-----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, CQt7yrVcVf2nTNv4dfurMDVGf6OhN2aGPLNsdLM7qncJp/R4IJS6gPFPXNE4L6BM fK2QXtsUpkCH2rxH7wdMhA== 0001144204-06-034249.txt : 20060816 0001144204-06-034249.hdr.sgml : 20060816 20060816165105 ACCESSION NUMBER: 0001144204-06-034249 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060816 DATE AS OF CHANGE: 20060816 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26454 FILM NUMBER: 061038679 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/A 1 v050583.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number 005-79737 AVP, INC. --------- (Exact name of registrant as specified in its charter) Delaware 98-0142664 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 Center Drive, Suite 900, Los Angeles, CA 90045 --------------------------------------------------- (Address of principal executive offices - Zip code) (310) 426 - 8000 ---------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes |_| No |X| As of July 15, 2006, the Registrant had 19,654,908 shares of common stock outstanding. Traditional Small Business Disclosure Format (check one): Yes |X| No |_| PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Background We originally incorporated under the name Malone Road Investments, Ltd., on August 6, 1990, in the Isle of Man. We re-domesticated in the Turks and Caicos Islands in 1992 and subsequently domesticated as a Delaware corporation in 1994. Pursuant to Delaware law, we are deemed to have been incorporated in Delaware as of the date of our formation in the Isle of Man. We changed our name to PL Brands, Inc. in 1994; changed our name to Othnet, Inc. in March 2001; and changed our name to AVP, Inc. on March 9, 2005. Since December 2001 until the Merger (as defined below), we had no business operations other than to attempt to locate and consummate a business combination with an operating company. AVP's 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. 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 have scheduled 16 men's and 16 women's events to be held in Fort Lauderdale, FL; Tempe, AZ; Santa Barbara, CA; Huntington Beach, CA; Hermosa Beach, CA; Sacramento, CA; Seaside Heights, NJ; Atlanta, GA; Birmingham, AL; Chicago, IL; Manhattan Beach, CA; Brooklyn (Coney Island), NY; Boulder, CO; Cincinnati, OH; Las Vegas, NV; and Lake Tahoe, NV. Ten of the 16 cities are the same as last year. 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 for the three months ended June 30, 2006 and 2005
Operating Income (Loss) and Net Income (Loss) % Revenue - ---------------------------------------------------------------------------- ----------------------------------- Three Months Ended June 30, Three Months Ended 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. 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. Summary Revenue Percentage Three Months Ended June 30, Increase 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 is being allocated to the six events taking 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 being allocated for the five events taking 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. 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 luxury 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 Gross Profit - -------------------------------------------------------------------------- Three Months Ended June 30, 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 taken 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. Operating Expenses
Summary Costs % Revenue - ------------------------------------------------------- -------------------------------- Increase (Decrease) as Three Months Ended June 30, Three Months Ended June 30, % of Revenue 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.
Depreciation and Amortization Expense - ----------------------------------------------------------------------------------- Percentage Three Months Ended June 30, Increase 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.
Other Income (Expense) - ----------------------------------------------------------------------------------- Percentage Three Months Ended June 30, Increase 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. Results of Operations for the Six months Ended June 30, 2006 and 2005 Operating Income (Loss) and Net Income (Loss)
- ---------------------------------------------------------------------------- ----------------------------------- Operating Income (Loss) and Net Income (Loss) % of Revenue - ---------------------------------------------------------------------------- ----------------------------------- Six Months Ended June 30, Six Months Ended June 30, 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 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 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
- --------------------------------------------------------------------- Summary Revenue - --------------------------------------------------------------------- Increase Six Months Ended June 30, Increase 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% =============== ===============
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 luxury 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 Gross Profit - ----------------------------------------------------------------------------- Six Months Ended June 30, 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. 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 - --------------------------------------------------------------- -------------------------------- Summary Costs % of Revenue - --------------------------------------------------------------- -------------------------------- Increase (Decrease) in Six Months Ended June 30, Six Months Ended June 30, % of Revenue 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. 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 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.
Depreciation and Amortization Expense - ----------------------------------------------------------------------------------- Percentage Six Months Ended June 30, Increase 2006 2005 (Decrease) ------------------ ------------------ ------------------ Depreciation Expense $ 76,144 $ 63,080 21% Amortization Expense 4,022 130,692 (97%) ------------------ ------------------ $ 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. Other Income (Expenses)
- ----------------------------------------------------------------------------------- Percentage Six Months Ended June 30, Increase 2006 2005 (Decrease) ---------------- ------------------ ------------------ Interest Expense $ (11,931) $ (98,571) (88%) Interest Income 54,946 53,009 4% Derivative financial instrument gain 111,042 -- --% ---------------- ------------------ $ 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. 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 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. 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. 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. PART II. OTHER INFORMATION 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 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 16 day of August 2006. AVP, INC. (Registrant) By: /s/ Andrew Reif ------------------- Andrew Reif Chief Operating Officer and Chief Financial Officer EX-31.1 2 v050583_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 Amendment No. 1 to quarterly report on Form 10-QSB for the quarter ended June 30, 2006 of AVP, Inc. 2. Based on my knowledge, this amended 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 amended 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; 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. Dated: August 16, 2006 By: /s/ Leonard Armato --------------------------------- Leonard Armato Chief Executive Officer EX-31.2 3 v050583_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 Amendment No. 1 to quarterly report on Form 10-QSB for the quarter ended June 30, 2006 of AVP, Inc. 2. Based on my knowledge, this amended 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 amended 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; 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. Dated: August 16, 2006 By: /s/ Andrew Reif ----------------------------- Andrew Reif Chief Financial Officer EX-32 4 v050583_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 Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of AVP, Inc. hereby certifies, to such officers' knowledge, that this Amendment No. 1 to the Quarterly Report on Form 10-QSB of AVP, Inc. for the quarter ended June 30, 2006 fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this amended Quarterly Report on Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of AVP, Inc. Dated: August 16, 2006 By:/s/ Leonard Armato ------------------------------------ Leonard Armato Chief Executive Officer By:/s/ Andrew Reif ------------------------------------ Andrew Reif Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----