SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 333-18967
AMERICAN CHAMPION ENTERTAINMENT, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3261987
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26203 PRODUCTION AVENUE, SUITE 5
HAYWARD, CALIFORNIA 94545
-------------------- -----
(Address of principal executive offices) (Zip Code)
(510) 782-8168
--------------
(Registrant's telephone number including area code)
---------------------------------------------------
Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- ---------------------
Common Stock, $.0001 par value The Nasdaq SmallCap Market
Warrant to Purchase Common Stock The Nasdaq SmallCap Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [ X ]
Revenues for its most recent fiscal year: $1,179,553
Aggregate market value of common stock held by nonaffiliates at
March 2, 1998: $23,273,250
Number of shares of common stock outstanding at March 2, 1998: 3,832,345
Documents Incorporated by Reference: Location in Form 10-K
------------------------------------ ----------------------
Portions of the Proxy Statement for 1998 Part III
Annual Meeting of Shareholders
Transitional Small Business Disclosure Format (check one):
Yes _____ No ___x___
TABLE OF CONTENTS
Part I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Part II
Item 5 Market for Common Equity and Related Stockholder Matters
Item 6 Management's Discussion and Analysis or Plan of Operation
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 9 Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management
Item 12 Certain Relationships and Related Transactions
Item 13 Exhibits and Reports on Form 8-K
<PAGE>
PART I
Item 1. Description of 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 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 transport 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.
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 five 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.
Employees
At December 31, 1997, the Company employed a total of 16 employees
on a full-time basis and three employees on a part-time basis.
Item 2. Description of 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.
Item 3. Legal Proceedings
No lawsuits or proceedings are currently pending against the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since the Company's initial public offering which closed in August
1997, the Company's common stock and warrants are traded on The Nasdaq
SmallCap Market under the trading symbols "ACEI" and "ACEIW,"
respectively. The following table sets forth high and low sales prices
of the Company's common stock as quoted on The Nasdaq SmallCap Market.
Prior to August 1997, there was no public market for the Company's
common stock.
High Low
Sales Price Sales Price
--------------- ---------------
1997 3rd Quarter $5.75 $3.50
4th Quarter $8.00 $4.75
At December 31, 1997 there were 720 shareholders of the Company's
common stock.
The Company has never paid a dividend on its common stock. The
Company intends to retain future earnings, if any, that may be generated
to finance the operations and expansion of the Company and, accordingly,
does not plan for the reasonably foreseeable future, to pay dividends on
its common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
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
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 12.3%
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 22.8%. 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 24.9% 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.
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 40.8%
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 $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 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.
Item 7. Financial Statements
The consolidated financial statements of the Company and
subsidiaries and independent auditors' report are filed herewith
in this report.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance With Section 16(a) of the Exchange Act
See information under the caption "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act" of the Company's
proxy statement for the 1998 Annual Meeting of Shareholders (the "1998
Proxy Statement") which information is incorporated by reference
herein.
Item 10. Executive Compensation
See information under the caption "Executive Compensation" of
the 1998 Proxy Statement which information is incorporated by reference
herein.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
See information under the caption "Principal Shareholders" and
"Stock ownership of Management" of the 1998 Proxy Statement which
information is incorporated by reference herein.
Item 12. Certain Relationships and Related Transactions.
See information under the caption "Certain Relationships and
Related Transactions" of the 1998 Proxy Statement which information is
incorporated by reference herein.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Index to Exhibits in this Form 10-KSB.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998
AMERICAN CHAMPION ENTERTAINMENT, INC.
By: /s/ ANTHONY K. CHAN
-----------------------------------------
Anthony K. Chan, President
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ ANTHONY K. CHAN President, Chief Executive March 30, 1998
- ------------------------- Officer, Chief Financial
Anthony K. Chan Officer and Director
(Principal Executive Officer
and Principal Financial Officer)
/s/ GEORGE CHUNG Chairman of the Board and March 30, 1998
- ------------------------- Director
George Chung
/s/ DON BERRYESSA Director March 30, 1998
- -------------------------
Don Berryessa
/s/ JAN HUTCHINS Director March 30, 1998
- -------------------------
Jan Hutchins
/s/ WILLIAM DUFFY Director March 30, 1998
- -------------------------
Willian Duffy
/s/ ALAN ELKES Director March 30, 1998
- -------------------------
Alan Elkes
/s/ RONNIE LOTT Director March 30, 1998
- -------------------------
Ronnie Lott
</TABLE>
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
AND
SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<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>
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 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 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.
Certified Public Accountants.
Cranford, New Jersey
January 31, 1997
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash....................................... $1,795,657 $28,763
Account receivable......................... 220,817 5,817
Loans receivable, related parties.......... 114,773 92,083
Current portion of film costs.............. 655,500 --
Prepaid expenses and other................. 96,556 12,462
----------- -----------
Total current assets....................... 2,883,303 139,125
----------- -----------
Property and equipment, net of
accumulated depreciation and
amortization of $253,513 and $249,263...... 255,423 50,860
----------- -----------
Other assets:
Film costs, net of accumulated
amortization of $62,998 and $4,685....... 1,789,917 660,004
Other Assets............................... 35,152 119,501
----------- -----------
Total other assets......................... 1,825,069 779,505
----------- -----------
$4,963,795 $969,490
=========== ===========
Liabilities and Stockholders' Equity [Deficit]
Current liabilities:
Accounts payable and accrued expenses...... $199,344 $316,644
Deferred revenues, current portion......... 282,056 453,404
Loans payable, related parties............. 37,255 352,175
Long-term debt, current portion............ 5,856 261,853
Obligations under capital leases,
current portion.......................... 10,157 26,459
Other...................................... 4,216 4,216
----------- -----------
Total current liabilities.................. 538,884 1,414,751
----------- -----------
Long-term liabilities:
Deferred revenues.......................... 261,464 465,272
Long-term Debt............................. 58,343 71,392
Obligations under capital leases........... 6,565 20,641
Other...................................... 4,216 8,432
----------- -----------
Total long-term liabilities................ 330,588 565,737
----------- -----------
Common Stock Subject to Rescission........... -- 927,500
----------- -----------
Stockholders' Equity [Deficit]:
Common stock, $0.0001 par value;
10,000,000 shares authorized;
3,832,345 shares outstanding,
paid-in capital.......................... 5,529,419 (1,155,318)
Common stock warrants...................... 149,500 --
Accumulated deficit........................ (1,584,596) (783,180)
----------- -----------
Total stockholders' equity [deficit]....... 4,094,323 (1,938,498)
----------- -----------
$4,963,795 $969,490
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUE:
Tuition and related fees.............. $853,335 $931,231
Accessories and video sales........... 67,823 119,322
Film income........................... 215,000 --
Interest income....................... 43,395 --
------------ ------------
Total revenue......................... 1,179,553 1,050,553
------------ ------------
COSTS AND EXPENSES:
Cost of sales......................... 36,098 88,942
Amortization of film costs............ 58,000 --
Salaries and payroll taxes............ 793,486 712,574
Rent.................................. 382,928 496,212
Selling, general and administrative... 372,773 325,025
Interest.............................. 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.............. 1,980,969 1,692,136
------------ ------------
Net loss................................ ($801,416) ($641,583)
============ ============
Weighted average number of shares
outstanding........................... 3,155,257 2,376,588
============ ============
Net loss per share...................... ($0.25) ($0.27)
============ ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
----------------------- Total
Number Paid-in Common Stockholders'
of Capital Stock Accumulated Equity
Shares (Deficit) 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................... 455 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............................. -- -- -- (641,583) (641,583)
---------- ----------- ------------ ------------- ------------
Balance, December 31, 1996............. 92,030 (1,155,318) -- (783,180) (1,938,498)
Conversion of ABK shares
to ACE shares...................... 2,494,018 -- -- -- --
Issuance of common stock, net of
offering costs of $1,474,508....... 1,437,519 5,463,737 -- -- 5,463,737
Issuance of warrants................. -- -- 149,500 -- 149,500
Debt converted to equity............. 53,400 133,500 -- -- 133,500
Cancellation of founders' shares..... (228,622) -- -- -- --
Common stock subject to rescission... -- (248,020) -- -- (248,020)
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............................. -- -- -- (801,416) (801,416)
---------- ----------- ------------ ------------- ------------
Balance, December 31, 1997............. 3,832,345 $5,529,419 $149,500 ($1,584,596) $4,094,323
========== =========== ============ ============= ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ ($801,416) ($641,583)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization............... 101,407 64,409
Write off of film costs..................... 105,000 --
Interest amortization, debt issue costs..... -- 6,272
Rent concession amortization............... (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.................... (66,289) 3,567
Decrease in:
Accounts payable and accrued expenses......... (117,300) 77,335
Deferred revenues............................. (375,156) (55,319)
Other liabilities............................. -- 6,000
------------- -------------
Net cash used for operating activities..... (1,235,745) (546,922)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (247,970) (7,014)
Payments for film costs......................... (1,722,413) (350,364)
Advances to stockholders........................ (22,690) (92,083)
Deposits........................................ -- 2,083
------------- -------------
Net cash used for investing activities..... (1,993,073) (447,378)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
S Corp. distributions........................... -- (12,518)
Proceeds from issuance of common stocks......... 6,748,020 728,000
Proceeds from issuance of warrants.............. 149,500 --
Offering costs.................................. (1,407,964) (66,544)
Rescission of common stock...................... (40,000) --
Proceeds of short-term debts.................... -- 49,344
Proceeds (payments) of loans from related
parties....................................... (314,920) 338,850
Payments on long-term debt...................... (108,546) (52,078)
Principal payments on capital leases............ (30,378) (28,234)
------------- -------------
Net cash provided by financing activities.. 4,995,712 956,820
------------- -------------
NET INCREASE IN CASH............................ 1,766,894 (37,480)
CASH, beginning of year......................... 28,763 66,243
------------- -------------
CASH, end of year............................... $1,795,657 $28,763
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................... $116,132 $57,663
============= =============
State income taxes.......................... $ -- $ --
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for short-term debt....... $27,000 $21,636
============= =============
Debt converted to equity...................... $133,500 $ --
============= =============
Options and common stock issued
related to film costs...................... $226,000 $ --
============= =============
</TABLE>
See accompanying notes.
<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.
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.
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 - 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.
Note 3 - Property and Equipment
1997 1996
----------- -----------
Furniture and fixtures...................... $95,322 $95,322
Equipment................................... 51,251 34,367
Leasehold improvements...................... 11,938 50,535
Leased assets............................... 119,899 119,899
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 4 - 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 of 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
Production equipment........................ ----------- -----------
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
=========== ===========
Production of the first seven episodes of The Adventures of Kanga
Roddy was completed during 1997. The remaining six episodes are
expected to be completed in early 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 5 - 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 6 - 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 7 - 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
----------- -----------
Federal 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
----------- -----------
$ -- $ --
=========== ===========
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 carryford............................... $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 8 - 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.
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 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 9 - 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.
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 June 1997, the Company and SEGA entered into an agreement
appointing SEGA as the Company's non-exclusive agent for purposes
of licensing and merchandising the "Kanga Roddy" trademark, brand
name and logo at a licensing show in New York. In such agreement,
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 two
year period following execution of the agreement by the Company
with any person or entity introduced to the Company by SEGA.
Pursuant to such agreement, 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 10 - 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.
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 11 - 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.
Note 12 - 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:
1997 1996
----------- -----------
Net sales (1):
Tuition and related fees.................... $921,158 $1,031,407
Video 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
Video and television........................ 68,597 4,685
----------- -----------
Depreciation and amortization............... $101,407 $64,409
=========== ===========
Capital expenditures:
Tuition and related fees.................... $12,080 $7,014
Video 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)
Video and television........................ 43,642 (166,144)
Corporate................................... (201,713) --
----------- -----------
Net loss.................................... ($801,416) ($641,583)
=========== ===========
Identifiable assets (2):
Tuition and related fees.................... $216,241 $100,517
Video 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
=========== ===========
[1] There were no sales between industry segments.
[2] Corporate and other assets are principally cash, receivables,
and prepaid expenses.
Note 13 - 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 14 - 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.
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 15 - 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 16 - 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.
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
Options/ Under
Award 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.
The following table summarizes information about stock options
and warrants outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options and Warrants
Options and Warrants Outstanding 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 17 -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.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
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
10.8* 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
10.15* Amended Deal Memo between ABK and Rick Fichter dated February
23, 1997, with respect to payments related to the Kanga Roddy
Series
10.17* Form of Indemnification Agreement
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 Agent Agreement, dated July 25, 1997, between American
Champion Media, Inc. and Sega of America, Inc.
21.1* Subsidiaries of the Registrant
23.1 Consent of Moss Adams, LLP
27.1 Financial Data Schedule
- -------------------------
* Filed as an exhibit with the registrant's Form SB-2 filed with SEC
on March 21, 1997 or Form SB-2/A filed March 3 and June 20, 1997 and
incorporated by reference herein.
<PAGE>
EXHIBIT 10.25
LICENSING AGENT AGREEMENT
This Licensing Agent Agreement (the "Agreement") is
entered into July 25, 1997 by and between Sega of America, Inc., a
California corporation with offices at 275 Shoreline Drive, Redwood
City, California 94065 ("Sega") and American Champion Media, Inc., a
California corporation, with offices at 26203 Production Avenue, Suite
5, Hayward, California 94545 ("American").
This Agreement is being entered into with respect to the
following facts:
A. American is the sole owner and has the exclusive right to
license the trademark, brand name, logo, characters and related
properties known as "Kanga Roddy" (collectively the "Name") based
upon the television programs of the same name to be broadcast on PBS
("Programs").
B. American desires to appoint Sega as its non-exclusive agent
(and if any of the conditions set forth in paragraph 1(a) through (d)
below are satisfied, its exclusive agent) for purposes of licensing and
merchandising the Name for use on or in connection with all categories
of merchandise products (e.g., clothing, toys, sporting goods, etc.),
services and home video programs (collectively the "Products"), and
Sega desires to accept such appointment in accordance with the terms
and conditions set forth in this Agreement.
In consideration of the promises and agreements set forth
herein, the parties hereby agree as follows:
1. Subject to the provisions set forth below in this
paragraph 1, American hereby appoints Sega to represent American as its
non-exclusive agent for purposes of licensing and merchandising the
Name to third parties for use on and in connection with the Products
throughout the world (the "Territory").
Notwithstanding the forgoing, American agrees that in
the event Sega enters into any license provided in subparagraphs (a)
through (c) below, Sega shall immediately become the exclusive (as
distinguished from non-exclusive) agent for American for the purposes
of licensing and merchandising the "Name" to the third parties for use
on or in connection with the Products throughout the Territory and
American agrees that no other person or entity (including American
and/or Gelfand) shall thereafter be entitled to solicit or otherwise
arrange for the merchandising and licensing of the Name (other than
Sega). American may solicit providing they turnover the negotiations
to Sega for final negotiations.
(a) A master toy licensing;
(b) A home video license;
(c) A master apparel license.
2. Sega shall submit each proposed licensing arrangement
to American in the form of a term sheet providing reasonable detail as
to the proposed transaction. American shall forward to Sega any
proposed changes to the terms promptly following receipt of the term
sheet but in any event no later than five (5) business days after
receipt. Based on the terms approved by American, Sega shall prepare
or have prepared a merchandise license agreement ("License Agreement")
incorporating the agreed terms and such other terms and conditions as
are customary and reasonable. No License Agreement shall be entered
into without American's prior consent. American shall have approval
over the Products and over the material terms of the License
Agreements, which approval shall be exercised in American's sole
discretion. Sega hereby waives any claim it may have that American did
not exercise it approval rights in good faith with respect to any
proposed License Agreement. American shall respond to Sega within
fourteen (14) days with respect to its approval or disapproval of any
proposed License Agreements. All License Agreements shall be entered
into in the name of American and shall be executed by American.
3. This Agreement shall be effective as of the date of
execution hereof and shall continue for a term of three (3) years (the
"Term"). Commencing sixty (60) days prior to the expiration of the
Term, Sega and American shall negotiate in good faith with respect to
extending the term for some additional period of time. The initial
term and any extension thereof is referred to herein as the "Term."
4. Sega shall do the following with respect to the Name:
(a) Seek out, negotiate and present for approval
and execution by American, business opportunities relative to the
merchandising and licensing of the Name.
(b) Monitor and oversee the licensing, promotion
and marketing programs with all existing or hereinafter acquired
third party licensees ("Licensees").
(c) Whenever necessary, conduct personal visits to
Licensees' manufacturing facilities, to ensure conformance with
the quality control provisions of the License Agreements.
(d) Engage in other such activities as the parties
may mutually agree and use its best efforts to maximize revenue
generated from the exploitation of the rights granted hereunder
and to enhance the value and the reputation of the Name.
(e) Report and update American in writing on a
regular basis as to the status of License Agreements and all
pending or anticipated business arrangements relating to the
Name.
(f) If appropriate, attend the Consumer Electronics
Show, the Toy Fair, the annual Licensing Show and other trade
shows to exhibit and display the Name.
5. American agrees to reimburse Sega for all expenses
incurred by Sega in connection with the licensing and merchandising of
the Products which are pre-approved by American in writing, including,
but not limited to, presentations, press kits, style guides, art work,
design materials, display materials, trade show expenses specifically
related to the Name (including travel expenses related thereto and
promotional materials.) Sega agrees that it will absorb all of its own
office and overhead expenses relating to the licensing and
merchandising of the Name and any travel and legal expenses not
specifically related thereto and that it will receive no compensation
except as specified in this paragraph and in paragraph 8 below.
6. American shall have the responsibility at its own
cost and expense for obtaining and maintaining appropriate trademark
and copyright protection throughout the Territory with respect to the
Products. Sega shall advise American in writing of any suspected of
known infringement of the Name.
7. Sega is hereby authorized, but not obligated to,
solicit third party relationships in the multimedia and interactive
areas as well as any other medium (other than television which shall
remain exclusively the domain of American.) Any compensation for
services not already contemplated by this Agreement shall be separately
negotiated between American and Sega.
8. All monies, including advances and guarantees,
received by American or any of its agents or affiliated companies, from
the licensing, merchandising or other disposition of the Products
utilizing the Name or from any other rights granted hereunder ("Gross
Receipts") shall be applied in the following order and priority:
(a) First, American shall pay Sega 30% of the Gross
Receipts.
(b) Second, American shall pay Sega an amount equal
to the expenses incurred by Sega and pre-approved by
American in writing pursuant to paragraph 5 above.
(c) Third, all sums remaining after the payment to
Sega of the sums specified in subparagraphs 8(a) and
(b) above shall be retained by American.
(d) Upon the expiration or earlier termination of
this Agreement, Sega shall (provided the Agreement
has not been terminated for Sega's fraud,
misrepresentation or other tortious or illegal
conduct) continue to be entitled to receive the
forgoing fee and expenses with respect to any License
Agreements entered into during the Term for the
greater of (i) the actual term of each such License
Agreement; or (ii) five (5) years from the date of
commencement of each such License Agreement; provided
Sega continues to service such License Agreements as
provided in paragraph 4 above.
9. The License Agreements shall provide that payments
due from Licensees shall be paid to American. American shall deposit
all sums received from such License Agreements into a bank account in
the name of American ("Distribution Account"). American shall hold
Sega's portion of the Gross Receipts in trust for the benefit of Sega.
10. American shall remit to Sega itemized statements of
its collections and of all deductions therefrom on a quarterly basis.
American shall pay Sega interest on any amounts not paid by American in
a timely fashion at the then prevailing prime rate of interest charged
by Bank of America.
11. American will keep true and accurate books of account
with respect to each License Agreement showing all receipts thereunder
and all deductions therefrom. Sega shall have the right to audit
American's books, records and documents relating to the License
Agreements during normal business hours, at its own cost, but not more
frequently than once per year. A copy of any audit report shall be
delivered by the auditor to American concurrently with the delivery of
the report to Sega. If, as a result of such audit, it is determined
that American has under-accounted to Sega by 5% or more, American shall
promptly pay Sega such under-accounted for amount plus interest thereon
at the then prevailing prime rate of interest charged by Bank of
America plus all reasonable sums paid by Sega in connection with such
audit.
12. American acknowledges that Sega is engaged in the
business (among others) of acting as a merchandising and licensing
agent for companies and their products and services and Sega shall be
entitled to continue to represent such other companies, products and
services in their business activities during the Term and thereafter
whether or not in competition with American. Sega shall not, at any
time during the Term, reveal, divulge or make known to any person
(other that its accountants, attorneys or taxing authorities) or use
for Sega's own account, any non-public proprietary information of which
Sega may become aware during the Term by virtue of this Agreement. At
American's request, Sega shall make available to American a list of
those clients for whom Sega is currently acting as a licensing agent.
13. Either party may terminate this agreement if the
other party commits a material breach of any of the terms hereof and
fails to cure such a breach within thirty (30) days after receipt of
written notice of the alleged breach from the other party; or if the
other party becomes insolvent or bankrupt, goes into liquidation or
otherwise takes advantage of or becomes subject to any law relating to
insolvency or reorganization. If Cynthia Wilkes ("Wilkes") shall
leave the employ of Sega during the Term, American may terminate this
Agreement by giving written notice to Sega within thirty (30) days
after American receives notice from Sega that Wilkes will be leaving
the employ of Sega.
14. American represents, warrants and agrees for the
benefit of Sega that:
(a) American has full power and authority to enter
into this Agreement and to fulfill its obligations hereunder.
(b) The performance of the terms of this Agreement
and of American's obligations hereunder shall not be inconsistent
with any agreement of American.
(c) American is the sole owner of the Name and the
use thereof with respect to any Product in the Territory shall
not intringe upon or violate any patent, copyright, trademark,
tradename, trade secret or other proprietary right of a any third
party nor violate the right of privacy of publicity of, nor
constitute a libel or slander against, or violate the copyright
of any person or entity; and
(d) So long as this Agreement remains in effect
American shall not make or enter into any agreement or
arrangement with any third party which is inconsistent with any
of the provisions of this Agreement, it being understood that (i)
American may enter into any agreement with PBS or any of its
affiliated companies including, but not limited to, agreements
relating to "pledge drives" and PBS retail affiliates such as
the Store of Knowledge and Sega shall not be entitled to any fees
in connection therewith; and (ii) American may (unless and until
this Agreement becomes exclusive pursuant to the provisions of
paragraph 1 above) enter into another licensing agent agreement
with a party other that Sega provided American shall notify Sega
in such event. American may solicit providing they turn over
final negotiations to Sega for execution, in the event that this
agreement becomes exclusive.
15. American agrees to defend, indemnify and hold Sega
harmless from and against any and all claims, losses, liabilities,
damages, expenses and costs (including reasonable attorneys' fees and
court costs) which may result from a breach or alleged breach by
American any of the warranties, representations or other agreements by
American contained herein.
16. Sega represents, warrants and agrees for the benefit
of American that:
(a) Sega possess full power and authority to enter
into this agreement and to fulfill its obligations.
(b) The performance of the terms of this Agreement
and of Sega's obligations shall not constitute a breach of any
agreement by which Sega is bound.
(c) So long as this Agreement remains in effect,
Sega shall not make or enter into any agreement or arrangement
with any third party which is inconsistent with any of the
provisions of this Agreement.
(d) Sega will not knowingly engage in any tortious
or illegal or illegal conduct in its solicitation of proposals
for American or in the performance of any of its duties as
expressed in paragraph 4 above.
(e) Sega will cooperate with American, at
American's expense, with respect to the prosecution of any
infringement actions brought hereunder.
17. Sega agrees to defend, indemnify and hold American
harmless from and against any and all claims, losses, liabilities,
damage expenses, and costs (including reasonable attorneys' fees and
court costs) which may result from a breach or alleged breach of any
warranty, representation or agreement by Sega herein.
18. In the event American (or any company in which
American or any shareholder of American may have an interest) enters
into any agreement(s) during the period commencing on the date hereof
and terminating one (1) year after the Term of this Agreement, for the
license of the Name for use on or in connection with any Products with
any person or entity (or affiliate thereof) to whom Sega may make a
presentation to American during the Term, American shall pay Sega the
fee provided in paragraph 8(a) with respect to any such agreement.
American hereby acknowledges that a presentation was made by Sega to
American with respect to the companies referred to on Exhibit "A"
attached hereto at the Licensing Show in New York on June 9, 1997.
19. All notices which either party may be required to
give the other shall be given by sending them by certified or
registered mail, return receipt requested, postage pre-paid or by
delivering them pre-paid to a national overnight courier service or by
telefax at the addresses set forth above.
20. Nothing contained in this Agreement shall be deemed
to constitute a partnership or other legal relationship except that of
principal and agent.
21. Any controversy or dispute arising out of this
Agreement shall be settled by binding arbitration in accordance with
the then current rules of the American Arbitration Association and any
judgment from such award may be entered by any court of competent
jurisdiction. Such arbitration shall take place in Los Angeles,
California. In the event of any proceeding brought by either party to
enforce the terms of this Agreement, the prevailing party shall be
entitled to recover from the other reasonable attorneys' fees and
expenses and all court costs.
22. Neither party hereto may assign or transfer this
Agreement or any rights hereunder to any person, firm or corporation
except to an affiliated company or a company acquiring substantially
all of the assets of Sega or American.
23. This Agreement shall be deemed to have been entered
into and delivered within the state of California and the rights and
obligations to the parties shall be construed and enforced in
accordance with and governed by the internal laws of the state of
California.
24. The terms of paragraphs 8, 9, 10, 11, 15, 17, 18 and
21 shall survive the termination or expiration of this agreement.
25. This Agreement constitutes the entire understanding
of the parties, and revokes and supersedes all prior agreements between
the parties with reference to the Name. This Agreement may not be
modified except by written agreement between the parties.
IN WITNESS WHEREOF, the parties hereto intending to be
legally bound hereby have executed this Agreement on the date first
written above.
SEGA OF AMERICA, INC.
By: /s/ Bernard Stolar
AMERICAN CHAMPION MEDIA, INC.
By: /s/ Anthony K. Chan
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
American Champion Entertainment, Inc.:
We consent to the incorporation by reference in Registration Statement
Number 333-43161 (American Champion Entertainment, Inc. 1997 Stock Plan
and 1997 Non-Employee Directors Stock Option Plan) of American Champion
Entertainment, Inc. on Forms S-8 of our report dated February 11, 1998
appearing in and incorporated by reference in this Annual Report on Form
10-KSB of American Champion Entertainment, Inc. for the year ended
December 31, 1997.
/s/ MOSS ADAMS LLP
San Francisco, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended December 31, 1997 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 1,795,657
<SECURITIES> 0
<RECEIVABLES> 220,817
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,883,303
<PP&E> 508,936
<DEPRECIATION> 253,513
<TOTAL-ASSETS> 4,963,795
<CURRENT-LIABILITIES> 538,884
<BONDS> 0
0
0
<COMMON> 5,529,419
<OTHER-SE> (1,435,096)
<TOTAL-LIABILITY-AND-EQUITY> 4,963,795
<SALES> 67,823
<TOTAL-REVENUES> 1,179,553
<CGS> 36,098
<TOTAL-COSTS> 36,098
<OTHER-EXPENSES> 1,834,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,684
<INCOME-PRETAX> (801,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (801,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (801,416)
<EPS-PRIMARY> ($0.25)
<EPS-DILUTED> ($0.25)
</TABLE>
