that
is not returning in 2006 utilized AVP's sponsorship activation services in 2005.
A detailed analysis of local and miscellaneous sources of revenue for 2005 and
2004 follows:
Local and Miscellaneous Revenue
Percentage
2005 2004 Increase
---------- -------- ----------
Local Revenue
Ticket Sales $ 620,319 $304,875 103%
Registration Fees 176,265 126,506 39%
Beach Club (Corporate Hospitality) 260,580 123,688 111%
Suites 119,821 - -
Food and Beverages 64,237 53,859 19%
---------- --------
$1,241,222 $608,928 104%
========== ========
Percentage
Increase/
2005 2004 (Decrease)
-------- -------- ----------
Miscellaneous Revenue
Trademark Licensing $396,806 $339,740 17%
Merchandising 108,948 327,182 (67)%
Site Fees and State Grants 60,000 116,935 (49)%
Grass-Roots Marketing 120,680 81,627 48%
International Television Licensing 37,143 75,000 (50)%
Other 59,712 2,700 2112%
-------- --------
$783,289 $943,184 (17)%
======== ========
Local Revenue. The increase in local revenue primarily reflects increases in the
number of events, the number of events at which AVP charged for general or
reserved seating, the amount charged for general admission and reserved seating,
and intensified local marketing and sales efforts. In 2005, AVP charged for
general admission at ten events compared with six in 2004. The increase in
reserved seating and Beach Club (individual hospitality) revenue in 2005
primarily reflects increased local sales efforts and promotion at each AVP
event. For 2006, the Company has decided to eliminate Beach Club seating and
instead add additional reserved seating, which management believes will result
in higher margins. AVP also enhanced its stadium in 2005 and included
corporate/luxury suites which AVP sold in local markets. AVP expects corporate
suite sales to increase over time as AVP markets and promotes their availability
and benefits.
Miscellaneous Revenue. Miscellaneous revenue primarily decreased because AVP
recognized merchandise licensing revenue in 2005 based upon a royalty received
from AEG, AVP's event merchandiser, as opposed to gross merchandise revenue
received by AVP in 2004, when AVP handled all merchandising operations in-house.
AVP engaged AEG for 2005 and 2006 to sell AVP-branded products at events and
undertake fulfillment of online sales. AVP receives a royalty on all
merchandising revenue. In 2004, gross merchandising revenue was included in
miscellaneous revenue (with costs of goods sold included in operating expenses
under marketing costs).
The remaining decrease in miscellaneous revenue in 2005 stemmed from a small
decline in site fees for one event and a decline in recognized international
television licensing. AVP expects site fees to be reduced in 2006, as AVP
expects to license local revenue to local event promoters at approximately half
the events, rather than retaining local
32
revenue including site fees. Grass-roots marketing revenue primarily reflects an
increase in the number of memberships sold as well as an increase in the price
of memberships. To reduce logistical issues, AVP will be reducing membership
prices in 2006 and member benefits accordingly (e.g. no free t-shirt with
membership). International television licensing revenue decreased from $75,000
in 2004 to $37,143 in recognized revenue in 2005 as a result of AVP's
uncertainty as to how much earned international television licensing revenue
shall be paid to AVP by its 2005 licensing agent, Jones Sagansky Broadcast
Group. AVP terminated its agreement with Jones Sagansky Broadcast Group in 2005
and has engaged SFX, Inc. to license our international television rights in
2006.
GROSS PROFIT
Gross Profit
2005 2004
----------- -----------
Revenue $15,581,282 $12,309,005
Event Costs 11,512,511 9,125,829
----------- -----------
Gross Profit $ 4,068,771 $ 3,183,176
=========== ===========
Gross Profit % 26% 26%
=========== ===========
AVP's gross profit for 2005 increased to approximately $4.1 million, or 28%
above gross profit in 2004, primarily due to an increase in sponsorship revenue.
The gross margin percentage achieved in 2005 remained unchanged from the prior
year's, despite the increase in sponsorship revenue, primarily due to increases
in prize money, staging costs, and advertising costs. In 2004, AVP and the
players extended the exclusive player agreements through December 31, 2008, and,
as part of this extension, AVP agreed to increase prize money from $1.6 million
in 2004 to $3.0 million in 2005 and by $500,000 in 2006, 2007, and 2008.
Accordingly, management expects prize money to increase at significantly lower
rates in those years, compared with the increase between 2004 and 2005.
Staging costs also increased as a result of AVP's using an enhanced stadium for
its 2005 events, which included corporate suites at all events. While staging
costs are expected to increase at AVP events where AVP is responsible for
overseeing construction of the stadium due to increased transportation and labor
costs, management expects increased corporate suite sales at the events to
offset this increase in staging costs. Management expects gross profit margins
to increase in the future through increases in its sponsorship revenue without
corresponding increases in event costs, as well as by increasing the number of
agreements with event promoters.
33
OPERATING EXPENSES
Increase
Summary Costs % of Revenue (Decrease) in
------------ % of Revenue
2005 2004 2005 2004 2005 vs. 2004
----------- ----------- ---- ---- -------------
Event Costs $11,512,511 $ 9,125,829 74% 74% 0%
Administrative 10,529,096 3,442,479 68% 28% 40%
Marketing 2,447,802 2,435,124 16% 20% (4)%
Interest Expense 167,859 245,870 1% 2% (1)%
----------- ----------- --- --- ---
Total Costs $24,657,268 $15,249,302 159% 124% 35%
=========== =========== === === ===
Event costs include the direct cost of producing an event and costs related to
television airing. 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. Event costs in 2005
increased 26%, primarily as a result of the number of events and increases in
the size and scope of events to accommodate and entertain a larger fan base,
including a larger stadium build. Event costs as a percentage of revenue
remained unchanged at 74% between 2004 and 2005. In 2005, we entered an
agreement with an event promoter in Cincinnati, pursuant to which the promoter
was required to pay for some event expenses such as stadium, sand, various
operation costs (hotel accommodations, certain event personnel, security, etc.),
event permits, and marketing and promotion costs. AVP expects to have similar
arrangements with a total of eight promoters in 2006.
Administrative costs rose 206% in 2005, due primarily to charges and expenses
related to the Merger and financing and registration statement filing. The
increase in administrative costs includes a $5,640,132 charge to stock
compensation for non-employee warrants valued under SFAS 123 for warrants
granted on February 28, 2005, as a result of the Merger. The increase in
administrative costs also includes increases in Merger-related legal costs of
$346,804, accounting fees of $263,820, SEC filing and registration costs of
$483,510, and consulting fees payable in connection with the Merger of $165,512,
as well as increases in depreciation expense and budgeted 2005 salaries. Such
increases in administrative costs were partially offset by a decrease in
amortization expense resulting from the elimination of cable network deferred
costs expensed in 2004.
Marketing costs included increases in AVPNext marketing expenditures and public
relations costs to $339,266, in 2005, compared with $185,120, in 2004. These
increases were partially offset by a reduction in amortization of commissions
owed to a related party, Management Plus Enterprises (MPE), for sponsorship
sales services provided in 2001 and 2002, as well as reductions in activation
costs and promotion.
Interest expense in 2005 decreased 32% from 2004, due to repayment and
conversion of short-term debt.
Depreciation and Amortization Expense
Percentage
Increase
2005 2004 (Decrease)
-------- -------- ----------
Depreciation Expense $164,148 $ 57,561 185%
Amortization Expense 261,382 688,437 (62)%
-------- --------
$425,530 $745,998 (43)%
======== ========
The increase in depreciation expense of $106,587 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).
Amortization expense decreased 62% from 2004, primarily due to the absence in
2005 of cable network deferred costs that amounted to $387,500 in 2004. The
decrease in amortization expense was also due to a decline in
34
amortization of MPE deferred commission costs. Deferred commissions charged to
operations were $253,339 in 2005, compared to $294,904 in 2004. The underlying
MPE sponsorship sales service contract provided for reduced commission rates
from year to year.
Interest Income
Percentage
2005 2004 Increase
-------- ------- ----------
Interest Income $112,030 $67,185 67%
The increase in interest income of $44,845 reflects interest earned on the
proceeds realized from the private placement consummated on February 28, 2005
("February 2005 Financing").
Liquidity and Capital Resources
Cash flows from operating activities for 2005 and 2004 were $(2,145,569) and
$(1,185,774), respectively. Working capital deficiency, consisting of current
assets less current liabilities, was $1,197,861 at December 31, 2005 and
$3,604,731 at December 31, 2004. The negative working capital for the year ended
December 31, 2005 resulted from increased accounts payable and accrued expenses
related to the Merger and the delayed effectiveness of the registration
statement. The negative working capital for the year ended December 31, 2004
resulted from an increase in debt, including $2,000,000 of short-term bridge
financing debt.
At December 31, 2005 and 2004, accounts receivable had decreased $125,135 and
increased $169,442, respectively, and deferred revenues had decreased $284,050
and increased $275,050, respectively, over their respective amounts at December
31, 2005 and 2004, as AVP collects revenues prior to holding certain events.
If sponsorship revenue in 2006 is less than AVP anticipates, current working
capital could be insufficient to sustain AVP's operations without significantly
reducing costs and expenses in connection with the events.
Capital expenditures for the year ended December 31, 2005 and 2004 were $370,131
and $228,416, respectively. During the year ended December 31, 2005, AVP
purchased sand for certain AVP events not held on beaches, tents, banners and
flags and a trailer for the tour season, as well as computer equipment for AVP's
corporate office.
Cash flows provided from financing activities for 2005 and 2004 were $2,921,512
and $1,816,667, respectively. Upon consummation of the February 2005 Financing,
AVP realized proceeds of $4,247,023, net of offering costs of $753,038.
Pursuant to the February 2005 Financing, the Series B Convertible Preferred
Stock investors were entitled to penalties if the shares were not registered
within four months following the closing. The registration was not declared
effective until November 1, 2005. AVP has paid $31,357 of the $311,505 in
registration penalties as of December 31, 2005.
In June 2004, the Association borrowed $2,000,000 from AVP, at an interest rate
of 10% per annum, through a series of debentures payable to AVP. As part of the
Merger, this inter-company indebtedness was cancelled. 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.
In 2005, AVP repaid $950,000 on a note payable owed to Management Plus
Enterprises, Inc., a related party, in connection with sponsorship sales
services, $200,000 to holders of the bridge financing notes, and $183,333 to
Major League Volleyball, Inc.
35
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
during the tour season, as the events occur and collection is reasonably
assured, in the proportion that prize money for an event bears to total prize
money for the season. Cash collected before the related events are recorded as
deferred revenue. Event costs are recognized on an event-by-event basis. Event
costs billed and/or paid before the related events are recorded as deferred
costs and expensed at the time the event occurs.
AVP also derives additional revenue from activation services, event ticket
sales, concession rights, event merchandising, promoter fees, licensing, and
sanctioning fees. Revenues and expenses from the foregoing ancillary activities
are recognized on an event-by-event basis as the revenues are realized and
collection is reasonably assured. Licensing revenue is recognized as royalties
are earned and collection is reasonably assured.
Income Taxes
AVP accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded to reduce deferred taxes to the amount that is more likely than not to
be realized.
Recently Issued Accounting Standards
In May 2003, FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, was issued.
This statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The statement also includes required disclosures for financial
instruments within the scope. For the Company, the Statement was effective for
instruments entered or modified after May 31, 2003 and otherwise became
effective as of January 1, 2004, except for certain mandatorily redeemable
financial instruments. For certain mandatorily redeemable financial instruments,
the Statement will be effective for the Company on January 1, 2005. The
effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. The Company currently does not
have any financial instruments that are within the scope of this Statement.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46R (revised December 2003), Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46R). FIN 46 replaces
the earlier version of this interpretation issued in January 2003. FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined. Immediate application is required in financial statements
of nonpublic entities that have interests in variable interest entities created
after December 31, 2003 and interests in all other variable interest entities by
the beginning of the first annual period beginning after December 15, 2004.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. Special provisions apply to enterprises that have
fully or partially applied Interpretation 46 ("Interpretation") prior to
issuance of this Interpretation. Otherwise, application of this Interpretation
is required in financial statements of public entities that have interests in
variable interest entities or potential variable interest entities commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application by small business issuers, to entities other than
special-purpose entities and by nonpublic entities and all other types of
entities is required at various dates in 2004 and 2005. In some instances,
enterprises have the option of applying or continuing to apply Interpretation 46
for a short period of time before applying this Interpretation. The adoption of
the Interpretation did not have any impact on AVP's financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). ARB 43 previously stated that "...under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to
36
require treatment as current period charges...". This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal".
In addition, this Statement requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement shall be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after the date this Statement is issued. The provisions of this
Statement shall be applied prospectively. The adoption of this Statement is not
expected to have any impact on AVP's financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share - Based
Payment. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share - based payment transactions be
recognized in financial statements. That cost will be measured based upon the
fair value of the equity or liability instruments issued. Statement 123(R)
covers a wide range of share - based compensation arrangements including share
options, restricted share plans, performance - based awards, share appreciation
rights, and employee share purchase plans.
Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock - Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123, as originally issued in 1995, established as
preferable a fair - value - based method of accounting for share - based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair - value - based method been used. Public entities that file
as small business issuers will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 15, 2005.
AVP is in the process of evaluating the impact of the adoption of SFAS 123(R) on
its financial position or results of operations for 2006. However, it is
anticipated that the adoption of this standard will have a materially adverse
effect on AVP's results of operations in the event AVP issues options or
warrants in 2006.
In February 2006, the FASB issued the new standard, "Statement of Financial
Accounting Standard No. 155, Accounting for Certain Hybrid Instruments," which
is an amendment of FASB Statements No. 133 and 140. SFAS No. 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The adoption of this Statement is not expected to have any impact on AVP's
financial position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B.
37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of our
executive officers and directors as of July 14, 2006.
Has Served as Director
Name Position and Age or Executive Officer Since
- -------------------- ------------------------------------ --------------------------
Leonard Armato Chief Executive Officer and
Chairman of the Board of
Directors; 53 March 25, 2005
Bruce Binkow Chief Marketing Officer
and Director; 49 March 25, 2005
William Chardavoyne Director; 53 May 10, 2006
Philip Guarascio Director; 65 March 25, 2005
Jack Kemp Director; 71 December 16, 2005
Scott Painter Director; 37 March 25, 2005
Andrew Reif Chief Operating Officer, Chief
Financial Officer, and Secretary; 41 March 25, 2005
Thomas Torii Controller; 39 March 25, 2005
Jeffrey Wattenberg Director; 51 2002
Roger L. Werner, Jr. Director; 56 July 6, 2005
Leonard Armato has been Chairman, Chief Executive Officer, Tour Commissioner and
a director of the Association since 2001. Previously, Mr. Armato was Chief
Executive of Management Plus Enterprises, Inc. ("MPE"), a sports representation
and marketing firm owned by Mr. Armato that he founded in 1988.
Bruce Binkow has been Chief Marketing Officer and a director of the Association
since 2001. From 1996, Mr. Binkow worked as executive vice president at MPE.
Previously, Mr. Binkow was an Executive Vice President of Marketing at Playboy
Enterprises, Inc., a media company, from 1987 to 1991.
William Chardavoyne, Chairman of the Audit Committee and determined by the Board
to be "independent" and an audit committee financial expert, held the position
of Chief Financial Officer at Activision, Inc., an international publisher of
interactive entertainment software products, from 2000 to 2006. Prior to this,
Mr. Chardavoyne was Chief Financial Officer for Movietown.com, a development
stage Internet company selling home entertainment products and marketing
intelligence for the home entertainment industry. From 1987-1998, Mr.
Chardavoyne held several senior management positions in operations and finance
at Columbia Tri Star Home Video, a subsidiary of Sony Pictures Entertainment.
Prior to this, Mr. Chardavoyne was Vice President and Controller for MTV
Networks, Inc., a unit of Viacom, where he was responsible for all financial and
accounting functions. Mr. Chardavoyne is a certified public accountant and was a
Principal of Ernst & Young from 1974 through 1985.
Philip Guarascio has been a member of the board of directors of the Association
since 2002. Mr. Guarascio has been a consultant for the National Football League
since October 2000 and has been a consultant for the William Morris Agency, a
talent agency, since October 2001. In 2000, he retired as the Vice President of
Marketing and Advertising for General Motors' North American operations.
Scott Painter has been a member of the board of directors of the Association
since 2002. He was a founder and former Chief Executive Officer of
CarsDirect.com, an online car dealership, from October 1998 to May 2000. From
May 2000 until May 2001, Mr. Painter was Chairman and Chief Executive Officer of
Direct.com, an online retailer of high-end consumer goods. From May 2001 until
March 2003, Mr. Painter was Founder and Chairman of Build-To-Order, Inc., a
start up car company seeking to outsource the engineering and manufacture of
production vehicles.
38
Mr. Painter is currently the Chairman and Chief Executive Officer of Zag.com, an
online automotive retailer and lead generation company.
Andrew Reif has been Chief Operating Officer of the Association since 2001 and
Chief Financial Officer since 2005. As Co-President of Baldwin/Cohen
Productions, a motion picture and television programming production company, Mr.
Reif supervised the development and production of motion pictures and television
productions from 1999 to 2000. From 1995 to 1999, Mr. Reif was a Vice President
at International Creative Management, a talent agency.
Thomas Torii has been the Association's controller since 2002. Previously, Mr.
Torii was Director of Finance for the Jim Henson Company, a motion picture and
television production company, beginning in 2001, and Director of Accounting at
Twentieth Century Fox Corporation, a media company, from 1999 to 2001.
Jeffrey Wattenberg had been President, Secretary, and Director of AVP since May
2002 and has been a Director of the Association since 2005. For the last five
years, he has been a private investor and has served as an independent
consultant to various entities seeking to raise venture capital.
Roger L. Werner, Jr. founded both Speedvision (now Fox's Speed Channel) and
Outdoor Life Network and served as President and CEO of both cable networks from
1995 through 2001. Previously, Mr. Werner was a management consultant at
McKinsey & Company and served as Chief Operating Officer of ESPN from 1982-1990.
Mr. Werner has been Chairman of WATV, Inc., an event and television production
company, since 2003.
Jack Kemp is Founder and Chairman of Kemp Partners. From January 1993 until July
2004 he was co-director of Empower America, a Washington, D.C.-based public
policy and advocacy organization. In September 2001, Mr. Kemp helped form a new
non-partisan, non-profit think tank, the Foundation for the Defense of
Democracies, to counter terrorist propaganda efforts, and he has been writing a
weekly syndicated column for the Copley News Service nationwide since February
of 2000. Prior to founding Empower America, Mr. Kemp served for four years as
Secretary of Housing and Urban Development and in the United States House of
Representatives from 1971-1989. Before his election to Congress in 1970, Mr.
Kemp played as a professional football quarterback for 13 years.
Except for Messrs. Wattenberg, Werner, Kemp, and Chardavoyne, each person who
serves on our Board of Directors was appointed on March 25, 2005, in connection
with the transactions contemplated by the Merger. Directors are elected at each
annual meeting and serve until the next annual meeting and until their
successors have been elected and qualified. Executive officers are appointed for
one-year terms and until their successors have been elected and qualified.
No director or executive officer is related to any other director or executive
officer by blood or marriage.
39
EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation tables set forth information concerning the
annual and long-term compensation for services in all capacities for the years
ended December 31, 2005, December 31, 2004, and December 31, 2003, of those
persons who were, at December 31, 2005, AVP's chief executive officer or another
executive officer whose 2005 compensation exceeded $100,000.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------ ------------ ------------
Shares
Name and Principal Fiscal Underlying
Position Year Salary (1) Options
- --------------------------- ------ ------------ ------------
Leonard Armato, 2005 $350,000 1,502,157
Chief Executive Officer 2004 385,000 -0-
2003 350,000 1,009,768
Bruce Binkow, 2005 $250,000 346,868
Chief Marketing Officer 2004 220,000 -0-
2003 200,000 201,954
Andrew Reif, 2005 $240,000 193,424
Chief Operating Officer and 2004 220,000 -0-
Chief Financial Officer 2003 200,000 201,954
Thomas Torii, 2005 $155,000 25,000
Chief Accounting 2004 135,000 12,526
Officer 2003 100,000 -0-
(1) No bonuses were paid in any of the relevant years.
Stock Option Plan
Under AVP's 2005 Stock Incentive Plan (the "2005 Plan"), we may grant awards of
stock options (including stock purchase warrants) and restricted stock grants to
our officers, directors, employees, consultants, players, and independent
contractors. We may issue an aggregate of 30,000,000 shares of our common stock
under the 2005 Plan, including approximately 14,000,000 shares subject to
management warrants and options converted from stock options to purchase shares
of the Association, pursuant to the Merger Agreement. We may grant both
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code, and options, warrants, and other rights to buy our common stock
that are not qualified as incentive stock options. No stock options may be
granted at an exercise price less than the fair market value of our common stock
on the date of grant. The exercise price of incentive stock options granted to
holders of more than 10% of our common stock must be at least 110% of the fair
market value of the common stock on the date of grant. Stock options granted
under the 2005 Plan will expire no more than ten years from the date on which
the option is granted, unless the Board of Directors determines an alternative
termination date. If incentive stock options are granted to holders of more than
10% of our common stock, such options will expire no more than five (5) years
from the date the option is granted. Except as otherwise determined by the Board
of Directors or the Compensation Committee, stock options granted under the 2005
Plan will vest and become exercisable on the anniversary of the date of grant of
such option at a rate of 25% per year over four years from the date of grant.
40
Option Grants
The following table sets forth certain information with respect to stock options
granted to the persons named in the Summary Compensation Table during the year
ended December 31, 2005.
Option Grants in Last Fiscal Year
Number of Percent of Total
Securities Options Granted Exercise
Underlying to Employees in Price Per
Options Granted Fiscal Year Share Expiration Date
--------------- ---------------- --------- ---------------
Leonard Armato 1,502,157 63% $2.20 6/23/2009
Bruce Binkow 346,868 14% $2.20 6/23/2009
Andy Reif 193,424 8% $2.20 6/23/2009
Thomas Torii 25,000 1% $2.20 6/23/2009
41
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information as to each exercise of
stock options during the year ended December 31, 2005, by the persons named in
the summary compensation table and the fiscal year-end value of unexercised
options:
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
Number of
Shares Number of Securities Value of Unexercisable In-the-
Acquired Value Underlying Unexercised Money Options at Fiscal Year-
Name on Exercise Realized Options at FY-End end (1)
- -------------- ----------- -------- -------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- ----------------
Leonard Armato -0- $0 6,466,840 -0- $7,592,599 $0
Bruce Binkow -0- $0 1,895,178 -0- $2,457,100 $0
Andy Reif -0- $0 981,900 -0- $1,071,135 $0
Thomas Torii -0- $0 37,526 -0- $ 1,253 $0
Executive Officer Employment Agreements
Pursuant to the merger agreement, the Association entered employment
agreements with Messrs. Leonard Armato, AVP's CEO and Chairman and a director;
Bruce Binkow, Chief Marketing Officer and a director; and Andrew Reif, Chief
Operating Officer, Chief Financial Officer, and Secretary. Mr. Armato's at-will
employment agreement provides for an annual salary of $350,000 with minimum
annual increases of 10% and an annual bonus in the range of 50% of annual salary
(based on certain to-be-determined milestones); health and disability insurance;
a $1,000,000 term life insurance policy; and a monthly car allowance in the
amount of $1,000. In the event that Mr. Armato's employment is terminated other
than for good cause, he will receive a payment of one year's base salary.
Messrs. Binkow's and Reif's employment agreements are of substantially the same
form as Mr. Armato's, except that the salaries are $250,000 and $240,000,
respectively. For the fiscal year 2005, Messrs. Armato, Binkow, and Reif
voluntarily declined the annual bonus and the monthly car allowance they were
entitled to per their employment agreements.
Pursuant to a provision of the merger agreement authorizing allocation of
warrants, the executive officers were granted four-year Management Warrants to
purchase the indicated numbers of shares of common stock, at an exercise price
of $2.20 per share (equal to 110% of the market price of a share on the date of
grant): Mr. Armato, 1,502,157; Mr. Binkow, 346,868; Mr. Reif, 193,424; Mr.
Torii, 25,000. Per the employment agreements Messrs. Armato, Binkow and Reif
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 Chief Executive Officer will determine
the allocation of the Profit Sharing Bonus Pool among officers eligible to
participate in the Profit Sharing Bonus Pool.
Employee Pension Plan
AVP offers its full-time employees a 401k Plan administered by AVP's
payroll provider. AVP does not currently make any contributions on behalf of
employees.
Compensation of Directors
Our non-management directors receive compensation for service on our Board
of Directors or any committee, paid in stock. They receive shares valued at
$2,500 for attending board meetings in person, $1,500 for attending board
meeting by telephone, and $1,500 for attending committee meetings. Our
non-management Committee Chairperson can charge a $200 per hour for time
reasonably required to fulfill his duties. In consideration of board services in
2005, Management Warrants to purchase the indicated numbers of shares of common
stock have been allocated to non-management directors, as follows: Mr.
Guarascio, 39,380; Mr. Painter, 126,811; Mr. Wattenberg, 334,557; Mr. Werner,
25,000; Mr. Kemp, 50,000.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of July 14, 2006, the beneficial
ownership, as defined in Securities and Exchange Commission Rule 13d-3, of AVP
voting securities, by each director and executive officer, all directors and
executive officers as a group, and each person or group known by management to
be a beneficial owner of more than 5% of any class of voting securities. Except
as otherwise indicated, the stockholders listed in the table below have sole
voting and investment powers with respect to the shares indicated.
Series B Preferred Stock Common Stock (1)
------------------------ -------------------------
Number of Percent of Number of Percent of
Shares Class Shares Class
--------- ---------- ---------- ----------
Leonard Armato (2)(3) -0- -0- 8,262,638 31.6
Bruce Binkow (2)(4) -0- -0- 1,895,178 8.8
William J. Chardavoyne (2) -0- -0- - -
Philip Guarasico (2)(4) -0- -0- 160,283 *
Jack Kemp (2)(4) -0- -0- 50,000 *
Scott Painter (2)(4) -0- -0- 774,927 3.8
Andrew Reif (2)(4) -0- -0- 981,900 4.8
Thomas Torii (2)(4) -0- -0- 37,526 *
Jeffrey Wattenberg (2)(5) -0- -0- 617,485 3.0
Robert L. Werner, Jr. (2)(4) -0- -0- 25,000 *
All directors and executive
officers as a group, including those
named above (10 persons) -0- -0- 12,804,937 41.8
AEG(6) -0- -0- 1,129,261 5.7
Amtrust Financial Group (7) -0- -0- 4,235,292 20.8
Diker Micro Value Fund (8) -0- -0- 1,123,692 5.7
Diker Micro Value QP Fund,
LP; Diker Micro and Small
Cap Fund, LP; Diker Micro
And Small Cap Offshore
Fund, Ltd.(8) -0- -0- 2,123,370 10.7
Fox (9) -0- -0- 2,345,260 11.9
Highbridge (10) 29,472 41.5 1,026,731 5.0
* Less than 1%.
(1) Includes shares issuable upon conversion of Series B Preferred Stock
reflected in the table opposite the identified person or group, as well as
exercise of currently exercisable stock options or warrants to acquire shares,
as set forth in the succeeding notes. In accordance with SEC rules, each owner's
or group's percentage is computed assuming conversion or exercise of only that
person's convertible securities, options, or warrants.
(2) Address is c/o AVP Pro Beach Volleyball Tour, Inc., 6100 Center Drive, Suite
900, Los Angeles, CA 90045.
(3) Common stock includes 6,466,840 shares issuable upon exercise of currently
exercisable stock options and a warrant.
(4) All shares of common stock are issuable upon exercise of currently
exercisable stock options and warrants.
(5) Common stock includes 534,985 shares issuable upon exercise of warrants
currently exercisable.
(6) The stockholder's address is 1111 South Figueroa Street Suite 3100 Los
Angeles, CA 90015.
43
(7) The stockholder's address is 10451 Mill Run Circle, Owings Mills, MD 21117.
Common stock includes 705,882 shares issuable upon exercise of warrants issued.
(8) The stockholder's address is 745 Fifth Avenue, Suite 1409, New York, NY
10151. Common stock includes 541,177 shares issuable upon exercise of warrants.
(9) The stockholder's address is c/o Fox Sports Net, 10201 W. Pico Boulevard,
Building 101, Suite 5420, Los Angeles, CA 90035.
(10) The stockholder's address is 9 West 57th Street, 27th Floor, New York, NY
10019. Common stock includes 179,042 shares issuable upon exercise of a
currently exercisable warrant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Leonard Armato is the sole owner of MPE, which owned MPE Sales, LLC
prior to its sale to the Association. MPE entered an agreement with the
Association on August 15, 2001 pursuant to which MPE was engaged to secure
sponsorship agreements in return for a commission (the "Sales Agreement"). The
Sales Agreement remained in place through December 31, 2002, and MPE was
projected to earn approximately $1.6 million in commissions through 2005 based
upon the sponsorship agreements secured by MPE during the term of the Sales
Agreement. MPE assigned the Sales Agreement to the LLC in 2003. The Association
acquired the LLC later in 2003 for a convertible promissory note with a
principal amount of approximately $1.4 million, of which $250,000 was paid from
the proceeds of the February 2005 Financing, concurrently with the Merger
Closing. The balance was paid on February 28, 2006.
Mr. Scott Painter, a member of the Board of Directors, entered a
consulting agreement with us whereby he was compensated as a financial advisor
in specified areas relating to our operations and fund-raising efforts.
Specifically, Mr. Painter gave Association officers advice regarding valuation
of the Association, financial modeling, and structure of financings. He also
consulted with the officers regarding proposed transactions and participated in
merger negotiations between the Association and AVP, as well as terms of
financings with the broker dealer for the February 2005 Financing. Mr. Painter
did not in any circumstance solicit investors. For his services, Mr. Painter
received compensation equal to $150,000 in cash and a Management Warrant to
purchase a total of 527,213 shares of our common stock, at an exercise price of
$2.20 per share, equal to 110% of the market price of a share on the date of
grant.
Until February 28, 2006, we retained a firm controlled by Jeffrey
Wattenberg, a member of our Board of Directors, for a $20,000 monthly fee for
consulting, advisory, and investor relations services. Pursuant to the Merger
Agreement, Mr. Wattenberg was granted a Management Warrant to purchase 334,557
shares.
Fox, an owner of more than 5% of our outstanding common stock, distributes
our programming on broadcast and cable television.
On February 21, 2006, we entered into an agreement with Fox pursuant to
which Fox will produce and distribute one AVP tournament final on May 20, 2006
and one AVP tournament final on June 17, 2006. As consideration for Fox's
production and distribution services, we issued 666,667 shares of common stock,
par value $0.001 per share.
44
DESCRIPTION OF SECURITIES
The following description of the material terms of our capital stock
summarizes provisions of our Amended and Restated Certificate of Incorporation,
which has been filed as an exhibit to our registration statement of which this
prospectus is a part.
CAPITALIZATION
We are currently authorized to issue 80,000,000 shares of common stock, $0.001
par value and 2,000,000 shares of preferred stock, $0.001 par value. As of June
30, 2006 we had outstanding 19,654,908 shares of common stock; 71,020 shares of
Series B Preferred Stock, which are convertible into 27.87 shares of common
stock; and options and warrants to purchase 18,452,402 shares of common stock.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share of
record on all matters to be voted on by stockholders. Our stockholders are not
entitled to cumulative voting. The holders of our common stock are entitled to
receive dividends when, and if, declared by our Board of Directors from funds
legally available therefor. In the event of liquidation, dissolution or winding
up, our holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities,
and after provision has been made for each class of stock having preference over
the common stock, including the shares of Series B Preferred Stock. Holders of
the shares of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
common stock.
Pursuant to the May 2006 Financing, AVP sold 6,470,590 shares of common stock
and five-year warrants to purchase 1,294,118 shares of common stock at price of
$1.00 per share, to accredited investors, for a total price $5,500,001.50.
PREFERRED STOCK
The Preferred Stock may be issued without further stockholder approval, in one
or more series, with such voting powers, dividend rights, designations,
preferences, rights, qualifications, limitations and restrictions as shall be
determined by the Board of Directors before the issuance thereof.
SERIES B PREFERRED STOCK
A holder of the Series B Preferred Stock has no preemptive rights. The Series B
Preferred Stock is not subject to any sinking fund or other obligation to redeem
or retire the Series B Preferred Stock. Unless converted or redeemed, the Series
B Preferred Stock has a perpetual term.
The Series B Preferred Stock is senior to the common stock with respect to
payment of amounts upon liquidation, dissolution or winding up. While any Series
B Preferred Stock is outstanding, we cannot authorize, create, or increase the
authorized amount of any class or series of stock that ranks prior or senior to,
or in parity with, the Series B Preferred Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution, or winding up, without the
consent of the holders of a majority of the Series B Preferred Stock.
The holders of Series B Preferred Stock will receive dividends when, and if,
declared on our common stock, on an as-converted basis. The holders of Series B
Preferred Stock will be entitled to receive, in the event of liquidation,
dissolution, whether voluntary or involuntary, payment of $33.93 for each share
of Series B Preferred Stock held, in preference to holders of any junior class
of stock.
The holders of Series B Preferred Stock have the right, exercisable at any time,
to convert each share into 27.87 shares of common stock. The conversion ratio
may be increased, on a weighted average basis, upon issuances of the common
stock or securities convertible into common stock at a purchase price or
conversion price less than the Series B Preferred Stock conversion price then in
effect.
45
The holders of Series B Preferred Stock vote with holders of common stock in all
matters in which they are entitled to vote. Each share of Series B Preferred
Stock carries a number of votes equal to the number of shares of common stock
into which such share is convertible. The approval of the holders of a majority
of the outstanding Series B Preferred Stock is required to amend our Certificate
of Incorporation to adversely affect the rights of holders of Series B Preferred
Stock, or to authorize, create, or increase the authorized amount of any class
of stock giving rights senior to, or in parity with, the holders of Series B
Preferred Stock with respect to payment of dividends or amounts upon
liquidation, dissolution, or winding up.
The Series B Preferred Stock may be redeemed at our election, after the fifth
anniversary of issuance on 30 days notice, at a redemption price of $33.93 per
share. We have the option to convert the Series B Preferred Stock into common
stock on 30 days notice, if a resale registration statement covering the
underlying common stock is effective, our common stock is quoted on the OTCBB or
a similar electronic quotation system or stock exchange, the closing price per
share, or the average of the closing bid and ask prices per share, if
applicable, have been at least twice the quotient obtained by dividing the
Series B Preferred Stock redemption price by its conversion rate, and the daily
trading volume of our common stock for 30 consecutive trading days averages at
least 2,000,000 shares.
WARRANTS
The units sold in the Bridge Financing included two-year warrants to purchase a
total of 472,000 shares of common stock at a purchase price of $2.10 per share,
which warrants were scheduled to expire in June 2006. In April 2006, the Board
of Directors of AVP, Inc. agreed to extend the warrants for an additional
18-month period through December 2007.
In connection with consummation of the Merger, AVP issued four-year warrants to
purchase a total of 4,424,260 shares of common stock at a price of $2.20 per
share.
The units sold in the February 2005 Financing included 36,841 five-year
warrants, each exercisable to purchase 27.87 shares of our common stock at a
price of $1.7046 per share. In connection with the February 2005 Financing, the
placement agent received a five-year warrant to purchase up to 480,993 shares of
our common stock at an exercise price of $1.0395 per share that may be exercised
on a cashless basis.
The units sold in the May 2006 Financing included five-year warrants to purchase
1,294,118 shares of our common stock at a price of $1.00 per share. In
connection with the offering, the placement agent received a five-year warrant
to purchase up to 621,177 shares of our common stock at an exercise price of
$1.00 per share that may be exercised on a cashless basis.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Delaware General Corporation Law and our Bylaws provide for indemnification
of our directors for liabilities and expenses that they may incur in such
capacities. In general, our directors and officers are indemnified with respect
to actions taken in good faith and in a manner such person believed to be in our
best interests, and provided that with respect to any criminal action or
proceeding, the person had no reasonable cause to believe was unlawful.
Furthermore, the personal liability of our directors is limited as provided in
our certificate of incorporation.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXPERTS
Our financial statements as of December 31, 2005 and for the years ended
December 31, 2005 and 2004 appearing in this prospectus and registration
statement have been audited by Mayer Hoffman McCann P.C., independent registered
public accounting firm, as set forth in their report appearing elsewhere herein,
and are included in reliance upon the authority of such firm as experts in
accounting and auditing in issuing such reports.
46
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act, which
requires us to file reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information may be inspected at
the public reference room of the SEC at 100 F Street N.E., Washington D.C.
20549. Copies of such material can be obtained from the facility at prescribed
rates. Please call the SEC toll free at 1-800-SEC-0330 for information about its
public reference room. Because we file documents electronically with the SEC,
you may also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov or our website at http://www.avp.com. Information contained
in our web site is not part of this prospectus.
You should rely only on the information incorporated by reference or provided in
this prospectus. We have not authorized anyone else to provide you with
different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
We furnish our stockholders with annual reports containing audited financial
statements.
47
INDEX TO FINANCIAL STATEMENTS
PAGE
-------
Report of Independent Registered Public Accounting Firm ............. F-1
Consolidated Balance Sheet as of December 31, 2005 .................. F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 ........................................ F-3
Consolidated Statements of Changes in Stockholders' Deficiency
for the Years Ended December 31, 2005 and 2004 .................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 ........................................ F-5
Notes to Consolidated Financial Statements .......................... F-7
Unaudited Consolidated Balance Sheet as of March 31, 2006 ........... F-26
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005 .............................. F-27
Unaudited Consolidated Statements of Changes in Stockholders'
Deficiency for the three months ended March 31, 2006 and 2005 ..... F-28
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2006 and 2005 ........................ F-29
Unaudited Notes to Consolidated Financial Statements ................ F-31
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of AVP, Inc.
We have audited the accompanying consolidated balance sheet of AVP, Inc. and
subsidiary (AVP) as of December 31, 2005 and the related consolidated statements
of operations, changes in stockholders' deficiency and cash flows for the years
ended December 31, 2005 and 2004. These consolidated financial statements are
the responsibility of AVP's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AVP as of December
31, 2005 and the results of its operations and its cash flows for the years
ended December 31, 2005 and 2004 in conformity with U.S. generally accepted
accounting principles.
Mayer Hoffman McCann P.C.
Los Angeles, California
February 28, 2006, except for paragraph 3 of Note 15,
as to which the date is April 13, 2006
F-1
AVP, INC.
CONSOLIDATED BALANCE SHEET
December 31,
2005
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,143,345
Accounts receivable, net of allowance for doubtful
accounts of $49,232 484,770
Prepaid expenses 158,054
Current portion of investment in sales-type lease 145,768
------------
TOTAL CURRENT ASSETS 1,931,937
------------
PROPERTY AND EQUIPMENT, net 288,409
------------
OTHER ASSETS
Investment in sales-type lease 416,551
Other assets 38,641
------------
TOTAL OTHER ASSETS 455,192
------------
TOTAL ASSETS $ 2,675,538
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes payable $ 600,071
Accounts payable 711,303
Accrued expenses 1,576,435
Accrued interest 125,989
Deferred revenue 116,000
------------
TOTAL CURRENT LIABILITIES 3,129,798
------------
OTHER LIABILITIES
Long-term deferred revenue 150,000
------------
TOTAL LIABILITIES 3,279,798
------------
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, 94,488 shares
issued and outstanding 94
Common stock, $.001 par value, 80,000,000 shares
authorized, 11,669,931 shares issued and outstanding 11,670
Additional paid-in capital 32,183,810
Accumulated deficit (32,799,834)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (604,260)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,675,538
============
See notes to consolidated financial statements.
F-2
AVP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
2005 2004
----------- -----------
REVENUE
Sponsorships $12,918,471 $ 9,918,117
Other 2,662,811 2,390,888
----------- -----------
TOTAL REVENUE 15,581,282 12,309,005
EVENT COSTS 11,512,511 9,125,829
----------- -----------
Gross Profit 4,068,771 3,183,176
----------- -----------
OPERATING EXPENSES
Marketing 2,447,802 2,435,124
Administrative 10,409,819 (1 3,442,479
Impairment loss for fixed assets 119,277 -
----------- -----------
TOTAL OPERATING EXPENSES 12,976,898 5,877,603
----------- -----------
OPERATING LOSS (8,908,127) (2,694,427)
OTHER INCOME (EXPENSE)
Interest expense (167,859) (245,870)
Interest income 112,030 67,185
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (55,829) (178,685)
----------- -----------
LOSS BEFORE INCOME TAXES (8,963,956) (2,873,112)
INCOME TAXES - -
NET LOSS $(8,963,956) $(2,873,112)
=========== ===========
Basic and diluted loss per share $ (1.03) $ (0.97)
=========== ===========
Weighted average common shares outstanding 8,681,388 2,973,861
=========== ===========
(1) Administrative includes stock based compensation of $5,640,132 for the year
ended December 31, 2005.
See notes to consolidated financial statements.
F-3
AVP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Series A Series B
Preferred Stock Preferred Stock Common Stock
--------------- ---------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------- ------ ---------- -------
Balance, January 1, 2004 - $- - $ - 2,973,861 $ 2,974
Net loss - - - - - -
--- --- ------- ---- ---------- -------
Balance, December 31, 2004 - - - - 2,973,861 2,974
Merger of AVP, Inc. into the Association ("the reverse merger") - - - - 2,251,474 2,251
Conversion of 10% convertible notes payable - - - - 1,707,683 1,708
Conversion of Series A redeemable preferred stock - - - - 2,317,188 2,317
Private placement units (net of offering costs of $753,038) - - 147,364 147 - -
Conversion of Series B Preferred Stock to common stock - - (52,876) (53) 1,284,877 1,285
Payment of accrued registration penalty in common stock - - - - 5,587 6
Conversion of AEG note payable to common stock - - - - 1,129,261 1,129
Compensation expense from issuance of warrants - - - - - -
Net loss - - - - - -
--- --- ------- ---- ---------- -------
Balance, December 31, 2005 - $- 94,488 $ 94 11,669,931 $11,670
=== === ======= ==== ========== =======
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficiency
----------- ------------ ------------
Balance, January 1, 2004 $16,118,266 $(20,962,766) $(4,841,526)
Net loss - (2,873,112) (2,873,112)
----------- ------------ ------------
Balance, December 31, 2004 16,118,266 (23,835,878) (7,714,638)
Merger of AVP, Inc. into the Association ("the reverse merger") (954,175) - (951,924)
Conversion of 10% convertible notes payable 2,288,640 - 2,290,348
Conversion of Series A redeemable preferred stock 3,655,283 - 3,657,600
Private placement units (net of offering costs of $753,038) 4,246,876 - 4,247,023
Conversion of Series B Preferred Stock to common stock (1,232) - -
Payment of accrued registration penalty in common stock 7,816 - 7,822
Conversion of AEG note payable to common stock 1,182,204 - 1,183,333
Compensation expense from issuance of warrants 5,640,132 - 5,640,132
Net loss - (8,963,956) (8,963,956)
----------- ------------ -----------
Balance, December 31, 2005 $32,183,810 $(32,799,834) $ (604,260)
=========== ============ ===========
See notes to consolidated financial statements.
F-4
AVP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$(8,963,956) $(2,873,112)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization of property and equipment
164,148 57,561
Loss (gain) on property and equipment 119,277 -
Interest income on investment in sales-type lease (39,596) (67,185)
Amortization of deferred commissions 253,339 294,904
Other amortization 8,043 6,033
Amortization of deferred costs - 1,352,100
Allowance for doubtful accounts 39,232 10,000
Compensation from issuance of stock options and warrants 5,640,132 -
Decrease (increase) in operating assets:
Accounts receivable 125,135 (169,442)
Investment in and due from joint venture - 291,084
Prepaid expenses (131,448) (26,606)
Other assets (3,946) (1,305)
Increase (decrease) in operating liabilities:
Accounts payable 396,504 (625,052)
Accrued expenses 589,955 211,950
Accrued officer compensation (43,208) (167,625)
Accrued interest (7,308) 245,871
Deferred revenue (284,050) 275,050
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (2,137,747) (1,185,774)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (370,131) (228,416)
Investment in sales-type lease 105,600 158,400
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (264,531) (70,016)
----------- -----------
See notes to consolidated financial statements.
F-5
AVP. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended December 31,
-------------------------
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 (1,333,333) (183,333)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 2,913,690 1,816,667
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 511,412 560,877
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 631,933 71,056
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,143,345 $ 631,933
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 86,159 $ 48,939
=========== ===========
Income taxes $ 800 $ -
=========== ===========
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 AEG note payable to common stock $ 1,183,333 $ -
=========== ===========
Payment of accrued registration penalty in common stock $ 7,822 $ -
=========== ===========
See notes to consolidated financial statements.
F-6
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
AVP, Inc. (AVP), domesticated in Delaware on August 6, 1990, is the sole
stockholder of AVP Pro Beach Volleyball Tour, Inc. f/k/a Association of
Volleyball Professionals, Inc., a Delaware corporation (the "Association"),
which is the sole nationally recognized men's and women's U.S. professional
beach volleyball tour. AVP conducts professional beach volleyball activities in
the United States, including tournaments, sponsorships sales, broadcast rights,
licensing and trademark agreements, sales of food, beverage and merchandise at
tournaments, player contracts and other associated activities.
On July 28, 2003, the Association merged with Digital Media Campus, Inc. (DMC),
its then sole stockholder, in a transaction accounted for as a transfer between
entities under common control with the Association as the surviving entity. The
accompanying financial statements have been prepared including the net assets
and results of operations of DMC as if the merger occurred January 1, 2003.
2. MERGER
On February 28, 2005, upon filing a certificate of merger with the Delaware
Secretary of State, a wholly owned subsidiary of AVP named Othnet Merger Sub,
Inc., a Delaware corporation, and 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) (the "Bridge
Financing"). 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 (the "February
2005 Financing"), concurrently with the merger closing.
Each share of Series B preferred stock is convertible into 24.3 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 2,973,861 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 8,842,839
shares of AVP common stock.
As part of the merger, the Association's preferred stockholders converted
$3,657,600 of redeemable preferred stock into 2,317,188 shares of AVP common
stock. In addition, as part of the merger, holders of Bridge Financing
convertible notes converted $2.1 million into 1,707,672 shares of AVP common
stock. In February 2005, the two television networks waived their put rights on
their redeemable Series A preferred stock that AVP previously issued to them,
and subsequently converted the preferred stock into common stock pursuant to the
merger.
F-7
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER (CONTINUED)
Concurrent with the merger, AVP raised $5,000,061 through the February 2005
Financing, representing 147,364 shares of Series B Convertible Preferred Stock,
which are convertible into 3,580,945 shares of AVP common stock.
In conjunction with the merger, AVP was obligated to grant warrants to purchase
5,677,590 shares of common stock as consideration for services that facilitated
the merger.
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 constituted
a majority of the Board of Directors.
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.
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.
On March 9, 2005, Othnet changed its name to its current name, AVP, Inc.
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 was 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 amend the Articles of Incorporation to effect a 1 for
10 reverse stock split. The Articles of Incorporation were subsequently amended
to reduce the authorized shares of common stock to 80,000,000.
As such, for all disclosures referencing shares authorized and issued, shares
reserved for issuance, per share amounts and other disclosures relating to
equity, amounts have been retroactively restated to reflect share quantities as
altered by the terms of the merger agreement, the authorization of additional
shares and the reverse stock split, which was effective on December 16, 2005.
F-8
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of AVP and its
significant subsidiary in which a controlling interest is held. All intercompany
transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in these financial statements include
acquisition liabilities associated with the Othnet merger, accrued expenses,
allowances for doubtful accounts, useful lives for depreciation and
amortization, loss contingencies, income taxes and tax valuation reserves.
Actual results could differ materially from these estimates.
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
during the tour, as the events occur and collection is reasonably assured, in
the proportion that prize money for an event bears to total prize money for the
season. Cash collected before the related events are recorded as deferred
revenue. Event costs are recognized on an event-by-event basis. Event costs
billed and/or paid before the related events are recorded as deferred costs and
expensed at the time the event occurs.
AVP also derives additional revenue from activation services, event ticket
sales, concession rights, event merchandising, licensing, and sanctioning fees.
Revenues and expenses from foregoing ancillary activities are recognized on an
event-by-event basis as the revenues are realized and collection is reasonably
assured. Licensing revenue is recognized as royalties are earned and collection
is reasonably assured.
Fair Value of Financial Instruments
AVP considers the recorded carrying amounts of cash and cash equivalents,
receivables, accounts payable, accrued expenses and notes payable to approximate
their respective fair values because of the short maturities of these
instruments.
Cash and Cash Equivalents
Cash equivalent consists primarily of cash, money market account, and accounts
receivable with an initial term of less than three months.
F-9
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
Accounts receivable consist primarily of amounts due from sponsors and licensees
for sponsorship fees and royalties, respectively. Such amounts are billed when
due under the terms of the respective sponsorship agreements, or, in the case of
royalties, when earned. AVP performs ongoing credit evaluations of its customers
and extends credit without requiring collateral. AVP does not accrue finance or
interest charges on outstanding receivable balances. Accounts receivable are
carried at outstanding principal less any allowance for doubtful accounts. The
Company writes off uncollectible receivables against the allowance for doubtful
accounts when the likelihood of collection is remote. On a periodic basis, the
Company evaluates its accounts receivable and determines the requirement for an
allowance for doubtful accounts, based on the history of past write-offs,
collections, and current credit condition. The allowance for doubtful accounts
was $49,232 as of December 31, 2005.
Concentration of Credit Risks and Significant Customers
Financial instruments that potentially subject AVP to a concentration of credit
risk consist principally of accounts receivable and uninsured cash deposits. AVP
places its cash deposits with what management believes are high-credit quality
financial institutions. At times, balances with any one financial institution
may exceed the Federal Deposit Insurance Corporation (FDIC) limit of $100,000.
Concentrations of credit risk with respect to accounts receivable are present
due to the small number of customers comprising the Company's customer base.
However, the credit risk is reduced through the Company's efforts to monitor its
exposure for credit losses and by maintaining allowances, if necessary. Two
sponsors accounted for approximately 27% of the Company's total revenue during
2005 and one sponsor accounted for approximately 18% of the Company's total
revenue during 2004. At December 31, 2005, three customers accounted for
approximately 48% of the Company's outstanding accounts receivable balance.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided for using
the straight-line method over the estimated useful lives of the assets as
follows:
Assets Useful Lives
- ------------------------ ------------
Furniture and equipment 3 years
Transportation equipment 3 years
Leasehold improvements are amortized over the term of the lease or estimated
useful life, whichever is shorter.
Long-Lived Assets
In accordance with SFAS No. 144, when facts and circumstances indicate that the
cost of long-lived assets may be impaired, an evaluation of the recoverability
is performed by comparing the carrying value of the assets to the estimated
undiscounted future cash flows. If the estimated undiscounted future cash flows
are less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value. In addition, the remaining estimated
useful life or amortization period for the impaired asset would be reassessed
and revised if necessary. During 2005, AVP recognized an impairment loss of
$119,277 for property and equipment that was impaired and no longer used in
operations since the sponsor and the event for which such property and equipment
were used did not renew for 2006.
F-10
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bartering Transactions
AVP barters advertising for products and services. Revenue and related expenses
from barter transactions are recorded at fair value in accordance with EITF
99-17, Accounting for Advertising Barter Transactions. Revenue from barter
transactions is recognized in accordance with AVP's revenue recognition
policies. Expenses for barter transactions are generally recognized as incurred.
Comprehensive Income
Comprehensive income consists of net income (loss) and other gains and losses
affecting stockholders' equity that, under U.S. generally accepted accounting
principles are excluded from net income (loss). Such items consist primarily of
unrealized gains and losses on marketable equity securities and foreign
translation gains and losses. AVP has not had any such items in the prior two
years and, consequently, net income (loss) and comprehensive income (loss) are
the same.
Advertising
AVP advertises primarily through radio and print media for each specific event.
Most of AVP's advertising is event specific. AVP's policy is to expense
advertising costs, including production costs, as incurred. Advertising expense
charged to operations was $675,277 in 2005 and $646,394 in 2004.
Income Taxes
AVP accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded to reduce deferred taxes to the amount that is more likely than not to
be realized.
Stock Based Compensation
AVP accounts for stock-based compensation in accordance with the provisions of
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
25, compensation expense is recognized based on the difference, if any, on the
date of grant between the fair value of AVP's common stock and the amount an
employee must pay to acquire the stock. The expense associated with stock-based
compensation is amortized over the periods the employee performs the related
services, generally the vesting period, consistent with the multiple option
method described in Financial Accounting Standards Board Interpretation (FIN)
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans."
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which amends SFAS No. 123. SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS No.
148 also requires disclosure about the method of accounting and the effect of
the method used on reported results in both annual and interim financial
statements.
F-11
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (Continued)
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 APB No. 25, "Accounting for Stock Issued to Employees", until January 2006,
at which time AVP will be required to adopt SFAS No. 123(R). Under APB 25,
compensation expense is recognized over the vesting period based on the excess
of the fair market value over the exercise price on the grant date. If AVP had
elected to recognize compensation expense based upon the fair value at the grant
date for options 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:
Year Ended December 31,
--------------------------
2005 2004
------------ -----------
Net loss applicable to common stockholders, as reported $ (8,963,956) $(2,873,112)
Less, stock-based employee compensation
expense determined under fair-value-based methods
for all awards, net of related tax effects
(4,686,689) (133,288)
------------ -----------
Pro forma net loss $(13,650,645) $(3,006,400)
============ ===========
Basic and diluted loss per share of common stock:
As reported $ (1.03) $ (0.97)
============ ===========
Pro forma $ (1.57) $ (1.01)
============ ===========
The fair value of these options was estimated at the dates of grant using the
Black-Scholes option pricing model, with the following assumptions for the years
ended December 31, 2005 and 2004:
Year Ended December 31,
-----------------------------
2005 2004
------------- -------------
Risk-free interest rate 3.66 - 4.37% 3.86 - 4.19%
Expected life 4 to 10 years 4 to 10 years
Expected volatility 100% 0%
Expected dividend yield 0% 0%
F-12
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards
In May 2003, FASB Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," was issued.
This statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The statement also includes required disclosures for financial
instruments within its scope. For AVP, the Statement was effective for
instruments made or modified after May 31, 2003 and otherwise became effective
as of January 1, 2004, except for certain mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement became effective January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company currently does not have any financial instruments that
are within the scope of this Statement.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46R (revised December 2003), "Consolidation of Variable
Interest Entities", an Interpretation of ARB No. 51 (FIN 46R). FIN 46R replaces
the earlier version of this interpretation issued in January 2003. FIN 46R
addresses the consolidation by business enterprises of variable interest
entities as defined. Immediate application is required in financial statements
of nonpublic entities that have interests in variable interest entities created
after December 31, 2003 and interests in all other variable interest entities by
the beginning of the first annual period beginning after December 15, 2004.
FIN 46R requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. Special provisions apply to enterprises that have
fully or partially applied Interpretation 46 ("Interpretation") prior to
issuance of this Interpretation. Otherwise, application of this Interpretation
is required in financial statements of public entities that have interests in
variable interest entities or potential variable interest entities commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application by small business issuers, to entities other than
special-purpose entities and by nonpublic entities and all other types of
entities is required at various dates in 2004 and 2005. In some instances,
enterprises have the option of applying or continuing to apply Interpretation 46
for a short period of time before applying this Interpretation. The adoption of
the Interpretation did not have any impact on AVP's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). ARB 43 previously stated that "...under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current period charges...". SFAS 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal".
In addition, SFAS 151 requires that allocation of fixed production overhead to
the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS 151, which are to be applied prospectively,
shall become effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after the date this Statement was
issued. The adoption of this Statement is not expected to have any impact on
AVP's financial statements.
F-13
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards (Continued)
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets", which amended APB Opinion No. 29, "Accounting for Nonmonetary
Transactions." SFAS No. 153, which is to be applied prospectively, amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No. 153 became
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after the date the Statement was
issued. The adoption of this Statement is not expected have any impact on AVP's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share - Based
Payment." Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share - based payment transactions be
recognized in financial statements. That cost will be measured based upon the
fair value of the equity or liability instruments issued. Statement 123(R)
covers a wide range of share - based compensation arrangements including share
options, restricted share plans, performance - based awards, share appreciation
rights, and employee share purchase plans.
Statement 123(R) replaces FASB Statement No. 123, "Accounting for Stock - Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." Statement 123, as originally issued in 1995, established as
preferable a fair - value - based method of accounting for share - based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair - value - based method been used. Public entities that file
as small business issuers will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 15, 2005.
AVP is in the process of evaluating the impact of the adoption of SFAS 123(R) on
its financial position or results of operations for 2006. However, it is
anticipated that the adoption of this standard will have a materially adverse
effect on AVP's results of operations.
In February 2006, the FASB issued the new standard, Statement of Financial
Accounting Standard No. 155, "Accounting for Certain Hybrid Instruments," which
is an amendment of FASB Statements No. 133 and 140. SFAS No. 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The adoption of this Statement is not expected to have any impact on AVP's
financial position or results of operations.
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.
F-14
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss per Basic and Diluted Share of Common Stock (Continued)
The following options, warrants and other incremental shares to purchase shares
of common stock were excluded from the computation of diluted earnings (loss)
per share for the periods presented as their effect would be antidilutive.
Year Ended December 31,
-----------------------
2005 2004
---------- ----------
Options and Warrants 15,482,688 8,842,838
Convertible Debt - 1,129,261
Redeemable Series A Preferred Stock - 2,317,188
Series B Preferred Stock 2,296,060 --
---------- ----------
Total 17,778,748 12,289,287
========== ==========
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.
If this rescission is accepted by all players to whom it is made, AVP could be
required to make aggregate payments of up to $240,000, which includes statutory
interest, based on options outstanding as of December 31, 2005. AVP may continue
to be liable under federal and state securities laws for amounts with respect to
which the rescission offer is not accepted. As management believes there is only
a remote likelihood the rescission offer will be accepted by 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. DEFERRED COMMISSION - RELATED PARTY
On April 6, 2003, AVP acquired from Management Plus Enterprises, Inc, (MPE), a
corporation owned by an officer, director and stockholder, the ownership
interests to MPE Sales, LLC, whose only asset was the right to receive certain
commissions that MPE was entitled to receive under a sponsorship sales agreement
between the Association and MPE. The aggregate cost of acquiring the rights of
$1,366,737 was charged to operations over the term of the related sponsorship
agreements and projected revenues thereunder. The deferred commissions were
fully amortized as of December 31, 2005.
Deferred commissions charged to operations aggregated $253,339 in 2005 and
$294,904 in 2004.
F-15
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 consists of:
Cost
Furniture and equipment $ 395,415
Transportation equipment 49,836
Leasehold improvements 23,704
---------
Total cost 468,955
Less, accumulated depreciation and amortization (180,546)
---------
Net property and equipment $ 288,409
=========
Depreciation and amortization expense for property and equipment charged to
operations was $164,148 in 2005 and $57,561 in 2004.
7. INVESTMENT IN SALES-TYPE LEASE
In 2001, AVP leased furniture and equipment associated with a former office
facility to a third party in a lease classified as a sales-type lease. The
unearned lease income is being amortized to income over the lease term, using
the effective interest method. The lease expires in October 2008. AVP's
investment in the sales-type lease at December 31, 2005 is as follows:
Minimum lease payments $ 501,600
Estimated unguaranteed residual value 183,600
Less unearned lease income (122,881)
---------
Investment in sales-type lease, net $ 562,319
=========
The following is a schedule of future minimum lease payments to be received
under the investment in sales-type lease:
Years Ending December 31,
- -------------------------
2006 $211,200
2007 158,400
2008 132,000
--------
Total $501,600
========
F-16
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS
During 2004, in connection with the Bridge Financing, the Association issued
debentures aggregating $2,000,000 to Othnet, with whom Association had entered
into a merger agreement. The convertible promissory note holders had the right
to convert the principal amount of the note and accrued interest, based on a
conversion price of the lower of $5.60 per share of common stock or 85% of the
offering price in the next round of financing of Othnet common stock, as defined
in the convertible promissory note. As part of the consummated merger, on
February 28, 2005, $2.1 million of the $2.36 million convertible promissory
notes and accrued interest were converted into common stock.
In April 2003, AVP issued a $1,366,737 promissory note to MPE with whom Leonard
Armato, the Chief Executive Officer and Chairman of the Board of Directors of
the Company was affiliated. This note constituted the purchase price delivered
by AVP to MPE for the interests in MPE Sales, LLC. The debenture was payable in
installments through January 2006 plus interest at a rate of 3.75% per annum.
During 2005, $950,000 in principal was repaid under this obligation.
In 2004, AVP entered in a consulting agreement with a shareholder/member of
AVP's Board of Directors to provide financial consulting services regarding
AVP's operations and fund-raising efforts. He also participated in merger
negotiations between the Association and AVP, as well as terms of financings
with the broker dealer of the February 2005 Financing. For his services, this
non-management director received compensation equal to $150,000 in cash plus an
additional 527,213 in warrants. Prior to 2004, this non-management director
received 120,903 warrants for his service on our Board of Directors, and he
received 126,811 warrants in 2005 as a result of the merger. AVP recognized
consulting expense of $100,000 in 2004 and $50,000 in 2005.
In February 2005, AVP entered a consulting agreement with Montecito Capital
Partners, LLC ("Montecito"), a firm controlled by one of AVP's non-management
directors. Under the terms of the agreement, Montecito provides various
management consulting services to AVP, including, but not limited to strategic
planning and marketing. The agreement obligates AVP to pay $20,000 per month to
services through February 2006. Total consulting fees of $200,000 were charged
to operations during 2005 under this agreement.
F-17
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE
Notes payable consist of the following:
Related party note dated April 2003, payable in installments through January
2006 plus interest at 3.75% per annum. The related party agreed to defer
payments due August 2003, January 2004, and August 2004, aggregating to
$700,000, until February 2005. In connection with the merger, the related party
agreed to defer payments due August 2005 and January 2006, aggregating $416,737,
until February 28, 2006. $416,737
Convertible note dated July 2003 payable to a former stockholder in annual
installments of $183,333, plus interest at 5% per annum, through November 2006.
Beginning November 2004, the note holder may exchange the unpaid principal and
any unpaid interest for shares of Common Stock of AVP at a per share price equal
to the per share price paid to AVP under AVP's most recent round of equity
financing. The borrowings are collateralized by AVP's accounts receivable and
property and equipment. 183,334
--------
Total Notes Payable $600,071
========
10 STOCKHOLDERS' EQUITY
Capitalization
Outstanding shares and their par value give effect to the merger with Othnet,
and the authorization of additional shares in August 2005, and the effectiveness
of the reverse stock split.
Stock Transaction
In February 2005, 2,251,474 shares of Common Stock were issued as result of the
"reverse merger" with Othnet Merger Sub, Inc.; 1,707,672 shares of Common Stock
were issued as a result of the conversion of 10% convertible notes payable, and
147,364 shares of Series "B" preferred stock convertible into 3,580,945 shares
of common stock were issued in a private placement offering.
In February 2005, 2,317,188 shares of Common Stock were issued as a result of
the conversion of redeemable Association Series "A" preferred stock.
In December 2005, 52,876 shares of Series "B" preferred stock were converted
into 1,284,887 shares of common stock, and Anschutz Entertainment Group, Inc.
("AEG"), exercised its option to convert its $1,000,000 principal convertible
promissory note plus accrued interest into 1,129,261 shares of Company Common
Stock. The conversion satisfied all of the Company's obligations under the
agreements pursuant to which the convertible note was issued. Also, in December
2005, AVP agreed to issue 5,587 shares of Common Stock to Series "B"
stockholders in lieu of cash penalty payments of liquidated damages.
F-18
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS
Stock Option Plans
On August 23, 2005, the stockholders approved the adoption of the 2005 Stock
Incentive Plan. Under the 2005 Plan, AVP may grant awards of stock options
(including stock purchase warrants) and restricted stock grants to its officers,
directors, employees, consultants, players, and independent contractors. AVP may
issue an aggregate of 30,000,000 shares of its common stock under the 2005 Plan,
including approximately 14,000,000 shares subject to management warrants and
options converted from stock options to purchase shares of the Association,
pursuant to the merger agreement. AVP may grant both incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code, and options,
warrants, and other rights to buy AVP's common stock that are not qualified as
incentive stock options. No stock options may be granted at an exercise price
less than the fair market value of our common stock on the date of grant. The
exercise price of incentive stock options granted to holders of more than 10% of
AVP's Common Stock must be at least 110% of the fair market value of the Common
Stock on the date of grant. Stock options granted under the 2005 Plan will
expire no more than ten years from the date on which the option is granted,
unless the Board of Directors determines an alternative termination date. If
incentive stock options are granted to holders of more than 10% of AVP's Common
Stock, such options will expire no more than five (5) years from the date the
option is granted. Except as otherwise determined by the Board of Directors or
the Compensation Committee, stock options granted under the 2005 Plan will vest
and become exercisable on the anniversary of the date of grant of such option at
a rate of 25% per year over four years from the date of grant.
The exercise price of each optioned share is determined by the Committee;
however the exercise price for incentive stock options will not be less than
100%, and in the case of a nonqualified stock option, not less than 85%, of the
fair market value of the optioned shares on the date of grant. The expiration
date of each option shall be determined by the Committee at the date of grant;
however, in no circumstances shall the option be exercisable after 10 years from
the date of grant.
The following table, as restated, contains information on the stock options
under the Plan for the years ended December 31, 2005 and 2004. The outstanding
options expire from April 2008 to September 2013.
Weighted Average
Number of Shares Exercise Price
----------------- ----------------
Options outstanding at January 1, 2004 7,774,423 $ .19
Granted 780,818 1.60
Exercised -- --
Cancelled -- --
---------- -----
Options outstanding at December 31, 2004 8,555,241 .32
Granted 3,259,593 2.19
Converted Othnet options 200,428 2.50
Exercised -- --
Cancelled -- --
---------- -----
Options outstanding at December 31, 2005 12,015,262 $ .87
========== =====
The weighted average fair value per share of options granted was $1.41 in 2005
and $ -0- in 2004.
F-19
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS (CONTINUED)
Stock Option Plans (Continued)
The following table summarizes information about AVP's stock-based compensation
plan at December 31, 2005:
Options outstanding and exercisable by price range as of December 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- ------------- ----------- ------------- -------- ----------- --------
$ .01 - .30 6,118,943 4.0 $0.03 6,118,943 $0.03
.31 - .90 1,655,480 7.7 0.77 1,655,480 0.77
.91 - 1.60 780,818 3.3 1.60 711,406 1.60
1.61 - 2.80 3,460,021 3.6 2.21 3,403,176 2.22
---------- ----------
$ .01 - 2.80 12,015,262 4.3 $0.87 11,889,005 $0.86
========== === ===== ========== =====
In connection with stock options granted to employees to purchase common stock,
AVP recorded stock-based compensation expense of $ -0- for the years ended
December 31, 2005 and 2004. Such amounts represent, for each employee stock
option, the difference between the grant date exercise price and the stock price
on the date of the grant.
F-20
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS (CONTINUED)
Other Stock Options
The following table contains information on all of AVP's non-plan stock options
for the years ended December 31, 2005 and 2004.
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Options outstanding at January 1, 2004 302,930 $0.30
Granted -- --
Exercised -- --
Cancelled -- --
--------- -----
Options outstanding at December 31, 2004 302,930 0.30
Granted 2,491,056 1.99
Converted Othnet options 728,557 2.39
Exercised -- --
Cancelled (55,118) 4.42
--------- -----
Options outstanding at December 31, 2005 3,467,425 $1.89
========= =====
The weighted average fair value of options granted was $2.26 in 2005 and -0- in
2004.
The following table summarizes information about AVP's non-qualified stock
options at December 31, 2005:
Options outstanding and exercisable by price range as of December 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- ----------------- ----------- ------------- -------- ----------- --------
$ .30 - 1.50 661,025 4.3 $0.89 661,025 $0.89
1.60 - 3.40 2,806,400 3.2 2.12 2,806,400 2.12
--------- ---------
$ .30 - 3.40 3,467,425 3.4 $1.89 3,467,425 $1.89
========= === ===== ========= =====
In connection with warrants granted to non-employees to purchase Common Stock in
connection with the February 2005 Financing, AVP recorded consulting expense of
$5,640,132 and $-0- for the years ended December 31, 2005 and 2004,
respectively. Such amounts represent, for each non-employee stock option, the
valuation under SFAS 123 on the date of the grant. These grants were fully
vested on the grant date.
F-21
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its corporate office facilities under a non-cancellable
operating lease expiring in March 2010. The lease agreement contains a renewal
option for an additional five-year term. In addition, the lease agreement
provides for rental escalations at defined intervals during the lease term. Rent
expense is recognized on the straight-line method over the term of the lease.
The difference between rent expense recognized and rent payable under the rental
escalation clauses is reflected in accrued expenses.
The future minimum rental payments under the non-cancellable operating lease
commitment are as follows:
Years Ending December 31,
- -------------------------
2006 $ 329,000
2007 338,000
2008 347,000
2009 356,000
Thereafter 91,000
----------
Total $1,461,000
==========
Rent expense charged to operations was $308,194 in 2005 and $282,442 in 2004.
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 Chief Executive Officer
will determine the allocation of the Profit Sharing Bonus Pool among officers
eligible to participate in the Profit Sharing Bonus Pool.
Legal proceedings
A complaint was filed by Carl Schneider and Schneider Productions, LLC on
October 24, 2005 in the United States District Court, Central District of
California, in which the plaintiffs seek damages for copyright infringement in
connection with the allegedly unauthorized use of a still photograph in a
television commercial that was broadcast on NBC and FSN in 2005.
Discovery has not yet commenced and therefore management is unable to determine
or predict the outcome of this claim or the impact, if any, on the Company's
financial condition or results of operations. Accordingly, the Company has not
recorded a provision for this matter in their financial statements.
F-22
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The components of the provision for income taxes are as follows:
2005 2004
---- ----
Current
Federal $ -- $--
State 800 --
---- ----
Total 800 --
---- ----
Deferred
Federal -- --
State -- --
---- ----
Total -- --
---- ----
Total Income Tax Provision (Benefit) $800 $--
==== ====
The provision (benefit) for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision (benefit) for
income taxes as follows:
2005 2004
---- ----
Federal statutory rate (34)% (34)%
State income taxes, net of federal benefits (6) (6)
Valuation allowance 40 40
---- ----
Total --% --%
==== ====
Significant components of deferred income taxes as of December 31, 2005 are as
follows:
Net operating loss $ 7,368,130
Valuation allowance (7,368,130)
-----------
Net Deferred Tax $ --
-==========
F-23
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (CONTINUED)
AVP records a valuation allowance for certain temporary differences for which it
is more likely than not that AVP will not receive future tax benefits. AVP
assesses its past earnings history and trends and projections of future net
income to determine the allowance. AVP recorded a valuation allowance for the
entire amount of the net deferred assets in 2005 and 2004, as it had determined
that it was more likely than not that no deferred tax assets would be realized.
The net change in the valuation allowances for deferred tax assets were
increases of $2,698,945 and $1,575,000 in 2005 and 2004, respectively. AVP will
continue to review this valuation allowance quarterly and make adjustments as
appropriate.
The tax benefits associated with employee exercises of stock options reduces
income taxes currently payable. However, no benefits were recorded to additional
paid in capital in 2005 and 2004 because their realization was not more likely
than not to occur, and, consequently, a valuation allowance was recorded against
the entire benefit.
At December 31, 2005, AVP had federal net operating loss carryforwards of
approximately $18,500,000 which expire at various intervals from the years 2019
to 2024. As of December 31, 2005, $18,500,000 of AVP's federal net operating
loss carryforwards were subject to approximately $652,000 in limitations related
to their utilization under Section 382 of the Internal Revenue Code. Future
ownership changes as determined under Section 382 of the Internal Revenue Code
could further limit the utilization of net operating loss carryforwards.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance.
14. PENSION PLAN
AVP sponsors a qualified 401(k) savings plan for eligible employees. The plan
provides for pre-tax employee contributions. Additionally, the plan provides for
employer matching contributions at the discretion of AVP. No matching
contributions were contributed to the plan by the employer in 2005 or 2004.
15. SUBSEQUENT EVENTS
In February 2006, AVP entered a production and distribution agreement with Fox
Broadcasting Company in connection with two events. Under the agreement, the Fox
Network will have the exclusive right to telecast the finals of two 2006 AVP
tournaments throughout the U.S., its territories, and possessions. In
consideration for its services valued at $1,000,000, Fox will receive 666,667
shares of Common Stock, par value $0.001 per share, of AVP.
In February 2006, AVP paid $527,184 principal amount due (and accrued interest)
on the promissory note to MPE with whom Leonard Armato, the Chief Executive
Officer and Chairman of the Board of Directors of the Company was affiliated.
This note constituted the purchase price delivered by AVP to MPE for the
interests in MPE Sales, LLC.
On April 12, 2006, AVP entered a multi-year sponsorship agreement ("Agreement")
with Crocs, Inc. ("Crocs") pursuant to which Crocs shall become the title
sponsor of the AVP Tour through the final event of the 2008 AVP Tour season. The
Agreement is significant to AVP's 2006 projected revenue.
Included in the Agreement AVP agreed to issue warrants to purchase up to
1,000,000 shares of common stock of AVP, Inc. The vesting period is: (i) 200,000
shares on April 12, 2006; and (ii) 200,000 shares on each January 15th of the
remaining years of the five year term (three year sponsorship agreement and two
optional years), however no shares shall be granted in 2008, 2009 or 2010 if
Crocs reduces its sponsorship in 2008, or in either 2009 or 2010 if the
Agreement is not extended or such earlier years if the Agreement is terminated
for breach prior to the final event of the 2008 AVP Tour season. The exercise
price of the warrant is $.80. The registration rights are subject to Securities
Act rules, AVP agrees to file a registration statement for resale of the shares
underlying the warrants by April 12, 2007. The expiration date of the warrant is
April 12, 2012 (sixth anniversary of the execution of the Agreement).
F-24
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS (CONTINUED)
Pursuant to a Securities Purchase Agreement dated May 4, 2006, AVP sold
2,941,180 shares of common stock and five-year warrants to purchase 588,236
shares of common stock at price of $1.00 per share, to accredited investors, for
a total price $2,500,003. Oppenheimer & Co., Inc. acted as the placement agent
and in addition to its commission, received a warrant to purchase 282,353 shares
of common stock on substantially the same terms as the warrants sold to
investors. The sale of the securities is exempt from registration under
Securities Act section 4(2), due to the limited number of investors, all of
which are accredited.
Pursuant to a Securities Purchase Agreement dated June 9, 2006, AVP sold 705,882
units, each unit consisting of five shares of common stock and a five-year
warrant to purchase one share of common stock at price of $1.00 per share, to an
accredited investor, for a total price $2,999,998.50. Oppenheimer & Co., Inc.
acted as the placement agent and in addition to its commission, received a
warrant to purchase 338,824 shares of common stock on substantially the same
terms as the warrants sold to investor. The sale of the securities is exempt
from registration under Securities Act section 4(2), due to the limited number
of investors, all of which are accredited. The Securities Purchase Agreements in
May and June of 2006 require AVP to file a re-sale registration statement within
10 business days from closing and gives the investors rights of first
negotiation regarding future issuances of common stock, subject to exceptions.
On February 28, 2005, AVP consummated a private placement. Each unit sold in the
February 2005 Financing consisted of 4 shares of AVP's Series B Preferred Stock;
each share was originally convertible into 24.3 shares of common stock, and a
five-year warrant to purchase up to 24.3 shares of the AVP's common stock.
However, as a result of the new shares sold in May and June 2006, the conversion
rate of the outstanding Series B Convertible Preferred Stock increased from 24.3
to 27.87 in accordance with its anti-dilution provision. All outstanding shares
of Series B Convertible Preferred Stock are now convertible into 27.87 shares of
common stock.
F-25
AVP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2006
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 759,892
Accounts receivable, net of
allowance for doubtful accounts of $49,232 263,732
Prepaid expenses 1,650,121
Current portion of investment in sales-type lease 113,876
------------
TOTAL CURRENT ASSETS 2,787,621
------------
PROPERTY AND EQUIPMENT, net 306,279
------------
OTHER ASSETS
Investment in sales-type lease 387,020
Other assets 36,633
------------
TOTAL OTHER ASSETS 423,653
------------
TOTAL ASSETS $ 3,517,553
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes payable $ 183,334
Accounts payable 296,769
Accrued expenses 1,233,757
Accrued interest 21,673
Deferred revenue 2,731,915
------------
TOTAL CURRENT LIABILITIES 4,467,448
------------
OTHER LIABILITIES
Long-term deferred revenue 131,250
------------
TOTAL LIABILITIES 4,598,698
------------
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,
74,708 shares issued and outstanding 74
Common stock, $.001 par value, 80,000,000 shares
authorized, 12,817,919 shares issued and outstanding 12,819
Additional paid-in capital 33,194,342
Accumulated deficit (34,288,380)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (1,081,145)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 3,517,553
============
See notes to financial statements.
F-26
AVP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2006 2005
----------- -----------
REVENUE
Sponsorships $ - $ -
Other 122,816 103,956
----------- -----------
TOTAL REVENUE 122,816 103,956
EVENT COSTS - -
----------- -----------
Gross Profit 122,816 103,956
----------- -----------
OPERATING EXPENSES
Marketing 555,950 411,600
Administrative (includes stock-based compensation
of $10,726 for 2006 and $3,498,022 for 2005) 1,068,338 4,518,384
----------- -----------
TOTAL OPERATING EXPENSES 1,624,288 4,929,984
----------- -----------
OPERATING LOSS (1,501,472) (4,826,028)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (8,213) (70,558)
Interest income 21,139 15,356
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 12,926 (55,202)
----------- -----------
LOSS BEFORE INCOME TAXES (1,488,546) (4,881,230)
INCOME TAXES - -
----------- -----------
NET LOSS $(1,488,546) $(4,881,230)
=========== ===========
Basic and diluted loss per share $ (0.12) $ (0.95)
=========== ===========
Weighted average common shares outstanding 12,468,848 5,135,713
=========== ===========
See notes to financial statements.
F-27
AVP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(Unaudited)
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional Total
--------------- ---------------- -------------------- Paid-in Accumulated Stockholders
Shares Amount Shares Amount Shares Amount Capital Deficit Deficiency
------ ------ ------- ------ ---------- ------- ----------- ------------ ------------
Balance, December 31, 2005 - $- 94,488 $ 94 11,669,931 $11,670 $32,183,810 $(32,799,834) $ (604,260)
Conversion of Series B
Preferred Stock to
common stock - - (19,780) (20) 480,654 481 (461) - -
Payment of accrued
registration penalty in
common stock - - - - 667 1 934 - 935
Issuance of common stock to
non-employees for services - - - - 666,667 667 999,333 - 1,000,000
Compensation expense from
issuance of warrants - - - - - - 10,726 - 10,726
Net loss - - - - - - - (1,488,546) (1,488,546)
--- ------ ---- ---------- ------- ----------- ------------ -----------
Balance, March 31, 2006 - $- 74,708 $ 74 12,817,919 $12,819 $33,194,342 $(34,288,380) $(1,081,145)
=== ====== ==== ========== ======= =========== ============ ===========
See notes to financial statements.
F-28
AVP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,488,546) $(4,881,230)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization of property and equipment 36,545 22,101
Interest income on investment in sales-type lease (12,843) (15,356)
Amortization of deferred commissions - 63,335
Gain on property and equipment (9,864) -
Other amortization 2,011 2,011
Compensation from issuance of stock options and warrants 10,726 3,498,022
Decrease (increase) in operating assets:
Accounts receivable 202,903 (453,706)
Prepaid expenses (492,067) (527,476)
Other assets (3) (4,500)
Increase (decrease) in operating liabilities:
Accounts payable (414,534) 164,381
Accrued expenses (341,742) 208,347
Accrued interest (104,316) (56,127)
Deferred revenue 2,597,165 2,969,847
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (14,565) 989,649
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (64,216) (137,384)
Investment in sales-type lease 92,400 39,600
Proceeds from disposal of property and equipment 19,665 -
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 47,849 (97,784)
----------- -----------
See notes to financial statements.
F-29
AVP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(CONTINUED)
Three Months Ended
March 31,
------------------------
2006 2005
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of capital stock $ - $5,000,061
Offering costs - (753,038)
Debt repayments (416,737) (950,000)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (416,737) 3,297,023
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (383,453) 4,188,888
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,143,345 631,933
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 759,892 $4,820,821
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 110,447 $ -
========== ==========
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 in common stock $ - $2,290,348
========== ==========
Payment of accrued registration penalty in common stock $ 935 $ -
========== ==========
Issuance of common stock to non-employees for services $1,000,000 $ -
========== ==========
See notes to financial statements.
F-30
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated 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 on Form 10-KSB filed with the SEC. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of AVP's 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 consolidated financial statements
which would substantially duplicate the disclosures contained in the
consolidated audited financial statements for the most recent fiscal year 2005,
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 named Othnet Merger Sub,
Inc., a Delaware corporation, and the Association of Volleyball Professionals,
Inc. (the "Association") consummated a merger ("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 common stock to Association stockholders.
In the second half of 2004, AVP issued $2,360,000 principal amount of 10%
convertible notes and, as required by the Merger, 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) (the "Bridge
Financing"). 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 (the "Units
Offering"), concurrently with the Merger closing.
Each share of Series B preferred stock is convertible into 24.3 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, the outstanding shares of the Association's
common stock were converted into 2,973,861 shares of AVP common stock. The
Association also had outstanding options and warrants that, as a result of the
Merger, now represent the right to purchase 8,842,839 shares of AVP common
stock.
As part of the Merger, the Association's preferred stockholders converted
$3,657,600 of redeemable preferred stock into 2,317,188 shares of AVP common
stock. In addition, as part of the Merger, holders of Bridge Financing
convertible notes converted $2.1 million into 1,707,672 shares of AVP common
stock. In February 2005, the two television networks waived their put rights on
their redeemable Series A preferred stock that AVP previously issued to them,
and subsequently converted the preferred stock into common stock pursuant to the
Merger.
F-31
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. MERGER (CONTINUED)
Concurrent with the Merger, AVP raised $5,000,061 through the Units Offering,
representing 147,364 shares of Series B Convertible Preferred Stock, which are
convertible into 3,580,945 shares of AVP common stock.
Pursuant to the merger agreement and in conjunction with the Merger, AVP was
obligated to grant warrants to purchase 5,677,590 shares of common stock.
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 constituted
a majority of the Board of Directors.
Because AVP was a publicly traded shell corporation at the time of the Merger,
the transaction was accounted for as a capital transaction. For accounting
purposes, the equivalent of the Association issuing stock for AVP's net assets,
accompanied by a recapitalization of the Association. The accounting is
identical to that resulting from a reverse acquisition, except that there are no
adjustments to the historical carrying values of the assets and liabilities of
AVP.
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.
On March 9, 2005, Othnet changed its name to its current name, AVP, Inc.
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 was required to pay a penalty to the Series B preferred stock
stockholders of approximately $50,000 for each month that the penalty condition
was 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 Certificate of
Incorporation increasing the number of authorized shares of common stock to
300,000,000 shares and to amend the Articles of Incorporation to effect a 1 for
10 reverse stock split. The Certificate of Incorporation was subsequently
amended to reduce the authorized shares of common stock to 80,000,000.
As such, for all disclosures referencing shares authorized and issued, shares
reserved for issuance, per share amounts and other disclosures relating to
equity, amounts have been retroactively restated to reflect share quantities as
altered by the terms of the merger agreement, the authorization of additional
shares and the reverse stock split, which was effective on December 16, 2005.
F-32
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
If this rescission is accepted by all players to whom it is made, AVP could be
required to make aggregate payments of up to $245,000, which includes statutory
interest, based on options outstanding as of March 31, 2006. AVP may continue to
be liable under federal and state securities laws for amounts with respect to
which the rescission offer is not accepted. As management believes there is only
a remote likelihood the rescission offer will be accepted by 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.
The following options, warrants and other incremental shares to purchase shares
of common stock were excluded from the computation of diluted earnings (loss)
per share for the periods presented as their effect would be antidilutive.
Three Months Ended
March 31,
-----------------------
2006 2005
---------- ----------
Options and Warrants 15,482,688 11,053,950
Convertible Debt - 1,129,261
Redeemable Series A Preferred Stock - -
Series B Preferred Stock 1,815,404 3,580,945
---------- ----------
Total 17,298,092 15,764,156
========== ==========
F-33
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. STOCK BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123(R). Prior to January 1, 2006, the Company had accounted for
stock-based payments under the recognition and measurement provisions of
Accounting Principles Board ("APB") Opinion 25 and related interpretations, as
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." In
accordance with APB 25, no compensation expense was required to be recognized
for options granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant.
Under the modified prospective method of SFAS No. 123(R), compensation expense
was recognized during the three months ended March 31, 2006 and includes
compensation expense for all stock-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123. There were no stock
based grants between January 1, 2006 and March 31, 2006. The Company's financial
results for the prior periods have not been restated.
AVP adopted SFAS No. 148 effective for the year ended December 31, 2002, and has
accounted for its stock-based compensation in accordance with APB No. 25,
"Accounting for Stock Issued to Employees", until January 2006, at which time
AVP adopted SFAS No. 123(R). Under APB 25, compensation expense is recognized
over the vesting period based on the excess of the fair market value over the
exercise price on the grant date. The reported net income and net income per
share for the three months ended March 31, 2005 do not reflect the impact of the
adoption of SFAS No. 123(R). If AVP had elected to recognize compensation
expense based upon the fair value at the grant date for options under its
stock-based compensation plans consistent with the methodology prescribed by
SFAS No. 123, AVP's net loss for the three months ending March 31, 2005 would
increase to the following pro forma amounts. The pro forma net loss did not
increase since there were no employee grants for the three months ending March
31, 2005.
Three Months
Ended March 31,
---------------
2005
---------------
Net loss applicable to common
stockholders, as reported $(4,881,230)
Less, stock-based employee
compensation expense determined
under fair-value-based methods for all
awards, net of related tax effects -
-----------
Pro forma net loss $(4,881,230)
===========
Basic and diluted loss per share of
common stock:
As reported $ (0.95)
===========
Pro forma $ (0.95)
===========
The fair value of these options was estimated at the dates of grant using the
Black-Scholes option pricing model, with the following assumptions for the three
months ended March 31, 2005:
Three Months Ended
March 31,
------------------
2005
------------------
Risk-free interest rate 3.66 - 3.93%
Expected life 4 years
Expected volatility 100%
Expected dividend yield 0%
F-34
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. STOCK BASED COMPENSATION (CONTINUED)
As a result of adopting SFAS No. 123(R), during the three months ended March 31,
2006, the Company's net loss is $10,726 greater than if it had continued to
account for stock based compensation under APB 25 as it did for the three months
ended March 31, 2005. Basic and diluted earnings per share for the three months
ended March 31, 2006 would have been ($0.12) if the Company had not adopted SFAS
No. 123(R), compared to basic and diluted earnings per share of ($0.12). The
adoption of SFAS No. 123(R) had no impact on the Company's cash flows.
Consistent with the valuation method used for the disclosure only provisions of
SFAS No. 123, the Company is using the Black-Scholes option-pricing model to
value compensation expense. Forfeitures are estimated at the date of grant based
on historical rates and reduce the compensation expense recognized. The expected
term of options granted from historical data on employee exercises is not yet
determinable. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the date of grant. Expected volatility is based on the
historical volatility of the Company's stock. As of March 31, 2006, the Company
had approximately $80,770 of unrecognized compensation expense expected to be
recognized over a weighted average period of approximately 1.9 years.
F-35
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. STOCK OPTIONS
Stock Option Plans
On August 23, 2005, the stockholders approved the adoption of the 2005 Stock
Incentive Plan. Under the 2005 Plan, AVP may grant awards of stock options
(including stock purchase warrants) and restricted stock grants to its officers,
directors, employees, consultants, players, and independent contractors. AVP may
issue an aggregate of 30,000,000 shares of its common stock under the 2005 Plan,
including approximately 14,000,000 shares subject to management warrants and
options converted from stock options to purchase shares of the Association,
pursuant to the merger agreement. AVP may grant both incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code, and options,
warrants, and other rights to buy AVP's common stock that are not qualified as
incentive stock options. No stock options may be granted at an exercise price
less than the fair market value of our common stock on the date of grant. The
exercise price of incentive stock options granted to holders of more than 10% of
AVP's Common Stock must be at least 110% of the fair market value of the Common
Stock on the date of grant. Stock options granted under the 2005 Plan will
expire no more than ten years from the date on which the option is granted,
unless the Board of Directors determines an alternative termination date. If
incentive stock options are granted to holders of more than 10% of AVP's Common
Stock, such options will expire no more than five (5) years from the date the
option is granted. Except as otherwise determined by the Board of Directors or
the Compensation Committee, stock options granted under the 2005 Plan will vest
and become exercisable on the anniversary of the date of grant of such option at
a rate of 25% per year over four years from the date of grant.
The exercise price of each optioned share is determined by the Committee;
however the exercise price for incentive stock options will not be less than
100%, and in the case of a nonqualified stock option, not less than 85%, of the
fair market value of the optioned shares on the date of grant. The expiration
date of each option shall be determined by the Committee at the date of grant;
however, in no circumstances shall the option be exercisable after 10 years from
the date of grant.
The following table, as restated for the 2005 period, contains information on
the stock options under the Plan for the period ended March 31, 2006 and the
year ended December 31, 2005. The outstanding options expire from April 2008 to
September 2013.
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Options outstanding at January 1, 2005 8,555,241 $ .32
Granted 3,259,593 2.19
Converted Othnet options 200,428 2.50
Exercised -- --
Cancelled -- --
---------- -----
Options outstanding at December 31, 2005 12,015,262 .87
Granted -- --
Converted Othnet options -- --
Exercised -- --
Cancelled -- --
---------- -----
Options outstanding at March 31, 2006 12,015,262 $ .87
========== =====
The weighted average fair value per share of options granted was $-0- in 2006
and $1.38 in 2005.
F-36
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. STOCK OPTIONS (CONTINUED)
Stock Option Plans (Continued)
The following table summarizes information about AVP's stock-based compensation
plan at March 31, 2006:
Options outstanding and exercisable by price range as of March 31, 2006:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- ------------- ----------- ------------- -------- ----------- --------
$ .01 - .30 6,118,943 3.8 $0.03 6,118,943 $0.03
.31 - .90 1,655,480 7.4 0.77 1,655,480 0.77
.91 - 1.60 780,818 3.1 1.60 716,568 1.60
1.61 - 2.80 3,460,021 3.3 2.21 3,409,931 2.22
---------- ----------
$ .01 - 2.80 12,015,262 4.1 $0.87 11,900,922 $0.86
========== === ===== ========== =====
In connection with stock options granted to employees to purchase common stock,
AVP recorded $10,726 of stock-based compensation expense for the period ended
March 31, 2006 and $-0- for the period ended March 31, 2005.
F-37
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. STOCK OPTIONS (CONTINUED)
Other Stock Options
The following table contains information on all of AVP's non-plan stock options
for the period ended March 31, 2006 and the year ended December 31, 2005.
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Options outstanding at January 1, 2005 302,930 $0.30
Granted 2,491,056 1.99
Converted Othnet options 728,557 2.39
Exercised -- --
Cancelled (55,118) 4.42
--------- -----
Options outstanding at December 31, 2005 3,467,425 1.89
Granted -- --
Converted Othnet options -- --
Exercised -- --
Cancelled -- --
--------- -----
Options outstanding at March 31, 2006 3,467,425 $1.89
========= ======
The weighted average fair value of options granted was $-0- in 2006 and $2.26 in
2005.
The following table summarizes information about AVP's non-qualified stock
options at March 31, 2006:
Options outstanding and exercisable by price range as of March 31, 2006:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------------
Weighted Average Weighted
Remaining Average
Range of Exercise Number Contractual Exercise Number Weighted Average
Prices Outstanding Life in Years Price Exercisable Exercise Price
- ----------------- ----------- ---------------- -------- ----------- ----------------
$ .30 - 1.50 661,025 4.0 $0.89 661,025 $0.89
1.60 - 3.40 2,806,400 2.9 2.12 2,806,400 2.12
--------- ---------
$ .30 - 3.40 3,467,425 3.1 $1.89 3,467,425 $1.89
========= === ===== ========= =====
In connection with warrants granted to non-employees to purchase Common Stock in
connection with the Units Offering, AVP recorded consulting expense of $-0- for
the period ended March 31, 2006 and $3,498,022 for the period ended March 31,
2005. Such amounts represent, for each non-employee stock option, the valuation
under SFAS 123 on the date of the grant. These grants were fully vested on the
grant date.
F-38
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its corporate office facilities under a non-cancellable
operating lease expiring in March 2010. The lease agreement contains a renewal
option for an additional five-year term. In addition, the lease agreement
provides for rental escalations at defined intervals during the lease term. Rent
expense is recognized on the straight-line method over the term of the lease.
The difference between rent expense recognized and rent payable under the rental
escalation clauses is reflected in accrued expenses.
The future minimum rental payments under the non-cancellable operating lease
commitment are as follows:
Three Months Ending March 31,
- -----------------------------
2007 $ 331,000
2008 340,000
2009 350,000
2010 360,000
----------
Total $1,381,000
==========
Rent expense charged to operations was $78,157 for the three months ended March
31, 2006 and $89,841 for the three months ended March 31, 2005.
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 by EBITDA or such other appropriate specification of the AVP for such
fiscal year to establish a Profit Sharing Bonus Pool. The Chief Executive
Officer will determine the allocation of the Profit Sharing Bonus Pool among
officers eligible to participate in the Profit Sharing Bonus Pool.
Legal proceedings
A complaint was filed by Carl Schneider and Schneider Productions, LLC on
October 24, 2005 in the United States District Court, Central District of
California, in which the plaintiffs seek damages for copyright infringement in
connection with the allegedly unauthorized use of a still photograph in a
television commercial that was broadcast on NBC and FSN in 2005. Discovery has
just commenced and therefore management is unable to determine or predict the
outcome of this claim or the impact on the Company's financial condition or
results of operations. Accordingly, the Company has not recorded a provision for
this matter in their financial statements.
F-39
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. CAPITAL TRANSACTIONS
In February 2006, AVP entered a production and distribution agreement with Fox
Broadcasting Company ("FBC") in connection with two events. Under the agreement,
FBC will have the exclusive right to telecast the finals of two 2006 AVP
tournaments throughout the U.S., its territories, and possessions. In
consideration for its services valued at $1,000,000, FBC received 666,667 shares
of Common Stock, par value $0.001 per share, of AVP.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2006, the FASB issued the new standard, Statement of Financial
Accounting Standard No. 155, "Accounting for Certain Hybrid Instruments," which
is an amendment of FASB Statements No. 133 and 140. SFAS No. 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host), if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The adoption of this Statement is not expected to have any impact on AVP's
financial position or results of operations.
9. SUBSEQUENT EVENT
On April 12, 2006, AVP entered a multi-year sponsorship agreement ("Agreement")
with Crocs, Inc. ("Crocs") pursuant to which Crocs shall become the title
sponsor of the AVP Tour through the final event of the 2008 AVP Tour season. The
Agreement is significant to AVP's 2006 projected revenue.
In the Agreement, AVP agreed to issue warrants to purchase up to 1,000,000
shares of common stock of AVP. The vesting period is as follows: (i) 200,000
shares on April 12, 2006 and (ii) 200,000 shares on each January 15th for the
years 2007 through 2010; however no shares shall be granted in 2008, 2009 or
2010 if Crocs reduces its sponsorship in 2008, or in either 2009 or 2010 is not
extended or in such earlier years if the Agreement is terminated by either party
for breach prior to the final event of the 2008 AVP Tour season. The exercise
price of the warrant is $.80. The registration rights are subject to Securities
Act rules, AVP agrees to file a registration statement for resale of the shares
underlying the warrants by April 12, 2007. The expiration date of the warrant is
April 12, 2012 (sixth anniversary of the execution of the Agreement).
Pursuant to a Securities Purchase Agreement dated May 4, 2006, AVP sold
2,941,180 shares of common stock and five-year warrants to purchase 588,236
shares of common stock at price of $1.00 per share, to accredited investors, for
a total price $2,500,003. Oppenheimer & Co., Inc. acted as the placement agent
and in addition to its commission, received a warrant to purchase 282,353 shares
of common stock on substantially the same terms as the warrants sold to
investors. The sale of the securities is exempt from registration under
Securities Act section 4(2), due to the limited number of investors, all of
which are accredited.
Pursuant to a Securities Purchase Agreement dated June 9, 2006, AVP sold 705,882
units, each unit consisting of five shares of common stock and a five-year
warrant to purchase one share of common stock at price of $1.00 per share, to an
accredited investor, for a total price $2,999,998.50. Oppenheimer & Co., Inc.
acted as the placement agent and in addition to its commission, received a
warrant to purchase 338,824 shares of common stock on substantially the same
terms as the warrants sold to investor. The sale of the securities is exempt
from registration under Securities Act section 4(2), due to the limited number
of investors, all of which are accredited. The Securities Purchase Agreements in
May and June of 2006 require AVP to file a re-sale registration statement within
10 business days from closing and gives the investors rights of first
negotiation regarding future issuances of common stock, subject to exceptions.
F-40
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. SUBSEQUENT EVENT (CONTINUED)
On February 28, 2005, AVP consummated a private placement. Each unit sold in the
February 2005 Financing consisted of 4 shares of AVP's Series B Preferred Stock;
each share was originally convertible into 24.3 shares of common stock, and a
five-year warrant to purchase up to 24.3 shares of the AVP's common stock.
However, as a result of the new shares sold in May and June 2006, the conversion
rate of the outstanding Series B Convertible Preferred Stock increased from 24.3
to 27.87 in accordance with its anti-dilution provision. All outstanding shares
of Series B Convertible Preferred Stock are now convertible into 27.87 shares of
common stock.
F-41
APPENDIX A
Rescission Offer Election Form
AVP, Inc.
6100 Center Drive
Suite 900
Los Angeles, CA 90045
Attn: Andrew Reif
Dear Mr. Reif:
I have received and had an opportunity to review carefully the rescission
offer, dated August 9, 2006, relating to your offer to rescind the grant to me,
in 2004, pursuant to my AVP Player Agreement, possibly in violation of federal
or state securities laws, of a stock option to purchase ____________ [insert
number of option shares] shares of AVP common stock. I advise AVP as follows by
placing an "X" in the proper space provided below:
|_| 1. I hereby elect to reject the rescission offer and to retain the
stock option.
|_| 2. I hereby elect to accept the offer to rescind the grant of the
stock option. I ACKNOWLEDGE THAT I WILL NOT HAVE ANY FURTHER RIGHT,
UNDER THE STOCK OPTION TO PURCHASE SHARES OF COMMON STOCK SUBJECT
THERETO AND THAT I WILL FOREGO ANY SUBSEQUENT APPRECIATION IN THE
VALUE OF THE SHARES.
For California residents:
THIS OFFER OF REPURCHASE HAS BEEN APPROVED BY THE CALIFORNIA COMMISSIONER OF
CORPORATIONS IN ACCORDANCE WITH SECTION 25507(b) OF THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968 ONLY AS TO ITS FORM. SUCH APPROVAL DOES NOT IMPLY A
FINDING BY THE COMMISSIONER THAT ANY STATEMENTS MADE HEREIN OR IN ACCOMPANYING
DOCUMENTS ARE TRUE OR COMPLETE; NOR DOES IT IMPLY A FINDING THAT THE AMOUNT
OFFERED BY AVP IS EQUAL TO THE AMOUNT RECOVERABLE BY THE BUYER OF THE SECURITY
IN ACCORDANCE WITH SECTION 25503 IN A SUIT AGAINST AVP, AND THE COMMISSIONER
DOES NOT ENDORSE THE OFFER AND MAKES NO RECOMMENDATION AS TO ITS ACCEPTANCE OR
REJECTION.
Dated:
----------------------------------------
Signature
----------------------------------------
Print Name
Address of Offeree:
----------------------------------------
----------------------------------------
----------------------------------------
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS DOCUMENT OR ANY SUPPLEMENT. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. NEITHER THIS DOCUMENT NOR ANY SUPPLEMENT
IS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES
IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION IS NOT PERMITTED. NO SALE
MADE PURSUANT TO THIS DOCUMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF AVP, INC. SINCE
THE DATE OF THIS DOCUMENT.
AVP, INC.
STOCK OPTIONS TO PURCHASE
652,494 SHARES OF
COMMON STOCK
RESCISSION OFFER
August 9, 2006