As Filed with the Securities and Exchange Commission on October __, 2006
Registration No. 333-[_______]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AVP, INC.
(Exact name of Small Business Issuer in its charter)
DELAWARE 7941 98-0142664
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or Classification Code Number) identification
organization) number)
6100 Center Drive, Suite 900
Los Angeles, CA 90045
(310) 426-8000
(Address of Principal Place of Business or Intended Principal Place of Business)
Andrew Reif
Chief Operating Officer
6100 Center Drive, Suite 900
Los Angeles, CA 90045
(310) 426-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
David C. Fischer, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154-0037
(212) 407-4827
(212) 214-0686 (fax)
dfischer@loeb.com
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on the Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. |X|
If the Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities
Act"), check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If the Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: |_|
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Be Amount To Be Offering Price Aggregate Amount of
Registered Registered Per Share(1) Offering Price(2) Registration Fee
- --------------------- ------------ ---------------- ----------------- ----------------
Common Stock, $0.001
par value per share 597,368 $1.60 $955,788.80 $102.27
(1) Pursuant to Rule 416 under the Securities Act, the shares being registered
hereunder include such indeterminate number of shares of Common Stock as
may be issuable with respect to the shares being registered hereunder as a
result of stock splits, stock dividends or similar transactions affecting
the shares to be offered by the selling stockholders.
(2) Based on 597,368 shares of Common Stock with respect to which options were
granted at an exercise price of $1.60 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS DOCUMENT IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED October __, 2006
PROSPECTUS
597,368 SHARES
AVP, INC.
COMMON STOCK
This prospectus relates to an aggregate of up to 597,368 shares of our common
stock, which may be offered by the selling stockholders identified in this
prospectus for their own account. See Selling Stockholders, beginning on page
33. We will not receive any proceeds from the sale of the shares by these
selling stockholders. We may, however, receive proceeds in the event that some
or all of the options or warrants held by the selling stockholders are exercised
for cash.
Unless the context otherwise requires, the terms "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 selling stockholders may sell common stock from
time to time on the OTCBB at the prevailing market price or in negotiated
transactions. The last reported sales price per share of our common stock, as
reported by the OTCBB on October 25, 2006, was $.70.
INVESTING IN OUR COMMON STOCK IS HIGHLY RISKY. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October __, 2006.
Table of Contents
Page
----
SUMMARY ................................................................. 1
RISK FACTORS ............................................................ 4
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................ 8
BUSINESS ................................................................ 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................. 16
MANAGEMENT .............................................................. 32
EXECUTIVE COMPENSATION .................................................. 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ........................................... 37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 38
PLAN OF DISTRIBUTION .................................................... 38
SELLING STOCKHOLDERS .................................................... 39
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES .......................... 43
EXPERTS ................................................................. 43
AVAILABLE INFORMATION ................................................... 44
INDEX TO FINANCIAL STATEMENTS ........................................... 1
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.
ii
SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in our securities. 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 (collectively, 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
related to the 2006 Financing, 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 tickets, food, beverage, and merchandise at tournaments; contracting with
players on the tour; and associated activities. AVP produced 16 men's and 16
women's professional beach volleyball tournaments throughout the United States
in 2006.
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
Six Months Ended Year Ended
June 30, December 31,
------------------------- -------------------------
2006 2005 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Revenue (includes interest income) $ 7,488,914 $ 4,466,410 $15,693,312 $12,376,190
=========== =========== =========== ===========
Net Loss $(1,434,991) $(6,902,038) $(8,963,956) $(2,873,112)
=========== =========== =========== ===========
Source of revenue as a percent of revenue
Sponsorship 85.1% 76.7% 82.3% 80.1%
Activation fees 2.0% 4.2% 4.1% 6.8%
----------- ----------- ----------- -----------
87.1% 80.9% 86.4% 86.9%
----------- ----------- ----------- -----------
Local Revenue
Merchandising 0.7% 1.1% 0.7% 2.6%
Ticket sales and parking 4.2% 5.9% 4.0% 2.5%
Registration fees 1.3% 1.6% 1.1% 1.0%
Beach Club (corporate hospitality) 0.7% 1.7% 2.4% 1.0%
Food and beverages 0.4% 1.1% 0.4% 0.5%
----------- ----------- ----------- -----------
7.4% 11.4% 8.6% 7.6%
----------- ----------- ----------- -----------
Miscellaneous Revenue
Trademark licensing 4.3% 3.9% 2.5% 2.8%
Site fees and state grants 0.0% (0.1%) 0.4% 0.9%
Grass roots marketing 0.5% 1.9% 0.8% 0.7%
International television licensing 0.0% 0.8% 0.2% 0.6%
Interest income 0.7% 1.2% 0.7% 0.5%
Other 0.0% 0.0% 0.4% 0.0%
----------- ----------- ----------- -----------
5.5% 7.7% 5.0% 5.50%
----------- ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
Balance Sheet Data
June 30, December 31,
------------------------- -------------------------
2006 2005 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Working capital (deficiency) $ 4,151,828 $ (323,324) $(1,197,861) $(3,604,731)
Total assets $10,760,118 $6,950,371 $ 2,675,538 $ 2,433,779
Total liabilities $ 6,091,626 $7,112,012 $ 3,279,798 $10,148,417
Stockholders' equity (deficiency) $ 4,668,492 $ (161,641) $ (604,260) $(7,714,638)
2
The Offering
Common stock offered by AVP, Inc.: None
Common stock offered by selling stockholders: 597,368 shares
Capital stock outstanding: As of October 13, 2006, we had outstanding 19,690,185
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
conversion rate; and options and warrants to purchase a total of 18,257,340
shares of common stock.
Proceeds to AVP: We will not receive proceeds from the resale of shares by the
selling stockholders. We may, however, receive proceeds in the event that some
or all of the options or warrants held by the selling stockholders are exercised
for cash.
OTC bulletin board symbol: AVPI
Shares being offered for resale:
We are registering for resale 597,368 shares of AVP common stock issued or
issuable upon exercise of options to players on our professional beach
volleyball tour.
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 Agreement"). 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.
3
RISK FACTORS
An investment in AVP securities is highly speculative and extremely risky. You
should carefully consider the following risks, in addition to the other
information contained in this prospectus, before deciding to buy AVP securities.
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 six months of 2006 and 2005, were $1,400,000 and $6,900,000,
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 June 30, 2006 by May 31, 2010. 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.
4
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 compared to baseball,
basketball, football, golf, or auto racing, so its continuing popularity cannot
be assumed. 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 or if the contract terms become less favorable to
AVP, our business will be materially adversely affected.
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
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.
5
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-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.
6
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 20,236,669 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 9.3% 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 38.4% 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 28% 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
28% 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 22% of the votes to vote for management's
proposals. Defeat of a management proposal would require votes against by
holders of more than 69.4% 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.
7
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 19,641,293 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 3rd $ .90 $ .60
2nd 1.02 0.75
1st 1.95 0.87
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 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 October 13, 2006, there were 318 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.
8
Equity Compensation Plans
Information regarding AVP's equity compensation plans, as of December 31, 2005,
is set forth in the table below:
Number of Securities
to be issued upon
exercise of Weighted average
outstanding options, exercise price of Number of securities
warrants and outstanding options, remaining available
rights warrants and rights for future issuance
Plan Category (a) (b) (c)
- -------------------------------------- -------------------- -------------------- --------------------
Equity compensation plans approved by
security holders -- $ -- --
Equity compensation plans not approved
by security holders 15,482,688 $1.09 14,517,312
---------- ----- ----------
Total 15,482,688 $1.09 14,517,312
9
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. From December 2001 until the
Merger (as defined below) on February 28, 2005, 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. Concurrently 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 tickets, food, beverage, and merchandise at the tournaments;
contracting with players in the tour; and associated activities.
We produced 16 men's and 16 women's professional beach volleyball tournaments
throughout the United States from April through September 2006. The 2006 events
took place 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 were the same as 2005. 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 and Advertising: 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 (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.
10
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 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 2006, we entered agreements with
event promoters in eight cities for the promoters to pay AVP a
fee in exchange for the right to exploit local revenue,
including ticket sales, parking, concessions, and ancillary
revenue. The event promoters also paid for specified event
expenses such as the stadium, sand, various operational costs
(hotel accommodations, certain event personnel, security,
etc.), event permits, and marketing costs.
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 Suite Sales: We sell corporate "suites", which consist of
reserved seating areas at tournaments and table seating, food,
and beverages.
o Ticket Sales: Increasingly, we are charging admission for
events that previously were free to the general public. In
2006, we charged 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. We engaged SFX, Inc. to license our television
programming internationally in 2006. Our events were broadcast
in over 125 countries 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
(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.
11
Distribution. National Broadcasting Company (NBC) and Fox Broadcasting Company
(FBC) broadcast certain of our events on network television in 2006, and Fox
Sport Net (FSN) broadcast the remainder of our 2006 events on cable and
satellite television. By separate agreements, we contracted with NBC, FBC and
FSN for production of the programming.
o NBC: NBC broadcast 11 hours of four of our events in 2006. We
paid NBC a per program fee for such broadcast time and
retained all of the commercial units in the broadcasts.
o FBC: FBC broadcast 3 hours of coverage of the men's and
women's finals at two events in 2006. AVP retained all the
commercial units in the broadcast. FBC received AVP common
stock in exchange for the broadcast time and production.
o FSN: FSN currently distributes our programming over cable and
satellite television. FSN broadcast all 16 events in 2006
(including replaying the events broadcast by NBC and FBC). FSN
distributed the programming and provided production services
in 2006 in return for the same number of commercial units in
the broadcasts as FSN received during 2005 and previously. AVP
did not pay FSN any compensation for the broadcast time or
television production services that FSN provided; FSN's only
compensation is the commercial units that FSN retained 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 2006 AVPNext circuit included
over 200 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;
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;
12
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 customarily 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. 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 597,368 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
$1.60 per share) upon effectiveness of the registration statement of which this
prospectus is a part.
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.
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 whenever possible, 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.
13
Employees
Currently, we have 28 full-time employees and retain 2 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 terms 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.
The lawsuit is in discovery 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.
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.
14
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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
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
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. 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. Our business includes establishing and
managing tournaments; sponsorship/advertising 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.
AVP's beach volleyball tournament season customarily commences in early April
and continues until late September or early October. For 2006, we conducted 16
men's and 16 women's events 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 were the same as last year.
AVP Acquisition
On February 28, 2005, Association of Volleyball Professionals, Inc. (the
"Association") and a wholly owned subsidiary of AVP, then known as Othnet, Inc.,
consummated a merger pursuant to a merger agreement, signed in June 2004, as
amended (the "Merger"). 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. On December 16, 2005, AVP effectuated a 1-for-10 reverse stock split,
which is reflected in all share amounts referred to in this report.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
OPERATING INCOME (LOSS) AND NET INCOME (LOSS)
% of Revenue
Three Months Ended Three Months Ended
June 30, June 30,
---------------------- ------------------
2006 2005 2006 2005
-------- ----------- ------ -------
Operating Income (Loss) $(87,576) $(2,030,448) (1)% (47)%
Net Income (Loss) $(53,555) $(2,020,808) 1% (47)%
The 96% decrease in operating loss in 2006 primarily reflects an increase of
$3,001,707 or 70% in recognized revenue for the three months ended June 30, 2006
as well as decreases in warrant expense and contra revenue of $1,400,587 (from
$1,713,966 to $313,379), a decrease in amortization expense of $64,000 and
decreases in accounting and legal fees of $60,000. The reduction in warrant
expense, amortization expense, and accounting and legal fees offset increases in
network broadcast time and television production costs of $1 million, prize
money of $431,000, and other event costs of $571,000.
16
In addition to the above, the decline in our net loss was also due to derivative
financial instrument gain for the three months ended June 30, 2006 of $111,042
compared to $0 for the three months ended June 30, 2005. Derivative financial
instrument gain arises from fair value adjustments for certain financial
instruments, such as warrants to acquire common stock which are classified as
liabilities when either (a) the holder possesses rights to net-cash settlement
or (b) physical or net share settlement is not within the control of the
Company. Since there were liquidated damages, payable in cash, of 1% of the
gross proceeds per month ($55,000) should the Company have failed to achieve
effectiveness of the registration statement in accordance with the May and June
2006 Securities Purchase Agreements and the warrant agreements related there to,
the warrants issued pursuant to the May and June 2006 private placement were
initially recorded as derivative financial instruments and were later
reclassified as equity on the date the registration statement became effective
and adjusted to fair value using the Black-Scholes valuation method. The
increase in the derivative instrument gain noted above is due to the decline in
the trading stock price of our common stock during the period from the initial
recording as a derivative financial instrument until the reclassification as
equity.
Excluding the warrant expense, the contra revenue and the gain on warrant
derivative, net income (loss) for the three months ended June 30, 2006 would
have been approximately $256,000 compared to $(307,000) for the three months
ended June 30, 2005.
REVENUE
The majority of AVP's revenues are derived from sponsorship and advertising
contracts with national and local sponsors. AVP recognizes
sponsorship/advertising revenue pro rata based upon prize money per event as the
events occur during the tour season and collection is reasonably assured. AVP's
beach volleyball tournament season customarily commences in early April and
continues until late September or early October.
Three Months Ended
June 30, Percentage
------------------------ Increase
Summary Revenue 2006 2005 (Decrease)
- ----------------------- ---------- ---------- ----------
Sponsorship/Advertising $6,233,090 $3,424,395 82%
Activation Fees 148,447 190,133 (22%)
Promoter Fees 146,000 -- --%
Local Revenue 497,770 458,348 9%
Miscellaneous Revenue 285,845 236,569 21%
---------- ----------
Total Revenue $7,311,152 $4,309,445 70%
========== ==========
Sponsorship/advertising revenue for the three months ended June 30, 2006
increased approximately $2.8 million as compared to the three months ended June
30, 2005. The increase in sponsorship/advertising revenue was primarily due to
an increase in contracted 2006 sponsorship/advertising revenue. Contracted
sponsorship/advertising revenue increased from $12.9 million in 2005 to $16.5
million in 2006 as a result of increases in sponsorship/advertising fees and the
number of national sponsors/advertisers. The increase in sponsorship/advertising
revenue for the three months ended June 30, 2006 compared to the three months
ended June 30, 2005 was also due to six events taking place in the three months
ended June 30, 2006 (out of 16 events in 2006) compared to only five events
taking place in the three months ended June 30, 2005 (out of 14 events in 2005).
Accordingly, $6,233,090 (37.7%) of $16.5 million of 2006 contracted for
sponsorship/advertising revenue was allocated to the six events that took place
in the three months ended June 30, 2006, compared to only $3,424,395 (26.5%) out
of $12.9 million of 2005 contracted for sponsorship/advertising revenue that was
allocated for the five events that took place in the three months ended June 30,
2005. For the three months ended June 30, the average sponsorship/advertising
revenue per event for 2006 and 2005 was $1,038,848 and $684,879, respectively.
17
The decrease in activation fees of 22% is the result of several sponsors from
2005 who utilized AVP's activation services not returning as sponsors in 2006.
For the three months ended June 30, 2006, we entered an agreement with an event
promoter in connection with one event pursuant to which the promoter paid a
promoter 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 certain specified event expenses including the
stadium, sand, various operational costs (e.g., hotel accommodations, certain
event personnel, security), event permits, and marketing costs. We did not have
a similar arrangement in connection with any event for the three months ended
June 30, 2005.
Local revenue increased 9% mainly as a result of increases in sales of corporate
suites. In the first two quarters of 2005, we sold fewer corporate suites.
The 21% increase in miscellaneous revenue primarily reflects an increase in
trademark licensing revenue in connection with volleyball and volleyball net
sales and sale of AVP branded apparel for sale at AVP events and online. During
the second quarter of 2006, we entered a licensing agreement with Speedo for
AVP-SPEEDO co-branded apparel and with Crocs, Inc. for AVP branded footwear. We
do not anticipate recognizing any revenue from the Crocs licensing agreement
until the third quarter of 2006.
GROSS PROFIT
Three Months Ended
June 30,
------------------------
Gross Profit 2006 2005
- -------------- ---------- ----------
Revenue $7,311,152 $4,309,445
Event Costs 5,360,237 2,996,488
---------- ----------
Gross Profit $1,950,915 $1,312,957
========== ==========
Gross Profit % 27% 30%
========== ==========
AVP's gross profit margin for the three months ended June 30, 2006 was 27%
compared to 30% for the three months ended June 30, 2005. The decrease in the
gross profit margin primarily reflects increases in network broadcast time and
television production costs ($1,000,000 compared to $0). For the three months
ended June 30, 2006, two events were broadcast on network television; however,
for the three months ended June 30, 2005, none of the five events conducted was
broadcast on network television. For 2005 and 2006, we pay a fee for the network
broadcast time; however, we do not pay any fee for the broadcast time on cable
television. Event costs increased considerably due to an additional event taking
place during the three months ended June 30, 2006 (six events compared to five
events taking place during the three months ended June 30, 2005). In addition,
event costs also increased due to increases in prize money, staging costs, and
sponsorship costs. The 2004 exclusive player agreements provide for $500,000
increases in prize money for the years 2006, 2007, and 2008. Most of the
$500,000 increase in prize money was allocated to events taking place during the
three months ended June 30, 2006. Staging costs increased as a result of AVP
using an enhanced stadium for its 2006 events, which included additional seating
as well as corporate suites at all events. The increases outlined above for the
three months ended June 30, 2006 offset the cost savings resulting from one
event in the quarter having an event promoter who took on certain operational
costs of the event.
Our quarterly results of operations and gross margins vary depending on the
number of events scheduled each quarter, the number of agreements with local
event promoters, and the mode of television distribution of our events. Events
in which there is an agreement with a local event promoter carry higher gross
margins than those events in which there are no agreements with local event
promoters. Additionally, events broadcast on network television carry
significant costs compared to cable broadcasts and cause quarterly fluctuations
based on the timing of these events throughout the year. Management expects
gross profit margins to increase in the third quarter of 2006 as AVP has
agreements with seven more event promoters in which the event promoters take on
certain event costs and pay AVP promoter fees in return for the right to exploit
local revenue opportunities.
18
OPERATING EXPENSES
% of Revenue
Three Months Ended Three Months Ended Increase
June 30, June 30, (Decrease) as
----------------------- ------------------ % of Revenue
Summary Costs 2006 2005 2006 2005 2006 vs. 2005
- ------------------- ---------- ---------- ------- ------ -------------
Event Costs $5,360,237 $2,996,488 73% 70% 3%
Administrative 1,222,352 2,885,214 17% 67% (50%)
Sales and Marketing 816,139 458,191 11% 11% --
---------- ---------- --- --- ---
Total Costs $7,398,728 $6,339,893 101% 148% (47%)
========== ========== === === ===
Event costs primarily include the direct costs of producing an event and costs
related to television airing of network broadcasted events. Event costs also
include the cost of servicing our sponsors. 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 prepaid event costs and expensed at the time
the event occurs.
The increase of 79% in event costs was primarily attributable to one additional
event taking place during the three months ended June 30, 2006 (six events
compared to five events taking place during the three months ended June 30,
2005) as well as increases in network broadcast time and television production
costs of $1 million, in prize money of $431,000, in staging costs of $112,000,
in sponsorship/suite costs of $216,000, and in event crew of $86,000. For the
three months ended June 30, 2006, two events were broadcast on network
television compared to none for the three months ended June 30, 2005. We pay for
the broadcast time and production costs for our network broadcasts, but we do
not pay for the time or production costs for our cable broadcasts. With respect
to the two network events broadcast in the three months ended June 30, 2006, we
negotiated an agreement with Fox Broadcasting Company (FBC) pursuant to which
FBC agreed to take equity in AVP rather than AVP pay cash for the network
broadcast time and related production services. Staging costs increased as a
result of AVP using an enhanced stadium for its 2006 events, which included
additional seating as well as corporate suites at four events compared to three
events in 2005. The increase in sponsorship costs is the result of adding a
hospitality sponsorship that obligated AVP to enhance the VIP sections of the
event site.
The 58% decrease in administrative costs was due primarily to a decrease of
approximately $1.5 million in consulting expense as a result of non-employee
warrants valued under SFAS 123 for warrants granted during the three months
ended June 30, 2005 and a decrease in amortization expense which resulted from
the elimination of MPE deferred commission costs expensed in 2005.
The 78% increase in sales and marketing costs primarily reflects increase in
commission expense as a result of securing the title sponsor for the AVP Tour
and the hiring of a head of sales and other sales and marketing personnel. Other
factors contributing to the increase in marketing expenditures include logo
redesign costs as well as the cost of holding an inaugural high performance camp
to recruit top college volleyball players to play on the AVP tour.
19
Three Months Ended
June 30, Percentage
------------------ Increase
Depreciation and Amortization Expense 2006 2005 (Decrease)
- ------------------------------------- ------- -------- ----------
Depreciation Expense $39,599 $ 39,992 (1%)
Amortization Expense 2,011 66,396 (97%)
------- --------
Total $41,610 $106,388 61%
======= ========
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.
Three Months Ended
June 30, Percentage
------------------- Increase
Other Income Expense 2006 2005 (Decrease)
- ------------------------------------ -------- -------- ----------
Interest Expense $ (3,718) $(28,013) (87%)
Interest Income 33,807 37,653 (10%)
Derivative Financial Instrument gain 111,042 -- --%
-------- --------
Total $141,131 $ 9,640 1364%
======== ========
The decrease in interest expense of $24,295 reflects a reduction in debt.
The 10% increase in interest income reflects additional interest earned on the
proceeds realized from the private placement consummated on May and June 2006.
Pursuant to the May and June 2006 private placement, we sold 6,470,590 shares of
common stock and five-year warrants to purchase 1,294,118 shares of common stock
at an exercise price of $1.00 per share, to accredited investors. Under EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" (EITF 00-19"), the fair value of
the warrants issued under the May and June 2006 Financing have been reported as
a liability due to the requirement to net-cash settle the transaction in the
event that the shares underlying the warrant are not registered for sale.
Pursuant to the warrant agreement, the warrant holder is entitled to liquidated
damages, payable in cash, of 1% of the gross proceeds per month ($55,000) should
the Company fail to achieve effectiveness of the registration statement. The
warrants were considered a derivative financial instrument with a value of
$875,513, and they were later reclassified as equity on the date the
registration statement became effective. On the effective date, the warrants had
a value of approximately $764,471, which was determined using the Black-Scholes
valuation method. The assumptions utilized in computing the fair value of the
warrants were as follows: expected life of 5 years, estimated volatility of 90%
and a risk free interest rate of 5.10%. For the three months ended June 30,
2006, we recorded a gain of $111,042 associated with the fair value adjustment
of the warrants.
20
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
OPERATING INCOME (LOSS) AND NET INCOME (LOSS)
% of Revenue
Six Months Ended June 30, Six Months Ended June 30,
Operating Income (Loss) ------------------------- -------------------------
and Net Income (Loss) 2006 2005 2006 2005
- ----------------------- ----------- ----------- ---- ----
Operating Income (Loss) $(1,589,048) $(6,856,476) (21)% (155)%
Net Income (Loss) $(1,434,991) $(6,902,038) (19)% (156)%
The 77% decrease in operating loss in 2006 primarily reflects an increase of
$3,020,567 or 68% in recognized revenue for the six months ended June 30, 2006
as well as decreases in warrant expense and contra revenue of $4,887,883 (from
$5,211,988 to $324,105), a decrease in amortization costs of $127,000 and
decreases in accounting and legal fees of $82,000. The reduction in warrant
expense, amortization expense, and accounting and legal fees offset increases in
network broadcast time and television production costs of $1 million, prize
money of $431,000, and event costs of $571,000.
In addition to the above, the decline in our net loss was also due to derivative
financial instrument gain for the six months ended June 30, 2006 of $111,042
compared to $0 for the six months ended June 30, 2005. Derivative financial
instrument gain arises from fair value adjustments for certain financial
instruments, such as warrants to acquire common stock which are classified as
liabilities when either (a) the holder possesses rights to net-cash settlement
or (b) physical or net share settlement is not within the control of the
Company. Since there were liquidated damages, payable in cash, of 1% of the
gross proceeds per month ($55,000) should the Company have failed to achieve
effectiveness of the registration statement in accordance with the May and June
2006 Securities Purchase Agreements and the warrant agreements related thereto,
the warrants issued pursuant to the May and June 2006 private placement were
initially recorded as derivative financial instruments and were later
reclassified as equity on the date the registration statement became effective
and adjusted to fair value using the Black-Scholes valuation method. The
increase in the derivative instrument gain noted above is due to the decline in
the trading stock price of our common stock during the period from the initial
recording as a derivative financial instrument until the reclassification as
equity.
Excluding the warrant expense, the contra revenue and the gain on warrant
derivative, net loss for the six months ended June 30, 2006 would have been
approximately $1,221,928 compared to $1,690,050 for the six months ended June
30, 2005.
REVENUE
Six Months Ended June 30, Percentage
------------------------- Increase
Summary Revenue 2006 2005 (Decrease)
- ----------------------- ---------- ---------- ----------
Sponsorship/Advertising $6,233,090 $3,424,395 82%
Activation Fees 148,447 190,133 (22%)
Promoter Fees 146,000 -- --%
Local Revenue 497,770 458,348 9%
Miscellaneous Revenue 408,661 340,525 20%
---------- ----------
Total Revenue $7,433,968 $4,413,401 68%
========== ==========
21
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/advertising 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.
Sponsorship/advertising revenue for the six months ended June 30, 2006 increased
approximately $2.8 million as compared to the six months ended June 30, 2005.
The increase in sponsorship/advertising revenue was primarily due to an increase
in contracted 2006 sponsorship/advertising revenue. Contracted 2006
sponsorship/advertising revenue increased from $12.9 million in 2005 to $16.5
million in 2006 as a result of increases in sponsorship/advertising fees and the
number of national sponsors/advertisers. The increase in sponsorship/advertising
revenue for the six months ended June 30, 2006 compared to the six months ended
June 30, 2005 was also due to six events taking place in the six months ended
June 30, 2006 (out of 16 events in 2006) compared to only five events taking
place in the six months ended June 30, 2005 (out of 14 events in 2005).
Accordingly, $6,233,090 (37.7%) of $16.5 million of 2006 contracted for
sponsorship/advertising revenue is being allocated to the six events taking
place in the six months ended June 30, 2006 compared to only $3,424,395 (26.5%)
out of $12.9 million of 2005 contracted for sponsorship/advertising revenue
being allocated for the five events taking place in the six months ended June
30, 2005. For the six months ended June 30, the average sponsorship/advertising
revenue per event for 2006 and 2005 were $1,038,848 and $684,879, respectively.
The decrease in activation fees of 22% is the result of several sponsors from
2005 who utilized AVP's activation services not returning as sponsors in 2006.
For the six months ended June 30, 2006, we entered an agreement with an event
promoter in connection with one event pursuant to which the promoter paid AVP a
promoter 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 certain specified event expenses including the
stadium, sand, various operational costs (e.g., hotel accommodations, certain
event personnel, security), event permits, and marketing costs. No such
agreement existed during the six months ended June 30, 2005.
Local revenue increased 9% mainly as a result of increases in sales of corporate
suites. In the six months ended June 30, 2006, we sold corporate suites at four
out of the six events conducted during the period; however, in the six months
ended June 30, 2005, we only sold corporate suites at three events.
The 20% increase in miscellaneous revenue primarily reflects an increase in
trademark licensing revenue in connection with volleyball and volleyball net
sales and sale of AVP branded apparel for sale at AVP events and online. During
the second quarter of 2006, we entered a licensing agreement with Speedo for
AVP-SPEEDO co-branded apparel and with Crocs, Inc. for AVP branded footwear. We
do not anticipate recognizing any revenue from the Crocs licensing agreement
until the third quarter of 2006.
GROSS PROFIT
Six Months Ended June 30,
-------------------------
Gross Profit 2006 2005
- -------------- ---------- ----------
Revenue $7,433,968 $4,413,401
Event Costs 5,360,237 2,996,488
---------- ----------
Gross Profit $2,073,731 $1,416,913
========== ==========
Gross Profit % 28% 32%
========== ==========
AVP's gross profit margin for the six months ended June 30, 2006 was 28%
compared to 32% for the six months ended June 30, 2005. The decrease in the
gross profit margin primarily reflects increases in network broadcast time and
television production costs ($1,000,000 compared to $0). For the six months
ended June 30, 2006, two events were broadcast on network television; however,
for the six months ended June 30, 2005, none of the five events conducted was
broadcast on network television. For 2005 and 2006, we pay a fee for the network
broadcast time; however, we do not pay any fee for the broadcast time on cable
television. Event costs increased considerably due to an additional event taking
place during the six months ended June 30, 2006 (six events compared to five
events taking place during the six months ended June 30, 2005). In addition,
event costs also increased due to increases in prize money, staging costs, and
sponsorship costs. The 2004 exclusive player agreements provide for $500,000
increases in prize money for the years 2006, 2007, and 2008. Most of the
$500,000 increase in prize money was allocated to events taking place during the
six months ended June 30, 2006. Staging costs increased as a result of AVP using
an enhanced stadium for its 2006 events, which included additional seating as
well as corporate suites at all events. The increases outlined above for the six
months ending June 30, 2006 offset the cost savings resulting from one event in
the quarter having an event promoter who took on certain operational costs of
the event.
22
Our quarterly results of operations and gross margins vary depending on the
number of events scheduled each quarter, the number of agreements with local
event promoters, and the mode of television distribution of our events. Events
in which there is an agreement with a local event promoter carry higher gross
margins than those events in which there are no agreements with local event
promoters. Additionally, events broadcast on network television carry
significant costs compared to cable broadcasts and cause quarterly fluctuations
based on the timing of these events throughout the year. Management expects
gross profit margins to increase in the third quarter of 2006 as AVP has
agreements with seven event local promoters in which the event promoters take on
certain event costs and pay AVP promoter fees in return for the right to exploit
local revenue opportunities.
OPERATING EXPENSES
% of Revenue Increase
Six Months Ended June 30, Six Months Ended June 30, (Decrease) as
------------------------- ------------------------- % of Revenue
Summary Costs 2006 2005 2006 2005 2006 vs. 2005
- ------------------- ---------- ----------- ---- ---- --------------
Event Costs $5,360,237 $ 2,996,488 72% 68% 4%
Administrative 2,290,690 7,403,598 31% 168% (137%)
Sales and Marketing 1,372,089 869,791 18% 20% (2%)
---------- ----------- --- --- ----
Total Costs $9,023,016 $11,269,877 121% 256% (135%)
========== =========== === === ====
Event costs primarily include the direct costs of producing an event and costs
related to television airing of network broadcasted events. Event costs also
include the cost of servicing our sponsors. 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 prepaid event costs and expensed at the time
the event occurs.
The increase of 79% in event costs was primarily attributable to one additional
event taking place during the six months ended June 30, 2006 (six events
compared to five events taking place during the six months ended June 30, 2005)
as well as increases in network broadcast time and television production costs
of $1 million, in prize money of $431,000, in staging costs of $112,000, in
sponsorship/suite costs of $216,000, and in event crew of $86,000. For the six
months ended June 30, 2006, two events were broadcast on network television
compared to none for the six months ended June 30, 2005. We pay for the
broadcast time and production costs for our network broadcasts, but we do not
pay for the time or production costs for our cable broadcasts. With respect to
the two network events broadcast in the six months ended June 30, 2006, we
negotiated an agreement with Fox Broadcasting Company (FBC) pursuant to which
FBC agreed to take equity in AVP rather than AVP pay cash for the network
broadcast time and related production services. Staging costs increased as a
result of AVP using an enhanced stadium for its 2006 events, which included
additional seating as well as corporate suites at four events compared to three
events in 2005. The increase in sponsorship costs is the result of adding a
hospitality sponsorship that obligated AVP to enhance the VIP sections of the
event site.
The 69% decrease in administrative costs was due primarily to a decrease of
approximately $5.0 million in consulting expense as a result of non-employee
warrants valued under SFAS 123 for warrants granted during the six months ended
June 30, 2005 and a decrease in amortization expense of $0.1 million which
resulted from the elimination of MPE deferred costs commission expensed in 2005.
23
The 58% increase in sales and marketing costs of $502,298 primarily reflects an
increase in commission expense as a result of securing the title sponsor for the
AVP Tour and the hiring of a head of sales and other sales and marketing
personnel. Other factors contributing to the increase in marketing expenditures
including logo design cost as a result of the 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.
Six Months Ended June 30, Percentage
Depreciation and ------------------------- Increase
Amortization Expense 2006 2005 (Decrease)
- -------------------- ------- -------- ----------
Depreciation Expense $76,144 $ 63,080 21%
Amortization Expense 4,022 130,692 (97%)
------- --------
Total $80,166 $193,772 (59%)
======= ========
The increase in depreciation expense of $13,064 resulted from an increase in
depreciable assets, including information technology equipment and
transportation equipment (e.g., truck, flat bed trailer).
Amortization expense decreased 97% from 2005 due to the absence in 2006 of MPE
deferred commission costs. The underlying MPE sponsorship sales service contract
was fully amortized in 2005.
Six Months Ended June 30, Percentage
------------------------- Increase
Other Income (Expenses) 2006 2005 (Decrease)
- ------------------------------------ -------- -------- ----------
Interest Expense $(11,931) $(98,571) (88%)
Interest Income 54,946 53,009 4%
Derivative Financial Instrument gain 111,042 -- --%
-------- --------
Total $154,057 $(45,562) (438%)
======== ========
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.
The 4% increase in interest income reflects additional interest earned on the
proceeds realized from the private placement consummated on May and June 2006.
Pursuant to the May and June 2006 private placement, we sold 6,470,590 shares of
common stock and five-year warrants to purchase 1,294,118 shares of common stock
at an exercise price of $1.00 per share, to accredited investors. Under EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," the fair value of the warrants
issued under the May and June 2006 Financing have been reported as a liability
due to the requirement to net-cash settle the transaction in the event that the
shares underlying the warrant are not registered for sale. Pursuant to the
warrant agreements, the warrant holder is entitled to liquidated damages,
payable in cash, of 1% of the gross proceeds per month ($55,000) should the
Company fail to achieve effectiveness of the registration statement. The
warrants were recorded as a derivative financial instrument and were later
reclassified as equity on the date the registration statement became effective.
On the effective date, the warrants had a value of approximately $764,471, which
was determined using the Black-Scholes valuation method. The assumptions
utilized in computing the fair value of the warrants were as follows: expected
life of 5 years, estimated volatility of 90% and a risk free interest rate of
5.10%. For the six months ended June 30, 2006, we recorded a gain of $111,042
associated with the fair value adjustment of the warrants.
24
Liquidity and Capital Resources
Cash flows from operating activities for the six months ended June 30, 2006 and
2005 were $588,903 and $779,049, respectively. Working capital, consisting of
current assets less current liabilities, was $4,151,828 at June 30, 2006 and
$(323,324) at June 30, 2005. During the second quarter of 2006, we completed a
private placement of common stock and warrants which generated proceeds of
approximately $5.5 million. Consequently, at June 30, 2006 we had $6.3 million
of cash. The negative working capital at June 30, 2005 resulted from deferred
revenue being recognized for sponsorship/advertising payments received for
events occurring after June 30, 2005.
At June 30, 2006 and 2005, accounts receivable had increased $1,690,166 and
decreased $414,527 as compared to December 31, 2005 and 2004, respectively. At
June 30, 2006 and 2005, deferred revenues had increased $3,861,605 and
$2,650,529 as compared to December 31, 2005 and 2004, respectively. Deferred
revenues are recorded as AVP collects revenues prior to holding certain events.
Cash flows provided from investing activities for 2006 and 2005 included capital
expenditures for the six months ended June 30, 2006 and 2005 of $173,225 and
$308,949, respectively. During the six months ended June 30, 2006, AVP purchased
a scoreboard and a trailer in preparation for the 2006 tour season, as well as,
computer equipment. During the six months ended June 30, 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 $4,617,265
and $3,097,023, respectively. During the second quarter of 2006, we completed a
private placement of common stock and warrants which generated net proceeds of
$5,034,002, net of offering costs of $466,000. 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 previously provided by MPE to the Association. In 2005, upon
consummation of the Units Offering on February 28, 2005, 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 and $200,000 to holders of the bridge
financing notes.
Pursuant to 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 an exercise 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 was exempt from registration pursuant
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 an exercise 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 was
exempt from registration under Securities Act section 4(2), due to there having
been only one investor, which is accredited.
In February 2006, we 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.
25
Year Ended December 31, 2005 versus December 31, 2004
OPERATING INCOME (LOSS) AND NET INCOME (LOSS)
% of Revenue
Operating Income (Loss) ------------
and Net Income (Loss) 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%.
Percentage
Increase
Summary Revenue 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 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.
AVP's activation fees in 2006 will depend on our ability to have returning
sponsors as well as new sponsors elect to utilize our sponsorship activation
services in support of their AVP sponsorships.
26
A detailed analysis of local and miscellaneous sources of revenue for 2005 and
2004 follows:
Percentage
Local and Miscellaneous Revenue 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
Miscellaneous Revenue 2005 2004 Increase/(Decrease)
- ---------------------------------- -------- -------- -------------------
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 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.
27
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.
Operating Expenses
% of Revenue
------------------------------------------
Increase (Decrease) in % of
Summary Costs 2005 2004 2005 2004 Revenue 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.
28
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.
Percentage
Depreciation and Increase
Amortization Expense 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 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.
Percentage
Interest Income 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
("Units Offering").
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. Accordingly, AVP is
exploring raising equity financing to address this potential risk.
29
Capital expenditures for the year ended December 31, 2005 and 2004 were $370,131
and $228,416, respectively. During 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 Units Offering on
February 28, 2005, AVP realized proceeds of $4,247,023, net of offering costs of
$753,038.
Pursuant to the Units Offering, 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.
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/advertising 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, promoter fees,
event ticket sales, concession rights, event merchandising, 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 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.
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.
30
In July 2006, FASB issued FASB Interpretation No. 48 ( FIN 48), "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes," which is effective for fiscal years beginning
after December 15, 2006, and clarifies the accounting for uncertainty in tax
positions. FIN 48 requires that we recognize the impact of a tax position in our
financial statements if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. The cumulative effect
of the change in accounting principle is recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact of the adoption of FIN
48 on our financial statements.
In June 2006, the EITF reached a consensus on Issue No. 06-03, "How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)"
(EITF 06-03). EITF 06-03 applies to taxes assessed by a governmental authority
that are directly imposed on a revenue-producing transaction between a seller
and a customer, and states that the presentation of such taxes on either a gross
basis (included in revenues and costs) or on a net basis (excluded from
revenues) is an accounting policy decision that should be disclosed.
Additionally, for such taxes reported on a gross basis, the amount of such taxes
should be disclosed in interim and annual financial statements if the amounts
are significant. The provisions of EITF 06-03 are effective for interim and
annual reporting periods beginning after December 15, 2006. The adoption of EITF
06-3 is not expected to have a material impact on the financial position,
results of operations or cash flows of AVP.
In March 2006, the FASB issued SFAS No.156, "Accounting for Servicing of
Financial Assets - an Amendment of FASB Statement No.140". SFAS 156 amends SFAS
140 to clarify the accounting for servicing assets and servicing liabilities.
Among other provisions, the new accounting standard requires all separately
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable. SFAS 156 is effective for the fiscal periods
beginning after September 15, 2006. The Company is currently evaluating the
effect that the adoption of SFAS 156 will have on its consolidated results of
operations and financial condition but expects it will not have a material
impact.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of our
executive officers and directors as of October 13, 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; 54 May 10, 2006
Philip Guarascio Director; 65 March 25, 2005
Jack Kemp Director; 71 December 16, 2005
Scott Painter Director; 38 March 25, 2005
Andrew Reif Chief Operating Officer,
Chief Financial Officer,
and Secretary; 41 March 25, 2005
Thomas Torii Controller; 40 March 25, 2005
Brett Yormark Director; 40 August 31, 2006
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. Mr. Painter is currently the Chairman and Chief Executive
Officer of Zag.com, an online automotive retailer and lead generation company.
32
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.
Brett Yormark is the President and Chief Executive Officer of Nets Sports and
Entertainment. Prior to joining the Nets, Mr. Yormark was vice president,
corporate marketing at NASCAR from 2000 to 2005 and managing director, corporate
marketing at NASCAR from 1998-2000. Prior to joining NASCAR, Mr. Yormark was
senior vice president for corporate marketing for the New Jersey Nets from 1995
to 1998 and vice president for corporate marketing in 1994.
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. Werner, Kemp, Chardavoyne and Yormark, each person who serves
on our Board of Directors was originally 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.
33
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.
Annual Compensation Long Term Compensation
------ ------------ -------------------------
Name and Principal Fiscal
Position Year Salary (1) Shares Underlying 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.
34
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 Price Per Expiration
Options Granted in Fiscal Year Share 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
35
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 Securities Value of Unexercisable
Underlying Unexercised In-the-Money Options at
Number of Shares Options at FY-End Fiscal Year-end (1)
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized 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 into 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. Werner, 25,000; Mr. Kemp, 50,000. Mr. Jeffrey Wattenberg,
who resigned as a member of our Board of Directors on August 24, 2006, was
issued 334,557 Management Warrants in 2005.
36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, as of October 13, 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- 21,031 *
Philip Guarascio(2)(4) -0- -0- 165,771 *
Jack Kemp(2)(4) -0- -0- 28,117 *
Scott Painter(2)(4) -0- -0- 780,573 3.8
Andrew Reif(2)(4) -0- -0- 981,900 4.7
Thomas Torii(2)(4) -0- -0- 33,890 *
Brett Yormark(2) -0- -0- 56,644 *
Robert L. Werner, Jr.(2 (4) -0- -0- 26,829 *
All directors and executive
officers as a group,
including those named
above (9 persons) -0- -0- 12,907,435 42.1
AEG(5) -0- -0- 1,129,261 5.7
Amtrust Financial Group(6) -0- -0- 4,235,292 20.8
Diker Micro Value Fund,
LP; Diker Micro Value
QP Fund, LP; Diker
Micro and Small Cap
Fund, LP; Diker Micro
And Small Cap Offshore
Fund, Ltd.(7) -0- -0- 3,247,062 16.4
Fox(8) -0- -0- 2,345,260 11.9
Highbridge(9) 29,472 39.4 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) 1111 South Figueroa Street Suite 3100 Los Angeles, CA 90015.
(6) 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.
37
(7) 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.
(8) The stockholder's address is c/o Fox Sports Net, 10201 W. Pico Boulevard,
Building 101, Suite 5420, Los Angeles, CA 90035.
(9) 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
former 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 agreed to 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.
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. Sales of shares may be made by the selling stockholders, including
their respective donees, transferees, pledgees or other successors-in-interest,
directly to purchasers or to or through underwriters, broker-dealers, or agents.
Sales may be made from time to time on the over-the-counter market, or on any
other exchange upon which our shares may trade in the future, at market prices
prevailing at the time of sale, at prices related to market prices, or at
negotiated or fixed prices.
Sales of common stock may be effected from time to time in one or more types of
transactions (which may include block transactions) on the OTCBB, in negotiated
transactions, through put or call options transactions relating to the shares,
through short sales, or a combination of such methods of sale, at market prices
prevailing at the time of sale, or at negotiated prices. Such transactions may
or may not involve brokers or dealers. The selling stockholders have advised AVP
that they have not entered into any agreement, understanding, or arrangement,
with any underwriter or broker-dealer regarding the sale of their securities.
The selling stockholders have agreed to comply with Regulation M.
38
The selling stockholders may effect sales directly to purchasers or to or
through broker-dealers, which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling stockholders or the purchasers of common stock
for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). Any brokers, dealers, or agents that
participate in the distribution of the common stock are deemed to be
underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers, or agents are deemed to be underwriting discounts and
commissions under the Securities Act.
The selling stockholders also may resell all or a portion of their shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.
We will pay all the expenses incident to the registration, offering and sale of
the shares of common stock to the public hereunder other than commissions, fees,
and discounts of underwriters, brokers, dealers, and agents. We will not receive
any proceeds from the sale of any of the shares of common stock by the selling
stockholders. We will receive proceeds from the options and the warrants, if
exercised for cash.
SELLING STOCKHOLDERS
The following table sets forth the name of each person who, by this prospectus,
is offering common stock for resale; the number of shares of common stock
beneficially owned by each person; the number of shares of common stock that may
be sold in this offering; and the number and percentage of shares of common
stock each person will own after the offering, assuming all offered shares are
sold. Percentages are determined pursuant to Exchange Act Rule 13d-3. The
selling stockholders may be deemed underwriters.
Percentage
of
Shares Shares Outstanding
Beneficially Shares Beneficially Shares
Owned to be Sold Owned Beneficially
Before in the after the Owned After
Selling Stockholder Offering Offering Offering Offering
- -------------------- ------------ ---------- ------------ ------------
Angela Akers 8,531 8,531 -- 0%
Billy Allen 20 20 -- 0%
Lisa Arce 6,875 6,875 -- 0%
Nikki Audette 879 879 -- 0%
Eduardo Bacil 1,336 1,336 -- 0%
Paul Baxter 4,848 4,848 -- 0%
Dain Blanton 11,600 11,600 -- 0%
Aaron Boss 1,712 1,712 -- 0%
Ashley Bowles 1,700 1,700 -- 0%
Danalee Bragado 164 164 -- 0%
Nicole Branagh 1,066 1,066 -- 0%
Carrie Busch 14,001 14,001 -- 0%
Daven Casad-Allison 1,382 1,382 -- 0%
Canyon Ceman 3,925 3,925 -- 0%
Jill Changaris 770 770 -- 0%
Kimberly Coleman 1,447 1,447 -- 0%
Brian Corso 59 59 -- 0%
Phil Dalhausser 4,216 4,216 -- 0%
Scott Davenport 1,524 1,524 -- 0%
Annett Davis 25,319 25,319 -- 0%
Steve Delaney 99 99 -- 0%
Diane DeNecochea 1,667 1,667 -- 0%
Brent Doble 2,152 2,152 -- 0%
Jake Elliott 1,019 1,019 -- 0%
Eli Fairfield 1,851 1,851 -- 0%
39
David Fischer 445 445 -- 0%
Eric Fonoimoana 14,674 14,674 -- 0%
Barbra Fontana 12,682 12,682 -- 0%
Tanya Fuamatu 2,691 2,691 -- 0%
Matthew Fuerbringer 12,453 12,453 -- 0%
Erin Galli 439 439 -- 0%
Jake Gibb 18,269 18,269 -- 0%
Courtney Guerra 2,080 2,080 -- 0%
Chris Guigliano 198 198 -- 0%
Leanne Haarbauer 186 186 -- 0%
Albert Hannemann 1,168 1,168 -- 0%
Tyra Harper Turner 4,467 4,467 -- 0%
Matt Heath 1,465 1,465 -- 0%
Valinda Hilleary 482 482 -- 0%
Dax Holdren 4,669 4,669 -- 0%
Makalani Hovey 44 44 -- 0%
John Hyden 7,463 7,463 -- 0%
Heidi Ilustre 2,691 2,691 -- 0%
Casey Jennings 13,542 13,542 -- 0%
Adam Jewell 13,375 13,375 -- 0%
Denise Johns 779 779 -- 0%
Jenny Johnson Jordan 18,520 18,520 -- 0%
Colin Kaslow 20 20 -- 0%
Pat Keller 4,945 4,945 -- 0%
Jennifer Kessy 14,436 14,436 -- 0%
Karch Kiraly 20,018 20,018 -- 0%
Jenelle Koester 987 987 -- 0%
Michael Lambert 28,174 28,174 -- 0%
Scott Lane 851 851 -- 0%
Jason Lee 1,663 1,663 -- 0%
Angela Lewis 274 274 -- 0%
Brian Lewis 2,612 2,612 -- 0%
Priscilla Lima 373 373 -- 0%
Katherine Lindquist 3,226 3,226 -- 0%
Tracy Lindquist 3,226 3,226 -- 0%
Jose Loiola 1,742 1,742 -- 0%
Ty Loomis 406 406 -- 0%
Heather Lowe 4,233 4,233 -- 0%
Nick Lucena 4,082 4,082 -- 0%
Gaston Macau 297 297 -- 0%
Morgan Mainz 20 20 -- 0%
Ryan Mariano 1,523 1,523 -- 0%
Nancy Mason 14,001 14,001 -- 0%
Everett Matthews 119 119 -- 0%
Chip McCaw 1,128 1,128 -- 0%
Holly McPeak 29,127 29,127 -- 0%
Leanne McSorley 10,220 10,220 -- 0%
Anthony Medel 772 772 -- 0%
Andre Melo 277 277 -- 0%
Jennifer Meredith 8,399 8,399 -- 0%
Stein Metzger 4,669 4,669 -- 0%
AJ Mihalic 99 99 -- 0%
40
Marsha Miller 691 691 -- 0%
Jeff Minc 287 287 -- 0%
Dan Mintz 99 99 -- 0%
Sharman Mitchell 603 603 -- 0%
John Moran 584 584 -- 0%
Michelle More 154 154 -- 0%
Chad Mowrey 2,227 2,227 -- 0%
Jim Nichols 2,348 2,348 -- 0%
Brooke Niles 2,080 2,080 -- 0%
Jeff Nygaard 11,645 11,645 -- 0%
Barbara Nyland 927 927 -- 0%
Marla O'Hara 274 274 -- 0%
Matt Olson 2,348 2,348 -- 0%
Liz Pagano 428 428 -- 0%
Diane Pascua 164 164 -- 0%
Jennifer Pavley 4,233 4,233 -- 0%
Alicia Polzin 2,100 2,100 -- 0%
Tony Pray 20 20 -- 0%
Ed Ratledge 2,227 2,227 -- 0%
Helen Reale 241 241 -- 0%
Jason Ring 10,709 10,709 -- 0%
Adam Roberts 1,694 1,694 -- 0%
Paula Roca 4,248 4,248 -- 0%
Todd Rogers 13,308 13,308 -- 0%
Julie Romias 362 362 -- 0%
Sean Rosenthal 12,435 12,435 -- 0%
Gracie Santana-Baeni 4,396 4,396 -- 0%
Sean Scott 19,741 19,741 -- 0%
Saralyn Smith 647 647 -- 0%
David Smith 841 841 -- 0%
Suzanne Stonebarger 154 154 -- 0%
Sarah Straton 5,202 5,202 -- 0%
Jon Thompson 59 59 -- 0%
Brad Torsone 683 683 -- 0%
Ty Tramblie 20 20 -- 0%
Chad Turner 1,308 1,308 -- 0%
Franci Van Zweiten 472 472 -- 0%
Andrew Vazquez 79 79 -- 0%
Rachel Wacholder 7,632 7,632 -- 0%
Aaron Wachtfogel 129 129 -- 0%
Kerri Walsh 39,853 39,853 -- 0%
Mike Whitmarsh 3,628 3,628 -- 0%
Amber Willey 22 22 -- 0%
Mark Williams 451 451 -- 0%
Makare Wilson 4,632 4,632 -- 0%
Adam Witt 3,682 3,682 -- 0%
Larry Witt 13,920 13,920 -- 0%
Scott Wong 4,848 4,848 -- 0%
Kevin Wong 13,981 13,981 -- 0%
Ali Wood 1,689 1,689 -- 0%
------- ------- --- ---
597,368 597,368 0 0%
======= ======= === ===
41
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
October 13, 2006 we had outstanding 19,690,185 shares of common stock; 71,020
shares of Series B Preferred Stock, which are convertible into 1,979,327 shares
of common stock at a 27.87 conversion rate; and options and warrants to purchase
18,257,340 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 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.
42
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 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.
43
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.
44
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm.................. F-2
Consolidated Balance Sheet as of December 31, 2005....................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
2005 and 2004.......................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficiency for the
Years Ended December 31, 2005 and 2004................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2005 and 2004.......................................................... F-6
Notes to Consolidated Financial Statements............................... F-8
Unaudited Consolidated Balance Sheet as of June 30, 2006................. F-26
Unaudited Consolidated Statements of Operations for the six months
ended June 30, 2006 and 2005........................................... F-27
Unaudited Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the six months ended June 30, 2006 and 2005........... F-28
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005........................................... F-28
Unaudited Notes to Consolidated Financial Statements..................... F-31
F-1
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-2
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-3
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-4
AVP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional Total
--------------- --------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Deficiency
------ ------ ------- ------ ---------- ------- ----------- ------------ -------------
Balance, January 1, 2004 -- $-- -- $ -- 2,973,861 $ 2,974 $16,118,266 $(20,962,766) $(4,841,526)
Net loss -- -- -- -- -- -- -- (2,873,112) (2,873,112)
--- --- ------- ---- ---------- ------- ----------- ------------ -----------
Balance, December 31, 2004 -- -- -- -- 2,973,861 2,974 16,118,266 (23,835,878) (7,714,638)
Merger of AVP, Inc. into the
Association ("the reverse
merger") -- -- -- -- 2,251,474 2,251 (954,175) -- (951,924)
Conversion of 10%
convertible notes payable -- -- -- -- 1,707,683 1,708 2,288,640 -- 2,290,348
Conversion of Series A
redeemable preferred stock -- -- -- -- 2,317,188 2,317 3,655,283 -- 3,657,600
Private placement units (net
of offering costs of
$753,038) -- -- 147,364 147 -- -- 4,246,876 -- 4,247,023
Conversion of Series B
Preferred Stock to
common stock -- -- (52,876) (53) 1,284,877 1,285 (1,232) -- --
Payment of accrued
registration penalty in
common stock -- -- -- -- 5,587 6 7,816 -- 7,822
Conversion of AEG note
payable to common stock -- -- -- -- 1,129,261 1,129 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 -- $-- 94,488 $ 94 11,669,931 $11,670 $32,183,810 $(32,799,834) $ (604,260)
=== === ======= ==== ========== ======= =========== ============ ===========
See notes to consolidated financial statements.
F-5
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-6
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-7
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-8
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-9
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-10
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-11
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-12
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)
============ ===========
F-13
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-14
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-15
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-16
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
beginning within 30 days following the filing of AVP's 2005 Annual Report on
Form 10-KSB. 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-17
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-18
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-19
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-20
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.
Number of Weighted Average
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-21
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-22
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.
F-23
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-24
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-25
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-26
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-27
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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-28
AVP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) December 31,
June 30, 2006 2005
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,309,819 $ 1,143,345
Accounts receivable, net of allowance for doubtful accounts of
$49,232 and $49,232 2,174,936 484,770
Prepaid expenses 941,773 158,054
Other current assets - current portion 566,451 145,768
------------ ------------
TOTAL CURRENT ASSETS 9,992,979 1,931,937
------------ ------------
PROPERTY AND EQUIPMENT, net 375,689 288,409
------------ ------------
OTHER ASSETS 391,450 455,192
------------ ------------
TOTAL ASSETS $ 10,760,118 $ 2,675,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable $ 183,334 $ 600,071
Accounts payable 582,358 711,303
Accrued expenses 1,407,542 1,702,424
Deferred revenue 3,667,917 116,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,841,151 3,129,798
------------ ------------
OTHER LIABILITIES 250,475 150,000
------------ ------------
TOTAL LIABILITIES 6,091,626 3,279,798
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (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, 71,020 and 94,488 shares issued and outstanding 71 94
Common stock, $.001 par value, 80,000,000 shares authorized,
19,654,908 and 11,669,931 shares issued and outstanding 19,655 11,670
Additional paid-in capital 38,975,564 32,183,810
Accumulated deficit (34,326,798) (32,799,834)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,668,492 (604,260)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 10,760,118 $ 2,675,538
============ ============
See notes to financial statements.
F-29
AVP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUE
Sponsorships/Advertising (1) $ 6,233,090 $ 3,424,395 $ 6,233,090 $ 3,424,395
Other 1,078,062 885,050 1,200,878 989,006
----------- ----------- ----------- -----------
TOTAL REVENUE 7,311,152 4,309,445 7,433,968 4,413,401
EVENT COSTS 5,360,237 2,996,488 5,360,237 2,996,488
=========== =========== =========== ===========
Gross Profit 1,950,915 1,312,957 2,073,731 1,416,913
----------- ----------- ----------- -----------
OPERATING EXPENSES
Sales and Marketing (2) 816,139 458,191 1,372,089 869,791
Administrative (3) 1,222,352 2,885,214 2,290,690 7,403,598
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 2,038,491 3,343,405 3,662,779 8,273,389
----------- ----------- ----------- -----------
OPERATING LOSS (87,576) (2,030,448) (1,589,048) (6,856,476)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (3,718) (28,013) (11,931) (98,571)
Interest income 33,807 37,653 54,946 53,009
Gain on warrant derivative 111,042 -- 111,042 --
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 141,131 9,640 154,057 (45,562)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 53,555 (2,020,808) (1,434,991) (6,902,038)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) 53,555 (2,020,808) (1,434,991) (6,902,038)
Deemed Dividend to Series B Preferred
Stock Shareholders 91,973 -- 91,973 --
Net Loss available to common shareholders $ (38,418) $(2,020,808) $(1,526,964) $(6,902,038)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.00) $ (0.21) $ (0.11) $ (0.94)
=========== =========== =========== ===========
Weighted average common shares outstanding 15,885,300 9,668,057 14,098,748 7,318,740
=========== =========== =========== ===========
(1) Sponsorships/advertising includes $94,346 and $0 in stock based contra
revenue for the six months ended June 30, 2006 and 2005, respectively and
$94,346 and $0 for the three months ended June 30, 2006 and 2005,
respectively.
(2) Sales and Marketing expenses include stock based expenses of $15,792 and
$0 for the six months ended June 30, 2006 and 2005, respectively and
$15,792 and $0 for the three months ended June 30, 2006 and 2005,
respectively.
F-30
(3) Administrative expenses include stock based expenses of $213,967 and
$5,211,988 for the six months ended June 30, 2006 and 2005, respectively
and $203,241 and $1,713,966 for the three months ended June 30, 2006 and
2005, respectively.
See notes to financial statements.
F-31
AVP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For The Six Months Ended June 30, 2006
(Unaudited)
Series A Preferred Stock Series B Preferred Stock Common Stock
------------------------ ------------------------ --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------- ------ ---------- -------
Balance, December 31, 2005 -- $-- 94,488 $ 94 11,669,931 $11,670
Conversion of Series B Preferred Stock to common
stock -- -- (23,468) (23) 583,439 583
Payment of accrued registration penalty in common
stock -- -- -- -- 667 1
Issuance of common stock to Fox Broadcasting
Company for services -- -- -- -- 666,667 667
Issuance of common stock to sales agent for
services -- -- -- -- 250,000 250
Issuance of warrants to sales agent for services -- -- -- -- -- --
Contra-revenue from issuance of warrants to
national sponsor -- -- -- -- -- --
Value of modification of non-employee warrants -- -- -- -- -- --
Private placement units (net of offering costs of
$226,000) -- -- -- -- 2,941,180 2,941
Warrants derivative liability from private
placement unit -- -- -- -- -- --
Change in value of warrant derivative financial
instrument -- -- -- -- -- --
Private placement units (net of offering costs of
$240,000) -- -- -- -- 3,529,410 3,529
Warrants derivative liability from private
placement unit -- -- -- -- -- --
Change in value of warrant derivative financial
instrument -- -- -- -- -- --
Cashless exercise of non-employee options -- -- -- -- 13,614 14
Dividend from issuance of warrants -- -- -- -- -- --
Issuance of warrants to broker-dealer for services -- -- -- -- -- --
Expenses from issuance of employee options -- -- -- -- -- --
Net loss -- -- -- -- -- --
--- --- ------ ---- ---------- -------
Balance, June 30, 2006 -- $-- 71,020 $ 71 19,654,908 $19,655
=== === ====== ==== ========== =======
F-32
AVP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For The Six Months Ended June 30, 2006
(Unaudited) Continued
Total
Additional Shareholders'
Paid-in Accumulated Equity
Capital Deficit (Deficiency)
----------- ------------- -------------
Balance, December 31, 2005 $32,183,810 $(32,799,834) $ (604,260)
Conversion of Series B Preferred Stock to common
stock (560) -- --
Payment of accrued registration penalty in common
stock 934 -- 935
Issuance of common stock to Fox Broadcasting
Company for services 999,333 -- 1,000,000
Issuance of common stock to sales agent for
services 199,750 -- 200,000
Issuance of warrants to sales agent for services 117,039 -- 117,039
Contra-revenue from issuance of warrants to
national sponsor 252,842 -- 252,842
Value of modification of non-employee warrants 99,379 -- 99,379
Private placement units (net of offering costs of
$226,000) 2,271,062 -- 2,274,003
Warrants derivative liability from private
placement unit (401,530) -- (401,530)
Change in value of warrant derivative financial
instrument 345,883 -- 345,883
Private placement units (net of offering costs of
$240,000) 2,756,470 -- 2,759,999
Warrants derivative liability from private
placement unit (473,983) -- (473,983)
Change in value of warrant derivative financial
instrument 418,588 -- 418,588
Cashless exercise of non-employee options (14) -- --
Deemed dividend from issuance of warrants 91,973 (91,973) --
Issuance of warrants to broker-dealer for services 93,135 -- 93,135
Expenses from issuance of employee options 21,453 -- 21,453
Net loss -- (1,434,991) (1,434,991)
----------- ------------ -----------
Balance, June 30, 2006 $38,975,564 (34,326,798) $ 4,668,492
=========== ============ ===========
See notes to financial statements.
F-33
AVP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,434,991) $(6,902,038)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation of property and equipment 76,144 63,080
Interest income on investment in sales-type lease (25,018) (30,106)
Amortization of deferred commissions 33,973 126,670
Gain on property and equipment (9,864) --
Other amortization 4,022 4,022
Contra-revenue from issuance of warrant (94,346) --
Compensation from issuance of stock options and warrants 213,967 5,211,988
Change in fair value of derivative financial instrument (111,042) --
Decrease (increase) in operating assets:
Accounts receivable (1,690,166) 414,527
Prepaid expenses 216,282 (1,214,212)
Other assets (166,745) (4,500)
Increase (decrease) in operating liabilities:
Accounts payable (128,945) 338,906
Accrued expenses (155,973) 120,183
Deferred revenue 3,861,605 2,650,529
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 588,903 779,049
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (173,225) (308,949)
Investment in sales-type lease 113,866 79,200
Proceeds from disposal of property and equipment 19,665 --
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (39,694) (229,749)
=========== ===========
See notes to financial statements.
F-34
AVP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Continued
Six Months Ended
------------------------
2006 2005
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of capital stock $5,500,002 $ 5,000,061
Offering costs (466,000) (753,038)
Debt repayments (416,737) (1,150,000)
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 4,617,265 3,097,023
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,166,474 3,646,323
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,143,345 631,933
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,309,819 $ 4,278,256
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 110,447 $ 66,934
========== ===========
Income taxes $ -- $ --
========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING INFORMATION
Net liabilities assumed in merger $ -- $ 4,217
Cash -- (261,857)
Accounts payable -- (173,934)
---------- -----------
Accrued expenses $ -- $ (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
========== ===========
Conversion of Series B preferred stock into common stock $ 583 $ 7,521
========== ===========
Payment of accrued registration penalty in common stock $ 935 $ --
========== ===========
Issuance of common stock to non-employees for services $1,000,000 $ --
========== ===========
Issuance of common stock to sales agent for services $ 200,000 $ --
========== ===========
Issuance of common warrants to sales agent for services $ 117,039 $ --
========== ===========
Issuance of warrants to title sponsor $ 252,842 $ --
========== ===========
Cashless exercise of warrant $ 14 $ --
========== ===========
See notes to financial statements.
F-35
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of AVP,
Inc. ("AVP") 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 ("Merger Agreement") 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 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.
At the time of the merger, 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. As a result of the May 2006
and June 2006 financings, the conversion rate of the outstanding Series B
Convertible Preferred Stock increased from 24.3 to 27.87 in accordance with the
anti-dilution provision from the February 2005 Financing.
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 National Broadcasting Company (NBC) and Fox
Broadcasting Company (Fox) converted 3,442,161 shares of redeemable preferred
stock (948,627 and 2,493,534 shares of NBC and Fox respectively) into 2,317,188
shares of AVP common stock, and both television networks waived their put rights
on their redeemable Series A preferred stock that AVP previously issued to them.
In addition, as part of the Merger, holders of Bridge Financing convertible
notes converted $2.1 million of principal plus accrued interest into 1,707,672
shares of AVP common stock.
F-36
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 were
convertible into 3,580,945 shares of AVP common stock.
Pursuant to the merger agreement and in conjunction with the Merger, AVP granted
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 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 Certificate of Incorporation to effect a 1
for 10 reverse stock split immediately following the increase in the number of
authorized shares. 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-37
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 made 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 $254,000, which includes statutory interest,
based on options outstanding as of June 30, 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 INCOME (LOSS) PER BASIC AND DILUTED SHARE OF COMMON STOCK
Basic earnings (loss) per share is calculated using the average number of common
shares outstanding. Diluted earnings (loss) per share is computed on the basis
of the average number of common shares outstanding during the period increased
by the dilutive effect of outstanding stock options using the "treasury stock"
method.
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 available to common shareholders for the periods presented as their
effect would be antidilutive.
June 30,
-----------------------
2006 2005
---------- ----------
Options and Warrants 18,412,466 15,487,806
Convertible Debt -- 1,129,261
Series B Preferred Stock 1,979,327 2,828,811
---------- ----------
Total 20,391,793 19,445,878
========== ==========
F-38
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 six months ended June 30, 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. The Company's financial
results prior to December 31, 2005 were not restated. There were no employee
stock based grants between January 1, 2006 and June 30, 2006.
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 six months ended June 30, 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 awards under its stock-based compensation plans consistent
with the methodology prescribed by SFAS No. 123, AVP's net loss for the three
months and six months ended June 30, 2005 would increase to the following pro
forma amounts:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
Net loss applicable to common stockholders, as reported $(2,020,808) $ (6,902,038)
Less stock based employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (4,479,997) (4,479,997)
----------- ------------
Pro forma net loss $(6,500,805) $(11,382,035)
=========== ============
Net loss per share of common stock:
Basic and diluted
As reported $ (0.21) $ (0.94)
=========== ============
Pro forma $ (0.67) $ (1.56)
=========== ============
F-39
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 six
months ended June 30, 2005 and 2006:
Six Months Ended
June 30,
--------------------------
2005 2006
----------- -----------
Risk-free interest rate 3.66 - 3.93% 4.91 - 5.30%
Expected life 4 years 4 - 6 years
Expected volatility 100% 90 - 95%
Expected dividend yield 0% 0%
F-40
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 June 30,
2006, the Company's net loss is $10,727 greater than if it had continued to
account for stock based compensation under APB 25 as it did for the three months
ended June 30, 2005. Basic and diluted earnings per share for the three months
ended June 30, 2006 would have been ($0.00) if the Company had not adopted SFAS
No. 123(R), compared to basic and diluted earnings per share of ($0.00). The
adoption of SFAS No. 123(R) had no impact on the Company's cash flows.
As a result of adopting SFAS No. 123(R), during the six months ended June 30,
2006, the Company's net loss is $21,453 greater than if it had continued to
account for stock based compensation under APB 25 as it did for the six months
ended June 30, 2005. Basic and diluted earnings per share for the six months
ended June 30, 2006 would have been ($0.10) if the Company had not adopted SFAS
No. 123(R), compared to basic and diluted earnings per share of ($0.10). 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 June 30, 2006, the Company
had approximately $70,075 of unrecognized compensation expense expected to be
recognized over a weighted average period of approximately 1.23 years.
F-41
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 consisting of management warrants as
well as options previously granted by the Association which were subsequently
converted to AVP stock options, 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 each optioned share is
determined by the Compensation Committee; however the exercise price for
incentive stock options and nonqualified stock options will not be less than
100% of the fair market value of the optioned shares 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.
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. 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 following table contains information on the stock options under the Plan for
the period ended June 30, 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 -- --
Exercised -- --
Cancelled (19,738) 1.60
---------- -----
Options outstanding at June 30, 2006 11,995,524 $ .87
========== =====
The weighted average fair value per share of options granted was $-0- in 2006
and $1.38 in 2005.
F-42
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 June 30, 2006:
Options outstanding and exercisable by price range as of June 30, 2006:
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Average
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
- --------------- ----------- ------------- ---------------- ----------- ----------------
$.01 -.30 6,118,943 3.5 $0.03 6,118,943 $0.03
.31 -.90 1,655,480 7.1 0.77 1,655,480 0.77
.91 -1.60 761,080 2.8 1.60 711,526 1.60
1.61 -2.80 3,460,021 3.1 2.21 3,416,687 2.22
---------- ----------
$.01 - 2.80 11,995,524 3.8 $0.87 11,902,636 $0.86
========== === ===== ========== =====
In connection with stock options granted to employees to purchase common stock,
AVP recorded $21,453 of stock-based compensation expense for the period ended
June 30, 2006 and $-0- for the period ended June 30, 2005.
F-43
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 June 30, 2006 and the year ended December 31, 2005.
Weighted Average
Number of Shares Exercise 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 2,769,712 1.00
Exercised (20,195) 0.30
Cancelled -- --
--------- -----
Options outstanding at June 30, 2006 6,216,942 $1.50
========= =====
The weighted average fair value of options granted was $0.65 in 2006 and $2.26
in 2005.
F-44
The following table summarizes information about AVP's non-qualified stock
options at June 30, 2006:
Options outstanding and exercisable by price range as of June 30, 2006:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average
Range of Number Contractual Life Weighted Average Number Weighted Average
Exercise Prices Outstanding in Years Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$.30 - 1.50 3,279,022 4.7 $0.95 3,279,022 $0.95
1.60 - 3.40 2,937,920 3.3 2.11 2,937,920 2.11
--------- ---------
$.30 - 3.40 6,216,942 4.0 $1.50 6,216,942 $1.50
========= === ===== ========= =====
In connection with warrants granted to non-employees to purchase Common Stock,
AVP recorded warrant expense of $192,514 in administrative expenses, $15,792 in
sales and marketing expenses, and $94,346 in contra-revenue for the period ended
June 30, 2006 and $5,211,988 in administrative expenses for the period ended
June 30, 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-45
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:
Years Ending December 31,
- -------------------------
2006 $ 166,000
2007 338,000
2008 347,000
2009 357,000
2010 90,000
----------
Total $1,298,000
==========
Rent expense charged to operations was $81,312 and $69,257 for the three months
ended June 30, 2006 and 2005, respectively.
Rent expense was $159,470 for the six months ended June 30, 2006 and $159,097
for the six months ended June 30, 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. For 2005,
Messrs. Armato, Binkow, and Reif voluntarily declined the annual bonus and the
monthly car allowance they were entitled to per their employment agreements.
F-46
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 is
still being completed 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.
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.
On March 24, 2006, AVP entered an agreement with Wall Street Communications
Group, Inc. ("Sales Agent") pursuant to which Sales Agent performed sales
services for the AVP in connection with a sponsorship/advertising agreement with
Crocs, Inc. which currently serves as title sponsor for the AVP Tour. For his
services, the Sales Agent received 250,000 shares of AVP common stock valued at
$200,000 and a warrant to purchase up to 200,000 shares of AVP common stock. The
exercise price of the warrant is $.80. On June 30, 2006, the warrants had a
value of $117,039, which was determined using the Black-Scholes valuation
method. The assumptions utilized in computing the fair value of the warrants
were as follows: expected life of 4 years, estimated volatility of 95% and a
risk free interest rate of 5.10%. For the six months ended June 30, 2006, we
expensed $15,792. AVP agreed to file a registration statement for resale of the
shares and the shares underlying the warrant by April 12, 2007. The registration
statement became effective on June 30, 2006. The expiration date of the warrant
is April 12, 2010 (fourth anniversary of the signing of the Crocs
Sponsorship/Advertising Agreement).
On April 12, 2006, AVP entered a multi-year sponsorship/advertising agreement
("Agreement") with Crocs, Inc. ("Crocs") pursuant to which Crocs became the
title sponsor of the AVP Tour through the final event of the 2008 AVP Tour
season. 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
if the Agreement is not extended beyond 2008 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
warrants were recorded with a value of $252,842, which was determined using the
Black-Scholes valuation method. The assumptions utilized in computing the fair
value of the warrants were as follows: expected life of 6 years, estimated
volatility of 95% and a risk free interest rate of 4.92%. The fair value of the
warrants was recorded through the Consolidated Statement of Operations as
contra-revenue. For the six months ended June 30, 2006, we recognized $94,346
related to these warrants. The registration rights are subject to Securities Act
rules, and AVP agreed to file a registration statement for resale of the shares
underlying the warrants by April 12, 2007. The registration statement became
effective on June 30, 2006. The expiration date of the warrant is April 12, 2012
(sixth anniversary of the execution of the Agreement).
In April 2006, the Board of Directors of AVP, Inc. agreed to extend the warrants
included in the Bridge Financing, which were scheduled to expire in June 2006,
for an additional 18-month period through December 2007. The warrants were
recorded with a value of $99,379, which was determined using the Black-Scholes
valuation method. The assumptions utilized in computing the fair value of the
warrants were as follows: expected life of 1.7 years, estimated volatility of
90% and a risk free interest rate of 3.52%. For the six months ended June 30,
2006, we expensed $99,379.
F-47
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. CAPITAL TRANSACTIONS (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 an exercise price of $1.00 per share 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. Warrants
issued to the placement agent were capitalized as part of the offering costs.
Pursuant to a Securities Purchase Agreement dated 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 an exercise 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 the investor. Warrants issued to the placement agent were
capitalized as part of the offering costs.
The Securities Purchase Agreements in May and June of 2006 ("May and June 2006
Financing") required AVP to file a re-sale registration statement within 10
business days from closing of the June 9, 2006 Securities Purchase Agreement and
gives the investors rights of first negotiation regarding future issuances of
common stock, subject to exceptions. The registration statement became effective
on June 30, 2006.
Under EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" (EITF 00-19"), the fair value
of the warrants issued at the close of the May and June 2006 Financing have been
reported as a liability due to the requirement to net-cash settle the
transaction in the event that the shares underlying the warrant are not
registered for sale. The warrant provides that the holder is entitled to
liquidated damages, payable in cash, of 1% of the gross proceeds per month
($55,000) should the Company fail to achieve effectiveness of the registration
statement. The warrants were recorded as a derivative financial instrument with
a value of $875,513, and they were later reclassified as equity on the date the
registration statement became effective. On the effective date, the warrants had
a value of approximately $764,471, which was determined using the Black-Scholes
valuation method. The assumptions utilized in computing the fair value of the
warrants were as follows: expected life of 5 years, estimated volatility of 90%
and a risk free interest rate of 5.10%. The change in fair value of the warrants
was recorded through the Consolidated Statement of Operations as Other Income
(Expense). For the six months ended June 30, 2006, we recorded a gain of
$111,042 associated with the fair value adjustment of the warrants.
As a result of the shares of common stock 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 the anti-dilution provision from
the February 2005 Financing. Each unit sold in the February 2005 Financing
consisted of 4 shares of AVP's Series B Preferred Stock (each Preferred Stock
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. In accordance
with the February 2005 Financing anti-dilution provisions, the number of shares
of common stock for which the warrants were exercisable was adjusted. The
warrant agreement entitles Series B Preferred Stock holders to purchase 131,521
additional shares of common stock--for accounting purposes, the additional
warrants were treated as a dividend. All outstanding shares of Series B
Convertible Preferred Stock are now convertible into 27.87 shares of common
stock.
F-48
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal proceedings
7. CAPITAL TRANSACTIONS (CONTINUED)
In addition, as a result of the new shares sold in May and June 2006, AVP also
issued to Maxim, broker-dealer and underwriter for the February 2005 Financing,
a warrant to purchase 122,898 additional shares of common stock in accordance
with its anti-dilution provision. The warrants were recorded with a value of
$93,135, which was determined using the Black-Scholes valuation method. The fair
value of the warrants was recorded through the Consolidated Statement of
Operations as an administrative expense. For the six months ended June 30, 2006,
we expensed $93,135.
For the six months ended June 30, 2006, 23,688 shares of Series "B" preferred
stock were converted into 583,439 shares of AVP's common stock pursuant to
notices of conversions from two individual investors.
During the six months ended June 30, 2006, AVP issued 13,614 shares of common
stock pursuant to the cashless exercise of options for 20,195 shares of common
stock. The exercise price of the options was $0.30 per share.
Warrants granted on the May and June 2006 Financing include an anti-dilution
provision that could increase common stock shares outstanding. The company has
analyzed the anti-dilutive provision on the warrant agreements under EITF 00-19
and has concluded the warrants are not a liability.
F-49
AVP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2006, the FASB issued, 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.
In July 2006, FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes," which is effective for fiscal years beginning
after December 15, 2006, and clarifies the accounting for uncertainty in tax
positions. FIN 48 requires that we recognize the impact of a tax position in our
financial statements if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. The cumulative effect
of the change in accounting principle is recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact of the adoption of FIN
48 on our financial statements.
In June 2006, the EITF reached a consensus on Issue No. 06-03, "How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)"
(EITF 06-03). EITF 06-03 applies to taxes assessed by a governmental authority
that are directly imposed on a revenue-producing transaction between a seller
and a customer, and states that the presentation of such taxes on either a gross
basis (included in revenues and costs) or on a net basis (excluded from
revenues) is an accounting policy decision that should be disclosed.
Additionally, for such taxes reported on a gross basis, the amount of such taxes
should be disclosed in interim and annual financial statements if the amounts
are significant. The provisions of EITF 06-03 are effective for interim and
annual reporting periods beginning after December 15, 2006. The adoption of EITF
06-3 is not expected to have a material impact on the financial position,
results of operations or cash flows of AVP.
In March 2006, the FASB issued SFAS No.156, "Accounting for Servicing of
Financial Assets - an Amendment of FASB Statement No.140". SFAS 156 amends SFAS
140 to clarify the accounting for servicing assets and servicing liabilities.
Among other provisions, the new accounting standard requires all separately
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable. SFAS 156 is effective for the fiscal periods
beginning after September 15, 2006. The Company is currently evaluating the
effect that the adoption of SFAS 156 will have on its consolidated results of
operations and financial condition but expects it will not have a material
impact.
F-50
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.
PROSPECTUS
597,368 SHARES
AVP, INC.
COMMON STOCK
October __, 2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Delaware General Corporation Law and the Registrant's Bylaws provide for
indemnification of the Registrant's officers and directors for liabilities and
expenses that they may incur in such capacities. In general, the Registrant's
directors and officers are indemnified with respect to actions taken in good
faith and in a manner such person believed to be in the Registrant's best
interests, and with respect to any criminal action or proceedings, actions that
such person has no reasonable cause to believe were unlawful. Furthermore, the
personal liability of the Registrant's directors is limited as provided in the
Registrant's certificate of incorporation.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission (the "SEC"), such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered, other than the underwriting discount, are
estimated as follows:
SEC Registration Fee $100.00
Printing and Engraving Expenses $ 2,500
Legal Fees and Expenses $ 5,000
Accountants' Fees and Expenses $12,000
Miscellaneous Costs $ 500
-------
Total $20,100
=======
All of these expenses, except for the SEC registration and filing fees,
represent estimates only. The Registrant will pay all of the expenses of this
offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On January 31, 2003, the Registrant agreed to settle $138,653 of accounts
payable owed to a creditor for 20,000 shares of common stock and an unsecured
$30,000 promissory note payable, bearing 10% interest, maturing on March 31,
2003. Because only one creditor was involved, the common stock was issued under
the exemption from registration provided in Section 4(2) of the Securities Act.
In March 2003, the Registrant issued to five persons (which included Mr.
Wattenberg) a total of 400,000 shares of common stock for services rendered.
Because of the small number of investors involved, the common stock was issued
under the exemption from registration provided in Section 4(2) of the Securities
Act.
As of December 30, 2003, the Registrant obtained a $100,000 loan from an
unrelated party and issued a $100,000 convertible promissory note, convertible
into shares of common stock of the Registrant at a rate of $2.50 per share. In
connection with the loan, the Registrant issued to the unrelated party 10,000
shares of common stock, and an option to purchase an additional 10,000 shares of
common stock at an exercise price of $1.80 per share. In March 2004, such party
exercised the option to convert the entire principal balance and interest into
shares of common stock. In connection with the conversion, such party was issued
43,000 shares of common stock which represented (i) the number of shares on
account of the conversion of the entire principal balance and interest together
with (ii) additional shares as an inducement to such person to exercise such
option to convert. Because only one investor was involved, the foregoing
securities were issued under the exemption from registration provided in Section
4(2) of the Securities Act.
In February 2004, Mr. Wattenberg and two other persons previously known to him
were granted options to acquire up to an aggregate of 400,000 shares of common
stock at an exercise price of $2.50 per share. Because of the small number of
persons involved, the options were granted under the exemption from registration
provided in Section 4(2) of the Securities Act.
During the months of June through August 2004, the Registrant raised $2,360,000
through the sale of units to certain private investors ($2,060,000 was raised as
of July 31, 2004 and $300,000 was raised in August 2004). Each unit consisted of
a $100,000 principal amount of a 10% convertible promissory note due one year
from its issuance (the "Bridge Notes"), 20,000 shares of common stock (the
"Bridge Stock") and 20,000 common stock purchase warrants (the "Bridge
Warrants"). Accordingly, 472,000 shares of Bridge Stock and 472,000 Bridge
Warrants were issued. The investors were previously known to the Registrant's
CEO, Mr. Wattenberg; all investors completed questionnaires showing each to be
an accredited investor; each investor represented as to an absence of intent to
distribute the securities; and all securities bore Securities Act restrictive
legends. Accordingly, the securities were issued in reliance upon an exemption
from registration pursuant to Section 4(2) of the Securities Act.
On February 28, 2005, the Registrant consummated a private placement. Each unit
sold in the offering consisted of 4 shares of the Registrant's Series B
Preferred Stock, each share convertible into 27.87 shares of the Registrant's
common stock, and a five-year warrant to purchase up to 27.87 shares of the
Registrant's common stock at an exercise price of $1.7046 per share. As part of
the offering, the Registrant sold an aggregate of 36,841 units for an aggregate
purchase price of $5,000,061. Investors were solicited by Maxim Group LLC, an
NASD member. In connection with the offering, Maxim, the placement agent in the
offering, received a cash commission fee of $500,000 and warrants to purchase
480,993 shares of common stock. The warrants are exercisable for a period of
five years at an exercise price of $1.0395 per share. All investors completed
questionnaires showing each to be an accredited investor; each investor
represented as to an absence of intent to distribute the securities; and all
securities bore Securities Act restrictive legends. Accordingly, the units were
issued under the exemption from registration provided in Section 4(2) of the
Securities Act.
As a further inducement to the investors participating in the offering, the
Registrant agreed to file with the SEC a registration statement covering the
shares of common stock issuable upon conversion of the Series B Preferred Stock
and the shares of common stock underlying the warrants purchased by each
investor as part of the units. The cash proceeds of the above sales of
securities of the Registrant will be used for general corporate purposes.
Pursuant to the Offering, the Series "B" investors were entitled to penalties if
the shares were not registered within four months following the closing. Since
the registration was declare effective until November 1, 2005, Series "B"
investors were offered the opportunity to receive additional shares in lieu of
receiving cash penalties. As of May 15, 2006, AVP issued 6,254 shares at a price
of $1.40 per share.
During 2003 and 2005, options and warrants to purchase 4,905,478 shares were
granted to executive officers and directors, which grants were exempt under
Section 4(2), given the limited number of grantees and their relationship with
the issuer.
In 2004, the Association granted to employees stock options to purchase 242,318
shares of Association common stock at an exercise price $1.0317 per share;
pursuant to the Merger, these stock options were converted into options to
purchase 163,124 shares of AVP common stock at an exercise price of $1.60 per
share. The original grant and conversion of the stock options were exempt from
registration pursuant to Rule 701.
In 2004, the Association granted to players stock options to purchase 969,274
shares of Association Common Stock at a price of $1.0317 per share; pursuant to
the Merger, these stock options were converted into options to purchase 652,494
shares of AVP common stock at an exercise price of $1.60 per share. Because of
a typographical error, the total exercise price of the stock options exceeded
the Rule 504 limit. The conversion of the stock options into options for AVP
common stock constituted neither an offer nor a sale. The converted stock
options cannot be exercised until a registration statement with respect to such
exercise has become effective.
On February 21, 2006, AVP entered into a binding term sheet with National Sports
Programming ("Fox"), a beneficial owner of more than 5% of the common stock of
the Company, 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, AVP issued Fox
666,667 shares of common stock.
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. 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 in 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).
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 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.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
Exhibit Incorporated by
Number Name of Exhibit Reference to
- ------- ----------------------------------------------------- -----------------
2.1 Merger Agreement, dated as of June 29, 2004 among Exhibit 10.2(1)
Othnet, Inc., Othnet Merger Sub, Inc. and Association
of Volleyball Professionals, Inc.
2.2 First Amendatory Agreement, dated February 28, 2005, Exhibit 2.2(2)
to Agreement and Plan of Merger, dated June 29, 2004,
between Othnet and AVP.
2.3 Agreement detailing Othnet's liabilities, dated Exhibit 2.3(2)
February 28, 2005 between Othnet and AVP.
2.4 Supplement to Merger Agreement, dated as of November Exhibit 2.4(6)
10, 2004 among Othnet, Inc., Othnet Merger Sub, Inc.
and Association of Volleyball Professionals, Inc.
3.1 Amendment and restated certificate of incorporation Exhibit 3.1A(7)
dated December 16, 2005
3.2 Bylaws. Exhibit 3.2(3)
4.1 Registration Rights Agreement, dated January 5, 2005, Exhibit 4.1(2)
between Othnet and Units Investors.
4.2 Form of Units warrant. Exhibit 4.2(2)
4.3 Form of warrant for Maxim Group LLC Exhibit 4.3(3)
5. 1 Opinion of Loeb & Loeb LLP *
10.1 Executive Employment Agreement between Leonard Armato Exhibit 10.1(3)
and Association of Volleyball Professionals, Inc.,
dated as of January 3, 2005.
10.2 Executive Employment Agreement between Bruce Binkow Exhibit 10.2(3)
and Association of Volleyball Professionals, Inc.,
dated as of January 3, 2005.
10.3 Executive Employment Agreement between Andrew Reif Exhibit 10.3(3)
and Association of Volleyball Professionals, Inc.,
dated as of January 3, 2005.
10.4 Stock Option Agreement between Leonard Armato and Exhibit 10.4(3)
Association of Volleyball Professionals, Inc.,
dated as of September 1, 2003.
10.5 Stock Option Agreement between Bruce Binkow and Exhibit 10.5(3)
Association of Volleyball Professionals, Inc.,
dated as of September 1, 2003.
10.6 Stock Option Agreement between Andrew Reif and Exhibit 10.6(3)
Association of Volleyball Professionals, Inc.,
dated as of September 1, 2003.
10.7 Form of Management Warrant Exhibit 10.7(10)
10.8 Anschutz Entertainment Group, Inc. Promissory Note, Exhibit 10.8(3)
dated as of August 1, 2002 in the principal sum of
$1,000,000 and Option Agreement, dated as of
April 21, 2003 between AEG and AVP.
10.9 Non-negotiable Promissory Note, dated April 6, 2003 Exhibit 10.9(3)
made by Association of Volleyball Professionals, Inc.
to Management Plus Enterprises, Inc., dated
January 3, 2005
10.10 Major League Volleyball, Inc. Secured Convertible Exhibit 10.10(3)
Promissory Note, dated as of July 28, 2003.
10.11 Consulting Agreement between Scott Painter and Exhibit 10.11(3)
Association of Volleyball Professionals, Inc., dated
as of June 11, 2003 and amendment dated January
3, 2005.
10.12 Consulting Agreement between Association of Exhibit 10.12(3)
Volleyball Professionals, Inc. and Montecito Capital
Partners, Inc., dated as of February 28, 2005.
10.13 2005 Stock Option Plan Exhibit 10.13(4)
10.14 Form of Player Agreement Exhibit 10.14(5)
10.15 Lockup Agreements for AVP executive officers and Exhibit 10.15(5)
Othnet stockholders
10.16 Fox Term Sheet, as amended as of December 21, 2004 Exhibit 10.16(6)
10.17 NBC Sports Ventures letter agreement dated February Exhibit 10.17(6)
22, 2005
10.18 OLN letter agreement dated February 10, 2005 Exhibit 10.18(6)
10.19 Anschutz Entertainment Group, Inc. Conversion Exhibit 99.1 and
Agreement and Termination and Release, each dated Exhibit 99.2(8)
January 6, 2006
10.20 National Sports Programming (Fox) Agreement dated Exhibit 99.1(9)
February 21, 2006
10.21 Crocs Agreement dated April 6, 2006 (Portions omitted Exhibit 10.21(10)
pursuant to request for confidential treatment)
21 Subsidiaries of AVP, Inc. *
23.1 Consent of Mayer Hoffman McCann P.C. *
24 Power of Attorney (included in the signature page of
this registration statement).
* Filed herewith.
(1) Othnet, Inc. Annual Report on Form 10-KSB for year ended April 30, 2004
(File No. 0-26454).
(2) AVP, Inc. Current Report on Form 8-K dated March 2, 2005 (File No.
005-79737).
(3) Exhibit to AVP, Inc.'s Annual Report on Form 10-KSB for year ended
December 31, 2004 (File No. 005-79737).
(4) Annex C to AVP Proxy Statement dated July 18, 2005 (File No. 005-79737).
(5) AVP, Inc. Registration Statement on Form SB-2, Pre Am. No. 1 (Reg. No.
333-0124084).
(6) AVP, Inc. Registration Statement on Form SB-2, Pre Am. No. 2 (Reg. No.
333-0124084).
(7) AVP, Inc. Registration Statement on Form SB-2, Post Am. No. 3 (Reg. No.
333-0124084).
(8) AVP Form 8-K dated January 6, 2006.
(9) AVP Form 8-K dated February 21, 2006.
(10) AVP, Inc. Annual Report on Form 10-KSB for the year ended December 31,
2005 (File No. 0-26454).
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to:
File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
1. Include any prospectus required by Section 10(a)(3) of the Securities Act;
2. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement, and
3. Include any additional or changed material information on the plan of
distribution.
For determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on this Form SB-2 and authorizes this
registration statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California, on this 27 day of October 2006.
AVP, INC.
By: /s/ Andrew Reif
----------------------------------
Name: Andrew Reif
Title: Chief Operating Officer
POWER OF ATTORNEY
The officers and directors of AVP, Inc., whose signatures appear below, hereby
constitute and appoint Leonard Armato and Andrew Reif, and each of them, their
true and lawful attorneys and agents, each with power to act alone, to sign,
execute, and cause to be filed on behalf of the undersigned any amendment of
amendments, including post-effective amendments, to this registration statement
of AVP, Inc. on Form SB-2. Each of the undersigned does hereby ratify and
confirm all that said attorneys and agents shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Leonard Armato Chairman, Chief Executive Officer, and October 27, 2006
- ------------------------ Director (Principal Executive Officer)
Leonard Armato
/s/ Andrew Reif Chief Operating Officer, Chief Financial Officer, October 27, 2006
- ------------------------ and Director (Principal Financial Officer)
Andrew Reif
/s/ Bruce Binkow Chief Marketing Officer and Director October 27, 2006
- ------------------------
Bruce Binkow
/s/ Thomas Torii Controller (Principal Accounting Officer) October 27, 2006
- ------------------------
Thomas Torii
/s/ William Chardavoyne Director October 27, 2006
- ------------------------
William Chardavoyne
/s/ Philip Guarascio Director October 27, 2006
- ------------------------
Philip Guarascio
/s/ Jack Kemp Director October 27, 2006
- ------------------------
Jack Kemp
/s/ Scott Painter Director OOctober 27, 2006
- ------------------------
Scott Painter
/s/ Brett Yormark Director October 27, 2006
- ------------------------
Brett Yormark
/s/ Roger L. Werner, Jr. Director October 27, 2006
- ------------------------
Roger L. Werner, Jr.