SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1998
[ ] TRANSACTION 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.
(Name of small business issuer in its charter)
Delaware 94-3261987
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1694 The Alameda, Suite 100, San Jose, California 95126
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 288-8199
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.0001 par value The Nasdaq SmallCap Market
Warrants to Purchase Common Stock
---------------------------------
The Registrant hereby amends and restates in their entirety the following
items, financial statements, exhibits or other portions of its Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998 as set forth in the
pages attached hereto:
Part II, Item 6 and 7
Exhibit 23.1 and 27.1
-----------------------------------
American Champion Entertainment, Inc. (the "Company"), by this Form
10-KSB/A, Amendment No.1 to Form 10-KSB, hereby: (1) amends and restates in its
entirety Item 6 of Part II of the 1998 Annual Report; (2) amends and restates
in its entirety Item 7 of the 1998 Annual Report; (3) amends and restates in
their entirety Exhibit 23.1; and (4) amends and restates in their entirety
Exhibit 27.1. Each such amended Item of, and Exhibit to, the 1998 Annual
Report is attached to this Amendment No.1.
EXPLANATORY NOTE TO AMENDMENT NO. 1 TO 1998 ANNUAL REPORT ON FORM 10-KSB
This Form 10-KSB/A, Amendment No. 1 to Form 10-KSB (the "Amendment"), which
amends the 1998 Annual Report, includes the following changes: (i) Item 6,
"Management's Disscussion and Analysis or Plan of Operation" of Part II has
been amended with respect to the analysis of interest expense and results of
operations to discuss the effects of the non-cash charge to interest expense and
corresponding increase to paid in capital related to the beneficial conversion
feature of the convertible debentures, (ii) Item 7, "Financial Statements", of
Part II have been restated to reflect the non-cash charge to interest expense
and corresponding increase to paid in capital to account for the beneficial
conversion feature of the convertible debentures, (iii) a new Exhibit 23.1,
"Consent of Independent Accounts,"; and (iv) a new Exhibit 27.1, "Financial
Data Schedule".
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: $736,701
Aggregate market value of common stock held by nonaffiliates at March 18, 1999:
$8,856,880 Number of shares of common stock outstanding at March 18, 1999:
7,269,050
Documents Incorporated by Reference: Location in Form 10-K
Portions of the Proxy Statement for Part III
1999 Annual Meeting of Shareholders
Transitional Small Business Disclosure Format (check one):
Yes _____ No ___x___
<PAGE>
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. is a Delaware corporation headquartered
in San Jose, 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. ABK wholly
owns 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.
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. ABK owns, manages and
operates a karate school located in the San Francisco Bay Area which provides
karate instruction to students of all ages and skill levels.
"Adventures With Kanga Roddy"
The Company has developed and produced twenty (20) one half-hour episodes of
the Kanga Roddy Series. 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 through
traditional martial arts values such as knowledge, compassion, humility,
discipline, respect and an open mind. The show merges these values, with
contemporary music, dance, vibrant colors and exciting movements designed to
capture the attention of its target audience consisting primarily of
pre-school and primary school children.
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 actor Pat Morita, who was previously featured in "The Karate Kid" movies.
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 friends Bantu - a female
African snake, Tackle Bear - his workout partner, Cimbop and Kimbop - a pair
of feline sisters, and Zatochi - a wise old snow monkey, 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 or parallels drawn from
encounters with his buddy Tackle Bear. The children and the costumed cast
present the answers in song and dance routines. 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 ending May 1999. KTEH cleared the broadcast of the Kanga Roddy Series
with 40 other public broadcast stations which broadcast to approximately 50%
of the households in the United States (approximately 40 million households).
The Company delivered 13 half-hour episodes to KTEH for broadcast and received
$430,000 from KTEH for the exclusive broadcast rights for the series for a
period of two years. 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.
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-hour shows. As of February 1999, the Company has completed
and delivered 7 half-hour episodes to KTEH.
In January 1999, American Public Television ("APT"), a major national
distributor for PBS programming, agreed to distribute 26 new episodes of the
Kanga Roddy Series. As a result, the Kanga Roddy Series will now be available
for airing on over 300 PBS stations nationwide commencing April 4, 1999.
In August 1998, the Company signed an exclusive contract with Portfolio
Entertainment of Toronto, Ontario, for the international TV distribution of
the Kanga Roddy Series.
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 agreement was subsequently canceled by the Company in November
1998. The Company exercised its rights under a clause in the agreement which
allowed the Company to terminate the agreement in the event that key SEGA
licensing personnel left the employ of SEGA. Subsequently, the Company
engaged Joy Tashjian of Trademark Management as the licensing consultant on a
monthly retainer of $4,000 plus 10% commission basis. To date, the Company
has signed one licensing contract with Timeless Toys for the manufacturing and
marketing of premium plush toys based on the characters from the Company's
Kanga Roddy Series. 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 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.
In August 1998, the Company signed non-exclusive contracts with Kreative Video
Products, Inc. of Chatsworth, California, for the domestic distribution of the
Kanga Roddy series and the Montana Exercise Video. The Kanga Roddy Series was
released in the fourth quarter of 1998 while the Montana Exercise Video is
slated for release in Spring 1999.
Karate Studio
The Company used to manage and operate a chain of company-owned karate studios
in the San Francisco Bay Area under the name "America's Best Karate" which, as
of December 31, 1998, has been reduced from as many as ten locations to only
one remaining location. The Company plans to cease the operation of the
remaining location once the lease for the location expires in January 2000.
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, distribution channels
and financing, and related advertising revenues with other programming
products. The Company's competitors include motion picture studios,
television networks, and independent television production companies, which
have become increasingly active in children's programming, and many of which
have substantially greater financial and other resources than the Company.
The Company competes for broadcast commitments and production funding for
public television projects with Children's Television Workshop, other
independent production companies, and projects produced by local public
television stations.
If the Company attempts to expand into other areas, including commercial
television, it will face more intense competition from other, larger entities,
which have substantially greater financial and other resources than the
Company, such as The Walt Disney Company, Fox, Nickelodeon, Jim Henson
Productions, Scholastic Productions, Cinar, Lancit Media Entertainment, and
certain television syndicators, production companies, and networks which also
seek to attract the children's/family audience segments with their
programming. In addition, there is a strong trend toward vertical integration
in the business, with more networks owning productions, making it more
difficult for smaller, independent companies such as the Company to obtain
favorable production financing and distribution terms.
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.
In the licensing industry, there is strong competition from other independent
licensing agencies and from the in-house licensing divisions of other
production companies and television studios.
Employees
As of February 18, 1999, the Company employed a total of 20 employees on a
full-time basis, 10 of which are management and 10 of which are clerical, and
4 employees on a part-time basis. The Company also contracts with additional
employees for the production of the Kanga Roddy Series through the American
Federation of Television and Radio Artists.
Item 2. Description of Property
The Company leases approximately 3,000 square feet of space for its San Jose
headquarters pursuant to a two year lease expiring July 2000 at approximately
$10,000 per month. The Company also leases approximately 3,000 square feet of
space for its one karate studio in San Leandro pursuant to a lease expiring in
January 2000 at approximately $5,000 per month. The Company believes that its
facilities are adequate for its present purposes.
Item 3. 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. Mr. Jeffreys filed an answer
to the Company's complaint on June 15, 1998 along with a counterclaim. 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. In February 1999, Mr.
Jeffreys and the Company have agreed to settle the lawsuit and counterclaim
for $36,000 which the Company will pay Mr. Jeffreys in twelve monthly payments
of $3,000 each beginning in March of 1999.
With the exception of the foregoing, no lawsuits or proceedings are currently
pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders was held on September 23, 1998. The purpose
of the meeting was to ratify the Securities Purchase Agreement dated as of July
2, 1998 by and among the Company, The Endeavour Capital fund S.A. and Amro
International S.A. and the transactions contemplated thereby, including but not
limited to, the possible issuance of shares of the Company's Common Stock equal
to 20% or more of the total outstanding shares of the Company's Common Stock.
The result of voting was as follows:
For % Against Abstain Not Voted
2,057,668 53.69 9,500 10,600 1,754,577
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market For Securities
Our Common Stock and Common Stock Purchase Warrants commenced quotation on the
Nasdaq SmallCap Market System under the symbols "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 SmallCap Market since
the commencement of trading were as follows:
Common Stock:
High Low
1997
Third Quarter $5.50 $4.13
Fourth Quarter $8.00 $4.81
1998
First Quarter $9.63 $7.75
Second Quarter $9.56 $6.56
Third Quarter $7.00 $3.50
Fourth Quarter $3.63 $0.97
1999
First Quarter (through March 18, 1999) $3.00 $1.06
The prices set forth above reflect inter dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
As of March 25, 1999, shares of Common Stock were held by approximately 1400
stockholders of record, as reported by ADP Proxy Services.
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, 1998. 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, 1998, the Company's total
revenue decreased to $736,701, a decrease of $442,852 or 37.5% as compared to
total revenue for the year ended December 31, 1997 of $1,179,553.
The Company's revenues from the operation of its karate studios for the year
ended December 31, 1998 was $324,730, a decrease of 61.9% from revenues of
$853,335 for the year ended December 31, 1997. The decrease is attributable
to the reduction in the number of karate studios from five to one at the end
of 1998. The Company plans to either close or sell the remaining studio when
the lease for that location expires in January 2000.
For the year ended December 31, 1998 the Company recognized $343,877 in film
income, an increase of $128,877 or 59.9% from film income of $215,000 for the
year ended December 31, 1997. Film income was derived from the delivery of the
six episodes of the television show "Adventures with Kanga Roddy" to KTEH
pursuant to its Distribution Agreement with KTEH, and also from the Sara Lee
Corporation which was a sponsor of the show. See "Business."
Revenues from sale of accessories was $37,956 for the year ended December 31,
1998 as compared to $67,823 for the year ended December 31, 1997. The
decrease was due to the reduction of karate studios from five to one by the
end of 1998.
The Company's interest income of $30,138 was earned from investment activities.
Costs and Expenses.
The Company recognized $177,732 in amortization of film cost, which was
capitalized production costs for the television show "Adventures With Kanga
Roddy", for the year ended December 31, 1998 as compared to $58,000 for 1997.
The Company's expenses for salaries and payroll taxes were $847,147 for 1998,
an increase of $53,661 or 6.8% from $793,486 in 1997. Total selling, general
and administrative expenses was $924,740 for 1998, an increase of $551,967 or
148% from $372,773 in 1997. This increase was primarily due to marketing and
promotion expenses related to the Company and its television show.
Interest expense was $679,402 for 1998, a increase of $568,718 or 513.8% from
$110,684 in 1997. Included in intrest expense for 1998 is a non-cash charge
of $599,955 related to the beneficial conversion feature of the convertible
debentures issued within 1998. The debentures are convertible to common stock
of the Company with the shares to be issued upon conversion based on 75% of the
fair value of the stock at the time of conversion. Since the debt can be
converted at any time, the value of the discount as of the issuance date has
been charged to interest expense with a corresponding increase to additional
paid in capital. The balance of interest expense for 1998 was primarily
attributed to interest bearing convertible debentures the Company sold within
1998. Rent expense was $308,007 for 1998, a decrease of $74,921 or 19.6% from
$382,928 in 1997. The decrease in rent expense was primarily attributable to
the closure of karate studios within 1998 but partially offset by increased
rental expense for the Company's administrative headquarters.
As a result of foregoing factors, the Company's net loss increased by $1,122,100
or 140.0% from ($801,416) for the year ended December 31, 1997 to ($1,923,516)
for the year ended December 31, 1998. Net loss per share increased from
($0.25) in 1997 to ($0.48) in 1998, while weighted average number of shares
outstanding increased from 3,155,257 shares in 1997 to 4,033,619 shares in
1998.
Liquidity and Capital Resources
Stockholders' equity decreased slightly to $3,905,203 at the end of 1998,
representing a 4.6% decrease from 1997. Cash decreased for the twelve months
ended December 31, 1998 by $1,792,894. Cash utilized for operations for the
twelve months ended December 31, 1998 was ($413,956). Cash used for investing
activities for the twelve months ended December 31, 1998 was ($3,345,060) and
was primarily attributable to the cost of producing thirteen episodes of the
Kanga Roddy Series. Cash from financing activities for the twelve months
ended December 31, 1998 was an increase of $1,966,122 which resulted primarily
from sales of convertible debentures.
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, 1998 was $831,266 as compared to
$64,199 at December 31, 1997. The increase in long-term debt was attributable
to outstanding unconverted convertible debentures at the end of 1998. Loans
payable to related parties as of December 31, 1998 was $137,037 as compared to
$37,255 as of December 31, 1997. In addition, deferred revenues decreased
$465,500 or 85.6% from $543,520 at December 31, 1997 to $78,020 at December 31,
1998. 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 from elimination
of deferred revenues on studios sold 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 $32,000 as of December 31, 1998 and
repayment of this amount is made at the monthly rate of 2% of the outstanding
balance of the borrowing. Other than such loan, the Company does not presently
maintain any other borrowing facility or have any indebtedness to financial
institutions.
On January 19, 1999 the Company sold another $950,000 of convertible
debentures, and on March 5, 1999 the Company reset the exercise price of
certain warrants for the purchase of common stock granted to consultants of
the Company in January 1999 and received $540,000 from the exercise of such
warrants. This total of $1,490,000 is for funding of working capital and
further production of episodes of the Kanga Roddy series.
On February 19, 1999, the Company entered into a letter of intent with
JWGenesis Capital Markets LLC ("JWGenesis") pursuant to which JWGenesis will
act as the Company's exclusive placement agent in connection with a proposed
private offering (the "Proposed Offering") of a minimum of $700,000 and a
maximum of $4,500,000 of Units of the Company's securities, each Unit
consisting of 50 Shares of Series C Redeemable Convertible Preferred Stock,
$.0001 Par Value, 25,000 Class A Common Stock Warrants, and 25,000 Class B
Common Stock Warrants. In consideration for its services, JWGenesis will
receive a placement fee equal to 10% of the gross proceeds of the Proposed
Offering, plus a non-accountable expense allowance equal to 3% percent of the
aggregate purchase price of the securities sold, and a five (5) year warrant
to purchase at the Proposed Offering price additional Units equal to 10% of
the aggregate number of Units sold in the Proposed Offering. Additionally,
upon the first closing of the Proposed Offering, the Company is to enter into
an agreement whereby JWGenesis shall have the right to (i) purchase for its
account or to sell for the account of the Company or any of its stockholders
owning at least five percent (5%) of the Company's securities (the "Principal
Stockholders"), any securities with respect to which the Company or any of its
Principal Stockholders may seek a private or public offering pursuant to a
registration statement or otherwise, and (ii) nominate a designee to the
Company's Board of Directors. Further, upon completion of the Proposed
Offering, the Company is to enter into an agreement whereby JW Genesis shall
(i) have a two (2) year right of first refusal to act as the managing
underwriter, or as a member of the underwriting syndicate and/or selling group
with respect to any offering of the Company's securities, (ii) have a two (2)
year right to act as the Company's exclusive investment banker for a fee of
150,000 shares of Common Stock which shall be payable at the Closing, and
(iii) have a five (5) year right to receive a fee based upon a percentage of
the value of any business combination or financing arrangement, including but
not limited to mergers, acquisitions, sales, joint ventures, and any other
business or business combinations involving the Company, where such
arrangement is introduced to the Company by the JWGenesis or contacted by
JWGenesis or the Company from the signing date of the engagement letter or
within 24 months after the final closing of the Proposed Offering; and that
any such transaction fee due to JWGenesis will be paid in cash at the closing
of the particular transaction for which the finder's fee is due.
We now estimate that the average cost of developing and producing each episode
of the Kanga Roddy Series is $240,000 and that we will require approximately
$2.88 million of additional financing to complete the remaining 12 episodes of
the Kanga Roddy Series. Except for the Proposed Offering described above, we
have no other current arrangements with respect to additional financing and
there can be no assurances that additional financing will be available on
acceptable terms, if at all. The net proceeds from the Proposed Offering may
not be sufficient to fund production of all of the remaining 12 episodes of
the Kanga Roddy series. 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 on pages 14 through 37 of 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
1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") which
information is incorporated by reference herein.
Item 10. Executive Compensation
See information under the caption "Executive Compensation" of the 1999 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 1999 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 1999 Proxy Statement which information is incorporated by
reference herein.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Index to Exhibits at pages 38 to 39 of this Form 10-KSB.
(b) Reports on Form 8-K.
None.
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 31, 1999
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 31, 1999
- ------------------------- Officer, and Director
Anthony K. Chan (Principal Executive Officer)
/s/ GEORGE CHUNG Chairman of the Board and March 31, 1999
- ------------------------- Director
George Chung
/s/ DON BERRYESSA Senior Vice President, Chief March 31, 1999
- ------------------------- Operations Officer and Director
Don Berryessa
/s/ MAE LYN WOO Vice President and Chief March 31, 1999
- ------------------------- Financial Officer (Principal
Mae Lyn Woo Financial Officer)
/s/ JAN D. HUTCHINS Director March 31, 1999
- -------------------------
Jan D. Hutchins
/s/ WILLIAM T. DUFFY Director March 31, 1999
- -------------------------
Willian T. Duffy
/s/ ALAN ELKES Director March 31, 1999
- -------------------------
Alan Elkes
/s/ RONALD M. LOTT Director March 31, 1999
- -------------------------
Ronald M. Lott
</TABLE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
AND
SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet
Statement of operations and accumulated deficit
Statement of cash flows
Notes to financial statements
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Champion Entertainment, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of American
Champion Entertainment, Inc., and Subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits
provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
As disclosed in note 21, the accompanying financial statements have been
restated to account for the effect of EITF D-60, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion" on the debentures issued during 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company had limited cash reserves at December
31, 1998 and based on management's current cash flow estimates, will not
have sufficient cash to meet obligations over the next twelve months
without additional sources of capital. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plan in this regard is discussed in Note 20. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Moss Adams LLP
San Francisco, California
March 11, 1999
Except for note 21, as to
which the date is November 11, 1999
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash....................................... $2,763 $1,795,657
Account receivable......................... 37,675 220,817
Loans receivable, related parties.......... 114,937 114,773
Prepaid expenses........................... 56,267 96,556
Property and equipment..................... 395,330 255,423
Film costs, net............................ 5,381,329 2,445,417
Note receivable............................ 80,424 --
Other Assets............................... 11,673 35,152
----------- -----------
Total assets............................... 6,080,398 4,963,795
=========== ===========
Liabilities
Accounts payable and accrued expenses...... $1,122,307 $199,344
Note payable, related parties.............. 137,037 37,255
Other...................................... -- 8,432
Deferred revenues.......................... 78,020 543,520
Notes payable.............................. 831,266 64199
Obligations under capital leases........... 6,565 16,722
----------- -----------
Total liabilities.................. 2,175,195 869,472
----------- -----------
Stockholders' Equity
Preferred stock, $.0001 per share,
3,000,000 shares authorized, none
issued or outstanding.................... -- --
Common stock, $0.0001 par value;
20,000,000 shares authorized;
paid-in capital.......................... 7,122,414 5,529,419
Common stock warrants...................... 290,901 149,500
Accumulated deficit........................ (3,508,112) (1,584,596)
----------- -----------
Total stockholders' equity................. 3,905,203 4,094,323
$6,080,398 $4,963,795
=========== ===========
</TABLE>
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUE:
Film income........................... $343,877 $215,000
Tuition and related fees.............. 324,730 853,335
Accessories........................... 37,956 67,823
Interest income....................... 30,138 43,395
------------ ------------
Total revenue......................... 736,701 1,179,553
------------ ------------
COSTS AND EXPENSES:
Cost of sales......................... 26,152 36,098
Amortization of film costs............ 177,732 58,000
Salaries and payroll taxes............ 847,147 793,486
Rent.................................. 308,007 382,928
Selling, general and administrative... 924,740 372,773
Interest.............................. 679,402 110,684
Write off of film costs............... -- 105,000
Write off of loan fees................ -- 65,000
Facilities closure costs.............. -- 57,000
------------ ------------
Total costs and expenses.............. 2,960,180 1,980,969
------------ ------------
Loss from operations ................... ($2,223,479) ($801,416)
============ ============
Gain on sale of karate studio........... 307,429 --
------------ ------------
Loss before provision for income taxes.. (1,916,050) (801,416)
Provision for income taxes.............. 7,466 --
------------ ------------
Net Loss................................ (1,923,516) (801,416)
============ ============
Weighted average number of shares
outstanding........................... 4,033,619 3,155,257
============ ============
Basic loss per share.................... ($0.48) ($0.25)
============ ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<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, 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
Common stock warrants issued in
connection with debentures......... -- -- 124,501 -- 124,501
Conversion of debentures
to common stock.................... 1,421,901 1,176,442 -- -- 1,176,442
Exercise warrants to purchase
common stock warrants.............. -- -- 16,900 -- 16,900
--
Beneficial conversion
feature of debentures -- 599,955 -- -- 599,955
Net loss -- -- -- (1,923,516) (1,923,516)
---------- ----------- ------------ ------------- ------------
Balance, December 31, 1998............. 5,254,246 $7,122,414 $290,901 ($3,508,112) $3,905,203
========== =========== ============ ============= ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ ($1,323,561) ($801,416)
Adjustments to reconcile net loss to
net cash used for operating activities:
Non-cash charge for beneficial
conversion feature of debentures.......... 599,955 --
Gain on sale of karate studio............... (307,429) --
Depreciation and amortization............... 253,405 101,407
Write off of film costs..................... -- 105,000
Rent concession amortization................ (4,216) (4,216)
Amortization of original issue discount
on long term debt......................... 15,560 --
Common stock issued related to salary....... -- 72,225
Common stock issued related to loan fees.... -- 65,000
Decrease in:
Accounts receivable........................... 183,142 (215,000)
Prepaid expenses and other.................... 30,986 (66,289)
Increase in:
Accounts payable and accrued expenses......... 928,198 (117,300)
Deferred revenues............................. (190,041) (375,156)
------------- -------------
Net cash used for operating activities..... (413,956) (1,235,745)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (237,402) (247,970)
Payments for film costs......................... (3,113,644) (1,722,413)
Advances to stockholders........................ (164) (22,690)
Payments received 6,150 --
------------- -------------
Net cash used for investing activities..... (3,345,060) (1,993,073)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stocks......... -- 6,748,020
Proceeds from issuance of warrants.............. 16,900 149,500
Offering costs.................................. -- (1,407,964)
Rescission of common stock...................... -- (40,000)
Proceeds on loans from related parties ......... 137,000 --
Payments on loans from related parties.......... (37,218) (314,920)
Proceeds on long-term debt...................... 2,010,963 --
Payments on long-term debt...................... (151,366) (108,546)
Principal payments on capital leases............ (10,157) (30,378)
------------- -------------
Net cash provided by financing activities.. 1,966,122 4,995,712
------------- -------------
NET (DECREASE) INCREASE IN CASH................. (1,792,894) 1,766,894
CASH, beginning of year......................... 1,795,657 28,763
------------- -------------
CASH, end of year............................... $2,763 $1,795,657
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................... $60,887 $116,132
============= =============
State income taxes.......................... $7,466 $ --
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for short-term debt...... $ -- $27,000
============= =============
Long-term debt converted to equity............ $993,040 $133,500
============= =============
Options and common stock issued
related to film costs...................... $ -- $226,000
============= =============
Common stock warrants issued with debt $124,501 $ --
============= =============
Beneficial conversion feature of
debentures $599,955 $ --
============= =============
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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"). The Company and AC 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.
AC Media focuses on operating and managing all media-related programs for the
Company. 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 Company's 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.
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. See Note 18 related to sales of studios.
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 year or less to be cash
equivalents. The Company had cash equivalents of $ -0- and $1,496,000 at
December 31, 1998 and 1997, 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 approximate fair value
due to the short maturity of these instruments. The carrying value of
long-term obligations approximate 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.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(continued)
Basic Loss Per Share - Statement of Financial Accounting Standards (SFAS) No.
128 was adopted by the Company during the year ended December 31, 1997. Basic
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.
Presentation - Because of the Company's reduced activity in its karate
instruction segment, management believes utilizing a classified balance sheet
presentation is no longer appropriate, as the operating cycle of the
media-related segment of the Company is expected exceed 12 months.
Accordingly, an unclassified presentation is utilized for the accompanying
balance sheet, which is an acceptable method under SFAS No. 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films".
Reclassifications - Certain reclassifications have been made to the 1997
amounts to conform to the current presentation.
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 amounts reported in the financial statements and accompanying
notes. 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 and results of operations.
Note 3 - Property and Equipment
1998 1997
----------- -----------
Furniture and fixtures...................... $53,705 $95,322
Equipment................................... 70,429 51,251
Leasehold improvements...................... -- 11,938
Leased assets............................... -- 119,899
Production equipment........................ 402,887 230,526
----------- -----------
527,021 508,936
Less accumulated depreciation and
amortization............................. 131,691 253,513
----------- -----------
$395,330 $255,423
=========== ===========
Depreciation expense was $75,673 and $43,407 for the years ended December 31,
1998 and 1997, respectively. The accumulated depreciation related to the
leased assets at December 31, 1998 and 1997 was $-0- and $119,899,
respectively.
Note 4 - Film Costs
Film costs consist of the capitalized costs related to the
production of videos and programs for television as follows:
1998 1997
----------- -----------
Television program
The Adventures of Kanga Roddy............... $5,455,764 $2,342,120
Videos
Montana Exercise Video...................... 148,253 148,253
Strong Mind Fit Body........................ 18,042 18,042
----------- -----------
5,622,059 2,508,415
Less accumulated amortization............... 240,730 62,998
----------- -----------
5,381,329 2,445,417
=========== ===========
Production of the first seven episodes of The Adventures of Kanga Roddy was
completed during 1997. Thirteen additional episodes were completed during the
year ended December 31, 1998. Both videos were completed in 1996, but only the
Strong Mind Fit Body video has been released. During 1997, management wrote
down the capitalized costs for this video by $105,000.
Note 5 - Notes Payable, Related Parties
The notes payable to related parties bear interest at -0- to 12%
and are unsecured. Amounts due after 1999 are not material.
Note 6 - Notes Payable
Debentures, interest at 7% due
quarterly, unsecured and due July 1,
2000, net of original issue discount
of $86,662. Convertible to common
stock at 75% of the then current
market price of the common stock or
117.5% of the market price of the
stock at the date of issue. $ 536,896 $ -
Notes payable to individuals, interest
at -0- to 12%, unsecured and due at
various dates during 1999. 230,000 -
Drawings from a $40,000 bank business
credit card line with interest at
the banks prime rate plus 6.5%. 40,000 34,001
Other 24,370 30,198
---------- ----------
$ 831,266 $ 64,199
========== ==========
The debentures are due in 2000. However, these debentures, together with
accrued interest, were converted to 495,335 shares of common stock subsequent
to year-end. The remaining notes payable are substantially all due in 1999.
Note 7 - Income Taxes
Reconciliation of the Federal statutory tax rate of 34% and state
tax rate of 8.8% to the recorded amounts are as follows:
1998 1997
----------- -----------
Federal tax benefit at statutory rates...... ($450,000) ($274,000)
State tax benefit at statutory rates........ (117,000) (75,000)
Other....................................... 7,466 (13,000)
Increase in valuation allowance............. 567,000 362,000
----------- -----------
$7,466 $ --
=========== ===========
The Company has net operating loss (NOL) carryforwards for federal income tax
purposes of approximately $3,000,000, the benefits of which expire in 2011
through 2013 for federal purposes and through 2003 for state purposes. The NOLs
created by the Company's subsidiaries prior to the reorganization 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. In
addition because of changes in ownership of the Company, the utilization of
NOL's in any one year will be limited by section 382 of the Internal Revenue
Code.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
NOL carryford............................... $1,175,000 $500,000
Deferred revenue............................ 25,000 217,000
Other....................................... -- 36,000
Valuation allowance......................... (1,175,000) (608,000)
----------- -----------
25,000 145,000
----------- -----------
DEFERRED TAX LIABILITIES
Accounts receivable......................... -- 127,000
Depreciation................................ 25,000 18,000
----------- -----------
25,000 145,000
----------- -----------
$ -- $ --
=========== ===========
Note 7 - Income Taxes (continued)
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,
1998 and 1997.
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
----------- -----------
1999........................................ $6,565 $228,000
2000........................................ -- 85,000
----------- -----------
Total minimum lease payments................ 6,565 $313,000
=========== ===========
Management of the Company has developed a plan to close certain studios
related to its karate studio segment. As of December 31, 1998 and 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
consolidated 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.
Note 9 - 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 "The Adventures with 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. For the periods ended December 31, 1998 and
1997, the Company had recognized revenue of $215,000 in each year. 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 April 1998, KTEH agreed to purchase an additional 26 episodes and 2
one-hour specials for approximately $900,000. No revenue has been recognized
from this transaction as of December 31, 1998.
During 1998, the Company canceled the licensing agreements with SEGA. The
Company exercised a "key man" clause to terminate the contracts. Management of
the Company does not believe SEGA has any remaining rights under the
agreements.
During 1998, the Company entered into a non-exclusive toy licensing agreement
with Timeless Toys with respect to the "The Adventures with Kanga Roddy"
television program. Under the agreement, the Company is entitled to an 8%
royalty. The agreement expires in January 2001.
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
Loans to stockholders were $114,937 and $114,773 at December 31, 1998 and
1997, respectively.
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 initial public
offering and another $50,000, which is included in accounts payable at
December 31, 1998, will be paid 30 days prior to the release date. These two
participants are stockholders of the Company.
Note 10 - Related Party Transactions (Continued)
During 1998 and 1997, the Company paid $67,500 and $60,000, respectively, to
two shareholders for story lines and scripts for the production of the
television series "The Adventures with Kanga Roddy".
Note 11 - New Authoritative Pronouncements
In February 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits", in June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", and in October 1998, SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". Management believes the
provisions of SFAS Nos. 132, 133 and 134 will not have a material effect on
the financial condition or reported results of operations and cash flows.
Note 12 - Industry Segments
The Company is involved in the development of educational television programs
and fitness videos and operated one karate studio at December 31, 1998, 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, 1998 and 1997 are as follows:
Note 12 - Industry Segments (continued)
1998 1997
----------- -----------
Net sales (1):
Tuition and related fees.................... $362,686 $921,158
Video and television........................ 343,877 215,000
Corporate................................... 30,138 43,395
----------- -----------
Net sales................................... $736,701 $1,179,553
=========== ===========
Depreciation and amortization:
Tuition and related fees.................... $8,616 $32,810
Video and television........................ 244,789 68,597
----------- -----------
Depreciation and amortization............... $253,405 $101,407
=========== ===========
Capital expenditures:
Tuition and related fees.................... $2,778 $12,080
Video and television........................ 3,348,268 2,184,303
----------- -----------
Capital expenditures ....................... $3,351,046 $2,196,383
=========== ===========
Income (loss) from operations:
Tuition and related fees.................... ($383,191) ($643,345)
Video and television........................ (592,376) 43,642
Corporate................................... (647,957) (201,713)
----------- -----------
Net loss.................................... ($1,623,524) ($801,416)
=========== ===========
Identifiable assets (2):
Tuition and related fees.................... $218,048 $216,241
Video and television........................ 5,800,159 2,884,565
----------- -----------
Totals...................................... 6,018,207 3,100,806
Add: Corporate............................... 62,191 1,862,989
----------- -----------
Assets...................................... $6,080,398 $4,963,795
=========== ===========
[1] There were no sales between industry segments.
[2] Corporate and other assets are principally cash 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 $150,000, $150,000,
$105,000 and $75,000 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.
Additional options to purchase 20,000, 20,000, 15,000 and 10,000 shares of the
Company's Common Stock will be granted at the end of each twelve-month period
beginning July 1, 1998 at $6.5625 per share. 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. During 1998, the shares available under the plan were increased
to 800,000. 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.
Note 14 - Stock Plans (Continued)
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. In addition,
130,000 warrants were issued to the underwriters for nominal consideration.
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 1998, the Company issued 130,000 warrants upon exercise of
underwriter's warrants to purchase warrants to purchase the Company's common
stock. The Company received proceeds of $16,900 related to these warrants. The
Company also issued 124,501 warrants in connection with the debentures issued
during 1998. The Company received no proceeds related to these warrants. These
warrants entitle the registered holder to purchase one share of common stock
at $7.56125 per share at any time through July 2003. These warrants were
valued by the Company at $1 each and were accounted as original issue discount
(OID). The OID is being amortized against the related debt.
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 of their 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. At December 31, 1998,
there were 800,000 options authorized and 800,000 options outstanding under
the Company's Stock Plan. No options were exercised or canceled during the
year ended December 31, 1998.
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, 1998, the Company
accounted for 700,000 options under this method.
Stock options granted to non-employees for services provided to the Company
are accounted for under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock- Based Compensation." At December 31, 1998
and 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
value of options issued to non- employee directors were not material and have
been accounted for under the intrinsic value 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 1998 and 1997,
respectively: risk free interest rate of 4.65 and 6.25 percent; dividend yield
of 0 percent; expected option life of 7 years; and volatility of 78 and 42
percent.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the one-year average vesting period of the
options. The Company's pro forma net loss for the year ended December 31, 1998
and 1997, respectively, was $(1,881,000) and $(1,049,000) and pro forma net
loss per share was $(.47) and $(.33).
Note 16 - Stock Options (Continued)
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 1,625,000
----------- ----------- -----------
Balance, December 31, 1997...... 7,000 393,000 1,625,000
Authorized.................... 400,000 -- --
Granted....................... (407,000) 407,000 254,501
----------- ----------- -----------
Balance, December 31, 1998...... -- 800,000 1,879,501
=========== =========== ===========
No options were exercised or lapsed during the year ended December 31, 1998.
<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>
1997
Options.... 393,000 7.6 $5.61 368,000 $5.61
Warrants... 1,495,000 4.6 6.50 1,495,000 6.50
1998
Options.... 800,000 8.2 4.07 389,000 5.59
Warrants... 1,879,501 3.6 6.57 1,879,501 6.57
</TABLE>
Note 17 - Year 2000
In the opinion of management, no material adverse effect on either results of
operations, cash flows or financial position is anticipated due to the
modifications or replacement of existing information systems in order to
accommodate year 2000 implications.
Note 18 - Sale of Karate Studios
During the year ended December 31, 1998, the Company sold four karate studios
to the locations' general managers. The Company received notes receivable
totaling $86,500 due in monthly payments of $333 to $1,000 including interest
imputed at 10%. The Company has guaranteed payments of a studio lease, which
are $4,673 per month through March 2000. The Company retained all advance
payments of enrollment fees, which were approximately $310,000 as of the
closing dates; however, the Company is liable for any future refunds to
students enrolled prior to the closing dates. The Company reduced the
liability for advance payments of enrollment fees related to these studios to
$35,000, which is included in deferred revenue. Management will evaluate this
liability quarterly in light of cancellations to date and expected future
cancellations.
Note 19 -Subsequent Events
Common Stock Purchase Warrants - Subsequent to year-end the Company issued
600,000 warrants to purchase the Company's common stock. These warrants were
issued to consultants for services provided to the Company. The Company
received no proceeds upon issuance of the warrants. All holders exercised
their rights to convert the warrants to common stock subsequent to year-end.
The Company received total proceeds of $540,000 and issued one share of
common stock for each warrant exercised.
Financing - Subsequent to year-end the Company issued convertible debentures
totaling $950,000. The interest rate on the Debentures is 7% per annum,
payable in cash or in shares of the Company's Common Stock. The Debentures
mature January 1, 2002 and may be converted to shares of Common Stock. The
Company also issued 61,125 warrants in connection with these debentures. The
Company received no proceeds from these warrants. The warrants are
convertible to shares of the Company's common stock at $2.1406 per share and
expire January 31, 2002. Holders of these debentures converted principal of
$530,000 and interest of $5,017 to 871,719 shares of the Company's common
stock subsequent to year-end.
Subsequent to year-end the Company's Board of Directors approved a plan to
sell 100,000 shares of convertible preferred stock in a private placement.
Management expects to receive proceeds of approximately $4,050,000 (which is
net of approximately $450,000 of transaction fees) related to these
securities. Final settlement of this transaction will require shareholder
approval. The preferred shares are convertible to the Company's common stock
using a formula based on the five day average closing price of the Company's
publicly traded common stock at the date the shares are sold. Any shares
converted to common stock will be restricted stock for a period of twelve
months from shareholder approval of the transaction. There is no guarantee
that the Company will be able to sell the planned amount of securities or that
the shareholders of the Company will approve the transaction.
Note 19 -Subsequent Events (Continued)
Issuance of Common Stock - Subsequent to year-end the Company issued 47,730
shares of common stock to consultants for no consideration.
Note 20 -Going Concern
The Company is planning to complete the production of an additional nineteen
episodes of the television series "The Adventures of Kanga Roddy". Management
expects to deliver these episodes during 1999. Production of these episodes
is expected to require working capital in excess of the proceeds from the
debentures and warrants (Note 19), which were closed subsequent to year-end.
In addition the Company has experienced continuing losses from operations.
These factors cause substantial doubt about the ability of the Company to
continue as a going concern. Management is planning to use the proceeds from
the sale of the convertible preferred stock (Note 19) to fund obligations
incurred during the production of these episodes as well as the production of
additional episodes and other working capital requirements during the
remainder of 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The
continuation of the Company as a going concern is dependent upon the success
of the sale of preferred stock to qualified investors, approval of the
transaction by the Company's shareholders and, thereafter, on attaining
profitability. There can be no assurance that management will be successful in
the implementation of its plan. The financial statements do not include any
adjustments in the event the Company is unable to continue as a going concern.
Note 21 -Beneficial Conversion Feature of Debentures
The Company has restated its financial statements for the year ended December
31, 1998 (along with the effect on each quarter) to account for the beneficial
conversion feature of its 7% convertible debentures in accordance with EITF
D-60, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion." The application of EITF D-60
resulted in the recognition of a non-cash charge to interest expense of $599,955
($0.15 per share) for the year ended December 31, 1998 with a corresponding
increase to additional paid in capital. There was no effect on the balance
sheet except for the reclassification of the interest expense from additional
paid in capital to retained earnings. The impact of the application of EITF
D-60 on the quarterly reports for 1998 was as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Quarterly information unaudited.)
--------------------------------------------------------------
Q1 Q2 Q3 Q4 Total
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest Expense
As reported $ 8,901 $ 8,761 $ 46,575 $ 12,210 $ 76,447
============ ========== =========== =========== ===========
Restated $ 8,901 $ 8,761 $ 463,196 $ 195,544 $ 676,402
============ ========== =========== =========== ===========
Net Loss
As reported $ (134,890) $ (202,397) $ (448,787) $ (537,487) $ (1,323,561)
============ ========== =========== =========== ===========
Restated $ (134,890) $ (202,397) $ (865,408) $ (720,821) $ (1,923,516)
============ ========== =========== =========== ===========
Loss Per Share
As reported $ (0.04) $ (0.05) $ (0.12) $ (0.13) $ (0.33)
============ ========== =========== =========== ===========
Restated $ (0.04) $ (0.05) $ (0.23) $ (0.18) $ (0.48)
============ ========== =========== =========== ===========
</TABLE>
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.
10.26 Consultant Agreement between Olympia Partners, LLC, Dalton Kent
Securities Group, Inc. and American Champion Entertainment, Inc.
10.27 Merchant Licensing Agreement between Timeless Toys and American
Champion Media, Inc.
10.28 Loan Agreement between Olympia Partners and American Champion
Entertainment, Inc.
10.29 SEGA Agreement termination letter.
10.30 Consultant Agreement between American Champion Entertainment, Inc.
and Trademark Managment
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.
** Filed as an exhibit with the registrant's Form 10-KSB filed with SEC on
March 24, 1998 and incorporated by reference herein.
<PAGE>
Exhibit 10.26
Consulting Agreement
Mr. Seth Fireman Mr. Alan Elkes
Mr. Fred Rudy Chief Executive Officer
Managing Partners Dalton Kent Securities Group, Inc.
Olympia Partners, LLC 711 Fifth Avenue, 15th Floor
660 Madison Avenue, 15th Floor New York, NY 10022
New York, NY 10021
American Champion Entertainment, Inc. ("ACEI") hereby appoints Olympia
Partners, LLC and Dalton Kent Securities Group, Inc. as financial consultants
("Consultants") to ACEI with specific services as following:
* Assist in seeking financing for ACEI's production needs for the TV program
* Provide and set up promotional activities for ACEI, which includes but not
limited to retail support of ACEI's shares as traded on Nasdaq
* Term: 24 months beginning November 25, 1998
ACEI will compensate Consultants as follows, to be equally divided between
Olympia Partners, LLC, and Dalton Kent Securities Group, Inc.:
1) On the first business day of January 1999, ACEI will pay consultants
for services rendered in December 1998. This compensation will, at the option
of ACEI, equal to an aggregate of $100,000 or 100,000 warrants exercisable
at $1.25 per share. And,
2) Thereafter the following compensation shall be paid in aggregate to the
Consultants:
Eligible from
Effectiveness
Amount Strike Price of S-3 Registration Expires
100,000 shares $1.50 per share 45 days 30 months
100,000 shares $2.00 per share 90 days 30 months
100,000 shares $2.50 per share 135 days 30 months
100,000 shares $2.75 per share 180 days 30 months
100,000 shares $4.00 per share 360 days 30 months
For Accepted:
American Champion Entertainment, Inc. Olympia Partners, LLC
By: /s/ Anthony K. Chan By: /s/ Seth Fireman
Anthony K. Chan Name: Seth Fireman
President & CEO Title: Managing Partner
Date: November 25, 1998 Dalton Kent Securities Group, Inc.
By: /s/ Alan Elkes
Name: Alan Elkes
Title: Chief Executive Officer
Exhibit 10.27
Merchandise License Agreement
"Licensor": American Champion Media, Inc.
1694 The Alameda, Suite 100
San Jose, CA 95126
Contact: Anthony Chan Phone: (408) 288-8199
Fax: (408) 288-8098
"Licensee": Timeless Toys
1165 Chess Drive, Suite C
Foster City, CA 94404
Contact: Harold Nizamian Phone: (650) 574-5480
Fax: (650) 574-3890
"Effective Date" of the Agreement is upon signing.
"Properties" are the following Characters or other trademarks: Kanga Roddy and
all related characters seen in the Adventures with Kanga Roddy television
program.
"Products" that Licensee is authorized to produce are non-articulated plush
sizes 4.5" - 36", plush backpacks, plush fanny packs, plush hand puppets and
plush key chains which bear the Properties.
"Trademarks" being licensed to Licensee are Kanga Roddy and all related
characters.
"Territory" where Licensee can sell Products is United States and Canada.
"Distribution" is limited to department stores and specialty chains, (Discovery
Channel, Learning Express, Nordstroms and Macy's). Mass market is excluded as
well as FAO Schwartz and JC Penney.
"Advance Royalty" is $5,000 due upon contract execution.
"Earned Royalty" is 8% for Products shipped from a location inside the
Territory and 10% for Products shipped FOB rate.
"Guaranteed Royalty" is $20,000.
"Initial Sale Date" is February 1, 1999.
"Term" of this agreement is from the Effective Date until January 31, 2001.
"Renewal": Option to renew for an additional two year period provided Licensee
has generated in excess of $500,000 in royalties.
All Products and Advertising Materials will bear this notice:
In complete form:
Kanga Roddy is registered in the U.S. Patent and Trademark Office. Kanga Roddy
and all related characters and indicia are trademarks of American Champion
Media, Inc. Copyright 1998 American Champion Media, Inc. 1694 The Alameda,
Suite 100, San Jose, CA 95126, U. S. A. All Rights Reserved. Or in short form
if space is limited: Copyright 1998 American Champion Media
The parties have agreed to the terms of this Merchandise License Agreement
contained above and on the following pages.
American Champion Media, Inc. Timeless Toys
By: /s/ Anthony K. Chan By: /s/ Harold A. Nizamian
(signature) (signature)
Anthony K. Chan Harold A. Nizamian
(name) (name)
Chief Executive Officer President & CEO
(title) (title)
December 23, 1998 December 31, 1998
(date) (date)
Exhibit 10.28
BUSINESS LOAN AGREEMENT
Borrower: American Champion Lender: Olympia Partners, LLC
Entertainment, Inc. 660 Madison Ave,
1694 The Alameda, Suite 100 15th Floor
San Jose, CA 95126 New York, NY 10021
Principal Loan Date Interest Rate Interest Maturity
Amount (simple, yr) Payment Date
$100,000.00 11-25-1998 7.00% 45/365 days = 863.01 01-08-1999
Total Principal & Interest Payment $100,863.01
THIS BUSINESS LOAN AGREEMENT between American Champion Entertainment, Inc.
("Borrower") and Olympia Partners, LLC ("Lender") is made and executed on the
following terms and conditions.
TERM. This Agreement shall be effective as of November 25, 1998, and shall
continue for a time period defined per above schedule.
USE OF LOAN PROCEEDS. It is represented to Lender that Borrower intends to use
the borrowed funds for the production of the Borrower's TV program "Adventures
With Kanga Roddy" and for general working capital.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as
of the date of this Agreement:
Organization. Borrower is a Delaware corporation which is duly organized,
validly existing, and in good standing to conduct business in the State of
California. Borrower has the full power and authority to own its properties
and to transact the businesses in which it is presently engaged or presently
proposes to engage.
Authorization. The execution, delivery, and performance of this Agreement and
all related documents by Borrower, to the extent to be executed and performed
by Borrower, have been duly authorized by all necessary action by Borrower;
and do not conflict with any provision of its articles of incorporation or
organization or bylaws.
Legal Effect. This Agreement constitutes, and any instrument or agreement
require hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower
in accordance with their respective terms.
Survival of Representation and Warranties. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in making
the above referenced Loan to Borrower. Borrower further agrees that the
foregoing representations and warranties shall be continuing in nature and
shall remain in full force and effect until such time as Borrower's Loan shall
be paid in full, or until this Agreement shall be terminated in a manner
satisfactory to both Lender and Borrower.
Inspection. Lender or agents of Lender may at any reasonable time, inspect
Borrower's properties and examine or audit Borrower's books, accounts, and
records.
Default. In the event that Borrower fails to make payment to Lender when due
on the Loan, or if an alternative method of payment acceptable to the Lender
is not made, Lender may immediately request Anthony K. Chan and George Chung
("Chan" & "Chung"), who together act as personal guarantors for Borrower, to
cause Continental Stock Transfer & Trust Company to issue 75,000 shares each
from Chan & Chung's personal holdings of ACEI (total 150,000 shares) in favor
of Lender. Chan & Chung have executed Lock Up Agreements with Dalton Kent
Securities dated July 15, 1997 which prohibits Chan & Chung from selling
personal shares for 24 months from the date of such agreements. In the event
that the 150,000 shares from Chan & Chung are issued to Lender under this
Default provision, Dalton Kent Securities, by applying signature below,
acknowledges that it will release such shares from lock up provisions to allow
Lender to sell such shares.
Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses,
including attorney's fees, incurred in connection with Borrower's Default on
this Agreement. Borrower also will pay any court costs, in addition to all
other sums provided by law. Lender may submit to the jurisdiction of the
courts of Santa Clara County, the State of California.
BORROWER AND LENDER acknowledge having read all the provisions of this Business
Loan Agreement, and agree to its items. This agreement is dated as of
November 25, 1998.
BORROWER: LENDER:
American Champion Entertainment, Inc.
By: /s/ Anthony K. Chan By: /s/ Seth Fireman
Anthony K. Chan Name: Seth Fireman
President & Chief Executive Officer Title: Managing Partner
GUARANTORS: ACKNOWLEDGED:
Dalton Kent Securities
By: /s/ George Chung By: /s/ Alan Elkes
George Chung Alan Elkes
Chief Executive Officer
By: /s/ Anthony K. Chan
Anthony K. Chan
Exhibit 10.29
October 28, 1998
Anne Jordon
General Counsel
SEGA of America
255 Shoreline Drive, 2nd Floor
Redwood City, CA 94065
Re: Licensing Agent Agreement - Resignation of Cynthia Wilkes
Dear Anne:
We have received verbal notice from Cynthia Wilkes yesterday that she will be
leaving Sega of America, effective November 14, 1998.
Pursuant to Clause 13 of the Licensing Agent Agreement dated July 25, 1997
executed by our two companies: "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."
We hereby are giving notice to Sega, that due to Cynthia Wilkes' departure from
Sega, that we elect to terminate, effective immediately, the above mentioned
Licensing Agent Agreement in its entirety.
If you have any questions, please feel free to call me at 408-288-8199,
ext-8888.
Regards,
/s/ Anthony K. Chan
Anthony K. Chan
Chief Executive Officer
American Champion Media, Inc.
a subsidiary of
American Champion Entertainment, Inc.
cc: Cynthia Wilkes
Exhibit 10.30
Mr. Anthony Chan
Mr. Don Berryessa
American Champion Entertainment.
1694 The Alameda, Suite 100
San Jose, CA 95126
CONTRACT FOR CONSULTING SERVICES
This contract is made as of November 24, 1998 between AMERICAN CHAMPION
ENTERTAINMENT, mailing address is 1694 The Alameda, Suite 100, San Jose,
California, 95126, hereinafter referred to as "Client", and TRADEMARK
MANAGEMENT (Joy M. Tashjian), mailing address is 4 Julianna Court, Moraga, CA
94556, hereinafter referred to as "Consultant".
1. DESCRIPTION OF WORK
Consultant agrees to provide International Agent Management, Executive
Licensing Services, License development and Licensee Consulting Services to
Client.
2. COMPENSATION TO CONSULTANT
Client shall pay Consultant as consideration for aforementioned services the
sum of $3500.00 per month (payable to Joy M. Tashjian) for the term of one
year through November 30, 1999. Both Client and Consultant may cancel this
agreement provided either party give a sixty day written notice. Client will
remain obligated to compensate Consultant for their full commission for any
agreements initiated and executed during the term.
Any expenses related to travel, client entertainment, telephone, faxing, in
accordance with services being performed in this agreement, shall be discussed
with Client in advance, and payable by Client upon receipt of invoice from
Consultant.
3. COMMISSION
In addition to Consultant's monthly retainer described in paragraph 2, Client
agrees to compensate Consultant with a Ten Percent (10%) gross domestic
commission and net international agents fees for all agreements executed. This
percentage shall be paid to the Consultant throughout the term and any
extensions of these licensee agreements. Payment is due to consultant fifteen
days after receipt by client of the quarterly royalty reports from
manufacturers and agents. Client shall provide Trademark Management with copies
of the quarterly reports from licensees and agents along with a detailed
statement.
Payments for consultation services are due upon receipt of the monthly billing
at the beginning of each calendar month. If the Client fails to pay Consultant
according to the payment schedule set forth above, Consultant may, upon five
days written notice to Client, suspend performance of services under this
contract. Unless Consultant receives payment in full within ten days of the
date of the notice, Consultant may stop all further services without further
notice. In such, Consultant shall not be liable for any canceled agreements or
damages caused to Client. Unpaid balances to Consultant shall accrue interest
at 18% per month.
4. ARBITRATION
Any controversy or claim arising out of, or relating to, this contract or the
making, performance, or interpretation of this Contract, the amount of which
exceeds the jurisdictional limits for small claims action under California
law, shall be settled by arbitration.
5. MISCELLANEOUS PROVISIONS
(A) This document represents the entire and integrated agreement between
Client and Consultant and supersedes all prior negotiations, representations
or agreements, either in writing or oral. This contract may be amended only
through written agreement by both parties.
(B) This Contract shall be governed by the laws of the State of California.
This shall lie for any litigation arising out of the Contract.
(C) This Contract is binding on Client and Consultant as well as their
partners, successors, and assigns. However, this contract may not be assigned
by either party without prior written consent of the other party.
(D) Consultant is not responsible for any actions taken by associates,
agents or manufacturers Consultant may introduce to Client and Client may
engage agreements with. Consultant has provided Client with projections and
objectives, these are not guaranteed by Consultant and are solely dependent on
what the industry will bear.
(E) In the event the services of this agreement are terminated by Client
prior to completion of the term of this agreement, Client shall be
responsible to compensate Consultant for services through the term of this
agreement.
(F) All documents provided to Client and Consultant are confidential and
legally privileged only for the use of the individual or entity named on the
document. Any dissemination, distribution or copying of these documents is
strictly prohibited.
(G) If any lawsuit or arbitration is brought to enforce or interpret the
provisions of this agreement, the prevailing party will be entitled to
reasonable attorney's fees, in addition to any other relief to which that
party may be entitled.
Client
Date: 11-25-98 /s/ Anthony K. Chan
Anthony K. Chan / CEO
American Champion Entertainment, Inc.
Consultant
Date: 11-25-98 /s/ Joy Tashjian
Joy Tashjian / Principal
Trademark Management
ADDENDUM
This will serve as an addendum to the agreement between American Champion
Entertainment ("Client") and Trademark Management ("Consultant") dated
November 24, 1998. All other terms and conditions will remain the same.
2. COMPENSATION
Client agrees to review Consultant compensation for an increase of the monthly
retainer to $4000.00 per month after the initial ninety day period from date
of execution of the aforementioned November 24, 1998 agreement.
3. COMMISSIONS
(A) Consultant shall receive a 5% gross commission rate for the Toy Island
and Timeless Toys agreements.
(B) In the event either party elects to terminate the agreement the
consultant is entitled to the following commission Schedule:
Full commission of 10% gross for the months 1-12 after termination of agreement
for all contracts other than the Timeless Toys and Toy Island contracts which
the commission is 5%.
Half commission of 5% gross for months 13-24 for all agreements other than the
Timeless Toys and Toy Island agreements which the commission shall be 2.5%.
Date: 11-25-98 /s/ Anthony K. Chan
Anthony K. Chan / CEO
American Champion Entertainment, Inc.
Date: 11-25-98 /s/ Joy Tashjian
Joy Tashjian / Principal
Trademark Management
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
American Champion Entertainment, Inc.:
We consent to the incorporation by reference in Registration Statement
Numbers 333-60511, 333-67879, 333-72253, 333-82963 and333-90459 on Forms S-3
and Registration Statement Numbers 333-43161, 333-60107 and 333-80269 (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 March 19, 1999, except as to Note 21, which is dated November
11, 1999, appearing in and incorporated by reference in this 10-KSB/A,
Amendment No. 1 to Annual Report on Form 10-KSB of American Champion
Entertainment, Inc. for the year ended December 31, 1998.
/s/ Moss Adams LLP
Moss Adams LLP
San Francisco, California
November 11, 1999
<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, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 2,763
<SECURITIES> 0
<RECEIVABLES> 37,675
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,080,398
<PP&E> 527,021
<DEPRECIATION> 131,691
<TOTAL-ASSETS> 6,080,398
<CURRENT-LIABILITIES> 2,175,195
<BONDS> 0
0
0
<COMMON> 7,122,414
<OTHER-SE> (3,217,211)
<TOTAL-LIABILITY-AND-EQUITY> 6,080,398
<SALES> 37,956
<TOTAL-REVENUES> 736,701
<CGS> 26,152
<TOTAL-COSTS> 26,152
<OTHER-EXPENSES> 2,257,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 679,402
<INCOME-PRETAX> (1,916,050)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,916,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,923,516)
<EPS-BASIC> ($0.48)
<EPS-DILUTED> ($0.48)
</TABLE>
