NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF OPERATIONS
AVP,
Inc.
(AVP), domesticated in Delaware on August 6, 1990, is the sole stockholder
of
AVP Pro Beach Volleyball Tour, Inc. f/k/a Association of Volleyball
Professionals, Inc., a Delaware corporation (the “Association”), which is the
sole nationally recognized men’s and women’s U.S. professional beach volleyball
tour. AVP conducts professional beach volleyball activities in the United
States, including tournaments, sponsorships sales, broadcast rights, licensing
and trademark agreements, sales of food, beverage, and merchandise at
tournaments, player contracts and other associated activities.
2.
PROPOSED MERGER
On
April
5, 2007, AVP entered into an Agreement and Plan of Merger (the "Merger
Agreement") with AVP Holdings, Inc. and AVP Acquisition Corp., affiliates of
Shamrock Holdings, Inc. ("Shamrock"). Under the terms of the Merger Agreement,
AVP Acquisition Corp. was to be merged with and into AVP, with AVP continuing
as
the surviving corporation. Upon consummation of the merger, each outstanding
share of AVP common stock would have been cancelled and converted into the
right
to receive $1.23, and AVP would have become a wholly owned subsidiary of AVP
Holdings, Inc. The transaction was subject to certain customary terms and
conditions, including stockholder approval.
In
connection with the Merger Agreement, the special committee (“Committee”) of the
board of directors of AVP, entered into an agreement with Jefferies &
Company, Inc. (“Jefferies”) under which Jefferies provided the Committee with
financial advice and assistance in connection with the Committee’s review of the
merger with Shamrock (the “Transaction”). In addition, Jefferies provided an
opinion as to the fairness of the consideration to be paid to AVP stockholders
in the transaction. For its services, Jefferies received a non-refundable fee
of
$250,000 on April 5, 2007 upon delivery of its opinion. In addition to those
fees, AVP reimbursed Jefferies for all out-of-pocket expenses incurred by
Jefferies in connection with the engagement.
On
September 5, 2007, AVP and Shamrock mutually agreed to terminate the Merger
Agreement. Upon termination, AVP reimbursed Shamrock the sum of two hundred
forty thousand dollars ($240,000) for certain expenses related to the
transaction incurred by Shamrock. In addition, upon the earlier of September
5,
2008 or the date upon which AVP consummates a transaction or series of related
transactions pursuant to which AVP raises at least $5,000,000, AVP will pay
Shamrock $150,000.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of AVP and its
significant subsidiary in which a controlling interest is held. All intercompany
transactions have been eliminated.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation. In 2007, the Company reclassified $0.4 million of 2006 salary
expense previously reflected in Sales and Marketing in the consolidated
statement of operations. These fees are now reflected in Administrative. These
reclassifications had no overall impact on the Company’s previously reported net
income.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in these financial statements include
accrued expenses, allowances for doubtful accounts, useful lives for
depreciation and amortization, loss contingencies, income taxes and tax
valuation reserves. Actual results could differ materially from these
estimates.
Revenue
and Expense Recognition
The
majority of AVP’s revenues are derived from sponsorship and advertising
contracts with national and local sponsors. AVP recognizes national
sponsorship/advertising revenue and activation fees 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 is 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
derives additional revenue from local sponsorships/advertising, promoter fees,
event ticket sales, concession rights, event merchandising, and licensing.
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.
Fair
Value of Financial Instruments
AVP
considers the recorded carrying amounts of cash and cash equivalents,
receivables, accounts payable, accrued expenses and notes payable to approximate
their respective fair values because of the short maturities of these
instruments.
Cash
and Cash Equivalents
Cash
equivalent consists primarily of cash, money market account, and marketable
securities with an initial term of less than three months.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
Accounts
receivable consist primarily of amounts due from sponsors and licensees for
sponsorship fees and royalties, respectively. Such amounts are billed when
due
under the terms of the respective sponsorship agreements, or, in the case of
royalties, when earned. AVP performs ongoing credit evaluations of its customers
and extends credit without requiring collateral. AVP does not accrue finance
or
interest charges on outstanding receivable balances. Accounts receivable are
carried at outstanding principal less any allowance for doubtful accounts.
The
Company writes off uncollectible receivables against the allowance for doubtful
accounts when the likelihood of collection is remote. On a periodic basis,
the
Company evaluates its accounts receivable and determines the requirement for
an
allowance for doubtful accounts, based on the history of past write-offs,
collections, and current credit condition. The allowance for doubtful accounts
was $149,748 and $25,193 as of December 31, 2007 and 2006,
respectively.
Concentration
of Credit Risks and Significant Customers
Financial
instruments that potentially subject AVP to a concentration of credit risk
consist principally of accounts receivable and uninsured cash deposits. AVP
places its cash deposits with what management believes are high-credit quality
financial institutions. At times, balances with any one financial institution
may exceed the Federal Deposit Insurance Corporation (FDIC) limit of $100,000.
Concentrations of credit risk with respect to accounts receivable are present
due to the small number of customers comprising the Company’s customer base.
However, the credit risk is reduced through the Company’s efforts to monitor its
exposure for credit losses and by maintaining allowances, if necessary. Three
sponsors accounted for approximately 32% of the Company’s total revenue during
2007 and 35% of the Company’s total revenue during 2006. At December 31, 2007
and 2006, three sponsors accounted for approximately 82% and 72% of the
Company’s outstanding accounts receivable balance, respectively.
Depreciation
and Amortization
Depreciation
and amortization of property and equipment are provided for using the
straight-line method over the estimated useful lives of the assets as
follows:
|
Assets
|
|
Useful
Lives
|
|
|
Furniture
and equipment
|
|
|
3
years
|
|
|
Transportation
equipment
|
|
|
3
years
|
|
Leasehold
improvements are amortized over the term of the lease or estimated useful life,
whichever is shorter.
Long-Lived
Assets
In
accordance with SFAS No. 144, when facts and circumstances indicate that the
cost of long-lived assets may be impaired, an evaluation of the recoverability
is performed by comparing the carrying value of the assets to the estimated
undiscounted future cash flows. If the estimated undiscounted future cash flows
are less than the carrying value, a write-down would be recorded to reduce
the
related asset to its estimated fair value. In addition, the remaining estimated
useful life or amortization period for the impaired asset would be reassessed
and revised if necessary. During 2007 and 2006, AVP recognized an impairment
loss of $2,261 and $48,820 for property and equipment that was impaired and
no
longer used in operations since the event for which such property and equipment
were used did not renew for 2008 and 2007, respectively.
Accrued
Expenses
Accrued
expenses consisted of the following at December
31:
|
|
|
2007
|
|
2006
|
|
|
Other
accrued expenses
|
|
$
|
1,312,696
|
|
$
|
813,519
|
|
|
Sales
tax payable
|
|
|
186,528
|
|
|
186,528
|
|
|
Accrued
vacation
|
|
|
164,751
|
|
|
49,392
|
|
|
Accrued
expenses
|
|
$
|
1,663,975
|
|
$
|
1,049,439
|
|
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bartering
Transactions
AVP
barters advertising for products and services. Revenue and related expenses
from
barter transactions are recorded at fair value in accordance with EITF 99-17,
Accounting
for Advertising Barter Transactions
.
Revenue
from barter transactions is recognized in accordance with AVP’s revenue
recognition policies. During 2007, AVP recognized barter revenue of $0.3
million, which was offset by advertising cost. Expenses for barter
transactions are generally recognized as incurred.
Comprehensive
Income
Comprehensive
income consists of net income (loss) and other gains and losses affecting
stockholders’ equity that, under U.S. generally accepted accounting principles,
are excluded from net income (loss). Such items consist primarily of unrealized
gains and losses on marketable equity securities and foreign translation gains
and losses. AVP has not had any such items in the prior two years and,
consequently, net loss and comprehensive loss are the same.
Advertising
AVP
advertises primarily through radio and print media for each specific event.
Most
of AVP’s advertising is event specific. AVP’s policy is to expense advertising
costs, including production costs, as incurred. Advertising expense was
$1,007,200 in 2007, which includes $0.3 million of barter
transactions, and $568,539 in 2006.
Income
Taxes
AVP
accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effect
on
deferred tax assets and liabilities of a change in tax rates is recognized
in
income in the period that includes the enactment date. A valuation allowance
is
recorded to reduce deferred taxes to the amount that is more likely than not
to
be realized.
Stock
Based Compensation
On
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123 (Revised 2004). Prior to January 1, 2006, the Company had
accounted for stock-based payments under the recognition and measurement
provisions of Accounting Principles Board (“APB”) Opinion 25 and related
interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based
Compensation.” In accordance with APB 25, no compensation expense was required
to be recognized for options granted that had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Under
the
modified prospective method of SFAS No. 123(R), compensation expense was
recognized during the year ended December 31, 2006 and includes compensation
expense for all stock-based payments granted prior to, but not yet vested as
of
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock
Based Compensation (Continued)
Under
the
fair value recognition provisions of SFAS No. 123R, stock-based compensation
cost is estimated at the grant date based on the fair value of the award. The
fair value of stock options granted is estimated using the Black-Scholes-Merton
option pricing model. The fair value is amortized on a straight-line basis
over
the requisite service period of the awards, which is generally the vesting
period.
In
November 2007, the Board of Directors authorized the issuance of stock options
to key employees subject to a market condition in which a specified number
of
options vests on the date that the closing price of the Company’s
common
stock reaches $2.00, $3.00, and $4.00 per share for at least forty five
consecutive trading days.
The
fair
value of stock options awarded with a market condition was estimated at the
date
of grant using a Monte Carlo simulation and the derived service period range
from 1.81 to 3.29 years.
The
table
below sets forth the pricing assumptions used in determining the fair value
for
the common stock options using the Black Scholes model and the fair value of
the
award subject to the market condition using the Monte Carlo model:
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Regular
|
|
|
Market
Award
|
|
|
Regular
|
|
|
Risk-free
interest rate
|
|
|
3.07
- 4.95
|
%
|
|
4.29
|
%
|
|
4.66
- 5.30
|
%
|
|
Expected
life
|
|
|
3
to 5.8 years
|
|
|
1.8
to 3.3 years
|
|
|
4
to 10 years
|
|
|
Expected
volatility
|
|
|
75
- 84
|
%
|
|
79.38
|
%
|
|
83%
- 95
|
%
|
|
Expected
forfeiture rate
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Determining
the appropriate fair value of stock-based awards at the grant date requires
judgment, including estimating stock price volatility, forfeiture rates and
expected term. Forfeitures are estimated at the date of grant based on
historical rates and reduce the compensation expense recognized. The expected
term of options granted from historical data on employee exercises is not yet
determinable. The Company does not have sufficient historical exercise data
to
provide a reasonable basis upon which to estimate expected term due to the
limited period of time its equity shares have been publicly traded. When more
relevant detailed information becomes available, the Company intends to make
more refined estimates of expected term. In accordance with SAB 107, the company
used the simplified method in developing an estimate of expected term for the
"plain vanilla" share options granted on November 7, 2007. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the date
of
grant. Expected volatility is based on the historical volatility of the
Company’s stock. As of December 31, 2007, the Company had approximately
$2,341,315 of unrecognized compensation expense expected to be recognized over
a
weighted average period of approximately 2.68 years.
Due
to
the inherent uncertainty in valuing awards for publicly-traded stock as of
the
grant date, given that such awards will be exercised, purchased, or sold at
indeterminate future dates, the actual value realized by the recipients, if
any,
may vary significantly from the value of the awards estimated at the grant
date.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Standards
In
July
2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes”
(FIN 48), 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.
Effective January 1, 2007, the Company adopted FIN 48 with no significant impact
on the Company’s financial position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value
and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The adoption of this accounting
pronouncement did not have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Standards (Continued)
On
September 29, 2006, the FASB issued SFAS No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An Amendment of SFAS
No. 87, 88, 106, and 132R” (SFAS 158). This new standard requires an employer
to: (a) recognize in its statement of financial position an asset for a plan’s
overfunded status or a liability for a plan’s underfunded status; (b) measure a
plan’s assets and its obligations that determine its funded status as of the end
of the employer’s fiscal year (with limited exceptions); and (c) recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported in comprehensive
income of a business entity and in changes in net assets of a not-for-profit
organization. SFAS 158 applies to plan sponsors that are public and private
companies and nongovernmental not-for-profit organizations. The requirement
to
recognize the funded status of a benefit plan and the disclosure requirements
are effective for the fiscal year ended after December 15, 2006, for entities
with publicly traded equity securities, and at the end of the fiscal year ended
after June 15, 2007, for all other entities. The requirement to measure plan
assets and benefit obligations as of the date of the employer’s fiscal year-end
statement of financial position is effective for fiscal years ending after
December 15, 2008.
The
adoption of this accounting pronouncement is not expected to have a material
effect on the Company’s consolidated financial position, results of operations
or cash flows.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value that are not currently required to be measured at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company currently does not believe SFAS 159 will have a material
impact on its consolidated financial position, results of operations or cash
flows, as the Company has elected not to apply the fair value
option for any of its eligible financial instruments and other
items.
In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations-Revised” (“SFAS 141R”). This new standard replaces SFAS 141
“Business Combinations”. SFAS 141R requires that the acquisition method of
accounting, instead of the purchase method, be applied to all business
combinations and that an “acquirer” be identified in the process. The statement
requires that fair market value be used to recognize assets and assumed
liabilities instead of the cost allocation method where the costs of an
acquisition are allocated to individual assets based on their estimated fair
values. Goodwill would be calculated as the excess purchase price over the
fair
value of the assets acquired; however, negative goodwill will be recognized
immediately as a gain instead of being allocated to individual assets acquired.
Costs of the acquisition will be recognized separately from the business
combination. The end result is that the statement improves the comparability,
relevance and completeness of assets acquired and liabilities assumed in a
business combination. SFAS 141R is effective for business combinations which
occur in fiscal years beginning on or after December 15, 2008. The adoption
of SFAS 141R will impact the accounting for business combinations completed,
if
any, by the Company on or after January 1, 2009.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Standards (Continued)
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. This new
standard requires that ownership interests held by parties other than the parent
be presented separately within equity in the statement of financial position;
the amount of consolidated net income be clearly identified and presented on
the
statements of income; all transactions resulting in a change of ownership
interest whereby the parent retains control to be accounted for as equity
transactions; and when controlling interest is not retained by the parent,
any
retained equity investment will be valued at fair market value with a gain
or
loss being recognized on the transaction. SFAS 160 is effective for business
combinations which occur in fiscal years beginning on or after December 15,
2008. The Company does not expect this statement to have an impact on its
results of operations or financial condition.
In
December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used in
Valuation Methods - Expected Term” (“SAB 110”). According to SAB 110, under
certain circumstances the SEC staff will continue to accept beyond December
31,
2007 the use of the simplified method in developing an estimate of expected
term
of share options that possess certain characteristics in accordance with
SFAS
123(R) beyond December 31, 2007. We adopted SAB 110 effective January 1,
2008 and will continue to use the simplified method in developing the expected
term used for our valuation of stock-based compensation.
Net
Loss per Basic and Diluted Share of Common Stock
Basic
earnings (loss) per common share is computed by dividing income available to
common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed
by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include
the
number of additional shares of common stock that would have been outstanding
if
the dilutive potential shares of common stock had been issued. The dilutive
effect of outstanding options and warrants is reflected in diluted earnings
per
share by application of the “treasury stock” method. The dilutive effect of
outstanding convertible preferred stock is reflected in diluted earnings per
share by application of the “if-converted” method. Under the treasury stock
method, an increase in the fair market value of the Company’s common stock can
result in a greater dilutive effect from outstanding options and
warrants.
The
following options, warrants and other incremental shares to purchase shares
of
common stock were excluded from the computation of diluted earnings (loss)
per
share for the periods presented as their effect would be
antidilutive.
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Options
and Warrants
|
|
|
21,746,128
|
|
|
18,295,026
|
|
|
Series
B Preferred Stock
|
|
|
1,314,126
|
|
|
1,938,303
|
|
|
Total
|
|
|
23,060,254
|
|
|
20,233,329
|
|
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
RESCISSION OFFER
Options
granted in 2004 to AVP players under AVP’s 2002 Stock Option Plan were not
exempt from registration or qualification under federal and state securities
laws, and AVP did not obtain the required registrations or qualifications.
As a
result, AVP commenced a rescission offer to the holders of these options on
August 9, 2006. On September 8, 2006, the rescission offer expired. Several
players accepted the offer totaling approximately $20,000, including interest
expense.
5.
PROPERTY AND EQUIPMENT
Property
and equipment consists of:
|
|
|
|
December
31,
|
|
|
Cost
|
|
|
2007
|
|
|
2006
|
|
|
Furniture
and equipment
|
|
$
|
709,461
|
|
$
|
517,643
|
|
|
Transportation
equipment
|
|
|
165,226
|
|
|
97,867
|
|
|
Leasehold
improvements
|
|
|
23,704
|
|
|
23,704
|
|
|
Total
cost
|
|
|
898,391
|
|
|
639,214
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and
amortization
|
|
|
(505,944
|
)
|
|
(299,160
|
)
|
|
Net
property and equipment
|
|
$
|
392,447
|
|
$
|
340,054
|
|
Depreciation
and amortization expense charged to operations was $231,969 in 2007 and $178,219
in 2006.
6.
INVESTMENT IN SALES-TYPE LEASE
In
2001,
AVP leased furniture and equipment associated with a former office facility
to a
third party in a lease classified as a sales-type lease. The unearned lease
income was amortized to income over the lease term, using the effective interest
method. The sales-type lease was terminated on December 31, 2006, and the leased
assets were returned to AVP. Pursuant to SFAS No. 13 “Accounting for Leases”,
the termination of the lease was accounted by removing the investment and
recording the asset at the lower of its original cost, present fair value,
or
carrying amount. Upon termination of the lease, AVP recorded the assets at
its
carrying amount of $141,551. In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” which states long-lived assets
classified as held for sale should be recorded at the lower of its carrying
amount or fair value less cost to sell and to cease depreciation (amortization),
no depreciation on the assets was recorded. AVP sold the assets in the first
quarter of 2007 for $150,000.
7.
RELATED PARTY TRANSACTIONS
In
April
2003, AVP issued a $1,366,737 promissory note to Management Plus Enterprises,
Inc. ("MPE") with whom Leonard Armato, the Chief Executive Officer and
Chairman of the Board of Directors of the Company was affiliated. This note
constituted the purchase price delivered by AVP to MPE for the interests in
MPE
Sales, LLC. The debenture was payable in installments through January 2006
plus
interest at a rate of 3.75% per annum. During 2006, $416,737 in principal was
repaid under this obligation.
In
February 2005, AVP entered into a consulting agreement with Montecito Capital
Partners, LLC (“Montecito”), a firm controlled by one of AVP’s former
non-management directors. Under the terms of the agreement, Montecito provided
various management consulting services to AVP, including, but not limited to
strategic planning and marketing. The agreement obligated AVP to pay $20,000
per
month to services through February 2006. AVP recognized consulting expense
of $0
in 2007 and $40,000 in 2006.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
RELATED PARTY TRANSACTIONS (CONTINUED)
In
February 2006, AVP entered into a production and distribution agreement with
Fox
Broadcasting Company (“FBC”), an owner of more than 10% of our outstanding
common stock in February of 2006, in connection with two events. Under the
agreement, FBC had 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.
In
November 2007, AVP entered in a consulting agreement with Brooklyn Sports and
Entertainment (“BSE”), an organization managed by one of AVP’s non-management
directors. Under the terms of the agreement, BSE will pursue sales of
sponsorship opportunities with the respect to the naming rights of AVP’s
portable stadium and the sale of tour-level sponsorship for the period of
November 1, 2007 through April 30, 2008. In consideration for the services,
AVP
will pay
BSE
a
non-refundable retainer fee in the amount of $40,000. AVP recognized consulting
expense of $13,333 in 2007.
8.
CAPITAL TRANSACTIONS
In
February 2006, AVP entered a production and distribution agreement with Fox
Broadcasting Company (“FBC”) in connection with two events. Under the agreement,
FBC had 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 $1.0 million, FBC received 666,667 shares of common stock,
par value $0.001 per share, of AVP.
On
March
24, 2006, AVP entered an agreement with Wall Street Communications Group, Inc.
("Sales Agent") pursuant to which Sales Agent performed sales services for
AVP
in connection with a sponsorship/advertising agreement with Crocs, Inc.
(“Crocs”) which currently serves as title sponsor for the AVP Tour. For its
services, the Sales Agent received 250,000 shares of AVP common stock valued
at
$200,000 and a warrant to purchase up to 200,000 shares of AVP common stock.
The
exercise price of the warrant is $.80. On December 31, 2007, the warrants had
a
value of $87,053, 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 2.3 years, estimated volatility of 75.21% and a risk
free interest rate of 3.07%. For the years ended December 31, 2007 and 2006,
we
expensed $21,654 and $65,399, respectively. The expiration date of the
warrant is April 12, 2010 (the fourth anniversary of the signing of the Crocs
Sponsorship/Advertising Agreement).
On
April
12, 2006, AVP entered a multi-year sponsorship/advertising agreement
("Agreement") with Crocs pursuant to which Crocs became the title sponsor of
the
AVP Tour through the final event of the 2008 AVP Tour season. In the Agreement,
AVP agreed to issue warrants to purchase up to 1,000,000 shares of common stock
of AVP. The vesting period is as follows: (i) 200,000 shares on April 12, 2006
and (ii) 200,000 shares on each January 15th for the years 2007 through 2010;
however no shares shall be granted in 2008, 2009 or 2010 if Crocs reduces its
sponsorship in 2008, or in either 2009 or 2010 if the Agreement is not extended
beyond 2008 or in such earlier years if the Agreement is terminated by either
party for breach prior to the final event of the 2008 AVP Tour season. The
exercise price of the warrants is $.80. The warrants were recorded with a value
of $252,842, which was determined using the Black-Scholes valuation method.
The
assumptions utilized in computing the fair value of the warrants were as
follows: expected life of 6 years, estimated volatility of 95% and a risk free
interest rate of 4.92%. The fair value of the warrants was recorded through
the
Consolidated Statement of Operations as contra-revenue. For the year ended
December 31, 2006, AVP recognized $252,842 related to these warrants. The
expiration date of the warrant is April 12, 2012 (sixth anniversary of the
execution of the Agreement).
In
April
2006, the Board of Directors of AVP agreed to extend the warrants included
in
the 10% convertible notes issued in the second half of 2004, which were
scheduled to expire in June 2006, for an additional 18-month period through
December 2007. The warrants were recorded with a value of $99,379, which was
determined using the Black-Scholes valuation method. The assumptions utilized
in
computing the fair value of the warrants were as follows: expected life of
1.7
years, estimated volatility of 90% and a risk free interest rate of 3.52%.
For
the year ended December 31, 2006, the Company expensed
$99,379.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
CAPITAL TRANSACTIONS (CONTINUED)
Pursuant
to a Securities Purchase Agreement dated May 4, 2006, AVP sold 2,941,180 shares
of common stock and five-year warrants to purchase 588,236 shares of common
stock at an exercise price of $1.00 per share for a total price of $2,500,003.
Oppenheimer & Co., Inc. acted as the placement agent and in addition to its
commission, received a warrant to purchase 282,353 shares of common stock on
substantially the same terms as the warrants sold to investors. Warrants issued
to the placement agent were capitalized as part of the offering
costs.
Pursuant
to a Securities Purchase Agreement dated June 9, 2006, AVP sold 3,529,410 shares
of common stock and five-year warrants to purchase 705,882 shares of common
stock at an exercise price of $1.00 per share, to an accredited investor, for
a
total price of $2,999,998.50. Oppenheimer & Co., Inc. acted as the placement
agent and in addition to its commission, received a warrant to purchase 338,824
shares of common stock on substantially the same terms as the warrants sold
to
the investor. Warrants issued to the placement agent were capitalized as part
of
the offering costs.
The
Securities Purchase Agreements in May and June of 2006 ("May and June 2006
Financing") required AVP to file a re-sale registration statement within 10
business days from closing of the June 9, 2006 Securities Purchase Agreement
and
gave the investors rights of first negotiation regarding future issuances of
common stock, subject to exceptions. The registration statement became effective
on June 30, 2006.
Under
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" (EITF 00-19), the fair value
of
the warrants issued at the close of the May and June 2006 Financing have been
reported as a liability due to the requirement to netcash settle the transaction
in the event that the shares underlying the warrant are not registered for
sale.
The warrant provides that the holder is entitled to liquidated damages, payable
in cash, of 1% of the gross proceeds per month ($55,000) should the Company
fail
to achieve effectiveness of the registration statement. The warrants were
recorded as a derivative financial instrument with a value of $875,513, and
they
were later reclassified as equity on the date the registration statement became
effective. On the effective date, the warrants had a value of approximately
$764,471, which was determined using the Black-Scholes valuation method. The
assumptions utilized in computing the fair value of the warrants were as
follows: expected life of 5 years, estimated volatility of 90% and a risk free
interest rate of 5.10%. The change in fair value of the warrants was recorded
through the Consolidated Statement of Operations as Other Income (Expense).
For
the year ended December 31, 2006, we recorded a gain of $111,042 associated
with
the fair value adjustment of the warrants.
As
a
result of the shares of common stock sold in May and June 2006, the conversion
rate of the outstanding Series B Convertible Preferred Stock increased from
24.3
to 27.87 in accordance with the anti-dilution provision from the private
placement of units of Series B Convertible Preferred Stock closed in February
2005 (“February 2005 Financing”). Each unit sold in the February 2005 Financing
consisted of 4 shares of AVP's Series B Preferred Stock (each Preferred Stock
was originally convertible into 24.3 shares of common stock), and a five-year
warrant to purchase up to 24.3 shares of the AVP's common stock. In accordance
with the February 2005 Financing anti-dilution provisions, the number of shares
of common stock for which the warrants were exercisable was adjusted. The
warrant agreement entitles Series B Preferred Stock holders to purchase 131,521
additional shares of common stock—for accounting purposes, the additional
warrants were treated as a dividend. All outstanding shares of Series B
Convertible Preferred Stock are now convertible into 27.87 shares of common
stock.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
CAPITAL TRANSACTIONS (CONTINUTED)
In
addition, as a result of the new shares sold in May and June 2006, AVP also
issued to Maxim, placement agent for the February 2005 financing, a warrant
to
purchase 122,898 additional shares of common stock in accordance with its
anti-dilution provision. The warrants were recorded through the Consolidated
Statement of Operations as an administrative expense with a value of $93,135,
which was determined using the Black-Scholes valuation method, for the year
ended December 31, 2006.
For
the
year ended December 31, 2006, 24,940 shares of Series B preferred stock were
converted into 624,464 shares of AVP's common stock pursuant to notices of
conversions from two individual investors.
During
the year ended December 31, 2006, AVP issued 13,614 shares of common stock
pursuant to the cashless exercise of options for 20,195 shares of common stock.
The exercise price of the options was $0.30 per share.
Warrants
granted in the May and June 2006 Financing include an anti-dilution provision
that could increase common shares outstanding. The Company analyzed the
anti-dilutive provision on the warrant agreements under EITF 00-19 and concluded
the warrants were not a liability.
On
April
20, 2006, the Board of Directors approved fees for outside directors for their
services. In 2006, the fees were paid in common stock. For the year
ended December 31, 2006, AVP issued 55,905 common stock shares to directors
for
services rendered.
For
the
year ended December 31, 2007, 22,396 shares of Series B preferred stock were
converted into 624,176 shares of AVP’s common stock.
During
the year ended December 31, 2007, AVP issued 13,945 shares of common stock
pursuant to the cashless exercise of options for 16,829 shares of common stock.
The exercise price of the options was $0.30 per share.
During
the year ended December 31, 2007, AVP issued 100,137 shares of common stock
pursuant to the cashless exercise of options for 100,977 shares of common stock.
The exercise price of the options was $0.01 per share.
Pursuant
to the April 12, 2006 Title Sponsorship Agreement with Crocs, AVP agreed to
issue warrants to Crocs to purchase up to 1,000,000 shares of common stock
of
AVP as follows: a warrant for 400,000 shares on April 12, 2006 and for 200,000
shares for each of the years 2008 through 2010. However, no warrants would
be
issued in 2008, 2009, or 2010 if Crocs relinquished the “Title” sponsorship and
reduced its sponsorship to a “Platinum” level sponsorship following the 2007
season, or if the agreement was not extended for two more years, or if the
agreement was terminated for breach prior to the final event of the 2008 AVP
Tour season. Crocs had the option to reduce its sponsorship level until July
15,
2007. As of July 15, 2007, Crocs did not exercise its option to reduce its
sponsorship level for 2008; therefore, Crocs was granted a warrant to purchase
additional 200,000 shares. The warrants were valued using Black-Scholes method
and recorded through the Consolidated Statement of Operations as contra-revenue.
The warrants were recorded with a value of $174,600. The assumptions utilized
in
computing the fair value of the warrants were as follows: expected life of
4.75
years, estimated volatility of 79.32% and a risk free interest rate of
4.95%.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
CAPITAL TRANSACTIONS (CONTINUTED)
On
August
12, 2007, Crocs extended the term of its Title Sponsorship Agreement through
2012, which triggered a warrant grant for 400,000 shares for years 2009 and
2010
pursuant to the April 12, 2007 agreement. The warrants were valued at $333,200
using the Black-Scholes method and recorded through the Consolidated Statement
of Operations as contra-revenue. The assumptions utilized in computing the
fair
value of the warrants were as follows: expected life of 4.67 years, estimated
volatility of 78.15% and a risk free interest rate of 4.57%.
9.
STOCK OPTIONS
Stock
Option Plans
On
August
23, 2005, the AVP stockholders approved the adoption of the 2005 Stock Incentive
Plan. Under the 2005 Plan, AVP may grant awards of stock options (including
stock purchase warrants) and restricted stock grants to its officers, directors,
employees, consultants, players, and independent contractors. AVP may issue
an
aggregate of 30,000,000 shares of its common stock under the 2005 Plan,
including approximately 14,000,000 shares consisting of management warrants,
as
well as options previously granted by AVP’s wholly owned subsidiary, Association
of Volleyball Professionals, Inc. (the “Association”), which were subsequently
converted to AVP stock options upon the Association’s acquisition by AVP. AVP
may grant both incentive stock options intended to qualify under Section 422
of
the Internal Revenue Code, and options, warrants, and other rights to buy AVP’s
common stock that are not qualified as incentive stock options. The exercise
price of each optioned share is determined by the Compensation Committee;
however the exercise price for incentive stock options and nonqualified stock
options will not be less than 100% of the fair market value of the optioned
shares on the date of grant. The exercise price of incentive stock options
granted to holders of more than 10% of AVP’s Common Stock must be at least 110%
of the fair market value of the Common Stock on the date of grant.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
STOCK OPTIONS (CONTINUED)
The
expiration date of each option shall be determined by the Committee at the
date
of grant; however, in no circumstances shall the option be exercisable after
10
years from the date of grant. Stock options granted under the 2005 Plan will
expire no more than ten years from the date on which the option is granted,
unless the Board of Directors determines an alternative termination date. If
incentive stock options are granted to holders of more than 10% of AVP’s Common
Stock, such options will expire no more than five (5) years from the date the
option is granted. Except as otherwise determined by the Board of Directors
or
the Compensation Committee, stock options granted under the 2005 Plan will
vest
and become exercisable on the anniversaries of the date of grant of such option
at a rate of 25% per year over four years from the date of grant.
In
connection with stock options granted to employees
to purchase common stock, AVP recorded $214,233 of stock-based compensation
expense for the period ended December 31, 2007 and $53,491 for the period ended
December 31, 2006. The Company recorded no tax benefit related to these options.
The
following table contains information on the stock options under the Plan for
the
years ended December 31, 2007 and 2006. The outstanding options expire from
April 2008 to November 2017.
|
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Aggregate
Intrinsic Value
(1)
|
|
|
Options
outstanding at January 1, 2006
|
|
|
12,015,262
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
0.70
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(87,178
|
)
|
|
1.67
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
12,078,084
|
|
|
0.86
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,450,000
|
|
|
1.00
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100,977
|
)
|
|
0.01
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,081
|
)
|
|
2.31
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
15,419,026
|
|
$
|
.90
|
|
|
4.1
|
|
$
|
5,471,697
|
|
|
Options
exercisable at December 31, 2007
|
|
|
12,077,243
|
|
$
|
.86
|
|
|
2.5
|
|
$
|
5,460,847
|
|
|
Option
exercisable at December 31, 2007 and expected to vest
|
|
|
13,726,004
|
|
$
|
.88
|
|
|
3.4
|
|
$
|
5,469,318
|
|
(1)
The aggregate intrinsic value is calculated as the
difference b
etween
the exercise price of the underlying awards and the closing stock price of
$0.90
of our common stock on December 31, 2007, the last trading date of our
period end date of December 31, 2007. The intrinsic value was computed for
only
those awards that are in the money and excludes out of the money
awards.
On
November 7, 2007, the Board of Directors authorized the issuance to two key
employees of options to purchase 3,450,000 shares of common stock, of which
1,200,000 shares is subject to a market condition. The stock options subject
to
the market condition vest in three equal installments: the first one-third
vest
on the date that the closing price of the Company’s common stock reaches $2.00
per share for at least forty five consecutive trading days, the next one-third
vest on the date that the closing price of the Company’s common stock reaches
$3.00 per share for at least forty five consecutive trading days, and the
final
one-third vest on the date that the closing price of the Company’s common stock
reaches $4.00 per share for at least forty five consecutive trading days.
The
stock
option grant not subject to market condition was valued at $1,518,750 using
the
Black-Scholes method and recorded through the consolidated statement of
operations as option expense. The assumptions utilized in computing the fair
value of the options were as follows: expected life of 5.76 years, estimated
volatility of 75.53% and a risk free interest rate of 3.92%.
The
Company used a Monte Carlo stock option model to estimate fair value of the
options subject to the market condition and the derived vesting periods range
from 1.81 to 3.29 years.
The
assumptions utilized in computing the fair value of the
1,200,000
options
were as follows: estimated volatility of 79.38% and a risk free interest
rate of
4.29%. For the year ended December 31, 2007, we recognized $130,397 related
to
this option grant.
The
weighted average grant-date fair value per share of options granted was $0.71
in
2007 and $0.61 in 2006.
The
total
intrinsic value of stock options exercised during 2007 and 2006 was $123,370
and
$0, respectively. No cash was received as the options were exercised in a
cashless exercise. The Company did not recognize any tax benefit related
to this
exercise.
The
following table summarizes information about o
ptions
outstanding and exercisable by price range as of December 31, 2007:
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
in Years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$
.01 -
.30
|
|
|
6,017,966
|
|
|
2.0
|
|
$
|
0.03
|
|
|
6,017,966
|
|
$
|
0.03
|
|
|
.31
-
.90
|
|
|
1,805,480
|
|
|
5.9
|
|
|
0.77
|
|
|
1,749,384
|
|
|
0.77
|
|
|
.91
-
1.60
|
|
|
4,145,154
|
|
|
8.4
|
|
|
1.10
|
|
|
859,467
|
|
|
1.47
|
|
|
1.61
-
2.80
|
|
|
3,450,426
|
|
|
1.6
|
|
|
2.21
|
|
|
3,450,426
|
|
|
2.21
|
|
|
$
.01 -
2.80
|
|
|
15,419,026
|
|
|
4.1
|
|
$
|
0.90
|
|
|
12,077,243
|
|
$
|
0.86
|
|
When
options are exercised, the Company’s policy is to issue previously registered,
unissued shares of common stock. As of December 31, 2007, the Company had
12,692,432 registered but unissued shares of common stock
available.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
STOCK OPTIONS (CONTINUED)
Other
Stock Options/Warrants
In
connection with warrants granted to non-employees
to purchase Common Stock, AVP recorded warrant expense of $21,654 in sales
and
marketing expenses and $507,800 in contra-revenue for the year ended December
31, 2007 and $192,514 in administrative expenses, $65,399 in sales and marketing
expenses, and $252,842 in contra-revenue for the year ended December 31, 2006.
Such amounts represent, for each non-employee stock option, the valuation under
SFAS 123 on the date of the grant. These grants were fully vested on the grant
date.
The
following table contains information on all of AVP’s non-plan stock options and
warrants for the years ended December 31, 2007 and 2006.
|
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Aggregate
Intrinsic Value
|
|
|
Options/warrants
outstanding at January 1, 2006
|
|
|
3,467,425
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,173,506
|
|
|
1.16
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,195
|
)
|
|
0.30
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,403,794
|
)
|
|
1.76
|
|
|
|
|
|
|
|
|
Options/warrants
outstanding at December 31, 2006
|
|
|
6,216,942
|
|
|
1.44
|
|
|
|
|
|
|
|
|
Granted
|
|
|
600,000
|
|
|
0.80
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,829
|
)
|
|
0.30
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(473,011
|
)
|
|
2.10
|
|
|
|
|
|
|
|
|
Options/warrants
outstanding at December 31, 2007
|
|
|
6,327,102
|
|
$
|
1.33
|
|
|
2.8
|
|
$
|
279,544
|
|
|
Options/warrants
exercisable at December 31, 2007
|
|
|
6,327,102
|
|
$
|
1.33
|
|
|
2.8
|
|
$
|
279,544
|
|
The
weighted average fair value of options/warrants granted was $0.85 in 2007 and
$0.61 in 2006.
The
total
intrinsic value of stock options/warrants exercised during 2007 and 2006
was
$24,402 and $12,622, respectively. No cash was received as the options/warrants
were exercised in a cashless exercise. The Company did not recognize any
tax
benefit in connection with these exercises.
The
following table summarizes information about o
ptions/warrants
outstanding and exercisable by price range as of December 31, 2007:
|
|
|
|
Options/warrants
Outstanding
|
|
|
Options/warrants
Exercisable
|
|
|
Range
of Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual
Life
in Years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$
.30 - 1.50
|
|
|
3,862,193
|
|
|
3.4
|
|
$
|
0.89
|
|
|
3,862,193
|
|
$
|
0.89
|
|
|
1.51
- 3.40
|
|
|
2,464,909
|
|
|
1.8
|
|
|
2.01
|
|
|
2,464,909
|
|
|
2.01
|
|
|
$
.30 - 3.40
|
|
|
6,327,102
|
|
|
2.8
|
|
$
|
1.33
|
|
|
6,327,102
|
|
$
|
1.33
|
|
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES
The
Company leases its corporate office facilities under a non-cancellable operating
lease expiring in March 2010. The lease agreement contains a renewal option
for
an additional five-year term. In addition, the lease agreement provides for
rental escalations at defined intervals during the lease term. Rent expense
is
recognized on the straight-line method over the term of the lease. The
difference between rent expense recognized and rent payable under the rental
escalation clauses is reflected in accrued expenses.
The
Company also subleases approximately 4,500 square feet of warehouse space
pursuant to a sublease that expires on February 28, 2009. The space is used
for
storing tournament equipment and the Company’s trucks.
The
future minimum rental payments under the non-cancellable operating leases are
as
follows:
|
Years
Ending December 31,
|
|
|
|
|
|
2008
|
|
$
|
377,000
|
|
|
2009
|
|
|
362,000
|
|
|
2010
|
|
|
90,000
|
|
|
Total
|
|
$
|
829,000
|
|
Rent
expense for the corporate office facility charged to operations was $338,948
and
$318,565 for the years ended December 31, 2007 and 2006, respectively.
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 two officers. In addition to
base salary, the employment agreements provide for performance bonuses. The
performance bonuses will be 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 agreements also provide for an additional cash performance bonus
ranging from $25,000 up to $125,000 in the event the Company achieves positive
EBITDA. In the event the officers are terminated by AVP, their authority is
diminished, or AVP breaches the employment agreements, the officers will
continue to receive their annual base salary and their Annual Performance Bonus
and benefits for periods of one to two years following the termination,
depending on the circumstances of the termination.
Legal
Proceedings
A
complaint was filed on June 6, 2007 in the United States Circuit Court of Cook
County, Illinois, in which the plaintiff seeks damages for personal injuries
relating to a fall the plaintiff suffered during a volleyball tournament taking
place at the Hard Rock Hotel & Casino in Las Vegas, Nevada on September 7,
2005. Discovery is still being completed and therefore management is unable
to
determine or predict the outcome of this claim or the impact, if any, on the
Company’s financial condition or results of operations. Accordingly, the Company
has not recorded a provision for this matter in its financial
statements.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Purchased
Rights
On
November 5, 2007, AVP entered into an agreement with the Australian Volleyball
Federation (AVF) to obtain the right to conduct the Australian Beach Volleyball
Tour ("Australian Tour"). The agreement grants the AVP a license to operate,
stage, and promote the Australian Tour for a period of five years, and it is
extended for four years upon AVP meeting certain performance milestones. In
consideration of the grant of rights, AVP will be responsible for paying the
tour expenses and will pay AVF 10% of net profits (gross revenues less agreed
upon tour expenses) for each year of the tour.
In
connection with the exercise by AVP of its right to conduct, operate, stage,
and
promote the Australian Tour, AVP entered into an agreement with a third party
pursuant to which the third party shall manage the operations of the Australian
Tour and each of the 2008 events on behalf of AVP, including booking all the
locations for the events and providing the staging and seating for each event.
For the services, AVP will pay SportStage the agreed expenses in accordance
with
the following schedule:
|
|
|
Fees
|
|
Staff
Payroll
|
|
|
2007
|
|
$
|
20,000
|
|
$
|
5,000
|
|
|
2008
|
|
|
90,000
|
|
|
55,000
|
|
|
|
|
$
|
110,000
|
|
$
|
60,000
|
|
In
addition, AVP agreed to pay 50% of the pre-approved event expenses one week
prior to each event and 50% within three days of each event. Total cost per
event is projected to be approximately $50,000.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11.
INCOME TAXES
The
components of the provision (benefit) for income taxes are as
follows:
|
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
|
|
|
State
|
|
|
9,410
|
|
|
800
|
|
|
Total
|
|
|
9,410
|
|
|
800
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
—
|
|
|
State
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
—
|
|
|
—
|
|
|
Total
Income Tax Provision (Benefit)
|
|
$
|
9,410
|
|
$
|
800
|
|
The
provision (benefit) for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision (benefit)
for
income taxes as follows:
|
|
|
2007
|
|
2006
|
|
|
Federal
statutory rate
|
|
|
(34
|
)%
|
|
(34
|
)%
|
|
State
income tax
|
|
|
(4
|
)
|
|
(6
|
)
|
|
Valuation
allowance
|
|
|
37
|
|
|
40
|
|
|
Meals
and Entertainment and Other
|
|
|
1
|
|
|
—
|
|
|
Total
|
|
|
—
|
%
|
|
—
|
%
|
Significant
components of deferred income taxes as of December 31 are as
follows:
|
|
|
2007
|
|
2006
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Accrued
Liabilities and Other
|
|
$
|
396,280
|
|
$
|
—
|
|
|
Fixed
Asset Basis
|
|
|
369,982
|
|
|
—
|
|
|
Net
Operating Losses
|
|
|
8,045,131
|
|
|
6,454,419
|
|
|
TOTAL
Deferred Tax Assets
|
|
|
8,811,393
|
|
|
6,454,419
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
TOTAL
Deferred Tax Liabilities
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
(
8,811,393
|
)
|
|
(6,454,419
|
)
|
|
Net
Deferred Taxes
|
|
$
|
—
|
|
$
|
—
|
|
AVP
records a valuation allowance for certain temporary differences for which it
is
more likely than not that AVP will not receive future tax benefits. AVP assesses
its past earnings history and trends and projections of future net income to
determine the allowance. AVP recorded a valuation allowance for the entire
amount of the net deferred assets in 2007 and 2006, as it had determined that
it
was more likely than not that no deferred tax assets would be realized. The
net
change in the valuation allowances for deferred tax assets were increase
(decrease) of $2,356,974 and ($913,711) in 2007 and 2006, respectively. AVP
will
continue to review this valuation allowance quarterly and make adjustments
as
appropriate.
The
tax
benefits associated with employee exercises of stock options reduces income
taxes currently payable. However, no benefits were recorded to additional paid
in capital in 2007 and 2006 because their realization was not more likely than
not to occur, and, consequently, a valuation allowance was recorded against
the
entire benefit.
AVP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11.
INCOME TAXES (CONTINUED)
At
December 31, 2007, AVP had federal net operating loss carryforwards of
approximately $20,778,880, which expire at various intervals from the years
2019
to 2027. At December 31, 2007, AVP had state net operating loss carry forwards
of approximately 16,802,000, which expire at various intervals from the years
2011 to 2017. As of December 31, 2007, $5,227,000 and $9,672,000 of AVP’s
federal and state net operating loss carryforwards were subject to
approximately $61,000 and $652,000, respectively, in limitations related to
their utilization under Section 382 of the Internal Revenue Code. Future
ownership changes as determined under Section 382 of the Internal Revenue Code
could further limit the utilization of net operating loss carryforwards.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred
tax
assets have been fully offset by a valuation allowance.
12.
PENSION PLAN
AVP
sponsors a qualified 401(k) savings plan for eligible employees. The plan
provides for pre-tax employee contributions. Additionally, the plan provides
for
employer matching contributions at the discretion of AVP. No matching
contributions were contributed to the plan by the employer in 2007 or
2006.
13.
SUBSEQUENT EVENTS
On
February 5, 2008, the Company granted its employees
stock options to purchase a combined total of 500,000 shares of common
stock of the Company, at an exercise price of $0.76 per share, the fair
market value of the date of grant. The options vest ratably over a three-year
period.
On
February 22, 2008, Russ Pillar, AVP, Inc. (“AVP”) and AVP Pro Beach Volleyball
Tour, Inc. (together
with
AVP,
the “Company”) entered into a separation agreement, pursuant to which, effective
immediately, Mr. Pillar resigned all positions, titles, duties, authorities
and
responsibilities with, arising out of or relating to his employment with
the
Company, including his position as Vice Chair, Operations and as a member
of the
Board of Directors of AVP, Inc.
Pursuant
to the terms of the separation agreement, Mr. Pillar received payment for
all
unpaid salary, accrued but unused vacation, and reimbursable business expenses.
Vested options, including the acceleration of vesting of 102,740 shares,
would
be exercisable for one year. Mr. Pillar will also receive payments totaling
$112,500 for consulting services in connection with transition matters,
sponsorship sales and introductions, and digital strategy for 180 days from
February 22, 2008. In addition, Mr. Pillar, managing member of 5850 Group,
LLC,
will receive commission in the event 5850 Group secures or obtains a sponsorship
from certain targeted companies for the Company.
On
March 3, 2008, AVP entered into an “at will”
employment agreement with Jeffrey Benz, an officer of the Company.
Pursuant
to his employment agreement, Mr. Benz will receive a base salary of $250,000
through December 31, 2008, $265,000 from January 1, 2009 through December
31,
2009; $280,000 from January 1, 2010 through December 21, 2010. Mr. Benz received
a 10 year option to purchase 350,000 shares of AVP, Inc.’s common stock at a
price to equal the fair market value of the stock on the date of the grant,
of
which 87,500 vested immediately when awarded by the Board and the remainder
will
vest equally over 36 months.
On
March 27, 2008, an ex-officer of the Company
exercised stock options, using a cashless exercise method, whereby he received
456,039 shares of common stock.