AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-18967
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN CHAMPION ENTERTAINMENT, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
7812
(Primary Standard Industrial
Classification Code Number)
94-3261987
(I.R.S. Employer
Identification Number)
26203 PRODUCTION AVENUE, SUITE 5
HAYWARD, CALIFORNIA 94545
(510) 782-8168
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ANTHONY K. CHAN
CHIEF EXECUTIVE OFFICER
26203 PRODUCTION AVENUE, SUITE 5
HAYWARD, CALIFORNIA 94545
(510) 782-8168
(Name and address and telephone number of agent for service)
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COPIES TO:
GREGORY SICHENZIA, ESQ.
RICHARD A. FRIEDMAN, ESQ.
SICHENZIA, ROSS & FRIEDMAN LLP
135 WEST 50TH STREET, 20TH FLOOR
NEW YORK, NEW YORK 10020
(212) 664-1200
(213) 664-7329
EXPLANATORY NOTE
This Registration Statement contains one form of prospectus to be used
in connection with an offering of (a) up to 1,495,000 shares of Common
Stock, $.0001 par value, of American Champion Entertainment, Inc. (the
"Company") which are reserved for issuance upon exercise of Redeemable
Warrants, each to purchase one share of Common Stock at an exercise
price of $6.50 per share ("Warrants"), (b) 130,000 shares of Common
Stock and 130,000 Redeemable Warrants, issuable upon exercise of the
Underwriter's Warrants issued in connection with the Company's initial
public offering of Common Stock and Warrants in July 1997, and (c) up
to 130,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Underwriter's Warrants.
<PAGE>
CROSS REFERENCE SHEET
Registration Statement Item and Heading Prospectus Caption
1. Front of the Registration Statement
and Outside Front Cover
Page of Prospectus. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price. Not Applicable
6. Dilution. Dilution
7. Selling Security Holders. Not Applicable
8. Plan of Distribution Not Applicable
9. Legal Proceedings. Business - Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons Management
11. Security Ownership of Certain Beneficial Owners
and Management Principal Stockholders
12. Description of Securities Discription of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities Management - Indemnification of Officers and Directors
15. Organization Within Last 5 Years Not Applicable
16. Description of Business Prospectus Summary - The Company; Business
17. Management's Discussion and Analysis Management's Discussion or Plan of
Financial Condition and Results
of Operations
18. Description of Property Description of Property
19. Certain Relationships and Related Transactions Certain Transactions
20. Market Price for Common Equity
and Related Stockholder Matters Outside Front Cover Page of Prospectus;
Risk Factors
21. Executive Compensation Management - Executive Compensation
22. Financial Statements. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. Experts
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be
sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an order to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED __________, 1998
PROSPECTUS
AMERICAN CHAMPION ENTERTAINMENT, INC.
1,495,000 Shares of Common Stock,
Issuable Upon the Exercise of Redeemable Warrants
130,000 Shares of Common Stock
and 130,000 Redeemable Warrants
130,000 Shares of Common Stock,
Issuable upon the Exercise of Redeemable Warrants
This Prospectus relates to (i) the sale of up to 1,495,000 shares of
common stock, par value $.0001 per share (the "Common Stock"), of
American Champion Entertainment, Inc. (the "Company") which are
reserved for issuance upon the exercise of redeemable warrants, each
warrant to purchase one share of Common Stock each ("Warrant"), issued
in connection with the Company's 1997 initial public offering of
securities (the "IPO"), (ii) the issuance of up to 130,000 shares of
Common Stock and 130,000 Warrants issuable upon the exercise of the
Warrants (the "Underwriters' Warrants") originally sold to Dalton Kent
Securities Group, Inc. (the "Managing Underwriter") and Sharpe Capital,
Inc. (Dalton Kent Securities Group, Inc. and Sharpe Capital, Inc. are
herinafter referred to as the "Underwriters") in connection with the
IPO, and (iii) up to 130,000 shares of Common Stock which are reserved
for issuance upon the exercise of the Warrants included in the
Underwriters' Warrants.
Each Warrant entitles the registered holder thereof to purchase
one share of Common Stock at an exercise price of $6.50 per share,
subject to adjustment in certain events, until July 29, 2002. The
Warrants are subject to redemption by the Company at $.10 per Warrant
at any time commencing July 30, 1998 upon certain terms and conditions.
See "Description of Securities--Warrants."
On August 1, 1997, the Common Stock and the Warrants began trading on
the NASDAQ SmallCap Market ("NASDAQ") under the symbols "ACEI" and
"ACEIW", respectively. On June 24, 1998 the closing sale price of the
Common Stock and Warrants on NASDAQ was $6.5625 and $1.50,
respectively. See "Certain Market Information."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND SUBSTANTIAL DILUTION. ONLY INVESTORS WHO CAN BEAR THE RISK
OF LOSS OF THEIR ENTIRE INVESTMENT SHOULD INVEST. SEE "RISK FACTORS"
BEGINNING ON PAGE 10 AND "DILUTION" ON PAGE 16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT APPLICABLE TO AND MAY NOT BE USED FOR THE RESALE
OF THE COMMON STOCK ACQUIRED UPON EXERCISE OF THE WARRANTS.
THE DATE OF THIS PROSPECTUS IS , 1998.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration
Statement (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities
offered by this Prospectus. This Prospectus, filed as part of such
Registration Statement, does not contain all of the information set
forth in, or annexed as exhibits to, the Registration Statement,
certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the
Registration Statement including the exhibits filed therewith. The
Registration Statement may be inspected and copies may be obtained from
the Public Reference Section at the Commission's principal office, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
New York Regional Office, 7 World Trade Center, New York, New York
10048, upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and where the
contract or other document has been filed as an exhibit to the
Registration Statement, each such statement is qualified in all
respects by such reference to the applicable document filed with the
Commission.
<PAGE>
The Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith is required to file reports, proxy statements
and other information with the Securities and Exchange Commission
("Commission"). Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its
New York Regional Office, 7 World Trade Center, New York, New York
10048; and at its Pacific Regional Office, 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036-3648, and copies of such
material can be obtained from the Commission's Public Reference Section
at the prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically. The Company furnishes its shareholders with annual
reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, references in this Prospectus to the Company are
references to the Company and its subsidiaries, American Champion
Media, Inc. ("AC Media") and America's Best Karate. Except as otherwise
noted, all information in the Prospectus assumes no exercise of the
Warrants, the Underwriters' Over-allotment Option, the Underwriters'
Warrants or outstanding options or warrants to purchase shares of the
Company's Common Stock.
General
American Champion Entertainment, Inc. (the "Company") is a Delaware
corporation headquartered in Hayward, California and incorporated on
February 5, 1997. The Company was formed as a holding company for its
wholly-owned subsidiary, America's Best Karate, a California
corporation ("ABK"), formed in June 1991, and ABK's wholly-owned
subsidiary, American Champion Media, Inc., a Delaware corporation ("AC
Media"), formed in February 1997. Unless indicated otherwise,
references to the "Company" herein shall include ABK and AC Media.
ABK owns, manages and operates a chain of karate schools with
five locations in the San Francisco Bay Area. ABK's schools provide
karate instruction to students of all ages and skill levels. AC Media
is a media production and marketing company. Through AC Media, the
Company is involved in (i) the development, production and marketing of
"ADVENTURES WITH KANGA RODDY," a television program aimed at pre-school
and primary school children (the "Kanga Roddy Series"), (ii) the
licensing of merchandising rights related to the Kanga Roddy Series,
and (iii) the development, production and marketing of various audio
tapes, video tapes and workbooks that specialize in fitness
information.
"Adventures With Kanga Roddy"
The Company has developed and produced thirteen half-hour
episodes of the Kanga Roddy Series. The Kanga Roddy Series uses
martial arts values such as humility, discipline and respect, with the
added elements of song, contemporary music, dance, vibrant colors and
exciting movements designed to capture its targeted pre-school and
primary school children audience's attention. The Kanga Roddy Series
features a six-foot tall kangaroo character named Kanga Roddy who is a
martial arts expert. Unlike other martial arts programs which feature
violence, Kanga Roddy never fights because he understands that conflict
can always be resolved with knowledge, compassion, humility, respect
and an open mind.
Each episode of the Kanga Roddy Series focuses on a group of
children at a community center and their teachers (played by Jennifer
Montana and Karen Lott, wives of former San Francisco 49ers football
players, Joe Montana and Ronnie Lott) working on activities such as
reading, physical fitness and arts and crafts. During these
activities, the children encounter an ethical or social problem which
causes uneasiness or unhappiness among some of the children. The
teachers sense the problem and suggest that the children seek help from
their friend, Uncle Pat, the proprietor of a rare bookstore played by
Pat Morita. Uncle Pat, with the assistance of his pet bookworm,
Shakespeare, magically transports the children to the land of Hi-Yah
where Kanga Roddy lives.
Once in the land of Hi-Yah, Kanga Roddy and his friend Bantu, a
female African snake, help the children solve their problem by giving
examples presented through songs. Kanga Roddy gets inspiration for the
proper solution to the problem through flashbacks to lessons learned
from his martial arts teacher, Zatochi, a wise old snow monkey. The
children also learn a physical activity each time they visit Kanga
Roddy such as balance, jumping or kicking. When the children return to
the community center, they review what they have learned with their
teachers.
In May 1997, the Company and KTEH, the public broadcasting station
serving the San Jose, California area, entered into a Distribution
Agreement (the "Distribution Agreement") which grants KTEH the
exclusive right to distribute, advertise, market or otherwise exploit
the Kanga Roddy Series on public broadcast affiliated stations
throughout the United States for a two-year period. KTEH has cleared
the broadcast of the Kanga Roddy Series with 47 other public broadcast
stations which the Company believes broadcast to approximately 56% of
the households in the United States (approximately 47 million
households). Approximately one third of these stations are scheduled
to commence broadcast of the Kanga Roddy Series in April 1998 and the
balance are scheduled to commence broadcast in May and June 1998.
Under the terms of the Distribution Agreement, KTEH is entitles to 15%
of monies collected by KTEH (plus distribution expenses) from its
exploitation of the distribution rights granted to it with the balance
to be paid to the Company. KTEH also agreed to pay the Company an
advance of $430,000 payable in four equal installments tied to the
Company's delivery of thirteen episodes of the Kanga Roddy Series. As
of December 31, 1997, the Company had delivered seven episodes of the
Kanga Roddy Series and recognized $215,000 of the total advance. The
Company has completed the development and production of the remaining
six episodes and delivered such episodes to KTEH and recognized the
balance of the advance in the 3 month period ended on March 31, 1998.
The $430,000 advance will be deducted from all royalties payable
to the Company by KTEH. Under the Distribution Agreement, the Company
has also committed to sharing with KTEH (i) 8% of revenues from the
sale (less fees and commissions) and licensing of non-broadcast
ancillary rights of educational products such as video tapes, books and
music tapes and (ii) 5% of gross profits (less fees and commissions) of
the Company from the sale and licensing of toys and clothing. The
Company has also granted KTEH a right of first refusal with respect to
broadcast rights to the Kanga Roddy Series not granted to KTEH in the
Distribution Agreement.
<PAGE>
The Company's strategy includes pursuing licensing and
merchandising opportunities related to the Kanga Roddy Series.
Characters developed in a popular series, and often the series itself,
achieve a high level of recognition and popularity, making them
valuable licensing and merchandising assets. Among the most popular
licensed items are toys, clothing, food, dinnerware/lunch boxes,
watches and soft vinyl goods such as boots, backpacks and raincoats.
The Company plans to retain worldwide rights to the characters and
images developed in the Kanga Roddy Series, to protect its rights to
such characters and images through appropriate registration, and to
license their use to manufacturers for specific products. There is no
assurance, however, that the Company will be able to successfully
retain or protect its rights through registration, or to license its
properties. The Company also hopes to realize revenues through the
distribution of the Kanga Roddy Series in the home video market,
although there is no assurance that the Company will be able to do so.
If the Kanga Roddy Series does not attain and maintain widespread
television distribution, or widespread popularity, it is unlikely that
any significant licensing or merchandising opportunities or revenue
will arise or be maintained.
In July 1997, the Company and SEGA of America, Inc. ("SEGA") entered
into a Licensing Agent Agreement appointing SEGA as the Company's non-
exclusive agent for purposes of licensing and merchandising the "Kanga
Roddy" trademark brand name characters and logo and home video
distribution of the Kanga Roddy Series (the "SEGA Agreement").
Pursuant to the SEGA Agreement, SEGA has agreed to solicit and
negotiate licensing and merchandising agreements on behalf of the
Company, and monitor and oversee the licensing, promotion and marketing
programs in consideration for 30% of all monies or other consideration
payable to the Company under any agreement entered into during the
three year period following execution of the SEGA Agreement by the
Company which was secured or serviced by SEGA. Upon the expiration
or termination of the SEGA Agreement, SEGA will continue to be entitled
to receive such consideration with respect to any License Agreement for
the greater of (i) the actual term of each such License Agreement; or
(ii) five years from the date of commencement of each such License
Agreement. In addition, in the event SEGA enters into any master toy,
home video or master apparel license, SEGA will immediately become the
exclusive agent for the Company for purposes of licensing and
merchandising the "Kanga Roddy" name to third parties for use on or in
connection with merchandise products throughout the world. The SEGA
Agreement is not conditioned on the Company's receiving any minimum
amount from the persons or entities introduced by SEGA.
Fitness Products
The Company develops, produces and markets various video tapes,
audio tapes and workbooks that specialize in fitness information and
education ("Fitness Products"). The Company's first Fitness Product,
entitled "STRONG MIND FIT BODY," consists of video tapes, audio tapes
and a workbook, intended to teach motivational techniques to start and
stay with an exercise program in order to lose weight. In June 1996,
the Company entered into a Distribution Agreement with InteliQuest, a
Utah general partnership. See "Management's Discussion and Analysis or
Plan of Operation Results of Operations" for a discussion on the
Company's decision to write off its film costs relating to this Fitness
Product.
The Company's second Fitness Product, entitled the "MONTANA
EXERCISE VIDEO," is a cardio kick-boxing video starring former
superstar quarterback Joe Montana and his wife Jennifer, both of whom
have trained at the Company's karate schools. The Company has not
commenced distribution of this Fitness Product.
Karate Studios
The Company manages and operates a chain of company owned karate
studios with four locations in the San Francisco Bay Area under the
name "America's Best Karate." Each of the Company's instructors, all
of whom are black belts, have undergone a rigorous training program
conducted by Messrs. Chung and Chan (both members of the Karate Black
Belt Hall of Fame) and/or other instructors of ABK. Each karate studio
conducts approximately 40 forty-five minute classes each week. The
classes are generally comprised of 10 to 15 students and taught by one
to three instructors. The Company's black belt course requires
approximately 36 months of study and its second degree black belt
program requires approximately 48 months of study. Classes are
organized by skill level and age group. Students may take as many
classes as are available each week without additional charge. Fees, if
paid in advance, are generally $1,800 and $2,400 for the black belt and
second degree black belt programs, respectively. At each karate
studio, the Company also sells martial arts related products, such as
uniforms, other clothing and safety equipment.
<PAGE>
During 1997, the Company closed five studios, which were not
operating profitably. The Company was able to retain approximately 65%
of the students who attended the closed studios by combining them with
other nearby ABK studios. As of December 31, 1997, there were
approximately 1,350 students enrolled at the Company's five karate
studios. The Company believes that the average age of the Company's
students is approximately 12 years old. At these enrollment levels the
Company estimates that it is currently operating at approximately 75%
of its total capacity. See "Management's Discussion and Analysis or
Plan of Operation - Results of Operations."
The Company was incorporated in Delaware in February 1997 to
serve as a holding company for AC Media, a Delaware corporation formed
in February 1997, and America's Best Karate, a California corporation
formed in June 1991. This Prospectus assumes that the reorganization
transaction giving effect to this holding company structure will be
completed prior to the closing of the Offering, and that each share of
the currently outstanding shares of common stock of America's Best
Karate will be converted into 28.1 shares of Common Stock of the
Company. The Company's executive offices are located at 26203
Production Avenue, Suite 5, Hayward, California 94545, and its
telephone number is (510) 782-8168.
<PAGE>
THE OFFERING
Securities Offered....................Up to 1,495,000 shares of Common Stock
reserved for issuance upon exercise of
outstanding Warrants, up to 130,000
shares of Common Stock and 130,000
Warrants issuable upon exercise of one
Warrant originally sold to Dalton Kent
Securities Group, Inc. and Sharpe
Capital, Inc. (the "Underwriters") in
connection with the IPO (the
"Underwriters' Warrants"), up to 130,000
shares of Common Stock reserved for
issuance upon exercise of the Warrants
included in the Underwriters' Warrants.
See "Description of Securities."
Common Stock Outstanding:
Prior to the Offering (1)...........3,832,345 shares of Common Stock
After the Offering .................5,587,345 shares of Common Stock
Warrants:
Exercise Terms..................Each Warrant entitles the holder to purchase one
share of Common Stock at a price of $6.50
(the "Exercise Price"), subject to adjustment
in certain circumstances, during the five year
period commencing July 30, 1997.
Expiration Date..................July 29, 2002
Redemption of Warrants...........Redeemable by the Company at any time
commencing July 30, 1998, at a price of $.10
per Warrant, upon not less than 30 days'
prior written notice to the holders of the
Warrants, provided the average closing bid
quotation of the Common Stock as reported on
NASDAQ or the OTC Bulletin Board, if traded
thereon, or if not traded thereon the average
closing sale price of the Common Stock if
listed on a national securities exchange (or
other reporting system that provides last sale
prices), has been at least 120% of the then
current exercise price of the Warrants
(initially, $7.80 per share), subject to
adjustment, for a period of 20 consecutive
trading days ending on the third day prior to
the date on which the Company gives notice of
redemption. The Warrants will be exercisable
until the close of business on the day
immediately preceding the date fixed for
redemption. See "Description of Securities -
Warrants."
Use of Proceeds..................The net proceeds from the exercise of the
Warrants, if any, will be used primarily for
working capital and other general corporate
purposes. See "Use of Proceeds."
Risk Factors.....................The securities described herein involve a
high degree of risk and immediate substantial
dilution. Holders of Warrants should carefully
consider the factors set forth under the
caption "Risk Factors" before exercising the
Warrants to purchase the shares of Common
Stock offered hereby. See "Risk Factors" and
"Dilution."
NASDAQ Symbols:
Common Stock.....................ACEI
Warrants.........................ACEIW
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(1) Excludes (i) 4,055 shares issuable upon conversion
of certain convertible notes and 407,445 shares subject to options issued
under the Company's stock option plans. See "Management--Stock Plans."
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data for the years ended December
31, 1997 and 1996 are derived from the audited financial statements of
America's Best Karate. The data for the three months ended March 31,
1998 and 1997, and as of March 31, 1998, are unaudited but, in the
opinion of management, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results
of operations and financial position for such periods.
Statement of Operations:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997 1997 1996
Three Months Ended
March 31,
(Unaudited)
<S> <C> <C> <C> <C>
Total Revenue $381,998 $278,188 $1,179,553 $1,050,553
Net (loss) ($134,890) ($159,974) ($801,416) ($641,583)
Net (loss) per share ($0.04) ($0.06) ($0.25) ($0.27)
Weighted average shares outstanding 3,832,345 2,515,700 3,155,257 2,376,588
_____________
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
(Actual) (Actual)
March 31, 1998 March 31, 1997
(Unaudited, in thousands)
<S> <C> <C>
Working capital(deficiency) $1,495 $(1,281)
Total assets $4,867 $1,147
Current Liabilities $681 $1,424
Long-term debt $226 $485
Common Stock subject to recission 0 $1,176
Stockholders' equity $3,959 $(1,938)
___________
</TABLE>
RISK FACTORS
The securities offered hereby are highly speculative and should
be purchased only by persons who can afford to lose their entire
investment in the company. Each prospective investor should carefully
consider the following risk factors, as well as all other information
set forth elsewhere in this prospectus.
This prospectus contains certain forward looking statements.
Actual results could differ materially from those projected in the
forward looking statements as a result of the risk factors set forth
below and elsewhere in this prospectus, including but not limited to
general trends in the home health care industry and the ability of the
company to successfully implement its expansion plans.
1. History of Losses and Deficits; Uncertainty of Attaining
Profitability. The Company sustained operating losses of $641,583,
$801,416 and $134,890 in 1996, 1997 and the three months ended March
31, 1998, respectively. The Company expects to incur significant
additional operating losses for the foreseeable future as it continues
to develop, produce and market its media projects, including the Kanga
Roddy Series. There can be no assurance that the Company will ever
achieve profitability. See "Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
2. Liquidity and Financing Requirements; Dependence on Offering
Proceeds. The Company's venture into media projects, including the
development and production of the Kanga Roddy Series, requires
substantial amounts of capital. Although the Company was able to
finance the production of the pilot and the first 12 episodes of the
Kanga Roddy Series with its own funds and the proceeds of the IPO, the
Company is dependent upon the proceeds of additional financing and/or
proceeds of this Offering to produce the next 28 episodes of the Kanga
Roddy Series. The Company believes that the net proceeds of this
Offering, together with funds generated from operations, if any, will
be sufficient to produce these next 28 episodes. In the event that
production costs are higher than expected, or the Company is forced to
use funds earmarked for production for other purposes, the Company
could be required to modify its operations or to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to such additional financing and there can be
no assurance that such additional financing will be available at all or
on terms acceptable to the Company. See "Use of Proceeds."
<PAGE>
3. Dependence on the Success of the Kanga Roddy Series. The
Company is dependent on the success of the Kanga Roddy Series, which in
turn is dependent upon unpredictable and volatile factors beyond the
Company's control, such as children's preferences, competing
programming and the availability of other entertainment activities for
children. The failure of the Company to attract a significant
television audience for the Kanga Roddy Series over a long period of
time would have a material adverse effect on the Company's financial
condition and results of operations, and in all likelihood on the
market price of the Company's securities. There is no assurance that
the Kanga Roddy Series will be successful or that, if successful
initially, that television viewership of the Kanga Roddy Series will be
maintained.
4. Licensing and Merchandising. The Company's strategy in
producing the Kanga Roddy Series includes the licensing of its
characters to others for the merchandising of a variety of products
ranging from toys to apparel. The ability of the Company to
successfully exploit the merchandising opportunities afforded by the
Kanga Roddy Series is dependent on the popularity of the Kanga Roddy
Series and the ability of the Company's characters to provide
attractive merchandising features to its customers. If the Company is
unable to attract a significant television audience for the Kanga Roddy
Series, it is doubtful that any significant licensing or merchandising
opportunities will arise. Even if the Kanga Roddy Series is popular
with television audiences, there is no assurance that licensing
opportunities will materialize as the Company must compete with
hundreds of owners of creative content who seek to license their
characters and properties to a limited number of manufacturers and
distributors. See "Business--Licensing and Merchandising."
5. Absence of Significant Experience with Television Programming
or Licensing and Merchandising. Prior to its involvement with the Kanga
Roddy Series, the Company has had no significant experience with the
development and production of television programming or with the
licensing and merchandising of products. As a result, the Company could
enter into contracts or make other agreements that are on less than
optimal terms. The television and licensing and merchandising
businesses are complicated and the absence of experience in such
businesses could materially and adversely affect the financial
condition and results of operations of the Company.
6. Dependence on Key Personnel. The Company is dependent on the
efforts and abilities of Anthony Chan and George Chung, the Company's
founders and principal executive officers, and Don Berryessa, Vice
President and Jan D. Hutchins, President of AC Media. The Company has
entered into employment agreements, effective as of August 5, 1997,
with each of such individuals. None of such employment agreements
contains non-competition provisions. See "Management--Employment
Agreements." The loss of the services of any of the above individuals,
or of other key personnel, could have a material adverse effect on the
business of the Company. The Company has obtained "key-man" life
insurance with $1,000,000 coverage for each of Messrs. Chung and Chan.
7. Dependence on Association with Joe Montana, Ronnie Lott and
the San Francisco 49ers. The success of the Kanga Roddy Series depends
in part on the Company's continued association with former 49ers Joe
Montana and Ronnie Lott, and their wives, and the San Francisco 49ers.
The failure of Joe Montana, Ronnie Lott, or their wives, or the San
Francisco 49ers, to continue to actively support the Kanga Roddy Series
could have a material adverse impact on the ability to market the Kanga
Roddy Series. None of Joe Montana, Ronnie Lott, or their wives, or the
San Francisco 49ers are obligated to engage in any business
transactions or jointly participate in any opportunities with the
Company, and the possibility exists that the current relationships
between the parties could materially change in the future.
8. Competition. Each of the industries in which the Company
competes is highly competitive and most of the companies with which the
Company competes have greater financial and other resources than the
Company. With respect to the Company's television production
activities, the Company competes on the basis of relationships and
pricing for access to a limited supply of facilities and talented
creative personnel to produce its programs. If the Company is
successful at getting the Kanga Roddy Series aired on television, the
Company will compete for time slots, ratings and related advertising
revenues and for the licensing and merchandising of products related to
the Kanga Roddy Series. The Company's Fitness Products compete with
many other products aimed at the fitness and weight loss markets,
including other video tapes, audio tapes and workbooks, and various
types of exercise machinery. Many of these competing products are
sponsored or endorsed by celebrities and sports figures, and are
marketed by companies having significantly greater resources than the
Company. The martial arts industry is also highly competitive. The
Company's competitors include a variety of small to medium sized
martial arts instructional centers, many of which may be better
established and better financed than the Company. See "Business--
Competition."
9. Government Regulation and Potential Return of Membership
Fees. In the event that the Company elects to close a given karate
studio, state or local laws may require that the Company return the
"unearned" portion of membership fees to karate studio members. Some
states require that health and other fitness clubs register with an
appropriate regulatory authority and post a bond in order to secure
payment of such "unearned" membership fees. The Company is not aware of
any existing or pending legislation in the states in which it operates
which would require the Company to post a bond. Conceivably, in the
event such laws are in effect, or are enacted in states where the
Company operates karate studios, the cost associated with posting such
bonds or returning "unearned" membership fees could in the aggregate be
substantial and may adversely affect the Company's financial condition
and its future prospects. Pursuant to the terms of its standard
contract with its students, America's Best Karate is required to refund
(i) all funds received if a student cancels within three (3) days of
signing a membership contract and (ii) all "unearned" funds received in
the event the student dies, becomes permanently disabled, moves more
than twenty-five (25) miles away from America's Best Karate or
America's Best Karate closes for more than thirty (30) consecutive
days. The Company does not currently maintain nor does it anticipate
maintaining a reserve account for return of membership fees. As a
consequence, the Company may be unable to refund membership fees which
could have a material adverse effect on the Company's business and its
prospects.
<PAGE>
10. Control by Messrs. Chan and Chung; Anti-takeover Effects of
Delaware Law. As of the date of this Prospectus, Anthony Chan and
George Chung, the Company's founders and principal executive officers,
collectively beneficially own 1,016,276 shares of the Company's
outstanding Common Stock, representing approximately 26.5% of the
outstanding shares prior to this Offering and approximately 18.2% of
the outstanding shares of Common Stock (assuming no exercise of the
Warrants, the Underwriter's Warrants or the Warrants included therein
or of any other options or warrants). Since holders of Common Stock do
not have any cumulative voting rights and directors are elected by a
majority vote, Messrs. Chan and Chung are in a position to strongly
influence the election of directors as well as the affairs of the
Company. See "Management" and "Principal Stockholders." Assuming that
all of the Warrants, Underwriter's Warrants and Warrants included
therein are exercised, the officers and directors will beneficially
own, in the aggregate, approximately 21.7% of the outstanding Common
Stock (assuming no exercise of any other options or warrants other than
those held by such individuals). Although such shareholders would not
represent, in the aggregate, a majority of the voting securities of the
Company, their significant beneficial holdings would enable them to
exercise substantial influence over the Company. See "Principal
Stockholders" and "Description of Securities." In addition, Section
203 of the General Corporation Law of Delaware prohibits the Company
from engaging in certain business combinations with interested
stockholders, as defined by statute. These provisions may have the
effect of delaying or preventing a change of control of the Company
without action by the stockholders, and therefore could adversely
affect the price of the Company's Common Stock. See "Description of
Securities."
11. Broad Discretion in Application of Proceeds. The proceeds to
the Company from the exercise of the Warrants, the Underwriter's
Warrants and the Warrants included therein, net of expenses of this
offering (other than solicitation fees, if any, to be paid to the
Underwriter in connection with the exercise of Warrants), will be
approximately $11,374,400 assuming that all such Warrants,
Underwriter's Warrants and Warrants included therein are exercised.
Management anticipates that the proceeds of this offering, if any, will
be used for acquisitions, working capital and general corporate
purposes. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds. See "Use of
Proceeds" and "Warrant Solicitation."
12. Immediate and Substantial Dilution. This Offering involves
an immediate and substantial dilution of $3.76 per share (or 57.8%) to
investors receiving shares of Common Stock in this offering upon the
exercise of Warrants, Underwriter's Warrants or the Warrants included
therein. See "Dilution."
13. Liability Insurance. The Company has purchased liability
insurance for each of its karate studios in the amount of $1,000,000
per occurrence and $2,000,000 in the aggregate which the Company
believes is sufficient for its current level of business operations.
There is no assurance, however, that the present coverage will continue
to be available in the future or that the Company will be able to
retain such coverage at a reasonable cost. Further, there can be no
assurance that such insurance will be sufficient to cover potential
claims, including without limitation, claims brought by students or
instructors injured during karate classes, or that adequate, affordable
insurance coverage will be available to the Company in the future as
the Company expands its operations. A successful claim against the
Company in excess of the liability limits or relating to an injury
excluded under the policy could have a material adverse effect on the
Company.
14. No Intention to Pay Dividends. The Company has no present
intention to declare or pay cash dividends. Any earnings which the
Company may realize in the foreseeable future will be retained to
finance the growth of the Company.
15. Exercise Price Arbitrarily Determined. The exercise price
and other terms of the Warrants were determined by negotiation between
the Company and the Underwriters and are not necessarily related to the
Company's assets, book value or financial condition, and may not be
indicative of the actual value of the Company.
16. Nasdaq Maintenance Requirements; Possible Delisting of
Securities from Nasdaq Market; Risks of Low
priced Stocks. The Company's Common Stock and Warrants are listed on
NASDAQ. The Commission has approved rules imposing criteria for listing
of securities on NASDAQ, including standards for maintenance of such
listing. For continued listing, a company, among other things, must
have $2,000,000 in net tangible assets, $1,000,000 in market value of
securities in the public float and a minimum bid price of $1.00 per
share. If the Company is unable to satisfy NASDAQ's maintenance
criteria in the future, its securities may be delisted from NASDAQ. In
such event, trading, if any, in the Company's securities would
thereafter be conducted in the over counter market in the so called
"pink sheets" or the NASD's "Electronic Bulletin Board." As a
consequence of such delisting, an investor would likely find it more
difficult to dispose of, or to obtain quotations as to, the price of
the Company's securities.
17. Penny Stock Regulation. In the event that the Company is
unable to satisfy the maintenance requirements for NASDAQ and its
Common Stock falls below the minimum bid price of $1.00 per share for
the continued quotation, trading would be conducted on the "pink
sheets" or the NASD's Electronic Bulletin Board. In the absence of the
Common Stock being quoted on NASDAQ, or the Company's having $2,000,000
in stockholders' equity, trading in the Common Stock would be covered
by Rule-15g 9 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), for non NASDAQ and non exchange listed
securities. Under such rule, broker dealers who recommend such
securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a
transaction prior to sale. Securities are exempt from this rule if the
market price is at least $5.00 per share.
<PAGE>
The Commission adopted regulations that generally define a penny
stock to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Such exceptions include
an equity security listed on NASDAQ, and an equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for three years, (ii) net
tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
If the Company's securities were to become subject to the
regulations applicable to penny stocks, the market liquidity for the
securities would be severely affected, limiting the ability of broker
dealers to sell the securities and the ability of purchasers in this
Offering to sell their securities in the secondary market. There is no
assurance that trading in the Company's securities will not be subject
to these or other regulations that would adversely affect the market
for such securities.
18. Shares Available for Future Sale; Registration Rights. Of
the 3,832,345 shares of Common Stock of the Company outstanding as of
the date of this Prospectus, 2,441,151 shares are "restricted
securities," which are owned by "affiliates" of the Company, as those
terms are defined in Rule-144 promulgated under the Securities Act.
Absent registration under the Securities Act, the sale of such shares
is subject to Rule-144, as promulgated under the Securities Act. All of
the "restricted securities" will be eligible for resale under Rule-144
commencing in October, 1997. In general, under Rule-144, subject to the
satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares
of Common Stock for at least one year is entitled to sell in brokerage
transactions, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding
shares of the same class, or if the Common Stock is quoted on NASDAQ or
a stock exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. Rule-144 also permits a person who
presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has
beneficially owned the shares of Common Stock for at least two years to
sell such shares without regard to any of the volume limitations as
described above. No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or the availability of such shares
for sale will have on the market prices of the Company's securities
prevailing from time to time. The possibility that substantial amounts
of Common Stock may be sold under Rule-144 into the public market may
adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital in the future
through the sale of equity securities. The Company has agreed to file a
registration statement under the Securities Act with respect to the
resale of 255,000 shares of Common Stock of the Company by certain
stockholders upon demand by a majority of such stockholders. Upon the
effectiveness of such registration statement, such stockholders would
be free to sell their shares in the public market without volume
restriction unless such shares were held by an affiliate or are subject
to a lock-up agreement described above. See "Shares Eligible for Future
Sale."
19. Potential Adverse Effect of Redemption of Warrants. The
Warrants offered hereby are redeemable, in whole or in part, at a price
of $.10 per Warrant, commencing July 30, 1998 (or earlier with the
consent of the Managing Underwriter) on not less than 30 days' prior
written notice to the holders of such Warrants, provided that the last
sales price of the Common Stock on NASDAQ is at least 120% of the then
current exercise price of the Warrants (initially, $7.80 per share,
subject to adjustment) for a period of 20 consecutive trading days
ending on the third day prior to the date the notice of redemption is
given. Holders of Warrants shall have exercise rights until the close
of the business day preceding the date fixed for redemption. Notice of
redemption of the Warrants could force the holders to exercise the
Warrants and pay the Exercise Price at a time when it may be
disadvantageous for them to do so, or to sell the Warrants at the
current market price when they might otherwise wish to hold them, or to
accept the redemption price, which may be substantially less than the
market value of the Warrants at the time of redemption. The Warrants
may not be exercised unless the registration statement pursuant to the
Securities Act covering the underlying shares of Common Stock is
current and such shares have been qualified for sale, or there is an
exemption from applicable qualification requirements, under the
securities laws of the state of residence of the holder of the
Warrants. Such restrictions could have the effect of preventing
certain Warrantholders from liquidating their Warrants. See
"Description of Securities - Warrants."
20. Non-registration in Certain Jurisdictions of Shares
Underlying the Warrants. Although the Warrants were not knowingly sold
to purchasers in jurisdictions in which they were not registered or
otherwise qualified for sale, purchasers may have purchased Warrants in
the aftermarket or may have moved to jurisdictions in which the shares
of Common Stock issuable upon exercise of the Warrants are not so
registered or qualified during the period that the Warrants are
exercisable. In the event that such registration or qualification is
required, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants unless and until the shares could
be registered or qualified for sale in the jurisdiction in which such
purchasers reside. If the Company was unable to register or qualify
the shares in a particular state and no exemption to such registration
or qualification was available, in order to realize any economic
benefit from the purchase of the Warrants, a holder might have to sell
the Warrants rather than exercising them. No assurance can be given,
however, as to the ability of the Company to effect any required
registration or qualification of the Common Stock or Warrants in any
jurisdiction in which registration or qualification has not already
been completed. See "Description of Securities - Warrants."
<PAGE>
Forward Looking Statements and Associated Risks
This Prospectus contains certain forward-looking statements,
including among others (i) anticipated trends in the Company's
financial condition and results of operations and (ii) the Company's
business strategy for developing, producing, distributing, licensing
and merchandising the Kanga Roddy Series and its Fitness Products.
These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these
forward-looking statements. In addition to the other risks described
elsewhere in this "Risk Factors" discussion, important factors to
consider in evaluating such forward-looking statements include (i)
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; (ii) unanticipated working capital or other cash
requirements; (iii) 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 (iv) various competitive factors
that may prevent the Company from competing successfully in the
marketplace. In light of these risks and uncertainties, many of which
are described in greater detail elsewhere in this "Risk Factors"
discussion, there can be no assurance that the events predicted in
forward-looking statements contained in this Prospectus will in fact
transpire.
USE OF PROCEEDS
The proceeds received by the Company upon exercise of the
Warrants, the Underwriter's Warrants and the Warrants included therein,
net of expenses of the offering, estimated at $33,100, (other than
solicitation fees, if any, to be paid to the Underwriter in connection
with the exercise of Warrants), are estimated to be $11,374,400,
assuming that all of such Warrants, Underwriter's Warrants and Warrants
included therein are exercised. There can be no assurance as to the
number of Warrants, if any, or Underwriter's Warrants or Warrants
included therein, if any, which will be exercised. Management
anticipates that the net proceeds of this offering, if any, will be
used for acquisitions and allocated to working capital and general
corporate purposes. See "Warrant Solicitation."
The proceeds allocated to working capital and general corporate
purposes will be applied, to the extent necessary, to the Company's
current operations.
CERTAIN MARKET INFORMATION
The Company's Common Stock and Warrants commenced trading on the
NASDAQ National Market System under the symbol "ACEI" and "ACEIW",
respectively, on August 1, 1997. The range of high and low reported
closing sales prices for the Common Stock as reported by NASDAQ since
the commencement of trading were as follows:
High Low
ACEI
1997
Third Quarter $5.50 $4.125
Fourth Quarter $8.00 $4.813
1998
First Quarter $9.625 $7.75
Second Quarter (through June 24, 1998) $9.563 $6.563
High Low
ACEIW
1997
Third Quarter $1.00 $0.313
Fourth Quarter $2.75 $0.531
1998
First Quarter $3.563 $2.188
Second Quarter (through June 24, 1998) $3.50 $1.50
- ---------------------------------------
<PAGE>
The prices set forth above reflect inter dealer prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
On April 1, 1998, as reported by the Company's transfer agent,
shares of Common Stock were held by 700 shareholders of record.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, that may
be generated from the Company's operations to help finance the
operations and expansion of the Company and, accordingly, does not
plan, for the reasonably foreseeable future, to pay dividends to
holders of the Common Stock. Any decision as to the future payment of
dividends will depend on the results of operations and financial
position of the Company and such other factors as the Company's Board
of Directors, in its discretion, deems relevant.
DILUTION
The difference between the exercise price of the Warrants and the
adjusted net tangible book value per share of Common Stock after this
offering, assuming exercise for cash of all Warrants, Underwriters'
Warrants and Warrants included therein, constitutes the dilution to
investors in this offering. Net tangible book value per share on any
given date is determined by dividing the net tangible book value (total
tangible book value less total liabilities) of the Company on such date
by the number of shares of Common Stock outstanding on such date.
At March 31, 1998, the net tangible book value of the Company was
$3,959,433, or approximately $1.03 per share of Common Stock. After
giving effect to the sale by the Company of 1,495,000 shares of Common
Stock upon the exercise of outstanding Warrants, 130,000 shares of
Common Stock upon the exercise of the Underwriters' Warrants and
130,000 shares of Common Stock upon the exercise of the Warrants
included therein, and the receipt of the net proceeds therefrom, the
net tangible book value at March 31, 1998 would have been $15,333,833,
or approximately $2.74 per share of Common Stock, representing an
immediate increase in net tangible book value of $1.71 per share to
existing shareholders and an immediate dilution of $3.76 (58%) per
share to those who exercise Warrants. The following table illustrates
the foregoing information with respect to dilution on a per share
basis:
Exercise Price (1) $6.50
Net tangible book value per share before exercise $1.03
Increase per share attributable to exercise (2)(3) $1.71
Adjusted net tangible book value after exercise $2.74
Dilution to persons exercising Warrants $3.76
_____________________________
(1) Before deducting solicitation fees, if any, to be paid to the
Underwriter in connection with the exercise of Warrants. See "Warrant
Solicitation."
(2) Assumes no exercise of other outstanding options or warrants.
(3) Includes proceeds from the sale of 130,000 shares of Common Stock
upon the exercise of the Underwriters' Warrants at an average price of
$6.50 per share.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company
as of March 31, 1998 and as adjusted to give effect to the sale of
Units offered hereby and the application of the net proceeds of this
Offering. This information should be read in conjunction with the
Financial Statements and related notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Actual As Adjusted (1)
As of March 31,
1998
(unaudited)
<S> <C> <C>
Long-term Debt $226,231 $226,231
Stockholders' Equity:
Common Stock $).0001 par value;
Authorized 20,000,000 shares
Issued and outstanding - 3,832,345 and 5,587,345 shares, respectively $3,959,433 $15,333,833
Preferred Stock $0.0001 par value;
Authorized 3,000,000 share
Issued and outstanding - No shares 0 0
Additional paid-in capital 0 0
Accumulated deficit ($1,719,486) ($1,719,486)
------------ ------------
Total stockholders' equity $3,959,433 $13,614,347
============ ============
- ------------
</TABLE>
(1) Gives effect to the sale of 1,495,000 shares of Common Stock upon
the exercise of outstanding Warrants and the sale of 130,000 shares of
Common Stock upon exercise of the Underwriters' Warrants and 130,000
shares of Common Stock upon the exercise of the Warrants included
therein, resulting in net proceeds to the Company of $11,374,400 (after
deducting expenses of the offering other than solicitation fees, if
any, to be paid to the Underwriter in connection with the exercise of
the Warrants). See "Warrant Solicitation."
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years ended
December 31, 1997 and 1996 are derived from the audited financial statements
of American Champion Entertainment, Inc. The data for the three months
ended March 31, 1998 and 1997, and as of March 31, 1998, are unaudited
but, in the opinion of management, reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of
the results of operations and financial position for such periods. The
data should be read in conjunction with the financial statements,
related notes, and other financial information included or incorporated
by reference herein.
Statement of Operations:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997 1997 1996
Three Months Ended
March 31,
(Unaudited)
<S> <C> <C> <C> <C>
Total Revenue $381,998 $278,188 $1,179,553 $1,050,553
Net (loss) ($134,890) ($159,974) ($801,416) ($641,583)
Net (loss) per share ($0.04) ($0.06) ($0.25) ($0.27)
Weighted average shares outstanding 3,832,345 2,515,700 3,155,257 2,376,588
_____________
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
(Actual) (As Adjusted) (1)
March 31, 1998 March 31, 1998
(Unaudited, in thousands)
<S> <C> <C>
Working capital(deficiency) $1,495 $12,869
Total assets $4,867 $16,241
Current Liabilities $681 $681
Long-term debt $226 $226
Stockholders' equity $3,959 $15,334
</TABLE>
___________
(1)Gives effect to (i) exercise of all outstanding Warrants, (ii) exercise of
all Underwriter's Warrants and (iii) exercise of all Warrants included in the
Units issuable upon exercise of the Underwriter's Warrants, resulting in
proceeds to the Company of $11,374,400 (after deducting expenses of the
offering other than solicitation fees, if any, to be paid to the Underwriter
in connection with the exercise of the Warrants). See "Warrant Solicitation."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" from liability for forward-looking statements. Certain information
included in 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 the
television viewer 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.
The following section discusses the significant operating
changes, business trends, financial condition, earnings and liquidity
that have occurred in the three-month period ended March 31, 1998. This
discussion should be read in conjunction with the Company's
consolidated financial statements and notes appearing elsewhere in this
report.
<PAGE>
The following section discusses the significant operating
changes, business trends, financial condition, earnings and liquidity
that have occurred in the two-year period ended December 31, 1997.
This discussion should be read in conjunction with the Company's
consolidated financial statements and notes appearing elsewhere in this
report.
The following discussion may contain forward-looking statements
that are subject to risks and uncertainties. Such risks and
uncertainties could cause actual results to differ materially from
those indicated. For a discussion of factors that could cause actual
results to differ, please see the discussion contained herein. Readers
should not place undue reliance on the forward-looking statements,
which reflect management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-
looking statements to reflect subsequent events or circumstances.
Readers are also encouraged to review the Company's publicly available
filings with the Securities and Exchange Commission.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997
Revenues. For the three months ended March 31, 1998, the
Company's total revenue increased to $381,998, an increase of $103,810
or 37% as compared to total revenue for the three months ended March
31, 1997 of $278,188.
The Company's revenues from the operation of its karate studios
for the three months ended March 31, 1998 was $126,905, a decrease of
50% from revenues of $255,950, for the three months ended March 31,
1997. The decrease is attributable to the reduction in the number of
karate studios. In 1997, the Company closed five schools, two in
Nevada and three in California which were not operating profitably. On
March 31, 1998, the Company sold a studio to a former employee of the
Company for $52,859 which was paid in the form of a promissory note
which provides for 70 monthly payments of $1,000 including interest.
For the three months ended March 31, 1998, the Company recognized
$215,000 in film income. Film income was derived from the delivery of
six episodes of the television show "Adventures with Kanga Roddy" to
KTEH pursuant to the Distribution Agreement with KTEH dated May 6,
1997.
The Company's interest income of $26,692 was earned from
investment of the proceeds from the Company's initial public offering.
Costs and Expenses. The Company's revenue from its karate
studios and film business were offset by amortization of film costs of
$73,332, calculated in proportion to the revenue generated by the
television show in this first quarter to total expected revenues from
the television show.
The Company's expenses for salaries and payroll taxes increased
by $22,606 or 12% for the three months ended March 31, 1998 from
$193,028 for the comparable period in 1997. The increase was mainly
the result of increases in administrative, film production and
marketing personnel. Total selling, general and administrative
expenses increased by $180,239 for the three months ended March 31,
1998 from $55,878 for the comparable period in 1997. This increase is
primarily due to promotional expenses related to the television show,
depreciation of production equipment and legal and accounting fees.
Interest expense decreased $41,484 or 82% for the three months
ended March 31, 1998 from $50,385 for the comparable period in 1997.
This decrease in expense is attributable to the payoff of loans in 1997
with proceeds from the Company's IPO. Rent expense also decreased to
$84,616 for the three month period ended March 31, 1998 from $124,299
for the comparable period in 1997, a decrease of 32%. The decrease in
rent expense is primarily attributable to the closure of karate
studios.
As a result of the foregoing factors, the Company's net loss
decreased by $25,084 or 16% from $159,974 for the three months ended
March 31, 1997 to $134,890 for the three months ended March 31, 1998.
Net loss per share decreased from $0.06 for the three months ended
March 31, 1997 to $0.04 for the comparable period in 1998. Weighted
average number of shares outstanding increased from 2,515,700 for the
three months ended March 31, 1997 to 3,832,345 for the comparable
period in 1998 due to the Company's initial public offering in August
1997.
Liquidity And Capital Resources
Cash decreased for the three months ended March 31, 1998 by
$1,241,488 of which $1,200,715 was for investing activities related to
the production of the Adventures With Kanga Roddy show. Net operating
cash loss was $34,655 and the balance of $6,118 was used in financing
activities.
As of March 31, 1998, total long-term debt was $62,261 and loans
payable to related parties was $35,503. In addition, deferred revenues
were $244,912 (current portion) and $163,215 (long-term liabilities) at
March 31, 1998. Deferred revenues are primarily pre-paid tuition for
the karate studios which cannot be immediately recognized. In
connection with the sale of the studio discussed above, the Company
retained all advance payments of tuition which were $156,536 at March
31, 1998 but adjusted this for future estimated refunds to students
enrolled prior to March 31, 1998 to $94,000. This amount is included
in deferred revenue.
<PAGE>
Recent Developments
On April 20, 1998, the Company entered into a Continuing Distribution
Agreement with KTEH for the distribution of 26 more half-hour Kanga
Roddy shows and two one-hour specials. Under the Continuing
Distribution Agreement, KTEH receives the exclusive domestic broadcast
rights to the new episodes for two years and agrees to pay the Company
$30,000 for each half-hour program and $60,000 for each of the two one-
half hour shows. In anticipation of its need for additional working
capital to produce the additional 28 episodes of the Kanga Roddy
series, the Company engaged JW Charles Securities, Inc. on April 24,
1998 to assist the Company in identifying sources of financing. There
can be no assurance that such financing will be available, or, if
available, will be on terms satisfactory to the Company or not dilutive
of existing shareholders.
On April 29, 1998, the Company executed a sponsorship agreement with
Sara Lee Corporation, the parent company of Hanes, which provides for
Hanes' corporate sponsorship of the Adventures With Kanga Roddy show.
It is anticipated that basketball legend Michael Jordon will star in
the Hanes campaigns.
Year Ended December 31, 1997 ("Fiscal 1997") Compared to Year Ended
December 31, 1996 ("Fiscal 1996")
The Company was formed in February 1997 and has a wholly owned
subsidiary, ABK which owns and operates karate studios. ABK wholly
owns AC Media which is a media production and marketing company.
Revenues. During the year ended December 31, 1997, the
Company's total revenue increased to $1,179,553, an increase of
$129,000 or 12% as compared to total revenue for the year ended
December 31, 1996 of $1,050,553.
The Company's revenues from the operation of its karate studios
for the year ended December 31, 1997 was $921,158, a decrease of 12%
from revenues of $1,050,553, for the year ended December 31, 1996.
The decrease is attributable to the reduction in the number of karate
studios. In 1997, the Company closed five schools, two in Nevada and
three in California which were not operating profitably. There were
five remaining studios at the end of 1997. The Company plans to
continue to review the profitability of its remaining studios and will
sell or close those that are not performing in the Company's judgment.
For the year ended December 31, 1997 the Company recognized
$215,000 in film income. Film income was derived from the delivery of
the first seven episodes of the television show "Adventures with Kanga
Roddy" to KTEH pursuant to its Distribution Agreement with KTEH. See
"Business."
The Company's interest income of $43,395 was earned from
investment of the proceeds from the Company's initial public offering.
Costs and Expenses. The Company's revenue from its karate
studios and film business were offset by a write off of film costs of
$105,000 resulting from the Company's determination that it is unlikely
that it will generate significant revenue from sales of the "STRONG
MIND FIT BODY" program. The Company also paid loan fees of $65,000
during 1997 pursuant to a 1994 loan agreement which required the
Company, as borrower, to pay such fees in the form of shares of its
common stock in the event the Company's common stock became publicly
traded. In addition, the Company also accrued expenses of $57,000 for
the estimate costs to be incurred in further periods related to karate
studios closed.
The Company's expenses for salaries and payroll taxes increased
by $80,912 or 11% in 1997 from $712,574 in 1996. The increase was
mainly the result of increases in administrative, film production and
marketing personnel. Total selling, general and administrative
expenses increased $47,748 or 15% in 1997 from $325,025 in 1996. This
increase is primarily due to production expenses and other expenses
incurred in connection with the Company's common stock becoming
publicly traded.
Interest expense increased $41,301 or 60% in 1997 from $69,383 in
1996. This increase in expense is attributable to loans incurred in
1996 and 1997, which were paid in full in the third quarter of 1997.
Rent expense, however, decreased from $496,212, for the twelve month
period ended December 31, 1996 to $382,928 for the comparable periods
ended December 31, 1997, a decrease of 23%. The decrease in rent
expense is primarily attributable to the closure of karate studios in
1997.
As a result of foregoing factors, the Company's net loss
increased by $159,833 or 25% from ($641,583) for the year ended
December 31, 1996 to ($801,416) for the year ended December 31, 1997.
Net loss per share decreased from ($0.27) in 1996 to ($0.25) in 1997
due to the increase in the number of outstanding shares of the Company
issued in the Company's initial public offering which closed in August
1997.
Liquidity and Capital Resources
Stockholders' equity increased $6,032,821 or 311% in 1997 as a result
of the completion of the Company's initial public offering in 1997 and
the expiration of the common stock rescission agreement. Cash
increased for the twelve months ended December 30, 1997 by $1,766,894
and decreased by ($37,480) for the twelve months ended December 31,
1996. Cash utilized for operations for the twelve months ended
December 31, 1997 and 1996 was ($1,235,745) and ($546,922),
respectively. Cash used for investing activities for the twelve months
ended December 31, 1997 and 1996 was ($1,993,073) and ($447,378),
respectively, and is primarily attributable to the cost of producing
seven episodes of the Kanga Roddy Series. Cash from financing
activities for the twelve months ended December 31, 1997 and 1996 was
$4,995,712 and $956,820, respectively. Cash from financing for 1997
resulted primarily from sales of common stock and warrants in the
Company's initial public offering. Cash from financing for 1996
resulted primarily from private sales of the Company's common stock.
<PAGE>
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.
Total long-term debt as of December 31, 1997 was $64,199, which
was $269,046 less than total long-term debt of $333,245 at December 31,
1996. Loans payable to related parties as of December 31, 1997 was
$37,255 as compared to $352,175 as of December 31, 1996. The decreases
in such debt and loans are attributable to the re-payments made by the
Company during 1997 from net proceeds of its common stock public
offering. In addition, deferred revenues decreased $375,156 or 41%
from $918,676 at December 31, 1996 to $543,520 at December 31, 1997.
Deferred revenues are primarily pre-paid tuition for the karate studios
which cannot be immediately recognized and the decrease is the result
of the conversion of such deferred revenues into recognized revenues
and the refund of pre-paid tuition for students who terminate their
karate instruction prior to completing their subscribed program.
The Company maintains a credit line with Wells Fargo Bank
pursuant to which the Company has borrowed approximately $31,000 (the
maximum amount available is $40,000), repayment of which is made at the
monthly rate of 2% of the outstanding balance of the borrowing. Other
than such loan and an immaterial amount owed to another bank, the
Company does not presently maintain any other borrowing facility or
have any indebtedness to financial institutions.
As of December 1997, the Company had working capital of
$2,344,419 which the Company believes will be adequate to sustain
operations for the foreseeable future. The Company may seek to develop
and produce additional episodes of the Kanga Rodddy series which will
require working capital. To the extent that the Company's available
working capital is insufficient to finance the Company's working
capital requirements, the Company will be required to raise additional
funds through public or private equity or debt financing or by
exercising its rights to redeem the outstanding warrants to purchase
common stock. There can be no assurance that such additional financing
will be available, or, if available, will be on terms satisfactory to
the Company or not dilutive of existing shareholders.
<PAGE>
BUSINESS
General
American Champion Entertainment, Inc. (the "Company") is a Delaware
corporation headquartered in Hayward, California and incorporated on
February 5, 1997. The Company was formed as a holding company for its
wholly-owned subsidiary, America's Best Karate, a California
corporation ("ABK"), formed in June 1991, and ABC's wholly-owned
subsidiary, American Champion Media, Inc., a Delaware corporation ("AC
Media"), formed in February 1997. Unless indicated otherwise,
references to the "Company" herein shall include ABK and AC Media.
ABK owns, manages and operates a chain of karate schools with
four locations in the San Francisco Bay Area. ABK's schools provide
karate instruction to students of all ages and skill levels. AC Media
is a media production and marketing company. Through AC Media, the
Company is involved in (i) the development, production and marketing of
"ADVENTURES WITH KANGA RODDY," a television program aimed at pre-school
and primary school children (the "Kanga Roddy Series"), (ii) the
licensing of merchandising rights related to the Kanga Roddy Series,
and (iii) the development, production and marketing of various audio
tapes, video tapes and workbooks that specialize in fitness
information.
"Adventures With Kanga Roddy"
The Company has developed and produced thirteen half-hour
episodes of the Kanga Roddy Series. The Kanga Roddy Series uses
martial arts values such as humility, discipline and respect, with the
added elements of song, contemporary music, dance, vibrant colors and
exciting movements designed to capture its targeted pre-school and
primary school children audience's attention. The Kanga Roddy Series
features a six-foot tall kangaroo character named Kanga Roddy who is a
martial arts expert. Unlike other martial arts programs which feature
violence, Kanga Roddy never fights because he understands that conflict
can always be resolved with knowledge, compassion, humility, respect
and an open mind.
Each episode of the Kanga Roddy Series focuses on a group of
children at a community center and their teachers (played by Jennifer
Montana and Karen Lott, wives of former San Francisco 49ers football
players, Joe Montana and Ronnie Lott) working on activities such as
reading, physical fitness and arts and crafts. During these
activities, the children encounter an ethical or social problem which
causes uneasiness or unhappiness among some of the children. The
teachers sense the problem and suggest that the children seek help from
their friend, Uncle Pat, the proprietor of a rare bookstore played by
Pat Morita. Uncle Pat, with the assistance of his pet bookworm,
Shakespeare, magically transports the children to the land of Hi-Yah
where Kanga Roddy lives.
Once in the land of Hi-Yah, Kanga Roddy and his friend Bantu, a
female African snake, help the children solve their problem by giving
examples presented through songs. Kanga Roddy gets inspiration for the
proper solution to the problem through flashbacks to lessons learned
from his martial arts teacher, Zatochi, a wise old snow monkey. The
children also learn a physical activity each time they visit Kanga
Roddy such as balance, jumping or kicking. When the children return to
the community center, they review what they have learned with their
teachers.
In May 1997, the Company and KTEH, the public broadcasting station
serving the San Jose, California area, entered into a Distribution
Agreement (the "Distribution Agreement") which grants KTEH the
exclusive right to distribute, advertise, market or otherwise exploit
the Kanga Roddy Series on public broadcast affiliated stations
throughout the United States for a two-year period. KTEH has cleared
the broadcast of the Kanga Roddy Series with 47 other public broadcast
stations which the Company believes broadcast to approximately 56% of
the households in the United States (approximately 47 million
households). Approximately one third of these stations are scheduled
to commence broadcast of the Kanga Roddy Series in April 1998 and the
balance are scheduled to commence broadcast in May and June 1998.
Under the terms of the Distribution Agreement, KTEH is entitles to 15%
of monies collected by KTEH (plus distribution expenses) from its
exploitation of the distribution rights granted to it with the balance
to be paid to the Company. KTEH also agreed to pay the Company an
advance of $430,000 payable in four equal installments tied to the
Company's delivery of thirteen episodes of the Kanga Roddy Series. As
of December 31, 1997, the Company had delivered seven episodes of the
Kanga Roddy Series and recognized $215,000 of the total advance. The
Company has completed the development and production of the remaining
six episodes and anticipates delivery of such episodes to KTEH and
recognition of the balance of the advance on or prior to March 31,
1998. The $430,000 advance will be deducted from all royalties payable
to the Company by KTEH. Under the Distribution Agreement, the Company
has also committed to sharing with KTEH (i) 8% of revenues from the
sale (less fees and commissions) and licensing of non-broadcast
ancillary rights of educational products such as video tapes, books and
music tapes and (ii) 5% of gross profits (less fees and commissions) of
the Company from the sale and licensing of toys and clothing. The
Company has also granted KTEH a right of first refusal with respect to
broadcast rights to the Kanga Roddy Series not granted to KTEH in the
Distribution Agreement.
The Company's strategy includes pursuing licensing and
merchandising opportunities related to the Kanga Roddy Series.
Characters developed in a popular series, and often the series itself,
achieve a high level of recognition and popularity, making them
valuable licensing and merchandising assets. Among the most popular
licensed items are toys, clothing, food, dinnerware/lunch boxes,
watches and soft vinyl goods such as boots, backpacks and raincoats.
The Company plans to retain worldwide rights to the characters and
images developed in the Kanga Roddy Series, to protect its rights to
such characters and images through appropriate registration, and to
license their use to manufacturers for specific products. There is no
assurance, however, that the Company will be able to successfully
retain or protect its rights through registration, or to license its
properties. The Company also hopes to realize revenues through the
distribution of the Kanga Roddy Series in the home video market,
although there is no assurance that the Company will be able to do so.
If the Kanga Roddy Series does not attain and maintain widespread
television distribution, or widespread popularity, it is unlikely that
any significant licensing or merchandising opportunities or revenue
will arise or be maintained.
<PAGE>
In July 1997, the Company and SEGA of America, Inc. ("SEGA") entered
into a Licensing Agent Agreement appointing SEGA as the Company's non-
exclusive agent for purposes of licensing and merchandising the "Kanga
Roddy" trademark brand name characters and logo and home video
distribution of the Kanga Roddy Series (the "SEGA Agreement").
Pursuant to the SEGA Agreement, SEGA has agreed to solicit and
negotiate licensing and merchandising agreements on behalf of the
Company, and monitor and oversee the licensing, promotion and marketing
programs in consideration for 30% of all monies or other consideration
payable to the Company under any agreement entered into during the
three year period following execution of the SEGA Agreement by the
Company which was secured or serviced by SEGA. Upon the expiration
or termination of the SEGA Agreement, SEGA will continue to be entitled
to receive such consideration with respect to any License Agreement for
the greater of (i) the actual term of each such License Agreement; or
(ii) five years from the date of commencement of each such License
Agreement. In addition, in the event SEGA enters into any master toy,
home video or master apparel license, SEGA will immediately become the
exclusive agent for the Company for purposes of licensing and
merchandising the "Kanga Roddy" name to third parties for use on or in
connection with merchandise products throughout the world. The SEGA
Agreement is not conditioned on the Company's receiving any minimum
amount from the persons or entities introduced by SEGA.
Fitness Products
The Company develops, produces and markets various video tapes,
audio tapes and workbooks that specialize in fitness information and
education ("Fitness Products"). The Company's first Fitness Product,
entitled "STRONG MIND FIT BODY," consists of video tapes, audio tapes
and a workbook, intended to teach motivational techniques to start and
stay with an exercise program in order to lose weight. In June 1996,
the Company entered into a Distribution Agreement with InteliQuest, a
Utah general partnership. See "Management's Discussion and Analysis or
Plan of Operation - Results of Operations" for a discussion on the
Company's decision to write off its film costs relating to this Fitness
Product.
The Company's second Fitness Product, entitled the "MONTANA
EXERCISE VIDEO," is a cardio kick-boxing video starring former
superstar quarterback Joe Montana and his wife Jennifer, both of whom
have trained at the Company's karate schools. The Company has not
commenced distribution of this Fitness Product.
Karate Studios
The Company manages and operates a chain of company owned karate
studios with four locations in the San Francisco Bay Area under the
name "America's Best Karate." Each of the Company's instructors, all
of whom are black belts, have undergone a rigorous training program
conducted by Messrs. Chung and Chan (both members of the Karate Black
Belt Hall of Fame) and/or other instructors of ABK. Each karate studio
conducts approximately 40 forty-five minute classes each week. The
classes are generally comprised of 10 to 15 students and taught by one
to three instructors. The Company's black belt course requires
approximately 36 months of study and its second degree black belt
program requires approximately 48 months of study. Classes are
organized by skill level and age group. Students may take as many
classes as are available each week without additional charge. Fees, if
paid in advance, are generally $1,800 and $2,400 for the black belt and
second degree black belt programs, respectively. At each karate
studio, the Company also sells martial arts related products, such as
uniforms, other clothing and safety equipment.
During 1997, the Company closed five studios, which were not
operating profitably. The Company was able to retain approximately 65%
of the students who attended the closed studios by combining them with
other nearby ABK studios. As of December 31, 1997, there were
approximately 1,350 students enrolled at the Company's five karate
studios. The Company believes that the average age of the Company's
students is approximately 12 years old. At these enrollment levels the
Company estimates that it is currently operating at approximately 75%
of its total capacity. See "Management's Discussion and Analysis or
Plan of Operation - Results of Operations."
Competition
Each of the industries in which the Company competes is highly
competitive and most of the companies with which the Company competes
have greater financial and other resources than the Company. With
respect to the Company's media activities, the Company competes with
major production companies, and competition for access to a limited
supply of facilities and talented creative personnel to produce its
programs is often based on relationships and pricing. The Company's
programs compete for time slots, ratings and related advertising
revenues with other programming products.
The Company's Fitness Products compete with many other products
aimed at the fitness and weight loss markets, including other video
tapes, audio tapes and workbooks, and various types of exercise
machinery. Many of these competing products are sponsored or endorsed
by celebrities and sports figures, and many are marketed by companies
having significantly greater resources than the Company.
The martial arts industry is also highly competitive. The
Company's competitors include a variety of small to medium sized
martial arts instructional centers. Some of the Company's karate
studio competitors have significantly greater financial and other
resources and longer operating history and there can be no assurance
that the Company will be able to compete successfully in the
marketplace or achieve a significant market share. The Company does
not perceive its karate studios to be in competition with health or
fitness clubs, gyms, YMCA's or YWCA's. Although such facilities may
offer some martial arts classes, they do not generally offer intensive
martial arts programs emphasizing discipline and the development of
self-confidence.
<PAGE>
Employees
At June 15, 1998, the Company employed a total of 20 employees on
a full-time basis and 6 employees on a part-time basis.
Property
The Company leases space for its Hayward headquarters on a month-
to-month basis and is considering relocating its headquarters. The
Company also leases space as needed for its five karate studios in the
San Francisco Bay Area. Such leases are for premises ranging from
1,800 to 3,200 square feet. The Company believes that its facilities
are adequate for its present purposes.
Legal Proceedings
On April 24,1998, the Company filed a Complaint for Declaratory Relief
in the U.S. District Court, Northern District of California, against
William Charles Jeffreys, requesting a judicial determination of the
Company's rights in certain intellectual property associated with the
Adventures with Kanga Roddy show, and that Mr. Jeffreys has no such
rights. The Company disputes all claims of Mr. Jeffreys to an
interest in certain of the Company's intellectual property and intends
to vigorously protect its ownership and rights to such intellectual
property.
With the exception of the foregoing, no lawsuits or proceedings
are currently pending against the Company.
MANAGEMENT
Directors, Executive Officers and Key Employees
The current directors, nominated directors, executive officers
and key employees of the Company are as follows:
Name Position with Company Age
Anthony K. Chan President, Chief Executive 43
Officer, Chief Financial
Officer and Director
George Chung Chairman and Director 36
Don Berryessa Vice President and Director 27
William T. Duffy Director 42
Alan Elkes Director 52
Jan D. Hutchins Director 49
Ronald M. Lott Director 39
The following information with respect to the principal
occupation or employment of each nominee for director, the principal
business of the corporation or other organization in which such
occupation or employment is carried on, and such nominee's business
experience during the past five years, has been furnished to the
Company by the respective director nominees.
Anthony K. Chan. Mr. Chan has served as President, Chief
Executive Officer, Chief Financial Officer and a Director of the
Company since February 1997, and as Chief Executive Officer and Chief
Financial Officer of America's Best Karate since 1991. From 1985 to
1990, Mr. Chan served as the Director of Chinese Affairs for the
Eisenberg Company, a diversified business enterprise, where Mr. Chan's
principal duty was to negotiate contracts in the People's Republic of
China. Prior to 1985, Mr. Chan was employed by the Bank of America NT
& SA as an economic forecaster. Mr. Chan received his MBA from the
University of California at Berkeley. Mr. Chan's martial arts training
began in 1968 in Hong Kong. He was the first American allowed to train
as a professional in the People's Republic of China. He is a published
author and has been featured in newspapers, magazine covers, television
and motion pictures. He was inducted into the Black Belt Hall of Fame
in 1981.
George Chung. Mr. Chung has served as Chairman of the Board and
a Director of the Company since February 1997, and as President of
America's Best Karate since 1991. From 1981 to 1991, Mr. Chung owned
and operated a karate studio in Los Gatos, California. Mr. Chung was
inducted into the Black Belt Hall of Fame in 1983. He is regarded in
the martial arts industry as a pioneer in the modernization of what is
known as contemporary martial arts training, which includes the use of
music in both training and performance. He has been featured in
magazines, books, television and motion pictures. He is a published
author and wrote "Defend Yourself," a worldwide published self-defense
system for Sybervision Systems. In 1995, he was awarded a "Superbowl
Ring" from the San Francisco 49ers in recognition for his outstanding
martial arts work with their championship football team.
<PAGE>
Don Berryessa. Mr. Berryessa has served as Vice President and
Director of the Company since February 1997, and as Vice President and
General Manager of America's Best Karate since July 1993. Mr.
Berryessa received his Bachelor's of Science degree in marketing and
economics from San Jose State University in 1992 while working as
America's Best Karate's District Manager. As America's Best Karate's
District Manager, Mr. Berryessa was in charge of marketing and sales
and played an instrumental role in the expansion of America's Best
Karate from one location to 10. Prior to working with America's Best
Karate he served as a member of the United States Army & Army Reserve
as a combat military policeman.
William T. Duffy. Mr. Duffy has served as Vice-President of
Business Operations and Chief Financial Officer for the San Francisco
49ers since June 1996. He is responsible for all non-football related
business and provides financial guidance and support for all the team's
football related activities. Mr. Duffy's previous experience has
included serving as Director of Compliance for the National Football
League from October 1993 to May 1996, Treasurer of Robbie Stadium
Corporation from June 1990 to September 1993 and Director of Finance of
the Miami Dolphins from March 1988 to May 1990. Mr. Duffy, a CPA, is a
graduate of Princeton University and received his Masters of Accounting
from New York University.
Alan Elkes. Mr. Elkes has served as Chief Executive Officer of
Dalton Kent Securities Group, Inc., an investment banking and brokerage
firm, since June 1996. From September 1994 to June 1996, Mr. Elkes
served as Financial and Operations Manager at a branch office of
Corporate Securities Group Inc., an investment banking and brokerage
company. From February 1991 to September 1994, Mr. Elkes owned and
operated Minuteman Press, a printing company. Mr. Elkes began his
career in the stock brokerage industry in 1968. He has an MBA in
accounting from St. Johns University in New York and is also a licensed
CPA in the State of New York.
Jan D. Hutchins. Mr. Hutchins has served as President of AC
Media, since February 1997. From July 1994 to November 1995, Mr.
Hutchins was one of a four person management team for GolfPro
International, an emerging company designing and marketing a terrain-
based, personal service robot. From 1993 to 1994, Mr. Hutchins was
community services director for the San Francisco Giants professional
baseball team. From 1991 to 1993, Mr. Hutchins developed, produced and
hosted the HOOKED ON GOLF radio program for KNBR 68 in San Francisco.
From 1972 to 1991, Mr. Hutchins served in various capacities in the
television field, including news anchor, sports director, sports
anchor/reporter and television host.
Ronald M. Lott. Mr. Lott spent 15 seasons in the National
Football League, playing for the San Francisco 49ers (1981-1990), Los
Angeles Raiders (1991-1992), New York Jets (1993-1994) and the Kansas
City Chiefs (1995). Mr. Lott was selected to play in the Pro Bowl 10
times and won four Superbowl Championships with the San Francisco
49ers. In 1996, Mr. Lott joined FOX Sports as a studio analyst and,
along with James Brown, Howie Long and Terry Bradshaw, won an Emmy for
their pregame show, FOX NFL Sunday. Mr. Lott is also very active in
civic and community activities. He founded "All-Stars Helping Kids," a
non-profit charity to raise funds for youth organizations, is involved
with the national "Stay in School" program and hosts a number of events
such as golf tournaments and benefits to raise funds for worthwhile
causes. Mr. Lott is also the owner of Ronnie Lott's Club Fitness in
San Jose and Dream Sports, a sports marketing company.
No director or executive officer of the Company has any family
relationship with any other director or executive officer of the
Company.
Committees of the Board of Directors
The Board of Directors has appointed an Audit Committee and a
Compensation Committee.
The members of the Audit Committee are Messrs. Chan, Duffy and
Elkes. The committee (a) approves the selection and termination of
independent public accountants, (b) approves the scope of external
audit services, (c) reviews adjustments recommended by the independent
public accountant and address disagreements between the independent
public accountants and management, (d) reviews the adequacy of internal
controls and management's handling of identified material inadequacies
and reportable conditions in the internal controls over financial
reporting and compliance with laws and regulations, and (e) supervises
the internal audit function, which may include approving the selection,
compensation and termination of internal auditors. The Audit Committee
did not meet in 1997, and has one meeting in 1998.
The members of the Compensation Committee are Messrs. Chan,
Chung, Duffy, Elkes and Berryessa. The purpose of the committee is to
ensure that the Company's directors and employees receive adequate and
fair compensation, including salaries and bonuses, and that such
compensation is competitive within the industry. The committee also
administers the Company's stock option plans. The Compensation
Committee acted by unanimous written consent three times in 1997.
<PAGE>
Directors' Compensation
The Company's directors do not currently receive any cash
compensation for service on the Board of Directors or any committee
thereof, but directors may be reimbursed for certain expenses incurred
following completion of the Offering in connection with attendance at
Board of Directors and committee meetings. Directors may also receive
stock options under the Company's stock option plans. See "Management--
Stock Plans."
Pursuant to Section 145 of the Delaware General Corporation Law,
the Company's Certificate of Incorporation provides that the Company
shall, to the fullest extent permitted by law, indemnify all directors,
officers, incorporators, employees and agents of the Company against
liability for certain of their acts, and the Company intends to enter
into seperate indemnification agreements with each of its directors and
officers to effectuate these provisions. The Company's Certificate of
Incorporation also provides that, with certain exceptions, no director
of the Company will be liable to the Company for monetary damages as a
result of certain breaches of fiduciary duties as a director.
Exceptions to this include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declaration of
dividends and transactions from which the director derived an improper
personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to any arrangement, provisions or
otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid (for
services rendered in all capacities) during the Company's past three
fiscal years to Anthony K. Chan, President, Chief Executive Officer and
Chief Financial Officer of the Company and to George Chung, Chairman of
the Board, the only executive officer other than the Chief Executive
Officer whose total annual salary and bonus exceeded $100,000 in 1997,
(together, "named executive officers").
<TABLE>
<CAPTION>
Name Position Year (1) Salary Long-Term
Compensation
Awards/Options
(1)(2)
<S> <C> <C> <C> <C>
Anthony K. President, Chief 1997 $101,704 87,500
Chan Executive Officer and 1996 $57,600 0
Chief Financial 1995 $43,000 0
Officer
George Chairman of the 1997 $107,284 87,500
Chung Board 1996 $57,600 0
1995 $ 43,000 0
</TABLE>
(1) Information provided for 1995 and 1996 represent compensation received
by Messrs. Chan and Chung, as President and Chief Executive
Officer, respectively, of America's Best Karate, the predecessor to the
Company.
(2) Options were granted under the Company's 1997 Stock Plan.
Employment Contracts
In March 1997, the Company entered into employment agreements,
effective as of August 5, 1997, the closing date of the Company's
initial public offering, with each of Mr. Chung, Mr. Chan and Mr.
Berryessa pursuant to which Mr. Chung continues to serve as the
Company's Chairman of the Board, Mr. Chan continues to serve as the
Company's President, Chief Executive Officer and Chief Financial
Officer and Mr. Berryessa continues to serve as the Company's Vice-
President. Each agreement has a term of five years. Pursuant to the
agreements, in 1997 the Company paid to Messrs. Chung, Chan and
Berryessa a base salary of $100,000, $100,000 and $65,000 per year,
respectively. Each agreement also provides for the following bonuses:
(i) options to purchase 87,500, 87,500 and 25,000 shares of Common
Stock of the Company, respectively, exercisable at 120% of the
Company's initial public offering price of the Common Stock of the
Company which was $6.00, which options were granted on July 30, 1997
(ii) $200,000, $200,000 and $100,000, respectively, if all of the
warrants issued to the Company's initial public offering are exercised
by the holders thereof within the five-year exercise period of such
warrants. In addition, the executives are also entitled to certain
fringe benefits. If any of Messrs. Chung, Chan or Berryessa is
terminated other than for cause, death or disability, the Company is
obligated to pay such executive an amount equal to his base salary then
in effect for the remaining term of the agreement.
<PAGE>
In March 1997, the Company and AC Media, entered into a two-year
employment agreement with Jan D. Hutchins effective as of August 5,
1997, the closing date of the Company's initial public offering,
pursuant to which Mr. Hutchins serves as President of AC Media and is
responsible for supervising the production and marketing of the AC
Media's media projects. Pursuant to the agreement Mr. Hutchins
received an annual base salary of $39,600 in 1997. The employment
agreement also provides for the following bonuses: (i) 4,000 shares of
Common Stock of the Company upon the public offering, subject to
compliance with applicable laws (these shares were issued at no cost to
Mr. Hutchins and were capitalized into the Company's film costs,
because of Mr. Hutchins contributions to the Company's film production,
at their fair market value at the time of issuance); (ii) options to
purchase 20,000 shares of Common Stock of the Company, exercisable at
120% of the public offering price of the Common Stock of the Company
which was $6.00, which options were granted on July 30,1997; and (iii)
$100,000 in cash if all of the warrants issued to the public in the
Company's initial public offering are exercised by the holders thereof
within two years of the consummation of the offering. The employment
agreement also provides for certain fringe benefits. If Mr. Hutchins
is terminated for reasons other than for cause, death or disability,
the Company is obligated to pay Mr. Hutchins an amount equal to his
base salary then in effect for the remaining term of the agreement.
None of the above-referenced employment agreements contain non-
competition provisions.
Stock Options Grants and Exercises
The following table shows the stock options granted to the named
executive officers during the last completed fiscal year:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
% of Total
Number of Securities Options Granted
Underlying Option to Employees in Exercise or Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
<S> <C> <C> <C> <C>
Anthony K. 87,500 37% $6.00 7/30/07
Chan
George 87,500 37% $6.00 7/30/07
Chung
</TABLE>
The following table shows the value at December 31, 1997,
of unexercised options held by the named executive officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of securities Value of unexercised
underlying unexercised in-the-money options
options at fiscal year-end at fiscal year-end ($)
(#)
Name Shares acquired Value Realized Exercisable/unexercisable Exercisable/
on exercise (#) ($) unexercisable
<S> <C> <C> <C> <C>
Anthony K. Chan 0 0 87,500/0 $164,063/$0
George Chung 0 0 87,500/0 $164,063/$0
</TABLE>
Stock Plans
1997 STOCK PLAN
The 1997 Stock Plan was adopted by the Board of Directors and
stockholders of the Company in March 1997 and become effective upon the
closing of the IPO. The total number of shares of Common Stock subject
to issuance under the 1997 Stock Plan was originally 350,000, subject
to adjustments as provided in the 1997 Stock Plan; however, the 1997
Stock Plan was amended in May 1998 to provide that the total number of
shares of Common Stock subject to issuance under the 1997 Stock Plan is
800,000.
The 1997 Stock Plan provides for the grant of stock options
(including incentive stock options as defined in Section 422 of the
Code and non-qualified stock options), stock appreciation rights
("SARs") and other stock awards (including restricted stock awards and
stock bonuses) to employees of the Company or its affiliates or any
consultant or advisor engaged by the Company who renders bona fide
services to the Company or the Company's affiliates in connection with
its business; provided, that such services are not in connection with
the offer or sale of securities in a capital raising transaction. Prior
to the date when securities are first registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the 1997 Stock Plan will be administered by the Company's Board
of Directors.
<PAGE>
The Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee") which will be comprised of
"disinterested persons" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended. Stock options may be
granted by the Committee on such terms, including vesting and payment
forms, as it deems appropriate in its discretion; provided, that no
option may be exercised later than ten years after its grant, and the
purchase price for incentive stock options and non-qualified stock
options shall not be less than 100% and 85% of the fair market value of
the Common Stock at the time of grant, respectively.
SARs may be granted by the Committee on such terms, including
payment forms, as the Committee deems appropriate, provided that a SAR
granted in connection with a stock option shall become exercisable and
lapse according to the same vesting schedule and lapse rules
established for the stock option (which shall not exceed ten years from
the date of grant). A SAR shall not be exercisable during the first six
months of its term and only when the fair market value of the
underlying Common Stock exceeds the SAR's exercise price and is
exercisable subject to any other conditions on exercise imposed by the
Committee. In the event of a change in control of the Company, the
Committee retains the discretion to accelerate the vesting of stock
options and SARs and to remove restrictions on transfer of restricted
stock awards. Unless terminated by the Board of Directors, the 1997
Stock Plan continues until December 2007. Upon the occurrence of an
event constituting a Change of Control, in the sole discretion of the
Committee, all options and SARs will become immediately exercisable in
full for the remainder of their terms and restrictions on stock granted
pursuant to a Restricted Stock Award will lapse.
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's 1997 Non-Employee Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and
stockholders of the Company in March 1997 and became effective upon the
closing of the IPO. A total of 50,000 shares are available for grant
under the Directors Plan. The Directors Plan provides for the automatic
grant to each of the Company's non-employee directors of (i) an option
to purchase 5,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors (the "Initial
Grant") and (ii) an option to purchase 2,000 shares of Common Stock on
each anniversary thereof on which the director remains on the Board of
Directors (the "Annual Grant"). The options will have an exercise price
of 100% of the fair market value of the Common Stock on the date of
grant and have a 10-year term. Initial Grants become exercisable in two
equal annual installments commencing on the first anniversary of date
of grant thereof and Annual Grants become fully exercisable beginning
on the first anniversary of the date of grant. Both Initial and Annual
Grants are subject to acceleration in the event of certain corporate
transactions. Any options which are vested at the time the optionee
ceases to be a director shall be exercisable for one year thereafter.
Options which are not vested automatically terminate in the event the
optionee ceases to be a director of the Company. Options which are
vested on the date the optionee ceased to be a director due to death or
disability generally remain exercisable for five years thereafter. If
the Company is a party to a transaction involving a sale of
substantially all its assets, a merger or consolidation, all then
outstanding options under the Directors Plan may be canceled. However,
during the 30 day period preceding the effective date of such
transaction, all partly or wholly unexercised options will be
exercisable, including those not yet exercisable pursuant to the
vesting schedule. As of the date of this Prospectus, a total of 15,000
options have been granted under the Directors Plan.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and
as adjusted to reflect the issuance by the Company of shares of Common
Stock upon exercise of the Warrants, certain information with respect
to stock ownership of (i) all persons known by the Company to be
beneficial owners of 5% or more of its outstanding shares of Common
Stock; (ii) each director; and (iii) all directors and officers as a
group, together with their respective percentage ownership of such
shares before the Offering and as adjusted to reflect the sale of the
shares of Common Stock and Warrants offered hereby. Unless otherwise
indicated, the beneficial owners have sole voting and investment power
over the shares of Common Stock listed below.
<TABLE>
<CAPTION>
Name and Address Shares Owned Before After
Offering Offering(6)
Percentage of Common Stock
Owned
<S> <C> <C> <C>
George Chung(1) 597,838 (2) 15.6% 10.7%
Anthony Chan(1) 593,438 (3) 15.5% 10.6%
Don Berryessa(1) 193,600 (4) 5.1% 3.5%
Montana Family Trust 258,456(5) 6.7% 4.6%
c/o Raimondo, Pettit & Glassman
21515 Hawthorne Blvd., #1250
Hawthorne, CA 90503
William T. Duffy* - - -
Alan Elkes* - - -
Jan D. Hutchins * - - -
Ronald M. Lott* - - -
All officers and directors as a group ( 7 persons) 1,384,876 36.1% 24.8%
</TABLE>
* Less than one percent.
___________
(1) The addresses for the directors and executive officers are the
same as that of the Company.
(2) Includes (i) 87,500 shares subject to presently exercisable
options granted under the Company's 1997 Stock Plan and (ii) 4,400
shares owned by Mr. Chung's wife.
(3) Includes 87,500 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan.
(4) Includes Includes (i) 25,000 shares subject to presently
exercisable options granted under the Company's 1997 Stock and (ii)
28,100 shares owned by Mr. Berryessa's wife.
(5) Includes 100,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan.
(6) These percentages assume that all outstanding Warrants are
exercised and that the Underwriter exercises all of the
Underwriter's Warrants and all of the Warrants included therein.
<PAGE>
CERTAIN TRANSACTIONS
Messrs. Chung and Chan are the guarantors of two loans from Karen
T.I. Shen and Thomas Jung Woo originally totaling $27,000 and bearing
interest at 14% per annum which are due and payable in 1999 and 2000,
and are the direct obligors on a loan in the original principal amount
of $100,000 from the Michael Triantos M.D. Inc. Money Purchase and
Profit Sharing Pension Plans Trust which is being treated as a debt of
the Company which loan bears interest at the rate of 12% per annum and
is due on the earlier of the completion of this Offering or December
15, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Messrs. Chung and Chan are also the guarantors of one property lease of
the Company and are the direct obligors on two property leases which
are being treated as leases of the Company. See Notes to Financial
Statements."
In a letter dated October 29, 1996, the Company agreed to pay Joe
and Jennifer Montana, significant stockholders of the Company, $50,000
in cash, payable 30 days prior to the release of the Company's second
Fitness Product, entitled "MONTANA EXERCISE VIDEO." In such letter, the Company
also agreed, and have paid, to Joe and Jennifer Montana an additional $50,000
from the proceeds of the initial public offering, and then subsequently a
royalty payment of $1 per video tape sold. See "Business-Fitness Products."
Joe and Jennifer Montana have both been training in the Company's karate
schools for approximately three years. The "MONTANA EXERCISE VIDEO" stars
the former superstar quarterback and his wife Jennifer in a kick-boxing
video. Jennifer Montana also co-hosts the Kanga Roddy Series.
Mr. Alan Elkes, a director nominee of the Company, is Chief
Executive Officer of the Managing Underwriter. For a description of the
arrangements between the Company and the Managing Underwriter, see
"Underwriting."
In June 1997, Mr. George Chung, the Chairman of the Board, loaned
at no interest approximately $17,673 to the Company in order to allow
the Company to repay its loan with the Bank of Canton. The Company
intends to repay Mr. Chung the outstanding principal balance of this
loan with the net proceeds of the Offering. On July 2, 1997, Mr. Chung
also loaned at no interest approximately $35,400 to the Company in
order to allow the Company to repay its loan from Silicon Valley Bank.
The Company has repaid the outstanding principal balance of this
loan with the net proceeds of the initial public offering.
None of the transactions with officers or shareholders of the
Company and their affiliates were made on terms less favorable to the
Company than those available from unaffiliated parties. In future
transactions of this nature, the Company will ensure that more
favorable terms are not available to it from unaffiliated third parties
before engaging officers or shareholders of the Company or their
affiliates.
DESCRIPTION OF SECURITIES
General
The Company has an authorized capital of 20,000,000 shares of
Common Stock, $.0001 par value, and 3,000,000 shares of Preferred
Stock, $.0001 par value, of which 3,832,345 shares of Common Stock and
no shares of Preferred Stock are currently outstanding. The issued and
outstanding shares of Common Stock are fully paid and non-assessable,
and all the shares of Common Stock underlying the Warrants included in
the Offering, when issued, will be fully paid and non-assessable.
Common Stock
Holders of the Shares are entitled to one vote per share on all
matters submitted to a vote of the stockholders and do not have
cumulative voting rights in the election of directors.
Holders of the Common Stock are entitled to share pro rata in
such dividends as may be declared by the board of directors out of
funds legally available. See "Dividend Policy." On any dissolution,
liquidation or winding-up of the Company, the holders of Common Stock
will be entitled to share pro rata in all distributions made after
payment of or provision for the payment of all debts and prior claims.
There are no preemptive rights or conversion privileges applicable to
the Common Stock.
During January through March of 1997, the Company sold 305,000
shares of its common stock to certain investors at a price per share of
$.80 (as adjusted for the proposed reorganization). Holders of these
shares have orally agreed to return such number of these shares to the
Company as is necessary to increase the price per share paid by these
investors to $2.50 (which is a price greater than the price of $2.14
per share at which the Company sold common stock prior to this private
placement). These holders have also orally agreed to an unconditional
lock-up of twelve months regarding the resale of these securities.
Messrs. Chan and Chung may offer these holders the opportunity to
purchase an amount of shares owned personally by them for nominal
consideration at a later date.
Preferred Stock
The Company is authorized to issue up to 3,000,000 shares of
preferred stock, par value $.0001 per share. The preferred stock may be
issued in one or more series, the terms of which may be determined at
the time of issuance by the Board of Directors, without further action
by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends
and liquidation, conversion rights, redemption rights and sinking fund
provisions. The issuance of any such preferred stock could adversely
affect the rights of the holders of Common Stock and, therefore, reduce
the value of the Common Stock. The ability of the Board of Directors to
issue preferred stock could discourage, delay or prevent a takeover of
the Company. See "Risk Factors - Preferred Stock."
<PAGE>
Warrants
Warrants will be issued pursuant to a Warrant Agreement between
the Company and Continental Stock Transfer & Trust Company (the
"Transfer and Warrant Agent") and will be in registered form. The
Company has authorized the issuance of Warrants to purchase an aggregate
of 1,495,000 shares of Common Stock (inclusive of 195,000 Warrants issued
upon exercise of the Underwriters' Over-Allotment Option and exclusive
of 130,000 Warrants underlying the Underwriters' Warrants).
Each Warrant entitles its holder to purchase, at any time from the date
of this Prospectus through the fifth anniversary date of this
Prospectus, one share of Common Stock at an exercise price of $6.50 per
share, subject to adjustment in accordance with the anti-dilution and
other provisions referred to below.
The Warrants may be redeemed by the Company at any time
commencing July 30, 1998 (or earlier with the prior written consent of
the Managing Underwriter) and prior to their expiration, at a
redemption price of $.10 per Warrant, on not less than 30 days' prior
written notice to the holders of such Warrants, provided that the last
sales price of the Common Stock on NASDAQ is at least 120% ($7.80 per
share, subject to adjustment) of the exercise price of the Warrants for
a period of 20 consecutive trading days ending on the third day prior
to the date the notice of redemption is given. Holders of Warrants
shall have exercise rights until the close of the business day
preceding the date fixed for redemption. The exercise price of the
Warrants should in no event be regarded as an indication of any future
market price of the securities offered hereby.
The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment
upon the occurrence of certain events, including stock dividends, stock
splits, combinations or reclassification of the Common Stock. The
Warrants do not confer upon holders any voting or any other rights as
stockholders of the Company.
Subject to the rules and regulations of the NASD, the
Underwriters shall be entitled to act as the warrant solicitation agent
for the solicitation of the Warrants for a period of five years after
the date hereof, commencing one year after the date hereof and receive
a warrant solicitation fee of five percent (5%) of the exercise price
for each Warrant exercised during the period commencing one year after
the date hereof.
The Company is required to have a current Registration Statement
on file with the Commission and to effect appropriate qualifications
under the laws and regulations of the states in which the holders of
Warrants reside in order to comply with applicable laws in connection
with the exercise of Warrants and the sale of the Common Stock issued
upon such exercise. The Company, therefore, will be required to file
post-effective amendments to its Registration Statement when subsequent
events require such amendments in order to continue the registration of
the Common Stock underlying the Warrants and to take appropriate action
under state securities laws. There can be no assurance that the Company
will be able to keep its Registration Statement current or to effect
appropriate action under applicable state securities laws. Its failure
to do so may restrict the ability of the Warrant holders to exercise
the Warrants and resell or otherwise dispose of the underlying Common
Stock, whether pursuant to redemption of the Warrants or otherwise.
Registration Rights
In connection with the IPO, the Company granted to the Underwriter
certain demand and piggyback registration rights with respect to the
130,000 shares of Common Stock issuable upon exercise of the
Underwriters' Warrants and the 130,000 shares of Common Stock issuable
upon the exercise of the Warrants included in the Underwriters'
Warrants. All 260,000 shares of Common Stock underlying the
Underwriters' Warrants have been included in the Registration Statement
of which this Prospectus forms a part.
In addition to the foregoing, the Company has agreed to file a
registration statement under the Securities Act with respect to the
resale of 255,000 shares of Common Stock of the Company by certain
stockholders upon demand by a majority of such stockholders. Upon the
effectiveness of such registration statement, such stockholders would
be free to sell their shares in the public market without volume
restriction unless such shares were held by an affiliate or are subject
to a lock-up agreement described above.
Limitation of Directors' Liabilities
The Company's Certificate of Incorporation eliminates, to the
fullest extent permitted by law, the liability of its directors to the
Company and its stockholders for monetary damages for breach of the
directors' fiduciary duty. This provision is intended to afford the
Company's directors the benefit of the Delaware General Corporation
Law, which provides that directors of Delaware corporations may be
relieved of monetary liability for breach of their fiduciary duty of
care, except under certain circumstances involving breach of a
director's duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law or any
transaction from which the director derived an improper personal
benefit.
<PAGE>
Certain Anti-takeover Devices
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"), which restricts certain transactions
and business combinations between a corporation and an "Interested
Stockholder" owning 15% or more of the corporation's outstanding voting
stock for a period of three years from the date the stockholder becomes
an Interested Stockholder. Subject to certain exceptions, unless the
transaction is approved by the Board of Directors and the holders of at
least 66-2/3% of the outstanding voting stock of the corporation
(excluding shares held by the Interested Stockholder), Section 203
prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial
benefits by the Interested Stockholder, or any other transaction that
would increase the Interested Stockholder's proportionate ownership of
any class or series of the corporation's stock. The statutory ban does
not apply if, upon consummation of the transaction in which any person
becomes an Interested Stockholder, the Interested Stockholder owns at
least 85% of the outstanding voting stock of the corporation (excluding
shares held by persons who are both directors and officers or by
certain stock plans).
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company has been appointed as
the transfer agent and registrar for the Company's Common Stock. Its
telephone number is (212) 509-4000.
Reports to Shareholders
The Company has registered the Common Stock and Warrants under
the provisions of Sections 12(b) and 12(g) of the Exchange Act, and has
agreed that it will use its best efforts to continue to maintain such
registration for a minimum of five years from July 30, 1997. Such
registration requires the Company to comply with periodic reporting,
proxy solicitation and certain other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,587,345
shares of Common Stock outstanding. All of the 1,755,000 shares of
Common Stock sold in this Offering will be freely transferable by
persons other than "affiliates" of the Company (as that term is defined
under the Securities Act).
Of the remaining 3,832,345 outstanding shares of Common Stock,
2,444,151 are "restricted securities" within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of a
registration under the Securities Act unless an exemption from
registration is available, including the exemption contained in Rule
144. Each of the Company's stockholders owning an aggregate of
2,444,151 shares of Common Stock have entered into lock-up agreements
whereby they agreed not to offer or sell any shares of Common Stock or
other equity securities of the Company or any securities convertible
into or exchangeable for, or warrants to purchase or acquire, Common
Stock, owned as of the date of this Prospectus or hereafter acquired,
except as follows: 125,000 shares of Common Stock by January 30, 1998,
provided however, that the Common Stock has traded at least 15,000
shares per day at a bid price of at least $7.50 per share (150% above
the initial public offering price) for any fifteen consecutive trading
days during such period; an additional 312,500 shares of Common Stock
commencing July 30, 1998; and an additional 500,000 shares of Common
Stock commencing January 30, 1999. The Managing Underwriter may, in
its discretion and without notice to the public, waive the lock-up and
permit the holders of these shares to resell all or a portion of their
shares at any time prior to the time periods described above.
In general, under Rule 144 as currently in effect, a person who
has beneficially owned restricted securities for a period of at least
one year, including an "affiliate" as that term is defined in Rule 144,
is entitled to sell, within any three-month period commencing 90 days
after the date of this Prospectus, a number of "restricted" shares that
does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 55,873 shares immediately after the
Offering) or the average weekly trading volume during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the
availability of current public information about the Company. Rule
144(k) provides that a person who is not deemed an "affiliate" and who
has beneficially owned shares for at least two years is entitled to
sell such shares at any time under Rule 144 without regard to the
limitation described above.
WARRANT SOLICITATION
The Company has agreed to engage the Representative as warrant
solicitation agent, in connection with which it would be entitled to a
5% fee upon exercise of the Warrants. In accordance with the NASD
Notice to Members 81-38, no fee shall be paid: (i) upon the exercise
where the market price of the underlying Common Stock is lower than the
exercise price; (ii) for the exercise of Warrants held in any
discretionary account; (iii) upon the exercise of Warrants where
disclosure of compensation arrangements has not been made and documents
have not been provided to customers both as part of the original
Offering and at the time of exercise; (iv) upon the exercise of
Warrants in unsolicited transactions; or (v) upon the exercise of
Warrants where such exercise is solicited by the Company.
Notwithstanding the foregoing, no fees will be paid to the
Representative or any other NASD members upon exercise of the Warrants
prior to July 30,1998. In addition, upon consent of the Representative,
other NASD members may solicit the exercise of the Warrants without
giving up a portion of the 5% solicitation fee to the Representative.
Further, such NASD broker/dealer will receive a 5% solicitation fee
only when designated in writing by the warrantholder as the soliciting
broker.
<PAGE>
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock
offered hereby will be passed upon for the Company by Sichenzia, Ross &
Friedman LLP, New York, New York.
EXPERTS
The financial statements of America's Best Karate as of December
31, 1996, and for the year then ended have been included herein and in the
registration statement in reliance upon the reports of Moore Stephens P.C.,
independent certified public accountants, appearing elsewhere herein, and
upon the authority of such firm as experts in accounting and auditing.
The financial statements of American Champion Entertainment, Inc.
as of December 31, 1997, and for the year then ended have been included
herein and in the registration statement in reliance upon the reports of
Moss Adams LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
Effective October 8, 1997, the Board of Directors (the "Board")
of American Champion Entertainment, Inc. (the "Registrant"), dismissed
Moore Stephens, P.C. ("Moore Stephens"), and such firm will no longer
be acting as the Registrant's principal accountant. Moore Stephens'
report on the Registrant's financial statements dated February 5, 1997,
the date of the Registrant's incorporation, did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. Moore Stephens'
report on the financial statements for the past two years relating to
America's Best Karate, predecessor to the Registrant ("ABK"), dated
January 31, 1997, did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to audit scope or
accounting principles; however, such report did include a modification
of the auditors' standard report, noting that certain factors raised
substantial doubt about ABK's ability to continue as a going concern.
During Registrant's and its predecessor's two most recent fiscal years
and the interim period through October 8, 1997, there were no
disagreements between Registrant or its predecessor and Moore Stephens
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which, if not
resolved to the satisfaction of Moore Stephens, would have caused it to
make reference to the subject matter of the disagreements in connection
with its report.
Effective October 8, 1997, Registrant engaged Moss Adams LLP as
its principal accountant. Such engagement was approved by the
Registrant's Board of Directors. During Registrant's two most recent
fiscal years and any subsequent interim period through October 8, 1997,
Registrant did not consult Moss Adams LLP regarding the application of
accounting principals to a specified transaction, the type of audit
opinion that might be rendered on Registrant's financial statements or
any matter that was the subject of disagreement or a reportable event.
ADDITIONAL INFORMATION
This Prospectus does not contain all information set forth in the
Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Securities and
Exchange Commission. Statements contained herein concerning the
provisions of any documents are not necessarily complete and in each
instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified
in its entirety by such reference. A copy of the Registration Statement
may be inspected by anyone without charge at the Securities and
Exchange Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the Pacific Regional Office located at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-
3648, the New York Regional Office located at 7 World Trade Center,
13th Floor, New York, New York 10048, and the Chicago Regional Office
located at Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511, and copies of all or any part thereof may
be obtained from the Public Reference Branch of the Commission upon the
payment of certain fees prescribed by the Securities and Exchange
Commission. The Commission maintains an Internet Web Site that contains
reports, proxy and information statements and other information
statements and other information regarding registrants that file
electronically with the Commission, including the Company, and that
address is http://www.sec.gov.
<PAGE>
No dealer, salesperson or other person is authorized to give any
information or to make any representations other than those contained
in this Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized by
the Company or the Underwriter. This Prospectus does not constitute an
offer to buy any security other than the securities offered by this
Prospectus, or an offer to sell or a solicitation of an offer to buy
any securities by any person in any jurisdiction where such offer or
solicitation is not authorized or is unlawful. Neither delivery of this
Prospectus nor any sale hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of
the Company since the date hereof.
______________
TABLE OF CONTENTS
Page
Prospectus Summary 3
The Offering 7
Risk Factors 8
Use of Proceeds 12
Certain Market Information 12
Dividends 13
Dilution 13
Capitalization 14
Selected Financial Data 15
Management's Discussion and Analysis of
Fiancial Condition and Results of Operations 15
Business 19
Management 21
Principal Stockholders 26
Certain Transactions 27
Description of Securities 27
Shares Eligible for Future Sale 29
Warrant Solicitaion 29
Legal Matters 30
Experts 30
Additional Information 30
Independent Auditor's Report 32
Financial Statements 34
AMERICAN CHAMPION ENTERTAINMENT, INC.
1,495,000 SHARES OF COMMON STOCK,
ISSUABLE UPON THE EXERCISE OF REDEEMABLE WARRANTS
130,000 SHARES OF COMMON STOCK AND
130,000 REDEEMABLE WARRANTS,
130,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF
REDEEMABLE WARRANTS INCLUDED IN SUCHWARRANTS
------------------------
PROSPECTUS
_______________
_________, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
America's Best Karate
Hayward, California
We have audited the accompanying balance sheet of America's Best Karate
(a California corporation) as of December 31, 1996, and the related statement
of operations, stockholders' equity (deficit) , and cash flows for the year
then ended. These financial statements are the responsibility of America's
Best Karate's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and preform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of America's Best Karate as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
January 31, 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Champion Entertainment, Inc.
and Subsidiaries
We have audited the consolidated balance sheet of American Champion
Entertainment, Inc., and Subsidiaries as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the financial position of American Champion
Entertainment, Inc. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Moss Adams LLP
San Francisco, California
February 11, 1998
<PAGE>
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1997 1996
--------- --------- --------- ---------
Assets Unaudited
<S> <C> <C> <C> <C>
Current assets
Cash $ 554,169 $ 15,575 $ 1,795,657 $ 28,763
Accounts receivable 220,817 5,817 220,817 5,817
Loans receivable, related parties 114,723 113,361 114,773 92,083
Current portion of film costs 1,200,000 - 655,500 -
Prepaid expenses and other 86,520 8,409 96,556 12,462
---------- ---------- ---------- ---------
Total current assets 2,176,229 143,162 2,883,303 139,125
---------- ---------- ---------- ---------
Property and equipment, net 253,176 38,390 255,423 50,860
---------- ---------- ---------- ---------
Other assets
Film costs, net of accumulated amortization 2,359,574 692,880 1,789,917 660,004
Other assets 78,010 272,745 35,152 119,501
---------- ---------- ----------- --------
Total other assets 2,437,584 965,625 1,825,069 779,505
---------- ---------- ---------- ---------
Total assets $ 4,866,989 $1,147,177 $4,963,795 $969,490
========== ========== ========== =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses $ 381,047 $ 370,677 $ 199,344 $ 316,644
Deferred revenues, current portion 244,912 441,041 282,056 453,404
Loans payable, related parties 35,503 422,855 37,255 352,175
Long-term debt, current portion 5,183 159,468 5,856 261,853
Obligations under capital leases, current portion 10,464 25,904 10,157 26,459
Other 4,216 4,216 4,216 4,216
--------- --------- --------- --------
Total current liabilities 681,325 1,424,161 538,884 1,414,751
--------- --------- --------- --------
Long-term liabilities
Deferred revenues 163,215 412,277 261,464 465,272
Long-term debt and other 57,078 50,111 58,343 71,392
Obligations under capital leases 3,830 15,702 6,565 20,641
Other 2,108 7,378 4,216 8,432
---------- --------- --------- ---------
Total long-term liabilities - 1,175,520 - 927,500
---------- --------- ---------- ---------
Stockholders' equity (deficit)
Common stock 5,529,419 (994,818) 5,529,419 (1,155,318)
Common stock warrants 149,500 - 149,500 -
Accumulated deficit (1,719,486) (943,154) (1,584,596) (783,180)
------------ ---------- ------------ ------------
Total stockholders' equity (deficit) 3,959,433 (1,937,972) 4,094,323 (1,938,498)
------------ ----------- ------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 4,866,989 $ 1,147,177 $ 4,963,795 $ 969,490
============ =========== ============ ============
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1997 1996
---------- ---------- ----------- ---------
Unaudited
<S> <C> <C> <C> <C>
Revenue
Tuition and related fees $ 126,905 $ 255,950 $ 853,335 $ 931,231
Accessories and video sales 13,401 22,238 67,823 119,322
Film income 215,000 - 215,000 -
Intrest income 26,692 - 43,395 -
--------- --------- ---------- ----------
Total revenue 981,998 278,188 1,179,553 1,050,553
--------- ---------- ---------- ----------
Costs and expenses
Cost of sales 8,711 14,572 36,098 88,942
Amortization of film costs 73,332 - 58,000 -
Salaries and payroll taxes 215,634 193,028 793,486 712,574
Rent 84,616 124,299 382,928 496,212
Selling, general and administrative 236,117 55,878 372,773 325,025
Intrest 8,901 50,385 110,684 69,383
Write off of film costs - - 105,000 -
Write off of loan fees - - 65,000 -
Facilities closure costs - - 57,000 -
---------- ---------- ---------- ----------
Total costs and expenses 627,311 438,162 1,980,969 1,692,136
Net loss from operations (245,313) (159,974) (801,416) (641,583)
Gain on sale of studio 115,473 - - -
---------- ---------- ---------- ----------
Net loss before provision for income taxes (129,840) (159,974) (801,416) (641,583)
Provision for income taxes 5,050 - - -
---------- ---------- ---------- ----------
Net loss $ (134,890) $ (159,974) $ (801,416) $ (641,583)
========== ========== ========== ==========
Weighted average number of 3,832,345 2,515,700 3,155,257 2,376,588
========== ========== ========== ==========
Basic loss per share $ (0.04) $ (0.06) $ (0.25) $ (0.27)
========== ========== ========== ==========
</TABLE>
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Common Stockholders'
Number Stock Accumulated Equity
of Shares Amount Warrants Deficit (Deficit)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 76,251 $ 17,438 $ - $ (1,343,971) $ (1,326,533)
Capitalization of accumulated deficit
on S Corp. termination - (1,214,892) - 1,214,892 -
Issuance of common stock 15,324 707,500 - - 707,500
Common stock issued for short-term loans 445 21,636 - - 21,636
Reduction of receivable from stockholders - 20,500 - - 20,500
Common stock subject to rescission - (707,500) - - (707,500)
S Corp distributions - - - (12,518) (12,518)
Net loss (twelve months) - - - (641,583) (641,583)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 92,030 (1,155,318) - (783,180) (1,938,498)
Issuance of common stock 3,733 275,020 275,020
Debt converted to equity 1,900 133,500 133,500
Cancellation of founders' shares (8,136) -
Common stock subject to rescission (248,020) (248,020)
Net loss (three months) (159,974) (159,974)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 89,527 (994,818) - (943,154) (1,937,972)
Conversion of ABK shares to ACE shares 2,494,018 - - - -
Issuance of common stock, net of offering
costs of $1,474,508 1,433,786 5,188,717 - - 5,188,717
Issuance of warrants - - 149,500 - 149,500
Debt converted to equity 51,500 - - - -
Cancellation of founders' shares (220,486) - - - -
Rescission of common stock (16,000) (40,000) - - (40,000)
Expiration of rescission agreement - 1,175,520 - - 1,175,520
Stock options issued in connection with
film costs - 200,000 - - 200,000
Net loss (nine months) - - - (641,442) (641,442)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 3,832,345 5,529,419 149,500 (1,584,596) 4,094,323
Net loss (three months) - - - (134,890) (134,890)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1998 3,832,345 $ 5,529,419 $ 149,500 $ (1,719,486) $ 3,959,433
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Thrre months ended March 31, Year ended December 31,
1998 1997 1997 1996
---------- ---------- ---------- ----------
Unaudited
<S> <C> <C> <C> <C>
Operating Activities:
Net loss $ (134,890) $ (159,974) $ (801,416) $ (641,583)
used for operating activities
Gain on sale of studio (115,473) - - -
Depreciation and amortization 88,805 12,782 101,407 64,409
Write off of film costs - - 105,000 -
Intrest amortization, debt issue costs - - - 6,272
Rent concession amortization (2,108) (1,054) (4,216) (4,216)
Loss on property and equipment - - - 2,430
Common stock issued related to salary - - 72,225 -
Common stock issued related to loan fees - - 65,000 -
Increase in
Accounts receivable - - (215,000) (5,817)
Prepaid expenses and other 20,087 4,053 (66,289) 3,567)
Decrease in
Accounts payable and accrued expenses 181,703 (12,761) (117,300) 77,335
Deferred revenues (72,779) (65,358) (375,156) (55,319)
Other liabilities - 20,998 - 6,000
---------- ---------- ---------- ----------
Net cash - operating activities (34,655) (201,314) (1,235,745) (546,922)
---------- ---------- ---------- ----------
Investing Activities:
Purchase of property and equipment (13,226) - (247,970) (7,014)
Payments fro film costs (1,187,489) (33,189) (1,722,413) (350,364)
Advances to stockholders - (21,278) (22,690) (92,083)
Deposits - 4,694 - 2,083
---------- ---------- ---------- ----------
Net cash - investing activities (1,200,715) (49,773) (1,993,073) (447,378)
---------- ---------- ---------- ----------
Financing Activities:
S Corp distributions - - - (12,518)
Proceeds from issuance of common stocks - 248,020 6,748,020 728,000
Proceeds from issuance of warrants - - 149,500 -
Offering costs - (91,418) 1,407,964) (66,544)
Rescission of common stock - - (40,000) -
Proceeds (payments) from/on short-term debts - (4,430) - 49,344
Proceeds (payments) from/on loans from related parties (1,752) 103,142 (314,920) 338,850
Payments on long-term debt (1,938) (11,921) (108,546) (52,078)
Principal payments on capital leases (2,428) (5,494) (30,378) (28,234)
---------- ---------- ---------- ----------
Net cash - financing activities (6,118) 237,899 4,995,712 956,820
---------- ---------- ---------- ----------
Net (decrease) increase in cash (1,241,488) (13,188) 1,766,894 (37,480)
Cash, beginning of year 1,795,657 28,763 28,763 66,243
---------- ---------- ---------- ----------
Cash, end of year $ 554,169 $ 15,575 $ 1,795,657 $ 28,763
========== ========== ========== ==========
Supplemental disclousure of Cash Flow Information:
Cash paid during the year for:
Intrest $ 8,901 $ 25,552 $ 116,132 $ 57,663
========== ========== ========== ==========
State income taxes $ 5,050 $ 800 $ - $ -
========== ========== ========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Common stock issued for short-term debt $ - $ 27,000 $ 27,000 $ 21,636
========== ========== ========== ==========
Debts converted to equity $ - $ 133,500 $ 133,500 $ -
========== ========== ========== ==========
Options and common stock issued related to film costs $ - $ - $ 226,000 $ -
========== ========== ========== ==========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Consolidation - 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. ("AC Media"). American Champion
Entertainment and American Champion Media were formed during
1997. 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
financial statements included herein give effect to the
Reorganization in which the Company became the successor to ABK.
All significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements as of
December 31, 1996 and for the year then ended reflect the
operations of America's Best Karate.
AC Media focuses on operating and managing all media-related
programs. These programs consist of fitness information video
tapes, books and audio tapes and production of educational
television programs for children which emphasize martial arts
values and fun. ABK focuses solely on operating and managing the
karate studios which are located in the San Francisco Bay Area.
Revenue Recognition - AC Media - Revenue from films is recognized
on the accrual method. Film costs are amortized using the
individual-film-forecast-computation method which amortizes costs
in the ratio that current gross revenues bear to anticipated
total gross revenues from all sources. The management of AC Media
periodically reviews its estimates of future revenues for each
master and if necessary a revision is made to amortization rates
and a write down to net realizable value may occur.
ABK - Substantially all ABK's students are required to sign a
student enrollment agreement (the "Enrollment Agreement")
covering a period from 36 to 48 months to complete a black belt
course or a 2nd degree black belt course, respectively. The
students have the option to (a) make an initial fee payment equal
to 2-5 months of instruction with the remaining amount payable
monthly over the remaining term of the agreement, (starting with
the month following enrollment), or (b) make one or more lump sum
payments for the entire course at a significant discount.
Revenues are recognized over the term of the Enrollment
Agreement.
<PAGE>
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(continued)
A student may cancel an Enrollment Agreement at any time. A
refund, if any, is made if the student's advanced payments exceed
the elapsed portion of the course, prorated at $75 per month
(additional family members prorated at $45 per person per month).
The elapsed portion of the course is the number of months between
the course starting date and the cancellation date. Fee payments
subject to refund are shown in the financial statements as
deferred revenue which will be recognized as revenue in the
future years if there is no cancellation by the student.
Concentration of Credit Risk - Financial instruments which
potentially subject the Company to concentrations of credit risk
are cash and accounts receivable arising from its normal business
activities. The Company places its cash with high credit quality
financial institutions. The amount on deposit in any one
institution that exceeds federally insured limits is subject to
credit risk. To reduce credit risk, the Company requires advanced
payments from students and thus, no student fees receivable is
recorded.
Cash and Cash Equivalents - The Company considers certain highly
liquid instruments purchased with original maturities of three
months or less to be cash equivalents. The Company had cash
equivalents of $1,496,000 and $0 at December 31, 1997 and 1996,
respectively.
Property and Equipment - Property and equipment is stated at
cost. Depreciation for furniture and fixtures and certain
equipment is computed using the straight-line method over an
estimated useful life of five years. Leasehold improvements are
amortized using the straight-line method over the term of the
respective leases. Leased assets under capital lease agreements
are amortized using the straight-line method over the shorter of
the estimated useful lives or the length of the lease terms,
ranging from two to five years.
Film Costs - Film costs consist of the capitalized costs related
to the production of original film masters for videos and
television programs. The net film costs are presented on the
balance sheet at the net realizable value for each master.
Fair Values of Financial Instruments - The carrying value of
cash, receivables, accounts payable and short-term borrowings
approximates fair value due to the short maturity of these
instruments. The carrying value of long-term obligations
approximates fair value since the interest rates either fluctuate
with the lending banks' prime rates or approximate market rate.
None of the financial instruments are held for trading purposes.
Reclassifications - Certain 1996 amounts have been reclassified
to conform with the 1997 presentation.
<PAGE>
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(continued)
Loan Interest Amortization - The value of the stock given to
lenders as additional compensation are being amortized over the
term of the loans and is included in interest expense in the
accompanying statement of operations.
Net Loss Per Share - Statement of Financial Accounting Standards
(SFAS) No. 128 was adopted by the Company during the year ended
December 31, 1997. Net loss per share is based on the weighted
average outstanding shares issued. Because the Company has a net
loss, the common stock equivalents would have an anti-dilutive
effect on earnings per share. Accordingly, basic earnings per
share and diluted earnings per share are the same.
Income Taxes - Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences
between the tax bases of assets and liabilities and their
reported amounts. The Company and its Subsidiaries file a
consolidated tax return.
Note 2 - Basis of Reporting
The accompanying unaudited financial statements as of March 31,
1998 and 1997 and for the three months then ended, have been
prepared in accordance with generally accepted accounting
principles for interim financial information. 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 March 31, 1998 and 1997
and the results of its operations and its cash flows for the
three months periods ended March 31, 1998 and 1997.
Note 3 - Uses of Estimates, Risks and Uncertainties
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates used in these financial statements include
the recovery of film costs which has a direct relationship to the
net realizable value of the related asset. It is at least
reasonably possible that management's estimate of revenue from
films could change in the near term which could have a material
adverse effect on the Company's financial condition.
<PAGE>
Note 4 - Property and Equipment
1997 1996
---------- ----------
Furniture and fixtures $ 95,322 $ 95,322
Equipment 51,251 34,367
Leasehold improvments 11,938 50,535
Leased assets 119,889 119,889
Production equipment 230,526 -
---------- ----------
508,936 300,123
Less accumulated depreciation and amortization 253,513 249,263
---------- ----------
$ 255,423 $ 50,860
========== ==========
Depreciation expense was $43,407 and $64,409 for the years ended
December 31, 1997 and 1996, respectively. The accumulated
depreciation related to the leased assets at December 31, 1997
and 1996 was $119,899 and $105,641, respectively. Depreciation on
leases assets is included in depreciation expense.
Note 5 - Film Costs
Film costs consist of the capitalized costs related to the
production of videos and program for television as follows:
1997 1996
---------- ----------
Television program
The Adventures With Kanga Roddy - In process $ 2,342,120 $ 400,894
Videos
Montana Exercise Video 148,253 140,753
Strong Mind Fit Body 18,042 123,042
---------- ----------
2,508,415 664,689
Less accumulated amortization 62,998 4,685
---------- ----------
2,445,417 660,004
Less current portion of film costs 655,500 -
---------- ----------
Long-term portion of film costs $ 1,789,917 $ 660,004
========== ==========
<PAGE>
Note 5 - Film Costs (continued)
Production of the first seven episodes of The Adventures of Kanga
Roddy was completed during 1997. Six additional episodes were
completed during the three months ended March 31, 1998. Both
videos were completed in 1996, but only the Strong Mind Fit Body
video has been partially released. During 1997 management wrote
down the capitalized costs for this video by $105,000.
Note 6 - Notes Payable, Related Parties
All outstanding loans payable to related parties, with the
exception of $37,255 were subsequently paid with proceeds from
the Company's Initial Public Offering ("IPO") consummated on
August 5, 1997. This note bears interest at 12% and is unsecured.
The note has been classified as current, as the non-current
portion is not material.
Note 7 - Long-Term Debt
Long-term debt consists of a credit line with a 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
bank loan and an immaterial amount owed to another bank, the
Company does not presently maintain any other borrowing facility
or have any indebtedness to financial institutions.
The Company also has loans from three individuals and a bank
totaling $30,970, with interest at rates ranging from 13% to 14%,
maturing through June 2000.
Note 8 - Income Taxes
Reconciliation of the Federal statutory tax rate of 34% and state
tax rate of 9.3% to the recorded amounts are as follows:
1997 1996
---------- ----------
Ferderal tax benefit at statutory rates $ (274,000) $ (217,532)
State tax benefit at statutory rates (75,000) (59,501)
Other (13,000) 31,033
Increase in valuation allowance 362,000 246,000
---------- ----------
$ - $ -
========== ==========
<PAGE>
Note 8 - Income Taxes (continued)
The Company has net operating loss (NOL) carryforwards for
federal income tax purposes of approximately $1,250,000, and for
state income tax purposes of approximately $625,000, the benefits
of which expire in 2011 through 2012. The NOLs created by the
Company's subsidiaries prior to their acquisition and the NOLs
created as a consolidated group subsequent to the reorganization
described in Note 1, may have limitations related to the amount
of usage by each subsidiary or the consolidated group as
described in the Internal Revenue Code.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
1997 1996
---------- ----------
DEFERRED TAX ASSETS
NOL carryforward $ 500,000 $ -
Deferred revenue 217,000 223,000
Other 36,000 28,000
Valuation allowance (608,000) (246,000)
---------- ----------
145,000 5,000
---------- ----------
DEFERRED TAX LIABILITIES
Accounts receivable 127,000 -
Depreciation 18,000 5,000
---------- ----------
145,000 5,000
---------- ----------
$ - $ -
========== ==========
SFAS No. 109 requires the Company to record a valuation allowance
when it is "more likely than not that some portion of the
deferred tax asset will not be realized." Management believes
that some of the excess NOL carryforwards over temporary
differences may be utilized in future periods. However, due to
the uncertainty of future taxable income, a valuation allowance
for the net amount of the deferred tax assets and liabilities has
been recorded at December 31, 1997 and 1996.
Note 9 - Lease Commitments
The Company leases facilities under operating leases and gym
equipment under capital leases that range from two to six years
and expire at various dates through 2000. Some leases have
options to renew for additional terms and some require additional
increases as defined.
<PAGE>
Note 9 - Lease Commitments (continued)
Future minimum lease payments under these leases are:
Capital Operating
---------- ----------
1998 $ 11,616 $ 156,086
1999 6,858 132,828
2000 - 37,153
---------- ----------
Total minimum lease payments 18,474 $ 326,067
==========
Less amount representing interest 1,752
----------
Present value of net minimum
capital lease payments 16,722
Less current portion of obligations
under capital lease 10,157
----------
Non-current portion of obligations
under capital lease $ 6,565
==========
Total rent expense was $382,928 and $496,212 for the years ended
December 31, 1997 and 1996, respectively.
Management of the Company has developed a plan to close certain
studios related to its karate studio segment. As of December 31,
1997, the Company has accrued $57,000 to account for the
estimated costs to be incurred in future periods related to
studios which have been closed. The accrual is included in
accounts payable and accrued expenses in the accompanying balance
sheet.
Note 10 - Commitments and Contingencies
In September 1996, the Company entered into an agreement with the
director of The Adventures With Kanga Roddy television program,
whereby the director would receive 2% in the distribution of net
profits from the TV broadcasting, syndication, and video sales of
the first 13 episodes of that program.
<PAGE>
Note 10 - Commitments and Contingencies (continued)
The Company has entered into a distribution agreement with KTEH,
the public broadcasting system ("PBS") station serving the San
Jose, California area, for the exclusive right to distribute the
Kanga Roddy Series throughout the United States for a two-year
period. Under the terms of the Distribution Agreement, the
Company will receive $430,000 which is based on delivery of 13
episodes to KTEH. At December 31, 1997, the Company had
recognized revenue of $215,000 which was based on delivery of the
first seven episodes. In addition, the Company is entitled to 85%
of any distribution fees collected by KTEH in excess of $505,000.
Under the Distribution Agreement, the Company has also committed
to sharing with KTEH (i) 8% of all revenues from the sale and
licensing of products such as video tapes, books and music tapes
and (ii) 5% of gross profits of the Company from the sale and
licensing of toys and clothing. The Company has also granted KTEH
a right of first refusal with respect to rights to the Kanga
Roddy Series not granted to KTEH in the Distribution Agreement.
In July 1997, the Company and SEGA entered into two agreements
appointing SEGA as the Company's non-exclusive agent for purposes
of licensing and merchandising the "Kanga Roddy" trademark, brand
name and logo. In such agreements, SEGA agreed to introduce the
Company to prospective sub-licensees in consideration of an
amount equal to 30% of all revenues earned by the Company under
any agreement entered into during the three-year period following
execution of the agreement by the Company with any person or
entity introduced to the Company by SEGA. Pursuant to such
agreements, SEGA is not subject to any minimum sales requirement.
The Company has entered into an agreement with the two
participants of the Montana Exercise Video in which a royalty fee
of $1 will be paid for each tape sold.
Note 11 - Related Party Transactions
During 1997 the Company paid consulting fees of $60,000 to two
shareholders for story lines and scripts for the production of
the television series " The Adventures with Kanga Roddy".
Advances to stockholders were $114,773 and $92,083 at December
31, 1997 and 1996, respectively.
During 1997, the Company obtained from a shareholder a $119,300
non-interest bearing loan which was repaid during 1997.
<PAGE>
Note 11 - Related Party Transactions (continued)
During 1996, ABK borrowed $333,800 from six of its stockholders.
During 1997, additional loans of $89,227 were borrowed from five
other shareholders. Additionally, a total of $133,500 unsecured
loans were converted into 53,400 shares of ACE common stock
during 1997. As additional compensation to these stockholders, a
total of 18,400 shares of ACE and 455.5 shares of ABK (12,800 ACE
shares) common stock with values of $92,000 and $21,636 were
issued to them as of December 31, 1997 and December 31, 1996,
respectively. Management determined the assigned value with
reference to the selling prices of similar shares during the time
period in which such shares were issued. Substantially all of
these loans were repaid during 1997. At December 31, 1996, the
loans are presented net of unamortized loan charges of $16,464.
During 1997 these amounts were charged to expense when the loans
were repaid. For the year ended December 31, 1996, $5,172, of
unamortized loan charges were expensed in the statement of
operations.
In 1996, the Company borrowed $10,000 from an individual related
to another individual who is an officer, director and
stockholder. The loan bears interest at the rate of 15% and
initially matured in July 1997. The loan was converted to 4,000
shares of ACE common stock during 1997.
In November 1996, the Company agreed to pay to two participants
of the Montana Exercise Video the sum of $50,000 from the
proceeds of the intended initial public offering and another
$50,000 will be paid 30 days prior to the release date. These two
participants are stockholders of the Company.
During 1996, ABK issued S corporation distributions of $12,518,
to three stockholders.
Note 12 - New Authoritative Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 130
and SFAS No. 131 and in February 1998 issued SFAS No. 132. SFAS
No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 131 establishes
standards for reporting operating segments, products, and
services, geographic areas, and major customers. SFAS No. 132
revises employers' disclosures about pension and other post-
retirement benefit plans. The standards become effective for
fiscal years beginning after December 15, 1997. Management plans
to adopt these standards in the year ending December 31, 1998.
Management believes the provisions of SFAS Nos. 130, 131 and 132
will not have a material effect on the financial condition or
reported results of operations.
<PAGE>
Note 13 - Industry Segments
The Company is involved in the development of educational
television programs and fitness videos and operates a chain of
karate studios which are segmented into two categories for
reporting purposes. Television and videos reflect the activities
related to the development and production of educational
television programs and fitness videos. Tuition and related fees
includes activities related to operations of karate studios.
The relative contributions to net sales, income from operations
and identifiable assets of the Company's two industry segments
for the years ended December 31, 1997 and 1996 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net Sales [1]:
Tuition and Related Fees $ 921,158 $ 1,031,407
Videos and Television 215,000 19,146
Corporate 43,395 -
---------- ----------
NET SALES $ 1,179,553 $ 1,050,553
========== ==========
Depreciation and Amortization:
Tuition and Related Fees $ 32,810 $ 59,724
Videos and Television 68,597 4,685
---------- ----------
DEPRECIATION AND AMORTIZATION $ 101,407 $ 64,409
========== ==========
Capital Expenditures:
Tuition and Related Fees $ 12,080 $ 7,014
Videos and Television 2,184,303 350,364
---------- ----------
CAPITAL EXPENDITURES $ 2,196,383 $ 357,378
========== ==========
Income [Loss] From Operations:
Tuition and Related Fees $ (643,345) $ (475,439)
Videos and Television 43,642 (166,144)
Corporate (201,713) -
---------- ----------
NET LOSS $ (801,416) $ (641,583)
========== ==========
Less Other [2] - -
---------- ----------
NET [LOSS] INCOME $ (801,416) $ (641,583)
========== ==========
Identifiable Assets [2]:
Tuition and Related Fees $ 216,241 $ 100,517
Videos and Television 2,884,565 729,848
---------- ----------
Totals 3,100,806 830,365
Add: Corporate 1,862,989 139,125
---------- ----------
ASSETS $ 4,963,795 $ 969,490
========== ==========
</TABLE>
<PAGE>
Note 13 - Industry Segments (continued)
[1] There were no sales between industry segments.
[2] Corporate and other assets are principally cash, receivables,
and prepaid expenses.
Note 14 - Employment Agreements
During 1997, the Company entered into employment agreements with
each of Mr. Chung, Mr. Chan, Mr. Berryessa, and Mr. Hutchins.
Each agreement has a term of five years except Mr. Hutchins which
is two years. Pursuant to the agreements, the Company will pay to
these individuals a base salary of $100,000, $100,000, $65,000
and $39,600 per year, respectively. Each agreement also provides
for the following bonuses: (i) options to purchase 87,500,
87,500, 25,000 and 20,000 shares of Common Stock of the Company,
respectively, exercisable at 120% of the public Offering price of
the Common Stock of the Company upon consummation of the Offering
($6 per share) and (ii) $200,000, $200,000, $100,000 and
$100,000, respectively, if all of the Warrants issued to the
public in the Offering are exercised by the holders thereof
within the five-year (two years for Mr. Hutchins) exercise period
of such Warrants. In addition, the executives are also entitled
to certain fringe benefits. If any of these individuals is
terminated other than for cause, death or disability, the Company
is obligated to pay such executive an amount equal to his base
salary then in effect for the remaining term of the agreement.
Note 15 - Stock Plans
The Stock Plan was adopted by the Board of Directors and
stockholders of the Company during 1997. The total number of
shares of Common Stock subject to issuance under the Stock Plan
is 400,000, subject to adjustments as provided in the Plan. The
Plan provides for the grant of stock options, stock appreciation
rights ("SARs") and other stock awards to employees of the
Company or any consultant or advisor engaged by the Company who
renders bona fide services to the Company; provided, that such
services are not in connection with the offer or sale of
securities in a capital raising transaction. The Plan is
administered by the Compensation Committee of the Board of
Directors (the "Committee"). Stock options may be granted by the
Committee on such terms, including vesting and payment forms, as
it deems appropriate in its discretion; provided, that no option
may be exercised later than ten years after its grant, and the
purchase price for incentive stock options and non-qualified
stock options shall not be less than 100% and 85% of the fair
market value of the Common Stock at the time of grant,
respectively.
<PAGE>
Note 15 - Stock Plans (continued)
In the event of a change in control of the Company, the Committee
retains the discretion to accelerate the vesting of stock options
and SARs and to remove restrictions on transfer of restricted
stock awards. Unless terminated by the Board of Directors, the
Plan continues until December 2007. The Plan provides for the
automatic grant to each of the Company's non-employee directors
of (i) an option to purchase 5,000 shares of Common Stock on the
date of such director's initial election or appointment to the
Board of Directors (the "Initial Grant") and (ii) an option to
purchase 2,000 shares of Common Stock on each anniversary thereof
on which the director remains on the Board of Directors (the
"Annual Grant"). The options will have an exercise price of 100%
of the fair market value of the Common Stock on the date of grant
and have a 10-year term.
Note 16 - Common Stock
During the year ended December 31, 1997, the Company sold
1,300,000 shares of its common stock at $5 per share and
1,495,000 warrants to purchase the Company's common stock at $.10
per warrant, in a public offering. Each warrant entitles the
registered holder to purchase one share of common stock at $6.50
per share at any time through August 2002. During 1997 and 1996,
the Company incurred costs of $1,407,964 and $66,544,
respectively, related to the offering. The costs incurred during
1996 were deferred at December 31, 1996, and are included in
other assets. These costs were charged against the proceeds of
the stock offering in 1997.
At the time of the public offering the Company offered to certain
stockholders of the Company who previously purchased common stock
of ABK, the right to rescind their previous purchase and receive
the return to the purchase price paid plus interest. The total
number of shares subject to rescission was 684,619 (ACE shares).
One stockholder rescinded 16,000 shares at $40,000. The
rescission offer expired October 1, 1997.
During 1997 certain "founding" stockholders of the Company
canceled 228,622 shares of common stock. These stockholders
received no proceeds related to cancellation of these shares.
Note 17 - Stock Options
At December 31, 1997, there were 400,000 options authorized and
393,000 options outstanding under the Company's Stock Plan. No
options were exercised or canceled during the year.
<PAGE>
Note 17 - Stock Options (continued)
Stock options granted to non-employees for services provided to
the Company are accounted for under by Statement of Financial
Accounting No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." At December 31, 1997, the Company accounted for
100,000 options which were issued in connection with the
production of The Adventures With Kanga Roddy under this method.
These options were valued at $200,000 and are included in film
costs and additional paid in capital in the accompanying balance
sheet.
The Company applies the intrinsic value based method prescribed
by Accounting Principals Board Opinion No. 25 "Accounting for
Stock Issued to Employees," in accounting for employee stock
options. Accordingly, compensation expense is recognized only
when options are granted with a discounted exercise price. Any
such compensation expense is recognized ratably over the
associated service period, which is generally the vesting term.
At December 31, 1997, the Company accounted for 293,000 options
under this method.
Pro forma net earnings and earnings per share information, as
required by SFAS 123, has been determined as if the Company had
accounted for employee stock options under SFAS 123's fair value
method. The fair value of these options was estimated at grant
date using a Black-Scholes option pricing model with the
following weighted average assumptions for fiscal 1997: risk free
interest rate of 6.25 percent; dividend yield of 0 percent;
expected option life of 7 years; and volatility of 42 percent.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the two-year average
vesting period of the options. The Company's pro forma net loss
for 1997 was $(1,049,000) and pro forma net loss per share was
$(.33).
Shares of Common Stock
---------------------------------------------
Available For
Exercise of Options
Option / Award Under Plan Warrants
-------------- ---------- ----------
Balance, December 31, 1996 - - -
Authorized 400,000 - -
Granted (393,000) 393,000 1,495,000
-------------- ---------- ----------
Balance, December 31, 1997 7,000 393,000 1,495,000
============== ========== ==========
No options were exercised or lapsed during 1997.
<PAGE>
Note 17 - Stock Options (continued)
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
-------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Options 393,000 7.6 $ 5.61 368,000 $ 5.61
Warrants 1,495,000 4.6 6.50 1,495,000 6.50
</TABLE>
Note 18 -Year 2000
In the opinion of management, no material adverse effect on
either results of operations or financial position is anticipated
due to the modifications or replacement of existing information
systems in order to accommodate year 2000 implications.
Note 19 - Sale of Karate Studio
During the three months ended March 31, 1998, the Company sold a
karate studio to its general manager. The Company received a note
receivable of $52,859 due in 70 monthly payments of $1,000
including interest imputed at 10%. The Company has guaranteed
payments of the studio lease which are $4,673 per month through
March 2000. The Company retained all advance payments of enrollment
fees which were $156,536 at March 31, 1998; however, the Company is
liable for any future refunds to students enrolled prior to
March 31, 1998. The Company reduced the liability for advance
payments of enrollment fees to $94,000 which is included in
deferred revenue. Management will evaluate this liability quarterly
in light of cancellations to date and expected future
cancellations.
Note 20 - Subsequent Event
Subsequent to March 31, 1998, the Company entered into an
Engagement Agreement with a finder for equity financing. Terms are
yet to be determined.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits, to the maximum
extent permitted by Delaware law, the personal liability of directors
for monetary damages for breach of their fiduciary duties as a
director. The Company's Bylaws provided that the Company shall
indemnify its officers and directors and may indemnify its employees
and other agents to the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides that
a corporation may indemnify a director, officer, employee or agent made
a party to an action by reason of that fact that he or she was a
director, officer employee or agent of the corporation or was serving
at the request of the corporation against expenses actually and
reasonably incurred by him or her in connection with such action if he
or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable
cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with
the distribution of the securities being registered are as follows:
AMOUNT
----------
SEC Registration Fee (1).................................. $ 7,368
NASD Filing Fee........................................... 2,499
NASDAQ Listing Fee........................................ 9,000
Printing Expenses (1)..................................... 50,000
Accounting Fees and Expenses.............................. 95,000
Legal Fees and Expenses (1)............................... 220,000
Blue-Sky Fees and Expenses (1)............................ 50,000
Transfer Agent's Fees and Expenses........................ 2,500
Underwriters' Non-Accountable Expense Allowance........... 155,140
Miscellaneous Expenses ................................... 108,493
-----------
Total.................................................. $700,000
===========
- ------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In July, 1997, in connection with the reorganization transaction
whereby the Company became the parent holding company of America's Best
Karate and AC Media, an aggregate of 2,515,700 shares of Common Stock
of the Company were issued to an aggregate of 68 persons, each of whom
was a shareholder of America's Best Karate. This issuance was effected
in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act and/or Regulation D adopted thereunder on
the basis that the transaction did not involve a public offering.
Set forth below is a listing of issuances of unregistered shares
of Common Stock by the Company's subsidiary, America's Best Karate,
during the last three years prior to the aforementioned reorganization
transaction. All of such sales were intended to be exempt from the
registration requirements under the Securities Act pursuant to Section
4(2). The Company believes that sales to the first 11 listed
shareholders below are exempt from the registration requirements under
the Securities Act pursuant to Section 4(2) based on the fact that all
such sales were made to personal or business acquaintances of America's
Best Karate and its management. The Company believes that several of
these shareholders are "sophisticated" within the meaning of the
exemption because they include people such as Carmen Policy, the
general manager of the San Francisco 49ers and accredited investors,
such as Joe Montana, with the means of informing themselves about the
Company and its affairs. Because sales of shares of Common Stock from
November 1995 to March 1997 (other than shares issued as additional
consideration for loans and shares issued on March 31, 1997, pursuant
to the conversion of $133,500 worth of debt to equity), may not have
qualified for such exemption because of the lack of sophistication of
certain purchasers, the Company intends to make a rescission offer to
the holders of such securities (see * next to shareholders' names). See
"Rescission Offer." The Company also believes that the shares issued on
March 31, 1997, to the seven individuals listed below pursuant to such
individuals' agreements to convert the aggregate principal amount of
$133,500 in debt to shares of America's Best Karate, are exempt from
the registration requirements under the Securities Act pursuant to
Section 3(a)(9). In relying on such exemption, the Company notes that
(i) the securities for exchange was offered by the same entity that
issued the outstanding ones; (ii) the security holders were not asked
to part with anything of value besides the outstanding security; (iii)
the exchange was offered exclusively to the Company's existing security
holders and (iv) the Company did not pay any compensation for the
solicitation of the exchange.
<PAGE>
NO. OF
DATE SHAREHOLDER SHARES CONSIDERATION
- ---------- -------------------------------- --------------------------------
23-May-95 Don Berryessa 5,000.00 Services
01-Jun-95 Peter K. Y. Kwong 4,500.00 Services
01-Jun-95 Sheri Sylvester 1,000.00 Services
01-Jun-95 Don H. Yee 752.00 Services
01-Jun-95 Montana Family Trust 5,639.00 Services
01-Jun-95 Ronnie Lott 752.00 Services
01-Jun-95 Dwight Clark 752.00 Services
01-Jun-95 Carmen Policy 752.00 Services
01-Jun-95 Brent Jones 100.00 Services
01-Jun-95 Mary Ochs 752.00 Services
01-Jun-95 Palestra Corp 752.00 Services
07-Nov-95 Richard & Gloria Yee* 500.00 $ 20,000
07-Nov-95 Steven Tang* 250.00 $ 10,000
10-Nov-95 Ricky Tung* 1,000.00 $ 40,000
14-Nov-95 Albert Tang* 1,000.00 $ 40,000
30-Nov-95 May Roberts* 250.00 $ 10,000
08-Dec-95 John R. Powers, III* 500.00 $ 20,000
08-Dec-95 Laurene Yip* 250.00 $ 10,000
20-Dec-95 Bonnie LeMat* 250.00 $ 10,000
20-Dec-95 Susan Yagai* 250.00 $ 10,000
20-Dec-95 Dale Chung* 1,000.00 $ 40,000
27-Dec-95 Linda Durnell* 250.00 $ 10,000
08-Jan-96 Ricky Tung* 1,000.00 $ 40,000
08-Jan-96 Petro Estakhri* 500.00 $ 20,000
12-Jan-96 Terry L. Gray* 250.00 $ 10,000
31-Jan-96 Amy Chow* 100.00 $ 4,000
23-Feb-96 Michael Booth* 165.00 $ 5,000
26-Feb-96 Billy Y. Prasadi* 250.00 $ 10,000
02-Apr-96 Richard Yee* 1,000.00 $ 40,000
02-Apr-96 Kwong Family Trust* 500.00 $ 20,000
02-Apr-96 Ted & Irene Chin* 500.00 $ 20,000
02-Apr-96 May Roberts* 250.00 $ 10,000
05-Apr-96 Stanley Ching* 500.00 $ 20,000
12-Apr-96 May Roberts* 500.00 $ 20,000
24-May-96 Kwong Family Trust* 500.00 $ 20,000
01-Jun-96 Stanley Ching* 500.00 $ 20,000
29-May-96 William Loh* 500.00 $ 20,000
03-Jun-96 Warren Wong* 2,000.00 $ 80,000
03-Jun-96 Ted & Irene Chin* 500.00 $ 20,000
03-Jun-96 Tommy O. Ng* 1,000.00 $ 40,000
19-Aug-96 Clayton Tominaga* 1,500.00 $ 90,000
20-Aug-96 Laurene Yip* 125.00 $ 7,500
20-Aug-96 Peter C. Ho* 125.00 $ 7,500
25-Aug-96 Camilla T. Y. Kwong* 125.00 $ 7,500
25-Aug-96 Tommy O. Ng* 125.00 $ 7,500
14-Oct-96 John R. Powers, III 71.17 For loan
14-Oct-96 May W. Roberts 71.17 For loan
01-Nov-96 John R. Powers, III 71.17 For loan
09-Nov-96 Noreen Yamaoka 142.35 For loan
25-Nov-96 John C. Chan 14.235 For loan
25-Nov-96 Dale Chung 14.235 For loan
01-Dec-96 John R. Powers, III 71.17 For loan
01-Dec-96 Albert & Amy Tang* 125.00 $ 7,500
01-Dec-96 Laurene Yip* 125.00 $ 7,500
01-Dec-96 Stephen Thomas* 125.00 $ 7,500
01-Dec-96 Louisa Kwok* 500.00 $ 30,000
04-Dec-96 Michael Tom* 166.67 $ 10,000
05-Dec-96 Rafael S. Tom* 300.00 $ 18,000
10-Dec-96 Peter Ho* 125.00 $ 7,500
11-Dec-96 Paul P. H. Shen* 150.00 $ 9,000
12-Dec-96 Eric C. & Ellen Ng* 500.00 $ 30,000
27-Dec-96 Van Living Trust* 250.00 $ 15,000
27-Dec-96 Vivian Lee* 125.00 $ 7,500
28-Dec-96 Brian Shing* 150.00 $ 9,000
28-Dec-96 Joseph Chan* 166.67 $ 10,000
30-Dec-96 Julian & Ann Englestad 71.17 For loan
01-Jan-97 Marianne Chung 14.235 For loan
14-Jan-97 Stanley F. Wasowski 35.587 For loan
14-Jan-97 Amy Okegaki 14.235 For loan
16-Jan-97 Rafael Tom 14.235 For loan
19-Jan-97 Stephen Thomas* 67.00 $ 4,020
23-Jan-97 Jack Yuk Lim Tam 42.705 For loan
31-Jan-97** Scott Gerard* 683.274 $ 48,000
11-Mar-97** Susan Cohen* 56.94 $ 4,000
11-Mar-97** Peter Marsh* 683.274 $ 48,000
13-Mar-97** Keith Loiselle* 216.37 $ 15,200
17-Mar-97** Paul G. Leff* 569.395 $ 40,000
18-Mar-97** Rory Nichols* 284.698 $ 20,000
18-Mar-97** Brian Schuster* 284.698 $ 20,000
18-Mar-97** Al Levine* 284.698 $ 20,000
18-Mar-97** William E. Gay, Jr.* 68.327 $ 4,800
18-Mar-97** David Braver* 45.552 $ 3,200
19-Mar-97** Sarine Chaki* 227.758 $ 16,000
20-Mar-97** Al Levine* 68.327 $ 4,800
31-Mar-97 Marianne Chung 142.349 $ 10,000
31-Mar-97 John R. Powers 711.744 $ 50,000
31-Mar-97 Jack Yuk Lim Tam 427.046 $ 30,000
31-Mar-97 Rafael S. Tom 142.349 $ 10,000
31-Mar-97 Stanley F. Wasowski 142.349 $ 10,000
31-Mar-97 David L. Lei 192.171 $ 13,500
31-Mar-97 Michael Triantos 142.349 $ 10,000
- ------------------------
<PAGE>
** Sales made in a private placement in which America's Best Karate
obtained $244,000 of financing in exchange for 3,473.31 shares.
Set forth below is a listing of issuances of debt securities by
the Company's subsidiary, America's Best Karate, during the last three
years prior to the aforementioned reorganization transaction. All of
such sales were intended to be exempt from the registration
requirements under the Securities Act pursuant to Section 4(2) based on
the fact that substantially all of such sales were made to personal or
business acquaintances of America's Best Karate and its management.
<PAGE>
ORIGINAL
PRINCIPAL
AMOUNT OF
DATE DEBTHOLDER DEBT
- ---------------- -------------------------------- -----------
- -------
8-Dec-94 Thomas Fu $ 27,000
15-Dec-94 Michael Triantos $ 100,000
30-Apr-95 Thomas Fu $ 27,000
5-May-95 David Lei $ 27,000
14-Oct-96 John R. Powers, III $ 50,000
14-Oct-96 May W. Roberts $ 50,000
1-Nov-96 John R. Powers, III $ 50,000
9-Nov-96 Noreen Yamaoka $ 100,000
25-Nov-96 John C. Chan $ 10,000
26-Nov-96 Dale Chung $ 10,000
1-Dec-96 John R. Powers, III $ 50,000
30-Dec-96 Julian and Ann Englestad $ 50,000
31-Dec-96 Marianne Chung $ 10,000
14-Jan-97 Stanley F. Wasowski $ 25,000
14-Jan-97 Amy Okagaki $ 10,000
16-Jan-97 Rafael Tom $ 10,000
23-Jan-97 Jack Yuk Lim $ 30,000
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen stock certificate
4.2* Warrant Agreement with form of Warrant
4.3* Form of Underwriters' Warrant
5* Opinion of Sheppard Mullin Richter & Hampton LLP
10.1* 1997 Stock Plan
10.2* Form of Stock Option Agreement for 1997 Stock Plan
10.3* 1997 Non-Employee Directors Stock Option Plan
10.4* Form of Non-Employee Directors Stock Option Agreement
10.5* Form of Business Loan Agreement utilized for $455,000 of
short-term loans due the earlier of July 1, 1997 or consummation
of the Offering
10.6* Business Loan Agreement between ABK and the Bank of Canton
of California dated May 15, 1993, and related Promissory Note and
Security Agreement
10.7* Business Loan Agreement between the Company and Silicon
Valley Bank dated April 25, 1995, and related Promissory Note and
Security Agreement
10.8* Promissory Note dated December 15, 1994 made payable by
Messrs. Chung and Chan and their wives in favor of Michael
Triantos M.D. Inc. Money Purchase and Profit Sharing Pension
Plans Trust
10.9* Employment Agreement between the Company and George Chung
dated March 4, 1997, effective upon the closing date of the
Offering
10.10* Employment Agreement between the Company and Anthony Chan
dated March 4, 1997, effective upon the closing date of the
Offering
10.11* Employment Agreement between the Company and Don Berryessa
dated March 4, 1997, effective upon the closing date of the
Offering
10.12* Employment Agreement between the Company, AC Media and Jan
Hutchins dated March 4, 1997, effective upon the closing date of
the Offering
10.13* Convertible Loan Agreement dated as of May 5, 1995, between
ABK and David Y. Lei
10.14* Convertible Loan Agreement dated as of December 8, 1994,
between ABK and Thomas Y. Fu
10.15* Amended Deal Memo between ABK and Rick Fichter dated
February 23, 1997, with respect to payments related to the Kanga
Roddy Series
10.16* Intentionally Omitted
10.17* Form of Indemnification Agreement
10.18* Form of Amendment No. 1 to Business Loan Agreement utilized
for $455,000 of short-term loans due the earlier of July 1, 1997
or consummation of the Offering
10.19* Letter dated October 29, 1996 from the Company to Tim
Pettitt regarding certain payments to the Montanas
10.20* Distribution Agreement dated June 18, 1996 by and between
America's Best Karate and InteliQuest
10.21* Distribution Agreement, dated May 6, 1997, by and between
KTEH, San Jose Public Television and American Champion Media,
Inc.
10.22* Letter Agreement, dated June 1997, between AC Media, Inc.
and Sega of America, Inc.
10.23* Business Loan Agreement between America's Best Karate and
Karen Shen
10.24* Business Loan Agreement between America's Best Karate and
Thomas J. Woo
10.25** Licensing Agreement dated July 25, 1997, between American
Champion Media, Inc. and Sega of America, Inc.
10.26*** Continuous Distribution Agreement dated April 20, 1998,
between KTEH, San Jose and American Champion Media, Inc.
10.27***Sponsorship Agreement dated April 29, 1998, between Sara Lee
Corporation and American Champion Media, Inc.
10.28*** Engagement Agreement dated April 24, 1998, between JW Charles
and American Champion Entertainment, Inc.
21.1* Subsidiaries of the Registrant
23.1* Consent of Sheppard, Mullin, Richter & Hampton LLP
(contained in Exhibit 5)
23.2 Consent of Moss Adams, LLP
23.3 Consent of Moore Stephens, P.C.
23.4 Consent of Sichenzia, Ross & Friedman, LLP
27.1* Financial Data Schedule
------------------------
* Incorporated by reference to the Registrant's Form SB-2
Registration Statement (SEC File #333-), filed with the
Commission on March 21, 1997 or Form SB-2/A filed March 3, 1997
and June 20, 1997.
** Incorporated by reference to the Registrant's Form 10-KSB Annual
Report, filed with the Commission on March 30, 1998.
*** Incorporated by reference to the Registrants' Form 10-QSB Quarterly
Report, filed with the Commision on May 15, 1998.
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Company pursuant to the provisions described in Item 24,
or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by the
director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities
Act; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized
this Post-Effective Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Hayward, State of California, on June 28, 1998.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By:/s/ ANTHONY K. CHAN
Anthony K. Chan
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement has been
signed by the following persons in the capacities and on the dates
stated.
NAME TITLE DATE
/s/ ANTHONY K. CHAN President, Chief Executive Officer, June 28, 1998
Anthony K. Chan Chief Financial Officer and Director
(Principal executive officer and
principal financial officer)
/s/ GEORGE CHUNG Chairman of the Board and Director June 28, 1998
George Chung
/s/ DON BERRYESSA Vice President and Director June 28, 1998
Don Berryessa
/s/ WILLIAM T. DUFFY Director June 28, 1998
William T. Duffy
/s/ ALAN ELKES Director June 28, 1998
Alan Elkes
/s/ JAN D. HUTCHINS Director June 28, 1998
Jan D. Hutchins
/s/ RONALD M. LOTT Director June 28, 1998
Ronald M. Lott
EXHIBIT 23.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement of Form SB-2 of
our report dated Febuary 11, 1998, of our audit of the financial statements
of American Champion Entertainment, Inc. We also consent to the reference to
our firm under the caption "Experts" in the Prospectus forming part of such
Registration Statement.
/s/Moss Adams
San Francisco, California
June 30, 1998
EXHIBIT 23.3
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No.1 to the Registration
Statement (No.333-18967) on Form SB-2 of our report dated January 31, 1997, on
our audit of the balance sheet of America's Best Karate (a California
corporation) as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended.
/s/ Moore Stephens, P.C.
MOORE STEPHENS, P.C
Certified Public Accountants
Cranford, New Jersey
July 1, 1998
EXHIBIT 23.4
CONSENT OF SICHENZIA, ROSS & FRIEDMAN LLP
We hereby consent to the reference to our firm under "Legal Matters" in the
Prospectus forming a part of the Post-Effective Amendment No. 1 to the
Registration Statement. In giving the foregoing consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission.
Very truly yours,
/s/ Sichenzia, Ross & Friedman LLP
SICHENZIA, ROSS & FRIEDMAN LLP
Dated: July 1, 1998
