-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ti+DMJg59mlibGPPxhDgPBP3ZjdOSTPp+g9VAuJT+4P7WyM1VKc11YJD7fvOftP3 lQbvJKh9+5Lg4NNiodc8bA== 0001144204-05-016925.txt : 20050523 0001144204-05-016925.hdr.sgml : 20050523 20050523172412 ACCESSION NUMBER: 0001144204-05-016925 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050523 DATE AS OF CHANGE: 20050523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVP INC CENTRAL INDEX KEY: 0000930817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 980142664 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26454 FILM NUMBER: 05852133 BUSINESS ADDRESS: STREET 1: 6100 CENTER DRIVE STREET 2: SUITE 900 CITY: LOS ANGELES STATE: CA ZIP: 90045 BUSINESS PHONE: 310-426-8000 MAIL ADDRESS: STREET 1: 6100 CENTER DRIVE STREET 2: SUITE 900 CITY: LOS ANGELES STATE: CA ZIP: 90045 FORMER COMPANY: FORMER CONFORMED NAME: OTHNET INC DATE OF NAME CHANGE: 20010502 FORMER COMPANY: FORMER CONFORMED NAME: PL BRANDS INC DATE OF NAME CHANGE: 19941003 10QSB 1 v018998.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number 000-26454 AVP, INC. ----------------------------------------- (Exact name of registrant as specified in its charter) Delaware 98-0142664 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 Center Drive, Suite 900, Los Angeles, CA 90045 -------------------------------------------------------- (Address of principal executive offices - Zip code) (310) 426 - 8000 ---------------- (Registrant's telephone number, including area code) 1 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 23, 2005, the Registrant had approximately 22,514,742 shares of Common Stock outstanding. 2 AVP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION........................ .................4 ITEM 1. FINANCIAL STATEMENTS......................... .................4 Balance Sheet as of March 31, 2005 (Unaudited)......................................... .................5 Statements of Operations for the three months ended March 31, 2005 and 2004 (Unaudited)......................................... .................6 Statement of Changes in Stockholder's Equity for the three months ended March 31, 2005 (Unaudited)......................................... ................ 7 Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (Unaudited)......................................... .................8 Notes to Financial Statements (Unaudited).......... .................10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................... .................17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......................... .................20 ITEM 4. CONTROLS AND PROCEDURES..................... .................20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS........................... .................20 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS... .................20 ITEM 5. OTHER INFORMATION........................... .................21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............ .................21 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVP, INC. Index to Financial Information Period Ended March 31, 2005 PAGES Financial Statements Unaudited Balance Sheet 5 Unaudited Statements of Operations 6 Unaudited Statement of Changes in Stockholder's Equity 7 Unaudited Statements of Cash Flows 8 - 9 Unaudited Notes to Financial Statements 10 - 16 4 AVP, INC. Balance Sheet March 31, 2005 (Unaudited)
March 31, 2005 ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,820,821 Accounts receivable, net of allowance for doubtful accounts of $10,000 1,102,843 Prepaid expenses 554,082 Deferred commission-related party 190,004 ----------- TOTAL CURRENT ASSETS 6,667,750 ----------- PROPERTY AND EQUIPMENT, net 316,986 OTHER ASSETS Investment in sales-type lease 604,078 Other assets 45,228 ----------- TOTAL OTHER ASSETS 649,306 ----------- TOTAL ASSETS $ 7,634,042 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 1,330,070 Accounts payable 479,177 Accrued expenses 1,215,861 Accrued interest 260,502 Deferred revenue 3,294,897 ----------- TOTAL CURRENT LIABILITIES 6,580,507 ----------- OTHER LIABILITIES Long-term deferred revenue 225,000 Long-term debt - less current portion 683,334 ----------- TOTAL OTHER LIABILITIES 908,334 ----------- TOTAL LIABILITIES 7,488,841 ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Series A convertible preferred stock, $.001 par value, 2,000,000 shares authorized, 288 288,014 shares issued and outstanding Series B convertible preferred stock, $.001 par value, 2,000,000 shares authorized, 147 147,364 shares issued and outstanding Common stock, $.0001 par value, 40,000,000 shares authorized, 22,515 22,514,742 shares issued and outstanding Additional paid-in capital 13,717,431 ACCUMULATED DEFICIT (13,595,180) ----------- TOTAL STOCKHOLDERS' EQUITY 145,201 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,634,042 ===========
5 AVP, INC. Statements of Operations Three Months Ended March 31, 2005 and 2004 (Unaudited) Three Months Ended March 31, 2005 2004 ------------ ------------ REVENUE Sponsorships $ -- $ -- Other 103,956 52,698 ------------ ------------ TOTAL REVENUE 103,956 52,698 EVENT COSTS -- -- ------------ ------------ Gross Profit 103,956 52,698 ------------ ------------ OPERATING EXPENSES Marketing 411,600 328,985 Administrative 4,518,384 677,653 ------------ ------------ TOTAL OPERATING EXPENSE 4,929,984 1,006,638 ------------ ------------ OPERATING LOSS (4,826,028) (953,940) ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (70,558) (38,000) Interest income 15,356 24,517 Joint venture loss -- -- ------------ ------------ TOTAL OTHER EXPENSE (55,202) (13,483) ------------ ------------ LOSS BEFORE INCOME TAXES (4,881,230) (967,423) INCOME TAXES -- -- ------------ ------------ NET LOSS $ (4,881,230) $ (967,423) ============ ============ Basic and diluited loss per share $ (0.22) $ (0.06) ============ ============ Weighted average common shares outstanding 22,514,742 17,364,279 ============ ============ 6 AVP, INC. Statement of Changes in Stockholder's Equity Three Months Ended March 31, 2005 (Unaudited)
Series A Series B Preferred Stock Preferred Stock Common Stock --------------------------------------------------------------------------------- Additional Shares Amount Shares Amount Shares Amount Paid in Capital ---------------------------------------------------------------------------------- Balance, January 1, 2005 122,381 $ 122 - $ - - $ - $ 999,190 Merger of AVP, Inc. into the Association ("the reverse merger") - - - - 22,514,742 22,515 (974,439) Conversion of 10% convertible notes 70,275 70 - - - - 2,290,278 Conversion of redeemable preferred stock 95,358 96 - - - - 3,657,504 Private placement units - - 147,364 147 - - 4,246,876 Consulting expense from issuance of stock options - - - - - - 3,498,022 Net loss - - - - - - - ----------- --------- ----------- --------- ----------- ---------- -------------- Balance, March 31, 2005 288,014 $ 288 147,364 $ 147 22,514,742 $ 22,515 $ 13,717,431 =========== ========= =========== ========= =========== ========== ============== Total Accumulated Stockholders' Deficit Equity ----------------- ------------- Balance, January 1, 2005 $ (8,713,950) $ (7,714,638) Merger of AVP, Inc. into the Association ("the reverse merger") - (951,924) Conversion of 10% convertible notes - 2,290,348 Conversion of redeemable preferred stock - 3,657,600 Private placement units - 4,247,023 Consulting expense from issuance of stock options - 3,498,022 - Net loss (4,881,230) (4,881,230) ----------------- ------------- Balance, March 31, 2005 $ (13,595,180) $ 145,201 ================= =============
7 AVP, INC. Statements of Cash Flows Three Months Ended March 31, 2005 and 2004 (Unaudited)
Three Months Ended March 31, 2005 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(4,881,230) $ (967,423) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization of property and equipment 22,101 4,993 Other amortization 2,011 -- Amortization of deferred commissions 63,335 73,726 Consulting expense from issuance of stock options 3,498,022 -- Decrease (increase) in operating assets: Accounts receivables (453,706) (328,430) Investment in and due from joint venture -- 291,084 Prepaid expenses (527,476) (275,767) Other assets (4,500) (5,028) Increase (decrease) in operating liabilities: Accounts payable 164,381 (509,342) Accrued expenses 251,555 (317,196) Accrued officer compensation (43,208) 169,230 Accrued interest (56,127) 157,698 Deferred revenue 2,969,847 2,253,986 ----------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES 1,005,005 547,530 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property and equipment (137,384) (14,497) Investment in sales-type lease 24,244 21,967 ----------- ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES (113,140) 7,470 ----------- -----------
8 AVP, INC. Statements of Cash Flows Three Months Ended March 31, 2005 and 2004 (Unaudited) (CONTINUED)
Three Months Ended March 31, 2005 2004 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of capital stock 4,247,023 -- Debt repayments (950,000) -- ----------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES 3,297,023 -- ----------- ----------- NET INCREASE IN CASH 4,188,888 555,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 631,933 71,056 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,820,821 $ 626,056 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 48,939 -- ----------- ----------- Income taxes -- -- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING INFORMATION Net liabilities assumed in merger Cash $ 4,217 -- Accounts payable (261,857) -- Accrued Expenses (173,934) -- ----------- ----------- $ (431,574) -- ----------- ----------- Conversion of Association redeemable preferred stock into Series A convertible preferred stock $ 3,657,600 -- ----------- ----------- Conversion of notes payable into Series A convertible preferred stock $ 2,290,348 -- ----------- -----------
9 AVP, INC. Notes to Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements of AVP, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in AVP, Inc.'s latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year 2004, as reported in the Form 10-KSB as previously filed with the SEC, have been omitted. 2. MERGER On February 28, 2005, upon filing a certificate of merger with the Delaware Secretary of State, a wholly owned subsidiary of AVP, Inc. ("AVP") named Othnet Merger Sub, Inc., a Delaware corporation, and AVP Pro Beach Volleyball Tour, Inc., a Delaware corporation (the "Association"), consummated a merger pursuant to an Agreement and Plan of Merger dated as of June 29, 2004, as amended. As a result of the merger, the Association, which survived the merger, became AVP's wholly owned subsidiary, and AVP issued to Association stockholders Series A Convertible Preferred Stock, which will be converted automatically into AVP common stock upon authorization of a sufficient amount of common stock. In the second half of 2004, AVP issued $2,360,000 principal amount of 10% convertible notes and, as required by the merger agreement, lent $2,000,000 of the proceeds of the notes to the Association (the notes were issued in units that included common stock and common stock purchase warrants). It was a condition to the closing of the merger, among other things, that at least $2,000,000 principal amount of the notes (and accrued interest) be converted into Series A Convertible Preferred Stock. Another condition was the closing of a private placement of units of Series B Convertible Preferred Stock and common stock purchase warrants, gross proceeds of which was $5,000,000, concurrently with the merger closing. Each share of Series A preferred stock and Series B preferred stock is convertible into 243 shares of AVP common stock and carries the number of votes that equals the number of shares into which it is convertible, except that, until the authorization of additional shares of common stock, the Series B preferred stock will carry ten times the vote per share that it otherwise would carry. 10 AVP, INC. Notes to Financial Statements (Unaudited) 2. MERGER (Continued) Immediately prior to the merger, the Association had outstanding 4,443,944 shares of $0.0001 par value common stock ("Association common stock"). In accordance with the merger agreement, the outstanding shares of the Association's common stock was converted into 122,381 shares of Series A Convertible Preferred stock which is exchangeable for 29,738,605 shares of AVP's common stock. The Association also had outstanding options and warrants to purchase a total of 12,732,220 shares of Association common stock that, as a result of the merger agreement, now represent the right to purchase 85,832,927 shares of the AVP common stock. As part of the merger, the Association's preferred stockholder's converted $3,657,600 of Redeemable Preferred Stock into 95,358 shares of Series A Convertible Preferred stock which is exchangeable for 23,171,881 shares of AVP common stock. In addition, as part of the merger, holders of the 10% convertible notes converted them into 70,275 shares of Series A Convertible Preferred stock which in turn is exchangeable for 17,076,755 shares of AVP common stock. Concurrent with the merger, AVP raised through private placement $5,000,000 of private placement units representing 147,364 shares of Series B Convertible Preferred Stock which is exchangeable for 35,809,452 shares of AVP common stock. An Association note holder has indicated its intention to exercise its option to convert its $1,000,000 note payable into 46,472 shares of Series A Convertible Preferred Stock which is exchangeable for 11,292,614 shares of AVP common stock. The Series A and Convertible Preferred Stock, will convert automatically into common stock upon authorization of a sufficient amount of common stock. As such, for all disclosures referencing shares authorized and issued, shares reserved for issuance, per share amounts and other disclosures relating to equity, amounts have been presented reflecting share quantities as altered by the terms of the merger agreement. In conjunction with the merger, AVP is obligated to issue warrants to purchase 53,771,332 shares of common stock as consideration for services that facilitated the merger. As a result of the merger, AVP will have 139,604,049 shares of common stock outstanding and will have outstanding stock options and warrants to acquire AVP common stock aggregating 155,257,124 shares. 11 AVP, INC. Notes to Financial Statements (Unaudited) 2. MERGER (Continued) Upon consummation of the merger and the private offering, the Association's former stockholders held Series A Preferred Stock entitling them to cast 58.22% of votes entitled to be cast at an election of AVP directors; the Association's executive officers became AVP's executive officers, and Association designees hold five of six Board of Directors seats. Accordingly, the Association, which was the acquired entity, from the legal standpoint, is the acquirer from the accounting standpoint, and AVP is the accounting acquiree. Because AVP was a publicly traded shell corporation at the time of the merger, the transaction is being accounted for as a capital transaction, the equivalent of AVP's issuing stock for the Association's net assets, accompanied by a recapitalization of AVP. The accounting is identical to that resulting from a reverse acquisition, except that there are no adjustments to the historic carrying values of the assets and liabilities of the Association. AVP agreed to register for resale the shares of common stock underlying the Series B preferred stock. The agreement provides that if a registration statement does not become effective by June 28, 2005, AVP must pay a penalty to the Series B preferred stock stockholder of approximately $50,000 for each month that the penalty condition is not satisfied, until August 28, 2005, when the monthly penalty increases to $100,000. 3. STOCK OPTIONS AVP adopted SFAS No. 148 effective for the year ended December 31, 2002, and has elected to continue to account for its stock-based compensation in accordance with the provisions of APB No. 25, Accounting for Stock Issued to Employees. Under APB 25, compensation expense is recognized over the vesting period based on the excess of the fair market value over the exercise price on the grant date. 12 AVP, INC. Notes to Financial Statements (Unaudited) 3. STOCK OPTIONS (CONTINUED) If AVP had elected to recognize compensation expense based upon the fair value at the grant date for awards under its stock-based compensation plans consistent with the methodology prescribed by SFAS No. 123, AVP's net loss would increase to the following pro forma amounts:
Three Months Ended March 31, -------------------------- 2005 2004 ----------- ----------- Net loss applicable to common shareholders, as reported $(4,881,230) $ (967,423) Less stock based employee compensation expense determined under fair-value-based methods for all awards, net of related tax effects -- (33,322) ----------- ----------- Pro forma net loss $(4,881,230) $(1,000,745) =========== ===========
The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the three months ended March 31, 2005 and the year ended December 31, 2004:
2005 2004 ---------- ------------- Risk-free interest rate -- 3.86 - 4.19% Expected life -- 2 to 10 years Expected volatility -- 0% Expected dividend yield -- 0%
The following table contains information on the stock options for the period ended March 31, 2005 and the year ended December 31, 2004. The outstanding options expire from December 31, 2005 to September 1, 2013. 13 AVP, INC. Notes to Financial Statements (Unaudited) 3. STOCK OPTIONS (CONTINUED) Weighted Average Number of Exercise Shares Price ---------- ----------- Options outstanding at January 1, 2004 77,538,396 $ 0.02 Granted 12,294,531 0.19 Exercised -- -- Cancelled -- -- ---------- ----------- Options outstanding at December 31, 2004 89,832,927 $ 0.04 Granted -- -- Exercised -- -- Cancelled -- -- ---------- ----------- Options outstanding at March 31, 2005 89,832,927 $ 0.04 ========== =========== The weighted average fair value of options granted was $-0- in 2005 and $-0- in 2004. The following table summarizes information about AVP's stock-based compensation plan at March 31, 2005: Options outstanding and exercisable by price range as of March 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 ------------- ----------- -------------------- ------------------- ------------- -------------- $.00 - .03 60,960,929 6.0 $ 0.00 60,960,929 $ 0.00 $.03 - .09 16,577,467 9.3 $ 0.08 7,269,855 $ 0.08 $.09 - .16 8,294,531 3.0 $ 0.16 8,294,531 $ 0.16 $.17 - .25 4,000,000 4.0 $ 0.25 4,000,000 $ 0.25 ------------- ----------- -------------------- ------------------- ------------- -------------- $.00 - .25 89,832,927 5.3 $ 0.04 80,525,315 $ 0.04 ============= =========== ==================== =================== ============= ==============
In connection with stock options granted to employees to purchase common stock, AVP recorded no stock-based compensation expense the periods ended March 31, 2005 and March 31, 2004. Other Stock Options Non-qualified stock options granted to other individuals aggregating 20,531,504 shares and expire from June 2006 to June 2010. 14 AVP, INC. Notes to Financial Statements (Unaudited) 3. STOCK OPTIONS (CONTINUED) The following table contains information on all of AVP's non-plan stock options for the period ended March 31, 2005 and the year ended December 31, 2004. Weighted Average Number of Exercise Shares Price ---------- ---------- Options outstanding at January 1, 2004 3,133,450 $ 0.03 Granted 4,730,110 0.21 Exercised -- -- Cancelled -- -- ---------- ---------- Options outstanding at December 31, 2004 7,863,560 0.14 Granted 12,667,944 0.45 Exercised -- -- Cancelled -- -- ---------- ---------- Options outstanding at March 31, 2005 20,531,504 $ 0.33 ========== ========== The weighted average fair value of options granted was $.28 in 2005 and $.21 in 2004. The following table summarizes information about AVP's non-qualified stock options at March 31, 2005: Options outstanding and exercisable by price range as of March 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 ------------- ----------- -------------------- ------------------- ------------- -------------- $.03 - .15 3,033,450 5.0 $ 0.03 3,033,450 $ 0.03 $.16 - .34 4,964,746 1.6 $ 0.21 4,964,746 $ 0.21 $.35 - .50 12,533,308 5.0 $ 0.45 12,533,308 $ 0.45 ------------- ----------- -------------------- ------------------- ------------- -------------- $.03 - .50 20,531,504 4.2 $ 0.33 20,531,504 $ 0.33 ============= =========== ==================== =================== ============= ==============
In connection with stock options granted to non-employees to purchase common stock as a result of the private placement, AVP recorded consulting expense of $3,498,022 for the period ended March 31, 2005 and $ -0- for the period ended March 31, 2004. Such amounts represent, for each non-employee stock option, the valuation under SFAS 123 on the date of the grant. 15 AVP, INC. Notes to Financial Statements (Unaudited) 4. COMMITMENTS AND CONTINGENCIES Operating Lease AVP is obligated under a noncancellable operating lease for its office facilities. The lease expires March 31, 2010 subject to a five-year renewal option. The future minimum rental payments, excluding cost escalations, as of March 31, 2005 are as follows: Years Ending December 31, 2005 $ 242,000 2006 329,000 2007 338,000 2008 347,000 2009 356,000 Thereafter 91,000 ---------- Total $1,703,000 ========== Officer Indemnification Under the organizational documents, AVP's directors are indemnified against certain liabilities arising out of the performance of their duties to AVP. AVP also has an insurance policy for its directors and officers to insure them against liabilities arising from the performance of their duties required by their positions with AVP. AVP's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against AVP that have not yet occurred. However, based on experience, AVP expects the risk of loss to be remote. Employment Agreements AVP has entered into "at will" employment agreements with three officers. In addition to base salary, the employment agreements provide for annual performance bonuses and profit sharing bonuses. The performance bonuses range from 30% to 50% of the respective officer's base salary. The performance bonuses awarded, if any, will be based upon achieving certain milestones and targets as determined by the Board of Directors' Compensation Committee. The employment agreements also provide that AVP will set aside 10% of the net profits (as defined by EBITDA or such other specification as determined by the Compensation Committee) to establish a Profit Sharing Bonus Pool. The Compensation Committee and the AVP's President will determine the allocation of the Profit Sharing Bonus Pool among officers eligible to participate in the Profit Sharing Bonus Pool. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Background AVP, Inc. was originally incorporated under the name Malone Road Investments, Ltd., on August 6, 1990 in the Isle of Man. The corporation was redomesticated in the Turks and Caicos Islands in 1992, and subsequently domesticated as a Delaware corporation in 1994. Pursuant to Delaware law, the corporation is deemed to have been incorporated in Delaware as of the date of its formation in the Isle of Man. The company changed its name to PL Brands, Inc. in 1994; changed its name to Othnet, Inc., in March 2001; and changed its name to the current one on March 9, 2005. AVP had no business operations other than to attempt to locate and consummate a business combination with an operating company since December 2001. AVP Acquisition On February 28, 2005, a wholly owned subsidiary of AVP and AVP Pro Beach Volleyball Tour, Inc., f/k/a Association of Volleyball Professionals, Inc., a Delaware corporation (the "Association"), consummated a merger pursuant to an Agreement and Plan of Merger dated as of June 29, 2004, as amended. The name of the subsidiary before it merged with the Association was Othnet Merger Sub, Inc. As a result of the merger, the Association became AVP's wholly owned subsidiary, and AVP issued to Association stockholders AVP Series A Convertible Preferred Stock, which will be converted automatically into AVP common stock upon authorization of a sufficient amount of common stock. AVP's Business AVP owns and operates professional beach volleyball events in the United States through its wholly owned subsidiary, the Association. AVP's revenue comes from national, regional, and local sponsorships; ticket sales (admissions), Beach Club (corporate hospitality) sales, food and beverage sales, and merchandise sales; trademark licensing; and other ancillary sources. AVP produced 12 men's and 12 women's professional beach volleyball tournaments throughout the United States in 2004. AVP has more than 125 of the top professional players under exclusive contracts, as well as a sizable and growing base of spectators and television viewers that represents an attractive audience for national, regional, and local sponsors. AVP has scheduled 14 events for April through October 2005, to be held in Fort Lauderdale, FL; Tempe, AZ; Austin, TX; Santa Barbara, CA; San Diego, CA; Belmar, NJ; Hermosa Beach, CA; Huntington Beach, CA; Manhattan Beach, CA; Chicago, IL; Las Vegas, NV; Oahu, HA; Cincinnati, OH; and Boulder, CO. The tournaments are returning to each city in which events were held in 2004; the Cincinnati and Boulder events are new for 2005. AVP's beach volleyball tournament season customarily commences in early April and continues until late September or early October. Results of Operations
Results of Operations Operating Income (Loss) and Net Income (Loss) % Revenue Three Months Ended March 31, Three Months Ended March 31, 2005 2004 2005 2004 --------------- -------------- --------------- -------------- Operating Income (Loss) $ (4,826,028) $ (953,940) (4,642)% (1,810)% Net Income (Loss) $ (4,881,231) $ (967,423) (4,695)% (1,836)%
The 406% increase in quarterly operating loss primarily reflects a $3,498,022 charge to consulting expense as a result of non-employee warrant valuation under SFAS 123. In addition, there are merger-related legal costs, SEC reporting requirements costs, and consulting fees payable in connection with the merger and miscellaneous other expenses as well as budgeted 2005 salary increases which contributed to the increase in quarterly operating loss for March 31, 2005. Revenue The following chart reflects comparative revenues with respect to AVP's significant revenue drivers. The majority of AVP's revenues are derived from sponsorship and advertising contracts with national and local sponsors. AVP recognizes sponsorship revenue pro rata over each event during the tour season as the events occur and collection is reasonably assured. AVP's beach volleyball tournament season customarily commences in early April and continues until late September or early October. AVP did not produce any beach volleyball events in the first quarter of 2005 or 2004. Accordingly, AVP did not recognize any sponsorship revenue or activation fees in the quarters ending March 31, 2005 and 2004. - -------------------------------------------------------------- Summary Revenue - -------------------------------------------------------------- Three Months Ended March 31, Percentage 2005 2004 Increase -------------- -------------- -------------- Sponsorship $ - $ - - Activation Fees - - - Local Revenue - - - Miscellaneous Revenue 103,956 52,698 97 % -------------- -------------- -------------- $ 103,956 $ 52,698 97 % ============== ============== ============== The increase in revenue primarily reflects an increase in trademark licensing revenue relating to AVP's volleyball license agreement with Wilson Sporting Goods. AVP and Wilson entered into a new license agreement effective January 1, 2005 which provided for an increase in the royalty and minimum guarantee payable to AVP in connection with volleyball sales. Operating Expenses
- ------------------------------------------------ ---------------------------- Summary Costs % Revenue (Increase) - ------------------------------------------------ ---------------------------- Decrease as Three Months Ended March 31, Three Months Ended March 31, % of Revenue 2005 2004 2005 2004 2005 vs. 2004 --------------- -------------- -------------- ------------- --------------- Event Costs $ - $ - 0% 0% - Administrative 4,518,384 677,653 4346% 1286% (3,061)% Marketing 411,600 328,985 396% 624% 228 % Interest Expense 70,559 38,000 68% 72% 4 % --------------- -------------- -------------- ------------- --------------- Total Costs $ 5,000,543 $ 1,044,638 4810% 1982% (2,828)% =============== ============== ============== ============= ===============
Event costs include the direct costs of producing an event and costs related to television airing of broadcasted events. Event costs are recognized on an event-by-event basis and event costs billed and/or paid prior to their respective events are recorded as deferred costs and expensed at the time the event occurs. Since no event took place in the quarters ended March 31, 2005 and 2004, no event costs were recognized. The increase in administrative costs of $3,840,731 (or 567%) primarily reflects a $3,498,022 charge to consulting expense as a result of non-employee warrant valuation under SFAS 123 for warrants granted on February 28, 2005 as a result of the merger. In addition, the increase in administrative costs include merger-related legal costs, SEC reporting requirements costs, consulting fees payable in connection with the merger aggregating $130,000 and budgeted 2005 salary increases. 17 The increase in marketing costs of $82,615 (or 25%) primarily reflects an outside third party public relations agency engaged by AVP in January 2005. The increase in interest expense of $32,559 (or 86%) is due to the interest incurred in connection with the $2,000,000 loan that AVP made to the Association in 2004.
- -------------------------------------------------- Depreciation and Amortization Expense - -------------------------------------------------- Percentage Three Months Ended March 31, Increase 2005 2004 (Decrease) --------------- --------------- --------------- Depreciation Expense $ 21,050 $ 4,993 322 % Amortization Expense 66,396 73,726 (10)% --------------- --------------- --------------- $ 87,447 $ 78,719 11 % =============== =============== ===============
The increase in depreciation expense of $16,057 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). Liquidity and Capital Resources Cash flows from operating activities for the three months ended March 31, 2005 and 2004 were $(1,383,208) and $(933,422), respectively. Working capital, consisting of current assets less current liabilities, was $87,243 at March 31, 2005 and $(1,624,706) at March 31, 2004. Cash flows provided from financing activities for the three months ended March 31, 2005 and 2004 were $4,247,023 and $0, respectively. As a result of the consummation of the $5,000,000 private placement Series B Convertible Preferred Stock on February 28, 2005, AVP realized net proceeds of $4,247,023. Cash flows used in financing activities for the three months ended March 31, 2005 and 2004 were $950,000 and $0, respectively. During the three months ended March 31, 2005, AVP repaid $950,000 on a note payable owed to Management Plus Enterprises, Inc., a related party, in connection with sponsorship sales services. Capital expenditures for the three months ended March 31, 2005 and 2004 were $137,384 and $14,497, respectively. During the three months ended March 31, 2005, AVP purchased banners and flags and a trailer in preparation for the 2005 tour season, as well as, computer equipment. In June 2004, the Association borrowed $2,000,000 from AVP, at an interest rate of 10% per annum. As part of the merger, this liability was converted to equity. In addition, NBC and Fox had the right to put their Series A preferred stock investment back to the Association at the end of the 2005 and 2006 seasons for the amount of their respective investments. Prior to the merger, both NBC and Fox agreed to waive their put rights and converted the Association preferred stock holdings aggregating $3,657,600 into AVP Series A Preferred Stock. 18 Revenue and Expense Recognition The majority of AVP's revenues are derived from sponsorship and advertising contracts with national and local sponsors. AVP recognizes sponsorship revenue pro rata over each event during the tour season as the events occur and collection is reasonably assured. Revenues invoiced and/or collected prior to their respective events are recorded as deferred revenue. Event costs are recognized on an event-by-event basis. Event costs billed and/or paid prior to their respective events are recorded as deferred costs and expensed at the time the event occurs. Income Taxes AVP provides deferred income taxes to reflect the impact of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Temporary differences result from differences between the amounts reported for financial statement purposes and corresponding amounts for tax purposes. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Off-Balance Sheet Arrangements As part of its ongoing business, AVP does not participate in transactions with unconsolidated entities such as special purpose entities or structured finance entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS None. ITEM 4. CONTROLS AND PROCEDURES AVP's management has evaluated, with the participation of its principal executive and financial officers, the effectiveness of AVP's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report. Based on this evaluation, these officers have concluded that, as of March 31, 2005, AVP's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by AVP in reports that it files or submits under the Exchange Act is accumulated and communicated to AVP's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 28, 2005, the merger between AVP's wholly owned subsidiary, Othnet Acquisition, Inc., and the Association was consummated, as a result of which the Association became AVP's wholly owned subsidiary, and the Association's former stockholders were issued AVP Series A Convertible Preferred Stock, which will convert automatically into common stock upon authorization of a sufficient amount of common stock. The 3rd through 7th paragraphs of Note 2 and the 4th paragraph through the end of Note 3 of the Notes to Financial Statements are incorporated by reference. Except as otherwise set forth below, the exchange of Association equity securities for AVP equity securities was exempt pursuant to Section 4(2) of the Securities Act. Sale of units of Series B Convertible Preferred Stock and Common Stock Purchase Warrants was exempt pursuant to Securities Act Rule 506. All investors were accredited. The placement agent received a 10% commission on closing of the $5,000,000 gross proceeds offering of the units. The exchange of Association employee stock options for employee stock options to purchase 1,631,235 shares of AVP Common Stock was exempt pursuant to Rule 701. The material incorporated by reference contains information relating to options to purchase 6,542,941 shares of Common Stock reserved for issuance to Tour players, which will be issued pursuant to a Securities Act registration statement. The material incorporated by reference also contains information relating to warrants to purchase 53,771,332 shares to be granted pursuant to the merger agreement; Section 4(2) of the Securities Act will be relied upon with respect to such grant. 20 ITEM 5. OTHER INFORMATION STOCKHOLDER PROPOSALS: To be included in AVP's proxy statement for the 2005 annual meeting, a stockholder proposal must be received by June 13, 2005, addressed to: AVP, Inc. 6100 Center Drive, Suite 900 Los Angeles, California 90045 ATTN: Secretary ITEM 6. EXHIBITS 31.1 - Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 - Certification of President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 SIGNATURE --------- Pursuant to the requirements of Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the __ day of May, 2005. AVP, INC. (Registrant) By: /s/ Andrew Reif ------------------- Andrew Reif Chief Operating Officer and Chief Financial Officer 21 EX-31.1 2 v018998_ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Leonard Armato, Chief Executive Officer of AVP, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the quarter ended March 31, 2005 of AVP, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report. 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. By: /s/ Leonard Armato --------------------------------- Leonard Armato Chief Executive Officer May 23, 2005 EX-31.2 3 v018998_ex31-2.txt EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Andrew Reif, Chief Financial Officer of AVP, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the quarter ended March 31, 2005 of AVP, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report. 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. By: /s/ Andrew Reif ----------------------------- Andrew Reif Chief Financial Officer May 23, 2005 EX-32 4 v018998_ex32.txt EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Leonard Armato, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-QSB of AVP, Inc. for the quarter ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of AVP, Inc. I, Andrew Reif, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-QSB of AVP, Inc. for the quarter ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of AVP, Inc. By:/s/ Leonard Armato ------------------------------------ Leonard Armato Chief Executive Officer By:/s/ Andrew Reif ------------------------------------ Andrew Reif Chief Financial Officer May 23, 2005 -----END PRIVACY-ENHANCED MESSAGE-----