SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 1997
[ ] 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 333-18967
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AMERICAN CHAMPION ENTERTAINMENT, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3261987
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
26203 Production Avenue, Suite 5
Hayward, California 94545
--------------------------------
(Address of Principal Executive Offices)
(510) 782-8168
-------------------------
(Registrant's Telephone Number, Including Area Code)
(No Change)
-------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 of
1934 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..... No..X..
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes..... No..... Not Applicable..X..
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 8, 1997
----------------- --------------------------------
Common Stock, $.0001 3,815,700 shares
par value
Transitional Small Business Disclosure Format (check one)
Yes..... No..X..
Exhibit Index on Page 17
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AMERICAN CHAMPION ENTERTAINMENT, INC.
Form 10-QSB
September 12, 1997
TABLE OF CONTENTS
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Page
----
PART I - Financial Information
Item 1. Financial Statements 4
Consolidated Balance Sheet as of June 30, 1997 4
Consolidated Statements of Operations
for the three month and six month periods
ended June 30, 1997 and 1996 6
Consolidated Statements of Cash Flows for
the Six Month Periods ended June 30,
1997 and 1996 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - Other Information.
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 16
Exhibit Index 17
Exhibits 18
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Part I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1997
(Unaudited)
ASSETS
Current Assets:
Cash $ 14,611
Account Receivable 5,817
Loans Receivable - Related Parties 113,361
Prepaid Expenses and Other 19,045
-----------
Total Current Assets 152,834
-----------
Property and Equipment,
Net of Accumulated Depreciation and Amortization
of $234,808 27,337
-----------
Other Assets:
Film Costs, Net of Accumulated Amortization of $4,998 716,004
Deferred Offering Costs 269,594
Other Assets 38,541
-----------
Total Other Assets 1,024,139
-----------
Total Assets $ 1,204,310
===========
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]
Current Liabilities:
Accounts Payable and Accrued Expenses $ 403,205
Deferred Revenues - Current Portion 444,687
Short-Term Debts 193,322
Loans Payable - Related Parties 646,943
Long-Term Debts - Current Portion 39,084
Obligations Under Capital Leases 25,573
Other 4,216
-----------
Total Current Liabilities 1,757,030
-----------
Long-Term Liabilities:
Deferred Revenues 387,596
Long-Term Debts 39,776
Obligations Under Capital Leases 10,722
Other 6,324
-----------
Total Long-Term Liabilities 444,418
-----------
Total Liabilities 2,201,448
-----------
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Common Stock Subject to Rescission 1,175,520
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity [Deficit]
Common Stock, 10,000,000 Authorized, $.0001
Par Value, None Outstanding --
Paid-In Capital [Deficit] (994,818)
Accumulated Deficit (1,177,840)
-----------
Total Stockholders' Equity [Deficit] (2,172,658)
-----------
Total Liabilities and Stockholders'
Equity [Deficit] $ 1,204,310
===========
See Accompanying Notes to Consolidated Financial Statements.
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AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Tuition and Related Fees $ 427,412 $ 451,553 $ 171,462 $ 224,595
Accessories and Video Sales 39,750 58,865 17,512 29,638
----------- ----------- ----------- -----------
TOTAL REVENUE 467,162 510,418 188,974 254,233
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Sales 25,976 39,276 11,404 24,274
Salaries and Payroll Taxes 381,138 365,934 188,110 187,286
Rent 233,866 248,482 109,567 125,471
Selling, General and Administrative 125,012 152,203 69,134 84,801
Interest 95,830 30,119 45,445 14,962
----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 861,822 836,014 423,660 436,794
----------- ----------- ----------- -----------
[LOSS] FROM OPERATIONS (394,660) (325,596) (234,686) (182,561)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET [LOSS] $ (394,660) $ (325,596) $ (234,686) $ (182,561)
=========== =========== =========== ===========
NET [LOSS] PER SHARE $ (0.16) $ (0.13) $ (0.09) $ (0.07)
=========== =========== =========== ===========
Number of Shares 2,515,700 2,515,700 2,515,700 2,515,700
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
------------------------
June 30, June 30,
1997 1996
-------- --------
OPERATING ACTIVITIES:
Net [Loss] $(394,660) $(325,596)
Adjustments to Reconcile Net [Loss]
to Net Cash [Used for] Operating
Activities:
Depreciation and Amortization 25,011 32,204
Interest Amortization - Debt Issue Costs 44,014 550
Loss on Property and Equipment 440 --
Rent Concession Amortization (2,108) (2,108)
[Increase] Decrease in:
Prepaid Expenses and Other (6,583) 3,869
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (4,626) (6,886)
Deferred Revenues (86,393) (240)
Other Liabilities -- 3,000
--------- ---------
NET CASH - OPERATING ACTIVITIES (424,905) (295,207)
--------- ---------
INVESTING ACTIVITIES:
Purchase of Property and Equipment (1,618) (7,014)
Payments for Film Costs (56,313) (52,093)
Advances to Stockholders (21,278) (31,704)
Deposits 13,866 (1,099)
--------- ---------
NET CASH - INVESTING ACTIVITIES (65,343) (91,910)
--------- ---------
FINANCING ACTIVITIES:
S Corp Distributions -- (12,518)
Proceeds from issuance of Common Stocks 248,020 376,500
Proceeds from Short-Term Debts 91,210 1,005
Proceeds from Loans from Related Parties 299,019 --
Payments on Long-Term Debts (39,486) (22,697)
Principal Payments on Capital Leases (10,805) (15,581)
Deferred Offering Costs (111,862) --
--------- ---------
NET CASH - FINANCING ACTIVITIES 476,096 326,709
--------- ---------
NET [DECREASE] IN CASH (14,152) (60,408)
CASH - BEGINNING OF PERIODS 28,763 66,243
--------- ---------
CASH - END OF PERIODS $ 14,611 $ 5,835
========= =========
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 55,068 $ 29,104
State Income Taxes $ 1,600 $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common Stock Issued for Short-Term Debts $ 27,000 $ --
Debts converted to equity $ 133,500 $ --
See Accompanying Notes to Consolidated Financial Statements.
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AMERICAN CHAMPION ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
- ----------------------------------------------------
The consolidated financial statements include the accounts of American
Champion Entertainment, Inc. (the "Company") and its wholly owned subsidiary
America's Best Karate ("ABK") which owns 100% of American Champion Media, Inc.
Pursuant to an Agreement and Plan of Merger, dated as of July 14, 1997, the
Company entered into a reorganization transaction pursuant to which the
Company acquired all of the issued and outstanding shares of ABK (the
"Reorganization"). The interim financial statements included herein give
effect to the Reorganization. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Significant accounting policies of the Company and ABK are set forth in the
Company's financial statements for the year ended December 31, 1996 contained
in the Company's Form SB-2 as filed with the Securities and Exchange
Commission ("SEC") on July 17, 1997.
Note 2 - Basis of Reporting
- -----------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and disclosures required by generally accepted
accounting principles for completed financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal
recurring items) which are considered necessary for a fair presentation of the
financial position of the Company at June 30, 1997 and the results of its
operations and its cash flows for the six months periods ended June 30, 1997
and 1996. The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes for the year ended
December 31, 1996 included in the Company's Form SB-2 as filed with the SEC on
July 17, 1997.
Note 3 - Short Term Debts
- -------------------------
The Company obtained an additional $96,000 of unsecured loans during the
quarter ended June 30, 1997, of which $81,000 bore no interest and the
remaining $15,000 required a loan fee of $600 payable upon completion of the
Company's initial public offering ("IPO"). All outstanding short term debts
were subsequently paid off with proceeds from the IPO (see Note 5).
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Note 4 - Loans Payable to Related Parties
- -----------------------------------------
The Company obtained an additional $204,673 of unsecured loans from related
parties during the quarter ended June 30, 1997, of which $174,673 beared no
interest and the remaining $30,000 required payment of monthly interest only at
the rate of 22% per annum. All outstanding loans payable to related parties,
with the exception of $47,408, were subsequently paid off with proceeds from the
IPO (see Note 5).
Note 5 - Subsequent Events
- --------------------------
During August 1997, the Company completed the IPO and received net proceeds of
$5,550,155 from the sale of 1,300,000 shares of common stock and 1,495,000
redeemable common stock warrants. As of August 31, 1997, the Company has used
the offering proceeds as follows:
Repayment of Debts $ 801,000
Investment in Television
Series 473,000
Payment of accounts payable
and operating expenses 592,000
----------
Total $1,866,000
==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and notes for the year ended December 31, 1996
included in the Company's Form SB-2 as filed with the SEC on July 17, 1997.
Karate Studio Segment
- ---------------------
The Company's revenues in its karate studio segment for the three month and
six month periods ended June 30, 1997 were $188,974 and $464,615,
respectively, a decrease of 26% and 9%, respectively, from revenues of
$254,233 and $510,418, respectively, for the comparable periods ended June 30,
1996. The decrease in sales is principally attributable to the reduction of
marketing activities in anticipation of the closure of unprofitable studios.
Prior to June 30, 1997, the Company's Summerlin (NV), Nellis (NV) and Blossom
Hill (CA) studios were closed.
Salaries and payroll taxes in the Company's karate studio segment decreased
from $178,069 and $347,563, respectively, for the three and six month periods
ended June 30, 1996 to $132,206 and $325,234 for the same periods ended June
30, 1997, a decrease of 26% and 6%, respectively. The decrease in these
expenses is primarily attributable to the closure of the three studios
referred to above.
The Company's rent expense decreased from $125,471 and $248,482, respectively,
for the three and six months ended June 30, 1996 to $109,567 and $233,866,
respectively, for the comparable periods ended June 30, 1997, a decrease of
13% and 6%, respectively. The decrease in rent expenses is primarily
attributable to the closure of the Blossom Hill studio and the reduction of
rent for the San Ramon studio.
The Company's selling, general and administrative expenses for the Company's
karate studio segment decreased from $79,382 and $139,600, respectively, for
the three and six months ended June 30, 1996 to $54,769 and $110,647,
respectively, for the three months and six months ended June 30, 1997, a
decrease of 31% and 21%, respectively. The decrease in these expenses is
primarily due to the closure of the three studios referred to above.
The Company's interest expense in the karate studio segment increased from
$7,481 and $15,059, respectively, for the three months and six months ended
June 30, 1996 to $17,245 and $42,438, respectively, for the same periods ended
June 30, 1997, an increase of 131% and 182%, respectively. This increase in
interest expense was primarily due to interest paid on additional short term
loans obtained in the fourth quarter of 1996 and the first six months of 1997.
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Net loss from operations in the Company's karate studio segment decreased from
$160,444 and $279,562, respectively, for the three months and six months ended
June 30, 1996 to $136,217 and $272,793, respectively, for the same periods
ended June 30, 1997, a decrease of 15% and 2%, respectively. This decrease is
primarily due to the closure of the three studios referred to above.
Video and Television Segment
- ----------------------------
The Company did not earn any revenue for the quarters ended June 30, 1997 and
1996 in the video and television segment. The Company's revenues in its video
and television segment for the six months ended June 30, 1997 was $2,547.
There was no revenue earned for the six months ended June 30, 1996.
Salaries and payroll taxes, general and administrative expense, and interest
expense in the video and television segment increased from $9,217, $5,419 and
$7,481, respectively, for the quarter ended June 30, 1996 to $31,673, $9,595
and $21,000, respectively, for the quarter ended June 30, 1997. The Company's
salaries and payroll taxes and interest expense in the video and television
segment increased from $18,371 and $15,060, respectively, for the six months
ended June 30, 1996 to $31,673 and $46,193, respectively, for the six months
ended June 30, 1997. These increases are principally due to interest and
expenses related to the production activities for the television series -
ADVENTURES WITH KANGA RODDY.
Net loss from the Company's video and television segment increased from
$22,117 for the quarter ended June 30, 1996 to $62,268 for the quarter ended
June 30, 1997, an increase of 182%. Net loss from the Company's video and
television segment increased from $46,034 for the six months ended June 30,
1996 to $85,667 for the six months ended June 30, 1997, an increase of 86%.
These increases are principally due to interest and expenses related to the
production activities for the television series - ADVENTURES WITH KANGA RODDY.
The Holding Company Segment
- ---------------------------
The Company was formed in February 1997 as a holding company and did not earn
any revenue through June 30, 1997. For the quarter ended June 30, 1997, the
Company incurred expenses for salaries and payroll taxes, general administrative
and interest expense of $24,231, $4,770 and $7,200, respectively. These expenses
were principally for salaries, telephone, interest and other expenses related to
the Company's IPO.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased for the six months ended June 30, 1997 by $(14,152) and by
($60,408) for the six months ended June 30, 1996. Cash utilized for operations
for the six months ended June 30, 1997 and 1996 was $(424,905) and $(295,207),
respectively.
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<PAGE>
Cash from investing activities for the six months ended June 30, 1997 and 1996
was $(65,343) and $(91,910) respectively.
Cash from financing activities for the six months ended June 30, 1997 and 1996
was $476,096 and $326,709, respectively. Financing in the six months ended
June 30, 1997 resulted primarily from sales of common stock, additional
proceeds from short terms debt and loans from related parties. Financing in
the six months ended June 30, 1996 resulted primarily from sales of common
stock.
During August 1997, the Company completed its initial public offering and
received net proceeds of $5,550,155 from the sale of 1,300,000 shares of
common stock and 1,495,000 warrants. As of August 31, 1997, the Company has
used $1,866,000 of the offering proceeds as follows: (i) $801,000 for the
repayment of short term debt and loans; (ii) $473,000 for the investment in
television series; and (iii) $592,000 for the payment of accounts payable and
operating expenses.
The Company has historically financed its operating and capital outlays
primarily through sales of common stock, loans from stockholders and other
third parties and bank financing. These sources are described in the Company's
Form SB-2 filed July 17, 1997 under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources." Proceeds from the Company's IPO were used to pay off or
reduce amounts owed by the Company as described above.
The Company maintains a credit line with Wells Fargo Bank pursuant to which
the Company has borrowed approximately $35,000 (the maximum amount available),
repayment of which is made at the monthly rate of 2% of the outstanding
balance of the borrowing. Other than the WFB Loan and an immaterial amount
owed to Bank of America, the Company does not presently maintain any other
borrowing facility or have any indebtedness to financial institutions.
The Company's San Ramon studio was closed as of August 31, 1997, and existing
students were combined with another nearby America's Best Karate studio. The
Company expects net loss from Karate studio operations to continue to decline
due to decreasing payroll expenses and significant reduction in interest
expense resulting from the repayment of loans from proceeds of the IPO.
The Company anticipates that it will spend approximately $1.2 million on the
production of six episodes of the TV series "Adventures With Kanga Roddy"
during the 3rd and 4th quarter of 1997, most of which will be capitalized into
investment activity. When finished master copies are provided to KTEH, the
Company will be paid $215,000 for broadcast rights of these six episodes.
The Company believes that the net proceeds of the IPO, plus working capital
from operations and other sources of funds will be adequate to sustain
operations for at least the next 12 months.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
from liability for forward-looking statements. Certain information included in
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<PAGE>
this Form 10-QSB and other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by or on behalf
of the Company) are forward-looking, such as statements relating to
operational and financing plans, capital uses and resources, competition, and
demands for the Company's products and services. Such forward-looking
statements involve important risks and uncertainties, many of which will be
beyond the control of the Company. These risks and uncertainties could
significantly affect anticipated results in the future, both short-term and
long-term, and accordingly, such results may differ from those expressed in
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, the acceptance by
television viewers and public television stations of the television series -
ADVENTURES WITH KANGA RODDY, production delays and/or cost overruns with
respect to such series, changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations, unanticipated working capital or other cash
requirements, changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated change in the industries in which it
operates; and various competitive factors that may prevent the Company from
competing successfully in the marketplace.
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Part II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders during
the three month period ended June 30, 1997:
By written consent dated April 24, 1997, the holders of the
Company's common stock approved the Amended and Restated
Certificate of Incorporation of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Form of a Warrant (1)
4.3 Form of Underwriters' Warrant (1)
10.1 Distribution Agreement, dated May 6, 1997, by and between
KTEH, San Jose Public Television and American Champion
Media, Inc. (1)
27 Financial Data Schedule
- ---------------------------
(1) Incorporated by reference from the Registrant's Form SB-2 filed with the
SEC on July 17, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the period covered by this
report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN CHAMPION ENTERTAINMENT, INC.
(Registrant)
Dated: September 12, 1997 By: /s/ Anthony K. Chan
-----------------------------------
Anthony K. Chan, Chief Executive
Officer and Chief Financial
Officer
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EXHIBIT INDEX
Exhibit No. Description Page No.
- -------------------------------------------------------------------------------
27 Financial Data Schedule 18
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,611
<SECURITIES> 0
<RECEIVABLES> 119,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 152,834
<PP&E> 262,145
<DEPRECIATION> 234,808
<TOTAL-ASSETS> 1,204,310
<CURRENT-LIABILITIES> 1,757,030
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,172,658)
<TOTAL-LIABILITY-AND-EQUITY> 1,204,310
<SALES> 188,974
<TOTAL-REVENUES> 188,974
<CGS> 11,404
<TOTAL-COSTS> 297,677
<OTHER-EXPENSES> 69,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,445
<INCOME-PRETAX> (234,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (234,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (234,686)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
